-----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, Jc0I2HC8blzrDhelK8UoN7O4PDPQTg4ij1ihHs58Uf0OBYRL5omUhwIFkD4eWntR M2DdT3WK7MCNdrKfAYEw3w== 0000908737-02-000127.txt : 20020415 0000908737-02-000127.hdr.sgml : 20020415 ACCESSION NUMBER: 0000908737-02-000127 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 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-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-11527 FILM NUMBER: 02589614 BUSINESS ADDRESS: STREET 1: 400 CENTRE ST CITY: NEWTON STATE: MA ZIP: 02158 BUSINESS PHONE: 6179648389 MAIL ADDRESS: STREET 1: 400 CENTRE STREET CITY: NEWTON STATE: MA ZIP: 02158 10-K405 1 hpt10k_2002.txt 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 For the Fiscal Year Ended December 31, 2001 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF 1934 Commission File Number 1-11527 HOSPITALITY PROPERTIES TRUST Maryland 04-3262075 (State of incorporation) (IRS Employer Identification No.) 400 Centre Street, Newton, Massachusetts 02458 617-964-8389 Securities registered pursuant to Section 12(b) of the Act: Name of each Class exchange on which registered Common Shares of Beneficial Interest New York Stock Exchange Series A Cumulative Redeemable New York Stock Exchange Preferred Shares of Beneficial Interest 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 shares of the registrant held by non-affiliates was $1,965 million based on the $33.80 closing price per share on the New York Stock Exchange on March 20, 2002. For purposes of this calculation, 4,000,000 Common Shares of Beneficial Interest, $0.01 par value ("Common Shares") held by HRPT Properties Trust, and an aggregate of 416,091 Common 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 Common Shares, outstanding as of March 20, 2002: 62,537,598 References in this Annual Report on Form 10-K to the "Company", "HPT", "we", "us" or "our" include consolidated subsidiaries unless the context indicates otherwise. DOCUMENTS INCORPORATED BY REFERENCE Part III of this Annual Report on Form 10-K is to be incorporated herein by reference from our definitive Proxy Statement for the annual meeting of shareholders currently scheduled for May 7, 2002. --------------- CERTAIN IMPORTANT FACTORS Our 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 our intent, belief or expectation, or the intent, belief or expectation of our Trustees or our officers with respect to the declaration or payment of distributions, our policies and plans regarding investment, financing, or other matters, our qualification and continued qualification as a real estate investment trust, trends affecting us or our tenants' and operators' financial condition, results of operations and ability to pay rent and returns to us or factors which affect our hotels' quality, operations, financial results or competitiveness. You 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 statements as a result of various factors. Such factors include without limitation changes in financing terms, our ability or inability to complete acquisitions and financing transactions, results of operations of and competition affecting our hotels or our tenants and general changes in industry or general and local economic conditions not presently contemplated. The accompanying information contained in this Form 10-K, including the information under the headings "Business and Properties" 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, 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, HOSPITALITY PROPERTIES TRUST. ALL PERSONS DEALING WITH THE TRUST, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HOSPITALITY PROPERTIES TRUST FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
HOSPITALITY PROPERTIES TRUST 2001 FORM 10-K ANNUAL REPORT Table of Contents Part I Page Items 1. & 2. Business and Properties........................................................ 1 Item 3. Legal Proceedings.............................................................. 22 Item 4. Submission of Matters to a Vote of Security Holders............................ 22 Part II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters...... 23 Item 6. Selected Financial Data........................................................ 24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................................. 25 Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................... 33 Item 8. Financial Statements and Supplementary Data.................................... 34 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................................................... 34 Part III Item 10. Directors and Executive Officers of the Registrant............................. * Item 11. Executive Compensation......................................................... * Item 12. Security Ownership of Certain Beneficial Owners and Management................. * Item 13. Certain Relationships and Related Transactions................................. * * Incorporated by reference from our Proxy Statement for the Annual Meeting of Shareholders currently scheduled to be held on May 7, 2002, to be filed pursuant to Regulation 14A. Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................ 35
PART I Items 1. & 2. Business and Properties The Company. We are a real estate investment trust, or REIT, formed in 1995 to buy and own hotels leased to or operated by unaffiliated hotel companies. At December 31, 2001, we owned 230 hotels with 31,691 rooms or suites located in 37 states in the U.S., which cost approximately $2.6 billion. We are organized as a Maryland real estate investment trust. Our principal place of business is 400 Centre Street, Newton, Massachusetts 02458, and our telephone number is (617) 964-8389. Our principal growth strategy is to expand our investments in hotels and to set minimum rents or returns which produce income in excess of our operating and capital costs. We seek to provide capital to unaffiliated hotel operators who wish to divest their properties while remaining in the hotel business. Our principal 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 our hotels. Our hotels are currently operated as Marriott Hotels(R), Courtyard by Marriott(R), Residence Inn by Marriott(R), Wyndham Garden(R), Wyndham(R), Summerfield Suites by Wyndham(R), AmeriSuites(R), Candlewood Suites(R), Homestead Studio Suites(R), TownePlace Suites by Marriott(R) or SpringHill Suites by Marriott(R). We believe that our portfolio of hotels is among the newest of publicly owned hotel REITs. The average age of our hotels is approximately 7.3 years at December 31, 2001. 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 size beds. Most Courtyard by Marriott(R) hotels are situated on well landscaped grounds and typically are built with a courtyard containing a patio, pool and socializing area that may be enclosed depending upon location. Most of these hotels have lounges, meeting rooms, an exercise room, a guest laundry and many have 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 2001, over 553 Courtyard by Marriott(R) hotels were open and operating in the United States and internationally. We believe that the Courtyard by Marriott(R) brand is a leading brand in the upscale, limited service segment of the United States hotel industry. We have invested a total of $770 million in 71 Courtyard by Marriott(R) hotels which have 10,280 rooms. The occupancy, average daily rate ("ADR") and revenue per available room ("RevPAR") for our 67 Courtyard by Marriott(R) hotels which were open for a full year as of January 1, 2001, were as follows: HPT COURTYARD BY MARRIOTT(R) HOTELS 2001 2000 ---- ---- Occupancy.................... 72.2% 79.1% ADR.......................... $100.60 $98.00 RevPAR....................... $72.63 $77.52 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 and 130 studio, one-bedroom and two-bedroom suites. Most Residence Inn by Marriott(R) hotels are designed as 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 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 have swimming pools, exercise rooms, sports courts and guest laundries. According to Marriott, as of December 2001, 392 Residence Inn by Marriott(R) hotels were open and operating in the United States, Mexico and Canada. We believe that the Residence Inn by Marriott(R) brand is the leading brand in the extended stay segment of the United States hotel industry. 1 We have invested a total of $420 million in 37 Residence Inn by Marriott(R) hotels which have 4,695 suites. The average occupancy, ADR and RevPAR for our 36 Residence Inn by Marriott(R) hotels which were open for a full year as of January 1, 2001, were as follows: HPT RESIDENCE INN BY MARRIOTT(R) HOTELS 2001 2000 ---- ---- Occupancy...................... 77.8% 82.1% ADR............................ $101.59 $101.86 RevPAR......................... $79.04 $83.63 Wyndham(R) Hotels Twelve of our hotels are Wyndham(R) hotels, including the Wyndham(R) and Wyndham Garden(R) brands. Wyndham Garden(R) hotels are upscale, mid-sized, full service hotels located primarily near suburban business centers and airports, and are designed to attract business travelers and small business groups. Each of our Wyndham(R) hotels contains between 140 and 381 rooms. Amenities and services include large desks, room service and access to 24-hour telecopy and mail/package service. The 1,500 to 5,000 square feet of meeting facilities at Wyndham Garden(R) hotels generally can accommodate groups of between 10 and 200 people in a flexible meeting room design with audiovisual equipment. Most Wyndham(R) hotels also feature a lobby lounge, a swimming pool, exercise facilities, and one or more restaurants. According to Wyndham, as of December 2001 there were 24 Wyndham Garden(R) and 71 Wyndham(R) hotels open and operating in the United States. We have invested a total of $183 million in 12 Wyndham(R) and Wyndham Garden(R) hotels which have 2,321 rooms. These hotels, all of which were open for at least a full year as of January 1, 2001, had average occupancy, ADR and RevPAR as follows: HPT WYNDHAM(R) HOTELS 2001 2000 ---- ---- Occupancy...................... 67.0% 72.4% ADR............................ $90.23 $91.88 RevPAR......................... $60.45 $66.52 Summerfield Suites by Wyndham(R) hotels are upscale, all suite extended stay hotels which offer guests separate living and sleeping areas, full kitchens, large work areas, complimentary breakfasts and evening social hours. Private voice mail, video players, on site convenience stores and "room service" contracted from area restaurants also are generally available. In addition, Summerfield Suites by Wyndham(R) offers "signature" two bedroom, two bathroom suites designed for equal-status business travelers in training classes or attending meetings and for families. According to Wyndham, there were 37 Summerfield Suites by Wyndham(R) open and operating in the United States as of December 2001. We have invested a total of $240 million in 15 Summerfield Suites by Wyndham(R) hotels which contain 1,822 suites (2,766 rooms). These hotels, all of which were open for at least a full year as of January 1, 2001, had average occupancy, ADR and RevPAR as follows: HPT SUMMERFIELD SUITES BY WYNDHAM(R) HOTELS 2001 2000 ---- ---- Occupancy...................... 75.8% 82.3% ADR............................ $120.56 $126.86 RevPAR......................... $91.38 $104.41 AmeriSuites(R) hotels are all-suite hotels designed to attract value-oriented business travelers. AmeriSuites(R) hotels compete in the all-suite segment of the lodging industry with such brands as Embassy Suites(R), SpringHill Suites(R) and Hampton Inn & Suites(R). Each AmeriSuites(R) guest room offers an efficient space for working which includes two phones with data ports and voice mail, a living area which includes a coffee maker, microwave, mini-refrigerator, sleeper-sofa and 25-inch television, and a separate bedroom area with either one king or two double beds. Each AmeriSuites(R) hotel has a lobby lounge where free continental breakfast is provided in the mornings and cocktails are generally available in the evening. In addition, all AmeriSuites(R) hotels have meeting rooms that can accommodate up to 150 persons, fitness facilities and a pool. AmeriSuites(R) hotels are generally high-rise hotels of six or seven stories and are of masonry construction. According to Prime Hospitality, there were 140 AmeriSuites(R) hotels open and operating across 2 the United States as of December 31, 2001. We have invested $243 million in our 24 AmeriSuites(R) hotels which include 2,929 guest suites. These hotels, all of which were open for at least a full year as of January 1, 2001, had average occupancy, ADR and RevPAR as follows: HPT AMERISUITES(R) HOTELS 2001 2000 ---- ---- Occupancy...................... 60.9% 59.4% ADR............................ $71.97 $77.18 RevPAR......................... $43.83 $45.84 Candlewood Suites(R) hotels are mid-priced extended stay hotels which offer studio and one bedroom suites designed for business travelers expecting to stay five or more nights. Candlewood Suites(R) hotels compete in the mid-priced extended stay segment of the lodging industry against such other brands as Sierra Suites(R), TownePlace Suites by Marriott(R) and MainStay Suites(R). Each Candlewood Suites(R) suite contains a fully equipped kitchen area, a combination living and work area and a sleeping area. The kitchen includes a full-size microwave, full-size refrigerator, stove, dishwasher and coffee maker. The living area contains a convertible sofa, or recliner, 25-inch television, videocassette player and compact disc player. The work area includes a large desk and executive chair, two phone lines, voice mail and a speaker phone. Each Candlewood Suites(R) suite contains a king size bed. Other amenities offered at each Candlewood Suites(R) hotel include a fitness center, free guest laundry facilities, and a Candlewood Cupboard(R) area where guests can purchase light meals, snacks and other refreshments. According to Candlewood, there were over 101 Candlewood Suites(R) hotels open and operating across the United States as of December 2001. We have invested $290 million in 36 Candlewood Suites(R) hotels which include 4,294 suites. The average occupancy, ADR and RevPAR for our 35 Candlewood Suites(R) hotels which were open for a full year as of January 1, 2001, were as follows: HPT CANDLEWOOD SUITES(R) HOTELS 2001 2000 ---- ---- Occupancy...................... 74.4% 77.3% ADR............................ $56.09 $56.35 RevPAR......................... $41.73 $43.56 Homestead Studio Suites(R) hotels are extended stay hotels designed for value-oriented business travelers. Each Homestead Studio Suites(R) room features a kitchen with a full-size refrigerator, stovetop, microwave, coffee maker, utensils and dishes. A work area is provided with a well-lit desktop and a computer data port. Complimentary local phone calls, fax service, copy service and personalized voice-mail are also available to guests. On-site laundry and other personal care items are available. Housekeeping services are provided on a twice-weekly basis. According to Homestead, there were 112 Homestead Studio Suites(R) hotels open as of December 2001. We have invested $145 million in 18 Homestead Studio Suites(R) hotels with a total of 2,399 rooms. These hotels, all of which were open for at least a full year as of January 1, 2001, had average occupancy, ADR and RevPAR as follows: HPT HOMESTEAD STUDIO SUITES(R) HOTELS 2001 2000 ---- ---- ccupancy...................... 74.8% 79.7% DR............................ $52.76 $50.67 evPAR......................... $39.46 $40.38 TownePlace Suites(R) are extended-stay hotels offering studio, one bedroom and two-bedroom suites for business and family travelers. TownePlace Suites(R) compete in the mid-priced extended-stay segment of the lodging industry. Each suite offers a fully equipped kitchen, a bedroom and separate living and work areas. Other amenities offered include voice mail, data lines, on-site business services, guest laundry facilities and a fitness center. According to Marriott, there were 99 TownePlace Suites(R) open as of December 2001. We have invested in 12 TownePlace Suites which include 1,331 rooms for $102 million. The average occupancy, ADR and 3 RevPAR for our 10 TownePlace Suites(R) which were open for a full year as of January 1, 2001, were as follows: HPT TOWNEPLACE SUITES(R) HOTELS 2001 2000 ---- ---- Occupancy...................... 73.3% 74.6% ADR............................ $67.10 $67.02 RevPAR......................... $49.18 $50.00 The Kauai Marriott Resort & Beach Club is a 356 room, 10 floor hotel with 50,000 square feet of meeting space, five restaurants and an on-the-beach lounge. The resort includes a 26,000-square-foot pool, multiple acres of Hawaiian gardens and waterfalls, tennis courts, sauna, whirlpool, exercise spa facilities and beauty and massage salons. The Marriott St. Louis Airport hotel is a 601 room hotel located in Missouri on approximately 12 acres of land at the I-70 exit for Lambert International Airport, across the street from the airport entrance. The hotel has two nine floor towers and three low rise buildings which create a courtyard for the hotel's pool and gardens. The property includes 20 meeting rooms totaling approximately 18,000 square feet of space, three restaurants and a concierge floor. Included in the 601 rooms are 77 Rooms That Work(R), which are rooms specifically designed by Marriott for the business traveler. The Marriott Nashville Airport hotel is a 399 room, 17 floor hotel located in Tennessee on 17 acres of land in High Ridge Business Park across I-40 from the Nashville Airport and a short drive from downtown Nashville. The property includes 14 meeting rooms totaling approximately 17,000 square feet of space, a restaurant and a concierge floor. Included in the 399 rooms are 85 Rooms That Work(R). SpringHill Suites(R) are value focused suites for business and family travelers. SpringHill Suites(R) compete in the mid-priced all-suite segment of the lodging industry. Each suite offers separate sleeping, living and work areas, a mini-refrigerator, a microwave and coffee service. Other amenities offered include a pull-out sofa bed, complimentary breakfast buffet, weekday newspaper, two line phones with data port and voice mail, on-site business services, guest laundry facilities and a fitness center. According to Marriott, there were over 84 SpringHill Suites(R) open as of December 2001. We have invested in two SpringHill Suites(R) which include 264 hotel rooms for $21 million. These hotels opened in 2000. 4 PRINCIPAL LEASE OR MANAGEMENT FEATURES As of December 31, 2001, all of our hotels are leased to or managed by unrelated third-parties. Each hotel we own is leased or operated as part of a combination of hotels, as described below. The principal features of the lease and management agreements for our 230 hotels are as follows: o Minimum rent or returns. All of our agreements require minimum annual rent or returns equal to between 10% and 12% of our investment in our hotels. o Percentage rent or returns. All of our agreements require percentage rent or returns equal to between 5% and 10% of increases in gross hotel revenues over threshold amounts. o Long term. All of the agreements for our hotels expire after 2010. The weighted average term remaining for our hotels as of December 31, 2001, is 13.8 years. o Pooled agreements. Each of our hotels is part of a combination of hotels. The tenant or manager obligations to us with respect to each hotel in a combination are subject to cross default with the obligations with respect to all the other hotels in the same combination. The smallest combination includes 12 hotels with 2,321 rooms in which we have invested $183 million; the largest combination includes 53 hotels with 7,610 rooms in which we have invested $513 million. o Geographic diversification. Each combination of hotels is geographically diversified. In addition, many of our hotels are located in the vicinity of major demand generators such as large suburban office parks, airports, medical or educational facilities or major tourist attractions. o All or none renewals. All renewal options for each combination of our hotels may only be exercised on an all or none basis and not for separate hotels. o Security deposits. All of our agreements require security deposits, generally equal to one year's minimum rent or minimum investment return. o FF&E Reserves. All of our agreements require the deposit of 3-6% of gross hotel revenues into escrow to fund periodic renovations (the "FF&E Reserve") in addition to minimum rents or returns. For hotels which were open for at least one year prior to 2001 (220 hotels) the FF&E Reserve contributions in 2001 averaged $1,300 per room. o Subordinated fees. Some or all of the management fees for our hotels are subordinated to minimum amounts due to us. o Guarantees for new hotels. When we purchase recently built hotels, we require that payments to us be guaranteed generally until the operations of the hotels achieve negotiated levels. As of December 31, 2001, five of our nine hotel pools, including 132 hotels have minimum rent or returns due to us guaranteed by the parent companies of our operators. These hotels represent 55.8% of our total investments, at cost. o Coverage. We define coverage as combined total hotel sales minus all expenses which are not subordinated to minimum payments to us and the required FF&E Reserve contributions, divided by the aggregate minimum payments to us. During 2001, the 220 HPT hotels which had been open at least one year at the beginning of 2001 had average coverage of approximately 1.20 times. All of our hotels, including 10 which opened in 2000 or 2001, had average coverage of approximately 1.15 times in 2001. We own 132 hotels operated under leases or management agreements which are guaranteed by the parent companies of our tenants and managers. The 98 hotels operated pursuant to leases or management agreements which are not guaranteed had average coverage of 1.39 times in 2001. At December 31, 2001, 10 of our hotels were on leased land. In each case, the remaining term of the ground lease (including renewal options) is in excess of 34 years, and the ground lessors are unrelated to us. Ground rent payable under the ground leases 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 $503,000 per year; rent under two ground leases has been pre-paid. If a ground lease terminates, the lease with respect to the hotel on such ground-leased land will also terminate. Generally payment of ground lease obligations are made by our tenant or manager. However, if a tenant or manager did not perform obligations under a ground lease or elected not to renew any ground lease, we might have to perform obligations under the ground lease or renew the ground lease in order to protect our investment in the affected hotel. Any pledge of our interests in a ground lease may also require 5 the consent of the applicable ground lessor and its lenders. We have no current requirement to make any pledge of our ground lease interests. INVESTMENT AND OPERATING POLICIES We provide capital to unaffiliated hotel operators who wish to divest their properties while remaining in the hotel business. Many other public hotel REITs seek to control the operations of hotels in which they invest and generally design their affiliated leases to capture substantially all net operating revenues from their hotels as rent. Our agreements are designed so that net operating revenues from our hotels exceed minimum amounts due to us by considerable coverage margins. We believe that these differences in operating philosophy afford us a competitive advantage over other hotel REITs in finding high quality hotel investment opportunities on attractive terms and increase the dependability of our cash flows used to pay distributions. Our investment objectives include increasing per share distributions and cash available for distribution, or CAD, from dependable and diverse resources. To achieve these objectives, we seek 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 CAD per share because of positive spreads between our cost of investment capital and investment yields; structure investments which generate a minimum return and provide an opportunity to participate in a percentage of operating growth at our hotels; when market conditions permit, refinance debt with additional equity or long term debt; and pursue diversification so that our CAD is received from diverse properties and operators. In order to benefit from potential property appreciation, we prefer to own properties rather than make mortgage investments. We may invest in real estate joint ventures if we conclude that we may benefit from the participation of co-venturers or that the opportunity to participate in the investment is contingent on the use of a joint venture structure. We may invest in participating, convertible or other types of mortgages if we conclude that we may benefit from the cash flow or appreciation in the value of the mortgaged 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 December 31, 2001, we owned no mortgages or joint venture interests. Our day-to-day operations are conducted by REIT Management & Research LLC, our investment manager. REIT Management originates and presents investment opportunities to our Board of Trustees. Because we are a REIT, generally, we may not operate hotels. We or our tenants have entered into arrangements for operation of our hotels. Our agreements require the lessee or operator to pay all operating expenses, including taxes, insurance and capital reserves and to pay to us minimum returns plus percentage returns based upon increases in gross revenues at the hotels. As described elsewhere in this Form 10-K, tax law changes known as the REIT Modernization Act, or RMA, were enacted and became effective January 1, 2001. The RMA, among other things, allows a REIT to lease hotels to a so-called "taxable REIT subsidiary" if the hotel is managed by an independent third party. We entered into our first transaction using a taxable REIT subsidiary on June 15, 2001. The income realized by our taxable REIT subsidiary in excess of the rent paid to us by our subsidiary will be subject to income tax at customary corporate rates. As and if the financial performance of the hotels operated for the account of our taxable REIT subsidiary improves, these taxes may become material, but the anticipated taxes are not material to our consolidated financial results at this time. We may enter new leases with taxable REIT subsidiaries, but we currently expect to do so only to the extent such new arrangements are reasonably consistent with the investment and operating policies set forth above. ACQUISITION POLICIES We intend to pursue growth through the acquisition of additional hotels. Generally, we prefer to purchase multiple hotels in one transaction because we believe a single agreement, cross default covenants and all or none renewal rights for multiple hotels in diverse locations enhance the credit characteristics and the security of our investments. In implementing our acquisition strategy, we consider 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 hotel; (iii) the availability of a qualified lessee or operator; (iv) the design and physical condition of the hotel; (v) the estimated replacement cost and proposed acquisition price of the hotel; (vi) the price segment in which the hotel is operated; (vii) the reputation of the particular hotel management organization, if any, with which the hotel is or may become affiliated; (viii) the age of the hotel; (ix) the level of services and amenities offered at the hotel; and (x) the hotel brand under which the hotel operates or is expected to operate. In determining the competitive position of a hotel, we examine the proximity of the hotel to business, retail, academic and tourist attractions and transportation routes, the number and characteristics of competitive hotels within the hotel's market area and the existence of barriers to entry within that market, including site availability, and zoning restrictions. While we have historically focused on the acquisition of upscale limited service, extended stay and full service hotel properties, we consider acquisitions in all segments of the hospitality industry. An important part of our acquisition strategy is to 6 identify and select qualified and experienced hotel operators. We intend to continue to select hotels for acquisition which will enhance the diversity of our portfolio with respect to location, brand name, and lessee/operator. DISPOSITION POLICIES We have no current intention to dispose of any hotels, although we may do so. We currently anticipate that disposition decisions, if any, will be based on 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 our portfolio; (iv) the existence of alternative sources, uses or needs for capital; and (v) the maintenance of our qualification as a REIT. FINANCING POLICIES We currently intend to employ conservative financing policies in pursuit of our growth strategies. Although there are no limitations in our organizational documents on the amount of indebtedness we may incur, we currently intend to pursue our growth strategies while maintaining a capital structure under which our debt will not exceed 50% of our total capitalization. We may from time to time re-evaluate and modify our financing policies in light of then current economic conditions, relative availability and costs of debt and equity capital, market values of properties, growth and acquisition opportunities and other factors and may increase or decrease our ratio of debt to total capitalization accordingly. Our Board of Trustees may determine to obtain a replacement for our current credit facilities or to seek additional capital through additional equity offerings, debt financings, or retention of cash flows in excess of distributions to shareholders, or a combination of these methods. None of our properties are encumbered by mortgages. To the extent that the Board of Trustees decides to obtain additional debt financing, we may do so on an unsecured basis (or a secured basis, subject to limitations which may be present in existing financing or other arrangements) and may seek to obtain other lines of credit or to issue securities senior to our common and/or preferred shares, including preferred shares of beneficial interest and debt securities, either of which may be convertible into common shares or be accompanied by warrants to purchase common shares, or to engage in transactions which may involve a sale or other conveyance of hotels to subsidiaries or to unaffiliated special purpose entities. We may finance acquisitions through an exchange of properties or through the issuance of additional common shares or other securities. The proceeds from any of our financings 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. Investment Manager. We have an agreement whereby REIT Management provides investment and administrative services to us. REIT Management is a Delaware limited liability company beneficially owned by Barry M. Portnoy and Gerard M. Martin, who are our Managing Trustees. REIT Management has a principal place of business at 400 Centre Street, Newton, Massachusetts, 02458; and its telephone number is (617) 928-1300. REIT Management acts as the investment manager to HRPT Properties Trust (NYSE:HRP), the holder of 4,000,000 of our common shares and Senior Housing Properties Trust (NYSE: SNH) and has other business interests. The directors of REIT Management are Gerard M. Martin, Barry M. Portnoy and David J. Hegarty. The executive officers of REIT Management are David J. Hegarty, President and Secretary; John G. Murray, Executive Vice President; Evrett W. Benton, Vice President; Jennifer B. Clark, Vice President; John R. Hoadley, Vice President; David M. Lepore, Vice President; Bruce J. Mackey Jr., Vice President; John A. Mannix, Vice President; Thomas M. O'Brien, Vice President; and John C. Popeo, Treasurer. Mr. Murray and Mr. O'Brien are also our officers. Employees. We have no employees. Services which would otherwise be provided by employees are provided by REIT Management pursuant to our advisory agreement and by our Managing Trustees and officers. As of March 8, 2002, REIT Management had approximately 250 full-time employees. Competition. The hotel industry is highly competitive. Each of our 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 the occupancy rates and daily room rates at our hotels located in that area. Agreements with the operators of our hotels restrict the right of each operator and its affiliates for a limited period of time to own, build, operate, franchise or manage other hotels of the same brand within various specified areas around our hotels. Under these agreements neither the operators nor their affiliates are restricted from operating other brands of hotels in the market areas of any of our hotels, and after such limited period of time, the operators and their affiliates may also compete with our hotels by opening, managing or franchising additional hotels under the same brand name in direct competition with our hotels. We expect to compete for hotel acquisition and financing opportunities with entities which may have substantially greater financial resources than us, including, without limitation, other REITs, hotel operating companies, banks, insurance companies, pension plans and public and private partnerships. These entities may be able to accept more risk than we can prudently manage, including risks with respect to the creditworthiness of hotel operators. Such competition may reduce the number of suitable hotel 7 acquisition or financing opportunities available to us or increase the bargaining power of hotel owners seeking to sell or finance their properties. Environmental Matters Under various laws, owners of real estate may be required to investigate and clean up hazardous substances present at a property, and may be held liable for property damage or personal injuries that result from such contamination. These laws also expose us to the possibility that we become liable to reimburse the government for damages and costs it incurs in connection with the contamination. We reviewed environmental surveys of the facilities we own prior to their purchase. Based upon those surveys we do not believe that any of our properties are subject to material environmental contamination. However, no assurances can be given that environmental liabilities are not present in our properties or that costs we incur to remediate contamination will not have a material adverse effect on our busienss or financial condition. FEDERAL INCOME TAX CONSIDERATIONS The following summary of federal income tax consequences is based on existing law, and is limited to investors who own our shares as investment assets rather than as inventory or as property used in a trade or business. The summary does not discuss the particular tax consequences that might be relevant to you if you are subject to special rules under the federal income tax law, for example if you are: o a bank, life insurance company, regulated investment company, or other financial institution, o a broker or dealer in securities or foreign currency, o a person who has a functional currency other than the U.S. dollar, o a person who acquires our shares in connection with employment or other performance of services, o a person subject to alternative minimum tax, o a person who owns our shares as part of a straddle, hedging transaction, constructive sale transaction, or conversion transaction, or o except as specifically described in the following summary, a tax-exempt entity or a foreign person. The sections of the Internal Revenue Code that govern the federal income tax qualification and treatment of a REIT and its shareholders are complex. This presentation is a summary of applicable Internal Revenue Code provisions, related rules and regulations and administrative and judicial interpretations, all of which are subject to change, possibly with retroactive effect. Future legislative, judicial, or administrative actions or decisions could affect the accuracy of statements made in this summary. We have not sought a ruling from the IRS with respect to any matter described in this summary, and we cannot assure you that the IRS or a court will agree with the statements made in this summary. In addition, the following summary is not exhaustive of all possible tax consequences, and does not discuss any estate, gift, state, local, or foreign tax consequences. For all these reasons, we urge you and any prospective acquiror of our shares to consult with a tax advisor about the federal income tax and other tax consequences of the acquisition, ownership and disposition of our shares. Your federal income tax consequences may differ depending on whether or not you are a "U.S. shareholder." For purposes of this summary, a "U.S. shareholder" for federal income tax purposes is: o a citizen or resident of the United States, including an alien individual who is a lawful permanent resident of the United States or meets the substantial presence residency test under the federal income tax laws, o a corporation, partnership or other entity treated as a corporation or partnership for federal income tax purposes, that is created or organized in or under the laws of the United States, any state thereof or the District of Columbia, unless otherwise provided by Treasury regulations, o an estate the income of which is subject to federal income taxation regardless of its source, or 8 o a trust if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more United States persons have the authority to control all substantial decisions of the trust, or electing trusts in existence on August 20, 1996 to the extent provided in Treasury regulations, whose status as a U.S. shareholder is not overridden by an applicable tax treaty. Conversely, a "non-U.S. shareholder" is a beneficial owner of our shares who is not a U.S. shareholder. Taxation as a REIT We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code, commencing with our taxable year ending December 31, 1995. Our REIT election, assuming continuing compliance with the qualification tests summarized below, continues in effect for subsequent taxable years. Although no assurance can be given, we believe that we are organized, have operated, and will continue to operate in a manner that qualifies us to be taxed under the Internal Revenue Code as a REIT. As a REIT, we generally will not be subject to federal income tax on our net income distributed as dividends to our shareholders. Distributions to our shareholders generally will be includable in their income as dividends to the extent of our current or accumulated earnings and profits. A portion of these dividends may be treated as capital gain dividends, as explained below. No portion of any dividends will be eligible for the dividends received deduction for corporate shareholders. Distributions in excess of current or accumulated earnings and profits generally will be treated for federal income tax purposes as a return of capital to the extent of a recipient shareholder's basis in our shares, and will reduce this basis. Our current or accumulated earnings and profits will generally be allocated first to distributions made on our preferred shares, and thereafter to distributions made on our common shares. Our counsel, Sullivan & Worcester LLP, has opined that we have been organized and have qualified as a REIT under the Internal Revenue Code for our 1995 through 2001 taxable years, and that our current investments and plan of operation will enable us to meet the requirements for qualification and taxation as a REIT under the Internal Revenue Code. Our actual qualification and taxation as a REIT will depend upon our ability to meet the various qualification tests imposed under the Internal Revenue Code and summarized below. While we believe that we will operate in a manner to satisfy the various REIT qualification tests, our counsel has not reviewed and will not review compliance with these tests on a continuing basis. If we fail to qualify as a REIT in any year, we will be subject to federal income taxation as if we were a C corporation, and our shareholders will be taxed like shareholders of C corporations. In this event, we could be subject to significant tax liabilities, and the amount of cash available for distribution to our shareholders may be reduced or eliminated. If we qualify as a REIT and meet the annual distribution tests described below, we generally will not be subject to federal income taxes on the amounts we distribute. However, even if we qualify as a REIT, we may be subject to federal tax in the following circumstances: o We will be taxed at regular corporate rates on any undistributed "real estate investment trust taxable income," including our undistributed net capital gains. o If our alternative minimum taxable income exceeds our taxable income, we may be subject to the corporate alternative minimum tax on our items of tax preference. o If we have net income from the sale or other disposition of "foreclosure property" that is held primarily for sale to customers in the ordinary course of business or other nonqualifying income from foreclosure property, we will be subject to tax on this net income from foreclosure property at the highest regular corporate rate, which is currently 35%. o If we have net income from prohibited transactions, including sales or other dispositions of inventory or property held primarily for sale to customers in the ordinary course of business other than foreclosure property, we will be subject to tax on this income at a 100% rate. o If we fail to satisfy the 75% gross income test or the 95% gross income test discussed below, but nonetheless maintain our qualification as a REIT, we will be subject to tax at a 100% rate on the greater of the amount by which we fail the 75% or the 95% test, multiplied by a fraction intended to reflect our profitability. o If we fail to distribute for any calendar year at least the sum of 85% of our REIT ordinary income for that year, 95% of our REIT capital gain net income for that year, and any undistributed taxable income from prior periods, we will be subject to a 4% excise tax on the excess of the required distribution over the amounts actually distributed. 9 o If we acquire an asset from a corporation in a transaction in which our basis in the asset is determined by reference to the basis of the asset in the hands of a present or former C corporation, and if we subsequently recognize gain on the disposition of this asset during the ten-year period beginning on the date on which the asset ceased to be owned by the C corporation, then we will pay tax at the highest regular corporate tax rate, which is currently 35%, on the lesser of the excess of the fair market value of the asset over the C corporation's basis in the asset on the date the asset ceased to be owned by the C corporation, or the gain recognized in the disposition. o As explained below, we are permitted within limits to own stock and securities of a "taxable REIT subsidiary." A taxable REIT subsidiary of ours will be separately taxed on its net income as a C corporation, and will be subject to limitations on the deductibility of interest expense paid to us. In addition, we will be subject to a 100% tax on redetermined rents, redetermined deductions, and excess interest expense, in order to ensure that transactions between and among us, our tenants, and our taxable REIT subsidiaries are at arm's length. If we invest in properties in foreign countries, our profits from those investments will generally be subject to tax in the countries where those properties are located. The nature and amount of this taxation will depend on the laws of the countries where the properties are located. If we operate as we currently intend, then we will distribute our taxable income to our shareholders and we will generally not pay federal income tax, and thus we generally cannot recover the cost of foreign taxes imposed on our foreign investments by claiming foreign tax credits against our federal income tax liability. Also, we cannot pass through to our shareholders any foreign tax credits. If we fail to qualify or elect not to qualify as a REIT in any taxable year, then we will be subject to federal income tax in the same manner as a C corporation. Any distributions to our shareholders in a year in which we fail to qualify as a REIT will not be deductible, nor will these distributions be required under the Internal Revenue Code. In that event, to the extent of our current and accumulated earnings and profits, any distributions to our shareholders will be taxable as ordinary dividends and, subject to limitations in the Internal Revenue Code, will be eligible for the dividends received deduction for corporate recipients. Also, we will generally be disqualified from federal income taxation as a REIT for the four taxable years following disqualification. Failure to qualify for federal income taxation as a REIT for even one year could result in reduction or elimination of distributions to our shareholders, or in our incurring substantial indebtedness or liquidating substantial investments in order to pay the resulting corporate-level taxes. REIT Qualification Requirements General Requirements. Section 856(a) of the Internal Revenue Code defines a REIT as a corporation, trust or association: (1) that is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares or by transferable certificates of beneficial interest; (3) that would be taxable, but for Sections 856 through 859 of the Internal Revenue Code, as a C corporation; (4) that is not a financial institution or an insurance company subject to special provisions of the Internal Revenue Code; (5) the beneficial ownership of which is held by 100 or more persons; (6) that is not "closely held" as defined under the personal holding company stock ownership test, as described below; and (7) that meets other tests regarding income, assets and distributions, all as described below. Section 856(b) of the Internal Revenue Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year and that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a pro rata part of a taxable year of less than 12 months. Section 856(h)(2) of the Internal Revenue Code provides that neither condition (5) nor (6) need be met for our first taxable year as a REIT. We believe that we have satisfied conditions (1) to (6), inclusive, during each of the requisite periods ending on or before December 31, 2001, and that we will continue to satisfy those conditions in future taxable years. There can, however, be no assurance in this regard. By reason of condition (6) above, we will fail to qualify as a REIT for a taxable year if at any time during the last half of the year more than 50% in value of our outstanding shares is owned directly or indirectly by five or fewer individuals. To help comply with condition (6), our declaration of trust restricts transfers of our shares. In addition, if we comply with applicable Treasury regulations to ascertain the ownership of our shares and do not know, or by exercising reasonable diligence would not have known, that we failed condition (6), then we will be treated as satisfying condition (6). However, our failure to comply with these regulations for ascertaining 10 ownership may result in a penalty of $25,000, or $50,000 for intentional violations. Accordingly, we intend to comply with these regulations, and to request annually from record holders of significant percentages of our shares information regarding the ownership of our shares. Under our declaration of trust, our shareholders are required to respond to these requests for information. For purposes of condition (6) above, REIT shares held by a pension trust are treated as held directly by the pension trust's beneficiaries in proportion to their actuarial interests in the pension trust. Consequently, five or fewer pension trusts could own more than 50% of the interests in an entity without jeopardizing that entity's federal income tax qualification as a REIT. However, as discussed below, if a REIT is a "pension-held REIT," each pension trust owning more than 10% of the REIT's shares by value generally may be taxed on a portion of the dividends it receives from the REIT. Our Wholly-Owned Subsidiaries and Our Investments through Partnerships. Except in respect of taxable REIT subsidiaries as discussed below, Section 856(i) of the Internal Revenue Code provides that any corporation, 100% of whose stock is held by a REIT, is a qualified REIT subsidiary and shall not be treated as a separate corporation. The assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are treated as the REIT's. We believe that each of our direct and indirect wholly-owned subsidiaries, other than the taxable REIT subsidiaries discussed below, will either be a qualified REIT subsidiary within the meaning of Section 856(i) of the Internal Revenue Code, or a noncorporate entity that for federal income tax purposes is not treated as separate from its owner under regulations issued under Section 7701 of the Internal Revenue Code. Thus, except for the taxable REIT subsidiaries discussed below, in applying all the federal income tax REIT qualification requirements described in this summary, all assets, liabilities and items of income, deduction and credit of our direct and indirect wholly-owned subsidiaries are treated as ours. We have invested and may invest in real estate through one or more limited or general partnerships or limited liability companies that are treated as partnerships for federal income tax purposes. In the case of a REIT that is a partner in a partnership, regulations under the Internal Revenue Code provide that, for purposes of the REIT qualification requirements regarding income and assets discussed below, the REIT is deemed to own its proportionate share of the assets of the partnership corresponding to the REIT's proportionate capital interest in the partnership and is deemed to be entitled to the income of the partnership attributable to this proportionate share. In addition, for these purposes, the character of the assets and gross income of the partnership generally retain the same character in the hands of the REIT. Accordingly, our proportionate share of the assets, liabilities, and items of income of each partnership in which we are a partner is treated as ours for purposes of the income tests and asset tests discussed below. In contrast, for purposes of the distribution requirement discussed below, we must take into account as a partner our share of the partnership's income as determined under the general federal income tax rules governing partners and partnerships under Sections 701 through 777 of the Internal Revenue Code. Taxable REIT Subsidiaries. We are permitted to own any or all of the securities of a "taxable REIT subsidiary" as defined in Section 856(l) of the Internal Revenue Code, provided that no more than 20% of our assets, at the close of each quarter of our taxable year, is comprised of our investments in the stock or securities of our taxable REIT subsidiaries. Among other requirements, a taxable REIT subsidiary must: (1) be a non-REIT corporation for federal income tax purposes in which we directly or indirectly own shares, (2) join with us in making a taxable REIT subsidiary election, (3) not directly or indirectly operate or manage a lodging facility or a health care facility, and (4) not directly or indirectly provide to any person, under a franchise, license, or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, except that in limited circumstances a subfranchise, sublicense or similar right can be granted to an independent contractor to operate or manage a lodging facility. In addition, a corporation other than a REIT in which a taxable REIT subsidiary directly or indirectly owns more than 35% of the voting power or value will automatically be treated as a taxable REIT subsidiary. Subject to the discussion below, we believe that we and each of our taxable REIT subsidiaries have complied with, and will continue to comply with, the requirements for taxable REIT subsidiary status during all times each subsidiary's taxable REIT subsidiary election remains in effect, and we believe that the same will be true for any taxable REIT subsidiary that we later form or acquire. Our ownership of stock and securities in taxable REIT subsidiaries is exempt from the 10% and 5% REIT asset tests discussed below. Also, as discussed below, taxable REIT subsidiaries can perform services for our tenants without disqualifying the rents we receive from those tenants under the 75% or 95% gross income tests discussed below. Moreover, because taxable REIT subsidiaries are taxed as C corporations that are separate from us, their assets, liabilities and items of income, deduction and credit are not imputed to us for purposes of the REIT qualification requirements described in this summary. Therefore, taxable REIT subsidiaries can generally undertake third-party management and development activities and activities not related to real estate. Finally, a REIT can earn qualifying rental 11 income from the lease of a qualified lodging facility to a taxable REIT subsidiary, so long as the taxable REIT subsidiary hires an eligible independent contractor to operate the facility, as discussed more fully below. Restrictions are imposed on taxable REIT subsidiaries to ensure that they will be subject to an appropriate level of federal income taxation. For example, a taxable REIT subsidiary may not deduct interest paid in any year to an affiliated REIT to the extent that the interest payments exceed, generally, 50% of the taxable REIT subsidiary's adjusted taxable income for that year. However, the taxable REIT subsidiary may carry forward the disallowed interest expense to a succeeding year, and deduct the interest in that later year subject to that year's 50% adjusted taxable income limitation. In addition, if a taxable REIT subsidiary pays interest, rent, or other amounts to its affiliated REIT in an amount that exceeds what an unrelated third party would have paid in an arm's length transaction, then the REIT generally will be subject to an excise tax equal to 100% of the excessive portion of the payment. Finally, if in comparison to an arm's length transaction, a tenant has overpaid rent to the REIT in exchange for underpaying the taxable REIT subsidiary for services rendered, then the REIT may be subject to an excise tax equal to 100% of the overpayment. There can be no assurance that arrangements involving our taxable REIT subsidiaries will not result in the imposition of one or more of these deduction limitations or excise taxes, but we do not believe that we are or will be subject to these impositions. Income Tests. There are two gross income requirements for qualification as a REIT under the Internal Revenue Code: o At least 75% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from investments relating to real property, including "rents from real property" as defined under Section 856 of the Internal Revenue Code, mortgages on real property, or shares in other REITs. When we receive new capital in exchange for our shares or in a public offering of five-year or longer debt instruments, income attributable to the temporary investment of this new capital in stock or a debt instrument, if received or accrued within one year of our receipt of the new capital, is generally also qualifying income under the 75% test. o At least 95% of our gross income, excluding gross income from sales or other dispositions of property held primarily for sale, must be derived from a combination of items of real property income that satisfy the 75% test described above, dividends, interest, payments under interest rate swap or cap agreements, options, futures contracts, forward rate agreements, or similar financial instruments, and gains from the sale or disposition of stock, securities, or real property. For purposes of these two requirements, income derived from a "shared appreciation provision" in a mortgage loan is generally treated as gain recognized on the sale of the property to which it relates. Although we will use our best efforts to ensure that the income generated by our investments will be of a type which satisfies both the 75% and 95% gross income tests, there can be no assurance in this regard. In order to qualify as "rents from real property" under Section 856 of the Internal Revenue Code, several requirements must be met: o The amount of rent received generally must not be based on the income or profits of any person, but may be based on receipts or sales. o Rents do not qualify if the REIT owns 10% or more by vote or value of the tenant, whether directly or after application of attribution rules. While we intend not to lease property to any party if rents from that property would not qualify as rents from real property, application of the 10% ownership rule is dependent upon complex attribution rules and circumstances that may be beyond our control. For example, an unaffiliated third party's ownership directly or by attribution of 10% or more by value of our shares, as well as 10% or more by vote or value of the stock of one of our tenants, would result in that tenant's rents not qualifying as rents from real property. Our declaration of trust disallows transfers or purported acquisitions, directly or by attribution, of our shares that could result in disqualification as a REIT under the Internal Revenue Code and permits our trustees to repurchase the shares to the extent necessary to maintain our status as a REIT under the Internal Revenue Code. Nevertheless, there can be no assurance that these provisions in our declaration of trust will be effective to prevent REIT status under the Internal Revenue Code from being jeopardized under the 10% affiliated tenant rule. Furthermore, there can be no assurance that we will be able to monitor and enforce these restrictions, nor will our shareholders necessarily be aware of ownership of shares attributed to them under the Internal Revenue Code's attribution rules. o For our 2001 taxable year and thereafter, there is a limited exception to the above prohibition on earning "rents from real property" from a 10% affiliated tenant, if the tenant is a taxable REIT subsidiary. If at least 90% of the leased space of a property is leased to tenants other than taxable REIT subsidiaries and 10% affiliated tenants, and if the taxable REIT subsidiary's rent for space at that property is substantially comparable to the rents paid by nonaffiliated tenants for comparable space at the property, then otherwise qualifying rents paid by the taxable REIT subsidiary to the REIT will not be disqualified on account of the rule prohibiting 10% affiliated tenants. 12 o For our 2001 taxable year and thereafter, there is a second exception to the above prohibition on earning "rents from real property" from a 10% affiliated tenant. For this second exception to apply, a real property interest in a "qualified lodging facility" must be leased by the REIT to its taxable REIT subsidiary, and the facility must be operated on behalf of the taxable REIT subsidiary by a person who is an "eligible independent contractor." Qualified lodging facilities are defined as hotels, motels, or other establishments where more than half of the dwelling units are used on a transient basis, provided that legally authorized wagering or gambling activities are not conducted at or in connection with such facilities. Also included in the definition are the qualified lodging facility's customary amenities and facilities. An eligible independent contractor with respect to a qualified lodging facility is defined as an independent contractor if, at the time the contractor enters into the agreement with the taxable REIT subsidiary to operate the qualified lodging facility, that contractor or any person related to that contractor is actively engaged in the trade or business of operating qualified lodging facilities for persons unrelated to the taxable REIT subsidiary or its affiliated REIT. For these purposes, an otherwise qualifying independent contractor is not disqualified from that status on account of the taxable REIT subsidiary bearing the expenses for the operation of the qualified lodging facility, the taxable REIT subsidiary receiving the revenues from the operation of the qualified lodging facility, net of expenses for that operation and fees payable to the independent contractor, or the REIT receiving income from the independent contractor pursuant to a preexisting or otherwise grandfathered lease of another property. Also, as explained above, we will be subject to a 100% excise tax if the IRS successfully asserts that the rents paid by our taxable REIT subsidiary to us exceed an arm's length rental rate. In June 2001, we acquired 4 hotels and agreed to lease these hotels, along with 31 other hotels then currently leased to tenants unaffiliated with us, to a taxable REIT subsidiary. Our taxable REIT subsidiary engaged independent managers to operate these 35 hotels. To date, 16 hotels are leased and managed in this fashion, and the remaining 19 hotels will prior to June 30, 2004 become leased and managed in this manner. Although there is no clear precedent to distinguish for federal income tax purposes among leases, management contracts, partnerships, financings, and other contractual arrangements, we believe that our leases and our taxable REIT subsidiary's management agreements will be respected for purposes of the requirements of the Internal Revenue Code discussed above. Accordingly, we expect that the rental income from our current and future taxable REIT subsidiaries will qualify favorably as "rents from real property," and that the 100% excise tax on excessive rents from a taxable REIT subsidiary will not apply. o In order for rents to qualify, we generally must not manage the property or furnish or render services to the tenants of the property, except through an independent contractor from whom we derive no income or, for our 2001 taxable year and thereafter, through one of our taxable REIT subsidiaries. There is an exception to this rule permitting a REIT to perform customary tenant services of the sort which a tax-exempt organization could perform without being considered in receipt of "unrelated business taxable income" as defined in Section 512(b)(3) of the Internal Revenue Code. In addition, a de minimis amount of noncustomary services will not disqualify income as "rents from real property" so long as the value of the impermissible services does not exceed 1% of the gross income from the property. o If rent attributable to personal property leased in connection with a lease of real property is 15% or less of the total rent received under the lease, then the rent attributable to personal property will qualify as "rents from real property", if this 15% threshold is exceeded, the rent attributable to personal property will not so qualify. For our taxable years through December 31, 2000, the portion of rental income treated as attributable to personal property is determined according to the ratio of the tax basis of the personal property to the total tax basis of the real and personal property which is rented. For our 2001 taxable year and thereafter, the ratio will be determined by reference to fair market values rather than tax bases. We believe that all or substantially all our rents have qualified and will qualify as rents from real property for purposes of Section 856 of the Internal Revenue Code. In order to qualify as mortgage interest on real property for purposes of the 75% test, interest must derive from a mortgage loan secured by real property with a fair market value, at the time the loan is made, at least equal to the amount of the loan. If the amount of the loan exceeds the fair market value of the real property, the interest will be treated as interest on a mortgage loan in a ratio equal to the ratio of the fair market value of the real property to the total amount of the mortgage loan. Any gain we realize on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business will be treated as income from a prohibited transaction that is subject to a penalty tax at a 100% rate. This prohibited transaction income also may adversely affect our ability to satisfy the 75% and 95% gross income tests for federal income tax qualification as a REIT. We cannot provide assurances as to whether or not the IRS might successfully assert that one or more of our dispositions is subject to the 100% penalty tax. However, we believe that dispositions of assets that we might make will not be subject to the 100% penalty tax, because we intend to: o own our assets for investment with a view to long-term income production and capital appreciation; 13 o engage in the business of developing, owning and operating our existing properties and acquiring, developing, owning and operating new properties; and o make occasional dispositions of our assets consistent with our long-term investment objectives. If we fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, we may nevertheless qualify as a REIT for that year if: o our failure to meet the test was due to reasonable cause and not due to willful neglect; o we report the nature and amount of each item of our income included in the 75% or 95% gross income tests for that taxable year on a schedule attached to our tax return; and o any incorrect information on the schedule was not due to fraud with intent to evade tax. It is impossible to state whether in all circumstances we would be entitled to the benefit of this relief provision for the 75% and 95% gross income tests. Even if this relief provision did apply, a special tax equal to 100% is imposed upon the greater of the amount by which we failed the 75% test or the 95% test with certain adjustments, multiplied by a fraction intended to reflect our profitability. Asset Tests. At the close of each quarter of each taxable year, we must also satisfy these asset percentage tests in order to qualify as a REIT for federal income tax purposes: o At least 75% of our total assets must consist of real estate assets, cash and cash items, shares in other REITs, government securities, and stock or debt instruments purchased with proceeds of a stock offering or an offering of our debt with a term of at least five years, but only for the one-year period commencing with our receipt of the offering proceeds. o Not more than 25% of our total assets may be represented by securities other than those securities that count favorably toward the preceding 75% asset test. o Of the investments included in the preceding 25% asset class, the value of any one non-REIT issuer's securities that we own may not exceed 5% of the value of our total assets, and we may not own more than 10% of any one non-REIT issuer's outstanding voting securities. For our 2001 taxable year and thereafter, we may not own more than 10% of the vote or value of any one non-REIT issuer's outstanding securities, unless that issuer is our taxable REIT subsidiary or the securities are straight debt securities. o For our 2001 taxable year and thereafter, our stock and securities in a taxable REIT subsidiary are exempted from the preceding 10% and 5% asset tests. However, no more than 20% of our total assets may be represented by stock or securities of taxable REIT subsidiaries. When a failure to satisfy the above asset tests results from an acquisition of securities or other property during a quarter, the failure can be cured by disposition of sufficient nonqualifying assets within 30 days after the close of that quarter. We intend to maintain records of the value of our assets to document our compliance with the above asset tests, and to take actions as may be required to cure any failure to satisfy the tests within 30 days after the close of any quarter. Annual Distribution Requirements. In order to qualify for taxation as a REIT under the Internal Revenue Code, we are required to make annual distributions other than capital gain dividends to our shareholders in an amount at least equal to the excess of: (A) the sum of 90% of our "real estate investment trust taxable income," as defined in Section 857 of the Internal Revenue Code, computed by excluding any net capital gain and before taking into account any dividends paid deduction for which we are eligible, and 90% of our net income after tax, if any, from property received in foreclosure, over (B) the sum of our qualifying noncash income, e.g., imputed rental income or income from transactions inadvertently failing to qualify as like-kind exchanges. Prior to our 2001 taxable year, the preceding 90% percentages were 95%. The distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before we timely file our tax return for the earlier taxable year and if paid on or before the first regular distribution payment after that declaration. If a dividend is declared in October, November or December to shareholders of record during one of those months, and if the dividend is paid during the following January, then for federal income tax purposes the 14 dividend will be treated as having been both paid and received on December 31 of the prior taxable year. A distribution which is not pro rata within a class of our beneficial interests entitled to a distribution, or which is not consistent with the rights to distributions among our classes of beneficial interests, is a preferential distribution that is not taken into consideration for purposes of the distribution requirements, and accordingly the payment of a preferential distribution could affect our ability to meet the distribution requirements. Taking into account our distribution policies, including the dividend reinvestment plan we have adopted, we expect that we will not make any preferential distributions. The distribution requirements may be waived by the IRS if a REIT establishes that it failed to meet them by reason of distributions previously made to meet the requirements of the 4% excise tax discussed below. To the extent that we do not distribute all of our net capital gain and all of our real estate investment trust taxable income, as adjusted, we will be subject to tax on undistributed amounts. In addition, we will be subject to a 4% excise tax to the extent we fail within a calendar year to make required distributions to our shareholders of 85% of our ordinary income and 95% of our capital gain net income plus the excess, if any, of the "grossed up required distribution" for the preceding calendar year over the amount treated as distributed for that preceding calendar year. For this purpose, the term "grossed up required distribution" for any calendar year is the sum of our taxable income for the calendar year without regard to the deduction for dividends paid and all amounts from earlier years that are not treated as having been distributed under the provision. If we do not have enough cash or other liquid assets to meet the 90% distribution requirements, we may find it necessary to arrange for new debt or equity financing to provide funds for required distributions, or else our REIT status for federal income tax purposes could be jeopardized. We can provide no assurance that financing would be available for these purposes on favorable terms. If we fail to distribute sufficient dividends for any year, we may be able to rectify this failure by paying "deficiency dividends" to shareholders in a later year. These deficiency dividends may be included in our deduction for dividends paid for the earlier year, but an interest charge would be imposed upon us for the delay in distribution. Although we may be able to avoid being taxed on amounts distributed as deficiency dividends, we will remain liable for the 4% excise tax discussed above. Depreciation and Federal Income Tax Treatment of Leases Our initial tax bases in our assets will generally be our acquisition cost. We will generally depreciate our real property on a straight-line basis over 40 years and our personal property over 9 years. These depreciation schedules may vary for properties that we acquire through tax-free or carryover basis acquisitions. We will be entitled to depreciation deductions from our facilities only if we are treated for federal income tax purposes as the owner of the facilities. This means that the leases of the facilities must be classified for federal income tax purposes as true leases, rather than as sales or financing arrangements, and we believe this to be the case. In the case of sale-leaseback arrangements, the IRS could assert that we realized prepaid rental income in the year of purchase to the extent that the value of a leased property, at the time of purchase, exceeded the purchase price for that property. While we believe that the value of leased property at the time of purchase did not exceed purchase prices, because of the lack of clear precedent we cannot provide assurances as to whether the IRS might successfully assert the existence of prepaid rental income in any of our sale-leaseback transactions. Taxation of U.S. Shareholders As long as we qualify as a REIT for federal income tax purposes, a distribution to our U.S. shareholders that we do not designate 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. Distributions made out of our current or accumulated earnings and profits that we properly designate as capital gain dividends will be taxed as long-term capital gains, as discussed below, to the extent they do not exceed our actual net capital gain for the taxable year. However, corporate shareholders may be required to treat up to 20% of any capital gain dividend as ordinary income under Section 291 of the Internal Revenue Code. In addition, we may elect to retain net capital gain income and treat it as constructively distributed. In that case: (1) we will be taxed at regular corporate capital gains tax rates on retained amounts, (2) each U.S. shareholder will be taxed on its designated proportionate share of our retained net capital gains as though that amount were distributed and designated a capital gain dividend, (3) each U.S. shareholder will receive a credit for its designated proportionate share of the tax that we pay, 15 (4) each U.S. shareholder will increase its adjusted basis in our shares by the excess of the amount of its proportionate share of these retained net capital gains over its proportionate share of this tax that we pay, and (5) both we and our corporate shareholders will make commensurate adjustments in our respective earnings and profits for federal income tax purposes. If we elect to retain our net capital gains in this fashion, we will notify our U.S. shareholders of the relevant tax information within 60 days after the close of the affected taxable year. For noncorporate U.S. shareholders, long-term capital gains are generally taxed at maximum rates of 20% or 25%, depending upon the type of property disposed of and the previously claimed depreciation with respect to this property. If for any taxable year we designate as capital gain dividends any portion of the dividends paid or made available for the year to our U.S. shareholders, including our retained capital gains treated as capital gain dividends, then the portion of the capital gain dividends so designated that will be allocated to the holders of a particular class of shares will on a percentage basis equal the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares. We will similarly designate the portion of any capital gain dividend that is to be taxed to noncorporate U.S. shareholders at the maximum rates of 20% or 25% so that the designations will be proportionate among all classes of our shares. Distributions in excess of current or accumulated earnings and profits will not be taxable to a U.S. shareholder to the extent that they do not exceed the shareholder's adjusted basis in the shareholder's shares, but will reduce the shareholder's basis in those shares. To the extent that these excess distributions exceed the adjusted basis of a U.S. shareholder's shares, they will be included in income as capital gain, with long-term gain generally taxed to noncorporate U.S. shareholders at a maximum rate of 20%. No U.S. shareholder may include on his federal income tax return any of our net operating losses or any of our capital losses. Dividends that we declare in October, November or December of a taxable year to U.S. shareholders of record on a date in those months will be deemed to have been received by shareholders on December 31 of that taxable year, provided we actually pay these dividends during the following January. Also, items that are treated differently for regular and alternative minimum tax purposes are to be allocated between a REIT and its shareholders under Treasury regulations which are to be prescribed. It is possible that these Treasury regulations will require tax preference items to be allocated to our shareholders with respect to any accelerated depreciation or other tax preference items that we claim. A U.S. shareholder's sale or exchange of our shares will result in recognition of gain or loss in an amount equal to the difference between the amount realized and the shareholder's adjusted basis in the shares sold or exchanged. This gain or loss will be capital gain or loss, and will be long-term capital gain or loss if the shareholder's holding period in the shares exceeds one year. In addition, any loss upon a sale or exchange of our shares held for six months or less will generally be treated as a long-term capital loss to the extent of our long-term capital gain dividends during the holding period. Noncorporate U.S. shareholders who borrow funds to finance their acquisition of our shares could be limited in the amount of deductions allowed for the interest paid on the indebtedness incurred. Under Section 163(d) of the Internal Revenue 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 investor's net investment income. A U.S. shareholder's net investment income will include ordinary income dividend distributions received from us and, if an appropriate election is made by the shareholder, capital gain dividend distributions received from us; however, distributions treated as a nontaxable return of the shareholder's basis will not enter into the computation of net investment income. Taxation of Tax-Exempt Shareholders In Revenue Ruling 66-106, the IRS ruled that amounts distributed by a REIT to a tax-exempt employees' pension trust did not constitute "unrelated business taxable income," even though the REIT may have financed some its activities with acquisition indebtedness. Although revenue rulings are interpretive in nature and subject to revocation or modification by the IRS, based upon the analysis and conclusion of Revenue Ruling 66-106, our distributions made to shareholders that are tax-exempt pension plans, individual retirement accounts, or other qualifying tax-exempt entities should not constitute unrelated business taxable income, unless the shareholder has financed its acquisition of our shares with "acquisition indebtedness" within the meaning of the Internal Revenue Code. Special rules apply to tax-exempt pension trusts, including so-called 401(k) plans but excluding individual retirement accounts or government pension plans, that own more than 10% by value of a "pension-held REIT" at any time during a taxable year. The pension trust may be required to treat a percentage of all dividends received from the pension-held REIT during the year as unrelated business taxable income. This percentage is equal to the ratio of: 16 (1) the pension-held REIT's gross income derived from the conduct of unrelated trades or businesses, determined as if the pension-held REIT were a tax-exempt pension fund, less direct expenses related to that income, to (2) the pension-held REIT's gross income from all sources, less direct expenses related to that income, except that this percentage shall be deemed to be zero unless it would otherwise equal or exceed 5%. A REIT is a pension-held REIT if: o the REIT is "predominantly held" by tax-exempt pension trusts, and o the REIT would otherwise fail to satisfy the "closely held" ownership requirement discussed above if the stock or beneficial interests in the REIT held by tax-exempt pension trusts were viewed as held by tax-exempt pension trusts rather than by their respective beneficiaries. A REIT is predominantly held by tax-exempt pension trusts if at least one tax-exempt pension trust owns more than 25% by value of the REIT's stock or beneficial interests, or if one or more tax-exempt pension trusts, each owning more than 10% by value of the REIT's stock or beneficial interests, own in the aggregate more than 50% by value of the REIT's stock or beneficial interests. Because of the restrictions in our declaration of trust regarding the ownership concentration of our shares, we believe that we are not and will not be a pension-held REIT. However, because our shares are publicly traded, we cannot completely control whether or not we are or will become a pension-held REIT. Taxation of Non-U.S. Shareholders The rules governing the United States federal income taxation of non-U.S. shareholders are complex, and the following discussion is intended only as a summary of these rules. If you are a non-U.S. shareholder, we urge you to consult with your own tax advisor to determine the impact of United States federal, state, local, and foreign tax laws, including any tax return filing and other reporting requirements, with respect to your investment in our shares. In general, a non-U.S. shareholder will be subject to regular United States federal income tax in the same manner as a U.S. shareholder with respect to its investment in our shares if that investment is effectively connected with the non-U.S. shareholder's conduct of a trade or business in the United States. In addition, a corporate non-U.S. shareholder that receives income that is or is deemed effectively connected with a trade or business in the United States may also be subject to the 30% branch profits tax under Section 884 of the Internal Revenue Code, which is payable in addition to regular United States federal corporate income tax. The balance of this discussion of the United States federal income taxation of non-U.S. shareholders addresses only those non-U.S. shareholders whose investment in our shares is not effectively connected with the conduct of a trade or business in the United States. A distribution by us to a non-U.S. shareholder that is not attributable to gain from the sale or exchange of a United States real property interest and that is not designated 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 of this type will generally be subject to United States federal income tax and withholding at the rate of 30%, or the lower rate that may be specified by a tax treaty if the non-U.S. shareholder has in the manner prescribed by the IRS demonstrated its entitlement to benefits under a tax treaty. Because we cannot determine our current and accumulated earnings and profits until the end of the taxable year, withholding at the rate of 30% or applicable lower treaty rate will generally be imposed on the gross amount of any distribution to a non-U.S. shareholder that we make and do not designate a capital gain dividend. Notwithstanding this withholding on distributions in excess of our current and accumulated earnings and profits, these distributions are a nontaxable return of capital to the extent that they do not exceed the non-U.S. shareholder's adjusted basis in our shares, and the nontaxable return of capital will reduce the adjusted basis in these shares. To the extent that distributions in excess of current and accumulated earnings and profits exceed the non-U.S. shareholder's adjusted basis in our shares, the distributions will give rise to tax liability if the non-U.S. shareholder would otherwise be subject to tax on any gain from the sale or exchange of these shares, as discussed below. A non-U.S. shareholder may seek a refund from the IRS of amounts withheld on distributions to him in excess of our current and accumulated earnings and profits. For any year in which we qualify as a REIT, distributions that are attributable to gain from the sale or exchange of a United States real property interest are taxed to a non-U.S. shareholder as if these distributions were gains effectively connected with a trade or business in the United States conducted by the non-U.S. shareholder. Accordingly, a non-U.S. shareholder will be taxed on these amounts at the normal capital gain rates applicable to a U.S. shareholder, subject to any applicable alternative minimum tax and to a special alternative minimum tax in the case of nonresident alien individuals; the non-U.S. shareholder will be required to file a United States federal income tax return reporting these amounts, even if applicable withholding is imposed as described below; and corporate non-U.S. shareholders may owe the 30% branch profits tax under Section 884 of the Internal Revenue Code in respect of these amounts. We will be required to withhold from distributions to non-U.S. shareholders, and remit to the IRS, 35% of the maximum amount of any distribution that could be 17 designated as a capital gain dividend. In addition, for purposes of this withholding rule, if we designate prior distributions as capital gain dividends, then subsequent distributions up to the amount of the designated prior distributions will be treated as capital gain dividends. The amount of any tax withheld is creditable against the non-U.S. shareholder's United States federal income tax liability, and any amount of tax withheld in excess of that tax liability may be refunded if an appropriate claim for refund is filed with the IRS. If for any taxable year we designate as capital gain dividends any portion of the dividends paid or made available for the year to our shareholders, including our retained capital gains treated as capital gain dividends, then the portion of the capital gain dividends so designated that will be allocated to the holders of a particular class of shares will on a percentage basis equal the ratio of the amount of the total dividends paid or made available for the year to the holders of that class of shares to the total dividends paid or made available for the year to holders of all classes of our shares. Tax treaties may reduce the withholding obligations on our distributions. Under some treaties, however, rates below 30% that are applicable to ordinary income dividends from United States corporations may not apply to ordinary income dividends from a REIT. You must generally use an applicable IRS Form W-8, or substantially similar form, to claim tax treaty benefits. If the amount of tax withheld by us with respect to a distribution to a non-U.S. shareholder exceeds the shareholder's United States federal income tax liability with respect to the distribution, the non-U.S. shareholder may file for a refund of the excess from the IRS. In this regard, note that the 35% withholding tax rate on capital gain dividends corresponds to the maximum income tax rate applicable to corporate non-U.S. shareholders but is higher than the 20% and 25% maximum rates on capital gains generally applicable to noncorporate non-U.S. shareholders. Treasury regulations also provide special rules to determine whether, for purposes of determining the applicability of a tax treaty, our distributions to a non-U.S. shareholder that is an entity should be treated as paid to the entity or to those owning an interest in that entity, and whether the entity or its owners are entitled to benefits under the tax treaty. These Treasury regulations require the use of the IRS Forms W-8 series. If our shares are not "United States real property interests" within the meaning of Section 897 of the Internal Revenue Code, a non-U.S. shareholder's gain on sale of these shares generally will not be subject to United States federal income taxation, except that a nonresident alien individual who was present in the United States for 183 days or more during the taxable year will be subject to a 30% tax on this gain. Our shares will not constitute a United States real property interest if we are a "domestically controlled REIT." A domestically controlled REIT is a REIT in which at all times during the preceding five-year period less than 50% in value of its shares is held directly or indirectly by foreign persons. We believe that we are and will be a domestically controlled REIT and thus a non-U.S. shareholder's gain on sale of our shares will not be subject to United States federal income taxation. However, because our shares are publicly traded, we can provide no assurance that we will be a domestically controlled REIT. If we are not a domestically controlled REIT, a non-U.S. shareholder's gain on sale of our shares will not be subject to United States federal income taxation as a sale of a United States real property interest, if that class of shares is "regularly traded," as defined by applicable Treasury regulations, on an established securities market like the New York Stock Exchange, and the non-U.S. shareholder has at all times during the preceding five years owned 5% or less by value of that class of shares. If the gain on the sale of our shares were subject to United States federal income taxation, the non-U.S. shareholder will generally be subject to the same treatment as a U.S. shareholder with respect to its gain, will be required to file a United States federal income tax return reporting that gain, and in the case of corporate non-U.S. shareholders might owe branch profits tax under Section 884 of the Internal Revenue Code. A purchaser of our shares from a non-U.S. shareholder will not be required to ithhold on the purchase price if the purchased shares are regularly traded on an established securities market or if we are a domestically controlled REIT. Otherwise, a purchaser of our shares from a non-U.S. shareholder may be required to withhold 10% of the purchase price paid to the non-U.S. shareholder and to remit the withheld amount to the IRS. Backup Withholding and Information Reporting Information reporting and backup withholding may apply to distributions or proceeds paid to our shareholders under the circumstances discussed below. The backup withholding rate is currently 30%, but this rate will fall to 28% over the next several years. Amounts withheld under backup withholding are generally not an additional tax and may be refunded or credited against the REIT shareholder's federal income tax liability. A U.S. shareholder will be subject to backup withholding when it receives distributions on our shares or proceeds upon the sale, exchange, redemption, retirement or other disposition of our shares, unless the U.S. shareholder properly executes under penalties of perjury an IRS Form W-9 or substantially similar form that: o provides the U.S. shareholder's correct taxpayer identification number; and o certifies that the U.S. shareholder is exempt from backup withholding because it is a corporation or comes within another exempt category, it has not been notified by the IRS that it is subject to backup withholding, or it has been notified by the IRS that it is no longer subject to backup withholding. 18 If the U.S. shareholder does not provide its correct taxpayer identification number on the IRS Form W-9 or substantially similar form, it may be subject to penalties imposed by the IRS and the REIT or other withholding agent may have to withhold a portion of any capital gain distributions paid to it. Unless the U.S. shareholder has established on a properly executed IRS Form W-9 or substantially similar form that it is a corporation or comes within another exempt category, distributions on our shares paid to it during the calendar year, and the amount of tax withheld, if any, will be reported to it and to the IRS. Distributions on our shares to a non-U.S. shareholder during each calendar year and the amount of tax withheld, if any, will generally be reported to the non-U.S. shareholder and to the IRS. This information reporting requirement applies regardless of whether the non-U.S. shareholder is subject to withholding on distributions on our shares or whether the withholding was reduced or eliminated by an applicable tax treaty. Also, distributions paid to a non-U.S. shareholder on our shares may be subject to backup withholding, unless the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form in the manner described above. Similarly, information reporting and backup withholding will not apply to proceeds a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares, if the non-U.S. shareholder properly certifies its non-U.S. shareholder status on an IRS Form W-8 or substantially similar form. Even without having executed an IRS Form W-8 or substantially similar form, however, in some cases information reporting and backup withholding will not apply to proceeds that a non-U.S. shareholder receives upon the sale, exchange, redemption, retirement or other disposition of our shares if the non-U.S. shareholder receives those proceeds through a broker's foreign office. Other Tax Consequences You should recognize that our and our shareholders' federal income tax treatment may be modified by legislative, judicial, or administrative actions at any time, which actions may be retroactive in effect. The rules dealing with federal income taxation are constantly under review by the Congress, the IRS and the Treasury Department, and statutory changes, new regulations, revisions to existing regulations, and revised interpretations of established concepts are issued frequently. No prediction can be made as to the likelihood of passage of new tax legislation or other provisions either directly or indirectly affecting us and our shareholders. Revisions in federal income tax laws and interpretations of these laws could adversely affect the tax consequences of an investment in our shares. We and our shareholders may also be subject to state or local taxation in various state or local jurisdictions, including those in which we or our shareholders transact business or reside. State and local tax consequences may not be comparable to the federal income tax consequences discussed above. For example, if a state has not updated its REIT taxation provisions to permit taxable REIT subsidiaries, then our use of a taxable REIT subsidiary may disqualify us from favorable taxation as a REIT in that state. 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, ERISA, must consider whether: o their investment in our shares satisfies the diversification requirements of ERISA; o the investment is prudent in light of possible limitations on the marketability of our shares; o they have authority to acquire our shares under the applicable governing instrument and Title I of ERISA; and o the investment is otherwise consistent with their fiduciary responsibilities. 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, these fiduciaries may be subject to a civil penalty of up to 20% of any amount recovered by the plan on account of a violation. Fiduciaries of any IRA, Roth IRA, Keogh Plan or other qualified retirement plan not subject to Title I of ERISA, referred to as "non-ERISA plans," should consider that a plan may only make investments that are authorized by the appropriate governing instrument. Fiduciary shareholders should consult their own legal advisors if they have any concern as to whether the investment is consistent with the foregoing criteria. Prohibited Transactions Fiduciaries of ERISA plans and persons making the investment decision for an IRA or other non-ERISA plan should consider the application of the prohibited transaction provisions of ERISA and the Internal Revenue Code in making their investment decision. Sales and other transactions between an ERISA or non-ERISA plan, and persons related to it, are prohibited transactions. The particular facts 19 concerning the sponsorship, operations and other investments of an ERISA plan or 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 Internal Revenue Code or a penalty under ERISA upon the disqualified person or party in interest with respect to the plan. If the disqualified person who engages in the transaction is the individual on behalf of whom an IRA or Roth IRA is maintained or his beneficiary, the IRA or Roth IRA may lose its tax-exempt status and its assets may be deemed to have been distributed to the individual in a taxable distribution on account of the prohibited transaction, but no excise tax will be imposed. Fiduciary shareholders should consult their own legal advisors as to whether the ownership of our shares involves a prohibited transaction. Special Fiduciary and Prohibited Transactions Consequences The Department of Labor, which has administrative responsibility over ERISA plans as well as non-ERISA plans, has issued a regulation defining "plan assets." The regulation generally provides that when an ERISA or non-ERISA plan 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 plan's or non-ERISA plan'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. Each class of our shares, that is, our common shares and any class of preferred shares that we have issued or may issue, must be analyzed separately to ascertain whether it is a publicly offered security. 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, or sold under an effective registration statement under the Securities Act of 1933, provided the securities are registered under the Securities Exchange Act of 1934 within 120 days after the end of the fiscal year of the issuer during which the offering occurred. All our outstanding shares have been registered under the Securities Exchange Act of 1934. 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. Our common shares and our preferred shares have been widely held and we expect our common shares and our preferred shares to continue to be widely held. We expect the same to be true of any additional class of preferred stock that we may issue, but we can give no assurance in that regard. 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, some restrictions on transfer ordinarily will not, alone or in combination, affect a finding that these securities are freely transferable. The restrictions on transfer enumerated in the regulation as not affecting that finding include: o any restriction on or prohibition against any transfer or assignment which would result in a termination or reclassification for federal or state tax purposes, or would otherwise violate any state or federal law or court order; o any requirement that advance notice of a transfer or assignment be given to the issuer 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; o any administrative procedure which establishes an effective date, or an event prior to which a transfer or assignment will not be effective; and o any limitation or restriction on transfer or assignment which is not imposed by the issuer or a person acting on behalf of the issuer. We believe that the restrictions imposed under our declaration of trust on the transfer of shares do not result in the failure of our shares to be "freely transferable." Furthermore, we believe that at present there exist no other facts or circumstances limiting the transferability of our shares which are not included among those enumerated as not affecting their free transferability under the regulation, and we do not expect or intend to impose in the future, or to permit any person to impose on our behalf, any limitations or restrictions on transfer which would not be among the enumerated permissible limitations or restrictions. Assuming that each class of our shares will be "widely held" and that no other facts and circumstances exist which restrict transferability of these shares, we have received an opinion of our counsel Sullivan & Worcester LLP that our shares will not fail to be 20 "freely transferable" for purposes of the regulation due to the restrictions on transfer of the shares under our declaration of trust and that under the regulation the shares are publicly offered securities and our assets will not be deemed to be "plan assets" of any ERISA plan or non-ERISA plan that invests in our shares. 21 Item 3. Legal Proceedings Although in the ordinary course of business we may become involved in legal proceedings, we are not aware of any material pending legal proceeding affecting us or any of our hotels for which we might become liable. Item 4. Submission of Matters to a Vote of Security Holders None. 22 PART II Item 5. Market for the Registrant's Common Equity and Related Shareholder Matters Our common 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 our common shares as reported in the New York Stock Exchange Composite Transactions reports. 2000 High Low ---- ---- --- First Quarter $ 21.13 $ 18.56 Second Quarter $ 24.94 $ 20.38 Third Quarter $ 25.25 $ 23.25 Fourth Quarter $ 23.25 $ 20.56 2001 High Low ---- ---- --- First Quarter $ 26.96 $ 22.75 Second Quarter $ 29.65 $ 25.35 Third Quarter $ 29.40 $ 20.95 Fourth Quarter $ 30.00 $ 24.35 The closing price of the common shares on the New York Stock Exchange on March 20, 2002, was $33.80 per share. As of March 20, 2002, there were approximately 1,173 shareholders of record, and we estimate that as of such date there was in excess of 69,000 beneficial owners of the common shares. Information about distributions paid to common shareholders is summarized in the table below. Common share distributions are generally paid in the quarter following the quarter to which they relate. Distributions Per Common Share ---------------- 2000 2001 ----- ----- First Quarter $0.69 $0.70 Second Quarter $0.69 $0.71 Third Quarter $0.70 $0.71 Fourth Quarter $0.70 $0.71 ----- ----- Total $2.78 $2.83 All common distributions shown in the table above have been paid. We intend to continue to declare and pay future common share distributions on a quarterly basis. In order to qualify for the beneficial tax treatment accorded to REITs by Sections 856 through 860 of the Internal Revenue Code, we are required to make annual distributions to shareholders of at least 90% (in our 2000 taxable year this requirement was 95%) of our taxable income. Distributions are made at the discretion of the Board of Trustees and depend on our earnings, cash available for distribution, financial condition, capital market conditions, growth prospects and other factors as the Board of Trustees deems relevant. We intend to distribute substantially all of our "real estate investment trust taxable income" to our shareholders. 23 Item 6. Selected Financial Data The following table sets forth selected financial data for the five years ended December 31, 2001. This data should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and accompanying notes included in this Annual Report on Form 10-K.
