ITEM 1.01 ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT
Contribution Agreement
On August 24, 2021, Lodging Fund REIT III OP, LP (the “Operating Partnership”), the operating partnership subsidiary of Lodging Fund REIT III, Inc. (the “Company”) and High Desert Investors, LP (the “Contributor”) entered into a Legendary Equity Preservation UPREIT (Pat. Pend.) Contribution Agreement (the “Contribution Agreement”), pursuant to which the Contributor agreed to contribute the 153-room Hilton Garden Inn El Paso University hotel in El Paso, Texas (the “Hotel Property”) to the Operating Partnership. The Contributor is not affiliated with the Company or Legendary Capital REIT III, LLC, the Company’s external advisor. The aggregate consideration for the Hotel Property under the Contribution Agreement is $17,600,000 plus closing costs, subject to adjustment as provided in the Contribution Agreement. The majority of the consideration consists of the assumption or refinancing by the Operating Partnership of existing debt secured by the Hotel Property. The remaining consideration consists of the issuance by the Operating Partnership of Series T Limited Units of the Operating Partnership. Pursuant to the Contribution Agreement, the Operating Partnership is responsible for up to $100,000 of certain closing costs to be agreed upon by the parties. As required by the Contribution Agreement, the Operating Partnership will deposit $50,000 into escrow as earnest money pending the closing or termination of the Contribution Agreement. Except in certain circumstances described in the Contribution Agreement, if the Operating Partnership fails to perform its obligations under the Contribution Agreement, it will forfeit the earnest money.
Upon closing, the parties will enter into an amendment to the amended and restated limited partnership agreement of the Operating Partnership to evidence the issuance of the Series T Limited Units to the Contributor. Such Series T Limited Units will be entitled to annual cash distributions of up to 6% of the value of the Series T Limited Units for the three years after closing, depending upon the net operating income (“NOI”) of the Hotel Property during each such applicable year. The Series T Limited Units will convert into Common Limited Units of the Operating Partnership beginning 36 months, or at the option of the Contributor, up to 48 months, after the closing. The number of Common Limited Units to be issued to the Contributor upon conversion will be based upon a capitalization rate applied to the then-current trailing 12-month NOI of the Hotel Property, less amounts incurred or accrued by the Operating Partnership for (i) any funds advanced as cash at closing (ii) $100,000 contribution towards any commercially reasonable closing costs identified under section 3.4, (iii) the Original Loan Balance, as defined in the Contribution Agreement, (iv) loan assumption or origination fees and related expenses, (v) if applicable, costs of prepayment or defeasance and related expenses, (vi) PIP and capital expenditures, (vii) operating cash infused by the General Partner and/or Partnership, (viii) any shortfall of the 10% minimum cumulative yield on General Partner’s invested capital, and (ix) any other unrealized or unreimbursed costs of operating the Contributed Asset.
The Contribution Agreement contains various covenants, representations and warranties from the respective parties. The acquisition of the Hotel Property by the Operating Partnership is subject to certain closing conditions, including the Operating Partnership’s assumption or refinancing of the existing debt secured by the Hotel Property. There can be no assurance that the Operating Partnership will complete the acquisition of the Hotel Property.
