| Related Person Transactions | 9. Related Person Transactions
We have adopted written Governance Guidelines that describe the consideration and approval of related person transactions. Under these Governance Guidelines, we may not enter into a transaction in which any Trustee or executive officer, any member of the immediate family of any Trustee or executive officer or other related person, has or will have a direct or indirect material interest unless that transaction has been disclosed or made known to our Board of Trustees and our Board of Trustees reviews and approves or ratifies the transaction by the affirmative vote of a majority of the disinterested Trustees, even if the disinterested Trustees constitute less than a quorum. If there are no disinterested Trustees, the transaction must be reviewed, authorized and approved or ratified by both (i) the affirmative vote of a majority of our Board of Trustees and (ii) the affirmative vote of a majority of our Independent Trustees. In determining whether to approve or ratify a transaction, our Board of Trustees, or disinterested Trustees or Independent Trustees, as the case may be, also act in accordance with any applicable provisions of our declaration of trust and bylaws, consider all of the relevant facts and circumstances and approve only those transactions that they determine are fair and reasonable to us. All related person transactions described below were reviewed and approved or ratified by a majority of the disinterested Trustees or otherwise in accordance with our policies, declaration of trust and bylaws, each as described above. In the case of transactions with us by employees of RMR Inc. and its subsidiaries who are subject to our Code of Business Conduct and Ethics, but who are not Trustees or executive officers of us, the employee must seek approval from an executive officer who has no interest in the matter for which approval is being requested. Copies of our Governance Guidelines and Code of Business Conduct and Ethics are available on our website, www.hptreit.com .
TA . TA is our former 100% owned subsidiary and our largest tenant, and we are TA’s largest shareholder. TA was created as a separate public company in 2007 as a result of its spin - off from us. As of December 31, 2015, we owned 3,420,000 common shar es, representing approximately 8.8% of TA’s outstanding common shares. Mr. Barry Portnoy, one of our Managing Trustees, is a M anaging D irector of TA. Mr. Thomas O’Brien, a former officer of ours prior to the TA spin-off, is President and Chief Executive Officer and the other managing director of TA; he is also an officer of RMR LLC. TA’s Chief Financial Officer and General Counsel are also officers of RMR LLC. Mr. Arthur Koumantzelis, who was one of our Independent Trustees prior to the TA spin - off, serves as an independent director of TA.
TA is the lessee of 37% of our real estate properties, at cost, as of December 31, 2015. Until June 2015, TA had two leases with us, the TA No. 1 lease, which we refer to as the Prior TA Lease, and the TA No. 2 lease, which we refer to as the Prior Petro Lease. We refer to the Prior TA Lease and Prior Petro Lease collectively as the Prior Leases. The Prior TA Lease was for travel centers that TA operates under the “TravelCenters of America” or “TA” brand names. The Prior Petro Lease was for travel centers that TA operates under the “Petro” brand name. As described below, in June 2015, the Prior TA Lease was expanded and subdivided into four amended and restated leases, which we refer to as the New TA Leases, and the Prior Petro Lease was amended.
On April 15, 2013, TA entered an agreement with Shell Oil Products US, or Shell, pursuant to which Shell has agreed to construct a network of natural gas fueling lanes at up to 100 of TA’s travel centers located along the U.S. interstate highway system, including travel centers TA leases from us. In connection with that agreement, on April 15, 2013, we and TA amended our Prior Leases to specify the economic equivalent for natural gas sales to diesel fuel sales for the calculation of percentage rent payable to us under the leases, with the intended effect that the amount of percentage rent be unaffected by the type of fuel sold, whether diesel fuel or natural gas. That amendment also made certain administrative changes. Also on that date, in order to facilitate TA’s agreement with Shell, we entered into a subordination, non-disturbance and attornment agreement with Shell, whereby we agreed to recognize Shell’s license and other rights with respect to the natural gas fueling lanes at our travel centers leased to TA on certain conditions and in certain circumstances.
On July 1, 2013, we purchased land that we previously leased from a third party and subleased to TA. Effective as of that date, rents due to that third party and TA’s reimbursement of those rents of approximately $545 annually to us under the terms of the Prior TA Lease ceased. Also on that date, we and TA amended the Prior TA Lease to reflect our direct lease to TA of that land and certain minor properties adjacent to other existing travel centers included in the lease that we also had purchased and to increase the annual rent payable by TA under the Prior TA Lease to us by $537 , which equaled 8.5% of our total investment in these properties.
