Washington, D.C. 20549
CRI HOTEL INCOME PARTNERS, L.P.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
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.
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
The units of limited partner interest of the Registrant are not traded in any market. Therefore, the units of limited partner interest had neither a market selling price nor an average bid or asked price.
CRI HOTEL INCOME PARTNERS, L.P.
In addition, certain transfers of BACs in the Partnership may not exceed two percent of the total interests in the Partnership’s capital or profits during any one taxable year to avoid the Partnership being deemed a publicly traded partnership.
In the event that the Partnership is unable to obtain refinancing or extend the current agreement, the loan becomes due May 5, 2010, the lender may exercise its right to foreclose on the Days Inn University hotel. These factors raise substantial doubt about the Partnership's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Partnership recognized net loss for the year ended December 31, 2009, compared to net income at December 31, 2008, primarily due to decreased rooms revenue as a result of lower occupancy, partially offset by decreases in rooms expense, general and administrative expenses, building lease expense, marketing expense and property operations and maintenance expenses. General and administrative expenses decreased primarily due to the forbearance fee paid in 2008. Building lease expense decreased due to lower revenues at the Scottsdale hotel. Market expense decreased due to lower frequent guest program expense and lower payroll expense. Property operations and maintenance expenses decreased due to less repair needed as a result of lower occupancy.
Results of Operations – Hotels
Analysis of each hotel’s operating results for the year 2009 versus the year 2008 follows.
Operating statistics
The hotels’ results of operations are affected by changing market conditions and by seasonality caused by variables such as vacations, holidays and climate. Based on the hotels' operating budgets and historical trends, the following months should provide the highest net cash flow to the Partnership from each of the hotels.
| Hotel Location | | Peak Months |
| | | |
| Clearwater, FL | | January through April |
| Minneapolis, MN | | March through November |
| Plymouth, MN | | April through October |
| Roseville, MN | | April through October |
| Scottsdale, AZ | | January through April; and October and November |
The hotels’ results of operations set forth below may not be consistent with longer-term historical trends.
The Partnership’s statements of operations include operating results for each of the hotels as summarized below. Gross Operating Income represents total revenue from rooms, rental and other, telephone, and food and beverage, less the related departmental expenses. Operating Income represents Gross Operating Income less unallocated operating income and expenses. The results of operations and average occupancy for the hotels for the years ended December 31, 2009 and 2008, follow.
II-7
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
| | | Gross Operating Income | |
| Hotel Location | | 2009 | | | 2008 | |
| | | | | | | |
| Clearwater, FL | | $ | 539,330 | | | $ | 706,887 | |
| Minneapolis, MN | | | 1,874,674 | �� | | | 2,157,018 | |
| Plymouth, MN | | | 518,470 | | | | 845,549 | |
| Roseville, MN | | | 734,107 | | | | 1,084,843 | |
| Scottsdale, AZ | | | 1,705,469 | | | | 2,376,799 | |
| | | | | | | | | |
Total | | $ | 5,372,050 | | | $ | 7,171,096 | |
| | | Operating (Loss) Income | |
| Hotel Location | | 2009 | | | 2008 | |
| | | | | | | |
| Clearwater, FL | | $ | (136,479 | ) | | $ | (28,330 | ) |
| Minneapolis, MN | | | 951,037 | | | | 1,193,772 | |
| Plymouth, MN | | | (6,751 | ) | | | 281,841 | |
| Roseville, MN | | | 150,116 | | | | 454,559 | |
| Scottsdale, AZ | | | 93,943 | | | | 360,443 | |
| Depreciation and net Partnership | | | | | | | | |
operating expenses | | | (1,418,342 | ) | | | (1,570,437 | ) |
| | | | | | | | | |
Total | | $ | (366,476 | ) | | $ | 691,848 | |
| | | Average Occupancy | |
| Hotel Location | | 2009 | | | 2008 | |
| | | | | | | |
| Clearwater, FL | | | 43 | % | | | 49 | % |
| Minneapolis, MN | | | 70 | % | | | 79 | % |
| Plymouth, MN | | | 49 | % | | | 66 | % |
| Roseville, MN | | | 52 | % | | | 68 | % |
| Scottsdale, AZ | | | 62 | % | | | 72 | % |
2009 versus 2008
Clearwater, Florida: Gross operating income decreased and operating loss increased for the year ended December 31, 2009, compared to 2008 primarily due to decreases in rooms revenue, telephone revenue and rental and other revenue and increased energy expense, partially offset by decreases in rooms expense, telephone expense, rental and other expense, general and administrative expenses, marketing expense, repair and maintenance expenses, management fees, insurance expense and property tax expense. Occupancy decreased due to the sluggish economy and a significant decrease in the housing and construction markets and by third party intermediary discount packages through Priceline, Hotwire, Travelocity and Orbitz.
Minneapolis, Minnesota: Gross operating income and operating income for the year ended December 31, 2009, decreased compared to 2008 primarily due to decreases in rooms revenue and telephone revenue and increases in telephone expense, insurance expense and property tax expense, partially offset by increased rental and other revenue and decreases in rooms expense, rental and other expense, general and administrative expenses, marketing expense, energy expense, repair and maintenance expenses and management fees. Occupancy decreased due to market demand with the largest shortfall in the transient market, the University of Minnesota visitor rate, and the demand generated by the Republican National Convention in 2008.
II-8
PART II
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - Continued
Plymouth, Minnesota: Gross operating income decreased and operating loss was recognized for the year ended December 31, 2009, compared to 2008 primarily due to decreases in rooms revenue, telephone revenue and rental and other revenue and increases in insurance expense and property tax expense, partially offset by decreases in rooms expense, telephone expense, rental and other expense, general and administrative expenses, marketing expense, energy expense, repair and maintenance expenses and management fees. Occupancy decreased due to the economy and lack of production from some long term corporate groups, and the demand generated by the Republican National Convention in 2008.
Roseville, Minnesota: Gross operating income and operating income for the year ended December 31, 2009, decreased compared to 2008 primarily due to decreases in rooms revenue, telephone revenue and rental and other revenue and increases in telephone expense, insurance expense and property tax expense, partially offset by decreases in rooms expense, rental and other expenses, general and administrative expenses, marketing expense, energy expense, repair and maintenance expenses and management fees. Occupancy decreased due to the sluggish economy and sharp decline in walk in business, and the demand generated by the Republican National Convention in 2008.
Scottsdale, Arizona: Gross operating income and operating income for the year ended December 31, 2009, decreased compared to 2008 primarily due to decreases in rooms revenue, food and beverage revenue, telephone revenue and rental and other revenue and increased insurance expense, partially offset by decreases in rooms expense, food and beverage expense, telephone expense, rental and other expense, general and administrative expenses, marketing expense, energy expense, repair and maintenance expenses, management fees, property tax expense and land lease expense. Occupancy decreased due to the sluggish economy and the absence of demand in the Scottsdale market.
