Report of Independent Registered Public Accounting Firm
To the unitholders of Intown Hospitality Investors LP:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income (loss), comprehensive loss, unitholders’ equity and cash flows present fairly, in all material respects, the financial position of Intown Hospitality Investors LP and Subsidiaries at December 31, 2009 and 2008 and the results of their operations and their cash flows for the years ended December 31, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements 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 stat ements are free of material misstatement. 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers
January 29, 2010
182
Intown Hospitality Investors LP and Subsidiaries
Consolidated Balance Sheets
December 31, 2009 and 2008
| | | | |
| | 2009 | | 2008 |
Assets | | | | |
Real estate assets (Note 2) | | | | |
Land | $ | 138,019,548 | $ | 138,019,548 |
Building and improvements | | 649,136,901 | | 645,592,815 |
Furniture, fixtures and equipment | | 28,019,849 | | 24,809,234 |
Total real estate assets | | 815,176,298 | | 808,421,597 |
Less: Accumulated depreciation | | (67,848,565) | | (40,012,263) |
Real estate assets | | 747,327,733 | | 768,409,334 |
Cash and cash equivalents | | 13,313,586 | | 10,829,597 |
Cash held in escrow and restricted cash | | 9,180,420 | | 9,770,630 |
Trade name | | 20,442,376 | | 20,442,376 |
Other assets | | 3,243,699 | | 3,602,257 |
Loan origination costs, net of accumulated amortization $3,541,245 and $2,267,131 | | 3,455,532 | | 4,698,146 |
Total assets | $ | 796,963,346 | $ | 817,752,340 |
Liabilities and Unitholders' Equity | | | | |
Mortgage notes payable (Note 5) | $ | 632,479,814 | $ | 638,018,610 |
Accounts payable and other accrued expenses | | 14,603,524 | | 15,002,207 |
Derivative instruments (Notes 6 and 7) | | 11,628,824 | | 15,289,705 |
Deferred tax liability (Note 8) | | 2,462,850 | | 2,818,049 |
Total liabilities | | 661,175,012 | | 671,128,571 |
Noncontrolling interest | | 125,000 | | 125,000 |
Unitholders' equity | | 135,663,334 | | 146,498,769 |
Total equity | | 135,788,334 | | 146,623,769 |
Total liabilities and unitholders' equity | $ | 796,963,346 | $ | 817,752,340 |
The accompanying notes are an integral part of these financial statements.
183
Intown Hospitality Investors LP and Subsidiaries
Consolidated Statements of Income (Loss)
Years Ended December 31, 2009, 2008 and period
from January 8, 2007 (inception) to December 31, 2007
| | | | | | |
| | 2009 | | 2008 | | 2007* |
Revenues | | | | | | |
Room rental income | $ | 136,367,705 | $ | 155,967,903 | $ | 84,276,506 |
Other | | 2,270,757 | | 2,458,399 | | 1,397,494 |
Total revenues | | 138,638,462 | | 158,426,302 | | 85,674,000 |
Operating expenses | | | | | | |
Salaries, wages and employment expense | | 28,893,780 | | 29,256,754 | | 16,130,857 |
Utilities | | 22,202,427 | | 22,776,845 | | 11,714,080 |
Property taxes | | 9,971,041 | | 9,731,378 | | 4,470,578 |
Maintenance and repairs | | 5,578,785 | | 6,384,524 | | 3,188,262 |
Other general and administrative | | 17,478,946 | | 20,236,286 | | 10,243,108 |
Depreciation | | 28,072,388 | | 26,893,727 | | 13,167,712 |
Total operating expenses | | 112,197,367 | | 115,279,514 | | 59,184,597 |
Operating income | | 26,441,095 | | 43,146,788 | | 26,489,403 |
Other expenses | | | | | | |
Interest, net | | 35,573,846 | | 37,541,553 | | 21,724,267 |
Hedge break gain | | - | | - | | (2,855,026) |
Lease termination fee (Note 1) | | - | | 1,046,686 | | - |
Loss on disposal of real estate assets | | 355,079 | | 362,274 | | 44,190 |
Other (Note 10) | | 2,221,511 | | 384,610 | | 114,698 |
Total other expenses | | 38,150,436 | | 39,335,123 | | 19,028,129 |
(Loss)/income from continuing operations before income taxes | | (11,709,341) | | 3,811,665 | | 7,461,274 |
Provision for income taxes | | 140,803 | | 3,198,283 | | 208,209 |
(Loss)/income from continuing operations | | (11,850,144) | | 613,382 | | 7,253,065 |
Discontinued operations | | | | | | |
Income from discontinued operations | | - | | 110,552 | | 90,974 |
Loss on disposal of operating properties | | - | | (662,162) | | - |
(Loss)/income from discontinued operations | | - | | (551,610) | | 90,974 |
Net (loss) income | | (11,850,144) | | 61,772 | | 7,344,039 |
Income attributable to the noncontrolling interest | | 15,625 | | 15,191 | | 100,000 |
Net (loss)/income attributable to unitholders | $ | (11,865,769) | $ | 46,581 | $ | 7,444,039 |
* Not covered by auditor’s opinion
The accompanying notes are an integral part of these financial statements.
184
Intown Hospitality Investors LP and Subsidiaries
Consolidated Statements of Comprehensive Loss
Years Ended December 31, 2009, 2008 and period
from January 8, 2007 (inception) to December 31, 2007
| | | | | | |
| | 2009 | | 2008 | | 2007* |
| | | | | | |
Net (loss) income | $ | (11,850,144) | $ | 61,772 | $ | 7,344,039 |
Change in fair value of derivative instruments | | 3,660,881 | | (7,765,898) | | (7,523,807) |
Comprehensive loss | | (8,189,263) | | (7,704,126) | | (179,768) |
Comprehensive income attributable to the noncontrolling interest | | 15,625 | | 15,191 | | 100,000 |
Comprehensive loss attributal to unitholders | $ | (8,204,888) | $ | (7,719,317) | $ | 79,768 |
* Not covered by auditor’s opinion
The accompanying notes are an integral part of these financial statements.