Year Ended December 31, ---------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---------------------------------------------------------------------- (in thousands, except per share data) Operating Data: Revenues: Rental income .................................... $ 240,290 $ 234,377 $ 212,669 $ 157,223 $ 98,561 Hotel operating revenues ......................... 37,982 -- -- -- -- FF&E reserve income .............................. 24,652 25,753 20,931 16,108 14,643 Interest income .................................. 953 2,893 3,618 1,630 928 ---------- ---------- ---------- ---------- ---------- Total revenues ............................... 303,877 263,023 237,218 174,961 114,132 Expenses: Hotel operating expenses ......................... 24,375 -- -- -- -- Interest ......................................... 41,312 37,682 37,352 21,751 15,534 Depreciation and amortization .................... 91,395 84,303 74,707 54,757 31,949 Terminated acquisition costs ..................... -- -- -- -- 713 General and administrative ....................... 14,839 14,767 13,230 10,471 6,783 ---------- ---------- ---------- ---------- ---------- Total expenses ............................... 171,921 136,752 125,289 86,979 54,979 ---------- ---------- ---------- ---------- ---------- Income before extraordinary item ................. 131,956 126,271 111,929 87,982 59,153 Extraordinary loss from extinguishment of debt ...................................... -- -- -- 6,641 -- Net income .......................................... 131,956 126,271 111,929 81,341 59,153 Preferred distributions ............................. 7,125 7,125 5,106 -- -- ---------- ---------- ---------- ---------- ---------- Net income available for common shareholders ................................. $ 124,831 $ 119,146 $ 106,823 $ 81,341 $ 59,153 ========== ========== ========== ========== ========== Weighted average common shares outstanding ................................ 58,986 56,466 52,566 42,317 27,530 Per Common Share Data: Income before extraordinary item available to common ........................ $ 2.12 $ 2.11 $ 2.03 $ 2.08 $ 2.15 shareholders Net income available for common shareholders ............................... $ 2.12 $ 2.11 $ 2.03 $ 1.92 $ 2.15 Cash distributions per common share ................. $ 2.83 $ 2.78 $ 2.75 $ 2.62 $ 2.45 Balance Sheet Data (as of December 31): Real estate properties, net ......................... $2,265,824 $2,157,487 $2,082,999 $1,774,811 $1,207,868 Total assets ........................................ 2,354,964 2,220,909 2,194,852 1,837,638 1,313,256 Debt, net of discount ............................... 464,781 464,748 414,780 414,753 125,000 Shareholders' equity ................................ 1,604,519 1,482,940 1,519,715 1,173,857 1,007,893
24 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview The following discussion should be read in conjunction with the financial statements and the notes thereto included in this Annual Report. This discussion includes references to Cash Available for Distribution, or CAD. We compute CAD as net income available for common shareholders plus depreciation and amortization expense, plus non-cash expenses (including only amortization of deferred financing costs and administrative expenses to be settled in our common shares), minus those deposits made into FF&E Escrow accounts which are owned by us but which are restricted to use for improvements at our properties. Our method of calculation of CAD may not be comparable to CAD which may be reported by other REITs that define this term differently. We consider CAD to be an appropriate measure of performance for an equity REIT, along with cash flow from operating activities, investing activities and financing activities, because it provides investors with an indication of an equity REIT's operating performance and its ability to incur and service debt, make capital expenditures, pay distributions and fund other cash needs. Our CAD is an important factor considered by our Board of Trustees in determining the amount of our distributions to shareholders. CAD does not represent cash generated by operating activities in accordance with GAAP and should not be considered as an alternative to net income or cash flow from operating activities as measures of financial performance or liquidity. Events of September 11, 2001 Since the terrorist attacks on the United States on September 11, 2001, the U.S. hotel industry has experienced significant declines versus the comparable prior year period in occupancy, revenues and profitability. These declines primarily arise from reduced travel. These declines are in addition to more modest declines which began to affect the hotel industry earlier in 2001 as a result of the recessionary economy. Most of our hotel operators have reported operating declines at our hotels. Our leases and operating agreements contain features such as guarantees which are intended to require payment of minimum returns to us. The operation of various security features to provide uninterrupted payments to us is not assured, particularly if travel patterns continue at depressed levels for extended periods. If our tenants, hotel managers or guarantors default in their obligations to us, our revenues will decline. Results of Operations Year Ended December 31, 2001 versus Year Ended December 31, 2000 Total revenues in 2001 were $303.9 million versus $263.0 million in 2000. This increase is due primarily to our recognition of total hotel sales as hotel operating revenue for 16 hotels leased to our taxable REIT subsidiary and operated by Marriott, discussed in Note 4 to the financial statements. FF&E reserve income represents amounts paid by our tenants into restricted accounts owned by us, the purpose of which is to accumulate funds for future capital expenditures. The terms of our leases require these amounts to be calculated as a percentage of total hotel sales at our properties. Total revenues were comprised of minimum rent of $236.9 million, percentage rent of $3.4 million, hotel operating revenues of $38.0 million, and FF&E reserve income of $24.7 million in 2001 versus $228.7 million, $5.6 million, $0 and $25.8 million, respectively, in 2000. The 3.6% increase in minimum rent revenue reflects the full year impact of 12 hotels acquired and leased in 2000, offset somewhat by minimum rents recognized in 2000 for hotels which, in 2001, began to be leased to our taxable REIT subsidiary. Hotel operating revenues of $38.0 million, net of hotel operating expenses of $24.4 million for the 16 hotels leased to our taxable REIT subsidiary was $13.6 million in 2001, compared to minimum rent of $5.1 million and FF&E reserve income of $0.7 million (total $5.8 million) for the comparable 2000 period an increase of 134.5% or $7.8 million. This increase was due primarily to our 2001 purchase of four hotels. The decrease in percentage rent revenue of 39.5% is due to reduced levels of hotel sales at many of our properties. FF&E reserve income decreased by 4.3% resulting primarily from lower gross hotel revenues at many of our properties, offset somewhat by additional hotels purchased during 2000 and 2001. Interest income in 2001 was $1.0 million versus 2000 interest income of $2.9 million. The decrease is primarily due to our lower average cash balance and by lower interest rates in 2001 versus 2000. Total expenses in 2001 were $171.9 million versus $136.8 million in 2000. The 25.7% increase is due primarily to our recognition of hotel operating expenses from 16 hotels leased to our taxable REIT subsidiary and operated by Marriott as well as increases in depreciation and amortization, and in interest expenses. We began leasing 10 hotels to a 100% owned subsidiary on June 15, 2001, and an additional six hotels on September 7, 2001. During 2001 operating expenses realized from the hotels under this agreement 25 were $24.4 million. There are no comparable hotel operating expenses presented in the year 2000 period because these hotels were operated under a third party lease during 2000. The increase in depreciation and amortization was $7.1 million, or 8.4%. Depreciation and amortization increased primarily as a result of new investments during 2000 and 2001. Interest expense in 2001 increased $3.6 million, or 9.6% due to higher average borrowings during the 2001 period resulting primarily from the July 2000 issuance of $50.0 million senior unsecured fixed rate notes, offset somewhat by lower interest rates on our revolving credit facility. We expect hotel operating revenues and hotel operating expenses to increase in the future as 19 hotels begin to be leased to our taxable REIT subsidiary and operated by Marriott. Net income for 2001 was $132.0 million, a 4.5% increase over net income of $126.3 million in 2000. The increase was primarily due to higher rental income and hotel operating revenues in excess of hotel operating expenses, the effects of which were offset by increases in depreciation and interest expenses as well as reduced percentage rents, FF&E reserve income, and interest income. These changes were primarily the result of an increase in revenue from new investments in 2001 and 2000, offset to some extent by the weaker operating environment in 2001 which reduced total hotel sales at most of our hotels. Net income available for common shareholders in 2001 was $124.8 million, a 4.8% increase over net income available for common shareholders of $119.1 million in 2000, resulting from factors discussed above. On a per share basis, net income available for common shareholders was $2.12, a 0.5% increase over $2.11 in 2000. This increase resulted from the factors discussed above, partially offset by higher weighted average common shares outstanding. Cash Available for Distribution, or CAD, for 2001 and 2000 is derived as follows (dollars in thousands): 2001 2000 --------- -------- Net income available for common shareholders $124,831 $119,146 Add: Depreciation and amortization 91,395 84,303 Non-cash expenses, primarily amortization of deferred financing costs as interest 3,313 3,067 Less: FF&E reserves (1) 26,540 25,753 -------- -------- Cash Available for Distribution $192,999 $180,763 ======== ======== (1) All of our leases require that our tenants make periodic payments into FF&E reserve escrow accounts for the purpose of funding capital expenditures at our hotels. Also, for the 2001 period, the amount shown here includes $1,888 of hotel operating revenues which we have escrowed for routine capital improvements for the hotels leased to our taxable REIT subsidiary. Our net income includes $26,540 and $25,753 for 2001 and 2000, respectively, of deposits into FF&E reserve escrow accounts owned by us, which are removed here because these amounts are not available to us for distributions to shareholders. Some of our leases provide that FF&E Reserve escrow accounts are owned by our tenants during the lease terms while we have security and remainder interests in the escrow accounts and in property purchased with funding from those accounts. Deposits into FF&E reserve accounts owned by our tenants during the 2001 and 2000 periods totaled $14,355 and $15,284, respectively, and are not removed here because they are not included in our income. CAD for 2001 was $193.0 million, a 6.8% increase over CAD of $180.8 million in 2000. This increase was due primarily to the impact of our acquisition of 20 hotels in 2000 and 2001, offset somewhat by the decreases in percentage rents and interest income and the increase in interest expense discussed above. CAD does not represent cash flows from operating activities as determined in accordance with generally accepted accounting principles and should not be considered an alternative to net income as an indicator of our financial performance or to cash flows from operating activities as a measure of liquidity. Cash flow provided by (used for) operating, investing and financing activities was $205.4 million, ($179.2 million), and ($11.8 million), respectively for the year ended December 31, 2001. Cash flow from operations in 2001 increased 9.0% from $188.3 million in 2000 primarily due to the impact of new investments in 2000 and 2001. Cash used in investing activities increased in 2001 over 2000 levels primarily because of a larger investment in the hotels purchased in 2001 versus hotels in 2000. Cash used in financing activities in 2001 decreased 89.6% from 2000, primarily because of our equity issuance in 2001 offset somewhat by increased distributions on common shares; we issued no equity in 2000. Our total assets increased to $2,355.0 million as of December 31, 2001, from $2,220.9 million as of December 31, 2000. The 26 increase resulted primarily from hotel acquisitions completed in 2001 offset in part by the impact of depreciation expense accumulated on net real estate during the year. Year Ended December 31, 2000 versus Year Ended December 31, 1999 Total revenues in 2000 were $263.0 million versus $237.2 million in 1999. Total revenues were comprised principally of minimum rent of $228.7 million, percentage rent of $5.6 million and FF&E reserve income of $25.8 million in 2000 versus $209.0 million, $3.7 million and $20.9 million, respectively, in 1999. The 9.4% increase in minimum rent revenue reflects the full year impact of 40 hotels acquired in 1999 and the partial impact of 12 hotels acquired during 2000. The increases in percentage rent revenue of 54.0% and FF&E reserve income of 23.0% result from the impact of additional hotels purchased as well as increased gross hotel revenues at our hotels in 2000 versus 1999. Interest income in 2000 was $2.9 million versus $3.6 million in 1999. The decrease is primarily due to a decrease in the average balance of cash offset somewhat by higher interest rates in 2000 versus 1999. Total expenses in 2000 were $136.8 million versus $125.3 million in 1999. The 9.1% increase is primarily the result of increases in depreciation and amortization, and general and administrative expenses. The increase in depreciation and amortization was $9.6 million, or 12.8%, and general and administrative expenses increased $1.5 million, or 11.6%. Depreciation and amortization and general and administrative expenses increased primarily as a result of new investments during 1999 and 2000. Interest expense in 2000 increased $0.3 million, or less than 0.9%. Net income available for common shareholders in 2000 was $119.1 million, or $2.11 per common share versus $106.8 million, or $2.03 per common share in 1999. The increase in net income available for common shareholders is primarily a result of an increase in revenue from new investments. Cash Available for Distribution, or CAD, for 2000 and 1999 is derived as follows (dollars in thousands): 2000 1999 -------- -------- Net income available for common shareholders $119,146 $106,823 Add: Depreciation and amortization 84,303 74,707 Non-cash expenses, primarily amortization of deferred financing costs as interest 3,067 2,708 Less: FF&E reserves (1) 25,753 20,931 -------- -------- Cash Available for Distribution $180,763 $163,307 ======== ======== (1) All of our leases require that our tenants make periodic payments into FF&E reserve escrow accounts for the purpose of funding capital expenditures at our hotels. Our net income includes $25,753 and $20,931 for 2000 and 1999, respectively, of deposits into FF&E reserve escrow accounts owned by us, which are removed here because these amounts are not available to us for distributions to shareholders. Some of our leases provide that FF&E Reserve escrow accounts are owned by our tenants during the lease terms while we have security and remainder interests in the escrow accounts and in property purchased with funding from those accounts. Deposits into FF&E reserve accounts owned by our tenants during the 2000 and 1999 periods totaled $15,284 and $13,056, respectively, and are not removed here because they are not included in our income. CAD for 2000 was $180.8 million, a 10.7% increase over CAD of $163.3 million in 1999. This increase was due primarily to the impact of our acquisition of 52 hotels in 1999 and 2000 and increases in percentage rents, offset somewhat by the decrease in interest income discussed above and increased preferred distributions. CAD does not represent cash flows from operating activities as determined in accordance with generally accepted accounting principles and should not be considered an alternative to net income as an indicator of our financial performance or to cash flows from operating activities as a measure of liquidity. Cash flow provided by (used for) operating, investing and financing activities was $188.3 million, ($123.2 million), and ($114.1 million), respectively for the year ended December 31, 2000. Cash flow from operations in 2000 increased 9.7% from $171.6 million in 1999 primarily due to the impact of new investments in 1999 and 2000. Cash used in investing activities decreased in 2000 over 1999 levels primarily because of investments in 12 hotels in 2000 versus 40 hotels in 1999. Cash was used in financing activities in 2000 versus 1999, during which cash was provided by financing activities primarily because of our equity issuance in 1999; we issued no equity in 2000. 27 Our total assets increased to $2,220.9 million as of December 31, 2000, from $2,194.9 million as of December 31, 1999. The increase resulted primarily from hotel acquisitions completed in 2000 offset in part by the impact of depreciation expense accumulated on net real estate during the year. Liquidity and Capital Resources -- Liquidity and Resources of our Tenants and Operators All of our hotels are leased to or operated by third parties. All costs of operating and maintaining our hotels are paid by these third parties for their own account or as agent for us. These third parties derive their funding for hotel operating expenses, reserves for renovations, or FF&E reserves, and rents and returns due us generally from hotel operating revenues. We define coverage as combined total hotel sales minus all expenses which are not subordinated to minimum payments to us and the required FF&E Reserve contributions, divided by the aggregate minimum payments to us. During 2001, the 220 HPT hotels which had been open at least one year at the beginning of 2001 had average coverage of approximately 1.20 times. All of our hotels, including 10 which opened in 2000 or 2001, had average coverage of approximately 1.15 times in 2001. As described below, we own 132 hotels under leases or management agreements which are guaranteed. The 98 hotels operated pursuant to leases or management agreements which are not guaranteed had average coverage of 1.39 times in 2001. Obligations to us by our tenants and managers of 55.8% of our total investments, at cost, are guaranteed by the parent companies of our tenants and managers. These parent company guarantees may provide us with continued payments if the hotels combined total hotel sales less total hotel expenses during any year are not in excess of amounts due to us. Our tenants and managers or their affiliates may also supplement cash flow from our hotels in order to make payments to us and preserve their rights to continue operation. For the full year 2000 and 2001, according to our tenants and managers, the hotels in one of our combination leases generated cash which was less than amounts due to us; nevertheless, all amounts due to us were paid. The 16 hotels leased to our taxable REIT subsidiary are operated by Marriott in combination with an additional 19 hotels which are leased to a subsidiary of Marriott. These 19 hotels are expected to begin to be leased by our taxable REIT subsidiary during 2002. The operations of all 35 of these hotels are combined for all purposes under our agreement with Marriott to pay combined rents and returns to us. For any of these 35 hotels, funding for hotel operating expenses, rents and returns to us, may be provided by a combination of hotel operating revenues from all other hotels in the combination, payments from Marriott International under its guarantee obligation, or voluntary payments by affiliates of Marriott. During the portion of 2001 that Marriott operated 16 hotels leased to our taxable REIT subsidiary, these 16 hotels did not generate hotel operating revenues in excess of hotel operating expenses including expenses allocated by Marriott and allocated minimum returns to us by approximately $1.9 million. This $1.9 million is reflected as a reduction to hotel operating expenses for 2001. However, during 2001 the combination of 35 hotels, of which these 16 hotels are a part, generated sufficient total hotel sales to pay hotel expenses, rent and returns to us without additional payments from Marriott under its guarantee or otherwise. Guarantee payments to us, if any, made on any of our leases or management agreements, do not subject us to repayment obligations. To maintain our status as a real estate investment trust ("REIT") under the Internal Revenue Code, we must meet certain requirements, including the distribution of a substantial portion of our taxable income to our shareholders. As a REIT, we do not expect to pay federal income taxes on the majority of our income. In 1999 federal legislation known as the REIT Modernization Act, or RMA, was enacted and became effective on January 1, 2001. The RMA, among other things, allows a REIT to lease hotels to a so-called "taxable REIT subsidiary" if the hotel is managed by an independent third party. As described in Note 4 to our financial statements, we entered our first transaction using a taxable REIT subsidiary on June 15, 2001. The income realized by our taxable REIT subsidiary in excess of the rent paid to us by our subsidiary will be subject to income tax at customary corporate rates. As and if the financial performance of the hotels operated for the account of our taxable REIT subsidiary improves, these taxes may become material, but the anticipated taxes are not material to our consolidated financial results at this time. -- Our Operating Liquidity and Resources Our principal sources of funding for current expenses and for distributions to shareholders is provided by our operations, primarily rents derived from leasing and the excess of hotel operating revenues over hotel operating expenses of our hotels. Minimum rents and minimum returns are received from our tenants and managers monthly in advance and percentage rents or returns are received either monthly or quarterly in arrears. This flow of funds has historically been sufficient for us to pay day to day operating expenses, interest and distributions. We believe that our operating cash flow will be sufficient to meet our operating expenses, interest and distribution payments for the foreseeable future. 28 Various percentages of total sales at all of our hotels are escrowed as reserves for future renovations and refurbishment, or FF&E reserves, as discussed above. As of December 31, 2001, there was approximately $52.9 million on deposit in these escrow accounts of which $39.9 million was held directly by us and reflected on our balance sheet as restricted cash. During 2001, $41.1 million was deposited into these accounts and $31.9 million was spent to renovate and refurbish our properties. Certain of these accounts are held and owned by tenants and not reflected on our balance sheet. -- Our Investment and Financing Liquidity and Resources 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 make distributions or pay operating expenses, we have entered into a revolving credit facility with a group of commercial banks. During 2001 our credit facility permitted borrowing up to $300 million, all of which was available at December 31, 2001. The credit facility in effect during 2001 expired in March 2002, and we entered a new credit facility. The new facility matures in June 2005 and may be extended at our option to June 2006 upon our payment of an extension fee. The new facility permits borrowing up to $350 million and includes an accordion feature under which the maximum draw could expand to $700 million, in certain circumstances. Drawings under our credit facility are unsecured. Funds may be drawn, repaid and redrawn until maturity, and no principal repayment is due until maturity. Interest on borrowings under the credit facility are payable at a spread above LIBOR. In the third quarter of 2001 we issued 6.0 million common shares of beneficial interest, raising gross proceeds of $168.3 million. Net proceeds, after underwriting costs and other offering expenses, were $159.3 million and were used to repay all amounts outstanding under our revolving credit facility, acquire hotels and for general business purposes. At December 31, 2001, we had cash and cash equivalents of $39.0 million and the ability to draw up to the full amount, or $300 million, under our credit facility. We expect to use existing cash balances, borrowings under our credit facility or other lines of credit and net proceeds of offerings of equity or debt securities to fund future hotel acquisitions. We have no debt which matures in the next twelve months and no principal or sinking-fund payments in the next twelve months. Our debts mature as follows: $115 million in 2005; $150 million in 2008; $150 million in 2009; and $50 million in 2010. None of these debt obligations require principal or sinking-fund payments prior to their maturity date. To the extent we borrow on the credit facility and, as the maturity dates of our credit facility and term debt approach over the longer term, we will explore various alternatives for the repayment of amounts due. Such alternatives in the short-term and long-term may include incurring additional long-term debt and issuing new equity securities. On January 15, 1998, our shelf registration statement for up to $2 billion of securities, including debt securities, was declared effective by the Securities and Exchange Commission, or SEC. An effective shelf registration statement enables us to issue securities to the public on an expedited basis by filing a prospectus supplement with the SEC. We had $793.6 million available on our shelf registration statement as of December 31, 2001. On March 8, 2002, we filed a new shelf registration statement to increase our availability to $2.8 billion; this registration was declared effective by the SEC on March 20, 2002. Although there can be no assurance that we will consummate any debt or equity security offerings or other financings, we believe we will have access to various types of financing in the future, including investment grade debt or equity securities offerings, with which to finance future acquisitions and to pay our debt and other obligations. -- Debt Covenants Our debt obligations at December 31, 2001, were limited to our revolving credit facility and our $465 million of public debt. Each issue of our public debt is governed by an indenture. These indentures and our credit facility agreement contain a number of financial ratio covenants which generally restrict our ability to incur debts, including debts secured by mortgages on our properties, in excess of calculated amounts, require us to maintain a minimum net worth, as defined, restrict our ability to make distributions under certain circumstances and require us to maintain other ratios, as defined. During the period from our incurrence of these debts through December 31, 2001, we were in compliance with all of our covenants under our indentures and our credit agreement. None of our indentures or our bank credit facility contain provisions for acceleration which could be triggered by our debt ratings. However, under our credit agreement, our senior debt rating is used to determine the fees and interest rate "spread" applied to borrowings. Our public debt indentures contain cross default provisions to any other debts equal to or in excess of $20 million. Similarly, a default on any of our public indentures would constitute a default on our credit agreement. 29 As of December 31, 2001, we had no commercial paper, derivatives, swaps, hedges, guarantees, joint ventures or partnerships. As of December 31, 2001, we had no secured debt obligations. None of our debt documentation requires us to provide collateral security in the event of a ratings downgrade. We have no "off balance sheet" arrangements. -- Related Party Transactions We have an agreement with REIT Management & Research LLC, or RMR. RMR provides investment, management and administrative services to us. RMR is owned by Barry M. Portnoy and Gerard M. Martin, each a managing trustee and member of our board of trustees. Each of our executive officers are also officers of RMR. Our independent trustees, including all of our trustees other than Messrs. Portnoy and Martin, review our contract with RMR at least annually and make determinations regarding its negotiation, renewal or termination. Any termination of our contract with RMR would cause a default under our bank credit facility, if not approved by a majority of lenders. Our current contract with RMR expires on December 31, 2002. RMR is compensated at an annual rate equal to 0.7% of our average real estate investments, as defined, up to the first $250 million of such investments and 0.5% thereafter plus an incentive fee based upon increases in cash available for distribution per share, as defined. The incentive fees payable to RMR are paid in our common shares. Critical Accounting Policies Our most critical accounting policies involve our investments in real property. These policies affect our: o allocation of purchase price between various asset categories and the related impact on our recognition of depreciation expense; o assessment of the carrying value of long-lived assets; and o classification of our leases. These policies involve significant judgments based upon our experience, including judgments about current valuations, ultimate realizable value, estimated useful lives, salvage or residual value, the ability of our tenants and operators to perform their obligations to us, and the current and likely future operating and competitive environment in which our properties are located. In the future we may need to revise our assessments to incorporate information which is not now known and such revisions could increase or decrease our depreciation expense related to properties we own, which could result in the classification of new leases as other than operating leases or could decrease the net carrying value of our assets. Property Leases and Operating Agreements As of March 20, 2002 we owned 230 hotels which are grouped into nine combinations and leased to or managed by separate affiliates of hotel operating companies including Marriott International, Inc., Host Marriott Corporation, Crestline Capital Corporation, Wyndham International, Inc., Prime Hospitality Corporation, Candlewood Hotel Company, Inc. and BRE/Homestead Village LLC. The tables on the following pages summarize the key terms of our leases and the operating agreements at December 31, 2001, and operating statistics of our tenants' operations of our hotels including average occupancy, average daily rates, or ADR and revenue per available room, or RevPAR. 30
- ------------------------------------------------------------------------------------------------------------------------------------ Marriott(R)/Residence Residence Inn by Courtyard by Residence Inn by Inn by Marriott(R)/ Marriott(R)/Courtyard Hotel Brand Marriott(R) Marriott(R) Courtyard by by Marriott(R)/ Wyndham(R) Marriott(R)/ TownePlace Suites TownePlace Suites by by Marriott(R)/SpringHill Marriott(R)/SpringHill Suites by Marriott(R)(1) Suites by Marriott(R) - ------------------------------------------------------------------------------------------------------------------------------------ Number of Hotels 53 18 35 19 12 Number of Rooms 7,610 2,178 5,382 2,756 2,321 Number of States 24 14 15 14 8 Tenant Subsidiary of Host Subsidiary of Host Subsidiary of Subsidiary of Subsidiary of Subleased to Subleased to Marriott/Subsidiary Crestline Wyndham Subsidiary of Subsidiary of of Hospitality Crestline Crestline Properties Trust Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Subsidiary of Marriott Marriott Marriott Marriott Wyndham Investment at December 31, 2001 (000s) $513,126 $177,784 $453,954 $274,222 $182,570 (2) Security Deposit (000s) (3) $50,540 $17,220 $36,204 $28,508 $18,325 End of Initial Term 2012 2010 2019 2015 2014 Renewal Options (4) 3 for 12 years each 1 for 10 years, 2 for 15 years each 2 for 10 years each 4 for 12 2 for 15 years each years each Current Annual Minimum Rent /Return (000s) $51,313 $17,724 $48,288 $28,508 $18,325 Percentage Rent/Return (5) 5.0% 7.5% 7.0% 7.0% 8.0% Number of Comparable Hotels (6) 53 18 32 13 12 2001: Occupancy 73.2% 77.6% 74.1% 73.1% 67.0% ADR $102.12 $103.65 $94.14 $104.42 $90.23 RevPAR $74.75 $80.43 $69.76 $76.33 $60.45 2000: Occupancy 80.1% 83.8% 78.1% 77.3% 72.4% ADR $99.85 $105.09 $93.19 $103.10 $91.88 RevPAR $79.98 $88.07 $72.78 $79.70 $66.52 - ------------------------------------------------------------------------------------------------------------------------------------ (1) At December 31, 2001, 19 of the 35 hotels in this combination were leased to and operated by subsidiaries of Marriott. The remaining 16 hotels were operated by subsidiaries of Marriott under a management contract with our wholly-owned subsidiary tenant. Marriott's obligations under the lease and the management contracts are subject to cross-default provisions and Marriott has provided us with a limited guarantee of its lease and management obligations, including the obligation to pay minimum rents and returns to us. (2) Excludes expenditures made from FF&E reserves subsequent to our initial purchase. (3) Excludes other deposits totaling approximately $26.6 million retained by us to secure various guarantee obligations to us. (4) Renewal options may be exercised by the tenant or manager for all, but not less than all, of the hotels within a pool. (5) Each lease or management contract provides for payment to HPT of a percentage of increases in total hotel sales over base year levels as additional rent or return. (6) Includes only hotels open for at least a full year as of January 1, 2001.
31
- ------------------------------------------------------------------------------------------------------------------------------------ Summerfield Total / Suites by Wyndham(R) Candlewood Homestead Range / Hotel Brand AmeriSuites(R) Suites(R) Studio Suites(R) Average - ------------------------------------------------------------------------------------------------------------------------------------ Number of Hotels 15 24 36 18 230 Number of Rooms 1,822 2,929 4,294 2,399 31,691 Number of States 8 13 23 5 37 Tenant Subsidiary of Subsidiary of Subsidiary of Subsidiary of Wyndham Prime Candlewood BRE/Homestead Village LLC Manager Subsidiary of Subsidiary of Subsidiary of Subsidiary of Wyndham Prime Candlewood BRE/Homestead Village LLC Investment at December 31, 2001 (000s)(1) $240,000 $243,350 $289,750 $145,000 $2,519,756 Security Deposit (000s) (2) $15,000 $25,575 $30,086 $15,960 $237,418 End of Initial Term 2017 2013 2016 2015 2010-2019 (average 13.5 years) Renewal Options (3) 4 for 12 3 for 15 3 for 15 2 for 15 years each years each years each years each Current Annual Minimum Rent/Return (000s) $25,000 $25,575 $29,507 $15,960 $260,200 Percentage Rent/Return (4) 7.5% 8.0% 10.0% 10.0% 5%-10% Number of Comparable Hotels (5) 15 24 35 18 220 2001: Occupancy 75.8% 60.9% 74.4% 74.8% 72.4% ADR $120.56 $71.97 $56.09 $52.76 $88.44 RevPAR $91.38 $43.83 $41.73 $39.46 $64.03 2000: Occupancy 82.3% 59.4% 77.3% 79.7% 77.0% ADR $126.86 $77.18 $56.35 $50.67 $88.81 RevPAR $104.41 $45.84 $43.56 $40.38 $68.38 - ------------------------------------------------------------------------------------------------------------------------------------ (1) Excludes expenditures made from FF&E Reserves subsequent to our initial purchase. (2) Excludes other deposits totaling approximately $26.6 million retained by us to secure various guarantee obligations to us. (3) Renewal options may be exercised by the tenant or manager for all, but not less than all, of the hotels within a pool. (4) Each lease or management contract provides for payment to HPT of a percentage of increases in total hotel sales over base year levels as additional rent or return. (5) Includes only hotels open for at least a full year as of January 1, 2001.
32 Seasonality Our 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 material fluctuations in our income because we believe that the net revenues generated by our hotels will be sufficient for the lessees to pay rents and returns to us on a regular basis notwithstanding seasonal fluctuations. Seasonality may effect our hotel operating revenues, but we do not expect seasonal variations to have a material impact upon our financial results of operations. Inflation We believe that inflation should not have a material adverse effect on us. Although increases in the rate of inflation may tend to increase interest rates which we may pay for borrowed funds, our floating rate borrowings are not expected to be outstanding for extended periods, and if we believe they will be outstanding for extended periods we may purchase interest rate caps to protect us from interest rate increases. In addition, our leases provide for the payment of percentage rent to us based on increases in total sales, and such rent may increase with inflation. Certain Considerations The discussion and analysis of our financial condition and results of operations requires us to make certain estimates and assumptions and contains certain statements of our beliefs, intentions or expectations concerning projections, plans, future events and performance. The estimates, assumptions and statements, such as those relating to our ability to expand our portfolio, performance of our assets, the ability of our operators to pay rent and returns to us, remain competitive or improve hotel operating revenues or results, our ability to make distributions, our tax status as a "real estate investment trust," the ability to appropriately balance the use of debt and equity and to access capital markets, depend upon various factors over which we and/or our operators and tenants have or may have limited or no control. Those factors include, without limitation, the status of the economy, capital markets (including prevailing interest rates), compliance with the changes to regulations within the hospitality industry, competition, changes to federal, state and local legislation and other factors. We cannot predict the impact of these factors, if any. However, these factors could cause our actual results for subsequent periods to be different from those stated, estimated or assumed in this discussion and analysis of our financial condition and results of operations. We believe that our estimates and assumptions are reasonable at this time. Item 7A. Quantitative and Qualitative Disclosures About Market Risk We are exposed to risks associated with market changes in interest rates. We manage our exposure to this market risk by monitoring our available financing alternatives. Our strategy to manage exposure to changes in interest rates is unchanged from December 31, 2000. Other than as described below we do not foresee any significant changes in our exposure to fluctuations in interest rates or in how we manage this exposure in the near future. At December 31, 2001, our total outstanding debt consisted of four issues of fixed rate, senior unsecured notes:
Annual Annual Principal Balance Interest Rate Interest Expense Maturity Interest Payments Due ----------------- ------------- ---------------- -------- --------------------- $115.0 million 8.250 % $9.5 million 2005 Monthly 150.0 million 7.000 % 10.5 million 2008 Semi-Annually 150.0 million 8.500 % 12.8 million 2009 Monthly 50.0 million 9.125 % 4.6 million 2010 Semi-Annually ---------------- --------------- $465.0 million $37.4 million
No principal repayments are due under these notes until maturity. Because interest on all of our outstanding debt at December 31, 2001, is at fixed rates, changes in interest rates during the term of this debt will not effect our operating results. If at maturity these notes were refinanced at interest rates which are 10% higher than shown above, our per annum interest cost would increase by approximately $3.7 million. Changes in the interest rate also affect the fair value of our debt obligations; increases in market interest rates decrease the fair value of our fixed rate debt while decreases in market interest rates increase the fair value of our fixed rate debt. Based on the balances outstanding as of December 31, 2001, a hypothetical immediate 10% change in interest rates would change the fair value of our fixed rate debt obligations by approximately $16.0 million. 33 Each of our fixed rate debt arrangements allows us to make repayments earlier than the stated maturity date. Our $115 million 8.25% monthly notes due 2005 became callable by us at par any time after November 15, 2001. Our $150 million 8.5% monthly notes due 2009 are callable by us at par any time after December 15, 2002. In other cases we are allowed to make prepayments only at face value plus a premium equal to a make-whole amount, as defined, generally designed to preserve a stated yield to the note holder. These prepayment rights may afford us the opportunity to mitigate the risk of refinancing at maturity at higher rates by refinancing prior to maturity. Our revolving credit facility bears interest at floating rates and currently matures in 2005. As of December 31, 2001, there was zero outstanding and the full amount of $300 million was available for drawing under our then existing revolving credit facility. We replaced that facility in March 2002 with a new $350 million facility which can be expanded to up to $700 million, in certain circumstances. Our revolving credit facility is available to finance acquisitions and for general business purposes. Repayments under the revolving credit facility may be made at any time without penalty. Our exposure to fluctuations in interest rates may in the future increase if we incur debt to fund future acquisitions or otherwise. A change in interest rates would not affect the value of our floating rate debt obligations, but would affect the interest which we must pay on this debt. The interest rate market which has an impact upon us is the U.S. dollar interest rate market for corporate obligations, including floating rate LIBOR based obligations and fixed rate obligations. Item 8. Financial Statements and Supplementary Data Our financial statements and financial statement schedule begin on Page F-1 (see index in Item 14(a)). One of our tenants, HMH HPT Courtyard LLC, a subsidiary of Host Marriott Corporation, leases 53 hotels from us which represent 20% of our investments, at cost. During 1999, with our consent, HMH HPT Courtyard LLC began to sublease these 53 properties to CCMH Courtyard I LLC, a subsidiary of Crestline Capital Corporation. The financial statements for HMH HPT Courtyard LLC as of December 31, 2001, and December 31, 2000, and for the three fiscal years ended December 31, 2001, begin on page F-16. The financial statements of CCMH Courtyard I LLC as of December 28, 2001, and December 29, 2000 and for the three fiscal years ended December 28, 2001, begin on page F-27. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III The information in Part III (Items 10, 11, 12 and 13) is incorporated by reference to our definitive Proxy Statement, which is expected to be filed not later than 120 days after the end of our fiscal year. 34 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Index to Financial Statements and Financial Statement Schedules
The following audited consolidated financial statements and schedule of Hospitality Properties Trust are included on the pages indicated: Page Report of Independent Public Accountants.......................................... F-1 Consolidated Balance Sheet as of December 31, 2001 and 2000....................... F-2 Consolidated Statement of Income for the three years ended December 31, 2001...... F-3 Consolidated Statement of Shareholders' Equity for the three years ended December 31, 2001................................................................. F-4 Consolidated Statement of Cash Flows for the three years ended December 31, 2001................................................................. F-5 Notes to Consolidated Financial Statements........................................ F-6 Report of Independent Public Accountants on Schedule.............................. F-12 Schedule III - Real Estate and Accumulated Depreciation........................... F-13
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.