ITEM 8. FINANCIAL STATEMENTS
The information required by this item is contained in Part IV.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
II-9
PART II
| ITEM 9A. | CONTROLS AND PROCEDURES |
In February 2010, representatives of the Managing General Partner of the Partnership carried out an evaluation of the effectiveness of the design and operation of the Partnership’s disclosure controls and procedures, pursuant to Exchange Act Rules 13a-15 and 15d-15. The Managing General Partner does not expect that the Partnership’s disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. &# 160;Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Based on such evaluation, our principal executive officer and principal financial officer have c oncluded that as of December 31, 2009, our disclosure controls and procedures were effective to ensure that (i) the information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, was recorded, processed, summarized or reported within the time periods specified in the SEC’s rules and forms and (ii) such information was accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. In addition, there have been no significant changes in the Partnership’s internal controls over financial reporting that occurred during the Partnership’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal controls over financial reporting.
| ITEM 9B. | OTHER INFORMATION |
There has not been any information required to be disclosed in a report on Form 8-K during the quarter ended December 31, 2009, but not reported, whether or not otherwise required by this Form 10-K/A at December 31, 2009.
Certain states may assert claims against the Partnership for failure to withhold and remit state income tax on operating profit or where the sale(s) of property in which the Partnership was invested failed to produce sufficient cash proceeds with which to pay the state tax and/or to pay statutory partnership filing fees. The Partnership is unable to quantify the amount of such potential claims at this time. The Partnership has consistently advised its Partners that they should consult with their tax advisors as to the necessity of filing non-resident returns in such states with respect to their proportional taxes due.
II-10
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) and (b)
The Partnership has no directors, executive officers or significant employees of its own.
(a) and (b)
The names, ages and business experience of the directors and executive officers of C.R.I., Inc. (CRI), the General Partner of the Partnership, follow.
William B. Dockser, 73, has been the Chairman of the Board and a Director of CRI since 1974. Prior to forming CRI, he served as President of Kaufman and Broad Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed publicly held limited partnerships created to invest in low and moderate income multifamily apartment properties. Prior to joining Kaufman and Broad, he served in various positions at HUD, culminating in the post of Deputy FHA Commissioner and Deputy Assistant Secretary for Housing Production and Mortgage Credit, where he was responsible for all federally insured housing production programs. Before coming to the Washington, D. C. area, Mr. Dockser was a practicing attorney in Boston and served as a special Assistant Attorney General for the Commonwealth of Ma ssachusetts. He holds a Bachelor of Laws degree from Yale University Law School and a Bachelor of Arts degree, cum laude, from Harvard University.
H. William Willoughby, 63 has been President, Secretary and a Director of CRI since January 1990 and was Senior Executive Vice President, Secretary and a Director of CRI from 1974 to 1989. Effective May 7, 2005, he assumed the duties of Principal Financial Officer and Principal Accounting Officer of CRI. He is principally responsible for the financial management of CRI and its associated partnerships. Prior to joining CRI in 1974, he was Vice President of Shelter Corporation of America and a number of its subsidiaries dealing principally with real estate development and equity financing. Before joining Shelter Corporation, he was a senior tax accountant with Arthur Andersen & Co. He holds a Juris Doctor degree, a Master of Business Administration degree and a Bachelor of Science degree in Business Administration from the University of South Dakota.
| | (c) | There is no family relationship between any of the foregoing directors and executive officers. |
| | (d) | Involvement in certain legal proceedings. |
None.
III-1
PART III
ITEM 11. EXECUTIVE COMPENSATION
(a), (b), (c), (d), (e), (f), (g), and (h)
The Partnership has no officers or directors. However, in accordance with the Partnership Agreement, and as disclosed in the public offering, various types of compensation and fees were paid or are payable to the General Partner and its affiliates. Additional information required by Item 11 is incorporated herein by reference to Note 9 of the notes to financial statements contained in Part IV.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
| | (a) | Security ownership of certain beneficial owners. |
The following table sets forth certain information concerning any person (including any "group") who is known to the Partnership to be the beneficial owner of more than five percent of the issued and outstanding BACs at March 31, 2010.
| | Name and Address | Amount and Nature | % of total BACs |
| | of Beneficial Owner | of Beneficial Ownership | Issued and outstanding |
| | | | |
| | CMG Advisors LLC, et.al. | 108,569 BACs | 14.26% |
| | 1000 Second Avenue | | |
| | Suite 3950 | | |
| | Seattle, WA 98104 | | |
| | | | |
| | Equity Resource | | |
| | Investments, LLC | 51,293 BACs | 6.74% |
| | 1280 Massachusetts Avenue | | |
| | 4th Floor | | |
| | Cambridge, MA 02138 | | |
| | | | |
| | MacKenzie, Patterson | | |
| | Fuller, LLP | 68,985 BACs | 9.06% |
| | 1640 School Street | | |
| | Suite 100 | | |
| | Morgan, CA 94556 | | |
| | | | |
| | Peachtree Partners | 67,496 BACs | 8.87% |
| | 3116 E. Shea Boulevard | | |
| | PMB 191 | | |
| | Phoenix, AZ 85028 | | |
| | (b) | Security ownership of management. |
The following table sets forth certain information concerning all BACs beneficially owned, as of March 31, 2010, by each director and by all directors and officers as a group of the managing general partner of the Partnership's General Partner.
III-2
PART III
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT - Continued
| | | Amount and Nature | % of total BACs |
| | Name of Beneficial Owner | of Beneficial Ownership | Issued and outstanding |
| | | | |
| | William B. Dockser | None | 0.0% |
| | H. William Willoughby | None | 0.0% |
| | All Directors and Officers | | |
| | As a Group (2 persons) | None | 0.0% |
| | There exists no arrangement known to the Partnership, the operation of which may, at a subsequent date, result in a change in control of the Partnership. There is a provision in the Partnership Agreement which allows, under certain circumstances, the ability to change control. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) and (b)
Transactions with management and others.
The Partnership has no directors or officers. In addition, the Partnership has had no transactions with individual officers or directors of the managing general partner of the General Partner of the Partnership other than any indirect interest such officers and directors may have in the amounts paid to the General Partner or its affiliates by virtue of either their interest in the General Partner or their stock ownership in CRI. Item 11 of this report, which contains a discussion of the fees and other compensation paid or accrued by the Partnership to the General Partner or its affiliates, is incorporated herein by reference. Note 9 of the notes to financial statements, which contains disclosure of related party transactions, is also incorporated herein by reference.
| | (c) | Certain business relationships. |
The Partnership’s response to Item 13(a) is incorporated herein by reference. In addition, the Partnership has no business relationship with entities of which the managing general partner of the General Partner of the Partnership is an officer, director or equity owner other than as set forth in the Partnership's response to Item 13(a).
| | (d) | Transactions with promoters. |
Not applicable.