On August 13, 2013, a travel center located in Roanoke, VA that we leased to TA was taken by eminent domain proceedings brought by the Virginia Department of Transportation, or VDOT , in connection with certain highway construction. The Prior TA Lease provided that the annual rent payable by TA to us was reduced by 8.5% of the amount of the proceeds we receive from the taking or, at our option, the fair market value rent of the property on the commencement date of the Prior TA Lease . In January 2014, we received proceeds from the VDOT of $6,178 , which is a substantial portion of the VDOT’s estimate of the value of the property, and as a result the annual rent payable by TA to us under the Prior TA Lease was reduced by $525 effective January 6, 2014. We and TA are challenging the VDOT’s estimate of this property’s value and we expect that the final resolution of this matter will take considerable time. Following the VDOT taking, we entered a lease agreement with the VDOT to lease this property for $40 per month; and we entered into a sublease with TA for TA to continue operating the property as a travel center and TA became responsible to pay this VDOT lease rent. Following expiration of this lease, in November 2014, this property was surrendered to the VDOT.
In December 2013, we acquired land adjacent to an existing travel center leased to TA. In connection with that acquisition, we amended the Prior TA Lease to add this property to that lease. As a result of this amendment, the minimum annual rent payable to us by TA under the Prior TA Lease increased by $105 , which equaled 8.5% of our investment in this acquired land .
On June 1, 2015, we entered a transaction agreement with TA , or the TA Transaction Agreement, pursuant to which the following transactions were completed as of December 31, 2015:
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We entered into the New TA Leases with a subsidiary of TA, or our TA No. 1 agreement, TA No. 2 agreement, TA No. 3 agreement and TA No. 4 agreement, with expirations in 2029, 2028, 2026 and 2030, respectively. Each New TA Lease grants TA two renewal options of 15 years each. Percentage rent, which totaled $2,902 in 2014 under the Prior TA Lease, was incorporated into the annual minimum rent under the New TA Leases and was otherwise eliminated for the remainder of 2015; thereafter, percentage rent will be equal to 3% of the excess of gross non-fuel revenues over gross non-fuel revenues in 2015. In the case of the five properties to be developed by TA and sold to us (further described below), the base year for percentage rent will be the calendar year in which the third anniversary of the completion of development of the property occurs and percentage rent will not apply to those properties until the next succeeding year. Our deferred rent obligation of $107,085 owed by TA under the Prior TA Lease, and due December 31, 2022, was allocated among the New TA Leases and the due dates were extended to the end of the initial term of each respective New TA Lease.
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We purchased from TA, for $279,383 , 14 travel centers it owned and certain assets it owned at 11 properties we then leased to TA. We leased back these properties to TA under the New TA Leases. The annual minimum rent payable to us increased by $24,027 as a result of the completion of this purchase and sale leaseback.
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TA purchased from us, for $45,042 , five travel centers that we previously leased to TA under the Prior TA Lease. These properties were subleased by TA to its franchisees. TA’s annual minimum rent decreased by $3,874 as a result of our completion of the sale of these properties. We recognized a gain of $11,015 on these sales.
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We and TA entered into an amendment to the Prior Petro Lease, and which we now refer to as our TA No. 5 agreement. Among other things, this amendment eliminated percentage rent payable on fuel, which, in 2014 was nominal but was not paid by TA because we had previously waived payment of the first $2,500 of percentage rent due under the TA No. 5 agreement.
Under the TA Transaction Agreement, we also agreed to purchase from TA five travel centers upon the completion of their development at a purchase price equal to their development costs, including the cost of the land, which costs are estimated to be not more than $118,000 in the aggregate and we agreed to leaseback these development properties to TA under the New TA Leases. These purchase/leaseback transactions remain to be completed. The terms of the TA Transaction Agreement were approved by special committees of our Independent Trustees and TA’s independent directors, none of whom are directors or trustees of the other company. Each special committee was represented by separate counsel.
In October 2015, we purchased the land and certain improvements at a travel center we then leased from a third party and subleased to TA located in Waterloo, NY for $15,000 . Upon this acquisition, the land and improvements were directly leased to TA under our TA No. 5 agreement and TA’s annual minimum rent increased by $1,275 , but its obligation to pay the ground rent of $1,260 annually was terminated.
As of December 31, 20 15, we leased to TA a total of 153 travel cente rs under the New TA Leases and 40 travel centers under the TA No. 5 agreement. As of December 31, 2015, the number of travel centers leased, the term, the annual minimum rent and deferred rent balances under our five leases with TA were as follows:
Number of Sites
Initial Term End (1)
Minimum Annual Rent as of December 31, 2015 (2)
Deferred Rent (3)
TA No. 1 Agreement
39
December 31, 2029
$
$
TA No. 2 Agreement
38
December 31, 2028
TA No. 3 Agreement
38
December 31, 2026
TA No. 4 Agreement
38
December 31, 2030
TA No. 5 Agreement
40
June 30, 2024
193
$
$
(1) TA has two renewal options of fifteen years each under each of the leases.