The following audited financial statements of HMH HPT Courtyard LLC, a subsidiary of Host Marriott Corporation and the lessee of 53 of our Courtyard by Marriott(R) hotels (20% of our investments, at cost) are included on the pages indicated: Page Introduction to Supplementary Financial Statements of HMH HPT Courtyard LLC.......................................................... F-15 Report of Independent Public Accountants.......................................... F-16 Balance Sheets as of December 31, 2001 and December 31, 2000...................... F-17 Statements of Operations for the fiscal years ended December 31, 2001, December 31, 2000 and December 31, 1999........................................... F-18 Statements of Shareholder's and Member's Equity for the fiscal years ended December 31, 2001, December 31, 2000 and December 31, 1999.................. F-19 Statements of Cash Flows for the fiscal years ended December 31, 2001, December 31, 2000 and December 31, 1999........................................... F-20 Notes to Financial Statements..................................................... F-21
35
The following audited financial statements of CCMH Courtyard I LLC, a subsidiary of Crestline Capital Corporation, and the sublessee of the 53 Courtyard by Marriott(R) hotels leased to HMH HPT Courtyard LLC, are included on the pages indicated. These assets are subleased by CCMH Courtyard I LLC from HMH HPT Courtyard LLC, a subsidiary of Host Marriott Corporation, whose audited financial statements appear on the pages indicated above. Page Introduction to Supplementary Financial Statements of CCMH Courtyard I LLC........................................................... F-26 Report of Independent Public Accountants.......................................... F-27 Balance Sheets as of December 28, 2001 and December 29, 2000...................... F-28 Statements of Operations for the fiscal years ended December 28, 2001, December 29, 2000 and December 31, 1999........................................... F-29 Statements of Member's Equity for the fiscal years ended December 28, 2001, December 29, 2000 and December 31, 1999........................ F-30 Statements of Cash Flows for the fiscal years ended December 28, 2001, December 29, 2000 and December 31, 1999........................................... F-31 Notes to Financial Statements..................................................... F-32
(b) Reports on Form 8-K During the fourth quarter of 2001, we did not file any Current Reports on Form 8-K. Exhibits 3.1 Composite copy of Amended and Restated Declaration of Trust dated August 21, 1995, as amended to date. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998) 3.2 Articles Supplementary dated June 2, 1997. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 3.3 Articles Supplementary dated April 8, 1999. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000) 3.4 Articles Supplementary dated May 16, 2000. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000) 3.5 Amended and Restated Bylaws of the Company, as amended. (Incorporated by reference to the Company's Current Report on Form 8-K dated June 30, 2000) 4.1 Form of Common Share Certificate. (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 4.2 Form of 9-1/2% Series A Cumulative Redeemable Preferred Share Certificate. (Incorporated by reference to the Company's Report on Form 10-K for the year ended December 31, 1999) 4.3 Rights Agreement, dated as of May 20, 1997, between the Company and State Street Bank and Trust Company, as Rights Agent. (Incorporated by reference to the Company's Current Report on Form 8-K dated May 29, 1997) 4.4 Indenture, dated as of February 25, 1998, between the Company and State Street Bank and Trust Company. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 36 4.5 Supplemental Indenture No. 1, dated as of February 25, 1998, between the Company and State Street Bank and Trust Company, relating to the Company's 7.00% Senior Notes due 2008, including form thereof. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) 4.6 Supplemental Indenture No. 2, dated as of November 12, 1998, by and between the Company and State Street Bank and Trust Company, relating to the Company's 8-1/4% Monthly Income Senior Notes due 2005, including form thereof. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998) 4.7 Supplemental Indenture No. 3, dated as of December 16, 1998, by and between the Company and State Street Bank and Trust Company, relating to the Company's 8-1/2% Monthly Income Senior Notes due 2009, including form thereof. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1998) 4.8 Supplemental Indenture No. 4 dated as of July 14, 2000, between the Company and State Street Bank and Trust Company, relating to the Company's 9.125% Senior Notes due 2010, including form thereof. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000) 4.9 Supplemental Indenture No. 5, dated as of July 28, 2000, between the Company and State Street Bank and Trust Company, relating to the Company's 9.125% Senior Notes due 2010, including form thereof. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000) 8.1 Opinion of Sullivan & Worcester LLP as to certain tax matters. (Filed herewith) 10.1 Advisory Agreement, dated January 1, 1998, by and between REIT Management & Research, Inc. and the Company (+). (Incorporated by reference to the Company's Current Report on Form 8-K dated February 11, 1998) 10.2 The Company's 1995 Incentive Share Award Plan (+). (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 10.3 Form of Courtyard Management Agreement between HMH Courtyard Properties, Inc., d/b/a/ HMH Properties, Inc. and Courtyard Management Corporation. (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 10.4 Form of First Amendment to Courtyard Management Agreement between Courtyard Management Corporation and the Company and Consolidation Letter Agreement by and between Courtyard Management Corporation and the Company. (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 10.5 Form of Lease Agreement between the Company and HMH HPT Courtyard, Inc. (Incorporated by reference to the Company's Registration Statement on Form S-11 (File No. 33-92330)) 10.6 Amended and Restated Master Lease Agreement, dated as of December 23, 1999, by and between HPTSHC Properties Trust and Summerfield HPT Lease Company, L.P. (Incorporated by reference to the Company's Report on Form 10-K for the year ended December 31, 1999) 10.7 Master Lease Agreement, dated as of April 30, 1999, by and among the Company, HPTCY Properties Trust and HMH HPT Courtyard LLC. (Incorporated by reference to the Company's Report on Form 10-K for year ended December 31, 1999) 10.8 Agreement to Assign, Release, Franchise and Manage, dated as of June 15, 2001, by and among HPT, HPTMI Properties Trust ("HPTMI"), HPTMI Hawaii, Inc. ("HPTMI Hawaii"), HPT TRS MI-135, Inc. ("TRS"), Marriott International, Inc. ("MI"), CR14 Tenant Corporation ("CR14"), CRTM17 Tenant Corporation ("CRTM17"), Courtyard Marriott Corporation ("Courtyard"), Marriott Hotel Services, Inc. ("Full Service Manager"), Residence Inn by Marriott, Inc. ("Residence Inn"), SpringHill SMC Corporation ("SpringHill") and TownePlace Management Corporation, ("TownePlace"). (Incorporated by reference to the Company's Current Report on Form 8-K dated July 31, 2001) 10.9 Form of Management Agreement by and between Courtyard and TRS. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001) 37 10.10 Pooling Agreement, dated as of June 15, 2001, by and among MI, Full Service Manager, Residence Inn, Courtyard, SpringHill, TownePlace and TRS. (Incorporated by reference to the Company's Current Report on Form 8-K dated July 31, 2001) 10.11 Amended and Restated Limited Rent Guaranty, dated as of June 15, 2001, made by MI in favor of HPTMI. (Incorporated by reference to the Company's Current Report on Form 8-K dated July 31, 2001) 10.12 Guaranty, dated as of June 15, 2001, made by MI in favor of TRS. (Incorporated by reference to the Company's Current Report on Form 8-K dated July 31, 2001) 10.13 Holdback and Security Agreement, dated as of June 15, 2001, by and among MI, St. Louis Airport, L.L.C., Nashville Airport, L.L.C., Residence Inn, Courtyard, SpringHill, TownePlace, Full Service Manager, CR14, CRTM17, TRS, HPTMI Hawaii and HPTMI. (Incorporated by reference to the Company's Current Report on Form 8-K dated July 31, 2001) 10.14 Credit Agreement dated as of March 26, 2002 by and among the Company, First Union Securities, Inc., d/b/a Wachovia Securities, Dresdner Bank Real Estate, First Union National Bank, Dresdner Bank AG, New York and Grand Cayman Branches, ING Capital LLC, CIBC World Markets Corp., Societe Generale, and each of the Financial Institutions Initially a signatory thereto together with their Assignees. (Filed herewith) 12.1 Ratio of Earnings to Fixed Charges. (Filed herewith) 12.2 Ratio of Earnings to Combined Fixed Charges and Preferred Distributions. (Filed herewith) 21.1 Subsidiaries of the Registrant. (Filed herewith) 23.1 Consent of Arthur Andersen LLP. (Filed herewith) 23.2 Consent of Sullivan & Worcester LLP. (included in Exhibit 8.1 to this Annual Report on Form 10-K) 99 Letter Regarding Confirmation of Receipt of Assurances from Arthur Andersen LLP. (Filed herewith) (+) Management contract or compensatory plan or agreement. 38 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 and subsidiaries (a Maryland real estate investment trust) (the "Company") as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Hospitality Properties Trust and subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Vienna, Virginia January 15, 2002 F-1
HOSPITALITY PROPERTIES TRUST CONSOLIDATED BALANCE SHEET (dollars in thousands, except share data) As of December 31, -------------------------- 2001 2000 ----------- ----------- ASSETS Real estate properties, at cost: Land ........................................................... $ 347,009 $ 319,219 Buildings, improvements and equipment .......................... 2,282,144 2,110,202 ----------- ----------- 2,629,153 2,429,421 Accumulated depreciation ....................................... (363,329) (271,934) ----------- ----------- 2,265,824 2,157,487 Cash and cash equivalents ......................................... 38,962 24,601 Restricted cash (FF&E escrow) ..................................... 39,913 27,306 Other assets, net ................................................. 10,265 11,515 ----------- ----------- $ 2,354,964 $ 2,220,909 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Senior notes, net of discounts .................................... $ 464,781 $ 464,748 Revolving credit facility ......................................... -- -- Security and other deposits ....................................... 263,983 257,377 Accounts payable and other ........................................ 19,964 15,071 Due to affiliate .................................................. 1,717 773 ----------- ----------- Total liabilities .......................................... 750,445 737,969 ----------- ----------- Shareholders' equity: Series A preferred shares; 9 1/2% cumulative redeemable; no par value; 3,000,000 shares issued and outstanding, aggregate ... 72,207 72,207 liquidation preference $75,000 Common shares of beneficial interest; $0.01 par value; 62,515,940 and 56,472,512 shares issued and outstanding, respectively ................................................ 625 565 Additional paid-in capital .................................... 1,667,256 1,506,976 Cumulative net income ......................................... 573,663 441,707 Cumulative preferred distributions ............................ (19,356) (12,231) Cumulative common distributions ............................... (689,876) (526,284) ----------- ----------- Total shareholders' equity .................................. 1,604,519 1,482,940 ----------- ----------- $ 2,354,964 $ 2,220,909 =========== ===========
The accompanying notes are an integral part of these financial statements. F-2
HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF INCOME (in thousands, except per share data) Year Ended December 31, ------------------------------- 2001 2000 1999 --------- --------- --------- REVENUES: Rental income: Minimum rent ................................. $236,876 $228,733 $209,003 Percentage rent .............................. 3,414 5,644 3,666 -------- -------- -------- 240,290 234,377 212,669 Hotel operating revenues ....................... 37,982 -- -- FF&E reserve income ............................ 24,652 25,753 20,931 Interest income ................................ 953 2,893 3,618 -------- -------- -------- Total revenues ............................... 303,877 263,023 237,218 -------- -------- -------- EXPENSES: Hotel operating expenses ....................... 24,375 -- -- Interest (including amortization of deferred financing costs of $2,417, $2,068 and $2,223,a respectively) ................................ 41,312 37,682 37,352 Depreciation and amortization .................. 91,395 84,303 74,707 General and administrative ..................... 14,839 14,767 13,230 -------- -------- -------- Total expenses ............................... 171,921 136,752 125,289 -------- -------- -------- Net income ......................................... 131,956 126,271 111,929 Preferred distributions ............................ 7,125 7,125 5,106 -------- -------- -------- Net income available for common shareholders ....... $124,831 $119,146 $106,823 ======== ======== ======== Weighted average common shares outstanding ......... 58,986 56,466 52,566 ======== ======== ======== Basic and diluted earnings per common share: Net income available for common shareholders ... $ 2.12 $ 2.11 $ 2.03 ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-3
HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (in thousands, except share data) Preferred Shares Common Shares ----------------------------------------- ----------------------------------------- Cumulative Cumulative Number Preferred Preferred Number of Common Common of Shares Shares Distributions Shares Shares Distributions ------------ ----------- ------------- ----------- ----------- ------------- Balance at December 31, 1998 -- $-- $-- 45,595,539 $ 456 $ (260,955) Issuance of shares, net .... 3,000,000 72,207 -- 10,812,400 108 -- Common share grants ........ -- -- -- 41,804 -- -- Net income ................. -- -- -- -- -- -- Distributions .............. -- -- (5,106) -- -- (108,925) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1999 3,000,000 72,207 (5,106) 56,449,743 564 (369,880) Common share grants ........ -- -- -- 22,769 1 -- Net income ................. -- -- -- -- -- -- Distributions .............. -- -- (7,125) -- -- (156,404) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2000 3,000,000 72,207 (12,231) 56,472,512 565 (526,284) Issuance of shares, net .... -- -- -- 6,000,000 60 -- Common share grants ........ -- -- -- 43,428 -- -- Net income ................. -- -- -- -- -- -- Distributions .............. -- -- (7,125) -- -- (163,592) ----------- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2001 3,000,000 $ 72,207 $ (19,356) 62,515,940 $ 625 $ (689,876) =========== =========== =========== =========== =========== =========== Additional Paid-in Cumulative Capital Net Income Total ----------- ------------ ------------ Balance at December 31, 1998 $ 1,230,849 $ 203,507 $ 1,173,857 Issuance of shares, net .... 274,565 -- 346,880 Common share grants ........ 1,080 -- 1,080 Net income ................. -- 111,929 111,929 Distributions .............. -- -- (114,031) ----------- ----------- ----------- Balance at December 31, 1999 1,506,494 315,436 1,519,715 Common share grants ........ 482 -- 483 Net income ................. -- 126,271 126,271 Distributions .............. -- -- (163,529) ----------- ----------- ----------- Balance at December 31, 2000 1,506,976 441,707 1,482,940 Issuance of shares, net .... 159,250 -- 159,310 Common share grants ........ 1,030 -- 1,030 Net income ................. -- 131,956 131,956 Distributions .............. -- -- (170,717) ----------- ----------- ----------- Balance at December 31, 2001 $ 1,667,256 $ 573,663 $ 1,604,519 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-4
HOSPITALITY PROPERTIES TRUST CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands) Year Ended December 31, ------------------------------------ 2001 2000 1999 --------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................................ $ 131,956 $ 126,271 $ 111,929 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization ....................... 91,395 84,303 74,707 Amortization of deferred financing costs as interest 2,417 2,068 2,223 FF&E reserve income and deposits .................... (26,540) (25,753) (20,931) Changes in assets and liabilities: (Increase) decrease in other assets ............... (498) (541) 1,172 Increase in accounts payable and other ............ 4,926 2,235 2,036 Increase (decrease) in due to affiliate ........... 1,706 (238) 485 --------- --------- --------- Cash provided by operating activities ............... 205,362 188,345 171,621 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Real estate acquisitions .............................. (185,799) (134,353) (365,201) Increase in security and other deposits ............... 6,606 16,410 40,224 Refund of other deposits .............................. -- (5,275) -- --------- --------- --------- Cash used in investing activities ................... (179,193) (123,218) (324,977) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of preferred shares, net ....... -- -- 72,207 Proceeds from issuance of common shares, net .......... 159,310 -- 274,673 Debt issuance, net of discount ........................ -- 49,938 -- Draws on revolving credit facility .................... 150,000 42,000 172,000 Repayments of revolving credit facility ............... (150,000) (42,000) (172,000) Deferred finance costs paid ........................... (401) (489) -- Distributions to preferred shareholders ............... (7,125) (7,125) (5,106) Distributions to common shareholders .................. (163,592) (156,404) (139,474) --------- --------- --------- Cash (used in) provided by financing activities ..... (11,808) (114,080) 202,300 --------- --------- --------- Increase (decrease) in cash and cash equivalents .......... 14,361 (48,953) 48,944 Cash and cash equivalents at beginning of period .......... 24,601 73,554 24,610 --------- --------- --------- Cash and cash equivalents at end of period ................ $ 38,962 $ 24,601 $ 73,554 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest ................................ $ 39,025 $ 33,508 $ 35,028 Non-cash investing and financing activities: Property managers deposits in FF&E reserve .......... 23,521 23,212 18,670 Purchases of fixed assets with FF&E reserve ......... (14,102) (24,698) (17,694)
The accompanying notes are an integral part of these financial statements. F-5 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 1. Organization Hospitality Properties Trust ("HPT") is a Maryland real estate investment trust organized on February 7, 1995, which invests in hotels. At December 31, 2001, HPT, directly and through subsidiaries, owned 230 properties. The properties of HPT and its subsidiaries (the "Company") are leased to or managed by subsidiaries (the "Lessees" and the "Managers") of companies unaffiliated with HPT: Host Marriott Corporation ("Host"); Marriott International, Inc. ("Marriott"); Crestline Capital Corporation ("Crestline"); Wyndham International, Inc. ("Wyndham"); Prime Hospitality Corporation ("Prime"); Candlewood Hotel Company, Inc. ("Candlewood"); and BRE/Homestead Village LLC ("Homestead"). 2. Summary of Significant Accounting Policies Consolidation. These consolidated financial statements include the accounts of HPT and its subsidiaries, all of which are 100% owned directly or indirectly by HPT. 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 estimated useful lives of 7 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. 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 financing costs. Costs incurred to borrow are capitalized and amortized over the term of the related borrowing. Deferred financing costs were $6,627, $8,643 and $10,221 at December 31, 2001, 2000 and 1999, respectively, net of accumulated amortization of $7,426, $5,009 and $2,941, respectively. Financial instruments--interest rate cap agreements. The Company had entered into interest rate protection agreements to limit exposure to risks of rising interest rates. In May 1999 the Company sold these agreements for the approximate carrying value at the time of the sale with no resulting gain or loss. As of December 31, 2001, and 2000, the Company was not a party to any interest rate cap or swap agreements. Revenue recognition. Rental income from operating leases is recognized on a straight line basis over the life of the lease agreements. Percentage rent is recognized when all contingencies are met and rent is earned. Hotel operating revenues, consisting primarily of room sales and sales of food, beverages and telephone services are recognized when earned. Some of the Company's leases provide that FF&E Reserve escrows are owned by the Company. All other leases provide that FF&E Reserve escrows are owned by the tenant and the Company has a security and remainder interest in the escrow account. When the Company owns the escrow for leased properties, generally accepted accounting principles require that payments into the escrow be reported as additional rent. When the Company has a security and remainder interest in the escrow account, deposits are not included in revenue. Per common share amounts. Per common share amounts are computed using the weighted average number of common shares outstanding during the period. The Company has no common share equivalents, instruments convertible into common shares or other dilutive instruments. 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 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) Segment Information. The Company derives its revenues from a single line of business, hotel real estate ownership. Income taxes. The Company is a real estate investment trust under the Internal Revenue Code of 1986, as amended. The Company is not subject to Federal income taxes on its net income provided it distributes its taxable income to shareholders and meets certain other requirements. The characterization of the distributions for 2001, 2000 and 1999 was 85.9%, 85.1% and 100% ordinary income, respectively, and 14.1%, 14.9% and 0.0% return of capital, respectively. As permitted by the REIT Modernization Act, or RMA, during 2001 the Company formed a so-called "taxable REIT subsidiary," to act as lessee for some of its hotels. The hotels leased to this subsidiary are operated by subsidiaries of Marriott under a long-term operating agreement. For federal income tax purposes, this subsidiary is a taxable entity separate from the Company's other subsidiaries, which are generally not subject to federal taxes, as described above. During 2001, the Company estimates that its taxable REIT subsidiary had zero taxable income, and accordingly made no provision for federal income taxes. As of December 31, 2001, the Company's taxable REIT subsidiary had no difference between the bases of its assets or liabilities under generally accepted accounting principles and their tax bases. New accounting pronouncements. In August 2001 the Financial Accounting Standards Board ("FASB") issued Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). The Company is required to adopt FAS 144 on January 1, 2002, and does not expect the adoption will have a material effect on the Company's financial position or results of operations. In June 2001 the FASB issued Statement No. 141, "Business Combinations" ("FAS 141") and Statement No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"). Adoption of FAS 141 and FAS 142 did not have and is not expected to have a material impact on the Company's financial position or results of operations. FASB Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities" was adopted for the Company's 2001 financial statements and did not have a material impact on the Company's financial condition or results of operations. 3. Preferred Shares Each of the Company's 3,000,000 outstanding Series A cumulative redeemable preferred shares has a distribution rate of $2.375 per annum, payable in equal quarterly amounts, and a liquidation preference of $25 ($75,000 in aggregate). Series A preferred shares are redeemable, at the Company's option, for $25 each plus accrued and unpaid distributions at any time on or after April 12, 2004. 4. Leases and Operating Agreements Each of the Company's 230 hotel properties are leased to or operated by a third party. The Company's agreements have initial terms expiring between 2010 and 2019. Each of these agreements is for a group or pool of between 12 and 53 of the Company's properties. The agreements contain renewal options for all, but not less than all, of the related properties, and the renewal terms total 20-48 years. Each agreement requires the third-party lessee or operator to: pay all operating costs associated with the property; deposit a percentage of total hotel sales into reserves established for the regular refurbishment of the Company's hotels ("FF&E Reserves"); make payments to the Company of minimum rents or returns; and make payments to the Company of additional returns equal to 5%-10% of increases in total hotel sales over a base year threshold amount. Each third party has posted a security or performance deposit with the Company generally equal to one year's minimum rent or return. In 2001 some hotels which the Company previously leased and four hotels which the Company purchased on June 15, 2001, began to be operated under a management contract by an affiliate of their former tenant. A total of 16 hotels are now leased to a taxable REIT subsidiary of the Company and operated by a third party under a long-term agreement. As a result, hotel operating revenues and expenses from these hotels are reflected in the Company's F-7 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) consolidated financial statements. These hotels are pooled with 19 other hotels which will be leased under the prior agreement until the third party operator elects to operate them under the new management agreement during 2002. The Company's leases and operating agreements provide for payments to be received by the Company during the remaining initial terms as follows: Total Minimum Payments Under Total Minimum Lease Operating Payments from Third Agreements with Parties Third Parties Total ---------------------------------------------------------------- 2002 $236,092 $24,108 $260,200 2003 236,092 24,108 260,200 2004 236,092 24,108 260,200 2005 236,092 24,108 260,200 2006 236,092 24,108 260,200 Thereafter 1,976,234 313,404 2,289,638 --------- ------- --------- $3,156,694 $433,944 $3,590,638 As of December 31, 2001, the weighted average remaining initial terms of the Company's leases and operating agreements was approximately 14 years, and the weighted average remaining total term was 51 years. As further described in Note 8, a number of the Company's leases and operating agreements are subject to guarantees by the parent company owner of the Company's tenant or operator. In addition to the security deposits provided by the lessee equal to one year's rent, two of the Company's lease guarantors, as of December 31, 2001, have deposited an aggregate $26,565 with the Company to secure their guarantee obligations. Generally, the Company is obligated to refund these guarantee deposits if and when certain financial performance is achieved at the related leased hotels. During the time the Company holds the guarantee deposits, total net payments due from these tenants and guarantors to the Company are reduced by $2,899 per annum. 5. Real Estate Properties The Company's real estate properties, at cost, consisted of land of $347,009, buildings and improvements of $1,984,287 and furniture, fixtures and equipment of $297,857, as of December 31, 2001, and land of $319,219, buildings and improvements of $1,837,888 and furniture, fixtures and equipment of $272,314, as of December 31, 2000. During 2001, 2000 and 1999, the Company purchased and leased 8, 12 and 40 properties, respectively, for aggregate purchase prices of $185,487, $128,548 and $361,000 excluding closing costs, respectively. As of December 31, 2001, the Company owned and leased 230 hotel properties. During 2001, 2000 and 1999, the Company invested $2,507, $5,805 and $1,787, respectively, in its existing hotels in excess of amounts funded from FF&E Reserves. As a result of these additional investments, tenant obligations to the Company for annual minimum lease payments increased $251, $581 and $179, respectively. F-8 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) 6. Indebtedness As of December 31, -------------------------------- 2001 2000 --------------- ------------- Unsecured revolving credit facility............ $-- $-- 7% Senior Notes, due 2008...................... 150,000 150,000 8.25% Senior Notes, due 2005................... 115,000 115,000 8.5% Senior Notes, due 2009.................... 150,000 150,000 9.125% Senior Notes, due 2010.................. 50,000 50,000 Unamortized discounts.......................... (219) (252) --------------- ------------- $464,781 $464,748 =============== ============= All of the Company's senior notes are prepayable prior to their maturity date. Notes due in 2008 and 2010 are prepayable at anytime at par plus a premium equal to a make-whole amount, as defined, generally designed to preserve a stated yield to the note holder. Notes due 2005 are prepayable at anytime at par. Notes due 2009 are not prepayable until December 15, 2002, after which they are prepayable at anytime at par. Interest on the Company's notes due 2008 and 2010 is payable semi-annually in arrears. Interest on the Company's notes due 2005 and 2009 is payable monthly in arrears. The Company's $300 million revolving credit facility is available for draw and repayment until March 2002, at which time any outstanding amounts are due. The revolving credit facility carries interest at floating rates. During 2001, 2000 and 1999, the weighted average interest rate on the amounts outstanding under the revolving credit facility was 5.5%, 8.3% and 6.2%, respectively. As of December 31, 2001 and 2000, no amounts were outstanding under the facility. The company's credit agreement and note indentures contain financial covenants which, among other things, restrict the ability of the Company to incur indebtedness and require the Company to maintain financial ratios and minimum net worth. The Company was in compliance with these covenants during the periods presented. As of December 31, 2001, none of the Company's assets were pledged or mortgaged. The estimated aggregate market value of the Company's indebtedness based on a combination of their observable trading prices and quotations from financial institutions for similar obligations were: As of December 31, ------------------------------------ 2001 2000 ---------------- ---------------- 7% Senior Notes, due 2008............ $151,130 $137,685 8.25% Senior Notes, due 2005......... 122,293 112,735 8.5% Senior Notes, due 2009.......... 159,427 147,210 9.125% Senior Notes, due 2010........ 56,356 50,000 ---------------- ---------------- $489,206 $447,630 ================ ================ 7. Transactions with Affiliates REIT Management & Research LLC ("RMR") provides investment, management and administrative services to the Company. The Company's contract with RMR for such services has a one-year term, and currently extends to December 31, 2002. RMR is compensated at an annual rate equal to 0.7% of the Company's average real estate investments, as defined, up to the first $250,000 of such investments and 0.5% thereafter plus an incentive fee based upon increases in cash available for distribution per share, as defined. Advisory fees excluding incentive fees earned for the years ended 2001, 2000 and 1999 were $12,702, $11,851 and $10,949, respectively. Incentive advisory fees are paid in restricted common shares based on a formula. The Company accrued $619, $762 and $237 F-9 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) in incentive fees during 2001, 2000 and 1999, respectively. The Company issued 33,828 and 12,869 restricted common shares in satisfaction of the 2000 and 1999 incentive fees, respectively. As of December 31, 2001, RMR and its affiliates owned 413,592 common shares of the Company. In 2002 the Company issued 21,658 restricted common shares in satisfaction of the 2001 incentive fee. RMR is owned by Gerard M. Martin and Barry M. Portnoy, who also serve as Managing Trustees of the Company. 8. Concentration At December 31, 2001, the Company's 230 hotels contained 31,691 rooms and were located in 37 states in the United States, with between 5% and 13% of its hotels, by investment, in each of California, Texas, Virginia, Georgia, Florida, and Arizona. All of the Company's third party tenants or operators are subsidiaries of other companies. Many of the Company's agreements include guarantees of minimum rents or returns by the parent company of the third-party tenant or operator. The percentage of the Company's investment in each pool of hotels shown below as of December 31, 2001, is approximately equal to the Company's percentage of minimum rent and return payments shown in Note 4 and reflected in the accompanying financial statements for 2001.
December 31, Lessee/Operator is a Number of 2001 % of Guarantee of Rent / Minimum Returns to Subsidiary of: Properties Investment Total Company Provided by: - ------------------------------ -------------------------------------------------------------------------------------- Host (lease no. 1) 53 $513,126 20% -- Host (lease no. 2) 18 177,784 7% -- Marriott 35 453,954 18% Marriott International, Inc. (NYSE: MAR) Crestline 19 274,222 11% Crestline Capital, Inc. (NYSE: CLJ) and Marriott International, Inc. (NYSE: MAR) Wyndham (lease no. 1) 15 240,000 10% -- Wyndham (lease no. 2) 12 182,570 7% -- Homestead 18 145,000 6% BRE/Homestead Village LLC Candlewood 36 289,750 11% Candlewood Hotel Company (NYSE: CNDL) Prime 24 243,350 10% Prime Hospitality, Inc. (NYSE: PDQ) -- ------- --- Total 230 $2,519,756 100% === ========== ====
Guarantees provided to the Company from Marriott and Crestline are limited, in the case of 35 hotels to $48.3 million, and in the case of 19 hotels, to $31.2 million. These guarantees expire in 2005, or earlier if and when the related hotels reach negotiated net operating results levels. Other guarantees are unlimited as to amounts, and do not expire with the passage of time. These other guarantees are subject to release when the related hotels reach negotiated annual net operating results levels, except that if the 18 Homestead hotels reach their negotiated annual net operating results for three years, the guarantee from BRE/Homestead Village LLC may only be released if additional cash or a letter of credit is posted with the Company. Each of the Company's hotels is combined as a part of a single lease or operating agreement, as outlined in the above table. During a portion of 2001, 16 hotels in the 35 hotel combination operated by Marriott began to be leased to the Company's taxable REIT subsidiary, but remained operated by Marriott, under an arrangement which provides the Company with aggregate minimum rents and returns for all 35 hotels of $48.3 million per annum. The aggregate net operating results of all 35 hotels were in excess of the aggregate minimum return to the Company during 2001 and no payments under the guarantee were due. However, the 16 hotels leased to the Company's taxable REIT subsidiary generated net operating results which were $1.9 million less than the minimum returns due to the Company. This amount has been reflected in the accompanying statement of income as a net reduction to hotel operating expenses. During 2001, 2000 and 1999 total hotel sales for each group of properties reflected above were in excess of the aggregate of total hotel expenses and minimum rent or returns due to and paid to the Company except in the case F-10 HOSPITALITY PROPERTIES TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share data) of 24 hotels leased to a subsidiary of Prime. Shortfalls representing 3.1%, 2.3% and 3.0% of total 2001, 2000 and 1999 total revenue were paid to the Company as and when due by this tenant or its affiliates. 9. Selected Quarterly Financial Data (Unaudited)
2001 ----------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------- Revenues..................................................... $66,173 $70,139 $83,188 $84,377 Net income available for common shareholders................. 28,307 29,647 31,493 35,385 Net income available for common shareholders per share (1)... .50 .52 .52 .57 Distributions per common share (2)........................... .70 .71 .71 .71 2000 ----------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ----------------------------------------------------------- Revenues..................................................... $62,177 $63,639 $65,824 $71,383 Net income available for common shareholders................. 27,753 28,524 28,659 34,211 Net income available for common shareholders per share (1)... .49 .51 .51 .61 Distributions per common share (2)........................... .69 .69 .70 .70 (1) The sum of per common share amounts for the four quarters differs from annual per share amounts due to the required method of computing weighted average number of shares in interim periods and rounding. (2) Amounts represent distributions declared with respect to the periods shown.
F-11 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Trustees and Shareholders of Hospitality Properties Trust: We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of Hospitality Properties Trust included in this Form 10-K, and have issued our report thereon dated January 15, 2002. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule and related notes on pages F-13 and F-14 are the responsibility of Hospitality Properties Trust's management and are presented for the purpose of complying with the Securities and Exchange Commission's rules and are 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. /s/ Arthur Andersen LLP Vienna, Virginia January 15, 2002 F-12
HOSPITALITY PROPERTIES TRUST SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2001 (dollars in millions) Costs Capitalized Initial Subsequent Gross Amount at which Cost to Company to Acquisition Carried at Close of Period --------------------- -------------- ------------------------------ Buildings & Buildings & Encumbrances Land Improvements Improvements Land Improvements Total 71 Courtyards $-- $120 $589 $10 $120 $599 $719 36 Candlewood Hotels -- 32 233 -- 32 233 265 37 Residence Inns -- 69 322 4 69 326 395 24 AmeriSuites -- 25 194 -- 25 194 219 18 Homestead Village -- 28 106 -- 28 106 134 15 Summerfield Suites -- 23 196 -- 23 196 219 12 Wyndham Hotels -- 16 154 1 16 155 171 3 Marriott Full Service -- 14 82 -- 14 82 96 12 TownePlace Suites -- 17 78 -- 17 78 95 2 SpringHill Suites -- 3 15 -- 3 15 18 -- --- ------ ---- ---- ------ ------ Total (230 hotels) $-- $347 $1,969 $15 $347 $1,984 $2,331 === ==== ====== ==== ==== ====== ======
Life on which Depreciation in Latest Accumulated Date of Date Income Statement is Depreciation Construction Acquired Computed ------------- ------------------- -------------------- ---------------------- 71 Courtyards $(75) 1987 through 2000 1995 through 2001 15 - 40 Years 36 Candlewood Hotels (20) 1996 through 2000 1997 through 2001 15 - 40 Years 37 Residence Inns (37) 1989 through 2001 1996 through 2001 15 - 40 Years 24 AmeriSuites (17) 1992 through 2000 1997 through 2000 15 - 40 Years 18 Homestead Village (9) 1996 through 1998 1999 15 - 40 Years 15 Summerfield Suites (20) 1989 through 1993 1998 15 - 40 Years 12 Wyndham Hotels (21) 1987 through 1990 1996 through 1997 15 - 40 Years 3 Marriott Full Service (6) 1972 through 1995 1998 through 2001 15 - 40 Years 12 TownePlace Suites (4) 1997 through 2000 1998 through 2001 15 - 40 Years 2 SpringHill Suites (1) 1997 through 2000 2000 through 2001 15 - 40 Years ------ Total (230 hotels) $(210) ======
F-13 HOSPITALITY PROPERTIES TRUST NOTES TO SCHEDULE III DECEMBER 31, 2001 (dollars in thousands) (A) The change in accumulated depreciation for the period from January 1, 1999, to December 31, 2001, is as follows: 2001 2000 1999 ---- ---- ---- Balance at beginning of period $159,867 $112,321 $ 68,289 Additions: depreciation expense 50,572 47,546 44,032 -------- -------- -------- Balance at close of period $210,439 $159,867 $112,321 ======== ======== ======== (B) The change in total cost of properties for the period from January 1, 1999, to December 31, 2001, is as follows: 2001 2000 1999 ---- ---- ---- Balance at beginning of period $2,157,107 $2,035,934 $1,698,457 Additions: hotel acquisitions and capital expenditures 174,189 121,173 337,477 ---------- ---------- ---------- Balance at close of period $2,331,296 $2,157,107 $2,035,934 ========== ========== ========== (C) The net tax basis for federal income tax purposes of the Company's real estate properties was $2,120,921 on December 31, 2001. F-14 Introduction to Supplementary Financial Statements of HMH HPT Courtyard LLC HMH HPT Courtyard LLC is the lessee of 20% of Hospitality Properties Trust's investments, at cost. HMH HPT Courtyard LLC is a subsidiary of Host Marriott Corporation and is not owned by Hospitality Properties Trust. The following financial statements of HMH HPT Courtyard LLC are presented to comply with applicable accounting regulations of the Securities and Exchange Commission and were prepared by HMH HPT Courtyard LLC's management. F-15 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To HMH HPT Courtyard LLC: We have audited the accompanying balance sheets of HMH HPT Courtyard LLC as of December 31, 2001 and 2000, and the related statements of operations, changes in member's equity and cash flows for the years ended December 31, 2001, 2000 and 1999. 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 auditing standards generally accepted in the United States. 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 LLC as of December 31, 2001 and 2000, and the results of its operations and its cash flows for the years ended December 31, 2001, 2000 and 1999 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Vienna, Virginia March 20, 2002 F-16 HMH HPT COURTYARD LLC BALANCE SHEETS December 31, 2001 and December 31, 2000 (in thousands) 2001 2000 -------- -------- ASSETS Rent receivable from Crestline............................ $ 3,492 $ 3,700 Prepaid rent.............................................. 3,947 -- Security deposit.......................................... 50,540 50,540 Note receivable from CCMH Courtyard I LLC................. 5,100 5,100 Restricted cash........................................... 4,145 8,780 -------- -------- Total assets....................................... $ 67,224 $ 68,120 ======== ======== LIABILITIES AND MEMBER'S EQUITY Due to Host Marriott, L.P................................. $ 9,040 $ 9,232 Due to Hospitality Properties Trust....................... 369 863 Due to CCMH Courtyard I LLC............................... 1,967 2,006 Deferred gain............................................. 25,162 28,039 -------- -------- Total liabilities.................................. 36,538 40,140 -------- -------- Member's equity........................................... 30,686 27,980 -------- -------- Total liabilities and member's equity.............. $ 67,224 $ 68,120 ======== ======== See Notes to Financial Statements. F-17
HMH HPT COURTYARD LLC STATEMENTS OF OPERATIONS For the Fiscal Years Ended December 31, 2001, 2000 and 1999 (in thousands) 2001 2000 1999 ---------- ---------- -------- REVENUES Rental income from Crestline..................................... $ 58,672 $ 62,632 $ 60,463 Interest income.................................................. 369 416 326 Amortization of deferred gain.................................... 2,877 2,877 2,877 ---------- ---------- ---------- Total revenues............................................ 61,918 65,925 63,666 ---------- ---------- ---------- EXPENSES Rent expense to HPT.............................................. 53,901 55,366 53,586 Corporate expenses............................................... 2,006 2,203 1,933 Other expenses................................................... 182 100 23 ---------- ---------- ---------- Total expenses............................................ 56,089 57,669 55,542 ---------- ---------- ---------- NET INCOME $ 5,829 $ 8,256 $ 8,124 ========== ========== ==========
See Notes to Financial Statements. F-18 HMH HPT COURTYARD LLC STATEMENTS OF CHANGES IN MEMBER'S EQUITY For the Fiscal Years Ended December 31, 2001, 2000 and 1999 (in thousands) Balance at December 31, 1998....................................... $ 19,192 Dividend to Host Marriott, L.P..................................... (3,167) Net income......................................................... 8,124 --------- Balance at December 31, 1999....................................... 24,149 Dividend to Host Marriott, L.P..................................... (4,425) Net income......................................................... 8,256 --------- Balance at December 31, 2000....................................... 27,980 Dividend to Host Marriott, L.P..................................... (3,123) Net income......................................................... 5,829 --------- Balance at December 31, 2001....................................... $ 30,686 ========= See Notes to Financial Statements F-19
HMH HPT COURTYARD LLC STATEMENTS OF CASH FLOWS Fiscal Years Ended December 31, 2001, 2000 and 1999 (in thousands) 2001 2000 1999 ---------- ---------- ---------- OPERATING ACTIVITIES Net income......................................................... $ 5,829 $ 8,256 $ 8,124 Adjustments to reconcile net income to cash provided by operating activities: Amortization of deferred gain.................................. (2,877) (2,877) (2,877) Changes in operating accounts: Decrease (increase) in rent receivable from Crestline........ 208 (42) (3,658) Increase in prepaid rent..................................... (3,947) -- -- Decrease (increase) in due from Hospitality Properties Trust............................. -- 1,192 (1,192) Decrease (increase) in restricted cash....................... 4,635 (1,449) (7,331) Decrease in due from Marriott International, Inc............. -- -- 3,244 (Decrease) increase in due to Host Marriott, L.P............. (192) (686) 4,019 (Decrease) increase in due to Hospitality Properties Trust... (494) (16) 879 (Decrease) increase in due to CCMH Courtyard I LLC........... (39) 47 1,959 ---------- ---------- ---------- Cash provided by operating activities................... 3,123 4,425 3,167 ---------- ---------- ---------- FINANCING ACTIVITIES Dividend to Host Marriott, L.P..................................... (3,123) (4,425) (3,167) ---------- ----------- ---------- Cash used in financing activities....................... (3,123) (4,425) (3,167) ---------- ---------- ---------- NET CHANGE IN CASH AND CASH EQUIVALENTS................................. -- -- -- CASH AND CASH EQUIVALENTS, beginning of year............................ -- -- -- ---------- ---------- ---------- CASH AND CASH EQUIVALENTS, end of year.................................. $ -- $ -- $ -- ========== ========== ==========
See Notes to Financial Statements. F-20 HMH COURTYARD LLC NOTES TO FINANCIAL STATEMENTS NOTE 1. THE COMPANY Basis of Presentation HMH HPT Courtyard, Inc. was incorporated in Delaware on February 7, 1995 as a wholly-owned indirect subsidiary of Host Marriott Corporation. HMH HPT Courtyard, Inc. had no operations prior to March 24, 1995 (the "Commencement Date"). In connection with the REIT Conversion discussed below, HMH HPT Courtyard, Inc. was merged into HMH HPT Courtyard LLC on December 23, 1998 (collectively the activities of HMH HPT Courtyard, Inc. and HMH HPT Courtyard LLC are referred to as the "Company"). On the Commencement Date, affiliates of Host Marriott Corporation ("Host Marriott" or 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 their historical cost. On April 17, 1998, Host Marriott announced that its Board of Directors authorized Host Marriott to reorganize its business operations to qualify as a real estate investment trust ("REIT") which became effective as of January 1, 1999 (the "REIT Conversion"). Subsequent to the REIT Conversion, Host Marriott is referred to as Host REIT. In connection with the REIT Conversion, Host Marriott contributed substantially all of its hotel assets to a newly-formed partnership, Host Marriott, LP ("Host LP"). In connection with the REIT Conversion, the following steps occurred: 1) in December 1998, HMH HPT Courtyard LLC was formed as a wholly owned subsidiary of Host Marriott Hospitality, Inc. ("Hospitality") a then wholly owned subsidiary of Host Marriott; 2) on December 23, 1998, HMH HPT Courtyard, Inc. merged into HMH HPT Courtyard LLC and HMH HPT Courtyard, Inc. ceased to exist; and 3) on December 24, 1998, Hospitality contributed its LLC interest in the Company to Host LP, such that the Company is wholly owned by Host LP. The merger of HMH HPT Courtyard, Inc. and HMH HPT Courtyard LLC was accounted for as a reorganization of affiliated entities and the assets and liabilities of HMH HPT Courtyard, Inc. were carried over at their historical cost. Prior to January 1, 2001, as REITs were not permitted to derive revenues directly from the operations of hotels, the Company subleased its hotels and assigned its interest in the management agreements to subsidiaries of Crestline Capital Corporation ("Crestline"). See Notes 3 and 5. NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting The Company's records are maintained on the accrual basis of accounting and the fiscal year coincides with the calendar year. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. F-21 HMH COURTYARD LLC NOTES TO FINANCIAL STATEMENTS (continued) Revenues Revenues primarily represent sublease rental income from Crestline. The rent due under the sublease is the greater of base rent or percentage rent, as defined and determined on an annual basis. Sublease percentage rent applicable to room, food and beverage and other types of hotel revenue varies by sublease and is calculated by multiplying fixed percentages by the total amounts of such revenues over specified threshold amounts. Both the sublease minimum rent and the revenue thresholds used in computing sublease percentage rents are subject to annual adjustments based on increases in the United States Consumer Price Index and the Labor Index, as defined. Corporate Expenses The Company operates as a unit of Host LP, utilizing Host LP's employees, centralized system for cash management, insurance and administrative services. The Company has no employees. All cash received by the Company is commingled with Host LP's general corporate funds. Operating expenses and other cash requirements of the Company are paid by Host LP and charged directly or allocated to the Company. Certain general and administrative costs of Host LP are allocated to the Company, based on Host LP's specific identification of individual cost items when appropriate 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. Concentration of Credit Risk The Company's largest asset is the security deposit (see Note 4) which constitutes 75% of the Company's total assets as of December 31, 2001. The security deposit is not collateralized and is due from HPT at the termination of the leases, which are described in Note 3. In addition, on January 1, 1999, subsidiaries of Crestline became the sublessees of all of the Hotels, and as such, their rent payments were the primary source of the Company's revenues for all periods presented. The rent payable under the subleases is guaranteed by the sublessees up to a maximum amount of $20 million. Restricted Cash Restricted cash consists of cash and cash equivalents held in an interest-bearing deposit account pursuant to the Cash Management and Security Agreement between HPT, Crestline, and Host LP. Base and percentage rent under the Company's leases are collected and disbursed through the account, which is owned by the Company but controlled by HPT. 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 gain over the initial term of the Lease, as defined below. Accumulated amortization was $14.4 million and $11.5 million at December 31, 2001 and 2000, respectively. Income Taxes Provision for Federal and state income taxes has not been made in the accompanying financial statements since the Company does not pay income taxes but rather allocates profits and losses to Host LP. Significant differences exist between the net income for financial reporting purposes and the net income (loss) as reported in the F-22 HMH COURTYARD LLC NOTES TO FINANCIAL STATEMENTS (continued) Company's tax return. These differences are due primarily to the use, for income tax purposes, of accelerated depreciation methods and shorter depreciable lives of the assets. NOTE 3. LEASE COMMITMENTS Leases with HPT On March 24, 1995, 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, all the leases are referred to as the "Lease"). The initial term of the Lease expires in 2012. Thereafter, the Lease may be renewed 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 $51,260,000 ("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. The Company is also required to provide Marriott International (the "Manager") with working capital to meet the operating needs of the Hotels. Under the sublease agreements discussed below, Crestline is responsible for making the payments required under the Lease 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 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 renovations. 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, net worth is defined as member's equity plus the deferred gain. Net worth, as defined, was $55,848,000 and $56,019,000, respectively, at December 31, 2001 and 2000. As of December 31, 2001, future minimum annual rental commitments for the Lease on the Hotels are as follows (in thousands). Lease 2002...................................................... $ 51,260 2003...................................................... 51,260 2004...................................................... 51,260 2005...................................................... 51,260 2006...................................................... 51,260 Thereafter................................................ 307,561 ---------- Total minimum lease payments....................... $ 563,861 ========== Total minimum lease payments exclude percentage rent which was $2,582,000, $4,129,000 and $2,866,000 for 2001, 2000 and 1999, respectively. Ground Leases The land under eight of the Hotels is leased from third parties. The ground leases have remaining terms F-23 HMH COURTYARD LLC NOTES TO FINANCIAL STATEMENTS (continued) (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 defined in the agreements. As is discussed below, under the sublease agreements, Crestline makes ground lease rent payments. Subleases with Crestline In connection with the REIT Conversion, the Company agreed to sublease the Hotels (the "Subleases") to separate indirect sublessee subsidiaries of Crestline ("Sublessee"), subject to the terms of the original Lease with HPT. Under the Subleases, the Company has committed aggregate minimum subrental income of $564 million, which is equal to the Company's minimum lease payment obligation described above. The terms of each Sublease expire simultaneously with the expiration of the initial term of the Lease to which it relates and automatically renews for the corresponding renewal term under the Lease, unless either the Company (the "Sublessor") elects not to renew the Lease, or the Sublessee elects not to renew the Sublease at the expiration of the initial term provided, however, that neither party can elect to terminate fewer than all of the Subleases. Rent under the Subleases consisted of minimum rent of $51.3 million, $51.2 million and $50.7 million and additional percentage rent of $7.4 million, $11.4 million and $9.8 million in 2001, 2000 and 1999, respectively. The percentage rent from Crestline is sufficient to cover the Percentage Rent due under the Lease with HPT, with any excess being retained by the Company. The rent payable under the Sublease is guaranteed by the Sublessee up to a maximum amount of $20 million. The Sublessee is responsible for paying all of the expenses of operating the applicable hotels, including all personnel costs, utility costs and general repair and maintenance of the hotels. Crestline is also responsible for paying real estate taxes, personal property taxes (to the extent the Company owns the personal property), casualty insurance on the structures, ground lease rent payments, required expenditures for FF&E (including maintaining the FF&E reserve, to the extent such is required by the applicable management agreement) and other capital expenditures. Crestline also is responsible for all fees payable to the applicable manager, including base and incentive management fees, chain services payments, and franchise or system fees, with respect to periods covered by the term of the Subleases. The Company also remains liable under each management agreement. NOTE 4. SECURITY DEPOSIT HPT holds $50,540,000 as a security deposit for the obligations of the Company under the Leases (the "Security Deposit"). The Security Deposit is due upon termination of the Lease. NOTE 5. MANAGEMENT AGREEMENTS The rights and obligations under management agreements (the "Agreements") with the Manager were transferred to HPT and then through the Leases to the Company. In connection with the REIT Conversion, Host Marriott assigned its rights and obligations under the Agreements to subsidiaries of Crestline. The Agreement has an initial term expiring in 2012 with options to extend the Agreement on all of the Hotels for up to 36 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 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. Beginning in 1999 all fees payable under the Agreements are the obligation of the Sublessee. The obligations of the Lessees are guaranteed to a limited extent by F-24 HMH COURTYARD LLC NOTES TO FINANCIAL STATEMENTS (continued) Crestline. The Company remains obligated to the managers if the Sublessee fails to pay these fees (but would be entitled to reimbursement from the Sublessee under the terms of the Subleases). 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 Rewards and Marriott's Courtyard Club programs. The costs of these programs are charged to all hotels in the system. Crestline, as the Company's Sublessee, 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 Hotel's 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 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. Upon termination of the Agreements, the working capital will be returned to the Company. In connection with the REIT Conversion, the Company sold the existing working capital to the Sublessee in return for a note receivable that bears interest at a rate of 5.12%. Interest accrued on the note is due simultaneously with each periodic rent payment. The principal amount of the note is payable upon termination of the Subleases. The Sublessee can return the working capital in satisfaction of the note. As of December 31, 2001 and 2000, the note receivable from Crestline for working capital was $5.1 million. F-25 Introduction to Supplementary Financial Statements of CCMH Courtyard I LLC CCMH Courtyard I LLC is the sublessee of the 20% of Hospitality Properties Trust's investments, at cost, which are leased to HMH HPT Courtyard LLC. The financial statements of HMH HPT Courtyard LLC are presented on the pages F-28 to F-35. CCMH Courtyard I LLC is a subsidiary of Crestline Capital Corporation and is not owned by Hospitality Properties Trust. The following financial statements of CCMH Courtyard I LLC are presented to comply with applicable accounting regulations of the Securities and Exchange Commission and were prepared by CCMH Courtyard I LLC's management. F-26 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To CCMH Courtyard I LLC: We have audited the accompanying balance sheets of CCMH Courtyard I LLC (a Delaware limited liability company) as of December 28, 2001 and December 29, 2000, and the related statements of operations, member's equity and cash flows for the fiscal years ended December 28, 2001, December 29, 2000 and December 31, 1999. These financial statements are the responsibility of CCMH Courtyard I LLC's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 CCMH Courtyard I LLC as of December 28, 2001 and December 29, 2000 and the results of its operations and its cash flows for the fiscal years ended December 28, 2001, December 29, 2000 and December 31, 1999 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Vienna, Virginia March 26, 2002 F-27 CCMH COURTYARD I LLC BALANCE SHEETS As of December 28, 2001 and December 29, 2000 (in thousands) ASSETS 2001 2000 ---- ---- Current assets Cash and cash equivalents.......................... $ 3,824 $ 635 Due from Marriott International.................... 3,793 3,608 Note receivable from Crestline..................... 20,000 20,000 Other current assets............................... 5 8 --------- --------- 27,622 24,251 Hotel working capital................................... 5,100 5,100 Sublease deposit........................................ 1,948 1,948 --------- --------- Total assets....................................... $ 34,670 $ 31,299 ========= ========= LIABILITIES AND MEMBER'S EQUITY Current liabilities Lease payable to HMH............................... $ 3,463 $ 3,869 Other current liabilities.......................... -- 142 --------- --------- 3,463 4,011 Hotel working capital notes payable to HMH.............. 5,100 5,100 --------- --------- Total liabilities.................................. 8,563 9,111 --------- --------- Member's equity......................................... 26,107 22,188 --------- --------- Total liabilities and member's equity.............. $ 34,670 $ 31,299 ========= ========= See Notes to Financial Statements. F-28
CCMH COURTYARD I LLC STATEMENTS OF OPERATIONS Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999 (in thousands) 2001 2000 1999 ---- ---- ---- REVENUES Rooms...................................................... $ 207,037 $ 221,571 $ 209,408 Food and beverage.......................................... 13,799 15,198 15,034 Other...................................................... 6,313 7,955 8,378 --------- ----------- ----------- Total revenues......................................... 227,149 244,724 232,820 --------- ----------- ----------- OPERATING COSTS AND EXPENSES Property-level operating costs and expenses Rooms...................................................... 44,834 48,603 45,950 Food and beverage.......................................... 11,990 13,652 13,214 Other...................................................... 81,575 85,200 81,911 Other operating costs and expenses Lease expense paid to HMH.................................. 58,603 62,332 60,463 Management fees paid to Marriott International............. 22,152 26,827 23,935 --------- ----------- ----------- Total operating costs and expenses..................... 219,154 236,614 225,473 --------- ----------- ----------- OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST............................................... 7,995 8,110 7,347 Corporate expenses.............................................. (282) (311) (342) Interest expense................................................ (261) (261) (261) Interest income................................................. 235 142 80 --------- ----------- ----------- INCOME BEFORE INCOME TAXES...................................... 7,687 7,680 6,824 Provision for income taxes...................................... (3,075) (3,160) (2,798) --------- ----------- ----------- NET INCOME ................................................. $ 4,612 $ 4,520 $ 4,026 ========= =========== ===========
See Notes to Financial Statements. F-29 CCMH COURTYARD I LLC STATEMENTS OF MEMBER'S EQUITY Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999 (in thousands) Total ----- Balance, January 1, 1999....................................... $ 20,000 Dividend to Crestline....................................... (2,630) Net income.................................................. 4,026 ----------- Balance, December 31, 1999..................................... 21,396 Dividend to Crestline....................................... (3,728) Net income.................................................. 4,520 ----------- Balance, December 29, 2000..................................... 22,188 Dividend to Crestline....................................... (693) Net income.................................................. 4,612 ----------- Balance, December 28, 2001..................................... $ 26,107 =========== See Notes to Financial Statements. F-30
CCMH COURTYARD I LLC STATEMENTS OF CASH FLOWS Fiscal Years Ended December 28, 2001, December 29, 2000 and December 31, 1999 (in thousands) 2001 2000 1999 ---- ---- ---- OPERATING ACTIVITIES Net income ................................................ $ 4,612 $ 4,520 $ 4,026 Change in amounts due from Marriott International............. (185) (599) (3,009) Change in lease payable to Host Marriott...................... (406) 211 3,661 Change in other current assets and liabilities................ (139) 131 - -------- -------- --------- Cash provided by operating activities.................... 3,882 4,263 4,678 -------- -------- --------- INVESTING ACTIVITIES Sublease deposit.............................................. - - (1,948) -------- -------- --------- FINANCING ACTIVITIES Dividend to Crestline......................................... (693) (3,728) (2,630) -------- -------- --------- Increase in cash and cash equivalents......................... 3,189 535 100 Cash and cash equivalents, beginning of year.................. 635 100 - -------- -------- --------- Cash and cash equivalents, end of year........................ $ 3,824 $ 635 $ 100 ======== ======== =========
See Notes to Financial Statements. F-31 CCMH COURTYARD I LLC NOTES TO FINANCIAL STATEMENTS - (Continued) Note 1. Summary of Significant Accounting Policies Organization CCMH Courtyard I LLC (the "Company") was organized in the state of Delaware on December 28, 1998 as a wholly owned subsidiary of Crestline Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a publicly traded company when Host Marriott Corporation ("Host Marriott") completed its plan of reorganizing its business operations by spinning-off Crestline to the shareholders of Host Marriott as part of a series of transactions pursuant to which Host Marriott converted into a real estate investment trust (the "Distribution"). On December 31, 1998, the Company entered into sublease agreements with HMH HPT Courtyard LLC ("HMH"), a wholly owned subsidiary of Host Marriott, to sublease 53 of HMH's limited-service hotels with the existing management agreements of the subleased hotels assigned to the Company. As of December 28, 2001, the Company subleased 53 limited-service Courtyard hotels from HMH. The Company operates as a unit of Crestline, utilizing Crestline's employees, insurance and administrative services since the Company does not have any employees. Certain direct expenses are paid by Crestline and charged directly or allocated to the Company. Certain general and administrative costs of Crestline are allocated to the Company, using a variety of methods, principally Crestline's specific identification of individual costs and otherwise through allocations based upon estimated levels of effort devoted by general and administrative departments to the Company or relative measures of the size of the Company based on revenues. In the opinion of management, the methods for allocating general and administrative expenses and other direct costs are reasonable. Fiscal Year The Company's fiscal year ends on the Friday nearest December 31. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less at date of purchase as cash equivalents. Revenues The Company records the gross property-level revenues generated by the hotels as revenues. The Company recognizes revenue when it is earned. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Note 2. Subleases HMH leases 53 limited-service hotels under the Courtyard by Marriott brand (the "HPT Leases") from Hospitality Properties Trust ("HPT"). The HPT Leases have initial terms expiring through 2012 and are renewable at the option of HMH. In connection with the Distribution, the Company entered into sublease agreements with HMH for these limited-service hotels (the "Subleases"). The terms of the Subleases will expire simultaneously with the expiration of the initial term of the HPT Leases. If HMH elects to renew the HPT Leases, the Company can elect to also renew the Subleases for the corresponding renewal term. Each Sublease provides that generally all of the terms in the HPT Leases will apply to the Subleases. The HPT Leases require the lessee to pay rent equal to (i) a fixed minimum rent of $51,305,000 plus (ii) an additional F-32 CCMH COURTYARD I LLC NOTES TO FINANCIAL STATEMENTS - (Continued) rent equal to 5% of the excess of hotel revenues over a base year total of hotel revenues. The minimum rent is increased by 10% of payments by the owner for certain capital expenditures. In addition, the HPT Leases require the lessee to pay all repair and maintenance costs, impositions, utility charges, insurance premiums and all fees payable under the hotel management agreements. Pursuant to the Subleases, the Company is required to pay rent to HMH equal to the minimum rent due under the HPT Leases and an additional rent based on a percentage of revenues. Pursuant to the Subleases, the Company is required to maintain a minimum net worth of $20 million. The Company is also not permitted under its Subleases to pay dividends or advance funds to Crestline or its affiliates in excess of its cumulative net income. The Subleases also required the Company to provide a security deposit to HMH for $1,948,000, which shall be returned to the Company upon the termination of the Subleases. Recent Tax Legislation On December 17, 1999, the Work Incentives Improvement Act was passed which contained certain tax provisions related to REITs, commonly known as the REIT Modernization Act ("RMA"). Under the RMA, beginning on January 1, 2001, REITs could lease hotels to a "taxable subsidiary" if the hotel is operated and managed on behalf of such subsidiary by an independent third party. This law enables Host Marriott, beginning in 2001, to lease its hotels to a taxable REIT subsidiary. Host Marriott may, at its discretion, elect to terminate all of Crestline's subleases beginning in 2001, upon payment of a termination fee equal to the fair market value of the Company's leasehold interests in the remaining term of the Subleases using a discount rate of five percent. If Host Marriott elects to terminate the Subleases, it would have to terminate all of Crestline's subleases. Future minimum annual rental commitments for all non-cancelable leases as of December 28, 2001 are as follows (in thousands): 2002........................................................................... $ 51,305 2003........................................................................... 51,305 2004........................................................................... 51,305 2005........................................................................... 51,305 2006........................................................................... 51,305 Thereafter..................................................................... 307,841 ------------- Total minimum lease payments................................................... $ 564,366 =============
Rent expense for the fiscal years 2001, 2000 and 1999 consisted of the following (in thousands):
2001 2000 1999 ---- ---- ---- Sublease base rent..................................... $ 50,999 $ 50,957 $ 50,646 Sublease percentage rent............................... 7,604 11,375 9,817 -------- --------- --------- Total rent to HMH...................................... 58,603 62,332 60,463 Other base rent........................................ 2,821 2,944 2,811 -------- --------- --------- $ 61,424 $ 65,276 $ 63,274 ======== ========= =========
Note 3. Working Capital Notes Upon the commencement of the Subleases, the Company purchased the working capital of the subleased hotels from HMH for $5,100,000 with the purchase price evidenced by notes that bear interest at 5.12%. Interest on each note is due simultaneously with the rent payment of each Sublease. The principal amount of each note is due upon the termination of each Sublease. Upon termination of the Subleases, the Company will sell HMH the existing working capital at its current value. To the extent the working capital delivered to HMH is less than the value of the note, the Company will pay HMH the difference in cash. However, to the extent the working capital delivered to HMH exceeds the value of the note, HMH will pay the Company the difference in cash. As of December 28, 2001, the outstanding balance of the working capital notes was $5,100,000, which mature in 2010. Cash paid for interest expense in 2001, 2000 and 1999 totaled $261,000, $261,000 and $241,000, respectively. Note 4. Management Agreements F-33 CCMH COURTYARD I LLC NOTES TO FINANCIAL STATEMENTS - (Continued) The hotels are managed by Marriott International, Inc. ("Marriott International") under long-term management agreements between HPT and Marriott International (the "Agreements"). HPT's rights and obligations under the Agreements were transferred to HMH through the HPT Leases. HMH's rights and obligations under the Agreements with Marriott International were assigned to the Company for the term of the Subleases. The Agreements have an initial term expiring in 2012 with an option to extend the Agreements on all of the hotels for up to 36 years. The Agreements provide that Marriott International be paid a system fee equal to 3% of hotel revenues, a base management fee of 2% of hotel revenues ("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, Marriott International 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 Marriott International. Base rent on the Subleases are 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 Marriott International. Pursuant to the terms of the Agreements, Marriott International 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 Rewards and Marriott's Courtyard Club programs. The cost of these programs are charged to all hotels in the system. The Company is obligated to provide Marriott International 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. To the extent the reserves for FF&E replacements are insufficient to meet the hotel's capital expenditure requirements, HPT is required to fund the shortfall. Note 5. Income Taxes The Company is included in the consolidated Federal income tax return of Crestline and its affiliates (the "Group"). Tax expense is allocated to the Company as a member of the Group based upon the relative contribution to the Group's consolidated taxable income/loss and changes in temporary differences. This allocation method results in Federal and state tax expense allocated for the period presented that is substantially equal to the expense that would have been recognized if the Company had filed separate tax returns. As of December 28, 2001 and December 29, 2000, the Company had no deferred tax assets or liabilities. Note 6. Note Receivable from Crestline The Company was capitalized with a $20 million note receivable from Crestline. The note is payable upon demand. Effective December 28, 2001, the note bears interest at 8.0%. Prior to that date, the note was non-interest bearing. Fair value approximates book value at December 28, 2001 and December 29, 2000. The note receivable serves as a collateral security for the sublease. F-34 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 27, 2002 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 27, 2002 John G. Murray Chief Operating Officer /s/ Thomas M. O'Brien Treasurer and Chief March 27, 2002 Thomas M. O'Brien Financial Officer /s/ John L. Harrington Trustee March 27, 2002 John L. Harrington /s/ Arthur G. Koumantzelis Trustee March 27, 2002 Arthur G. Koumantzelis /s/ William J. Sheehan Trustee March 27, 2002 William J. Sheehan /s/ Gerard M. Martin Trustee March 27, 2002 Gerard M. Martin /s/ Barry M. Portnoy Trustee March 27, 2002 Barry M. Portnoy EX-8.1 3 ex8-1.txt Exhibit 8.1 SULLIVAN & WORCESTER LLP ONE POST OFFICE SQUARE BOSTON, MASSACHUSETTS 02109 (617) 338-2800 FAX NO. 617-338-2880 IN WASHINGTON, D.C. IN NEW YORK CITY 1666 K STREET, N.W. 565 FIFTH AVENUE WASHINGTON, D.C. 20006 NEW YORK, NEW YORK 10017 (202) 775-8190 (212) 486-8200 FAX NO. 202-293-2275 FAX NO. 212-758-2151 March 27, 2002 Hospitality Properties Trust 400 Centre Street Newton, Massachusetts 02458 Ladies and Gentlemen: In connection with the filing by Hospitality Properties Trust, a Maryland real estate investment trust (the "Company"), of its Annual Report on Form 10-K for the year ended December 31, 2001 (the "Form 10-K"), under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the following opinion is furnished to you to be filed with the Securities and Exchange Commission (the "SEC") as Exhibit 8.1 to the Form 10-K. We have acted as counsel for the Company in connection with the preparation of the Form 10-K, and we have reviewed originals or copies, certified or otherwise identified to our satisfaction, of 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. In doing so, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies, and the authenticity of the originals of such documents. Specifically, and without limiting the generality of the foregoing, we have reviewed: (i) the declaration of trust and the by-laws of the Company, each as amended and restated; and (ii) the sections in the Form 10-K captioned "Federal Income Tax Considerations" and "ERISA Plans, Keogh Plans and Individual Retirement Accounts." 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 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 Hospitality Properties Trust March 27, 2002 Page 2 change. In preparing the discussions with respect to Tax Laws and ERISA Laws matters in the sections of the Form 10-K captioned "Federal Income Tax Considerations" 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. We have relied upon, but not independently verified, the foregoing assumptions. If any of the foregoing assumptions are inaccurate or incomplete for any reason, or if the transactions described in the Form 10-K (or the documents incorporated therein by reference) have been consummated in a manner that is inconsistent with the manner contemplated therein, our opinion as expressed below may be adversely affected and may not be relied upon. Based upon and subject to the foregoing, we are of the opinion that the discussions with respect to Tax Laws and ERISA Laws matters in the sections of the Form 10-K captioned "Federal Income Tax Considerations" and "ERISA Plans, Keogh Plans and Individual Retirement Accounts," in all material respects are accurate and fairly summarize the Tax Laws issues and the 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. Our opinion above is limited to the matters specifically covered hereby, and we have not been asked to address, nor have we addressed, any other matters or any other transactions. Further, we disclaim any undertaking to advise you of any subsequent changes of the matters stated, represented or assumed herein or any subsequent changes in the Tax Laws or the ERISA Laws. This opinion is intended solely for the benefit and use of the Company, and is not to be used, released, quoted, or relied upon by anyone else for any purpose (other than as required by law) without our prior written consent. We hereby consent to filing of a copy of this opinion as an exhibit to the Form 10-K, which is incorporated by reference in the Company's Registration Statements on Form S-3 (File Nos. 333-43573, 333-89307, 333-84064) under the Securities Act of 1933, as amended (the "Act"), and to the references to our firm in the Form 10-K and such Registration Statements. 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-10.14 4 ex10-14.txt ================================================================================ CREDIT AGREEMENT Dated as of March 26, 2002 by and among Hospitality Properties Trust, as Borrower FIRST UNION SECURITIES, INC., d/b/a WACHOVIA SECURITIES as Lead Arranger, DRESDNER BANK REAL ESTATE as Co-Lead Arranger, FIRST UNION NATIONAL BANK, as Administrative Agent, Each of DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES and ING CAPITAL LLC, as Syndication Agent, Each of CIBC WORLD MARKETS CORP. and SOCIETE GENERALE, as Documentation Agent, and THE FINANCIAL INSTITUTIONS PARTY HERETO AND THEIR ASSIGNEES UNDER SECTION 12.5., as Lenders ================================================================================
