-----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, UzSh8vdpevnS4azSvK56dT/Q9gudyVS8C50W4mvdl1bUsMQAFe575ybGDeEZ27tM bvC5S1FuPWPEkwTLLWe1KQ== 0000908737-97-000125.txt : 19970401 0000908737-97-000125.hdr.sgml : 19970401 ACCESSION NUMBER: 0000908737-97-000125 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOSPITALITY PROPERTIES TRUST CENTRAL INDEX KEY: 0000945394 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 043262075 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-11527 FILM NUMBER: 97570559 BUSINESS ADDRESS: STREET 1: 400 CENTER ST CITY: NEWTON STATE: MA ZIP: 02158 BUSINESS PHONE: 6179648389 MAIL ADDRESS: STREET 1: 400 CENTRE STREET CITY: NEWTON STATE: MA ZIP: 02158 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the Fiscal Year Ended December 31, 1996 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 [NO FEE REQUIRED] Commission File Number 1-11527 HOSPITALITY PROPERTIES TRUST Maryland 04-3262075 (State of incorporation) (IRS Employer Identification No.) 400 Centre Street, Newton, Massachusetts 02158 617-964-8389 Securities registered pursuant to Section 12(b) of the Act: Class Name of each exchange on which registered Common Shares of Beneficial Interest New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock of the registrant held by non-affiliates was $734,515,113 based on the $32.50 closing price per share for such stock on the New York Stock Exchange on March 26, 1997. For purposes of this calculation, 264,595 Common Shares of Beneficial Interest, $0.01 par value ("Shares") held by HRPT Advisors, Inc. ("Advisors"), 4,000,000 Shares held by Health and Retirement Properties Trust ("HRP"), and an aggregate of 6,335 shares held by the trustees and officers of the registrant, have been included in the number of shares held by affiliates. Number of the registrant's Shares, outstanding as of March 26, 1997: 26,871,395 DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K is incorporated herein by reference from the definitive Proxy Statement of Hospitality Properties Trust (the "Company") dated March 28, 1997 for its annual meeting of shareholders currently scheduled to be held on May 20, 1997. --------------- CERTAIN IMPORTANT FACTORS The Company's Annual Report on Form 10-K contains statements which constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Those statements appear in a number of places in this Form 10-K and include statements regarding the intent, belief or expectations of the Company, its Trustees or its officers with respect to the declaration or payment of dividends, the consummation of additional acquisitions, policies and plans of the Company regarding investments, dispositions, financings, conflicts of interest or other matters, the Company's qualification and continued qualification as a real estate investment trust or trends affecting the Company's or any hotel's financial condition or results of operations. Readers are cautioned that any such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those contained in the forward looking statement as a result of various factors. Such factors include without limitation changes in financing terms, the Company's ability or inability to complete acquisitions and financing transactions, results of operations of the Company's hotels and general changes in economic conditions not presently contemplated. The accompanying information contained in this Form 10-K, including the information under the headings "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations", identifies other important factors that could cause such differences. THE AMENDED AND RESTATED DECLARATION OF TRUST OF THE COMPANY, DATED AUGUST 21, 1995 A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HOSPITALITY PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE TRUST SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE TRUST. ALL PERSONS DEALING WITH THE TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF THE TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. HOSPITALITY PROPERTIES TRUST 1996 FORM 10K ANNUAL REPORT
Table of Contents Part I Page Item 1. Business..................................................................... 1 Item 2. Properties................................................................... 20 Item 3. Legal Proceedings............................................................ 21 Item 4. Submission of Matters to a Vote of Security Holders.......................... 21 Part II Item 5. Market for the Registrant's Common Shares and Related Stockholders Matters 21 Item 6. Selected Financial Data...................................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................. 24 Item 8. Financial Statements and Supplementary Data.................................. 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................. 26 Part III To be incorporated by reference from the Company's definitive Proxy Statement for the annual meeting of shareholders currently scheduled to be held on May 20, 1996, which is expected to be filed not later than 120 days after the end of the Company's fiscal year. Part IV Item 14. Exhibits, Financial Statement Schedules and Report on Form 8K................ 27
Item 1. Business The Company. The Company is a real estate investment trust ("REIT") formed to acquire, own and lease hotels to unaffiliated tenants. At December 31, 1996 the Company owned 82 hotels with 11,728 rooms or suites located in 26 states, purchased for approximately $813 million. The Company was formed in February 1995 as a subsidiary of Health and Retirement Properties Trust ("HRP"), a healthcare REIT. In March 1995, the Company acquired 21 Courtyard by Marriott(R) Hotels for approximately $179.4 million. In August 1995, the Company completed an initial public offering of 8,325,000 Shares at an initial public offering price of $25.00 per Share, raising gross proceeds of $208.1 million which were principally used to repay indebtedness due to HRP and to acquire an additional 16 Courtyard by Marriott(R) Hotels for approximately $149.6 million. In early 1996, the Company completed a follow-on offering of an additional 14,250,000 common shares of beneficial interest (the "Follow-on Offering") raising net proceeds of approximately $360 million. Such proceeds and proceeds from borrowings were used to acquire, through subsidiaries, 11 Wyndham Garden(R) Hotels for approximately $135.3 million, 18 Residence Inn by Marriott(R) Hotels for approximately $172.2 million and an additional 16 Courtyard by Marriott(R) Hotels for approximately $176.4 million. The Company's principal growth strategy is to expand its investments in hotels and to set minimum rents which produce income in excess of the Company's cost of raising capital. The Company seeks to provide capital to unaffiliated hotel operators who wish to divest their properties while remaining in the hotel business as tenants. The Company believes that its operating philosophy affords it opportunities to find high quality hotel investment opportunities on attractive terms. In addition, the Company's internal growth strategy is to participate through percentage rents in increases in Total Hotel Sales (including gross revenues from room rentals, food and beverage sales and other services) at the Company's hotels. The Company is organized as a Maryland real estate investment trust. The Company's principal place of business is 400 Centre Street, Newton, Massachusetts 02158, and its telephone number is (617) 964-8389. As of December 31, 1996 the Company's portfolio consisted of 82 hotels, located in 26 states. Information with respect to hotel revenues by state is contained in Item 2. Number of Number of State Hotels Rooms - ----- --------- --------- Arizona 8 1,164 California 10 1,470 Delaware 1 152 Florida 3 449 Georgia 7 978 Illinois 3 514 Indiana 1 149 Iowa 1 108 Maryland 3 406 Massachusetts 8 1,072 Michigan 2 281 Minnesota 2 358 Missouri 2 298 New Jersey 3 416 New Mexico 1 112 New York 3 403 North Carolina 4 534 Ohio 1 106 Pennsylvania 4 567 Rhode Island 1 148 South Carolina 1 108 Tennessee 3 399 Texas 3 405 Virginia 3 462 Washington 3 522 Wisconsin 1 147 ---- ------ 82 11,728 ==== ====== 1 The Hotels, Leases and Management Agreements. The Company's Courtyard by Marriott(R) and Residence Inn by Marriott(R) hotels are leased to special purpose subsidiaries ("Host I" and "Host II," respectively) of Host Marriott Corporation ("Host") and are managed by subsidiaries ("Marriott I" and "Marriott II," respectively) of Marriott International, Inc. ("Marriott"). The Company's Wyndham Garden(R) hotels are leased to a subsidiary ("Wyndham I") of Wyndham Hotel Corporation ("Wyndham") and are managed by a subsidiary ("Wyndham II") of Wyndham. Each of Host I, Host II and Wyndham I are herein referred to as "Lessees" and each of Marriott I, Marriott II and Wyndham II are herein referred to as "Managers." The annual rent payable to the Company for its 82 hotels ("Hotels") totals $81.3 million in base rent plus percentage rent ranging from 5% to 8% of increases in Total Hotel Sales (as defined below) over a base year level. In addition, 5% of Total Hotel Sales is required to be escrowed periodically by the Lessee or the Manager as a reserve for renovations and refurbishment of the hotels. "Total Hotel Sales" means all revenues and receipts of every kind derived from guests or customers related to the operation of the hotels and has the same meaning as "Gross Revenues" under the Company's leases. The hotels have an average age of approximately six years and, for their fiscal year 1996, had average occupancy of 80.5% and an average daily rate per room ("ADR") of $81.31. Under the leases and management agreements, the hotels are currently operated as Courtyard by Marriott(R), Residence Inn by Marriott(R) and Wyndham Garden(R) hotels. Courtyard by Marriott(R) hotels are designed to attract both business and leisure travelers. A typical Courtyard by Marriott(R) hotel has 145 guest rooms. The guest rooms are larger than those in most other moderately priced hotels and predominately offer king sized beds. Most Courtyard by Marriott(R) hotels are situated on well landscaped grounds and typically are built around a courtyard containing a patio, pool and socializing area that may be glass enclosed depending upon location. Most of these hotels have lounges or lobbies, meeting rooms, an exercise room, a small laundry room available to guests and a restaurant or coffee shop. Generally, the guest rooms are similar in size and furnishings to guest rooms in full service Marriott(R) hotels. In addition, many of the same amenities as would be available in full service Marriott(R) hotels are available in Courtyard by Marriott(R) hotels, except that restaurants may be open only for breakfast buffets or serve limited menus, room service may not be available and meeting and function rooms are limited in size and number. According to Marriott, as of December 31, 1996, 286 Courtyard by Marriott(R) hotels were open and operating nationally. The Company believes that the Courtyard by Marriott(R) brand is a leading brand in the limited service segment of the United States hotel industry. Residence Inn by Marriott(R) hotels are designed to attract business, governmental and family travelers who stay more than five consecutive nights. Residence Inn by Marriott(R) hotels generally have between 80 to 130 studios, one-bedroom, and two-bedroom suites. Most Residence Inn by Marriott(R) hotels are designed as a cluster of residential style buildings with landscaped walkways, courtyards and recreational areas. Residence Inn by Marriott(R) hotels do not have restaurants. All offer complimentary continental breakfast and most provide a complimentary evening hospitality hour. In addition, each suite contains a fully equipped kitchen and many have fireplaces. Most Residence Inn by Marriott(R) hotels also contain swimming pools, exercise rooms, business centers and guest laundries. According to Marriott, as of December 31, 1996, 221 Residence Inn by Marriott(R) hotels were open and operating nationally. The Company believes that the Residence Inn by Marriott(R) brand is the leading brand in the extended stay segment of the United States hotel industry. Wyndham Garden(R) hotels are mid-size, full service hotels located primarily near suburban business centers and airports which are designed to attract business travelers and small business groups in suburban markets. Each hotel contains 140 to 250 rooms and approximately 1,500 to 5,000 square feet of meeting space. The amenities and services provided at these hotels are designed to meet the needs of the upscale business traveler. Amenities and services in each room include desks large enough to accommodate personal computers, longer phone cords, high wattage light bulbs for reading, room service and access to 24-hour telecopy and mail/package service. The meeting facilities at Wyndham Garden(R) hotels generally can accommodate groups of between 10 and 200 people and include a flexible meeting room design, 2 exterior views, additional phone lines and audiovisual equipment. Wyndham Garden(R) hotels also feature a lobby lounge, most of which have a fireplace, a library typically overlooking a landscaped garden and a swimming pool. In addition, many Wyndham Garden(R) hotels contain a whirlpool and an exercise facility. Unlike many other mid-priced hotels, each Wyndham Garden(R) hotel contains a cafe restaurant that serves a full breakfast, lunch and dinner menu. The Company believes that the Wyndham Garden(R) brand is one of the leading brands in the full service suburban segment of the United States hotel industry. The principal features of the Company's leases and management agreements for the hotels are as follows: o Each of the hotels is the subject of a separate lease. However, in the event any of these leases is defaulted, the Company may declare all of the leases with such Lessee to be in default. o The initial lease terms expire between 2010 and 2012. o At the end of the initial lease terms, each Lessee has 3 or 4 consecutive 10 to 15 year renewal options totaling 36 to 48 years. Renewal options may be exercised only on an all or none basis for all hotels leased to a particular Lessee. o The leases require minimum rent payments aggregating $81.3 million per year. o In addition to minimum rents, the leases of the hotels require percentage rents equal to 5% to 8% of Total Hotel Sales in excess of Total Hotel Sales in a base year. Percentage rents are calculated on a combined basis for all hotels leased to a particular Lessee. o The leases and management agreements for the hotels require that 5% of Total Hotel Sales be escrowed periodically to fund refurbishments and renovations to these hotels ("FF&E Reserves"). Funds in the FF&E Reserves are pooled for all hotels leased to a particular Lessee and generally may be withdrawn only for capital improvements. o Under certain circumstances, the Company may be required to fund major repairs to the hotels, in which event annual base rents will be increased by a minimum of 10% of the amount funded. o A security deposit equal to a full year's base rent is retained by the Company as security for each Lessee's obligations under the leases of the hotels. Provided that the Lessee does not default under any of such leases, the Company must repay the security deposit to the Lessee at the expiration of the leases, including renewal terms, if any. No interest will be paid by the Company on the security deposit and it will not be escrowed. o The leases of the hotels are net leases requiring the Lessee to pay all operating expenses, including taxes and insurance and any applicable ground rent. Under the management agreements for the hotels, substantially all of the Lessees' operating responsibilities have been delegated to the Managers. o The management agreements for the Company's Courtyard by Marriott(R) and Residence Inn by Marriott(R) hotels may be canceled by the Lessee (with the consent of the Company) on a hotel by hotel basis if specified performance levels are not achieved by the Manager. Similarly, in the event that the leases for individual hotels were terminated, the Company or the successor lessee would be able to cancel the corresponding management agreements on a hotel by hotel basis if specified performance levels are not achieved. o The management agreements for the Company's Courtyard by Marriott(R) and Residence Inn by Marriott(R) hotels are not cross defaulted with each other nor with the leases for these hotels. Accordingly, if one or more of such management agreements were defaulted and terminated, the Lessee and the Company will be able to continue the affiliation with Marriott and use the Courtyard by Marriott(R) or Residence Inn by 3 Marriott(R) hotels brand name and chain services under the remaining agreements. Also, if the leases for these hotels were defaulted and terminated, the Company and any successor lessee will be able to continue the affiliation with Marriott and use the Courtyard by Marriott(R) or the Residence Inn by Marriott(R) hotels brand name and chain services under existing management agreements. o The management agreements for the Company's Courtyard by Marriott(R) and Residence Inn by Marriott(R) hotels expire between 2012 and 2020. Such management agreements provide for up to two or three consecutive 12 to 15 year renewal terms. o Borrowings in respect of each of the Company's Courtyard by Marriott(R) and Residence Inn by Marriott(R) hotels are limited in accordance with a formula set forth in such management agreements to no more than 70% of the allocable purchase price of each such hotel in the case of a borrowing secured by a single hotel, or 60% of the aggregate allocable purchase prices of such hotels in the case of a borrowing secured by two or more of such hotels on a combined basis. o Management fees payable to the Managers for operation of the hotels are subordinated to minimum rents due to the Company. All related company charges payable by any Lessee to the Lessee's parent or other affiliates of Host are likewise subordinated to rents due to the Company. Developments since December 31, 1996. On January 3, 1997, the Company, through a new subsidiary, acquired a 388-room full service hotel in Salt Lake City, Utah (the "Salt Lake Hotel"), for $44 million. Additionally, the Company has committed to fund up to $3.75 million for planned improvement costs to complete certain upgrades to the hotel facilities. Upon purchase, the hotel was flagged as a full service Wyndham(R) hotel and the Company entered into a long-term lease for the operation of the Salt Lake Hotel with an affiliate (Wyndham III) of Wyndham Hotel Corporation (Wyndham). In connection with the transaction, Wyndham funded a $4.7 million cash security deposit under the lease, and another affiliate of Wyndham contributed approximately $5.3 million (the "Guarantee Deposit") to the purchase price. Upon the Salt Lake Hotel achieving certain operating thresholds or lease expiration other than by event of default, the Company must refund the $5.3 million Guarantee Deposit. Fundings for the planned improvements discussed above and refunding of the Guarantee Deposit will increase base rent on the property by approximately 11.1% of amounts so funded. The initial term of the lease expires in 2012 and Wyndham III has four consecutive renewal options of 12 years each. The lease requires minimum rent of approximately $3.78 million annually initially. Other terms of the lease for the Salt Lake Hotel are substantially similar to those for the Company's 11 Wyndham Garden(R) hotels. At the option of the Company, Wyndham I and Wyndham III may be required to merge and the leases and management agreement with respect to the Salt Lake Hotel and the Company's 11 Wyndham Garden(R) hotels, will be combined as a single group of cross-defaulted leases. Investment Policy and Method of Operation. The Company's strategy for increasing Cash Available for Distribution (as defined below) per Share is to provide capital to unaffiliated hotel operators who wish to divest their properties while remaining in the hotel business as tenants. Most other public hotel REITs seek to control the operations of hotels in which they invest by leasing those properties to affiliated tenants. In many cases affiliated management entities also manage such hotels. To achieve its objectives, the Company seeks to operate as follows: maintain a strong capital base of shareholders' equity; invest in high quality properties operated by unaffiliated hotel operating companies; use moderate debt leverage to fund additional investments which increase Cash Available for Distribution per Share because of positive spreads between the Company's cost of investment capital and rent yields; design leases which require minimum rents and provide an opportunity to participate in a percentage of increases in gross revenues at the Company's hotels; when market conditions permit, refinance debt with additional equity or long term debt; and pursue diversification so that the Company's Cash Available for Distribution is received from diverse properties and operators. "Cash Available for Distribution" as used herein means net income from operations, plus depreciation and amortization and certain non-cash items (all computed in accordance with generally accepted accounting principles) and less Company owned funds reserved for renovations and refurbishments and adjusted for non-recurring items, if any. 4 The Company's day-to-day operations are conducted by HRPT Advisors, Inc. ("Advisors"), the Company's investment advisor. Advisors originates and presents investment opportunities to the Company's Board of Trustees. As a REIT, the Company may not operate hotels. The Company has entered into leases (the "Leases") with each Lessee and management agreements (the "Management Agreements") with each Manager for operation of the hotels. The Company's Leases require the Lessee to pay all operating expenses, including taxes and insurance and to pay to the Company minimum rents plus percentage rents based upon increases in gross revenues at the hotels. Acquisition Policy. The Company is committed to pursuing growth through the acquisition of additional hotels and intends to pursue acquisition opportunities. Generally, the Company prefers to purchase and lease multiple hotels in one transaction because the Company believes cross default covenants and all or none renewal rights for multiple hotels enhance the credit characteristics of its leases and the security of its investments. In implementing its acquisition strategy, the Company considers a range of factors relating to proposed hotel purchases including: (i) historical and projected cash flows; (ii) the competitive market environment and the current or potential market position of each proposed hotel; (iii) the availability of a qualified lessee; (iv) the physical condition of the proposed hotel and its potential for redevelopment or expansion; (v) the estimated replacement cost and proposed acquisition price of the proposed hotel; (vi) the price segment in which the proposed hotel is operated; and (vii) the strength of the particular national hotel management organization, if any, with which the proposed hotel is or may become affiliated; and (viii) the hotel brand under which the hotel operates or is expected to operate. In determining the competitive position of a prospective hotel, the Company examines the proximity of the proposed hotel to business, retail, academic and tourist attractions and transportation routes, the number and characteristics of competitive hotels within the proposed hotel's market and the existence of any barriers to entry within that market, including zoning restrictions and financing constraints. While the Company focuses on the acquisition of upscale limited service, extended stay and full service hotel properties, it also considers acquisitions in all segments of the hotel industry. An important part of the Company's acquisition strategy is to identify and select qualified and experienced hotel lessees and managers. The Company intends to continue to select hotels for acquisition which will enhance the diversity of its portfolio in respect to location, brand name, lessees and managers. The Company has no policies which would limit the purchase price or the percentage of its assets which may be invested in any individual hotel or invested in hotels leased to a single lessee or managed by a single manager or operated with a single franchise affiliation. Other Investments in Real Estate. Although the Company emphasizes direct wholly owned investments in its hotels, it may, in its discretion, invest in joint ventures, mortgages and other real estate interests, consistent with its qualification as a REIT. The Company may invest in real estate joint ventures if it concludes that by doing so it may benefit from the participation of coventurers or that the opportunity of the Company to participate in the investment is contingent on the use of a joint venture structure. The Company may invest in participating, convertible or other types of mortgages if it concludes that by doing so it may benefit from the cash flow or any appreciation in the value of the subject property. Convertible mortgages are similar to equity participation because they permit the lender to either participate in increasing revenues from the property or convert some or all of that mortgage into equity ownership interests. At all times, the Company intends to make its investments in such a manner as to be consistent with the requirements of the Internal Revenue Code of 1986, as amended (the "Code") to qualify as a REIT. Disposition Policies. The Company has no current intention to dispose of any hotels, although it reserves the right to do so. The Company currently anticipates that disposition decisions, if any, will be made by the Company based on (but not limited to) factors such as the following: (i) potential opportunities to increase revenues and property values by reinvesting sale proceeds; (ii) the proposed sale prices; (iii) the strategic fit of the hotel with the rest of the Company's portfolio; (iv) the potential for, or the existence of, any environmental or regulatory problems; (v) the existence of alternative uses or needs for capital; and (vi) the maintenance of the Company's 5 qualification as a REIT. For a description of certain tax consequences arising from disposition of hotels, see "Taxation of the Company." Financing Policies. The Company currently intends to employ conservative financial policies in pursuit of its growth strategies. Although there are no limitations in the Company's organizational documents on the amount of indebtedness it may incur, the Company currently intends to pursue its growth strategies while maintaining a capital structure under which its debt will not exceed 50% of its total market capitalization. The Company may from time to time re-evaluate and modify its current borrowing policies in light of then current economic conditions, relative costs of debt and equity capital, market values of properties, growth and acquisition opportunities and other factors and may increase or decrease its ratio of debt to total market capitalization accordingly. The Board of Trustees of the Company may determine to obtain a replacement for its current credit facilities or to seek additional capital through additional equity offerings, debt financings, securitizations, retention of cash flow (subject to satisfying the Company's distribution requirements under the REIT rules) or a combination of these methods. To the extent that the Board of Trustees decides to obtain additional debt financing, the Company may do so on a secured or unsecured basis. Any mortgages may be recourse, non-recourse or cross collateralized and may contain cross default provisions. The Company has not established any limit on the number or amount of mortgages that may be placed on any single property or on its portfolio as a whole. The Company may also seek to obtain other lines of credit (both secured or unsecured) or to issue securities senior to the Shares, including preferred shares of beneficial interest and debt securities (either of which may be convertible into Shares or be accompanied by warrants to purchase Shares) or to engage in securitization transactions which may involve a sale or other conveyance of the Company's hotels to subsidiaries or to unaffiliated special purpose entities. The Company may also finance acquisitions through an exchange of properties or through the issuance of additional Shares or other securities. The proceeds from any financings by the Company may be used to pay distributions, to provide working capital, to refinance existing indebtedness or to finance acquisitions and expansions of existing or new properties. Advisors. Advisors is a Delaware corporation owned by Barry M. Portnoy and Gerard M. Martin. Advisors' principal place of business is 400 Centre Street, Newton, Massachusetts and its telephone number is (617) 332-3990. Advisors provides management services and investment advice to the Company. Advisors also acts as the investment advisor to HRP and has other business interests. The Directors of Advisors are Gerard M. Martin, Barry M. Portnoy and David J. Hegarty. The officers of Advisors are David J. Hegarty, President and Secretary, John G. Murray, Executive Vice President and Chief Financial Officer, John A. Mannix, Vice President, Thomas M. O'Brien, Vice President, Ajay Saini, Vice President and Treasurer, and David M. Lepore, Vice President. Mr. Murray and Mr. O'Brien are also officers of the Company. Effective January 1, 1997, Adam D. Portnoy resigned as Vice President of Advisors and as an officer of the Company to pursue other interests. In the ordinary course of their business, Advisors is occasionally involved in litigation, including the following matters to which the Company is not a party. Early in 1995, HRP commenced a foreclosure action to enforce indemnities given in connection with the surrender of certain leaseholds to, and the purchase of certain properties by, HRP in 1992. In May 1995, the defendants in the foreclosure action and parties related to HRP's former tenants and sellers asserted cross claims against HRP and others, including Advisors, Messrs. Portnoy and Martin and others, including Sullivan & Worcester which acts as counsel to HRP, Advisors and the Company. The same cross-claim defendants were served in late February 1996 in an additional action in a federal court. The cross claims and separate claims allege, among other things, fraud (including violations of federal securities laws), conflicts of interest, breach of fiduciary duties, legal malpractice, civil conspiracy and violations of 18 U.S.C. ss.1962 (RICO) in connection with the leasehold surrenders, the transactions and indemnities underlying the foreclosure action and certain related transactions, and that the foreclosure defendants and third party plaintiffs suffered substantial damages as a result. HRP, Advisors and other parties to this dispute have sought arbitration of all arbitrable claims arising from this dispute pursuant to the contract under which the dispute originated, and an arbitration proceeding is now underway. The Company has been informed that additional related actions have been brought against HRP, Advisors and other defendants in the original cross claims. The amounts claimed against HRP and such other defendants are material. The Company has been informed that HRP, Advisors and the other cross claim defendants intend to defend themselves in the actions or otherwise to pursue such claims and rights which they may have. The outcome of those pending claims and proceedings cannot be predicted. The Company is not a party to any of these actions. 6 Employees. The Company is an advised REIT and has no employees. Services which would otherwise be provided by employees are provided by Advisors pursuant to the Advisory Agreement (described below) and by the Managing Trustees and officers of the Company. Advisors, which administers the day-to-day operations of the Company, has 47 full-time employees and three active directors. Competition. The hotel industry is highly competitive. Each of the hotels is located in an area that includes other hotels. Increases in the number of hotels in a particular area could have a material adverse effect on occupancy rates and average daily rates of the hotels located in that area. Agreements with the operators of the hotels restrict the right of each operator and its affiliates for a limited period of time to own, build, operate, franchise or manage any other hotel of the same brand within various specified areas around the Company's hotels. Neither the operator nor its affiliates are restricted from operating other branded hotels in the market areas of any of the hotels, and after such limited period of time, the Managers and their affiliates may also compete with the hotels by opening, managing or franchising additional hotels under the same brand name in direct competition with the Company's hotels. The Company expects to compete for hotel acquisition and financing opportunities with entities which may have substantially greater financial resources than the Company, including, without limitation, other publicly owned REITs, banks, insurance companies, pension plans and public and private partnerships. These entities may be able to accept more risk than the Company can prudently manage, including risks with respect to the creditworthiness of hotel operators. Such competition may reduce the number of suitable hotel acquisition or financing opportunities available to the Company and increase the bargaining power of hotel owners seeking to sell or finance their properties. Seasonality. The effects of seasonality, if any, are discussed in Management's Discussion and Analysis. Regulatory Matters. Hotel properties are subject to various laws, ordinances and regulations, including regulations relating to restaurants and other food and beverage operations and recreational facilities such as swimming pools, activity centers and other common areas. The Company believes that each of its hotels has the necessary permits and approvals required to enable the Lessee and or Manager to operate the hotels in the manner contemplated by the Leases and the Management Agreements. The Company requires its Lessees and Managers to maintain such required permits and approvals. Under various environmental laws, a current or previous owner or operator of real property may be liable for the costs of removal or remediation of hazardous or toxic substances on, under, in or emanating from such property. Such laws often impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances, and the liability under such laws has been interpreted to be strict, meaning that liability is imposed without regard to fault. Liability under such laws has also been interpreted to be joint and several, meaning that any current or previous owner or operator or other responsible party might be liable for the entire amount of the cleanup and remediation costs for a contaminated site. In addition, the presence of hazardous or toxic substances, or the failure to remediate such property properly, may adversely affect the market value of the property, as well as the owner's ability to sell or lease the property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal or remediation of such substances at the disposal or treatment facility, whether or not such facility is or ever was owned or operated by such person. In addition, certain environmental laws and common law principles govern the responsibility for the removal, encapsulation or disturbance of asbestos containing materials ("ACMs") when these ACMs are in poor condition or when a property with ACMs is undergoing renovation or demolition. Such laws could also be used to impose liability upon owners or operators of real properties for release of ACMs into the air that cause personal injury or other damage. The Company received a Phase I environmental assessment report for each of the hotels. The purpose of these reports is to identify, to the extent reasonably possible and based on reasonably available information, any existing and potential conditions resulting from hazardous or toxic substances, including petroleum products and ACMs, at the hotels. The scope of the Phase I environmental assessments generally included: (i) a review of available maps, aerial photographs and past and present uses of the site; (ii) an inspection of appropriate public records; and (iii) in certain cases, limited inquiries of governmental agencies having jurisdiction over certain environmental matters. Each Phase I environmental assessment also includes an on site visual inspection 7 of the Hotel to assess visual evidence of past or present on site waste disposal, visible surface contamination, potential sources of soil and groundwater contamination, above surface and subsurface storage tanks, visible drums, barrels and other storage containers, current waste streams and management practices, ACMs and polychlorinated biphenyl transformers. In addition, as part of the Phase I environmental assessment, abutting properties and nearby sources of potential contamination are identified through publicly available information and evaluated for potential impact on the hotels, to the extent reasonably possible. In some instances, the Company also caused additional investigations to be conducted with respect to certain of the hotels. Some of the hotels are located on or near properties with former or existing underground or above ground storage tanks used to store petroleum or other hazardous products, or on which activities involving hazardous substances have been or currently are being conducted. The Company is aware of petroleum contaminated soil and/or groundwater at several hotels from former or existing on-site or nearby service stations, leaking underground storage tanks or storage drums. In addition, the Company believes that some of the hotels may have been constructed on sites at which fill materials containing hazardous substances were used and that one of the hotels was constructed over abandoned oil and gas wells. The Company is also aware of several hotels that are located in a "Superfund" area or an area of regional groundwater contamination. The Company does not believe that these instances of on-site or regional contamination and historical or current activities will have a material adverse effect on the Company's business or results of operations. However, the Company cannot predict whether modifications of existing laws or regulations, the adoption of new laws or regulations or changes in conditions at the hotels may have a material adverse effect on the Company's business or results of operations in the future. Except as described above, the Company is not aware of any environmental condition with respect to the hotels that could have a material adverse effect on the Company's business or results of operations. No assurances can be given, however, that the Phase I environmental assessments undertaken with respect to the hotels have revealed all potential environmental liabilities, that any prior owner or operator of the real property on which the hotels are located did not create any material environmental condition not known to the Company, or that a material environmental condition does not otherwise exist as to any one or more of the hotels. Under Title III of the Americans with Disabilities Act ("ADA"), a hotel with more than five rooms for rent is considered both a "public accommodation" and a "commercial facility." Under the public accommodations provisions of the ADA, the Company, as owner of the hotels, is obligated to make reasonable accommodations to patrons who have physical, mental or other disabilities. This includes the obligation to remove architectural and communication barriers at the hotels when doing so is "readily achievable" and to ensure that alterations to the hotels performed after January 26, 1992 conform to the specific requirements of the ADA implementing regulations. The Leases require the Lessee to comply with the ADA with respect to the hotels. The Lessee will also generally be obligated to remedy any ADA compliance matters from the applicable FF&E Reserve, its own funds, financing by third parties or financing provided by the Company (which would increase base rent under the Leases). Taxation of the Company. Based upon certain representations described below, in the opinion of Sullivan & Worcester LLP, counsel to the Company ("Company Counsel"), the Company has been organized in conformity with the requirements for qualification as a REIT beginning with its taxable year ending December 31, 1995, and its currently proposed method of operation as represented by the Company will enable it to satisfy the requirements for such qualification. This opinion is conditioned upon the assumption that the Leases, the Company's Declaration of Trust and Bylaws and all other legal documents to which the Company is a party will be complied with by all parties thereto and upon certain representations made by the Company as to certain factual matters relating to the Company's organization and intended or expected manner of operation. In addition, this opinion is based on the law existing and in effect on the date thereof. The Company's qualification and taxation as a REIT will depend upon the Company's ability to meet on a continuing basis, through actual operating results, asset composition, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Code discussed below. While the Company has represented that it will operate in a manner so as to satisfy on a continuing basis the various REIT qualification tests, Company Counsel will not review compliance with these tests on a continuing basis, and no assurance can be given that the Company will satisfy such tests on a continuing basis. 8 In brief, if certain detailed conditions imposed by the REIT provisions of the Code are met, entities, such as the Company, that invest primarily in real estate and that otherwise would be treated for federal income tax purposes as corporations, are generally not taxed at the corporate level on their "REIT taxable income" that is currently distributed to shareholders of the Company ("Shareholders"). This treatment substantially eliminates the "double taxation" that generally results from the use of corporations. If the Company fails to qualify as a REIT in any year, however, it will be subject to federal income taxation as if it were a domestic corporation, and its Shareholders will be taxed in the same manner as shareholders of ordinary corporations. In such an event, the Company could be subject to potentially significant tax liabilities, and therefore the amount of cash available for distribution to its Shareholders would be reduced or eliminated. The Company elected REIT status for the taxable year ended December 31, 1995 and currently expects to continue to operate in a manner that permits it to retain REIT status in each taxable year thereafter. There can be no assurance, however, that this expectation will be fulfilled, since qualification as a REIT depends on the Company's continuing to satisfy numerous asset, income and distribution tests described below, which in turn will be dependent in part on the Company's operating results. The following summary is based on existing law, is not exhaustive of all possible tax considerations and does not give a detailed discussion of any state, local, or foreign tax considerations, nor does it discuss all of the aspects of federal income taxation that may be relevant to a Shareholder in light of his or her particular circumstances or to certain types of Shareholders (including insurance companies, tax-exempt entities, financial institutions, broker-dealers, foreign corporations and persons who are not citizens or residents of the United States) subject to special treatment under the federal income tax laws. General. In any year in which the Company qualifies as a REIT, in general it will not be subject to federal income tax on that portion of its REIT taxable income or capital gain which is distributed to Shareholders. The Company may, however, be subject to tax at normal corporate rates upon any taxable income or capital gain not distributed. Notwithstanding its qualification as a REIT, the Company may also be subject to taxation in certain other circumstances. If the Company should fail to satisfy either the 75% or the 95% gross income test (as discussed below), and nonetheless maintains its qualification as a REIT because certain other requirements are met, it will be subject to a 100% tax on the greater of the amount by which the Company fails either the 75% or the 95% gross income test, multiplied by a fraction intended to reflect the Company's profitability. The Company will also be subject to a tax of 100% on net income from any "prohibited transaction" as described below, and if the Company has (i) net income from the sale or other disposition of "foreclosure property" which is held for sale to customers in the ordinary course of business or (ii) other non-qualifying income from foreclosure property, it will be subject to tax on such income from foreclosure property at the highest corporate rate. In addition, if the Company should fail to distribute during each calendar year at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income for such year, and (iii) any undistributed taxable income from prior years, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. The Company may also be subject to tax in certain circumstances if it disposes within ten years of their acquisition of assets acquired in a tax-free reorganization (although no such transaction is currently contemplated). The Company may also be subject to the corporate alternative minimum tax. The Company will use the calendar year both for federal income tax purposes, and for financial reporting purposes. In order to qualify as a REIT, the Company must meet, among others, the following requirements: Share Ownership Tests. The Company's Shares must be held by a minimum of 100 persons for at least 335 days in each taxable year (or a proportional number of days in any short taxable year). In addition, at all times during the second half of each taxable year, no more than 50% in value of the outstanding Shares of the Company may be owned, directly or indirectly and by applying certain constructive ownership rules, by five or fewer individuals, which for this purpose includes certain tax-exempt entities. However, for purposes of this test, any Shares held by a qualified domestic pension or other retirement trust will be treated as held directly by its beneficiaries in proportion to their actuarial interest in such trust rather than by such trust. 9 In order to ensure compliance with the foregoing share ownership tests, the Company has placed certain restrictions on the transfer of its Shares to prevent additional concentration of Share ownership. Moreover, to evidence compliance with these requirements, under Treasury Regulations the Company must maintain records which disclose the actual ownership of its outstanding Shares. In fulfilling its obligations to maintain records, the Company must and will demand written statements each year from the record holders of designated percentages of its capital stock disclosing the actual owners of such Shares (as prescribed by the Treasury Regulations). A list of those persons failing or refusing to comply with such demand must be maintained as a part of the Company's records. A Shareholder failing or refusing to comply with the Company's written demand must submit with his tax return a similar statement disclosing the actual ownership of Shares of the Company and certain other information. In addition, the Company's Declaration of Trust provides restrictions regarding the transfer of its Shares that are intended to assist the Company in continuing to satisfy the Share ownership requirements. Asset Tests. At the close of each quarter of the Company's taxable year, the Company must satisfy two tests relating to the nature of its assets (determined in accordance with generally accepted accounting principles). First, at least 75% of the value of the Company's total assets must be represented by interests in real property, interests in mortgages on real property, shares in other REITs, cash, cash items, government securities and qualified temporary investments. Second, although the remaining 25% of the Company's assets generally may be invested without restriction, securities in this class may not exceed (i) in the case of securities of any one non-government issuer, 5% of the value of the Company's total assets or (ii) 10% of the outstanding voting securities of any one such issuer. Where a failure to satisfy the 25% asset test results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient non-qualifying assets within 30 days after the close of such quarter. The Company intends to maintain adequate records of the value of its assets to maintain compliance with the 25% asset test, and to take such action as may be required to cure any failure to satisfy the test within 30 days after the close of any quarter. Gross Income Tests. The Company must satisfy three source of income tests in each taxable year. The three tests are as follows: The 75% Test. At least 75% of the Company's gross income for the taxable year must be "qualifying income." Qualifying income generally includes (i) rents from real property (as defined below); (ii) interest on obligations secured by mortgages on, or interests in, real property; (iii) gains from the sale or other disposition of interests in real property and real estate mortgages, other than gain from property held primarily for sale to customers in the ordinary course of the Company's trade or business ("dealer property"); (iv) dividends or other distributions on shares in other REITs, as well as gain from the sale of such shares; (v) abatements and refunds of real property taxes; (vi) income from the operation, and gain from the sale, of property acquired at or in lieu of a foreclosure of the mortgage secured by such property ("foreclosure property"); (vii) commitment fees received for agreeing to make loans secured by mortgages on real property or to purchase or lease real property; and (viii) qualified temporary investment income. When the Company receives new capital in exchange for its Shares or other capital stock (other than dividend reinvestment amounts) or in a public offering of five-year or longer debt instruments, income attributable to the temporary investment of such new capital in stock or a debt instrument, if received or accrued within one year of the Company's receipt of the new capital, is qualifying temporary investment income. Rents received by the Company will qualify as "rents from real property" in satisfying the gross income requirements only if several conditions are met. Rents received from a tenant will not qualify as rents from real property if the Company, or an owner of 10% or more of the Company, directly or constructively owns 10% or more of such tenant. Thus, in order for gross income from a Hotel to qualify as rents from real property, the Company must not own, directly or constructively (applying constructive ownership rules under the Code), 10% or more of any lessee (the "10% ownership test"). Such constructive ownership rules generally provide that, if 10% or more in value of the Shares of the Company is owned, directly or indirectly, by or for any person, the Company is considered as owning the stock owned, directly or indirectly, by or for such Person. With respect to the 10% ownership test, the Company does not own and does not intend to acquire, directly or constructively, stock of any lessee. There can be no assurance, however, that the Company will be able to monitor and enforce such restrictions, nor will Shareholders necessarily be aware of shareholdings attributed to them under the attribution rules. The Company has 10 represented (which representation Sullivan & Worcester LLP has relied upon in rendering its opinion herein on REIT qualification) that it will satisfy the 10% ownership test. If rent attributable to personal property leased in connection with a lease of real property is greater than 15% of the total rent for the taxable year under or in connection with the lease, then the portion of rent attributable to such personal property will not qualify as rents from real property. Accordingly, the rents attributable to the Company's personal property leased under or in connection with a lease of the real property comprising a hotel must not be greater than 15% of the rents received under the applicable lease. The rent attributable to the Company's personal property for a hotel is the amount that bears the same ratio to total rent for the taxable year as (i) the average of the adjusted bases of the Company's personal property of such hotel at the beginning and at the end of the taxable year bears to (ii) the average of the aggregate adjusted bases of both the Company's real and personal property of such hotel at the beginning and at the end of such taxable year (the "Adjusted Basis Ratio"). The Company has represented (which representation Company Counsel has relied upon in rendering its opinion herein on REIT qualification) that the allocation of purchase price with respect to each Hotel is accurate and that not more than 15% of the rent for each taxable year with respect to each of the hotels or any other hotel property acquired by the Company in the future will be attributable to the Company's personal property under the foregoing rules. In addition, the Company intends not to acquire additional personal property for any hotels if such acquisition would cause the Adjusted Basis Ratio for such hotels to exceed 15%. While the Company believes that the allocation for tax purposes of the purchase price for the hotels to the personal property is accurate, there can be no assurance that the Service will not assert that a different allocation is appropriate and that more than 15% of the rents received under a Lease is attributable to personal property under the foregoing rules, or that a court would not uphold such assertion. If such a challenge were successfully asserted, the Company could fail the 15% Adjusted Basis Ratio as to one or more of its leases, which in turn could cause it to fail to satisfy the 75% or 95% gross income test and to fail to qualify as a REIT. An amount received or accrued, directly or indirectly with respect to any real or personal property, will not qualify as "rents from real property" for purposes of the 75% or the 95% gross income test if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that an amount so derived or accrued generally will not be excluded from "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales). In addition, the Company must not manage the property or furnish or render services to the tenants of such property, except through an independent contractor from whom the company derives no income. There is an exception to this rule permitting a REIT to perform certain customary tenant services of the sort which a tax-exempt organization could perform without being considered in receipt of "unrelated business taxable income." The 95% Test. In addition to deriving 75% of its gross income from the sources listed above, at least 95% of the Company's gross income for the taxable year must be derived from the above described qualifying income, dividends, interest, or gains from the sale or other disposition of stock, securities and real property that is not dealer property. Dividends and interest on any obligations not collateralized by an interest in real property are included for purposes of the 95% gross income test, but not for purposes of the 75% gross income test. For purposes of determining whether the Company complies with the 75% and the 95% gross income tests, gross income does not include income from prohibited transactions. A "prohibited transaction" is a sale of dealer property (excluding foreclosure property); however, it does not include a sale of property if such property is held by the Company for at least four years and certain other requirements (relating to the number of properties sold in a year, their tax bases, and the cost of improvements made thereto) are satisfied. See "-- Taxation of the Company -- General" above. Gain realized by the Company on the sale of any dealer property generally will be treated as income from a prohibited transaction that is subject to a 100% penalty tax. Under existing law, whether property is dealer property is a question of fact that depends on all the facts and circumstances with respect to the particular transaction. The Company intends to hold the hotels for investment with a view to long-term appreciation, to engage in the business of acquiring, owning and developing the hotels and other hotel properties acquired by the Company in the future, and to make such occasional sales of such hotels as are consistent with the Company's 11 investment objectives. Based upon the Company's investment objectives, the Company believes that overall, the hotels should not be considered dealer property and that the amount of income from prohibited transactions, if any, will not be material. The Company believes that, for purposes of both the 75% and the 95% gross income tests, its investment in the hotels will generally give rise to qualifying income in the form of rents, and that gains on sales of the hotels generally will also constitute qualifying income. The Company also believes that, for purposes of the 95% gross income test, if the portion of rent attributable in any case to furniture, furnishings, equipment and operating equipment were to be recharacterized as payments from a deemed financing of such items, any gross income attributable to such payments would be qualifying gross income in the form of interest and such interest income would not cause the Company to be unable to satisfy the 75% gross income test. Even if the Company fails to satisfy one or both of the 75% or the 95% gross income tests for any taxable year, it may still qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions will generally be available if: (i) the Company's failure to comply was due to reasonable cause and not to willful neglect; (ii) the Company reports the nature and amount of each item of its income included in the tests on a schedule attached to its tax return; and (iii) any incorrect information on such schedule is not due to fraud with intent to evade tax. If these relief provisions apply, however, the Company will nonetheless be subject to a 100% tax on the greater of the amount by which it fails either the 75% or the 95% gross income test, multiplied by a fraction intended to reflect the Company's profitability. The 30% Test. The Company must derive less than 30% of its gross income for each taxable year from the sale or other disposition of (i) real property held for less than four years (other than foreclosure property and involuntary conversions); (ii) stock or securities (including certain interest rate swap or cap agreements) held for less than one year; and (iii) property in a prohibited transaction. The Company does not anticipate that it will have difficulty in complying with this test. However, if extraordinary circumstances were to occur that gave rise to dispositions of hotels within four years after the respective dates of the Company's acquisition thereof, the Company may be unable to satisfy the 30% test. The Company may temporarily invest working capital in short term investments, which may include shares in other REITs. Although the Company will use its best efforts to ensure that its income generated by these investments will be of a type which satisfies the 75% and 95% gross income tests, there can be no assurance in this regard (see discussion above of the "new capital" rule under the 75% test). Moreover, the Company may realize short-term capital gain upon sale or exchange of such investments, and such short-term capital gain would be subject to the limitations imposed by the 30% gross income test. Foreclosure Property. The Company will be subject to tax at the maximum corporate rate (currently 35%) on income from any "foreclosure property," other than income that would be qualified income under the 75% gross income test, less expenses directly connected with the production of such income. However, gross income from any such foreclosure property will qualify under the 75% and the 95% gross income tests. Foreclosure property is defined as any real property (including interests in real property) and any personal property incident to such real property, acquired by a REIT as the result of a REIT having bid in such property at foreclosure, or having otherwise reduced such property to ownership or possession by agreement or process of law, after there was a default (or default was imminent) on a lease of such property or on an indebtedness which such property secured and for which the REIT makes a proper election to treat such property as foreclosure property. However, a REIT will not be considered to have foreclosed on a property where it takes control of the property as a mortgagee in possession and cannot receive any profit or sustain any loss except as a creditor of the mortgagor. Under the Code, property generally ceases to be foreclosure property with respect to a REIT on the date which is two years after the date such REIT acquired such property (or longer if an extension is granted by the Secretary of the Treasury). However, the foregoing grace period is terminated and foreclosure property ceases to be foreclosure property on the first day (i) on which a lease is entered into with respect to such property which, by its terms, will give rise to income which does not qualify under the 75% gross income test or any amount is received or accrued, directly or indirectly, pursuant to a lease entered into on or after such day which will give rise to income which does not qualify under the 75% gross income test, (ii) 12 on which any construction takes place on such property (other than completion of a building, or completion of any other improvement, where more than 10% of the construction of such building or other improvement was completed before default became imminent), or (iii) which is more than 90 days after the day on which such property was acquired by the REIT and the property is used in a trade or business which is conducted by the REIT (other than through an independent contractor from whom the REIT itself does not derive or receive any income). As a result of the rules with respect to foreclosure property, if a Lessee defaults on its obligations under a Lease for a Hotel and the respective Manager is not available to manage such Hotel after the Company terminates the Lessee's leasehold interest therein, and the Company is unable to find a replacement lessee for such Hotel within 90 days of such foreclosure and unable to find an independent contractor to manage it, gross income from hotel operations conducted by the Company from such property would cease to qualify for the 75% and the 95% gross income tests. (Advisors should qualify as an independent contractor which could operate foreclosure property for up to two years.) In such event, the Company might be unable to satisfy the 75% or the 95% gross income test, resulting in its failure to qualify as a REIT. Annual Distribution Requirements. In order to qualify as a REIT the Company is required to distribute dividends (other than capital gain dividends) to its Shareholders with respect to each year in an amount at least equal to (A) the sum of (i) 95% of the Company's REIT taxable income (computed without regard to the dividends paid deduction and the Company's net capital gain) and (ii) 95% of the net income (after tax), if any, from foreclosure property, minus (B) the sum of certain items of non-cash income (from certain imputed rental income and income from transactions inadvertently failing to qualify as like-kind exchanges). Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for such year and if paid on or before the first regular dividend payment after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its REIT taxable income, as adjusted, it will be subject to tax on the undistributed amount at regular capital gains or ordinary corporate tax rates, as the case may be. The Company will also be required to distribute currently as a dividend an amount equal to the earnings and profits of any corporation it may acquire in a tax-free reorganization (although no such transaction is currently contemplated). The Company intends to make timely distributions sufficient to satisfy the annual distribution requirements described in the first and last sentences of the preceding paragraph. It is possible that the Company may not have sufficient cash or other liquid assets to meet the 95% distribution requirement, due to timing differences between the actual receipt of income and actual payment of expenses on the one hand, and the inclusion of such income and deduction of such expenses in computing the Company's REIT taxable income on the other hand. To avoid any problem with the 95% distribution requirement, the Company will closely monitor the relationship between its REIT taxable income and cash flow and intends, if necessary, to borrow funds in order to satisfy the distribution requirement. However, there can be no assurance that such borrowing would be available at such time. If the Company fails to meet the 95% distribution requirement as a result of an adjustment to the Company's tax return by the Service, the Company may retroactively cure the failure by paying a "deficiency dividend" (plus applicable penalties and interest) within a specified period. Failure to Qualify. If the Company fails to qualify for taxation as a REIT in any taxable year and the relief provisions do not apply, the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to Shareholders in any year in which the Company fails to qualify as a REIT will not be deductible by the Company, nor generally will they be required to be made under the Code. In such event, to the extent of current and accumulated earnings and profits, all distributions to Shareholders will be taxable as ordinary income, and, subject to certain limitations in the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, the Company also will be disqualified from reelecting taxation as a REIT for the four taxable years following the year during which qualification was lost. Other Issues. In the case of certain sale leaseback arrangements, the Service could assert that the Company realized prepaid rental income in the year of purchase to the extent that the value of a leased property exceeds the purchase price paid by the Company for that property. In litigated cases 13 involving sale leasebacks which have considered this issue, courts have concluded that buyers have realized prepaid rent where both parties acknowledged that the purported purchase price for the property was substantially less than fair market value and the purported rents were substantially less than the fair market rentals. Because of the lack of clear precedent, complete assurance cannot be given that the Service could not successfully assert the existence of prepaid rental income. Depreciation of Properties. For tax purposes, the Company's real property generally is depreciated on a straight line basis over 40 years and personal property owned by the Company generally is depreciated over nine years. Taxation of Shareholders. Taxation of Taxable Domestic Shareholders. As long as the Company qualifies as a REIT, distributions made to the Company's taxable domestic Shareholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by them as ordinary income and will not be eligible for the dividends received deduction for corporations. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent they do not exceed the Company's actual net capital gain for the taxable year) without regard to the period for which the Shareholder has held its Shares. However, corporate Shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. To the extent that the Company makes distributions in excess of current and accumulated earnings and profits, these distributions are treated first as a tax-free return of capital to the Shareholder, reducing the tax basis of a Shareholder's Shares by the amount of such excess distribution (but not below zero), with distributions in excess of the Shareholder's tax basis being taxed as capital gains (if the Shares are held as a capital asset). In addition, any dividend declared by the Company in October, November or December of any year and payable to a Shareholder of record on a specific date in any such month shall be treated as both paid by the Company and received by the Shareholder on December 31 of such year, provided that the dividend is actually paid by the Company during January of the following calendar year. Shareholders may not include in their individual income tax returns any net operating losses or capital losses of the Company. Federal income tax rules may also require that certain of the Company's minimum tax adjustments and preferences be apportioned to Shareholders. In general, any loss upon a sale or exchange of Shares by a Shareholder who has held such Shares for six months or less (after applying certain holding period rules) will be treated as a long-term capital loss, to the extent of distributions from the Company required to be treated by such Shareholder as long-term capital gains. Investors (other than certain corporations) who borrow funds to finance their acquisition of Shares in the Company could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred in such an arrangement. Under Section 163(d) of the Code, interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment is generally deductible only to the extent of the taxpayer's net investment income. An investor's net investment income will include the dividend and (if the investor so elects) capital gain dividend distributions he receives from the Company; however, distributions treated as a nontaxable return of the Shareholder's basis will not enter into the computation of net investment income. Under Section 469 of the Code, taxpayers (other than certain corporations) generally will not be entitled to deduct losses from so-called passive activities except to the extent of their income from passive activities. For purposes of these rules, distributions received by a Shareholder from the Company will not be treated as income from a passive activity and thus will not be available to offset a Shareholder's passive activity losses. Taxation of Tax-Exempt Shareholders. The Service has ruled that amounts distributed by a REIT to a tax-exempt employees' pension trust do not constitute unrelated business taxable income ("UBTI"). Subject to the discussion below regarding a "pension-held REIT," based upon such ruling and the statutory framework of the Code, distributions by the Company to a Shareholder that is a tax-exempt entity would not constitute UBTI, provided that the tax-exempt entity has not financed the acquisition of its Shares with "acquisition indebtedness" within the meaning of the Code, that the Shares are not otherwise used in an unrelated trade or business of the tax-exempt entity, and that the Company, consistent with its present intent, does not hold a residual interest in a REMIC. 14 If any pension or other retirement trust that qualifies under Section 401(a) of the Code ("qualified pension trust") holds more than 10% by value of the interests in a "pension-held REIT" at any time during a taxable year, a portion of the dividends paid to the qualified pension trust by such REIT may constitute UBTI. For these purposes, a "pension-held REIT" is defined as a REIT if (i) such REIT would not have qualified as a REIT but for the provisions of the Code which look through such a qualified pension trust in determining ownership of shares of the REIT and (ii) at least one qualified pension trust holds more than 25% by value of the interests of such REIT or one or more qualified pension trusts (each owning more than a 10% interest by value in the REIT) hold in the aggregate more than 50% by value of the interests in such REIT. Information Reporting and Backup Withholding Tax. The Company will report to its domestic Shareholders and to the Service the amount of dividends paid for each calendar year, and the amount of tax withheld, if any, with respect thereto. Under the back-up withholding rules, a Shareholder may be subject to backup withholding at the rate of 31% with respect to dividends paid unless such Shareholder (i) is a corporation or comes within certain other exempt categories and, when required, demonstrates this fact or (ii) provides a taxpayer identification number, certifies as to no loss of exemption from backup withholding, and otherwise complies with applicable requirements of the backup withholding rules. A Shareholder that does not provide the Company with its correct taxpayer identification number may also be subject to penalties imposed by the Service. Any amount paid as backup withholding is available as a credit against the Shareholder's income tax liability. In addition, the Company may be required to withhold a portion of capital gain distributions made to any Shareholders who fail to certify their non-foreign status to the company. See "Certain United States Tax Considerations for Non-U.S. Shareholders." Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained provided that the required information is furnished to the Service. Other Tax Considerations. Possible Legislative or Other Actions Affecting Tax Consequences. Shareholders should recognize that the present federal income tax treatment of investment in the Company may be modified by legislative, judicial or administrative action at any time and that any such action may affect investments and commitments previously made. The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the Service and the Treasury Department, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. No assurance can be given as to the form or content (including with respect to effective dates) of any tax legislation which may be enacted. Revisions in federal tax laws and interpretations thereof could affect the tax consequences of an investment in the Company. State and Local Taxes. The Company and its Shareholders may be subject to state or local taxation, and the Company may be subject to state or local tax withholding requirements, in various jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its Shareholders may not conform to the federal income tax consequences discussed above. Consequently, prospective Shareholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the Shares. Certain United States Tax Considerations Non-U.S. Shareholders. The following is a discussion of certain anticipated U.S. federal income and U.S. federal estate tax consequences of the ownership and disposition of Shares applicable to non-U.S. Shareholders of such Shares. The discussion is based on current law and is for general information only. The discussion does not address either aspects of U.S. federal taxation other than income and estate taxation or all aspects of U.S. federal income and estate taxation. The discussion does not consider any specific facts or circumstances that may apply to a particular non-U.S. Shareholder. In general, a non-U.S. Shareholder will be subject to regular United States income tax with respect to its investment in the Company if such investment is "effectively connected" with the non-U.S. Shareholder's conduct of a trade or business in the United States, or if the non-U.S. Shareholder is a nonresident alien individual who is present in the United States for 183 days or more during the taxable year. A corporate non-U.S. Shareholder that receives income that is (or is treated as) effectively connected with a U.S. trade or business may also be subject to the branch profits tax under Section 884 of the 15 Code, which is payable in addition to regular United States corporate income tax. The following discussion will apply to non-U.S. Shareholders whose investment in the Company is not so effectively connected and who are not individuals present in the U.S. for 183 days or more during the taxable year. A distribution by the Company that is not deemed to be attributable to gain from the sale or exchange by the Company of a United States real property interest and that is not designated by the Company as a capital gain dividend will be treated as an ordinary income dividend to the extent that it is made out of current or accumulated earnings and profits. A distribution by the Company that is designated as a capital gain dividend will generally not be subject to withholding except to the extent that such dividend is attributable to the sale or exchange by the Company of United States real property interests, as described below. Generally, an ordinary income dividend will be subject to a United States withholding tax equal to 30% of the gross amount of the dividend unless such withholding is reduced by an applicable tax treaty. A distribution of cash in excess of the Company's earnings and profits will be treated first as a nontaxable return of capital that will reduce a non-U.S. Shareholder's basis in its Shares (but not below zero) and then as gain from the disposition of such Shares, the tax treatment of which is described under the rules discussed below with respect to disposition of Shares. A distribution in excess of the Company's earnings and profits may be subject to 30% dividend withholding if at the time of the distribution it cannot be determined whether the distribution will be in an amount in excess of the Company's current and accumulated earnings and profits. If it is subsequently determined that such distribution is, in fact, in excess of current and accumulated earnings and profits, the non-U.S. Shareholder may seek a refund from the Service. The Company expects to withhold United States income tax at the rate of 30% on the gross amount of any such distributions made to a non-U.S. Shareholder in any tax year unless (i) a lower tax treaty applies and the required form evidencing eligibility for that reduced rate for such tax year is filed with the Company or (ii) the non-U.S. Shareholder files IRS Form 4224 for such tax year with the Company claiming that the distribution is "effectively connected" income. For any year in which the Company qualifies as a REIT, distributions by the Company that are attributable to gain from the sale or exchange of a United States real property interest will be taxed to a non-U.S. Shareholder in accordance with the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, such distributions are taxed to a non-U.S. Shareholder as if such distributions were gains "effectively connected" with a United States trade or business. Accordingly, a non-U.S. Shareholder will be taxed at the normal capital gain rates applicable to a U.S. Shareholder (subject to any applicable alternative minimum tax and a special alternative minimum tax in the case of non-resident alien individuals). Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a foreign corporate Shareholder that is not entitled to treaty exemption. The Company will be required to withhold from distributions to non-U.S. Shareholders, and remit to the Service, 35% of the amount of any distribution that could be designated as capital gain dividends to the extent that such dividends are attributable to the sale or exchange by the Company of United States real property interests. Tax treaties may reduce the Company's withholding obligations. If the amount of tax withheld by the Company with respect to a distribution to a non-U.S. Shareholder exceeds the Shareholder's United States liability with respect to such distribution, the non-U.S. Shareholder may file for a refund of such excess from the Service. In this regard, it should be noted that the 35% withholding tax rate on capital gain dividends corresponds to the maximum income tax rate applicable to corporations but is higher than the 28% maximum rate on capital gains of individuals. The United States Treasury issued proposed regulations on April 22, 1996 (the "Proposed Regulations") which, if adopted, would affect the United States taxation of dividends paid to a non-U.S. Shareholder. Under the Proposed Regulations, to obtain a reduced rate of withholding under treaty, a non-U.S. Shareholder generally would be required to provide an Internal Revenue Service Form W-8 certifying such non-U.S. Shareholder's entitlement to benefits under the treaty. The Proposed Regulations also provide rules to determine whether, for purposes of determining the applicability of a tax treaty, dividends paid to a non-U.S. Shareholder that is an entity should be treated as paid to the entity or to those holding an interest in the entity. The Proposed Regulations are generally proposed to be effective with respect to dividends paid after December 31, 1997, subject to certain transition rules. The foregoing discussion is not intended to be a complete discussion of the provisions of the Proposed Regulations, and Shareholders are urged to consult their tax advisors with respect to the effect the Proposed Regulations would have if adopted. 16 If the Shares fail to constitute a "United States real property interest" within the meaning of FIRPTA, a sale of the Shares by a non-U.S. Shareholder generally will not be subject to United States taxation unless (i) investment in the Shares is effectively connected with the non-U.S. Shareholder's United States trade or business, in which case, as discussed above, the non-U.S. Shareholder would be subject to the same treatment as U.S. Shareholders on such gain or (ii) the non-U.S. Shareholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year, in which case the nonresident alien individual will be subject to a 30% tax on the individual's capital gains. The Shares will not constitute a United States real property interest if the Company is a "domestically controlled REIT." A domestically controlled REIT is a REIT in which at all times during a specified testing period less than 50% in value of its shares is held directly or indirectly by non-U.S. Shareholders. It is currently anticipated that the Company will be a domestically controlled REIT, and therefore that the sale of Shares will not be subject to taxation under FIRPTA. However, because the Shares will be publicly traded, no assurance can be given that the Company will continue to be a domestically controlled REIT. If the Company did not constitute a domestically controlled REIT, whether a non-U.S. Shareholder's sale of Shares would be subject to tax under FIRPTA as a sale of a United States real property interest would depend on whether the Shares were "regularly traded" (as defined by applicable Treasury Regulations) on an established securities market (e.g., the NYSE, on which the Shares will be listed) and on the size of the selling Shareholder's interest in the Company. If the gain on the sale of the Shares were subject to taxation under FIRPTA, the non-U.S. Shareholder would be subject to the same treatment as a U.S. Shareholder with respect to such gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). In any event, a purchaser of Shares from a non-U.S. Shareholder will not be required under FIRPTA to withhold on the purchase price if the purchased Shares are "regularly traded" on an established securities market or if the Company is a domestically controlled REIT. Otherwise, under FIRPTA, the purchaser of Shares may be required to withhold 10% of the purchase price and to remit such amount to the Service. Federal Estate Tax. Shares owned or treated as owned by an individual who is not a citizen or resident (as defined for United States federal estate tax purposes) of the United States at the time of death will be includible in the individual's gross estate for United States federal estate tax purposes unless an applicable estate tax treaty provides otherwise. Backup Withholding and Information Reporting Requirements. The Company must report annually to the Service and to each non-U.S. Shareholder the amount of dividends paid to and the tax withheld with respect to such holder. These information reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of these information returns may also be made available under the provisions of a specific treaty or agreement to the tax authorities in the country in which the non-U.S. Shareholder resides. United States backup withholding tax (which generally is a withholding tax imposed at the rate of 31% on certain payments to persons that fail to furnish the information required under the United States information reporting requirements) will generally not apply to dividends paid on Shares to a non-U.S. Shareholder at an address outside the United States. The payment of the proceeds from the disposition of Shares to or through the United States office of a broker will be subject to information reporting and backup withholding at a rate of 31% unless the owner, under penalties of perjury, certifies, among other things, its status as a non-U.S. Shareholder, or otherwise establishes an exemption. The payment of the proceeds from the disposition of Shares to or through a non-U.S. office of a broker generally will not be subject to backup withholding and information reporting. In the case of proceeds from a disposition of Shares paid to or through a non-U.S. office of a U.S. broker or paid to or through a non-U.S. office of a non-U.S. broker that is (i) a "controlled foreign corporation" for United States federal income tax purposes or (ii) a person 50% or more of whose gross income from all sources for a certain three-year period was effectively connected with a United States trade or business, (a) backup withholding will not apply unless the broker has actual knowledge that the owner is not a non-U.S. Shareholder, and (b) information reporting will not apply if the broker has documentary evidence in its files that the owner is a non-U.S. Shareholder (unless the broker has actual knowledge to the contrary). 17 Any amounts withheld under the backup withholding rules from a payment to a non-U.S. Shareholder will be refunded by the Service (or credited against the non-U.S. Shareholder's United States federal income tax liability, if any), provided that the required information is furnished to the Service. As discussed above, the United States Treasury issued the Proposed Regulations which also would, if adopted, alter the information reporting and backup withholding rules applicable to non-U.S. Shareholders. Among other things, the Proposed Regulations would provide certain presumptions under which a non-U.S. Shareholder would be subject to backup withholding and information reporting until the Company receives certification from such shareholder of non-U.S. status. As noted, the Proposed Regulations are generally proposed to be effective with respect to dividends paid after December 31, 1997, subject to certain transition rules. The foregoing discussion is not intended to be a complete discussion of the provisions of the Proposed Regulations, and Shareholders are urged to consult their tax advisors with respect to the effect that the Proposed Regulations would have if adopted. Other Tax Consequences. The Company and its Shareholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. There may be other federal, state, local or foreign income, or estate and gift, tax considerations applicable to the circumstances of a particular investor. Shareholders should consult their own tax advisors with respect to such matters. ERISA Plans, Keogh Plans and Individual Retirement Accounts. General Fiduciary Obligations. Fiduciaries of a pension, profit-sharing or other employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") ("ERISA Plan") must consider whether their investment in the Company's Shares satisfies the diversification requirements of ERISA, whether the investment is prudent in light of possible limitations on the marketability of the Shares, whether such fiduciaries have authority to acquire such Shares under the appropriate governing instrument and Title I of ERISA, and whether such investment is otherwise consistent with their fiduciary responsibilities. Any ERISA Plan fiduciary should also consider ERISA's prohibition on improper delegation of control over or responsibility for "plan assets." Trustees and other fiduciaries of an ERISA plan may incur personal liability for any loss suffered by the plan on account of a violation of their fiduciary responsibilities. In addition, such fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the plan on account of such a violation (the "Fiduciary Penalty"). Also, fiduciaries of any Individual Retirement Account ("IRA"), Keogh Plan or other qualified retirement plan not subject to Title I of ERISA because it does not cover common law employees ("Non-ERISA Plan") should consider that such an IRA or Non-ERISA Plan may only make investments that are authorized by the appropriate governing instrument. Fiduciary Shareholders should consult their own legal advisers if they have any concern as to whether the investment is inconsistent with any of the foregoing criteria. Prohibited Transactions. Fiduciaries of ERISA Plans and persons making the investment decision for an IRA or other Non-ERISA Plan should also consider the application of the prohibited transaction provisions of ERISA and the Code in making their investment decision. Sales and certain other transactions between an ERISA Plan, IRA, or other Non-ERISA Plan and certain persons related to it are prohibited transactions. The particular facts concerning the sponsorship, operations and other investments of an ERISA Plan, IRA, or other Non-ERISA Plan may cause a wide range of other persons to be treated as disqualified persons or parties in interest with respect to it. A prohibited transaction, in addition to imposing potential personal liability upon fiduciaries of ERISA Plans, may also result in the imposition of an excise tax under the Code or a penalty under ERISA upon the disqualified person or party in interest with respect to the ERISA or Non-ERISA Plan or IRA. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA is maintained (or his beneficiary), the IRA may lose its tax-exempt status and its assets may be deemed to have been distributed to such individual in a taxable distribution (and no excise tax will be imposed) on account of the prohibited transaction. Fiduciary Shareholders should consult their own legal advisers if they have any concern as to whether the investment is a prohibited transaction. 18 Special Fiduciary and Prohibited Transactions Considerations. The Department of Labor ("DOL"), which has certain administrative responsibility over ERISA Plans as well as over IRAs and other Non-ERISA Plans, has issued a regulation defining "plan assets." The regulation generally provides that when an ERISA or Non-ERISA Plan or IRA acquires a security that is an equity interest in an entity and that security is neither a "publicly offered security" nor a security issued by an investment company registered under the Investment Company Act of 1940, the ERISA or Non-ERISA Plan's or IRA's assets include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established either that the entity is an operating company or that equity participation in the entity by benefit plan investors is not significant. The regulation defines a publicly offered security as a security that is "widely held," "freely transferable" and either part of a class of securities registered under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or sold pursuant to an effective registration statement under the Securities Act (provided the securities are registered under the Exchange Act within 120 days after the end of the fiscal year of the issuer during which the offering occurred). The Company's Shares are registered under the Exchange Act. The regulation provides that a security is "widely held" only if it is part of a class of securities that is owned by 100 or more investors independent of the issuer and of one another. However, a security will not fail to be "widely held" because the number of independent investors falls below 100 subsequent to the initial public offering as a result of events beyond the issuer's control. The regulation provides that whether a security is "freely transferable" is a factual question to be determined on the basis of all relevant facts and circumstances. The regulation further provides that, where a security is part of an offering in which the minimum investment is $10,000 or less, certain restrictions ordinarily will not, alone or in combination, affect a finding that such securities are freely transferable. The restrictions on transfer enumerated in the regulation as not affecting that finding include: any restriction on or prohibition against any transfer or assignment which would result in a termination or reclassification of the Company for federal or state tax purposes, or would otherwise violate any state or federal law or court order; any requirement that advance notice of a transfer or assignment be given to the Company and any requirement that either the transferor or transferee, or both, execute documentation setting forth representations as to compliance with any restrictions on transfer which are among those enumerated in the regulation as not affecting free transferability, including those described in the preceding clause of this sentence; any administrative procedure which establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and any limitation or restriction on transfer or assignment which is not imposed by the issuer or a person acting on behalf of the issuer. The Company believes that the restrictions imposed under the Company's Declaration and Bylaws on the transfer of Shares do not result in the failure of the Shares to be "freely transferable." Furthermore, the Company believes that at present there exist no other facts or circumstances limiting the transferability of the Shares which are not included among those enumerated as not affecting their free transferability under the regulation, and the Company does not expect or intend to impose in the future (or to permit any person to impose on its behalf) any limitations or restrictions on transfer which would not be among the enumerated permissible limitations or restrictions. However, the final regulation only establishes a presumption in favor of a finding of free transferability, and no guarantee can be given that the DOL or the Treasury Department will not reach a contrary conclusion. Assuming that the Shares will be "widely held" and that no other facts and circumstances exist which restrict transferability of the Shares, the Company has received an opinion from Company Counsel that the Shares should not fail to be "freely transferable" for purposes of the regulation due to the restrictions on transfer of the Shares under the Company's Declaration and Bylaws and that under the regulation the Shares are publicly offered securities and the assets of the Company will not be deemed to be "plan assets" of any ERISA Plan, IRA or other Non-ERISA Plan that invests in the Shares. If the assets of the Company are deemed to be plan assets under ERISA: (i) the prudence standards and other provisions of Part 4 of Title I of ERISA would be applicable to investments made by the Company; (ii) the person or persons having investment discretion over the assets of ERISA Plans which invest in the Company would be liable under the aforementioned Part 4 of Title I of ERISA for investments made by the Company which do not conform to such ERISA standards unless Advisors registers as an investment adviser under the 19 Investment Advisers Act of 1940 and certain other conditions are satisfied; and (iii) certain transactions that the Company might enter into in the ordinary course of its business and operation might constitute "prohibited transactions" under ERISA and the Code. Item 2. Properties General. As of December 31, 1996, the Company's hotels consist of 53 Courtyard by Marriott(R) hotels, 18 Residence Inn by Marriott(R) hotels, and 11 Wyndham Garden(R) hotels, with 11,728 rooms in 26 states. These hotels have an average age of approximately six years and the Company believes that the physical plant of each hotel in which it has invested is suitable and adequate for its present and any currently proposed uses. The hotels are all leased to the Lessees and operated by the Managers. See "Business -- The Hotels, Leases and Management Agreements." The following table summarizes certain information about the properties as of December 31, 1996. All dollar figures are in thousands. Total Number of Number of Investment at Annual Base State Hotels Rooms December 31, 1996 Rent - ----- ------ ----- ----------------- ---- Arizona 8 1,164 $ 67,628 $ 6,604 California 10 1,470 110,081 10,580 Delaware 1 152 12,830 1,210 Florida 3 449 38,882 3,780 Georgia 7 978 67,977 6,584 Illinois 3 514 39,879 3,811 Indiana 1 149 8,973 880 Iowa 1 108 8,034 780 Maryland 3 406 34,967 3,340 Massachusetts 8 1,072 71,919 6,970 Michigan 2 281 12,209 1,180 Minnesota 2 358 18,276 1,813 Missouri 2 298 16,934 1,620 New Jersey 3 416 33,096 3,170 New Mexico 1 112 12,543 1,190 New York 3 403 29,761 2,850 North Carolina 4 534 33,113 3,190 Ohio 1 106 6,741 650 Pennsylvania 4 567 46,353 4,450 Rhode Island 1 148 10,507 1,020 South Carolina 1 108 6,053 580 Tennessee 3 399 32,785 3,189 Texas 3 405 29,430 2,830 Virginia 3 462 40,331 3,870 Washington 3 522 44,442 4,369 Wisconsin 1 147 8,943 850 ------- -------- -------- -------- 82 11,728 $842,687 $ 81,360 ======= ======== ======== ======== Certain of the hotels are currently and from time to time may be made subject to mortgages securing the Company's lines of credit, secured borrowings of the Company's subsidiaries or other secured borrowings. See "Management's Discussion and Analysis of Results of Operations and Financial Condition -- Liquidity and Capital Resources." The right to occupy the land underlying 10 of the hotels was acquired by an assignment of leasehold interest under long-term ground leases. In each case, the remaining term of the ground lease (including renewal options) is in excess of 42 years, and the ground lessors are unrelated to the sellers and the Company. 20 Rent payable under the 10 ground leases is the responsibility of the Company's Lessees and is generally calculated as a percentage of Hotel revenues. Eight of the 10 ground leases require minimum annual rent ranging from approximately $90,000 to $502,900 per year. If a ground lease terminates, the Lease with respect to the Hotel on such ground-leased land will also terminate. If a Lessee does not perform such obligations under the ground lease or elects not to renew any ground lease, the Company must perform such obligations under the ground lease or renew such ground lease in order to protect its investments in the affected Hotel. Any pledge of the Company's interests in a ground lease may also require the consent of the applicable ground lessor and its lenders. Item 3. Legal Proceedings Although in the ordinary course of business the Company is or may become involved in legal proceedings, the Company has a limited operating history and is not aware of any material pending legal proceeding affecting any of the hotels for which it might become liable. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of shareholders during the fourth quarter of the year covered by this Form 10-K. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. The Company's Shares are traded on the New York Stock Exchange (symbol: HPT). The following table sets forth for the periods indicated the high and low closing sale prices for the Shares as reported in the New York Stock Exchange Composite Transactions reports since the Company's initial public offering. 1995 High Low August 22 to September 30 27 24 1/2 Fourth Quarter 26 3/4 24 3/8 1996 High Low First Quarter 27 7/8 25 1/2 Second Quarter 27 24 5/8 Third Quarter 26 7/8 25 Fourth Quarter 29 1/2 25 The closing price of the Shares on the New York Stock Exchange on March 26, 1997 was $32.50 per Share. 21 As of March 4, 1997, there were 850 Shareholders of record and the Company estimates that as of such date there were approximately 38,000 beneficial owners of the Shares. Information about the Company's dividends paid is summarized in the table below. Dividends are generally paid in the quarter following the quarter to which they relate. Dividend Annualized Per Share Dividend Rate 1995 Third Quarter $0.24 $2.20 Fourth Quarter 0.55 2.20 1996 First Quarter $0.58 $2.32 Second Quarter 0.58 2.32 Third Quarter 0.59 2.36 Fourth Quarter 0.59 2.36 All dividends declared have been paid. The Company intends to continue to declare and pay future dividends on a quarterly basis. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Code, the Company is required to make distributions to shareholders which annually will be at least 95% of the Company's "real estate investment trust taxable income" (as defined in the Code). All distributions will be made by the Company at the discretion of the Board of Trustees and will depend on the earnings of the Company, cash available for distribution, the financial condition of the Company and such other factors as the Board of Trustees deems relevant. The Company intends to distribute substantially all of its "real estate investment trust taxable income" to its shareholders. Item 6. Selected Financial Data The following table sets forth selected financial and operating data on an historical and a pro forma basis for the Company for the years ended December 31, 1995 and 1996. The pro forma data for 1995 are unaudited and presented as if the Company's formation transactions, primarily the acquisition and leasing of the 37 hotels acquired in 1995 and the Company's initial public offering of Shares, and certain other transactions had been consummated as of the date or for the period presented. The pro forma data are not necessarily indicative of what the actual financial position or results of operations would have been, nor do they purport to represent the financial position or results of operations for future periods. The following selected and pro forma financial and operating data should be read in conjunction with the financial statements and the notes thereto included beginning at page F-1 of this 22 Report on Form 10-K.