(2) These minimum rents are exclusive of any increase in minimum rent as a result of our funding or reimbursing costs of improvements to leased travel centers or purchase/leaseback of additional travel centers occurring after December 31, 2015.
(3) The deferred rent obligation is subject to acceleration at our option upon an uncured default under our TA agreements or a change in control of TA, each as provided under the leases.
Our leases with TA are “triple net” leases that require TA to pay all costs incurred in the operation of the leased travel centers, including personnel, utility, inventory, customer service and insurance expenses, real estate and personal property taxes, environmental related expenses, underground storage tank removal costs and ground lease payments at those travel centers at which we lease the property and sublease it to TA. TA also is required generally to indemnify us for certain environmental matters and for liabilities which arise during the terms of the leases from ownership or operation of the leased travel centers. In addition, TA is obligated to pay us at lease expiration an amount equal to an estimate of the cost of removing underground storage tanks on the leased properties. The leases also include arbitration provisions for the resolution of disputes.
We recognized rental income of $250,582 , $225,394 and $219,050 in 2015, 2014 and 2013, respectively, under our leases with TA. Rental income for 2015, 2014 and 2013 includes $9,100 , $1,580 and $1,783 , respectively, of adjustments necessary to record the scheduled rent increase on our Prior TA Lease and the estimated future payment to us by TA for the cost of removing underground storage tanks on a straight line basis. As of December 31, 2015, 2014 and 2013, we had ac cruals for unpaid amounts of $50,987 , $40,253 and $37,034 , respectively, owed to us by TA (excluding any deferred rents), which amounts are included in due from related persons on our consolidated balance sheets. On June 9, 2015, we began recognizing the deferred rent obligation under our TA agreements as rental income on a straight line basis over the remaining initial terms of the respective leases because we believe the future payment of these amounts to us by TA is reasonably assured.
We waived $1,121 , $624 and $383 of percentage rent under the TA No. 5 agreement for 2015, 2014 and 2013, respectively. As of December 31, 2015, we have cumulatively waived $2,128 of the $2,500 of percentage rent we previously agreed to waive. The total amount of percentage rent from TA that we recognized (which is n et of the waived amount) was $2,048 , $2,896 and $2,102 for 20 1 5, 2014 and 2013, respectively.
Under our leases with TA, TA may request that we fund approved amounts for renovations, improvements and equipment at the leased travel centers in return for increases in TA’s minimum annual rent according to the following formula: the minimum rent per year is increased by an amount equal to the amount funded by us multiplied by the greater of (i) 8.5% or (ii) a benchmark U.S. Treasury interest rate plus 3.5% . We are not required to fund these improvements and TA is not required to sell them to us. In addition to purchases of improvements we made pursuant to the TA Transaction Agreement described above, pursuant to ou r leases with TA, we funded $99,896 , $66,133 and $83,912 in 2015, 2014 and 2013, respectively, for qualifying capital improvements to travel centers leased by TA and TA’s annual minimum rent payable to us increased by approximately $8,491 , $5,621 and $7,133 , respectively, as a result.
RMR LLC provides management services to both us and TA and certain of TA’s executive officers are officers of RMR LLC. At the time TA became a separate publicly owned company as a result of the distribution of its shares to our shareholders, TA entered into a business management agreement with RMR LLC. In addition, in connection with TA’s spin-off, TA entered a transaction agreement with us and RMR LLC, pursuant to which TA granted us a right of first refusal to purchase, lease, mortgage or otherwise finance any interest TA owns in a travel center before it sells, leases, mortgages or otherwise finances that travel center to or with another party, and TA also granted us and any other company managed by RMR LLC a right of first refusal to acquire or finance any real estate of the types in which we or they invest before TA does. TA also agreed that for so long as TA is a tenant of ours it will not permit: the acquisition by any person or group of beneficial ownership of 9.8% or more of the voting shares or the power to direct the management and policies of TA or any of its subsidiary tenants or guarantors under its leases with us; the sale of a material part of the assets of TA or any such tenant or guarantor; or the cessation of certain continuing directors constituting a majority of the board of directors of TA or any such tenant or guarantor. Also, TA agreed not to take any action that might reasonably be expected to have a material adverse impact on our ability to qualify as a REIT and to indemnify us for any liabilities we may incur relating to TA’s assets and business. The transaction agreement includes arbitration provisions for the resolution of disputes.