TABLE OF CONTENTS Article I. Definitions...................................................................................1 Section 1.1. Definitions.......................................................................1 Section 1.2. General; References to Times.....................................................25 Article II. Credit Facility.............................................................................25 Section 2.1. Revolving Loans..................................................................25 Section 2.2. Swingline Loans..................................................................26 Section 2.3. Letters of Credit................................................................28 Section 2.4. Rates and Payment of Interest on Loans...........................................32 Section 2.5. Number of Interest Periods.......................................................33 Section 2.6. Repayment of Loans...............................................................33 Section 2.7. Prepayments......................................................................33 Section 2.8. Continuation.....................................................................34 Section 2.9. Conversion.......................................................................34 Section 2.10. Notes...........................................................................35 Section 2.11. Voluntary Reductions of the Commitment..........................................35 Section 2.12. Expiration or Maturity Date of Letters of Credit Past Termination Date..........35 Section 2.13. Amount Limitations..............................................................36 Section 2.14. Increase of Commitments.........................................................36 Section 2.15. Extension of Termination Date...................................................37 Article III. Payments, Fees and Other General Provisions................................................37 Section 3.1. Payments.........................................................................37 Section 3.2. Pro Rata Treatment...............................................................38 Section 3.3. Sharing of Payments, Etc.........................................................38 Section 3.4. Several Obligations..............................................................39 Section 3.5. Minimum Amounts..................................................................39 Section 3.6. Fees.............................................................................39 Section 3.7. Computations.....................................................................40 Section 3.8. Usury............................................................................40 Section 3.9. Agreement Regarding Interest and Charges.........................................41 Section 3.10. Statements of Account...........................................................41 Section 3.11. Defaulting Lenders..............................................................41 Section 3.12. Taxes...........................................................................42 Article IV. Yield Protection, Etc.......................................................................44 Section 4.1. Additional Costs; Capital Adequacy...............................................44 Section 4.2. Suspension of LIBOR Loans........................................................45 Section 4.3. Illegality.......................................................................46 Section 4.4. Compensation.....................................................................46 Section 4.5. Affected Lenders.................................................................47 Section 4.6. Treatment of Affected Loans......................................................47 Section 4.7. Change of Lending Office.........................................................48
-i-
Section 4.8. Assumptions Concerning Funding of LIBOR Loans....................................48 Article V. Conditions Precedent.........................................................................48 Section 5.1. Initial Conditions Precedent.....................................................48 Section 5.2. Conditions Precedent to All Loans and Letters of Credit..........................51 Section 5.3. Conditions as Covenants..........................................................51 Article VI. Representations and Warranties..............................................................52 Section 6.1. Representations and Warranties...................................................52 Section 6.2. Survival of Representations and Warranties, Etc..................................58 Article VII. Affirmative Covenants......................................................................58 Section 7.1. Preservation of Existence and Similar Matters....................................58 Section 7.2. Compliance with Applicable Law and Material Contracts............................58 Section 7.3. Maintenance of Property..........................................................59 Section 7.4. Conduct of Business..............................................................59 Section 7.5. Insurance........................................................................59 Section 7.6. Payment of Taxes and Claims......................................................59 Section 7.7. Visits and Inspections...........................................................59 Section 7.8. Use of Proceeds; Letters of Credit...............................................60 Section 7.9. Environmental Matters............................................................60 Section 7.10. Books and Records...............................................................60 Section 7.11. Further Assurances..............................................................61 Section 7.12. New Subsidiaries/Guarantors.....................................................61 Section 7.13. REIT Status.....................................................................61 Section 7.14. Exchange Listing................................................................61 Article VIII. Information...............................................................................62 Section 8.1. Quarterly Financial Statements...................................................62 Section 8.2. Year-End Statements..............................................................62 Section 8.3. Compliance Certificate...........................................................63 Section 8.4. Other Information................................................................63 Article IX. Negative Covenants..........................................................................66 Section 9.1. Financial Covenants..............................................................66 Section 9.2. Indebtedness.....................................................................67 Section 9.3. Certain Permitted Investments.....................................................67 Section 9.4. Investments Generally............................................................68 Section 9.5. Liens; Negative Pledges; Other Matters...........................................69 Section 9.6. Restricted Payments..............................................................69 Section 9.7. Merger, Consolidation, Sales of Assets and Other Arrangements....................70 Section 9.8. Fiscal Year......................................................................71 Section 9.9. Modifications to Advisory Agreement and Other Material Contracts.................71 Section 9.10. Transactions with Affiliates....................................................71 Section 9.11. ERISA Exemptions................................................................71
-ii-
Article X. Default......................................................................................72 Section 10.1. Events of Default...............................................................72 Section 10.2. Remedies Upon Event of Default..................................................75 Section 10.3. Remedies Upon Default...........................................................76 Section 10.4. Allocation of Proceeds..........................................................77 Section 10.5. Collateral Account..............................................................77 Section 10.6. Performance by Agent............................................................78 Section 10.7. Rights Cumulative...............................................................78 Article XI. The Agent...................................................................................79 Section 11.1. Authorization and Action........................................................79 Section 11.2. Agent's Reliance, Etc...........................................................79 Section 11.3. Notice of Defaults..............................................................80 Section 11.4. First Union as Lender...........................................................80 Section 11.5. Approvals of Lenders............................................................80 Section 11.6. Lender Credit Decision, Etc.....................................................81 Section 11.7. Indemnification of Agent........................................................82 Section 11.8. Successor Agent.................................................................82 Section 11.9. Titled Agents...................................................................83 Article XII. Miscellaneous..............................................................................83 Section 12.1. Notices.........................................................................83 Section 12.2. Expenses........................................................................84 Section 12.3. Setoff..........................................................................85 Section 12.4. Litigation; Jurisdiction; Other Matters; Waivers................................85 Section 12.5. Successors and Assigns..........................................................86 Section 12.6. Amendments......................................................................88 Section 12.7. Nonliability of Agent and Lenders...............................................89 Section 12.8. Confidentiality.................................................................89 Section 12.9. Indemnification.................................................................90 Section 12.10. Termination; Survival..........................................................92 Section 12.11. Severability of Provisions.....................................................92 Section 12.12. GOVERNING LAW..................................................................92 Section 12.13. Counterparts...................................................................92 Section 12.14. Obligations with Respect to Loan Parties.......................................93 Section 12.15. Limitation of Liability........................................................93 Section 12.16. Entire Agreement...............................................................93 Section 12.17. Construction...................................................................93 Section 12.18. LIABILITY OF TRUSTEES, ETC.....................................................93
-iii- SCHEDULE 1.1.(a) Applicable Margin SCHEDULE 1.1.(b) Facility Fee SCHEDULE 1.1.(c) List of Loan Parties SCHEDULE 6.1.(b) Ownership Structure SCHEDULE 6.1.(f) Title to Properties; Liens SCHEDULE 6.1.(g) Indebtedness and Guaranties SCHEDULE 6.1.(h) Material Contracts SCHEDULE 6.1.(i) Litigation SCHEDULE 6.1.(k) Financial Statements SCHEDULE 6.1.(y) List of Unencumbered Assets EXHIBIT A Form of Assignment and Acceptance Agreement EXHIBIT B Form of Guaranty EXHIBIT C Form of Notice of Borrowing EXHIBIT D Form of Notice of Continuation EXHIBIT E Form of Notice of Conversion EXHIBIT F Form of Notice of Swingline Borrowing EXHIBIT G Form of Swingline Note EXHIBIT H Form of Revolving Note EXHIBIT I-1 Form of Opinion of Counsel EXHIBIT I-2 Form of Opinion of Special Counsel EXHIBIT J Form of Compliance Certificate -iv- THIS CREDIT AGREEMENT dated as of March 26, 2002 by and among HOSPITALITY PROPERTIES TRUST, a real estate investment trust organized under the laws of the State of Maryland (the "Borrower"), FIRST UNION SECURITIES, INC., d/b/a WACHOVIA SECURITIES, as Lead Arranger, DRESDNER BANK REAL ESTATE, as Co-Lead Arranger, First Union National Bank, as Agent, each of DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES and ING CAPITAL LLC, as Syndication Agent, each of CIBC WORLD MARKETS CORP. and SOCIETE GENERALE, as Documentation Agent, and each of the financial institutions initially a signatory hereto together with their assignees pursuant to Section 12.5.(d). WHEREAS, the Agent and the Lenders desire to make available to the Borrower a revolving credit facility in the initial amount of $350,000,000, which will include a $50,000,000 letter of credit subfacility and a $25,000,000 swingline subfacility, on the terms and conditions contained herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the parties hereto agree as follows: ARTICLE I. DEFINITIONS Section 1.1. Definitions. In addition to terms defined elsewhere herein, the following terms shall have the following meanings for the purposes of this Agreement: "Accession Agreement" means an Accession Agreement substantially in the form of Annex I to the Guaranty. "Additional Costs" has the meaning given that term in Section 4.1. "Adjusted EBITDA" means, with respect to a Person for a given period, such Person's EBITDA for such period determined on a consolidated basis less the sum of (a) any FF&E Reserves to the extent included in EBITDA and (b) the excess, if any, with respect to each Hotel or Hotel Pool (as applicable) of such Person, of (i) 4.0% of total gross room revenues of such Hotel or Hotel Pool for such period over (ii) the FF&E Reserve actually funded during such period with respect to such Property or Hotel Pool pursuant to the applicable Lease or any related Ancillary Agreement, and (c) to the extent included in EBITDA, replacement reserves for (i) any Property that is not a Hotel and is part of a Hotel Pool included in Unencumbered Hotels, or (ii) Other Acceptable Properties. "Adjusted Eurodollar Rate" means, with respect to each Interest Period for any LIBOR Loan, the rate obtained by dividing (a) LIBOR for such Interest Period by (b) a percentage equal to 1 minus the stated maximum rate (stated as a decimal) of all reserves, if any, required to be maintained against "Eurocurrency liabilities" as specified in Regulation D of the Board of Governors of the Federal Reserve System (or against any other category of liabilities which includes deposits by reference to which the interest rate on LIBOR Loans is determined or any category of extensions of credit or other assets which includes loans by an office of any Lender outside of the United States of America to residents of the United States of America). "Advisory Agreement" means that certain Advisory Agreement dated as of January 1, 1998 by and between the Borrower and RMR. "Affiliate" means any Person (other than the Agent or any Lender): (a) directly or indirectly controlling, controlled by, or under common control with, the Borrower; (b) directly or indirectly owning or holding ten percent (10.0%) or more of any Equity Interest in the Borrower; or (c) ten percent (10.0%) or more of whose voting stock or other Equity Interest is directly or indirectly owned or held by the Borrower. For purposes of this definition, "control" (including with correlative meanings, the terms "controlling", "controlled by" and "under common control with") means the possession directly or indirectly of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities or by contract or otherwise. The Affiliates of a Person shall include any officer or director of such Person. "Agent" means First Union National Bank, as contractual representative for the Lenders under the terms of this Agreement, and any of its successors. "Agreement Date" means the date as of which this Agreement is dated. "Ancillary Agreement" means, with respect to any Lease, any material incidental agreement with respect to such Lease (including, by way of example, guarantees, franchise agreements, and management agreements) to which the Borrower or any Subsidiary is a party. "Applicable Law" means all applicable provisions of constitutions, statutes, rules, regulations and orders of all governmental bodies and all orders and decrees of all courts, tribunals and arbitrators. "Applicable Margin" means the percentage per annum determined, at any time, based on the range into which the Borrower's Credit Rating then falls, in accordance with the table set forth in Schedule 1.1.(a). Any change in the Borrower's Credit Rating which would cause it to move to a different Level in such table shall effect a change in the Applicable Margin on the Business Day on which such change occurs. During any period that the Borrower has received Credit Ratings that are not equivalent, the Applicable Margin shall be determined by the lower of such two Credit Ratings. During any period for which the Borrower has not received a Credit Rating from a Rating Agency, then the Applicable Margin shall be determined as Level 4. As of the Agreement Date, the Applicable Margin is determined based on Level 3. "Asset Under Development" means, as of any date of determination, any Property on which construction of new income-producing improvements has been commenced and is continuing. If such construction consists of the construction of tenant improvements, as opposed to material expansion of such Property or any "ground up" development, such Property shall not be considered to be an Asset Under Development. In addition, to the extent any Property -2- includes a revenue-generating component (e.g. an existing Hotel) and a building under development, such revenue-generating component shall not be considered to be an Asset Under Development but such building under development shall be considered to be an Asset Under Development. Further, no Hotel shall be considered an Asset Under Development if the opening date with respect to such Hotel has occurred. "Assignee" has the meaning given that term in Section 12.5.(d). "Assignment and Acceptance Agreement" means an Assignment and Acceptance Agreement among a Lender, an Assignee and the Agent, substantially in the form of Exhibit A. "Base Rate" means the per annum rate of interest equal to the greater of (a) the Prime Rate or (b) the Federal Funds Rate plus one-half of one percent (0.5%). Any change in the Base Rate resulting from a change in the Prime Rate or the Federal Funds Rate shall become effective as of 12:01 a.m. on the Business Day on which each such change occurs. The Base Rate is a reference rate used by the Lender acting as the Agent in determining interest rates on certain loans and is not intended to be the lowest rate of interest charged by the Lender acting as the Agent or any other Lender on any extension of credit to any debtor. "Base Rate Loan" means a Loan bearing interest at a rate based on the Base Rate. "Base Rent" means the minimum or base rent that a Lease requires a Lessee to pay. The term excludes: (a) payments (such as real estate taxes, insurance premiums, and costs of maintenance) that the Lease requires the Lessee to pay third parties; (b) any element of rent that is conditional, contingent, or not yet capable of determination; and (c) FF&E Reserves. If Lease(s) for multiple Hotels do not separately allocate Base Rent to such Hotels, then Base Rent shall be reasonably allocated among such Hotels (where necessary) in a manner satisfactory to Agent. "Benefit Arrangement" means at any time an employee benefit plan within the meaning of Section 3(3) of ERISA which is not a Plan or a Multiemployer Plan and which is maintained or otherwise contributed to by any member of the ERISA Group. "Borrower" has the meaning set forth in the introductory paragraph hereof and shall include the Borrower's successors and permitted assigns. "Business Day" means (a) any day other than a Saturday, Sunday or other day on which banks in Charlotte, North Carolina or New York, New York are authorized or required to close and (b) with reference to a LIBOR Loan, any such day that is also a day on which dealings in Dollar deposits are carried out in the London interbank market. "Capitalization Rate" means 10.0%. "Capitalized Lease Obligation" means obligations under a lease that is required to be capitalized for financial reporting purposes in accordance with GAAP. The amount of a Capitalized Lease Obligation is the capitalized amount of such obligation as would be required to -3- be reflected on the balance sheet prepared in accordance with GAAP of the applicable Person as of the applicable date. "Cash Equivalents" means: (a) securities issued, guaranteed or insured by the United States of America or any of its agencies with maturities of not more than one year from the date acquired; (b) certificates of deposit with maturities of not more than one year from the date acquired issued by a United States federal or state chartered commercial bank of recognized standing, or a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, acting through a branch or agency, which bank at the time of the acquisition thereof has capital and unimpaired surplus in excess of $500,000,000.00 and which bank or its holding company at the time of the acquisition thereof has a short-term commercial paper rating of at least A-2 or the equivalent by S&P or at least P-2 or the equivalent by Moody's; (c) reverse repurchase agreements with terms of not more than seven days from the date acquired, for securities of the type described in clause (a) above and entered into only with commercial banks having the qualifications described in clause (b) above; (d) commercial paper issued by any Person incorporated under the laws of the United States of America or any State thereof and rated at the time of the acquisition thereof at least A-2 or the equivalent thereof by S&P or at least P-2 or the equivalent thereof by Moody's, in each case with maturities of not more than one year from the date acquired; and (e) investments in money market funds registered under the Investment Company Act of 1940, which have at the time of the acquisition thereof net assets of at least $500,000,000.00 and at least 85% of whose assets consist of securities and other obligations of the type described in clauses (a) through (d) above. "Collateral Account" means a special non-interest bearing deposit account maintained by the Agent at the Principal Office and under its sole dominion and control. "Commitment" means, as to each Lender, such Lender's obligation to make Revolving Loans pursuant to Section 2.1., to issue (in the case of the Agent) or participate in (in the case of the Lenders) Letters of Credit pursuant to Section 2.3.(a) and 2.3.(i), respectively, and to participate in Swingline Loans pursuant to Section 2.2.(e), to an amount up to, but not exceeding (but in the case of the Lender acting as the Agent excluding the aggregate amount of participations in the Letters of Credit held by other Lenders), the amount set forth for such Lender on its signature page hereto as such Lender's "Commitment Amount" or as set forth in the applicable Assignment and Acceptance Agreement, as the same may be reduced from time to time pursuant to Section 2.11., increased pursuant to Section 2.14., or as appropriate to reflect any assignments to or by such Lender effected in accordance with Section 12.5. "Commitment Percentage" means, as to each Lender, the ratio, expressed as a percentage, of (a) the amount of such Lender's Commitment to (b) the aggregate amount of the Commitments of all Lenders hereunder; provided, however, that if at the time of determination the Commitments have terminated or been reduced to zero, the "Commitment Percentage" of each Lender shall be the Commitment Percentage of such Lender in effect immediately prior to such termination or reduction. "Compliance Certificate" has the meaning given that term in Section 8.3. -4- "Continue", "Continuation" and "Continued" each refers to the continuation of a LIBOR Loan from one Interest Period to another Interest Period pursuant to Section 2.8. "Convert", "Conversion" and "Converted" each refers to the conversion of a Loan of one Type into a Loan of another Type pursuant to Section 2.9. "Credit Event" means any of the following: (a) the making (or deemed making) of any Loan, (b) the Conversion of a Loan and (c) the issuance of a Letter of Credit. "Credit Rating" means the lowest rating assigned by a Rating Agency to each series of rated senior unsecured long term indebtedness of the Borrower. "Debt Service" means, for any period, the sum of: (a) Interest Expense of the Borrower and its Subsidiaries determined on a consolidated basis for such period and (b) all regularly scheduled principal payments made with respect to Indebtedness of the Borrower and its Subsidiaries during such period, other than any balloon, bullet or similar principal payment which repays such Indebtedness in full. "Default" means any of the events specified in Section 10.1., whether or not there has been satisfied any requirement for the giving of notice, the lapse of time, or both. "Defaulting Lender" has the meaning set forth in Section 3.11. "Developable Property" means (a) any Property on which there are no improvements or (b) any Property (or portion thereof) acquired by the Borrower or any Subsidiary for the purpose of being developed. Developable Property shall not include any Property that is an Asset Under Development. "Dollars" or "$" means the lawful currency of the United States of America. "Due Diligence Reports" means, as to any Hotel Pool or individual Hotel not in a Hotel Pool, (a) a Lease Abstract and (b) such other information as the Agent may reasonably request in order to evaluate such Hotel Pool or Hotel. "EBITDA" means, with respect to a Person for a given period: (a) net earnings (or loss) of such Person for such period determined on a consolidated basis exclusive of the following (to the extent included in determination of such net earnings (loss)): (i) depreciation and amortization expense; (ii) Interest Expense; (iii) income tax expense; and (iv) extraordinary or non-recurring gains and losses; plus (b) such Person's pro rata share of EBITDA of its Unconsolidated Affiliates. Straight line rent leveling adjustments and deferred percentage rent adjustments required under GAAP shall be disregarded in determinations of EBITDA. "Effective Date" means the later of: (a) the Agreement Date; and (b) the date on which all of the conditions precedent set forth in Section 5.1. shall have been fulfilled or waived in writing by the Requisite Lenders. -5- "Eligible Assignee" means any Person who is: (i) currently a Lender; (ii) a commercial bank, trust company, insurance company, investment bank or pension fund organized under the laws of the United States of America, or any state thereof, and having total assets in excess of $5,000,000,000; (iii) a savings and loan association or savings bank organized under the laws of the United States of America, or any state thereof, and having a tangible net worth of at least $500,000,000; or (iv) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having total assets in excess of $10,000,000,000, provided that such bank is acting through a branch or agency located in the United States of America. If such Person is not currently a Lender, such Person's senior unsecured long term indebtedness must be rated BBB or higher by S&P, Baa2 or higher by Moody's, or the equivalent or higher of either such rating by another rating agency acceptable to the Agent. Notwithstanding the foregoing, during any period in which an Event of Default shall have occurred and be continuing under any of subsections (a), (b), (f) or (g) of Section 10.1., the term "Eligible Assignee" shall mean any Person that is not an individual. "Environmental Laws" means any Applicable Law relating to environmental protection or the manufacture, storage, disposal or clean-up of Hazardous Materials including, without limitation, the following: Clean Air Act, 42 U.S.C.ss. 7401 et seq.; Federal Water Pollution Control Act, 33 U.S.C.ss. 1251 et seq.; Solid Waste Disposal Act, as amended by the Resource Conservation and Recovery Act, 42 U.S.C.ss. 6901 et seq.; Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.ss. 9601 et seq.; National Environmental Policy Act, 42 U.S.C.ss. 4321 et seq.; regulations of the Environmental Protection Agency and any applicable rule of common law and any judicial interpretation thereof relating primarily to the environment or Hazardous Materials. "Equity Interest" means, with respect to any Person, any share of capital stock of (or other ownership or profit interests in) such Person, any warrant, option or other right for the purchase or other acquisition from such Person of any share of capital stock of (or other ownership or profit interests in) such Person, any security (other than a security constituting Indebtedness) convertible into or exchangeable for any share of capital stock of (or other ownership or profit interests in) such Person or warrant, right or option for the purchase or other acquisition from such Person of such shares (or such other interests), and any other ownership or profit interest in such Person (including, without limitation, partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such share, warrant, option, right or other interest is authorized or otherwise existing on any date of determination. "Equity Issuance" means any issuance by a Person of any Equity Interest and shall in any event include the issuance of any Equity Interest upon the conversion or exchange of any security constituting Indebtedness that is convertible or exchangeable, or is being converted or exchanged, for Equity Interests. "ERISA" means the Employee Retirement Income Security Act of 1974, as in effect from time to time. -6- "ERISA Group" means the Borrower, any Subsidiary and all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the Borrower or any Subsidiary, are treated as a single employer under Section 414 of the Internal Revenue Code. "Event of Default" means any of the events specified in Section 10.1., provided that any requirement for notice or lapse of time or any other condition has been satisfied. "Excluded Subsidiary" means any Subsidiary (a) which has a legal structure and capitalization intended to make such entity a single purpose, "bankruptcy remote" entity; (b) for which none of the Borrower, any Subsidiary (other than another Excluded Subsidiary) or any other Loan Party has Guaranteed any of the Indebtedness of such Subsidiary or has any direct obligation to maintain or preserve such Subsidiary's financial condition or to cause such Subsidiary to achieve any specified levels of operating results, except for (i) customary exceptions for fraud, misapplication of funds, environmental indemnities, and other similar exceptions to recourse liability, and (ii) guaranties of the refund of any Lessee Deposit; and (c) which is directly obligated for any Secured Indebtedness. "Excluded Property" means any Property that is not located entirely in a state of the United States or the District of Columbia. "Existing Credit Agreement" means that certain Second Amended and Restated Revolving Loan Agreement dated as of June 10, 1998 by and among the Borrower, the financial institutions party thereto as "Lenders", Dresdner Bank AG, New York and Grand Cayman Branches, as Agent, and certain Subsidiaries of the Borrower. "Facility Fee" means the per annum percentage in the table set forth in Schedule 1.1.(b) corresponding to the Level at which the "Applicable Margin" is determined in accordance with the definition thereof. As of the Agreement Date, the Facility Fee equals 0.30%. "Fair Market Value" means, with respect to (a) a security listed on a principal national securities exchange, the price of such security as reported on such exchange by any widely recognized reporting method customarily relied upon by financial institutions and (b) with respect to any other property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of which is under pressure or compulsion to complete the transaction. "Federal Funds Rate" means, for any day, the rate per annum (rounded upward to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to the Agent by federal funds dealers selected by the Agent on such day on such transaction as determined by the Agent. -7- "Fees" means the fees and commissions provided for or referred to in Section 3.6. and any other fees payable by the Borrower hereunder or under any other Loan Document. "FF&E Reserve" means, for any period and with respect to a given Property or Hotel Pool, an amount equal to the amount that the Lease or any Ancillary Agreement for such Property or Hotel Pool requires the Lessee or Manager to reserve during such period for (i) replacements and renewals to such Property's or Hotel Pool's furnishings, fixtures and equipment, (ii) routine repairs and maintenance to buildings which are normally capitalized under GAAP and (iii) major repairs, alterations, improvements, renewals or replacements to building structures, roofs or exterior facade, or for mechanical, electrical, HVAC, plumbing or vertical transportation systems. "First Union" means First Union National Bank, together with its successors and assigns. "Fitch" means Fitch, Inc. and its successors. "Fixed Charges" means, for any period, the sum (without duplication) of (a) Debt Service for such period and (b) Preferred Dividends for such period. "Floating Rate Debt" means all Indebtedness of the Borrower and its Subsidiaries which bears interest at fluctuating rates (and in any event shall include all Loans and other Indebtedness of the Borrower under any of the Loan Documents) and for which the Borrower or any such Subsidiary has not obtained Interest Rate Agreements which Interest Rate Agreements (a) effectively cause such variable rates to be equivalent to, or to be capped at, fixed rates, (b) have scheduled termination dates later than the Termination Date and (c) have terms approved of by the Agent, such approval not to be unreasonably withheld. "Funds From Operations" means, for any period, (a) net income of the Borrower for such period determined on a consolidated basis exclusive of the following (to the extent included in the determination of such net income): (i) depreciation and amortization; (ii) gains and losses from extraordinary or non-recurring items; (iii) gains and losses on sales of real estate; (iv) gains and losses on investments in marketable securities; and (v) provisions/benefits for income taxes for such period, plus (b) FF&E Reserves required under Leases but not included in net income, plus (c) the Borrower's share of Funds From Operations from Unconsolidated Affiliates. Straight line rent leveling adjustments and deferred percentage rent adjustments required under GAAP shall be disregarded in determinations of Funds From Operations (to the extent such adjustments otherwise would be included in the determination of Funds From Operations). "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession, which are applicable to the circumstances as of the Agreement Date. -8- "Governing Documents" of any Person means the declaration of trust, certificate or articles of incorporation, by-laws, partnership agreement or operating or members agreement, as the case may be, and any other organizational or governing documents, of such Person. "Governmental Approvals" means all authorizations, consents, approvals, licenses and exemptions of, registrations and filings with, and reports to, all Governmental Authorities. "Governmental Authority" means any national, state or local government (whether domestic or foreign), any political subdivision thereof or any other governmental, quasi-governmental, judicial, public or statutory instrumentality, authority, body, agency, bureau or entity (including, without limitation, the Federal Deposit Insurance Corporation, the Comptroller of the Currency or the Federal Reserve Board, any central bank or any comparable authority) or any arbitrator with authority to bind a party at law. "Ground Lease" means a ground lease containing the following terms and conditions: (a) either (i) a remaining term (taking into account extensions which may be effected by the lessee without the consent of the lessor) of no less than 30 years from the Agreement Date, or (ii) the right of the lessee to purchase the property on terms reasonably acceptable to the Agent; (b) the right of the lessee to mortgage and encumber its interest in the leased property; (c) the obligation of the lessor to give the holder of any mortgage Lien on such leased property written notice of any defaults on the part of the lessee and that such lease will not be terminated until such holder has had a reasonable opportunity to cure or complete foreclosures, and fails to do so; and (d) free transferability of the lessee's interest under such lease, including ability to sublease, subject to only reasonable consent provisions. "Guarantor" means any Person that is a party to the Guaranty as a "Guarantor" and in any event shall include each Material Subsidiary (unless an Excluded Subsidiary). "Guaranty", "Guaranteed" or to "Guarantee" as applied to any obligation means and includes: (a) a guaranty (other than by endorsement of negotiable instruments for collection in the ordinary course of business), directly or indirectly, in any manner, of any part or all of such obligation, or (b) an agreement, direct or indirect, contingent or otherwise, and whether or not constituting a guaranty, the practical effect of which is to assure the payment or performance (or payment of damages in the event of nonperformance) of any part or all of such obligation whether by: (i) the purchase of securities or obligations, (ii) the purchase, sale or lease (as lessee or lessor) of property or the purchase or sale of services primarily for the purpose of enabling the obligor with respect to such obligation to make any payment or performance (or payment of damages in the event of nonperformance) of or on account of any part or all of such obligation, or to assure the owner of such obligation against loss, (iii) the supplying of funds to or in any other manner investing in the obligor with respect to such obligation, (iv) repayment of amounts drawn down by beneficiaries of letters of credit (including Letters of Credit), or (v) the supplying of funds to or investing in a Person on account of all or any part of such Person's obligation under a Guaranty of any obligation or indemnifying or holding harmless, in any way, such Person against any part or all of such obligation. As the context requires, "Guaranty" shall also mean the Guaranty to which the Guarantors are parties substantially in the form of Exhibit B. -9- "Hazardous Materials" means all or any of the following: (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable Environmental Laws as "hazardous substances", "hazardous materials", "hazardous wastes", "toxic substances" or any other formulation intended to define, list or classify substances by reason of deleterious properties such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive toxicity, "TCLP" toxicity or "EP toxicity"; (b) oil, petroleum or petroleum derived substances, natural gas, natural gas liquids or synthetic gas and drilling fluids, produced waters and other wastes associated with the exploration, development or production of crude oil, natural gas or geothermal resources; (c) any flammable substances or explosives or any radioactive materials; (d) asbestos in any form; and (e) electrical equipment which contains any oil or dielectric fluid containing levels of polychlorinated biphenyls in excess of fifty parts per million. "Hotel" means any Property, the improvements on which are operated as a hotel, inn or the providing of lodging services, together with any incidental improvements on such Property operated in connection with such hotel, inn or lodging facility. "Hotel Net Cash Flow" means the net operating cash flow of a Hotel, after (a) all taxes (except income taxes), insurance, salaries, utilities, and other operating expenses, all sums that the applicable Lease or any related Ancillary Agreement requires the applicable Lessee or the applicable Manager to pay (excluding (i) all items payable to such Manager that are subordinated to Base Rent and (ii) Base Rent), and (b) the greater of (a) FF&E Reserves, or (b) 4.0% of total gross room revenues for such period. Hotel Net Cash Flow shall be determined as of any date based on the last four completed fiscal quarters of the Person that owns such Hotel (subject to reasonable adjustment or interpolation to accommodate differences between such Person's fiscal quarters and those of its Lessee). "Hotel Pool" means any group of two or more Properties, substantially all of the value of which is attributable to Hotels, that are (a) leased to a Lessee pursuant to a single Lease, or (b) leased pursuant to Leases that are cross-defaulted (as to defaults by Lessee), together with all other Properties whose Leases are cross-defaulted (as to defaults by Lessee) with such Lease. "Indebtedness" means, with respect to a Person, at the time of computation thereof, all of the following (without duplication): (a) all obligations of such Person in respect of money borrowed; (b) all obligations of such Person, whether or not for money borrowed (1) represented by notes payable, or drafts accepted, in each case representing extensions of credit, (2) evidenced by bonds, debentures, notes or similar instruments, or (3) constituting purchase money indebtedness, conditional sales contracts, title retention debt instruments or other similar instruments, upon which interest charges are customarily paid or that are issued or assumed as full or partial payment for property or services rendered; (c) Capitalized Lease Obligations of such Person; (d) all reimbursement obligations of such Person under any letters of credit or acceptances (whether or not the same have been presented for payment); (e) all obligations, contingent or otherwise, of such Person under any synthetic lease, tax retention operating lease, off balance sheet loan or similar off balance sheet financing arrangement if the transaction giving rise to such obligation (1) is considered indebtedness for borrowed money for tax purposes but is classified as an operating lease under GAAP and (2) does not (and is not required pursuant to GAAP to) appear as a liability on the balance sheet of such Person; (f) all obligations of such -10- Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Mandatorily Redeemable Stock issued by such Person or any other Person, valued at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; (g) all obligations of such Person in respect of any take-out commitment or forward equity commitment (excluding, in the case of the Borrower and its Subsidiaries, any such obligation that can be satisfied solely by the issuance of Equity Interests (other than Mandatorily Redeemable Stock)); (h) all Indebtedness of other Persons which such Person has Guaranteed or is otherwise recourse to such Person, valued at the lesser of (1) the stated or determinable amount of the Indebtedness such Person Guaranteed or, if the amount of such Indebtedness is not stated or determinable, the maximum reasonably anticipated liability in respect thereof, and (2) the amount of any express limitation on such Guaranty; (i) all Indebtedness of another Person secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property or assets owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness or other payment obligation, valued, in the case of any such Indebtedness as to which recourse for the payment thereof is expressly limited to the property or assets on which such Lien is granted, at the lesser of (1) the stated or determinable amount of the Indebtedness that is so secured or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) and (2) the Fair Market Value of such property or assets; and (j) such Person's pro rata share of the Indebtedness of any Unconsolidated Affiliate of such Person. "Intellectual Property" has the meaning given that term in Section 6.1.(t). "Interest Expense" means, with respect to a Person for any period of time, (a) the interest expense, whether paid, accrued or capitalized (without deduction of consolidated interest income) of such Person for such period plus (b) in the case of the Borrower, the Borrower's pro rata share of Interest Expense of its Unconsolidated Affiliates. Interest Expense shall exclude any amortization of (i) deferred financing fees and (ii) debt discounts (but only to the extent such discounts do not exceed 3.0% of the initial face principal amount of such debt). "Interest Period" means with respect to any LIBOR Loan, each period commencing on the date such LIBOR Loan is made or the last day of the next preceding Interest Period for such Loan and ending 7, 30, 60 or 90 days thereafter, as the Borrower may select in a Notice of Borrowing, Notice of Continuation or Notice of Conversion, as the case may be, except that each Interest Period of 30, 60 or 90 day's duration that commences on the last Business Day of a calendar month shall end on the last Business Day of the appropriate subsequent calendar month. Notwithstanding the foregoing: (i) if any Interest Period would otherwise end after the Termination Date, such Interest Period shall end on the Termination Date; and (ii) each Interest Period that would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (or, if such next succeeding Business Day falls in the next succeeding calendar month, on the next preceding Business Day). "Interest Rate Agreement" means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar contractual agreement or arrangement entered into with a nationally recognized financial institution then having an Investment Grade Rating for the purpose of protecting against fluctuations in interest rates. -11- "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended. "Investment" means, (x) with respect to any Person, any acquisition or investment (whether or not of a controlling interest) by such Person, by means of any of the following: (a) the purchase or other acquisition of any Equity Interest in another Person, (b) a loan, advance or extension of credit to, capital contribution to, Guaranty of Indebtedness of, or purchase or other acquisition of any Indebtedness of, another Person, including any partnership or joint venture interest in such other Person, or (c) the purchase or other acquisition (in one transaction or a series of transactions) of assets of another Person that constitute the business or a division or operating unit of another Person and (y) with respect to any Property or other asset, the acquisition thereof. Any commitment to make an Investment in any other Person, as well as any option of another Person to require an Investment in such Person, shall constitute an Investment. Except as expressly provided otherwise, for purposes of determining compliance with any covenant contained in a Loan Document, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment. "Investment Grade Rating" means a Credit Rating of BBB-/Baa3 (or equivalent) or higher from both Rating Agencies. "Lease" means a (sub)lease of a Property, between the Borrower or a Subsidiary, as Lessor, and a Lessee. "Lease Abstract" means, as to any Lease for a Hotel Pool or individual Hotel not in a Hotel Pool, an abstract of such Lease and Ancillary Agreements in form and substance reasonably acceptable to the Lender, which shall include a reasonably detailed description of the following for such Lease and Ancillary Agreements: (a) all rent payable under such Lease, including a description of Base Rent and other components of rent payable under such Lease, (b) the term (including provisions for extension) of the Lease and any related Ancillary Agreements, (c) reserves for items of the type described in the definition of FF&E Reserve, (d) security deposits and other similar deposits required to made by the Lessee, (e) the terms of any Guaranty of such Lease, including without limitation, the identity of the guarantor(s), any collateral security for the obligations of such guarantor(s) and any provisions providing for reduction or release of the obligations of such guarantor(s) thereunder, (f) termination events, (g) the terms of any Ancillary Agreements for the Hotel Pool or Hotel subject to such Lease, (h) a summary of any restrictions on the Lessor's ability to sell, encumber, pledge, mortgage or otherwise grant Liens upon the Properties subject to such Lease, (i) restrictions, requirements or other provisions regarding the hotel brand name, trademark or trade name under which the Lessee may operate any Hotel subject to such Lease, and (j) any materials terms that are unusual in nature or not contained in the majority of the Leases or Ancillary Agreement for the Unencumbered Hotels at such time. "L/C Commitment Amount" equals $50,000,000. -12- "Lender" means each financial institution from time to time party hereto as a "Lender", together with its respective successors and permitted assigns. "Lending Office" means, for each Lender and for each Type of Loan, the office of such Lender specified as such on its signature page hereto or in the applicable Assignment and Acceptance Agreement, or such other office of such Lender as such Lender may notify the Agent in writing from time to time. "Lessee" means the (sub)lessee of a Property pursuant to a Lease, provided that (without the Agent's approval) no such (sub)lessee shall be an Affiliate (including, without limitation, RMR, or any Managing Trustee) of the Borrower, other than a TRS. "Lessee Deposits" means the following: (a) any cash or Cash Equivalent deposited with any Loan Party to secure a Lessee's obligations under such Lessee's Lease or the obligations of a manager or franchisor under an Ancillary Agreement (including, without limitation, any cash or Cash Equivalent deposited in connection with a Guaranty of a Lessee's obligations under a Lease); or (b) the total amount of any deferred purchase price payable by the Borrower or any of its Subsidiaries to a Lessee or a Lessee's Affiliates, against which purchase price the Borrower or such Subsidiary, as applicable, is entitled, pursuant to such Lessee's Lease, to offset damages resulting from such Lessee's default under its Lease or from a default by a manager or franchisor under an Ancillary Agreement. "Letter of Credit" has the meaning given that term in Section 2.3.(a). "Letter of Credit Documents" means, with respect to any Letter of Credit, collectively, any application therefor, any certificate or other document presented in connection with a drawing under such Letter of Credit and any other agreement, instrument or other document governing or providing for (a) the rights and obligations of the parties concerned or at risk with respect to such Letter of Credit or (b) any collateral security for any of such obligations. "Letter of Credit Liabilities" means, without duplication, at any time and in respect of any Letter of Credit, the sum of (a) the Stated Amount of such Letter of Credit plus (b) the aggregate unpaid principal amount of all Reimbursement Obligations of the Borrower at such time due and payable in respect of all drawings made under such Letter of Credit. For purposes of this Agreement, a Lender (other than the Lender acting as the Agent) shall be deemed to hold a Letter of Credit Liability in an amount equal to its participation interest in the related Letter of Credit under Section 2.3.(i), and the Lender acting as the Agent shall be deemed to hold a Letter of Credit Liability in an amount equal to its retained interest in the related Letter of Credit after giving effect to the acquisition by the Lenders other than the Lender acting as the Agent of their participation interests under such Section. "LIBOR" means, for any LIBOR Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on Telerate Page 3750 (or any successor page) as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period. If for any reason such rate is not available, -13- the term "LIBOR" shall mean, for any LIBOR Loan for any Interest Period therefor, the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%) appearing on the Reuters Screen LIBO Page as the London interbank offered rate for deposits in Dollars at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period for a term comparable to such Interest Period; provided, however, if more than one rate is specified on the Reuters Screen LIBO Page, the applicable rate shall be the arithmetic mean of all such rates. "LIBOR Loans" means Loans bearing interest at a rate based on LIBOR. "Lien" as applied to the property of any Person means: (a) any security interest, encumbrance, mortgage, deed to secure debt, deed of trust, pledge, lien, charge or lease constituting a Capitalized Lease Obligation, conditional sale or other title retention agreement, or other security title or encumbrance of any kind in respect of any property of such Person, or upon the income or profits therefrom; (b) any arrangement, express or implied, under which any property of such Person is transferred, sequestered or otherwise identified for the purpose of subjecting the same to the payment of Indebtedness or performance of any other obligation in priority to the payment of the general, unsecured creditors of such Person; (c) the filing of any financing statement under the Uniform Commercial Code or its equivalent in any jurisdiction, other than a financing statement filed (i) in respect of a lease not constituting a Capitalized Lease Obligation pursuant to Section 9-408 (or a successor provision) of the Uniform Commercial Code as in effect in an applicable jurisdiction or (ii) in connection with a sale or other disposition of accounts or other assets not prohibited by this Agreement in a transaction not otherwise constituting or giving rise to a Lien; and (d) any agreement by such Person to grant, give or otherwise convey any of the foregoing. "Loan" means a Revolving Loan or a Swingline Loan. "Loan Document" means this Agreement, each Note, each Letter of Credit Document, the Guaranty and each other document or instrument now or hereafter executed and delivered by a Loan Party in connection with, pursuant to or relating to this Agreement. "Loan Party" means each of the Borrower and each other Person who guarantees all or a portion of the Obligations and/or who pledges any collateral security to secure all or a portion of the Obligations. Schedule 1.1.(c) sets forth the Loan Parties in addition to the Borrower as of the Agreement Date. "Manager" means the manager of a Hotel pursuant to an Ancillary Agreement. "Managing Trustee" means either Mr. Barry M. Portnoy or Mr. Gerard M. Martin, both having a business address c/o RMR. "Mandatorily Redeemable Stock" means, with respect to any Person, any Equity Interest of such Person which by the terms of such Equity Interest (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable), upon the happening of any event or otherwise (a) matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise (other than an Equity Interest which is redeemable solely in -14- exchange for common stock or other equivalent common Equity Interests), (b) is convertible into or exchangeable or exercisable for Indebtedness or Mandatorily Redeemable Stock, or (c) is redeemable at the option of the holder thereof, in whole or in part (other than an Equity Interest which is redeemable solely in exchange for common stock or other equivalent common Equity Interests), in each case on or prior to the date on which all Revolving Loans are scheduled to be due and payable in full. "Material Adverse Effect" means a materially adverse effect on (a) the business, assets, liabilities, financial condition, results of operations or business prospects of the Borrower and its Subsidiaries taken as a whole, (b) the ability of the Borrower or any other Loan Party to perform its obligations under any Loan Document to which it is a party, (c) the validity or enforceability of any of the Loan Documents, (d) the rights and remedies of the Lenders and the Agent under any of the Loan Documents or (e) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith. "Material Contract" means any contract or other arrangement (other than Loan Documents), whether written or oral, to which the Borrower, any Subsidiary or any other Loan Party is a party as to which the breach, nonperformance, cancellation or failure to renew by any party thereto could reasonably be expected to have a Material Adverse Effect, and in any event shall include the Advisory Agreement. "Material Plan" means at any time a Plan or Plans having aggregate Unfunded Liabilities in excess of $10,000,000. "Material Subsidiary" means any Subsidiary to which 2.0% or more of Total Asset Value is, directly or indirectly, attributable. "Moody's" means Moody's Investors Service, Inc. and its successors. "Multiemployer Plan" means at any time an employee pension benefit plan within the meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is then making or accruing an obligation to make contributions or has within the preceding five plan years made contributions, including for these purposes any Person which ceased to be a member of the ERISA Group during such five year period. "Negative Pledge" means a provision of any agreement (other than this Agreement or any other Loan Document) that prohibits or limits the creation or assumption of any Lien on any assets of a Person or entitles another Person to obtain or claim the benefit of a Lien on any assets of such Person; provided, however, that an agreement that establishes a maximum ratio of unsecured debt to unencumbered assets, or of secured debt to total assets, or that otherwise conditions a Person's ability to encumber its assets upon the maintenance of one or more specified ratios that limit such Person's ability to encumber its assets but that do not generally prohibit the encumbrance of its assets, or the encumbrance of specific assets or that limits the encumbrance of specific assets or pools or assets in combination with other assets or pools of assets, shall not constitute a Negative Pledge for purposes of this Agreement. -15- "Net Proceeds" means with respect to any Equity Issuance by a Person, the aggregate amount of all cash and the Fair Market Value of all other property received by such Person in respect of such Equity Issuance net of investment banking fees, legal fees, accountants' fees, underwriting discounts and commissions and other customary fees and expenses actually incurred by such Person in connection with such Equity Issuance. "Nonrecourse Indebtedness" means, with respect to a Person, Indebtedness for borrowed money in respect of which recourse for payment (except for customary exceptions for fraud, misapplication of funds, environmental indemnities, and other similar exceptions to recourse liability) is contractually limited to specific assets of such Person encumbered by a Lien securing such Indebtedness. "Note" means a Revolving Note or a Swingline Note. "Notice of Borrowing" means a notice in the form of Exhibit C to be delivered to the Agent pursuant to Section 2.1.(b) evidencing the Borrower's request for a borrowing of Revolving Loans. "Notice of Continuation" means a notice in the form of Exhibit D to be delivered to the Agent pursuant to Section 2.8. evidencing the Borrower's request for the Continuation of a LIBOR Loan. "Notice of Conversion" means a notice in the form of Exhibit E to be delivered to the Agent pursuant to Section 2.9. evidencing the Borrower's request for the Conversion of a Loan from one Type to another Type. "Notice of Swingline Borrowing" means a notice in the form of Exhibit F to be delivered to the Agent pursuant to Section 2.2. evidencing the Borrower's request for a borrowing of Swingline Loans. "Obligations" means, individually and collectively: (a) the aggregate principal balance of, and all accrued and unpaid interest on, all Loans; (b) all Reimbursement Obligations and all other Letter of Credit Liabilities; and (c) all other indebtedness, liabilities, obligations, covenants and duties of the Borrower and the other Loan Parties owing to the Agent, the Swingline Lender or any Lender of every kind, nature and description, under or in respect of this Agreement or any of the other Loan Documents, including, without limitation, the Fees and indemnification obligations, whether direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, and whether or not evidenced by any promissory note. "Other Acceptable Property" means any Excluded Property or any Property not otherwise qualifying as an Unencumbered Hotel which the Requisite Lenders have agreed in their sole discretion and in writing is to be included as an Unencumbered Asset; provided, however, that, unless waived by the Requisite Lenders, such Property must satisfy all the following requirements: (a) such Property is owned in fee simple solely by the Borrower or a -16- Guarantor or leased solely by the Borrower or a Guarantor pursuant to a Ground Lease; (b) such Property is in service; (c) neither such Property, nor any interest of the Borrower or such Guarantor therein, is subject to any Lien (other than Permitted Liens of the types described in clauses (a) through (c) or (e) through (h) of the definition thereof or Liens in favor of the Borrower or a Guarantor) or to any Negative Pledge; (d) if such Property is owned or leased by a Subsidiary, (i) none of the Borrower's direct or indirect ownership interest in such Subsidiary is subject to any Lien (other than Permitted Liens of the types described in clauses (a) through (c) or (e) through (h) of the definition thereof or Liens in favor of the Borrower or a Guarantor) or to any Negative Pledge, (ii) no Property of such Subsidiary is subject to a Lien (except for Permitted Liens) and (iii) such Subsidiary has not directly or indirectly guarantied or assumed liability for any Indebtedness of any Subsidiary that is not a Guarantor except Lessee Deposits for which any Subsidiary that is not a Guarantor is responsible; (e) such Property is free of all structural defects or major architectural deficiencies, title defects, environmental conditions or other adverse matters which, collectively, materially impair the value of such Property; (f) such Property shall be subject to a Lease and Ancillary Documents satisfactory to the Agent; (g) the Lessee is not more than 30 days past due with respect to any payment obligations under the applicable Lease for such Property; and (h) such Property has not been removed voluntarily by the Borrower from "Other Acceptable Property" pursuant to Section 8.4(p). "Participant" has the meaning given that term in Section 12.5.(c). "PBGC" means the Pension Benefit Guaranty Corporation and any successor agency. "Permitted Liens" means, as to any Person: (a) Liens securing taxes, assessments and other charges or levies imposed by any Governmental Authority (excluding any Lien imposed pursuant to any of the provisions of ERISA) or the claims of materialmen, mechanics, carriers, warehousemen or landlords for labor, materials, supplies or rentals incurred in the ordinary course of business, which (i) are not at the time required to be paid or discharged under Section 7.6., or (ii) if such Lien is the responsibility of a tenant or manager to discharge, do not materially detract from (A) if the Property subject to such Lien is part of a Hotel Pool, the value of such Hotel Pool, or (B) if the Property subject to such Lien is not part of a Hotel Pool, the value of such Property; (b) Liens consisting of deposits or pledges made, in the ordinary course of business, in connection with, or to secure payment of, obligations under workers' compensation, unemployment insurance or similar Applicable Laws; (c) Liens consisting of -17- encumbrances in the nature of zoning restrictions, easements, and rights or restrictions of record on the use of real property, which do not materially detract from the value of such property or impair the use thereof in the business of such Person; (d) Liens in existence as of the Agreement Date and set forth in Part II of Schedule 6.1.(f); (e) deposits to secure trade contracts (other than for Indebtedness), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (f) the lessor's interest in property leased to the Borrower or any of its Subsidiaries pursuant to a lease permitted by this Agreement; (g) the interests of tenants, operators, franchisors, or managers of Properties; and (h) Liens in favor of the Agent for the benefit of the Lenders. "Person" means an individual, corporation, partnership, limited liability company, association, trust or unincorporated organization, or a government or any agency or political subdivision thereof. "Plan" means at any time an employee pension benefit plan (other than a Multiemployer Plan) which is covered by Title IV of ERISA or subject to the minimum funding standards under Section 412 of the Internal Revenue Code and either (a) is maintained, or contributed to, by any member of the ERISA Group for employees of any member of the ERISA Group or (b) has at any time within the preceding five years been maintained, or contributed to, by any Person which was at such time a member of the ERISA Group for employees of any Person which was at such time a member of the ERISA Group. "Post-Default Rate" means, in respect of any principal of any Loan or any other Obligation that is not paid when due (whether at stated maturity, by acceleration, by optional or mandatory prepayment or otherwise), a rate per annum equal to four percent (4.0%) plus the Base Rate as in effect from time to time. "Preferred Dividends" means, for any given period and without duplication, all Restricted Payments accrued or paid (and in the case of Restricted Payments paid, which were not accrued during a prior period) during such period on Preferred Stock issued by the Borrower or a Subsidiary. Preferred Dividends shall not include dividends or distributions paid or payable (a) solely in Equity Interests (other than Mandatorily Redeemable Stock) payable to holders of such class of Equity Interests; (b) to the Borrower or a Subsidiary; or (c) constituting or resulting in the redemption of Preferred Stock, other than scheduled redemptions not constituting balloon, bullet or similar redemptions in full. "Preferred Stock" means, with respect to any Person, Equity Interests in such Person which are entitled to preference or priority over any other Equity Interest in such Person in respect of the payment of dividends or distribution of assets upon liquidation or both. "Prime Rate" means the rate of interest per annum announced publicly by the Lender acting as the Agent as its prime rate from time to time. The Prime Rate is not necessarily the best or the lowest rate of interest offered by the Lender acting as the Agent or any other Lender. -18- "Principal Office" means the office of the Agent located at One First Union Center, Charlotte, North Carolina, or such other office of the Agent as the Agent may designate from time to time. "Property" means any parcel of real property, together with all improvements thereon, owned or leased pursuant to a Ground Lease by the Borrower or any Subsidiary. "Rating Agencies" means S&P and Moody's. If either such corporation ceases to act as a securities rating agency or ceases to provide ratings with respect to the senior long-term unsecured debt obligations of the Borrower, then the Borrower may designate as a replacement Fitch or any other nationally recognized securities rating agency acceptable to the Agent. "Register" has the meaning given that term in Section 12.5.(e). "Regulatory Change" means, with respect to any Lender, any change effective after the Agreement Date in Applicable Law (including without limitation, Regulation D of the Board of Governors of the Federal Reserve System) or the adoption or making after such date of any interpretation, directive or request applying to a class of banks, including such Lender, of or under any Applicable Law (whether or not having the force of law and whether or not failure to comply therewith would be unlawful) by any Governmental Authority or monetary authority charged with the interpretation or administration thereof or compliance by any Lender with any request or directive regarding capital adequacy. "Reimbursement Obligation" means the absolute, unconditional and irrevocable obligation of the Borrower to reimburse the Agent for any drawing honored by the Agent under a Letter of Credit. "REIT" means a Person qualifying for treatment as a "real estate investment trust" under the Internal Revenue Code. "RMR" means REIT Management & Research LLC, together with its successors and permitted assigns. "Requisite Lenders" means, as of any date, Lenders having at least 66 2/3% of the aggregate amount of the Commitments (excluding Defaulting Lenders who, accordingly, are not entitled to vote), or, if the Commitments have been terminated or reduced to zero, Lenders holding at least 66 2/3% of the principal amount of the Loans and Letter of Credit Liabilities (excluding Defaulting Lenders who, accordingly, are not entitled to vote). "Responsible Officer" means (a) with respect to the Borrower, the Borrower's President or Treasurer or any Managing Trustee of the Borrower and (b) with respect to any other Loan Party, such Loan Party's chief executive officer or chief financial officer. "Restricted Payment" means: (a) any dividend or other distribution, direct or indirect, on account of any Equity Interest of the Borrower or any of its Subsidiaries now or hereafter outstanding, except a dividend payable solely in Equity Interests of identical class to the holders -19- of that class; (b) any redemption, conversion, exchange, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any Equity Interest of the Borrower or any of its Subsidiaries now or hereafter outstanding; and (c) any payment made to retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire any Equity Interests of the Borrower or any of its Subsidiaries now or hereafter outstanding. "Revolving Loan" means a loan made by a Lender to the Borrower pursuant to Section 2.1.(a). "Revolving Note" has the meaning given that term in Section 2.10.(a). "Secured Indebtedness" means, with respect to a Person as of any given date, the aggregate principal amount of all Indebtedness of such Person outstanding at such date and that is secured in any manner by any Lien, and in the case of the Borrower and the Guarantors, shall include (without duplication) the Borrower's and such Guarantors' pro rata share of the Secured Indebtedness of its Unconsolidated Affiliates. "Securities Act" means the Securities Act of 1933, as amended from time to time, together with all rules and regulations issued thereunder. "Solvent" means, when used with respect to any Person, that (a) the fair value and the fair salable value of its assets (excluding any Indebtedness due from any affiliate of such Person) are each in excess of the fair valuation of its total liabilities (including all contingent liabilities computed at the amount which, in light of all the facts and circumstances existing at such time, represents the amount that could reasonably be expected to become an actual and matured liability); (b) such Person is able to pay its debts or other obligations in the ordinary course as they mature; and (c) such Person has capital not unreasonably small to carry on its business and all business in which it proposes to be engaged. "S&P" means Standard & Poor's Rating Services, a division of The McGraw-Hill Companies, Inc. and its successors. "Stated Amount" means the amount available to be drawn by a beneficiary under a Letter of Credit from time to time, as such amount may be increased or reduced from time to time in accordance with the terms of such Letter of Credit. "Subsidiary" means, for any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (without regard to the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person, and shall include all Persons the accounts of which are consolidated with those of such Person pursuant to GAAP. -20- "Supermajority Lenders" means, as of any date, Lenders having at least 75% of the aggregate amount of the Commitments (excluding Defaulting Lenders who, accordingly, are not entitled to vote), or, if the Commitments have been terminated or reduced to zero, Lenders holding at least 75% of the principal amount of the Loans and Letter of Credit Liabilities (excluding Defaulting Lenders who, accordingly, are not entitled to vote). "Swingline Commitment" means the Swingline Lender's obligation to make Swingline Loans pursuant to Section 2.2. in an amount up to, but not exceeding, $25,000,000, as such amount may be reduced from time to time in accordance with the terms hereof. "Swingline Lender" means First Union National Bank, together with its respective successors and assigns. "Swingline Loan" means a loan made by the Swingline Lender to the Borrower pursuant to Section 2.2.