185
Intown Hospitality Investors LP and Subsidiaries
Consolidated Statements of Unitholders’ Equity
Years Ended December 31, 2009, 2008 and
the period from January 8, 2007 (inception) to December 31, 2007
| | | | | | | | |
| | Total Equity | | Unitholder's Equity | | Noncontrolling Interest | | Accumulated other Comprehensive Loss |
| | | | | | | | |
Balances at January 8, 2007* | $ | - | $ | - | $ | - | $ | - |
Contributions* | | 163,271,353 | | 163,146,353 | | 125,000 | | - |
Distributions* | | (2,877,773) | | (2,777,773) | | (100,000) | | - |
Net income* | | 7,444,039 | | 7,344,039 | | 100,000 | | - |
Change in fair value of interest rate cap and swap* | | (7,523,807) | | (7,523,807) | | - | | (7,523,807) |
Comprehensive loss* | | 79,768 | | 179,768 | | 100,000 | | - |
Balances at December 31, 2007 | | 160,313,812 | | 160,188,812 | | 125,000 | | (7,523,807) |
Contributions | | 8,774,014 | | 8,774,014 | | - | | |
Distributions | | (14,759,931) | | (14,744,740) | | (15,191) | | |
Net income | | 61,772 | | 46,581 | | 15,191 | | |
Change in fair value of interest rate cap and swap (Notes 6 and 7) | | (7,765,898) | | (7,765,898) | | - | | (7,765,898) |
Comprehensive loss | | (7,704,126) | | (7,719,317) | | 15,191 | | |
Balances at December 31, 2008 | | 146,623,769 | | 146,498,769 | | 125,000 | | (15,289,705) |
Contributions | | - | | - | | - | | |
Distributions | | (2,646,172) | | (2,630,547) | | (15,625) | | |
Net (loss) income | | (11,850,144) | | (11,865,769) | | 15,625 | | |
Change in fair value of interest rate cap and swap (Notes 6 and 7) | | 3,660,881 | | 3,660,881 | | - | | 3,660,881 |
Comprehensive loss | | (8,189,263) | | (8,204,888) | | 15,625 | | |
Balances at December 31, 2009 | $ | 135,788,334 | $ | 135,663,334 | $ | 125,000 | $ | (11,628,824) |
* Not covered by auditor’s opinion
The accompanying notes are an integral part of these financial statements.
186
Intown Hospitality Investors LP and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2009, 2008 and
the period from January 8, 2007 (inception) to December 31, 2007
| | | | | | |
| | 2009 | | 2008 | | 2007* |
Cash flows from operating activities | | | | | | |
Net (loss) income | $ | (11,850,144) | $ | 61,772 | $ | 7,344,039 |
Adjustments to reconcile net (loss) income to net cash provided by operating activities | | | | | | |
Depreciation | | 28,072,388 | | 26,947,049 | | 13,235,574 |
Deferred taxes | | (347,415) | | 2,797,357 | | - |
Amortization of loan origination cost and debt fair value adjustment included in interest expense | | 2,131,943 | | 2,113,423 | | 1,481,496 |
Loss on disposal of real estate assets | | 355,079 | | 362,274 | | 47,632 |
Loss on disposal of operating properties | | - | | 662,162 | | - |
Decrease in other assets | | 350,774 | | 482,287 | | 1,799,430 |
Decrease in accounts payable and accrued expenses | | (398,683) | | (885,761) | | 4,350,401 |
Net cash provided by operating activities | | 18,313,942 | | 32,540,563 | | 28,258,572 |
Cash flows from investing activities | | | | | | |
Acquisition of Intown Suites Management, Inc. | | - | | (925,000) | | (474,747,668) |
Acquisition of Houston Properties | | - | | (8,826,381) | | - |
Acquisition of Project Montreal | | - | | - | | (41,151,327) |
Acquisition of Louisville Northeast | | - | | (35,991) | | (3,142,509) |
Additions to real estate assets - improvements | | (7,345,866) | | (16,600,082) | | (12,022,497) |
Decrease in cash held in escrow and restricted cash | | 590,210 | | 4,328,705 | | (11,145,501) |
Payments on note receivable, included in other assets | | - | | 8,454 | | 2,295 |
Net cash used in investing activities | | (6,755,656) | | (22,050,295) | | (542,207,207) |
Cash flows from financing activities | | | | | | |
Proceeds from mortgage/notes payable | | - | | - | | 528,719,904 |
Repayments of notes payable | | (6,396,625) | | (6,016,006) | | (155,878,140) |
Payment of loan origination costs | | (31,500) | | - | | (6,968,204) |
Contributions from minority interest | | - | | 125,000 | | - |
Distribution to noncontrolling interest | | (15,625) | | (15,191) | | - |
Contributions from partners | | - | | 8,774,014 | | 163,146,353 |
Distributions to partners | | (2,630,547) | | (14,744,740) | | (2,855,026) |
Net cash used in financing activities | | (9,074,297) | | (11,876,923) | | 526,164,887 |
Net increase (decrease) in cash and cash equivalents | | 2,483,989 | | (1,386,655) | | 12,216,252 |
Cash and cash equivalents | | | | | | |
Beginning of period | | 10,829,597 | | 12,216,252 | | - |
End of period | $ | 13,313,586 | $ | 10,829,597 | $ | 12,216,252 |
Supplemental non-cash investing and financing activities | | | | | | |
Change in the fair market value of derivative instruments (Notes 6 and 7) | $ | 3,660,881 | $ | (7,765,898) | $ | (7,546,554) |
Supplemental cash flow information | | | | | | |
Cash paid for income tax | | 604,161 | | 120,291 | | - |
Cash paid for interest | | 33,608,364 | | 35,658,302 | | 16,827,078 |
* Not covered by auditor’s opinion
The accompanying notes are an integral part of these financial statements.