Historical Pro Forma Historical --------------------- ----------------- ------------------ February 7, 1995 (Inception) to Year Ended Year Ended December 31, 1995 (1) December 31, 1995 December 31, 1996 (In thousands, except per Share data) Operating Data: Revenues: $ 19,531 $ 33,308 $ 69,514 Rental income 4,037 6,424 12,169 FF&E reserve income 74 144 946 -------- -------- -------- Total revenues 23,642 39,876 82,629 Expenses: Interest 5,063 -- 5,646 Depreciation and amortization 5,820 9,229 20,398 General and administrative 1,410 2,616 4,921 -------- -------- -------- Total expense: 12,293 11,845 30,965 -------- -------- -------- Net income $ 11,349 $ 28,031 $ 51,664 ======== ======== ======== Net income per share $ 2.51 $ 2.22 $ 2.23 Weighted average shares outstanding . 4,515 12,601 23,170 Balance Sheet Data (as of December 31): Real estate properties, net $326,752 $326,752 $816,469 Total Assets 338,947 338,947 871,603 Total debt -- -- 125,000 Shareholders' equity 297,951 297,951 645,208 Other Data: Cash available for distribution (2) $ 13,156 $ 30,836 $ 60,794 Cash provided by operating activities (3) 14,140 31,820 61,743 Cash used in investing activities(3) . 303,652 303,652 448,678 Cash provided by financing activities(3) 291,647 268,481 422,873 Cash available for Distribution per share(2)$2.91 $2.45 $2.62 (1) From inception on February 7, 1995 until completion of its initial public offering on August 22, 1995, the Company was a 100% owned subsidiary of HRP. The Company was initially capitalized with $1.0 million of equity and $163.3 million of debt. The debt was provided by HRP at rates which were lower than the market rates which the Company would have paid on a stand alone basis. Accordingly, the Company does not believe that its results of operations while it was a wholly owned subsidiary are comparable to subsequent periods. (2) Some REITs use funds from operations ("FFO"), representing net income, calculated in accordance with generally accepted accounting principles, adjusted for non-recurring items, before real estate depreciation and amortization as a measure of financial performance. Because of the impact of FF&E Reserves on the Company's calculation of FFO which results from the fact that the FF&E Reserves from certain Leases are included in FFO (and by the Company), the Company does not believe FFO represents a meaningful measure of its performance or offers a meaningful basis for comparison of its performance with that of other public hotel REITs. Instead, the Company believes that the best measure of its financial performance is Cash Available for Distribution, which it defines as net income from operations, plus depreciation and amortization and other non-cash charges and less Company income reserved for renovations and refurbishment (i.e., the FF&E Reserves) and adjusted for other than non-cash items and non-recurring items, if any. Moreover, the Company believes that Cash Available for Distribution provides a meaningful basis for comparison of the Company's performance with the performance of other public hotel REITs provided that appropriate amounts are reserved for renovations and refurbishment in all cases. 23 (3) Amounts are computed on a pro forma basis in accordance with generally accepted accounting principles, except that cash provided by (used in) operating activities excludes the effect on cash resulting from changes in current assets and current liabilities. The Company does not believe that these excluded items are material to net cash provided by operating activities.
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition Overview The Company was organized on February 7, 1995 and commenced operations on March 24, 1995 with the acquisition of its first 21 hotels. The Company completed its initial public offering of shares and acquired an additional 16 hotels on August 22, 1995. Since it has been recently formed and has limited historical financial data, the Company believes it is meaningful to an understanding of its present and ongoing operations to discuss the Company's pro forma results of operations as well as its historical results of operations. The following discussion should be read in conjunction with the financial statements and the notes thereto included elsewhere herein. Pro forma results and percentage relationships set forth in the financial highlights section and in such financial statements may not be indicative of the future operations of the Company. Historical and Pro Forma Results of Operations Year Ended December 31, 1996 versus Pro Forma Year Ended December 31, 1995 The Company's assets increased to $871.6 million as of December 31, 1996 from $338.9 million at December 31, 1995. The increase primarily resulted from three hotel portfolio acquisitions completed during 1996. In March and April of 1996, the Company acquired 16 Courtyard by Marriott(R) hotels for $176.4 million and 18 Residence Inn(R) by Marriott hotels for $172.2 million. In May 1996, the Company acquired 11 Wyndham Garden(R) hotels for $135.3 million. These acquisitions were funded through the use of cash on hand, borrowings on the Company's line of credit, and the net proceeds form the offering of 14,250,000 shares in April 1996. Total revenues in 1996 were $82.6 million versus pro forma 1995 revenue of $39.9 million. Total revenues were comprised principally of base and percentage rent of $69.5 million and FF&E reserve income of $12.2 million in 1996 versus $33.3 million and $6.4 million, respectively, in the pro forma period. The Company's results of operations in 1996 are reflective of the growth in the number of owned hotels to 82, from 37 at year end 1995. The leases for the Company's 82 hotels at December 31, 1996 call for base rent of $81.3 million annually, versus $32.9 million for the 37 hotels owned at December 31, 1995. During 1996, the Company earned revenue of approximately $1.2 million ($0.05/share) in percentage rents from its portfolio of 53 Courtyard hotels, reflective of continued increases in Total Hotel Sales at these properties. Total expenses in 1996 were $31.0 million, including interest expense and depreciation and amortization of $5.6 million and $20.4 million, respectively, versus pro forma 1995 expenses of $11.8 million, including depreciation and amortization of $9.2 million. A portion of the hotels purchased in 1996 were financed with proceeds from the Company's line of credit which was ultimately repaid with prepayable floating rate mortgages. Such debt financing in 1996 gave rise to the $5.6 million of interest expense referred to above, versus zero for pro forma 1995, when the Company did not use third-party debt. The substantial increase in the number of hotels owned by the Company has also proportionately increased the Company's general expense levels, including depreciation and amortization and general and administrative expenses. Net income in 1996 was $51.7 million ($2.23 per share) and cash available for distribution for the period was $60.8 million ($2.62 per share), based in both cases on average outstanding shares for the period of 23,170,000. This compares with pro forma 1995 net income of $28.0 million ($2.22 per share) and cash available for distribution of $30.8 million ($2.45 per share), based in both cases upon 13,600,900 outstanding shares. This 7% growth in CAD is primarily related to the effects of the Company's 1996 hotel acquisitions and 24 related financing activity as well as growth in percentage rent to $1.2 million in 1996 from $0.4 million in the 1995 pro forma period. During April 1996, the Company completed an offering of 14,250,000 common shares of beneficial interest raising net proceeds of approximately $358 million to fund its acquisitions and more than doubling its equity capitalization and shares outstanding. Cash flow provided by (used for) operating, investing and financing activities was $61.7 million, ($448.7 million) and $422.9 million, respectively, for the year ended December 31, 1996. February 7, 1995 (Inception) Through December 31, 1995 Total revenues from Inception through December 31, 1995 were $23.6 million, which included base and percentage rent of $19.5 million and FF&E reserve income of $4.0 million. Total expenses for the period were $12.3 million, including interest expense and depreciation and amortization of $5.0 million and $5.8 million, respectively. Net income for the period was $11.3 million ($2.51 per share) and cash available for distribution for the period was $13.2 million ($2.91 per share), based in both cases on average outstanding shares for the period of 4,515,000. From Inception until completion of its initial public offering on August 22, 1995, the Company was a 100% owned subsidiary of HRP and was initially capitalized with $1 million of equity and $163.3 million of debt. The debt was provided by HRP at rates which were lower than the market rates which the Company would have paid on a stand alone basis. Accordingly, the Company does not believe that its results of operations while it was a wholly owned subsidiary of HRP are comparable to subsequent periods. Cash flow provided by (used for) operating, investing and financing activities was $14.1 million, ($303.7 million) and $291.6 million, respectively, for the year ended December 31, 1996. Pro Forma Year Ended December 31, 1995 The pro forma results of operations assume that the Company's formation transactions, the initial public offering of shares and the acquisition and leasing of the 37 hotels and related transactions all occurred on January 1, 1995. On this pro forma basis, total revenues would have been $39.9 million (principally base and percentage rents of $33.3 million and FF&E reserve income of $6.4 million). Total expenses would have been $11.8 million (including depreciation and amortization of $9.2 million and general and administrative expenses of $2.6 million). Net income would have been $28.0 million or $2.22 per share, and cash available for distribution would have been $30.8 million or $2.45 per share, based in both cases upon 12,600,900 shares outstanding. Liquidity and Capital Resources The Company's primary source of cash to fund its dividends and day to day operations is the base and percentage rent it receives. Base rent is paid monthly in advance and percentage rent is paid either monthly or quarterly in arrears. This flow of funds from rent has historically been sufficient for the Company to pay dividends and meet day to day operating expenses. The Company believes that its operating cash flow will be sufficient to meet its operating expenses and dividend payments. In order to fund acquisitions and to accommodate occasional cash needs which may result from timing differences between the receipt of rents and the need to pay dividends or operating expenses, the Company has entered into a line of credit arrangement was with DLJ Mortgage Capital, Inc. ("DLJMC"). The line of credit is for up to $200 million, all of which was available at December 31, 1996. Drawings under the line of credit are secured by first mortgage liens on certain of the Company's hotels. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. The line of credit matures on December 31, 1998; however, upon request and subject to certain terms and conditions, the Company has the right (but not the obligation) to convert amounts outstanding at maturity, if any, into an amortizing mortgage loan due on December 31, 2008. Interest on borrowings under the line of credit are payable until maturity at a spread above LIBOR; and interest during the extended term, if any, will be set at market rates at the time the loan is extended. During 1996, subsidiaries of the Company issued $125 million of commercial mortgage-backed securities ("Notes") in an unregistered 144A offering. The Notes are non-recourse notes sold to the public and secured by the Company's subsidiaries' assets including 18 Residence Inn by Marriott(R) and 11 25 Wyndham Garden(R) hotels. The Notes carry interest that floats with one-month LIBOR plus a spread and are due December 1, 2001, but may be prepaid by the Company at any time without penalty. In connection with this issuance of Notes, the Company entered into interest rate cap agreements for $125 million (notional amount) with a major financial institution (the "Cap Counterparty") which limit the Company's maximum interest rate exposure to 7.6925% on this debt. The Company expects to use existing cash balances, borrowings under the Line of Credit and/or net proceeds of offerings of equity or debt securities to fund future hotel acquisitions. To the extent the Company borrows on the line of credit, the Company will explore various alternatives in both the timing and method of repayment of such amounts. Such alternatives may include incurring long term debt. On December 24, 1996, the Company's Shelf Registration for up to $500 million of securities, including debt securities, was declared effective by the Securities and Exchange Commission (SEC). An effective Shelf Registration enables HPT to issue specific securities on an expedited basis by filing a prospectus supplement with the SEC. On January 8, 1997, the Company acquired a 381-room full service hotel in Salt Lake City, Utah, for $44 million. The hotel is leased to Wyndham Hotel Corporation and has been rebranded as a Wyndham(R) hotel. The Company's net cash funding for this acquisition was approximately $34 million for which it used cash then on hand, which was generated primarily from the Notes offering. Although there can be no assurance that the Company will consummate any debt or equity security offerings, the Company believes it will have access to various types of financing in the future, including debt or equity securities offerings, with which to finance future acquisitions. Seasonality The Company's hotels have historically experienced seasonal differences typical of the hotel industry with higher revenues in the second and third quarters of calendar years compared with the first and fourth quarters. This seasonality is not expected to cause fluctuations in the Company's rental income because the Company believes that the revenues generated its hotels will be sufficient for the lessees to pay rents on a regular basis notwithstanding seasonal fluctuations. Inflation The Company believes that inflation should not have a material adverse effect on the Company. Although increases in the rate of inflation may tend to increase interest rates which the Company may be required to pay for borrowed funds, the Company has a policy of obtaining interest rate caps in appropriate circumstances to protect it from interest rate increases. In addition, the Company's leases provide for the payment of percentage rent to the Company based on increases in total sales, and such rent should increase with inflation. Item 8. Financial Statements and Supplementary Data The financial statements, related notes, schedule and reports of independent public accountants for the Company are included following Part IV, beginning on page F-1, and identified in the index appearing at Item 14(a). The financial statements for HMH HPT Courtyard, Inc. and HMH HPT Residence, Inc. as of January 3, 1997 and for the period the ended and the report of independent public accountants begin on page F-13. Item 9. Changes in and Disagreements on Accounting and Financial Disclosure None. 26 PART III The information in Part III (Items, 10, 11, 12 and 13) is incorporated by reference to the Company's definitive Proxy Statement, which is expected to be filed not later than 120 days after the end of the Company's fiscal year. PART IV Item 14. Exhibits, Financial Statements, Schedule and Reports on Form 8-K.
(a) Index to Financial Statements and Financial Statement Schedules Hospitality Properties Trust Financial Statements: Report of Independent Public Accountants......................................... F-1 Consolidated Balance Sheet as of December 31, 1995 and December 31, 1996......... F-2 Consolidated Statement of Income for the period February 7, 1995 (inception) to December 31, 1995 and year ended December 31, 1996................ F-3 Consolidated Statement of Shareholders' Equity for the period February 7 , 1995 (inception) to December 31, 1995 and year ended December 31, 1996................ F-4 Consolidated Statement of Cash Flows for the Period February 7, 1995 (inception) to December 31, 1995 and year ended December 31, 1996................ F-5 Notes to Consolidated Financial Statements........................................ F-6 Report of Independent Public Accountants......................................... F-10 Schedule III - Real Estate and Accumulated Depreciation.......................... F-11 HMH HPT Courtyard, Inc. Financial Statements: Report of Independent Public Accountants......................................... F-13 Balance Sheet as of December 29, 1995 and January 3, 1997........................ F-14 Statement of Income for the period from inception through December 29, 1995 and the fiscal year ended January 3, 1997........................................ F-15 Statement of Shareholder's Equity for the period from inception to December 29, 1995 and the fiscal year ended January 3, 1997...................... F-16 Statement of Cash Flows for the period from inception to December 29, 1995 and the fiscal year ended January 3, 1997................... F-17 Notes to Financial Statements.................................................... F-18 HMH HPT Residence, Inc. Financial Statements: Report of Independent Public Accountants......................................... F-22 Balance Sheet as of January 3, 1997.............................................. F-23 27 Statement of Income for the period from inception through January 3, 1997....... F-24 Statement of Shareholder's Equity for the period from inception through January 3, 1997.......................................................... F-25 Statement of Cash Flows for the period from inception through January 3, 1997.......................................................... F-26 Notes to Financial Statements.................................................... F-27
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Exhibits: 3.1* Declaration of Trust of the Registrant 3.2* Bylaws of the Registrant 4.1* Form of Share Certificate 8.1 Opinion of Sullivan & Worcester LLP as to certain tax matters 10.1* Purchase-Sale and Option Agreement dated as of February 3, 1995 by and among HMH Courtyard Properties, Inc., HMH Properties, Inc. and Hospitality Properties, Inc., as amended 10.2** Fifth Amendment to Purchase-Sale and Option Agreement dated February 26, 1996, by and between IIIT and IIMII Properties, Inc. 10.3* Form of Courtyard Management Agreement between HMH Courtyard Properties, Inc., d/b/a HMH Properties, Inc. and Courtyard Management Corporation 10.4* Form of First Amendment to Courtyard Management Agreement between Courtyard Management Corporation and Hospitality Properties, Inc. and Consolidation Letter Agreement by and between Courtyard Management Corporation and Hospitality Properties, Inc. 10.5* Form of Lease Agreement between Hospitality Properties, Inc. and HMH HPT Courtyard, Inc. 10.19** Form of Lease Agreement between HMH HPT Residence Inn, Inc. and Hospitality Properties Trust 10.10* Advisory Agreement(+) 10.11 Form of Revolving Credit Agreement by and between the Company and DLJ Mortgage Capital, Inc., as amended and restated on December 29, 1995, as further amended by Amendment No. 1, dated February 26, 1996 10.12 Amendment, dated November 25, 1996 to the Revolving Credit Agreement, amended and restated on December 29, 1995, by and between the Company and DLJ Mortgage Capital, Inc. 10.13** Form of Residence Inn Management Agreement between HMH Properties, Inc. and Residence Inn by Marriott(R), Inc. 10.14* Hospitality Properties Trust 1995 Incentive Share Award Plan(+) 10.15*** Promissory Note in the amount of $125,000,000 dated as of November 25, 1996 from HPTRI Corporation and HPTWN Corporation to Column Financial Inc. 10.16*** Loan Agreement dated as of November 25, 1996 by and between HPTRI Corporation and HPTWN Corporation, as borrowers, and Column Financial Inc., as lender 10.17*** Form of Deed of Trust, Assignment of Leases and Rents and Security Agreement from HPTRI Corporation, as Trustor, to Chicago Title Insurance Company, as Trustee, for benefit of Column Financial, Inc. 28 10.18*** Trust and Servicing agreement dated as of November 25, 1996 by and among Hospitality Properties Mortgage Acceptance Corp., as Depositor, AMRESCO Management, Inc., as Servicer, and The Chase Manhattan Bank, as Trustee 10.19 Lease Agreement by and between HPTSLC Corporation, as landlord, and WIIC Salt Lake Corporation, as tenant, dated January 1997 12 Ratio of Earnings to Fixed Charges 21 Subsidiaries of the Registrant 23.1 Consents of Arthur Andersen LLP 23.2 Consent of Sullivan & Worcester LLP (included in Exhibit 8.1 to this Registration Statement) 27 Financial Data Schedule 99 Certain Investment Considerations - ----------------------- Each exhibit marked by an (*) or a (**) is incorporated by reference to the corresponding document or instrument filed as an exhibit to the Company's Registration Statement on Form S-11 (File No. 33-93330) or File No. 333-1433, respectively. Each exhibit marked with a (***) is incorporated by reference to the corresponding document or instrument filed as an exhibit to the Company's Current Report on Form 8-K dated December 4, 1996. (+) Management contract, compensatory plan or agreement. 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Trustees and Shareholders of Hospitality Properties Trust: We have audited the accompanying consolidated balance sheet of Hospitality Properties Trust (the "Company") as of December 31, 1995 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for the period from February 7, 1995 (inception) to December 31, 1995 and the year ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hospitality Properties Trust as of December 31, 1995 and 1996, and the results of operations and its cash flows for the period from February 7, 1995 (inception) to December 31, 1995 and the year ended December 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Washington, D.C. January 10, 1997 F-1
HOSPITALITY PROPERTIES TRUST CONSOLIDATED BALANCE SHEET (Dollars in thousands) As of As of December 31, 1995 December 31, 1996 ----------------- ----------------- ASSETS Real estate properties, at cost: Land $ 62,311 $ 143,462 Buildings and improvements 270,261 699,225 --------- --------- 332,572 842,687 Less accumulated depreciation (5,820) (26,218) --------- --------- 326,752 816,469 Cash and cash equivalents 2,135 38,073 Rent receivable 322 1,671 Restricted cash (FF&E Reserve) 5,342 7,277 Other assets, net 4,396 8,113 --------- --------- $ 338,947 $ 871,603 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Security deposits $ 32,900 $ 81,360 Debt -- 125,000 Dividends payable 6,930 15,846 Due to affiliate 770 2,376 Accounts payable and accrued expenses 396 1,813 --------- --------- Total liabilities 40,996 226,395 Shareholders' equity: Preferred shares of beneficial interest, no par value, 100,000,000 shares authorized, none issued -- -- Common shares of beneficial interest, $.01 par value, 100,000,000 shares authorized, 12,600,900 and 26,856,800 shares issued and outstanding 126 269 Additional paid-in capital 297,962 656,253 Cumulative net income 11,349 63,013 Dividends (paid or declared) (11,486) (74,327) --------- --------- Total shareholders' equity 297,951 645,208 --------- --------- $ 338,947 $ 871,603 ========= =========
See accompanying notes. F-2
HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF INCOME (Amounts in thousands, except per share data) February 7, 1995 Year Ended (Inception) to December 31, December 31, 1995 1996 ----------------- -------------- Revenues: Rental income $19,531 $69,514 FF&E reserve income 4,037 12,169 Interest income 74 946 ------- ------- Total revenues 23,642 82,629 ------- ------- Expenses: Interest (including amortization of deferred finance costs of $24 and $341, respectively) 5,063 5,646 Depreciation and amortization of real estate assets 5,820 20,398 General and administrative 1,410 4,921 ------- ------- Total expenses 12,293 30,965 ------- ------- Net Income $11,349 $51,664 ======= ======= Weighted average Shares outstanding 4,515 23,170 Net income per Share $ 2.51 $ 2.23 ======= =======
See accompanying notes. F-3
HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (Dollars in thousands) Additional Cumulative Number Of Common Paid-In Net Shares Shares Capital Income Dividends Total --------- ------ ---------- ---------- --------- ----- Initial capitalization as of February 7, 1995 (Inception) 40,000 $ -- $ 960 $ -- $ -- $ 960 Issuance of Common Shares of Beneficial Interest, net 12,560,000 126 296,980 -- -- 297,106 Stock grants 900 -- 22 -- -- 22 Net income -- -- -- 11,349 -- 11,349 Dividends (paid or declared) -- -- -- -- (11,486) (11,486) ---------- ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1995 12,600,900 126 297,962 11,349 (11,486) $ 297,951 Issuance of Common Shares of Beneficial Interest, net 14,250,000 143 358,136 -- -- 358,279 Stock grants 5,900 -- 155 -- -- 155 Net income -- -- -- 51,664 -- 51,664 Dividends (paid or declared) -- -- -- -- (62,841) (62,841) Balance at December 31, 1996 26,856,800 $ 269 $ 656,253 $ 63,013 $ (74,327) $ 645,208 ========== ========== ========== ========== ========== ==========
See accompanying notes. F-4
HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) February 7, 1995 (Inception) to For the Year Ended December 31, 1995 December 31, 1996 ----------------- ----------------- Cash flows from operating activities: Net income $ 11,349 $ 51,664 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 5,820 20,398 Amortization of deferred finance costs as interest 24 341 FF&E reserve income (4,037) (12,169) Changes in assets and liabilities: Increase in rent receivable and other assets (182) (1,566) Increase in accounts payable and accrued expenses 396 1,926 Increase in due to affiliate 770 1,149 --------- --------- Cash provided by operating activities 14,140 61,743 --------- Cash flows from investing activities: Real estate acquisitions (328,148) (491,638) Increase in security deposits 32,900 48,460 Payments for purchase option (4,500) -- Purchase of FF&E reserve (3,904) (5,500) --------- --------- Cash used in investing activities (303,652) (448,678) --------- --------- Cash flows from financing activities: Draws on credit facility -- 115,650 Repayments of credit facility -- (115,650) Issuance of debt -- 125,000 Proceeds from issuance of shares, net 198,088 358,279 Borrowings and advances from HRP 165,241 -- Payments on borrowings and advances from HRP (65,241) -- Dividends paid (4,556) (53,925) Financing costs (1,885) (3,931) Purchase of interest rate cap -- (2,550) --------- --------- Cash provided by financing activities 291,647 422,873 --------- --------- Increase in cash and cash equivalents $ 2,135 $ 35,938 Cash and cash equivalents at beginning of period -- 2,135 --------- --------- Cash and cash equivalents at end of period $ 2,135 $ 38,073 ========= ========= Supplemental cash flow information: Interest paid $ 5,039 $ 4,652 Non-cash financing activities: Issuance of shares to HRP 100,000 -- Cancellation of indebtedness to HRP (100,000) -- Non-cash investing activities: Property managers' deposits in FF&E reserve 3,862 12,100 Purchases of fixed assets with FF&E reserve (2,424) (15,665)
See accompanying notes. F-5 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per Share and percent data) 1. Organization and Commencement of Operations Hospitality Properties Trust (HPT) was incorporated in the state of Delaware on February 7, 1995. Subsequently, HPT became a Maryland real estate investment trust and effected a 400-for-1 split of its common shares of beneficial interest (the Shares). HPT, which invests in income producing hotel and lodging related real estate, was a 100% owned subsidiary of Health and Retirement Properties Trust (HRP) from its inception through August 22, 1995, when it completed its initial public offering of Shares (the IPO). HRP remains an affiliate of HPT, owning approximately 15% of HPT's issued and outstanding Shares as of December 31,1996. HPT commenced operations on March 24, 1995 and, through December 31, 1996, acquired 82 hotels and related replacement and refurbishment reserves (the FF&E Reserves) directly and through subsidiaries. The properties of HPT and its subsidiaries (the Company) are leased to and managed by subsidiaries (the Lessees and the Managers) of companies unaffiliated with HPT: Host Marriott Corporation; Marriott International, Inc. (Marriott); and Wyndham Hotel Corporation. 2. Summary of Significant Accounting Policies Consolidation. These consolidated financial statements include the accounts of HPT and its subsidiaries. All intercompany transactions have been eliminated. Real estate properties. Real estate properties are recorded at cost. Depreciation is provided for on a straight-line basis over the estimated useful lives ranging up to 40 years. The Company periodically evaluates the carrying value of its long-lived assets in accordance with Statement of Financial Accounting Standards No. 121 (SFAS 121), which it adopted on January 1, 1996. The adoption of SFAS 121 had no effect on the Company's financial statements. Cash and cash equivalents. Highly liquid investments with maturities of three months or less at date of purchase are considered to be cash equivalents. The carrying amount of cash and cash equivalents is equal to its fair value. Deferred interest and finance costs. Costs incurred to secure certain borrowings are capitalized and amortized over the terms of the related borrowing, and were $1,861 and $5,352 at December 31, 1995 and 1996, respectively, net of accumulated amortization of $24 and $313, respectively. Revenue recognition. Rental income from operating leases is recognized on a straight line basis over the life of the lease agreements. Additional rent and interest income is recognized as earned. Net income per share. Net income per share is computed using the weighted average number of shares outstanding during the period. The Company has no common share equivalents. Financial Instruments--Interest Rate Cap Agreements. During 1996, in connection with a $125,000 debt issuance, certain subsidiaries of HPT entered into interest rate protection agreements to limit the Company's exposure to risks of rising interest rates. The cost of the agreements was capitalized and is being amortized over the life of the related borrowing as an adjustment to interest expense. Amounts receivable from the counterparties to the cap agreements are accrued as adjustments to interest expense. At December 31, 1996, the carrying value of such agreements was $2,498 (net of accumulated amortization of $52) and the fair value of such agreements was $2,756. During 1996 interest rates did not exceed the interest rate cap amounts and no balances were receivable under the cap agreements at December 31, 1996. Use of estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts. Actual results could differ from those estimates. F-6 Income taxes. The Company elected to be taxed as a Real Estate Investment Trust (REIT) under Sections 856 through 860 of the Internal Revenue Code of 1986 (the "Code"), commencing with its first taxable year ended December 31, 1995, and intends to conduct its operations so as to continue to qualify as a REIT under the Code. As a REIT, the Company generally will not be subject to Federal income tax on its net income that it currently distributes to shareholders. Qualifications and taxation as a REIT depends on the Company's ability to meet certain dividend distribution tests, stock ownership requirements and various qualification tests prescribed in the Code. During 1996 the Company created several new 100% owned subsidiaries primarily for the purpose of acquiring and owning real estate. Such subsidiaries are all qualified REIT subsidiaries. Subsequent to the IPO the dividends paid by the Company for 1995 ($0.79 per share) were 100% ordinary taxable income and for 1996 ($2.34 per share) were 85% ordinary taxable income and 15% return of capital. 3. Real Estate Properties The Company's 82 hotel properties are leased pursuant to long term operating leases expiring between 2010 and 2012. The leases provide for various automatic renewal terms generally totaling 36-48 years unless the Lessee properly notifies the Company in accordance with the leases. Each lease is a triple net lease and generally requires the Lessee to pay: base rent, percentage rent of between 5% and 8% of increases in total hotel sales over a base year, 5% FF&E reserve escrows, and all operating costs associated with the leased property. Each Lessee posted a security deposit equal to one year's base rent. The FF&E reserve may be used by the Manager and Lessee to maintain the properties in good working order and repair. If the FF&E reserve is not available to fund such expenditures, the Lessees may require the Company to fund such expenditures, in which case annual base rent will be increased by a minimum of 10% of the amount so funded. Under the management agreements with affiliates of Marriott, borrowings secured by certain of the Company's hotels are limited, according to a formula, to amounts less than 60% to 70% of the allocable purchase price of the hotel securing the borrowings. Future minimum lease payments to be received by the Company during the remaining initial terms of its leases total $1,267,320 ($81,360 annually). As of December 31, 1996, the weighted average initial term of the Company's leases was 15.6 years, and the weighted average total term (including all renewal options) was 54.6 years. 4. Indebtedness As of December 31, 1996, the Company had no borrowings outstanding under its $200,000 revolving acquisition credit facility ("Credit Facility") which provides for interest on borrowings at one-month LIBOR plus a premium. Borrowings, if any, may be repaid and reborrowed as necessary until December 31, 1998, at which time outstanding balances may, at the Company's option (subject to lender consent), be either repaid or converted into a 10-year loan. The Credit Facility is secured by certain assets of HPT and one of its subsidiaries. The weighted average interest rate on Credit Facility borrowings outstanding during 1996 was 7.05%. There were no borrowings outstanding at any time under the Credit Facility during the 1995 period. During 1996, certain subsidiaries of the Company issued $125,000 of notes (Notes) through the issuance of certificates of participation. The Notes require payment of interest only through their maturity in December 2001, at which time the principal balance is due. The Notes are prepayable at any time without penalty. Interest on the Notes is equal to one month LIBOR plus a premium. The Notes are non-recourse to HPT and its subsidiaries and are secured by first mortgages on hotels owned by certain subsidiaries of the Company having a net carrying value of $310,000 at December 31, 1996. Approximately $30,820 of annual minimum lease payments are attributed to such hotels. Generally, the terms of the Notes limit the ability of certain subsidiaries of the Company to incur significant secured or unsecured liabilities and restrict the use of proceeds, if any, from the sale or other disposition of assets, if any. The Notes carried a weighted average interest rate from their date of issuance to December 31, 1996 of 6.32%. At December 31, 1996, the Notes carried an interest rate of 6.07%. The carrying amount of the Notes is equal to their fair value. F-7 5. Transactions with Affiliates The Company has an agreement with HRPT Advisors, Inc. ("Advisors") whereby Advisors provides investment, management and administrative services to the Company. Advisors is owned by Gerard M. Martin and Barry M. Portnoy. Messrs. Martin and Portnoy are Managing Trustees of HPT and HRP. Mr. Portnoy is also a partner in the law firm which provides legal services to the Company. The Company's officers are also employees of the Advisor. Advisors is compensated at an annual rate equal to 0.7% of HPT's average real estate investments up to the first $250,000 of such investments and 0.5% thereafter. Advisory fees earned for the period from February 7, 1995 (inception) to December 31, 1995 and the year ended December 31, 1996 were $1,292 and $3,915, respectively. As of December 31, 1996, Advisors owned 250,000 shares of HPT. Incentive advisory fees are paid to Advisors in restricted Common Shares based on a formula, not to exceed 2 cents per weighted average share. The Company accrued $463 in incentive fees during 1996 to be paid in restricted Common Shares in 1997. No incentive fees were due for the 1995 period. HRP owns 4,000,000 shares of HPT, 3,960,000 shares of which it received in consideration of cancellation of a loan receivable totaling $99,000 from the Company. Under the provisions of the Company's Incentive Share Award Plan, 100,000 Common Shares have been reserved for issuance to officers of the Company, consultants to the Company and Independent Trustees of the Company. Each of the three Independent Trustees of HPT were awarded 300 shares under this plan in each of 1995 and 1996. In 1996, 5,000 shares were granted to officers of the Company under this plan and no shares were granted in 1995. Share grants expense is recognized over the related expected service period (one year) based on the market value of shares on the grant date and totaled $101 during 1996 and $10 during the 1995 period. 6. Concentration At December 31, 1996, the Company's 53 Courtyard by Marriott(R) hotels are leased to a subsidiary (Host I) of Host Marriott Corporation (Host) and managed by a subsidiary of Marriott International, Inc. (Marriott). The Company's 18 Residence Inn by Marriott(R) hotels are leased to a subsidiary (Host II) of Host and managed by a subsidiary of Marriott. The Company's 11 Wyndham Garden(R) hotels are leased to a subsidiary (Wyndham I) of Wyndham Hotel Corporation (Wyndham) and managed by another Wyndham subsidiary. The percentage of the Company's annual minimum rents and equity investment attributable to each Lessee are approximately: Host I--63%; Host II--21%; and Wyndham I--16%. The Company's 82 hotels contain 11,728 rooms and are located in 26 states, with 5% to 12% of its hotels in each of California, Massachusetts, Georgia, and Arizona. 7. Pro Forma Information (Unaudited) In April 1996, the Company completed an offering of 14,250,000 common shares of beneficial interest and the acquisition of 45 additional hotels. If such transactions occurred on January 1, 1996, unaudited pro forma 1996 revenues, net income and earnings per share would have been $96,775, $59,330 and $2.22, respectively. In the opinion of management, all adjustments necessary to reflect the effects of the transactions discussed above have been reflected in the pro forma data. The unaudited pro forma data is not necessarily indicative of what the actual consolidated results of operations for the Company would have been for the year indicated, nor does it purport to represent the results of operations for the Company for future periods. F-8 8. Selected Quarterly Financial Data (Unaudited) The following is a summary of the unaudited quarterly results of operations of the Company for 1995 and 1996.
1995 1996 --------------------------- ------------------------------------------------------------- Third Fourth First Second Third Fourth Quarter(1) Quarter Quarter Quarter Quarter Quarter ---------- ------- ------- ------- ------- ------- Revenues $7,853 $9,998 $10,334 $23,011 $24,878 $24,406 Net income 3,623 6,989 6,622 14,623 15,446 14,973 Net income per share .24(2) .55 .53 .56 .58 .56 (1) HPT's IPO occurred August 22, 1995 and accordingly the third quarter 1995 figures for revenues and net income partially relate to periods prior to the IPO. (2) Represents the per share amount of net income from the IPO date to September 30, 1995.