(a). "Swingline Note" means the promissory note of the Borrower payable to the order of the Swingline Lender in a principal amount equal to the amount of the Swingline Commitment as originally in effect and otherwise duly completed, substantially in the form of Exhibit G. "Tangible Net Worth" means, as of any given time: (a) the book value (exclusive of depreciation) of all real estate assets of the Borrower and its Subsidiaries that constitute Properties at such time; plus (b) the book value of other assets (excluding any real estate assets) of the Borrower and its Subsidiaries; less (c) all amounts appearing on the assets side of a consolidated balance sheet of the Borrower for assets separately classified as intangible assets under GAAP; less (d) all Total Indebtedness of the Borrower and its Subsidiaries determined on a consolidated basis; less (e) all other liabilities of the Borrower and its Subsidiaries determined on a consolidated basis. "Taxes" has the meaning given that term in Section 3.12. "Termination Date" means June 30, 2005. "Titled Agent" means any of the Lead Arranger, the Co-Lead Arranger, the Syndication Agents or the Documentation Agents, and their respective successors and permitted assigns. "Total Asset Value" means the sum of the following (without duplication) of the Borrower and its Subsidiaries for the fiscal quarter most recently ended: (a)(i) with respect to all Properties owned (or leased pursuant to a Ground Lease) by the Borrower or any Subsidiary for the entire fiscal quarter most recently ending, Adjusted EBITDA attributable to such Properties for such period multiplied by (ii) 4 and divided by (iii) the Capitalization Rate; (b) the purchase price paid for any Property acquired during such fiscal quarter (less any amounts paid as a purchase price adjustment, held in escrow, retained as a contingency reserve, or other similar arrangements but including amounts retained as Lessee Deposits); (c) all cash, cash equivalents and accounts receivable that are not (i) owing in excess of 90 days as of the end of such fiscal period or (ii) being contested in writing by the obligor in respect thereof (in which case only such -21- portion being contested shall be excluded from Total Asset Value); (d) prepaid taxes and operating expenses as of the end of such fiscal quarter; (e) the book value of all Developable Property as of the end of such fiscal quarter; (f) the book value of all other tangible assets (excluding land or other real property) as of the end of such fiscal quarter; (g) the book value of all Unencumbered Mortgage Notes as of the end of such fiscal quarter; and (h) the Borrower's pro rata share of the preceding items of any Unconsolidated Affiliate of the Borrower. "Total Indebtedness" means, as of a given date, all liabilities of the Borrower and its Subsidiaries which would, in conformity with GAAP, be properly classified as a liability on a consolidated balance sheet of the Borrower and its Subsidiaries as of such date, and in any event shall include (without duplication): (a) all Indebtedness of the Borrower and its Subsidiaries; (b) the Borrower's pro rata share of Indebtedness of its Unconsolidated Affiliates; and (c) the aggregate amount of all Lessee Deposits (other than those Lessee Deposits held by a Loan Party in connection with Leases for which a monetary default exists and has existed for a period of 30 days or more). "TRS" means a Subsidiary of the Borrower that is a "taxable REIT subsidiary" within the meaning of Section 856(l) of the Internal Revenue Code. "Type" with respect to any Loan, refers to whether such Loan is a LIBOR Loan or Base Rate Loan. "Unconsolidated Affiliate" means, with respect to any Person, any other Person in whom such Person holds an Investment, which Investment is accounted for in the financial statements of such Person on an equity basis of accounting and whose financial results would not be consolidated under GAAP with the financial results of such Person on the consolidated financial statements of such Person. "Unencumbered Asset" means any (a) Unencumbered Hotel, (b) Unencumbered Mortgage Note, or (c) Other Acceptable Property. "Unencumbered Asset Certificate" has the meaning given that term in Section 8.3. "Unencumbered Asset Value" means, as of the end of a fiscal quarter, the sum of: (a) unrestricted cash of the Borrower and its Subsidiaries; (b)(i) Adjusted EBITDA for the fiscal quarter most recently ended attributable to Unencumbered Hotels (excluding a proportionate share of EBITDA attributable to Excluded Properties) owned or leased by the Borrower or any Subsidiary for the entire fiscal quarter of the Borrower most recently ended, multiplied by (ii) 4 divided by (iii) the Capitalization Rate; (c) the purchase price paid for any Unencumbered Hotel (excluding a proportionate share of the purchase price attributable to Excluded Properties) acquired during such fiscal quarter (less any amounts paid as a purchase price adjustment, held in escrow, retained as a contingency reserve, or other similar arrangements); (d) the book value of all Unencumbered Mortgage Notes of the Borrower and its Subsidiaries (excluding any Unencumbered Mortgage Note where the obligor is more than 30 days past due with respect to any payment obligation and a proportionate amount of the value of any Unencumbered Mortgage Note that is secured by Excluded Properties); and (e) with respect to all Other Acceptable -22- Properties, the value of each such Property determined in accordance with the valuation method established by the Requisite Lenders when the Requisite Lenders approved of such Property as an Other Acceptable Property. To the extent that the sum of the book value of Unencumbered Mortgage Notes would, in the aggregate, account for more than 10.0% of Unencumbered Asset Value, such excess shall be excluded. To the extent that Properties leased by the Borrower or a Guarantor pursuant to a Ground Lease would, in the aggregate, account for more than 10.0% of Unencumbered Asset Value, such excess shall be excluded. If an Unencumbered Hotel or Unencumbered Mortgage Note is not owned as of the last day of a quarter then such asset shall be excluded from the foregoing calculations. "Unencumbered EBITDA" means, for a given period, the aggregate Adjusted EBITDA attributable to the Unencumbered Hotels (excluding a proportionate share of EBITDA attributable to Excluded Properties), Unencumbered Mortgage Notes (excluding any EBITDA from that portion of the Unencumbered Mortgage Note that is secured by Excluded Properties) and Other Acceptable Properties. "Unencumbered Hotels" means every Hotel Pool and Hotel that is not in a Hotel Pool that satisfy all of the following requirements: (a) such Hotel or each Property in such Hotel Pool is (i) owned in fee simple solely by the Borrower or a Guarantor or (ii) leased solely by the Borrower or a Guarantor pursuant to a Ground Lease; (b) such Hotel, or in the case of a Hotel Pool, each Property in such Hotel Pool (i) is not an Asset Under Development and (ii) is in service; (c) neither such Hotel (or in the case of a Hotel Pool, no Property in such Hotel Pool), nor any interest of the Borrower or such Guarantor therein, is subject to any Lien (other than Permitted Liens of the types described in clauses (a) through (c) or (e) through (h) of the definition thereof or Liens in favor of the Borrower or a Guarantor) or to any Negative Pledge; (d) if such Hotel or Hotel Pool is owned or leased by a Subsidiary, (i) none of the Borrower's direct or indirect ownership interest in such Subsidiary is subject to any Lien (other than Permitted Liens of the types described in clauses (a) through (c) or (e) through (h) of the definition thereof or Liens in favor of the Borrower or a Guarantor) or to any Negative Pledge, and (ii) such Subsidiary has not directly or indirectly guarantied or assumed liability for any Indebtedness of any Subsidiary that is not a Guarantor except Lessee Deposits for which any Subsidiary that is not a Guarantor is responsible; (e) such Hotel, or in the case of a Hotel Pool, each Property in such Hotel Pool, is free of all structural defects or major architectural deficiencies, title defects, environmental conditions or other adverse matters which, collectively, materially impair the value of such Property or Hotel Pool; (f) such Hotel or Hotel Pool shall be subject to agreements containing terms -23- and conditions which provide the Borrower with substantially the same benefits and risks as Leases and Ancillary Documents of Unencumbered Hotels as of the Agreement Date, or otherwise satisfactory to the Agent, with Persons reasonably satisfactory to Agent; (g) the Lessee is not more than 30 days past due with respect to any payment obligations under any Lease for such Hotel or Hotel Pool; and (h) such Hotel or Hotel Pool (i) has been designated by the Borrower as an "Unencumbered Hotel" on Schedule 6.1(y) or on an Unencumbered Asset Certificate delivered by the Borrower to the Agent pursuant to Section 8.3 or 8.4(o), and (ii) has not been removed voluntarily by the Borrower from "Unencumbered Hotels" pursuant to Section 8.4(p). "Unencumbered Mortgage Note" means a promissory note satisfying all of the following requirements: (a) such promissory note is owned solely by the Borrower or a Guarantor; (b) such promissory note is secured by a Lien on real property and the improvements on which, include, but are not limited to, a hotel, inn or other lodging facility or other improvements of a type similar to improvements located on the Properties as of the Agreement Date; (c) neither such promissory note, nor any interest of the Borrower or such Guarantor therein, is subject to any Lien (other than Permitted Liens of the types described in clauses (a) through (c) and (e) of the definition thereof or Liens in favor of the Borrower or a Guarantor) or to any Negative Pledge; (d) if such promissory note is owned by a Subsidiary, (i) none of the Borrower's direct or indirect ownership interest in such Subsidiary is subject to any Lien (other than Permitted Liens of the types described in clauses (a) through (c) and (e) of the definition thereof or Liens in favor of the Borrower or a Guarantor) or to any Negative Pledge and (ii) the Borrower directly, or indirectly through a Subsidiary, has the right to sell, transfer or otherwise dispose of such promissory note without the need to obtain the consent of any Person; (d) such real property and related improvements are not subject to (i) any other Lien (other than Permitted Liens of the types described in clauses (a) through (c) and (e) of the definition thereof or Liens in favor of the Borrower or a Guarantor) or (ii) any environmental conditions or other adverse matters which, individually or collectively, materially impair the value of such real property or related improvements; (e) the obligor in respect of such promissory note is not an Affiliate of the Borrower or RMR; (f) if the Borrower or any Subsidiary were to acquire such real property and related improvements, no Default or Event of Default would result from such acquisition; and (g) such promissory note (i) has been designated by the Borrower as an "Unencumbered Mortgage Note" on Schedule 6.1(y) or on an Unencumbered Asset Certificate delivered by the Borrower to the Agent pursuant to Section 8.3 or 8.4(o), and (ii) has not been removed by the Borrower from "Unencumbered Mortgage Notes" pursuant to Section 8.4(p). "Unfunded Liabilities" means, with respect to any Plan at any time, the amount (if any) by which (a) the value of all benefit liabilities under such Plan, determined on a plan termination basis using the assumptions prescribed by the PBGC for purposes of Section 4044 of ERISA, exceeds (b) the fair market value of all Plan assets allocable to such liabilities under Title IV of ERISA (excluding any accrued but unpaid contributions), all determined as of the then most recent valuation date for such Plan, but only to the extent that such excess represents a potential -24- liability of a member of the ERISA Group to the PBGC or any other Person under Title IV of ERISA. "Unsecured Debt Service" means, for a given period, Debt Service for such period, with respect to Unsecured Indebtedness of the Borrower and its Subsidiaries. "Unsecured Indebtedness" means, with respect to a Person as of any given date, the aggregate principal amount of all Indebtedness of such Person outstanding at such date that is not Secured Indebtedness (excluding Indebtedness associated with Unconsolidated Affiliates that is not Guaranteed by a Loan Party) and in the case of the Borrower shall include (without duplication) Indebtedness that does not constitute Secured Indebtedness. "Wholly Owned Subsidiary" means any Subsidiary of a Person in respect of which all of the equity securities or other ownership interests (other than, in the case of a corporation, directors' qualifying shares) are at the time directly or indirectly owned or controlled by such Person or one or more other Subsidiaries of such Person or by such Person and one or more other Subsidiaries of such Person. Section 1.2. General; References to Times. Unless otherwise indicated, all accounting terms, ratios and measurements shall be interpreted or determined in accordance with GAAP in effect as of the Agreement Date. References in this Agreement to "Sections", "Articles", "Exhibits" and "Schedules" are to sections, articles, exhibits and schedules herein and hereto unless otherwise indicated. references in this Agreement to any document, instrument or agreement (a) shall include all exhibits, schedules and other attachments thereto, (b) shall include all documents, instruments or agreements issued or executed in replacement thereof, to the extent permitted hereby and (c) shall mean such document, instrument or agreement, or replacement or predecessor thereto, as amended, supplemented, restated or otherwise modified as of the date of this Agreement and from time to time thereafter to the extent not prohibited hereby and in effect at any given time. Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, the feminine and the neuter. Unless explicitly set forth to the contrary, a reference to "Subsidiary" means a Subsidiary of the Borrower or a Subsidiary of such Subsidiary and a reference to an "Affiliate" means a reference to an Affiliate of the Borrower. Titles and captions of Articles, Sections, subsections and clauses in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement. Unless otherwise indicated, all references to time are references to Charlotte, North Carolina time. ARTICLE II. CREDIT FACILITY Section 2.1. Revolving Loans. (a) Generally. Subject to the terms and conditions hereof, during the period from the Effective Date to but excluding the Termination Date, each Lender severally and not jointly agrees to make Revolving Loans to the Borrower in an aggregate principal amount at any one time outstanding up to, but not exceeding, the amount of such Lender's Commitment. Subject to -25- the terms and conditions of this Agreement, during the period from the Effective Date to but excluding the Termination Date, the Borrower may borrow, repay and reborrow Revolving Loans hereunder. (b) Requesting Revolving Loans. The Borrower shall give the Agent notice pursuant to a Notice of Borrowing or telephonic notice of each borrowing of Revolving Loans. Each Notice of Borrowing shall be delivered to the Agent before 11:00 a.m. (i) in the case of LIBOR Loans, on the date three Business Days prior to the proposed date of such borrowing and (ii) in the case of Base Rate Loans, on the date one Business Day prior to the proposed date of such borrowing. Any such telephonic notice shall include all information to be specified in a written Notice of Borrowing and shall be promptly confirmed in writing by the Borrower pursuant to a Notice of Borrowing sent to the Agent by telecopy on the same day of the giving of such telephonic notice. The Agent will transmit by telecopy the Notice of Borrowing (or the information contained in such Notice of Borrowing) or the information contained in a telephonic notice of borrowing (if such telephonic notice is received prior to a Notice of Borrowing) to each Lender promptly upon receipt by the Agent. Each Notice of Borrowing or telephonic notice of each borrowing shall be irrevocable once given and binding on the Borrower. (c) Disbursements of Revolving Loan Proceeds. No later than 1:00 p.m. on the date specified in the Notice of Borrowing, each Lender will make available for the account of its applicable Lending Office to the Agent at the Principal Office, in immediately available funds, the proceeds of the Revolving Loan to be made by such Lender. With respect to Revolving Loans to be made after the Effective Date, unless the Agent shall have been notified by any Lender prior to the specified date of borrowing that such Lender does not intend to make available to the Agent the Revolving Loan to be made by such Lender on such date, the Agent may assume that such Lender will make the proceeds of such Revolving Loan available to the Agent on the date of the requested borrowing as set forth in the Notice of Borrowing and the Agent may (but shall not be obligated to), in reliance upon such assumption, make available to the Borrower the amount of such Revolving Loan to be provided by such Lender. Subject to satisfaction of the applicable conditions set forth in Article V. for such borrowing, the Agent will make the proceeds of such borrowing available to the Borrower no later than 2:00 p.m. on the date and at the account specified by the Borrower in such Notice of Borrowing. Section 2.2. Swingline Loans. (a) Swing Line Loans. Subject to the terms and conditions hereof, during the period from the Effective Date to but excluding the Termination Date, the Swingline Lender agrees to make Swingline Loans to the Borrower in an aggregate principal amount at any one time outstanding up to, but not exceeding, the amount of the Swingline Commitment. If at any time the aggregate principal amount of the Swingline Loans outstanding at such time exceeds the Swingline Commitment in effect at such time, the Borrower shall immediately pay the Agent for the account of the Swingline Lender the amount of such excess. Subject to the terms and conditions of this Agreement, the Borrower may borrow, repay and reborrow Swingline Loans hereunder. (b) Procedure for Borrowing Swingline Loans. The Borrower shall give the Agent and the Swingline Lender notice pursuant to a Notice of Swingline Borrowing or telephonic -26- notice of each borrowing of a Swingline Loan. Each Notice of Swingline Borrowing shall be delivered to the Swingline Lender no later than 3:00 p.m. on the proposed date of such borrowing. Any such telephonic notice shall include all information to be specified in a written Notice of Swingline Borrowing and shall be promptly confirmed in writing by the Borrower pursuant to a Notice of Swingline Borrowing sent to the Swingline Lender by telecopy on the same day of the giving of such telephonic notice. On the date of the requested Swingline Loan and subject to satisfaction of the applicable conditions set forth in Article V. for such borrowing, the Swingline Lender will make the proceeds of such Swingline Loan available to the Borrower in Dollars, in immediately available funds, at the account specified by the Borrower in the Notice of Swingline Borrowing not later than 11:00 a.m. on such date if the Swingline Lender received such Notice of Swingline Borrowing by 9:00 a.m. on such date, and otherwise not later than 4:00 p.m. on such date. (c) Interest. Swingline Loans shall bear interest at a per annum rate equal to the Base Rate plus the Applicable Margin for Base Rate Loans (or at such other rate or rates as the Borrower and the Swingline Lender may agree from time to time in writing). Interest payable on Swingline Loans is solely for the account of the Swingline Lender. All accrued and unpaid interest on Swingline Loans shall be payable on the dates and in the manner provided in Section 2.4. with respect to interest on Base Rate Loans (except as the Swingline Lender and the Borrower may otherwise agree in writing in connection with any particular Swingline Loan). (d) Swingline Loan Amounts, Etc. Each Swingline Loan shall be in the minimum amount of $1,000,000 and integral multiples of $500,000 or such other minimum amounts agreed to by the Swingline Lender and the Borrower. Any voluntary prepayment of a Swingline Loan must be in integral multiples of $100,000 or the aggregate principal amount of all outstanding Swingline Loans (or such other minimum amounts upon which the Swingline Lender and the Borrower may agree) and in connection with any such prepayment, the Borrower must give the Swingline Lender prior written notice thereof no later than 10:00 a.m. on the date of such prepayment. The Swingline Loans shall, in addition to this Agreement, be evidenced by the Swingline Note. (e) Repayment and Participations of Swingline Loans. The Borrower agrees to repay each Swingline Loan within one Business Day of demand therefor by the Swingline Lender and in any event, within 5 Business Days after the date such Swingline Loan was made. Notwithstanding the foregoing, the Borrower shall repay the entire outstanding principal amount of, and all accrued but unpaid interest on, the Swingline Loans on the Termination Date (or such earlier date as the Swingline Lender and the Borrower may agree in writing). In lieu of demanding repayment of any outstanding Swingline Loan from the Borrower in respect of which the Agent has not either (x) received a Notice of Borrowing indicating that such Swingline Loan is to be repaid with the proceeds thereof or (y) received notice from the Borrower that it intends to repay such Swingline Loan on a specified date and, in the case of this clause (y) only, such Swingline Loan is not repaid by 11:30 a.m. on such date, the Swingline Lender may, on behalf of the Borrower (which hereby irrevocably directs the Swingline Lender to act on its behalf), request a borrowing of Revolving Loans (which shall be Base Rate Loans) from the Lenders in an amount equal to the principal balance of such Swingline Loan. The limitations of Section 3.5.(a) shall not apply to any borrowing of Base Rate Loans made pursuant to this -27- subsection. The Swingline Lender shall give notice to the Agent of any such borrowing of Base Rate Loans not later than 12:00 noon on the proposed date of such borrowing, and the Agent shall promptly give notice to the Lenders of any such borrowing of Base Rate Loans. No later than 2:00 p.m. on such date, each Lender will make available to the Agent at the Principal Office for the account of Swingline Lender, in immediately available funds, the proceeds of the Base Rate Loan to be made by such Lender. The Agent shall pay the proceeds of such Base Rate Loans to the Swingline Lender, which shall apply such proceeds to repay such Swingline Loan. If the Lenders are prohibited from making Loans required to be made under this subsection for any reason, including without limitation, the occurrence of any of the Events of Default described in Sections 10.1.(f) or 10.1.(g), each Lender shall purchase from the Swingline Lender, without recourse or warranty, an undivided interest and participation to the extent of such Lender's Commitment Percentage of such Swingline Loan, by directly purchasing a participation in such Swingline Loan in such amount (regardless of whether the conditions precedent thereto set forth in Section 5.2. are then satisfied, whether or not the Borrower has submitted a Notice of Borrowing and whether or not the Commitments are then in effect, any Event of Default exists or all the Loans have been accelerated) and paying the proceeds thereof to the Agent for the account of the Swingline Lender in Dollars and in immediately available funds. If such amount is not in fact made available to the Swingline Lender by any Lender, the Swingline Lender shall be entitled to recover such amount on demand from such Lender, together with accrued interest thereon for each day from the date of demand thereof, at the Federal Funds Rate. If such Lender does not pay such amount forthwith upon the Swingline Lender's demand therefor, and until such time as such Lender makes the required payment, the Swingline Lender shall be deemed to continue to have outstanding Swingline Loans in the amount of such unpaid participation obligation for all purposes of the Loan Documents (other than those provisions requiring the other Lenders to purchase a participation therein). Further, such Lender shall be deemed to have assigned any and all payments made of principal and interest on its Loans, and any other amounts due to it hereunder, to the Swingline Lender to fund Swingline Loans in the amount of the participation in Swingline Loans that such Lender failed to purchase pursuant to this Section until such amount has been purchased (as a result of such assignment or otherwise). A Lender's obligation to purchase such a participation in a Swingline Loan shall be absolute and unconditional and shall not be affected by any circumstance whatsoever, including without limitation, (i) any claim of setoff, counterclaim, recoupment, defense or other right which such Lender or any other Person may have or claim against the Agent, the Swingline Lender or any other Person whatsoever, (ii) the occurrence or continuation of a Default or Event of Default (including without limitation, any of the Defaults or Events of Default described in Sections 10.1.(f) or 10.1.(g)) or the termination of any Lender's Commitment, (iii) the existence (or alleged existence) of an event or condition which has had or could have a Material Adverse Effect, (iv) any breach of any Loan Document by the Agent, any Lender or the Borrower or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. Section 2.3. Letters of Credit. (a) Letters of Credit. Subject to the terms and conditions of this Agreement, the Agent, on behalf of the Lenders, agrees to issue for the account of the Borrower during the period from and including the Effective Date to, but excluding, the date 30 days prior to the Termination Date one or more letters of credit (each a "Letter of Credit") up to a maximum -28- aggregate Stated Amount at any one time outstanding not to exceed the L/C Commitment Amount. (b) Terms of Letters of Credit. At the time of issuance, the amount, form, terms and conditions of each Letter of Credit, and of any drafts or acceptances thereunder, shall be subject to approval by the Agent and the Borrower. Notwithstanding the foregoing, in no event may the expiration date of any Letter of Credit extend beyond the earlier of (i) the date one year from its date of issuance or (ii) the Termination Date. (c) Requests for Issuance of Letters of Credit. The Borrower shall give the Agent written notice (or telephonic notice promptly confirmed in writing) at least 5 Business Days prior to the requested date of issuance of a Letter of Credit, such notice to describe in reasonable detail the proposed terms of such Letter of Credit and the nature of the transactions or obligations proposed to be supported by such Letter of Credit, and in any event shall set forth with respect to such Letter of Credit (i) the proposed initial Stated Amount, (ii) the beneficiary or beneficiaries, and (iii) the proposed expiration date. The Borrower shall also execute and deliver such customary letter of credit application forms as requested from time to time by the Agent. Provided the Borrower has given the notice prescribed by the first sentence of this subsection and subject to Section 2.13. and the other terms and conditions of this Agreement, including, without limitation, the satisfaction of any applicable conditions precedent set forth in Article V., the Agent shall issue the requested Letter of Credit on the requested date of issuance for the benefit of the stipulated beneficiary and will notify each Lender of the issuance of such Letter of Credit within a reasonable time after the issuance thereof. Upon the written request of the Borrower, the Agent shall deliver to the Borrower a copy of each issued Letter of Credit within a reasonable time after the date of issuance thereof. To the extent any term of a Letter of Credit Document is inconsistent with a term of any Loan Document, the term of such Loan Document shall control. (d) Reimbursement Obligations. Upon receipt by the Agent from the beneficiary of a Letter of Credit of any demand for payment under such Letter of Credit, the Agent shall promptly notify the Borrower of the amount to be paid by the Agent as a result of such demand and the date on which payment is to be made by the Agent to such beneficiary in respect of such demand; provided, however, the Agent's failure to give, or delay in giving, such notice shall not discharge the Borrower in any respect from the applicable Reimbursement Obligation. The Borrower hereby unconditionally and irrevocably agrees to pay and reimburse the Agent for the amount of each demand for payment under such Letter of Credit on or prior to the date on which payment is to be made by the Agent to the beneficiary thereunder, without presentment, demand, protest or other formalities of any kind. Upon receipt by the Agent of any payment in respect of any Reimbursement Obligation, the Agent shall promptly pay to each Lender that has acquired a participation therein under the second sentence of Section 2.3.(i) such Lender's Commitment Percentage of such payment. (e) Manner of Reimbursement. Upon its receipt of a notice referred to in the immediately preceding subsection (d), the Borrower shall advise the Agent whether or not the Borrower intends to borrow hereunder to finance its obligation to reimburse the Agent for the amount of the related demand for payment. If the Borrower fails to so advise the Agent, or if the -29- Borrower fails to reimburse the Agent for a demand for payment under a Letter of Credit by the date of such payment, then (i) if the applicable conditions contained in Article V. would permit the making of Revolving Loans, the Borrower shall be deemed to have requested a borrowing of Revolving Loans (which shall be Base Rate Loans) in an amount equal to the unpaid Reimbursement Obligation and the Agent shall give each Lender prompt notice (which shall be no later than 12:00 p.m.) of the amount of the Revolving Loan to be made available to the Agent not later than 1:00 p.m. and (ii) if such conditions would not permit the making of Revolving Loans, the provisions of subsection (j) of this Section shall apply. The limitations of Section 3.5.(a) shall not apply to any borrowing of Base Rate Loans under this subsection. (f) Effect of Letters of Credit on Commitments. Upon the issuance by the Agent of any Letter of Credit and until such Letter of Credit shall have expired or been terminated, the Commitment of each Lender shall be deemed to be utilized for all purposes of this Agreement in an amount equal to the product of (i) such Lender's Commitment Percentage and (ii) the sum of (A) the Stated Amount of such Letter of Credit plus (B) any related Reimbursement Obligations then outstanding. (g) Agent's Duties Regarding Letters of Credit; Unconditional Nature of Reimbursement Obligation. In examining documents presented in connection with drawings under Letters of Credit and making payments under such Letters of Credit against such documents, the Agent shall only be required to use the same standard of care as it uses in connection with examining documents presented in connection with drawings under letters of credit in which it has not sold participations and making payments under such letters of credit. The Borrower assumes all risks of the acts and omissions of, or misuse of the Letters of Credit by, the respective beneficiaries of such Letters of Credit. In furtherance and not in limitation of the foregoing, neither the Agent nor any of the Lenders shall be responsible for (i) the form, validity, sufficiency, accuracy, genuineness or legal effects of any document submitted by any party in connection with the application for and issuance of or any drawing honored under any Letter of Credit even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; (ii) the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign any Letter of Credit, or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) failure of the beneficiary of any Letter of Credit to comply fully with conditions required in order to draw upon such Letter of Credit; (iv) errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telex, telecopy or otherwise, whether or not they be in cipher; (v) errors in interpretation of technical terms; (vi) any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit, or of the proceeds thereof; (vii) the misapplication by the beneficiary of any Letter of Credit, or the proceeds of any drawing under any Letter of Credit; or (viii) any consequences arising from causes beyond the control of the Agent or the Lenders. None of the above shall affect, impair or prevent the vesting of any of the Agent's or any Lender's rights or powers hereunder. Any action taken or omitted to be taken by the Agent under or in connection with any Letter of Credit, if taken or omitted in the absence of gross negligence or willful misconduct, shall not create against the Agent or any Lender any liability to the Borrower or any Lender. In this connection, the obligation of the Borrower to reimburse the Agent for any drawing made under any Letter of Credit shall be absolute, unconditional and -30- irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances whatsoever, including without limitation, the following circumstances: (A) any lack of validity or enforceability of any Letter of Credit Document or any term or provisions therein; (B) any amendment or waiver of or any consent to departure from all or any of the Letter of Credit Documents; (C) the existence of any claim, setoff, defense or other right which the Borrower may have at any time against the Agent, any Lender, any beneficiary of a Letter of Credit or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or in the Letter of Credit Documents or any unrelated transaction; (D) any breach of contract or dispute between the Borrower, the Agent, any Lender or any other Person; (E) any demand, statement or any other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein or made in connection therewith being untrue or inaccurate in any respect whatsoever; (F) any non-application or misapplication by the beneficiary of a Letter of Credit or any other Person of the proceeds of any drawing under such Letter of Credit; (G) payment by the Agent under any Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of such Letter of Credit; and (H) any other act, omission to act, delay or circumstance whatsoever that might, but for the provisions of this Section, constitute a legal or equitable defense to or discharge of the Borrower's Reimbursement Obligations. Notwithstanding anything to the contrary contained in this Section or Section 12.9., but not in limitation of the Borrower's unconditional obligation to reimburse the Agent for any drawing made under a Letter of Credit as provided in this Section, the Borrower shall have no obligation to indemnify the Agent or any Lender in respect of any liability incurred by the Agent arising solely out of the gross negligence or willful misconduct of the Agent in respect of a Letter of Credit as actually and finally determined by a court of competent jurisdiction. Except as otherwise provided in this Section, nothing in this Section shall affect any rights the Borrower may have with respect to the Agent's gross negligence or willful misconduct with respect to any Letter of Credit. (h) Amendments, Etc. The issuance by the Agent of any amendment, supplement or other modification to any Letter of Credit shall be subject to the same conditions applicable under this Agreement to the issuance of new Letters of Credit (including, without limitation, that the request therefor be made through the Agent), and no such amendment, supplement or other modification shall be issued unless either (i) the respective Letter of Credit affected thereby would have complied with such conditions had it originally been issued hereunder in such amended, supplemented or modified form or (ii) the Requisite Lenders shall have consented thereto. In connection with any such amendment, supplement or other modification, the Borrower shall pay the Fees, if any, payable under the last sentence of Section 3.6.(b). (i) Lenders' Participation in Letters of Credit. Immediately upon the issuance by the Agent of any Letter of Credit each Lender shall be deemed to have irrevocably and unconditionally purchased and received from the Agent, without recourse or warranty, an undivided interest and participation to the extent of such Lender's Commitment Percentage of the liability of the Agent with respect to such Letter of Credit and each Lender thereby shall absolutely, unconditionally and irrevocably assume, as primary obligor and not as surety, and shall be unconditionally obligated to the Agent to pay and discharge when due, such Lender's Commitment Percentage of the Agent's liability under such Letter of Credit. In addition, upon the making of each payment by a Lender to the Agent in respect of any Letter of Credit pursuant -31- to the immediately following subsection (j), such Lender shall, automatically and without any further action on the part of the Agent or such Lender, acquire (i) a participation in an amount equal to such payment in the Reimbursement Obligation owing to the Agent by the Borrower in respect of such Letter of Credit and (ii) a participation in a percentage equal to such Lender's Commitment Percentage in any interest or other amounts payable by the Borrower in respect of such Reimbursement Obligation (other than the Fees payable to the Agent pursuant to the second and last sentences of Section 3.6.(b)). (j) Payment Obligation of Lenders. Each Lender severally agrees to pay to the Agent on demand in immediately available funds in Dollars the amount of such Lender's Commitment Percentage of each drawing paid by the Agent under each Letter of Credit to the extent such amount is not reimbursed by the Borrower pursuant to Section 2.3.(d). Each such Lender's obligation to make such payments to the Agent under this subsection, and the Agent's right to receive the same, shall be absolute, irrevocable and unconditional and shall not be affected in any way by any circumstance whatsoever, including without limitation, (i) the failure of any other Lender to make its payment under this subsection, (ii) the financial condition of the Borrower or any other Loan Party, (iii) the existence of any Default or Event of Default, including any Event of Default described in Section 10.1.(f) or 10.1.(g) or (iv) the termination of the Commitments. Each such payment to the Agent shall be made without any offset, abatement, withholding or deduction whatsoever. (k) Information to Lenders. Upon the request of any Lender from time to time, the Agent shall deliver to such Lender information reasonably requested by such Lender with respect to each Letter of Credit then outstanding. Other than as set forth in this subsection, the Agent shall have no duty to notify the Lenders regarding the issuance or other matters regarding Letters of Credit issued hereunder. The failure of the Agent to perform its requirements under this subsection shall not relieve any Lender from its obligations under Section 2.3.(j). Section 2.4. Rates and Payment of Interest on Loans. (a) Rates. The Borrower promises to pay to the Agent for the account of each Lender interest on the unpaid principal amount of each Loan made by such Lender for the period from and including the date of the making of such Loan to but excluding the date such Loan shall be paid in full, at the following per annum rates: (i) during such periods as such Loan is a Base Rate Loan, at the Base Rate (as in effect from time to time) plus the Applicable Margin; and (ii) during such periods as such Loan is a LIBOR Loan, at the Adjusted Eurodollar Rate for such Loan for the Interest Period therefor plus the Applicable Margin. Notwithstanding the foregoing, during the continuance of an Event of Default, the Borrower shall pay to the Agent for the account of each Lender interest at the Post-Default Rate on the outstanding principal amount of any Loan made by such Lender, on all Reimbursement Obligations and on any other amount payable by the Borrower hereunder or under the Notes held -32- by such Lender to or for the account of such Lender (including without limitation, accrued but unpaid interest to the extent permitted under Applicable Law). (b) Payment of Interest. Accrued interest on each Loan shall be payable (i) in the case of a Base Rate Loan, monthly in arrears on the first day of each calendar month, (ii) in the case of a LIBOR Loan, on the last day of each Interest Period therefor, and (iii) in the case of any Loan, upon the payment, prepayment or Continuation thereof or the Conversion of such Loan to a Loan of another Type (but only on the principal amount so paid, prepaid, Continued or Converted). Interest payable at the Post-Default Rate shall be payable from time to time on demand. Promptly after the determination of any interest rate provided for herein or any change therein, the Agent shall give notice thereof to the Lenders to which such interest is payable and to the Borrower. All determinations by the Agent of an interest rate hereunder shall be conclusive and binding on the Lenders and the Borrower for all purposes, absent manifest error. (c) Ratings Change. If the Applicable Margin shall change as a result of a change in the Borrower's Credit Rating and then within a 90-day period change back to the Applicable Margin in effect at the beginning of such period as a result of another change in such Credit Rating, and (i) if the initial change in the Applicable Margin were an increase, then the Borrower will receive as a credit against its Obligations any incremental interest expense with respect to the Loans and the Facility Fee for the period during which the increase existed and (ii) if the initial change in the Applicable Margin were a decrease, then the Borrower shall promptly pay to the Agent for the benefit of the Lenders additional interest with respect to the Loans and additional Facility Fees for the period during which the decrease existed determined as if such decrease had not occurred. Section 2.5. Number of Interest Periods. There may be no more than 6 different Interest Periods for LIBOR Loans outstanding at the same time. Section 2.6. Repayment of Loans. The Borrower shall repay the entire outstanding principal amount of, and all accrued but unpaid interest on, the Loans, together with all other amounts then outstanding under this Agreement, on the Termination Date. Section 2.7. Prepayments. (a) Optional. Subject to Section 4.4., the Borrower may prepay any Loan at any time without premium or penalty. The Borrower shall give the Agent at least one Business Day's prior written notice of the prepayment of any Revolving Loan. (b) Mandatory. If at any time the aggregate principal amount of all outstanding Revolving Loans, together with the aggregate amount of all Letter of Credit Liabilities and the aggregate principal amount of all outstanding Swingline Loans, exceeds the aggregate amount of the Commitments in effect at such time, the Borrower shall immediately pay to the Agent for the accounts of the Lenders the amount of such excess. Such payment shall be applied to pay all -33- amounts of principal outstanding on the Loans and any Reimbursement Obligations pro rata in accordance with Section 3.2. and if any Letters of Credit are outstanding at such time the remainder, if any, shall be deposited into the Collateral Account for application to any Reimbursement Obligations. If the Borrower is required to pay any outstanding LIBOR Loans by reason of this Section prior to the end of the applicable Interest Period therefor, the Borrower shall pay all amounts due under Section 4.4. Section 2.8. Continuation. So long as no Default or Event of Default shall have occurred and be continuing, the Borrower may on any Business Day, with respect to any LIBOR Loan, elect to maintain such LIBOR Loan or any portion thereof as a LIBOR Loan by selecting a new Interest Period for such LIBOR Loan. Each new Interest Period selected under this Section shall commence on the last day of the immediately preceding Interest Period. Each selection of a new Interest Period shall be made by the Borrower giving to the Agent a Notice of Continuation not later than 11:00 a.m. on the third Business Day prior to the date of any such Continuation. Such notice by the Borrower of a Continuation shall be by telephone or telecopy, confirmed immediately in writing if by telephone, in the form of a Notice of Continuation, specifying (a) the proposed date of such Continuation, (b) the LIBOR Loans and portions thereof subject to such Continuation and (c) the duration of the selected Interest Period, all of which shall be specified in such manner as is necessary to comply with all limitations on Loans outstanding hereunder. Each Notice of Continuation shall be irrevocable by and binding on the Borrower once given. Promptly after receipt of a Notice of Continuation, the Agent shall notify each Lender by telecopy, or other similar form of transmission, of the proposed Continuation. If the Borrower shall fail to select in a timely manner a new Interest Period for any LIBOR Loan in accordance with this Section, or if a Default or Event of Default shall have occurred and be continuing, such Loan will automatically, on the last day of the current Interest Period therefor, Convert into a Base Rate Loan notwithstanding the first sentence of Section 2.9. or the Borrower's failure to comply with any of the terms of such Section. Section 2.9. Conversion. So long as no Default or Event of Default shall have occurred and be continuing, the Borrower may on any Business Day, upon the Borrower's giving of a Notice of Conversion to the Agent, Convert all or a portion of a Loan of one Type into a Loan of another Type. Any Conversion of a LIBOR Loan into a Base Rate Loan shall be made on, and only on, the last day of an Interest Period for such LIBOR Loan and, upon Conversion of a Base Rate Loan into a LIBOR Loan, the Borrower shall pay accrued interest to the date of Conversion on the principal amount so Converted. Each such Notice of Conversion shall be given not later than 11:00 a.m. on the Business Day prior to the date of any proposed Conversion into Base Rate Loans and on the third Business Day prior to the date of any proposed Conversion into LIBOR Loans. Promptly after receipt of a Notice of Conversion, the Agent shall notify each Lender by telecopy, or other similar form of transmission, of the proposed Conversion. Subject to the restrictions specified above, each Notice of Conversion shall be by telephone (confirmed immediately in writing) or telecopy in the form of a Notice of Conversion specifying (a) the requested date of such Conversion, (b) the Type of Loan to be Converted, (c) the portion of such Type of Loan to be Converted, (d) the Type of Loan such Loan is to be Converted into and (e) if such Conversion -34- is into a LIBOR Loan, the requested duration of the Interest Period of such Loan. Each Notice of Conversion shall be irrevocable by and binding on the Borrower once given. Section 2.10. Notes. (a) Revolving Note. The Revolving Loans made by each Lender shall, in addition to this Agreement, also be evidenced by a promissory note of the Borrower substantially in the form of Exhibit H (each a "Revolving Note"), payable to the order of such Lender in a principal amount equal to the amount of its Commitment as originally in effect and otherwise duly completed. (b) Records. The date, amount, interest rate, Type and duration of Interest Periods (if applicable) of each Loan made by each Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by such Lender on its books and such entries shall be binding on the Borrower absent manifest error. (c) Lost, Stolen, Destroyed or Mutilated Notes. Upon receipt by the Borrower of (i) written notice from a Lender that a Note of such Lender has been lost, stolen, destroyed or mutilated, and (ii) (A) in the case of loss, theft or destruction, an unsecured agreement of indemnity from such Lender in form reasonably satisfactory to the Borrower, or (B) in the case of mutilation, upon surrender and cancellation of such Note, the Borrower shall at its own expense execute and deliver to such Lender a new Note dated the date of such lost, stolen, destroyed or mutilated Note. Section 2.11. Voluntary Reductions of the Commitment. The Borrower shall have the right to terminate or reduce the aggregate unused amount of the Commitments (for which purpose use of the Commitments shall be deemed to include the aggregate amount of Letter of Credit Liabilities and the aggregate principal amount of all outstanding Swingline Loans) at any time and from time to time without penalty or premium upon not less than 15 Business Days prior written notice to the Agent of each such termination or reduction, which notice shall specify the effective date thereof and the amount of any such reduction and shall be irrevocable once given and effective only upon receipt by the Agent. The Agent will promptly transmit such notice to each Lender. The Commitments may not be reduced below $200,000,000 in the aggregate unless the Borrower terminates the Commitments in their entirety, and, once terminated or reduced, the Commitments may not be increased or reinstated. Any reduction in the aggregate amount of the Commitments shall result in a proportionate reduction (rounded to the next lowest integral multiple of multiple of $100,000) in the Swingline Commitment and the L/C Commitment Amount. Section 2.12. Expiration or Maturity Date of Letters of Credit Past Termination Date. If on the date (the "Facility Termination Date") the Commitments are terminated (whether voluntarily, by reason of the occurrence of an Event of Default or otherwise), there are any Letters of Credit outstanding hereunder, the Borrower shall, on the Facility Termination Date, pay to the Agent an amount of money equal to the Stated Amount of such Letter(s) of Credit for deposit into the Collateral Account. If a drawing pursuant to any such Letter of Credit -35- occurs on or prior to the expiration date of such Letter of Credit, the Borrower authorizes the Agent to use the monies deposited in the Collateral Account to make payment to the beneficiary with respect to such drawing or the payee with respect to such presentment. If no drawing occurs on or prior to the expiration date of such Letter of Credit, the Agent shall withdraw the monies deposited in the Collateral Account with respect to such outstanding Letter of Credit on or before the date 15 Business Days after the expiration date of such Letter of Credit and apply such funds to the Obligations, if any, then due and payable in the order prescribed by Section 10.4. Section 2.13. Amount Limitations. Notwithstanding any other term of this Agreement or any other Loan Document, at no time may the aggregate principal amount of all outstanding Revolving Loans, together with the aggregate principal amount of all outstanding Swingline Loans and the aggregate amount of all Letter of Credit Liabilities, exceed the aggregate amount of the Commitments at such time. Section 2.14. Increase of Commitments. Subject to the approval of the Agent (which shall not be unreasonably withheld or delayed), the Borrower shall have the right to request increases in the aggregate amount of the Commitments (provided that there shall be no more than three such increases in the Commitments and the aggregate amount of increases in the Commitments pursuant to this Section shall not exceed $350,000,000) by providing written notice to the Agent, which notice shall be irrevocable once given. Each such increase in the Commitments must be an aggregate minimum amount of $35,000,000 and integral multiples of $10,000,000 in excess thereof. The Agent shall promptly notify each Lender of any such request. Each existing Lender shall have the right to increase its Commitment by an amount so that such Lender's Commitment Percentage shall not be decreased as a result of such requested increase in the Commitments. Each Lender shall notify the Agent within 10 Business Days after receipt of the Agent's notice whether such Lender wishes to increase the amount of its Commitment. If a Lender fails to deliver any such notice to the Agent within such time period, then such Lender shall be deemed to have declined to increase its Commitment. No Lender shall be required to increase its Commitment and any new Lender(s) becoming a party to this Agreement in connection with any such requested increase must be an Eligible Assignee. In the event a new Lender or Lenders become a party to this Agreement, or if any existing Lender agrees to increase its Commitment, such Lender shall on the date it becomes a Lender hereunder (or increases its Commitment, in the case of an existing Lender) (and as a condition thereto) purchase from the other Lenders its Commitment Percentage (as determined after giving effect to the increase of Commitments) of any outstanding Revolving Loans, by making available to the Agent for the account of such other Lenders at the Principal Office, in same day funds, an amount equal to the sum of (A) the portion of the outstanding principal amount of such Revolving Loans to be purchased by such Lender plus (B) the aggregate amount of payments previously made by the other Lenders under Sections 2.2.(e) or 2.3.(j) which have not been repaid plus (C) interest accrued and unpaid to and as of such date on such portion of the outstanding principal amount of such Revolving Loans. The Borrower shall pay to the Lenders amounts payable, if any, to such Lenders under Section 4.4. as a result of the prepayment of any such Revolving Loans. No increase of the Commitments may be effected under this Section if either (x) a Default or Event of Default shall be in existence on -36- the effective date of such increase or (y) any representation or warranty made or deemed made by the Borrower or any other Loan Party in any Loan Document to which any such Loan Party is a party is not (or would not be) true or correct on the effective date of such increase (except for representations or warranties which expressly relate solely to an earlier date). In connection with any increase in the aggregate amount of the Commitments pursuant to this subsection, (a) any Lender becoming a party hereto shall execute such documents and agreements as the Agent may reasonably request and (b) the Borrower shall make appropriate arrangements so that each new Lender, and any existing Lender increasing its Commitment, receives a new or replacement Note, as appropriate, in the amount of such Lender's Commitment within 2 Business Days of the effectiveness of the applicable increase in the aggregate amount of Commitments. Section 2.15. Extension of Termination Date. The Borrower may request that the Agent and the Lenders extend the current Termination Date by one year by executing and delivering to the Agent at least 30 days but not more than 90 days prior to the current Termination Date, a written request for such extension. The Agent shall forward to each Lender a copy of any such request delivered to the Agent promptly upon receipt thereof. Subject to satisfaction of the following conditions, the Termination Date shall be extended for one year: (a) no Default or Event of Default shall exist as of the date of the current Termination Date or would exist immediately after giving effect to the requested extension; (b) the representations and warranties made or deemed made by the Borrower and each other Loan Party in the Loan Documents to which any of them is a party would be true and correct immediately after giving effect to the requested extension of the Termination Date, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate on and as of such earlier date) and except for changes in factual circumstances specifically and expressly permitted hereunder and (c) the Borrower shall have paid the Fees payable under Section 3.6.(d). The Termination Date may only be extended one time pursuant to this Section. ARTICLE III. PAYMENTS, FEES AND OTHER GENERAL PROVISIONS Section 3.1. Payments. Except to the extent otherwise provided herein, all payments of principal, interest and other amounts to be made by the Borrower under this Agreement or any other Loan Document shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Agent at its Principal Office, not later than 2:00 p.m. on the date on which such payment shall become due (each such payment made after such time on such due date to be deemed to have been made on the next succeeding Business Day). Subject to Sections 3.2. and 3.3., the Agent may (but shall not be obligated to) debit the amount of any such payment which is not made by such time from any special or general deposit account of the Borrower with the Agent (with notice to the Borrower). The Borrower shall, at the time of making each payment under this Agreement or any Note, specify to the Agent the amounts payable by the Borrower hereunder to which such payment is to be applied. Each payment received by the Agent for the account of a Lender under this Agreement or any Note shall be paid to such Lender at the applicable Lending Office of such Lender no later than 5:00 p.m. on the date of receipt. If the Agent fails to pay such amount to a Lender as provided in the previous sentence, the Agent shall -37- pay interest on such amount until paid at a rate per annum equal to the Federal Funds Rate from time to time in effect. If the due date of any payment under this Agreement or any other Loan Document would otherwise fall on a day which is not a Business Day such date shall be extended to the next succeeding Business Day and interest shall be payable for the period of such extension. Section 3.2. Pro Rata Treatment. Except to the extent otherwise provided herein: (a) each borrowing from the Lenders under Section 2.1.(a) shall be made from the Lenders, each payment of the Fees under Section 3.6.(a), the first sentence of Section 3.6.(b) and Sections 3.6.(c) and (d) shall be made for the account of the Lenders, and each termination or reduction of the amount of the Commitments under Section 2.11. shall be applied to the respective Commitments of the Lenders, pro rata according to the amounts of their respective Commitments; (b) each payment or prepayment of principal of Revolving Loans by the Borrower shall be made for the account of the Lenders pro rata in accordance with the respective unpaid principal amounts of the Revolving Loans held by them, provided that if immediately prior to giving effect to any such payment in respect of any Revolving Loans the outstanding principal amount of the Revolving Loans shall not be held by the Lenders pro rata in accordance with their respective Commitments in effect at the time such Loans were made, then such payment shall be applied to the Revolving Loans in such manner as shall result, as nearly as is practicable, in the outstanding principal amount of the Revolving Loans being held by the Lenders pro rata in accordance with their respective Commitments; (c) each payment of interest on Revolving Loans by the Borrower shall be made for the account of the Lenders pro rata in accordance with the amounts of interest on such Loans then due and payable to the respective Lenders; (d) the making, Conversion and Continuation of Revolving Loans of a particular Type (other than Conversions provided for by Section 4.6.) shall be made pro rata among the Lenders according to the amounts of their respective Commitments (in the case of making of Loans) or their respective Loans (in the case of Conversions and Continuations of Loans) and the then current Interest Period for each Lender's portion of each Loan of such Type shall be coterminous; (e) the Lenders' participation in, and payment obligations in respect of, Letters of Credit under Section 2.3., shall be pro rata in accordance with their respective Commitments; and (f) the Lenders' participation in, and payment obligations in respect of, Swingline Loans under Section 2.2., shall be in accordance with their respective Commitments. All payments of principal, interest, fees and other amounts in respect of the Swingline Loans shall be for the account of the Swingline Lender only (except to the extent any Lender shall have acquired a participating interest in any such Swingline Loan pursuant to Section 2.2.(e)). Section 3.3. Sharing of Payments, Etc. If a Lender shall obtain payment of any principal of, or interest on, any Loan made by it to the Borrower under this Agreement, or shall obtain payment on any other Obligation owing by the Borrower or a Loan Party through the exercise of any right of set-off, banker's lien or counterclaim or similar right or otherwise or through voluntary prepayments directly to a Lender or other payments made by the Borrower to a Lender not in accordance with the terms of this Agreement and such payment should be distributed to the Lenders pro rata in accordance with Section 3.2. or Section 10.4., as applicable, such Lender shall promptly purchase from the other -38- Lenders participations in (or, if and to the extent specified by such Lender, direct interests in) the Loans made by the other Lenders or other Obligations owed to such other Lenders in such amounts, and make such other adjustments from time to time as shall be equitable, to the end that all the Lenders shall share the benefit of such payment (net of any reasonable expenses which may be incurred by such Lender in obtaining or preserving such benefit) pro rata in accordance with Section 3.2. or Section 10.4. To such end, all the Lenders shall make appropriate adjustments among themselves (by the resale of participations sold or otherwise) if such payment is rescinded or must otherwise be restored. The Borrower agrees that any Lender so purchasing a participation (or direct interest) in the Loans or other Obligations owed to such other Lenders may exercise all rights of set-off, banker's lien, counterclaim or similar rights with respect to such participation as fully as if such Lender were a direct holder of Loans in the amount of such participation. Nothing contained herein shall require any Lender to exercise any such right or shall affect the right of any Lender to exercise, and retain the benefits of exercising, any such right with respect to any other indebtedness or obligation of the Borrower. Section 3.4. Several Obligations. No Lender shall be responsible for the failure of any other Lender to make a Loan or to perform any other obligation to be made or performed by such other Lender hereunder, and the failure of any Lender to make a Loan or to perform any other obligation to be made or performed by it hereunder shall not relieve the obligation of any other Lender to make any Loan or to perform any other obligation to be made or performed by such other Lender. Section 3.5. Minimum Amounts. (a) Borrowings and Conversions. Each borrowing of Base Rate Loans shall be in an aggregate minimum amount of $1,000,000 and integral multiples of $500,000 in excess thereof. Each borrowing and each Conversion of LIBOR Loans shall be in an aggregate minimum amount of $1,000,000 and integral multiples of $1,000,000 in excess of that amount. (b) Prepayments. Each voluntary prepayment of Revolving Loans shall be in an aggregate minimum amount of $1,000,000 and integral multiples of $500,000 in excess thereof (or, if less, the aggregate principal amount of Revolving Loans then outstanding). (c) Reductions of Commitments. Each reduction of the Commitments under Section 2.11. shall be in an aggregate minimum amount of $10,000,000 and integral multiples of $5,000,000 in excess thereof. (d) Letters of Credit. The initial Stated Amount of each Letter of Credit shall be at least $500,000. Section 3.6. Fees. (a) Facility Fees. The Borrower agrees to pay to the Agent for the account of each Lender a facility fee equal to the average daily amount of the Commitment of such Lender (whether or not utilized) times the Facility Fee for the period from and including the Agreement Date to but excluding the date such Commitment is terminated or reduced to zero or the -39- Termination Date, such fee to be paid in arrears on (i) the last Business Day of March, June, September and December in each year, (ii) the date of each reduction in the Commitments (but only on the amount of the reduction) and (iii) on the Termination Date. (b) Letter of Credit Fees. The Borrower agrees to pay to the Agent for the account of each Lender a letter of credit fee at a rate per annum equal to the Applicable Margin for LIBOR Loans times the daily average Stated Amount of each Letter of Credit for the period from and including the date of issuance of such Letter of Credit (x) to and including the date such Letter of Credit expires or is terminated or (y) to but excluding the date such Letter of Credit is drawn in full. In addition, the Borrower shall pay to the Agent for its own account and not the account of any Lender, a fronting fee in respect of each Letter of Credit at the rate equal to one-eighth of one percent (0.125%) per annum on the daily average Stated Amount of such Letter of Credit for the period from and including the date of issuance of such Letter of Credit (A) to and including the date such Letter of Credit expires or is terminated or (B) to but excluding the date such Letter of Credit is drawn in full. The fees provided for in the immediately preceding two sentences shall be nonrefundable and payable in arrears (i) on the last Business Day of March, June, September and December in each year, (ii) on the Termination Date, (iii) on the date the Commitments are terminated or reduced to zero and (iv) thereafter from time to time on demand of the Agent. The Borrower shall pay directly to the Agent from time to time on demand all commissions, charges, costs and expenses in the amounts customarily charged by the Agent from time to time in like circumstances with respect to the issuance of each Letter of Credit, drawings, amendments and other transactions relating thereto. (c) Administrative and Other Fees. The Borrower agrees to pay the administrative and other fees of the Agent as may be agreed to in writing from time to time. (d) Extension Fees. If, pursuant to Section 2.15., the Termination Date is extended, the Borrower agrees to pay to the Agent for the account of each Lender an extension fee equal to 0.35% of each such Lender's Commitment at the time of such extension. Payment of such fees shall be a condition precedent to the effectiveness of any such extension. Section 3.7. Computations. Unless otherwise expressly set forth herein, any accrued interest on any Loan, any Fees or any other Obligations due hereunder shall be computed on the basis of a year of 360 days and the actual number of days elapsed. Section 3.8. Usury. In no event shall the amount of interest due or payable on the Loans or other Obligations exceed the maximum rate of interest allowed by Applicable Law and, if any such payment is paid by the Borrower or received by any Lender, then such excess sum shall be credited as a payment of principal, unless the Borrower shall notify the respective Lender in writing that the Borrower elects to have such excess sum returned to it forthwith. It is the express intent of the parties hereto that the Borrower not pay and the Lenders not receive, directly or indirectly, in any manner whatsoever, interest in excess of that which may be lawfully paid by the Borrower under Applicable Law. -40- Section 3.9. Agreement Regarding Interest and Charges. The parties hereto hereby agree and stipulate that the only charge imposed upon the Borrower for the use of money in connection with this Agreement is and shall be the interest specifically described in Section 2.4.(a)(i) and (ii) and in Section 2.2.(c). Notwithstanding the foregoing, the parties hereto further agree and stipulate that all agency fees, syndication fees, facility fees, closing fees, letter of credit fees, underwriting fees, default charges, late charges, funding or "breakage" charges, increased cost charges, attorneys' fees and reimbursement for costs and expenses paid by the Agent or any Lender to third parties or for damages incurred by the Agent or any Lender, or any other similar amounts are charges made to compensate the Agent or any such Lender for underwriting or administrative services and costs or losses performed or incurred, and to be performed or incurred, by the Agent and the Lenders in connection with this Agreement and shall under no circumstances be deemed to be charges for the use of money. All charges other than charges for the use of money shall be fully earned and nonrefundable when due. Section 3.10. Statements of Account. The Agent will account to the Borrower monthly with a statement of Loans, Letters of Credit, accrued interest and Fees, charges and payments made pursuant to this Agreement and the other Loan Documents, and such account rendered by the Agent shall be deemed conclusive upon Borrower absent manifest error. The failure of the Agent to deliver such a statement of accounts shall not relieve or discharge the Borrower from any of its obligations hereunder. Section 3.11. Defaulting Lenders. (a) Generally. If for any reason any Lender (a "Defaulting Lender") shall fail or refuse to perform any of its obligations under this Agreement or any other Loan Document to which it is a party within the time period specified for performance of such obligation or, if no time period is specified, if such failure or refusal continues for a period of two Business Days after notice from the Agent, then, in addition to the rights and remedies that may be available to the Agent or the Borrower under this Agreement or Applicable Law, such Defaulting Lender's right to participate in the administration of the Loans, this Agreement and the other Loan Documents, including without limitation, any right to vote in respect of, to consent to or to direct any action or inaction of the Agent or to be taken into account in the calculation of the Requisite Lenders, shall be suspended during the pendency of such failure or refusal. If a Lender is a Defaulting Lender because it has failed to make timely payment to the Agent of any amount required to be paid to the Agent hereunder (without giving effect to any notice or cure periods), in addition to other rights and remedies which the Agent or the Borrower may have under the immediately preceding provisions or otherwise, the Agent shall be entitled (i) to collect interest from such Defaulting Lender on such delinquent payment for the period from the date on which the payment was due until the date on which the payment is made at the Federal Funds Rate, (ii) to withhold or setoff and to apply in satisfaction of the defaulted payment and any related interest, any amounts otherwise payable to such Defaulting Lender under this Agreement or any other Loan Document and (iii) to bring an action or suit against such Defaulting Lender in a court of competent jurisdiction to recover the defaulted amount and any related interest. Any -41- amounts received by the Agent in respect of a Defaulting Lender's Loans shall not be paid to such Defaulting Lender and shall be held uninvested by the Agent and either applied against the purchase price of such Loans under the following subsection (b) or paid to such Defaulting Lender upon the Defaulting Lender's curing of its default. (b) Purchase or Cancellation of Defaulting Lender's Commitment. Any Lender who is not a Defaulting Lender shall have the right, but not the obligation, in its sole discretion, to acquire all of a Defaulting Lender's Commitment. Any Lender desiring to exercise such right shall give written notice thereof to the Agent and the Borrower no sooner than 2 Business Days and not later than 5 Business Days after such Defaulting Lender became a Defaulting Lender. If more than one Lender exercises such right, each such Lender shall have the right to acquire an amount of such Defaulting Lender's Commitment in proportion to the Commitments of the other Lenders exercising such right. If after such 5th Business Day, the Lenders have not elected to purchase all of the Commitment of such Defaulting Lender, then the Borrower may, by giving written notice thereof to the Agent, such Defaulting Lender and the other Lenders, either (i) demand that such Defaulting Lender assign its Commitment to an Eligible Assignee subject to and in accordance with the provisions of Section 12.5.(d) for the purchase price provided for below or (ii) terminate the Commitment of such Defaulting Lender, whereupon such Defaulting Lender shall no longer be a party hereto or have any rights or obligations hereunder or under any of the other Loan Documents (except as expressly provided in this subsection (b)). No party hereto shall have any obligation whatsoever to initiate any such replacement or to assist in finding an Eligible Assignee. Upon any such purchase or assignment, the Defaulting Lender's interest in the Loans and its rights hereunder (but not its liability in respect thereof or under the Loan Documents or this Agreement to the extent the same relate to the period prior to the effective date of the purchase) shall terminate on the date of purchase, and the Defaulting Lender shall promptly execute all documents reasonably requested to surrender and transfer such interest to the purchaser or assignee thereof, including an appropriate Assignment and Acceptance Agreement and, notwithstanding Section 12.5.(d), shall pay to the Agent an assignment fee in the amount of $7,000. The purchase price for the Commitment of a Defaulting Lender shall be equal to the amount of the principal balance of the Loans outstanding and owed by the Borrower to the Defaulting Lender. Prior to payment of such purchase price to a Defaulting Lender, the Agent shall apply against such purchase price any amounts retained by the Agent pursuant to the last sentence of the immediately preceding subsection (a). The Defaulting Lender shall be entitled to receive amounts owed to it by the Borrower under the Loan Documents which accrued prior to the date of the default by the Defaulting Lender, to the extent the same are received by the Agent from or on behalf of the Borrower. There shall be no recourse against any Lender or the Agent for the payment of such sums except to the extent of the receipt of payments from any other party or in respect of the Loans. Section 3.12. Taxes. (a) Taxes Generally. All payments by the Borrower of principal of, and interest on, the Loans and all other Obligations shall be made free and clear of and without deduction for any present or future excise, stamp or other taxes, fees, duties, levies, imposts, charges, deductions, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding (i) franchise taxes, (ii) any taxes (other than withholding taxes) that would not be imposed but for a connection between the Agent or a Lender and the jurisdiction imposing such -42- taxes (other than a connection arising solely by virtue of the activities of the Agent or such Lender pursuant to or in respect of this Agreement or any other Loan Document), (iii) any taxes imposed on or measured by any Lender's assets, net income, receipts or branch profits, (iv) any taxes arising after the Agreement Date solely as a result of or attributable to a Lender changing its designated Lending Office after the date such Lender becomes a party hereto, and (v) any taxes, fees, duties, levies, imposts, charges, deductions, withholdings or other charges to the extent imposed as a result of the failure of the Agent or a Lender, as applicable, to provide and keep current (to the extent legally able) any certificates, documents or other evidence required to qualify for an exemption from, or reduced rate of, any such taxes fees, duties, levies, imposts, charges, deductions, withholdings or other charges or required by the immediately following subsection (c) to be furnished by the Agent or such Lender, as applicable (such non-excluded items being collectively called "Taxes"). If any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Taxes pursuant to any Applicable Law, then the Borrower will: (i) pay directly to the relevant Governmental Authority the full amount required to be so withheld or deducted; (ii) promptly forward to the Agent an official receipt or other documentation satisfactory to the Agent evidencing such payment to such Governmental Authority; and (iii) pay to the Agent for its account or the account of the applicable Lender, as the case may be, such additional amount or amounts as is necessary to ensure that the net amount actually received by the Agent or such Lender will equal the full amount that the Agent or such Lender would have received had no such withholding or deduction been required. (b) Tax Indemnification. If the Borrower fails to pay any Taxes when due to the appropriate Governmental Authority or fails to remit to the Agent, for its account or the account of the respective Lender, as the case may be, the required receipts or other required documentary evidence, the Borrower shall indemnify the Agent and the Lenders for any incremental Taxes, interest or penalties that may become payable by the Agent or any Lender as a result of any such failure. For purposes of this Section, a distribution hereunder by the Agent or any Lender to or for the account of any Lender shall be deemed a payment by the Borrower. (c) Tax Forms. Prior to the date that any Lender or participant organized under the laws of a jurisdiction outside the United States of America becomes a party hereto, such Person shall deliver to the Borrower and the Agent such certificates, documents or other evidence, as required by the Internal Revenue Code or Treasury Regulations issued pursuant thereto (including Internal Revenue Service Forms W-8ECI and W-8BEN, as applicable, or appropriate successor forms), properly completed, currently effective and duly executed by such Lender or participant establishing that payments to it hereunder and under the Notes are (i) not subject to United States Federal backup withholding tax or (ii) not subject to United States Federal withholding tax under the Internal Revenue Code because such payment is either effectively connected with the conduct by such Lender or participant of a trade or business in the United States or totally exempt from United States Federal withholding tax by reason of the application -43- of the provisions of a treaty to which the United States is a party or such Lender is otherwise wholly exempt. In addition, any such Lender or participant shall deliver to the Borrower and the Agent further copies of any such certificate, document or other evidence on or before the date that any such certificate, document or other evidence expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it, in each case establishing that payments to it hereunder and under the Notes are (i) not subject to United States Federal backup withholding tax or (ii) not subject to United States Federal withholding tax under the Internal Revenue Code because such payment is either effectively connected with the conduct by such Lender or participant of a trade or business in the United States or totally exempt from United States Federal withholding tax by reason of the application of the provisions of a treaty to which the United States is a party or such Lender or participant, as applicable, is otherwise wholly exempt, unless an event (including, without limitation, any change in Applicable Law) has occurred prior to the date on which any such delivery would otherwise be required which renders all such certificates, documents and other evidence wholly inapplicable or which would prevent such Lender or participant, as applicable, from duly completing and delivering any such certificates, documents or other evidence form with respect to it, and such Lender or participant, as applicable, so advises the Borrower and the Agent in writing. ARTICLE IV. YIELD PROTECTION, ETC. Section 4.1. Additional Costs; Capital Adequacy. (a) Additional Costs. The Borrower shall promptly pay to the Agent for the account of a Lender from time to time such amounts as such Lender may determine to be necessary to compensate such Lender for any costs incurred by such Lender that it determines are attributable to its making or maintaining of any LIBOR Loans or its obligation to make any LIBOR Loans hereunder, any reduction in any amount receivable by such Lender under this Agreement or any of the other Loan Documents in respect of any of such Loans or such obligation or the maintenance by such Lender of capital in respect of its Loans or its Commitment (such increases in costs and reductions in amounts receivable being herein called "Additional Costs"), resulting from any Regulatory Change that: (i) changes the basis of taxation of any amounts payable to such Lender under this Agreement or any of the other Loan Documents in respect of any of such Loans or its Commitment (other than taxes, fees, duties, levies, imposts, charges, deductions, withholdings or other charges which are excluded from the definition of Taxes pursuant to the first sentence of Section 3.12.