187
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
* Amounts related to the period from January 8, 2007 (inception) to December 31, 2007 are not covered by auditor’s opinion
1.
Organization and Operations
Intown Hospitality Investors, LP (“Investors”) (together with its subsidiaries the “Company”), a Delaware limited partnership, has a 100% interest in Intown Hospitality Corp (“Hospitality Corp”). Hospitality Corp is a real estate investment trust (REIT) that owns extended stay lodging facilities throughout the United States of America. As of December 31, 2009, the Company owned 138 hotels. The Company’s extended stay lodging facilities are concentrated in Texas and Georgia with 21.8 percent and 16.7 percent located in each state, respectively. The remaining properties are located in 19 other states.
The Company, operates, acquires, and owns Intown Suites, which are economy extended-stay lodging facilities. The Company's facilities are located in predominately retail-oriented locations proximate to or in major metropolitan areas. The Company offers a product designed to appeal to guests seeking conveniently located, safe, and furnished accommodations at substantially lower rates than most other extended-stay lodging alternatives. The product provides guests an affordable alternative to the nightly rates of hotels and the long-term commitments of apartment leases.
Formation– As of December 31, 2009, Investor’s general partner, Intown GP, LLC, a Delaware limited liability company, owned 2% of the limited partnership while the remaining interests were owned by its limited partners, Kimco Intown Corp., a Delaware Corporation (75%), Intown Holdings, LP, a Delaware limited partnership (22.5%), and Intown Investor, LLC, a Delaware limited liability company (0.5%). Investors and Hospitality Corp were formed January 8, 2007 for the purpose of entering into an agreement to purchase the stock of Intown Suites Management, Inc. Investors began operations with the stock acquisition of Intown Suites Management, Inc. on June 15, 2007.
On January 15, 2008, Hospitality Corp sold 125 Shares of 12.5% Series A Cumulative Non-Voting Preferred Stock for $1,000 each, which netted $79,620 after issuance cost. The additional shareholders allow Hospitality Corp to meet the Internal Revenue requirement that a REIT have at least 100 beneficial shareholders during the year. The interest is reflected as noncontrolling interest in the accompanying financial statements.
The financial statements included Intown Lessee Associates, LLC (“Lessee”), a consolidated Variable Interest Entity through November 30, 2008. The Lessee was the sole lessee and operator of the extended stay lodging facilities until December 1, 2008 when the lease was terminated. Hospitality Corp paid Lessee $1,046,686 to terminate the lease including closing proration of $296,686. The payment was recorded as an expense. The purchase price was allocated to the assets acquired and liabilities assumed. No intangible assets or liabilities were identified.
On December 1, 2008 after the lease termination with Lessee, Hospitality Corp began directly operating 129 of the 138 Intown locations and transferred 9 properties into 9 separate wholly owned taxable REIT subsidiaries ("TRS"), which are operated by an independent third party as Intown Suites. Housekeeping services to all 129 locations are provided through a wholly owned taxable REIT subsidiary (Intown Services).
During 2009, 6 properties were transferred from the TRS back to Hospitality Corp and 1 property was transferred from Hospitality Corp to the TRS. As a result of these transactions at December 31, 2009, Hospitality Corp directly operated 134 properties and 4 properties were operated by a third party manager as Intown Suites.
Limited Partnership Agreement of Investors– The partnership agreement provides, among other things, that (a) the general partner has the exclusive right and power to conduct the business affairs of the limited partnership, unless expressly designated otherwise in the agreement, (b) the general partner has the right and duty to manage the day-to-day business of the limited partnership and to implement the decisions made by the limited partnership, and (c) the liability of each limited partner shall be limited to the amount of its capital contributions and any distributions received, subject to the Delaware Revised Uniform Limited Partnership Act. Profits and losses of the limited partnership are to be allocated to the partners in accordance with the partnership agreement.
The limited partnership agreement will terminate upon the earliest of (a) the sale or disposition of all assets of the limited partnership and the receipt of all consideration, (b) the election or determination to dissolve the limited partnership, or (c) the occurrence of any bankruptcy event or other event that terminates the partnership of any partner, unless each of the remaining partners elects to continue the business and appoints a new partner.
188
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
The financial statements include the following wholly owned subsidiaries of Investors at December 31, 2009:
| |
BEC Atlanta Gwinnett, LLC | Intown Properties V, LLC |
BEC Charleston Central, LLC | Oxmoor |
Intown Suites Columbia Northwest, LLC | Gwinnett Place |
Intown Suites Lithia Springs, LLC | Northside Drive |
Intown Suites Warner Robins, LLC | Columbus North |
Intown Hospitality Corp. | Ashley Phosphate |
Intown Hospitality Investors, LP | Intown Properties VI, LLC |
Intown Mezz One, LLC | Indianapolis East |
Intown Mezz Two, LLC | Jackson, MS |
Intown Mezz Three, LLC | Hazelwood |
Intown Mezz Four, LLC | St. Charles |
Intown Mezz Five, LLC | Newport News North |