F-9 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Trustees and Shareholders of Hospitality Properties Trust: We have audited in accordance with generally accepted auditing standards the consolidated financial statements of Hospitality Properties Trust and have issued our report thereon dated January 10, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule on pages F-11 and F-12 is the responsibility of Hospitality Properties Trust's management and is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Washington, D.C. January 10, 1997 F-10
HOSPITALITY PROPERTIES TRUST SCHEDULE III--REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (Dollars in millions) Gross Amount at Initial Costs December 31, 1996 ----------------------------- -------------------------------------------- Subsequent Encum- Buildings & Costs Buildings & Accumulated Date of Depreciation Description brances Land Improvements Capitalized Land Improvements Total Depreciation Acquisition Life 53 Courtyard by $ -- $ 91 $389 $2 $ 91 $391 $482 $(13) 1995/1996 5-40 years Marriott(R) hotels 18 Residence Inn by Marriott(R) 70 39 124 -- 39 124 163 (2) 1996 5-40 years hotels 11 Wyndham Garden(R) hotels 55 13 115 -- 13 115 128 (2) 1996 5-40 years ------------------------------------------------------------------------------------- Total $ 125 $143 $628 $2 $143 $630 $773 $(17) =====================================================================================
The accompanying notes are an integral part of this schedule. F-11 HOSPITALITY PROPERTIES TRUST NOTES TO SCHEDULE III DECEMBER 31, 1996 (In thousands) (A) The change in total cost of properties for the period from February 7, 1995 (inception) to December 31, 1996 is as follows: 1995 1996 ---- ---- Balance at beginning of period $ -- $305,447 Additions: Hotel acquisitions and capital expenditures 305,447 468,050 -------- -------- Balance at close of period $305,447 $773,497 ======== ======== (B) The change in accumulated depreciation for the period from February 7, 1995 (inception) to December 31, 1996 is as follows: 1995 1996 ---- ---- Balance at beginning of period $ -- $ 3,679 Additions: Depreciation expense 3,679 13,022 ------- ------- Balance at close of period $ 3,679 $16,701 ======= ======= F-12 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To HMH HPT Courtyard, Inc.: We have audited the accompanying balance sheets of HMH HPT Courtyard, Inc. (the "Company") as of January 3, 1997 and December 29, 1995, and the related statements of operations, shareholder's equity and cash flows for the fiscal year ended January 3, 1997 and for the period March 24, 1995 (inception) through December 29, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HMH HPT Courtyard, Inc. as of January 3, 1997 and December 29, 1995, and the results of its operations and its cash flows for the fiscal year ended January 3, 1997 and for the period March 24, 1995 (inception) through December 29, 1995, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Washington, D.C. February 28, 1997 F-13
HMH HPT COURTYARD, INC. BALANCE SHEETS January 3, 1997 and December 29, 1995 (in thousands, except share data) ASSETS 1996 1995 ---- ---- Advances to manager $ 5,100 $ 3,984 Due from Marriott International, Inc. 3,481 2,218 Security deposit 50,540 32,900 -------- -------- Total assets $ 59,121 $ 39,102 ======== ======== LIABILITIES AND SHAREHOLDER'S EQUITY Due to Host Marriott Corporation $ 4,793 $ 1,508 Deferred gain 39,570 12,908 -------- -------- Total liabilities 44,363 14,416 -------- -------- Shareholder's equity: Common stock, no par value, 100 shares authorized, issued and outstanding -- -- Additional paid-in capital 15,478 25,406 Retained deficit (720) (720) -------- -------- Total shareholder's equity 14,758 24,686 -------- -------- $ 59,121 $ 39,102 ======== ========
See Notes to Financial Statements. F-14
HMH HPT COURTYARD, INC. STATEMENTS OF OPERATIONS For the Fiscal Year Ended January 3, 1997 and for the Period March 24, 1995 (inception) through December 29, 1995 (in thousands) 1996 1995 ---- ---- REVENUES $ 94,161 $ 37,813 EXPENSES Rent 46,495 19,379 FF&E contribution expense 9,289 3,810 Base and incentive management fees paid to Marriott International, Inc. 18,318 5,156 Other expenses 9,677 5,859 Total operating expenses 83,779 34,204 OPERATING PROFIT BEFORE AMORTIZATION OF DEFERRED GAIN AND CORPORATE EXPENSES 10,382 3,609 Amortization of deferred gain 2,351 675 Corporate expenses (2,235) (1,059) INCOME BEFORE INCOME TAXES 10,498 3,225 Provision for income taxes (4,199) (1,322) NET INCOME $ 6,299 $ 1,903
See Notes to Financial Statements. F-15
HMH HPT COURTYARD, INC. STATEMENTS OF SHAREHOLDER'S EQUITY For the Fiscal Year Ended January 3, 1997 and for the Period March 24, 1995 (inception) through December 29, 1995 (in thousands) Additional Common Paid-In Retained Stock Capital Deficit -------- ------- --------- Net assets contributed by Host Marriott Corporation $ -- $ 25,406 $ -- Dividend to Host Marriott Corporation -- -- (2,623) Net income -- -- 1,903 ------ -------- -------- Balance, December 29, 1995 -- 25,406 (720) Net liabilities contributed by Host Marriott Corporation -- (9,928) -- Dividend to Host Marriott Corporation -- -- (6,299) Net income -- -- 6,299 ------ -------- -------- Balance, January 3, 1997 $ -- $ 15,478 $ (720)
See Notes to Financial Statements. F-16
HMH HPT COURTYARD, INC. STATEMENTS OF CASH FLOWS For the Fiscal Year Ended January 3, 1997 and for the Period March 24, 1995 (inception) through December 29, 1995 (in thousands) 1996 1995 ---- ---- OPERATING ACTIVITIES: Net income $ 6,299 $ 1,903 Adjustments to reconcile net income to cash provided by operating activities: Amortization of deferred gain (2,351) (675) Changes in operating accounts: Increase in Due to Host Marriott Corporation 3,285 1,082 Decrease in prepaid rent 329 2,531 Increase in due from Marriott International, Inc. (1,263) (2,218) -------- -------- Cash provided by operations 6,299 2,623 -------- -------- FINANCING ACTIVITIES: Dividend to Host Marriott Corporation (6,299) (2,623) -------- -------- CASH AND CASH EQUIVALENTS, end of period $ -- $ -- -------- -------- SUPPLEMENTAL INFORMATION, NON-CASH ACTIVITY: Balances transferred to the Company by Host Marriott Corporation upon commencement of leases Advances to manager $ 1,116 $ 3,984 Prepaid rent 329 2,531 Security deposits 17,640 32,900 Accrued expenses -- (426) Deferred gain (29,013) (13,583) -------- -------- Net (liabilities)/assets contributed by Host Marriott Corporation $ (9,928) $ 25,406 ======== ========
See Notes to Financial Statements. F-17 HMH HPT COURTYARD, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation HMH HPT Courtyard, Inc. (the "Company") was incorporated in Delaware on February 7, 1995 as a wholly-owned indirect subsidiary of Host Marriott Corporation ("Host Marriott"). The Company had no operations prior to March 24, 1995 (the "Commencement Date" or "Inception"). On the Commencement Date, affiliates of Host Marriott (the "Sellers") sold 21 Courtyard properties to Hospitality Properties Trust ("HPT"). On August 22, 1995, HPT purchased an additional 16 Courtyard properties from the Sellers. On March 22, 1996 and April 4, 1996, a total of 16 additional Courtyard properties were purchased by HPT for a total of 53 Courtyard hotels (the "Hotels"). The Sellers contributed the assets and liabilities related to the operations of such properties to the Company, including working capital advances to the manager, prepaid rent under leasing arrangements and rights to other assets as described in Note 2. Such assets have been accounted for at the historical cost. Fiscal Year The Company's fiscal year ends on the Friday nearest to December 31. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenues Revenues represent house profit from the Hotels because the Company has delegated substantially all of the operating decisions relating to the generation of house profit from the Hotels to Marriott International, Inc. (the "Manager" or "Marriott International"). House profit reflects the net revenues flowing to the Company as lessee and represents total hotel sales less property level expenses excluding depreciation and amortization, real and personal property taxes, lease payments, insurance, contributions to the property improvement fund and management fees. Corporate Expenses The Company operates as a unit of Host Marriott utilizing Host Marriott's employees, centralized system for cash management, insurance and administrative services. The Company has no employees. All cash received by the Company is deposited in and commingled with Host Marriott's general corporate funds. Operating expenses and other cash requirements of the Company are paid by Host Marriott and charged directly or allocated to the Company. Certain general and administrative costs of Host Marriott are allocated to the Company, principally based on Host Marriott's specific identification of individual cost items and otherwise based upon estimated levels of effort devoted by its general and administrative departments to individual entities. In the opinion of management, the methods for allocating corporate, general and administrative expenses and other direct costs are reasonable. It is not practicable to estimate the costs that would have been incurred by the Company if it had been operated on a stand-alone basis, however, management believes that these expenses are comparable to the expected expenses levels on a forward-looking basis. F-18 Concentration of Credit Risk The Company's largest asset is the security deposit (see Note 3) which constitutes 85% of the Company's total assets as of January 3, 1997. The security deposit is not collateralized and is due from HPT at the termination of the Lease. Deferred Gain Host Marriott contributed to the Company deferred gains relating to the sale of the 53 Courtyard properties to HPT in 1995 and 1996. The Company is amortizing the deferred gains over the initial term of the Lease. NOTE 2. LEASE COMMITMENTS On the Commencement Date, the Company entered into a lease for 21 Courtyard properties. On August 22, 1995, the Company entered into a lease for an additional 16 Courtyard properties. On March 22, 1996 and April 4, 1996, the Company entered into a lease for an additional 16 Courtyard properties (collectively, the "Lease"). The initial term of the Lease expires in 2012. Thereafter, the Lease automatically renews for three consecutive twelve-year terms at the option of the Company. The Company is required to pay rents equal to aggregate minimum annual rent of $50,540,000 ("Base Rent") and percentage rent equal to 5% of the excess of total hotel sales over base year total hotel sales ("Percentage Rent"). A pro rata portion of Base Rent is due and payable in advance on the first day of thirteen predetermined accounting periods. Percentage Rent is due and payable quarterly in arrears. Additionally, the Company is required to make payments when due on behalf of HPT for real estate taxes and other taxes, assessments and similar charges arising from or related to the Hotels and their operation, utilities, premiums on required insurance coverage, rents due under ground and equipment leases and all amounts due under the terms of the management agreements described below. The Company is also required to provide the Manager with working capital to meet the operating needs of the Hotels. The Sellers had previously made advances related to the Hotels and transferred their interest in such amounts to the Company in the amount of $3,984,000 and $1,116,000 in 1995 and 1996. The Lease also requires the Company to escrow, or cause the Manager to escrow, an amount equal to 5% of the annual total hotel sales into an HPT-owned furniture, fixture and equipment reserve (the "FF&E Reserve"), which is available for the cost of required replacements and renovation. Any requirements for funds in excess of amounts in the FF&E Reserve shall be provided by HPT ("HPT Fundings") at the request of the Company. In the event of HPT Fundings, Base Rent shall be adjusted upward by an amount equal to 10% of HPT Fundings. The Company is required to maintain a minimum net worth equal to one year's base rent. For purposes of this covenant, the deferred gain is excluded from the calculation of net worth. As of January 3, 1997, future minimum annual rental commitments for the Lease on the Hotels and other non-cancelable leases, including the ground leases described below, are as follows (in thousands): Other Operating Lease Leases ----- ------ 1997 ...................................... $ 50,540 $ 2,343 1998 ...................................... 50,540 2,005 1999 ...................................... 50,540 1,720 2000 ...................................... 50,540 1,572 2001 ...................................... 50,540 1,519 Thereafter.................................. 555,940 9,159 ---------- ---------- Total minimum lease payments.......... $ 808,640 $ 18,318 ========== ========== The land under eight of the Hotels is leased from third parties. The ground leases have remaining terms (including all renewal options) expiring between the years 2039 and 2067. The ground leases provide for rent based on specific percentages of certain sales subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as F-19 defined in the agreements. Total minimum lease payments exclude Percentage Rent which was $716,000 and $271,000 for fiscal year 1996 and the period March 24, 1995 through December 29, 1995. NOTE 3. SECURITY DEPOSIT HPT holds $50,540,000 as a security deposit for the obligations of the Company under the Lease (the "Security Deposit"). The Security Deposit is due upon termination of the Lease. NOTE 4. INCOME TAXES The Company and Host Marriott are members of a consolidated group for federal income tax purposes. Host Marriott has contributed the Security Deposit and deferred gain without contributing their related tax attributes and have agreed that the Company will not be responsible for any tax liability or benefit associated with the Security Deposit or deferred gain. Accordingly, no deferred tax balances are reflected in the accompanying balance sheets. There is no difference between the basis of assets and liabilities for income tax and financial reporting purposes other than for the Security Deposit and the deferred gain. The components of the Company's effective income tax rate follow: 1996 1995 ---- ---- Statutory Federal tax rate......................... 35.0% 35.0% State income tax, net of Federal tax benefit....... 5.0 6.0 --- --- 40.0% 41.0% The provision for income taxes consists of the following (in thousands): 1996 1995 ---- ---- Current-Federal.................................... $3,674 $1,129 State.................................. 525 193 ------ ------ $4,199 $1,322 ====== ====== All current tax provision amounts are included in Due to Host Marriott Corporation on the accompanying balance sheets. NOTE 5. MANAGEMENT AGREEMENTS The Sellers' rights and obligations under management agreements (the "Agreements") with the Manager were transferred to HPT and then through the Leases to the Company. The Agreements have an initial term expiring in 2013 with an option to extend the Agreements on all of the Hotels for up to 30 years. The Agreements provide that the Manager be paid a system fee equal to 3% of hotel sales, a base management fee of 2% of hotel sales ("Base Management Fee") and an incentive management fee equal to 50% of available cash flow, not to exceed 20% of operating profit, as defined ("Incentive Management Fee"). In addition, the Manager is reimbursed for each Hotel's pro rata share of the actual costs and expenses incurred in providing certain services on a central or regional basis to all Courtyard by Marriott hotels operated by the Manager. Base Rent is to be paid prior to payment of Base Management Fees and Incentive Management Fees. To the extent Base Management Fees are so deferred, they must be paid in future periods. If available cash flow is insufficient to pay Incentive Management Fees, no Incentive Management Fees are earned by the Manager. Pursuant to the terms of the Agreements, the Manager is required to furnish the Hotels with certain services ("Chain Services") which are generally provided on a central or regional basis to all hotels in the Marriott International hotel system. Chain Services include central training, advertising and promotion, a national reservation system, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among all domestic hotels managed, owned or leased by Marriott International or its subsidiaries. In addition, the Hotels participate in Marriott's Courtyard Club program. The cost of these programs are charged to all hotels in the system. F-20 The Company is obligated to provide the Manager with sufficient funds to cover the cost of (a) certain non-routine repairs and maintenance to the Hotels which are normally capitalized; and (b) replacements and renewals to the Hotels' property and improvements. Under certain circumstances, the Company will be required to establish escrow accounts for such purposes under terms outlined in the Agreements. Pursuant to the terms of the Agreements, the Company is required to provide Marriott International with funding for working capital to meet the operating needs of the hotels. Marriott International converts cash advanced by the Company into other forms of working capital consisting primarily of operating cash, inventories, and trade receivables. Under the terms of the Agreements, Marriott International maintains possession of and sole control over the components of working capital, and accordingly, the Company reports the total amounts so advanced to Marriott International as a component of Due from Marriott International, Inc. Upon termination of the Agreements, the working capital will be returned to the Company. NOTE 6. REVENUES As discussed in Note 1, hotel revenues reflect house profit from the Company's hotel properties. House profit reflects the net revenues flowing to the Company as lessee and represents all gross hotel operating revenues, less all gross property-level expenses, excluding depreciation, management fees, real and personal property taxes, lease payments, insurance, contributions to the property improvement fund and certain other costs, which are classified as operating costs and expenses. The following table presents the detail of house profit for the fiscal year ended January 3, 1997 and for the period March 24, 1995 (inception) through December 29, 1995 (in thousands): 1996 1995 ---- ---- Hotel Sales: Rooms $164,738 $ 66,968 Food and beverage 14,167 6,225 Other 7,138 2,999 -------- -------- Total hotel sales 186,043 76,192 -------- -------- Rooms (A) 34,858 14,713 Food and beverage (B) 12,133 5,044 Other operating departments (C) 1,904 827 General and administrative (D) 19,956 7,768 Utilities (E) 7,200 2,955 Repairs, maintenance and accidents (F) 6,930 2,899 Marketing and sales (G) 2,290 1,121 Chain services (H) 6,611 3,052 -------- -------- Total expenses 91,882 38,379 -------- -------- Revenues (House Profit) $ 94,161 $ 37,813 ======== ======== (A) Includes expenses for linen, cleaning supplies, laundry, guest supplies, reservations costs, travel agents' commissions, walked guest expenses and wages, benefits and bonuses for employees of the rooms department. (B) Includes cost of food and beverages sold, china, glass, silver, paper and cleaning supplies and wages, benefits and bonuses for employees of the food and beverage department. (C) Includes expenses related to operating the telephone department. (D) Includes management and hourly wages, benefits and bonuses, credit and collection expenses, employee relations, guest relations, bad debt expenses, office supplies and miscellaneous other expenses. (E) Includes electricity, gas and water at the properties. (F) Includes cost of repairs and maintenance and the cost of accidents at the properties. (G) Includes management and hourly wages, benefits and bonuses, promotional expense and local advertising. (H) Includes charges from the Manager for Chain Services as allowable under the Agreements. F-21 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To HMH HPT Residence Inn, Inc.: We have audited the accompanying balance sheet of HMH HPT Residence Inn, Inc. (the "Company") as of January 3, 1997 and the related statements of operations, shareholder's equity and cash flows for the period March 22, 1996 (inception) through January 3, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HMH HPT Residence Inn, Inc. as of January 3, 1997, and the results of its operations and its cash flows for the period March 22, 1996 (inception) through January 3, 1997, in conformity with generally accepted accounting principles. Arthur Andersen LLP Washington, D.C. February 28, 1997 F-22
HMH HPT RESIDENCE INN, INC. BALANCE SHEET January 3, 1997 (in thousands, except share data) ASSETS Advances to manager $ 2,230 Due from Marriott International, Inc. 1,506 Security deposit 17,220 ------- Total assets $20,956 ======= LIABILITIES AND SHAREHOLDER'S EQUITY Due to Host Marriott Corporation $ 1,416 Deferred gain 15,149 ------- Total liabilities 16,565 ======= Shareholder's equity: Common stock, no par value, 100 shares authorized, issued and outstanding -- Additional paid-in capital 4,391 Retained earnings -- ------- Total shareholder's equity 4,391 ------- 20,956 =======
See Notes to Financial Statements. F-23
HMH HPT RESIDENCE INN, INC. STATEMENT OF OPERATIONS For the Period from March 22, 1996 (inception) through January 3, 1997 (in thousands) REVENUES $ 27,418 -------- EXPENSES Rent 12,839 FF&E contribution expense 2,505 Base and incentive management fees paid to Marriott International, Inc. 6,191 Other expenses 2,204 -------- Total operating expenses 23,739 -------- OPERATING PROFIT BEFORE AMORTIZATION OF DEFERRED GAIN AND CORPORATE EXPENSES 3,679 Amortization of deferred gain 859 Corporate expenses (825) -------- INCOME BEFORE INCOME TAXES 3,713 Provision for income taxes (1,511) -------- NET INCOME $ 2,202 ========
See Notes to Financial Statements. F-24
HMH HPT RESIDENCE INN, INC. STATEMENT OF SHAREHOLDER'S EQUITY For the Period March 22, 1996 (inception) through January 3, 1997 (in thousands) Additional Common Paid-In Retained Stock Capital Earnings ------ ---------- -------- Net assets contributed by Host Marriott Corporation $ -- $ 4,391 $ -- Net income -- -- 2,202 Dividend to Host Marriott Corporation -- -- (2,202) ------- --------- --------- Balance, January 3, 1997 $ -- $ 4,391 $ --
See Notes to Financial Statements. F-25
HMH HPT RESIDENCE INN, INC. STATEMENT OF CASH FLOWS For the Period March 22, 1996 (inception) through January 3, 1997 (in thousands) OPERATING ACTIVITIES: Net income $ 2,202 Adjustments to reconcile net income to cash provided by operating activities: Amortization of deferred gain (859) Changes in operating accounts: Increase in Due to Host Marriott Corporation 1,416 Decrease in other assets 949 Increase in due from Marriott International, Inc. (1,506) -------- Cash provided by operations 2,202 -------- FINANCING ACTIVITIES: Dividend to Host Marriott Corporation (2,202) -------- CASH AND CASH EQUIVALENTS, end of period $ -- ======== SUPPLEMENTAL INFORMATION, NON-CASH ACTIVITY: Balances transferred to the Company by Host Marriott Corporation upon commencement of leases Advances to manager $ 2,230 Prepaid rent 949 Security deposit 17,220 Deferred gain (16,008) -------- Net assets contributed by Host Marriott Corporation $ 4,391 ========
See Notes to Financial Statements. F-26 HMH HPT RESIDENCE INN, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation HMH HPT Residence Inn, Inc. (the "Company") was incorporated in Delaware as a wholly-owned indirect subsidiary of Host Marriott Corporation ("Host Marriott"). The Company had no operations prior to March 22, 1996 (the "Commencement Date" or "Inception"). On the Commencement Date, affiliates of Host Marriott (the "Sellers") sold 5 Residence Inn properties to Hospitality Properties Trust ("HPT"). The Sellers sold an additional 13 Residence Inn properties to Hospitality Properties Trust on April 4, 1996 for a total of 18 Residence Inn hotels (the "Hotels"). The Sellers contributed the assets and liabilities related to the operations of such properties to the Company, including working capital advances to the hotel manager, prepaid rent under leasing arrangements and rights to other assets as described in Note 2. Such assets have been accounted for at the historical cost. Fiscal Year The Company's fiscal year ends on the Friday nearest to December 31. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenues Revenues represent house profit from the Hotels because the Company has delegated substantially all of the operating decisions relating to the generation of house profit from the Hotels to Marriott International, Inc. (the "Manager" or "Marriott International"). House profit reflects the net revenues flowing to the Company as lessee and represents total hotel sales less property level expenses excluding depreciation and amortization, real and personal property taxes, lease payments, insurance, contributions to the property improvement fund and management fees. Corporate Expenses The Company operates as a unit of Host Marriott utilizing Host Marriott's employees, centralized systems for cash management, insurance and administrative services. The Company has no employees. All cash received by the Company is deposited in and commingled with Host Marriott's general corporate funds. Operating expenses and other cash requirements of the Company are paid by Host Marriott and charged directly or allocated to the Company. Certain general and administrative costs of Host Marriott are allocated to the Company, principally based on Host Marriott's specific identification of individual cost items and otherwise based upon estimated levels of effort devoted by its general and administrative departments to individual entities. In the opinion of management, the methods for allocating corporate, general and administrative expenses and other direct costs are reasonable. It is not practicable to estimate the costs that would have been incurred by the Company if it had been operated on a stand-alone basis, however, management believes that these expenses are comparable to the expected expense levels on a forward-looking basis. F-27 Concentration of Credit Risk The Company's largest asset is the security deposit (see Note 3) which constitutes 82% of the Company's total assets as of January 3, 1997. The security deposit is not collateralized and is due from HPT at the termination of the Lease. Deferred Gain Host Marriott contributed to the Company deferred gains relating to the sale of the Residence Inn properties to Hospitality Properties Trust. The Company is amortizing the deferred gains over the initial term of the Lease. NOTE 2. LEASE COMMITMENTS On the Commencement Date, the Company entered into a lease (the "Lease") for the Hotels with HPT. The initial term of the Lease expires in 2010. Thereafter, the Lease automatically renews for one ten-year term and two consecutive 15-year terms, unless the Company properly notifies HPT in accordance with the Lease. The Company is required to pay rents equal to aggregate minimum annual rent of $17,220,000 ("Base Rent") and percentage rent equal to 7.5% of the excess of total hotel sales over 1996 total hotel sales ("Percentage Rent"). A pro rata portion of Base Rent is due and payable in advance on the first day of thirteen predetermined accounting periods. Percentage Rent is due and payable quarterly in arrears. Additionally, the Company is required to make payments when due on behalf of HPT for real estate taxes and other taxes, assessments and similar charges arising from or related to the Hotels and their operation, utilities, premiums on required insurance coverage, rents due under ground and equipment leases and all amounts due under the terms of the management agreements described below. The Company is also required to provide the Manager with working capital to meet the operating needs of the Hotels. The Sellers had previously made advances related to the Hotels and transferred their interest in such amounts to the Company in the amount of $2,230,000 in 1996. The Lease also requires the Company to escrow, or cause the Manager to escrow, an amount equal to 5% of the annual total hotel sales into an HPT-owned furniture, fixture and equipment reserve (the "FF&E Reserve"), which is available for the cost of required replacements and renovation. Any requirements for funds in excess of amounts in the FF&E Reserve shall be provided by HPT ("HPT Fundings") at the request of the Company. In the event of HPT Fundings, Base Rent shall be adjusted upward by an amount equal to 10% of HPT Fundings. The Company is required to maintain a minimum net worth equal to one year's base rent. For purposes of this covenant, the deferred gain is excluded from the calculation of net worth. As of January 3, 1997, future minimum annual rental commitments for the Lease on the Hotels and other non-cancelable leases, including the ground lease described below, are as follows (in thousands): Other Operating Lease Leases ----- --------- 1997 ..................................... $ 17,220 $ 259 1998 ..................................... 17,220 231 1999 ..................................... 17,220 207 2000 ..................................... 17,220 228 2001 ..................................... 17,220 120 Thereafter................................. 154,980 2,160 ---------- ---------- Total minimum lease payments......... $ 241,080 $ 3,205 ========== ========== The land under one of the Hotels is leased from a third party. The lease has an initial term expiring in 2021 with two extension periods of a total of 20 years. Annual ground rent is equal to the greater of minimum rent or 3% of annual gross sales. F-29 NOTE 3. SECURITY DEPOSIT The Lessor holds $17,220,000 as a security deposit for the obligations of the Company under the Lease (the "Security Deposit"). The Security Deposit is due upon termination of the Lease. NOTE 4. INCOME TAXES The Company and Host Marriott are members of a consolidated group for federal income tax purposes. Host Marriott contributed the Security Deposit and deferred gain without contributing their related tax attributes and have agreed that the Company will not be responsible for any tax liability or benefit associated with the Security Deposit or deferred gain. Accordingly, no deferred tax balances are reflected in the accompanying balance sheet. There is no difference between the basis of assets and liabilities for income tax and financial reporting purposes other than for the Security Deposit and the deferred gain. The components of the Company's effective income tax rate follow: Statutory Federal tax rate......................... 35.0% State income tax, net of Federal tax benefit....... 5.7 ----- 40.7% ===== The provision for income taxes consists of the following (in thousands): Current-Federal.................................... $ 1,300 State.................................... 211 -------- $ 1,511 ======== All current tax provision amounts are included in Due to Host Marriott Corporation in the accompanying balance sheet. NOTE 5. MANAGEMENT AGREEMENTS The Sellers' rights and obligations under management agreements (the "Agreements") with the Manager were transferred to HPT and then through the Lease to the Company. The Agreements have an initial term expiring in 2013 with an option to extend the Agreements on all of the Hotels for up to 30 years. The Agreements provide that the Manager be paid a system fee equal to 4% of hotel sales, a base management fee of 2% of hotel sales ("Base Management Fee") and an incentive management fee equal to 50% of available cash flow, not to exceed 20% of operating profit, as defined ("Incentive Management Fee"). In addition, the Manager is reimbursed for each Hotel's pro rata share of the actual costs and expenses incurred in providing certain services on a central or regional basis to all Residence Inn hotels operated by the Manager. Base Rent is to be paid prior to payment of Base Management Fees and Incentive Management Fees. To the extent Base Management Fees are so deferred, they must be paid in future periods. If available cash flow is insufficient to pay incentive management fees, no incentive management fees are earned by the Manager. Pursuant to the terms of the Agreements, the Manager is required to furnish the Hotels with certain services ("Chain Services") which are generally provided on a central or regional basis to all hotels in the Marriott International hotel system. Chain Services include central training, advertising and promotion, a national reservation system, computerized payroll and accounting services, and such additional services as needed which may be more efficiently performed on a centralized basis. Costs and expenses incurred in providing such services are allocated among all domestic hotels managed, owned or leased by Marriott International or its subsidiaries. The Company is obligated to provide the Manager with sufficient funds to cover the cost of (a) certain non-routine repairs and maintenance to the Hotels which are normally capitalized; and (b) replacements and renewals to the Hotels' property and improvements. Under certain circumstances, the Company will be required to establish escrow accounts for such purposes under terms outlined in the Agreements. F-29 Pursuant to the terms of the Agreements, the Company is required to provide Marriott International with funding for working capital to meet the operating needs of the hotels. Marriott International converts cash advanced by the Company into other forms of working capital consisting primarily of operating cash, inventories, and trade receivables. Under the terms of the Agreements, Marriott International maintains possession of and sole control over the components of working capital, and accordingly, the Company reports the total amounts so advanced to Marriott International as a component of Due from Marriott International, Inc. Upon termination of the Agreements, the working capital will be returned to the Company. NOTE 6. REVENUES As discussed in Note 1, hotel revenues reflect house profit from the Company's hotel properties. House profit reflects the net revenues flowing to the Company as lessee and represents all gross hotel operating revenues, less all gross property-level expenses, excluding depreciation, management fees, real and personal property taxes, lease payments, insurance, contributions to the property improvement fund and certain other costs, which are classified as operating costs and expenses. The following table presents the detail of house profit for the period March 22, 1996 (inception) through January 3, 1997 (in thousands): Hotel Sales: Rooms................................................. $ 47,479 Other ............................................... 2,621 -------- Total hotel sales.............................. 50,100 -------- Expenses: Rooms (A)............................................. 9,632 Other operating departments (B)....................... 540 General and administrative (C)........................ 4,240 Utilities (D)......................................... 2,034 Repairs, maintenance and accidents (E)................ 2,538 Marketing and sales (F)............................... 2,746 Chain services (G).................................... 952 -------- Total expenses................................. 22,682 -------- Revenues (House Profit)...................................... $ 27,418 ======== (A) Includes expenses for linen, cleaning supplies, laundry, guest supplies, reservations costs, travel agents' commissions, walked guest expenses and wages, benefits and bonuses for employees of the rooms department. (B) Includes expenses related to operating the telephone department. (C) Includes management and hourly wages, benefits and bonuses, credit and collection expenses, employee relations, guest relations, bad debt expenses, office supplies and miscellaneous other expenses. (D) Includes electricity, gas and water at the properties. (E) Includes cost of repairs and maintenance and the cost of accidents at the properties. (F) Includes management and hourly wages, benefits and bonuses, promotional expense and local advertising. (G) Includes charges from the Manager for Chain Services as allowable under the Agreements. F-30 SIGNATURES 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, thereunto duly authorized. HOSPITALITY PROPERTIES TRUST By: /s/ John G. Murray John G. Murray President and Chief Operating Officer Dated: March 28, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, or by their attorney-in-fact, in the capacities and on the dates indicated.
Signature Title Date /s/ John G. Murray President and March 28, 1997 John G. Murray Chief Operating Officer /s/ Thomas M. O'Brien Treasurer and Chief March 28, 1997 Thomas M. O'Brien Financial Officer Trustee _______________________ John L. Harrington /s/ Arthur G. Koumantzelis Trustee March 28, 1997 Arthur G. Koumantzelis Trustee _______________________ William J. Sheehan /s/ Gerard M. Martin Trustee March 28, 1997 Gerard M. Martin /s/ Barry M. Portnoy Trustee March 28, 1997 Barry M. Portnoy
EX-8.1 2 SULLIVAN & WORCESTER LLP One Post Office Square Boston, Massachusetts 02109 March 28, 1997 Hospitality Properties Trust 400 Centre Street Newton, Massachusetts 02158 Ladies and Gentlemen: In connection with the Annual Report on Form 10-K (the "Annual Report") by Hospitality Properties Trust, a Maryland real estate investment trust (the "Company"), the following opinion is furnished to you to be filed with the Securities and Exchange Commission (the "SEC") as Exhibit 8.1 to the Annual Report, to be filed within one week of the date hereof, under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We have acted as counsel for the Company in connection with the preparation of its Annual Report and we have examined originals or copies, certified or otherwise identified to our satisfaction, of the Annual Report, corporate records, certificates and statements of officers and accountants of the Company and of public officials, and such other documents as we have considered relevant and necessary in order to furnish the opinion hereinafter set forth. Specifically, and without limiting the generality of the foregoing, we have reviewed the declaration of trust, as amended and restated, and the by-laws of the Company. We have reviewed the sections in the Annual Report captioned "Taxation of the Company" and "ERISA Plans, Keogh Plans and Individual Retirement Accounts." With respect to all questions of fact on which such opinions are based, we have assumed the accuracy and completeness of and have relied on the information set forth in the Annual Report, and on representations made to us by the officers of the Company. We have not independently verified such information; nothing has come to our attention, however, which would lead us to believe that we are not entitled to rely on such information. The opinion set forth below is based upon the Internal Revenue Code of 1986, as amended, the Treasury Regulations issued thereunder, published administrative interpretations thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively the "Tax Laws"), and upon the Employee Retirement Income Security Act of Hospitality Properties Trust March 28, 1997 Page 2 1974, as amended, the Department of Labor regulations issued thereunder, published administrative interpretations thereof, and judicial decisions with respect thereto, all as of the date hereof (collectively, the "ERISA Laws"). No assurance can be given that the Tax Laws or the ERISA Laws will not change. In preparing the discussions with respect to federal income tax and ERISA Laws matters in the sections of the Annual Report captioned "Taxation of the Company" and "ERISA Plans, Keogh Plans and Individual Retirement Accounts," we have made certain assumptions and expressed certain conditions and qualifications therein, all of which assumptions, conditions and qualifications are incorporated herein by reference. Based upon and subject to the foregoing, we are of the opinion that the discussions with respect to federal income tax and ERISA Laws matters in the sections of the Annual Report captioned "Taxation of the Company" and "ERISA Plans, Keogh Plans and Individual Retirement Accounts," in all material respects are accurate and fairly summarize the federal income tax issues and ERISA Laws issues addressed therein, and hereby confirm that the opinions of counsel referred to in said sections represent our opinions on the subject matter thereof. We hereby consent to the filing of this opinion as an exhibit to the Company's Annual Report and to the incorporation of this opinion by reference as an exhibit to the Company's Registration Statement on Form S-3, No. 333-17983. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Act or under the rules and regulations of the SEC promulgated thereunder. Very truly yours, /s/ Sullivan & Worcester LLP SULLIVAN & WORCESTER LLP EX-10.11 3 UP TO U.S. $200,000,000 AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT Dated as of December 29, 1995 as amended by Amendment No. 1 dated February 26, 1996 Between HOSPITALITY PROPERTIES TRUST as Borrower and DLJ MORTGAGE CAPITAL, INC. as Lender SCHEDULES Schedule 1.1 - Initial Hotels Schedule 3.2 - Mortgaged Property Prioritization Schedule Schedule 5.8(a) - Stock Related Agreements Schedule 5.8(c) - Subsidiaries Schedule 5.19 - Environmental Matters Schedule 5.22(a) - Owned Real Estate Schedule 5.22(b) - Leased Real Estate Schedule 5.22(c) - Defects in Improvements Schedule 8.1 - Existing Liens v EXHIBITS Exhibit A - Form of Note Exhibit B - Form of Notice of Borrowing Exhibit C - Form of Negative Pledge Agreement Exhibit D - Form of Opinion of Counsel for the Loan Parties Exhibit E - Form of Mortgage Exhibit F - Form of Assignment Agreement Exhibit G - Form of Management Agreement Exhibit H - Form of Operating Lease Exhibit I - Form of Security Agreement Exhibit J - Form of Subordination Agreement Exhibit K - Form of Letter Agreement vi AMENDED AND RESTATED REVOLVING CREDIT AGREEMENT, dated as of the 29th day of December, 1995, between HOSPITALITY PROPERTIES TRUST, a Maryland real estate investment trust (the "Borrower") and DLJ MORTGAGE CAPITAL, INC., a Delaware corporation (the "Lender"). W I T N E S S E T H: WHEREAS, pursuant to that certain Revolving Credit Agreement dated as of August 22, 1995 between the Borrower and the Lender (the "Original Revolving Credit Agreement"), the Lender agreed to make to the Borrower revolving credit advances of up to $200,000,000 in aggregate principal amount outstanding at any one time, for the purposes and upon the terms and subject to the conditions set forth therein; WHEREAS, as of the date hereof no advances have been made under the Original Revolving Credit Agreement; WHEREAS, the Borrower and the Lender have agreed to amend certain terms and provisions of the Original Revolving Credit Agreement and to restate the same as hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the covenants and agreements contained herein, the parties hereto hereby agree that the aforementioned recitals are true and correct and hereby incorporated herein and that the Original Revolving Credit Agreement is hereby amended and restated in its entirety so that all of the terms and conditions contained in this Agreement shall supersede and control the terms and conditions of the Original Revolving Credit Agreement. ARTICLE I DEFINITIONS AND ACCOUNTING TERMS 1.1. Defined Terms. As used in this Agreement, the following terms have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): 1 "Advisor" means HRPT Advisors or such other Person as shall act as an advisor to the Borrower, whether pursuant to the Advisory Agreement, or an agreement analogous to the Advisory Agreement, with the prior written consent of the Lender. "Advisory Agreement" means the Advisory Agreement, dated as of August 21, 1995, between the Borrower and the Advisor, as amended, supplemented or modified from time to time in a manner not inconsistent with the terms hereof or of the Subordination Agreement. "Affiliate" means, as to any Person, any Subsidiary of such Person and any other Person which, directly or indirectly, controls, is controlled by or is under common control with such Person and includes each officer or director or trustee or general partner of such Person, and each Person who is the beneficial owner of 10% or more of any class of voting Stock of such Person. For the purposes of this definition, "control" means the possession of the power to direct or cause the direction of management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise. "Agreement" means the Original Revolving Credit Agreement as amended and restated pursuant to this Amended and Restated Revolving Credit Agreement, together with all Exhibits and Schedules hereto, as the same may be amended, supplemented or otherwise modified from time to time. "Appraisal" means an appraisal using methodologies reasonably acceptable to the Lender at the time such appraisal is or was made and performed by a Recognized Appraiser. "Approved Hotel Facility" means any Proposed Hotel Facility approved by the Lender pursuant to Section 3.1 hereof. "Asset Sale" means any sale, conveyance, transfer, assignment, lease or other disposition (including, without limitation, by merger or consolidation and whether by operation of law or otherwise) by the Borrower or any of its Subsidiaries to any Person of any Stock of any of its Subsidiaries, any Stock Equivalents of any of its 2 Subsidiaries or any Mortgaged Property but excluding Operating Leases. Asset Sale Proceeds" means payments received by the Borrower or any of its Subsidiaries (including, without limitation, any payments received by way of deferred payment of principal pursuant to a note or receivable or otherwise, but only as and when received) from any Asset Sale (after repayment of any Indebtedness other than the Loans secured by the Mortgaged Property subject of such Asset Sale to the extent such Indebtedness is permitted hereunder), in each case net of the amount of (i) brokers' and advisors' fees and commissions payable other than to an Affiliate of the Borrower in connection with such Asset Sale, (ii) all foreign, federal, state and local taxes payable as a direct consequence of such Asset Sale, (iii) the reasonable fees and expenses attributable to such Asset Sale, to the extent not included in clause (i), except to the extent payable to any Affiliate of the Borrower, and (iv) any amount required to be paid to any Person (other than the Borrower and any of its Subsidiaries) owning a beneficial interest in the property or assets sold. "Assignment Agreement" means, with respect to each Mortgaged Property, an agreement substantially in the form of Exhibit F, executed by the Borrower, the Lender and the Manager, assigning to the Lender, the Management Agreement relating thereto, "Base Rate" means, for any period, a fluctuating interest rate per annum as shall be in effect from time to time, which rate per annum shall be equal at all times to the higher of: (a) the rate of interest announced publicly by Citibank, N.A. in New York, New York, from time to time, as such bank's prime rate; and (b) the sum (adjusted to the nearest 1/4 of one percent or, if there is no nearest 1/4 of one percent, to the next higher 1/4 of one percent) of (i) one and one-half percent (1 1/2%) per annum plus (ii) the Federal Funds Rate. "Base Rent" means, for any period, the base or fixed rent or percentage rent during such period payable by 3 an Operating Lessee pursuant to the terms of an Operating Lease. "Business Day" means a day of the year on which banks are not required or authorized to close in New York City and a day on which dealings are also carried on in the London interbank market. "Capital Expenditures" means, for any Person for any period, the aggregate of all expenditures by such Person and its consolidated Subsidiaries, except interest capitalized during construction, during such period for property, plant or equipment, including, without limitation, renewals, improvements, replacements and capitalized repairs, that would be reflected as additions to property, plant or equipment on a consolidated balance sheet of such Person and its Subsidiaries prepared in conformity with GAAP. For the purpose of this definition, the purchase price of equipment which is acquired simultaneously with the trade-in of existing equipment owned by such Person or any of its Subsidiaries or with insurance proceeds shall be included in Capital Expenditures only to the extent of the gross amount of such purchase price less the credit granted by the seller of such equipment being traded in at such time or the amount of such proceeds, as the case may be. "Capital Financing Indebtedness" means the principal amount of all Indebtedness incurred or assumed in connection with any Capital Expenditures, all Capitalized Lease Obligations and all other Indebtedness (including purchase money Indebtedness) incurred solely for the purpose of financing or refinancing the acquisition of assets or properties. "Capitalized Lease" means, as to any Person, any lease of property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in conformity with GAAP. "Capitalized Lease Obligations" means, as to any Person, the capitalized amount of all obligations of such Person or any of its Subsidiaries under Capitalized Leases, as determined on a consolidated basis in conformity with GAAP. 4 "Cash Flow" means, for any Person for any period, the Net Income (Loss) of such Person for such period plus all non-cash charges of such Person and its consolidated Subsidiaries for such period to the extent included in the computation of such Net Income (Loss). "Closing Date" means the first date on which any Loan is made. "Code" means the Internal Revenue Code of 1986 (or any successor legislation thereto), as amended from time to time. "Collateral" means all property and interests in property and proceeds thereof now owned or hereafter acquired by any Loan Party in or upon which a Lien is granted under any of the Collateral Documents. "Collateral Documents" means, the Negative Pledge Agreements, the Assignment Agreements, the Mortgages, the Security Agreements and any other document now or hereafter executed and delivered by a Loan Party granting a Lien on any of its property to secure payment of the Obligations. "Commitment" has the meaning specified in Section 2.1. "Contingent Obligation" means, as applied to any Person, any direct or indirect liability, contingent or otherwise, of such Person with respect to any Indebtedness or Contractual Obligation of another Person, if the purpose or intent of such Person in incurring the Contingent Obligation is to provide assurance to the obligee of such Indebtedness or Contractual Obligation that such Indebtedness or Contractual Obligation will be paid or discharged, or that any agreement relating thereto will be complied with, or that any holder of such Indebtedness or Contractual Obligation will be protected (in whole or in part) against loss in respect thereof. Contingent Obligations of a Person include, without limitation, (a) the direct or indirect guarantee, endorsement (other than for collection or deposit in the ordinary course of business), co-making, discounting with recourse or sale with recourse by such Person of an obligation of another Person, and (b) any liability of such Person for an obligation of 5 another Person through any agreement (contingent or other wise) (i) to purchase, repurchase or otherwise acquire such obligation or any security therefor, or to provide funds for the payment or discharge of such obligation (whether in the form of a loan, advance, stock purchase, capital contribution or otherwise), (ii) to maintain the solvency or any balance sheet item, level of income or financial condition of another Person, (iii) to make take-or-pay or similar payments, if required, regardless of non-performance by any other party or parties to an agreement, (iv) to purchase, sell or lease (as lessor or lessee) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such obligation or to assure the holder of such obligation against loss, or (v) to supply funds to or in any other manner invest in such other Person (including, without limitation, to pay for property or services irrespective of whether such property is received or such services are rendered), if in the case of any agreement described under subclause (i), (ii), (iii), (iv) or (v) of this sentence the primary purpose or intent thereof is as described in the preceding sentence. The amount of any Contingent Obligation shall be equal to the amount of the obligation so guaranteed or otherwise supported. "Contract" means any contract, agreement, undertaking, indenture, note, bond, loan, instrument, lease, conditional sales contract, mortgage, deed of trust, license, franchise, insurance policy, commitment or other arrangement or agreement. "Contractual Obligation" of any Person means any obligation, agreement, undertaking or similar provision of any security issued by such Person or of any Contract (excluding a Loan Document) to which such Person is a party or by which it or any of its property is bound or to which any of its properties is subject. "Default" means any event which with the passing of time or the giving of notice or both would become an Event of Default. "DOL" means the United States Department of Labor, or any successor thereto. 6 "Dollars" and the sign "$" each mean the lawful money of the United States of America. "Environmental Claim" means any accusation, allegation, notice of violation, action, claim, Environmental Lien, demand, abatement or other Order or direction (conditional or otherwise) by any Governmental Authority or any other Person for personal injury (including sickness, disease or death), tangible or intangible property damage, damage to the environment, nuisance, pollution, contamination or other adverse effects on the environment, or for fines, penalties or restriction, resulting from or based upon (i) the existence, or the continuation of the existence, of a Release (including, without limitation, sudden or non-sudden accidental or non-accidental Releases) of, or exposure to, any Hazardous Material or odor, audible noise or other nuisance, or other Release in, into or onto the environment (including, without limitation, the air, soil, surface water or groundwater) at, in, by, from or related to any property owned, operated or leased by the Borrower or any of its Subsidiaries or any activities or operations thereof; (ii) the environmental aspects of the transportation, storage, treatment or disposal of Hazardous Materials in connection with any property owned, operated or leased by the Borrower or any of its Subsidiaries or their operations or facilities; or (iii) the violation, or alleged violation, of any Environmental Laws, Orders or Environmental Permits of or from any Governmental Authority relating to environmental matters connected with any property owned, leased or operated by the Borrower or any of its Subsidiaries. "Environmental Laws" means any federal, state, local or foreign law (including common law), statute, code, ordinance, rule, regulation or other requirement relating in any way to the environment, natural resources, or public or employee health and safety and includes, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), 42 U.S.C. ss. 9601 et seq., the Hazardous Materials Transportation Act, 49 U.S.C. ss. 1801 et seq., the Federal Insecticide, Fungicide, and Rodenticide Act, 7 U.S.C. ss. 136 et seq., the Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. ss. 6901 et seq., the Toxic Substances Control Act, 15 U.S.C. ss. 2601 et seq., the Clean Air Act, 42 U.S.C. ss. 7401 et seq., the Clean Water Act, 33 U.S.C. ss. 1251 et seq., the Occupational Safety and Health 7 Act, 29 U.S.C. ss. 651 et seq., and the Oil Pollution Act of 1990, 33 U.S.C. ss. 2701 et seq., as such laws have been amended or supplemented, and the regulations promulgated pursuant thereto, and all analogous state and local statutes. "Environmental Liabilities and Costs" means, as to any Person, all liabilities, obligations, responsibilities, Remedial Actions, losses, damages, punitive damages, consequential damages, treble damages, costs and expenses (including, without limitation, all fees, disbursements and expenses of counsel, experts and consultants and costs of investigation and feasibility studies), fines, penalties, sanctions and interest incurred as a result of any Environmental Claim. "Environmental Lien" means any Lien in favor of any Governmental Authority arising under any Environmental Law. "Environmental Permit" means any Permit required under any applicable Environmental Laws or Order and all supporting documents associated therewith. "ERISA" means the Employee Retirement Income Security Act of 1974 (or any successor legislation thereto), as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) under common control or treated as a single employer with any Loan Party within the meaning of Section 414 (b), (c), (m) or (o) of the Code. "ERISA Event" means (i) an event described in Sections 4043(b)(1), (2), (3), (5), (6), (8) or (9) of ERISA with respect to a Pension Plan; (ii) the withdrawal of any Loan Party or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer, as defined in Section 4001(a)(2) of ERISA; (iii) the complete or partial withdrawal of any Loan Party or any ERISA Affiliate from any Multiemployer Plan or the insolvency of any Multiemployer Plan; (iv) the filing of a notice of intent to terminate a Pension Plan or the treatment of a plan amendment as a termination under Section 4041 of ERISA; (v) the institution 8 of proceedings by the PBGC to terminate or appoint a trustee to administer a Pension Plan or Multiemployer Plan; (vi) the failure to make any required contribution to a Pension Plan; (vii) any other event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; (viii) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA; (ix) a prohibited transaction (as described in Code Section 4975 or ERISA Section 406) shall occur with respect to any Plan; or (x) any Loan Party or ERISA Affiliate shall request a minimum funding waiver from the IRS with respect to any Pension Plan. "Eurocurrency Liabilities" has the meaning assigned to that term in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time. "Eurodollar Rate" means, for any Interest Period, an interest rate per annum equal to the sum of (a) the rate per annum obtained by dividing (i) the rate of interest determined by the Lender to be the average (rounded upward to the nearest whole multiple of 1/16 of 1% per annum, if such average is not such a multiple) of the rates for Dollar deposits which appear on the display designated as page "LIBO" on the Reuter Monitor Money Rates Service (or such other page as may replace such page or that service for the purpose of displaying London interbank offered rates for major banks) (the "Reuters Page"), as of 11:00 A.M. (London time) two Business Days before the first day of such Interest Period in an amount substantially equal to the Loan during such Interest Period and for a period equal to such Interest Period by (ii) a percentage equal to 100% minus the Eurodollar Rate Reserve Percentage for such Interest Period, plus (b) 1.50%. If the Lender is unable to ascertain the interest rate referred to in (i) above from the Reuters Page, such rate shall be determined from such financial reporting service or other information as shall be reasonably determined by the Lender. "Eurodollar Rate Reserve Percentage" for any Interest Period means the reserve percentage applicable two Business Days before the first day of such Interest Period 9 under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York City with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities which includes deposits by reference to which the Eurodollar Rate is determined) having a term equal to such Interest Period. "Event of Default" has the meaning specified in Section 9.1. "Fair Market Value" means with respect to any Hotel Facility at any date, the value thereof reasonably determined by the Lender by dividing the Base Rents from such Hotel Property during the previous twelve (12) month period by ten percent (10%). "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Lender from three Federal funds brokers of recognized standing selected by it. "FF&E Reserve" has the meaning given to such term in the Management Agreement attached as Exhibit G hereto "Final Maturity Date" means December 31, 1998. "Financial Officer's Certificate" has the meaning specified in Section 7.11(c). "Fiscal Quarter" means each of the three month periods ending on March 31, June 30, September 30 and December 31. 10 "Fiscal Year" means the twelve month period ending on December 31. "GAAP" means generally accepted accounting principles in the United States of America as in effect from time to time set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and the statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination except that, for purposes of Article VI, GAAP shall be determined on the basis of such principles in effect on the date hereof and consistent with those used in the preparation of the audited financial statements referred to in Section 5.5. "Governmental Authority" means any nation or government, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Hazardous Material" means any substance, material or waste which is regulated by any Governmental Authority of the United States or other national government, including, without limitation, any material, substance or waste which is defined as a "hazardous waste," "hazardous material," "hazardous substance," "extremely hazardous waste," "restricted hazardous waste," "contaminant," "toxic waste" or "toxic substance" under any provision of Environmental Law, which includes, but is not limited to, petroleum, petroleum products, asbestos, urea formaldehyde and polychlorinated biphenyls. "HMC" means Host Marriott Corporation, a Delaware corporation. "Hotel Facility" means, subject to the provisions of Section 3.2 hereof, each of (a) the Initial Hotels, and (b) the Approved Hotel Facilities acquired by the Borrower using the proceeds of a Loan or Loans made by the Lender hereunder. 11 "HRP" means Health and Retirement Properties Trust, a Maryland real estate investment trust. "HRP Loan" means the demand loan made by HRP to the Borrower in connection with the acquisition by the Borrower of certain of the Initial Hotels. "HRPT Advisors" means HRPT Advisors, Inc., a Delaware corporation. "Improvements" has the meaning specified in Section 5.22(c). "Indebtedness" of any Person means (i) all indebtedness of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured) or for the deferred purchase price of property or services, (ii) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, (iii) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (iv) all Capitalized Lease Obligations of such Person, (v) all Contingent Obligations of such Person, (vi) all obligations of such Person to purchase, redeem, retire, defease or otherwise acquire for value any Stock or Stock Equivalents of such Person, valued, in the case of redeemable preferred stock, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (vii) all obligations of such Person under Interest Rate Contracts, and (viii) all Indebtedness referred to in clause (i), (ii), (iii), (iv), (v), (vi) or (vii) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including, without limitation, accounts and general intangibles) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness, (ix) in the case of the Borrower, the Obligations, and (x) all liabilities of such Person that would be shown on a balance sheet of such Person prepared in conformity with GAAP. 12 "Indemnitees" has the meaning specified in Section 10.4. "Initial Hotels" means the Real Estate consisting of 37 Courtyard by Marriott(R) hotels listed in Schedule 1.1 hereto. "Initial Selected Properties" means such of the Initial Hotels as the Lender shall select (consistent with the Mortgaged Property Prioritization Schedule attached as Schedule 3.2 hereto and made a part hereof) such that, after giving effect to the Initial Loan to be made hereunder and the Mortgage Documents relating to such Initial Hotels, the Loan to Value Requirement would be satisfied. "Interest Period" means, in the case of any Loan, (i) initially, the period commencing on the date such Loan is made and ending one (1) month thereafter, and (ii) there after, a period commencing on the last day of the immediately preceding Interest Period therefor and ending one (1) month thereafter; provided, however, that: (a) if any Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day, unless the result of such extension would be to extend such Interest Period into another calendar month, in which event such Interest Period shall end on the immediately preceding Business Day; (b) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (c) if the Borrower, by written notice to the Lender given no later than two (2) Business Days prior to the expiration of an Interest Period for any Loan, requests a one day interest period for such Loan, the Interest Period for such Loan shall mean a period of one day (the "1 Day Interest Period"); provided that in no event shall any Loan have a 1 Day Interest Period for a period in excess of thirty (30) consecutive days (the "Limited Period"), and upon the expiration of the Limited Period in respect of any 13 Loan, such Loan shall automatically be continued at the one (1) month Interest Period specified above. "Interest Rate Contracts" means interest rate swap agreements, interest rate cap agreements, interest rate collar agreements, interest rate insurance, and other agreements or arrangements designed to provide protection against fluctuations in interest rates. "Investments" has the meaning specified in Section 8.6. "IRS" means the Internal Revenue Service, or any successor thereto. "Leases" means, with respect to the Borrower or any of its Subsidiaries, all of those leasehold estates in real property owned by the Borrower or such Subsidiary, as lessee, as such may be amended, supplemented or otherwise modified from time to time to the extent permitted by this Agreement. "Legal Proceedings" means any judicial, administrative or arbitral actions, suits, proceedings (public or private), claims or governmental proceedings. "Lending Office" means, with respect to the Lender, the office located at 140 Broadway, New York, New York 10005-1285 or such other office of the Lender as the Lender may from time to time specify to the Borrower. "Lien" means any mortgage, deed of trust, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever intended to secure payment of any Indebtedness or other obligation, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a Capitalized Lease Obligation, any financing lease having substantially the same economic effect as any of the foregoing, and the filing, under the Uniform Commercial Code or comparable law of any jurisdiction, of any financing statement naming the owner of the asset to which such Lien relates as debtor (excluding precautionary filings. 14 "Loan" or "Loans" means the revolving credit loan or loans made or to be made by the Lender to the Borrower pursuant to Article II. "Loan Documents" means, collectively, this Agreement, the Note, the Collateral Documents and each certificate, agreement or document executed by a Loan Party and delivered to the Lender in connection with or pursuant to any of the foregoing, as such agreements, documents or instruments may be amended, modified or supplemented from time to time. "Loan Party" means the Borrower and each Subsidiary and Affiliate of the Borrower which executes and delivers a Loan Document. "Loan to Value Requirement" means the requirement that, at any time, the aggregate principal amount of the Loans outstanding at such time shall not exceed the lesser of (i) fifty percent (50%) of the aggregate of the Fair Market Values for all of the Mortgaged Properties, and (ii) the aggregate of the Qualified Loan Amounts for all of the Mortgaged Properties. "Management Agreement" means an agreement relating to the operation and/or management of a Hotel Facility between the Borrower and the Manager, substantially in the form of the management agreement and amendments thereto annexed as Exhibit G hereto or such other form as shall be approved by the Lender, which approval shall not be unreasonably withheld, delayed or conditioned. "Manager" means Courtyard Management Corporation, a wholly owned subsidiary of Marriott International Inc., or such other manager as shall be approved by the Lender (which approval shall not be unreasonably withheld, delayed or conditioned), as manager under the Management Agreement. 15 "Material Adverse Change" means a material adverse change in any of (i) the condition (financial or otherwise), business, performance, prospects, operations or properties of (A) any Loan Party and its Subsidiaries taken as one enterprise, (B) any Operating Lessee, (C) any Manager, or (D) the Advisor (ii) the legality, validity or enforceability of any Loan Document or any Operating Lease, Management Agreement or Advisory Agreement (iii) the perfection or priority of the Liens granted pursuant to the Collateral Documents, (iv) the ability of the Borrower to repay the Obligations or of any Loan Party to perform its material obligations under any Loan Document, (v) the ability of any Operating Lessee to perform obligations under any Operating Lease, (vi) the ability of any Manager to perform its obligations under any Management Agreement; (vii) the ability of the Advisor to perform its obligations under the Advisory Agreement or (viii) the rights and remedies of the Lender under the Loan Documents. "Material Adverse Effect" means an effect that results in or causes, or has a reasonable likelihood of resulting in or causing, a Material Adverse Change. "Mortgages" means the mortgages or deeds of trust made or required herein to be made by the Borrower or any of its Subsidiaries in substantially the form of Exhibit E, as such Mortgages may be amended, supplemented or otherwise modified from time to time. "Mortgage Documents" means with respect to any Hotel Facility, a Mortgage and the other documents and payments including, without limitation, the Mortgage Payments, specified in Sections 4.2(c)(ii) through (iv) and 4.2(d), where applicable, in the forms attached hereto, subject to appropriate revisions for state or property specific requirements. "Mortgage Payments" means the payments specified in Section 4.2(d)(vi). "Mortgaged Property" means any property subject to a Mortgage in favor of the Lender. "Multiemployer Plan" means, as of any applicable date, a multiemployer plan, as defined in Section 4001(a)(3) 16 of ERISA, and to which any Loan Party, any of its Subsidiaries or any ERISA Affiliate is making, is obligated to make, or within the six-year period ending at such date, has made or been obligated to make, contributions on behalf of participants who are or were employed by any of them. "Negative Pledge Agreement" means, in respect of each Hotel Facility, an agreement, in substantially the form of Exhibit C, executed by the Borrower or the Subsidiary owning such Hotel Facility, as such agreement may be amended, supplemented or modified from time to time. "Net Income (Loss)" means, for any Person for any period, the aggregate of net income (or loss) of such Person and its Subsidiaries for such period, determined on a consolidated basis in conformity with GAAP. "Net Interest Expense" means, for any Person for any period, gross interest expense in respect of all Indebtedness of such Person and its Subsidiaries for such period determined on a consolidated basis in conformity with GAAP, less the following for such Person and its Subsidiaries determined on a consolidated basis in conformity with GAAP: (a) the sum of (i) interest capitalized during construction for such period, (ii) interest income for such period, and (iii) gains for such period on Interest Rate Contracts (to the extent not included in interest income above and to the extent not deducted in the calculation of such gross interest expense), plus the following for such Person and its Subsidiaries determined on a consolidated basis in conformity with GAAP: (b) the sum of (i) losses for such period on Interest Rate Contracts (to the extent not included in such gross interest expense), and (ii) the amortization of upfront costs or fees for such period associated with Interest Rate Contracts (to the extent not included in gross interest expense). "Net Worth" of any Person means at any date the excess of (a) the total assets of such Person and its Subsidiaries at such date determined on a consolidated basis in conformity with GAAP over (b) all obligations which in conformity with GAAP would be included in determining total liabilities as shown on the liabilities side of a consolidated balance sheet of such Person and its Subsidiaries at such date. 17 "Note" means a promissory note of the Borrower payable to the order of the Lender in a principal amount equal to the amount of the Commitment as originally in effect, in substantially the form of Exhibit A, evidencing the aggregate Indebtedness of the Borrower to the Lender resulting from the Loans made by the Lender. "Notice of Borrowing" has the meaning specified in Section 2.2(a). "Obligations" means the Loans and all other advances, debts, liabilities, obligations, covenants and duties owing by the Borrower to the Lender, any Affiliate of the Lender or any Indemnitee, of every type and description, present or future, whether or not evidenced by any note, guaranty or other instrument, arising under this Agreement or under any other Loan Document, whether or not for the payment of money, loan, guaranty, indemnification, foreign exchange transaction or Interest Rate Contract or in any other manner, whether direct or indirect (including, without limitation, those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising and however acquired. The term "Obligations" includes, without limitation, all interest, charges, expenses, fees, attorneys' fees and disbursements and any other sum chargeable to the Borrower under this Agreement or any other Loan Document. "Operating Lease" means a lease or sublease relating to any Real Estate or Lease, between the Borrower or any of its Subsidiaries, as lessor, and the Operating Lessee, as lessee, substantially in the form of the lease annexed as Exhibit H hereto or such other form as shall be approved by the Lender, which approval shall not be unreasonably withheld, delayed or conditioned. "Operating Lessee" means HMH HPT Courtyard, Inc., a wholly owned subsidiary of HMC or such other lessee as shall be approved by the Lender (which approval shall not be unreasonably withheld, delayed or conditioned), as lessee under the Operating Lease. "Operator" means the Operating Lessee and/or the Manager (as the case may be) responsible for the operation and management of any Real Estate. 