III-3
PART III
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
During the years ended December 31, 2009 and 2008, the Partnership retained Grant Thornton LLP to provide services as follows.
| | | Year Ended | |
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Audit fees (1) | | $ | 210,500 | | | $ | 185,750 | |
| Audit-related fees | | | -- | | | | | |
| Tax fees (2) | | | 14,000 | | | | 14,000 | |
| All other fees | | | -- | | | | -- | |
| | | | | | | | | |
| Total billed | | $ | 224,500 | | | $ | 199,750 | |
| | (1) Includes quarter revuews of Forms 10-Q. (2) Preparation of Partnership federal and state tax returns. |
The Partnership has no directors or officers. The Board of Directors of the General Partner of the General Partner of the Partnership, serving as the audit committee, has approved in advance 100% of the fees paid to, and services provided by, Grant Thornton LLP. Prior to approving Grant Thornton LLP’s providing any non-audit services, the Board of Directors of the General Partner of the General Partner of the Partnership would assess whether the provision of those services would compromise Grant Thornton LLP’s independence. No such services were provided by Grant Thornton LLP during the years ended December 31, 2009 and 2008.
III-4
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS
1. Financial Statements
a. The following documents are included as part of this report:
(1) Financial Statements
Report of Independent Registered Public Accounting Firm
Balance Sheets
Statements of Operations
Statements of Changes in Partners’ (Deficit) Capital
Statements of Cash Flows
Notes to Financial Statements
(2) Financial Statement Schedules
None.
(3) Exhibits
Index of Exhibits. (Listed according to the number assigned in the table in Item 601 of Regulation S-K.)
Exhibit No. 1 - Underwriting Agreement.
| | a. | Forms of Sales Agency Agreement. (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.) |
| | b. | Forms of Selected Dealer Agreements. (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.) |
Exhibit No. 3 - Articles of Incorporation and Bylaws.
| | a. | Certificate of Limited Partnership dated as of September 23, 1986 of CRI Hotel Income Partners, L.P. (formerly named CRI Hotel Income Fund, L.P.). (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.) |
1. Amendment dated as of March 12, 1987.
2. Amendment dated as of April 17, 1987.
IV-1
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS - Continued
Exhibit No. 10 - Material Contracts.
| | a. | Sale/Purchase Agreement, dated as of October 9, 1986, by and between Days Inns of America, Inc. (DIA), Days Inns Corp. (DID), Days Inns Management Company, Inc. (DIM), and CRI Hotel Income Fund, L.P., and six modifications thereto. (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.) |
| | b. | Form of Management Agreement by and between DIM and CRI Hotel Income Fund, L.P. (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.) |
| | c. | Form of Beneficial Assignee Certificate. (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.) |
| | d. | Forms of Amendment to Hotel Management Agreement by and between CRI Hotel Income Partners, L.P. and Buckhead Hotel Management Company, Inc. (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 15, 1995.) |
| | Exhibit No. 10.1 - | Form of Management Agreement dated March 1, 2008, between Registrant and Oak Hotels, Inc. for the University, Plymouth and Roseville hotels, April 1, 2008 for the Clearwater Hotel and July 1, 2008 for the Scottsdale Hotel. |
| | Exhibit No. 31.1 - | Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Exhibit No. 31.2 - | Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | Exhibit No. 32 - | Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
IV-2
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | CRI HOTEL INCOME PARTNERS, L.P. |
| | (Registrant) |
| | |
| | by: CRICO Hotel Associates I, L.P. |
| | |
| | by: C.R.I., Inc. |
| | |
| | |
March 31, 2010 | by: /s/ William B. Dockser |
| DATE | William B. Dockser |
| | Director, Chairman of the Board, |
| | and Treasurer |
| | Principal Executive Officer |
| | |
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
March 31, 2010 | by: /s/ H. William Willoughby |
| DATE | H. William Willoughby |
| | Director, President, Secretary, |
| | Principal Financial Officer and |
| | Principal Account Officer |
| | |
IV-3
CRI HOTEL INCOME PARTNERS, L. P.
INDEX TO FINANCIAL STATEMENTS
| | Page |
| | |
| Financial Statements of Capital Realty Investors, Ltd. | |
| | |
| Report of Independent Registered Public Accounting Firm | IV-5 |
| Balance Sheets as of December 31, 2009 and 2008 | IV-6 |
| Statements of Operations for the Years Ended | |
December 31, 2009, 2008 and 2007 | IV-7 |
| Statements of Changes in Partners’ (Deficit) Capital for the Years Ended | |
December 31, 2009, 2008 and 2007 | IV-8 |
| Statements of Cash Flows for the Years Ended | |
December 31, 2009, 2008 and 2007 | IV-9 |
| Notes to Financial Statements | IV-10 |
Report of Independent Registered Public Accounting Firm
Partners
CRI Hotel Income Partners, L.P.
We have audited the accompanying balance sheets of CRI Hotel Income Partners, L.P. (a Delaware limited partnership) (the Partnership) as of December 31, 2009 and 2008, and the related statements of operations, changes in partners’ (deficit) capital, and cash flows for each of the three years in the period ended December 31, 2009. These financial statements are the responsibility of the Partnership’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 CRI Hotel Income Partners, L.P. as of December 31, 2009 and 2008, and the results of its operations, and its cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Partnership will continue as a going concern. As discussed in Note 3, the Partnership has approximately $2.9 million in outstanding debt that is due on May 5, 2010. Management’s plans relating to these matters is described in Note 3. The uncertainty of the ability to refinance this debt raises substantial doubt about the Partnership’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Grant Thornton LLP
McLean, Virginia
March 31, 2010
IV-5
CRI HOTEL INCOME PARTNERS, L.P.