Intown Mezz Six, LLC | Intown Suites Independence Boulevard, LLC |
Intown Mezz Seven, LLC | Intown Suites Indianapolis North, LLC |
Intown Properties I, LLC | Intown Suites Jana Lane, LP |
Forest Park | Intown Suites Jonesboro, LLC |
Roswell | Intown Suites Kennesaw, LLC |
Dayton | Intown Suites Kieth Harrow, LP |
Greenville South | Intown Suites Knoxville, LLC |
North Dallas | Intown Suites Lamar Boulevard, LP |
Intown Properties II, LLC | Intown Suites Lee Highway, LLC |
Lilburn | Intown Suites Leon Valley, LP |
Preston Hwy | Intown Suites Louisville Northeast, LLC |
UNC | Intown Suites Louisville South, LLC. |
Greenville North | Intown Suites Mableton, LLC |
Chesapeake | Intown Suites Macon, LLC |
Intown Properties IV, LLC | Intown Suites Major Boulevard, LLC |
Douglasville | Intown Suites Management, Inc. |
Indian Trail | Intown Suites McDowell Road, LLC |
Indianapolis NW | Intown Suites Memphis Southeast, LLC |
Mathews | Intown Suites Midlothian, LLC |
Columbus East | Intown Suites Midvale, LLC |
Intown Suites Military Trail, LLC | Intown Suites Colerain, LLC |
Intown Suites Mills Road, LP | Intown Suites Commercial Boulevard, LLC |
Intown Suites Mobile, LLC | Intown Suites Conyers, LLC |
Intown Suites Mobile West, LLC | Intown Suites Coon Rapids, LLC |
Intown Suites Montgomery, LLC | Intown Suites Dothan, LLC |
189
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
| |
Intown Suites Nashville North, LLC | Intown Suites Downers Grove, LLC |
Intown Suites Newport News, LLC | Intown Suites Dublin, LLC |
Intown Suites North Charleston, LLC | Intown Suites Edmond, LLC |
Intown Suites North Collins, LP | Intown Suites El Paso, LP |
Intown Suites North Dallas, LP | Intown Suites Fairfield, LLC |
Intown Suites Oak Village, LP | Intown Suites Gilbert, LLC |
Intown Suites O’hare, LLC | Intown Suites GP Three, LLC |
Intown Suites Orlando, LLC | Intown Suites GP Two, LLC |
Intown Suites Orlando North, LLC | Intown Suites Greenwood, LLC |
Intown Suites Orlando South, LLC | Intown Suites Group Two, LLC |
Intown Suites Perdue Springs, LLC | Intown Suites Gunbarrel, LLC |
Intown Suites Perrin Beitel LP | Intown Suites Hamilton Church, LLC |
Intown Suites Piedmont, LLC | Intown Suites Culebra Road, LP |
Intown Suites Pittsburgh, LLC | Intown Suites Hickory Hill, LLC |
Intown Suites Pressley Road, LLC | Intown Suites Highway 121, LP |
Intown Suites Raleigh, LLC | Intown Suites Highway 17, LLC |
Intown Suites Rolling Creek, LP | Intown Suites Highway 2252, LP |
Intown Suites Roosevelt Boulevard, LLC | Intown Suites Highway 290, LP |
Intown Suites Rufe Snow, LP | Intown Suites Highway 6, LP |
Intown Suites Albany, LLC | Intown Suites Huntsville, LLC |
Intown Suites Albemarle Road, LLC | Intown Suites Hurstbourne Parkway, LLC |
Intown Suites Albuquerque, LLC | Intown Suites Ina Road, LLC |
Intown Suites Arlington, LP | Intown Suites Salt Lake South, LP |
Intown Suites Arlington South, LP | Intown Suites San Pedro, LP |
Intown Suites Athens, LLC | Intown Suites Sandy Springs, LLC |
Intown Suites Atlantic Blvd, LLC | Intown Suites Savannah, LLC |
Intown Suites Aurora, LLC | Intown Suites Sheridan, LLC |
Intown Suites Bandera Road, LP | Intown Suites Southpark, LLC |
Intown Suites Beach Boulevard, LLC | Intown Suites St .Johns, LLC |
Intown Suites Bell Road, LLC | Intown Suites Stone Mountain, LLC |
Intown Suites Bellevue, LLC | Intown Suites Stuebner, LP |
Intown Suites Birmingham North, LLC | Intown Suites Trinity Mills, LP |
Intown Suites Blanding Boulevard, LLC | Intown Suites Two Notch, LLC |
Intown Suites Brandon, LLC | Intown Suites Valdosta, LLC |
Intown Suites Broad River, LLC | Intown Suites Virginia Beach, LLC |
Intown Suites Brook River, LP | Intown Suites Webster, LP |
Intown Suites Buford Highway, LLC | Intown Suites West Oaks, LP |
Intown Suites Burnsville, LLC | Intown Suites Woods Cross, LLC |
Intown Suites Carrollton, LP | Intown Suites Woodstock, LLC |
Intown Suites Chandler Boulevard, LLC | Intown Services Corp |
Intown Suites Charlotte North, LLC | Intown Suites Houston Intercontinental, LLC |
Intown Suites Chicago West, LLC | Intown Suites Houston Cy-Fair, LLC |
190
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
The following subsidiaries, which were consolidated with the Lessee through FIN 46R through November 30, 2008, were wholly owned by Intown Hospitality after November 30, 2008 and, with the exception of Intown Lessee Services, LLC, were dissolved in 2009:
| |
Intown Lessee Associates, LLC | IT Tenant RBS, LLC |
Intown Lessee Services, LLC | IT Tenant RBS2, LLC |
IT Tenant B1, LLC | IT Tenant Mont, LLC |
IT Tenant B2, LLC | IT Louisville, LLC |
IT Tenant B3, LLC | IT Tenant ORL, LLC |
IT Tenant B4, LLC | |
2.
Summary of Significant Accounting Policies
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Investors, its wholly owned subsidiary, Hospitality Corp, and all of Hospitality Corp’s subsidiary companies as well as variable interests held in other entities during 2008.
The Company follows the authoritative guidance included in accounting principles generally accepted in the United States of America (“GAAP”) on accounting for consolidation of variable interest entities (VIEs). Such guidance applies to certain entities (called VIEs) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In the normal course of business, the Company enters into a variety of transactions with VIEs. The Company determines if it is the primary beneficiary of a VIE by performing a qualitative analysis of each VIE that includes a review of, among other factors, its capital structure, contractual terms, related party relationships, the Company’s fee arrangement and the design of the VIE. At December 31, 2008 and 2009 the Compan y held no interests in VIE'S.
