Marriott San Jose Hotel
Combined Financial Report
For the Three Months Ended March 31, 2016 and 2015
(Unaudited)
Includes accounts of:
SP6 San Jose Hotel Owner, LLC
SP6 San Jose Hotel Lessee, LLC
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| Contents |
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| Financial statements | |
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| | Combined balance sheet (unaudited) | 1 |
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| | Combined statements of operations (unaudited) | 2 |
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| | Combined statements of changes in equity (unaudited) | 3 |
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| | Combined statements of cash flows (unaudited) | 4 |
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| | Notes to combined financial statements (unaudited) | 5-9 |
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| Marriott San Jose Hotel | |
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| Combined Balance Sheet (Unaudited) | |
| March 31, 2016 | |
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| Assets | |
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| Investment in hotel property, net | $ | 87,141,042 |
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| Cash and cash equivalents | 1,064,789 |
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| Restricted cash | 1,047,899 |
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| Accounts receivable | 3,048,155 |
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| Prepaid expenses and other assets | 429,598 |
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| | $ | 92,731,483 |
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| Liabilities and Equity | |
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| Mortgage payable | $ | 53,479,562 |
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| Accounts payable, accrued expenses and other liabilities | 3,245,367 |
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| Advance deposits | 193,452 |
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| Due to affiliates | 30,288 |
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| | 56,948,669 |
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| Equity | 35,782,814 |
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| | $ | 92,731,483 |
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| See notes to combined financial statements (unaudited). | |
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| Marriott San Jose Hotel | | |
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| Combined Statements of Operations (Unaudited) | | |
| Three Months Ended March 31, 2016 and 2015 | | |
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| | 2016 | 2015 |
| Revenue: | | |
| Rooms | $ | 9,665,871 |
| $ | 8,238,539 |
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| Food and beverage | 3,201,797 |
| 3,333,312 |
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| Other hotel revenue | 416,586 |
| 350,041 |
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| | 13,284,254 |
| 11,921,892 |
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| Expenses: | | |
| Hotel expenses: | | |
| Rooms | 2,132,407 |
| 2,210,484 |
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| Food and beverage | 2,626,792 |
| 2,530,453 |
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| Other hotel expense | 345,120 |
| 163,303 |
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| Administrative and general | 849,287 |
| 979,392 |
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| Sales and marketing | 948,366 |
| 923,038 |
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| Property taxes, insurance and other | 582,674 |
| 493,822 |
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| Utilities | 222,046 |
| 204,088 |
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| Repairs and maintenance | 476,487 |
| 364,389 |
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| Management fees | 394,859 |
| 357,654 |
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| Depreciation and amortization | 951,197 |
| 794,810 |
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| | 9,529,235 |
| 9,021,433 |
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| Income from operations | 3,755,019 |
| 2,900,459 |
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| Other operating expenses: | | |
| Asset advisory fees | 61,716 |
| 85,744 |
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| | 61,716 |
| 85,744 |
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| Other expenses: | | |
| Interest expense | 510,704 |
| 504,087 |
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| Interest expense - amortization of deferred financing costs | 21,437 |
| 21,437 |
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| | 532,141 |
| 525,524 |
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| Net income | $ | 3,161,162 |
| $ | 2,289,191 |
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| See notes to combined financial statements (unaudited). | | |
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| Marriott San Jose Hotel | |
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| Combined Statements of Changes in Equity (Unaudited) | |
| Three Months Ended March 31, 2016 and 2015 | |
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| Balance, January 1, 2015 | $ | 32,329,082 |
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| Contributions | 1,271,130 |
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| Distributions | (2,562,206 | ) |
| Net income | 2,289,191 |
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| Balance, March 31, 2015 | $ | 33,327,197 |
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| Balance, January 1, 2016 | $ | 34,742,773 |