BALANCE SHEETS
ASSETS
| | | December 31, | |
| | | 2009 | | | 2008 | |
| | | | | | | |
| Property and equipment - at cost: | | | | | | |
Land | | $ | 1,574,490 | | | $ | 1,574,490 | |
Buildings and site improvements | | | 14,395,423 | | | | 14,382,485 | |
Furniture, fixtures and equipment | | | 4,382,160 | | | | 4,214,546 | |
Leasehold improvements | | | 1,431,234 | | | | 1,431,234 | |
| | | | | | | | | |
| | | | 21,783,307 | | | | 21,602,755 | |
Less: accumulated depreciation and amortization | | | (15,361,284 | ) | | | (14,542,003 | ) |
| | | | | | | | | |
| | | | 6,422,023 | | | | 7,060,752 | |
| | | | | | | | | |
| Hotel operating cash | | | 110,395 | | | | 156,805 | |
| Working capital reserve | | | 1,649,444 | | | | 2,333,266 | |
| Receivables and other assets, net of allowance for doubtful accounts | | | | | | | | |
of $29,458 and $37,215, respectively | | | 467,722 | | | | 406,899 | |
| Acquisition fees, principally paid to related parties, | | | | | | | | |
net of accumulated amortization of $774,719 and $740,175, respectively | | | 245,384 | | | | 279,928 | |
| Property purchase costs, | | | | | | | | |
net of accumulated amortization of $141,099 and $134,870, respectively | | | 41,168 | | | | 47,397 | |
| Loan refinancing costs, | | | | | | | | |
net of accumulated amortization of $77,949 and $97,148, respectively | | | 124,203 | | | | 173,152 | |
| | | | | | | | | |
Total assets | | $ | 9,060,339 | | | $ | 10,458,199 | |
LIABILITIES AND PARTNERS' CAPITAL
| | | | | | | |
| Accounts payable and accrued expenses | | $ | 369,925 | | | $ | 524,350 | |
| Hotel trade payables | | | 270,002 | | | | 274,258 | |
| Mortgages payable | | | 7,216,472 | | | | 7,341,231 | |
| | | | | | | | | |
Total liabilities | | | 7,856,399 | | | | 8,139,839 | |
| | | | | | | | | |
| Partners' (deficit) capital: | | | | | | | | |
General Partner | | | (364,706 | ) | | | (342,418 | ) |
Beneficial Assignee Certificates (BACs) Series A; | | | | | | | | |
868,662 BACs issued and outstanding | | | 1,568,646 | | | | 2,660,778 | |
| | | | | | | | | |
Total partners' capital | | | 1,203,940 | | | | 2,318,360 | |
| | | | | | | | | |
Total liabilities and partners' capital | | $ | 9,060,339 | | | $ | 10,458,199 | |
The accompanying notes are an integral part
of these financial statements.
IV-6
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF OPERATIONS
| | | For the years ended | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Revenue: | | | | | | | | | |
Rooms | | $ | 7,654,564 | | | $ | 9,769,097 | | | $ | 10,134,740 | |
Rental and other | | | 211,355 | | | �� | 249,537 | | | | 297,050 | |
Telephone | | | 25,027 | | | | 37,764 | | | | 47,336 | |
Food and beverage | | | 20,443 | | | | 41,100 | | | | 48,382 | |
| | | | | | | | | | | | | |
| | | | 7,911,389 | | | | 10,097,498 | | | | 10,527,508 | |
| | | | | | | | | | | | | |
| Departmental expenses: | | | | | | | | | | | | |
Rooms | | | (2,414,799 | ) | | | (2,759,440 | ) | | | (2,840,633 | ) |
Rental and other | | | (44,955 | ) | | | (65,110 | ) | | | (77,702 | ) |
Telephone | | | (60,148 | ) | | | (70,290 | ) | | | (66,547 | ) |
Food and beverage | | | (19,437 | ) | | | (31,562 | ) | | | (38,054 | ) |
| | | | | | | | | | | | | |
| | | | (2,539,339 | ) | | | (2,926,402 | ) | | | (3,022,936 | ) |
| | | | | | | | | | | | | |
| Gross operating income | | | 5,372,050 | | | | 7,171,096 | | | | 7,504,572 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Unallocated operating income (expenses): | | | | | | | | | | | | |
Interest and other income | | | 89,063 | | | | 88,267 | | | | 176,308 | |
General and administrative | | | (1,250,920 | ) | | | (1,439,750 | ) | | | (1,273,968 | ) |
Depreciation and amortization | | | (938,003 | ) | | | (986,799 | ) | | | (1,005,778 | ) |
Marketing | | | (725,444 | ) | | | (864,701 | ) | | | (935,595 | ) |
Energy | | | (664,022 | ) | | | (674,224 | ) | | | (674,686 | ) |
Property operations and maintenance | | | (622,403 | ) | | | (704,062 | ) | | | (689,112 | ) |
Property taxes | | | (529,319 | ) | | | (540,817 | ) | | | (508,610 | ) |
Building lease | | | (500,133 | ) | | | (666,250 | ) | | | (755,942 | ) |
Management fees | | | (300,841 | ) | | | (365,935 | ) | | | (417,238 | ) |
Professional fees | | | (202,754 | ) | | | (231,227 | ) | | | (262,081 | ) |
Base asset management fee | | | (93,750 | ) | | | (93,750 | ) | | | (93,750 | ) |
| | | | | | | | | | | | | |
| | | | (5,738,526 | ) | | | (6,479,248 | ) | | | (6,440,452 | ) |
| | | | | | | | | | | | | |
| Operating (loss) income | | | (366,476 | ) | | | 691,848 | | | | 1,064,120 | |
| | | | | | | | | | | | | |
| Interest expense | | | (747,944 | ) | | | (663,037 | ) | | | (578,855 | ) |
| | | | | | | | | | | | | |
| Net (loss) income | | $ | (1,114,420 | ) | | $ | 28,811 | | | $ | 485,265 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net (loss) income allocated to General Partner (2%) | | $ | (22,288 | ) | | $ | 576 | | | $ | 9,705 | |
| | | | | | | | | | | | | |
| Net (loss) income allocated to BAC holders (98%) | | $ | (1,092,132 | ) | | $ | 28,235 | | | $ | 475,560 | |
| | | | | | | | | | | | | |
| Net (loss) income per BAC, based on 868,662 BACs outstanding | | $ | (1.26 | ) | | $ | 0.03 | | | $ | 0.55 | |
The accompanying notes are an integral part
of these financial statements.
IV-7
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
| | | | | | Beneficial | | | | |
| | | | | | Assignee | | | | |
| | | General | | | Certificate | | | | |
| | | Partner | | | Holders | | | Total | |
| | | | | | | | | | |
| Partners’ (deficit) capital, January 1, 2007 | | $ | (339,403 | ) | | $ | 2,808,479 | | | $ | 2,469,076 | |
| | | | | | | | | | | | | |
Net income | | | 9,705 | | | | 475,560 | | | | 485,265 | |
| | | | | | | | | | | | | |
| Distribution of $0.75 per BAC holders | | | | | | | | | | | | |
and General Partner | | | (13,296 | ) | | | (651,496 | ) | | | (664,792 | ) |
| | | | | | | | | | | | | |
| Partners’ (deficit) capital, December 31, 2007 | | | (342,994 | ) | | | 2,632,543 | | | | 2,289,549 | |
| | | | | | | | | | | | | |
Net income | | | 576 | | | | 28,235 | | | | 28,811 | |
| | | | | | | | | | | | | |
| Partners’ (deficit) capital, December 31, 2008 | | | (342,418 | ) | | | 2,660,778 | | | | 2,318,360 | |
| | | | | | | | | | | | | |
Net loss | | | (22,288 | ) | | | (1,092,132 | ) | | | (1,114,420 | ) |
| | | | | | | | | | | | | |
| Partners’ (deficit) capital, December 31, 2009 | | $ | (364,706 | ) | | $ | 1,568,646 | | | $ | 1,203,940 | |
The accompanying notes are an integral part
of these financial statements.