Prior to December 1, 2008 the Company leased all of its properties to Lessee, which was owned by officers and directors of the Lessee. The Lessee did not have recourse to the Company. The Company held no direct economic interest in the Lessee either but if the Lessee defaulted on the leases the Company would be required by the lenders to step in and operate the hotels and assume the liabilities of the properties to continue operations. Since Lessee was thinly capitalized compared to the total size of the operations, the Company believed that the entity meet the criteria to be a variable interest entity and that it was the primary beneficiary of the entity. The consolidated balance sheet and statement of income reflect the consolidation of this entity into the Company as of and for the period from the formation of Lessee on April 25, 2007 through November 30, 2008. The lease was terminated on December 1, 2008 and the Le ssee was acquired by the Company.
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. All significant intercompany accounts and transactions have been eliminated in consolidation.
Real Estate Investments and Intangible Assets
The Company follows GAAP to allocate the purchase price for acquisitions of operating properties. The Company’s methodology for this allocation includes estimating the fair value of the physical property, (land, building and improvements) and the fair values of intangible assets (trade name).
Real estate assets are stated at cost, less accumulated depreciation. The Company capitalizes costs of construction, property taxes, interest, and other miscellaneous items incurred during the development and construction period until the property becomes operational. Interest is capitalized to qualifying assets in an amount intended to represent the amount that could have theoretically been avoided during the development period if expenditures for the assets had not been made in accordance with GAAP. The Company did not capitalize any interest or property taxes in 2009 and 2008.
191
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
Depreciation is calculated using the straight-line method over the following estimated useful lives:
| |
Buildings and improvements | 15 to 40 years |
Furniture, fixtures and equipment | 3 to 10 years |
Depreciation expense totaled $28,072,388 and $26,947,049 for 2009 and 2008, respectively.
Expenditures for rehabilitation and betterments are capitalized, whereas expenditures for maintenance, repairs, and replacement of minor furniture, fixtures, and equipment, which do not improve or extend the lives of the respective assets, are expensed as incurred.
In accounting for the impairment or disposal of long-lived assets, the Company reviews its real estate investments for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company determines whether impairment has occurred by comparing the property’s carrying value to an estimate of the future undiscounted cash flows. In the event impairment exists, assets are written down to their fair value. In management’s opinion, none of the Company's real estate assets were considered impaired as of December 31, 2009 and 2008.
The estimated value of the Tradename, Intown Suites, in the amount of $20,442,376 was determined based on relief-from-royalty method. The Tradename has an indefinite life and is not depreciable. The Tradename is assessed for impairment on annual basis. No impairment existed at December 31, 2009 and 2008. In connection with the acquisition of Intown Suites Management, the Company, assumed debt with a face amount of $278,625,817 at date of assumption was recorded at an estimated value of $271,367,991. The difference between the face and recorded amounts is amortized over the life of the debt of 6 years. The Company recognized amortization expense of $857,829 and $857,829 in 2009 and 2008, respectively.
Loan Origination Costs
Loan origination costs are amortized using the straight-line method, which approximates the interest method, over the lives of the respective loans. Amortization of loan origination cost totaled $1,274,114 and $1,255,594 in 2009 and 2008, respectively.
Revenue Recognition
Revenues are recognized when services are rendered. Room revenues are derived from guest room rental, whereas other revenue includes charges for telecommunication, vending and other miscellaneous revenue. Security deposits are recorded as a liability until forfeited or refunded.
Advertising Costs
The Company expenses advertising costs as incurred. Such amounts are included in other general and administrative expenses in the accompanying consolidated statements of income. Advertising expenses for 2009 and 2008 were $1,600,237and $1,288,998, respectively.
Income Taxes
Investors is not subject to federal taxation of its income and losses due to its current status as a partnership for tax purposes.
Lessee was not subject to federal taxation of its income and losses due to its current status as disregarded single member LLC which was disregarded for tax purposes. In 2009 Lessee was dissolved.
Hospitality Corp elected to be taxed as a Real Estate Investment Trust ("REIT") under the Internal Revenue Code of 1986, effective May 1, 2007. To qualify as a REIT, Hospitality Corp must meet certain organizational and operational requirements, including a requirement to distribute at least 90% of Hospitality Corp's ordinary taxable income to its shareholders.
192
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
As a REIT, Hospitality Corp generally will not be subject to federal income tax on taxable income that it distributes to its shareholders. Hospitality Corp believes that it is organized and operates in such a manner as to qualify for treatment as a REIT and intends to continue to operate in the foreseeable future in such a manner that Hospitality Corp will remain qualified as a REIT for federal income tax purposes. If such requirements were not met, the income of Hospitality Corp could be subject to federal and state taxation.
As of December 31, 2009 and 2008, Hospitality Corp owned ten and five, respectively, taxable REIT subsidiaries ("TRS") subject to federal and state Income taxes. Additionally, the Company is subject to certain state and local taxes related to the operation in certain locations. Income taxes for these entities and specific operations have been provided for in the accompanying consolidated statements in accordance with generally accepted accounting principles which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred tax assets and liabilities are recognized for the estimated future tax effects attributal to temporary differences and carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The e ffect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment dates. Deferred tax assets are reduced by the amount of tax benefits that are not expected to be realized.
Prior to 2009, the Company accrued for liabilities relating to uncertain tax positions only when such liabilities were probable and reasonably estimable. Effective January 1, 2009, the Company recognizes a tax benefit from an uncertain position only if it is more likely than not that the position is sustainable, based solely on its technical merits and consideration of the relevant taxing authority’s widely understood administrative practices and precedents. If this threshold is met, the Company measures the tax benefit as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The adoption of this new policy had no effect on the Company's financial position or results of operations as of and for the year ended December 31, 2009.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and all highly liquid investments purchased with an original maturity of three months or less. As of December 31, 2009, the Company had a concentration of cash and cash equivalents held in demand deposit accounts. This amount exceeds the limit of the Federal Deposit Insurance Corporation. Management believes it mitigates this risk of loss by investing in or through major financial institutions (Wachovia, Wells Fargo, National City Bank and Bank of America).
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Financial Instruments
The Company considers the carrying amounts of its financial instruments, including cash and cash equivalents, certain other assets, accounts payable, and accrued liabilities, to approximate their fair market values due to their short maturities.
3.