(a)); or (ii) imposes or modifies any reserve, special deposit or similar requirements (other than Regulation D of the Board of Governors of the Federal Reserve System or other reserve requirement to the extent utilized in the determination of the Adjusted Eurodollar Rate for such Loan) relating to any extensions of credit or other assets of, or any deposits with or other liabilities of, such Lender, or any commitment of such Lender (including, without limitation, the Commitments of such Lender hereunder); or (iii) has or would have the effect of reducing the rate of return on capital of such Lender to a level below that which such Lender could have achieved but for such Regulatory Change (taking into consideration such Lender's policies with respect to capital adequacy). (b) Lender's Suspension of LIBOR Loans. Without limiting the effect of the provisions of the immediately preceding subsection (a), if, by reason of any Regulatory Change, -44- any Lender either (i) incurs Additional Costs based on or measured by the excess above a specified level of the amount of a category of deposits or other liabilities of such Lender that includes deposits by reference to which the interest rate on LIBOR Loans is determined as provided in this Agreement or a category of extensions of credit or other assets of such Lender that includes LIBOR Loans or (ii) becomes subject to restrictions on the amount of such a category of liabilities or assets that it may hold, then, if such Lender so elects by notice to the Borrower (with a copy to the Agent), the obligation of such Lender to make or Continue, or to Convert any other Type of Loans into, LIBOR Loans hereunder shall be suspended until such Regulatory Change ceases to be in effect (in which case the provisions of Section 4.6. shall apply). (c) Additional Costs in Respect of Letters of Credit. Without limiting the obligations of the Borrower under the preceding subsections of this Section (but without duplication), if as a result of any Regulatory Change or any risk-based capital guideline or other requirement heretofore or hereafter issued by any Governmental Authority there shall be imposed, modified or deemed applicable any tax, reserve, special deposit, capital adequacy or similar requirement against or with respect to or measured by reference to Letters of Credit and the result shall be to increase the cost to the Agent of issuing (or any Lender of purchasing participations in) or maintaining its obligation hereunder to issue (or purchase participations in) any Letter of Credit or reduce any amount receivable by the Agent or any Lender hereunder in respect of any Letter of Credit, then, upon demand by the Agent or such Lender, the Borrower shall pay promptly, and in any event within 3 Business Days of demand, to the Agent for its account or the account of such Lender, as applicable, from time to time as specified by the Agent or a Lender, such additional amounts as shall be sufficient to compensate the Agent or such Lender for such increased costs or reductions in amount. (d) Notification and Determination of Additional Costs. Each of the Agent and each Lender agrees to notify the Borrower of any event occurring after the Agreement Date entitling the Agent or such Lender to compensation under any of the preceding subsections of this Section as promptly as practicable; provided, however, the failure of the Agent or any Lender to give such notice shall not release the Borrower from any of its obligations hereunder; provided, however, that notwithstanding the foregoing provisions of this Section, the Agent or a Lender, as the case may be, shall not be entitled to compensation for any such amount relating to any period ending more than six months prior to the date that the Agent or such Lender, as applicable, first notifies the Borrower in writing thereof or for any amounts resulting from a change by any Lender of its Lending Office (other than changes required by Applicable Law). The Agent and or such Lender agrees to furnish to the Borrower a certificate setting forth the basis and amount of each request by the Agent or such Lender for compensation under this Section. Absent manifest error, determinations by the Agent or any Lender of the effect of any Regulatory Change shall be conclusive, provided that such determinations are made on a reasonable basis and in good faith. Section 4.2. Suspension of LIBOR Loans. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Adjusted Eurodollar Rate for any Interest Period: -45- (a) the Agent reasonably determines (which determination shall be conclusive) that by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Adjusted Eurodollar Rate for such Interest Period, or (b) the Agent reasonably determines (which determination shall be conclusive) that the Adjusted Eurodollar Rate will not adequately and fairly reflect the cost to the Lenders of making or maintaining LIBOR Loans for such Interest Period; then the Agent shall give the Borrower and each Lender prompt notice thereof and, so long as such condition remains in effect, the Lenders shall be under no obligation to, and shall not, make additional LIBOR Loans, Continue LIBOR Loans or Convert Loans into LIBOR Loans and the Borrower shall, on the last day of each current Interest Period for each outstanding LIBOR Loan, either repay such Loan or Convert such Loan into a Base Rate Loan. Section 4.3. Illegality. Notwithstanding any other provision of this Agreement, if it becomes unlawful for any Lender to honor its obligation to make or maintain LIBOR Loans hereunder, then such Lender shall promptly notify the Borrower thereof (with a copy to the Agent) and such Lender's obligation to make or Continue, or to Convert Loans of any other Type into, LIBOR Loans shall be suspended until such time as such Lender may again make and maintain LIBOR Loans (in which case the provisions of Section 4.6. shall be applicable). Section 4.4. Compensation. The Borrower shall pay to the Agent for the account of each Lender, upon the request of such Lender through the Agent, such amount or amounts as shall be sufficient (in the reasonable opinion of such Lender) to compensate it for any loss, cost or expense that such Lender determines is attributable to: (a) any payment or prepayment (whether mandatory or optional) of a LIBOR Loan, or Conversion of a LIBOR Loan, made by such Lender for any reason (including, without limitation, acceleration) on a date other than the last day of the Interest Period for such Loan; or (b) any failure by the Borrower for any reason (including, without limitation, the failure of any of the applicable conditions precedent specified in Article V. to be satisfied) to borrow a LIBOR Loan from such Lender on the date for such borrowing, or to Convert a Base Rate Loan into a LIBOR Loan or Continue a LIBOR Loan on the requested date of such Conversion or Continuation. Upon the Borrower's request, any Lender requesting compensation under this Section shall provide the Borrower with a statement setting forth the basis for requesting such compensation and the method for determining the amount thereof. Absent manifest error, determinations by any Lender in any such statement shall be conclusive, provided that such determinations are made on a reasonable basis and in good faith. -46- Section 4.5. Affected Lenders. If (a) a Lender requests compensation pursuant to Section 3.12. or 4.1., and the Requisite Lenders are not also doing the same, or (b) the obligation of any Lender to make LIBOR Loans or to Continue, or to Convert Base Rate Loans into, LIBOR Loans shall be suspended pursuant to Section 4.1.(b) or 4.3. but the obligation of the Requisite Lenders shall not have been suspended under such Sections, then, so long as there does not then exist any Default or Event of Default, the Borrower may either (i) demand that such Lender (the "Affected Lender"), and upon such demand the Affected Lender shall promptly, assign its Commitments to an Eligible Assignee subject to and in accordance with the provisions of Section 12.5.(d) for a purchase price equal to the aggregate principal balance of Loans then owing to the Affected Lender plus any accrued but unpaid interest thereon and accrued but unpaid fees owing to the Affected Lender, or (ii) pay to the Affected Lender the aggregate principal balance of Loans then owing to the Affected Lender plus any accrued but unpaid interest thereon and accrued but unpaid fees owing to the Affected Lender, whereupon the Affected Lender shall no longer be a party hereto or have any rights or obligations hereunder or under any of the other Loan Documents. Each of the Agent and the Affected Lender shall reasonably cooperate in effectuating the replacement of such Affected Lender under this Section, but at no time shall the Agent, such Affected Lender nor any other Lender be obligated in any way whatsoever to initiate any such replacement or to assist in finding an Eligible Assignee. The exercise by the Borrower of its rights under this Section shall be at the Borrower's sole cost and expenses and at no cost or expense to the Agent, the Affected Lender or any of the other Lenders. The terms of this Section shall not in any way limit the Borrower's obligation to pay to any Affected Lender compensation owing to such Affected Lender pursuant to Section 3.12. or 4.1. Section 4.6. Treatment of Affected Loans. If the obligation of any Lender to make LIBOR Loans or to Continue, or to Convert Base Rate Loans into, LIBOR Loans shall be suspended pursuant to Section 4.1.(b), 4.2. or 4.3., then such Lender's LIBOR Loans shall be automatically Converted into Base Rate Loans on the last day(s) of the then current Interest Period(s) for LIBOR Loans (or, in the case of a Conversion required by Section 4.1.(b) or 4.3., on such earlier date as such Lender may specify to the Borrower with a copy to the Agent) and, unless and until such Lender gives notice as provided below that the circumstances specified in Section 4.1. or 4.3. that gave rise to such Conversion no longer exist: (a) to the extent that such Lender's LIBOR Loans have been so Converted, all payments and prepayments of principal that would otherwise be applied to such Lender's LIBOR Loans shall be applied instead to its Base Rate Loans; and (b) all Loans that would otherwise be made or Continued by such Lender as LIBOR Loans shall be made or Continued instead as Base Rate Loans, and all Base Rate Loans of such Lender that would otherwise be Converted into LIBOR Loans shall remain as Base Rate Loans. -47- If such Lender gives notice to the Borrower (with a copy to the Agent) that the circumstances specified in Section 4.1. or 4.3. that gave rise to the Conversion of such Lender's LIBOR Loans pursuant to this Section no longer exist (which such Lender agrees to do promptly upon such circumstances ceasing to exist) at a time when LIBOR Loans made by other Lenders are outstanding, then such Lender's Base Rate Loans shall be automatically Converted, on the first day(s) of the next succeeding Interest Period(s) for such outstanding LIBOR Loans, to the extent necessary so that, after giving effect thereto, all Loans held by the Lenders holding LIBOR Loans and by such Lender are held pro rata (as to principal amounts, Types and Interest Periods) in accordance with their respective Commitments. Section 4.7. Change of Lending Office. Each Lender agrees that it will use reasonable efforts to designate an alternate Lending Office with respect to any of its Loans affected by the matters or circumstances described in Sections 3.12., 4.1. or 4.3. to reduce the liability of the Borrower or avoid the results provided thereunder, so long as such designation is not disadvantageous to such Lender as determined by such Lender in its sole discretion, except that such Lender shall have no obligation to designate a Lending Office located in the United States of America. Section 4.8. Assumptions Concerning Funding of LIBOR Loans. Calculation of all amounts payable to a Lender under this Article IV. shall be made as though such Lender had actually funded LIBOR Loans through the purchase of deposits in the relevant market bearing interest at the rate applicable to such LIBOR Loans in an amount equal to the amount of the LIBOR Loans and having a maturity comparable to the relevant Interest Period; provided, however, that each Lender may fund each of its LIBOR Loans in any manner it sees fit and the foregoing assumption shall be used only for calculation of amounts payable under this Article IV. ARTICLE V. CONDITIONS PRECEDENT Section 5.1. Initial Conditions Precedent. The obligation of the Lenders to effect or permit the occurrence of the first Credit Event hereunder, whether as the making of a Loan or the issuance of a Letter of Credit, is subject to the following conditions precedent: (a) The Agent shall have received each of the following, in form and substance satisfactory to the Agent: (i) Counterparts of this Agreement executed by each of the parties hereto; (ii) Revolving Notes executed by the Borrower, payable to each Lender and complying with the applicable provisions of Section 2.10., and the Swingline Note executed by the Borrower; -48- (iii) The Guaranty executed by each Guarantor existing as of the Effective Date; (iv) An opinion of Sullivan & Worcester LLP, counsel to the Loan Parties, addressed to the Agent, the Lenders and the Swingline Lender, substantially in the form of Exhibit I-1, and opinion of Ballard Spahr Andrews & Ingersoll, LLP, special Maryland counsel to the Loan Parties, addressed to the Agent, the Lenders and the Swingline Lender, substantially in the form of Exhibit I-2; (v) The declaration of trust of the Borrower certified as of a recent date by the Department of Assessments and Taxation of the State of Maryland; (vi) A good standing certificate with respect to the Borrower issued as of a recent date by the Department of Assessments and Taxation of the State of Maryland and certificates of qualification to transact business or other comparable certificates issued by the Secretary of State (and any state department of taxation, as applicable) of each state in which the Borrower is required to be so qualified and where the failure to be so qualified would have, in each instance, a Material Adverse Effect; (vii) A certificate of incumbency signed by the Secretary or Assistant Secretary of the Borrower with respect to each of the officers of the Borrower authorized to execute and deliver the Loan Documents to which the Borrower is a party and the officers of the Borrower then authorized to deliver Notices of Borrowing, Notices of Swingline Borrowings, Notices of Continuation and Notices of Conversion and to request the issuance of Letters of Credit; (viii) Copies, certified by the Secretary or Assistant Secretary of the Borrower, of all corporate (or comparable) action taken by the Borrower to authorize the execution, delivery and performance of the Loan Documents to which the Borrower is a party; (ix) The Governing Documents of each Guarantor certified as of a recent date by the Secretary of State of the State of formation of such Guarantor; (x) A certificate of good standing or certificate of similar meaning with respect to each Guarantor issued as of a recent date by the Secretary of State of the State of formation of each such Guarantor and certificates of qualification to transact business or other comparable certificates issued by each Secretary of State (and any state department of taxation, as applicable) of each state in which such Guarantor is required to be so qualified and where the failure to be so qualified would have, in each instance, a Material Adverse Effect; (xi) A certificate of incumbency signed by the Secretary or Assistant Secretary (or other individual performing similar functions) of each Guarantor with respect to each of the officers of such Guarantor authorized to execute and deliver the Loan Documents to which such Guarantor is a party; -49- (xii) Copies certified by the Secretary or Assistant Secretary of each Guarantor (or other individual performing similar functions) of (i) the by-laws of such Guarantor, if a corporation, the operating agreement, if a limited liability company, the partnership agreement, if a limited or general partnership, or other comparable document in the case of any other form of legal entity and (ii) all corporate, partnership, member or other necessary action taken by such Guarantor to authorize the execution, delivery and performance of the Loan Documents to which it is a party; (xiii) A copy of (x) each of the documents, instruments and agreements evidencing any of the Indebtedness described on Schedule 6.1.(g), (y) all Leases, all Ancillary Agreements, the Advisory Agreement, and each other Material Contract, in each case certified as true, correct and complete by the chief operating officer or chief financial officer of the Borrower, and (z) a Lease Abstract with respect to each Lease for the Unencumbered Hotels; (xiv) The Fees then due and payable under Section 3.6., and any other Fees payable to the Agent and the Lenders on or prior to the Effective Date; (xv) A Compliance Certificate calculated as of December 31, 2001; and (xvi) Such other documents, agreements and instruments as the Agent on behalf of the Lenders may reasonably request; and (b) In the good faith judgment of the Agent and the Lenders: (i) There shall not have occurred or become known to the Agent or any of the Lenders any event, condition, situation or status since the date of the information contained in the financial and business projections, budgets, pro forma data and forecasts concerning the Borrower and its Subsidiaries delivered to the Agent and the Lenders prior to the Agreement Date that has had or could reasonably be expected to result in a Material Adverse Effect; (ii) No litigation, action, suit, investigation or other arbitral, administrative or judicial proceeding shall be pending or threatened which could reasonably be expected to (1) result in a Material Adverse Effect or (2) restrain or enjoin, impose materially burdensome conditions on, or otherwise materially and adversely affect the ability of the Borrower or any other Loan Party to fulfill its obligations under the Loan Documents to which it is a party; (iii) The Borrower and its Subsidiaries shall have received all approvals, consents and waivers, and shall have made or given all necessary filings and notices as shall be required to consummate the transactions contemplated hereby without the occurrence of any default under, conflict with or violation of (1) any Applicable Law or (2) any agreement, document or instrument to which the Borrower or any other Loan Party is a party or by which any of them or their respective properties is bound, except for such approvals, consents, waivers, filings and notices the receipt, making or giving of -50- which would not reasonably be likely to (A) have a Material Adverse Effect, or (B) restrain or enjoin, impose materially burdensome conditions on, or otherwise materially and adversely affect the ability of the Borrower or any other Loan Party to fulfill its obligations under the Loan Documents to which it is a party; and (iv) There shall not have occurred or exist any other material disruption of financial or capital markets that could reasonably be expected to materially and adversely affect the transactions contemplated by the Loan Documents. Section 5.2. Conditions Precedent to All Loans and Letters of Credit. The obligations of the Lenders to make any Loans, of the Agent to issue Letters of Credit, and of the Swingline Lender to make any Swingline Loan are all subject to the further condition precedent that: (a) no Default or Event of Default shall have occurred and be continuing as of the date of the making of such Loan or date of issuance of such Letter of Credit or would exist immediately after giving effect thereto; (b) the representations and warranties made or deemed made by the Borrower and each other Loan Party in the Loan Documents to which any of them is a party, shall be true and correct on and as of the date of the making of such Loan or date of issuance of such Letter of Credit with the same force and effect as if made on and as of such date except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate on and as of such earlier date) and except for changes in factual circumstances specifically and expressly permitted hereunder and (c) in the case of the borrowing of Revolving Loans, the Agent shall have received a timely Notice of Borrowing. Each Credit Event shall constitute a certification by the Borrower to the effect set forth in the preceding sentence (both as of the date of the giving of notice relating to such Credit Event and, unless the Borrower otherwise notifies the Agent prior to the date of such Credit Event, as of the date of the occurrence of such Credit Event). In addition, if such Credit Event is the making of a Loan, the Borrower shall be deemed to have represented to the Agent and the Lender at the time such Loan is made that all conditions to the making of such Loan contained in Article V. have been satisfied. Section 5.3. Conditions as Covenants. If the Lenders make any Loans, or the Agent issues a Letter of Credit, prior to the satisfaction of all conditions precedent set forth in Sections 5.1. and 5.2., the Borrower shall nevertheless cause such condition or conditions to be satisfied within 5 Business Days after the date of the making of such Loans or the issuance of such Letter of Credit. Unless set forth in writing to the contrary, the making of its initial Loan by a Lender shall constitute a certification by such Lender to the Agent and the other Lenders that the Borrower has satisfied the conditions precedent for initial Loans set forth in Sections 5.1. and 5.2. -51- ARTICLE VI. REPRESENTATIONS AND WARRANTIES Section 6.1. Representations and Warranties. In order to induce the Agent and each Lender to enter into this Agreement and to make Loans and issue Letters of Credit, the Borrower represents and warrants to the Agent and each Lender as follows: (a) Organization; Power; Qualification. Each of the Borrower and its Subsidiaries is a corporation, partnership or other legal entity, duly organized or formed, validly existing and in good standing under the jurisdiction of its incorporation or formation, has the power and authority to own or lease its respective properties and to carry on its respective business as now being and hereafter proposed to be conducted and is duly qualified and is in good standing as a foreign corporation, partnership or other legal entity, and authorized to do business, in each jurisdiction in which the character of its properties or the nature of its business requires such qualification or authorization and where the failure to be so qualified or authorized would have, in each instance, a Material Adverse Effect. (b) Ownership Structure. As of the Agreement Date Part I of Schedule 6.1.(b) is a complete and correct list of all Subsidiaries of the Borrower setting forth for each such Subsidiary, (i) the jurisdiction of organization of such Subsidiary, (ii) each Person holding any Equity Interests in such Subsidiary, (iii) the nature of the Equity Interests held by each such Person, (iv) the percentage of ownership of such Subsidiary represented by such Equity Interests and (v) whether such Subsidiary is a Material Subsidiary and/or an Excluded Subsidiary. Except as disclosed in such Schedule, as of the Agreement Date (i) each of the Borrower and its Subsidiaries owns, free and clear of all Liens, and has the unencumbered right to vote, all outstanding Equity Interests in each Person shown to be held by it on such Schedule, (ii) all of the issued and outstanding capital stock of each such Person organized as a corporation is validly issued, fully paid and nonassessable and (iii) there are no outstanding subscriptions, options, warrants, commitments, preemptive rights or agreements of any kind (including, without limitation, any stockholders' or voting trust agreements) for the issuance, sale, registration or voting of, or outstanding securities convertible into, any additional shares of capital stock of any class, or partnership or other ownership interests of any type in, any such Person. As of the Agreement Date Part II of Schedule 6.1.(b) correctly sets forth all Unconsolidated Affiliates of the Borrower, including the correct legal name of such Person, the type of legal entity which each such Person is, and all Equity Interests in such Person held directly or indirectly by the Borrower. (c) Authorization of Agreement, Etc. The Borrower has the right and power, and has taken all necessary action to authorize it, to borrow and obtain other extensions of credit hereunder. The Borrower and each other Loan Party has the right and power, and has taken all necessary action to authorize it, to execute, deliver and perform each of the Loan Documents to which it is a party in accordance with their respective terms and to consummate the transactions contemplated hereby and thereby. The Loan Documents to which the Borrower or any other Loan Party is a party have been duly executed and delivered by the duly authorized officers of such Person and each is a legal, valid and binding obligation of such Person enforceable against such Person in accordance with its respective terms except as the same may be limited by -52- bankruptcy, insolvency, and other similar laws affecting the rights of creditors generally and the availability of equitable remedies for the enforcement of certain obligations (other than the payment of principal) contained herein or therein may be limited by equitable principles generally. (d) Compliance of Loan Documents with Laws, Etc. The execution, delivery and performance of this Agreement, the Notes and the other Loan Documents to which the Borrower or any other Loan Party is a party in accordance with their respective terms and the borrowings and other extensions of credit hereunder do not and will not, by the passage of time, the giving of notice, or both: (i) require any Governmental Approval or violate any Applicable Law (including all Environmental Laws) relating to the Borrower or any other Loan Party; (ii) conflict with, result in a breach of or constitute a default under the organizational documents of the Borrower or any other Loan Party, or any indenture, agreement or other instrument to which the Borrower or any other Loan Party is a party or by which it or any of its respective properties may be bound; or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by the Borrower or any other Loan Party. (e) Compliance with Law; Governmental Approvals. The Borrower, each Subsidiary and each other Loan Party is in compliance with each Governmental Approval applicable to it and in compliance with all other Applicable Law (including without limitation, Environmental Laws) relating to the Borrower, a Subsidiary or such other Loan Party except for noncompliances which, and Governmental Approvals the failure to possess which, would not, individually or in the aggregate, cause a Default or Event of Default or have a Material Adverse Effect. (f) Title to Properties; Liens; Title Insurance. As of the Agreement Date, Part I of Schedule 6.1.(f) sets forth all of the real property owned or leased by the Borrower, each other Loan Party and each other Subsidiary. Each such Person has good, marketable and legal title to, or a valid leasehold interest in, its respective assets. As of the Agreement Date, there are no Liens against any assets of the Borrower, any Subsidiary or any other Loan Party except for Permitted Liens. As to all or substantially all of the Hotels, the Borrower or a Subsidiary is the named insured under a policy of title insurance issued by a title insurer licensed to do business in the jurisdiction where such Hotel is located. As to each such policy of title insurance (i) the coverage amount equals or exceeds the acquisition cost of the related Hotel; (ii) exceptions to title do not include any Liens, except for Permitted Liens and Liens that have been released prior to the Effective Date; (iii) no claims are pending that, if adversely determined, could reasonably be expected to have a Material Adverse Effect; and (iv) no title insurer has given notice to the insured Person that such policy of title insurance is no longer in effect. Except for Permitted Liens, neither Borrower nor any Subsidiary has knowledge of any defect in title that could, individually or in the aggregate, have a Material Adverse Effect. (g) Existing Indebtedness. Schedule 6.1.(g) is, as of December 31, 2001, a complete and correct listing of all Indebtedness of the Borrower and its Subsidiaries, including without limitation, Guarantees of the Borrower and its Subsidiaries, and indicating whether such Indebtedness is Secured Indebtedness or Unsecured Indebtedness. During the period from such date to the Agreement Date, neither the Borrower nor any Subsidiary incurred any material -53- Indebtedness except as set forth on such Schedule. The Borrower and its Subsidiaries have performed and are in compliance with all of the terms of such Indebtedness and all instruments and agreements relating thereto, and no default or event of default, or event or condition which with the giving of notice, the lapse of time, or both, would constitute such a default or event of default, exists with respect to any such Indebtedness. (h) Material Contracts and Leases and Ancillary Agreements. Schedule 6.1.(h) is, as of the Agreement Date, a true, correct and complete listing of all Material Contracts, Leases and Ancillary Agreements. Each of the Borrower, its Subsidiaries and the other Loan Parties that is a party to any Material Contract is in compliance with all of the terms of such Material Contract, and no default or event of default, or event or condition which with the giving of notice, the lapse of time, or both, would constitute such a default or event of default, exists with respect to any such Material Contract. All Lease Abstracts provided by the Borrower to the Agent accurately summarize the relevant provisions of the Leases required to be described therein, and such Lease Abstracts are correct in all material respects. (i) Litigation. Except as set forth on Schedule 6.1.(i), there are no actions, suits or proceedings pending (nor, to the knowledge of the Borrower, are there any actions, suits or proceedings threatened, nor is there any basis therefor) against or in any other way relating adversely to or affecting the Borrower, any Subsidiary or any other Loan Party or any of its respective property in any court or before any arbitrator of any kind or before or by any other Governmental Authority which could reasonably be expected to have a Material Adverse Effect. There are no strikes, slow downs, work stoppages or walkouts or other labor disputes in progress or threatened relating to the Borrower, any Subsidiary or any other Loan Party which could reasonably be expected to have a Material Adverse Effect. (j) Taxes. All federal, state and other tax returns of the Borrower, any Subsidiary or any other Loan Party required by Applicable Law to be filed have been duly filed, and all federal, state and other taxes, assessments and other governmental charges or levies upon the Borrower, any Subsidiary and each other Loan Party and its respective properties, income, profits and assets which are due and payable have been paid, except any such nonpayment which is at the time permitted under Section 7.6. As of the Agreement Date, none of the United States income tax returns of the Borrower, its Subsidiaries or any other Loan Party is under audit. All charges, accruals and reserves on the books of the Borrower and each of its Subsidiaries in respect of any taxes or other governmental charges are in accordance with GAAP. (k) Financial Statements. The Borrower has furnished to each Lender copies of the audited consolidated balance sheet of the Borrower and its consolidated Subsidiaries for the fiscal year ending December 31, 2001, and the related audited consolidated statements of income, shareholders' equity and cash flow for the fiscal year ending on such date, with the opinion thereon of Arthur Andersen LLP. Such financial statements (including in each case related schedules and notes) are complete and correct and present fairly, in accordance with GAAP consistently applied throughout the periods involved, the consolidated financial position of the Borrower and its consolidated Subsidiaries as at their respective dates and the results of operations and the cash flow for such periods. Neither the Borrower nor any of its Subsidiaries has on the Agreement Date any material contingent liabilities, liabilities, liabilities for taxes, -54- unusual or long-term commitments or unrealized or forward anticipated losses from any unfavorable commitments, except as referred to or reflected or provided for in said financial statements or except as set forth on Schedule 6.1.(k). (l) No Material Adverse Change. Since December 31, 2001, there has been no material adverse change in the consolidated financial condition, results of operations, business or prospects of the Borrower and its consolidated Subsidiaries taken as a whole. Each of the Borrower, its Subsidiaries and the other Loan Parties is Solvent. (m) ERISA. Each member of the ERISA Group is in compliance with its obligations under the minimum funding standards of ERISA and the Internal Revenue Code with respect to each Plan and is in compliance with the presently applicable provisions of ERISA and the Internal Revenue Code with respect to each Plan, except in each case for noncompliances which could not reasonably be expected to have a Material Adverse Effect. As of the Agreement Date, no member of the ERISA Group has (i) sought a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code in respect of any Plan, (ii) failed to make any contribution or payment to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement, or made any amendment to any Plan or Benefit Arrangement, which has resulted or could result in the imposition of a Lien or the posting of a bond or other security under ERISA or the Internal Revenue Code or (iii) incurred any liability under Title IV of ERISA other than a liability to the PBGC for premiums under Section 4007 of ERISA. (n) Not Plan Assets; No Prohibited Transaction. None of the assets of the Borrower, any Subsidiary or any other Loan Party constitute "plan assets" within the meaning of ERISA, the Internal Revenue Code and the respective regulations promulgated thereunder. The execution, delivery and performance of this Agreement and the other Loan Documents, and the borrowing and repayment of amounts hereunder, do not and will not constitute "prohibited transactions" under ERISA or the Internal Revenue Code. (o) Absence of Defaults. Neither the Borrower, any Subsidiary nor any other Loan Party is in default under its Governing Documents, and no event has occurred, which has not been remedied, cured or waived: (i) which constitutes a Default or an Event of Default; or (ii) which constitutes, or which with the passage of time, the giving of notice, a determination of materiality, the satisfaction of any condition, or any combination of the foregoing, would constitute, a default or event of default by the Borrower, any Subsidiary or any other Loan Party under any agreement (other than this Agreement) or judgment, decree or order to which the Borrower or any Subsidiary or other Loan Party is a party or by which the Borrower or any Subsidiary or other Loan Party or any of their respective properties may be bound where such default or event of default could, individually or in the aggregate, have a Material Adverse Effect. (p) Environmental Laws. Each of the Borrower, its Subsidiaries and the other Loan Parties has obtained all Governmental Approvals which are required under Environmental Laws and is in compliance with all terms and conditions of such Governmental Approvals which the failure to obtain or to comply with could reasonably be expected to have a -55- Material Adverse Effect. Except for any of the following matters that could not be reasonably expected to have a Material Adverse Effect, (i) the Borrower is not aware of, and has not received notice of, any past, present, or future events, conditions, circumstances, activities, practices, incidents, actions, or plans which, with respect to the Borrower, its Subsidiaries and each other Loan Party, may interfere with or prevent compliance or continued compliance with Environmental Laws, or may give rise to any common-law or legal liability, or otherwise form the basis of any claim, action, demand, suit, proceeding, hearing, study, or investigation, based on or related to the manufacture, processing, distribution, use, treatment, storage, disposal, transport, or handling or the emission, discharge, release or threatened release into the environment, of any pollutant, contaminant, chemical, or industrial, toxic, or other Hazardous Material; and (ii) there is no civil, criminal, or administrative action, suit, demand, claim, hearing, notice, or demand letter, notice of violation, investigation, or proceeding pending or, to the Borrower's knowledge after due inquiry, threatened, against the Borrower, its Subsidiaries and each other Loan Party relating in any way to Environmental Laws. (q) Investment Company; Public Utility Holding Company. Neither the Borrower nor any Subsidiary nor any other Loan Party is (i) an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, (ii) a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii) subject to any other Applicable Law which purports to regulate or restrict its ability to borrow money or to consummate the transactions contemplated by this Agreement or to perform its obligations under any Loan Document to which it is a party. (r) Margin Stock. Neither the Borrower, any Subsidiary nor any other Loan Party is engaged principally, or as one of its important activities, in the business of extending credit for the purpose, whether immediate, incidental or ultimate, of buying or carrying "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System. (s) Affiliate Transactions. Except as permitted by Section 9.10., neither the Borrower, any Subsidiary nor any other Loan Party is a party to or bound by any agreement or arrangement (whether oral or written) to which any Affiliate of the Borrower, any Subsidiary or any other Loan Party is a party. (t) Intellectual Property. Each of the Borrower and each Subsidiary owns or has the right to use, under valid license agreements or otherwise, all material patents, licenses, franchises, trademarks, trademark rights, trade names, trade name rights, trade secrets and copyrights (collectively, "Intellectual Property") used in the conduct of its businesses as now conducted and as contemplated by the Loan Documents, without known conflict with any patent, license, franchise, trademark, trade secret, trade name, copyright, or other proprietary right of any other Person, except for such Intellectual Property, the absence of which, and for conflicts which, would not have a Material Adverse Effect. The Borrower and each such Subsidiary have taken all such steps as they deem reasonably necessary to protect their respective rights under and with respect to such Intellectual Property. No material claim has been asserted by any Person with respect to the use of any Intellectual Property by the Borrower or any Subsidiary, or challenging or questioning the validity or effectiveness of any Intellectual Property. The use of -56- such Intellectual Property by the Borrower, its Subsidiaries and the other Loan Parties, does not infringe on the rights of any Person, subject to such claims and infringements as do not, in the aggregate, give rise to any liabilities on the part of the Borrower and its Subsidiaries that could reasonably be expected to have a Material Adverse Effect. (u) Business. As of the Agreement Date, the Borrower and its Subsidiaries are engaged substantially in the business of the acquisition, financing, ownership, development and tenancy (through TRSs) of hotel properties and other businesses activities incidental thereto. (v) Broker's Fees. No broker's or finder's fee, commission or similar compensation will be payable with respect to the transactions contemplated hereby. No other similar fees or commissions will be payable by any Loan Party for any other services rendered to the Borrower or any of its Subsidiaries ancillary to the transactions contemplated hereby. (w) Accuracy and Completeness of Information. No written information, report or other papers or data (excluding financial projections and other forward looking statements) furnished to the Agent or any Lender by, on behalf of, or at the direction of, the Borrower, any Subsidiary or any other Loan Party in connection with or relating in any way to this Agreement, contained any untrue statement of a fact material to the creditworthiness of the Borrower, any Subsidiary or any other Loan Party or omitted to state a material fact necessary in order to make such statements contained therein, in light of the circumstances under which they were made, not misleading. All financial statements furnished to the Agent or any Lender by, on behalf of, or at the direction of, the Borrower, any Subsidiary or any other Loan Party in connection with or relating in any way to this Agreement, present fairly, in accordance with GAAP consistently applied throughout the periods involved, the financial position of the Persons involved as at the date thereof and the results of operations for such periods. All financial projections and other forward looking statements prepared by or on behalf of the Borrower, any Subsidiary or any other Loan Party that have been or may hereafter be made available to the Agent or any Lender were or will be prepared in good faith based on reasonable assumptions. No fact is known to the Borrower which has had, or may in the future have (so far as the Borrower can reasonably foresee), a Material Adverse Effect which has not been set forth in the financial statements referred to in Section 6.1.(k) or in such information, reports or other papers or data or otherwise disclosed in writing to the Agent and the Lenders prior to the Effective Date. (x) REIT Status. The Borrower qualifies, and has since 1995 qualified, as a REIT and is in compliance with all requirements and conditions imposed under the Internal Revenue Code to allow the Borrower to maintain its status as a REIT. (y) Unencumbered Assets. As of the Agreement Date, Schedule 6.1.(y) is a correct and complete list of all Unencumbered Hotels and Unencumbered Mortgage Notes. Each of the Properties and promissory notes included by the Borrower in calculations of Unencumbered Asset Value satisfies all of the requirements contained in the definition of an Unencumbered Hotel, Unencumbered Mortgage Note, or Other Acceptable Property, as applicable. (z) Insurance. All Leases require the Lessees thereunder to maintain with respect to the Hotels commercially reasonable insurance with financially sound and reputable insurance -57- companies. As of the Agreement Date, neither the Borrower nor any Subsidiary has received notice that any such insurance has been cancelled, nonrenewed, or impaired in any way. (aa) Existing Credit Facility. The Existing Credit Agreement has terminated and all amounts outstanding thereunder have been paid. Section 6.2. Survival of Representations and Warranties, Etc. All statements contained in any certificate, financial statement or other instrument delivered by or on behalf of the Borrower, any Subsidiary or any other Loan Party to the Agent or any Lender pursuant to or in connection with this Agreement or any of the other Loan Documents (including, but not limited to, any such statement made in or in connection with any amendment thereto or any statement contained in any certificate, financial statement or other instrument delivered by or on behalf of the Borrower prior to the Agreement Date and delivered to the Agent or any Lender in connection with closing the transactions contemplated hereby) shall constitute representations and warranties made by the Borrower under this Agreement. All representations and warranties made under this Agreement and the other Loan Documents shall be deemed to be made at and as of the Agreement Date, the Effective Date and the date of the occurrence of any Credit Event, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate on and as of such earlier date) and except for changes in factual circumstances specifically permitted hereunder. All such representations and warranties shall survive the effectiveness of this Agreement, the execution and delivery of the Loan Documents and the making of the Loans and the issuance of the Letters of Credit. ARTICLE VII. AFFIRMATIVE COVENANTS For so long as this Agreement is in effect, unless the Requisite Lenders (or, if required pursuant to Section 12.6., all of the Lenders) shall otherwise consent in the manner provided for in Section 12.6., the Borrower shall comply with the following covenants: Section 7.1. Preservation of Existence and Similar Matters. Except as otherwise permitted under Section 9.7., the Borrower shall preserve and maintain, and cause each Subsidiary and each other Loan Party to preserve and maintain, its respective existence, rights, franchises, licenses and privileges in the jurisdiction of its incorporation or formation and qualify and remain qualified and authorized to do business in each jurisdiction in which the character of its properties or the nature of its business requires such qualification and authorization and where the failure to be so authorized and qualified could reasonably be expected to have a Material Adverse Effect. Section 7.2. Compliance with Applicable Law and Material Contracts. The Borrower shall comply, and cause each Subsidiary and each other Loan Party to comply, with (a) all Applicable Law, including the obtaining of all Governmental Approvals, the -58- failure with which to comply could reasonably be expected to have a Material Adverse Effect, and (b) all material terms and conditions of all Material Contracts to which it is a party. Section 7.3. Maintenance of Property. In addition to the requirements of any of the other Loan Documents, the Borrower shall, and shall cause each Subsidiary and other Loan Party to, (a) protect and preserve all of its material properties or cause to be protected and preserved, and maintain or cause to be maintained in good repair, working order and condition all tangible properties, ordinary wear and tear excepted, and (b) make or cause to be made all needed and appropriate repairs, renewals, replacements and additions to such properties, so that the business carried on in connection therewith may be properly and advantageously conducted at all times. Section 7.4. Conduct of Business. The Borrower shall at all times carry on, and cause its Subsidiaries and the other Loan Parties to carry on, its respective businesses as described in Section 6.1.(u). Section 7.5. Insurance. In addition to the requirements of any of the other Loan Documents, the Borrower shall, and shall cause each Subsidiary and other Loan Party to, maintain or cause to be maintained commercially reasonable insurance with financially sound and reputable insurance companies, and from time to time deliver to the Agent or any Lender upon its request a detailed list, together with copies of all policies of the insurance then in effect, stating the names of the insurance companies, the amounts and rates of the insurance, the dates of the expiration thereof and the properties and risks covered thereby. Section 7.6. Payment of Taxes and Claims. The Borrower shall, and shall cause each Subsidiary and other Loan Party to, pay and discharge or cause to be paid and discharged when due (a) all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits or upon any properties belonging to it, and (b) all lawful claims of materialmen, mechanics, carriers, warehousemen and landlords for labor, materials, supplies and rentals which, if unpaid, might become a Lien on any properties of such Person; provided, however, that this Section shall not require the payment or discharge of any such tax, assessment, charge, levy or claim which is being contested in good faith by appropriate proceedings which operate to suspend the collection thereof and for which adequate reserves have been established on the books of the Borrower, such Subsidiary or such other Loan Party, as applicable, in accordance with GAAP. Section 7.7. Visits and Inspections. The Borrower shall, and shall cause each Subsidiary and other Loan Party to, permit representatives or agents of any Lender or the Agent, from time to time after reasonable prior notice if no Event of Default shall be in existence, as often as may be reasonably requested, but only during normal business hours and at the expense of such Lender or the Agent (unless a -59- Default or Event of Default shall be continuing, in which case the exercise by the Agent or such Lender of its rights under this Section shall be at the expense of the Borrower), as the case may be, to: (a) visit and inspect all properties of the Borrower or such Subsidiary or other Loan Party to the extent any such right to visit or inspect is within the control of such Person; (b) inspect and make extracts from their respective books and records, including but not limited to management letters prepared by independent accountants; and (c) discuss with its principal officers, and its independent accountants, its business, properties, condition (financial or otherwise), results of operations and performance. If requested by the Agent, the Borrower shall execute an authorization letter addressed to its accountants authorizing the Agent or any Lender to discuss the financial affairs of the Borrower and any Subsidiary or any other Loan Party with its accountants. Section 7.8. Use of Proceeds; Letters of Credit. The Borrower shall use the proceeds of all Loans and all Letters of Credit for general business purposes only. The Borrower shall not, and shall not permit any Subsidiary or other Loan Party to, use any part of such proceeds or Letters of Credit to purchase or carry, or to reduce or retire or refinance any credit incurred to purchase or carry, any margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System) or to extend credit to others for the purpose of purchasing or carrying any such margin stock. Section 7.9. Environmental Matters. The Borrower shall, and shall cause all of its Subsidiaries and the other Loan Parties to, comply or cause to be complied with, all Environmental Laws the failure with which to comply could reasonably be expected to have a Material Adverse Effect. If the Borrower, any Subsidiary or any other Loan Party shall (a) receive notice that any violation of any Environmental Law may have been committed or is about to be committed by such Person, (b) receive notice that any administrative or judicial complaint or order has been filed or is about to be filed against the Borrower, any Subsidiary or any other Loan Party alleging violations of any Environmental Law or requiring the Borrower, any Subsidiary or any other Loan Party to take any action in connection with the release of Hazardous Materials or (c) receive any notice from a Governmental Authority or private party alleging that the Borrower, any Subsidiary or any other Loan Party may be liable or responsible for costs associated with a response to or cleanup of a release of Hazardous Materials or any damages caused thereby, and such notices, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect, the Borrower shall provide the Agent and each Lender with a copy of such notice within 30 days after the receipt thereof by the Borrower, any Subsidiary or any other Loan Party. The Borrower shall, and shall cause its Subsidiaries and the other Loan Parties to, take or cause to be taken promptly all actions necessary to prevent the imposition of any Liens on any of their respective properties arising out of or related to any Environmental Laws. Section 7.10. Books and Records. The Borrower shall, and shall cause each of its Subsidiaries and the other Loan Parties to, maintain books and records pertaining to its respective business operations in such detail, form and scope as is consistent with good business practice and in accordance with GAAP. -60- Section 7.11. Further Assurances. The Borrower shall, at the Borrower's cost and expense and upon request of the Agent, execute and deliver or cause to be executed and delivered, to the Agent such further instruments, documents and certificates, and do and cause to be done such further acts that may be reasonably necessary or advisable in the reasonable opinion of the Agent to carry out more effectively the provisions and purposes of this Agreement and the other Loan Documents. Section 7.12. New Subsidiaries/Guarantors. (a) Requirement to Become Guarantor. Within 30 days of any Person (other than an Excluded Subsidiary) becoming a Material Subsidiary after the Effective Date, the Borrower shall deliver to the Agent each of the following items, each in form and substance satisfactory to the Agent: (a) an Accession Agreement executed by such Material Subsidiary and (b) the items that would have been delivered under Sections 5.1.(a)(v) and (x) through (xiii) if such Material Subsidiary had been one on the Effective Date; provided, however, promptly (and in any event within 5 Business Days) upon any Excluded Subsidiary ceasing to be subject to the restriction which prevented it from delivering an Accession Agreement pursuant to this Section, such Subsidiary shall comply with the provisions of this Section. The Agent shall send to each Lender copies of each of the foregoing items once the Agent has received all such items with respect to a Material Subsidiary. (b) Release of a Guarantor. The Borrower may request in writing that the Agent release, and upon receipt of such request the Agent shall release (subject to the terms of the Guaranty), a Guarantor from the Guaranty so long as: (i) such Guarantor meets, or will meet simultaneously with its release from the Guaranty, all of the provisions of the definition of the term "Excluded Subsidiary" or has ceased to be, or simultaneously with its release from the Guaranty will cease to be, a Material Subsidiary; (ii) such Guarantor is not otherwise required to be a party to the Guaranty under the immediately preceding subsection (a); (iii) no Default or Event of Default shall then be in existence or would occur as a result of such release, including without limitation, a Default or Event of Default resulting from a violation of any of the covenants contained in Section 9.1.; and (iv) the Agent shall have received such written request at least 10 Business Days prior to the requested date of release. Delivery by the Borrower to the Agent of any such request shall constitute a representation by the Borrower that the matters set forth in the preceding sentence (both as of the date of the giving of such request and as of the date of the effectiveness of such request) are true and correct with respect to such request. Section 7.13. REIT Status. The Borrower shall at all times maintain its status as a REIT. Section 7.14. Exchange Listing. The Borrower shall maintain at least one class of common shares of the Borrower having trading privileges on the New York Stock Exchange or the American Stock Exchange or which -61- is the subject of price quotations in the over-the-counter market as reported by the National Association of Securities Dealers Automated Quotation System. ARTICLE VIII. INFORMATION For so long as this Agreement is in effect, unless the Requisite Lenders (or, if required pursuant to Section 12.6., all of the Lenders) shall otherwise consent in the manner set forth in Section 12.6., the Borrower shall furnish to each Lender (or to the Agent if so provided below) at its Lending Office: Section 8.1. Quarterly Financial Statements. As soon as available and in any event within 45 days after the close of each of the first, second and third fiscal quarters of the Borrower, the unaudited consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such period and the related unaudited consolidated statements of income, shareholders' equity and cash flows of the Borrower and its Subsidiaries for such period, setting forth in each case in comparative form the figures as of the end of and for the corresponding periods of the previous fiscal year, all of which shall be certified by the chief financial officer of the Borrower, in his or her opinion, to present fairly, in accordance with GAAP as then in effect, the consolidated financial position of the Borrower and its Subsidiaries as at the date thereof and the results of operations for such period (subject to normal year-end audit adjustments). Together with such financial statements, the Borrower shall deliver reports, in form and detail satisfactory to the Agent, setting forth (a) a statement of Funds From Operations for the fiscal quarter then ending; (b) to the extent such information is obtained from Lessees, all capital expenditures made during the fiscal quarter then ended; (c) a description of all Properties acquired during such fiscal quarter, including the minimum rent or expected minimum return of each such Property, acquisition costs and related mortgage debt, (d) to the extent such information is obtained from Lessees, the underlying occupancy, average daily revenues, revenues per available room, and Hotel Net Cash Flow for each Hotel Pool and each Hotel that is not in a Hotel Pool, and (e) such other information as the Agent may request. Section 8.2. Year-End Statements. Within 90 days after the end of each fiscal year of the Borrower, the audited consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year and the related audited consolidated statements of income, shareholders' equity and cash flows of the Borrower and its Subsidiaries for such fiscal year, setting forth in comparative form the figures as at the end of and for the previous fiscal year, all of which shall be certified by (a) the chief financial officer of the Borrower, in his or her opinion, to present fairly, in accordance with GAAP as then in effect, the consolidated financial position of the Borrower and its Subsidiaries as at the date thereof and the results of operations for such period and (b) independent certified public accountants of recognized national standing acceptable to the Agent, whose certificate shall be unqualified and in scope and substance satisfactory to the Requisite Lenders and who shall have authorized the Borrower to deliver such financial statements and certification thereof to the Agent and the Lenders pursuant to this Agreement. Together with such financial statements, the Borrower shall deliver a report, in form and detail reasonably satisfactory to the Agent, setting forth the underlying occupancy, average daily revenues, revenues per available room, and Hotel Net -62- Cash Flow for each Hotel Pool and each Hotel that is not in a Hotel Pool for such fiscal year to the extent such information is obtained from Lessees. Section 8.3. Compliance Certificate. At the time financial statements are furnished pursuant to Sections 8.1. and 8.2., and within 10 Business Days of the Agent's request with respect to any other fiscal period, a certificate substantially in the form of Exhibit J (a "Compliance Certificate") executed by the chief financial officer of the Borrower: (a) setting forth in reasonable detail as at the end of such quarterly accounting period, fiscal year, or other fiscal period, as the case may be, the calculations required to establish whether or not the Borrower was in compliance with the covenants contained in Sections 9.1. through 9.3. and 9.6., and (b) stating that, to the best of his or her knowledge, information and belief after due inquiry, no Default or Event of Default exists, or, if such is not the case, specifying such Default or Event of Default and its nature, when it occurred, whether it is continuing and the steps being taken by the Borrower with respect to such event, condition or failure. With each Compliance Certificate, Borrower shall also deliver a certificate (an "Unencumbered Asset Certificate") executed by the chief financial officer of the Borrower that: (i) sets forth a list of all Unencumbered Hotels (with a listing of all Excluded Properties in any Hotel Pool included in Unencumbered Hotels, together with a certification of the book value of such Excluded Properties and the EBITDA attributable thereto), Unencumbered Mortgage Notes (including a listing of all promissory notes that are secured by Excluded Properties, together with a certification of the book value of the Excluded Properties and the EBITDA attributable thereto), and Other Acceptable Property; and (ii) certifies that all Unencumbered Hotels, Unencumbered Mortgage Notes, and Other Acceptable Property so listed fully qualify as such under the applicable criteria for inclusion as a Unencumbered Hotel, Unencumbered Mortgage Note, or Other Acceptable Property. Section 8.4. Other Information. (a) Management Reports. Promptly upon receipt thereof, copies of all management reports, if any, submitted to the Borrower or its Board of Trustees by its independent public accountants; (b) Securities Filings. Within 5 Business Days of the filing thereof, copies of all registration statements (excluding the exhibits thereto (unless requested by the Agent) and any registration statements on Form S-8 or its equivalent), reports on Forms 10-K, 10-Q and 8-K (or their equivalents) and all other periodic reports which the Borrower, any Subsidiary or any other Loan Party shall file with the Securities and Exchange Commission (or any Governmental Authority substituted therefor) or any national securities exchange; (c) Shareholder Information. Promptly upon the mailing thereof to the shareholders of the Borrower generally, copies of all financial statements, reports and proxy statements so mailed and promptly upon the issuance thereof copies of all press releases issued by the Borrower, any Subsidiary or any other Loan Party; (d) ERISA. If and when any member of the ERISA Group (i) gives or is required to give notice to the PBGC of any "reportable event" (as defined in Section 4043 of ERISA) with -63- respect to any Plan which might constitute grounds for a termination of such Plan under Title IV of ERISA, or knows that the plan administrator of any Plan has given or is required to give notice of any such reportable event, a copy of the notice of such reportable event given or required to be given to the PBGC; (ii) receives notice of complete or partial withdrawal liability under Title IV of ERISA or notice that any Multiemployer Plan is in reorganization, is insolvent or has been terminated, a copy of such notice; (iii) receives notice from the PBGC under Title IV of ERISA of an intent to terminate, impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or appoint a trustee to administer any Plan, a copy of such notice; (iv) applies for a waiver of the minimum funding standard under Section 412 of the Internal Revenue Code, a copy of such application; (v) gives notice of intent to terminate any Plan under Section 4041(c) of ERISA, a copy of such notice and other information filed with the PBGC; (vi) gives notice of withdrawal from any Plan pursuant to Section 4063 of ERISA, a copy of such notice; or (vii) fails to make any payment or contribution to any Plan or Multiemployer Plan or in respect of any Benefit Arrangement or makes any amendment to any Plan or Benefit Arrangement which has resulted or could result in the imposition of a Lien or the posting of a bond or other security, a certificate of the chief financial officer of the Borrower setting forth details as to such occurrence and the action, if any, which the Borrower or applicable member of the ERISA Group is required or proposes to take; (e) Litigation. To the extent the Borrower or any Subsidiary is aware of the same, prompt notice of the commencement of any proceeding or investigation by or before any Governmental Authority and any action or proceeding in any court or other tribunal or before any arbitrator against or in any other way relating adversely to, or adversely affecting, the Borrower or any Subsidiary or any of their respective properties, assets or businesses which could reasonably be expected to have a Material Adverse Effect, and prompt notice of the receipt of notice that any United States income tax returns of the Borrower or any of its Subsidiaries are being audited; (f) Modification of Governing Documents. A copy of any amendment to a Governing Document of the Borrower or any other Loan Party promptly upon, and in any event within 15 Business Days of, the effectiveness thereof; (g) Change of Management or Financial Condition. Prompt notice of any change in the senior management of the Borrower, any Subsidiary or any other Loan Party and any change in the business, assets, liabilities, financial condition, results of operations or business prospects of the Borrower, any Subsidiary or any other Loan Party which has had or could reasonably be expected to have Material Adverse Effect; (h) Default. Notice of the occurrence of any of the following promptly upon a Responsible Officer obtaining knowledge thereof: (i) any Default or Event of Default or (ii) any event which constitutes or which with the passage of time, the giving of notice, or otherwise, would constitute a default or event of default by the Borrower, any Subsidiary or any other Loan Party under any Material Contract, or any Lease or Ancillary Agreement relating to any Unencumbered Hotel or Other Acceptable Property, to which any such Person is a party or by which any such Person or any of its respective properties may be bound; -64- (i) Judgments. Prompt notice of any order, judgment or decree in excess of $5,000,000 having been entered against the Borrower, any Subsidiary or any other Loan Party or any of their respective properties or assets; (j) Notice of Violations of Law. Prompt notice if the Borrower, any Subsidiary or any other Loan Party shall receive any notification from any Governmental Authority alleging a violation of any Applicable Law or any inquiry which could reasonably be expected to have a Material Adverse Effect; (k) Material Subsidiary. Prompt notice of any Person becoming a Material Subsidiary; (l) Material Asset Sales. Prompt notice of the sale, transfer or other disposition of any material assets of the Borrower, any Subsidiary or any other Loan Party to any Person other than the Borrower, any Subsidiary or any other Loan Party; (m) Material Contracts. Promptly upon (i) entering into any Material Contract after the Agreement Date, a copy to the Agent of such Material Contract, together with a copy of all related or ancillary documentation and (ii) the giving or receipt thereof by the Borrower or any Subsidiary, notice alleging that any party to any Material Contract, Unencumbered Mortgage Note, or any Lease or Ancillary Agreement relating to an Unencumbered Hotel or Other Acceptable Property, is in default of its obligations thereunder; (n) Financial Information Regarding Lessees and Mortgagors. If requested by the Agent and available to the Borrower or any Subsidiary on a nonconfidential basis, the Borrower shall deliver to the Agent the same reports and information with respect to each mortgagor under any Unencumbered Mortgage Note and with respect to each Lessee as is required by Sections 8.1. and 8.2. with respect to the Borrower, except that: (i) every reference to the Borrower and its Subsidiaries shall be deemed to refer to such material mortgagor or Lessee; and (ii) the time periods within which the Borrower shall deliver such reports as to material mortgagors and Lessees shall each be 30 days longer than the time periods set forth in Sections 8.1. and 8.2.; (o) Additions to Unencumbered Assets. In order to add any Hotel or Hotel Pool to Unencumbered Hotels or add any promissory note to Unencumbered Mortgage Notes, the Borrower must deliver to the Agent an Unencumbered Asset Certificate reflecting such addition, together with a statement of: (i) the acquisition cost of such Hotel, Hotel Pool, or promissory note; and (ii) the same information that the Borrower would be required to include in a Compliance Certificate. The Borrower shall provide the Agent with Due Diligence Reports for any Hotel or Hotel Pool added to Unencumbered Hotels within 20 days of its delivery to the Agent of the Unencumbered Asset Certificate that added such Hotel or Hotel Pool to Unencumbered Hotels; (p) Removals from Unencumbered Assets. Within 10 Business Days after any Loan Party's disposition of any Unencumbered Asset or after any Unencumbered Asset ceases to qualify as an Unencumbered Hotel, Unencumbered Mortgage Note or Other Acceptable -65- Property, the Borrower shall deliver to the Agent an Unencumbered Asset Certificate reflecting such removal or disqualification, together with a statement of: (i) the identity of the Unencumbered Asset being disposed of or disqualified, and (ii) the Unencumbered Asset Value attributable to such Unencumbered Asset. The Borrower also may voluntarily remove (i) any Hotel or Hotel Pool from Unencumbered Hotels, (ii) any promissory note from Unencumbered Mortgage Notes, and (iii) any Property from Other Acceptable Properties by delivering to the Agent an Unencumbered Asset Certificate reflecting such removal, together with a statement (a) that no Default or Event of Default then exists or would, upon the occurrence of such event or with the passage of time, result from such removal, and (b) of (i) the identity of the Unencumbered Asset being removed, and (ii) the Unencumbered Asset Value attributable to such Unencumbered Asset; and (q) Other Information. From time to time and promptly upon each request, such data, certificates, reports, statements, opinions of counsel, documents or further information regarding the business, assets, liabilities, financial condition, results of operations or business prospects of the Borrower or any of its Subsidiaries as the Agent or any Lender may reasonably request. ARTICLE IX. NEGATIVE COVENANTS For so long as this Agreement is in effect, unless the Requisite Lenders (or, if required pursuant to Section 12.6., all of the Lenders) shall otherwise consent in the manner set forth in Section 12.6., the Borrower shall comply with the following covenants: Section 9.1. Financial Covenants. The Borrower shall not permit: (a) Leverage Ratio. The ratio of (i) Total Indebtedness to (ii) Total Asset Value, to exceed 0.50 to 1.00 at any time. (b) Interest Coverage Ratio. The ratio of (i) Adjusted EBITDA of the Borrower and its Subsidiaries determined on a consolidated basis for the fiscal quarter of the Borrower most recently ending to (ii) Interest Expense of the Borrower and its Subsidiaries determined on a consolidated basis for such period, to be less than 2.50 to 1.00 at any time. (c) Funded Debt Ratio. The ratio of (i) the average daily amount of Total Indebtedness outstanding during the fiscal quarter of the Borrower most recently ending to (ii) Adjusted EBITDA of the Borrower and its Subsidiaries determined on a consolidated basis for such fiscal quarter, to be greater than 5.0 to 1.0 at any time. (d) Minimum Fixed Charge Coverage Ratio. The ratio of (i) Adjusted EBITDA of the Borrower and its Subsidiaries determined on a consolidated basis for the fiscal quarter most recently ending to (ii) Fixed Charges for such period, to be less than 2.0 to 1.0 at any time. (e) Secured Indebtedness. The ratio of (i)(x) Secured Indebtedness of the Borrower and its Subsidiaries to (y) Total Asset Value, to be greater than 0.20 to 1.00 at any time; and -66- (ii)(x) Secured Indebtedness (other than Nonrecourse Indebtedness) of the Borrower and its Subsidiaries to (y) Total Asset Value, to be greater than 0.10 to 1.00 at any time. (f) Unencumbered Leverage Ratio. The ratio of (i) Unencumbered Asset Value to (ii) Unsecured Indebtedness, to be less than 2.0 to 1.0 at any time. (g) Unencumbered Interest Coverage Ratio. The ratio of (i) Unencumbered EBITDA to (ii) Unsecured Debt Service for the Borrower's fiscal quarter most recently ending, to be less than 2.50 to 1.00 at any time. (h) Minimum Tangible Net Worth. Tangible Net Worth at any time to be less than (i) $1,000,000,000 plus (ii) 75% of the Net Proceeds of all Equity Issuances effected by the Borrower or any Subsidiary (other than Equity Issuances to the Borrower or any Subsidiary) after the Agreement Date. (i) Floating Rate Debt. The aggregate principal amount of all outstanding Floating Rate Debt to exceed 20% of Total Asset Value at any time. (j) Total Assets Owned by Borrower and Guarantors. The amount of Total Asset Value directly owned by the Borrower and the Guarantors to be less than 95.0% of Total Asset Value (excluding the amount of Total Asset Value, if any, then attributable to Excluded Subsidiaries). Section 9.2. Indebtedness. The Borrower shall not, and shall not permit any Subsidiary or any other Loan Party to, create, incur, assume, or permit or suffer to exist, any Indebtedness other than the following: (a) the Obligations; (b) Indebtedness set forth on Schedule 6.1.(g); (c) intercompany Indebtedness among the Borrower and its Wholly Owned Subsidiaries; provided, however, that the obligations of the Borrower and each Guarantor in respect of such intercompany Indebtedness shall be subordinate to the Obligations; and (d) any other Indebtedness of a type not described above in this Section and created, incurred or assumed after the Agreement Date so long as immediately prior to the creation, incurring or assumption thereof, and immediately thereafter and after giving effect thereto, no Default or Event of Default is or would be in existence, including without limitation, a Default or Event of Default resulting from a violation of any of the covenants contained in Section 9.1. Section 9.3. Certain Permitted Investments. The Borrower shall not, and shall not permit any Subsidiary or any other Loan Party to, make any Investment in or otherwise own or hold the following items which would cause the -67- aggregate value of such holdings of the Borrower and such other Subsidiaries to exceed 20.0% of Total Asset Value at any time: (a) Investments in Persons which are not Subsidiaries, including without limitation Unencumbered Mortgage Notes and other Indebtedness owed to the Borrower or any Subsidiary and secured by real property; (b) Assets Under Development measured by the aggregate Construction Budget for all such Assets Under Development. For purposes of this subsection, (i) "Construction Budget" means the fully-budgeted costs for the acquisition and construction of a given piece of real property (including without limitation, the cost of acquiring such piece of real property, reserves for construction interest and operating deficits, tenant improvements, leasing commissions, and infrastructure costs) as reasonably determined by the Borrower in good faith and (ii) real property under construction to be (but not yet) acquired by the Borrower or a Subsidiary upon completion of construction pursuant to a contract in which the seller of such real property is required to complete construction prior to, and as a condition precedent to, such acquisition, shall be subject to this subsection; (c) Real property leased by the Borrower or any Subsidiary as lessee pursuant to a ground lease, including any Ground Lease; and (d) Owning or leasing as lessee real property not located in any state of the United States of America or the District of Columbia. Section 9.4. Investments Generally. The Borrower shall not, and shall not permit any Subsidiary or other Loan Party to, directly or indirectly, acquire, make or purchase any Investment, or permit any Investment of such Person to be outstanding on and after the Agreement Date, other than the following: (a) Investments in Subsidiaries in existence on the Agreement Date and disclosed on Part I of Schedule 6.1.