IV-8
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
| | | For the years ended | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Cash flows from operating activities: | | | | | | | | | |
Net (loss) income | | $ | (1,114,420 | ) | | $ | 28,811 | | | $ | 485,265 | |
| | | | | | | | | | | | | |
Adjustments to reconcile net (loss) income to net cash (used in) | | | | | | | | | | | | |
provided by operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 938,003 | | | | 986,799 | | | | 1,005,778 | |
| | | | | | | | | | | | | |
Changes in assets and liabilities: | | | | | | | | | | | | |
(Increase) decrease in receivables and other assets, net | | | (60,823 | ) | | | (77,639 | ) | | | 193,242 | |
(Decrease) increase in accounts payable and accrued expenses | | | (154,425 | ) | | | (174,164 | ) | | | 51,881 | |
(Decrease) increase in hotel trade payables | | | (4,256 | ) | | | 45,861 | | | | (23,063 | ) |
| | | | | | | | | | | | | |
Net cash (used in) provided by operating activities | | | (395,921 | ) | | | 809,668 | | | | 1,713,103 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
Additions to property and equipment | | | (180,552 | ) | | | (609,889 | ) | | | (370,864 | ) |
Net withdrawals from (deposits to) working capital reserve | | | 683,822 | | | | (750,858 | ) | | | (15,860 | ) |
Net withdrawals from (deposits to) capital improvements | | | | | | | | | | | | |
and real estate tax reserves held by servicer | | | -- | | | | 315,585 | | | | (98,905 | ) |
| | | | | | | | | | | | | |
Net cash provided by (used in) investing activities | | | 503,270 | | | | (1,045,162 | ) | | | (485,629 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
Distribution to BAC holders and on behalf of BAC holders | | | -- | | | | -- | | | | (651,496 | ) |
Distribution to General Partners | | | -- | | | | -- | | | | (13,296 | ) |
Refinance mortgage | | | -- | | | | 7,341,231 | | | | -- | |
Loan refinancing costs | | | (29,000 | ) | | | (270,300 | ) | | | -- | |
Payment of principal on mortgage payable/payoff mortgage | | | (124,759 | ) | | | (7,273,441 | ) | | | (225,734 | ) |
Decrease (increase) in deposit | | | -- | | | | 18,000 | | | | (18,000 | ) |
| | | | | | | | | | | | | |
Net cash used in financing activities | | | (153,759 | ) | | | (184,510 | ) | | | (908,526 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Net (decrease) increase in hotel operating cash and | | | | | | | | | | | | |
cash and cash equivalents | | | (46,410 | ) | | | (420,004 | ) | | | 318,948 | |
| | | | | | | | | | | | | |
Hotel operating cash and cash and cash equivalents, beginning of year | | | 156,805 | | | | 576,809 | | | | 257,861 | |
| | | | | | | | | | | | | |
Hotel operating cash and cash and cash equivalents, end of year | | $ | 110,395 | | | $ | 156,805 | | | $ | 576,809 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
Cash paid during the year for interest | | $ | 747,944 | | | $ | 663,037 | | | $ | 578,855 | |
The accompanying notes are an integral part
of these financial statements.
IV-9
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization and offering
CRI Hotel Income Partners, L.P. (the Partnership) is a limited partnership which was formed under the Delaware Revised Uniform Limited Partnership Act as of September 23, 1986 and will continue until December 31, 2016, unless dissolved earlier in accordance with the Partnership Agreement. The Partnership was formed for the purpose of investing in hotels that were acquired from Days Inns of America, Inc. The Partnership's primary objectives continue to be cash flow growth and capital appreciation. However, the attainment of these objectives is principally dependent on the hotels' operations. The hotels had been operated by Bryanston Group, Inc. d/b/a Buckhead Hotel Management Company, Inc. (Buckhead), formerly known as Days Inns Management Comp any, Inc., under the nationally recognized franchise name of Days Inns. The Partnership entered into new management contracts with Oak Hotels, Inc., which will continue to be operated as Days Inns. As of February 1, 2010 management was assigned to Capitol Hotel Group, Inc. (CHG). The management fees have remained unchanged. CHG was formed in 1986 to address the needs, interest and financial objectives of hotel operations from an owner’s perspective. CHG has been both an asset manager and a hotel operator of diverse properties in widely varied markets with many major hotel brands and a number of well-known independent destination resorts.
The General Partner of the Partnership is CRICO Hotel Associates I, L.P. (CRICO Associates), a Delaware limited partnership, the general partner of which is C.R.I., Inc. (CRI), a Delaware corporation. The General Partner has authority in the overall management and control of the Partnership. The Assignor Limited Partner of the Partnership is CRICO Hotel Fund, Inc. (CRICO Hotel Fund).
b. Method of Accounting
The financial statements of the Partnership have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (US GAAP).
c. Depreciation and amortization
Depreciation is based on the estimated useful lives of depreciable assets using the straight-line method. Salvage value has been incorporated relating to the Scottsdale hotel. The estimated lives used in determining depreciation follow.
| | | Type of asset | | Estimated life |
| | | | | |
| | | Building and site improvements | | 10-30 years |
| | | Furniture, fixtures and equipment | | 7 years |
| | | Leasehold improvements | | Shorter of estimated life (usually 7 years) or remaining lease term |
IV-10
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Property purchase costs and acquisition fees are being amortized over a thirty-year period using the straight-line method, except for the Scottsdale hotel which is being amortized over the remaining lease term. Loan refinancing costs are being amortized over the life of the loans using the straight-line method, which approximates the effective interest method.
d. Hotel operating cash; cash and cash equivalents
Hotel operating cash and cash and cash equivalents consist of demand deposits, repurchase agreements and money market funds with original maturities when purchased of three months or less, which have not been designated as a working capital reserve by the General Partner. Hotel operating cash represents funds maintained at the hotels and by the hotels’ unaffiliated manager, while cash and cash equivalents represents funds maintained at the Partnership. The Partnership has determined that the carrying amounts for these items approximate fair value.
e. Working capital reserve
The working capital reserve represents all cash and cash equivalents, as defined above, maintained as working capital for the Partnership. The General Partner has determined that all cash and cash equivalents maintained at the Partnership which are not currently distributable to the BAC holders and General Partner of the Partnership shall be deemed as a working capital reserve. The working capital reserve may be increased or reduced by the General Partner as it deems appropriate. The General Partner at its own discretion may use the working capital reserve for operations or to reduce the amount of the existing debt.
f. Hotel accounts receivable
Hotel accounts receivable, which is included in receivables and other assets in the accompanying balance sheets, are reviewed by the Partnership for collectability. Hotel accounts receivable are reflected net of allowance for doubtful accounts of $29,458 and $37,215 as of December 31, 2009 and 2008, respectively.
g. Revenue recognition
Revenues are generally recognized when services are provided. The Partnership’s revenues are derived primarily from hotel operations, including rooms rentals, telephone usage and food and beverage sales. Revenue for the Tea House Restaurant is being recognized using the straight-line method as of possession date.