Acquisition and Purchase Price Allocation
Houston Intercontinental and Houston Cy-Fair were acquired on February 6, 2008 as part of a reverse 1031 transaction for $8,826,381, net of liabilities assumed and including legal costs paid outside of closing. The properties were held by a qualified intermediary as part of a Section 1031 transaction. Based on GAAP evaluation, it was determined that the entities are variable interest entities and the Company was the primary beneficiary. Accordingly, the entities were recorded on a consolidated basis from February 6, 2008 to July 15, 2008 and August 4, 2008, which are dates that the 1031 transactions were completed on Houston Intercontinental and Houston Cy-Fair, respectively.
193
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
The acquisition was accounted for as a purchase. The Company’s allocation of the purchase price to the assets acquired and liabilities assumed at the date of acquisition was as follows:
| | |
Houston Intercontinental and Houston Cy-Fair | | |
Land | $ | 1,600,000 |
Building and improvements | | 6,789,330 |
Furniture, fixtures and equipment | | 450,000 |
Total assets acquired | | 8,839,330 |
Liabilities assumed | | 12,949 |
Net assets acquired with cash | $ | 8,826,381 |
4.
Discontinued Operations
On July 14, 2008, the Company sold one property (Mableton) for a sales price of approximately $1.9 million. The operating results of the property are included in income from discontinued operations for the year ended December 31, 2008 and the period ended December 31, 2007.
The combined operating income and loss on sale from the property are included in discontinued operations. The revenues from the property included in discontinued operations were $359,504 and $350,136 for year ended December 31, 2008 and the period ended December 31, 2007, respectively. The expenses from the property included in discontinued operations were $248,952 and $259,162 for year ended December 31, 2008 and the period ended December 31, 2007, respectively. The loss on sale from the property included in discontinued operations was $662,162 for year ended December 31, 2008.
5.
Mortgage Notes Payable
As of December 31, 2009 and 2008, mortgage notes payable consist of the following:
| | | | |
| | 2009 | | 2008 |
Note payable to a financial institution; interest at 5.1885% principal and interest payable in monthly installments of $208,469; due August 15, 2015 | $ | 31,800,572 | $ | 32,606,244 |
Note payable to a financial institution; interest at 5.3357% principal and interest payable in monthly installments of $1,365,751; due November 1, 2015 | | 207,041,205 | | 212,081,300 |
Note payable to a financial institution; interest at 5.7535% principal and interest payable in monthly installments of $132,157; due February 1, 2016 | | 19,452,426 | | 19,889,683 |
Note payable to a financial institution; interest at 5.75% interest only payable in monthly installments; due July 6, 2017 | | 186,000,000 | | 186,000,000 |
Note payable to a financial institution; interest at LIBOR + 1.25% interest only payable in monthly installments; due August 1, 2010. | | 40,744,000 | | 40,744,000 |
Note payable to a financial institution; interest at LIBOR + 0.325% interest only payable in monthly installments; due June 28, 2010 | | 128,000,000 | | 128,000,000 |
Note payable to a financial institution; interest at LIBOR + 0.325% interest only payable in monthly installments; due June 28, 2010 | | 19,500,000 | | 19,500,000 |
Note payable to a financial institution; interest at 5.89% principal and interest payable in monthly installments of $34,749; due November 1, 2015 | | 5,019,122 | | 5,132,723 |
| | 637,557,325 | | 643,953,950 |
Valuation adjustment resulting from Intown Suites Management Acquistion, net of accumulated amortization of $2,180,315 and $1,322,486, repectively | | (5,077,511) | | (5,935,340) |
| $ | 632,479,814 | $ | 638,018,610 |
Under the terms of the mortgage notes payable, cash of $3,778,499 at December 31, 2009, is held in escrow, of which approximately $764,368 is restricted for use for capital improvements and approximately $3,014,131 is restricted for payment of property taxes and insurance. Cash of approximately $4,496,943 at December 31, 2008, was held in escrow, of which approximately $2,035,689 was restricted for use for capital improvements and approximately $2,461,254 was restricted for payment of property taxes and insurance. At December 31, 2009, the Company also had cash of $5,401,921 held in escrow restricted for payments of mortgage payments and related escrows. At December 31, 2008, the Company also had cash of $5,273,687 held in escrow restricted for payments of mortgage payments and related escrows.
194
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
The mortgage notes payable described above contain various covenants, which among other things, provide for minimum debt service coverage ratios. The Company is in compliance with these debt covenants.
Future annual maturities of the mortgage notes payable as of December 31, 2009, are as follows:
| | |
2010 | $ | 188,244,000 |
2011 | | - |
2012 | | - |
2013 | | - |
2014 | | - |
Thereafter | | 449,313,325 |
| $ | 637,557,325 |
The fair values of the Company's mortgage notes payable are estimated using a discounted cash flow analysis based on the Company's estimate of current borrowing rates for credit facilities with similar maturities. At December 31, 2009, the estimated fair market value of the Company's mortgage notes payable was $527,764,328.
Based on the current methodology used in determining the fair value of mortgage loans payable held by the Company, Management believes the fair values disclosed for all mortgage loans payable qualify as Level 3 fair value measurements under GAAP (see Note 7). A review of fair value hierarchy classifications is conducted on an annual basis, which may result in a reclassification of levels within the fair value hierarchy.
The Company’s $128,000,000 and $19,500,000 loans with JP Morgan are due on June 28, 2010. The loans have two consecutive one-year renewal options that management intends to exercise thus extending the loans potentially until June 28, 2012. These two loans are guaranteed by Kimco Realty Corporation (Kimco), the parent of Kimco Intown Corp. Kimco has to continue to guarantee both loans in order for the two consecutive one-year renewal options to be available to be exercised. Continuation of the Kimco guarantee is a condition for renewal. Although Kimco intends to continue the guarantee, if Kimco does not continue the guarantee upon maturity of the two loans, then Kimco would be required to repay any part of the loan not satisfied by the Company. Should Kimco choose not to extend the loan and the loan could not be repaid in full by the Company, Kimco would be required to pay the remaining loan a mount and the amount paid by Kimco would be treated as a special member loan.