(b); (b) Investments to acquire Equity Interests of a Subsidiary or any other Person who after giving effect to such acquisition would be a Subsidiary, so long as in each case (i) immediately prior to such Investment, and after giving effect thereto, no Default or Event of Default is or would be in existence and (ii) if such Subsidiary is (or after giving effect to such Investment would become) a Material Subsidiary and is not an Excluded Subsidiary, the terms and conditions set forth in Section 7.12. are satisfied; (c) Investments permitted under Section 9.3.; (d) Investments in Cash Equivalents; (e) intercompany Indebtedness among the Borrower and its Wholly Owned Subsidiaries provided that such Indebtedness is permitted by the terms of Section 9.2.; -68- (f) loans and advances to officers and employees for moving, entertainment, travel and other similar expenses in the ordinary course of business consistent with past practices; and (g) any other Investment so long as immediately prior to making such Investment, and immediately thereafter and after giving effect thereto, no Default or Event of Default is or would be in existence, including without limitation, a Default or Event of Default resulting from a violation of Section 7.4. Section 9.5. Liens; Negative Pledges; Other Matters. (a) The Borrower shall not, and shall not permit any Subsidiary or other Loan Party to, create, assume, or incur any Lien (other than Permitted Liens) upon any of its properties, assets, income or profits of any character whether now owned or hereafter acquired if immediately prior to the creation, assumption or incurring of such Lien, or immediately thereafter, a Default or Event of Default is or would be in existence, including without limitation, a Default or Event of Default resulting from a violation of any of the covenants contained in Section 9.1.; (b) The Borrower shall not, and shall not permit any Subsidiary or other Loan Party to, enter into, assume or otherwise be bound by any Negative Pledge except for a Negative Pledge contained in any agreement (i) evidencing Indebtedness which the Borrower or such Subsidiary may create, incur, assume, or permit or suffer to exist under Section 9.2.; (ii) which Indebtedness is secured by a Lien permitted to exist and (iii) which prohibits the creation of any other Lien on only the property securing such Indebtedness as of the date such agreement was entered into; (c) The Borrower shall not, and shall not permit any Subsidiary or other Loan Party to, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of any Subsidiary (other than an Excluded Subsidiary) to: (i) pay dividends or make any other distribution on any of such Subsidiary's capital stock or other equity interests owned by the Borrower or any Subsidiary; (ii) pay any Indebtedness owed to the Borrower or any Subsidiary; (iii) make loans or advances to the Borrower or any Subsidiary; or (iv) transfer any of its property or assets to the Borrower or any Subsidiary. Section 9.6. Restricted Payments. The Borrower shall not, and shall not permit any Subsidiary or other Loan Party to, declare or make any Restricted Payment; provided, however, that: (a) the Borrower may declare or make cash distributions to its shareholders during any fiscal year in an aggregate amount not to exceed the greater of (i) the sum of (x) 90.0% of Funds From Operations of the Borrower for such period plus (y) 25.0% of the cash Net Proceeds of Equity Issuances effected by the Borrower or any Subsidiary during such period (other than Equity Issuances to the Borrower or any Subsidiary), or (ii) the minimum amount necessary for the Borrower to remain in compliance with Section 7.13.; -69- (b) the Borrower may make cash distributions to its shareholders of capital gains resulting from gains from certain asset sales to the extent necessary to avoid payment of taxes on such asset sales imposed under Sections 857(b)(3) and 4981 of the Internal Revenue Code; (c) the Borrower may make cash payments to repurchase outstanding shares of (i) any of its Preferred Stock, and (ii) up to $200,000,000 of common stock or other similar common Equity Interests; and (d) Subsidiaries may pay Restricted Payments to the Borrower or any other Subsidiary. Notwithstanding the foregoing, but subject to the following sentence, if a Default or Event of Default shall have occurred and be continuing, the Borrower may only declare or make cash distributions to its shareholders during any fiscal year in an aggregate amount not to exceed the minimum amount necessary for the Borrower to remain in compliance with Section 7.13. If a Default or Event of Default specified in Section 10.1.(a), Section 10.1.(f) or Section 10.1.(g) shall have occurred and be continuing, or if as a result of the occurrence of any other Event of Default the Obligations have been accelerated pursuant to Section 10.2.(a), the Borrower shall not, and shall not permit any Subsidiary or other Loan Party to, make any Restricted Payments to any Person whatsoever other than to the Borrower or any Subsidiary. Section 9.7. Merger, Consolidation, Sales of Assets and Other Arrangements. The Borrower shall not, and shall not permit any Subsidiary or other Loan Party to: (i) enter into any transaction of merger or consolidation; (ii) liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution); or (iii) convey, sell, lease, sublease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or any substantial part of its business or assets, whether now owned or hereafter acquired; provided, however, that: (a) any of the actions described in the immediately preceding clauses (i) through (iii) may be taken with respect to any Subsidiary or any other Loan Party (other than the Borrower) so long as immediately prior to the taking of such action, and immediately thereafter and after giving effect thereto, no Default or Event of Default is or would be in existence; (b) the Borrower, its Subsidiaries and the other Loan Parties may lease and sublease their respective assets, as lessor or sublessor (as the case may be), in the ordinary course of their business; (c) a Person may merge with and into the Borrower so long as (i) the Borrower is the survivor of such merger, (ii) immediately prior to such merger, and immediately thereafter and after giving effect thereto, no Default or Event of Default is or would be in existence; and (iii) the Borrower shall have given the Agent and the Lenders at least 10 Business Days' prior written notice of such merger (except that such prior notice shall not be required in the case of the merger of a Subsidiary with and into the Borrower); and (d) the Borrower and each Subsidiary may sell, transfer or dispose of assets among themselves. -70- Section 9.8. Fiscal Year. The Borrower shall not change its fiscal year from that in effect as of the Agreement Date. Section 9.9. Modifications to Advisory Agreement and Other Material Contracts. The Borrower shall not default in any material respect in the performance of any of its obligations under the Advisory Agreement or permit the Advisory Agreement to be canceled or terminated prior to its stated maturity. The Borrower shall not enter into any material amendment, modification or waiver of or with respect to any of the terms of the Advisory Agreement, except for extensions thereof. With respect to Material Contracts other than the Advisory Agreement, the Borrower shall not, and shall not permit any Subsidiary or other Loan Party to, enter into any amendment or modification to any such Material Contract which could reasonably be expected to have a Material Adverse Effect. With respect to any Lease or Ancillary Agreement relating to any Unencumbered Hotel or Other Acceptable Property, the Borrower shall not, and shall not permit any Subsidiary or other Loan Party to, enter into any amendment or modification to any such agreement if (a) such amendment or modification could reasonably be expected to have a Material Adverse Effect or (b) after giving pro forma effect to such amendment or modification, a Default or Event of Default could reasonably be expected to occur, including without limitation, a Default or Event of Default resulting from a violation of any of the covenants contained in Section 9.1. In connection with any amendment or modification to any Lease or Ancillary Agreement relating to any Unencumbered Hotel or Other Acceptable Property, the Borrower shall deliver to the Agent, within 10 Business Days' of the Agent's request, a Compliance Certificate calculated on a pro forma basis giving effect to such amendment or modification. Section 9.10. Transactions with Affiliates. The Borrower shall not, and shall not permit any of its Subsidiaries or any other Loan Party to, permit to exist or enter into, any transaction (including the purchase, sale, lease or exchange of any property or the rendering of any service) with any Affiliate, except transactions in the ordinary course of and pursuant to the reasonable requirements of the business of the Borrower or any of its Subsidiaries and upon fair and reasonable terms which are no less favorable to the Borrower or such Subsidiary than would be obtained in a comparable arm's length transaction with a Person that is not an Affiliate. Section 9.11. ERISA Exemptions. The Borrower shall not, and shall not permit any Subsidiary to, permit any of its respective assets to become or be deemed to be "plan assets" within the meaning of ERISA, the Internal Revenue Code and the respective regulations promulgated thereunder. -71- ARTICLE X. DEFAULT Section 10.1. Events of Default. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of Applicable Law or pursuant to any judgment or order of any Governmental Authority: (a) Default in Payment of Principal. The Borrower shall fail to pay when due (whether upon demand, at maturity, by reason of acceleration or otherwise) the principal of any of the Loans, or any Reimbursement Obligation. (b) Default in Payment of Interest and Other Obligations. The Borrower shall fail to pay when due any interest on any of the Loans or any of the other payment Obligations owing by the Borrower under this Agreement or any other Loan Document, or any other Loan Party shall fail to pay when due any payment Obligation owing by such other Loan Party under any Loan Document to which it is a party, and such failure shall continue for a period of 5 Business Days. (c) Default in Performance. (i) The Borrower shall fail to perform or observe any term, covenant, condition or agreement contained in Section 8.4.(h) or in Article IX. or (ii) the Borrower or any other Loan Party shall fail to perform or observe any term, covenant, condition or agreement contained in this Agreement or any other Loan Document to which it is a party and not otherwise mentioned in this Section and such failure shall continue for a period of 30 days after the earlier of (x) the date upon which a Responsible Officer of the Borrower or such Loan Party obtains knowledge of such failure or (y) the date upon which the Borrower has received written notice of such failure from the Agent. (d) Misrepresentations. Any written statement, representation or warranty made or deemed made by or on behalf of the Borrower or any other Loan Party under this Agreement or under any other Loan Document, or any amendment hereto or thereto, or in any other writing or statement at any time furnished or made or deemed made by or on behalf of the Borrower or any other Loan Party to the Agent or any Lender, shall at any time prove to have been incorrect or misleading, in light of the circumstances in which made or deemed made, in any material respect when furnished or made or deemed made. (e) Indebtedness Cross-Default. (i) The Borrower, any Subsidiary or any other Loan Party shall fail to pay when due and payable the principal of, or interest on, any Indebtedness (other than the Obligations) having an aggregate outstanding principal amount greater than or equal to (A) $25,000,000 in the case of Indebtedness that is not Nonrecourse Indebtedness or (B) $50,000,000 in the case of Indebtedness that is Nonrecourse Indebtedness (all such Indebtedness being "Material Indebtedness"); or (ii) (x) The maturity of any Material Indebtedness shall have been accelerated in accordance with the provisions of any indenture, contract or instrument evidencing, providing for the creation of or otherwise concerning such Material Indebtedness or -72- (y) any Material Indebtedness shall have been required to be prepaid or repurchased prior to the stated maturity thereof; or (iii) Any other event shall have occurred and be continuing which, with or without the passage of time, the giving of notice, or both, would permit any holder or holders of Material Indebtedness, any trustee or agent acting on behalf of such holder or holders or any other Person, to accelerate the maturity of any such Material Indebtedness or require any such Material Indebtedness to be prepaid or repurchased prior to its stated maturity. (f) Voluntary Bankruptcy Proceeding. The Borrower, any other Loan Party or any Subsidiary (other than (x) a Guarantor that, together with all other Guarantors then subject to a bankruptcy proceeding or other proceeding or condition described in this subsection or the immediately following subsection, does not account for more than $25,000,000 of Total Asset Value, or (y) a Subsidiary that, together with all other Subsidiaries then subject to a bankruptcy proceeding or other proceeding or condition described in this subsection or the immediately following subsection, does not account for more than $50,000,000 of Total Asset Value) shall: (i) commence a voluntary case under the Bankruptcy Code of 1978, as amended, or other federal bankruptcy laws (as now or hereafter in effect); (ii) file a petition seeking to take advantage of any other Applicable Laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts; (iii) consent to, or fail to contest in a timely and appropriate manner, any petition filed against it in an involuntary case under such bankruptcy laws or other Applicable Laws or consent to any proceeding or action described in the immediately following subsection; (iv) apply for or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of a substantial part of its property, domestic or foreign; (v) admit in writing its inability to pay its debts as they become due; (vi) make a general assignment for the benefit of creditors; (vii) make a conveyance fraudulent as to creditors under any Applicable Law; or (viii) take any corporate or partnership action for the purpose of effecting any of the foregoing. (g) Involuntary Bankruptcy Proceeding. A case or other proceeding shall be commenced against the Borrower, any other Loan Party or any Subsidiary (other than (x) a Guarantor that, together with all other Guarantors then subject to a bankruptcy proceeding or other proceeding or condition described in this subsection or the immediately preceding subsection, does not account for more than $25,000,000 of Total Asset Value, or (y) a Subsidiary that, together with all other Subsidiaries then subject to a bankruptcy proceeding or other proceeding or condition described in this subsection or the immediately preceding subsection, does not account for more than $50,000,000 of Total Asset Value) in any court of competent jurisdiction seeking: (i) relief under the Bankruptcy Code of 1978, as amended, or other federal bankruptcy laws (as now or hereafter in effect) or under any other Applicable Laws, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding-up, or composition or adjustment of debts; or (ii) the appointment of a trustee, receiver, custodian, liquidator or the like of such Person, or of all or any substantial part of the assets, domestic or foreign, of such Person, and such case or proceeding shall continue undismissed or unstayed for a period of 60 consecutive calendar days, or an order granting the remedy or other relief requested in such -73- case or proceeding against the Borrower, such Subsidiary or such other Loan Party (including, but not limited to, an order for relief under such Bankruptcy Code or such other federal bankruptcy laws) shall be entered. (h) Litigation; Enforceability. The Borrower or any other Loan Party shall disavow, revoke or terminate (or attempt to terminate) any Loan Document to which it is a party or shall otherwise challenge or contest in any action, suit or proceeding in any court or before any Governmental Authority the validity or enforceability of this Agreement, any Note or any other Loan Document or this Agreement, any Note, the Guaranty or any other Loan Document shall cease to be in full force and effect (except as a result of the express terms thereof). (i) Judgment. A judgment or order for the payment of money or for an injunction shall be entered against the Borrower, any Subsidiary or any other Loan Party, by any court or other tribunal and (i) such judgment or order shall continue for a period of 30 days without being paid, stayed or dismissed through appropriate appellate proceedings and (ii) either (A) the amount of such judgment or order for which insurance has not been acknowledged in writing by the applicable insurance carrier (or the amount as to which the insurer has denied liability) exceeds, individually or together with all other such outstanding judgments or orders entered against (1) the Borrower or any Guarantor, $25,000,000, or (2) any other Subsidiaries, $50,000,000, or (B) in the case of an injunction or other non-monetary judgment, such judgment could reasonably be expected to have a Material Adverse Effect. (j) Attachment. A warrant, writ of attachment, execution or similar process shall be issued against any property of the Borrower, any Subsidiary or any other Loan Party which exceeds, individually or together with all other such warrants, writs, executions and processes, (1) for the Borrower or any Guarantor, $25,000,000, or (2) for any other Subsidiaries, $50,000,000, and such warrant, writ, execution or process shall not be discharged, vacated, stayed or bonded for a period of 30 days; provided, however, that if a bond has been issued in favor of the claimant or other Person obtaining such warrant, writ, execution or process, the issuer of such bond shall execute a waiver or subordination agreement in form and substance satisfactory to the Agent pursuant to which the issuer of such bond subordinates its right of reimbursement, contribution or subrogation to the Obligations and waives or subordinates any Lien it may have on the assets of any Loan Party. (k) ERISA. Any member of the ERISA Group shall fail to pay when due an amount or amounts aggregating in excess of $10,000,000 which it shall have become liable to pay under Title IV of ERISA; or notice of intent to terminate a Material Plan shall be filed under Title IV of ERISA by any member of the ERISA Group, any plan administrator or any combination of the foregoing; or the PBGC shall institute proceedings under Title IV of ERISA to terminate, to impose liability (other than for premiums under Section 4007 of ERISA) in respect of, or to cause a trustee to be appointed to administer, any Material Plan; or a condition shall exist by reason of which the PBGC would be entitled to obtain a decree adjudicating that any Material Plan must be terminated; or there shall occur a complete or partial withdrawal from, or a default, within the meaning of Section 4219(c)(5) of ERISA, with respect to, one or more Multiemployer Plans which could cause one or more members of the ERISA Group to incur a current payment obligation in excess of $10,000,000. -74- (l) Loan Documents. An Event of Default (as defined therein) shall occur under any of the other Loan Documents. (m) Change of Control. (i) any "person" or "group" (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person will be deemed to have "beneficial ownership" of all securities that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of more than 15% of the total voting power of the then outstanding voting stock of the Borrower; or (ii) during any period of 12 consecutive months ending after the Agreement Date, individuals who at the beginning of any such 12-month period constituted the Board of Trustees of the Borrower (together with any new directors whose election by such Board or whose nomination for election by the shareholders of the Borrower was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Borrower then in office; (iii) RMR shall cease for any reason to act as the sole investment advisor to the Borrower; or (iv) any two of Barry M. Portnoy, Gerard M. Martin, John G. Murray, or Thomas M. O'Brien (or a substitute elected by the directors or trustees of RMR or the Borrower, as the case may be, and which is reasonably satisfactory to the Requisite Lenders) shall cease to serve as an officer, director or trustee of RMR or the Borrower in a position, in the case of an officer, of equal or greater seniority to the respective offices each holds with RMR or the Borrower, as the case may be as of the Agreement Date. Section 10.2. Remedies Upon Event of Default. Upon the occurrence of an Event of Default the following provisions shall apply: (a) Acceleration; Termination of Facilities. (i) Automatic. Upon the occurrence of an Event of Default specified in Sections 10.1.(f) or 10.1.(g), (A)(i) the principal of, and all accrued interest on, the Loans and the Notes at the time outstanding, (ii) an amount equal to the Stated Amount of all Letters of Credit outstanding as of the date of the occurrence of such Event of Default and (iii) all of the other Obligations of the Borrower, including, but not limited to, the other amounts owed to the Lenders, the Swingline Lender and the Agent under this Agreement, the Notes or any of the other Loan Documents shall become immediately and -75- automatically due and payable by the Borrower without presentment, demand, protest, or other notice of any kind, all of which are expressly waived by the Borrower and (B) all of the Commitments, the obligation of the Lenders to make Revolving Loans, the Swingline Commitment, the obligation of the Swingline Lender to make Swingline Loans, and the obligation of the Agent to issue Letters of Credit hereunder, shall all immediately and automatically terminate. (ii) Optional. If any other Event of Default shall have occurred and be continuing, the Agent shall, at the direction of the Requisite Lenders: (A) declare (1) the principal of, and accrued interest on, the Loans and the Notes at the time outstanding, (2) an amount equal to the Stated Amount of all Letters of Credit outstanding as of the date of the occurrence of such other Event of Default and (3) all of the other Obligations, including, but not limited to, the other amounts owed to the Lenders and the Agent under this Agreement, the Notes or any of the other Loan Documents to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived by the Borrower and (B) terminate the Commitments and the obligation of the Lenders to make Loans hereunder and the obligation of the Agent to issue Letters of Credit hereunder. Further, if the Agent has exercised any of the rights provided under the preceding sentence, the Swingline Lender shall: (x) declare the principal of, and accrued interest on, the Swingline Loans and the Swingline Note at the time outstanding, and all of the other Obligations owing to the Swingline Lender, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived by the Borrower and (y) terminate the Swingline Commitment and the obligation of the Swingline Lender to make Swingline Loans. (b) Loan Documents. The Requisite Lenders may direct the Agent to, and the Agent if so directed shall, exercise any and all of its rights under any and all of the other Loan Documents. (c) Applicable Law. The Requisite Lenders may direct the Agent to, and the Agent if so directed shall, exercise all other rights and remedies it may have under any Applicable Law. (d) Appointment of Receiver. To the extent permitted by Applicable Law, the Agent and the Lenders shall be entitled to the appointment of a receiver for the assets and properties of the Borrower and its Subsidiaries, without notice of any kind whatsoever and without regard to the adequacy of any security for the Obligations or the solvency of any party bound for its payment, to take possession of all or any portion of the business operations of the Borrower and its Subsidiaries and to exercise such power as the court shall confer upon such receiver. Section 10.3. Remedies Upon Default. Upon the occurrence of a Default specified in Sections 10.1.(f) or 10.1.(g), the Commitments shall immediately and automatically terminate. -76- Section 10.4. Allocation of Proceeds. If an Event of Default shall have occurred and be continuing and maturity of any of the Obligations has been accelerated, all payments received by the Agent under any of the Loan Documents, in respect of any principal of or interest on the Obligations or any other amounts payable by the Borrower hereunder or thereunder, shall be applied in the following order and priority: (a) amounts due to the Agent and the Lenders in respect of fees and expenses due under Section 12.2.; (b) payments of interest on Swingline Loans; (c) payments of interest on all other Loans and Reimbursement Obligations, to be applied for the ratable benefit of the Lenders; (d) payments of principal of Swingline Loans; (e) payments of principal of all other Loans and Reimbursement Obligations, to be applied for the ratable benefit of the Lenders; (f) amounts to be deposited into the Collateral Account in respect of Letters of Credit; (g) amounts due the Agent and the Lenders pursuant to Sections 11.7. and 12.9.; (h) payments of all other amounts due and owing by the Borrower under any of the Loan Documents, if any, to be applied for the ratable benefit of the Lenders; and (i) any amount remaining after application as provided above, shall be paid to the Borrower or whomever else may be legally entitled thereto. Section 10.5. Collateral Account. (a) As collateral security for the prompt payment in full when due of all Letter of Credit Liabilities and the other Obligations, the Borrower hereby pledges and grants to the Agent, for the benefit of the Agent and the Lenders as provided herein, a security interest in all of its right, title and interest in and to the Collateral Account and the balances from time to time in the Collateral Account (including the investments and reinvestments therein provided for below). The balances from time to time in the Collateral Account shall not constitute payment of any Letter of Credit Liabilities until applied by the Agent as provided herein. Anything in this Agreement to the contrary notwithstanding, funds held in the Collateral Account shall be subject to withdrawal only as provided in this Section and in Section 2.12. (b) Amounts on deposit in the Collateral Account shall be invested and reinvested by the Agent in such Cash Equivalents as the Agent shall determine in its sole discretion. All such -77- investments and reinvestments shall be held in the name of and be under the sole dominion and control of the Agent. The Agent shall exercise reasonable care in the custody and preservation of any funds held in the Collateral Account and shall be deemed to have exercised such care if such funds are accorded treatment substantially equivalent to that which the Agent accords other funds deposited with the Agent, it being understood that the Agent shall not have any responsibility for taking any necessary steps to preserve rights against any parties with respect to any funds held in the Collateral Account. (c) If an Event of Default shall have occurred and be continuing, the Requisite Lenders may, in their discretion, at any time and from time to time, instruct the Agent to liquidate any such investments and reinvestments and credit the proceeds thereof to the Collateral Account and apply or cause to be applied such proceeds and any other balances in the Collateral Account to the payment of any of the Letter of Credit Liabilities due and payable. (d) If (i) no Default or Event of Default has occurred and is continuing and (ii) all of the Letter of Credit Liabilities have been paid in full, the Agent shall, from time to time, at the request of the Borrower, deliver to the Borrower, against receipt but without any recourse, warranty or representation whatsoever, such of the balances in the Collateral Account as exceed the aggregate amount of Letter of Credit Liabilities at such time. (e) The Borrower shall pay to the Agent from time to time such fees as the Agent normally charges for similar services in connection with the Agent's administration of the Collateral Account and investments and reinvestments of funds therein. Section 10.6. Performance by Agent. If the Borrower shall fail to perform any covenant, duty or agreement contained in any of the Loan Documents, the Agent may perform or attempt to perform such covenant, duty or agreement on behalf of the Borrower after the expiration of any cure or grace periods set forth herein. In such event, the Borrower shall, at the request of the Agent, promptly pay any amount reasonably expended by the Agent in such performance or attempted performance to the Agent, together with interest thereon at the applicable Post-Default Rate from the date of such expenditure until paid. Notwithstanding the foregoing, neither the Agent nor any Lender shall have any liability or responsibility whatsoever for the performance of any obligation of the Borrower under this Agreement or any other Loan Document. Section 10.7. Rights Cumulative. The rights and remedies of the Agent and the Lenders under this Agreement and each of the other Loan Documents shall be cumulative and not exclusive of any rights or remedies which any of them may otherwise have under Applicable Law. In exercising their respective rights and remedies the Agent and the Lenders may be selective and no failure or delay by the Agent or any of the Lenders in exercising any right shall operate as a waiver of it, nor shall any single or partial exercise of any power or right preclude its other or further exercise or the exercise of any other power or right. -78- ARTICLE XI. THE AGENT Section 11.1. Authorization and Action. Each Lender hereby appoints and authorizes the Agent to take such action as contractual representative on such Lender's behalf and to exercise such powers under this Agreement and the other Loan Documents as are specifically delegated to the Agent by the terms hereof and thereof, together with such powers as are reasonably incidental thereto. Not in limitation of the foregoing, each Lender authorizes and directs the Agent to enter into the Loan Documents for the benefit of the Lenders. Each Lender hereby agrees that, except as otherwise set forth herein, any action taken by the Requisite Lenders in accordance with the provisions of this Agreement or the Loan Documents, and the exercise by the Requisite Lenders of the powers set forth herein or therein, together with such other powers as are reasonably incidental thereto, shall be authorized and binding upon all of the Lenders. Nothing herein shall be construed to deem the Agent a trustee or fiduciary for any Lender nor to impose on the Agent duties or obligations other than those expressly provided for herein. At the request of a Lender, the Agent will forward to such Lender copies or, where appropriate, originals of the documents delivered to the Agent pursuant to this Agreement or the other Loan Documents. The Agent will also furnish to any Lender, upon the request of such Lender, a copy of any certificate or notice furnished to the Agent by the Borrower, any Loan Party or any other Affiliate of the Borrower, pursuant to this Agreement or any other Loan Document not already delivered to such Lender pursuant to the terms of this Agreement or any such other Loan Document. As to any matters not expressly provided for by the Loan Documents (including, without limitation, enforcement or collection of any of the Obligations), the Agent shall not be required to exercise any discretion or take any action, but shall be required to act or to refrain from acting (and shall be fully protected in so acting or refraining from acting) upon the instructions of the Requisite Lenders (or all of the Lenders if explicitly required under any other provision of this Agreement), and such instructions shall be binding upon all Lenders and all holders of any of the Obligations; provided, however, that, notwithstanding anything in this Agreement to the contrary, the Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement or any other Loan Document or Applicable Law. Not in limitation of the foregoing, the Agent shall not exercise any right or remedy it or the Lenders may have under any Loan Document upon the occurrence of a Default or an Event of Default unless the Requisite Lenders have so directed the Agent to exercise such right or remedy. Section 11.2. Agent's Reliance, Etc. Notwithstanding any other provisions of this Agreement or any other Loan Documents, neither the Agent nor any of its directors, officers, agents, employees or counsel shall be liable for any action taken or omitted to be taken by it or them under or in connection with this Agreement, except for its or their own gross negligence or willful misconduct. Without limiting the generality of the foregoing, the Agent: (a) may treat the payee of any Note as the holder thereof until the Agent receives written notice of the assignment or transfer thereof signed by such payee and in form satisfactory to the Agent; (b) may consult with legal counsel (including its own counsel or counsel for the Borrower or any other Loan Party), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants -79- or experts; (c) makes no warranty or representation to any Lender or any other Person and shall not be responsible to any Lender or any other Person for any statements, warranties or representations made by any Person in or in connection with this Agreement or any other Loan Document; (d) shall not have any duty to ascertain or to inquire as to the performance or observance of any of the terms, covenants or conditions of any of this Agreement or any other Loan Document or the satisfaction of any conditions precedent under this Agreement or any Loan Document on the part of the Borrower or other Persons or inspect the property, books or records of the Borrower or any other Person; (e) shall not be responsible to any Lender for the due execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other Loan Document, any other instrument or document furnished pursuant thereto or any collateral covered thereby or the perfection or priority of any Lien in favor of the Agent on behalf of the Lenders in any such collateral; and (f) shall incur no liability under or in respect of this Agreement or any other Loan Document by acting upon any notice, consent, certificate or other instrument or writing (which may be by telephone or telecopy) believed by it to be genuine and signed, sent or given by the proper party or parties. Section 11.3. Notice of Defaults. The Agent shall not be deemed to have knowledge or notice of the occurrence of a Default or Event of Default unless the Agent has received notice from a Lender or the Borrower referring to this Agreement, describing with reasonable specificity such Default or Event of Default and stating that such notice is a "notice of default." If any Lender (excluding the Lender which is also serving as the Agent) becomes aware of any Default or Event of Default, it shall promptly send to the Agent such a "notice of default." Further, if the Agent receives such a "notice of default", the Agent shall give prompt notice thereof to the Lenders. Section 11.4. First Union as Lender. First Union, as a Lender, shall have the same rights and powers under this Agreement and any other Loan Document as any other Lender and may exercise the same as though it were not the Agent; and the term "Lender" or "Lenders" shall, unless otherwise expressly indicated, include First Union in each case in its individual capacity. First Union and its affiliates may each accept deposits from, maintain deposits or credit balances for, invest in, lend money to, act as trustee under indentures of, serve as financial advisor to, and generally engage in any kind of business with, the Borrower, any other Loan Party or any other affiliate thereof as if it were any other bank and without any duty to account therefor to the other Lenders. Further, the Agent and any affiliate may accept fees and other consideration from the Borrower for services in connection with this Agreement and otherwise without having to account for the same to the other Lenders. Section 11.5. Approvals of Lenders. All communications from the Agent to any Lender requesting such Lender's determination, consent, approval or disapproval (a) shall be given in the form of a written notice to such Lender, (b) shall be accompanied by a description of the matter or issue as to which such determination, approval, consent or disapproval is requested, or shall advise such Lender where information, if any, regarding such matter or issue may be inspected, or shall otherwise describe -80- the matter or issue to be resolved, (c) shall include, if reasonably requested by such Lender and to the extent not previously provided to such Lender, written materials and a summary of all oral information provided to the Agent by the Borrower in respect of the matter or issue to be resolved, and (d) shall include the Agent's recommended course of action or determination in respect thereof. Each Lender shall reply promptly, but in any event within 10 Business Days (or such lesser or greater period as may be specifically required under the Loan Documents) of receipt of such communication. Except as otherwise provided in this Agreement and except with respect to items requiring the unanimous consent or approval of the Lenders under Section 12.6., unless a Lender shall give written notice to the Agent that it specifically objects to the recommendation or determination of the Agent (together with a written explanation of the reasons behind such objection) within the applicable time period for reply, such Lender shall be deemed to have conclusively approved of or consented to such recommendation or determination. Section 11.6. Lender Credit Decision, Etc. Each Lender expressly acknowledges and agrees that neither the Agent nor any of its officers, directors, employees, agents, counsel, attorneys-in-fact or other affiliates has made any representations or warranties as to the financial condition, operations, creditworthiness, solvency or other information concerning the business or affairs of the Borrower, any other Loan Party, any Subsidiary or any other Person to such Lender and that no act by the Agent hereafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any such representation or warranty by the Agent to any Lender. Each Lender acknowledges that it has, independently and without reliance upon the Agent, any other Lender or counsel to the Agent, or any of their respective officers, directors, employees and agents, and based on the financial statements of the Borrower, the Subsidiaries or any other Affiliate thereof, and inquiries of such Persons, its independent due diligence of the business and affairs of the Borrower, the Loan Parties, the Subsidiaries and other Persons, its review of the Loan Documents, the legal opinions required to be delivered to it hereunder, the advice of its own counsel and such other documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the transaction contemplated hereby. Each Lender also acknowledges that it will, independently and without reliance upon the Agent, any other Lender or counsel to the Agent or any of their respective officers, directors, employees and agents, and based on such review, advice, documents and information as it shall deem appropriate at the time, continue to make its own decisions in taking or not taking action under the Loan Documents. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Agent under this Agreement or any of the other Loan Documents, the Agent shall have no duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, financial and other condition or creditworthiness of the Borrower, any other Loan Party or any other Affiliate thereof which may come into possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or other Affiliates. Each Lender acknowledges that the Agent's legal counsel in connection with the transactions contemplated by this Agreement is only acting as counsel to the Agent and is not acting as counsel to such Lender. -81- Section 11.7. Indemnification of Agent. Each Lender agrees to indemnify the Agent (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so) pro rata in accordance with such Lender's respective Commitment Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against the Agent (in its capacity as Agent but not as a Lender) in any way relating to or arising out of the Loan Documents, any transaction contemplated hereby or thereby or any action taken or omitted by the Agent under the Loan Documents (collectively, "Indemnifiable Amounts"); provided, however, that no Lender shall be liable for any portion of such Indemnifiable Amounts to the extent resulting from the Agent's gross negligence or willful misconduct or if the Agent fails to follow the written direction of the Requisite Lenders unless such failure is pursuant to the reasonable advice of counsel of which the Lenders have received notice. Without limiting the generality of the foregoing but subject to the preceding proviso, each Lender agrees to reimburse the Agent (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so) promptly upon demand for its ratable share of any out-of-pocket expenses (including reasonable counsel fees of the counsel(s) of the Agent's own choosing) incurred by the Agent in connection with the preparation, negotiation, execution, or enforcement of, or legal advice with respect to the rights or responsibilities of the parties under, the Loan Documents, any suit or action brought by the Agent to enforce the terms of the Loan Documents and/or collect any Obligations, any "lender liability" suit or claim brought against the Agent and/or the Lenders, and any claim or suit brought against the Agent and/or the Lenders arising under any Environmental Laws. Such out-of-pocket expenses (including counsel fees) shall be advanced by the Lenders on the request of the Agent notwithstanding any claim or assertion that the Agent is not entitled to indemnification hereunder upon receipt of an undertaking by the Agent that the Agent will reimburse the Lenders if it is actually and finally determined by a court of competent jurisdiction that the Agent is not so entitled to indemnification. The agreements in this Section shall survive the payment of the Loans and all other amounts payable hereunder or under the other Loan Documents and the termination of this Agreement. If the Borrower shall reimburse the Agent for any Indemnifiable Amount following payment by any Lender to the Agent in respect of such Indemnifiable Amount pursuant to this Section, the Agent shall share such reimbursement on a ratable basis with each Lender making any such payment. Section 11.8. Successor Agent. The Agent may resign at any time as Agent under the Loan Documents by giving written notice thereof to the Lenders and the Borrower. The Agent may be removed as Agent under the Loan Documents for good cause by the Supermajority Lenders upon 30 days' prior notice. Upon any such resignation or removal, the Requisite Lenders (other than the Lender then acting as Agent, in the case of the removal of the Agent under the immediately preceding sentence) shall have the right to appoint a successor Agent which appointment shall, provided no Default or Event of Default shall have occurred and be continuing, be subject to the Borrower's approval, which approval shall not be unreasonably withheld or delayed (except that the Borrower shall, in all events, be deemed to have approved each Lender and its affiliates as a successor Agent). If no successor Agent shall have been so appointed in accordance with the immediately preceding -82- sentence, and shall have accepted such appointment, within 30 days after the resigning Agent's giving of notice of resignation or the Lenders' removal of the resigning Agent, then the resigning or removed Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be a Lender, if any Lender shall be willing to serve, and otherwise shall be a commercial bank having total combined assets of at least $50,000,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under the Loan Documents. After any Agent's resignation or removal hereunder as Agent, the provisions of this Article XI. shall continue to inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under the Loan Documents. Section 11.9. Titled Agents. Each of the Titled Agents in each such respective capacity, assumes no responsibility or obligations hereunder, including, without limitation, for servicing enforcement or collection of any of the Loans, nor any duties as an agent hereunder for the Lenders. The titles of "Lead Arranger", "Co-Lead Arranger", "Syndication Agent" and "Documentation Agent" are solely honorific and imply no fiduciary responsibility on the part of the Titled Agents to the Agent, the Borrower or any Lender and the use of such titles does not impose on the Titled Agents any duties or obligations greater than those of any other Lender or entitle the Titled Agents to any rights other than those to which any other Lender is entitled. ARTICLE XII. MISCELLANEOUS Section 12.1. Notices. Unless otherwise provided herein, communications provided for hereunder shall be in writing and shall be mailed, telecopied or delivered as follows: If to the Borrower: Hospitality Properties Trust 400 Centre Street Newton, Massachusetts 02458 Attention: Thomas M. O'Brien Telecopy Number: (617) 796-8156 Telephone Number: (617) 964-8389 If to the Agent: First Union National Bank One First Union Center, NC0172 Charlotte, North Carolina 28288 Attention: Rex E. Rudy Telecopy Number: (704) 383-6205 Telephone Number: (704) 383-6506 -83- If to a Lender: To such Lender's address or telecopy number, as applicable, set forth on its signature page hereto or in the applicable Assignment and Acceptance Agreement. or, as to each party at such other address as shall be designated by such party in a written notice to the other parties delivered in compliance with this Section. All such notices and other communications shall be effective (i) if mailed, when received; (ii) if telecopied, when transmitted; or (iii) if hand delivered, when delivered. Notwithstanding the immediately preceding sentence, all notices or communications to the Agent or any Lender under Article II. shall be effective only when actually received. Neither the Agent nor any Lender shall incur any liability to the Borrower (nor shall the Agent incur any liability to the Lenders) for acting upon any telephonic notice referred to in this Agreement which the Agent or such Lender, as the case may be, believes in good faith to have been given by a Person authorized to deliver such notice or for otherwise acting in good faith hereunder. Section 12.2. Expenses. The Borrower agrees (a) to pay or reimburse the Agent for all of its reasonable out-of-pocket costs and expenses incurred in connection with the preparation, negotiation and execution of, and any amendment, supplement or modification to, any of the Loan Documents (including due diligence expenses and travel expenses relating to closing), and the consummation of the transactions contemplated thereby, including the reasonable fees and disbursements of counsel to the Agent, (b) to pay or reimburse the Agent and the Lenders for all their costs and expenses incurred in connection with the enforcement or preservation of any rights under the Loan Documents, including the reasonable fees and disbursements of their respective counsel (including the allocated fees and expenses of in-house counsel) and any payments in indemnification or otherwise payable by the Lenders to the Agent pursuant to the Loan Documents, (c) to pay, and indemnify and hold harmless the Agent and the Lenders from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any failure to pay or delay in paying, documentary, stamp, excise and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of any of the Loan Documents, or consummation of any amendment, supplement or modification of, or any waiver or consent under or in respect of, any Loan Document and (d) to the extent not already covered by any of the preceding subsections, to pay or reimburse the Agent and the Lenders for all their costs and expenses incurred in connection with any bankruptcy or other proceeding of the type described in Sections 10.1.(f) or 10.1.(g), including the reasonable fees and disbursements of counsel to the Agent and any Lender, whether such fees and expenses are incurred prior to, during or after the commencement of such proceeding or the confirmation or conclusion of any such proceeding. If the Borrower shall fail to pay any amounts required to be paid by it pursuant to this Section, the Agent and/or the Lenders may pay such amounts on behalf of the Borrower and either deem the same to be Loans outstanding hereunder or otherwise Obligations owing hereunder. -84- Section 12.3. Setoff. Subject to Section 3.3. and in addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, the Agent, each Lender and each Participant is hereby authorized by the Borrower, at any time or from time to time during the continuance of an Event of Default, without prior notice to the Borrower or to any other Person, any such notice being hereby expressly waived, but in the case of a Lender or Participant subject to receipt of the prior written consent of the Agent exercised in its sole discretion, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by the Agent, such Lender or any affiliate of the Agent or such Lender, to or for the credit or the account of the Borrower against and on account of any of the Obligations, irrespective of whether or not any or all of the Loans and all other Obligations have been declared to be, or have otherwise become, due and payable as permitted by Section 10.2., and although such obligations shall be contingent or unmatured. Promptly following any such set-off the Agent shall notify the Borrower thereof and of the application of such set-off, provided that the failure to give such notice shall not invalidate such set-off. Section 12.4. Litigation; Jurisdiction; Other Matters; Waivers. (a) EACH PARTY HERETO ACKNOWLEDGES THAT ANY DISPUTE OR CONTROVERSY BETWEEN OR AMONG THE BORROWER, THE AGENT OR ANY OF THE LENDERS WOULD BE BASED ON DIFFICULT AND COMPLEX ISSUES OF LAW AND FACT AND WOULD RESULT IN DELAY AND EXPENSE TO THE PARTIES. ACCORDINGLY, TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE LENDERS, THE AGENT AND THE BORROWER HEREBY WAIVES ITS RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST ANY PARTY HERETO ARISING OUT OF THIS AGREEMENT, THE NOTES, OR ANY OTHER LOAN DOCUMENT OR BY REASON OF ANY OTHER SUIT, CAUSE OF ACTION OR DISPUTE WHATSOEVER BETWEEN OR AMONG THE BORROWER, THE AGENT OR ANY OF THE LENDERS OF ANY KIND OR NATURE. (b) EACH OF THE BORROWER, THE AGENT AND EACH LENDER HEREBY AGREES THAT THE FEDERAL DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK OR, AT THE OPTION OF THE AGENT, ANY STATE COURT LOCATED IN NEW YORK, NEW YORK, SHALL HAVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN OR AMONG THE BORROWER, THE AGENT OR ANY OF THE LENDERS, PERTAINING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, THE LOANS AND LETTERS OF CREDIT, THE NOTES OR ANY OTHER LOAN DOCUMENT OR TO ANY MATTER ARISING HEREFROM OR THEREFROM. THE BORROWER AND EACH OF THE LENDERS EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN SUCH COURTS. EACH PARTY FURTHER WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH -85- ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT FORUM AND EACH AGREES NOT TO PLEAD OR CLAIM THE SAME. THE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE BRINGING OF ANY ACTION BY THE AGENT OR ANY LENDER OR THE ENFORCEMENT BY THE AGENT OR ANY LENDER OF ANY JUDGMENT OBTAINED IN SUCH FORUM IN ANY OTHER APPROPRIATE JURISDICTION. (c) THE PROVISIONS OF THIS SECTION HAVE BEEN CONSIDERED BY EACH PARTY WITH THE ADVICE OF COUNSEL AND WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF, AND SHALL SURVIVE THE PAYMENT OF THE LOANS AND ALL OTHER AMOUNTS PAYABLE HEREUNDER OR UNDER THE OTHER LOAN DOCUMENTS, THE TERMINATION OR EXPIRATION OF ALL LETTERS OF CREDIT AND THE TERMINATION OF THIS AGREEMENT. Section 12.5. Successors and Assigns. (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns, except that the Borrower may not assign or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of all Lenders and any such assignment or other transfer to which all of the Lenders have not so consented shall be null and void. (b) Any Lender may make, carry or transfer Loans at, to or for the account of any of its branch offices or the office of an affiliate of such Lender except to the extent such transfer would result in increased costs to the Borrower. (c) Any Lender may at any time grant to one or more banks or other financial institutions (each a "Participant") participating interests in its Commitment or the Obligations owing to such Lender; provided, however, (i) any such participating interest must be for a constant and not a varying percentage interest, (ii) no Lender may grant a participating interest in its Commitment, or if the Commitments have been terminated, the aggregate outstanding principal balance of Notes held by it, in an amount less than $5,000,000 and (iii) after giving effect to any such participation by a Lender, the amount of its Commitment, or if the Commitments have been terminated, the aggregate outstanding principal balance of Notes held by it, in which it has not granted any participating interests must be equal to $5,000,000 and integral multiples of $1,000,000 in excess thereof. Except as otherwise provided in Section 12.3., no Participant shall have any rights or benefits under this Agreement or any other Loan Document. In the event of any such grant by a Lender of a participating interest to a Participant, such Lender shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement. Any agreement pursuant to which any Lender may grant such a participating interest shall provide that such Lender shall retain the sole right and responsibility to enforce the obligations of the Borrower hereunder including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement; provided, however, such Lender may agree with the Participant that it will not, without the consent of the Participant, agree to -86- (i) increase, or extend the term or extend the time or waive any requirement for the reduction or termination of, such Lender's Commitment, (ii) extend the date fixed for the payment of principal of or interest on the Loans or portions thereof owing to such Lender, (iii) reduce the amount of any such payment of principal, (iv) reduce the rate at which interest is payable thereon or (v) release any Guarantor (except as otherwise permitted under Section 7.12.(b)). An assignment or other transfer which is not permitted by subsection (d) or (e) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection (c). The selling Lender shall notify the Agent and the Borrower of the sale of any participation hereunder and, if requested by the Agent, certify to the Agent that such participation is permitted hereunder. (d) Any Lender may with the prior written consent of the Agent and, so long as no Default or Event of Default shall have occurred and be continuing, the Borrower (which consent, in each case, shall not be unreasonably withheld or delayed), assign to one or more Eligible Assignees (each an "Assignee") all or a portion of its Commitment and its other rights and obligations under this Agreement and the Notes; provided, however, (i) no such consent by the Borrower shall be required in the case of any assignment to another Lender or any affiliate of such Lender or another Lender and no such consent by the Agent shall be required in the case of any assignment by a Lender to any affiliate of such Lender; (ii) any partial assignment shall be in an amount at least equal to $5,000,000 and integral multiples of $1,000,000 in excess thereof and after giving effect to such assignment the assigning Lender retains a Commitment, or if the Commitments have been terminated, holds Notes having an aggregate outstanding principal balance, of at least $5,000,000 and integral multiples of $1,000,000 in excess thereof; and (iii) each such assignment shall be effected by means of an Assignment and Acceptance Agreement. Upon execution and delivery of such instrument and payment by such Assignee to such transferor Lender of an amount equal to the purchase price agreed between such transferor Lender and such Assignee, such Assignee shall be deemed to be a Lender party to this Agreement as of the effective date of the Assignment and Acceptance Agreement and shall have all the rights and obligations of a Lender with a Commitment as set forth in such Assignment and Acceptance Agreement, and the transferor Lender shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection (d), the transferor Lender, the Agent and the Borrower shall make appropriate arrangements so that new Notes are issued to the Assignee and such transferor Lender, as appropriate. In connection with any such assignment, the transferor Lender shall pay to the Agent an administrative fee for processing such assignment in the amount of $3,500. (e) The Agent shall maintain at the Principal Office a copy of each Assignment and Acceptance Agreement delivered to and accepted by it and a register for the recordation of the names and addresses of the Lenders and the Commitment of each Lender from time to time (the "Register"). The Agent shall give each Lender and the Borrower notice of the assignment by any Lender of its rights as contemplated by this Section. The Borrower, the Agent and the Lenders may treat each Person whose name is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register and copies of each Assignment and Acceptance Agreement shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice to the Agent. Upon its receipt of an -87- Assignment and Acceptance Agreement executed by an assigning Lender, together with each Note subject to such assignment, the Agent shall, if such Assignment and Acceptance Agreement has been completed and if the Agent receives the processing and recording fee described in subsection (d) above, (i) accept such Assignment and Acceptance Agreement, (ii) record the information contained therein in the Register and (iii) give prompt notice thereof to the Borrower. (f) In addition to the assignments and participations permitted under the foregoing provisions of this Section, any Lender may assign and pledge all or any portion of its Loans and its Notes to any Federal Reserve Bank as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank, and such Loans and Notes shall be fully transferable as provided therein. No such assignment shall release the assigning Lender from its obligations hereunder. (g) A Lender may furnish any information concerning the Borrower, any other Loan Party or any of their respective Subsidiaries or Affiliates in the possession of such Lender from time to time to Assignees and Participants (including prospective Assignees and Participants) subject to compliance with Section 12.8. (h) Anything in this Section to the contrary notwithstanding, no Lender may assign or participate any interest in any Loan held by it hereunder to the Borrower, any other Loan Party or any of their respective Affiliates or Subsidiaries. (i) Each Lender agrees that, without the prior written consent of the Borrower and the Agent, it will not make any assignment hereunder in any manner or under any circumstances that would require registration or qualification of, or filings in respect of, any Loan or Note under the Securities Act or any other securities laws of the United States of America or of any other jurisdiction. Section 12.6. Amendments. Except as otherwise expressly provided in this Agreement, any consent or approval required or permitted by this Agreement or any other Loan Document to be given by the Lenders may be given, and any term of this Agreement or of any other Loan Document may be amended, and the performance or observance by the Borrower or any other Loan Party or any Subsidiary of any terms of this Agreement or such other Loan Document or the continuance of any Default or Event of Default may be waived (either generally or in a particular instance and either retroactively or prospectively) with, but only with, the written consent of the Requisite Lenders (and, in the case of an amendment to any Loan Document, the written consent of the Borrower). Notwithstanding the foregoing, no amendment, waiver or consent shall, unless in writing, and signed by all of the Lenders (or the Agent at the written direction of the Lenders), do any of the following: (i) increase the Commitments of the Lenders (except as contemplated by Section 2.14.) or subject the Lenders to any additional obligations; (ii) reduce the principal of, or interest rates that have accrued or that will be charged on the outstanding principal amount of, any Loans or Fees or other Obligations; (iii) reduce the amount of any Fees payable hereunder; (iv) postpone any date fixed for any payment of any principal of, or interest on, any Loans or any other Obligations, or extend the expiration date of any Letter of Credit beyond the Termination -88- Date; (v) change the Commitment Percentages (except as a result of any increase in the aggregate amount of the Commitments contemplated by Section 2.14., 3.11.(b) or 4.5.) or amend or otherwise modify the provisions of Section 3.2.; (vi) modify the definition of the term "Requisite Lenders", "Supermajority Lenders", or, except as otherwise provided in clauses (a) through (c) of the immediately following sentence, modify in any other manner the number or percentage of the Lenders required to make any determinations or waive any rights hereunder or to modify any provision hereof, including without limitation, any modification of this Section if such modification would have such effect; (vii) release any Guarantor from its obligations under the Guaranty (except as otherwise permitted under Section 7.12.(b)); (viii) amend Section 9.1.(f) or waive any Default or Event of Default occurring under Section 10.1.(c) resulting from a violation of such Section; (ix) amend the definition of "Unencumbered Asset Value" (or any of the definitions used in such definition for purposes of the use thereof in such definition, or the percentages or rates used in the calculation thereof); or (x) amend or otherwise modify the provisions of Section 2.13.. In addition, no amendment, waiver or consent shall, unless in writing, and signed by the Supermajority Lenders (or the Agent at the written direction of the Supermajority Lenders), do any of the following: (a) amend or otherwise modify the provisions of, or waive any Event of Default occurring under, Section 10.1.(m); or (b) amend Section 9.1.(g) or waive any Default or Event of Default occurring under Section 10.1.(c) resulting from a violation of such Section. Further, no amendment, waiver or consent unless in writing and signed by the Agent, in addition to the Lenders required hereinabove to take such action, shall affect the rights or duties of the Agent under this Agreement or any of the other Loan Documents. Any amendment, waiver or consent relating to Section 2.2. or the obligations of the Swingline Lender under this Agreement or any other Loan Document shall, in addition to the Lenders required hereinabove to take such action, require the written consent of the Swingline Lender. No waiver shall extend to or affect any obligation not expressly waived or impair any right consequent thereon and any amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose set forth therein. No course of dealing or delay or omission on the part of the Agent or any Lender in exercising any right shall operate as a waiver thereof or otherwise be prejudicial thereto. Except as otherwise explicitly provided for herein or in any other Loan Document, no notice to or demand upon the Borrower shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 12.7. Nonliability of Agent and Lenders. The relationship between the Borrower and the Lenders and the Agent shall be solely that of borrower and lender. Neither the Agent nor any Lender shall have any fiduciary responsibilities to the Borrower and no provision in this Agreement or in any of the other Loan Documents, and no course of dealing between or among any of the parties hereto, shall be deemed to create any fiduciary duty owing by the Agent or any Lender to any Lender, the Borrower, any Subsidiary or any other Loan Party. Neither the Agent nor any Lender undertakes any responsibility to the Borrower to review or inform the Borrower of any matter in connection with any phase of the Borrower's business or operations. Section 12.8. Confidentiality. Except as otherwise provided by Applicable Law, the Agent and each Lender shall utilize all non-public information obtained pursuant to the requirements of this Agreement which has -89- been identified as confidential or proprietary by the Borrower in accordance with its customary procedure for handling confidential information of this nature and in accordance with safe and sound banking practices but in any event may make disclosure: (a) to any of their respective affiliates (provided they shall agree to keep such information confidential in accordance with the terms of this Section); (b) as reasonably requested by any bona fide Assignee, Participant or other transferee in connection with the contemplated transfer of any Commitment or participations therein as permitted hereunder (provided they shall agree to keep such information confidential in accordance with the terms of this Section); (c) as required or requested by any Governmental Authority or representative thereof or pursuant to legal process or in connection with any legal proceedings; (d) to the Agent's or such Lender's independent auditors and other professional advisors (provided they shall be notified of the confidential nature of the information); (e) after the happening and during the continuance of an Event of Default, to any other Person, in connection with the exercise by the Agent or the Lenders of rights hereunder or under any of the other Loan Documents; and (f) to the extent such information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Agent or any Lender on a nonconfidential basis from a source other than the Borrower or any Affiliate. Section 12.9. Indemnification. (a) The Borrower shall and hereby agrees to indemnify, defend and hold harmless the Agent, any affiliate of the Agent and each of the Lenders and their respective directors, officers, shareholders, agents, employees and counsel (each referred to herein as an "Indemnified Party") from and against any and all losses, costs, claims, damages, liabilities, deficiencies, judgments or expenses of every kind and nature (including, without limitation, amounts paid in settlement, court costs and the fees and disbursements of counsel incurred in connection with any litigation, investigation, claim or proceeding or any advice rendered in connection therewith, but excluding losses, costs, claims, damages, liabilities, deficiencies, judgments or expenses indemnification in respect of which is specifically covered by Section 3.12. or 4.1. or expressly excluded from the coverage of such Sections) incurred by an Indemnified Party in connection with, arising out of, or by reason of, any suit, cause of action, claim, arbitration, investigation or settlement, consent decree or other proceeding (the foregoing referred to herein as an "Indemnity Proceeding") which is in any way related directly or indirectly to: (i) this Agreement or any other Loan Document or the transactions contemplated thereby; (ii) the making of any Loans or issuance of Letters of Credit hereunder; (iii) any actual or proposed use by the Borrower of the proceeds of the Loans or Letters of Credit; (iv) the Agent's or any Lender's entering into this Agreement; (v) the fact that the Agent and the Lenders have established the credit facility evidenced hereby in favor of the Borrower; (vi) the fact that the Agent and the Lenders are creditors of the Borrower and have or are alleged to have information regarding the financial condition, strategic plans or business operations of the Borrower and the Subsidiaries; (vii) the fact that the Agent and the Lenders are material creditors of the Borrower and are alleged to influence directly or indirectly the business decisions or affairs of the Borrower and the Subsidiaries or their financial condition; (viii) the exercise of any right or remedy the Agent or the Lenders may have under this Agreement or the other Loan Documents; provided, however, that the Borrower shall not be obligated to indemnify any Indemnified Party for any acts or omissions of such Indemnified Party in connection with matters described in this clause (viii) that constitute gross negligence or willful misconduct; or (ix) any violation or non-compliance by the Borrower or any Subsidiary -90- of any Applicable Law (including any Environmental Law) including, but not limited to, any Indemnity Proceeding commenced by (A) the Internal Revenue Service or state taxing authority or (B) any Governmental Authority or other Person under any Environmental Law, including any Indemnity Proceeding commenced by a Governmental Authority or other Person seeking remedial or other action to cause the Borrower or its Subsidiaries (or its respective properties) (or the Agent and/or the Lenders as successors to the Borrower) to be in compliance with such Environmental Laws. (b) The Borrower's indemnification obligations under this Section shall apply to all Indemnity Proceedings arising out of, or related to, the foregoing whether or not an Indemnified Party is a named party in such Indemnity Proceeding. In this connection, this indemnification shall cover all costs and expenses of any Indemnified Party in connection with any deposition of any Indemnified Party or compliance with any subpoena (including any subpoena requesting the production of documents). This indemnification shall, among other things, apply to any Indemnity Proceeding commenced by other creditors of the Borrower or any Subsidiary, any shareholder of the Borrower or any Subsidiary (whether such shareholder(s) are prosecuting such Indemnity Proceeding in their individual capacity or derivatively on behalf of the Borrower), any account debtor of the Borrower or any Subsidiary or by any Governmental Authority. (c) This indemnification shall apply to any Indemnity Proceeding arising during the pendency of any bankruptcy proceeding filed by or against the Borrower and/or any Subsidiary. (d) All out-of-pocket fees and expenses of, and all amounts paid to third-persons by, an Indemnified Party shall be advanced by the Borrower at the request of such Indemnified Party notwithstanding any claim or assertion by the Borrower that such Indemnified Party is not entitled to indemnification hereunder upon receipt of an undertaking by such Indemnified Party that such Indemnified Party will reimburse the Borrower if it is actually and finally determined by a court of competent jurisdiction that such Indemnified Party is not so entitled to indemnification hereunder. (e) An Indemnified Party may conduct its own investigation and defense of, and may formulate its own strategy with respect to, any Indemnified Proceeding covered by this Section and, as provided above, all costs and expenses incurred by such Indemnified Party shall be reimbursed by the Borrower. No action taken by legal counsel chosen by an Indemnified Party in investigating or defending against any such Indemnified Proceeding shall vitiate or in any way impair the obligations and duties of the Borrower hereunder to indemnify and hold harmless each such Indemnified Party; provided, however, that (i) if the Borrower is required to indemnify an Indemnified Party pursuant hereto and (ii) the Borrower has provided evidence reasonably satisfactory to such Indemnified Party that the Borrower has the financial wherewithal to reimburse such Indemnified Party for any amount paid by such Indemnified Party with respect to such Indemnified Proceeding, such Indemnified Party shall not settle or compromise any such Indemnified Proceeding without the prior written consent of the Borrower (which consent shall not be unreasonably withheld or delayed). -91- (f) If and to the extent that the obligations of the Borrower hereunder are unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under Applicable Law. (g) The Borrower's obligations hereunder shall survive any termination of this Agreement and the other Loan Documents and the payment in full in cash of the Obligations, and are in addition to, and not in substitution of, any other of their obligations set forth in this Agreement or any other Loan Document to which it is a party. Section 12.10. Termination; Survival. At such time as (a) all of the Commitments have been terminated, (b) all Letters of Credit have terminated, (c) none of the Lenders nor the Swingline Lender is obligated any longer under this Agreement to make any Loans and (d) all Obligations (other than obligations which survive as provided in the following sentence) have been paid and satisfied in full, this Agreement shall terminate. The indemnities to which the Agent, the Lenders and the Swingline Lender are entitled under the provisions of Sections 3.12., 4.1., 4.4., 11.7., 12.2. and 12.9. and any other provision of this Agreement and the other Loan Documents, and the provisions of Section 12.4., shall continue in full force and effect and shall protect the Agent, the Lenders and the Swingline Lender (i) notwithstanding any termination of this Agreement, or of the other Loan Documents, against events arising after such termination as well as before and (ii) at all times after any such party ceases to be a party to this Agreement with respect to all matters and events existing on or prior to the date such party ceased to be a party to this Agreement. Section 12.11. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions or affecting the validity or enforceability of such provision in any other jurisdiction. Section 12.12. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE. Section 12.13. Counterparts. This Agreement and any amendments, waivers, consents or supplements may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original, but all of which counterparts together shall constitute but one and the same instrument. -92- Section 12.14. Obligations with Respect to Loan Parties. The obligations of the Borrower to direct or prohibit the taking of certain actions by the other Loan Parties as specified herein shall be absolute and not subject to any defense the Borrower may have that the Borrower does not control such Loan Parties. Section 12.15. Limitation of Liability. Neither the Agent nor any Lender, nor any affiliate, officer, director, employee, attorney, or agent of the Agent or any Lender shall have any liability with respect to, and the Borrower hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by the Borrower in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or any of the other Loan Documents. The Borrower hereby waives, releases, and agrees not to sue the Agent or any Lender or any of the Agent's or any Lender's affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Agreement or any of the other Loan Documents, or any of the transactions contemplated by this Agreement or financed hereby. Section 12.16. Entire Agreement. This Agreement, the Notes, and the other Loan Documents referred to herein embody the final, entire agreement among the parties hereto and supersede any and all prior commitments, agreements, representations, and understandings, whether written or oral, relating to the subject matter hereof and thereof and may not be contradicted or varied by evidence of prior, contemporaneous, or subsequent oral agreements or discussions of the parties hereto. There are no oral agreements among the parties hereto. Section 12.17. Construction. The Agent, the Borrower and each Lender acknowledge that each of them has had the benefit of legal counsel of its own choice and has been afforded an opportunity to review this Agreement and the other Loan Documents with its legal counsel and that this Agreement and the other Loan Documents shall be construed as if jointly drafted by the Agent, the Borrower and each Lender. Section 12.18. LIABILITY OF TRUSTEES, ETC. THE PARTIES HERETO ACKNOWLEDGE AND AGREE AS FOLLOWS: THE AMENDED AND RESTATED DECLARATION OF TRUST ESTABLISHING THE BORROWER, DATED AUGUST 21, 1995, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE OFFICE OF THE STATE DEPARTMENT OF ASSESSMENTS AND TAXATION OF MARYLAND, PROVIDES THAT THE NAME "HOSPITALITY PROPERTIES TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS -93- 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 WAY, SHALL LOOK ONLY TO THE ASSETS OF THE BORROWER FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION. THE PROVISIONS OF THIS SECTION SHALL NOT LIMIT ANY OBLIGATIONS OF ANY LOAN PARTY OTHER THAN THE BORROWER. [Signatures on Following Pages] -94- IN WITNESS WHEREOF, the parties hereto have caused this Credit Agreement to be executed by their authorized officers all as of the day and year first above written. Borrower: Hospitality Properties Trust By: /s/ Thomas M. O'Brien Name: Thomas M. O'Brien Title: Treasurer Attest: /s/ John G. Murray Name: John G. Murray Title: President [Signatures Continued on Next Page] -95- [Signature Page to Credit Agreement dated as of March 26, 2002 with Hospitality Properties Trust] First Union National Bank, as Agent, as a Lender and as Swingline Lender By: /s/ Rex E. Rudy Name: Rex E. Rudy Title: Director Commitment Amount: $45,000,000 Lending Office (all Types of Loans): First Union National Bank REIT Banking Group One First Union Center, NC5604 301 South College Street Charlotte, North Carolina 28288 Attn: Rex E. Rudy Telecopier: (704) 383-6205 Telephone: (704) 383-6506 [Signatures Continued on Next Page] -96- [Signature Page to Credit Agreement dated as of March 26, 2002 with Hospitality Properties Trust] DRESDNER BANK AG, NEW YORK AND GRAND CAYMAN BRANCHES By: /s/ Michael A. Seton Name: Michael A. Seton Title: Director By: /s/ David Sarner Name: David Sarner Title: Associate Commitment Amount: $45,000,000 Lending Office (all Types of Loans): Dresdner Bank AG, New York and Grand Cayman Branches 75 Wall Street, 25th Floor New York, New York 10005 Attn: Michael Seton Telecopier: (212) 429-2129 Telephone: (212) 429-3277 [Signatures Continued on Next Page] -97- [Signature Page to Credit Agreement dated as of March 26, 2002 with Hospitality Properties Trust] ING CAPITAL LLC By: /s/ David J. Lattimer Name: David J. Lattimer Title: Vice President Commitment Amount: $40,000,000 Lending Office (all Types of Loans): ING Capital LLC 1325 Avenue of the Americas, 7th Floor New York, New York 10019 Attn: David J. Lattimer Telecopier: (646) 424-6210 Telephone: (646) 424-6209 [Signatures Continued on Next Page] -98- [Signature Page to Credit Agreement dated as of March 26, 2002 with Hospitality Properties Trust] CIBC INC. By: /s/ Dean J. Decker Name: Dean J. Decker Title: Managing Director CIBC World Markets Corp. AS AGENT Commitment Amount: $32,500,000 Lending Office (all Types of Loans): CIBC World Markets Corp. 10880 Wilshire Blvd. Suite 1700 Los Angeles, California 90024 Attn: Leo Fernandez Telecopier: (310) 446-3549 Telephone: (310) 446-3610 [Signatures Continued on Next Page] -99- [Signature Page to Credit Agreement dated as of March 26, 2002 with Hospitality Properties Trust] SOCIETE GENERALE By: /s/ Thomas K. Day Name: Thomas K. Day Title: Managing Director Commitment Amount: $32,500,000 Lending Office (all Types of Loans): Societe Generale 2001 Ross Avenue Suite 4900 Dallas, Texas 75201 Attn: Thomas K. Day Telecopier: (214) 979-2777 Telephone: (214) 979-2774 [Signatures Continued on Next Page] -100- [Signature Page to Credit Agreement dated as of March 26, 2002 with Hospitality Properties Trust] PNC BANK, NATIONAL ASSOCIATION By: /s/ James A. Colella Name: James A. Colella Title: Vice President Commitment Amount: $30,000,000 Lending Office (all Types of Loans): PNC Bank, National Association One PNC Plaza 249 Fifth Avenue Mail Stop P1-POPP-19-2 Pittsburgh, Pennsylvania 15222 Attn: Jim Colella Telecopier: (412) 762-6500 Telephone: (412) 762-2260 [Signatures Continued on Next Page] -101- [Signature Page to Credit Agreement dated as of March 26, 2002 with Hospitality Properties Trust] WELLS FARGO BANK, NATIONAL ASSOCIATION By: /s/ Douglas S. Novitch Name: Douglas S. Novitch Title: Authorized Officer Commitment Amount: $30,000,000 Lending Office (all Types of Loans): Wells Fargo Bank, National Association 2120 East Park Place St., 100 El Segundo, California 90245 Attn: Joel Padilla Telecopier: (310) 615-1014 Telephone: (310) 335-9460 Address for Notices: Wells Fargo Bank, National Association Real Estate Group 121 High Street, 6th Floor Boston, Massachusetts 02110 Attn: Keta N. Marsman, Loan Administration Officer Telecopier: (617) 772-9337 Telephone: (617) 574-6313 with a copy to: Wells Fargo Bank, National Association Real Estate Group 420 Montgomery Street, Sixth Floor San Francisco, California 94111 Attn: Chief Credit Officer, Real Estate Group Telecopier: 415-781-8324 Telephone: 415-394-4078 [Signatures Continued on Next Page] -102- [Signature Page to Credit Agreement dated as of March 26, 2002 with Hospitality Properties Trust] CREDIT LYONNAIS NEW YORK BRANCH By: /s/ David Bowers Name: David Bowers Title: Vice President Commitment Amount: $30,000,000 Lending Office (all Types of Loans): Credit Lyonnais New York Branch 1301 Avenue of the Americas New York, New York 10019 Attn: David Bowers Telecopier: (212) 261-7532 Telephone: (212) 261-7831 [Signatures Continued on Next Page] -103- [Signature Page to Credit Agreement dated as of March 26, 2002 with Hospitality Properties Trust] AMSOUTH BANK By: /s/ David G. Ellis Name: David G. Ellis Title: Officer Commitment Amount: $25,000,000 Lending Office (all Types of Loans): AmSouth Bank 1900 5th Avenue North AST-9 Birmingham, Alabama 35203 Attn: Dave Ellis Telecopier: (205) 326-4075 Telephone: (205) 581-7646 [Signatures Continued on Next Page] -104- [Signature Page to Credit Agreement dated as of March 26, 2002 with Hospitality Properties Trust] BANK OF MONTREAL By: /s/ Eduardo Mendoza Name: Eduardo Mendoza Title: Vice President Commitment Amount: $20,000,000 Lending Office (all Types of Loans): Bank of Montreal 115 S. LaSalle St., 5C Chicago, Illinois 60603 Attn: Eduardo Mendoza Telecopier: (312) 293-5852 Telephone: (312) 461-7521 [Signatures Continued on Next Page] -105- [Signature Page to Credit Agreement dated as of March 26, 2002 with Hospitality Properties Trust] ALLIED IRISH BANKS, P.L.C. By: /s/ Hillary Patterson Name: Hillary Patterson Title:___________________ By: /s/ Tony O'Reilly Name: Tony O'Reilly Title: Vice President Commitment Amount: $20,000,000 Lending Office (all Types of Loans): AIB Corporate Banking NY, Allied Irish Banks, p.l.c. 405 Park Avenue, Suite 1005 New York, New York 10022 Attn: Tony O'Reilly Telecopier: (212) 339-8325 Telephone: (212) 515-6847 -106- SCHEDULE 1.1.(a)