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| Contributions | 951,741 |
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| Distributions | (3,072,862 | ) |
| Net income | 3,161,162 |
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| Balance, March 31, 2016 | $ | 35,782,814 |
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| See notes to combined financial statements (unaudited). | |
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| Marriott San Jose Hotel | | |
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| Combined Statements of Cash Flows (Unaudited) | | |
| Three Months Ended March 31, 2016 and 2015 | | |
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| | 2016 | 2015 |
| Cash flows from operating activities: | | |
| Net income | $ | 3,161,162 |
| $ | 2,289,191 |
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| Adjustments to reconcile net income to net cash | | |
| provided by operating activities: | | |
| Depreciation and amortization | 951,197 |
| 794,810 |
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| Amortization of deferred financing costs | 21,437 |
| 21,437 |
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| Changes in: | | |
| Accounts receivable | (2,224,052 | ) | (409,678 | ) |
| Prepaid expenses and other assets | 8,008 |
| 48,724 |
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| Accounts payable, accrued expenses and other liabilities | 503,808 |
| 646,045 |
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| Advance deposits | (866,576 | ) | (36,467 | ) |
| Net cash provided by operating activities | 1,554,984 |
| 3,354,062 |
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| Cash flows from investing activities: | | |
| Additions to hotel operating property | (294,086 | ) | (2,281,964 | ) |
| Restricted cash | (380,101 | ) | 919,922 |
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| Net cash used in investing activities | (674,187 | ) | (1,362,042 | ) |
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| Cash flows from financing activities: | | |
| Payments on mortgage payable | (376,985 | ) | (485,716 | ) |
| Member capital contributions | 951,741 |
| 1,271,130 |
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| Member capital distributions | (3,072,862 | ) | (2,562,206 | ) |
| Net cash used in financing activities | (2,498,106 | ) | (1,776,792 | ) |
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| (Decrease) Increase in cash and cash equivalents | (1,617,309 | ) | 215,228 |
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| Cash and cash equivalents: | | |
| Beginning of period | 2,682,098 |
| 1,526,015 |
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| End of period | $ | 1,064,789 |
| $ | 1,741,243 |
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| Supplemental disclosure of cash flow information: | | |
| Interest paid | $ | 510,704 |
| $ | 678,468 |
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| See notes to combined financial statements (unaudited). | | |
Marriott San Jose Hotel
Notes to Combined Financial Statements (Unaudited)
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| Note 1. | Nature of Business and Significant Accounting Policies |
SP6 San Jose Hotel Owner, LLC (Owner) and SP6 San Jose Hotel Lessee, LLC (Tenant) (collectively the Company), Delaware limited liability companies, were formed for the purpose of acquiring and operating the Marriott San Jose Hotel (the Hotel), a 510-room full-service hotel located in San Jose, California with three food and beverage outlets, meeting and event space, a fitness center, business center and an outdoor swimming pool. On May 9, 2013, the Company acquired the Hotel for a purchase price of $85,295,000. The accompanying financial statements are presented on a combined basis as the Owner and Tenant are under common management and common ownership. The Owner owns the Hotel and leases it to the Tenant, which operates the Hotel.
At March 31, 2016, the Company’s sole member is CBRE Strategic U.S. Value 6 REIT Operating, L.P. The Company will terminate upon sale or distribution of all the investments, and all affairs of the Company will be completed and the certificate of formation will be canceled in the manner required, as defined in the operating agreement. All profits, losses, distributions and contributions are allocated to the Owner.
On July 13, 2016, the Hotel was sold to an unaffiliated third party (Note 8).
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| Note 2. | Summary of Significant Accounting Policies |
Basis of presentation: The accompanying combined financial statements are presented in accordance with accounting principles generally accepted in the United States of America (GAAP). The combined financial statements present the financial position, results of operations, and cash flows of the Hotel by combining the accounts of the Owner and Tenant. The rental income received by the Owner is eliminated against the lease expense of the Tenant. All other significant intercompany accounts and transactions have also been eliminated.
Use of estimates: The preparation of the combined financial statements in conformity with GAAP requires the Company 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.
Cash and cash equivalents: All highly liquid investments with original maturities of three months or less are considered to be cash equivalents. The Company maintained cash balances in financial institutions that, from time to time, exceeded the Federal Deposit Insurance Corporation (FDIC) insured limit. The Company believes it is not exposed to any significant credit risk related to cash.
Restricted cash: Restricted cash consists of cash held in escrow reserves to be utilized for tax payments and the payment of future capital improvements.