18 "Order" means any order, injunction, judgment, decree, ruling, assessment or arbitration award. "Other Taxes" has the meaning specified in Section 2.14(b). "PBGC" means the Pension Benefit Guaranty Corporation, or any successor thereto. "Pension Plan" means a plan, other than a Multiemployer Plan, which is covered by Title IV of ERISA or Code Section 412 and which any Loan Party, any of its Subsidiaries or any ERISA Affiliate maintains, contributes to or has an obligation to contribute to on behalf of participants who are or were employed by any of them. "Permit" means any permit, approval, authorization, license, variance, registration, permission or consent required from a Governmental Authority under an applicable Requirement of Law. "Permitted Lien" means any Lien permitted under Section 8.1 hereof. "Person" means an individual, partnership, corporation (including, without limitation, a business trust), joint stock company, trust, unincorporated association, joint venture or other entity, or a Governmental Authority. "Plan" means an employee benefit plan, as defined in Section 3(3) of ERISA, which any Loan Party or any of its Subsidiaries maintains, contributes to or has an obligation to contribute to on behalf of participants who are or were employed by any of them. "Proposed Hotel Facility" means any Real Estate or Lease comprising an operating facility offering hotel or other lodging services which the Borrower desires to acquire using the proceeds of a Loan made by the Lender hereunder. "Proposed Hotel Facility Statement" means a certificate of a Responsible Officer providing each of the following: 19 (i) details of the location of the Proposed Hotel Facility and the real estate interest to be acquired; (ii) specification of the proposed acquisition costs of the Borrower in respect of such Proposed Hotel Facility; (iii) certification (based on information available to the Borrower after diligent enquiry) as to the ratio of (A) the lesser of (1) the Cash Flow of the current owner or operator of the Proposed Hotel Facility (as applicable) over the four most recent financial quarters attributable to the Proposed Hotel Facility, and (2) the proposed annual Base Rent under the proposed Operating Lease of the Proposed Hotel Facility; to (B) projected fixed charges (including the Net Interest Expense) for such Proposed Hotel Facility for the next one year period and, further, certification that, to the knowledge of the Borrower after diligent enquiry, with respect to the Proposed Hotel Facility the details of Cash Flows of the operator thereof used by the Borrower in its calculations are current; (iv) audited balance sheets if available, or pro forma balance sheets, of the owner or operator of the Proposed Hotel Facility, and the related consolidated statements of income, retained earnings and cash flows of such owner or operator for its previous three (3) fiscal years; (v) audited balance sheets if available, or pro forma balance sheets, in respect of the Proposed Hotel Facility and the related consolidated statements of operations, changes in owner's equity (deficit) and cash flows in respect of such Proposed Hotel Facility, for the previous three (3) fiscal years; (vi) a written report of an investigation by an environmental consultant, reasonably acceptable to the Lender, addressing any significant environmental, health and safety violations, hazards or liabilities to which the owner or operator of the Proposed Hotel Facility may be subject, which report shall demonstrate, to the reasonable satisfaction of the 20 Lender, that the Proposed Hotel Facility and the operations thereof are in compliance in all material respects with all applicable Environmental Laws and are not subject to any material Environmental Liabilities and Costs. (vii) a copy of the proposed form of Operating Lease and, if applicable, Management Agreement; (viii) the names of the proposed Operating Lessee and, if applicable, Manager; (ix) a copy of a recent market study in respect of the Proposed Hotel Facility; (x) a current title report and survey in respect of the Proposed Hotel Facility, issued by a title company/surveyor reasonably acceptable to the Lender; and (xi) a written report of an investigation by an engineering consultant reasonably acceptable to the Lender. "Qualified Loan Amount" means, with respect to each Mortgaged Property, the maximum principal amount permitted for any Qualified Loan as such term is defined in the Management Agreement attached as Exhibit G hereto. "Rating Agency" shall mean any nationally recognized statistical agency selected by the Lender including, without limitation, Duff & Phelps Rating Co., Fitch Investors Services, Inc., Moody's Investors Services, Inc., and/or Standard and Poors corporation, collectively, and any successor to any of them; provided, however, that at any time during which the Loans are an asset of a securitization, "Rating Agency" shall mean the rating agency or rating agencies that from time to time rate the securities issued in connection with such securitization. "Recognized Appraiser" means a qualified and recognized professional appraiser as may be selected or approved by the Lender, having at least five (5) years' prior experience in performing real estate appraisals in the geographic area where the property being appraised is 21 located, having a recognized expertise in appraising properties operated as hotel or other lodging facilities. "Real Estate" means all of those plots, pieces or parcels of land now owned or hereafter acquired by the Borrower or any of its Subsidiaries (the "Land"), including, without limitation, those listed on Schedule 5.22(a) and described in the Mortgages, together with the right, title and interest of the Borrower or such Subsidiary, if any, in and to the streets, the land lying in the bed of any streets, roads or avenues, opened or proposed, in front of, adjoining or abutting the Land to the center line thereof, the air space and development rights pertaining to the Land and the right to use such air space and development rights, all rights of way, privileges, liberties, tenements, hereditaments and appurtenances belonging or in any way appertaining thereto, all fixtures, all easements now or hereafter benefiting the Land and all royalties and rights appertaining to the use and enjoyment of the Land, including, without limitation, all alley, vault, drainage, mineral, water, oil and gas rights, together with all of the buildings and other improvements now or hereafter erected on the Land, and any fixtures appurtenant thereto. "Registration Statement" means the Form S-11 Registration Statement under the Securities Act of 1933 as filed by the Borrower with the Securities and Exchange Commission on May 15, 1995 (as Registration Number 33-92330) and any filed amendments thereto. "Release" means any release, spill, emission, leaking, pumping, pouring, dumping, emptying, injection, deposit, disposal, discharge, dispersal, leaching or migration on or into the indoor or outdoor environment or into or out of any property. "Remedial Action" means all actions including, without limitation, any Capital Expenditures, required or voluntarily undertaken to (i) clean up, remove, treat or in any other way address any Hazardous Material or other sub stance in the indoor or outdoor environment, (ii) prevent the Release or threat of Release, or minimize the further Release, of any Hazardous Material or other substance so it does not migrate or endanger or threaten to endanger public health or welfare or the indoor or outdoor environment, 22 (iii) perform pre-remedial studies and investigations or post-remedial monitoring and care, or (iv) bring facilities on any property owned, leased or operated by the Borrower or any of its Subsidiaries into compliance with all Environmental Laws and Environmental Permits. "Requirement of Law" means, as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and all federal, state and local laws, rules and regulations, including, without limitation, federal, state or local securities, antitrust and licensing laws, all food, health and safety laws, and all applicable trade laws and requirements, including, without limitation, all disclosure requirements of Environmental Laws, ERISA and all orders, judgments, decrees or other determinations of any Governmental Authority or arbitrator, applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer" means, with respect to any Person, any of the principal executive officers or general partners of such Person. "Second Facility" means the proposed revolving credit facility in a maximum principal amount of up to approximately $250,000,000, to be entered into by and between the Borrower and the Lender. "Secured Indebtedness" of any Person means any Indebtedness of such Person for which the obligations thereunder are secured by a Lien on any assets of such Person. "Security Agreement" means, with respect to each Hotel Property, an agreement in substantially the form of Exhibit I, subject to such changes as the Manager shall reasonably request and the Lender shall reasonably agree to, executed by the Borrower and the other parties thereto, granting to the Lender a security interest in the Borrower's interest in the FF&E Reserve. "Selected Properties" has the meaning specified in Section 3.2. 23 "Solvent" means, with respect to any Person, that the value of the assets of such Person (both at fair value and present fair saleable value) is, on the date of determination, greater than the total amount of liabilities (including, without limitation, contingent and unliquidated liabilities) of such Person as of such date and that, as of such date, such Person is able to pay all liabilities of such Person as such liabilities mature and does not have unreasonably small capital. In computing the amount of contingent or unliquidated liabilities at any time, such liabilities will be computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability. "Stock" means shares of capital stock, beneficial or partnership interests, participations or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or non-voting, and includes, without limitation, common stock and preferred stock. "Stock Equivalents" means all securities convertible into or exchangeable for Stock and all warrants, options or other rights to purchase or subscribe for any stock, whether or not presently convertible, exchangeable or exercisable. "Subsidiary" means, with respect to any Person, any corporation, partnership or other business entity of which an aggregate of 50% or more of the outstanding Stock having ordinary voting power to elect a majority of the board of directors, managers, trustees or other controlling persons, is, at the time, directly or indirectly, owned or controlled by such Person and/or one or more Subsidiaries of such Person (irrespective of whether, at the time, Stock of any other class or classes of such entity shall have or might have voting power by reason of the happening of any contingency). "Subordination Agreement" means an agreement among the Lender, the Advisor and the Borrower, substantially in the form annexed as Exhibit J, as amended, supplemented or modified from time to time in a manner not inconsistent with the terms thereof and hereof. 24 "Tangible Net Worth" of any Person means, at any date, the Net Worth of such Person at such date, excluding, however, from the determination of the total assets of such Person at such date, (i) all goodwill, organizational expenses, research and development expenses, trademarks, trade names, copyrights, patents, patent applications, licenses and rights in any thereof, and other similar intangibles, (ii) all prepaid expenses, deferred charges or unamortized debt discount and expense, (iii) all reserves carried and not deducted from assets, (iv) treasury stock and capital stock, obligations or other securities of, or capital contributions to, or investments in, any Subsidiary of such Person, (v) securities which are not readily marketable, (vi) cash held in a sinking or other analogous fund established for the purpose of redemption, retirement, defeasance or prepayment of any Stock or Indebtedness, (vii) any write-up in the book value of any asset resulting from a revaluation thereof, and (viii) any items not included in clauses (i) through (vii) above which are treated as intangibles in conformity with GAAP. "Tax Affiliate" means, as to any Person, (i) any Subsidiary of such Person, and (ii) any Affiliate of such Person with which such Person files or is eligible to file consolidated, combined or unitary tax returns. "Tax Return" has the meaning specified in Section 5.3. "Taxes" has the meaning specified in Section 2.14(a). "Title Insurance Policies" has the meaning specified in Section 4.2(d)(i). "Total Assets" of any Person means, at any date, the aggregate value of all assets of such Person, determined on the basis of cost of each such asset to such Person without reduction for depreciation or adjustments due to asset reappraisals or otherwise. "Total Base Rents" means, for any period, the aggregate sum of Base Rents for such period payable under any Operating Leases in effect during such period, determined on a consolidated basis. 25 "Treasury Constant Maturity Yield Index" means the average yield for "This Week" as reported by the Federal Reserve Board in Federal Reserve Statistical Release H.15(519). "Underwriters" means the underwriters under the Underwriting Agreement. "Underwriting Agreement" means that certain Underwriting Agreement dated August 16, 1995 between the Borrower, Donaldson, Lufkin & Jenrette Securities Corporation and the other Underwriters. "Unsecured Indebtedness" of any Person means any Indebtedness of such Person for which the obligations thereunder are not secured by a pledge of or other encumbrance on any assets of such Person. 1.2. Computation of Time Periods. In this Agreement, in the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including" and the words "to" and "until" each mean "to but excluding" and the word "through" means "to and including". 1.3. Accounting Terms. All accounting terms not specifically defined herein shall be construed in conformity with GAAP and all accounting determinations required to be made pursuant hereto shall, unless expressly otherwise provided herein, be made in conformity with GAAP. 1.4. Certain Terms. (a) The words "herein," "hereof" and "hereunder" and other words of similar import refer to this Agreement as a whole, and not to any particular Article, Section, subsection or clause in this Agreement. References herein to an Exhibit, Schedule, Article, Section, subsection or clause refer to the appropriate Exhibit or Schedule to, or Article, Section, subsection or clause in this Agreement. (b) The term "Lender" includes its successors and each assignee of the Lender who becomes a party hereto pursuant to Section 10.7. 26 ARTICLE II AMOUNTS AND TERMS OF THE LOANS 2.1. The Loans. On the terms and subject to the conditions contained in this Agreement, the Lender agrees to make revolving credit loans (each a "Loan" and collectively, the "Loans") to the Borrower from time to time on any Business Day during the period from the date hereof to and including the Final Maturity Date in an aggregate outstanding amount not to exceed TWO HUNDRED MILLION DOLLARS ($200,000,000) (the "Commitment") at any time, to be used for the purposes identified in Section 5.18. Within the limits of the Commitment and subject to the other terms and conditions hereof, amounts prepaid pursuant to Section 2.6(b) may be reborrowed under this Section 2.1 up to and including the Final Maturity Date. No portion of the Commitment may be borrowed or reborrowed after the Final Maturity Date. The Loans shall be evidenced by the Note. The Lender is authorized to endorse, at any time, the date and amount of each Loan and the date and amount of each payment of principal with respect to the Loans on the schedule annexed to and constituting a part of the Note, which endorsement shall constitute prima facie evidence of the accuracy of the information endorsed. 2.2. Making the Loans. (a) Each Loan shall be made on notice, given by the Borrower to the Lender not later than 12:00 noon (New York City time) on the fifth (5th) Business Day prior to the date of the proposed Loan. Each such notice (a "Notice of Borrowing") shall be in substantially the form of Exhibit B, specifying therein (i) the date of such proposed Loan, (ii) the amount of such proposed Loan, (iii) the account or accounts to which the Loan should be made, and (iv) that the proceeds of the proposed Loan shall be used to repay the HRP Loan or details of the Approved Hotel Facility or Facilities or other permitted use for which the proceeds of the proposed Loan shall be used. Notwithstanding the foregoing, the Borrower agrees promptly to notify the Lender in writing that it intends to request a Loan in order to allow adequate time for the preparation of the Mortgage Documents for the Initial Selected Properties and the Selected Properties pursuant to Section 3.3 hereof. 27 (b) Upon fulfillment of the applicable conditions set forth in Article IV, the Lender shall on the date of the proposed Loan, make available to the Borrower at the account or accounts specified in the Notice of Borrowing, in immediately available federal funds, the Loan. (c) The Borrower may not request more than one (1) Loan per calendar month. (d) Each Notice of Borrowing shall be irrevocable and binding on the Borrower. The Borrower shall indemnify the Lender against any loss, cost or expense incurred by the Lender as a result of any failure to fulfill on or before the date specified in any Notice of Borrowing for a proposed Loan the applicable conditions set forth in Article IV, including, without limitation, any loss (including, without limitation, loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Lender to fund any Loan to be made by the Lender when such Loan, as a result of such failure, is not made on such date. 2.3. [Intentionally Omitted] 2.4. Reduction and Termination of the Commitment. The Borrower may, upon at least three Business Days' prior notice to the Lender, terminate in whole or reduce in part the unused portions of the Commitment without premium or penalty; provided, however, that each partial reduction shall be in the aggregate amount of not less than $10,000,000. 2.5. Repayment. The Borrower shall repay the entire unpaid principal amount of all and any Loans on the Final Maturity Date. 2.6. Prepayments. The Borrower may, upon at least ten (10) Business Days' prior notice to the Lender, stating the proposed date and aggregate principal amount of the prepayment, prepay the outstanding principal amount of the Loans in whole or in part, together with accrued interest to the date of such prepayment on the principal amount prepaid without premium or penalty, provided, however, that any prepayment of the Loans bearing interest at the Eurodollar Rate made other than on the last day of an Interest Period 28 for the Loans shall be subject to payment by the Borrower to the Lender of any costs, fees or expenses incurred by the Lender in connection with such prepayment including, without limitation, any costs to unwind any Eurodollar Rate contracts or Interest Rate Contracts. Any partial prepayment shall be applied to the installments of principal in the inverse order of maturity. Upon the giving of such notice of prepayment by the Borrower, the principal amount of the Loans specified to be prepaid shall become due and payable on the date specified for such prepayment. (c) If at any time the aggregate principal amount of Loans outstanding at such time exceeds the Commitment, the Borrower shall forthwith prepay the Loans then outstanding in an amount equal to such excess, together with accrued interest. (d) The Borrower shall forthwith prepay the Loans upon receipt by the Borrower or its Subsidiaries of Asset Sale Proceeds in connection with an Asset Sale of a Mortgaged Property in an amount equal to such Asset Sale Proceeds, together with accrued interest to the date of such prepayment on the principal amount prepaid. 2.7. Continuation of Loans at the Eurodollar Rate. At the end of any Interest Period with respect to the Loans, unless the Borrower has given notice pursuant to Section 2.6, the Loans will automatically be continued for an additional Interest Period at the Eurodollar Rate for such Interest Period. 2.8. Interest. The Borrower shall pay interest on the unpaid principal amount of each Loan from the date thereof until the principal amount thereof shall be paid in full: (a) At a rate per annum equal at all times during the applicable Interest Period for each Loan to the Eurodollar Rate for such Interest Period, payable on the last day of such Interest Period and on the Final Maturity Date; provided, however, that during the continuance of an Event of Default, all Loans shall bear interest, payable on demand, at a rate per annum equal at all times to 2% above the Eurodollar Rate in effect until the maturity of the Loans or the end of such Interest Period, whichever occurs 29 first, and thereafter at the greater of (x) 2% per annum above the Base Rate in effect from time to time and (y) 2% per annum above the rate per annum required to be paid on the Loans immediately prior to the date on which such Event of Default occurred. 2.9. Interest Rate Determination and Protection. (a) The Eurodollar Rate for each Interest Period for Loans shall be determined by the Lender two Business Days before the first day of such Interest Period. (b) The Lender shall give prompt notice to the Borrower of the applicable interest rate determined by the Lender for purposes of Section 2.9. (c) If, (i) the Lender determines, which determination shall be conclusive in the absence of manifest error, that quotations of interest rates for the relevant deposits referred to in the definition of "Eurodollar Rate" are not being provided in the relevant amounts or for the relevant maturities for purposes of determining the rates of interest for the Loans as provided herein, or (ii) the Lender determines, which determination shall be conclusive in the absence of manifest error, that the Eurodollar Rate for any Interest Period therefor will not adequately reflect the cost to the Lender of making the Loans or funding or maintaining the Loans for such Interest Period, the Lender shall forthwith so notify the Borrower, whereupon (i) each Loan will automatically, on the last day of the then existing Interest Period therefor, convert so as to accrue interest at an interest rate per annum equal to the Base Rate in effect from time to time; and (ii) the obligations of the Lender to make Loans at the Eurodollar Rate shall be suspended until the Lender shall notify the Borrower that the Lender has determined that the circumstances causing such suspension no longer exist; provided that, during the period of such suspension, the obligations of the Lender to make Loans at the Eurodollar Rate shall convert to obligations to make Loans at the Base Rate in effect from time to time. 30 2.10. Increased Costs. If, due to either (i) the introduction of or any change in or in the interpretation of any law or regulation (other than any change by way of imposition or increase of reserve requirements included in determining the Eurodollar Rate Reserve Percentage) or (ii) compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to the Lender of agreeing to make or making, funding or maintaining any Loans at the Eurodollar Rate, then the Borrower shall from time to time, upon demand by the Lender, pay to the Lender additional amounts sufficient to compensate the Lender for such increased cost. A certificate as to the amount of such increased cost, submitted to the Borrower by the Lender, shall be conclusive and binding for all purposes, absent manifest error. If the Borrower so notifies the Lender within five Business Days after the Lender notifies the Borrower of any increased cost pursuant to the foregoing provisions of this Section 2.10, the Borrower may either (A) prepay in full all Loans bearing interest at the Eurodollar Rate then outstanding in accordance with Section 2.6(b) and, additionally, reimburse the Lender for such increased cost in accordance with this Section 2.10, or (B) require the Lender to, and the Lender shall, convert all Loans bearing interest at the Eurodollar Rate into Loans bearing interest at the Base Rate in effect from time to time, and additionally, reimburse the Lender for such increased cost in accordance with this Section 2.10, provided that in the event that the election in (B) is made by the Borrower, the Lender's obligations to make Loans hereunder shall thereafter be deemed to be obligations to make Loans at the Base Rate in effect from time to time. 2.11. Illegality. Notwithstanding any other provision of this Agreement, if the introduction of or any change in or in the interpretation of any law or regulation shall make it unlawful, or any central bank or other Governmental Authority shall assert that it is unlawful, for the Lender or its Lending Office to make Loans at the Eurodollar Rate or to continue to fund or maintain Loans at the Eurodollar Rate, then, on notice thereof and demand therefor by the Lender to the Borrower (i) the obligation of the Lender to make or to continue the Loans bearing interest at the Eurodollar Rate shall terminate, (ii) the Borrower shall forthwith prepay in full all Loans then outstanding, 31 together with interest accrued thereon (and until paid in full, all such Loans bearing interest at the Eurodollar Rate then outstanding shall accrue interest at an interest rate per annum equal to the Base Rate in effect from time to time) provided that, the Borrower shall not be required to prepay such Loans if the Borrower, within five Business Days of such notice and demand, requires the Lender to convert such Loans to Loans bearing interest at the Base Rate in effect from time to time. 2.12. Capital Adequacy. If (i) the introduction of or any change in or in the interpretation of any law or regulation, (ii) compliance with any law or regulation, or (iii) compliance with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law) affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and the Lender reasonably determines that such amount is based upon the existence of the Lender's Commitment and Loans and its other commitment and loans of this type, then, upon demand by the Lender, the Borrower shall pay to the Lender, from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender in the light of such circumstances, to the extent that the Lender reasonably determines such increase in capital to be allocable to the existence of the Lender's Commitment and Loans. A certificate as to such amounts submitted to the Borrower by the Lender shall be conclusive and binding for all purposes absent manifest error. 2.13. Payments and Computations. (a) The Borrower shall make each payment hereunder and under the Note not later than 12:00 noon (New York City time) on the day when due, in Dollars, to the Lender at its address referred to in Section 10.2 in immediately available funds without set-off or counterclaim, to be applied in accordance with the terms of this Agreement. Payment received by the Lender after 12:00 noon (New York City time) shall be deemed to be received on the next Business Day. (b) All computations of interest shall be made by the Lender on the basis of a year of 360 days for the actual number of days (including the first day but excluding the last day) occurring in the period for which such interest is 32 payable. Each determination by the Lender of an interest rate hereunder shall be conclusive and binding for all purposes, absent manifest error. (c) Whenever any payment hereunder or under the Note shall be stated to be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest or fee, as the case may be; provided, however, that if such extension would cause payment of interest on or principal of any Loan to be made in the next calendar month, such payment shall be made on the next preceding Business Day. 2.14. Taxes. (a) Any and all payments by the Borrower under each Loan Document shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding taxes measured by the Lender's net income, and franchise taxes imposed on the Lender, by the jurisdiction under the laws of which the Lender is organized or any political subdivision thereof and taxes measured by the Lender's net income, and franchise taxes imposed on the Lender, by the jurisdiction of the Lender's Lending Office or any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower shall be required by law to deduct any Taxes from or in respect of any sum payable hereunder to the Lender (i) the sum payable shall be increased as may be necessary so that after making all required deductions (including, without limitation, deductions applicable to additional sums payable under this Section 2.14) the Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full amount deducted to the relevant taxing authority or other authority in accordance with applicable law, and (iv) the Borrower shall deliver to the Lender evidence of such payment to the relevant taxation or other authority. (b) In addition, the Borrower agrees to pay any present or future stamp or documentary taxes or any other 33 excise or property taxes, charges or similar levies of the United States or any political subdivision thereof or any applicable foreign jurisdiction which arise from any payment made under any Loan Document or from the execution, delivery or registration of, or otherwise with respect to, any Loan Document (collectively, "Other Taxes"). (c) The Borrower will indemnify the Lender for the full amount of Taxes or Other Taxes (including, without limitation, any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.14) paid by the Lender and any liability (including, without limitation, for penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. This indemnification shall be made within 30 days from the date the Lender makes written demand therefor. (d) Within 30 days after the date of any payment of Taxes or Other Taxes, the Borrower will furnish to the Lender, at its address referred to in Section 10.2, the original or a certified copy of a receipt evidencing payment thereof. (e) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.14 shall survive the payment in full of the Obligations. ARTICLE III APPROVAL OF PROPOSED HOTEL FACILITIES; SELECTED PROPERTIES AND PREPARATION OF MORTGAGE DOCUMENTS 3.1. Approval of Proposed Hotel Facilities. In the event that the Borrower desires to acquire either itself or through a Subsidiary a Proposed Hotel Facility using the proceeds of a Loan to be made by the Lender hereunder, the Borrower shall prior to submitting its Notice of Borrowing in respect of such Loan request in writing the Lender's consent to the acquisition thereof, which request shall be accompanied by a Proposed Hotel Facility Statement (together with all documents referred to therein) in respect of the 34 Proposed Hotel Facility and such other information as the Lender may reasonably require. The Lender's consent to such acquisition shall not be unreasonably withheld. The Lender shall not withhold its consent to such acquisition on grounds of insufficient Cash Flow from the Proposed Hotel Facility if and only if the Cash Flow of the current owner or operator of the Proposed Hotel Facility (as applicable) attributable to the Proposed Hotel Facility, over the four most recent financial quarters after deduction of an FF&E Reserve equal to five percent (5%) of total sales for such period but before payment of any income taxes or management fees for such period is not less than 1.0 times the proposed annual Base Rent under the proposed Operating Lease of the Proposed Hotel Facility. The Lender shall not approve the acquisition of any Proposed Hotel Facility that will not on the date the Loan is made be subject to and have the benefit of an Operating Lease. 3.2. Loan to Value Requirement; Selected Properties. If, at any time, the Lender determines in its reasonable discretion that the Loan to Value Requirement has not been or, after giving effect to any Loans that the Borrower intends to request, would not be satisfied, the Lender may require the Borrower to deliver and the Borrower promptly shall deliver to the Lender, Mortgage Documents with respect to such of the Hotel Properties as the Lender shall select (the "Selected Properties"), such that, after giving effect to such Mortgage Documents the Loan to Value Requirement would be satisfied. The parties acknowledge and agree that certain of the Hotel Properties which are not Mortgaged Properties pursuant to this Agreement may be granted as collateral security for the Second Facility and that to the extent mortgage documents are executed and delivered (and whether or not the same are recorded) in respect of any Hotel Facility as security for the Second Facility, such Hotel Facility shall be deemed to no longer be a Hotel Facility for the purposes of this Agreement, to the intent that no Hotel Facility shall be granted as collateral for both the purposes of loans obtained pursuant to this Agreement and the Second Facility. The Lender agrees that it shall select such Hotel Properties consistent with the priorities set forth in the Mortgaged Property Prioritization Schedule attached as Schedule 3.2 hereto and made a part hereof provided that, within each of the First through Ninth Priority States, Lender may select Hotel 35 Properties in any order Lender may determine, provided further that, if the Lender shall select a Hotel Property in a particular state, the Lender shall then prioritize such state for its selection of future Selected Properties. 3.3. Preparation and Execution of Mortgage Documents. (a) Immediately after (i) the Lender approves a Proposed Hotel Facility, and (ii) Lender determines that the Loan to Value Requirement has not been (or will not after giving effect to Loans requested by the Borrower be) satisfied, the Lender shall commence the preparation of the Mortgage Documents for the Selected Properties including, without limitation, the Initial Selected Properties and the parties shall cooperate and diligently proceed to prepare such Mortgage Documents (including, without limitation, ordering commitments for the title insurance policies, ALTA surveys and UCC-searches, obtaining estoppel certificates and retaining counsel, including local counsel for purposes of reviewing the Mortgage Documents and rendering opinions with respect to such documents in form and substance acceptable to the Lender as set forth in Section 4.2(d)(ii)). (b) The Borrower, on behalf of itself and each of its Subsidiaries, hereby appoints the Lender its attorney-in-fact to execute, acknowledge and deliver for and in the name of the Borrower or any of its Subsidiaries, as applicable, any and all of the Mortgage Documents for the Initial Selected Properties and/or the Selected Properties which the Borrower or any of its Subsidiaries fails to execute, acknowledge and/or deliver in accordance with the terms hereof, and this power, being coupled with an interest, shall be irrevocable as long as any part of the Obligations remains unpaid. ARTICLE IV CONDITIONS OF LENDING 4.1. Conditions Precedent to the Initial Loan. The obligation of the Lender to make the initial Loan is subject to satisfaction of the conditions precedent that the Lender shall have received, on the Closing Date, the following, each dated the Closing Date unless otherwise 36 indicated, in form and substance reasonably satisfactory to the Lender: (a) The Note to the order of the Lender. (b) A certificate of the Secretary or an Assistant Secretary of each Loan Party certifying (i) the resolutions of its Board of Trustees or Directors, as appropriate, approving each Loan Document to which it is a party, (ii) all documents evidencing other necessary trust or corporate action, as appropriate, and required governmental and third party approvals, licenses and consents with respect to each Loan Document to which it is a party and the transactions contemplated thereby, (iii) a copy of its and each of its Subsidiaries' declaration of trust, certificates of incorporation and By-Laws, as appropriate, as of the Closing Date, and (iv) the names and true signatures of each of its officers who has been authorized to execute and deliver any Loan Document or other document required hereunder to be executed and delivered by or on behalf of such Person. (c) A copy of the declaration of trust or articles or certificate of incorporation, as appropriate, of each Loan Party and of each of its Subsidiaries (if any) which is not a Loan Party certified as of a recent date by the Secretary of State of the state of formation of such Loan Party or Subsidiary, together with certificates of such official attesting to the good standing of each such Loan Party and Subsidiary. (d) A favorable opinion of Sullivan & Worcester, counsel to the Loan Parties, in substantially the form of Exhibit D, and as to such other matters as the Lender may reasonably request. (e) A Negative Pledge Agreement in respect of each of the Initial Hotels, duly executed and acknowledged by the Borrower. (f) Mortgage Documents, duly executed and acknowledged where appropriate, in respect of each of the Initial Selected Properties including, without limitation, payment of the Mortgage Payments in respect of such Initial Selected Properties. 37 (g) Assignment Agreements in respect of the Management Agreements for each Initial Selected Property duly executed by the Borrower or its Subsidiary, as applicable, and the Manager. (h) Security Agreements in respect of the FF&E Reserves for each of the Initial Hotels duly executed by the Borrower or its Subsidiary, as applicable, the Operating Lessee and the Manager, provided that, to the extent the FF&E Reserve in respect of each Initial Selected Property is not consolidated with other FF&E Reserves, the Lender shall accept in lieu of the foregoing, Security Agreements in respect of the FF&E Reserves for each Initial Selected Property, duly executed by the Borrower or its subsidiary, as applicable, the Operating Lessee and the Manager. (i) Financing Statements (Form UCC-1) under the Uniform Commercial Code of all jurisdictions as may be necessary or, in the reasonable opinion of the Lender, desirable to perfect the Lien created by the Security Agreements for each Initial Selected Property; copies of Requests for Information or Copies (Form UCC-11), or equivalent reports, listing all effective financing statements which name the Borrower or any Subsidiary of the Borrower (under its present name or any previous name) as debtor and which are filed in the jurisdictions referred to above, together with copies of such other financing statements (none of which shall cover the Collateral purported to be covered by the Security Agreement). (j) A copy of the Operating Lease and Management Agreement in respect of each Hotel Facility, each certified by a Responsible Officer. (k) Evidence that the insurance required by the terms of the Collateral Documents and by Section 7.4 is in full force and effect. (l) A written report of an investigation by an environmental consultant, reasonably acceptable to the Lender, addressing any significant environmental, health and safety violations, hazards or liabilities to which the Borrower or any of its Subsidiaries may be subject, which report shall demonstrate, to the reasonable satisfaction of the Lender, that the Borrower and its Subsidiaries and their 38 operations are in compliance in all material respects with all applicable Environmental Laws and are not subject to any material Environmental Liabilities and Costs. (m) Such additional documents, information and materials as the Lender may reasonably request. (n) The Lender shall have received evidence satisfactory to it that all costs and accrued and unpaid fees and expenses (including, without limitation, legal fees and expenses) required to be paid to the Lender on or before the Closing Date, including, without limitation, those referred to in Section 10.4 and any Mortgage Payment, to the extent then due and payable, have been paid. (o) A certificate, signed by a Responsible Officer of the Borrower, stating that the statements set forth in Section 4.2 (a) and (b) are true and correct on the Closing Date, after giving effect to the Loans being made on the Closing Date. (p) A copy of the Advisory Agreement certified by a Responsible Officer. (q) The Subordination Agreement duly executed and acknowledged by the Borrower and the Advisor. 4.2. Conditions Precedent to Each Loan. The obligation of the Lender to make any Loan (including the Loan being made by the Lender on the Closing Date) shall be subject to the further conditions precedent that: (a) The following statements shall be true on the date of such Loan, before and after giving effect thereto and to the application of the proceeds therefrom (and the acceptance by the Borrower of the proceeds of such Loan shall constitute a representation and warranty by the Borrower that on the date of such Loan such statements are true): 39 (i) The representations and warranties of the Borrower contained in Article V. and of each Loan Party in the other Loan Documents are correct on and as of such date as though made on and as of such date; and (ii) No Default or Event of Default will result from the Loans being made on such date. (b) The making of the Loans on such date does not violate any Requirement of Law and is not enjoined, temporarily, preliminarily or permanently. (c) The Lender shall have received, on or before such date, in respect of any Hotel Facility for which the same have not been delivered pursuant to Section 4.1(e), (j), (k) and (l) respectively: (i) a Negative Pledge Agreement duly executed and acknowledged by the Borrower or its Subsidiary, as applicable; (ii) A copy of the Operating Lease and Management Agreement in respect of such Hotel Facility, each certified by a Responsible Officer; (iii) Evidence that the insurance required by the terms of the Collateral Documents and by Section 7.4 is in full force and effect; and (iv) A written report of an investigation by an environmental consultant, reasonably acceptable to the Lender, addressing any significant environmental, health and safety violations, hazards or liabilities to which the Borrower or any of its Subsidiaries may be subject, which report shall demonstrate, to the reasonable satisfaction of the Lender, that the Borrower and its Subsidiaries and their operations are in compliance in all material respects with all applicable Environmental Laws and are not subject to any material Environmental Liabilities and Costs. (d) The Lender shall have received, on or before such date, duly executed and acknowledged Mortgages for each of the Selected Properties, in such amounts as shall be reasonably acceptable to the Lender, securing all of the 40 Indebtedness and the Obligations as such terms are defined and more particularly described therein, together with: (i) commitments for title insurance policies (the "Title Insurance Policies") issued by a title company acceptable to the Lender, in such form and amounts as are reasonably acceptable to the Lender, insuring that each such Mortgage is a valid first priority Lien on such Selected Properties subject only to such exceptions to title as shall be acceptable to the Lender in its reasonable discretion and containing such endorsements and affirmative insurance as the Lender may reasonably require and as are obtainable in the applicable jurisdiction, and true copies of each document, instrument or certificate required by the terms of each such policy or Mortgage to be, or have been, filed, recorded, executed or delivered in connection therewith; (ii) opinions reasonably satisfactory to the Lender of counsel and/or local counsel retained by the Borrower with respect to the due execution and delivery, validity and enforceability of the Mortgage Documents and such other matters as may be reasonably required by the Lender; and (iii) duly executed UCC-1 Financing Statements under the applicable Uniform Commercial Code to be filed in connection with such Mortgages in form and substance reasonably satisfactory to the Lender, to perfect the Lien created by the applicable Mortgages; (iv) (A) duly executed and acknowledged landlord consents from all lessors under all the Leases comprising Selected Properties, in form and substance reasonably satisfactory to the Lender, (B) duly executed and acknowledged non-disturbance and attornment agreements with the mortgagees, ground lessors and sublessors of property subject to Leases comprising Selected Properties, in form and substance reasonably satisfactory to the Lender, (C) duly executed and acknowledged consents from all mortgagees, ground lessors and sublessors of property subject to Leases comprising Selected Properties, in form and substance reasonably satisfactory to the Lender, 41 (D) duly executed and acknowledged estoppel certificates, dated not earlier than 30 days prior to the date of the Loan, from each landlord, ground lessor, sublessor and lessee of a Selected Property, in form and substance reasonably satisfactory to the Lender, (E) duly executed and acknowledged subordination, non-disturbance and attornment agreements (in recordable form) from each lessee (other than the Borrower or its Subsidiary) of a Selected Property, unless such lessee's lease, by its terms, is subject and subordinate to the Lien of the applicable Mortgage provided that, notwithstanding the foregoing, a subordination, non-disturbance and attornment agreement in the form attached as Exhibit K hereto and made a part hereof, duly executed and acknowledged by the Borrower and the Operating Lessee shall be required in respect of each such Selected Property, and (F) evidence satisfactory to the Lender that all such consents and agreements, and a memorandum of each Lease comprising a Selected Property, have been filed or recorded in all appropriate public records or delivered to the title company providing title insurance thereon, as the case may be; (v) current ALTA surveys and surveyor's certification as to all such Selected Properties, each in form and substance reasonably satisfactory to the Lender; and (vi) payment to the Lender, or as the Lender may direct, of all title insurance premiums, documentary, stamp or intangible taxes, recording fees and mortgage taxes payable in connection with the recording of any of the Loan Documents or the issuance of the Title Insurance Policies; (vii) an Assignment Agreement in respect of the Management Agreement for such Selected Property duly executed by the Borrower or its Subsidiary, as applicable, and the Manager; (viii) a Security Agreement in respect of the FF&E Reserves for such Selected Property duly executed by the Borrower or its Subsidiary, as applicable, the Operating Lessee and the Manager; 42 (ix) Financing Statements (Form UCC-1) under the Uniform Commercial Code of all jurisdictions as may be necessary or, in the reasonable opinion of the Lender, desirable to perfect the Lien created by the Security Agreement for such Selected Property; copies of Requests for Information or Copies (Form UCC-11), or equivalent reports, listing all effective financing statements which name the Borrower or any Subsidiary of the Borrower (under its present name or any previous name) as debtor and which are filed in the jurisdictions referred to above, together with copies of such other financing statements (none of which shall cover the Collateral purported to be covered by the Security Agreement). (e) The Borrower shall have paid the reasonable fees and out of pocket expenses of counsel to the Lender and local counsel, in connection with the preparation, execution, review and delivery of the Mortgage Documents. (f) All costs and accrued and unpaid fees and expenses (including, without limitation, legal fees and expenses) required to be paid to the Lender on or before the Closing Date, including, without limitation, those referred to in Section 10.4 and any Mortgage Payment, to the extent then due and payable, have been paid. (g) The Lender shall have received such additional documents, information and materials as the Lender may reasonably request. ARTICLE V REPRESENTATIONS AND WARRANTIES To induce the Lender to enter into this Agreement, the Borrower represents and warrants to the Lender that: 5.1. Existence; Compliance with Law. Each Loan Party and each of its Subsidiaries (i) is a real estate investment trust or a corporation, as specified herein, duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation; (ii) is duly 43 qualified or licensed and in good standing under the laws of each jurisdiction where such qualification is necessary, except for failures which in the aggregate have no Material Adverse Effect; (iii) has all requisite power and authority and the legal right to own, pledge and mortgage its properties, to lease (as lessee) the properties that it leases as lessee, to lease or sublease (as lessor) the properties it owns and/or leases (as lessee) and to conduct its business as now or currently proposed to be conducted; (iv) is in compliance with its declaration of trust or certificate of incorporation and by-laws, as appropriate; (v) is in compliance with all other applicable Requirements of Law except for such non-compliances as in the aggregate have no Material Adverse Effect; and (vi) has all necessary licenses, permits, consents or approvals from or by, has made all necessary filings with, and has given all necessary notices to, each Governmental Authority having jurisdiction, to the extent required for such ownership, leasing and conduct, except for licenses, permits, consents or approvals which can be obtained by the taking of ministerial action to secure the grant or transfer thereof or failures which in the aggregate have no Material Adverse Effect. 5.2. Power; Authorization; Enforceable Obligations. (a) The execution, delivery and performance by each Loan Party of the Loan Documents to which it is a party and the consummation of the transactions contemplated hereby: (i) are within such Loan Party's corporate or trust powers, as appropriate; (ii) have been or, at the time of delivery thereof pursuant to Article IV, will have been duly authorized by all necessary corporate or trust action, as appropriate, including, without limitation, the consent of any trustees or stockholders where required; (iii) do not and will not (A) contravene any Loan Party's or any of its Subsidiaries' respective declaration of trust, certificate of incorporation or by-laws or other comparable governing documents, (B) violate any other applicable Requirement of Law (including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve 44 System), or any order or decree of any Governmental Authority or arbitrator, (C) conflict with or result in the breach of, or constitute a default under, or result in or permit the termination or acceleration of, any material Contractual Obligation of any Loan Party or any of its Subsidiaries, or (D) result in the creation or imposition of any Lien upon any of the property of any Loan Party or any of its Subsidiaries, other than those in favor of the Lender pursuant to the Collateral Documents; and (iv) do not require the consent of, authorization by, approval of, notice to, or filing or registration with, any Governmental Authority or any other Person, other than those which have been or will be, prior to the Closing Date, obtained or made and copies of which have been or will be delivered to the Lender pursuant to Section 4.1, and each of which on the Closing Date will be in full force and effect, and any consents, authorizations, approvals of, notices to or filings or registrations required to be delivered under Article IV hereof. (b) This Agreement has been, and each of the other Loan Documents will have been upon delivery thereof pursuant to Article IV hereof, duly executed and delivered by each Loan Party thereto. This Agreement is, and the other Loan Documents will be, when delivered hereunder, the legal, valid and binding obligation of each Loan Party thereto, enforceable against it in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or limiting creditors' rights generally or by equitable principles relating to enforceability. 5.3. Taxes. All federal, state, local and foreign tax returns, reports and statements (collectively, the "Tax Returns") which, to the best knowledge and belief of the Borrower, are required to be filed by the Borrower or any of its Tax Affiliates have been filed with the appropriate governmental agencies in all jurisdictions in which such Tax Returns, are required to be filed, all such Tax Returns are true and correct in all material respects, and all taxes, charges and other impositions due and payable have been timely paid prior to the date on which any fine, 45 penalty, interest, late charge or loss may be added thereto for non-payment thereof, except where contested in good faith and by appropriate proceedings if adequate reserves therefor have been established on the books of the Borrower or such Tax Affiliate in conformity with GAAP. If applicable, proper and accurate amounts have been withheld by the Borrower and each of its respective Tax Affiliates from their respective employees (if any) for all periods in full and complete compliance with the tax, social security and unemployment withholding provisions of applicable federal, state, local and foreign law and such withholdings have been timely paid to the respective Governmental Authorities. None of the Borrower or any of its Tax Affiliates has (i) executed or filed with the IRS or any other Governmental Authority any agreement or other document extending, or having the effect of extending, the period for assessment or collection of any charges other than those that in the aggregate would have no Material Adverse Effect; (ii) agreed or been requested to make any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise other than those that in the aggregate would have no Material Adverse Effect; or (iii) any obligation under any written tax sharing agreement. 5.4. Full Disclosure. (a) No written statement prepared or furnished by or on behalf of any Loan Party or any of its Affiliates in connection with any of the Loan Documents or the consummation of the transactions contemplated thereby, and no financial statement delivered pursuant hereto or thereto, contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein not misleading. All facts known to the Borrower which are material to an understanding of the financial condition, business, properties or prospects of the Borrower and its Subsidiaries taken as one enterprise have been disclosed to the Lender. 5.5. Financial Matters. (a) The balance sheet of the Borrower as of March 31, 1995, and the related statement of income, retained earnings and cash flow of the Borrower for the period from February 7, 1995 (inception) to March 31, 1995, certified by Arthur Andersen, LLP, and the combined statements of assets, liabilities and net investment and advances of the Initial Hotels as of 46 December 30, 1994, and the related combined statements of revenues and expenses excluding income taxes, and cash flows for the fiscal year ended December 30, 1994, certified by Arthur Andersen, LLP, copies of which have been furnished to the Lender, fairly present the financial condition of the Borrower and the combined assets, liabilities and net investment and advances of the Initial Hotels as of such dates and the consolidated results of the operations of the Borrower and the revenues and expenses excluding income taxes, and cash flows of the Initial Hotels for the period ended on such dates, all in conformity with GAAP. (b) Since March 31, 1995, there has been no Material Adverse Change and there have been no events or developments that in the aggregate have had a Material Adverse Effect. (c) Neither the Borrower nor any of its Subsidiaries had at March 31, 1995 any material obligation, contingent liability or liability for taxes, long-term leases or unusual forward or long-term commitment which is not reflected in the balance sheet at such date referred to in subsection (a) above or in the notes thereto. (d) The unaudited pro forma balance sheets of the Borrower and in respect of the Initial Hotels (the "Pro Forma Balance Sheets"), copies of which have been delivered to the Lender, have been prepared with respect to the Borrower as of March 31, 1995, and with respect to the Initial Hotels, as of March 24, 1995, and reflect as of such dates, the pro forma financial condition of the Borrower and of the Initial Hotels. (e) The Borrower is, and on a consolidated basis the Borrower and its Subsidiaries are, Solvent. 5.6. Litigation. There are no pending or, to the knowledge of the Borrower, threatened actions, investigations or proceedings affecting the Borrower or, to the knowledge of the Borrower, any Operator or any of their respective properties or revenues before any court, Governmental Authority or arbitrator, other than those that in the aggregate, if adversely determined, would have no Material Adverse Effect. The performance of any action by (a) any Loan Party required or contemplated by any of the 47 Loan Documents or (b) any Operator required or contemplated by any Operating Lease or Management Agreement is not (in the case of (b) only, to the knowledge of the Borrower) restrained or enjoined (either temporarily, preliminarily or permanently), and no material adverse condition has been imposed by any Governmental Authority or arbitrator upon any of the foregoing transactions contemplated by the aforementioned documents. 5.7. Margin Regulations. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U issued by the Board of Governors of the Federal Reserve System), and no proceeds of any Loan will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. 5.8. Ownership of Borrower and HRPT Advisors; Subsidiaries. (a) The authorized capital stock of the Borrower consists of 100,000,000 common shares of beneficial interest, $0.01 par value per share, of which 11,750,000 shares will be issued and outstanding upon consummation of the Initial Public Offering, assuming that the Underwriters' over-allotment option is not exercised, and 100,000,000 preferred shares of beneficial interest, $0.01 par value per share, none of which shares will be issued and outstanding upon the consummation of the Initial Public Offering. Upon consummation of the Initial Public Offering all of the outstanding capital stock of the Borrower will be validly issued, fully paid and non-assessable and at least 250,000 shares of such stock will be owned beneficially and of record by HRPT Advisors free and clear of all Liens as of the date of this Agreement. No authorized but unissued shares, no treasury shares and, to the best knowledge of the Borrower, no other outstanding shares of capital stock of the Borrower are subject to any option, warrant, right of conversion or purchase or any similar right. Except as set forth on Schedule 5.8(a) hereto, there are no agreements or understandings with respect to the voting, sale or transfer of any shares of capital stock of the Borrower, or to the best knowledge of the Borrower, any agreement restricting the transfer or hypothecation of any such shares. 48 (b) The authorized capital stock of HRPT Advisors consists of 100,000 shares of common stock, $0.01 par value per share, of which 1,000 shares are issued and outstanding as of the date hereof. All of the outstanding capital stock of HRPT Advisors has been validly issued, is fully paid and non-assessable and at least 51% of such stock is owned, in the aggregate, beneficially and of record by Barry M. Portnoy and/or Gerard M. Martin, free and clear of all Liens as of the date of this Agreement. No authorized but unissued shares, no treasury shares and, to the best knowledge of the Borrower, no other outstanding shares of capital stock of HRPT Advisors are subject to any option, warrant, right of conversion or purchase or any similar right. There are no agreements or understandings with respect to the voting, sale or transfer of any shares of capital stock of HRPT Advisors, or to the best knowledge of the Borrower, any agreement restricting the transfer or hypothecation of any such shares. (c) Set forth on Schedule 5.8(c) hereto is a complete and accurate list showing, as of the date hereof, all Subsidiaries of the Borrower and, as to each such Subsidiary, the jurisdiction of its incorporation, the number of shares of each class of Stock authorized, the number outstanding on the date hereof and the percentage of the outstanding shares of each such class owned (directly or indirectly) by the Borrower. No Stock of any Subsidiary of the Borrower is subject to any outstanding option, warrant, right of conversion or purchase or any similar right. All of the outstanding capital Stock of each such Subsidiary has been validly issued, is fully paid and non-assessable and is owned by the Borrower, free and clear of all Liens. Neither the Borrower nor any such Subsidiary is a party to, or has knowledge of, any agreement restricting the transfer or hypothecation of any shares of Stock of any such Subsidiary, other than the Loan Documents. The Borrower does not own or hold, directly or indirectly, any capital stock or equity security of, or any equity interest in, any Person other than such Subsidiaries. 5.9. ERISA. (a) There are no Multiemployer Plans. (b) Each Plan and any related trust intended to qualify under Code Section 401 or 501 has been determined by 49 the IRS to be so qualified and to the best knowledge of the Borrower nothing has occurred which would cause the loss of such qualification. (c) None of the Borrower, any of its Subsidiaries or any ERISA Affiliate, with respect to any Pension Plan, has failed to make any contribution or pay any amount due as required by Section 412 of the Code or Section 302 of ERISA or the terms of any such plan, and all required contributions and benefits have been paid in accordance with the provisions of each such plan. (d) There are no pending or, to the knowledge of the Borrower, threatened claims, actions or proceedings (other than claims for benefits in the normal course), relating to any Plan other than those that in the aggregate, if adversely determined, would have no Material Adverse Effect. (e) No Pension Plan has any unfunded accrued benefit liabilities, as determined by using reasonable actuarial assumptions utilized by such plan's actuary for funding purposes. Within the last five years none of the Borrower, any of its Subsidiaries or any ERISA Affiliate has caused a Pension Plan with any such liabilities to be transferred outside of its "controlled group" (within the meaning of Section 4001(a)(14) of ERISA). (f) No Plan provides for continuing health, disability, accident or death benefits or coverage for any participant or his or her beneficiary after such participant's termination of employment (except as may be required by Section 4980B of the Code and at the sole expense of the participant or the beneficiary) which would result in the aggregate under all Plans in a liability in an amount which would have a Material Adverse Effect. 5.10. Liens. There are no Liens of any nature whatsoever on any Hotel Facilities of the Borrower or any of its Subsidiaries other than those permitted by Section 8.1. The forms of the Collateral Documents attached hereto are sufficient to grant to the Lender fully perfected first priority Liens in and to the Collateral subject only to Permitted Liens. 50 5.11. [Intentionally Omitted] 5.12. No Burdensome Restrictions; No Defaults; Contractual Obligations. (a) Neither the Borrower nor any of its Subsidiaries is in default beyond the expiration of any applicable notice or grace period under or with respect to any Contractual Obligation owed by it and, to the knowledge of the Borrower, no other party is in default beyond the expiration of any applicable notice or grace period under or with respect to any Contractual Obligation owed to the Borrower or to any of its Subsidiaries, other than those defaults which in the aggregate have no Material Adverse Effect. (b) No Event of Default or Default has occurred and is continuing. (c) There is no Requirement of Law that has not been complied with by the Borrower, the compliance with which by the Borrower or any of its Subsidiaries would have a Material Adverse Effect. (d) No Subsidiary of the Borrower is subject to any Contractual Obligation restricting or limiting its ability to transfer its assets to the Borrower or to declare or make any dividend payment or other distribution on account of any shares of any class of its Stock or its ability to purchase, redeem, or otherwise acquire for value or make any payment in respect of any such shares or any shareholder rights. 5.13. No Investments. Except as permitted by Section 8.6, none of the Borrower or any of its Subsidiaries is engaged in any joint venture or partnership with any other Person or maintains any Investment. 5.14. Government Regulation. Neither the Borrower nor any of its Subsidiaries is an "investment com pany" or an "affiliated person" of, or "promoter" or "prin cipal underwriter" for, an "investment company", as such terms are defined in the Investment Company Act of 1940, as amended, or subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, or any other federal or state statute or regulation such that its ability to incur 51 Indebtedness is limited, or its ability to consummate the transactions contemplated hereby or by any other Loan Document, or the exercise by the Lender of rights and remedies hereunder or thereunder, is impaired. The making of the Loans by the Lender, the application of the proceeds and repayment thereof by the Borrower and the consummation of the transactions contemplated by the Loan Documents will not violate any provision of any of the foregoing or any rule, regulation or order issued by the Securities and Exchange Commission thereunder. 5.15. Insurance. All policies of insurance of any kind or nature owned by or issued to the Borrower or any of its Subsidiaries, or issued in respect of any real property owned or leased by the Borrower or any of its Subsidiaries including, without limitation, policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, workers' compensation and employee health and welfare insurance, are in full force and effect and are of a nature and provide such coverage as (except earthquake coverage) is sufficient and as is customarily carried by companies of the size and character of such Person. None of the Borrower or any of its Subsidiaries has been refused insurance for which it applied or had any policy of insurance terminated (other than at its request). Lender confirms and agrees that the policies of insurance owned by or issued to the Operating Lessee in respect of any Hotel Facility shall be sufficient for the purposes of this representation provided that the same comply with the terms of the Operating Lease relating thereto. 5.16. Employees. Neither the Borrower nor any of its Subsidiaries has any employees and none of them has ever engaged employees. 5.17. Force Majeure. Neither the business nor the properties of the Borrower or any of its Subsidiaries are currently suffering from the effects of any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or of the public enemy or other casualty (whether or not covered by insurance), other than those which in the aggregate have no Material Adverse Effect. 52 5.18. Use of Proceeds. The proceeds of the Loans are being used by the Borrower solely as follows: (a) to repay the HRP Loan, (b) to pay the purchase price of Approved Hotel Facilities and for the payment of related transaction costs, fees and expenses, or (c) as to an aggregate amount not to exceed twenty million dollars ($20,000,000), for general business purposes in the ordinary course. 5.19. Environmental Protection. Except as disclosed on Schedule 5.19: (a) all real property leased, owned or operated by the Borrower or any of its Subsidiaries is free from contamination by any Hazardous Material which could reasonably be expected to subject the Borrower or any of its Subsidiaries to Environmental Liabilities and Costs that could in the aggregate have a Material Adverse Effect; (b) the operations of the Borrower and each of its Subsidiaries, and the operations at any real property leased, owned or operated by the Borrower or any of its Subsidiaries are in material compliance in all respects with all applicable Environmental Laws; (c) neither the Borrower nor any of its Subsidiaries have liabilities with respect to Hazardous Materials, and no facts or circumstances exist which could give rise to liabilities with respect to Hazardous Materials which could reasonably be expected to subject the Borrower or any of its Subsidiaries to Environmental Liabilities and Costs that could in the aggregate have a Material Adverse Effect; (d) (i) the Borrower and its Subsidiaries and, to the best knowledge of the Borrower and its Subsidiaries, the Operators have obtained, currently maintained and have all Environmental Permits necessary for their operations and are in material compliance with such Environmental Permits, except to the extent that the failure to obtain or maintain such Permits or to be in compliance therewith would not, in the aggregate, have a Material Adverse Effect, (ii) there are no Legal Proceedings pending nor, to the best knowledge of the Borrower and its Subsidiaries, threatened to revoke, or alleging the violation of, such Environmental Permits, 53 other than Legal Proceedings which, if adversely determined, would not, in the aggregate, have a Material Adverse Effect and (iii) neither the Borrower nor any of its Subsidiaries or, to the best knowledge of the Borrower and its Subsidiaries, the Operators have received any notice from any Governmental Authority to the effect that there is lacking any Environmental Permit required in connection with the current use or operation of any property leased, owned or operated by the Borrower or any of its Subsidiaries; (e) neither the Borrower's nor any of its Subsidiaries' current facilities and operations, nor, to the best knowledge of the Borrower and its Subsidiaries, any Operator or predecessor of the Borrower or any of its Subsidiaries, nor any of their past facilities and operations, nor any owner of premises leased or operated by the Borrower and its Subsidiaries, are subject to any outstanding written Order or Contract, including Environmental Liens, with any Governmental Authority or other Person, or to any federal, state, local, foreign or territorial investigation respecting (i) Environmental Laws, (ii) Remedial Action, (iii) any Environmental Claim, or (iv) the Release or threatened Release of any Hazardous Material, the compliance with which, in any case, is reasonably likely to have a Material Adverse Effect; (f) neither the Borrower, nor any of its Subsidiaries or, to the best knowledge of the Borrower and its Subsidiaries, any of the Operators are subject to any pending Legal Proceeding alleging the violation of any Environmental Law which, if adversely determined is reasonably likely to have a Material Adverse Effect, nor, to the best knowledge of the Borrower and its Subsidiaries, are any such proceedings threatened; (g) neither the Borrower nor any of its Subsidiaries nor, to the best knowledge of the Borrower and its Subsidiaries, any Operators or predecessor of the Borrower or any of its Subsidiaries, nor any owner of prem ises leased by the Borrower or any of its Subsidiaries, have filed any notice under federal, state or local, territorial or foreign law indicating past or present treatment, storage, or disposal of or reporting a Release of Hazardous Material into the environment, in the case of any Operator, with respect to Hotel Facilities only; 54 (h) none of the operations of the Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower and its Subsidiaries, of any Operators or predecessor of the Borrower or any of its Subsidiaries, or of any owner of premises leased by the Borrower or any of its Subsidiaries, involve or previously involved the generation, transportation, treatment, storage or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 (in effect as of the date of this Agreement) or any state, local, territorial or foreign equivalent, in the case of any Operator, with respect to Hotel Facilities only; and (i) there is not now, nor has there been in the past, on, in or under any real property leased or owned by the Borrower or any of its Subsidiaries (i) any underground storage tanks or surface tanks, dikes or impoundments, (ii) any asbestos-containing materials, (iii) any polychlorinated biphenyls, or (iv) any radioactive substances, the existence of which, in any case, is reasonably likely to have a Material Adverse Effect. 5.20. Contractual Obligations Concerning Assets. Except with respect to the Initial Hotels listed in Part II of Schedule 1.1 hereto, as of the date of this Agreement, neither the Borrower nor any of its Subsidiaries owns or holds, or is obligated under or a party to, any option, right of first refusal, or other contractual right to purchase or acquire, or any Contractual Obligation to effect an Asset Sale of, any asset or property owned or leased by the Borrower or any of its Subsidiaries. 5.21. Status as REIT. The Borrower is organized in conformity with the requirements for qualification as a real estate investment trust under the Code. Borrower has met all of the requirements for qualification as a real estate investment trust under the Code for its fiscal year ended December 31, 1995. The Borrower is in a position to qualify for its current fiscal year as a real estate investment trust under the Code and its proposed methods of operation will enable it to so qualify. 5.22. Real Property. (a) The Borrower and its Subsidiaries own good, clean and marketable fee simple absolute title to all of the Real Estate purported to be owned by them in fee simple, which Real Estate is at the 55 date hereof described in Schedule 5.22(a), and good, clean and marketable title to, or valid leasehold interests in, all other properties and assets purported to be owned by the Borrower or any of its Subsidiaries, including, without limitation, valid leasehold interests pursuant to the Leases and all property reflected in the latest balance sheet referred to in Section 5.5(a), except for such property as has been disposed of since that date without violation of any of the provisions hereof, and none of such properties and assets, including, without limitation, the Real Estate and the Leases, is subject to any Lien, except Liens granted to the Lender pursuant to the Loan Documents or permitted hereunder or thereunder. The Borrower and its Subsidiaries have received all deeds, assignments, waivers, consents, non-disturbance and recognition or similar agreements, bills of sale and other documents, and have duly effected all recordings, filings and other actions reasonably necessary to establish, protect and perfect the Borrower's and its Subsidiaries' right, title and interest in and to all such property. (b) All real property leased at the date hereof by the Borrower or any of its Subsidiaries, as lessee, is listed on Schedule 5.22(b), setting forth information regarding the commencement date, termination date, renewal options (if any) and annual base rents for each year until the Final Maturity Date, in each case as in effect on the Closing Date. To the best knowledge of the Borrower, each of such leases is valid and enforceable in accordance with its terms and is in full force and effect. The Borrower has delivered to the Lender true and complete copies of each of such leases and all documents affecting the rights or obligations of the Borrower or any of its Subsidiaries which is a party thereto, including, without limitation, any non-disturbance and recognition agreements, subordination agreements, attornment agreements and agreements regarding the term or rental of any of the leases. (c) Except as disclosed on Schedule 5.22(c) and those which in the aggregate have no Material Adverse Effect, (i) all components of all improvements included within the real property owned or leased by the Borrower or any of its Subsidiaries (collectively, "Improvements"), including, without limitation, the roofs and structural elements thereof and the heating, ventilation, air 56 conditioning, plumbing, electrical, mechanical, sewer, waste water, storm water, paving and parking equipment, systems and facilities included therein, are in good working order and repair; (ii) all water, gas, electrical, steam, compressed air, telecommunication, sanitary and storm sewage lines and systems and other similar systems serving the real property owned or leased by the Borrower or any of its Subsidiaries are installed and operating and are sufficient to enable the real property owned or leased by the Borrower and its Subsidiaries to continue to be used and operated in the manner currently being used and operated, and none of the Borrower or any of its Subsidiaries has any knowledge of any factor or condition that could result in the termination or material impairment of the furnishing thereof. No Improvement or portion thereof is dependent for its access, operation or utility on any land, building or other Improvement not included in the real property owned or leased by the Borrower or any of its Subsidiaries. (d) All Permits required to have been issued or appropriate to enable all real property owned or leased by the Borrower or any of its Subsidiaries to be lawfully occupied and used for all of the purposes for which they are currently occupied and used have been lawfully issued and are in full force and effect, other than those which in the aggregate have no Material Adverse Effect. (e) Neither the Borrower nor, to its knowledge, any Operator has received any notice, or has any knowledge, of (i) any pending, threatened or contemplated condemnation proceeding affecting any real property owned or leased by the Borrower or any of its Subsidiaries or any part thereof, or (ii) any proposed termination or impairment of any parking at any such owned or leased real property or (iii) any sale or other disposition of any real property owned or leased by the Borrower or any of its Subsidiaries or any part thereof in lieu of condemnation, in each case, other than those which in the aggregate have no Material Adverse Effect. (f) No material portion of any real property owned or leased by the Borrower or any of its Subsidiaries has suffered any material damage by fire or other casualty loss which has not heretofore been completely repaired and restored to its original condition or which will not be 57 completely repaired or restored to its original condition within twelve (12) months from the date hereof. No portion of any real property, that is not covered by adequate flood insurance, owned or leased by the Borrower or any of its Subsidiaries is located in a special flood hazard area as designated by any Federal Governmental Authorities. 