Applicable Margin - ------------------------------------------------------------------------------------------------------ Borrower's Credit Rating Applicable Margin Applicable Margin Level (S&P/Moody's (other)) for LIBOR Loans for Base Rate Loans - ------------------------------------------------------------------------------------------------------ 1 BBB+/Baa1 (or equivalent) 1.00% 0.0% - ------------------------------------------------------------------------------------------------------ 2 BBB/Baa2 (or equivalent) 1.15% 0.0% - ------------------------------------------------------------------------------------------------------ 3 BBB-/Baa3 (or equivalent) 1.35% 0.15% - ------------------------------------------------------------------------------------------------------ 4 < BBB-/Baa3 (or equivalent) 1.65% 0.50 % - ------------------------------------------------------------------------------------------------------
SCHEDULE 1.1.(b) Facility Fee -------------------------------------- Level Facility Fee -------------------------------------- 1 0.20% -------------------------------------- 2 0.25% -------------------------------------- 3 0.30% -------------------------------------- 4 0.35% -------------------------------------- SCHEDULES TO HOSPITALITY PROPERTIES TRUST CREDIT AGREEMENT dated as of March 26, 2002 Schedule 1.1(a) List of All Loan Parties and State of Formation [This schedule includes a list of the Borrower and all Material Subsidiaries indicating their respective states of formation.] Schedule 6.1(b) Ownership Structure [This schedule contains an organizational chart of the Borrower and its subsidiaries.] Schedule 6.1(f) [Part I of this schedule cross references the list of properties attached to Exhibit 6.1(y).] [Part II of this schedule lists Permitted Liens of which there are none.] Schedule 6.1(g) Indebtedness (excluding Indebtedness under Leases and Ancillary Documents) [This schedule contains a list of the Indebtedness of the Borrower, excluding Indebtedness under Leases and Ancillary Documents.] Schedule 6.1(h) Material Contracts [Part I of this schedule lists all Material Contracts (excluding leases and ancillary documents).] [Part II of this schedule lists lease documents and ancillary documents.] Schedule 6.1(i) Litigation None Schedule 6.1(k) Certain Liabilities not disclosed on Financial Statements None Schedule 6.1(y) List of Unencumbered Assets [This schedule contains a list of the properties owned by the Borrower.] EXHIBIT A FORM OF ASSIGNMENT AND Acceptance AGREEMENT THIS ASSIGNMENT AND Acceptance AGREEMENT dated as of ___________, 200_ (the "Agreement") by and among _________________________ (the "Assignor"), _________________________ (the "Assignee"), and First Union National Bank, as Agent (the "Agent"). WHEREAS, the Assignor is a Lender under that certain Credit Agreement dated as of March ___, 2002 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Hospitality Properties Trust (the "Borrower"), the financial institutions party thereto and their assignees under Section 12.5 thereof (the "Lenders"), the Agent, and the other parties thereto; WHEREAS, the Assignor desires to assign to the Assignee, among other things, all or a portion of the Assignor's Commitment under the Credit Agreement, all on the terms and conditions set forth herein; and WHEREAS, the Agent consents to such assignment on the terms and conditions set forth herein; NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged by the parties hereto, the parties hereto hereby agree as follows: Section 1. Assignment. (a) Subject to the terms and conditions of this Agreement and in consideration of the payment to be made by the Assignee to the Assignor pursuant to Section 2 of this Agreement, effective as of ____________, 200_ (the "Assignment Date"), the Assignor hereby irrevocably sells, transfers and assigns to the Assignee, without recourse, a $__________ interest (such interest being the "Assigned Commitment") in and to the Assignor's Commitment and all of the other rights and obligations of the Assignor under the Credit Agreement, such Assignor's Revolving Note and the other Loan Documents (representing ______% in respect of the aggregate amount of all Lenders' Commitments), including without limitation, a principal amount of outstanding Revolving Loans equal to $_________ and all voting rights of the Assignor associated with the Assigned Commitment, all rights to receive interest on such amount of Revolving Loans and all commitment and other Fees with respect to the Assigned Commitment and other rights of the Assignor under the Credit Agreement and the other Loan Documents with respect to the Assigned Commitment, all as if the Assignee were an original Lender under and signatory to the Credit Agreement having a Commitment equal to the amount of the Assigned Commitment. The Assignee, subject to the terms and conditions hereof, hereby assumes all obligations of the Assignor with respect to the Assigned Commitment as if the Assignee were an original Lender under and signatory to the Credit Agreement having a Commitment equal to the Assigned Commitment, which obligations shall include, but shall not A-1 be limited to, the obligation of the Assignor to make Revolving Loans to the Borrower with respect to the Assigned Commitment, the obligation to pay the Agent amounts due in respect of draws under Letters of Credit as required under Section 2.3 of the Credit Agreement and the obligation to indemnify the Agent as provided therein (the foregoing enumerated obligations, together with all other similar obligations more particularly set forth in the Credit Agreement and the other Loan Documents, shall be referred to hereinafter, collectively, as the "Assigned Obligations"). The Assignor shall have no further duties or obligations with respect to, and shall have no further interest in, the Assigned Obligations or the Assigned Commitment from and after the Assignment Date. (b) The assignment by the Assignor to the Assignee hereunder is without recourse to the Assignor. The Assignee makes and confirms to the Agent, the Assignor, and the other Lenders all of the representations, warranties and covenants of a Lender under Article XI. of the Credit Agreement. Not in limitation of the foregoing, the Assignee acknowledges and agrees that, except as set forth in Section 4 below, the Assignor is making no representations or warranties with respect to, and the Assignee hereby releases and discharges the Assignor for any responsibility or liability for: (i) the present or future solvency or financial condition of the Borrower, any Subsidiary or any other Loan Party, (ii) any representations, warranties, statements or information made or furnished by the Borrower, any Subsidiary or any other Loan Party in connection with the Credit Agreement or otherwise, (iii) the validity, efficacy, sufficiency, or enforceability of the Credit Agreement, any other Loan Document or any other document or instrument executed in connection therewith, or the collectibility of the Assigned Obligations, (iv) the perfection, priority or validity of any Lien with respect to any collateral at any time securing the Obligations or the Assigned Obligations under the Notes or the Credit Agreement and (v) the performance or failure to perform by the Borrower or any other Loan Party of any obligation under the Credit Agreement or any other Loan Document to which it is a party. Further, the Assignee acknowledges that it has, independently and without reliance upon the Agent, or on any affiliate or subsidiary thereof, the Assignor or any other Lender and based on the financial statements supplied by the Borrower and such other documents and information as it has deemed appropriate, made its own credit analysis and decision to become a Lender under the Credit Agreement. The Assignee also acknowledges that it will, independently and without reliance upon the Agent, the Assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Credit Agreement or any other Loan Documents or pursuant to any other obligation. Except as expressly provided in the Credit Agreement, the Agent shall have no duty or responsibility whatsoever, either initially or on a continuing basis, to provide the Assignee with any credit or other information with respect to the Borrower or any other Loan Party or to notify the Assignee of any Default or Event of Default. The Assignee has not relied on the Agent as to any legal or factual matter in connection therewith or in connection with the transactions contemplated thereunder. Section 2. Payment by Assignee. In consideration of the assignment made pursuant to Section 1 of this Agreement, the Assignee agrees to pay to the Assignor on the Assignment Date, an amount equal to $_________ representing (i) the aggregate principal amount outstanding of the Loans owing to the Assignor under the Credit Agreement and the other Loan Documents A-2 being assigned hereby plus (ii) the aggregate amount of payments previously made by Assignor under Section 2.3(j) of the Credit Agreement which have not been repaid and which are being assigned hereby. Section 3. Payments by Assignor. The Assignor agrees to pay to the Agent on the Assignment Date the administration fee, if any, payable under the applicable provisions of the Credit Agreement. Section 4. Representations and Warranties of Assignor. The Assignor hereby represents and warrants to the Assignee that (a) as of the Assignment Date (i) the Assignor is a Lender under the Credit Agreement having a Commitment under the Credit Agreement (without reduction by any assignments thereof which have not yet become effective), equal to $____________ and that the Assignor is not in default of its obligations under the Credit Agreement; and (ii) the outstanding balance of Revolving Loans owing to the Assignor (without reduction by any assignments thereof which have not yet become effective) is $____________; and (b) it is the legal and beneficial owner of the Assigned Commitment which is free and clear of any adverse claim created by the Assignor. Section 5. Representations, Warranties and Agreements of Assignee. The Assignee (a) represents and warrants that it is (i) legally authorized to enter into this Agreement, (ii) an "accredited investor" (as such term is used in Regulation D of the Securities Act) and (iii) an Eligible Assignee; (b) confirms that it has received a copy of the Credit Agreement, together with copies of the most recent financial statements delivered pursuant thereto and such other documents and information (including without limitation the Loan Documents) as it has deemed appropriate to make its own credit analysis and decision to enter into this Agreement; (c) appoints and authorizes the Agent to take such action as contractual representative on its behalf and to exercise such powers under the Loan Documents as are delegated to the Agent by the terms thereof together with such powers as are reasonably incidental thereto; and (d) agrees that it will become a party to and shall be bound by the Credit Agreement and the other Loan Documents to which the other Lenders are a party on the Assignment Date and will perform in accordance therewith all of the obligations which are required to be performed by it as a Lender. Section 6. Recording and Acknowledgment by the Agent. Following the execution of this Agreement, the Assignor will deliver to the Agent (a) a duly executed copy of this Agreement for acknowledgment and recording by the Agent and (b) the Assignor's Revolving Note. Upon such acknowledgment and recording, from and after the Assignment Date, the Agent shall make all payments in respect of the interest assigned hereby (including payments of principal, interest, Fees and other amounts) to the Assignee. The Assignor and Assignee shall make all appropriate adjustments in payments under the Credit Agreement for periods prior to the Assignment Date directly between themselves. Section 7. Addresses. The Assignee specifies as its address for notices and its Lending Office for all Loans, the offices set forth below: A-3 Notice Address: ------------------------------------ Telephone No.: ---------------------- Telecopy No.: ----------------------- Lending Office: ------------------------------------ Telephone No.: ---------------------- Telecopy No.: ----------------------- Section 8. Payment Instructions. All payments to be made to the Assignee under this Agreement by the Assignor, and all payments to be made to the Assignee under the Credit Agreement, shall be made as provided in the Credit Agreement in accordance with the following instructions: ----------------------------- ----------------------------- Section 9. Effectiveness of Assignment. This Agreement, and the assignment and assumption contemplated herein, shall not be effective until (a) this Agreement is executed and delivered by each of the Assignor, the Assignee, the Agent, and if required under Section 12.5.(d) of the Credit Agreement, the Borrower, and (b) the payment to the Assignor of the amounts, if any, owing by the Assignee pursuant to Section 2 hereof and (c) the payment to the Agent of the amounts, if any, owing by the Assignor pursuant to Section 3 hereof. Upon recording and acknowledgment of this Agreement by the Agent, from and after the Assignment Date, (i) the Assignee shall be a party to the Credit Agreement and, to the extent provided in this Agreement, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent provided in this Agreement, relinquish its rights (except as otherwise provided in Section 12.10 of the Credit Agreement) and be released from its obligations under the Credit Agreement; provided, however, that if the Assignor does not assign its entire interest under the Loan Documents, it shall remain a Lender entitled to all of the benefits and subject to all of the obligations thereunder with respect to its Commitment. Section 10. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE. Section 11. Counterparts. This Agreement may be executed in any number of counterparts each of which, when taken together, shall constitute one and the same agreement. Section 12. Headings. Section headings have been inserted herein for convenience only and shall not be construed to be a part hereof. A-4 Section 13. Amendments; Waivers. This Agreement may not be amended, changed, waived or modified except by a writing executed by the Assignee and the Assignor; provided, however, any amendment, waiver or consent which shall affect the rights or duties of the Agent under this Agreement shall not be effective unless signed by the Agent. Section 14. Entire Agreement. This Agreement embodies the entire agreement between the Assignor and the Assignee with respect to the subject matter hereof and supersedes all other prior arrangements and understandings relating to the subject matter hereof. Section 15. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Section 16. Definitions. Terms not otherwise defined herein are used herein with the respective meanings given them in the Credit Agreement. [Include this Section only if Borrower's consent is required under Section 12.5.(d) Section 17. Agreements of the Borrower. The Borrower hereby agrees that the Assignee shall be a Lender under the Credit Agreement having a Commitment equal to the Assigned Commitment. The Borrower agrees that the Assignee shall have all of the rights and remedies of a Lender under the Credit Agreement and the other Loan Documents as if the Assignee were an original Lender under and signatory to the Credit Agreement, including, but not limited to, the right of a Lender to receive payments of principal and interest with respect to the Assigned Obligations, and to the Revolving Loans made by the Lenders after the date hereof and to receive the commitment and other Fees payable to the Lenders as provided in the Credit Agreement. Further, the Assignee shall be entitled to the indemnification provisions from the Borrower in favor of the Lenders as provided in the Credit Agreement and the other Loan Documents. The Borrower further agrees, upon the execution and delivery of this Agreement, to execute in favor of the Assignee Notes as required by Section 12.5(d) of the Credit Agreement. Upon receipt by the Assignor of the amounts due the Assignor under Section 2, the Assignor agrees to surrender to the Borrower such Assignor's Notes.] [Signatures on Following Pages] A-5 IN WITNESS WHEREOF, the parties hereto have duly executed this Assignment and Acceptance Agreement as of the date and year first written above. ASSIGNOR: [Name of Assignor] By: -------------------------------- Name: ------------------------- Title: ------------------------ ASSIGNEE: [Name of Assignee] By: -------------------------------- Name: ------------------------- Title: ------------------------ [Include signature of the Borrower only if required under Section 12.5.(d) of the Credit Agreement] Agreed and consented to as of the date first written above. BORROWER: HOSPITALITY PROPERTIES TRUST By: ---------------------------------------- Name: ---------------------------------- Title: --------------------------------- [Signatures Continued on Following Page] A-6 Accepted as of the date first written above. AGENT: First Union National Bank, as Agent By: ----------------------------------------- Name: --------------------------------- Title: -------------------------------- A-7 EXHIBIT B FORM OF GUARANTY THIS GUARANTY dated as of March ___, 2002, executed and delivered by each of the undersigned and the other Persons from time to time party hereto pursuant to the execution and delivery of an Accession Agreement in the form of Annex I hereto (all of the undersigned, together with such other Persons each a "Guarantor" and collectively, the "Guarantors") in favor of (a) FIRST UNION NATIONAL BANK, in its capacity as Agent (the "Agent") for the Lenders under that certain that certain Credit Agreement dated as of March ___, 2002 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Hospitality Properties Trust (the "Borrower"), the financial institutions party thereto and their assignees under Section 12.5 thereof (the "Lenders"), the Agent, and the other parties thereto, and (b) the Lenders and the Swingline Lender. WHEREAS, pursuant to the Credit Agreement, the Agent, the Lenders and the Swingline Lender have agreed to make available to the Borrower certain financial accommodations on the terms and conditions set forth in the Credit Agreement; WHEREAS, the Borrower owns, directly or indirectly, at least a majority of the issued and outstanding Equity Interests in each Guarantor; WHEREAS, the Borrower and each of the Guarantors, though separate legal entities, are mutually dependent on each other in the conduct of their respective businesses as an integrated operation and have determined it to be in their mutual best interests to obtain financing from the Agent, the Lenders and the Swingline Lender through their collective efforts; WHEREAS, each Guarantor acknowledges that it will receive direct and indirect benefits from the Agent, the Lenders and the Swingline Lender making such financial accommodations available to the Borrower under the Credit Agreement and, accordingly, each Guarantor is willing to guarantee the Borrower's obligations to the Agent, the Lenders and the Swingline Lender on the terms and conditions contained herein; and WHEREAS, each Guarantor's execution and delivery of this Guaranty is a condition to the Agent and the Lenders making, and continuing to make, such financial accommodations to the Borrower. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each Guarantor, each Guarantor agrees as follows: Section 1. Guaranty. Each Guarantor hereby absolutely, irrevocably and unconditionally guaranties the due and punctual payment and performance when due, whether at stated maturity, by acceleration or otherwise, of all of the following (collectively referred to as the "Guarantied Obligations"): (a) all indebtedness and obligations owing by the Borrower to any Lender, the Swingline Lender or the Agent under or in connection with the Credit Agreement and any other B-1 Loan Document, including without limitation, the repayment of all principal of the Revolving Loans, Swingline Loans and the Reimbursement Obligations, and the payment of all interest, Fees, charges, attorneys' fees and other amounts payable to any Lender or the Agent thereunder or in connection therewith; (b) any and all extensions, renewals, modifications, amendments or substitutions of the foregoing; (c) all expenses, including, without limitation, reasonable attorneys' fees and disbursements, that are incurred by the Lenders and the Agent in the enforcement of any of the foregoing or any obligation of such Guarantor hereunder; and (d) all other Obligations. Section 2. Guaranty of Payment and Not of Collection. This Guaranty is a guaranty of payment, and not of collection, and a debt of each Guarantor for its own account. Accordingly, none of the Lenders, the Swingline Lender or the Agent shall be obligated or required before enforcing this Guaranty against any Guarantor: (a) to pursue any right or remedy any of them may have against the Borrower, any other Guarantor or any other Person or commence any suit or other proceeding against the Borrower, any other Guarantor or any other Person in any court or other tribunal; (b) to make any claim in a liquidation or bankruptcy of the Borrower, any other Guarantor or any other Person; or (c) to make demand of the Borrower, any other Guarantor or any other Person or to enforce or seek to enforce or realize upon any collateral security held by the Lenders, the Swingline Lender or the Agent which may secure any of the Guarantied Obligations. Section 3. Guaranty Absolute. Each Guarantor guarantees that the Guarantied Obligations will be paid strictly in accordance with the terms of the documents evidencing the same, regardless of any Applicable Law now or hereafter in effect in any jurisdiction affecting any of such terms or the rights of the Agent, the Lenders or the Swingline Lender with respect thereto. The liability of each Guarantor under this Guaranty shall be absolute, irrevocable and unconditional in accordance with its terms and shall remain in full force and effect without regard to, and shall not be released, suspended, discharged, terminated or otherwise affected by, any circumstance or occurrence whatsoever, including without limitation, the following (whether or not such Guarantor consents thereto or has notice thereof): (a) (i) any change in the amount, interest rate or due date or other term of any of the Guarantied Obligations, (ii) any change in the time, place or manner of payment of all or any portion of the Guarantied Obligations, (iii) any amendment or waiver of, or consent to the departure from or other indulgence with respect to, the Credit Agreement, any other Loan Document, or any other document or instrument evidencing or relating to any Guarantied Obligations, or (iv) any waiver, renewal, extension, addition, or supplement to, or deletion from, or any other action or inaction under or in respect of, the Credit Agreement, any of the other Loan Documents, or any other documents, instruments or agreements relating to the Guarantied Obligations or any other instrument or agreement referred to therein or evidencing any Guarantied Obligations or any assignment or transfer of any of the foregoing; (b) any lack of validity or enforceability of the Credit Agreement, any of the other Loan Documents, or any other document, instrument or agreement referred to therein or evidencing any Guarantied Obligations or any assignment or transfer of any of the foregoing; B-2 (c) any furnishing to the Agent, the Lenders or the Swingline Lender of any security for the Guarantied Obligations, or any sale, exchange, release or surrender of, or realization on, any collateral securing any of the Obligations; (d) any settlement or compromise of any of the Guarantied Obligations, any security therefor, or any liability of any other party with respect to the Guarantied Obligations, or any subordination of the payment of the Guarantied Obligations to the payment of any other liability of the Borrower or any other Loan Party; (e) any bankruptcy, insolvency, reorganization, composition, adjustment, dissolution, liquidation or other like proceeding relating to such Guarantor, the Borrower, any other Loan Party or any other Person, or any action taken with respect to this Guaranty by any trustee or receiver, or by any court, in any such proceeding; (f) any act or failure to act by the Borrower, any other Loan Party or any other Person which may adversely affect such Guarantor's subrogation rights, if any, against the Borrower to recover payments made under this Guaranty; (g) any nonperfection or impairment of any security interest or other Lien on any collateral, if any, securing in any way any of the Obligations; (h) any application of sums paid by the Borrower, any other Guarantor or any other Person with respect to the liabilities of the Borrower to the Agent, the Lenders or the Swingline Lender, regardless of what liabilities of the Borrower remain unpaid; (i) any defect, limitation or insufficiency in the borrowing powers of the Borrower or in the exercise thereof; or (j) any other circumstance which might otherwise constitute a defense available to, or a discharge of, a Guarantor hereunder (other than indefeasible payment in full). Section 4. Action with Respect to Guarantied Obligations. The Lenders and the Agent may, at any time and from time to time, without the consent of, or notice to, any Guarantor, and without discharging any Guarantor from its obligations hereunder, take any and all actions described in Section 3 and may otherwise: (a) amend, modify, alter or supplement the terms of any of the Guarantied Obligations, including, but not limited to, extending or shortening the time of payment of any of the Guarantied Obligations or changing the interest rate that may accrue on any of the Guarantied Obligations; (b) amend, modify, alter or supplement the Credit Agreement or any other Loan Document; (c) sell, exchange, release or otherwise deal with all, or any part, of any collateral securing any of the Obligations; (d) release any other Loan Party or other Person liable in any manner for the payment or collection of the Guarantied Obligations; (e) exercise, or refrain from exercising, any rights against the Borrower, any other Guarantor or any other Person; and (f) apply any sum, by whomsoever paid or however realized, to the Guarantied Obligations in such order as the Lenders shall elect. B-3 Section 5. Representations and Warranties. Each Guarantor hereby makes to the Agent, the Lenders and the Swingline Lender all of the representations and warranties made by the Borrower with respect to or in any way relating to such Guarantor in the Credit Agreement and the other Loan Documents, as if the same were set forth herein in full. Section 6. Covenants. Each Guarantor will comply with all covenants which the Borrower is to cause such Guarantor to comply with under the terms of the Credit Agreement or any of the other Loan Documents. Section 7. Waiver. Each Guarantor, to the fullest extent permitted by Applicable Law, hereby waives notice of acceptance hereof or any presentment, demand, protest or notice of any kind, and any other act or thing, or omission or delay to do any other act or thing, which in any manner or to any extent might vary the risk of such Guarantor or which otherwise might operate to discharge such Guarantor from its obligations hereunder. Section 8. Inability to Accelerate Loan. If the Agent, the Swingline Lender and/or the Lenders are prevented under Applicable Law or otherwise from demanding or accelerating payment of any of the Guarantied Obligations by reason of any automatic stay or otherwise, the Agent, the Swingline Lender and/or the Lenders shall be entitled to receive from each Guarantor, upon demand therefor, the sums which otherwise would have been due had such demand or acceleration occurred. Section 9. Reinstatement of Guarantied Obligations. If claim is ever made on the Agent, any Lender or the Swingline Lender for repayment or recovery of any amount or amounts received in payment or on account of any of the Guarantied Obligations, and the Agent, such Lender or the Swingline Lender repays all or part of said amount by reason of (a) any judgment, decree or order of any court or administrative body of competent jurisdiction, or (b) any settlement or compromise of any such claim effected by the Agent, such Lender or the Swingline Lender with any such claimant (including the Borrower or a trustee in bankruptcy for the Borrower), then and in such event each Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding on it, notwithstanding any revocation hereof, any release herefrom, or the cancellation of the Credit Agreement, any of the other Loan Documents, or any other instrument evidencing any liability of the Borrower, and such Guarantor shall be and remain liable to the Agent, such Lender or the Swingline Lender for the amounts so repaid or recovered to the same extent as if such amount had never originally been paid to the Agent, such Lender or the Swingline Lender. Section 10. Subrogation. Upon the making by any Guarantor of any payment hereunder for the account of the Borrower, such Guarantor shall be subrogated to the rights of the payee against the Borrower; provided, however, that such Guarantor shall not enforce any right or receive any payment by way of subrogation or otherwise take any action in respect of any other claim or cause of action such Guarantor may have against the Borrower arising by reason of any payment or performance by such Guarantor pursuant to this Guaranty, unless and until all of the Guarantied Obligations have been indefeasibly paid and performed in full. If any amount shall B-4 be paid to such Guarantor on account of or in respect of such subrogation rights or other claims or causes of action, such Guarantor shall hold such amount in trust for the benefit of the Agent, the Lenders and the Swingline Lender and shall forthwith pay such amount to the Agent to be credited and applied against the Guarantied Obligations, whether matured or unmatured, in accordance with the terms of the Credit Agreement or to be held by the Agent as collateral security for any Guarantied Obligations existing. Section 11. Payments Free and Clear. All sums payable by each Guarantor hereunder, whether of principal, interest, Fees, expenses, premiums or otherwise, shall be paid in full, without set-off or counterclaim or any deduction or withholding whatsoever (including any Taxes), and if any Guarantor is required by Applicable Law or by a Governmental Authority to make any such deduction or withholding, such Guarantor shall pay to the Agent, the Lenders and the Swingline Lender such additional amount as will result in the receipt by the Agent, the Lenders and the Swingline Lender of the full amount payable hereunder had such deduction or withholding not occurred or been required. Section 12. Set-off. In addition to any rights now or hereafter granted under any of the other Loan Documents or Applicable Law and not by way of limitation of any such rights, each Guarantor hereby authorizes the Agent and each Lender, at any time during the continuance of an Event of Default, without any prior notice to such Guarantor or to any other Person, any such notice being hereby expressly waived, but in the case of a Lender subject to receipt of the prior written consent of the Agent exercised in its sole discretion, to set off and to appropriate and to apply any and all deposits (general or special, including, but not limited to, indebtedness evidenced by certificates of deposit, whether matured or unmatured) and any other indebtedness at any time held or owing by the Agent, such Lender, or any affiliate of the Agent or such Lender, to or for the credit or the account of such Guarantor against and on account of any of the Guarantied Obligations, although such obligations shall be contingent or unmatured. Each Guarantor agrees, to the fullest extent permitted by Applicable Law, that any Participant may exercise rights of setoff or counterclaim and other rights with respect to its participation as fully as if such Participant were a direct creditor of such Guarantor in the amount of such participation. Section 13. Subordination. Each Guarantor hereby expressly covenants and agrees for the benefit of the Agent, the Lenders and the Swingline Lender that all obligations and liabilities of the Borrower to such Guarantor of whatever description, including without limitation, all intercompany receivables of such Guarantor from the Borrower (collectively, the "Junior Claims") shall be subordinate and junior in right of payment to all Guarantied Obligations. If an Event of Default shall have occurred and be continuing, then no Guarantor shall accept any direct or indirect payment (in cash, property or securities, by setoff or otherwise) from the Borrower on account of or in any manner in respect of any Junior Claim until all of the Guarantied Obligations have been indefeasibly paid in full. Section 14. Avoidance Provisions. It is the intent of each Guarantor, the Agent, the Lenders and the Swingline Lender that in any Proceeding, such Guarantor's maximum obligation hereunder shall equal, but not exceed, the maximum amount which would not otherwise cause the obligations of such Guarantor hereunder (or any other obligations of such Guarantor to the B-5 Agent, the Lenders and the Swingline Lender) to be avoidable or unenforceable against such Guarantor in such Proceeding as a result of Applicable Law, including without limitation, (a) Section 548 of the Bankruptcy Code of 1978, as amended (the "Bankruptcy Code") and (b) any state fraudulent transfer or fraudulent conveyance act or statute applied in such Proceeding, whether by virtue of Section 544 of the Bankruptcy Code or otherwise. The Applicable Laws under which the possible avoidance or unenforceability of the obligations of such Guarantor hereunder (or any other obligations of such Guarantor to the Agent, the Lenders and the Swingline Lender) shall be determined in any such Proceeding are referred to as the "Avoidance Provisions". Accordingly, to the extent that the obligations of any Guarantor hereunder would otherwise be subject to avoidance under the Avoidance Provisions, the maximum Guarantied Obligations for which such Guarantor shall be liable hereunder shall be reduced to that amount which, as of the time any of the Guarantied Obligations are deemed to have been incurred under the Avoidance Provisions, would not cause the obligations of such Guarantor hereunder (or any other obligations of such Guarantor to the Agent, the Lenders and the Swingline Lender), to be subject to avoidance under the Avoidance Provisions. This Section is intended solely to preserve the rights of the Agent, the Lenders and the Swingline Lender hereunder to the maximum extent that would not cause the obligations of any Guarantor hereunder to be subject to avoidance under the Avoidance Provisions, and no Guarantor or any other Person shall have any right or claim under this Section as against the Agent, the Lenders and the Swingline Lender that would not otherwise be available to such Person under the Avoidance Provisions. Section 15. Information. Each Guarantor assumes all responsibility for being and keeping itself informed of the financial condition of the Borrower and the other Guarantors, and of all other circumstances bearing upon the risk of nonpayment of any of the Guarantied Obligations and the nature, scope and extent of the risks that such Guarantor assumes and incurs hereunder, and agrees that none of the Agent, the Lenders or the Swingline Lender shall have any duty whatsoever to advise any Guarantor of information regarding such circumstances or risks. Section 16. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE. Section 17. Waiver of jury trial. (a) EACH PARTY HERETO ACKNOWLEDGES THAT ANY DISPUTE OR CONTROVERSY BETWEEN OR AMONG ANY GUARANTOR, THE AGENT OR ANY OF THE LENDERS WOULD BE BASED ON DIFFICULT AND COMPLEX ISSUES OF LAW AND FACT AND WOULD RESULT IN DELAY AND EXPENSE TO THE PARTIES. ACCORDINGLY, TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE LENDERS, THE AGENT AND EACH GUARANTOR HEREBY WAIVES ITS RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND OR NATURE IN ANY COURT OR TRIBUNAL IN WHICH AN ACTION MAY BE COMMENCED BY OR AGAINST ANY PARTY HERETO ARISING OUT OF THIS AGREEMENT OR ANY B-6 OTHER LOAN DOCUMENT OR BY REASON OF ANY OTHER SUIT, CAUSE OF ACTION OR DISPUTE WHATSOEVER BETWEEN OR AMONG THE BORROWER, THE AGENT OR ANY OF THE LENDERS OF ANY KIND OR NATURE. (b) EACH OF THE GUARANTORS, THE AGENT AND EACH LENDER HEREBY AGREES THAT THE FEDERAL DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK OR, AT THE OPTION OF THE AGENT, ANY STATE COURT LOCATED IN NEW YORK, NEW YORK, SHALL HAVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR DISPUTES BETWEEN OR AMONG ANY GUARANTOR, THE AGENT OR ANY OF THE LENDERS, PERTAINING DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, THE LOANS, THE LETTERS OF CREDIT, THE NOTES OR ANY OTHER LOAN DOCUMENT OR TO ANY MATTER ARISING HEREFROM OR THEREFROM. EACH GUARANTOR AND EACH OF THE LENDERS EXPRESSLY SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN SUCH COURTS. EACH PARTY FURTHER WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT FORUM AND EACH AGREES NOT TO PLEAD OR CLAIM THE SAME. THE CHOICE OF FORUM SET FORTH IN THIS SECTION SHALL NOT BE DEEMED TO PRECLUDE THE BRINGING OF ANY ACTION BY THE AGENT OR ANY LENDER OR THE ENFORCEMENT BY THE AGENT OR ANY LENDER OF ANY JUDGMENT OBTAINED IN SUCH FORUM IN ANY OTHER APPROPRIATE JURISDICTION. (c) THE PROVISIONS OF THIS SECTION HAVE BEEN CONSIDERED BY EACH PARTY WITH THE ADVICE OF COUNSEL AND WITH A FULL UNDERSTANDING OF THE LEGAL CONSEQUENCES THEREOF, AND SHALL SURVIVE THE PAYMENT OF THE LOANS AND ALL OTHER AMOUNTS PAYABLE HEREUNDER OR UNDER THE OTHER LOAN DOCUMENTS AND THE TERMINATION OF THIS GUARANTY. Section 18. Loan Accounts. The Agent, each Lender and the Swingline Lender may maintain books and accounts setting forth the amounts of principal, interest and other sums paid and payable with respect to the Guarantied Obligations, and in the case of any dispute relating to any of the outstanding amount, payment or receipt of any of the Guarantied Obligations or otherwise, the entries in such books and accounts shall be deemed prima facie evidence of the amounts and other matters set forth herein. The failure of the Agent, any Lender or the Swingline Lender to maintain such books and accounts shall not in any way relieve or discharge any Guarantor of any of its obligations hereunder. Section 19. Waiver of Remedies. No delay or failure on the part of the Agent, any Lender or the Swingline Lender in the exercise of any right or remedy it may have against any Guarantor hereunder or otherwise shall operate as a waiver thereof, and no single or partial exercise by the Agent, any Lender or the Swingline Lender of any such right or remedy shall preclude any other or further exercise thereof or the exercise of any other such right or remedy. B-7 Section 20. Termination. This Guaranty shall remain in full force and effect until indefeasible payment in full of the Guarantied Obligations and the other Obligations and the termination or cancellation of the Credit Agreement in accordance with its terms. Section 21. Successors and Assigns. Each reference herein to the Agent or the Lenders shall be deemed to include such Person's respective successors and assigns (including, but not limited to, any holder of the Guarantied Obligations) in whose favor the provisions of this Guaranty also shall inure, and each reference herein to each Guarantor shall be deemed to include such Guarantor's successors and assigns, upon whom this Guaranty also shall be binding. The Lenders and the Swingline Lender may, in accordance with the applicable provisions of the Credit Agreement, assign, transfer or sell any Guarantied Obligation, or grant or sell participations in any Guarantied Obligations, to any Person without the consent of, or notice to, any Guarantor and without releasing, discharging or modifying any Guarantor's obligations hereunder. Each Guarantor hereby consents to the delivery by the Agent or any Lender to any Assignee or Participant (or any prospective Assignee or Participant) of any financial or other information regarding the Borrower or any Guarantor. No Guarantor may assign or transfer its obligations hereunder to any Person without the prior written consent of all Lenders and any such assignment or other transfer to which all of the Lenders have not so consented shall be null and void. Section 22. Joint and Several Obligations. the obligationS of the Guarantors HEREUNDER SHALL BE joint and several, and ACCORDINGLY, each Guarantor CONFIRMS THAT IT is liable for the full amount of the "GUARANTiED Obligations" AND ALL OF THE OBLIGATIONS AND LIABILITIES OF EACH OF THE OTHER gUARANTORS HEREUNDER. Section 23. Amendments. This Guaranty may not be amended except in writing signed by the Requisite Lenders (or all of the Lenders if required under the terms of the Credit Agreement), the Agent and each Guarantor. Section 24. Payments. All payments to be made by any Guarantor pursuant to this Guaranty shall be made in Dollars, in immediately available funds to the Agent at the Principal Office, not later than 2:00 p.m. on the date of demand therefor. Section 25. Notices. All notices, requests and other communications hereunder shall be in writing (including facsimile transmission or similar writing) and shall be given (a) to each Guarantor at its address set forth below its signature hereto, (b) to the Agent, any Lender or the Swingline Lender at its respective address for notices provided for in the Credit Agreement, or (c) as to each such party at such other address as such party shall designate in a written notice to the other parties. Each such notice, request or other communication shall be effective (i) if mailed, when received; (ii) if telecopied, when transmitted; or (iii) if hand delivered, when delivered; provided, however, that any notice of a change of address for notices shall not be effective until received. B-8 Section 26. Severability. In case any provision of this Guaranty shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 27. Headings. Section headings used in this Guaranty are for convenience only and shall not affect the construction of this Guaranty. Section 28. Trustees, Etc. Not Liable. IN THE CASE OF ANY GUARANTOR THAT IS A TRUST, NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF SUCH GUARANTOR SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, SUCH GUARANTOR. ALL PERSONS DEALING WITH SUCH GUARANTOR, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF SUCH GUARANTOR FOR THE PAYMENT OF ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION OWING BY SUCH GUARANTOR HEREUNDER. THE PROVISIONS OF THIS SECTION SHALL NOT LIMIT ANY OBLIGATIONS OF ANY LOAN PARTY. Section 29. Limitation of Liability. Neither the Agent nor any Lender, nor any affiliate, officer, director, employee, attorney, or agent of the Agent or any Lender, shall have any liability with respect to, and each Guarantor hereby waives, releases, and agrees not to sue any of them upon, any claim for any special, indirect, incidental, or consequential damages suffered or incurred by a Guarantor in connection with, arising out of, or in any way related to, this Guaranty or any of the other Loan Documents, or any of the transactions contemplated by this Guaranty, the Credit Agreement or any of the other Loan Documents. Each Guarantor hereby waives, releases, and agrees not to sue the Agent or any Lender or any of the Agent's or any Lender's affiliates, officers, directors, employees, attorneys, or agents for punitive damages in respect of any claim in connection with, arising out of, or in any way related to, this Guaranty, the Credit Agreement or any of the other Loan Documents, or any of the transactions contemplated by Credit Agreement or financed thereby. Section 30. Definitions. (a) For the purposes of this Guaranty: "Proceeding" means any of the following: (i) a voluntary or involuntary case concerning any Guarantor shall be commenced under the Bankruptcy Code of 1978, as amended; (ii) a custodian (as defined in such Bankruptcy Code or any other applicable bankruptcy laws) is appointed for, or takes charge of, all or any substantial part of the property of any Guarantor; (iii) any other proceeding under any Applicable Law, domestic or foreign, relating to bankruptcy, insolvency, reorganization, winding-up or composition for adjustment of debts, whether now or hereafter in effect, is commenced relating to any Guarantor; (iv) any Guarantor is adjudicated insolvent or bankrupt; (v) any order of relief or other order approving any such case or proceeding is entered by a court of competent jurisdiction; (vi) any Guarantor makes a general assignment for the benefit of creditors; (vii) any Guarantor shall fail to pay, or shall state that it is B-9 unable to pay, or shall be unable to pay, its debts generally as they become due; (viii) any Guarantor shall call a meeting of its creditors with a view to arranging a composition or adjustment of its debts; (ix) any Guarantor shall by any act or failure to act indicate its consent to, approval of or acquiescence in any of the foregoing; or (x) any corporate action shall be taken by any Guarantor for the purpose of effecting any of the foregoing. (b) Terms not otherwise defined herein are used herein with the respective meanings given them in the Credit Agreement. [Signature on Next Page] B-10 IN WITNESS WHEREOF, each Guarantor has duly executed and delivered this Guaranty as of the date and year first written above. [signed by Guarantors] B-11 ANNEX I FORM OF ACCESSION AGREEMENT THIS ACCESSION AGREEMENT dated as of ____________, ____, executed and delivered by ______________________, a _____________ (the "New Subsidiary"), in favor of (a) FIRST UNION NATIONAL BANK, in its capacity as Agent (the "Agent") for the Lenders under that certain Credit Agreement dated as of March ___, 2002 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Hospitality Properties Trust (the "Borrower"), the financial institutions party thereto and their assignees under Section 12.5 thereof (the "Lenders"), the Agent, and the other parties thereto, and (b) the Lenders and the Swingline Lender. WHEREAS, pursuant to the Credit Agreement, the Agent, the Lenders and the Swingline Lender have agreed to make available to the Borrower certain financial accommodations on the terms and conditions set forth in the Credit Agreement; WHEREAS, the Borrower owns, directly or indirectly, at least a majority of the issued and outstanding Equity Interests in the New Subsidiary; WHEREAS, the Borrower, the New Subsidiary, and the existing Guarantors, though separate legal entities, are mutually dependent on each other in the conduct of their respective businesses as an integrated operation and have determined it to be in their mutual best interests to obtain financing from the Agent, the Lenders and the Swingline Lender through their collective efforts; WHEREAS, the New Subsidiary acknowledges that it will receive direct and indirect benefits from the Agent, the Lenders and the Swingline Lender making such financial accommodations available to the Borrower under the Credit Agreement and, accordingly, the New Subsidiary is willing to guarantee the Borrower's obligations to the Agent, the Lenders and the Swingline Lender on the terms and conditions contained herein; and WHEREAS, the New Subsidiary's execution and delivery of this Agreement is a condition to the Agent, the Lenders and the Swingline Lender continuing to make such financial accommodations to the Borrower. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the New Subsidiary, the New Subsidiary agrees as follows: Section 1. Accession to Guaranty. The New Subsidiary hereby agrees that it is a "Guarantor" under that certain Guaranty dated as of March ___, 2002 (as amended, supplemented, restated or otherwise modified from time to time, the "Guaranty"), made by each Subsidiary of the Borrower a party thereto in favor of the Agent, the Lenders and the Swingline Lender and assumes all obligations of a "Guarantor" thereunder, all as if the New Subsidiary had B-12 been an original signatory to the Guaranty. Without limiting the generality of the foregoing, the New Subsidiary hereby: (a) irrevocably and unconditionally guarantees the due and punctual payment and performance when due, whether at stated maturity, by acceleration or otherwise, of all Guarantied Obligations (as defined in the Guaranty); (b) makes to the Agent, the Lenders and the Swingline Lender as of the date hereof each of the representations and warranties contained in Section 5 of the Guaranty and agrees to be bound by each of the covenants contained in Section 6 of the Guaranty; and (c) consents and agrees to each provision set forth in the Guaranty. SECTION 2. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE. Section 3. Definitions. Capitalized terms used herein and not otherwise defined herein shall have their respective defined meanings given them in the Credit Agreement. [Signatures on Next Page] B-13 IN WITNESS WHEREOF, the New Subsidiary has caused this Accession Agreement to be duly executed and delivered under seal by its duly authorized officers as of the date first written above. [NEW SUBSIDIARY] By:_______________________________ Name:________________________ Title:_______________________ Address for Notices: c/o Hospitality Properties Trust 400 Centre Street Newton, Massachusetts 02458 Attention:_______________________ Telecopy Number:(___) ___-____ Telephone Number:(617) 332-3990 Accepted: FIRST UNION NATIONAL BANK, as Agent By:_______________________________ Name:________________________ Title:_______________________ B-14 EXHIBIT C FORM OF NOTICE OF BORROWING ____________, 200_ First Union National Bank, as Agent One First Union Center, NC0172 Charlotte, North Carolina 28288 Attention: __________________ Ladies and Gentlemen: Reference is made to that certain Credit Agreement dated as of March ___, 2002 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Hospitality Properties Trust (the "Borrower"), the financial institutions party thereto and their assignees under Section 12.5 thereof (the "Lenders"), First Union National Bank, as Agent (the "Agent"), and the other parties thereto. Capitalized terms used herein, and not otherwise defined herein, have their respective meanings given them in the Credit Agreement. 1. Pursuant to Section 2.1.(b) of the Credit Agreement, the Borrower hereby requests that the Lenders make Revolving Loans to the Borrower in an aggregate amount equal to $-------------------. 2. The Borrower requests that such Revolving Loans be made available to the Borrower on ____________, 200_. 3. The Borrower hereby requests that the requested Revolving Loans all be of the following Type: [Check one box only] / / Base Rate Loans / / LIBOR Loans, each with an initial Interest Period for a duration of: [Check one box only] / / 7 days / / 30 days / / 60 days / / 90 days C-1 4. The proceeds of this borrowing of Revolving Loans will be used for the following purpose: ------------------------------- ------------------------------------------------------------. 5. The Borrower requests that the proceeds of this borrowing of Revolving Loans be made available to the Borrower by ____________________________. The Borrower hereby certifies to the Agent and the Lenders that as of the date hereof and as of the date of the making of the requested Revolving Loans and after giving effect thereto, (a) no Default or Event of Default has or shall have occurred and be continuing, and (b) the representations and warranties made or deemed made by the Borrower and each other Loan Party in the Loan Documents to which any of them is a party are and shall be true and correct in all material respects, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties were true and accurate on and as of such earlier date) and except for changes in factual circumstances specifically and expressly permitted under the Credit Agreement. In addition, the Borrower certifies to the Agent and the Lenders that all conditions to the making of the requested Revolving Loans contained in Article V. of the Credit Agreement will have been satisfied at the time such Revolving Loans are made. If notice of the requested borrowing of Revolving Loans was previously given by telephone, this notice is to be considered the written confirmation of such telephone notice required by Section 2.1.(b) of the Credit Agreement. IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Notice of Borrowing as of the date first written above. HOSPITALITY PROPERTIES TRUST By: -------------------------------- Name: -------------------------- Title: ------------------------- C-2 EXHIBIT D FORM OF NOTICE OF CONTINUATION ____________, 200_ First Union National Bank, as Agent One First Union Center, NC0172 Charlotte, North Carolina 28288 Attention: __________________ Ladies and Gentlemen: Reference is made to that certain Credit Agreement dated as of March ___, 2002 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Hospitality Properties Trust (the "Borrower"), the financial institutions party thereto and their assignees under Section 12.5 thereof (the "Lenders"), First Union National Bank, as Agent (the "Agent"), and the other parties thereto. Capitalized terms used herein, and not otherwise defined herein, have their respective meanings given them in the Credit Agreement. Pursuant to Section 2.8. of the Credit Agreement, the Borrower hereby requests a Continuation of a borrowing of Loans under the Credit Agreement, and in that connection sets forth below the information relating to such Continuation as required by such Section of the Credit Agreement: 1. The proposed date of such Continuation is ____________, _____. 2. The aggregate principal amount of Loans subject to the requested Continuation is $________________________ and was originally borrowed by the Borrower on ____________, 200_. 3. The portion of such principal amount subject to such Continuation is $--------------------------. 4. The current Interest Period for each of the Loans subject to such Continuation ends on ________________, 200_. D-1 5. The duration of the new Interest Period for each of such Loans or portion thereof subject to such Continuation is: [Check one box only] / / 7 days / / 30 days / / 60 days / / 90 days The Borrower hereby certifies to the Agent and the Lenders that as of the date hereof, as of the proposed date of the requested Continuation, and after giving effect to such Continuation, no Default or Event of Default has or shall have occurred and be continuing. If notice of the requested Continuation was given previously by telephone, this notice is to be considered the written confirmation of such telephone notice required by Section 2.8. of the Credit Agreement. IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Notice of Continuation as of the date first written above. HOSPITALITY PROPERTIES TRUST By: -------------------------------- Name: -------------------------- Title: ------------------------- D-2 EXHIBIT E FORM OF NOTICE OF CONVERSION ____________, 200_ First Union National Bank, as Agent One First Union Center, NC0172 Charlotte, North Carolina 28288 Attention: __________________ Ladies and Gentlemen: Reference is made to that certain Credit Agreement dated as of March ___, 2002 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Hospitality Properties Trust (the "Borrower"), the financial institutions party thereto and their assignees under Section 12.5 thereof (the "Lenders"), First Union National Bank, as Agent (the "Agent"), and the other parties thereto. Capitalized terms used herein, and not otherwise defined herein, have their respective meanings given them in the Credit Agreement. Pursuant to Section 2.9. of the Credit Agreement, the Borrower hereby requests a Conversion of a borrowing of Loans of one Type into Loans of another Type under the Credit Agreement, and in that connection sets forth below the information relating to such Conversion as required by such Section of the Credit Agreement: 1. The proposed date of such Conversion is ______________, 200_. 2. The Loans to be Converted pursuant hereto are currently: [Check one box only] / / Base Rate Loans / / LIBOR Loans 3. The aggregate principal amount of Loans subject to the requested Conversion is $_____________________ and was originally borrowed by the Borrower on ____________, 200_. 4. The portion of such principal amount subject to such Conversion is $___________________. E-1 5. The amount of such Loans to be so Converted is to be converted into Loans of the following Type: [Check one box only] / / Base Rate Loans / / LIBOR Loans, each with an initial Interest Period for a duration of: [Check one box only] / / 7 days / / 30 days / / 60 days / / 90 days The Borrower hereby certifies to the Agent and the Lenders that as of the date hereof and as of the date of the requested Conversion and after giving effect thereto, (a) no Default or Event of Default has or shall have occurred and be continuing, and (b) the representations and warranties made or deemed made by the Borrower and each other Loan Party in the Loan Documents to which any of them is a party are and shall be true and correct in all material respects, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties were true and accurate on and as of such earlier date) and except for changes in factual circumstances specifically and expressly permitted under the Credit Agreement. If notice of the requested Conversion was given previously by telephone, this notice is to be considered the written confirmation of such telephone notice required by Section 2.9. of the Credit Agreement. IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Notice of Conversion as of the date first written above. HOSPITALITY PROPERTIES TRUST By: ------------------------------------- Name: ------------------------------- Title: ------------------------------ E-2 EXHIBIT F FORM OF NOTICE OF SWINGLINE BORROWING ------------, ----- First Union National Bank, as Agent One First Union Center, NC0172 Charlotte, North Carolina 28288 Attention: __________________ Ladies and Gentlemen: Reference is made to that certain Credit Agreement dated as of March ___, 2002 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Hospitality Properties Trust (the "Borrower"), the financial institutions party thereto and their assignees under Section 12.5 thereof (the "Lenders"), First Union National Bank, as Agent (the "Agent"), and the other parties thereto. Capitalized terms used herein, and not otherwise defined herein, have their respective meanings given them in the Credit Agreement. 1. Pursuant to Section 2.2.(b) of the Credit Agreement, the Borrower hereby requests that the Swingline Lender make a Swingline Loan to the Borrower in an amount equal to $-------------------. 2. The Borrower requests that such Swingline Loan be made available to the Borrower on ____________, 200_. 3. The proceeds of this Swingline Loan will be used for the following purpose: ----------------------------- -----------------------------------------------------------. 4. The Borrower requests that the proceeds of such Swingline Loan be made available to the Borrower by ______________________________. The Borrower hereby certifies to the Agent, the Swingline Lender and the Lenders that as of the date hereof, as of the date of the making of the requested Swingline Loan, and after making such Swingline Loan, (a) no Default or Event of Default has or shall have occurred and be continuing, and (b) the representations and warranties made or deemed made by the Borrower and each other Loan Party in the Loan Documents to which any of them is a party are and shall be true and correct in all material respects, except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties were true and accurate on and as of such earlier date) and except for changes in factual circumstances specifically and expressly permitted under the Credit Agreement. In addition, the Borrower certifies to the Agent and the Lenders that all conditions to the making of the requested F-1 Swingline Loan contained in Article V. of the Credit Agreement will have been satisfied at the time such Swingline Loan is made. If notice of the requested borrowing of this Swingline Loan was previously given by telephone, this notice is to be considered the written confirmation of such telephone notice required by Section 2.2.(b) of the Credit Agreement. IN WITNESS WHEREOF, the undersigned has duly executed and delivered this Notice of Swingline Borrowing as of the date first written above. HOSPITALITY PROPERTIES TRUST By: ---------------------------------- Name: ---------------------------- Title: --------------------------- F-2 EXHIBIT G FORM OF SWINGLINE NOTE $25,000,000.00 March ___, 2002 FOR VALUE RECEIVED, the undersigned, HOSPITALITY PROPERTIES TRUST, a Maryland real estate investment trust (the "Borrower"), hereby promises to pay to the order of FIRST UNION NATIONAL BANK (the "Swingline Lender") to its address at One First Union Center, NC0172, Charlotte, North Carolina 28288, or at such other address as may be specified in writing by the Swingline Lender to the Borrower, the principal sum of TWENTY-FIVE MILLION AND NO/100 DOLLARS ($25,000,000.00) (or such lesser amount as shall equal the aggregate unpaid principal amount of Swingline Loans made by the Swingline Lender to the Borrower under the Credit Agreement), on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount owing hereunder, at the rates and on the dates provided in the Credit Agreement. The date, amount of each Swingline Loan, and each payment made on account of the principal thereof, shall be recorded by the Swingline Lender on its books and, prior to any transfer of this Note, endorsed by the Swingline Lender on the schedule attached hereto or any continuation thereof, provided that the failure of the Swingline Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing under the Credit Agreement or hereunder in respect of the Swingline Loans. This Note is the Swingline Note referred to in the Credit Agreement dated as of March ___, 2002 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among the Borrower, the financial institutions party thereto and their assignees under Section 12.5 thereof (the "Lenders"), First Union National Bank, as Agent, and the other parties thereto, and evidences Swingline Loans made to the Borrower thereunder. Terms used but not otherwise defined in this Note have the respective meanings assigned to them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events and for prepayments of Swingline Loans upon the terms and conditions specified therein. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE. The Borrower hereby waives presentment for payment, demand, notice of demand, notice of non-payment, protest, notice of protest and all other similar notices. G-1 Time is of the essence for this Note. IN WITNESS WHEREOF, the undersigned has executed and delivered this Swingline Note under seal as of the date first written above. HOSPITALITY PROPERTIES TRUST By: --------------------------------------- Name: --------------------------------- Title: -------------------------------- Attest: ------------------------------------ Name: ------------------------------ Title: ----------------------------- [CORPORATE SEAL] G-2 SCHEDULE OF SWINGLINE LOANS This Note evidences Swingline Loans made under the within-described Credit Agreement to the Borrower, on the dates and in the principal amounts set forth below, subject to the payments and prepayments of principal set forth below: Principal Unpaid Amount of Amount Paid Principal Notation Date of Loan Loan or Prepaid Amount Made By ------------ ---- ---------- ------ ------- G-3 EXHIBIT H FORM OF INVESTMENT MANAGER SUBORDINATION AGREEMENT H-1 EXHIBIT I FORM OF REVOLVING NOTE $____________________ _______________, 200_ FOR VALUE RECEIVED, the undersigned, HOSPITALITY PROPERTIES TRUST, a Maryland real estate investment trust (the "Borrower"), hereby promises to pay to the order of ____________________ (the "Lender"), in care of First Union National Bank, as Agent (the "Agent") to First Union National Bank, One First Union Center, 301 South College Street, Charlotte, North Carolina 28288, or at such other address as may be specified in writing by the Agent to the Borrower, the principal sum of ________________ AND ____/100 DOLLARS ($____________) (or such lesser amount as shall equal the aggregate unpaid principal amount of Revolving Loans made by the Lender to the Borrower under the Credit Agreement (as herein defined)), on the dates and in the principal amounts provided in the Credit Agreement, and to pay interest on the unpaid principal amount owing hereunder, at the rates and on the dates provided in the Credit Agreement. The date, amount of each Revolving Loan made by the Lender to the Borrower, and each payment made on account of the principal thereof, shall be recorded by the Lender on its books and, prior to any transfer of this Note, endorsed by the Lender on the schedule attached hereto or any continuation thereof, provided that the failure of the Lender to make any such recordation or endorsement shall not affect the obligations of the Borrower to make a payment when due of any amount owing under the Credit Agreement or hereunder in respect of the Revolving Loans made by the Lender. This Note is one of the Revolving Notes referred to in the Credit Agreement dated as of March ___, 2002 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among the Borrower, the financial institutions party thereto and their assignees under Section 12.5 thereof (the "Lenders"), the Agent, and the other parties thereto. Capitalized terms used herein, and not otherwise defined herein, have their respective meanings given them in the Credit Agreement. The Credit Agreement provides for the acceleration of the maturity of this Note upon the occurrence of certain events and for prepayments of Loans upon the terms and conditions specified therein. Except as permitted by Section 12.5.(d) of the Credit Agreement, this Note may not be assigned by the Lender to any other Person. I-1 This Note shall be governed by, and construed in accordance with, the laws of the State of NEW YORK APPLICABLE TO CONTRACTS EXECUTED, AND TO BE FULLY PERFORMED, IN SUCH STATE. The Borrower hereby waives presentment for payment, demand, notice of demand, notice of non-payment, protest, notice of protest and all other similar notices. Time is of the essence for this Note. IN WITNESS WHEREOF, the undersigned has executed and delivered this Revolving Note under seal as of the date first written above. HOSPITALITY PROPERTIES TRUST By: -------------------------------------- Name: -------------------------------- Title: ------------------------------- Attest: ----------------------------------- Name: ----------------------------- Title: ---------------------------- [CORPORATE SEAL] I-2 EXHIBIT J-1 FORM OF OPINION OF COUNSEL [Opinion letter to be substantially the same as the legal opinion delivered in connection with HRPT Properties Trust credit agreement] J-1-1 EXHIBIT J-2 FORM OF OPINION OF SPECIAL COUNSEL [Opinion letter to be substantially the same as the legal opinion delivered in connection with HRPT Properties Trust credit agreement] J-2-1 EXHIBIT K FORM OF COMPLIANCE CERTIFICATE _______________, 200_ First Union National Bank One First Union Center, NC0172 Charlotte, North Carolina 28288 Attention: ____________ Each of the Lenders Party to the Credit Agreement referred to below Ladies and Gentlemen: Reference is made to that certain Credit Agreement dated as of March ___, 2002 (as amended, restated, supplemented or otherwise modified from time to time, the "Credit Agreement"), by and among Hospitality Properties Trust (the "Borrower"), the financial institutions party thereto and their assignees under Section 12.5 thereof (the "Lenders"), First Union National Bank, as Agent (the "Agent") and the other parties thereto. Capitalized terms used herein, and not otherwise defined herein, have their respective meanings given them in the Credit Agreement. Pursuant to Section 8.3. of the Credit Agreement, the undersigned hereby certifies to the Agent and the Lenders as follows: (1) The undersigned is the chief financial officer of the Borrower. (2) The undersigned has examined the books and records of the Borrower and has conducted such other examinations and investigations as are reasonably necessary to provide this Compliance Certificate. (3) No Default or Event of Default exists [if such is not the case, specify such Default or Event of Default and its nature, when it occurred and whether it is continuing and the steps being taken by the Borrower with respect to such event, condition or failure]. (4) The representations and warranties made or deemed made by the Borrower and the other Loan Parties in the Loan Documents to which any is a party, are true and correct in all material respects on and as of the date hereof except to the extent that such representations and warranties expressly relate solely to an earlier date (in which case such representations and warranties shall have been true and accurate on and as of such earlier date) and except for changes in factual circumstances specifically and expressly permitted under the Credit Agreement. K-1 (5) Attached hereto as Schedule 1 are reasonably detailed calculations establishing whether or not the Borrower and its Subsidiaries were in compliance with the covenants contained in Sections 9.1 through 9.3 and 9.6 of the Credit Agreement. IN WITNESS WHEREOF, the undersigned has executed this certificate as of the date first above written. ----------------------------------------- Name: ----------------------------------- Title: ----------------------------------- K-2 Schedule 1 [Calculations to be Attached] K-3 EX-12.1 5 exh12-1.txt EXHIBIT 12.1
Hospitality Properties Trust Computation of Ratio of Earnings to Fixed Charges (in thousands, except ratio amounts) Year Ended December 31, ----------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Income Before Extraordinary $111,929 Item $131,956 $126,271 $87,982 $59,153 Fixed Charges 41,312 37,682 37,352 21,751 15,534 ---------- ---------- ------ ------ -------- Adjusted Earnings $173,268 $163,953 $149,281 $109,733 $74,687 Fixed Charges: Interest on indebtedness and amortization of deferred finance costs $41,312 $37,682 $37,352 $21,751 $15,534 Ratio of Earnings to Fixed Charges 4.19x 4.35x 4.00x 5.04x 4.81x
EX-12.2 6 exh12-2.txt EXHIBIT 12.2
Hospitality Properties Trust Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Distributions (in thousands, except ratio amounts) Year Ended December 31, ------------------------------------------------------------------------- 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- Income Before Extraordinary $111,929 Item $131,956 $126,271 $87,982 $59,153 Fixed Charges 41,312 37,682 37,352 21,751 15,534 ---------- ---------- ------ ------ --------- Adjusted Earnings $173,268 $163,953 $149,281 $109,733 $74,687 Fixed Charges and Preferred Distributions: Interest on indebtedness and amortization of deferred finance costs $41,312 $37,682 $37,352 $21,751 $15,534 Preferred distributions 7,125 7,125 5,106 -- -- ---------- ---------- --------- --------- --------- Total Combined Fixed Charges And Preferred Distributions $48,437 $44,807 $42,458 $21,751 $15,534 Ratio of Earnings to Combined Fixed Charges and Preferred Distributions 3.58x 3.66x 3.52x 5.04x 4.81x
EX-21.1 7 exh21-1.txt EXHIBIT 21.1 HOSPITALITY PROPERTIES TRUST SUBSIDIARIES OF THE REGISTRANT HH HPTCW II Properties LLC (Delaware) HH HPTCY Properties LLC (Delaware) HH HPTMI III Properties LLC (Delaware) HH HPTRI Properties LLC (Delaware) HH HPT Suite Properties LLC (Delaware) HH HPTWN Properties LLC (Delaware) HPT CW Properties Trust (Maryland) HPTCY Properties Trust (Maryland) HPT HSD Properties Trust (Maryland) HPTMI Hawaii, Inc. (Deleware) HPTMI Properties Trust (Maryland) HPTMI II Properties Trust (Maryland) HPTRI Properties Trust (Maryland) HPTSHC Properties Trust (Maryland) HPT Smokey Mountain LLC (Delaware) HPT Suite Properties Trust (Maryland) HPTSY Properties Trust (Maryland) HPT TRS, INC. (Delaware) HPT TRS MI-135, INC. (Delaware) HPTWN Properties Trust (Maryland) EX-23.1 8 exh23-1.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports on Hospitality Properties Trust, CCMH Courtyard I LLC and HMH HPT Courtyard LLC included in this Form 10-K, into the Company's previously filed Registration Statements, File Nos. 333-84064, 333-43573 and 333-89307. /s/ Arthur Andersen LLP Vienna, Virginia March 25, 2002 EX-99 9 exh99.txt Exhibit 99 HOSPITALITY PROPERTIES TRUST 400 Centre Street Newton, Massachusetts 02458 March 27, 2002 United States Securities and Exchange Commission 450 5th Street, N.W. Washington, D.C. 20549 Re: Annual Report on Form 10-K for the Year ended December 31, 2001; Confirmation of Receipt of Assurances from Arthur Andersen LLP Ladies and Gentlemen: Our auditors, Arthur Andersen LLP, have represented to us in a letter dated March 18, 2002 that (i) their audits of the consolidated financial statements included in Item 8, Part II of this Annual Report on Form 10-K were subject to their quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, (ii) there was appropriate continuity of Arthur Andersen personnel working on the audit, and (iii) there was availability of national office consultation. We do not have foreign affiliates, so the assurances from Arthur Andersen as to foreign affiliates is not applicable to us. Respectfully submitted, /s/ Thomas M. O'Brien Thomas M. O'Brien Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----