IV-11
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
h. Earnings per BAC
Income per BAC is 98% of net income divided by BACs outstanding. The Partnership has no dilutive instruments.
i. Income taxes
For federal and state income tax purposes, each partner reports on his or her personal income tax return his or her share of the Partnership’s income or loss as determined for tax purposes. Accordingly, no provision has been made for income taxes in these financial statements.
j. Use of estimates
In preparing financial statements in conformity with US GAAP, the Partnership is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
k. Fair value of financial instruments
On January 1, 2009, the Partnership adopted the new accounting standard which requires adoption of the fair value standards in the Financial Accounting Standards Board Accounting Standards Codification (“ASC”) for nonfinancial assets and nonfinancial liabilities. The adoption did not have a material impact on the financial position, results of operations or cash flows.
During the quarter ended June 30, 2009, the Partnership adopted the new accounting standard which requires disclosure regarding the fair value of financial instruments for interim reporting periods as well as in annual financial statements.
The ASC establishes a hierarchy for inputs used in measuring fair value as follows:
| | 1. | Level 1 Inputs -- quoted prices in active markets for identical assets and liabilities. |
| | 2. | Level 2 Inputs -- observable inputs other than quoted prices in active markets for identical assets and liabilities. |
| | 3. | Level 3 Inputs -- unobservable inputs. |
IV-12
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Except as disclosed in Note 3, the carrying amount of our financial instruments approximates their fair value.
l. Long-lived assets
The Partnership reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the estimated future undiscounted net cash flows expected to be generated by the asset. If an asset were determined to be impaired, its basis would be adjusted to fair value through the recognition of an impairment loss.
| | m. | Single operating segment |
The Partnership and the chief operating decision maker consider the hotels’ operations as a single homogeneous business activity as it relates to achieving their objectives of cash flow growth and capital appreciation. The chief operating decision maker reviews cash flow and operating results in the aggregate in order to determine the appropriate level of cash available for distribution to the investors in the Partnership. Accordingly, the Partnership considers itself to operate in a single reportable segment.
n. Risk and uncertainties
The hotel industry in the fourth quarter of 2009 is continuing to feel the effects of a declining economy with decreased demand and lower occupancies, which had a negative impact at all of the five hotels owned by the Partnership. The Partnership’s ability to pay operating expenses and current liabilities, and to pay distributions to BAC holders, is primarily dependent upon the performance of the underlying hotels. The Partnership is currently unable to estimate the impact the future state of the economy could have on its operations, liquidity, or capital resources.
IV-13
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
| | o. | New accounting pronouncements |
On July 1, 2009, the Partnership adopted Financial Accounting Standards Board Accounting Standards Codification, which establishes the ASC as the source of authoritative accounting principles to be applied in preparation of financial statements in conformity with US GAAP. The adoption of this standard did not have a material impact on the financial position, results of operations or cash flows.
On January 1, 2009, the Partnership adopted the new accounting standard which requires adoption of the fair value standards in the ASC for nonfinancial assets and nonfinancial liabilities. The adoption did not have a material impact on the financial position, results of operations or cash flows.
During the quarter ended June 30, 2009, the Partnership adopted the new accounting standard which requires disclosure regarding the fair value of financial instruments for interim reporting periods as well as in annual financial statements.
The ASC establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before the Partnership issues financial statements or has them available to issue. The ASC defines (i) the period after the balance sheet date during which a reporting entity’s management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures an entity should make about events or transactions that occurred after the balance sheet date. The guidance became effective for periods ending after June 15, 2009. The adoption of the guidance did not have a material impact on the financial position, results of operations or cash flows.
IV-14
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
2. HOTELS AND LEASEHOLD INTEREST OWNED BY THE PARTNERSHIP
As of December 31, 2009, the Partnership remained invested in four hotels and one leasehold interest, as follows.
| | Hotels | Date of purchase | Amount of purchase |
| | | | |
| | Clearwater Days Inn | 04/01/88 | $3,750,000 |
| | Minneapolis Days Inn | 11/01/87 | $4,800,000 |
| | Plymouth Days Inn | 12/30/87 | $4,000,000 |
| | Roseville Days Inn | 03/01/88 | $4,200,000 |
| | | | |
| | Leasehold interest | Date of purchase | Amount of purchase |
| | | | |
| | Scottsdale Days Inn (A) | 07/01/88 | $2,000,000 |
| | (A) Included in the purchase of the Scottsdale leasehold interest was $618,000 allocated to furniture, fixtures and equipment. |
3. MORTGAGE PAYABLE UNCERTAINTY
On December 19, 1997, the Partnership refinanced with Citicorp Real Estate, Inc. (Citicorp) the Zero Coupon Notes which were originally issued in connection with the Partnership's acquisition of the hotels. The loan matured January 1, 2008. On that date, a balloon payment in the amount of $7,273,441 became due. The General Partner was unable to refinance the Partnership’s mortgage debt prior to its maturity. Although the loan was in default, the special servicer agreed to a forbearance agreement for a period of 180 days for payment of a fee in the amount of $72,734.41, plus continued monthly payments of principal, interest (at the pre-default rate) and tax and capital improvements escrows.
On May 6, 2008, the Partnership closed three loans from General Electric Credit Corporation (“GE”) in the aggregate amount of $5,000,000 to refinance the Plymouth and Roseville hotels in Minnesota and the Clearwater hotel in Florida. The three loans are cross-collateralized by the three hotels. The Partnership used the loan proceeds together with the proceeds of a loan from Remediation Capital Funding, LLC in the amount of $2,900,000, of which $500,000 is held by the Lender pending resolution of the environmental matter further discussed below, secured by the University hotel in Minnesota, to pay off the existing debt in full.