Accounts receivable: Accounts receivable are comprised of (a) amounts billed but uncollected for room rental, food and beverage sales and other hotel income and (b) amounts earned but unbilled for the aforementioned services until guests check out of the Hotel. Receivables are recorded at the Company’s respective estimate of the amounts that will ultimately be collected. On a periodic basis, accounts receivable balances are evaluated and an allowance for doubtful accounts is established, when deemed necessary, based on its history of past write-offs, collections and current credit conditions. At March 31, 2016, there was no allowance for doubtful accounts.
Marriott San Jose Hotel
Notes to Combined Financial Statements (Unaudited)
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| Note 2. | Summary of Significant Accounting Policies (Continued) |
Inventories: Inventories consist of food, beverage and supplies and are stated at the lower of cost or market and are included within prepaid expenses and other assets on the accompanying combined balance sheet.
Investment in hotel property and depreciation: Investment in hotel property including land, building and improvements, furniture, fixtures, and equipment and site improvements are stated at cost. Replacements and improvements are capitalized and recorded at cost, while repairs and maintenance are expensed as incurred.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets, 40 years for the building, 4 years up to the remaining life of the building at the time of the addition for building improvements, 4 to 15 years for site improvements, 1 to 12 years for furniture, fixtures, and equipment and the lesser of the economic life or life of the lease for tenant improvements.
Impairment of long-lived assets: The Company reviews long-lived assets and certain identifiable intangibles with finite lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to estimated future cash flows expected to be generated by the asset. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. No impairment of the carrying value of long-lived assets was recognized for the three months ended March 31, 2016 and 2015.
Deferred financing costs: Deferred financing fees are bank fees and other costs incurred in obtaining financing that are amortized over the term of the respective loan agreement using a method which approximates the effective interest method. Upon refinancing, any unamortized financing costs are written off and included in interest expense – amortization of deferred financing costs on the accompanying combined statements of operations.
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts.
The Company adopted this new guidance and presented debt issuance costs related to its long-term debt as a deduction from the carrying amount of the associated debt on its combined balance sheet as of March 31, 2016. This change did not affect the Company’s combined statements of operations, cash flows or changes in equity.
Advance deposits: Advances received for rooms, group reservations, banquets, food and beverage and other property operations in advance of providing the related services are deferred. Related revenue is recognized when occupancy or the service is performed, or when an advance deposit is forfeited.
Revenue recognition: Hotel revenues are recognized when the services are provided and items are sold. Revenues consist of individual and group room sales, food and beverage sales and other hotel revenues such as telephone.
Sales and marketing costs: All sales and marketing costs, including production cost of print, radio, television, and other advertisements are expensed as incurred.
Marriott San Jose Hotel
Notes to Combined Financial Statements (Unaudited)
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| Note 2. | Summary of Significant Accounting Policies (Continued) |
Presentation of sales tax: Sales tax is collected from all nonexempt customers and the Company remits the entire amount to the respective state tax jurisdiction upon collection from the customer. The accounting policy is to exclude the tax collected and remitted to the state from revenue and expense.
Income taxes: No provision for federal income taxes has been made as the liability for such taxes is that of the Owner, rather than the Company. The Company is subject to the statutory requirements of the state in which it conducts business. Management of the Company identifies tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are more-likely-than-not of being sustained when challenged or when examined by the applicable taxing authority. For the three months ended March 31, 2016 and 2015, management has determined that there are no material uncertain tax positions.
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| Note 3. | Investment in Hotel Property |
At March 31, 2016, investment in hotel property, net consists of the following:
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| Land | | $ | 14,900,711 |
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| Buildings | | 64,916,953 |
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| Site improvements | | 10,692,442 |
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| Furniture, fixtures and equipment | | 5,245,370 |
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| | | 95,755,476 |
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| Less accumulated depreciation | | (8,614,434 | ) |
| Investment in hotel property, net | | $ | 87,141,042 |
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In connection with the purchase of the Hotel, the Company assumed all existing agreements associated with the original development of the Hotel from the prior owner including a Disposition and Development Agreement (DDA). Pursuant to the DDA, at the time of the development of the Hotel, the Redevelopment Agency of the city of San Jose (the Agency) conveyed title to an undeveloped parcel of land (the Site) located in a redevelopment district in downtown San Jose, California. The DDA also required payment to the Agency of an annual revenue participation amount through the 50-year term of the agreement, which was executed on June 9, 2000. The revenue participation equals:
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| • | 0.5 percent of Gross Revenue, as defined in the DDA agreement (DDA Gross Revenue), from the first through fifteenth Revenue Year, as defined in the DDA Agreement (DDA Revenue Year); |
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| • | 2.0 percent of DDA Gross Revenue from the sixteenth through twenty-fifth DDA Revenue Year, |
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| • | 3.0 percent of DDA Gross Revenue from the twenty-sixth through thirtieth DDA Revenue Year, |
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| • | 4.0 percent of DDA Gross Revenue from the thirty-first through fiftieth DDA Revenue Year, |
For the three months ended March 31, 2016 and 2015, the Company incurred charges of $66,421 and $59,608, respectively, which are included within property taxes, insurance and other on the accompanying combined statements of operations.