5.23. Operator and Advisor: Compliance with Law. (a) To the best knowledge of the Borrower and its Subsidiaries, each Operator (i) has full power and authority and the legal right to own, lease (or sublease), manage and operate (as applicable) the Hotel Facilities it operates and to conduct the business in which it is currently engaged with respect to any real property owned or leased by the Borrower or any of its Subsidiaries, (ii) is duly qualified or licensed and is in good standing under the laws of each jurisdiction where its ownership, lease (or sublease), management or operation of any real property owned or leased by the Borrower or any of its Subsidiaries requires such qualification, and (iii) is in compliance with all Requirements of Law applicable to the real property owned or leased by the Borrower or any of its Subsidiaries operated or managed by it, or applicable to the operation or management thereof, except to the extent that the failure to comply therewith is not reasonably likely to have, in the aggregate, a Material Adverse Effect. (b) To the best knowledge of Borrower and its Subsidiaries, the Advisor (i) has full power and authority and legal right to conduct the business in which it is presently engaged and to perform its obligations under the Advisory Agreement, (ii) is duly qualified or licensed and is in good standing under the laws of each jurisdiction where the conduct of its business requires such qualification, and (iii) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith is not reasonably likely to have, in the aggregate, a Material Adverse Effect. 5.24. Operating Leases, Management Agreement and Advisory Agreement. Each of the Operating Leases and Management Agreements in respect of the Hotel Facilities and the Advisory Agreement is in full force and effect and is a legally valid and binding obligation of the Borrower or its 58 Subsidiaries and the other parties thereto, subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. Neither the Borrower nor any of its Subsidiaries has mortgaged, pledged or otherwise encumbered any of the Operating Leases, Management Agreements or Advisory Agreements or its rights thereunder including, without limitation, its right to obtain rental, interest or other payments under the Operating Leases, other than by way of such mortgages, pledges or encumbrances in favor of the Lender. Neither the Borrower nor any of its Subsidiaries has collected any rents becoming due under any Operating Lease more than 30 days in advance. All rent and other sums and charges payable by any Operating Lessee under each Operating Lease to which it is a party are current, no notice of default or termination under any such Operating Lease is outstanding, to the knowledge of the Borrower no termination event or condition or uncured default on the part of the Operating Lessee exists under any Operating Lease, and to the knowledge of the Borrower no event of default has occurred which, with the giving of notice or the lapse of time or both, would constitute such a default or termination event or condition or uncured default on the part of the Borrower or its Subsidiaries or the Operators (as the case may be), subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. As to all of the Leases, Borrower and each of its Subsidiaries has performed all of its repair and maintenance obligations (if any) and, to the best knowledge and belief of Borrower, each Operating Lessee under each Operating Lease to which it is a party has performed all of its repair and maintenance obligations, subject to such exceptions which are not reasonably likely to have, in the aggregate, a Material Adverse Effect. 5.25. FF&E Reserves. An FF&E Reserve has been established in respect of each Hotel Facility and is currently funded as required by the terms of the Operating Lease and/or the Management Agreement relating thereto. ARTICLE VI FINANCIAL COVENANTS 59 As long as any of the Obligations or Commitment remain outstanding, unless the Lender otherwise consents in writing the Borrower agrees with the Lender that: 6.1. Limitation on Indebtedness. The Borrower shall maintain during each Fiscal Quarter on a consolidated basis, a ratio of (a) the total Indebtedness for borrowed money (including, without limitation, the Obligations and all Capitalized Lease Obligations) of the Borrower and its Subsidiaries to (b) Total Assets of the Borrower and its Subsidiaries not in excess of 1:2 6.2. Limitation on Secured Indebtedness. The Borrower shall maintain during each Fiscal Quarter on a consolidated basis a ratio of (a) total Secured Indebtedness (including, without limitation, Obligations and all Capitalized Lease Obligations) of the Borrower and its Subsidiaries to (b) Total Assets of the Borrower and its Subsidiaries not in excess of 1:2. 6.3. Interest Expense Coverage. The Borrower shall maintain at the end of each Fiscal Quarter, commencing with the Fiscal Quarter ending on September 30, 1995, a ratio of (a) Total Base Rents for such Fiscal Quarter to (b) Net Interest Expense for such Fiscal Quarter, of not less than 2:1. 6.4. Maintenance of Tangible Net Worth. The Borrower shall maintain during each Fiscal Quarter a Tangible Net Worth of not less than $200,000,000. 6.5. Maintenance of Loan to Value Ratio. The Borrower shall maintain during each Fiscal Quarter the Loan to Value Requirement. ARTICLE VII AFFIRMATIVE COVENANTS As long as any of the Obligations or the Commitment remain outstanding, unless the Lender otherwise consents in writing, the Borrower agrees with the Lender that: 60 7.1. Compliance with Laws, Etc. The Borrower shall comply, and shall cause each of its Subsidiaries and, with respect to Hotel Facilities only, each Operator to comply, in all material respects with all Requirements of Law, Contractual Obligations, commitments, instruments, licenses, permits and franchises, including, without limitation, all Permits; provided, however, that the Borrower shall not be deemed in default of this Section 7.1 if all such non-compliances in the aggregate have no Material Adverse Effect. 7.2. Conduct of Business. The Borrower shall (a) conduct, and shall cause each of its Subsidiaries to conduct, its business in the ordinary course and consistent with the description set forth in the Registration Statement; and (b) perform and observe, and cause each of its Subsidiaries to perform and observe, all the terms, covenants and conditions required to be performed and observed by it under its Contractual Obligations (including, without limitation, to pay all rent and other charges payable under any lease and all debts and other obligations as the same become due), and do, and cause its Subsidiaries to do, all things necessary to preserve and to keep unimpaired its rights under such Contractual Obligations; provided, however, that, in the case of each of clauses (a) and (b), the Borrower shall not be deemed in default of this Section 7.2 if all such failures in the aggregate have no Material Adverse Effect. 7.3. Payment of Taxes, Etc. The Borrower shall pay and discharge, and shall cause each of its Subsidiaries to pay and discharge, before the same shall become delinquent, all lawful governmental claims, taxes, assessments, charges and levies, except where contested in good faith, by proper proceedings, if adequate reserves therefor have been established on the books of the Borrower or the appropriate Subsidiary in conformity with GAAP; provided, however, that the Borrower shall not be deemed in default of this Section 7.3 if all such uncontested non- payments in the aggregate have no Material Adverse Effect and, with respect to any Mortgaged Property, the Borrower and each such Subsidiary otherwise complies with the provisions of the Mortgage in respect thereof. 61 7.4. Maintenance of Insurance. The Borrower shall maintain, or shall cause the Operators to maintain, insurance with responsible and reputable insurance companies or associations in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower or such Subsidiary operates and as otherwise satisfactory to the Lender, in its sole judgment exercised reasonably, and, in any event, all insurance required by any Collateral Document. All such insurance shall name the Lender as additional insured or loss payee, as the Lender shall determine. The Borrower will furnish to the Lender from time to time such information as may be reasonably requested as to such insurance. The Lender acknowledges that (i) no earthquake insurance has been obtained with respect to any Hotel Facilities in California and (ii) insurance maintained by the Operating Lessee in respect of any Hotel Facility shall be sufficient for the purposes of this covenant provided that such insurance complies with the terms of the Operating Lease relating thereto. 7.5. Preservation of Existence, Etc. The Borrower shall preserve and maintain, and shall cause each of its Subsidiaries to preserve and maintain, its existence (except as permitted under Section 8.5) and its rights (charter and statutory) and franchises, except to the extent that the failure to preserve and maintain such rights and/or franchises would not have a Material Adverse Effect. 7.6. Access. The Borrower shall upon reasonable advance notice, at any reasonable time and from time to time, permit the Lender, or any agents or representatives of the Lender, to (a) examine and make copies of and abstracts from the records and books of account of the Borrower and each of its Subsidiaries, (b) visit the properties of the Borrower and each of its Subsidiaries, (c) discuss the affairs, finances and accounts of the Borrower and each of its Subsidiaries with any of their respective officers or directors, and (d) communicate directly with the Borrower's independent certified public accountants. The Borrower shall authorize its independent certified public accountants to disclose to the Lender any and all financial statements and other information of any kind, including, without limitation, copies of any management letter, or the 62 substance of any oral information that such accountants may have with respect to the business, financial condition, results of operations or other affairs of the Borrower or any of its Subsidiaries. 7.7. Keeping of Books. The Borrower shall keep, and shall cause each of its Subsidiaries to keep, proper books of record and account, in accordance with GAAP, in which full and correct entries shall be made of all financial transactions and the assets and business of the Borrower and each such Subsidiary. 7.8. Maintenance of Properties, Etc. The Borrower shall maintain and preserve, and shall cause each of its Subsidiaries and each Operator to maintain and preserve, (i) all of its Hotel Facilities in good working order and condition, and (ii) all rights, permits, licenses, approvals and privileges (including, without limitation, all Permits) which are used or useful or necessary in the conduct of its business, in the case of an Operator, with respect to Hotel Facilities only; provided, however, that the Borrower shall not be deemed in default of this Section 7.8 if all such failures in the aggregate have no Material Adverse Effect. 7.9. Performance and Compliance with Other Covenants. The Borrower shall perform and comply with, and shall cause each of its Subsidiaries to perform and comply with, each of the covenants and agreements set forth in any Contractual Obligation to which it or any of its Subsidiaries is a party; provided, however, that the Borrower shall not be deemed in default of this Section 7.9 if all such failures in the aggregate have no Material Adverse Effect. 7.10. Application of Proceeds. The Borrower shall use the entire amount of the proceeds of the Loans as provided in Section 5.18. 7.11. Financial Statements. The Borrower shall furnish to the Lender: 63 (a) as soon as available and in any event within 45 days after the end of each Fiscal Quarter of each Fiscal Year (other than the last Fiscal Quarter of such Fiscal Year), consolidated balance sheets of the Borrower and its Subsidiaries as of the end of such quarter and consolidated statements of income, retained earnings and cash flow of the Borrower and its Subsidiaries for the period commencing at the end of the previous Fiscal Year and ending with the end of such Fiscal Quarter, all prepared in conformity with GAAP and certified by the chief financial officer of the Borrower as fairly presenting the financial condition and results of operations of the Borrower and its Subsidiaries at such date and for such period, subject to normal year-end audit adjustments, together with (i) a certificate of said officer stating that no Default or Event of Default has occurred and is continuing or, if a Default or an Event of Default has occurred and is continuing, a statement as to the nature thereof and the action which the Borrower proposes to take with respect thereto, (ii) a schedule in form reasonably satisfactory to the Lender of the computations used by the Borrower in determining compliance with all financial covenants contained herein, and (iii) a written discussion and analysis by the management of the Borrower of the financial statements furnished in respect of such Fiscal Quarter; (b) as soon as available and in any event within 90 days after the end of each Fiscal Year, consolidated balance sheets of the Borrower and its Subsidiaries as of the end of such year and consolidated statements of income, retained earnings and cash flow of the Borrower and its Subsidiaries for such Fiscal Year, all prepared in conformity with GAAP and certified, in the case of such consolidated financial statements, without qualification as to the scope of the audit or as to the Borrower being a going concern by Arthur Andersen LLP or other independent public accountants of recognized national standing, together with (i) a certificate of such accounting firm stating that in the course of the regular audit of the business of the Borrower and its Subsidiaries, which audit was conducted by such accounting firm in accordance with generally accepted auditing standards, such accounting firm has obtained no knowledge that a Default or Event of Default has occurred and is continuing, or, if in the opinion of such accounting firm, a Default or Event of Default has occurred and is 64 continuing, a statement as to the nature thereof, (ii) a schedule in form reasonably satisfactory to the Lender of the computations used by such accountants in determining, as of the end of such Fiscal Year, the Borrower's compliance with all financial covenants contained herein, and (iii) a written discussion and analysis by the management of the Borrower of the financial statements furnished in respect of such Fiscal Year; (c) as soon as available and in any event within 60 days after the end of each fiscal quarter of each fiscal year, in each case of any Operating Lessee (other than the last fiscal quarter of such fiscal year) consolidated balance sheets and statements of income and cash flow in respect of such Operating Lessee for such fiscal quarter, all prepared in conformity with GAAP and certified by the chief financial officer or chief accounting officer (or such officer's authorized designee) of the Operating Lessee, duly authorized, as fairly presenting the consolidated financial conditions and results of operations of such Operating Lessee at such date and for such period, subject to normal year-end adjustments, together with a certificate of said officer stating that no Default or Event of Default has occurred and is continuing under the relevant Operating Lease(s) (said certification, the "Financial Officer's Certificate"); (d) as soon as available, and in any event within 105 days after the end of each fiscal year of any Operating Lessee, consolidated balance sheets and statements of income, retained earnings and cash flow in respect of such Operating Lessee for such fiscal year, all prepared in conformity with GAAP and certified without qualification as to the scope of the audit by independent public accountants of recognized national standing, together with a Financial Officer's Certificate; (e) within thirty (30) days after the end of each Accounting Period (as defined in the Management Agreement) or if there is no Management Agreement, within thirty (30) days after the end of each calendar month, an unaudited operating statement in respect of each Hotel Facility, including occupancy percentages and average rate, accompanied by a Financial Officer's Certificate; 65 (f) promptly after the same are received by the Borrower, a copy of each management letter provided to the Borrower by its independent certified public accountants which refers in whole or in part to any inadequacy, defect, problem, qualification or other lack of fully satisfactory accounting controls utilized by the Borrower or any of its Subsidiaries or any Operating Lessee. 7.12. Reporting Requirements. The Borrower shall furnish to the Lender: (a) prior to any Asset Sale, a notice (i) describing the assets being sold and (ii) stating the estimated Asset Sales Proceeds in respect of such Asset Sale; (b) as soon as available and in any event within 30 days prior to the end of each Fiscal Year, an annual budget of the Borrower and its Subsidiaries for the succeeding Fiscal Year, displaying on a quarterly basis anticipated balance sheets, forecasted Capital Expenditures, working capital requirements, rent revenues, contributions by Operating Lessees to any FF&E Reserves, interest income, net income, cash flow and sales, all on a consolidated basis; (c) promptly and in any event within 30 days after the Borrower, any of its Subsidiaries or any ERISA Affiliate knows or has reason to know that any ERISA Event has occurred, a written statement of the chief financial officer or other appropriate officer of the Borrower describing such ERISA Event or waiver request and the action, if any, which the Borrower, its Subsidiaries and ERISA Affiliates propose to take with respect thereto and a copy of any notice filed by or with the PBGC or the IRS pertaining thereto; (d) promptly and in any event within 10 days after receipt thereof, a copy of any adverse notice, determination letter, ruling or opinion the Borrower, any of its Subsidiaries or any ERISA Affiliate receives from the PBGC, DOL or IRS with respect to any Plan, other than those which, in the aggregate, do not have any reasonable likelihood of resulting in a Material Adverse Change; 66 (e) promptly after the commencement thereof, notice of all actions, suits and proceedings before any domestic or foreign Governmental Authority or arbitrator, affecting the Borrower, any of its Subsidiaries or any Operator (subject to the Borrower having received notice or knowledge thereof), except those which in the aggregate, if adversely determined, would have no Material Adverse Effect; (f) promptly and in any event within five (5) Business Days after the Borrower becomes aware of the existence of (i) any Default or Event of Default, (ii) any breach or non-performance of, or any default under any Operating Lease, Management Agreement, Advisory Agreement or any Contractual Obligation which is material to the business, prospects, operations or financial condition of the Borrower and its Subsidiaries taken as one enterprise, or (iii) any Material Adverse Change or any event, development or other circumstance which has reasonable likelihood of causing or resulting in a Material Adverse Change, telephonic or telecopied notice in reasonable detail specifying the nature of such Default, Event of Default, breach, non-performance, default, event, development or circumstance, including, without limitation, the anticipated effect thereof, which notice (if by telephone) shall be promptly confirmed in writing within five days; (g) promptly after the sending or filing thereof, copies of all reports which the Borrower sends to its security holders generally, and copies of all reports and registration statements which the Borrower or any of its Subsidiaries files with the Securities and Exchange Commission or any national securities exchange or the National Association of Securities Dealers, Inc.; (h) upon the request of the Lender copies of all federal, state and local tax returns and reports filed by the Borrower or any of its Subsidiaries in respect of taxes measured by income (excluding sales, use and like taxes); (i) promptly and in any event within five days of the Borrower or any Subsidiary learning of any of the fol lowing, written notice to the Lender of any of the following: 67 (i) the Release or threatened Release of any Hazardous Material on or from any property owned, operated or leased by the Borrower of any of its Subsidiaries and any written order, notice, permit, application or other written communication or report received by the Borrower, any of its Subsidiaries or any Operator in connection with or relating to any such Release or threatened Release, unless such Release or threatened Release is not reasonably likely to have a Material Adverse Effect; (ii) any notice or claim to the effect that the Borrower, any of its Subsidiaries or any Operator is or may be liable to any Person as a result of the Release or threatened Release of any Hazardous Material into the environment that could reasonably be expected to have a Material Adverse Effect; (iii) receipt by the Borrower, any of its Subsidiaries or any Operator of notification that any real or personal property of the Borrower or any of its Subsidiaries is subject to an Environmental Lien that could reasonably be expected to have a Material Adverse Effect; (iv) any Remedial Action taken by the Borrower, any of its Subsidiaries or (if known to the Borrower) any Operator or any other Person in response to any Hazardous Material on, under or about any real property owned, operated or leased by the Borrower or any of its Subsidiaries, unless such Remedial Action is not reasonably likely to have a Material Adverse Effect; (v) receipt by the Borrower, any of its Subsidiaries or any Operator of any notice of violation of, or knowledge by the Borrower, any of its Subsidiaries or any Operator that there exists a condition which may result in a violation by the Borrower, any of its Subsidiaries or any Operator of, any Environmental Law, unless such violation is not reasonably likely to have a Material Adverse Effect; 68 (vii) the commencement of any judicial or administrative proceeding or investigation alleging a violation of any Environmental Law; or (viii) any proposed acquisition of stock, assets or real property, or any proposed leasing of property by the Borrower or any of its Subsidiaries, unless such action is not reasonably likely to have a Material Adverse Effect; (j) upon written request by the Lender, a report providing an update of the status of any Environmental Claim, Remedial Action or any other issue identified in any notice or report required pursuant to this Section 7.12; (k) promptly, such additional financial and other information respecting the financial or other condition of any Operators, the Advisor or the Borrower or any of its Subsidiaries or the status or condition of any real property owned or leased by the Borrower or its Subsidiaries, or the operation thereof which the Borrower is entitled to or can otherwise reasonably obtain, as the Lender from time to time reasonably request; and (l) such other information respecting the business, properties, condition, financial or otherwise, or operations of the Borrower, any of its Subsidiaries or any Operators as the Lender may from time to time reasonably request. 7.13. Leases and Operating Leases. The Borrower shall provide the Lender with a copy of each lease of real property to which the Borrower or any Subsidiary of the Borrower is then a party, whether as lessor or lessee. The Borrower shall, and shall cause each of its Subsidiaries to, (i) comply in all material respects with all of their respective obligations under all of their respective Leases and Operating Leases now or hereafter held respectively by them with respect to real property, including, without limitation, the Leases set forth in Schedule 5.22(b); (ii) not modify, amend, cancel, extend or otherwise change in any materially adverse manner any of the terms, covenants or conditions of any such Leases or Operating Leases; (iii) provide the Lender with a copy of each notice of default under any Lease or Operating Leases received by the 69 Borrower or any Subsidiary of the Borrower immediately upon receipt thereof and deliver to the Lender a copy of each notice of default sent by the Borrower or any Subsidiary of the Borrower under any Operating Lease or Lease simultaneously with its delivery of such notice under such Operating Lease or Lease; (iv) notify the Lender, not later than 30 days prior to the date of the expiration of the term of any Lease, of the Borrower's or any Subsidiary of the Borrower's intention either to renew or to not renew any such Lease, and, if the Borrower or any Subsidiary of the Borrower intends to renew such Lease, the terms and conditions of such renewal; and (v) maintain each Operating Lease in full force and effect in all material respects and enforce the material obligations of the Operating Lessee thereunder, in a timely manner. 7.14. [Intentionally Omitted] 7.15. Employee Plans. For each Plan and any related trust hereafter adopted or maintained by a Loan Party or any of its ERISA Affiliates intended to qualify under Code Section 125, 401 or 501, the Borrower shall (i) seek, and cause such of its ERISA Affiliates to seek, and receive determination letters from the IRS to the effect that such plan is so qualified; and (ii) cause such plan to be so qualified. 7.16. [Intentionally Omitted] 7.17. Fiscal Year. The Borrower shall maintain as its Fiscal Year the twelve month period ending on December 31 of each year. 7.18. Environmental Matters. (a) The Borrower shall comply and shall cause each of its Subsidiaries and, with respect to Hotel Facilities only, each Operator to comply in all material respects with all applicable Environmental Laws currently or hereafter in effect. (b) If the Lender at any time has a reasonable basis to believe that there may be a material violation of any Environmental Law by Borrower any of its Subsidiaries or any Operator related to any Hotel Facility, or real property adjacent thereto, then Borrower agrees, upon request from the Lender, to provide the Lender, at Borrower's expense, 70 with such reports, certificates, engineering studies or other written material or data as the Lender may reasonably require so as to reasonably satisfy the Lender that Borrower or such Subsidiary or Operator is in material compliance with all applicable Environmental Laws. Furthermore, the Lender shall have the right upon prior notice (except in the case of an emergency) to inspect during normal business hours any real property owned, operated or leased by Borrower or any of its Subsidiaries if at any time the Lender has a reasonable basis to believe that there may be such a material violation of Environmental Law. (c) The Borrower shall, and shall cause each of its Subsidiaries and, with respect to Hotel Facilities only, each Operator to, take such Remedial Action or other action as required by Environmental Laws, as any Governmental Authority requires, except to the extent contested in good faith and by proper proceedings, or as is appropriate and consistent with good business practice. 7.19. Appraisals and other Valuations. (a) From time to time during the term of this Agreement, the Lender may, in its sole discretion, order an Appraisal of one or more of the Hotel Facilities. Any such Appraisal shall be at the Borrower's cost if the Lender shall have obtained a letter from an expert appraiser or evaluator of real property or hotel or other lodging facilities to the effect that, or the Lender shall otherwise in good faith have determined that, facts or circumstances exist, or changes in market conditions have occurred, as a result of which there exists a reasonable possibility that Appraisals of the Hotel Facilities, might result in an aggregate valuation thereof reflecting a material loss of value as compared to the value thereof indicated in the certificate of a Responsible Officer delivered to the Lender pursuant to Section 7.12(k), or (ii) an Event of Default has occurred. (b) In addition to the Appraisals referred to in subsection (a) above, from time to time during the term of this Agreement, if so requested by the Lender, in its sole discretion, the Borrower shall furnish to the Lender a certificate of a Responsible Officer certifying as to the value of one or more of the Hotel Facilities in such officer's reasonable opinion. 71 7.20. REIT Requirements. The Borrower shall operate its business at all times so as to satisfy all requirements necessary to qualify as a real estate investment trust under Section 856 through 860 of the Code. The Borrower will maintain adequate records so as to comply with all record-keeping requirements relating to the qualification of the Borrower as a real estate investment trust as required by the Code and applicable regulations of the Department of the Treasury promulgated thereunder and will properly prepare and timely file with the IRS all returns and reports required thereby. The Borrower will request from its shareholders all shareholder information required by the Code and applicable regulations of the Department of Treasury promulgated thereunder. 7.21. Maintenance of FF&E Reserves. The Borrower shall cause the Operator to maintain FF&E Reserves in respect of each Hotel Facility, pursuant to the terms of the Operating Lease and/or Management Agreement relating thereto and shall direct the Operator to deliver to the Lender simultaneously with delivery to the Borrower or its Subsidiaries, copies of any reports, statements or other information required to be supplied to the Borrower or its Subsidiary under any Operating Lease or Management Agreement for any Hotel Facility. The Borrower shall not commingle, or permit the commingling of, other funds with the funds in the FF&E Reserves except to the extent permitted by the Management Agreement. 7.22. Further Assurances. At any time upon the request of the Lender, the Borrower will, promptly and at its expense, execute, acknowledge and deliver such further documents and do such other acts and things as the Lender may reasonably request to provide for payment of the Loans made hereunder and interest thereon in accordance with the terms of this Agreement. 7.23. Amendment to Management Agreement. The Borrower shall use all reasonable efforts to procure the following within three months of the date hereof: (i) an amendment to the definition of "Qualified Loan" in the Management Agreement and to any other applicable provisions of the Management Agreement including, without limitation, Section 6.09 thereof, to the effect that all and any Loans made pursuant to this Agreement, whether before or after the 72 date of such amendment, shall comply with the requirements of such definition and that in the context of cross collateralization of the Hotel Facilities, the test for Qualified Loans shall be applied on a consolidated basis for all such Hotel Facilities to be mortgaged as collateral for the Loans hereunder, and (ii) a written and binding agreement from the Management Company that, notwithstanding any provision to the contrary set forth in any Assignment Agreement, if this Agreement shall be amended, modified or supplemented without the prior written consent of the Management Company, provided that all Loans made by the Lender hereunder comply with the requirements for Qualified Loans, as the same are set forth in the Management Agreement and may be amended pursuant to subparagraph (i) above, such amendment, modification or supplement shall not disqualify the Loans from being Qualified Loans and Lender shall remain entitled to the benefits of the provisions of any existing Assignment Agreements and to the provisions of the Management Agreement intended for the benefit of a Qualified Lender as such term is defined in the Management Agreement." ARTICLE VIII NEGATIVE COVENANTS As long as any of the Obligations or Commitment remain outstanding, without the written consent of the Lender, the Borrower agrees with the Lender that: 8.1. Liens, Etc. The Borrower shall not create or suffer to exist, and shall not permit any of its Subsidiaries to create or suffer to exist, any Lien upon or with respect to any of its or such Subsidiary's properties, whether now owned or hereafter acquired, or assign, or permit any of its Subsidiaries to assign, any right to receive income therefrom, except for the following and the Lender hereby consents to the following liens notwithstanding the provisions of any Negative Pledge Agreement: (a) Liens created pursuant to the Loan Documents; 73 (b) Liens arising by operation of law in favor of materialmen, mechanics, warehousemen, carriers, lessors or other similar Persons incurred by the Borrower or any of its Subsidiaries in the ordinary course of business which secure its obligations to such Person; provided, however, that (i) the Borrower or such Subsidiary is not in default with respect to such payment obligation to such Person, (ii) the Borrower or such Subsidiary is in good faith and by appropriate proceedings diligently contesting such obligation and adequate provision is made for the payment thereof, or (iii) all such failures in the aggregate have no Material Adverse Effect; (c) Liens (excluding Environmental Liens) securing taxes, assessments or governmental charges or levies; provided, however, that (i) neither the Borrower nor any of its Subsidiaries is in default in respect of any payment obligation with respect thereto unless the Borrower or such Subsidiary is in good faith and by appropriate proceedings diligently contesting such obligation and adequate provision is made for the payment thereof, and (ii) all such failures in the aggregate have no Material Adverse Effect; (d) Zoning restrictions, easements, licenses, reservations, restrictions on the use of real property or minor irregularities incident thereto which do not in the aggregate materially detract from the value or use of the property or assets of the Borrower or any of its Subsidiaries or impair, in any material manner, the use of such property for the purposes for which such property is held by the Borrower or any such Subsidiary; (e) Liens in favor of landlords securing operating leases permitted by Section 8.3; (f) Liens existing on the date of this Agreement and disclosed on Schedule 8.1; (g) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of 74 tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, trade contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (h) Any attachment or judgment Lien not constituting an Event of Default under Section 9.1(f); (i) Any (i) interest or title of a lessor or sublessor under any Capitalized Lease or any operating lease not prohibited by this Agreement, (ii) restriction or encumbrance that the interest or title of such lessor or sublessor may be subject to, or (iii) subordination of the interest of the lessee or sublessee under such lease to any restriction or encumbrance referred to in the preceding clause (ii); (j) Liens arising from filing UCC financing statements relating solely to leases permitted by this Agreement; (k) Deposits in the ordinary course of business to secure liabilities to insurance carriers, lessors, utilities and other service providers; (l) Purchase money security interests (including mortgages, conditional sales, Capitalized Leases and any other title retention or deferred purchase devices) in personal property of the Borrower or any of its Subsidiaries in an amount not exceeding $200,000 in respect of each Hotel Facility, existing or created at the time of acquisition thereof or within 60 days thereafter. (m) Any Lien securing the renewal, extension or refunding of any Indebtedness or other Obligation secured by any Lien permitted by this Section 8.1 provided that such renewal, extension or refunding is otherwise permitted by this Agreement and the amount of such Indebtedness or other Obligation secured by such Lien and the assets subject to such Lien are not increased. 75 (n) Any Lien securing Indebtedness permitted pursuant to Section 8.2(v) and Section 8.2(vi). 8.2. Indebtedness. (a) The Borrower shall not create, incur or suffer to exist, or permit any of its Subsidiaries to create, incur or suffer to exist, any Indebtedness, or incur, assume, endorse, be or become liable for, or guarantee, directly or indirectly, or permit or suffer to exist, any Contingent Obligation, except: (i) Indebtedness and Contingent Obligations in respect of the Obligations or evidenced by a Loan Document; (ii) current liabilities in respect of taxes, assessments and governmental charges or levies incurred, or claims for labor, materials, inventory, services, supplies and rentals incurred, or for goods or services purchased, in the ordinary course of business consistent with the past practice of the Borrower and its Subsidiaries; (iii) Indebtedness of the Borrower consisting of fees and expenses referred to in Section 4.1(n) and 4.2(f); (iv) Indebtedness of the Borrower or any of its Subsidiaries arising pursuant to the Second Facility. (v) Indebtedness of the Borrower or any of its Subsidiaries under Capital Financing Indebtedness in respect of each Hotel Facility in an aggregate amount for such Hotel Facility not exceeding $200,000.00 at any one time outstanding; and (vi) Indebtedness of the Borrower or any of its Subsidiaries comprising pre-existing Indebtedness secured by Real Estate and any personal property located thereon, which the Borrower or any of its Subsidiaries assumes in connection with the acquisition of such Real Estate, in an aggregate amount not exceeding $25,000,000. 76 (b) The Borrower shall not cancel, or permit any of its Subsidiaries to cancel, any claim or Indebtedness owed to it except for adequate consideration and in the ordinary course of business. 8.3. Lease Obligations. The Borrower shall not, and shall not permit any of its Subsidiaries to, become or remain liable as lessee or guarantor or other surety with respect to any lease, whether an operating lease or a Capitalized Lease, of any property (whether real or personal or mixed), whether now owned or hereafter acquired, which (i) the Borrower or any of its Subsidiaries has sold or transferred or is to sell or transfer to any other Person, or (ii) the Borrower or any of its Subsidiaries intends to use for substantially the same purposes as any other property which has been or is to be sold or transferred by that entity to any other Person in connection with such lease. 8.4. [Intentionally Omitted.] 8.5. Mergers, Stock Issuances, Asset Sales, Etc. (a) The Borrower shall not sell, convey, transfer, lease or otherwise dispose of all or substantially all of its assets or properties, and shall not, and shall not permit any of its Subsidiaries to, (i) merge with any Person, or (ii) consolidate with any Person other than (A) the merger of a Subsidiary of the Borrower into a wholly-owned Subsidiary of the Borrower that is a Loan Party, or (B) the merger of a wholly-owned Subsidiary of the Borrower into the Borrower. (b) The Borrower shall not transfer, or permit any of its Subsidiaries to issue or transfer, any Stock or Stock Equivalents of any Subsidiary other than any such issuance or transfer (i) by a Subsidiary of the Borrower to a wholly-owned Subsidiary of the Borrower that is a Loan Party or (ii) by a wholly-owned Subsidiary of the Borrower to the Borrower. (c) The Borrower shall not and shall not permit any of its Subsidiaries to effect, enter into, consummate or suffer to exist any Asset Sale (other than an Asset Sale with respect to Mortgaged Properties as to which subsection (d) below shall apply) without the prior written consent of 77 the Lender, such consent not to be unreasonably withheld or delayed. (d) The Borrower shall not and shall not permit any of its Subsidiaries to effect, enter into, consummate or suffer to exist any Asset Sale with respect to any Mortgaged Property without (y) the prior written consent of the Lender, such consent not to be unreasonably withheld or delayed, and (z) prepayment of the Loans pursuant to Section 2.6(d). In the event that an Asset Sale of a Mortgaged Property is entered into in violation of any of the provisions of this Section 8.5(d), in addition to the other rights and remedies of the Lender hereunder, the Borrower shall forthwith prepay the Loans upon receipt by the Borrower of its Subsidiaries of the Asset Sale Proceeds relating thereto, in an amount equal to such Asset Sale Proceeds, together with accrued interest to the date of such prepayment on the principal amount prepaid. 8.6. Investments. The Borrower shall not, directly or indirectly, make or maintain, or permit any of its Subsidiaries to make or maintain, any loan or advance to any Person or own, purchase or otherwise acquire, or permit any of its Subsidiaries to own, purchase or otherwise acquire, any Stock, Stock Equivalents, other equity interest, obligations or other securities of, or all or substantially all of the assets of, any Person or all or substantially all of the assets constituting the business of a division, branch or other unit operation of any Person, or enter into any joint venture or partnership with, or make or maintain, or permit any of its Subsidiaries to make or maintain, any capital contribution to, or otherwise invest in, any Person or incorporate or organize any Subsidiary which was not in existence on the Closing Date (any such transaction being an "Investment"), except Investments consisting of the Stock of Subsidiaries listed on Schedule 5.8, 8.7. Change in Nature of Business or Organizational Documents(a) The Borrower shall not make, and shall not permit any of its Subsidiaries to make, any material change in the nature or conduct of its business as carried on at the date hereof. 78 (b) The Borrower shall not, and shall not permit any of its Subsidiaries to, amend its declaration of trust, certificate of incorporation or by-laws other than for amendments which in the aggregate have no Material Adverse Effect. 8.8. Modification of Material Agreements. The Borrower shall not, and shall not permit any of its Subsidiaries to, (i) alter, rescind, terminate, amend, supplement, waive or otherwise modify any provision of or permit any breach or default to exist under the Advisory Agreement without the prior written consent of the Lender; or (ii) alter, amend, modify, rescind, terminate, supplement or waive any of their respective rights under, or fail to comply in all material respects with, any of its material obligations arising under any Operating Lease or Management Agreement; provided, however, that, with respect to any such -------- ------- failure to comply with any such obligations, the Borrower shall not be deemed in default of this Section 8.8 if all such failures in the aggregate would have no Material Adverse Effect; and provided, further, that in the event of -------- ------- any material breach or event of default by a Person other than the Borrower or any of its Subsidiaries, the Borrower shall promptly notify the Lender of any such breach or event of default and take all such action as may be reasonably necessary in order to endeavor to avoid having such breach or event of default have a Material Adverse Effect. 8.9. Accounting Changes. The Borrower shall not make, nor permit any of its Subsidiaries to make, any change in accounting treatment and reporting practices or tax reporting treatment, except as required by GAAP or law and disclosed to the Lender. 8.10. Transactions with Affiliates. The Borrower shall not, and shall not permit any of its Subsidiaries, to enter into any transaction directly or indirectly with or for the benefit of any Affiliate of the Borrower (including, without limitation, employment contracts or contracts involving the payment of management or consulting fees, guaranties and assumptions of obligations of any such Affiliate) except for (A) transactions in the ordinary course of business on a basis no less favorable to the Borrower or such Subsidiary as would be obtained in a comparable arm's length transaction with a Person not an 79 Affiliate, and (B) salaries and other employee compensation and benefits to officers or directors of the Borrower or any of its Subsidiaries commensurate with current compensation and benefit levels. 8.11. Environmental Matters. (a) The Borrower shall not, and shall not permit any of its Subsidiaries or any Operator, or, to the extent practicable, any other Person to dispose of any Hazardous Material by placing it in or on the ground or waters of any property owned, operated or leased by the Borrower or any of its Subsidiaries, except as in compliance with all applicable Environmental Laws currently and hereinafter in effect; provided, however, that the Borrower shall not be deemed in default of this provision if all such disposals in the aggregate would have no Material Adverse Effect. (b) The Borrower shall not, and shall not permit any of its Subsidiaries or any Operator, or, to the extent practicable, any other Person to, dispose or to arrange for the disposal of any Hazardous Material on any property owned, operated or leased by any other Person, except as in compliance with all applicable Environmental Laws currently and hereinafter in effect; provided, however, that the Borrower shall not be deemed in default of this provision if all such disposals in the aggregate would have no Material Adverse Effect. ARTICLE IX EVENTS OF DEFAULT 9.1. Events of Default. Each of the following events shall be an Event of Default: (a) The Borrower shall fail to pay any principal (including, without limitation, mandatory prepayments of principal) of, or interest on, any Loan, any fee, any other amount due hereunder or under the other Loan Documents or other of the Obligations when the same becomes due and payable; or (b) Any representation or warranty made or deemed made by any Loan Party in any Loan Document or by any 80 Loan Party (or any of its officers) in writing in connection with any Loan Document shall prove to have been incorrect in any material respect when made or deemed made; or (c) Any Loan Party shall fail to perform or observe (i) any term, covenant or agreement contained in Articles VI or VIII or in any Collateral Document, or (ii) any other term, covenant or agreement contained in this Agreement or in any other Loan Document if such failure under this clause (ii) shall remain unremedied for fifteen (15) days after the date on which written notice thereof shall have been given to the Borrower by the Lender; or (d) Any Loan Party or any of its Subsidiaries shall fail to pay any principal of or premium or interest on any Indebtedness of such Loan Party or Subsidiary (excluding Indebtedness evidenced by the Note) beyond the period of grace (not to exceed 30 days), if any, with respect thereto (whether the same becomes due and payable by scheduled maturity, required prepayment, acceleration, demand or otherwise); or any other event shall occur or condition shall exist under any agreement or instrument relating to any such Indebtedness, if the effect of such event or condition is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness; or any such Indebtedness shall become or be declared to be due and payable, or any Loan Party or any of its Subsidiaries shall be required to repurchase or offer to repurchase such Indebtedness, prior to the stated maturity thereof; or (e) Any Loan Party or any of its Subsidiaries shall generally not pay its debts as such debts become due, or shall admit in writing its inability to pay its debts generally, or shall make a general assignment for the benefit of creditors, or any proceeding shall be instituted by or against any Loan Party or any of its Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for 81 relief or the appointment of a custodian, receiver, trustee or other similar official for it or for any substantial part of its property and, in the case of any such proceedings instituted against any Loan Party or any of its Subsidiaries (but not instituted by it), either such proceedings shall remain undismissed or unstayed for a period of sixty (60) days or any of the actions sought in such proceedings shall occur; or any Loan Party or any of its Subsidiaries shall take any corporate action to authorize any of the actions set forth above in this subsection (e); or (f) One or more judgments or orders for the payment of money in an aggregate amount in excess of $100,000 to the extent not fully covered by insurance shall be rendered against any Loan Party or any of its Subsidiaries and either (i) enforcement proceedings shall have been commenced by any creditor upon such judgment or order, or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (g) An ERISA Event shall occur which, in the reasonable determination of the Lender, is reasonably likely to have a Material Adverse Effect; or (h) The Borrower or any of its Subsidiaries shall have entered into any consent or settlement decree or agreement or similar arrangement with an Governmental Authority or any judgment, order, decree or similar action shall have been entered against the Borrower or any of its Subsidiaries or any Operator, in any case based on or arising from the violation of or pursuant to any Environmental Law, or the generation, storage, transportation, treatment, disposal or Release of any Hazardous Material and such judgment, order, decree or similar action is reasonably likely to have a Material Adverse Effect; or (i) Any material provision of any Collateral Document after delivery thereof under Article IV shall for any reason cease to be valid and binding on any Loan Party thereto, or any Loan Party shall so state in writing; or 82 (j) Any Collateral Document after delivery thereof pursuant to Article IV shall, for any reason, cease to create a valid Lien on any of the Collateral purported to be covered thereby or such Lien shall cease to be a perfected and first priority Lien, or any Loan Party shall so state in writing; or (k) There shall occur a Material Adverse Change or an event which is reasonable likely to have a Material Adverse Effect; or (l) The Lender shall have determined in good faith, and shall have so given notice to the Borrower, that the Borrower has at any time ceased to be in a position to qualify, or has not qualified, as a real estate investment trust for any of the purposes of the provisions of the Code applicable to real estate investment trusts; provided that no Event of Default under this subsection shall be deemed to have occurred and be continuing if, within 10 days after notice of any such determination is given to the Borrower, the Borrower shall have furnished the Lender with an opinion of the Borrower's tax counsel (who shall be reasonably satisfactory to the Lender) to the effect that the Borrower is then in a position to so qualify, or has so qualified, as the case may be, which opinion shall not contain any material qualification unsatisfactory to the Lender; or (m) HRPT Advisors shall cease at any time to (A) hold beneficially and of record at least 250,000 of the issued and outstanding common shares and each other class of equity securities of the Borrower (adjusted for any division, reclassification or stock dividend in respect of Common Shares), or (B) hold the power to direct or cause the direction of the management and policies of the Borrower; or (n) Barry M. Portnoy and Gerard M. Martin shall cease at any time to (A) hold beneficially and of record, in the aggregate, at least 51% of the issued and outstanding common shares and each other class of equity securities of HRPT Advisors (adjusted for any division, reclassification or stock dividend in respect of Common Shares), or (B) hold the power to direct or 83 cause the direction of the management and policies of HRPT Advisors; or (o) HRPT Advisors shall cease to be the sole Advisor to Borrower pursuant to and in accordance with the Advisory Agreement, without the Lender's prior written consent or the Advisory Agreement shall be materially amended, supplemented or modified without the Lender's prior written consent; or (p) Advisor shall default in the observance or performance of any material provision of the Subordination Agreement; or (q) Any Manager shall default in the observance or performance of any material provision of a Management Agreement and such defaults, in the aggregate, are reasonably likely to have a Material Adverse Effect; or (r) Any Operating Lessee shall default in the observance or performance of any material provision of an Operating Lease and such defaults, in the aggregate, are reasonably likely to have a Material Adverse Effect. 9.2. Remedies. If there shall occur and be continuing any Event of Default, the Lender (i) may by notice to the Borrower, declare the obligation of the Lender to make Loans to be terminated, whereupon the same shall forthwith terminate, and (ii) may by notice to the Borrower, declare the Loans, all interest thereon and all other amounts and Obligations payable under this Agreement to be forthwith due and payable, whereupon the Note, all such interest and all such amounts and Obligations (to the extent permitted by applicable law), shall become and be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Borrower; provided, however, that upon the occurrence of the Event of Default specified in subparagraph (e) above, (A) the obligation of the Lender to make Loans shall automatically be terminated and (B) the Loans, all such interest and all such amounts and Obligations shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the 84 Borrower. In addition to the remedies set forth above, the Lender may exercise any remedies provided for by the Collateral Documents in accordance with the terms thereof or any other remedies provided by applicable law. ARTICLE X MISCELLANEOUS 10.1. Amendments, Etc. No amendment or waiver of any provision of this Agreement nor consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the Lender, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 10.2. Notices, Etc. All notices and other communications provided for hereunder shall be in writing (including, without limitation, telegraphic, telex, telecopy or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered by hand: If to the Borrower, at its address at: 400 Centre Street, Newton, Massachusetts 02158 Attention: Mr. John G. Murray (telecopy number: 617-332-2261) (telephone number: 617-964-8389); with a copy to: Sullivan & Worcester One Post Office Square Boston, Massachusetts 02109 Attention: Lena G. Goldberg, Esq. (telecopy number: 617-338-2800) (telephone number: 617-338-2880). 85 If to the Lender, at its address at 140 Broadway, New York, New York 10005-1285 Attention: James W. Roiter, Managing Director (telecopy number: 212-504-4096) (telephone number: 212-504-4900) with a copy to: Weil Gotshal & Manges 767 Fifth Avenue New York, New York 10153 Attention: J. Philip Rosen, Esq. (telecopy number: 212-310-8007) (telephone number: 212-310-8000) or, as to the Borrower or the Lender, at such other address as shall be designated by such party in a written notice to the other party. All such notices and communications shall, when mailed, telegraphed, telexed, telecopied, cabled or delivered, be effective three (3) Business Days after being deposited in the mails, delivered to the telegraph company, confirmed by telex answerback, telecopied with confirmation of receipt, delivered to the cable company or delivered by hand to the addressee, respectively, except that notices and communications to the Lender pursuant to Article II shall not be effective until received by the Lender. 10.3. No Waiver; Remedies. No failure on the part of the Lender to exercise, and no delay in exercising, any right hereunder or under any Note shall operate as a waiver thereof; nor shall any single or partial exercise of any such right preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 10.4. Costs; Expenses; Indemnities. (a) The Borrower agrees to pay to the Lender or as the Lender may direct (i) on or before the date hereof (and not including any amounts previously paid) the sum of ONE HUNDRED THOUSAND DOLLARS ($100,000) toward the reasonable costs and expenses of the Lender in connection with the preparation, execution and delivery of this Agreement, each of the other Loan 86 Documents and each of the other documents to be delivered hereunder and thereunder, including, without limitation, the reasonable fees and out-of-pocket expenses of counsel, accountants, appraisers, consultants or industry experts retained by the Lender with respect thereto, provided that the Borrower acknowledges and agrees that the foregoing shall not include the fees and expenses to be paid by the Borrower pursuant to Section 4.2(e) hereof, and (ii) on demand, all costs and expenses of the Lender (including, without limitation, the fees and out-of-pocket expenses of counsel, retained by the Lender) in connection with the modification, amendment or enforcement (whether through negotiation, legal proceedings or otherwise) of this Agreement and the other Loan Documents. (b) The Borrower agrees to indemnify and hold harmless the Lender and its Affiliates, and the directors, officers, employees, agents, attorneys, consultants and advisors of or to any of the foregoing (including, without limitation, those retained in connection with the satisfaction or attempted satisfaction of any of the conditions set forth in Article IV) (each of the foregoing being an "Indemnitee") from and against any and all claims, damages, liabilities, obligations, losses, penalties, actions, judgments, suits, costs, disbursements and expenses of any kind or nature (including, without limitation, fees and disbursements of counsel to any such Indemnitee and experts, engineers and consultants and the costs of investigation and feasibility studies) which may be imposed on, incurred by or asserted against any such Indemnitee in connection with or arising out of any investigation, litigation or proceeding, whether or not any such Indemnitee is a party thereto, whether direct, indirect, or consequential and whether based on any federal, state or local law or other statutory regulation, securities or commercial law or regulation, or under common law or in equity, or on contract, tort or otherwise, in any manner relating to or arising out of or based upon or attributable to this Agreement, any other Loan Document, any document delivered hereunder or thereunder, any Obligation, or any act, event or transaction related or attendant to any thereof, including, without limitation, (i) arising from any misrepresentation or breach of warranty under Section 5.19 or any Environmental Claim or any Environmental Lien or any Remedial Action arising out of or based upon anything 87 relating to real property owned, leased or operated by the Borrower or any of its Subsidiaries and the facilities or operations (collectively, the "Indemnified Matters"); provided, however, that the Borrower shall not have any obligation under this Section 10.4(b) to an Indemnitee with respect to any Indemnified Matter caused by or resulting from the gross negligence or willful misconduct of that Indemnitee, as determined by a court of competent jurisdic tion in a final non-appealable judgment or order. (c) If the Lender receives any payment of principal of any Loan other than on the last day of an Interest Period relating to such Loan, as a result of any payment made by the Borrower or acceleration of the maturity of the Note pursuant to Section 9.2 or for any other reason, the Borrower shall, upon demand by the Lender, pay to the Lender all amounts required to compensate the Lender for any additional losses, costs or expenses which it may reasonably incur as a result of such payment, including, without limitation, any loss (including, without limitation, loss of anticipated profits), cost or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by the Lender to fund or maintain such Loan. (d) The Borrower shall indemnify the Lender for, and hold the Lender harmless from and against, any and all claims for brokerage commissions, fees and other compensation made against the Lender for any broker, finder or consultant with respect to any agreement, arrangement or understanding made by or on behalf of any Loan Party or any of its Subsidiaries in connection with the transactions contemplated by this Agreement. (e) The Borrower agrees that any indemnification or other protection provided to any Indemnitee pursuant to this Agreement (including, without limitation, pursuant to this Section 10.4) or any other Loan Document shall (i) survive payment of the Obligations and (ii) inure to the benefit of any Person who was at any time an Indemnitee under this Agreement or any other Loan Document. (f) The provisions of this Section 10.4 shall survive any termination of this Agreement. 88 10.5. Right of Set-off. Upon the occurrence and during the continuance of any Event of Default the Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Lender to or for the credit or the account of the Borrower against any and all of the Obligations now or hereafter existing whether or not the Lender shall have made any demand under this Agreement or any Note or any other Loan Document and although such Obligations may be unmatured. The Lender agrees promptly to notify the Borrower after any such set-off and application made by the Lender; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application. The rights of the Lender under this Section are in addition to the other rights and remedies (including, without limitation, other rights of set-off) which the Lender may have. 10.6. Binding Effect. This Agreement shall become effective when it shall have been executed by the Borrower and the Lender and thereafter shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the prior written consent of the Lender. 10.7. Assignments and Participations. (a) The Lender may sell, transfer, negotiate or assign to one or more other financial institutions all or a portion of its Commitment, the Loans owing to it and an interest in the Note held by it and a commensurate portion of its rights and obligations hereunder and under the other Loan Documents subject to the proviso to subparagraph (c) below. (b) The Lender may sell participations to one or more banks or other Persons in or to all or a portion of its rights and obligations under the Loan Documents (including, without limitation, all or a portion of the Commitment, the Loans owing to it and the Note held by it). In the event of the sale of any participation by the Lender, (i) the Lender's obligations under the Loan Documents (including, without limitation, the Commitment) shall remain unchanged, 89 (ii) the Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (iii) the Lender shall remain the holder of such Note and Obligations for all purposes of this Agreement, and (iv) the Borrower shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under this Agreement. (c) Each participant shall be entitled to the benefits of Sections 2.10, 2.12 and 2.14 as if it were a Lender; provided, however, that anything herein to the contrary notwithstanding, the Borrower shall not, at any time, be obligated to pay to any participant of any interest of the Lender, under Section 2.10, 2.12 or 2.14, any sum in excess of the sum which the Borrower would have been obligated to pay Lender in respect of such interest had such assignment not been effected or had such participation not been sold. (d) The Borrower shall cooperate with Lender, at no cost or expense to the Borrower, and any other party to whom the Lender may assign or sell participations (or negotiate for such assignment or sale) in all or a portion of the Commitment, the Loans owing to it and an interest in the Note. Such cooperation of the part of the Borrower shall include but shall not be limited to the execution and delivery of (i) amendments, modifications and/or supplements to one or more Loan Documents, in form and substance as may be required by Lender, and (ii) the execution and delivery of one or more additional promissory notes, at no cost or expense to the Borrower; provided however, that such promissory notes, amendments, modifications and/or supplements do not materially increase the obligations of the Borrower or materially diminish the rights of the Borrower under the Loan Documents. 10.8. Governing Law; Severability. This Agree ment and the Note and the rights and obligations of the parties hereto and thereto shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this agreement shall be prohibited by or invalid under applicable law, such provision shall be 90 ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10.9. Submission to Jurisdiction; Service of Process. (a) Any legal action or proceeding with respect to this Agreement or the Note or any document related thereto may be brought in the courts of the State of New York or of the United States of America for the Southern District of New York, and, by execution and delivery of this Agreement, the Borrower hereby accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. The parties hereto hereby irrevocably waive any objection, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens, which any of them may now or hereafter have to the bringing of any such action or proceeding in such respective jurisdictions. (b) The Borrower irrevocably consents to the service of process of any of the aforesaid courts in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to the borrower at its address provided herein. (c) Nothing contained in this Section 10.9 shall affect the right of the Lender or any holder of the Note to serve process in any other manner permitted by law or commence legal proceedings or otherwise proceed against the Borrower in any other jurisdiction. 10.10. Section Titles. The Section titles contained in this Agreement are and shall be without sub stantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. 10.11. Execution in Counterparts. This Agreement may be executed in any number of counterparts and by differ ent parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 10.12. Entire Agreement. This Agreement, together with all of the other Loan Documents and all 91 certificates and documents delivered hereunder or thereunder embody the entire agreement of the parties and supersedes all prior agreements and understandings relating to the subject matter hereof. 10.13. Confidentiality. The Lender agrees to keep information obtained by it pursuant hereto and the other Loan Documents confidential in accordance with the Lender's customary practices and agrees that it will only use such information in connection with the transactions contemplated by this Agreement and not disclose any of such information other than (i) to the Lender's employees, representatives and agents who are or are expected to be involved in the evaluation of such information in connection with the transactions contemplated by this Agreement and who are advised of the confidential nature of such information, (ii) to the extent such information presently is or hereafter becomes available to the Lender, as the case may be, on a non-confidential basis from a source other than the Borrower, (iii) to the extent disclosure is required by law, regulation or judicial order or requested or required by bank regulators or auditors, or (iv) to assignees or participants or potential assignees or participants who agree to be bound by the provisions of this sentence. 10.14. Waiver of Jury Trial. Each of the parties hereto waives any right it may have to trial by jury in respect of any litigation based on, or arising out of, under or in connection with this Agreement or any other Loan Document, or any course of conduct, course of dealing, verbal or written statement or action of any party hereto. 10.15. NON-LIABILITY OF TRUSTEES. THE DECLARATION OF TRUST OF THE BORROWER, DATED MAY 12, 1995, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO ("THE DECLARATION"), IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND, PROVIDES THAT THE NAME "HOSPITALITY PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF THE BORROWER SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, THE BORROWER. ALL PERSONS DEALING WITH THE BORROWER, IN ANY 92 WAY, SHALL LOOK ONLY TO THE ASSETS OF THE BORROWER FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized, as of the date first above written. HOSPITALITY PROPERTIES TRUST By:/s/ John G. Murray Name: John G. Murray Title: Treasurer and Chief Financial Officer DLJ MORTGAGE CAPITAL, INC. By:/s/ N. Dante LaRocca Name: N. Dante LaRocca Title: Senior Vice President By:/s/ Charles Garnett Name: Charles Garnett Title: Vice President 93 Schedule 1.1 Initial Hotels 94 Schedule 3.2 Mortgaged Property Prioritization Schedule 95 Schedule 5.8 (a) Stock Related Agreements 96 Schedule 5.8 (c) Subsidiaries 97 Schedule 5.19 Environmental Matters 98 Schedule 5.22(a) Owned Real Estate 99 Schedule 5.22(b) Leased Real Estate 100 Schedule 5.22(c) Defects in Improvements 101 Schedule 8.1 Existing Liens 102 Exhibit A Note 103 Exhibit B Notice of Borrowing 104 Exhibit C Form of Negative Pledge Agreement 105 Exhibit D Form of Opinion of Counsel for the Loan Parties 106 Exhibit E Form of Mortgage 107 Exhibit F Form of Assignment Agreement 108 Exhibit G Form of Management Agreement 109 Exhibit H Form of Operating Lease 110 Exhibit I Form of Security Agreement 111 Exhibit J Form of Subordination Agreement 112 TABLE OF CONTENTS SECTION PAGE ARTICLE I DEFINITIONS AND ACCOUNTING TERMS.....................................1 1.1. Defined Terms..................................................1 1.2. Computation of Time Periods...................................26 1.3. Accounting Terms..............................................26 1.4. Certain Terms.................................................26 ARTICLE II AMOUNTS AND TERMS OF THE LOANS......................................27 2.1. The Loans.....................................................27 2.2. Making the Loans..............................................27 2.3. [Intentionally Omitted].......................................28 2.4. Reduction and Termination of the Commitment...................28 2.5. Repayment.....................................................28 2.6. Prepayments...................................................28 2.7. Continuation of Loans at the Eurodollar Rate..................29 2.8. Interest......................................................29 2.9. Interest Rate Determination and Protection....................30 2.10. Increased Costs..............................................31 2.11. Illegality...................................................31 2.12. Capital Adequacy.............................................32 2.13. Payments and Computations....................................32 2.14. Taxes .......................................................33 ARTICLE III APPROVAL OF PROPOSED HOTEL FACILITIES; SELECTED PROPERTIES AND PREPARATION OF MORTGAGE DOCUMENTS...............................................34 3.1. Approval of Proposed Hotel Facilities.........................34 3.2. Loan to Value Requirement; Selected Properties................35 3.3. Preparation and Execution of Mortgage Documents...............36 ARTICLE IV CONDITIONS OF LENDING...............................................36 4.1. Conditions Precedent to the Initial Loan......................36 4.2. Conditions Precedent to Each Loan.............................39 i SECTION PAGE ARTICLE V REPRESENTATIONS AND WARRANTIES......................................43 5.1. Existence; Compliance with Law................................43 5.2. Power; Authorization; Enforceable Obligations.................44 5.3. Taxes .......................................................45 5.4. Full Disclosure...............................................46 5.5. Financial Matters.............................................46 5.6. Litigation....................................................47 5.7. Margin Regulations............................................48 5.8. Ownership of Borrower and HRPT Advisors; Subsidiaries...........................................48 5.9. ERISA .......................................................49 5.10. Liens .......................................................50 5.11. [Intentionally Omitted]......................................51 5.12. No Burdensome Restrictions; No Defaults; Contractual Obligations............................................51 5.13. No Investments...............................................51 5.14. Government Regulation........................................51 5.15. Insurance....................................................52 5.16. Employees....................................................52 5.17. Force Majeure................................................52 5.18. Use of Proceeds..............................................53 5.19. Environmental Protection.....................................53 5.20. Contractual Obligations Concerning Assets....................55 5.21. Status as REIT...............................................55 5.22. Real Property................................................55 5.23. Operator and Advisor: Compliance with Law....................58 5.24. Operating Leases, Management Agreement and Advisory Agreement..............................................58 5.25. FF&E Reserves................................................59 ARTICLE VI FINANCIAL COVENANTS.................................................59 6.1. Limitation on Indebtedness....................................60 6.2. Limitation on Secured Indebtedness............................60 6.3. Interest Expense Coverage.....................................60 6.4. Maintenance of Tangible Net Worth.............................60 6.5. Maintenance of Loan to Value Ratio............................60 ARTICLE VII AFFIRMATIVE COVENANTS...............................................60 7.1. Compliance with Laws, Etc.....................................61 7.2. Conduct of Business...........................................61 ii SECTION PAGE 7.3. Payment of Taxes, Etc.........................................61 7.4. Maintenance of Insurance......................................62 7.5. Preservation of Existence, Etc................................62 7.6. Access .......................................................62 7.7. Keeping of Books..............................................63 7.8. Maintenance of Properties, Etc................................63 7.9. Performance and Compliance with Other Covenants...............63 7.10. Application of Proceeds......................................63 7.11. Financial Statements.........................................63 7.12. Reporting Requirements.......................................66 7.13. Leases and Operating Leases..................................69 7.14. [Intentionally Omitted]......................................70 7.15. Employee Plans...............................................70 7.16. [Intentionally Omitted]......................................70 7.17. Fiscal Year..................................................70 7.18. Environmental Matters........................................70 7.19. Appraisals and other Valuations..............................71 7.20. REIT Requirements............................................72 7.21. Maintenance of FF&E Reserves.................................72 7.22. Further Assurances...........................................72 7.23. Amendment to Management Agreement............................72 ARTICLE VIII NEGATIVE COVENANTS..................................................73 8.1. Liens, Etc....................................................73 8.2. Indebtedness..................................................76 8.3. Lease Obligations.............................................77 8.4. [Intentionally Omitted.]