The Company’s $40,744,000 loan agreement with Royal Bank of Scotland is due on August 1, 2010. The loan has two consecutive automatic one-year renewal options that management intends to exercise thus extending the loan potentially until August 1, 2012.
All of the Company's real estate assets and future rental revenues are pledged as collateral on the mortgage notes payable except for rental income from Louisville Northeast, Houston Cy-Fair and Houston Intercontinental.
6.
Derivative Instruments
As required by GAAP, the Company expanded in 2009 the disclosure requirements related to derivative instruments, to provide users of financial statements with an enhanced understanding of the use of derivative instruments by the Company and how these derivatives affectthe financial position, financial performance and cash flows of the Company. GAAP requires qualitative disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about the fair value of, and gains and losses on, derivative instruments, as well as disclosures about credit-risk-related contingent features in derivative agreements.
The enhanced disclosure requirement for derivative instruments and related hedging activities effective in 2009 required by GAAP had no impact on the Consolidated Balance Sheet, Consolidated Statements of Income, Comprehensive Income (Loss) and Consolidated Statements of Unitholders’ Equity.
Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.
195
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in fair value or cash flows of the derivative hedging instrument with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings.
As required by GAAP, the Company records all derivatives on a separate line of the Consolidated Balance Sheets at fair value with changes in fair value reflected as net change in unrealized gains (losses) on derivatives within the Consolidated Statements of Comprehensive Loss.
The Company has two interest rate contracts, one swap and one cap with a notional/contractual amount totaling $168,744,000 and gross derivative liability of $11,628,824 at December 31, 2009. The change in fair value of these derivative instruments of $(3,660,881) and $7,765,898 in 2009 and 2008, respectively, is reported as a component of other comprehensive loss.
The Company’s objective in using derivatives is to add stability to interest expense and to manage its exposure to interest rate movements or other identified risks. To accomplish this objective, the Company primarily uses interest rate caps and interest rate swaps as part of its cash flow hedging strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying principal amount. Interest rate caps designated as cash flow hedges involve the receipt of cash when interest rates exceed the rate at which interest is capped. During 2009 and 2008, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.
The Company does not use derivatives for trading or speculative purposes or currently have any derivatives that are not designated as hedges. Further, the Company has a policy of only entering into contracts with major financial institutions based upon their credit ratings and other factors. As of December 31, 2009 and 2008, the Company had an interest rate swap and an interest rate cap related to a portion of the JP Morgan Loan and the RBS loan with terms as follows.
| | | | | | | | | | | | |
Product Type | | Notional Value | | Interest Rate | | Effective Date | | Maturity | | December 31, 2009 Fair Value (in thousands) | | December 31, 2008 Fair Value (in thousands) |
| | | | | | | | | | | | |
Interest rate swap on LIBOR | $ | 128,000,000 | | 5.4% | | 07/02/2007 | | 06/28/2012 | $ | (11,629) | $ | (15,290) |
| | | | | | | | | | | | |
Interest rate cap on LIBOR | $ | 40,744,000 | | 6.5% | | 07/11/2007 | | 08/03/2009 | $ | - | $ | - |
| | | | | | | | | | | | |
Interest rate cap on LIBOR | | 40,744,000 | | 6.5% | | 08/03/2009 | | 08/02/2010 | $ | - | $ | - |
| | | | | | | | | $ | (11,629) | $ | (15,290) |
7.
Fair Value Measurements
On January 1, 2008, the Company adopted the authoritative guidance under GAAP for estimating the fair value of investments. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
196
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.
Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly, such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is minimal, if any, related market activity.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The Company has certain financial instruments (derivatives instruments, see Note 6) that must be measured under the fair value standard.
The Company uses interest rate swaps to manage its interest rate risk. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. Based on these inputs the Company has determined that its interest rate swap valuations are classified within level 2 of fair value hierarchy.
The table below presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2009, aggregated by the level in the fair value hierarch within which those measurements fall (thousands):
| | | | | | | | |
| | Balance at December 31, 2009 | | Level 1 | | Level 2 | | Level 3 |
Assets | | | | | | | | |
Interest rate cap | $ | - | $ | - | $ | - | $ | - |
Liabilities | | | | | | | | |
Interest rate swap | $ | 11,629 | $ | - | $ | 11,629 | $ | - |
The Company currently does not have any financial instruments other than its derivative instruments and notes payable (see Note 5) that must be measured under the new fair value standard. The fair values of notes payable are determined using current rates available to the Company for debt of the same terms and remaining maturities. Based on these inputs, the Company has determined that its notes payable valuations are classified within level 3 of the fair value hierarchy. Additionally, the Company currently does not have non-financial assets and non- financial liabilities that are required to be measured at fair value on a recurring basis.
197
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
8.
Income Taxes
Hospitality Corp elected to qualify as a REIT in accordance with the Internal Revenue Code ("Code") commencing with its first taxable year, which began May 1, 2007. To qualify, as a REIT, Hospitality Corp. must meet a number of organizational and operational requirements, including a requirement that it currently distribute at least 90% of its adjusted REIT taxable income to its stockholders. It is management’s intention to adhere to these requirements and maintain Hospitality Corp’s REIT status. As a REIT, Hospitality Corp generally will not be subject to corporate federal income tax, provided that distributions to its stockholders equal at least the amount of its REIT taxable income as defined under the Code. If Hospitality Corp fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any applicable altern ative minimum tax) and may not be able to qualify as a REIT for subsequent taxable years. Even if Hospitality Corp qualifies for taxation as a REIT, it is subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed taxable income. In addition, taxable income from non-REIT activities managed through taxable REIT subsidiaries is subject to federal, state and local income taxes.