IV-15
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
3. MORTGAGE PAYABLE UNCERTAINTY- Continued
The Phase I environmental study of the University hotel required by GE revealed excess levels of three chemicals deemed hazardous in the groundwater on the property. The contamination is not due to acts or omissions of the hotel. Simultaneously with its refinancing efforts, the Partnership engaged a consultant to enroll the University property in the Minnesota Pollution Control Agency's (“MCPA”) Voluntary Investigation and Cleanup ("VIC") Program and deal with the contamination at the site. The Partnership's goal is to obtain a No Action Letter with a Covenant Not to Sue, at which point it should be able to obtain financing on the property again. NOVA, the Partnership’s consultant, has prepared and submitted an additional Phase I study i n accordance with the guidelines established by the MPCA-VIC Program along with the application and proposed scope of work for the required Phase II study. On July 16, 2008, the MPCA approved the work plan for the Phase II study with samples of soil and ground water scheduled to begin collection for analysis August 11, 2008. On January 28, 2009, NOVA completed the Phase II study. Based on the results of the solvent, petroleum, and RCRA metal impacts above action or guidance levels that were detected in the soil, soil vapor and groundwater samples collected at the site, with the exception of the petroleum impacts, the compounds detected at the site appear to be associated with regional up gradient off-site areas of contamination located to the northeast and possibly to the north of the site. It does not appear that the historical uses of the site are the source of the solvent, soil vapor and groundwater impacts detected at the site. NOVA has submitted the se results and requests that the MPCA issue an Off-Site Determination letter and No Further Action letter for the site. After reviewing Nova’s report the MPCA requested additional investigation to further evaluate the source of the chlorinated solvent contamination and the corresponding risk of the vapor intrusion into the site buildings. Nova is currently collecting samples and will prepare a supplemental investigation report summarizing the findings.
The three new GE loans bear interest at the rate of 6.79% per annum and mature on January 1, 2016 with balloon payments due as set forth below:
Plymouth $887,269
Roseville $2,083,122
Clearwater $887,269
The loan with Remediation Capital bears interest at the rate of 14% per annum and matures on May 5, 2010. The Partnership is currently negotiating a short term extension with the current lender and sent financial information to Enviro Finance Group, another environmental lender that has expressed an interest in underwriting a short term loan. To date neither lender has issued a commitment letter. The Partnership continues to work diligently to secure financing on the $2,900,000 note of which $500,000 is held in escrow. The note matures on May 5, 2010.
IV-16
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
3. MORTGAGE PAYABLE UNCERTAINTY- Continued
In the event that the Partnership is unable to obtain refinancing or extend the current agreement, the loan becomes due May 5, 2010, the lender may exercise its right to foreclose on the Days Inn University hotel. These factors raise substantial doubt about the Partnership's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Partnership made installments of principal and interest aggregating $872,703 and $802,042 for the years ended December 31, 2009 and 2008. The Partnership’s aggregate balance on the current loans was $7,216,472 and $7,341,231 as of December 31, 2009 and 2008, respectively.
Considerable judgment is necessary to estimate the fair value of financial instruments. Due to current limitations on credit availability and market conditions, the estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. We estimate the fair value of our mortgages payable using discounted cash flow analysis, unobservable inputs, and other internally developed estimates that incorporate market-based assumptions to range from $3,500,000 to $4,000,000 for the Plymouth hotel, Roseville hotel and Clearwater hotel; and approximately $2,400,000 for the University hotel loan based on unobservable inputs.
4. CAPITAL IMPROVEMENTS, REAL ESTATE TAX RESERVES HELD BY
SERVICER AND INTERCOMPANY TRANSACTIONS
In addition to the monthly loan installments under its former mortgage loan, as discussed above, the Partnership also made monthly payments which were escrowed for capital improvements and estimated annual real estate taxes. This loan was refinanced on May 6, 2008. The Partnership was reimbursed by the former servicer in June 2008 for the remaining balances in the escrowed capital improvement and real estate tax accounts. Under the new mortgages, the Partnership will pay directly for real estate taxes and capital improvements.
In 2009, the Partnership contributed $105,000 to the Clearwater hotel for capital improvement. In 2008, the Partnership contributed $83,640 to the Clearwater hotel for capital improvements. In November 2007, the Partnership contributed $31,835, $56,880, $39,636 and $145,725 to the Clearwater hotel, Plymouth hotel, Roseville hotel and Minneapolis hotel, respectively, for capital improvements.
IV-17
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
5. WORKING CAPITAL RESERVE
The working capital reserve of $1,649,444 and $2,333,266 as of December 31, 2009 and 2008, respectively, represents all cash and cash equivalents, as defined in Note 1.d., maintained as working capital for the Partnership. The working capital reserve may be increased or reduced by the General Partner as it deems appropriate.
6. COMMITMENT
a. Hotel Management Agreements
The hotels had been operated by Bryanston Group, Inc. d/b/a Buckhead Hotel Management Company, Inc. (Buckhead), formerly known as Days Inns Management Company, Inc., under the nationally recognized franchise name of Days Inns. The Partnership entered into new management contracts with Oak Hotels, Inc., which will continue to be operated as Days Inns. The new contracts will expire December 31, 2016, with the exception of Scottsdale, which is coterminous with the land lease on which that hotel is located. The agreements provide for a base management fee of 3.5% of gross revenues from operations for the University hotel, Plymouth hotel, Rosewater hotel and Clearwater hotel and 4.5% for the Scottsdale hotel. As of February 1, 2010 management was assigned to Capitol Hot el Group, Inc. (CHG). The management fees have remained unchanged. CHG was formed in 1986 to address the needs, interest and financial objectives of hotel operations from an owner’s perspective. CHG has been both an asset manager and a hotel operator of diverse properties in widely varied markets with many major hotel brands and a number of well-known independent destination resorts.
b. Lease Agreements
The Partnership assumed an existing lease agreement from Days Inns of America, Inc. in connection with the acquisition of the leasehold interest in the Scottsdale Days Inn. The assumption transfers the rights to operate the property on the lease's existing terms over the remaining life of the lease. In October 2002, the lease was extended to expire on December 31, 2008. The Partnership negotiated and executed a short term extension through December 31, 2010 until the ground lessor decides to re-develop the property. As of February 1, 2009, annual lease payments are equal to the greater of $480,000 or 22% of total room revenue and 2.5% of food and beverage revenue. Minimum lease payments of $40,000 are payable monthly with a quarterly analysis of the actu al amount due. For the years ended December 31, 2009, 2008 and 2007, annual lease payments were $500,133, $666,250 and $755,942, respectively.