......................................77 8.5. Mergers, Stock Issuances, Asset Sales, Etc....................77 8.6. Investments...................................................78 8.7. Change in Nature of Business or Organizational Documents..............................................78 8.8. Modification of Material Agreements...........................79 8.9. Accounting Changes............................................79 8.10. Transactions with Affiliates.................................79 8.11. Environmental Matters........................................80 ARTICLE IX EVENTS OF DEFAULT...................................................80 9.1. Events of Default.............................................80 9.2. Remedies......................................................84 iii SECTION PAGE ARTICLE X MISCELLANEOUS.......................................................85 10.1. Amendments, Etc..............................................85 10.2. Notices, Etc.................................................85 10.3. No Waiver; Remedies..........................................86 10.4. Costs; Expenses; Indemnities.................................86 10.5. Right of Set-off.............................................89 10.6. Binding Effect...............................................89 10.7. Assignments and Participations...............................89 10.8. Governing Law; Severability..................................90 10.9. Submission to Jurisdiction; Service of Process...............91 10.10. Section Titles..............................................91 10.11. Execution in Counterparts...................................91 10.12. Entire Agreement............................................91 10.13. Confidentiality.............................................92 10.14. Waiver of Jury Trial........................................92 10.15. NON-LIABILITY OF TRUSTEES...................................92 iv EX-10.12 4 EXHIBIT 10.12 DLJ MORTGAGE CAPITAL, INC. 277 PARK AVENUE NEW YORK, NEW YORK 10172 November 25, 1996 Hospitality Properties Trust 400 Centre Street Newton, Massachusetts 02158 Attn: Mr. John G. Murray Ladies and Gentlemen: Reference is made to that certain Revolving Credit Agreement dated as of August 22, 1995, as amended and restated pursuant to that certain Amended and Restated Revolving Credit Agreement dated as of December 29, 1995 (as further amended from time to time, the "Credit Agreement"). Capitalized terms used, but not otherwise defined herein, have the meanings ascribed to such terms in the Credit Agreement. As required by Sections 8.1 and 8.2 of the Credit Agreement, the Lender hereby consents to the incurrence of Indebtedness by HPTRI Corporation and HPTWN Corporation, each a Subsidiary of the Borrower, in the aggregate principal amount of $125,000,000 from Hospitality Properties Mortgage Acceptance Corp., or an originator on its behalf (the "Depositor") secured by a first mortgage lien on 18 Residence Inns by Marriott Hotel Facilities and 11 Wyndham Garden Hotel Facilities (each a "Securitized Hotel Facility") and the execution or acquisition by such Subsidiaries of two interest rate cap agreements in connection with such mortgage loan (the "Mortgage Loan"). In addition, Section 1.1 of the Credit Agreement is hereby amended by adding the following proviso to the definition of "Subsidiary": "provided, however, that HPTRI Corporation, a Delaware corporation, and HPTWN Corporation, a Delaware corporation, shall not be considered Subsidiaries of the Borrower for all purposes of this Agreement except (i) for the purposes of Sections 5.9, 5.19, 7.15, 7.18 and 8.11 and any definition used in any of the foregoing Sections but only for the purposes of use in such Sections and (ii) that the annual certification by the independent accountants required by Section 7.11(b) shall continue to be only of the year-end balance sheets and statements of income, retained earnings and cash flow of the Borrower and all Subsidiaries (including HPTRI Corporation and HPTWN Corporation)." Upon the closing of the Mortgage Loan as described in the preliminary private placement memorandum dated October 31, 1996 for the Depositor's Commercial Mortgage Pass-Through Certificates Series 1996-C1, or promptly thereafter, the Lender will execute and deliver to the Borrower, at the Borrower's expense, a release for each Negative Pledge Agreement recorded with respect to a Securitized Hotel Facility in the form attached hereto or in such other form as may be reasonably required by the title insurance company for the Depositor. This consent and amendment does not constitute a waiver or amendment of any other term or condition of the Credit Agreement of any other Loan Document, and all such terms and conditions remain in full force and effect and the Borrower, by its acknowledgment of this letter, hereby ratifies and confirms the same in all respects. DLJ MORTGAGE CAPITAL, INC. By: /s/ N. Dante LaRocca Name: N. Dante LaRocca Title: Senior Vice President AGREED AND ACKNOWLEDGED: HOSPITALITY PROPERTIES TRUST By: /s/ Thomas M. O'Brien Name: Thomas M. O'Brien Title: Treasurer 2 EX-10.19 5 LEASE AGREEMENT DATED AS OF JANUARY __, 1997 BY AND BETWEEN HPTSLC CORPORATION, AS LANDLORD AND WHC SALT LAKE CITY CORPORATION, AS TENANT TABLE OF CONTENTS ARTICLE 1: DEFINITIONS.......................................................1 1.1 Additional Rent ...............................................1 1.2 Additional Charges ............................................1 1.3 Affiliated Person .............................................2 1.4 Agreement .....................................................2 1.5 Applicable Laws ...............................................2 1.6 Award .........................................................2 1.7 Base Total Hotel Sales ........................................3 1.8 Base Year .....................................................3 1.9 Business Day ..................................................3 1.10 Capital Addition ..............................................3 1.11 Capital Expenditure ...........................................4 1.12 Claim .........................................................4 1.13 Code ..........................................................4 1.14 Commencement Date .............................................4 1.15 Condemnation ..................................................4 1.16 Condemnor .....................................................4 1.17 Consolidated Financials .......................................4 1.18 Date of Taking ................................................4 1.19 Default .......................................................4 1.20 Disbursement Rate .............................................4 1.21 Distribution ..................................................5 1.22 Encumbrance ...................................................5 1.23 Entity.........................................................5 1.24 Environment ...................................................5 1.25 Environmental Obligation ......................................5 1.26 Environmental Notice ..........................................5 1.27 Event of Default ..............................................5 1.28 Excess Total Hotel Sales.......................................5 1.29 Extended Terms ................................................5 1.30 FF&E Estimate..................................................5 1.31 FF&E Reserve...................................................5 1.32 Financial Officer's Certificate ...............................5 1.33 Fiscal Year ...................................................6 1.34 Fixed Term ....................................................6 1.35 Fixtures ......................................................6 1.36 GAAP ..........................................................6 1.37 Government Agencies............................................6 1.38 Hazardous Substances ..........................................6 1.39 Hotel .........................................................7 1.40 Hotel Mortgage ................................................7 1.41 Hotel Mortgagee ...............................................7 1.42 Immediate Family...............................................7 1.43 Impositions ...................................................7 1.44 Incidental Documents ..........................................8 1.45 Indebtedness ..................................................8 1.46 Insurance Requirements ........................................9 1.47 Interest Rate..................................................9 1.48 Land ..........................................................9 1.49 Landlord ......................................................9 1.50 Landlord Liens.................................................9 1.51 Lease Year ....................................................9 1.52 Leased Improvements ...........................................9 1.53 Leased Intangible Property ....................................9 -ii- 1.54 Leased Personal Property .....................................10 1.55 Leased Property ..............................................10 1.56 Leasehold Mortgage............................................10 1.57 Leasehold Mortgagee...........................................10 1.58 Legal Requirements ...........................................10 1.59 Lending Institution ..........................................10 1.60 Lien .........................................................10 1.61 Limited Guaranty .............................................11 1.63 Manager ......................................................11 1.64 Minimum Rent .................................................11 1.65 Notice .......................................................11 1.66 Officer's Certificate ........................................11 1.67 Overdue Rate .................................................11 1.68 Parent........................................................11 1.69 Permitted Encumbrances .......................................11 1.70 Permitted Liens ..............................................11 1.71 Permitted Use ................................................11 1.72 Person .......................................................12 1.73 Pledge and Security Agreement.................................12 1.74 Records ......................................................12 1.75 Rent .........................................................12 1.76 SEC ..........................................................12 1.77 Security Deposit..............................................12 1.78 State.........................................................12 1.79 Stock Pledge Agreement .......................................12 1.80 Subordinated Creditor ........................................12 1.81 Subordination Agreement ......................................12 1.82 Subsidiary ...................................................12 1.83 Successor Landlord ...........................................12 1.84 Tangible Net Worth ...........................................12 1.85 Tenant .......................................................13 1.86 Tenant's Personal Property ...................................13 1.87 Term .........................................................13 1.88 Total Hotel Sales.............................................13 1.89 Uniform System of Accounts ...................................14 1.90 Unsuitable for Its Permitted Use .............................14 1.91 Work .........................................................14 1.92 Wyndham ......................................................14 ARTICLE 2: LEASED PROPERTY AND TERM.........................................14 2.1 Leased Property................................................14 2.2 Condition of Leased Property...................................16 2.3 Fixed Term.....................................................16 2.4 Extended Term..................................................16 ARTICLE 3: RENT.............................................................17 3.1 Rent...........................................................17 3.1.1 Minimum Rent........................................17 3.1.2 Additional Rent.....................................18 3.1.3 Additional Charges..................................20 3.2 Late Payment of Rent, Etc......................................22 3.3 Net Lease......................................................23 3.4 No Termination, Abatement, Etc.................................23 3.5 Security Deposit...............................................24 ARTICLE 4: USE OF THE LEASED PROPERTY.......................................25 -iii- 4.1 Permitted Use..................................................25 4.1.1 Permitted Use.......................................25 4.1.2 Necessary Approvals.................................26 4.1.3 Lawful Use, Etc.....................................26 4.2 Compliance with Legal/Insurance Requirements, Etc..............26 4.3 Environmental Matters..........................................26 4.3.1 Restriction on Use, Etc.............................26 4.3.2 Indemnification of Landlord.........................27 4.3.3 Survival............................................28 ARTICLE 5: MAINTENANCE AND REPAIRS..........................................28 5.1 Maintenance and Repair.........................................28 5.1.1 Tenant's General Obligations........................29 5.1.2 FF&E Reserve........................................29 5.1.3 Landlord's Obligations..............................31 5.1.4 Nonresponsibility of Landlord, Etc..................32 5.2 Tenant's Personal Property.....................................32 5.3 Yield Up.......................................................33 5.4 Management Agreement...........................................33 ARTICLE 6: IMPROVEMENTS, ETC................................................34 6.1 Improvements to the Leased Property. .........................34 6.2 Improvement Advances...........................................35 6.3 Improvements Financed by Landlord..............................36 6.4 Salvage........................................................36 ARTICLE 7: LIENS............................................................36 7.1 Liens..........................................................36 7.2 Landlord's Lien................................................37 ARTICLE 8: PERMITTED CONTESTS...............................................37 ARTICLE 9: INSURANCE AND INDEMNIFICATION....................................38 9.1 General Insurance Requirements.................................38 9.2 Replacement Cost...............................................39 9.3 Waiver of Subrogation..........................................40 9.4 Form Satisfactory, Etc.........................................40 9.5 Blanket Policy.................................................41 9.6 No Separate Insurance..........................................41 9.7 Indemnification of Landlord....................................41 ARTICLE 10: CASUALTY........................................................42 10.1 Insurance Proceeds............................................42 10.2 Damage or Destruction.........................................42 10.2.1 Damage or Destruction of Leased Property..........42 10.2.2 Partial Damage or Destruction.....................43 10.2.3 Insufficient Insurance Proceeds...................43 10.2.4 Disbursement of Proceeds..........................43 -iv- 10.3 Damage Near End of Term.......................................44 10.4 Tenant's Property.............................................45 10.5 Restoration of Tenant's Property..............................45 10.6 No Abatement of Rent..........................................45 10.7 Waiver........................................................45 ARTICLE 11: CONDEMNATION....................................................45 11.1 Total Condemnation, Etc.......................................45 11.2 Partial Condemnation..........................................46 11.3 Abatement of Rent.............................................47 11.4 Temporary Condemnation........................................47 11.5 Allocation of Award...........................................48 ARTICLE 12: DEFAULTS AND REMEDIES...........................................48 12.1 Events of Default.............................................48 12.2 Remedies......................................................51 12.3 Tenant's Waiver...............................................52 12.4 Application of Funds..........................................52 12.5 Landlord's Right to Cure Tenant's Default.....................52 ARTICLE 13: HOLDING OVER....................................................53 ARTICLE 14: LANDLORD'S NOTICE OBLIGATIONS; LANDLORD DEFAULT.................53 14.1 Landlord Notice Obligation....................................53 14.2 Landlord's Default............................................53 ARTICLE 15: PURCHASE RIGHTS.................................................54 15.1 First Refusal to Purchase.....................................54 15.2 Landlord's Option to Purchase the Tenant's Personal Property; Transfer of Licenses...........55 ARTICLE 16: SUBLETTING AND ASSIGNMENT.......................................56 16.1 Subletting and Assignment.....................................56 16.2 Required Sublease Provisions..................................57 16.3 Permitted Sublease............................................58 16.4 Sublease Limitation...........................................58 ARTICLE 17: ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS..................58 17.1 Estoppel Certificates.........................................58 17.2 Financial Statements..........................................59 17.3 General Operations............................................60 ARTICLE 18: LANDLORD'S RIGHT TO INSPECT.....................................60 ARTICLE 19: LEASEHOLD MORTGAGES.............................................61 19.1 Leasehold Mortgages Authorized................................61 19.2 Notices to Landlord...........................................61 19.3 Cure by Leasehold Mortgagee...................................61 19.4 Landlord Estoppel Certificates. .............................62 -v- ARTICLE 20: HOTEL MORTGAGES.................................................62 20.1 Landlord May Grant Liens......................................62 20.2 Subordination of Lease........................................62 20.3 Notice to Mortgagee and Superior Landlord.....................64 ARTICLE 21: ADDITIONAL COVENANTS OF TENANT..................................64 21.1 Prompt Payment of Indebtedness................................64 21.2 Conduct of Business...........................................65 21.3 Maintenance of Accounts and Records...........................65 21.4 Notice of Litigation, Etc.....................................65 21.5 Indebtedness of Tenant........................................65 21.6 Financial Condition of Tenant.................................66 21.7 Distributions, Payments to Affiliated Persons, Etc......................................66 21.8 Prohibited Transactions.......................................67 21.9 Liens and Encumbrances........................................67 21.10 Merger; Sale of Assets; Etc..................................67 ARTICLE 22: REPRESENTATIONS AND WARRANTIES..................................68 22.1 Representations of Tenant.....................................68 22.1.1 Status and Authority of Tenant....................68 22.1.2 Action of Tenant..................................68 22.1.3 No Violations of Agreements.......................68 22.1.4 Litigation........................................68 22.1.5 Existing Leases, Agreements, Etc..................69 22.1.6 Disclosure........................................69 22.1.7 Utilities, Etc....................................69 22.1.8 Compliance With Law...............................69 22.1.9 Hazardous Substances..............................69 22.2 Representations of Landlord...................................70 22.2.1 Status and Authority of Landlord..................70 22.2.2 Action of Landlord................................70 22.2.3 No Violations of Agreements.......................70 22.2.4 Litigation........................................70 22.3 Survival, Etc.................................................70 ARTICLE 23: MISCELLANEOUS...................................................71 23.1 Limitation on Payment of Rent.................................71 23.2 No Waiver.....................................................72 23.3 Remedies Cumulative...........................................72 23.4 Severability..................................................72 23.5 Acceptance of Surrender.......................................72 23.6 No Merger of Title............................................72 23.7 Conveyance by Landlord........................................72 23.8 Quiet Enjoyment...............................................73 23.9 Memorandum of Lease...........................................73 23.10 Notices.......................................................73 23.11 Trade Area Restriction........................................75 23.12 Construction..................................................75 23.13 Counterparts; Headings........................................75 -vi- 23.14 Applicable Law, Etc...........................................75 23.15 Special Landlord Option.......................................76 23.16 Nonrecourse. ................................................77 23.17 Confidentiality...............................................77 EXHIBITS A - The Land B - Approved Budget and Improvements C - Form of Landlord Estoppel D - Restricted Trade Area E - Rent Allocation LEASE AGREEMENT THIS LEASE AGREEMENT is entered into as of this ___ day of January, 1997, by and between HPTSLC CORPORATION, a Delaware corporation, as landlord ("Landlord"), and WHC SALT LAKE CITY CORPORATION, a Delaware corporation, as tenant ("Tenant"). W I T N E S S E T H : WHEREAS, Landlord owns fee simple title to the Leased Property (this and other capitalized terms used and not otherwise defined herein having the meanings ascribed to such terms in Article 1); and WHEREAS, Landlord wishes to lease the Leased Property to Tenant and Tenant wishes to lease the Leased Property from Landlord, all subject to and upon the terms and conditions herein set forth; NOW, THEREFORE, in consideration of the mutual covenants herein contained and other good and valuable consideration, the mutual receipt and legal sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree as follows: ARTICLE 1 DEFINITIONS For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, (i) the terms defined in this Article shall have the meanings assigned to them in this Article and include the plural as well as the singular, (ii) all accounting terms not otherwise defined herein shall have the meanings assigned to them in accordance with GAAP, (iii) all references in this Agreement to designated "Articles," "Sections" and other subdivisions are to the designated Articles, Sections and other subdivisions of this Agreement, and (iv) the words "herein," "hereof," "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision. 1.1 "Additional Rent" shall have the meaning given such term in Section 3.1.2(a). 1.2 "Additional Charges" shall have the meaning given such term in Section 3.1.3. -2- 1.3 "Affiliated Person" shall mean, with respect to any Person, (a) in the case of any such Person which is a partnership, any partner in such partnership, (b) in the case of any such Person which is a limited liability company, any member of such company, (c) any other Person which is a Parent, a Subsidiary, or a Subsidiary of a Parent with respect to such Person or to one or more of the Persons referred to in the preceding clauses (a) and (b), (d) any other Person who is an officer, director, trustee or employee of, or partner in or member of, such Person or any Person referred to in the preceding clauses (a), (b) and (c), and (e) any other Person who is a member of the Immediate Family of such Person or of any Person referred to in the preceding clauses (a) through (d). 1.4 "Agreement" shall mean this Lease Agreement, including Exhibits A to D hereto, as it and they may be amended from time to time as herein provided. 1.5 "Applicable Laws" shall mean all applicable laws, statutes, regulations, rules, ordinances, codes, licenses, permits and orders, from time to time in existence, of all courts of competent jurisdiction and Government Agencies, and all applicable judicial and administrative and regulatory decrees, judgments and orders, including common law rulings and determinations, relating to injury to, or the protection of, real or personal property or human health (except those requirements which, by definition, are solely the responsibility of employers) or the Environment, including, without limitation, all valid and lawful requirements of courts and other Government Agencies pertaining to reporting, licensing, permitting, investigation, remediation and removal of underground improvements (including, without limitation, treatment or storage tanks, or water, gas or oil wells), or emissions, discharges, releases or threatened releases of Hazardous Substances, chemical substances, pesticides, petroleum or petroleum products, pollutants, contaminants or hazardous or toxic substances, materials or wastes whether solid, liquid or gaseous in nature, into the Environment, or relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Substances, underground improvements (including, without limitation, treatment or storage tanks, or water, gas or oil wells), or pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, liquid or gaseous in nature. 1.6 "Award" shall mean all compensation, sums or other value awarded, paid or received by virtue of a total or partial Condemnation of the Leased Property (after deduction of all reasonable legal fees and other reasonable costs and expenses, including, without limitation, expert witness fees, incurred by Landlord, in connection with obtaining any such award). -3- 1.7 "Base Total Hotel Sales" shall mean Total Hotel Sales for the Base Year; provided, however, that in the event that, with respect to any Lease Year, or portion thereof, for any reason (including, without limitation, a casualty or Condemnation) there shall be, for two hundred seventy (270) days or more in any Lease Year, a reduction in the number of rooms at the Hotel or a change in the services provided at the Hotel (including, without limitation, closing of restaurants or the discontinuation of food or beverage services) from the number of rooms or the services provided during the Base Year, in determining Additional Rent payable with respect to such Lease Year, Base Total Hotel Sales shall be reduced as follows: (a) in the event of and for the duration of a complete closing of the Hotel following application of any business interruption or Award proceeds collected with respect thereto, Total Hotel Sales during the applicable period of the Base Year throughout the period of such closing shall be subtracted from Base Total Hotel Sales; (b) in the event of a partial closing of the Hotel affecting any number of guest rooms in the Hotel and following application of any business interruption or Award proceeds collected with respect thereto, Total Hotel Sales attributable to guest room occupancy or guest room services at the Hotel during the Base Year shall be ratably allocated among all guest rooms in service at the Hotel during the Base Year and all such Total Hotel Sales attributable to rooms no longer in service shall be subtracted from Base Total Hotel Sales throughout the period of such closing; (c) in the event of a closing of a restaurant not, simultaneously with such closing, replaced by reasonably equivalent dining facilities and following application of any business interruption or Award proceeds collected with respect thereto, all Total Hotel Sales attributable to such restaurant during the Base Year shall be subtracted from Base Total Hotel Sales throughout the period of such closing; and (d) in the event of any other change in circumstances affecting the Hotel, Base Total Hotel Sales shall be equitably adjusted in such manner as Landlord and Tenant shall reasonably agree. 1.8 "Base Year" shall mean, with respect to the 1998 Fiscal Year, the 1997 calendar year and, with respect to all subsequent years, the 1998 calendar year. 1.9 "Business Day" shall mean any day other than Saturday, Sunday, or any other day on which banking institutions in The Commonwealth of Massachusetts or the State of Texas are authorized by law or executive action to close. 1.10 "Capital Addition" shall mean any renovation, repair or improvement to the Leased Property (or portion thereof), the cost of which constitutes a Capital Expenditure. 1.11 "Capital Expenditure" shall mean any expenditure treated as capital in nature in accordance with GAAP. -4- 1.12 "Claim" shall have the meaning given such term in Article 8. 1.13 "Code" shall mean the Internal Revenue Code of 1986 and, to the extent applicable, the Treasury Regulations promulgated thereunder, each as from time to time amended. 1.14 "Commencement Date" shall mean the date of this Agreement. 1.15 "Condemnation" shall mean (a) the exercise of any governmental power with respect to the Leased Property, whether by legal proceedings or otherwise, by a Condemnor of its power of condemnation, (b) a voluntary sale or transfer of the Leased Property by Landlord to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending, or (c) a taking or voluntary conveyance of all or part of the Leased Property, or any interest therein, or right accruing thereto or use thereof, as the result 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. 1.16 "Condemnor" shall mean any public or quasi-public authority, or private corporation or Person, having the power of Condemnation. 1.17 "Consolidated Financials" shall mean, for any Fiscal Year or other accounting period of Tenant, annual audited and quarterly unaudited financial statements of Wyndham prepared on a consolidated basis, including Wyndham's consolidated balance sheet and the related statements of income and cash flows, all in reasonable detail, and setting forth in comparative form the corresponding figures for the corresponding period in the preceding Fiscal Year, and prepared in accordance with GAAP throughout the periods reflected. 1.18 "Date of Taking" shall mean the date the Condemnor has the right to possession of the Leased Property, or any portion thereof, in connection with a Condemnation. 1.19 "Default" shall mean any event or condition which with the giving of notice and/or lapse of time may ripen into an Event of Default. 1.20 "Disbursement Rate" shall mean an annual rate of interest equal to the greater of, as of the date of determination, (i) the Interest Rate and (ii) the per annum rate for ten (10) year U.S. Treasury Obligations as published in The Wall Street Journal plus three hundred fifty (350) basis points. -5- 1.21 "Distribution" shall mean (a) any declaration or payment of any dividend (except dividends payable in common stock of Tenant) on or in respect of any shares of any class of capital stock of Tenant, (b) any purchase, redemption, retirement or other acquisition of any shares of any class of capital stock of a corporation, (c) any other distribution on or in respect of any shares of any class of capital stock of a corporation, or (d) any return of capital to shareholders. 1.22 "Encumbrance" shall have the meaning given such term in Section 20.1. 1.23 "Entity" shall mean any corporation, general or limited partnership, limited liability company or partnership, stock company or association, joint venture, association, company, trust, bank, trust company, land trust, business trust, cooperative, any government or agency or political subdivision thereof or any other entity. 1.24 "Environment" shall mean soil, surface waters, ground waters, land, stream, sediments, surface or subsurface strata and ambient air. 1.25 "Environmental Obligation" shall have the meaning given such term in Section 4.3.1. 1.26 "Environmental Notice" shall have the meaning given such term in Section 4.3.1. 1.27 "Event of Default" shall have the meaning given such term in Section 12.1. 1.28 "Excess Total Hotel Sales" shall mean, with respect to any Lease Year, or portion thereof, the amount of Total Hotel Sales for such Lease Year, or portion thereof, in excess of Base Total Hotel Sales for the equivalent period. 1.29 "Extended Terms" shall have the meaning given such term in Section 2.4. 1.30 "FF&E Estimate" shall have the meaning given such term in Section 5.1.2(c). 1.31 "FF&E Reserve" shall have the meaning given such term in Section 5.1.2(a). 1.32 "Financial Officer's Certificate" shall mean, as to any Person, a certificate of the chief financial officer or chief accounting officer (or such officers' authorized designee) of such Person, duly authorized, accompanying the financial statements required to be delivered by such Person pursuant to Section 17.2, in which such officer shall certify (a) that such -6- statements have been properly prepared in accordance with GAAP and are true, correct and complete in all material respects and fairly present the consolidated financial condition of such Person at and as of the dates thereof and the results of its and their operations for the periods covered thereby, and (b) certify that no Event of Default has occurred and is continuing hereunder. 1.33 "Fiscal Year" shall mean the calendar year. 1.34 "Fixed Term" shall have the meaning given such term in Section 2.3. 1.35 "Fixtures" shall have the meaning given such term in Section 2.1(d). 1.36 "GAAP" shall mean generally accepted accounting principles consistently applied. 1.37 "Government Agencies" shall mean any court, agency, authority, board (including, without limitation, environmental protection, planning and zoning), bureau, commission, department, office or instrumentality of any nature whatsoever of any governmental or quasi-governmental unit of the United States or the State or any county or any political subdivision of any of the foregoing, whether now or hereafter in existence, having jurisdiction over Tenant or the Leased Property or any portion thereof or the Hotel operated thereon. 1.38 "Hazardous Substances" shall mean any substance: (a) the presence of which requires or may hereafter require notification, investigation or remediation under any federal, state or local statute, regulation, rule, ordinance, order, action or policy; or (b) which is or becomes defined as a "hazardous waste", "hazardous material" or "hazardous substance" or "pollutant" or "contaminant" under any present or future federal, state or local statute, regulation, rule or ordinance or amendments thereto including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. et seq.) and the Resource Conservation and Recovery Act (42 U.S.C. section 6901 et seq.) and the regulations promulgated thereunder; or (c) which is toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise hazardous and is or becomes regulated by any governmental authority, agency, department, commission, board, agency or instrumentality of the United States, any -7- state of the United States, or any political subdivision thereof; or (d) the presence of which on the Leased Property causes or materially threatens to cause an unlawful nuisance upon the Leased Property or to adjacent properties or poses or materially threatens to pose a hazard to the Leased Property or to the health or safety of persons on or about the Leased Property; or (e) without limitation, which contains gasoline, diesel fuel or other petroleum hydrocarbons or volatile organic compounds; or (f) without limitation, which contains polychlorinated biphenyls (PCBs) or asbestos or urea formaldehyde foam insulation; or (g) without limitation, which contains or emits radioactive particles, waves or material; or (h) without limitation, constitutes materials which are now or may hereafter be subject to regulation pursuant to the Material Waste Tracking Act of 1988, or any Applicable Laws promulgated by any Government Agencies. 1.39 "Hotel" shall mean the hotel to be operated on the Leased Property as a full-service Wyndham Hotel as of the Commencement Date. 1.40 "Hotel Mortgage" shall mean any Encumbrance placed upon the Leased Property in accordance with Article 20. 1.41 "Hotel Mortgagee" shall mean the holder of any Hotel Mortgage. 1.42 "Immediate Family" shall mean, with respect to any individual, such individual's spouse, parents, brothers, sisters, children (natural or adopted), stepchildren, grandchildren, grandparents, parents-in-law, brothers-in-law, sisters-in-law, nephews and nieces. 1.43 "Impositions" shall mean collectively, all taxes (including, without limitation, all taxes imposed under the laws of the State, as such laws may be amended from time to time, and all ad valorem, sales and use, or similar taxes as the same relate to or are imposed upon Landlord, Tenant or the 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), water, sewer or other rents and charges, excises, tax levies, fees (including, without limitation, license, permit, -8- 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 Tenant (including all interest and penalties thereon due to any failure in payment by Tenant), which at any time prior to, during or in respect of the Term hereof may be assessed or imposed on or in respect of or be a lien upon (a) Landlord'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 Tenant; provided, however, that nothing contained herein shall be construed to require Tenant to pay (i) any tax based on net income imposed on Landlord, (ii) any net revenue tax of Landlord, (iii) any transfer fee or other tax imposed with respect to the sale, exchange or other disposition by Landlord of the Leased Property or the proceeds thereof, (iv) any single business, gross receipts tax, transaction privilege, rent or similar taxes as the same relate to or are imposed upon Landlord, (v) any interest or penalties imposed on Landlord as a result of the failure of Landlord to file any return or report timely and in the form prescribed by law or to pay any tax or imposition, except to the extent such failure is a result of a breach by Tenant of its obligations pursuant to Section 3.1.3, (vi) any Impositions imposed on Landlord that are a result of Landlord not being considered a "United States person" as defined in Section 7701(a)(30) of the Code, (vii) any Impositions that are enacted or adopted by their express terms as a substitute for any tax that would not have been payable by Tenant pursuant to the terms of this Agreement or (viii) any Impositions imposed as a result of a breach of covenant or representation by Landlord in any agreement governing Landlord's conduct or operation or as a result of the gross negligence or willful misconduct of Landlord. 1.44 "Incidental Documents" shall mean the Pledge and Security Agreement, the Stock Pledge Agreement and the Limited Guaranty. 1.45 "Indebtedness" shall mean all obligations, contingent or otherwise, which in accordance with GAAP should be reflected on the obligor's balance sheet as liabilities. 1.46 "Insurance Requirements" shall mean all terms of any insurance policy required by this Agreement and all requirements of the issuer of any such policy and all orders, rules and regulations and any other requirements of the National Board of Fire Underwriters (or any other body exercising similar functions) binding upon Landlord, Tenant or the Leased Property. -9- 1.47 "Interest Rate" shall mean ten percent (10%) per annum. 1.48 "Land" shall have the meaning given such term in Section 2.1(a). 1.49 "Landlord" shall have the meaning given such term in the preambles to this Agreement and shall also include its permitted successors and assigns. 1.50 "Landlord Liens" shall mean liens on or against the Leased Property or any payment of Rent (a) which result from any act of, or any claim against, Landlord or any owner of a direct or indirect interest in the Leased Property, or which result from any violation by Landlord of any terms of this Agreement or the Purchase Agreement, or (b) which result from liens in favor of any taxing authority by reason of any tax owed by Landlord or any fee owner of a direct or indirect interest in the Leased Property; provided, however, that "Landlord Lien" shall not include any lien resulting from any tax for which Tenant is obligated to pay or indemnify Landlord against until such time as Tenant shall have already paid to or on behalf of Landlord the tax or the required indemnity with respect to the same. 1.51 "Lease Year" shall mean any Fiscal Year or portion thereof, commencing with the 1997 Fiscal Year, during the Term. 1.52 "Leased Improvements" shall have the meaning given such term in Section 2.1(b). 1.53 "Leased Intangible Property" shall mean all hotel licensing agreements and other service contracts, equipment leases, booking agreements and other arrangements or agreements affecting the ownership, repair, maintenance, management, leasing or operation of the Leased Property to which Landlord is a party; all books, records and files relating to the leasing, maintenance, management or operation of the Leased Property belonging to Landlord; all transferable or assignable permits, certificates of occupancy, operating permits, sign permits, development rights and approvals, certificates, licenses, warranties and guarantees, rights to deposits, trade names, service marks, telephone exchange numbers identified with the Leased Property, and all other transferable intangible property, miscellaneous rights, benefits and privileges of any kind or character belonging to Landlord with respect to the Leased Property. 1.54 "Leased Personal Property" shall have the meaning given such term in Section 2.1(e). 1.55 "Leased Property" shall have the meaning given such term in Section 2.1. -10- 1.56 "Leasehold Mortgage" shall mean a mortgage, a deed to secure debt, or other security instrument by which the leasehold estate or any other rights of Tenant (including, without limitation, rights created by this Agreement) is mortgaged, conveyed, assigned, or otherwise transferred by Tenant, to secure a loan or loans obtained, or obligations incurred or guaranteed, by Tenant to a Lending Institution. 1.57 "Leasehold Mortgagee" shall mean the holder of any Leasehold Mortgage. 1.58 "Legal Requirements" shall mean all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting the Leased Property or the maintenance, construction, alteration or operation thereof, whether now or hereafter enacted or in existence, including, without limitation, (a) all permits, licenses, authorizations, certificates and regulations necessary to operate the Leased Property for its Permitted Use, and (b) all covenants, agreements, restrictions and encumbrances contained in any instruments at any time in force affecting the Leased Property, including those which may (i) require material repairs, modifications or alterations in or to the Leased Property or (ii) in any way materially and adversely affect the use and enjoyment thereof, but excluding any requirements arising as a result of Landlord's status as a real estate investment trust. 1.59 "Lending Institution" shall mean any United States insurance company, banking corporation, federally insured commercial or savings bank, national banking association, United States 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 $100,000,000 and shall also mean and include Bankers Trust Company and any Person participating in a loan syndicate with Bankers Trust Company. 1.60 "Lien" shall mean any mortgage, security interest, pledge, collateral assignment, or other encumbrance, lien or charge of any kind, or any transfer of property or assets for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to payment of its general creditors. 1.61 "Limited Guaranty" shall mean the Limited Guaranty Agreement, dated as of the date hereof, made by Wyndham for the benefit of Landlord. -11- 1.62 "Management Agreement" shall mean the Management Agreement, dated the date hereof, between Tenant and Wyndham, together with all amendments, modifications and supplements thereto. 1.63 "Manager" shall mean Wyndham Management Corporation, a Delaware corporation, and its permitted successors and assigns. 1.64 "Minimum Rent" shall mean, with respect to each calendar year, the sum of Four Million Four Hundred Thousand and Four Dollars ($4,400,004), allocated as set forth in Exhibit E. 1.65 "Notice" shall mean a notice given in accordance with Section 22.10. 1.66 "Officer's Certificate" shall mean a certificate signed by an officer of the certifying Entity duly authorized by the board of directors of the certifying Entity. 1.67 "Overdue Rate" shall mean, on any date, a per annum rate of interest equal to the lesser of fifteen percent (15%) and the maximum rate then permitted under applicable law. 1.68 "Parent" shall mean, with respect to any Person, any Person which owns directly, or indirectly through one or more Subsidiaries or Affiliated Persons, five percent (5%) or more of the voting or beneficial interest in, or otherwise has the right or power (whether by contract, through ownership of securities or otherwise) to control, such Person. 1.69 "Permitted Encumbrances" shall mean all rights, restrictions, and easements of record set forth on Schedule B to the owner's title insurance policy issued to Landlord on the date hereof, plus any other such encumbrances as may have been consented to in writing by Landlord from time to time. 1.70 "Permitted Liens" shall mean any Liens granted in accordance with Section 21.9(a). 1.71 "Permitted Use" shall mean any use of the Leased Property permitted pursuant to Section 4.1.1. 1.72 "Person" shall mean any individual or Entity, and the heirs, executors, administrators, legal representatives, successors and assigns of such Person where the context so admits. 1.73 "Pledge and Security Agreement" shall mean the Pledge and Security Agreement, dated as of the date hereof, made by Tenant for the benefit of Landlord. -12- 1.74 "Records" shall have the meaning given such term in Section 7.2. 1.75 "Rent" shall mean, collectively, the Minimum Rent, Additional Rent and Additional Charges. 1.76 "SEC" shall mean the Securities and Exchange Commission. 1.77 "Security Deposit" shall mean a cash amount equal to Four Million Seven Hundred Twenty-Five Thousand Dollars ($4,725,000). 1.78 "State" shall mean the State of Utah. 1.79 "Stock Pledge Agreement" shall mean the Stock Pledge Agreement, dated as of the date hereof, made by Wyndham to Landlord with respect to the stock of Tenant. 1.80 "Subordinated Creditor" shall mean any creditor of Tenant which is a party to a Subordination Agreement in favor of Landlord. 1.81 "Subordination Agreement" shall mean any agreement executed by a Subordinated Creditor pursuant to which the payment and performance of Tenant's obligations to such Subordinated Creditor are subordinated to the payment and performance of Tenant's obligations to Landlord under this Agreement. 1.82 "Subsidiary" shall mean, with respect to any Person, any Entity (a) in which such Person owns directly, or indirectly through one or more Subsidiaries, forty-nine percent (49%) or more of the voting or beneficial interest or (b) which such Person otherwise has the right or power to control (whether by contract, through ownership of securities or otherwise). 1.83 "Successor Landlord" shall have the meaning given such term in Section 20.2. 1.84 "Tangible Net Worth" shall mean 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) goodwill, organizational expenses, research and development expenses, trademarks, trade names, copyrights, patents, patent applications, licenses and rights in any thereof, and other similar intangibles; (b) all deferred charges or unamortized debt discount and expense; (c) all reserves carried and not deducted from assets; (d) treasury stock and capital stock, obligations or other securities of, or capital contributions to, or investments in, any Subsidiary; (e) securities which are not readily marketable; (f) any write-up in the book value of any asset -13- resulting from a revaluation thereof subsequent to the Commencement Date; (g) deferred gain; and (h) any items not included in clauses (a) through (g) above that are treated as intangibles in conformity with GAAP; and excluding, however, from the determination of total liabilities deferred fees payable to the Manager in accordance with the Management Agreement. 1.85 "Tenant" shall have the meaning given such term in the preambles to this Agreement and shall also include its permitted successors and assigns. 1.86 "Tenant's Personal Property" shall mean all motor vehicles and consumable inventory and supplies, furniture, furnishings, movable walls and partitions, equipment and machinery and all other tangible personal property of Tenant, if any, acquired by Tenant on and after the date hereof and located at the Leased Property or used in Tenant's business at the Leased Property and all modifications, replacements, alterations and additions to such personal property installed at the expense of Tenant, other than any items included within the definition of Fixtures or Leased Personal Property. 1.87 "Term" shall mean, collectively, the Fixed Term and the Extended Terms, to the extent properly exercised pursuant to the provisions of Section 2.4, unless sooner terminated pursuant to the provisions of this Agreement. 1.88 "Total Hotel Sales" shall mean, for each Fiscal Year during the Term, all revenues and receipts of every kind derived by Tenant from operating the Leased Property and parts thereof, including, but not limited to: income (from both cash and credit transactions), after deductions for bad debts, and discounts for prompt or cash payments and refunds, from rental of rooms, stores, offices, meeting, exhibit or sales space of every kind; license, lease and concession fees and rentals (not including gross receipts of licensees, lessees and concessionaires); income from vending machines; health club membership fees; food and beverage sales; wholesale and retail sales of merchandise (other than proceeds from the sale of furnishings, fixture and equipment no longer necessary to the operation of the Hotel, which shall be deposited in the FF&E Reserve); service charges, to the extent not distributed to the employees at the Hotel as gratuities; and proceeds, if any, from business interruption or other loss of income insurance; provided, however, that Total Hotel Sales shall not include the following: gratuities to Hotel employees; federal, state or municipal excise, sales, use or similar taxes collected directly from patrons or guests or included as part of the sales price of any goods or services; insurance proceeds (other than proceeds from business interruption or other loss of income insurance); Award proceeds (other than for a temporary Condemnation); any proceeds from any sale of the Leased Property or from the refinancing of any debt encumbering the Leased -14- Property; proceeds from the disposition of furnishings, fixture and equipment no longer necessary for the operation of the Hotel; interest which accrues on amounts deposited in the FF&E Reserve; and recoveries against predecessors in title to the extent such recoveries are compensation attributable to items not otherwise includable in the calculation of Total Hotel Sales. 1.89 "Uniform System of Accounts" shall mean A Uniform System of Accounts for Hotels, Eighth Revised Edition, 1986, as published by the Hotel Association of New York City, as the same may be further revised from time to time. 1.90 "Unsuitable for Its Permitted Use" shall mean a state or condition of the Hotel such that (a) following any damage or destruction involving the Hotel, the Hotel cannot be operated in the good faith judgment of Tenant on a commercially practicable basis for its Permitted Use and it cannot reasonably be expected to be restored to substantially the same condition as existed immediately before such damage or destruction, and as otherwise required by Section 10.2.4, within twelve (12) months following such damage or destruction or such shorter period of time as to which business interruption insurance is available to cover Rent and other costs related to the Leased Property following such damage or destruction, or (b) as the result of a partial taking by Condemnation, the Hotel cannot be operated, in the good faith judgment of Tenant or the Manager on a commercially practicable basis for its Permitted Use. 1.91 "Work" shall have the meaning given such term in Section 10.2.4. 1.92 "Wyndham" shall mean Wyndham Hotel Corporation, a Delaware corporation. ARTICLE 2 LEASED PROPERTY AND TERM 2.1 Leased Property. Upon and subject to the terms and conditions hereinafter set forth, Landlord leases to Tenant and Tenant leases from Landlord all of Landlord's right, title and interest in and to all of the following (collectively, the "Leased Property"): (a) those certain tracts, pieces and parcels of land, as more particularly described in Exhibit A, attached hereto and made a part hereof (the "Land"); (b) all buildings, structures and other improvements of every kind including, but not limited to, alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines (on-site and off-site), parking areas and roadways appurtenant to such buildings and structures presently -15- 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, now or 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 maximum extent permitted by law, are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto, but specifically excluding all items included within the category of Tenant's Personal Property (collectively, the "Fixtures"); (e) all machinery, equipment, furniture, furnishings, moveable walls or partitions, computers or trade fixtures or other personal property of any kind or description used or useful in Tenant's business on or in the Leased Improvements, and located on or in the Leased Improvements, and all modifications, replacements, alterations and additions to such personal property, except items, if any, included within the category of Fixtures, but specifically excluding all items included within the category of Tenant's Personal Property (collectively, the "Leased Personal Property"); (f) all of the Leased Intangible Property; and (g) any and all leases of space (including any security deposits held by Tenant or the Manager pursuant thereto) in the Leased Improvements to tenants thereof. 2.2 Condition of Leased Property. Tenant acknowledges receipt and delivery of possession of the Leased Property and Tenant accepts the Leased Property in its "as is" condition, subject to the rights of parties in possession, the existing state of title, including all covenants, conditions, restrictions, reservations, mineral leases, easements and other matters of record or that are visible or apparent on the Leased Property, all applicable Legal Requirements, the lien of any financing instruments, mortgages and deeds of trust existing prior to the Commencement Date or permitted by the terms of this Agreement, and such other matters which would be disclosed by an inspection of the Leased Property and the record title thereto or -16- by an accurate survey thereof. TENANT REPRESENTS THAT IT HAS INSPECTED THE LEASED PROPERTY AND ALL OF THE FOREGOING AND HAS FOUND THE CONDITION THEREOF SATISFACTORY AND IS NOT RELYING ON ANY REPRESENTATION OR WARRANTY OF LANDLORD OR LANDLORD'S AGENTS OR EMPLOYEES WITH RESPECT THERETO AND TENANT WAIVES ANY CLAIM OR ACTION AGAINST LANDLORD IN RESPECT OF THE CONDITION OF THE LEASED PROPERTY. LANDLORD 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 TENANT. To the maximum extent permitted by law, however, Landlord hereby assigns to Tenant all of Landlord's rights to proceed against any predecessor in title for breaches of warranties or representations or for latent defects in the Leased Property. Landlord shall fully cooperate with Tenant in the prosecution of any such claims, in Landlord's or Tenant's name, all at Tenant's sole cost and expense. Tenant shall indemnify, defend, and hold harmless Landlord from and against any loss, cost, damage or liability (including reasonable attorneys' fees) incurred by Landlord in connection with such cooperation. 2.3 Fixed Term. The initial term of this Agreement (the "Fixed Term") shall commence on the Commencement Date and shall expire December 31, 2012. 2.4 Extended Term. Provided that no Event of Default shall have occurred and be continuing, this Agreement shall be in full force and effect, the Term shall be automatically extended for four (4) consecutive renewal terms of twelve (12) years each (collectively, the "Extended Terms"), unless Tenant shall give Landlord Notice, not later than two (2) years prior to the scheduled expiration of the then current Term of this Agreement (Fixed or Extended, as the case may be), that Tenant elects not so to extend the term of this Agreement (and time shall be of the essence with respect to the giving of such Notice). Each Extended Term shall commence on the day succeeding the expiration of the Fixed Term or the preceding Extended Term, as the case may be. All of the terms, covenants and provisions of this Agreement shall apply to each such Extended Term, except that Tenant shall have no right to extend the Term beyond the expiration of the Extended Terms. If Tenant shall give Notice that it elects not to extend the Term in accordance with this Section 2.4, this Agreement shall automatically terminate at the end of the Term then in effect and Tenant shall have no further option to extend the Term of this Agreement. Otherwise, the extension of this Agreement shall be automatically effected without the execution of any additional documents; it being understood and agreed, however, that Tenant and Landlord shall -17- execute such documents and agreements as either party shall reasonably require to evidence the same. ARTICLE 3 RENT 3.1 Rent. Tenant shall pay, in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, without offset, abatement, demand or deduction (unless otherwise expressly provided in this Agreement), Minimum Rent and Additional Rent to Landlord and Additional Charges to the party to whom such Additional Charges are payable, during the Term. All payments to Landlord shall be made by wire transfer of immediately available federal funds or by other means acceptable to Landlord in its sole discretion. Rent for any partial Accounting Period shall be prorated on a per diem basis. 3.1.1 Minimum Rent. (a) Minimum Rent shall be paid in advance on the first Business Day of each month; provided, however, that the first payment of Minimum Rent shall be payable on the Commencement Date (and, if applicable, such payment shall be prorated as provided in the last sentence of the first paragraph of Section 3.1). (b) Adjustments of Minimum Rent Following Disbursements Under Sections 5.1.3(b), 10.2.4 or 11.2. Effective on the date of each disbursement to pay for the cost of any repairs, maintenance, renovations or replacements pursuant to Sections 5.1.3(b), 10.2.4 or 11.2, the Minimum Rent shall be increased by a per annum amount equal to the Disbursement Rate times the amount so disbursed. If any such disbursement is made during any month on a day other than the first day of a month, Tenant shall pay to Landlord on the first day of the immediately following month (in addition to the amount of Minimum Rent payable with respect to such month, as adjusted pursuant to this paragraph (b)) the amount by which Minimum Rent for the preceding month, as adjusted for such disbursement on a per diem basis, exceeded the amount of Minimum Rent paid by Tenant for such preceding month. (c) Adjustments of Minimum Rent Following Disbursements Under Section 6.2. Effective on the date of each disbursement to pay for the cost of any repairs, maintenance, renovations or replacements pursuant to Section 6.2, the Minimum Rent shall be increased by a per annum amount equal to the Interest Rate times the amount so -18- disbursed. If any such disbursement is made during any month on a day other than the first day of a month, Tenant shall pay to Landlord on the first day of the immediately following month (in addition to the amount of Minimum Rent payable with respect to such month, as adjusted pursuant to this paragraph (c)) the amount by which Minimum Rent for the preceding month, as adjusted for such disbursement on a per diem basis, exceeded the amount of Minimum Rent paid by Tenant for such preceding month. (d) Credits Against Minimum Rent. On the date on which Minimum Rent is payable pursuant to this Agreement, Landlord shall credit against the Minimum Rent then due accrued interest on the Guaranty Deposit (as defined therein) pursuant to the Guaranty. 3.1.2 Additional Rent. (a) Amount. Commencing with the Second Lease Year, for each Lease Year or portion thereof, Tenant shall pay an aggregate amount of additional rent ("Additional Rent") with respect to such Lease Year, pursuant to this Agreement, in an amount, not less than zero, equal to five percent (5%) of Excess Total Hotel Sales for the second Lease Year and (y) eight percent (8%) of Excess Total Hotel Sales for the third Lease Year and each Lease Year thereafter. (b) Monthly Installments. Commencing with the Second Lease Year, installments of Additional Rent for each Lease Year or portion thereof shall be calculated and paid monthly in arrears, together with an Officer's Certificate setting forth the calculation of Additional Rent due and payable for such month. (c) Reconciliation of Additional Rent. In addition, on or before April 30, of each year, commencing April 30, 1998, Tenant shall deliver to Landlord an Officer's Certificate setting forth the Total Hotel Sales for the Leased Property for such preceding Lease Year, together with an audit of Tenant's revenues for the preceding Lease Year, conducted by Arthur Anderson and Co., or another "Big Six", so-called, firm of independent certified public accountants proposed by Tenant and approved by Landlord (which approval shall not be unreasonably withheld or delayed). If the annual Additional Rent for such preceding Lease Year as shown in the Officer's Certificate exceeds the amount previously paid with respect thereto by Tenant, Tenant shall pay such excess to Landlord at such time as the Officer's Certificate is delivered, together with interest at the Interest Rate, which interest shall accrue from the close of such preceding Lease Year until the date that such certificate is required to be delivered -19- and, thereafter, such interest shall accrue at the Overdue Rate, until the amount of such difference shall be paid or otherwise discharged. If the annual Additional Rent for such preceding Lease Year as shown in the Officer's Certificate is less than the amount previously paid with respect thereto by Tenant, provided that no Event of Default shall have occurred and be continuing, Landlord shall grant Tenant a credit against the Rent next coming due in the amount of such difference, together with interest at the Interest Rate, which interest shall accrue from the date of payment by Tenant until the date such credit is applied or paid, as the case may be. If such credit cannot be made because the Term has expired prior to application in full thereof, provided no Event of Default has occurred and is continuing, Landlord shall pay the unapplied balance of such credit to Tenant, together with interest at the Interest Rate, which interest shall accrue from the date of payment by Tenant until the date of payment by Landlord. (d) Confirmation of Additional Rent. Tenant 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 GAAP, which will accurately record all Total Hotel Sales and Tenant shall retain, for at least three (3) years after the expiration of each Lease Year, reasonably adequate records conforming to such accounting system showing all Total Hotel Sales for such Lease Year. Landlord, at its own expense, except as provided hereinbelow, shall have the right, exercisable by Notice to Tenant within one (1) year after receipt of the applicable Officer's Certificate, by its accountants or representatives to audit the information set forth in the Officer's Certificate referred to in subparagraph (c) above and, in connection with such audits, to examine Tenant's and the Manager's books and records with respect thereto (including supporting data and sales and excise tax returns). If any such audit discloses a deficiency in the payment of Additional Rent and, either Tenant agrees with the result of such audit or the matter is otherwise compromised with Landlord, Tenant shall forthwith pay to Landlord the amount of the deficiency, as finally agreed or determined, together with interest at the Interest Rate, from the date such payment should have been made to the date of payment thereof. If such deficiency, as agreed upon or compromised as aforesaid, is more than four percent (4%) of the Total Hotel Sales reported by Tenant for such Lease Year and, as a result, Landlord did not receive at least ninety-five percent (95%) of the Additional Rent payable with respect to such Lease Year, Tenant shall pay the reasonable cost of such audit and examination. If any such audit discloses that Tenant paid more Additional Rent for any Lease Year than was due hereunder, and either Landlord agrees with the result of such audit or the matter is -20- otherwise determined, provided no Event of Default has occurred and is continuing, Landlord shall grant Tenant a credit equal to the amount of such overpayment against the Rent next coming due in the amount of such difference, as finally agreed or determined, together with interest at the Interest Rate, which interest shall accrue from the time of payment by Tenant until the date such credit is applied or paid, as the case may be. If such a credit cannot be made because the Term has expired before the credit can be applied in full, provided no Event of Default has occurred and is continuing, Landlord shall pay the unapplied balance of such credit to Tenant, together with interest at the Interest Rate, which interest shall accrue from the date of payment by Tenant until the date of payment from Landlord. Any proprietary information obtained by Landlord with respect to Tenant pursuant to the provisions of this Agreement 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 Landlord may disclose such information to its prospective lenders, provided that Landlord shall direct and obtain the agreement of such lenders to maintain such information as confidential. The obligations of Tenant and Landlord contained in this Section 3.1.2 shall survive the expiration or earlier termination of this Agreement. 3.1.3 Additional Charges. In addition to the Minimum Rent and Additional Rent payable hereunder, Tenant shall pay to the appropriate parties and discharge as and when due and payable the following (collectively, "Additional Charges"): (a) Impositions. Subject to Article 8 relating to permitted contests, Tenant shall pay, or cause to be paid, all Impositions before any fine, penalty, interest or cost (other than any opportunity cost as a result of a failure to take advantage of any discount for early payment) may be added for non-payment, such payments to be made directly to the taxing authorities where feasible, and shall promptly, upon request, furnish to Landlord copies of official receipts or other reasonably satisfactory proof evidencing such payments. 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), Tenant 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 as the same become due and before any fine, penalty, premium, further interest or cost may be added thereto. Landlord, at its expense, shall, to the extent required or permitted by Applicable Law, prepare and file all tax returns and pay all taxes due in respect of -21- Landlord's net income, gross receipts, sales and use, single business, transaction privilege, rent, ad valorem, franchise taxes and taxes on its capital stock, and Tenant, 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 Government Agencies. Provided no Event of Default shall have occurred and be continuing, if any refund shall be due from any taxing authority in respect of any Imposition paid by Tenant, the same shall be paid over to or retained by Tenant. Landlord and Tenant 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. In the event Government Agencies classify any property covered by this Agreement as personal property, Tenant shall file all personal property tax returns in such jurisdictions where it may legally so file. Each party shall, to the extent it possesses the same, provide the other, upon request, with cost and depreciation records necessary for filing returns for any property so classified as personal property. Where Landlord is legally required to file personal property tax returns for property covered by this Agreement, Landlord shall provide Tenant with copies of assessment notices in sufficient time for Tenant to file a protest. All Impositions assessed against such personal property shall be (irrespective of whether Landlord or Tenant shall file the relevant return) paid by Tenant not later than the last date on which the same may be made without interest or penalty. Landlord shall give prompt Notice to Tenant of all Impositions payable by Tenant hereunder of which Landlord at any time has knowledge; provided, however, that Landlord's failure to give any such notice shall in no way diminish Tenant's obligation hereunder to pay such Impositions, unless such failure continues for more than twelve (12) months after the date Landlord learned of such Imposition. (b) Utility Charges. Tenant shall pay or cause to be paid all charges for electricity, power, gas, oil, water and other utilities used in connection with the Leased Property. (c) Insurance Premiums. Tenant shall pay or cause to be paid all premiums for the insurance coverage required to be maintained pursuant to Article 9. (d) Other Charges. Tenant shall pay or cause to be paid all other amounts, liabilities and obligations with respect to the Leased Property and this Agreement, including, without limitation, all amounts payable under any -22- equipment leases and all agreements to indemnify Landlord under Sections 4.3.2 and 9.7. (e) Reimbursement for Additional Charges. If Tenant pays or causes to be paid property taxes or similar or other Additional Charges attributable to periods after the end of the Term, whether upon expiration or sooner termination of this Agreement (other than termination by reason of an Event of Default), Tenant may, within a reasonable time after the end of the Term, provide Notice to Landlord of its estimate of such amounts. Landlord shall promptly reimburse Tenant for all payments of such taxes and other similar Additional Charges that are attributable to any period after the Term of this Agreement. 3.2 Late Payment of Rent, Etc. If any installment of Minimum Rent, Additional Rent or Additional Charges (but only as to those Additional Charges which are payable directly to Landlord) shall not be paid within ten (10) days after its due date, Tenant shall pay Landlord, 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 Tenant pays any Additional Charges directly to Landlord or any Hotel Mortgagee pursuant to any requirement of this Agreement, Tenant shall be relieved of its obligation to pay such Additional Charges to the Entity to which they would otherwise be due. If any payments due from Landlord to Tenant shall not be paid within ten (10) days after its due date, Landlord shall pay to Tenant, on demand, 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. In the event of any failure by Tenant to pay any Additional Charges when due, Tenant shall promptly pay and discharge, as Additional Charges, every fine, penalty, interest and cost which is added for non-payment or late payment of such items. Landlord shall have all legal, equitable and contractual rights, powers and remedies provided either in this Agreement or by statute or otherwise in the case of non-payment of the Additional Charges as in the case of non-payment of the Minimum Rent and Additional Rent. 3.3 Net Lease. The Rent shall be absolutely net to Landlord so that this Agreement shall yield to Landlord the full amount of the installments or amounts of the Rent throughout the Term, subject to any other provisions of this Agreement which expressly provide otherwise, including those provisions for adjustment or abatement of such Rent. -23- 3.4 No Termination, Abatement, Etc. Except as otherwise specifically provided in this Agreement, each of Landlord and Tenant, to the maximum extent permitted by law, shall remain bound by this Agreement in accordance with its terms and shall not take any action without the consent of the other to modify, surrender or terminate this Agreement. In addition, except as otherwise expressly provided in this Agreement, Tenant shall not seek, or be entitled to, any abatement, deduction, deferment or reduction of the Rent, or set-off against the Rent, nor shall the respective obligations of Landlord and Tenant be otherwise affected by reason of (a) any damage to or destruction of the Leased Property or any portion thereof from whatever cause or any Condemnation, (b) the lawful or unlawful prohibition of, or restriction upon, Tenant's use of the Leased Property, or any portion thereof, or the interference with such use by any Person or by reason of eviction by paramount title; (c) any claim which Tenant may have against Landlord by reason of any default (other than a monetary default) or breach of any warranty by Landlord under this Agreement or any other agreement between Landlord and Tenant, or to which Landlord and Tenant are parties; (d) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Landlord or any assignee or transferee of Landlord; or (e) for any other cause whether similar or dissimilar to any of the foregoing (other than a monetary default by Landlord); provided, however, that the foregoing shall not apply or be construed to restrict Tenant's rights in the event of any act or omission by Landlord constituting gross negligence or willful misconduct. Except as otherwise specifically provided in this Agreement, Tenant hereby waives all rights arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law (a) to modify, surrender or terminate this Agreement or quit or surrender the Leased Property or any portion thereof, or (b) which would entitle Tenant to any abatement, reduction, suspension or deferment of the Rent or other sums payable or other obligations to be performed by Tenant hereunder. The obligations of each party hereunder shall be separate and independent covenants and agreements, and the Rent and all other sums payable by Tenant 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 Agreement. In any instance where, after the occurrence of an Event of Default, Landlord retains funds which, but for the occurrence of such Event of Default, would be payable to Tenant, Landlord shall refund such funds to Tenant to the extent the amount thereof exceeds the amount necessary to compensate Landlord for any cost, loss or damage incurred in connection with such Event of Default. 