Marriott San Jose Hotel
Notes to Combined Financial Statements (Unaudited)
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| Note 4. | Mortgage Note Payable |
During, 2013, the Company obtained a mortgage on the Hotel whereby it received the entire maximum commitment of $57,600,000. The term of the mortgage is for five years with no extension options.
The mortgage bears interest at a fixed rate of 3.64 percent and requires monthly principal and interest payments over a twenty-year amortization period with a balloon payment at maturity on July 1, 2018. As of March 31, 2016, outstanding borrowings were $53,479,562, net of unamortized deferred financing costs of $191,977.
At March 31, 2016, scheduled debt principal payments of the mortgage note payable are as follows:
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| 2016 (9 months) | $ | 1,141,133 |
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| 2017 | 1,580,726 |
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| 2018 | 50,949,680 |
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| | $ | 53,671,539 |
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In connection with the sale of the property to an unrelated third party (Note 8), the outstanding balance of the mortgage loan was repaid in its entirety.
In connection with the purchase of the Hotel, the Company assumed the management agreement with Marriott Hotel Services Inc. (the Hotel Property Management Agreement) for property management and other related services for the Hotel. The initial term of the Hotel Property Management Agreement ends on December 31, 2044. Pursuant to the terms of the Hotel Property Management Agreement, a base annual management fee of 3 percent of gross revenues of the Hotel, as defined in the agreement, and an incentive fee, as calculated per the terms of the agreement, are required. For the three months ended March 31, 2016 and 2015, the Company incurred $394,859 and $357,654, of base management fees, respectively. For the three months ended March 31, 2016 and 2015, there were no incentive management fees incurred.
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| Note 6. | Asset Advisory Fees |
On April 1, 2013, the Company entered into an advisory agreement with an unrelated third party to provide hotel advisory and consulting services related to the management, operation, renovation, repair and maintenance and strategic marketing and sales initiatives of the Hotel (the Advisory Agreement). In connection with this agreement, the Company will pay the advisor a monthly base fee of $20,000 per month and a renovation management fee of $8,000 for each full calendar month during the course of Renovation Work, as defined in the Advisory Agreement (collectively the “Asset Advisory Fees”). The renovation management fee will be pro-rated for any partial period of less than a full calendar month at $267 per day and will not exceed $200,000 over the term of the contract. Upon the occurrence of a Liquidation Event, as defined in the Advisory Agreement, the advisor would be entitled to an incentive fee provided certain conditions are met as described in the Advisory Agreement.
For the three months ended March 31, 2016 and 2015, the Company incurred $61,716 and $85,744 of Asset Advisory Fees, respectively. For the three months ended March 31, 2016 and 2015, there were no incentive fees incurred pursuant to the Advisory Agreement.
The Company may be involved from time to time in litigation arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
Marriott San Jose Hotel
Notes to Combined Financial Statements (Unaudited)
On May 13, 2016, the Company entered into an agreement to sell the Hotel to an unrelated third party for a purchase price of $154,000,000. The sale of the Hotel was completed on July 13, 2016. In connection with the sale, the acquirer paid off any existing amounts due under the mortgage note payable. Marriott Hotel Services Inc. was retained to manage and operate the Hotel.
Subsequent events were evaluated for potential recognition and/or disclosures in the financial statements through September 28, 2016, the date the financial statements were available to be issued.