Upon the conversion from C corporation status to REIT status, a built-in gain was created representing the excess of the fair market value over the tax basis of the entity's assets at the conversion, which will be subject to income tax if the assets are sold within 10 years after the conversion date. Hospitality Corp has not recorded any deferred tax related to potential built-in gains (approximately $286 million) because it intends to hold the acquired property for at least 10 years or utilize a tax deferral strategy (e.g., like-kind exchange) if an asset is sold earlier than 10 years in order to preclude the recognition of build-in gain tax.
Hospitality Corp is subject to federal, state and local income taxes on the income from its taxable REIT subsidiaries ("TRS"), which included Intown Services Corp, Intown Suites Atlantic Blvd, LLC, Intown Suites El Paso, LP, Intown Suites Mobile, LLC and Intown Suites Mobile West, LLC at December 31, 2009.
Provision for Income Taxes and Components of Deferred Taxes
The provision for income taxes is summarized as follows:
| | | | | | |
| | 2009 | | 2008 | | 2007 |
| | | | | | |
Current | $ | 488,218 | $ | 400,926 | $ | 208,209 |
Deferred | | (347,415) | | 2,797,357 | | - |
| $ | 140,803 | $ | 3,198,283 | $ | 208,209 |
| | | | | | |
| | 2009 | | 2008 | | 2007 |
| | | | | | |
TRS | $ | (57,052) | $ | 2,843,519 | $ | - |
Other state taxes attributable to the REIT | | 197,855 | | 354,764 | | 208,209 |
| $ | 140,803 | $ | 3,198,283 | $ | 208,209 |
Deferred taxes of $(347,415) and $2,797,357 in 2009 and 2008, respectively, relate to temporary differences, which existed upon the transfer of properties between the TRS and the REIT.
198
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
Deferred tax assets and liabilities at December 31, 2009 and 2008 are summarized as follows:
| | | | |
| | 2009 | | 2008 |
| | | | |
Deferred tax asset, included in other assets | $ | 12,908 | $ | 20,692 |
Deferred tax liabilities | | (2,462,850) | | (2,818,049) |
| $ | (2,449,942) | $ | (2,797,357) |
Deferred tax liabilities primarily relate to differences between the recorded value of real estate assets transferred to the TRS and the tax basis of such assets.
Reconciliation of Net (Loss) Income to Adjusted Taxable Income (Loss) Subject to 90% Dividend Requirement
| | | | | | |
| | 2009 (Estimated) | | 2008 (Actual) | | 2007 (Actual) |
Net (loss) income | $ | (11,850,144) | $ | 61,772 | $ | 7,444,039 |
Less: Net loss for Taxable REIT subsidiaries | | (939,698) | | (2,792,654) | | - |
Less: Net income for Intown Lessee Associates, LLC | | - | | 3,371,000 | | (3174,314) |
Less: Net loss Intown Hospitality Investors LP | | (1,919,155) | | (347,326) | | 2,775,037 |
Net loss for REIT operations | | (8,991,291) | | (169,248) | | 7,843,316 |
Net book depreciation in excess of tax depreciation | | 3,880,250 | | 3,250,885 | | 1,502,232 |
Deferred revenue | | 186,493 | | 840,066 | | (1,191,232) |
Straight-line Rent | | - | | 2,509,246 | | (2,509,246) |
Other book/tax differences, net | | (372,256) | | 2,203,402 | | (1,096,505) |
Adjusted taxable (loss) income subject to 90% dividend requirement | $ | (5,296,804) | $ | 8,634,351 | $ | 4,548,565 |
The taxable loss in the current year is not available in the future years to reduce the required dividend.
Hospitality Corp’s provision for income taxes relating to Hospitality Corp’s TRS for 2009 and from the date of formation of the TRS on December 1, 2008 to December 31, 2008 is summarized as follows:
| | | | |
| | 2009 | | 2008 |
| | | | |
(Loss) income before income taxes | $ | (996,750) | $ | 50,865 |
Less provision for income taxes | | | | |
Current tax payable | | 290,363 | | 46,162 |
Deferred | | (347,415) | | 2,797,357 |
Total tax provision expense/(credit) | | (57,052) | | 2,843,519 |
Net loss from taxable REIT subsidiaries | $ | (939,698) | $ | (2,792,654) |
The difference between the amount of income tax that would result from applying the federal tax rate of 34% to income before income taxes of the TRS and the amount recorded in the financial statements primarily relates to deferred taxes established upon transfer of the properties between REIT and the TRS.
9.
Commitments and Contingencies
The Company is involved in litigation and other legal proceedings arising in the course of its normal business activities. The Company believes that any liability resulting from these matters, after taking into consideration its insurance coverages and amounts recorded in the consolidated financial statements, will not have a material adverse effect on its consolidated financial position, cash flows or results of operations.
199
Intown Hospitality Investors, LP and Subsidiaries
Note to Consolidated Financial Statements
The Company is also party to certain operating leases with terms expiring through 2013. Future minimum payments required under operating leases as of December 31, 2009, are as follows:
| | |
Years Ending | | |
2010 | $ | 633,799 |
2011 | | 183,857 |
2012 | | 48,415 |
2013 | | 4,035 |
2014 | | - |
Total minimum lease payments under operating leases | $ | 870,106 |
Rent expense for 2009 and 2008 was $494,795 and $427,827, respectively.
10.
Related Party Transactions
In April 2009, the Company entered into an asset supervisory fee agreement with WHI Asset Management, LLC, an affiliate of the general partner. Total expense incurred for by the Company for the year ended December 31, 2009 was $1,811,577, which included a supplemental fee of $457,410 and is included in other expenses. At December 31, 2009, $457,410 payable to WHI Asset Management, LLC was included in accounts payable and other accrued expenses.
The general partner incurs travel costs while performing its role. For the year ended December 31, 2009 , the Company reimbursed the general partner $90,318, which is included in other expenses.
11.
Subsequent Events
The Company has performed an evaluation of subsequent events through January 29, 2010.
On January 1, 2010, 1 property (El Paso) was transferred from the independent third party back to Intown to operate upon Intown Suites El Paso, LP revoking its TRS election.
200