3.5 Security Deposit. Upon execution of this Agreement, Tenant shall deposit with Landlord the Security Deposit. The Security Deposit shall be held by Landlord as security for the faithful observance and performance by Tenant of all the terms, -24- covenants and conditions of this Agreement by Tenant to be observed and performed. The Security Deposit shall not be mortgaged, assigned, transferred or otherwise encumbered by Tenant without the prior written consent of Landlord and any such act on the part of Tenant without first having obtained Landlord's consent (which consent may be given or withheld by Landlord in Landlord's sole and absolute discretion) shall be without force and effect and shall not be binding upon Landlord; provided, however, that such consent shall not be required to the extent permitted by Article 19. If any Event of Default shall occur and be continuing, Landlord may, at its option and without prejudice to any other remedy which Landlord may have on account thereof, appropriate and apply the entire Security Deposit or so much thereof as may be necessary to compensate Landlord toward the payment of the Rent or other sums or loss or damage sustained by Landlord due to such breach by Tenant and Tenant shall, upon demand, restore the Security Deposit to the original sum deposited. It is understood and agreed that the Security Deposit is not to be considered as prepaid rent, nor shall damages be limited to the amount of the Security Deposit. Should Tenant comply with all the terms, covenants and conditions of this Agreement, the Security Deposit shall be returned in full to Tenant at the end of the Term. Landlord shall have no obligation to pay interest on the Security Deposit and shall have the right to commingle the same with Landlord's other funds. If Landlord conveys Landlord's interest under this Agreement, the Security Deposit, or any part thereof not previously applied, may be turned over by Landlord to Landlord's grantee, and, if so turned over, Tenant shall look solely to such grantee for proper application of the Security Deposit in accordance with the terms of this Section 3.5 and the return thereof in accordance herewith. No Hotel Mortgagee shall be responsible to Tenant for the return or application of the Security Deposit, whether or not it succeeds to the position of Landlord hereunder, unless the Security Deposit shall have been received in hand by such holder. In the event of bankruptcy or other creditor-debtor proceedings against Tenant, the Security Deposit shall be deemed to be applied first to the payment of the Rent and other charges due Landlord for all periods prior to the filing of such proceedings. ARTICLE 4 USE OF THE LEASED PROPERTY 4.1 Permitted Use. 4.1.1 Permitted Use. -25- (a) Tenant shall, at all times during the Term and at any other time that Tenant shall be in possession of the Leased Property, continuously use and operate, and cause the Manager to use and operate, the Leased Property as a Wyndham Hotel and any uses incidental thereto. Tenant shall not use (and shall direct the Manager not to use) the Leased Property or any portion thereof for any other use without the prior written consent of Landlord. No use shall be made or permitted to be made of the Leased Property and no acts shall be done thereon which will cause the cancellation of any insurance policy covering the Leased Property or any part thereof (unless another adequate policy is available), nor shall Tenant sell or otherwise provide or permit to be kept, used or sold in or about the Leased Property any article which may be prohibited by law or by the standard form of fire insurance policies, or any other insurance policies required to be carried hereunder, or fire underwriter's regulations. Tenant shall, at its sole cost (except as expressly provided in Section 5.1.3(b)), comply (or direct the Manager to comply) with all Insurance Requirements. Tenant shall not take or omit to take (and Tenant shall direct the Manager not to take or omit to take) any action, the taking or omission of which materially impairs the value or the usefulness of the Leased Property or any part thereof for its Permitted Use. (b) In the event that, in the reasonable determination of Tenant, it shall no longer be economically practical to operate the Leased Property as a Wyndham Hotel, Tenant shall give Landlord Notice thereof, which Notice shall set forth in reasonable detail the reasons therefor. Thereafter, Landlord and Tenant shall negotiate in good faith to agree on an alternative use for the Leased Property or substitution of one or more other properties for the Leased Property, appropriate adjustments to the Additional Rent and other related matters; provided, however, in no such event shall the Minimum Rent be reduced or abated. 4.1.2 Necessary Approvals. Tenant shall proceed with all due diligence and exercise best efforts to obtain and maintain, and shall direct the Manager to obtain and maintain, all approvals necessary to use and operate, for its Permitted Use, the Leased Property and the Hotel located thereon under applicable law. 4.1.3 Lawful Use, Etc. Tenant shall not, and shall direct the Manager not to, use or suffer or permit the use of the Leased Property or Tenant's Personal Property, if any, for any unlawful purpose. Tenant shall not, and shall direct the Manager not to, commit or suffer to be committed any waste on the Leased Property, or in the Hotel, nor shall Tenant cause or permit any -26- unlawful nuisance thereon or therein. Tenant shall not, and shall direct the Manager not to, suffer nor permit the Leased Property, or any portion thereof, to be used in such a manner as (i) might reasonably impair Landlord's title thereto or to any portion thereof, or (ii) may reasonably allow a claim or claims for adverse usage or adverse possession by the public, as such, or of implied dedication of the Leased Property or any portion thereof. 4.2 Compliance with Legal/Insurance Requirements, Etc. Subject to the provisions of Article 8 and Section 5.1.3(b), Tenant, at its sole expense, shall (or shall direct the Manager to) (i) comply with all material Legal Requirements and Insurance Requirements in respect of the use, operation, maintenance, repair, alteration and restoration of the Leased Property and with the terms and conditions of any ground lease affecting the Leased Property and (ii) procure, maintain and comply with all appropriate licenses, and other authorizations and agreements required for any use of the Leased Property and Tenant's Personal Property, if any, then being made, and for the proper erection, installation, operation and maintenance of the Leased Property or any part thereof. 4.3 Environmental Matters. 4.3.1 Restriction on Use, Etc. During the Term and any other time that Tenant shall be in possession of the Leased Property, Tenant shall not (and shall direct the Manager not to) store, spill upon, dispose of or transfer to or from the Leased Property any Hazardous Substance, except in compliance with all Applicable Laws. During the Term and any other time that Tenant shall be in possession of the Leased Property, Tenant shall maintain (and shall direct the Manager to maintain) the Leased Property at all times free of any Hazardous Substance (except in compliance with all Applicable Laws). Tenant shall promptly: (a) upon receipt of notice or knowledge and shall direct the Manager upon receipt of notice or knowledge promptly to, notify Landlord in writing of any material change in the nature or extent of Hazardous Substances at the Leased Property, (b) transmit to Landlord a copy of any Community Right to Know report which is required to be filed by Tenant or the Manager with respect to the Leased Property pursuant to SARA Title III or any other Applicable Law, (c) transmit to Landlord copies of any citations, orders, notices or other governmental communications received by Tenant or the Manager or their respective agents or representatives with respect thereto (collectively, "Environmental Notice"), which Environmental Notice requires a written response or any action to be taken and/or if such Environmental Notice gives notice of and/or presents a material risk of any material violation of any Applicable Law and/or presents a material risk of any material cost, expense, loss or damage (an "Environmental Obligation"), (d) observe and comply -27- (and direct the Manager to observe and comply) with all Applicable Laws relating to the use, maintenance and disposal of Hazardous Substances and all orders or directives from any official, court or agency of competent jurisdiction relating to the use or maintenance or requiring the removal, treatment, containment or other disposition thereof, and (e) pay or otherwise dispose of any fine, charge or Imposition related thereto, unless Tenant or the Manager shall contest the same in good faith and by appropriate proceedings and the right to use and the value of the Leased Property is not materially and adversely affected thereby. If, at any time prior to the termination of this Agreement, Hazardous Substances (other than those maintained in accordance with Applicable Laws) are discovered on the Leased Property, subject to Tenant's and the Manager's right to contest the same in accordance with Article 8, Tenant shall take (and shall direct the Manager to take) all actions and incur any and all expenses, as are required by any Government Agency and by Applicable Law, (i) to clean up and remove from and about the Leased Property all Hazardous Substances thereon, (ii) to contain and prevent any further release or threat of release of Hazardous Substances on or about the Leased Property and (iii) to use good faith efforts to eliminate any further release or threat of release of Hazardous Substances on or about the Leased Property. 4.3.2 Indemnification of Landlord. Tenant shall protect, indemnify and hold harmless Landlord and each Hotel Mortgagee, their trustees, officers, agents, employees and beneficiaries, and any of their respective successors or assigns with respect to this Agreement (collectively, the "Indemnitees" and, individually, an "Indemnitee") for, from and against any and all debts, liens, claims, causes of action, administrative orders or notices, costs, fines, penalties or expenses (including, without limitation, reasonable attorney's fees and expenses) imposed upon, incurred by or asserted against any Indemnitee resulting from, either directly or indirectly, the presence during the Term (or any other time Tenant shall be in possession of the Leased Property) in, upon or under the soil or ground water of the Leased Property or any properties surrounding the Leased Property of any Hazardous Substances in violation of any Applicable Law or otherwise, provided that any of the foregoing arises by reason of any failure by Tenant, the Manager or any Person claiming by, through or under Tenant or the Manager to perform or comply with any of the terms of this Section 4.3, except to the extent the same arise from the acts or omissions of Landlord or any other Indemnitee or during any period that Landlord or a Person designated by Landlord (other than Tenant) is in possession of the Leased Property. Tenant's duty herein includes, but is not limited to, costs associated with personal injury or property damage claims as a result of the presence prior to the expiration or sooner termination of the Term and the surrender of the Leased Property to Landlord in accordance with -28- the terms of this Agreement of Hazardous Substances in, upon or under the soil or ground water of the Leased Property in violation of any Applicable Law. Upon Notice from Landlord and any other of the Indemnitees, Tenant shall undertake the defense, at Tenant's sole cost and expense, of any indemnification duties set forth herein, in which event, Tenant shall not be liable for payment of any duplicative attorneys' fees incurred by any Indemnitee. Tenant shall, upon demand, pay to Landlord, as an Additional Charge, any cost, expense, loss or damage (including, without limitation, reasonable attorneys' fees) reasonably incurred by Landlord and arising from a failure of Tenant to observe and perform the requirements of this Section 4.3, which amounts shall bear interest from the date ten (10) days after written demand therefor is given to Tenant until paid by Tenant to Landlord at the Overdue Rate. 4.3.3 Survival. The provisions of this Section 4.3 shall survive the expiration or sooner termination of this Agreement. ARTICLE 5 MAINTENANCE AND REPAIRS 5.1 Maintenance and Repair. 5.1.1 Tenant's General Obligations. Tenant shall, at its sole cost and expense (except as expressly provided in Sections 5.1.3(b), 10.2.3 or 11.2), or shall direct the Manager to, keep the Leased Property and all private roadways, sidewalks and curbs appurtenant thereto (and Tenant's Personal Property) in good order and repair, reasonable wear and tear excepted (whether or not the need for such repairs occurs as a result of Tenant's or the Manager's use, any prior use, the elements or the age of the Leased Property or Tenant's Personal Property or any portion thereof), and shall promptly make (or cause the Manager to make) all necessary and appropriate repairs and replacements thereto of every kind and nature, whether interior or exterior, structural or nonstructural, ordinary or extraordinary, foreseen or unforeseen or arising by reason of a condition existing prior to the commencement of the Term (concealed or otherwise). All repairs shall be made in a good, workmanlike manner, consistent with the Manager's and industry standards for like hotels in like locales, in accordance with all applicable federal, state and local statutes, ordinances, by-laws, codes, rules and regulations relating to any such work. Tenant shall not take or omit to take (and shall direct the Manager not to take or omit to take) any action, the taking or omission of which would materially and adversely impair the value or the usefulness of the Leased -29- Property or any part thereof for its Permitted Use. Tenant's obligations under this Section 5.1.1(a) shall be limited in the event of any casualty or Condemnation as set forth in Sections 10.2 and 11.2 and also as set forth in Section 5.1.3(b) and Tenant's obligations with respect to Hazardous Substances are as set forth in Section 4.3. 5.1.2 FF&E Reserve. (a) Upon execution of this Agreement, Tenant shall establish a reserve account (the "FF&E Reserve") in a bank designated by Tenant and approved by Landlord. The purpose of the FF&E Reserve is to cover the cost of: (i) Replacements and renewals to the Hotel's furnishings, fixtures and equipment; (ii) Certain routine repairs and maintenance to the Hotel building which are normally capitalized under GAAP such as exterior and interior repainting, resurfacing building walls, floors, roofs and parking areas, and replacing folding walls and the like; and (iii) Major repairs, alterations, improvements, renewals or replacements to the Hotel's buildings' structure, roof, or exterior facade, or to its mechanical, electrical, heating, ventilating, air conditioning, plumbing or vertical transportation systems. Tenant agrees that it will, from time to time, execute such reasonable documentation as may be requested by Landlord and any Hotel Mortgagee to assist Landlord and such Hotel Mortgagee in establishing or perfecting its security interest in Landlord's residual interest in the funds which are in the FF&E Reserve, it being acknowledged and agreed that the funds in the FF&E Reserve are the property of Tenant; provided, however, that no such documentation shall contain any amendment or modification of any of the provisions of this Agreement. It is understood and agreed that, during the Term, the FF&E Reserve may not be applied against debts secured by a Hotel Mortgage nor shall any Hotel Mortgagee have the right to approve the release of such funds pursuant to the terms of this Agreement unless and until Landlord shall default in its obligations to such Hotel Mortgagee. (b) Throughout the Term, Tenant shall transfer (as of the end of each month of the Term) into the FF&E Reserve an amount equal to five percent (5%) of Total Hotel Sales for such month. Together with the documentation provided to Landlord pursuant to Section 3.1.2(c), Tenant shall deliver to Landlord an Officer's Certificate setting forth the total amount of deposits made to and expenditures from the FF&E -30- Reserve for the preceding Fiscal Year, together with a reconciliation of such expenditures with the applicable FF&E Estimate. (c) Prior to execution of this Agreement with respect to the 1997 calendar year and, thereafter, each year, on or before December 1 of the preceding year, Tenant shall prepare an estimate (the "FF&E Estimate") of FF&E Reserve expenditures necessary during the ensuing Fiscal Year, and shall submit such FF&E Estimate to Landlord for its review and approval, which approval shall not be unreasonably withheld or delayed. In the event Landlord shall fail to respond within thirty (30) days after receipt of the FF&E Estimate, such FF&E Estimate shall be deemed approved by Landlord. All expenditures from the FF&E Reserve shall be (as to both the amount of each such expenditure and the timing thereof) both reasonable and necessary, given the objective that the Hotel will be maintained and operated to a standard comparable to competitive hotels. (d) Tenant shall, consistent with the FF&E Estimate approved by Landlord, from time to time make expenditures from the FF&E Reserve as it deems necessary provided that Tenant shall not materially deviate from the FF&E Estimate approved by Landlord without the prior approval of Landlord, except in the case of emergency where immediate action is necessary to prevent imminent danger to person or property. (e) Upon the expiration or sooner termination of this Agreement, funds in the FF&E Reserve and all property purchased with funds from the FF&E Reserve during the Term shall be paid, granted and assigned to Landlord as Additional Charges. 5.1.3 Landlord's Obligations. (a) Except as otherwise expressly provided in this Agreement, Landlord 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, structural or nonstructural, foreseen or unforeseen, or, except as provided in Sections 5.1.3(b), 6,2, 10.2 and 11.2, to make any expenditure whatsoever with respect thereto, or to maintain the Leased Property in any way. Except as otherwise expressly provided in this Agreement, Tenant hereby waives, to the maximum extent permitted by law, the right to make repairs at the expense of Landlord pursuant to any law in effect on the date hereof or hereafter enacted. Landlord shall have the right to give, record and post, as appropriate, notices of nonresponsibility under any mechanic's lien laws now or hereafter existing. -31- (b) If, at any time, funds in the FF&E Reserve shall be insufficient for necessary and permitted expenditures thereof or, pursuant to the terms of this Agreement, Tenant is required to make any expenditures in connection with any repair, maintenance or renovation with respect to the Leased Property and the amount of such disbursements or expenditures exceeds the amount on deposit in the FF&E Reserve or such repair, maintenance or renovation is not a permitted expenditure from the FF&E Reserve as described in Section 5.1.2(a)(i), (ii) and (iii), Tenant may, at its election, give Landlord Notice thereof, which Notice shall set forth, in reasonable detail, the nature of the required repair, renovation or replacement, the estimated cost thereof and such other information with respect thereto as Landlord may reasonably require. Provided that no Event of Default shall have occurred and be continuing and Tenant shall otherwise comply with the applicable provisions of Article 6, Landlord shall, within ten (10) Business Days after such Notice, subject to and in accordance with the applicable provisions of Article 6, disburse such required funds to Tenant (or, if Tenant shall so elect, directly to the Manager or any other Person performing the required work) and, upon such disbursement, the Minimum Rent shall be adjusted as provided in Section 3.1.1(b); provided, however, that, in the event that Landlord shall elect not to disburse any funds pursuant to this Section 5.1.3(b), Tenant's sole recourse shall be to elect not to make the applicable repair, maintenance or renovation. 5.1.4 Nonresponsibility of Landlord, Etc. All materialmen, contractors, artisans, mechanics and laborers and other persons contracting with Tenant with respect to the Leased Property, or any part thereof, are hereby charged with notice that liens on the Leased Property or on Landlord's interest therein are expressly prohibited and that they must look solely to Tenant to secure payment for any work done or material furnished by Tenant, the Manager or for any other purpose during the term of this Agreement. Nothing contained in this Agreement shall be deemed or construed in any way as constituting the consent or request of Landlord, express or implied, by inference or otherwise, to any contractor, subcontractor, laborer or materialmen for the performance of any labor or the furnishing of any materials for any alteration, addition, improvement or repair to the Leased Property or any part thereof or as giving Tenant any right, power or authority to contract for or permit the rendering of any services or the furnishing of any materials that would give rise to the filing of any lien against the Leased Property or any part thereof nor to subject Landlord's estate in the Leased Property or any part thereof to liability under any Mechanic's Lien Law of -32- the State in any way, it being expressly understood Landlord's estate shall not be subject to any such liability. 5.2 Tenant's Personal Property. Tenant shall provide and maintain throughout the Term all such Tenant's Personal Property as shall be necessary in order to operate in compliance with applicable Legal Requirements and Insurance Requirements and otherwise in accordance with customary practice in the industry for the Permitted Use and all of such Personal Property shall, upon the expiration or earlier termination of this Agreement, become the property of Landlord. If, from and after the Commencement Date, Tenant acquires an interest in any item of tangible personal property (other than motor vehicles) on, or in connection with, the Leased Property which belongs to anyone other than Tenant, Tenant shall require the agreements permitting such use to provide that Landlord or its designee may assume Tenant's rights and obligations under such agreement upon the termination of this Agreement and the assumption of management or operation of the Hotel by Landlord or its designee. 5.3 Yield Up. Upon the expiration or sooner termination of this Agreement, Tenant shall vacate and surrender the Leased Property to Landlord in substantially the same condition in which the Leased Property was in on the Commencement Date, except as repaired, rebuilt, restored, altered or added to as permitted or required by the provisions of this Agreement, reasonable wear and tear excepted (and casualty damage and Condemnation, in the event that this Agreement is terminated following a casualty or total Condemnation in accordance with Article 10 or Article 11 excepted). In addition, upon the expiration or earlier termination of this Agreement, Tenant shall, at Landlord's sole cost and expense, use its good faith efforts to transfer to and cooperate with Landlord or Landlord's nominee in connection with the processing of all applications for licenses, operating permits and other governmental authorizations and all contracts, including contracts with governmental or quasi-governmental Entities which may be necessary for the use and operation of the Hotel as then operated. If requested by Landlord, Tenant will direct the Manager to continue to manage the Hotel after the expiration of the Term and for up to one hundred twenty (120) days, on such reasonable terms (which shall include a market rate management fee and an agreement to reimburse the Manager for its reasonable out-of-pocket costs and expenses, and reasonable administrative costs), as Landlord shall reasonably request. 5.4 Management Agreement. Tenant shall not, without Landlord's prior written consent, amend or modify the provisions of the Management Agreement which provide (i) that, from and after the occurrence of any Default or Event of Default, all amounts due from Tenant to the Manager shall be subordinate to -33- all amounts due from Tenant to Landlord, (ii) for operation of the Leased Property under the "Wyndham" name, (iii) that Wyndham, the Manager and their Affiliated Persons are prohibited from operating, managing or franchising another full-service Wyndham Hotel (as opposed to Wyndham Garden or resort hotels) within the designated area on Exhibit D and (iv) for termination thereof, at Landlord's option, upon the termination of this Agreement. Tenant shall not take any action, grant any consent or permit any action under the Management Agreement which might have a material adverse effect on Landlord, without the prior written consent of Landlord; provided, however, that Landlord's consent shall not be required in connection with any assignment of the Manager's rights under the Management Agreement to (x) any Affiliated Person of the Manager having the full power, right and authority to provide all services and organizational expertise as contemplated and required by the Management Agreement or (y) any Person (including, but not limited to, any Lending Institution) who acquires all or substantially all of the management contracts of the Manager, provided that, in either such case, the Leased Property will retain the right to use the "Wyndham" name. In the event of an assignment pursuant to clause (y) preceding, provided that the successor Manager (i) assumes, in writing all obligations of the Manager under the Management Agreement, and (ii) has a Tangible Net Worth, as of the date of assignment, equal to the greater of the Tangible Net Worth of the Manager as of the date of this Agreement, and the Tangible Net Worth of the Manager as of the date of such assignment, the Manager shall be released from all liabilities arising under the Management Agreement from and after the effective date of such assignment. Tenant shall not agree to any change in the Manager (except as provided in the preceding sentences), to any change in the Management Agreement (except as provided in the preceding sentences), terminate the Management Agreement or permit the Manager to assign the Management Agreement (except as provided in the preceding sentences) without the prior written approval of Landlord in each instance; provided, however, that the Manager may grant a security interest in its right to receive payments under the Management Agreement without Landlord's prior written approval. -34- ARTICLE 6 IMPROVEMENTS, ETC. 6.1 Improvements to the Leased Property. Tenant shall not make, construct or install (and shall direct the Manager not to construct or install) any Capital Additions (other than Capital Additions of the type described in Section 5.1.2(a)(ii) and approved pursuant to Section 5.1.2(c) or which are described in Exhibit B, attached hereto and made a part hereof, without, in each instance, obtaining Landlord's prior written consent, which consent shall not be unreasonably withheld, delayed or conditioned provided that (a) construction or installation of the same would not adversely affect or violate any Legal Requirement or Insurance Requirement applicable to the Leased Property and (b) Landlord shall have received an Officer's Certificate certifying as to the satisfaction of the conditions set out in clause (a) above; provided, however, that no such consent shall be required in the event immediate action is required to prevent imminent danger to person or property. Prior to commencing construction of any Capital Addition, Tenant shall submit, or shall direct the Manager to submit, to Landlord, in writing, a proposal setting forth, in reasonable detail, any such proposed improvement and shall provide to Landlord such plans and specifications, and such permits, licenses, contracts and such other information concerning the same as Landlord may reasonably request. Landlord shall have thirty (30) days to review all materials submitted to Landlord in connection with any such proposal. Failure of Landlord to respond to Tenant's or the Manager's proposal within thirty (30) days after receipt of all information and materials requested by Landlord in connection with the proposed improvement shall be deemed to constitute approval of the same. Without limiting the generality of the foregoing, such proposal shall indicate the approximate projected cost of constructing such proposed improvement and the use or uses to which it will be put. No Capital Addition shall be made which would tie in or connect any Leased Improvement with any other improvements on property adjacent to the Leased Property (and not part of the Land) including, without limitation, tie-ins of buildings or other structures or utilities. Tenant shall not finance, and shall direct the Manager not to finance, the cost of any construction of such improvement by the granting of a lien on or security interest in the Leased Property or such improvement, or Tenant's interest therein, without the prior written consent of Landlord, which consent may be withheld by Landlord in Landlord's sole discretion. Any such improvements shall, upon the expiration or sooner termination of this Agreement, remain or pass to and become the property of Landlord, free and clear of all encumbrances other than Permitted Encumbrances. 6.2 Improvement Advances. At any time during that portion of the Term commencing on the Commencement Date and expiring one -35- year thereafter, Landlord agrees to advance to Tenant, from time to time, as hereinafter provided, an aggregate amount of up to Three Million Two Hundred Fifty Thousand Dollars ($3,250,000) for the purpose of making improvements to the Leased Property in accordance with Exhibit B. The obligation of Landlord to make each advance pursuant to this Section 6.2 shall be subject to the prior or simultaneous satisfaction of the following conditions: (a) At the time of each disbursement, no Default or Event of Default shall have occurred and be continuing; (b) At least fifteen (15) Business Days before the date on which Tenant desires a disbursement to be made hereunder (but in no event subsequent to the first anniversary of the Commencement Date), Tenant shall submit to Landlord a written requisition and the substantiation therefor which shall include bills and invoices with respect to the work for which payment or reimbursement is sought, together with such other information with respect thereto as Landlord may reasonably require, including, without limitation, the items identified in Section 6.3, if applicable. Any such requisition shall be for not less than $250,000 (or such lesser amount as shall constitute the difference between $3,250,000 and the aggregate of all prior disbursements). Such requisitions shall be made not more frequently than monthly; and (c) The aggregate amount paid or payable to Tenant and its Affiliated Persons shall not exceed One Hundred Three Thousand Dollars ($103,000). 6.3 Improvements Financed by Landlord. In connection with the Landlord's funding of any improvements pursuant to Section 6.2), Tenant shall provide Landlord with such information as Landlord may from time to time reasonably request, including, without limitation, the following: (a) Evidence that such improvement will be, and, upon completion, has been, completed in compliance with all Applicable Laws; (b) Copies of all building, zoning and land use permits and approvals and upon completion of such improvement, a copy of the certificate of occupancy for such improvement, if required; (c) Such information, certificates, licenses, permits or other documents necessary to confirm that Tenant will be able to use the improvement upon completion thereof in accordance with the Permitted Use, including all required federal, State or local government licenses and approvals; -36- (d) An Officer's Certificate and a certificate from Tenant's architect setting forth, in reasonable detail, the projected (or actual, if available) improvement cost and invoices and lien waivers from Tenant's contractors for such work as is completed and paid for through the last advance date; and (e) Prints of architectural and engineering drawings relating to such improvement and such other certificates, documents and surveys as Landlord may reasonably require. 6.4 Salvage. All materials which are scrapped or removed in connection with the making of either Capital Additions or non-Capital Additions or repairs required by Article 5 shall be or become the property of the party that paid for such work. ARTICLE 7 LIENS 7.1 Liens. Subject to Article 8, Tenant shall not, directly or indirectly, create or allow to remain and shall promptly discharge, at its expense, any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property or Tenant's leasehold interest therein or any attachment, levy, claim or encumbrance in respect of the Rent, other than (a) Permitted Encumbrances, (b) restrictions, liens and other encumbrances which are consented to in writing by Landlord, (c) liens for those taxes of Landlord which Tenant is not required to pay hereunder, (d) subleases permitted by Article 17, (e) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as (i) the same are not yet due and payable, or (ii) are being contested in accordance with Article 8, (f) liens of mechanics, laborers, materialmen, suppliers or vendors incurred in the ordinary course of business that are not yet due and payable or are for sums that are being contested in accordance with Article 8, (g) any Hotel Mortgages or other liens which are the responsibility of Landlord pursuant to the provisions of Article 21, (h) Landlord Liens and any other voluntary liens created by Landlord and (i) Leasehold Mortgages. 7.2 Landlord's Lien. In addition to any statutory landlord's lien and in order to secure payment of the Rent and all other sums payable hereunder by Tenant, and to secure payment of any loss, cost or damage which Landlord may suffer by reason of Tenant's breach of this Agreement, Tenant hereby grants unto Landlord a security interest in and an express contractual lien upon Tenant's Personal Property (except motor vehicles and liquor licenses and permits), and Tenant's interest in all ledger sheets, files, records, documents and instruments (including, -37- without limitation, computer programs, tapes and related electronic data processing) relating to the operation of the Hotels (the "Records") and all proceeds therefrom, subject to any Permitted Encumbrances; and such Tenant's Personal Property shall not be removed from the Leased Property at any time when a Default or an Event of Default has occurred and is continuing. Upon Landlord's request, Tenant shall execute and deliver to Landlord financing statements in form sufficient to perfect the security interest of Landlord in Tenant's Personal Property and the proceeds thereof in accordance with the provisions of the applicable laws of the State. Tenant hereby grants Landlord an irrevocable limited power of attorney, coupled with an interest, to execute all such financing statements in Tenant's name, place and stead. The security interest herein granted is in addition to any statutory lien for the Rent. ARTICLE 8 PERMITTED CONTESTS Tenant shall have the right to contest the amount or validity of any Imposition, Legal Requirement, Insurance Requirement, Environmental Obligation, lien, attachment, levy, encumbrance, charge or claim (collectively, "Claims") as to the Leased Property, by appropriate legal proceedings, conducted in good faith and with due diligence, provided that (a) the foregoing shall in no way be construed as relieving, modifying or extending Tenant's obligation to pay any Claims as finally determined, (b) such contest shall not cause Landlord or Tenant to be in default under any mortgage or deed of trust encumbering the Leased Property (Landlord agreeing that any such mortgage or deed of trust shall permit Tenant to exercise the rights granted pursuant to this Article 8) or any interest therein or result in or reasonably be expected to result in a lien attaching to the Leased Property, (c) no part of the Leased Property nor any Rent therefrom shall be in any immediate danger of sale, forfeiture, attachment or loss, and (d) Tenant shall indemnify and hold harmless Landlord from and against any cost, claim, damage, penalty or reasonable expense, including reasonable attorneys' fees, incurred by Landlord in connection therewith or as a result thereof. Landlord agrees to join in any such proceedings if required legally to prosecute such contest, provided that Landlord shall not thereby be subjected to any liability therefor (including, without limitation, for the payment of any costs or expenses in connection therewith) unless Tenant agrees by agreement in form and substance reasonably satisfactory to Landlord, to assume and indemnify Landlord with respect to the same. Tenant shall be entitled to any refund of any Claims and such charges and penalties or interest thereon which have been paid by Tenant or paid by Landlord to the extent that Landlord -38- has been fully reimbursed by Tenant. If Tenant shall fail (x) to pay or cause to be paid any Claims when finally determined, (y) to provide reasonable security therefor, or (z) to prosecute or cause to be prosecuted any such contest diligently and in good faith, Landlord may, upon reasonable notice to Tenant (which notice shall not be required if Landlord shall reasonably determine that the same is not practicable), pay such charges, together with interest and penalties due with respect thereto, and Tenant shall reimburse Landlord therefor, upon demand, as Additional Charges. ARTICLE 9 INSURANCE AND INDEMNIFICATION 9.1 General Insurance Requirements. Tenant shall, at all times during the Term and at any other time Tenant shall be in possession of the Leased Property, keep the Leased Property and all property located therein or thereon, insured against the risks and in the amounts as follows and shall maintain the following insurance: (a) "All-risk" property insurance, including insurance against loss or damage by fire, vandalism and malicious mischief, earthquake, explosion of steam boilers, pressure vessels or other similar apparatus, now or hereafter installed in the Hotel located at the Leased Property, with the usual extended coverage endorsements, in an amount equal to one hundred percent (100%) of the then full Replacement Cost thereof (as defined in Section 9.2); (b) Business interruption insurance covering risk of loss during the lesser of the first twelve (12) months of reconstruction or the actual reconstruction period necessitated by the occurrence of any of the hazards described in subparagraph (a) above, in such amounts as may be customary for comparable properties in the area and in an amount sufficient to prevent Landlord or Tenant from becoming a co-insurer; (c) Comprehensive general liability insurance, including bodily injury and property damage in a form reasonably satisfactory to Landlord (and including, without limitation, broad form contractual liability, independent contractor's hazard and completed operations coverage) in an amount not less than One Million Dollars ($1,000,000) per occurrence, Three Million Dollars ($3,000,000) in the aggregate and umbrella coverage of all such claims in an amount not less than Fifty Million Dollars ($50,000,000); -39- (d) Flood (if the Leased Property is located in whole or in part within an area identified as an area having special flood hazards and in which flood insurance has been made available under the National Flood Insurance Act of 1968, as amended, or the Flood Disaster Protection Act of 1973, as amended (or any successor acts thereto)) and such other hazards and in such amounts as may be customary for comparable properties in the area; (e) Worker's compensation insurance coverage if required by applicable law for all persons employed by Tenant on the Leased Property with statutory limits and otherwise with limits of and provisions in accordance with the requirements of applicable local, State and federal law, and employer's liability insurance as is customarily carried by similar employers; and (f) Such additional insurance as may be reasonably required, from time to time, by Landlord or any Hotel Mortgagee and which is customarily carried by comparable lodging properties in the area. 9.2 Replacement Cost. "Replacement Cost" as used herein shall mean the actual replacement cost of the property requiring replacement from time to time, including an increased cost of construction endorsement, less exclusions provided in the standard form of fire insurance policy. In the event either party believes that the then full Replacement Cost has increased or decreased at any time during the Term, such party, at its own cost, shall have the right to have such full Replacement Cost redetermined by an independent accredited appraiser approved by the other, which approval shall not be unreasonably withheld or delayed. The party desiring to have the full Replacement Cost so redetermined shall forthwith, on receipt of such determination by such appraiser, give Notice thereof to the other. The determination of such appraiser shall be final and binding on the parties hereto until any subsequent determination under this Section 9.2, and Tenant shall forthwith conform the amount of the insurance carried to the amount so determined by the appraiser. 9.3 Waiver of Subrogation. Landlord and Tenant agree that (insofar as and to the extent that such agreement may be effective without invalidating or making it impossible to secure insurance coverage from responsible insurance companies doing business in the State) with respect to any property loss which is covered by insurance then being carried by Landlord or Tenant, respectively, the party carrying such insurance and suffering said loss releases the other of and from any and all claims with respect to such loss; and they further agree that their respective insurance companies shall have no right of subrogation against the other on account thereof, even though extra premium may result therefrom. In the event that any extra premium is -40- payable by Tenant as a result of this provision, Landlord shall not be liable for reimbursement to Tenant for such extra premium. 9.4 Form Satisfactory, Etc. All insurance policies and endorsements required pursuant to this Article 9 shall be fully paid for, nonassessable and be issued by insurance carriers authorized to do business in the State, having a general policy holder's rating of no less than B++ in Best's latest rating guide. All such policies described in Sections 9.1(a) through (d) shall include no deductible in excess of Two Hundred Fifty Thousand Dollars ($250,000) and, with the exception of the insurance described in Sections 9.1(e), shall name Landlord and any Hotel Mortgagee as additional insureds, as their interests may appear. All loss adjustments shall be payable as provided in Article 10. Tenant shall cause all insurance premiums to be paid and shall deliver certificates of insurance to Landlord prior to their effective date (and, with respect to any renewal policy, prior to the expiration of the existing policy). All such policies shall provide Landlord (and any Hotel Mortgagee if required by the same) thirty (30) days prior written notice of any material change or cancellation of such policy. In the event Tenant shall fail to effect such insurance as herein required, to pay the premiums therefor or to deliver such certificates to Landlord or any Hotel Mortgagee at the times required, Landlord shall have the right, but not the obligation, subject to the provisions of Section 12.5, to acquire such insurance and pay the premiums therefor, which amounts shall be payable to Landlord, upon demand, as Additional Charges, together with interest accrued thereon at the Overdue Rate from the date such payment is made until (but excluding) the date repaid. 9.5 Blanket Policy. Notwithstanding anything to the contrary contained in this Article 9, Tenant's obligation to maintain the insurance herein required may be brought within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Tenant, provided, that (a) the coverage thereby afforded will not be reduced or diminished from that which would exist under a separate policy meeting all other requirements of this Agreement, and (b) the requirements of this Article 9 are otherwise satisfied. 9.6 No Separate Insurance. Tenant shall not take out separate insurance, concurrent in form or contributing in the event of loss with that required by this Article 9, or increase the amount of any existing insurance by securing an additional policy or additional policies, unless all parties having an insurable interest in the subject matter of such insurance, including Landlord and all Hotel Mortgagees, are included therein as additional insureds and the loss is payable under such insurance in the same manner as losses are payable under this Agreement. In the event Tenant shall take out any such separate -41- insurance or increase any of the amounts of the then existing insurance, Tenant shall give Landlord prompt Notice thereof. 9.7 Indemnification of Landlord. Notwithstanding the existence of any insurance provided for herein and without regard to the policy limits of any such insurance, Tenant shall protect, indemnify and hold harmless Landlord for, from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and reasonable expenses (including, without limitation, reasonable attorneys' fees), to the maximum extent permitted by law, imposed upon or incurred by or asserted against Landlord 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 or rights of way, (b) any past, present or future use, misuse, non-use, condition, management, maintenance or repair by Tenant or anyone claiming under Tenant of the Leased Property or Tenant's Personal Property or any litigation, proceeding or claim by governmental entities or other third parties to which Landlord is made a party or participant relating to the Leased Property or Tenant's Personal Property or such use, misuse, non-use, condition, management, maintenance, or repair thereof including, failure to perform obligations (other than Condemnation proceedings) to which Landlord is made a party, (c) any Impositions that are the obligations of Tenant to pay pursuant to the applicable provisions of this Agreement, and (d) any failure on the part of Tenant or anyone claiming under Tenant to perform or comply with any of the terms of this Agreement. Tenant, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against Landlord (and shall not be responsible for any duplicative attorneys' fees incurred by Landlord) or may compromise or otherwise dispose of the same, with Landlord's prior written consent (which consent may not be unreasonably withheld or delayed). In the event Landlord shall unreasonably withhold or delay its consent, Tenant shall not be liable pursuant to this Section 9.7 for any incremental increase in costs or expenses resulting therefrom. The obligations of Tenant under this Section 9.7 are in addition to the obligations set forth in Section 4.3 and shall survive the termination of this Agreement. ARTICLE 10 CASUALTY 10.1 Insurance Proceeds. Except as provided in the last clause of this sentence, 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 9 (other than the proceeds of any business interruption insurance) shall be paid directly to Landlord (subject to the provisions of -42- Section 10.2) and all loss adjustments with respect to losses payable to Landlord shall require the prior written consent of Landlord; provided, however, that, so long as no Event of Default shall have occurred and be continuing, all such proceeds less than or equal to Two Hundred Fifty Thousand Dollars ($250,000) shall be paid directly to Tenant and such losses may be adjusted without Landlord's consent. If Tenant is required to reconstruct or repair the Leased Property as provided herein, such proceeds shall be paid out by Landlord from time to time for the reasonable costs of reconstruction or repair of the Leased Property necessitated by such damage or destruction, subject to and in accordance with the provisions of Section 10.2.4. Provided no Default or Event of Default has occurred and is continuing, any excess proceeds of insurance remaining after the completion of the restoration shall be paid to Tenant. In the event that the provisions of Section 10.2.1 are applicable, the insurance proceeds shall be retained by the party entitled thereto pursuant to Section 10.2.1. All salvage resulting from any risk covered by insurance shall belong to Landlord, provided any rights to the same have been waived by the insurer. 10.2 Damage or Destruction. 10.2.1 Damage or Destruction of Leased Property. If, during the Term, the Leased Property shall be totally or partially destroyed and the Hotel located thereon is thereby rendered Unsuitable for Its Permitted Use, either Landlord or Tenant may, by the giving of Notice thereof to the other, terminate this Agreement, whereupon, this Agreement shall terminate, Landlord shall be entitled to retain the insurance proceeds payable on account of such damage and Tenant shall thereafter have no obligation to pay Rent for periods arising after the effective date of termination. 10.2.2 Partial Damage or Destruction. If, during the Term, the Leased Property shall be totally or partially destroyed but the Hotel is not rendered Unsuitable for Its Permitted Use, Tenant shall, subject to Section 10.2.3, promptly restore the Hotel as provided in Section 10.2.4. 10.2.3 Insufficient Insurance Proceeds. If this Agreement is not otherwise terminated pursuant to this Article 10 and the cost of the repair or restoration of the Leased Property exceeds the amount of insurance proceeds received by Landlord and Tenant pursuant to Article 9(a), (c), (d) or, if applicable, (e), Tenant shall give Landlord Notice thereof which notice shall set forth in reasonable detail the nature of such deficiency and whether Tenant shall pay and assume the amount of such deficiency (Tenant having no obligation to do so, except that, if Tenant shall elect to make such funds available, the same shall become an irrevocable obligation of Tenant pursuant to this Agreement). In the event Tenant shall elect not to pay and assume the amount -43- of such deficiency, Landlord shall have the right (but not the obligation), exercisable at Landlord's sole election by Notice to Tenant, given within sixty (60) days after Tenant's notice of the deficiency, to elect to make available for application to the cost of repair or restoration the amount of such deficiency; provided, however, in such event, upon any disbursement by Landlord thereof, the Minimum Rent shall be adjusted as provided in Section 3.1.1(b). In the event that neither Landlord nor Tenant shall elect to make such deficiency available for restoration, either Landlord or Tenant may terminate this Agreement by Notice to the other, whereupon, this Agreement shall terminate as provided in Section 10.2.1. It is expressly understood and agreed, however, that, notwithstanding anything in this Agreement to the contrary, Tenant shall be strictly liable and solely responsible for the amount of any deductible and shall, upon any insurable loss, pay over the amount of such deductible to Landlord at the time and in the manner herein provided for payment of the applicable proceeds to Landlord. 10.2.4 Disbursement of Proceeds. In the event Tenant is required to restore the Leased Property pursuant to Section 10.2, Tenant shall (or shall direct the Manager to) commence promptly and continue diligently to perform the repair and restoration of the Leased Property (hereinafter called the "Work"), so as to restore the Leased Property in compliance with all Legal Requirements and so that the Leased Property shall be, to the extent practicable, substantially equivalent in value and general utility to its general utility and value immediately prior to such damage or destruction. Subject to the terms hereof, Landlord shall advance the insurance proceeds and any additional amounts payable by Landlord pursuant to Section 10.2.3 to Tenant regularly during the repair and restoration period so as to permit payment for the cost of any such restoration and repair. Any such advances shall be made not more than monthly within ten (10) Business Days after Tenant submits to Landlord a written requisition and substantiation therefor on AIA Forms G702 and G703 (or on such other form or forms as may be reasonably acceptable to Landlord). Landlord may, at its option, condition advancement of said insurance proceeds and other amounts on (i) the absence of any Event of Default, (ii) its approval of plans and specifications of an architect satisfactory to Landlord (which approval shall not be unreasonably withheld, delayed or conditioned), (iii) general contractors' estimates, (iv) architect's certificates, (v) unconditional lien waivers of general contractors, if available, (vi) evidence of approval by all governmental authorities and other regulatory bodies whose approval is required and (vii) such other certificates as Landlord may, from time to time, reasonably require. Landlord's obligation to disburse insurance proceeds under this Article 10 during the last two (2) years of the Term shall be subject to the release of such proceeds by any Hotel Mortgagee -44- to Landlord; otherwise each such Hotel Mortgagee shall be obligated to make such funds available for Landlord's use in accordance with the terms of this Agreement. If any Hotel Mortgagee shall be unwilling to disburse insurance proceeds in accordance with this Agreement, Tenant shall have the right to terminate this Agreement and Tenant shall thereafter have no obligation to pay Rent for periods arising after the effective date of termination. Tenant's obligation to restore the Leased Property pursuant to this Article 10 shall be subject to the release of available insurance proceeds by the applicable Hotel Mortgagee to Landlord or directly to Tenant and, in the event such proceeds are insufficient, Landlord electing to make such deficiency available therefor (and disbursement of such deficiency). 10.3 Damage Near End of Term. Notwithstanding any provisions of Section 10.1 or 10.2 to the contrary, if damage to or destruction of the Leased Property occurs during the last twelve (12) months of the Term (including any exercised Extended Terms) and if such damage or destruction cannot reasonably be expected to be fully repaired and restored prior to the date that is six (6) months prior to the end of such Term, the provisions of Section 10.2.1 shall apply as if the Leased Property had been totally or partially destroyed and the Hotel rendered Unsuitable for its Permitted Use. 10.4 Tenant's Property. All insurance proceeds payable by reason of any loss of or damage to any of Tenant's Personal Property shall be paid to Tenant and, to the extent necessary to repair or replace Tenant's Personal Property in accordance with Section 10.5, Tenant shall hold such proceeds in trust to pay the cost of repairing or replacing damaged Tenant's Personal Property. 10.5 Restoration of Tenant's Property. If Tenant is required to restore the Leased Property as hereinabove provided, Tenant shall either (a) restore all alterations and improvements made by Tenant and Tenant's Personal Property, or (b) replace such alterations and improvements and Tenant's Personal Property with improvements or items of the same or better quality and utility in the operation of the Leased Property. 10.6 No Abatement of Rent. This Agreement shall remain in full force and effect and Tenant's obligation to make all payments of Rent and to pay all other charges as and when required under this Agreement shall remain unabated during the Term notwithstanding any damage involving the Leased Property (provided that Landlord shall credit against such payments any amounts paid to Landlord as a consequence of such damage under any business interruption insurance obtained by Tenant hereunder). The provisions of this Article 10 shall be -45- considered an express agreement governing any cause of damage or destruction to the Leased Property and, to the maximum extent permitted by law, no local or State statute, laws, rules, regulation or ordinance in effect during the Term which provide for such a contingency shall have any application in such case. 10.7 Waiver. Tenant hereby waives any statutory rights of termination which may arise by reason of any damage or destruction of the Leased Property. ARTICLE 11 CONDEMNATION 11.1 Total Condemnation, Etc. If either (i) the whole of the Leased Property shall be taken by Condemnation or (ii) a Condemnation of less than the whole of the Leased Property renders the Leased Property Unsuitable for Its Permitted Use, this Agreement shall terminate, Tenant and Landlord shall seek the Award for their interests in the Leased Property as provided in Section 11.5 and Tenant shall thereafter have no obligation to pay Rent for periods arising after the effective date of termination. 11.2 Partial Condemnation. In the event of a Condemnation of less than the whole of the Leased Property such that the Leased Property is still suitable for its Permitted Use, Tenant shall, to the extent of the Award actually received by Tenant and any additional amounts disbursed by Landlord as hereinafter provided, commence promptly and continue diligently to restore the untaken portion of the Leased Improvements so that such Leased Improvements shall 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 such Condemnation, in full compliance with all Legal Requirements, subject to the provisions of this Section 11.2. If the cost of the repair or restoration of the Leased Property exceeds the amount of the Award, Tenant shall give Landlord Notice thereof which notice shall set forth in reasonable detail the nature of such deficiency and whether Tenant shall pay and assume the amount of such deficiency (Tenant having no obligation to do so, except that if Tenant shall elect to make such funds available, the same shall become an irrevocable obligation of Tenant pursuant to this Agreement). In the event Tenant shall elect not to pay and assume the amount of such deficiency, Landlord shall have the right (but not the obligation), exercisable at Landlord's sole election by Notice to Tenant given within sixty (60) days after Tenant's Notice of the deficiency, to elect to make available for application to the cost of repair or restoration the amount of such deficiency; provided, however, in such event, upon any -46- disbursement by Landlord thereof, the Minimum Rent shall be adjusted as provided in Section 3.1.1(b). In the event that neither Landlord nor Tenant shall elect to make such deficiency available for restoration, either Landlord or Tenant may terminate this Agreement, whereupon, the entire Award shall be retained by Landlord and Tenant shall thereafter have no obligation to pay Rent for periods arising after the effective date of termination. Subject to the terms hereof, Landlord shall contribute to the cost of restoration that part of the Award necessary to complete such repair or restoration, together with severance and other damages awarded for the taken Leased Improvements and any deficiency Landlord has agreed to disburse, to Tenant regularly during the restoration period so as to permit payment for the cost of such repair or restoration. Landlord may, at its option, condition advancement of such Award and other amounts on (i) the absence of any Event of Default, (ii) its approval of plans and specifications of an architect satisfactory to Landlord (which approval shall not be unreasonably withheld or delayed), (iii) general contractors' estimates, (iv) architect's certificates, (v) unconditional lien waivers of general contractors, if available, (vi) evidence of approval by all governmental authorities and other regulatory bodies whose approval is required and (vii) such other certificates as Landlord may, from time to time, reasonably require. Landlord's obligation under this Section 11.2 to disburse the Award and such other amounts shall be subject to (x) the collection thereof by Landlord and (y) during the last two (2) years of the Term, the release of such Award by the applicable Hotel Mortgagee; otherwise each such Hotel Mortgagee shall be obligated to make such funds available for Landlord's use in accordance with the terms of this Agreement. Tenant's obligation to restore the Leased Property shall be subject to the release of the Award by the applicable Hotel Mortgagee to Landlord. If any Hotel Mortgagee shall be unwilling to release such Award in accordance with this Agreement, Tenant shall have the right to terminate this Agreement. 11.3 Abatement of Rent. Other than as specifically provided in this Agreement, this Agreement shall remain in full force and effect and Tenant's obligation to make all payments of Rent and to pay all other charges as and when required under this Agreement shall remain unabated during the Term notwithstanding any Condemnation involving the Leased Property. The provisions of this Article 11 shall be considered an express agreement governing any Condemnation involving the Leased Property and, to the maximum extent permitted by law, no local or State statute, law, rule, regulation or ordinance in effect during the Term which provides for such a contingency shall have any application in such case. -47- 11.4 Temporary Condemnation. In the event of any temporary Condemnation of the Leased Property or Tenant's interest therein, this Agreement shall continue in full force and effect and Tenant shall continue to pay, in the manner and on the terms herein specified, the full amount of the Rent. Tenant shall continue to perform and observe all of the other terms and conditions of this Agreement on the part of the Tenant to be performed and observed. Provided no Event of Default has occurred and is continuing, the entire amount of any Award made for such temporary Condemnation allocable to the Term, whether paid by way of damages, rent or otherwise, shall be paid to Tenant. Tenant shall, promptly upon the termination of any such period of temporary Condemnation, at its sole cost and expense, restore the Leased Property to the condition that existed immediately prior to such Condemnation, in full compliance with all Legal Requirements, unless such period of temporary Condemnation shall extend beyond the expiration of the Term, in which event Tenant shall not be required to make such restoration. For purposes of this Section 11.4, a Condemnation shall be deemed to be temporary if the period of such Condemnation is not expected to, and does not, exceed twelve (12) months. 11.5 Allocation of Award. Except as provided in Section 11.4 and the second sentence of this Section 11.5, the total Award shall be solely the property of and payable to Landlord. Any portion of the Award made for the taking of Tenant's leasehold interest in the Leased Property, loss of business during the remainder of the Term, the taking of Tenant's Personal Property, or Tenant's removal and relocation expenses shall be the sole property of and payable to Tenant (subject to the provisions of Section 11.2). In any Condemnation proceedings, Landlord and Tenant shall each seek its own Award in conformity herewith, at its own expense. ARTICLE 12 DEFAULTS AND REMEDIES 12.1 Events of Default. The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (a) should Tenant fail to make any payment of the Rent or any other sum (including, but not limited to, funding of the FF&E Reserve) payable hereunder when due; or (b) should Tenant fail to maintain the insurance coverages required under Article 9 and such failure shall continue for ten (10) Business Days after Notice thereof (except that no Notice shall be required if any such insurance coverages shall have lapsed); or -48- (c) should Tenant default in the due observance or performance of any of the terms, covenants or agreements contained herein to be performed or observed by it (other than as specified in clauses (a) and (b) above) and such default shall continue for a period of fifteen (15) Business Days after Notice thereof from Landlord to Tenant; provided, however, that if such default is susceptible of cure but such cure cannot be accomplished with due diligence within such period of time and if, in addition, Tenant commences to cure or cause to be cured such default within fifteen (15) Business Days after Notice thereof from Landlord and thereafter prosecutes the curing of such default with all due diligence, such period of time shall be extended to such period of time (not to exceed an additional one hundred eighty (180) days in the aggregate) as may be necessary to cure such default with all due diligence; or (d) should an event of default by Tenant or any Affiliated Person as to Tenant occur and be continuing beyond the expiration of any applicable cure period under any of the Incidental Documents, the Other Leases or the Management Agreement; or (e) should there occur a final unappealable determination by applicable state authorities of the revocation or limitation of any material license, permit, certification or approval required for the lawful operation of the Hotel in accordance with its Permitted Use or the loss or material limitation of any material license, permit, certification or approval under any other circumstances under which Tenant is required to cease its operation of the Hotel in accordance with its Permitted Use at the time of such loss or limitation; or (f) should any material representation or warranty made by Tenant or any Affiliated Person as to Tenant under or in connection with this Agreement or any Incidental Document or in any document, certificate or agreement delivered in connection herewith or therewith prove to have been false or misleading in any material respect on the date when made or deemed made and the same shall continue for five (5) Business Days after Notice thereof from Landlord; or (g) should Tenant generally not be paying its debts as they become due or should Tenant make a general assignment for the benefit of creditors; or (h) should any petition be filed by or against Tenant under the Federal bankruptcy laws, or should any other proceeding be instituted by or against Tenant seeking to -49- adjudicate Tenant a bankrupt or insolvent, or seeking liquidation, reorganization, arrangement, adjustment or composition of Tenant's debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for Tenant or for any substantial part of the property of Tenant and such proceeding is not dismissed within ninety (90) days after institution thereof, or should Tenant take any action to authorize or effect any of the actions set forth above in this paragraph; or (i) should Tenant cause or institute any proceeding for its dissolution or termination, except as contemplated by or in connection with the assignment contemplated by Section 16.5; or (j) should the estate or interest of Tenant in the Leased Property or any part thereof be levied upon or attached in any proceeding and the same shall not be vacated or discharged within the later of (x) one hundred and twenty (120) days after commencement thereof, unless the amount in dispute is less than $250,000, in which case Tenant shall give notice to Landlord of the dispute but Tenant may defend in any suitable way, and (y) thirty (30) days after receipt by Tenant of Notice thereof from Landlord (unless Tenant shall be contesting such lien or attachment in good faith in accordance with Article 8); or (k) should Tenant at any time cease to be a wholly owned direct or indirect Subsidiary of Wyndham; or (l) should the Limited Guaranty be disaffirmed, disavowed or challenged by Wyndham; then, and in any such event, Landlord, in addition to all other remedies available to it, may terminate this Agreement by giving Notice thereof to Tenant and upon the expiration of the time, if any, fixed in such Notice, this Agreement shall terminate and all rights of Tenant under this Agreement shall cease. Landlord shall have and may exercise all rights and remedies available at law and in equity to Landlord as a result of Tenant's breach of this Agreement. Upon the occurrence of an Event of Default, Landlord may, in addition to any other remedies provided herein, enter upon the Leased Property or any portion thereof and take possession of any and all of Tenant's Personal Property, if any, and the Records, without liability for trespass or conversion (Tenant hereby waiving any right to notice or hearing prior to such taking of possession by Landlord) and sell the same at public or private sale, after giving Tenant reasonable Notice of the time and place -50- of any public or private sale, at which sale Landlord or its assigns may purchase all or any portion of Tenant's Personal Property, if any, unless otherwise prohibited by law. Unless otherwise provided by law and without intending to exclude any other manner of giving Tenant reasonable notice, the requirement of reasonable Notice shall be met if such Notice is given at least ten (10) days before the date of sale. The proceeds from any such disposition, less all expenses incurred in connection with the taking of possession, holding and selling of such property (including, reasonable attorneys' fees) shall be applied as a credit against the indebtedness which is secured by the security interest granted in Section 7.2. Any surplus shall be paid to Tenant or as otherwise required by law and Tenant shall pay any deficiency to Landlord, as Additional Charges, upon demand. 12.2 Remedies. None of (a) the termination of this Agreement pursuant to Section 12.1, (b) the repossession of the Leased Property or any portion thereof, (c) the failure of Landlord to re-let the Leased Property or any portion thereof, nor (d) the reletting of all or any of portion of the Leased Property, shall relieve Tenant of its liability and obligations hereunder, all of which shall survive any such termination, repossession or re-letting. In the event of any such termination, Tenant shall forthwith pay to Landlord all Rent due and payable with respect to the Leased Property through and including the date of such termination. Thereafter, Tenant, until the end of what would have been the Term of this Agreement in the absence of such termination, and whether or not the Leased Property or any portion thereof shall have been re-let, shall be liable to Landlord for, and shall pay to Landlord, as current damages, the Rent and other charges which would be payable hereunder for the remainder of the Term had such termination not occurred, less the net proceeds, if any, of any re-letting of the Leased Property, after deducting all reasonable expenses in connection with such reletting, including, without limitation, all repossession costs, brokerage commissions, legal expenses, attorneys' fees, advertising, expenses of employees, alteration costs and expenses of preparation for such reletting. Tenant shall pay such current damages to Landlord monthly on the days on which the Minimum Rent would have been payable hereunder if this Agreement had not been so terminated with respect to such of the Leased Property. At any time after such termination, whether or not Landlord shall have collected any such current damages, as liquidated final damages beyond the date of such termination, at Landlord's election, Tenant shall pay to Landlord an amount equal to the present value (discounted at the Interest Rate) of the excess, if any, of the Rent and other charges which would be payable hereunder from the date of such termination (assuming that, for the purposes of this paragraph, annual payments by Tenant on -51- account of Impositions and Additional Rent would be the same as payments required for the immediately preceding twelve calendar months, or if less than twelve calendar months have expired since the Commencement Date, the payments required for such lesser period projected to an annual amount) for what would be the then unexpired term of this Agreement if the same remained in effect, over the fair market rental for the same period. Nothing contained in this Agreement shall, however, limit or prejudice the right of Landlord to prove and obtain in proceedings for bankruptcy or insolvency an amount equal to the maximum allowed by any statute or rule of law in effect at the time when, and governing the proceedings in which, the damages are to be proved, whether or not the amount be greater than, equal to, or less than the amount of the loss or damages referred to above. In case of any Event of Default, re-entry, expiration and dispossession by summary proceedings or otherwise, Landlord may (a) relet the Leased Property or any part or parts thereof, either in the name of Landlord or otherwise, for a term or terms which may at Landlord's option, be equal to, less than or exceed the period which would otherwise have constituted the balance of the Term and may grant concessions or free rent to the extent that Landlord considers advisable and necessary to relet the same, and (b) may make such reasonable alterations, repairs and decorations in the Leased Property or any portion thereof as Landlord, in its sole and absolute discretion, considers advisable and necessary for the purpose of reletting the Leased Property; and the making of such alterations, repairs and decorations shall not operate or be construed to release Tenant from liability hereunder as aforesaid. Subject to the last sentence of this paragraph, Landlord shall in no event be liable in any way whatsoever for any failure to relet all or any portion of the Leased Property, or, in the event that the Leased Property is relet, for failure to collect the rent under such reletting. To the maximum extent permitted by law, Tenant hereby expressly waives any and all rights of redemption granted under any present or future laws in the event of Tenant being evicted or dispossessed, or in the event of Landlord obtaining possession of the Leased Property, by reason of the occurrence and continuation of an Event of Default hereunder. Landlord covenants and agrees, in the event of any termination of this Agreement as a result of an Event of Default, to use reasonable efforts to mitigate its damages. 12.3 Tenant's Waiver. IF THIS AGREEMENT IS TERMINATED PURSUANT TO SECTION 12.1 OR 12.2, TENANT WAIVES, TO THE EXTENT PERMITTED BY LAW, ANY RIGHT TO A TRIAL BY JURY IN THE EVENT OF SUMMARY PROCEEDINGS TO ENFORCE THE REMEDIES SET FORTH IN THIS ARTICLE 12, AND THE BENEFIT OF ANY LAWS NOW OR HEREAFTER IN FORCE EXEMPTING PROPERTY FROM LIABILITY FOR RENT OR FOR DEBT. -52- 12.4 Application of Funds. Any payments received by Landlord under any of the provisions of this Agreement during the existence or continuance of any Event of Default (and any payment made to Landlord rather than Tenant due to the existence of any Event of Default) shall be applied to Tenant's current and past due obligations under this Agreement in such order as Landlord may determine or as may be prescribed by the laws of the State. 12.5 Landlord's Right to Cure Tenant's Default. If an Event of Default shall have occurred and be continuing, Landlord, after Notice to Tenant (which Notice shall not be required if Landlord shall reasonably determine immediate action is necessary to protect person or property), without waiving or releasing any obligation of Tenant and without waiving or releasing any Event of Default, may (but shall not be obligated to), at any time thereafter, make such payment or perform such act for the account and at the expense of Tenant, and may, to the maximum extent permitted by law, enter upon the Leased Property or any portion thereof for such purpose and take all such action thereon as, in Landlord's sole and absolute discretion, may be necessary or appropriate therefor. No such entry shall be deemed an eviction of Tenant. All reasonable costs and expenses (including, without limitation, reasonable attorneys' fees) incurred by Landlord in connection therewith, together with interest thereon (to the extent permitted by law) at the Overdue Rate from the date such sums are paid by Landlord until repaid, shall be paid by Tenant to Landlord, on demand. ARTICLE 13 HOLDING OVER Any holding over by Tenant after the expiration or sooner termination of this Agreement shall be treated as a daily tenancy at sufferance at a rate equal to two (2) times the Minimum Rent and other charges herein provided (prorated on a daily basis). Tenant shall also pay to Landlord all damages (direct or indirect) sustained by reason of any such holding over. Otherwise, such holding over shall be on the terms and conditions set forth in this Agreement, to the extent applicable. Nothing contained herein shall constitute the consent, express or implied, of Landlord to the holding over of Tenant after the expiration or earlier termination of this Agreement. -53- ARTICLE 14 LANDLORD'S NOTICE OBLIGATIONS; LANDLORD DEFAULT 14.1 Landlord Notice Obligation. Landlord shall give prompt Notice to Tenant of any matters affecting the Leased Property of which Landlord receives written notice or actual knowledge and, to the extent Tenant otherwise has no notice or actual knowledge thereof, Landlord shall be liable for any liabilities arising from the failure to deliver such Notice to Tenant. 