IV-18
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
6. COMMITMENT - Continued
c. License Agreements
The five License Agreements pursuant to which the hotels are operated as Days Inns were assigned from the current licensee (and former management agent), Buckhead to the Partnership as Licensee. The business terms remained identical.
d. Legal Proceedings
On September 2, 2008, a complaint was filed against CRI Hotel Income Partners, L.P., in the Circuit Court of the Sixth Judicial Circuit, in and for Pinellas County, Florida. The Plaintiffs claimed damages of $15,000, exclusive of interest and cost as a result of being bitten by bed bugs while staying at the Days Inn Clearwater on or about July 16, 2008. The complaint was submitted to Wausau Insurance Company, Claim #PX415-008254-01. On January 21, 2009, the defense counsel retained by Wausau requested that the plaintiff make a demand for settlement of this lawsuit so as to avoid protracted litigation. The case was settled and the complaint was dismissed by the court on or about January 21, 2010.
7. GROUND LEASE AGREEMENTS
The Partnership had leased a portion of the Minneapolis Days Inn property to Vicorp Restaurants, Inc. (Vicorp), which operated a Baker's Square restaurant on the property. Gross rental income pursuant to the lease agreement with Vicorp, which is included in interest and other income in the accompanying statements of operations, was $12,712 and $73,694 for 2008 and 2007, respectively. As of March 2008, Vicorp failed to pay the monthly rent due. On April 3, 2008, Vicorp declared bankruptcy. It rejected the lease as an executory contract as of that date. It has filed a proof of claim for its permitted damages in Vicorp’s bankruptcy case.
On June 22, 2009, the Partnership executed a ten year lease with the Tea House Restaurant to replace the old tenant at Baker’s Square. The lease has two options to renew for five years each. The base rent for years one through five is $100,700. Rent commences on the first to occur of (i) 180 days subsequent to the possession date which occurred on June 22, 2009 or (ii) the opening of the premises for business to the general public.
The Partnership leases an adjacent building on the Roseville Days Inn property to India Palace, Inc., which operates a restaurant on the property. The lease expires on September 30, 2010. The lease provides one option to extend the lease for an additional period of five years. Gross base rental income pursuant to the lease agreement with India Palace, which is included in interest and other income in the accompanying statements of operations, was $30,000 each of the years ended December 31, 2009, 2008 and 2007.
IV-19
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
8. PARTNERS' CAPITAL
The Partnership's profits and losses and distributions are allocated 98% to the BAC holders and 2% to the General Partner. Upon reaching a non-cumulative, annual preferred cash flow return of 12%, the Partnership's profits and losses and distributions will be allocated 85% to the BAC holders and 15% to the General Partner. To date, the annual preferred cash flow return has not been achieved. Cash available for distribution, as defined in the Partnership Agreement, is intended to be distributed on a quarterly basis within 60 days after the end of each calendar quarter.
The Partnership did not make a distribution in 2009 or 2008. A distribution in the amount of $221,597 ($0.25 per BAC) was declared and paid to BAC holders of record and to the General Partner for the first quarter of 2007 in the amounts of $217,165 and $4,432, respectively. A distribution in the amount of $221,598 ($0.25 per BAC) was declared and paid to BAC holders of record, to the General Partner and to the state of Minnesota for withholding for the second quarter of 2007 in the amounts of $212,021, $4,432 and $5,145, respectively. A distribution in the amount of $221,597 ($0.25 per BAC) was declared and paid to BAC holders of record and to the General Partner and to the state of Minnesota for withholding for the third quarter of 2007 in the amounts of $212,020, $4,432 and $5,145, respectively. The Partnership did not declare a distribution for the fourth quarter of 2007.
9. RELATED-PARTY TRANSACTIONS
In accordance with the terms of the Partnership Agreement, the Partnership paid the General Partner a fee for services in connection with the review, selection, evaluation, negotiation and acquisition of the hotels. The Partnership paid $1,142,516 in acquisition fees. The acquisition fees were capitalized and are being amortized over a thirty-year period using the straight-line method.
In accordance with the terms of the Partnership Agreement, the Partnership reimbursed the General Partner or its affiliates for costs incurred on behalf of the Partnership for real estate appraisals and market studies, engineering studies, legal consultation and accounting fees, as well as travel and communication expenses related to the acquisition of the hotels. The Partnership paid $233,474 in such costs. The costs were capitalized and are being amortized over a thirty-year period using the straight-line method.
In accordance with the terms of the Partnership Agreement, the Partnership is obligated to reimburse the General Partner or its affiliates for their direct expenses in connection with managing the Partnership. For the years ended December 31, 2009, 2008 and 2007, the Partnership paid $177,682, $202,455 and $90,942, respectively, to the General Partner or its affiliates as direct reimbursement of expenses incurred on behalf of the Partnership. Such reimbursed expenses are included in the accompanying statements of operations as general and administrative expenses.
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CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
9. RELATED-PARTY TRANSACTIONS - Continued
In accordance with the terms of the Partnership Agreement, the Partnership is obligated to pay the General Partner or its affiliates an annual base asset management fee (Management Fee), equal to 0.50% of the weighted average balance of the adjusted partnership investment during the period, as defined in the Partnership Agreement. The Partnership paid a Management Fee of $93,750 for each of the years ended December 31, 2009, 2008 and 2007.
C.R.I., Inc., the general partner of the General Partner, has contracted with Capitol Hotel Group, Inc. (CHG), to perform certain asset management services related to the oversight of the operations and management of the hotels. The Chairman and President of C.R.I., Inc., are the Chairman and President, respectively, of, and holders of 100% of the equity interest in, CHG.
As of February 1, 2010 management was assigned to Capitol Hotel Group, Inc. (CHG). The management fees have remained unchanged. CHG was formed in 1986 to address the needs, interest and financial objectives of hotel operations from an owner’s perspective. CHG has been both an asset manager and a hotel operator of diverse properties in widely varied markets with many major hotel brands and a number of well-known independent destination resorts.
10. INCOME TAXES
A reconciliation of the Partnership’s financial statement net (loss) income to taxable (loss) income follows.
| | | For the years ended | |
| | | December 31, | |
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Financial statement net (loss) income | | $ | (1,114,420 | ) | | $ | 28,811 | | | $ | 485,265 | |
| | | | | | | | | | | | | |
Depreciation of buildings and site improvements | | | | | | | | | | | | |
computed over 40 years for tax purposes, and over | | | | | | | | | | | | |
shorter lives for financial statement purposes and | | | | | | | | | | | | |
differences between financial statement net income | | | | | | | | | | | | |
and taxable income | | | 320,183 | | | | 77,908 | | | | 459,235 | |
| | | | | | | | | | | | | |
| Taxable (loss) income | | $ | (794,237 | ) | | $ | 106,719 | | | $ | 944,500 | |
11. CASH CONCENTRATION RISK
Financial instruments that potentially subject the Partnership to concentrations of risk consist primarily of cash. The Partnership maintains fourteen cash accounts. As of December 31, 2009, the uninsured portion of the cash balance was $0.
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