14.2 Landlord's Default. If Landlord shall default in the performance or observance of any of its covenants or obligations set forth in this Agreement or any obligation of Landlord, if any, under any agreement affecting the Leased Property, the performance of which is not Tenant's obligation pursuant to this Agreement, and any such default shall continue for a period of ten (10) days after Notice thereof with respect to monetary defaults and thirty (30) days after Notice thereof with respect to non-monetary defaults from Tenant to Landlord and any applicable Hotel Mortgagee, or such additional period as may be reasonably required to correct the same, Tenant may declare the occurrence of a "Landlord Default" by a second Notice to Landlord and to such Hotel Mortgagee. Thereafter, Tenant may forthwith cure the same and, subject to the provisions of the following paragraph, invoice Landlord for costs and expenses (including reasonable attorneys' fees and court costs) incurred by Tenant in curing the same, together with interest thereon (to the extent permitted by law) from the date Landlord receives Tenant's invoice, at the Overdue Rate. Tenant shall have no right to terminate this Agreement for any default by Landlord hereunder and no right, for any such default, to offset or counterclaim against any Rent or other charges due hereunder. If Landlord shall in good faith dispute the occurrence of any Landlord Default and Landlord, before the expiration of the applicable cure period, shall give Notice thereof to Tenant, setting forth, in reasonable detail, the basis therefor, no Landlord Default shall be deemed to have occurred and Landlord shall have no obligation with respect thereto until final adverse determination thereof; provided, however, that in the event of any such adverse determination, Landlord shall pay to Tenant interest on any disputed funds at the Interest Rate, from the date demand for such funds was made by Tenant until the date of final adverse determination and, thereafter, at the Overdue Rate until paid. If Tenant and Landlord shall fail, in good faith, to resolve any such dispute within ten (10) days after Landlord's Notice of dispute, either may submit the matter for resolution to a court of competent jurisdiction. -54- ARTICLE 15 PURCHASE RIGHTS 15.1 First Refusal to Purchase. Provided, (a) no Default or Event of Default shall have occurred and be continuing, (b) this Agreement shall be of full force and effect, and (c) other than as expressly permitted or required by Section 16, Tenant shall not have assigned this Agreement (other than a collateral assignment to or from a Leasehold Mortgagee or as contemplated by Section 16.5) or subleased all or any portion of the Leased Property, Tenant shall have a first refusal option to purchase the Leased Property upon the same price, terms and conditions as Landlord shall propose to sell the Leased Property, or upon the same price, terms and conditions of any offer from a third party to purchase the Leased Property which Landlord intends to accept (or has accepted subject to Tenant's right of first refusal herein provided); provided, however, that, if the proposed purchase price is for other than cash, Tenant shall have the right to purchase the Leased Property on cash equivalent terms determined by the agreement of the parties or, if they cannot agree within ten (10) Business Days, by arbitration in accordance with the rules of the American Arbitration Association then in effect. If, during the Term, Landlord reaches such agreement with a third party or proposes to offer the Leased Property for sale, Landlord shall promptly give written notice to Tenant of the purchase price and all other material terms and conditions of such agreement or proposed sale and Tenant shall have sixty (60) days thereafter to exercise Tenant's option to purchase by written notice to Landlord thereof. Failure of Tenant to respond within such 60-day period shall be deemed a waiver of Tenant's right to purchase the Leased Property with respect to such offer pursuant to this Section 15.1. If Tenant exercises its option, the sale to Tenant shall be consummated upon the same terms and conditions as contained in such agreement or Landlord's notice of the proposed sale. If Tenant shall not exercise its option to purchase within the time period and in the manner above provided, Landlord shall be free to sell the Leased Property to such third party at the price and upon terms substantially similar to those offered to Tenant. The rights granted to Tenant pursuant to this Section 15.1 shall not apply to any financing or sale-leaseback transaction or any transaction pursuant to which Landlord is merged or consolidated with another Person; provided, however, that any Person who shall acquire the Leased Premises shall acquire them subject to, and shall be bound by, the provisions of this Section 15.1. The provisions of this Section 15.1 shall inure to the benefit of Tenant and any permitted successors and assigns of Tenant pursuant to this Agreement. 15.2 Landlord's Option to Purchase the Tenant's Personal Property; Transfer of Licenses. Landlord shall have the option to purchase Tenant's Personal Property, at the expiration or -55- termination of this Agreement, for an amount equal to the then net market value thereof (current replacement cost as determined by appraisal less accumulated depreciation on Tenant's books pertaining thereto), subject to, and with appropriate price adjustments for, all equipment leases, conditional sale contracts, UCC-1 financing statements and other encumbrances to which such Personal Property is subject. Upon the expiration or sooner termination of this Agreement, Tenant shall use its best efforts to transfer and assign to Landlord or its designee, or assist Landlord or its designee in obtaining, any contracts, licenses, and certificates required for the then operation of the Leased Property. ARTICLE 16 SUBLETTING AND ASSIGNMENT 16.1 Subletting and Assignment. Except as provided in Section 16.3 and Article 19, Tenant shall not, without Landlord's prior written consent (which consent may be given or withheld in Landlord's sole and absolute discretion), assign, mortgage, pledge, hypothecate, encumber or otherwise transfer this Agreement or sublease (which term shall be deemed to include the granting of concessions, licenses and the like), all or any part of the Leased Property or suffer or permit this Agreement or the leasehold estate created hereby or any other rights arising under this Agreement to be assigned, transferred, mortgaged, pledged, hypothecated or encumbered, in whole or in part, whether voluntarily, involuntarily or by operation of law, or permit the use or operation of the Leased Property by anyone other than Tenant and the Manager, or the Leased Property to be offered or advertised for assignment or subletting. For purposes of this Section 16.1, an assignment of this Agreement shall be deemed to include any direct or indirect transfer of any interest in Tenant such that Tenant shall cease to be a wholly owned direct or indirect Subsidiary of Wyndham or any transaction pursuant to which Tenant is merged or consolidated with another Entity or pursuant to which all or substantially all of Tenant's assets are transferred to any other Entity, as if such change in control or transaction were an assignment of this Agreement; provided, however, that the foregoing shall not be construed to prohibit collateral assignments or pledges of the capital stock of Tenant to Lending Institutions otherwise permitted by this Agreement. If this Agreement is assigned or if the Leased Property or any part thereof are sublet (or occupied by anybody other than Tenant, the Manager and their respective employees or hotel guests) Landlord may collect the rents from such assignee, subtenant or occupant, as the case may be, and apply the net amount collected to the Rent herein reserved, but no such collection shall be deemed a waiver of the provisions set forth in -56- the first paragraph of this Section 16.1, the acceptance by Landlord of such assignee, subtenant or occupant, as the case may be, as a tenant, or a release of Tenant from the future performance by Tenant of its covenants, agreements or obligations contained in this Agreement. No subletting or assignment shall in any way impair the continuing primary liability of Tenant hereunder (unless Landlord and Tenant expressly otherwise agree that Tenant shall be released from all obligations hereunder), and no consent to any subletting or assignment in a particular instance shall be deemed to be a waiver of the prohibition set forth in this Section 16.1. No assignment, subletting or occupancy shall affect any Permitted Use. Any subletting, assignment or other transfer of Tenant's interest under this Agreement in contravention of this Section 16.1 shall be voidable at Landlord's option. 16.2 Required Sublease Provisions. Any sublease of all or any portion of the Leased Property entered into on or after the date hereof shall provide (a) that it is subject and subordinate to this Agreement and to the matters to which this Agreement is or shall be subject or subordinate; (b) that in the event of termination of this Agreement or reentry or dispossession of Tenant by Landlord under this Agreement, Landlord may, at its option, terminate such sublease or take over all of the right, title and interest of Tenant, as sublessor under such sublease, and such subtenant shall, at Landlord's option, attorn to Landlord pursuant to the then executory provisions of such sublease, except that neither Landlord nor any Hotel Mortgagee, as holder of a mortgage or as Landlord under this Agreement, if such mortgagee succeeds to that position, shall (i) be liable for any act or omission of Tenant under such sublease, (ii) be subject to any credit, counterclaim, offset or defense which theretofore accrued to such subtenant against Tenant, (iii) be bound by any previous modification of such sublease not consented to in writing by Landlord or by any previous prepayment of more than one (1) month's Rent, (iv) be bound by any covenant of Tenant to undertake or complete any construction of the Leased Property or any portion thereof, (v) be required to account for any security deposit of the subtenant other than any security deposit actually delivered to Landlord by Tenant, (vi) be bound by any obligation to make any payment to such subtenant or grant any credits, except for services, repairs, maintenance and restoration provided for under the sublease that are performed after the date of such attornment, (vii) be responsible for any monies owing by Tenant to the credit of such subtenant, or (viii) be required to remove any Person occupying any portion of the Leased Property; and (c), in the event that such subtenant receives a written Notice from Landlord or any Hotel Mortgagee stating that an Event of Default has occurred and is continuing, such subtenant shall thereafter be obligated to pay all rentals accruing under such sublease directly to the party giving such -57- Notice or as such party may direct. All rentals received from such subtenant by Landlord or the Hotel Mortgagee, as the case may be, shall be credited against the amounts owing by Tenant under this Agreement and such sublease shall provide that the subtenant thereunder shall, at the request of Landlord, execute a suitable instrument in confirmation of such agreement to attorn. An original counterpart of each such sublease and assignment and assumption, duly executed by Tenant and such subtenant or assignee, as the case may be, in form and substance reasonably satisfactory to Landlord, shall be delivered promptly to Landlord and (a) in the case of an assignment, the assignee shall assume in writing and agree to keep and perform all of the terms of this Agreement on the part of Tenant to be kept and performed and shall be, and become, jointly and severally liable with Tenant for the performance thereof and (b) in case of either an assignment or subletting, Tenant 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 Tenant hereunder. The provisions of this Section 16.2 shall not be deemed a waiver of the provisions set forth in the first paragraph of Section 16.1. 16.3 Permitted Sublease. Notwithstanding the foregoing, including, without limitation, Section 16.2, but subject to the provisions of Section 16.4 and any other express conditions or limitations set forth herein, Tenant may, in each instance after Notice to Landlord, sublease space at the Leased Property for newsstand, gift shop, parking garage, health club, restaurant, bar or commissary purposes or similar concessions in furtherance of the Permitted Use, so long as such subleases do not demise, in the aggregate, in excess of two thousand (2,000) square feet, will not violate or affect any Legal Requirement or Insurance Requirement, and Tenant shall provide such additional insurance coverage applicable to the activities to be conducted in such subleased space as Landlord and any Hotel Mortgagee may reasonably require. 16.4 Sublease Limitation. For so long as Landlord or any Affiliated Person as to Landlord shall seek to qualify as a real estate investment trust, anything contained in this Agreement to the contrary notwithstanding, Tenant shall not sublet the Leased Property on any basis such that the rental to be paid by any sublessee thereunder would be based, in whole or in part, on the income or profits derived by the business activities of such sublessee, any other formula such that any portion of such sublease rental would fail to qualify as "rents from real property" within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto or would otherwise disqualify Landlord for treatment as a real estate investment trust. -58- ARTICLE 17 ESTOPPEL CERTIFICATES AND FINANCIAL STATEMENTS 17.1 Estoppel Certificates. At any time and from time to time, upon not less than ten (10) Business Days prior Notice by either party, the party receiving such Notice shall furnish to the other an Officer's Certificate certifying that this Agreement is unmodified and in full force and effect (or that this Agreement is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, that no Default or an Event of Default has occurred and is continuing or, if a Default or an Event of Default shall exist, specifying in reasonable detail the nature thereof, and the steps being taken to remedy the same, and such additional information as the requesting party may reasonably request. Any such certificate furnished pursuant to this Section 17.1 may be relied upon by the requesting party, its lenders and any prospective purchaser or mortgagee of the Leased Property or the leasehold estate created hereby. 17.2 Financial Statements. (a) within forty-five (45) days after each of the first three quarters of any Fiscal Year, the most recent Consolidated Financials, accompanied by the Financial Officer's Certificate; (b) within ninety (90) days after the end of each Fiscal Year, the most recent Consolidated Financials for such year, certified by an independent certified public accountant reasonably satisfactory to Landlord and accompanied by a Financial Officer's Certificate; (c) within thirty (30) days after the end of each month, an unaudited operating statement, including occupancy percentages and average rate, accompanied by a Financial Officer's Certificate; (d) promptly after the sending or filing thereof, copies of all reports which Tenant or Wyndham sends to its security holders generally, and copies of all periodic reports which Tenant or Wyndham files with the SEC or any stock exchange on which its shares are listed or traded; (e) at any time and from time to time upon not less than twenty (20) days Notice from Landlord, any Consolidated Financials or any other financial reporting information required to be filed by Landlord with any securities and exchange commission, the SEC or any successor agency, or any -59- other governmental authority, or required pursuant to any order issued by any court, governmental authority or arbitrator in any litigation to which Landlord is a party, for purposes of compliance therewith; and (f) promptly, upon Notice from Landlord, such other information concerning the business, financial condition and affairs of Tenant and Wyndham as Landlord reasonably may request from time to time. Landlord may at any time, and from time to time, provide any Hotel Mortgagee with copies of any of the foregoing statements. In addition, Landlord shall have the right, from time to time at Landlord's sole cost and expense, upon reasonable Notice, during Tenant's customary business hours, to cause Tenant's books and records with respect to the Leased Property to be audited by auditors selected by Landlord at the place where such books and records are customarily kept. 17.3 General Operations. Tenant shall furnish to Landlord: (a) Within thirty (30) days after receipt or modification thereof, copies of all licenses authorizing Tenant and/or the Manager to operate the Hotel for its Permitted Use; (b) Not less than thirty (30) days after the commencement of any Fiscal Year, proposed annual income and ordinary expense and capital improvement budgets setting forth projected income and costs and expenses projected to be incurred by Tenant in managing, owning, maintaining and operating the Hotel during the next succeeding Fiscal Year; and (c) Promptly after receipt or sending thereof, copies of all notices given or received by Tenant under the Management Agreement. ARTICLE 18 LANDLORD'S RIGHT TO INSPECT Tenant shall permit, and shall direct the Manager to permit, Landlord and its authorized representatives to inspect the Leased Property during usual business hours upon not less than twenty-four (24) hours' notice and to make such repairs as Landlord is permitted or required to make pursuant to the terms of this Agreement, provided that any inspection or repair by Landlord or its representatives will not unreasonably interfere with Tenant's use and operation of the Leased Property and further provided -60- that in the event of an emergency, as determined by Landlord in its reasonable discretion, prior Notice shall not be necessary. ARTICLE 19 LEASEHOLD MORTGAGES 19.1 Leasehold Mortgages Authorized. Notwithstanding anything to the contrary contained herein, on one or more occasions, without Landlord's prior consent, Tenant may grant one or more Leasehold Mortgages on its leasehold interest in the Security Deposit, the Leased Property and security interests in Tenant's rights to the FF&E Reserve and Tenant's Personal Property (collectively, the "Leasehold Estate") to one or more Lending Institutions to secure Indebtedness permitted hereunder. 19.2 Notices to Landlord. Promptly upon the granting of any Leasehold Mortgage, Tenant or the applicable Leasehold Mortgagee shall give Notice thereof to Landlord, such notice to identify the name and address of the Leasehold Mortgagee and to be accompanied by a copy of the applicable Leasehold Mortgage, as recorded. In the event of a change of address of a Leasehold Mortgagee or of any amendment to or assignment of a Leasehold Mortgage, Tenant or the applicable Leasehold Mortgagee shall promptly provide notice of such new address, amendment or assignment to Landlord, together with a copy of each such amendment or assignment. 19.3 Cure by Leasehold Mortgagee. Any Leasehold Mortgagee shall have the right, at any time during the Term hereof, while this Agreement is in full force and effect: (a) To do any act required by Tenant hereunder, and all such acts done or performed shall be effective as to prevent a forfeiture of Tenant's rights hereunder as if the same had been done or performed by Tenant; and (b) To rely on the security afforded by the Leasehold Estate, and to acquire and to succeed to the interest of Tenant hereunder by foreclosure, whether by judicial sale, by power of sale contained in any security instrument, or by assignment of leasehold interest given in lieu of foreclosure, and thereafter convey or assign title to the Leasehold Estate so required to any other person, firm or corporation. If the Leasehold Mortgagee or Tenant shall have furnished, in writing, to Landlord a request for Notice of any Event of Default, in the event of any Event of Default by Tenant, Landlord will not terminate this Lease by reason of such Event of Default if the Leasehold Mortgagee shall, prior to the expiration of the -61- applicable cure period, cure any monetary Event of Default or, if such Event of Default cannot be cured by the payment of money, provide Landlord with a written undertaking, in form and substance satisfactory to Landlord, to perform all covenants and obligations of Tenant under this Agreement upon foreclosure and, thereafter, such Leasehold Mortgagee shall proceed in a timely and diligent manner to accomplish the foreclosure of the Leasehold Estate. 19.4 Landlord Estoppel Certificates. Landlord agrees, from time to time, to provide to any Leasehold Mortgagee, promptly after written request therefor, an estoppel certificate substantially in the form of Exhibit C or otherwise in such form as any Leasehold Mortgagee may reasonably request. ARTICLE 20 HOTEL MORTGAGES 20.1 Landlord May Grant Liens. Without the consent of Ten ant, Landlord may, subject to the terms and conditions set forth in this Section 20.1, 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. Notwithstanding anything to the contrary set forth in Section 20.2, any such Encumbrance shall include the right to prepay (whether or not subject to a prepayment penalty) and shall provide (subject to Section 20.2) that it is subject to the rights of Tenant under this Agreement. 20.2 Subordination of Lease. Subject to Section 20.1 and this Section 20.2, this Agreement, any and all rights of Tenant hereunder, are and shall be subject and subordinate to any ground or master lease, and all renewals, extensions, modifications and replacements thereof, and to all mortgages and deeds of trust, which may now or hereafter affect the Leased Property or any improvements thereon and/or any of such leases, whether or not such mortgages or deeds of trust shall also cover other lands and/or buildings and/or leases, to each and every advance made or hereafter to be made under such mortgages and deeds of trust, and to all renewals, modifications, replacements and extensions of such leases and such mortgages and deeds of trust and all consolidations of such mortgages and deeds of trust. This section shall be self-operative and no further instrument of subordination shall be required provided that Tenant has received a nondisturbance and attornment agreement from each Superior Mortgagee and/or Superior Landlord, consistent with the provisions of this Section 20.2 and otherwise in form and substance reasonably satisfactory to Tenant, the benefits of -62- which agreement shall also extend to any Leasehold Mortgagee. In confirmation of such subordination, Tenant shall promptly execute, acknowledge and deliver any instrument that Landlord, the lessor under any such lease or the holder of any such mortgage or the trustee or beneficiary of any deed of trust or any of their respective successors in interest may reasonably request to evidence such subordination. Any lease to which this Agreement is, at the time referred to, subject and subordinate is herein called "Superior Lease" and the lessor of a Superior Lease or its successor in interest at the time referred to, is herein called "Superior Landlord" and any mortgage or deed of trust to which this Agreement is, at the time referred to, subject and subordinate, is herein called "Superior Mortgage" and the holder, trustee or beneficiary of a Superior Mortgage is herein called "Superior Mortgagee". Tenant shall have no obligations under any Superior Lease or Superior Mortgage other than those expressly set forth in this Section 20.2. If any Superior Landlord or Superior Mortgagee or the nominee or designee of any Superior Landlord or Superior Mortgagee shall succeed to the rights of Landlord under this Agreement (any such person, "Successor Landlord"), whether through possession or foreclosure action or delivery of a new lease or deed, or otherwise, such Successor Landlord shall recognize Tenant's rights under this Agreement as herein provided and Tenant shall attorn to and recognize the Successor Landlord as Tenant's landlord under this Agreement and Tenant shall promptly execute and deliver any instrument that such Successor Landlord may reasonably request to evidence such attornment (provided that such instrument does not alter the terms of this Agreement), whereupon, this Agreement shall continue in full force and effect as a direct lease between the Successor Landlord and Tenant upon all of the terms, conditions and covenants as are set forth in this Agreement, except that the Successor Landlord (unless formerly the landlord under this Agreement or its nominee or designee) shall not be (a) liable in any way to Tenant for any act or omission, neglect or default on the part of any prior Landlord under this Agreement, (b) responsible for any monies owing by or on deposit with any prior Landlord to the credit of Tenant (except to the extent actually paid or delivered to the Successor Landlord), (c) subject to any counterclaim or setoff which theretofore accrued to Tenant against any prior Landlord, (d) bound by any modification of this Agreement subsequent to such Superior Lease or Mortgage, or by any previous prepayment of Minimum Rent or Additional Rent for more than one (1) month in advance of the date due hereunder, which was not approved in writing by the Superior Landlord or the Superior Mortgagee thereto, (e) liable to Tenant beyond the Successor Landlord's interest in the Leased Property and the rents, income, receipts, revenues, issues and profits issuing from the Leased Property, (f) responsible for the performance of any work to be done by the Landlord under this Agreement to render the Leased Property ready -63- for occupancy by Tenant (subject to Landlord's obligations under Section 5.1.2(b) or with respect to any insurance or Condemnation proceeds), or (g) required to remove any Person occupying the Leased Property or any part thereof, except if such person claims by, through or under the Successor Landlord. Tenant agrees at any time and from time to time to execute a suitable instrument in confirmation of Tenant's agreement to attorn, as aforesaid and Landlord agrees to provide Tenant with an instrument of nondisturbance and attornment from each such Superior Mortgagee and Superior Landlord in form and substance reasonably satisfactory to Tenant. Nothing contained in this Section 20.2 shall relieve Landlord from any liability to Tenant under this Agreement following the exercise of remedies by a Superior Mortgagee. 20.3 Notice to Mortgagee and Superior Landlord. Subsequent to the receipt by Tenant of Notice from Landlord as to the identity of any Hotel Mortgagee or Superior Landlord under a lease with Landlord, as ground lessee, which includes the Leased Property as part of the demised premises and which complies with Section 20.1 and 20.2 (which Notice shall be accompanied by a copy of the applicable mortgage or lease), no notice from Tenant to Landlord as to the Leased Property shall be effective unless and until a copy of the same is given to such Hotel Mortgagee or Superior Landlord at the address set forth in the above described Notice, and the curing of any of Landlord's defaults by such Hotel Mortgagee or Superior Landlord shall be treated as performance by Landlord. ARTICLE 21 ADDITIONAL COVENANTS OF TENANT 21.1 Prompt Payment of Indebtedness. Tenant shall (a) pay or cause to be paid when due all payments of principal of and premium and interest on Tenant's Indebtedness for money borrowed and shall not permit or suffer any such Indebtedness to become or remain in default beyond any applicable grace or cure period, (b) pay or cause to be paid when due all lawful claims for labor and rents with respect to the Leased Property, (c) pay or cause to be paid when due all trade payables and (d) pay or cause to be paid when due all other of Tenant's Indebtedness upon which it is or becomes obligated, except, in each case, other than that referred to in clause (a), to the extent payment is being contested in good faith by appropriate proceedings in accordance with Article 8 and if Tenant shall have set aside on its books adequate reserves with respect thereto in accordance with GAAP, if appropriate, or unless and until foreclosure, distraint sale or other similar proceedings shall have been commenced. -64- 21.2 Conduct of Business. Tenant shall not engage in any business other than the leasing and operation of the Leased Property and shall do or cause to be done all things necessary to preserve, renew and keep in full force and effect and in good standing its corporate or partnership existence, as applicable, and its rights and licenses necessary to conduct such business. 21.3 Maintenance of Accounts and Records. Tenant shall keep true records and books of account of Tenant in which full, true and correct entries will be made of dealings and transactions in relation to the business and affairs of Tenant in accordance with GAAP, where applicable, Tenant shall apply accounting principles in the preparation of the financial statements of Tenant which, in the judgment of and the opinion of its independent public accountants, are in accordance with GAAP, where applicable, except for changes approved by such independent public accountants. Tenant shall provide to Landlord either in a footnote to the financial statements delivered under Section 17.2 which relate to the period in which such change occurs, or in separate schedules to such financial statements, information sufficient to show the effect of any such changes on such financial statements. 21.4 Notice of Litigation, Etc. Tenant shall give prompt Notice to Landlord of any litigation or any administrative proceeding to which it may hereafter become a party of which Tenant has notice or actual knowledge which involves a potential uninsured liability equal to or greater than Two Hundred Fifty Thousand Dollars ($250,000) or which, in Tenant's reasonable opinion, may otherwise result in any material adverse change in the business, operations, property, prospects, results of operation or condition, financial or other, of Tenant. Forthwith upon Tenant obtaining knowledge of any Default, Event of Default or any default or event of default under any agreement relating to Indebtedness for money borrowed in an aggregate amount exceeding, at any one time, Two Hundred Fifty Thousand Dollars ($250,000), or any event or condition that would be required to be disclosed in a current report filed by Tenant on Form 8-K or in Part II of a quarterly report on Form 10-Q if Tenant were required to file such reports under the Securities Exchange Act of 1934, as amended, Tenant shall furnish Notice thereof to Landlord specifying the nature and period of existence thereof and what action Tenant has taken or is taking or proposes to take with respect thereto. 21.5 Indebtedness of Tenant. Tenant shall not create, incur, assume or guarantee, or permit to exist, or become or remain liable directly or indirectly upon, any Indebtedness except the following: (a) Indebtedness of Tenant to Landlord; -65- (b) Indebtedness of Tenant for Impositions, to the extent that payment thereof shall not at the time be required to be made in accordance with the provisions of Article 8; (c) Indebtedness of Tenant in respect of judgments or awards (i) which have been in force for less than the applicable appeal period and in respect of which execution thereof shall have been stayed pending such appeal or review, or (ii) which are fully covered by insurance payable to Tenant, or (iii) which are for an amount not in excess of $250,000 in the aggregate at any one time outstanding and (x) which have been in force for not longer than the applicable appeal period, so long as execution is not levied thereunder or (y) in respect of which an appeal or proceedings for review shall at the time be prosecuted in good faith in accordance with the provisions of Article 8, and in respect of which execution thereof shall have been stayed pending such appeal or review; (d) unsecured borrowings of Tenant from its Affiliated Persons which are by their terms expressly subordinate pursuant to a Subordination Agreement to the payment and performance of Tenant's obligations under this Agreement; (e) Indebtedness for purchase money financing in accordance with Section 21.9(a) and other operating liabilities incurred in the ordinary course of Tenant's business; (f) Deferred fees to the Manager as provided in the Management Agreement, provided that such fees shall be, from and after the occurrence of a Default or Event of Default, subordinate to all amounts owing to Landlord; or (g) Indebtedness of Wyndham secured by a Leasehold Mortgage or otherwise guaranteed by Tenant. 21.6 Financial Condition of Tenant. Tenant shall at all times maintain Tangible Net Worth (except as provided in the last clause of this sentence) in an amount at least equal to the aggregate of one year's Minimum Rent payable pursuant to this Agreement; it being expressly understood and agreed that the amount of the Security Deposit may for such purpose be counted as equity at the full amount thereof. 21.7 Distributions, Payments to Affiliated Persons, Etc. Tenant shall not declare, order, pay or make, directly or indirectly, any Distributions or any payment to any Affiliated Person of Tenant (including payments in the ordinary course of business and payments pursuant to management agreements with any such Affiliated Person) or set apart any sum or property -66- therefor, or agree to do so, if, at the time of such proposed action, or immediately after giving effect thereto, any Event of Default shall exist. 21.8 Prohibited Transactions. Tenant shall not permit to exist or enter into any agreement or arrangement whereby it engages in a transaction of any kind with any Affiliated Person as to Tenant, except on terms and conditions which are commercially reasonable or as otherwise provided in Section 21.5. 21.9 Liens and Encumbrances. Except as permitted by Section 7.1, Article 19 and Section 21.5, Tenant shall not create or incur or suffer to be created or incurred or to exist any Lien on this Agreement or any of Tenant's assets, properties, rights or income, or any of its interest therein, now or at any time hereafter owned, other than: (a) Security interests securing the purchase price of equipment or personal property whether acquired before or after the Commencement Date; provided, however, that (i) such Lien shall at all times be confined solely to the asset in question and (ii) the aggregate principal amount of Indebtedness secured by any such Lien shall not exceed the cost of acquisition or construction of the property subject thereto; (b) Permitted Encumbrances; and (c) As permitted pursuant to Article 19 and Section 21.5. 21.10 Merger; Sale of Assets; Etc. Except as otherwise permitted by this Agreement, Tenant shall not (i) sell, lease (as lessor or sublessor), transfer or otherwise dispose of, or abandon, all or any material portion of its assets (including capital stock) or business to any Person, (ii) merge into or with or consolidate with any other Entity, or (iii) sell, lease (as lessor or sublessor), transfer or otherwise dispose of, or abandon, any personal property or fixtures or any real property; provided, however, that, notwithstanding the provisions of clause (iii) preceding, Tenant may dispose of equipment or fixtures which have become inadequate, obsolete, worn-out, unsuitable, undesirable or unnecessary, provided substitute equipment or fixtures having equal or greater value and utility (but not necessarily having the same function) have been provided. -67- ARTICLE 22 REPRESENTATIONS AND WARRANTIES 22.1 Representations of Tenant. To induce Landlord to enter into this Agreement, Tenant represents and warrants to Landlord as follows: 22.1.1 Status and Authority of Tenant. Tenant is a corporation duly organized, validly existing and in corporate good standing under the laws of its state of incorporation. Tenant has all requisite power and authority under the laws of its state of formation and its respective charter documents to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. Tenant has duly qualified to transact business in each jurisdiction in which the nature of the business conducted by it requires such qualification. 22.1.2 Action of Tenant. Tenant has taken all necessary action to authorize the execution, delivery and performance of this Agreement; this Agreement constitutes the valid and binding obligation and agreement of Tenant, enforceable against Tenant in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors. 22.1.3 No Violations of Agreements. Neither the execution, delivery or performance of this Agreement by Tenant, nor compliance with the terms and provisions hereof, will result in any breach of the terms, conditions or provisions of, or conflict with or constitute a default under, or result in the creation of any lien, charge or encumbrance upon Tenant or the Leased Property pursuant to the terms of any indenture, mortgage, deed of trust, note, evidence of indebtedness or any other material agreement or instrument by which Tenant or, to Tenant's knowledge, the Leased Property is bound, other than a Leasehold Mortgage. 22.1.4 Litigation. To Tenant's knowledge, no action or proceeding is pending or threatened and no investigation looking toward such an action or proceeding has begun, which questions the validity of this Agreement or any action taken or to be taken pursuant hereto, will result in any material adverse change in the business, operation, affairs or condition of the Leased Property or Tenant, result in or subject the Leased Property or Tenant to a material liability, or involves condemnation or eminent domain proceedings against any part of the Leased Property. -68- 22.1.5 Existing Leases, Agreements, Etc. To Tenant's knowledge, other than any agreements provided to Landlord prior to the date hereof, there are no material agreements affecting the Leased Property which will be binding on Landlord subsequent to the Commencement Date. 22.1.6 Disclosure. To Tenant's knowledge, there is no fact or condition which materially and adversely affects the business or condition of the Leased Property which has not been set forth in this Agreement or in the other documents, certificates or statements furnished to Landlord in connection with the transactions contemplated hereby. 22.1.7 Utilities, Etc. To Tenant's knowledge, all utilities and services necessary for the use and operation of the Leased Property (including, without limitation, road access, gas, water, electricity and telephone) are available thereto, are of sufficient capacity to meet adequately all needs and requirements necessary for the current use and operation of the Leased Property and for its intended purposes. To Tenant's knowledge, no fact, condition or proceeding exists which would result in the termination or material impairment of the furnishing of such utilities to the Leased Property. 22.1.8 Compliance With Law. To Tenant's knowledge, the Leased Property and the use and operation thereof do not violate any material federal, state, municipal and other governmental statutes, ordinances, by-laws, rules, regulations or any other legal requirements, including, without limitation, those relating to construction, occupancy, zoning, adequacy of parking, environmental protection, occupational health and safety and fire safety applicable thereto; and there are presently in effect all material licenses, permits and other authorizations necessary for the current use, occupancy and operation thereof. To Tenant's knowledge, there is no threatened request, application, proceeding, plan, study or effort which would materially adversely affect the present use or zoning of the Leased Property or which would modify or realign any adjacent street or highway in a manner which would materially adversely affect the use and operation of the Leased Property. 22.1.9 Hazardous Substances. Except as disclosed to Landlord in writing or as described in any environmental report delivered to Landlord, to Tenant's knowledge, no tenant or other occupant or user of the Leased Property, or any portion thereof, has stored or disposed of (or engaged in the business of storing or disposing of) or has released or caused the release of any Hazardous Substances, and, to Tenant's knowledge, except as disclosed to Landlord in writing or as described in any environmental report delivered to Landlord, the Leased Property is free from any such Hazardous Substances, except any such materials maintained in accordance with Applicable Law. -69- 22.2 Representations of Landlord. To induce Tenant to enter in this Agreement, Landlord represents and warrants to Tenant as follows: 22.2.1 Status and Authority of Landlord. Landlord is a corporation duly organized, validly existing and in corporate good standing under the laws of its state of incorporation. Landlord has all requisite power and authority under the laws of its state of formation and its respective charter documents to enter into and perform its obligations under this Agreement and to consummate the transactions contemplated hereby. Landlord has duly qualified to transact business in each jurisdiction in which the nature of the business conducted by it requires such qualification. 22.2.2 Action of Landlord. Landlord has taken all necessary action to authorize the execution, delivery and performance of this Agreement; this Agreement constitutes the valid and binding obligation and agreement of Landlord, enforceable against Landlord in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws of general application affecting the rights and remedies of creditors. 22.2.3 No Violations of Agreements. Neither the execution, delivery or performance of this Agreement by Landlord, nor compliance with the terms and provisions hereof, will result in any material breach of the terms, conditions or provisions of, or conflict with or constitute a default under, or result in the creation of any lien, charge or encumbrance upon any material property or assets of Landlord pursuant to the terms of any material indenture, mortgage, deed of trust, note, evidence of indebtedness or any other agreement or instrument by which Landlord is bound. 22.2.4 Litigation. No investigation, action or proceeding is pending and, to Landlord's knowledge, no action or proceeding is threatened and no investigation looking toward such an action or proceeding has begun, which questions the validity of this Agreement or any action taken or to be taken pursuant hereto. 22.3 Survival, Etc. The representations and warranties set forth in Sections 22.1.5 shall remain in effect only for a one-year period after the date hereof. Except as otherwise expressly provided in this Agreement, Tenant disclaims the making of any representations or warranties, express or implied, regarding the Leased Property or matters affecting the Leased Property, whether made by Tenant, on Tenant's behalf or otherwise, including, without limitation, the physical condition of the Leased Property, title to or the boundaries of the Land, pest control -70- matters, soil conditions, the presence, existence or absence of hazardous wastes, toxic substances or other environmental matters, compliance with building, health, safety, land use and zoning laws, regulations and orders, structural and other engineering characteristics, traffic patterns, market data, economic conditions or projections, and any other information pertaining to the Leased Property or the market and physical environments in which it is located. Landlord acknowledges (i) that Landlord has entered into this Agreement with the intention of making and relying upon its own investigation or that of third parties with respect to the physical, environmental, economic and legal condition of the Leased Property and (ii) that Landlord is not relying upon any statements, representations or warranties of any kind, other than those specifically set forth in this Agreement or in any document to be delivered to Landlord by Tenant. Landlord further acknowledges that it has not received from or on behalf of Tenant any accounting, tax, legal, architectural, engineering, property management or other advice with respect to this transaction and is relying solely upon the advice of third party accounting, tax, legal, architectural, engineering, property management and other advisors. Subject to the provisions of this Agreement, Landlord shall purchase the Leased Property in its "as is" condition on the date hereof. ARTICLE 23 MISCELLANEOUS 23.1 Limitation on Payment of Rent. All agreements between Landlord and Tenant herein are hereby expressly limited so that in no contingency or event whatsoever, whether by reason of acceleration of Rent, or otherwise, shall the Rent or any other amounts payable to Landlord under this Agreement exceed the maximum permissible under applicable law, the benefit of which may be asserted by Tenant as a defense, and if, from any circumstance whatsoever, fulfillment of any provision of this Agreement, at the time performance of such provision shall be due, shall involve transcending the limit of validity prescribed by law, or if from any circumstances Landlord should ever receive as fulfillment of such provision such an excessive amount, then, ipso facto, the amount which would be excessive shall be applied to the reduction of the installment(s) of Minimum Rent next due and not to the payment of such excessive amount. This provision shall control every other provision of this Agreement and any other agreements between Landlord and Tenant. 23.2 No Waiver. No failure by Landlord or Tenant 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 -71- such breach or of any such term. To the maximum extent permitted by law, no waiver of any breach shall affect or alter this Agreement, which shall continue in full force and effect with respect to any other then existing or subsequent breach. 23.3 Remedies Cumulative. To the maximum extent permitted by law, each legal, equitable or contractual right, power and remedy of Landlord or Tenant, now or hereafter provided either in this Agreement 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 Landlord or Tenant (as applicable) of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Landlord of any or all of such other rights, powers and remedies. 23.4 Severability. Any clause, sentence, paragraph, section or provision of this Agreement held by a court of competent jurisdiction to be invalid, illegal or ineffective shall not impair, invalidate or nullify the remainder of this Agreement, but rather the effect thereof shall be confined to the clause, sentence, paragraph, section or provision so held to be invalid, illegal or ineffective, and this Agreement shall be construed as if such invalid, illegal or ineffective provisions had never been contained therein. 23.5 Acceptance of Surrender. No surrender to Landlord of this Agreement 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 Landlord and no act by Landlord or any representative or agent of Landlord, other than such a written acceptance by Landlord, shall constitute an acceptance of any such surrender. 23.6 No Merger of Title. It is expressly acknowledged and agreed that it is the intent of the parties that there shall be no merger of this Agreement or of the leasehold estate created hereby by reason of the fact that the same Person may acquire, own or hold, directly or indirectly this Agreement or the leasehold estate created hereby and the fee estate or ground landlord's interest in the Leased Property. 23.7 Conveyance by Landlord. If Landlord or any successor owner of all or any portion of the Leased Property shall convey all or any portion of the Leased Property in accordance with the terms hereof other than as security for a debt, and the grantee or transferee of such of the Leased Property shall expressly assume all obligations of Landlord hereunder arising or accruing from and after the date of such conveyance or transfer, Landlord or such successor owner, as the case may be, shall, provided such successor owner shall have a Tangible Net Worth of not less than Five Million Dollars ($5,000,000), (y) such conveyance shall -72- occur subsequent to the first anniversary of the Commencement Date and (z) Landlord shall transfer in cash any unapplied balance of the Security Deposit to such successor owner, thereupon be released from all future liabilities and obligations of Landlord under this Agreement with respect to such of the Leased Property arising or accruing from and after the date of such conveyance or other transfer and all such future liabilities and obligations shall thereupon be binding upon the new owner. 23.8 Quiet Enjoyment. Provided that no Event of Default shall have occurred and be continuing, Tenant shall peaceably and quietly have, hold and enjoy the Leased Property for the Term, free of hindrance or molestation by Landlord or anyone claiming by, through or under Landlord, but subject to (a) any Encumbrance permitted under Article 20 or otherwise permitted to be created by Landlord hereunder provided that the holder of such Encumbrance has, to the extent appropriate, executed a nondisturbance agreement pursuant to Section 20.2 or a subordination agreement in form and substance reasonably acceptable to Tenant, (b) all Permitted Encumbrances, (c) liens as to obligations of Landlord that are either not yet due or which are being contested in good faith and by proper proceedings, provided the same do not materially interfere with Tenant's ability to operate the Hotel and (d) liens that have been consented to in writing by Tenant. Except as otherwise provided in this Agreement, no failure by Landlord to comply with the foregoing covenant shall give Tenant any right to cancel or terminate this Agreement or abate, reduce or make a deduction from or offset against the Rent or any other sum payable under this Agreement, or to fail to perform any other obligation of Tenant hereunder. 23.9 Memorandum of Lease. Neither Landlord nor Tenant shall record this Agreement. However, Landlord and Tenant shall promptly, upon the request of the other, enter into a short form memorandum of this Agreement, in form suitable for recording under the laws of the State in which reference to this Agreement, and all options contained herein, shall be made. The parties shall share equally all costs and expenses of recording such memorandum. 23.10 Notices. (a) Any and all notices, demands, consents, approvals, offers, elections and other communications required or permitted under this Agreement shall be deemed adequately given if in writing and the same shall be delivered either in hand, by telecopier with written acknowledgment of receipt, or by mail or Federal Express or similar expedited commercial carrier, addressed to the recipient of the notice, postpaid and registered or certified with return -73- receipt requested (if by mail), or with all freight charges prepaid (if by Federal Express or similar carrier). (b) All notices required or permitted to be sent hereunder shall be deemed to have been given for all purposes of this Agreement upon the date of acknowledged receipt, in the case of a notice by telecopier, and, in all other cases, upon the date of receipt or refusal, except that whenever under this Agreement a notice is either received on a day which is not a Business Day or is required to be delivered on or before a specific day which is not a Business Day, the day of receipt or required delivery shall automatically be extended to the next Business Day. (c) All such notices shall be addressed, if to Landlord to: c/o Hospitality Properties Trust 400 Centre Street Newton, Massachusetts 02158 Attn: Mr. John G. Murray [Telecopier No. (617) 969-5730] with a copy to: Sullivan & Worcester LLP One Post Office Square Boston, Massachusetts 02109 Attn: Jennifer B. Clark, Esq. [Telecopier No. (617) 338-2880] if to Tenant to: c/o Wyndham Hotel Corporation 2001 Bryan Street, Suite 2300 Dallas, Texas 75201 Attn: Ms. Anne L. Raymond [Telecopier No. (214) 863-1262] with a copy to: Locke, Purnell, Rain, Harrell 2200 Ross Avenue, Suite 2200 Dallas, Texas 75201 Attn: J. Mitchell Bell, Esq. [Telecopier No. (214) 740-8800] (d) By notice given as herein provided, the parties hereto and their respective successor and assigns shall have the right from time to time and at any time during the term of this Agreement to change their respective addresses effective upon receipt by the other parties of such notice -74- and each shall have the right to specify as its address any other address within the United States of America. 23.11 Trade Area Restriction. Neither Tenant nor any of its Affiliated Persons shall own, build, franchise, manage or operate any full-service Wyndham Hotel within the designated area on Exhibit D, at any time during the Term; it being expressly understood and agreed that hotels other than Wyndham Hotels (e.g. garden hotels or resort hotels) are not subject to the foregoing restriction. 23.12 Construction. Anything contained in this Agreement to the contrary notwithstanding, all claims against, and liabilities of, Tenant or Landlord arising prior to any date of termination or expiration of this Agreement with respect to the Leased Property shall survive such termination or expiration. In no event shall Landlord be liable for any consequential damages suffered by Tenant as the result of a breach of this Agreement by Landlord. Neither this Agreement nor any provision hereof may be changed, waived, discharged or terminated except by an instrument in writing signed by the party to be charged. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Each term or provision of this Agreement to be performed by Tenant shall be construed as an independent covenant and condition. Time is of the essence with respect to the provisions of this Agreement. Except as otherwise set forth in this Agreement, any obligations of Tenant (including without limitation, any monetary, repair and indemnification obligations) and Landlord shall survive the expiration or sooner termination of this Agreement. 23.13 Counterparts; Headings. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but which, when taken together, shall constitute but one instrument and shall become effective as of the date hereof when copies hereof, which, when taken together, bear the signatures of each of the parties hereto shall have been signed. Headings in this Agreement are for purposes of reference only and shall not limit or affect the meaning of the provisions hereof. 23.14 Applicable Law, Etc. This Agreement shall be interpreted, construed, applied and enforced in accordance with the laws of the State applicable to contracts between residents of the State which are to be performed entirely within the State, regardless of (i) where this Agreement is executed or delivered; or (ii) where any payment or other performance required by this Agreement is made or required to be made; or (iii) where any breach of any provision of this Agreement occurs, or any cause of action otherwise accrues; or (iv) where any action or other proceeding is instituted or pending; or (v) the nationality, -75- citizenship, domicile, principal place of business, or jurisdiction of organization or domestication of any party; or (vi) whether the laws of the forum jurisdiction otherwise would apply the laws of a jurisdiction other than the State; or (vii) any combination of the foregoing. To the maximum extent permitted by applicable law, any action to enforce, arising out of, or relating in any way to, any of the provisions of this Agreement may be brought and prosecuted in such court or courts located in the State as is provided by law; and the parties consent to the jurisdiction of said court or courts located in the State and to service of process by registered mail, return receipt requested, or by any other manner provided by law. 23.15 Special Landlord Option. GHALP Corporation, a Subsidiary of Wyndham, currently leases eleven Wyndham Garden Hotel properties from HPTWN Corporation, an Affiliated Person as to Landlord. Landlord shall have the right, exercisable by notice given at any time on or before the fifth anniversary of the Commencement Date, at Landlord's sole cost and expense, to require (a) that Tenant enter into an amendment to this Agreement and cause GHALP Corporation to enter into an amendment to its leases (collectively, the "GHALP Leases"), providing (i) that any Event of Default under any GHALP Lease is an Event of Default under this Agreement and that any Event of Default under this Agreement is an Event of Default under the GHALP Leases; (ii) that GHALP Corporation may not elect not to extend the term of the GHALP Leases for the Extended Terms (as defined therein) unless Tenant elects not to extend the Term of this Agreement for the Extended Terms and that Tenant may not elect not to extend the Term of this Agreement for the Extended Terms unless GHALP Corporation elects not to extend the term of its the GHALP Leases for the Extended Terms; and (iii) that amounts (as defined therein) in the FF&E Reserve under this Agreement be pooled and consolidated with amounts in the FF&E Reserve under the GHALP Leases; or (b) that Tenant be merged into GHALP Corporation and that the GHALP Leases be amended to designate this Agreement an "Other Lease" (as defined therein) under the GHALP Leases and that this Agreement be amended accordingly. In the event Landlord shall exercise either of the aforesaid options, Landlord and Tenant shall enter into an amendment to this Agreement (and shall cause their respective Affiliated Persons to enter into amendments to the GHALP Leases) within thirty (30) days after Landlord's Notice to Tenant. The form and substance of any such amendments shall be reasonably satisfactory to Landlord and Tenant. 23.16 Nonrecourse. Nothing contained in this Agreement shall be construed to impose any liabilities or obligations on Wyndham or any of its shareholders for the payment or performance of the obligations or liabilities of Tenant under this Agreement. -76- 23.17 Confidentiality. Except to prospective lenders and purchasers or as may be required by law, the SEC or any securities and exchange commission, Landlord shall not disclose any of Tenant's confidential or proprietary information to any Person. IN WITNESS WHEREOF, the parties have executed this Agreement as a sealed instrument as of the date above first written. LANDLORD: HPTSLC CORPORATION By: /s/ John G. Murray Its President TENANT: WHC SALT LAKE CITY CORPORATION By:/s/ Diane C. Parmerlee Diane C. Parmerlee Authorized Signatory EXHIBIT A The Land [See attached copy.] EXHIBIT B Approved Budget and Improvements [See attached copy.] EXHIBIT C Form of Landlord Estoppel Certificate [See attached copy.] EXHIBIT D Restricted Trade Area [See attached copy.] EXHIBIT E Annual Minimum Rent Minimum Rent is allocated as follows: Portion of Annual Minimum Portion of Annual Rent Allocated to Leased Minimum Rent Real Property and Leased Allocated to Leased Year Intangible Property Personal Property 1997 94.0% 6.0% 1998 95.5% 4.5% 1999 97.0% 3.0% 2000 98.5% 1.5% 2001 and beyond 100.0% 0% EX-12 6 Exhibit 12
Hospitality Propertues Trust Computation of Ratio to Fixed Charges (in thousands, except ratio amounts) For the Period February 7, 1995 (inception) to For the Year December 31, ended December 1995 31, 1996 Income $11,349 $51,664 Fixed Charges 5,063 5,646 ------- ------- Adjusted Earnings $16,412 $57,310 ======= ======= Fixed Charges: Interest on indebtedness and amortization of deferred finance cost $5,063 $5,646 ------- ------- Total Fixed Charges $5,063 $5,646 ======= ======= Ratio of Earnings to Fixed Charges 3.24x 10.15x ======= =======
EX-21 7 Exhibit 21 Subsidiary State of Incorporation HPTRI Corporation Delaware HPTWN Corporation Delaware HPTCY Corporation Delaware EX-23.1 8 Exhibit 23.1 ARTHUR ANDERSEN LLP CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333.17983. /s/ Arthur Andersen LLP Washington, D.C. March 27, 1997 EX-27 9
5 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 38,073 0 1,671 0 0 0 842,687 (26,218) 871,603 0 125,000 0 0 269 644,939 871,603 0 82,629 0 0 25,319 0 5,646 51,664 0 51,664 0 0 0 51,664 2.23 2.23
EX-99 10 Exhibit 99 CERTAIN INVESTMENT CONSIDERATIONS The following information should be considered in connection with an investment in the Company's securities. Cross-references contained herein are to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Dependence on Limited Number of Lessees. In order to generate cash sufficient to make distributions to Shareholders, the Company will rely on timely receipt of rents from the Lessees. The failure or delay by the Lessees in paying rents could adversely affect the ability of the Company to make distributions to Shareholders. In the event of a default under a Lease, the Company may relet or sell the applicable Hotel and seek recovery of damages from the applicable Lessee. Each Lessee, however, is a limited purpose entity formed for the purpose of leasing certain of the Hotels, and there can be no assurance that the Company will be able to recover damages from a Lessee under such circumstances. See "Business--The Hotels, Leases and Management Agreements." Dependence on Limited Number of Managers. The Company and the Lessees will rely on the Managers to manage the Hotels properly. The failure by the Managers to manage the Hotels properly could have a material adverse effect on the ability of the Lessees to pay rents. See "Business--The Hotels, Leases and Management Agreements." Substantial Dependence on Brand Names. The Wyndham Garden(R), Residence Inn by Marriott(R), and Courtyard by Marriott(R) brand names are not owned by the Company and any degradation or adverse market developments relating to these brand names could adversely affect the results of operations of the related Hotels and the ability of the applicable Lessee to pay rents. Inability to Operate Hotels. As a REIT, the Company is restricted in its ability to operate hotels. As a result, the Company will be unable to make and implement operating business decisions with respect to its Hotels, even if such decisions were in the best interest of the Company. In addition, the Company will be subject to the risk that, upon termination of a Lease, the Lease may not be renewed, the affected Hotel may not be relet or the terms of renewal or reletting may be less favorable than the previous Lease terms. All Leases to a particular Lessee have all or none renewal feature. Although Advisors may be able directly to provide for the operation of hotels for up to two years in certain circumstances, as a result of restrictions imposed on the Company as a REIT, the Company would likely not be able to operate directly any hotel without thereby failing to qualify as a REIT for federal income tax purposes. If the Company were unable promptly to enter into a new lease to replace a terminated Lease or if the rental rates upon a renewal or reletting were significantly lower than expected due to market conditions or other factors, then the Company's ability to make distributions to Shareholders could be adversely affected. See "Business--Taxation of the Company." Limited Operating History. The Company has only a limited operating history and has owned hotels for less than two years. Accordingly, the Company will be subject to all risks generally associated with a new business. Dependence on Key Personnel. The Company is an advised REIT and is highly dependent on the efforts of Advisors and the Company's Managing Trustees and officers, all of whom have extensive experience managing a REIT but only limited experience in the hotel industry. The loss of their services could have a material adverse effect on the Company. Conflict of Interest. Advisors acts as the financial advisor and provides management services to the Company and HRP and also has other business interests. Advisors will not be able to devote all of its business time and resources to the Company and conflicts could arise with respect to the allocation of its time and resources. The terms of the Advisory Agreement were not determined by arms' length negotiations. Barry M. Portnoy and Gerard M. Martin are each Managing Trustees of the Company, Managing Trustees of HRP and Directors and 50% shareholders of Advisors. To address the foregoing actual or potential conflicts of interest and competing time demands, the Declaration provides that a majority of the Company's Trustees will be Independent Trustees. Certain officers of Advisors devote substantially all of their business time to the Company. In addition, pursuant to the Advisory Agreement, Advisors and Messrs. Portnoy and Martin have agreed not to provide advisory services to, or serve as directors or officers of, any other REIT which is principally engaged in the business of ownership of hotels or to make competitive direct investments in hotels without, in each case, the consent of the Independent Trustees. Also, Advisors and Messrs. Portnoy and Martin will be required by applicable law to act in accordance with their fiduciary responsibilities to the Company. Under the terms of the Advisory Agreement, the fees payable to Advisors will increase as a result of the Company's purchase of the Additional Hotels and future hotels. Risks of Leverage. The organizational documents of the Company do not limit the level of debt the Company may incur. The Company could become highly leveraged, which could adversely affect the ability of the Company to make distributions to Shareholders and increase the risk of default under its indebtedness. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Security Deposits. The security deposits retained by the Company as security for the Lessees' obligations under the Leases are not escrowed. The security deposits will be repayable by the Company to the Lessees upon the expiration of the Leases, including renewal terms. The Company will record any reductions to security deposits resulting from failure by a Lessee to pay rent as non-cash income to the Company. Accordingly, funds represented by the security deposits may not be available to the Company when they are required to be repaid to the Lessees or to satisfy a Lessee's rent obligation in the event of a default. Ground Leases. Rights to use the land underlying 10 Hotels are held by assignments of the leasehold interests under long term ground leases. Under the Leases for these Hotels, the Lessees are required to pay all rents due and comply with all other obligations under the ground leases. The terms of the ground leases, including renewal terms, expire between 2039 and 2077. If a ground lease terminates, the Lease with respect to the applicable Hotel will also terminate. Accordingly, Leases for six Hotels may terminate by reasons of termination of a ground lease up to a maximum of nine years prior to the expiration of their final renewal terms if the Company is unable to acquire the underlying property or extend the applicable ground leases. If a Lessee does not perform the obligations under or elects not to renew any ground lease, the Company must perform such obligations or renew such ground lease in order to protect its investment in the affected Hotel. Any pledge of the Company's interests in a ground lease may also require the consent of the applicable ground lessor and its lenders. The ground leases generally require the Company to restore the premises following a casualty or taking and to apply in a specified manner any proceeds received in connection therewith. The Company may have to restore the premises following a casualty or taking and to apply in a specified manner any proceeds received in connection therewith. The Company may have to restore the premises if a material casualty occurs, even if the applicable Lessee has terminated its Lease by reason of such casualty, without regard to the sufficiency of proceeds available to the Company to effect such restoration. See "Properties." Tax Risks. The Company so as to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"). The Company has not requested, and does not expect to request, a ruling from the Internal Revenue Service (the "Service") regarding its status as a REIT. Qualification as a REIT involves the application of technical and complex provisions of the Code for which there are only limited judicial or administrative interpretations. The determination of various factual matters and circumstances not entirely within the Company's control (including termination of a Lease) may affect its ability to qualify as a REIT, and maintenance of such qualification imposes certain operating requirements on the Company. In addition, no assurance can be given that legislation, regulations, administrative interpretations or court decisions will not significantly change the rules applicable to the Company with respect to its qualification as a REIT or the federal income tax consequences of such qualification. If the Company were to fail to qualify as a REIT in any taxable year, such failure could have a material adverse effect on the Company and its Shareholders. Also, it is possible that future economic, market, legal, tax or other considerations may cause the Board of Trustees, with the consent of two thirds of the Shareholders, to revoke the REIT election. See "Business--Taxation of the Company." 2 Concentration of Ownership and Ownership Limitation. At March 31, 1997 HRP owned approximately 14.9% and Advisors owned approximately 1.0% of the outstanding Shares. Accordingly HRP alone, and HRP and Advisors collectively, will have significantly influence over the Company. Such influence may result in Company decisions which may not fully serve the best interests of all Shareholders. The Declaration prohibits ownership of more than 9.8% of the Shares by any Shareholder or affiliated group of Shareholders, except HRP, Advisors and certain other entities (the "Ownership Limitation"). The Ownership Limitation may (i) have the effect of precluding acquisition of control of the Company by a third party without the consent of the Board of Trustees, even if a change in control were in the interests of Shareholders, and (ii) limit the opportunity for Shareholders to receive a premium for their Shares that might otherwise exist if an investor were attempting to assemble a block of Shares in excess of 9.8% of the outstanding Shares or otherwise to effect a change in control of the Company. A transfer of Shares to a person who, as a result of the transfer, violates the Ownership Limitation may be void under some circumstances. The Company's Declaration and Bylaws each also contain provisions that may make it difficult to acquire control of the Company by means of a tender offer, an open market purchase, a proxy fight or otherwise, if such acquisition is not approved by the Company's Board of Trustees. Increases in Interest Rates. The annual yield from distributions by the Company on the Shares likely will influence the market price of the Shares. Accordingly, increases in market interest rates, which may result in higher yields on other financial instruments, could adversely affect the market price of the Shares. In addition, increases in market interest rates could adversely affect the Company's ability to finance additional hotel investments at positive spreads between its cost of funds and rent yields. Insurance. Each of the Leases specifies that comprehensive insurance is to be maintained, at the expense of the Lessee (except to the extent maintained by a Manager pursuant to a Management Agreement), including liability and commercial property insurance of the types and amounts customarily obtained by owners of comparable hotel properties. In the event of a substantial insured casualty or loss, the proceeds of insurance maintained by Lessees (or Managers in certain circumstances) may not be sufficient to pay the full current market value or current replacement cost of the insured Hotel. In such event, unless the Lessee elects to fund the amount of the deficiency in order to prevent termination of the applicable Lease, the Company may be required to advance funds to finance the deficiency. Also, there are certain types of losses, such as earthquakes, hurricanes, floods and other acts of God, that may not be insurable or insurable on economically viable terms. Hotel Operating Risks. The Company's results of operations will be affected by factors such as changes in general economic conditions, the level of demand for guest rooms and related services at the Hotels, cyclical overbuilding in the hotel industry, the ability of the Lessees to maintain and increase gross revenues at the Hotels and other factors relating to the operation of the Hotels. Other operating factors include: (i) the highly competitive nature of the hotel industry; (ii) changes in regional and local population and disposable income composition; (iii) the recurring need for renovations, refurbishment and improvements of the Hotels; (iv) restrictive changes in zoning and similar land use laws, or in health, safety and environmental laws; (v) changes in the characteristics of the locales in which the Hotels are located by reason of relocation of nearby attractions, academic institutions or businesses; (vi) the cost and availability of property and liability insurance; (vii) seasonality; (viii) changes or cancellations in local tourist, athletic or cultural events; (ix) changes in travel patterns which may be affected by increases in transportation costs or gasoline prices, changes in airline schedules and fares, strikes, weather patterns or relocation or construction of highways; and (x) inflationary pressures which could increase operating expenses of the Hotels above expected levels. Continuing expenditures must be made for modernizing, refurbishing and maintaining the Hotels. If necessary expenditures exceed the amounts available in the applicable FF&E Reserves, the applicable Lessees or Managers fail to otherwise make such expenditures or the Company fails to make such expenditures (with consequential increases in base rent), the value of, and operating revenues from, the applicable Hotels may diminish. In addition, the Hotels compete with existing hotel facilities in their markets as well as future hotels that may be developed in those markets. Subject to certain limitations in the Leases and Management Agreements, the Lessees or the Mangers could operate hotels in direct competition with the Company's Hotels. See "Business--Competition." 3 Certain Risks of Acquisition Strategy. The Company competes for hotel acquisition and financing opportunities with entities which may have substantially greater financial resources than the Company, including, without limitation, other publicly owned REIT's, banks, insurance companies, pension plans and public and private partnerships. These entities may be able to accept more risk than the Company can prudently manage, including risks with respect to the creditworthiness of a hotel operator. Such competition may reduce the number of suitable hotel acquisition or financing opportunities offered to the Company and increase the bargaining power of property owners seeking to sell or finance their properties. See "Business--Competition." In addition, the REIT requirement that the Company distribute 95% of its net taxable income will limit its ability to rely upon rents to finance acquisitions. As a result, if debt or equity financing were not available on acceptable terms, further acquisitions may be curtailed an the Company's ability to increase distributions to Shareholders may be adversely affected. Ion addition, all future hotel investments entail the general risk that investments may not perform in accordance with expectations. Americans with Disabilities Act. The public accommodations provisions of the Americans with Disabilities Act of 1990, as amended ("ADA"), impose obligations on hotel owners to make reasonable accommodations to patrons who have physical, mental or other disabilities, including removal of architectural and communication barriers in many circumstances. The Lessees will generally be obligated to remedy any ADA compliance matters at their respective Hotels, but if they fail to do so, the Company may become obligated to incur material expenses for ADA compliance. See "Business-- Regulatory Matters." Environmental Matters. Under various environmental laws, the Company, as an owner of hotel property, may be liable for the costs of removal or remediation of hazardous or toxic substances on, under, in or emanating from such property or other liabilities arising under environmental laws. Based on Phase I environmental reports (which may not reveal all potential environmental liabilities), the Company is aware of certain environmental issues affecting the Hotels; however, the Company does not believe that these issues will have a material adverse effect on the Company's business or results of operations. In addition, the Company cannot predict whether modifications or existing laws or regulations or the adoption of new laws or regulations or changes in the known conditions of the Hotels may have a material adverse effect on the Company's business or results of operations in the future. See "Business--Regulatory Matters." General Real Estate Investment Risks. The Company's investments will be subject to other risks generally incident to the ownership of real property. The Hotels may be adversely affected by various factors, including: adverse changes in national economic conditions, local market conditions, interest rates, real estate tax rates and other operating expenses, zoning and land use laws, other governmental rules and policies, and the availability, cost and terms of borrowings; competition; the ongoing need for capital improvements; civil unrest, acts of war, acts of God, including earthquakes, hurricanes and other natural disasters which may result in uninsured losses); and other factors which are beyond the control of the Company. In addition, real estate investments are relatively illiquid, and the ability of the Company to vary its portfolio in response to changes in economic or other conditions will be limited. 4 -----END PRIVACY-ENHANCED MESSAGE-----