Our Manager, RMR LLC . We have no employees. The personnel and various services we require to operate our business are provided to us by RMR LLC. We have two agreements with RMR LLC to provide management services to us: (i) a business management agreement, which relates to our business generally, and (ii) a property management agreement, which relates to our property level operations of the office building component of only one property in Baltimore, MD, which also includes a Royal Sonesta hotel. Both of these management agreements are described below in this Note under “ —Management Agreements with RMR LLC .”
One of our Managing Trustees, Mr. Barry Portnoy, is a Managing D irector, officer and controlling shareholder (through ABP Trust) of RMR Inc. and an officer of RMR LLC. Our other Managing Trustee, Mr. Adam Portnoy, is a Managing Director, President , Chief Executive Officer and controlling shareholder (through ABP Trust) of RMR Inc. and an officer of RMR LLC. ABP Trust is owned by Messrs. Barry and Adam Portnoy, Messrs. Barry and Adam Portnoy also own class A membership units of RMR LLC through their ownership of ABP Trust. Each of our executive officers is also an officer of RMR LLC, including Mr. Ethan Bornstein, who is the son-in-law of Mr. Barry Portnoy and the brother-in-law of Mr. Adam Portnoy. Certain of TA’s and Sonesta’s executive officers are officers of RMR LLC. Our Independent Trustees also serve as independent directors or independent trustees of other companies to which RMR LLC or its affiliates provide management services. Mr. Barry Portnoy serves as a director, managing director, trustee or managing trustee of all of the companies to which RMR LLC or its affiliate provides management services and Mr. Adam Portnoy serves as a director, trustee or managing trustee of a majority of those companies. In addition, officers of RMR LLC and RMR Inc. serve as our officers and officers of other companies to which RMR LLC or its affiliates provide management services.
Acquisition of Interest in our Manager : On June 5, 2015, we and three other REIT s to which RMR LLC provides management services – Government Properties Income Trust, or GOV, Select Income REIT, or SIR, and Senior Housing Properties Trust, or SNH, and collectively with GOV and SIR, the Other REITs – participated in a transaction, or the Up-C Transaction, by which we and the Other REITs each acquired class A common stock of RMR Inc.
The Up-C Transaction w as completed pursuant to a transaction agreement by and among us, our manager, RMR LLC, its then sole member, ABP Trust, and RMR Inc. and similar transaction agreements that each Other REIT entered into with RMR LLC, ABP Trust and RMR Inc. Pursuant to these transaction agreements: we contributed to RMR Inc. 1,490,000 of our common shares and $12,622 in cash; GOV contributed to RMR Inc. 700,000 of its common shares and $3,917 in cash; SIR contributed to RMR Inc. 880,000 of its common shares and $15,880 in cash; SNH contributed to RMR Inc. 2,345,000 of its common shares and $13,967 in cash; ABP Trust contributed to RMR Inc. $11,520 in cash, which RMR Inc. contributed to RMR LLC; RMR LLC issued 1,000,000 of its class B membership units to RMR Inc.; RMR Inc. issued 5,019,121 shares of its class A common stock to us, 1,541,201 shares of its class A common stock to GOV, 3,166,891 shares of its class A common stock to SIR, 5,272,787 shares of its class A common stock to SNH, and 1,000,000 shares of its class B-1 common stock and 15,000,000 shares of its class B-2 common stock to ABP Trust; ABP Trust delivered 15,000,000 of the 30,000,000 class A membership units of RMR LLC which ABP Trust then owned to RMR Inc.; and RMR Inc. delivered to ABP Trust our common shares, the common shares of the Other REITs and the cash which had been contributed by us and the Other REITs to RMR Inc.
The class A common stock and class B-1 common stock of RMR Inc. share ratably as a single class in dividends and other distributions of RMR Inc. when and if declared by the board of directors of RMR Inc. and have the same rights in a liquidation of RMR Inc. The class B-1 common stock of RMR Inc. is convertible into class A common stock of RMR Inc. on a 1 :1 basis. The class A common stock of RMR Inc. has one vote per share. The class B-1 common stock of RMR Inc. has 10 votes per share. The class B-2 common stock of RMR Inc. has no economic interest in RMR Inc., but has 10 votes per share and is paired with the class A membership units of RMR LLC owned by ABP Trust. Upon request by ABP Trust, RMR LLC is required to redeem the class A membership units of RMR LLC owned by ABP Trust for class A common stock of RMR Inc. on a 1 :1 basis, or if RMR Inc. elects, for cash. Under the governing documents of RMR Inc., upon the redemption of a class A membership unit of RMR LLC, the share of class B-2 common stock of RMR Inc. “paired” with the class A membership unit being redeemed is cancelled for no additional consideration.
As part of the Up-C Transaction and concurrently with entering the transaction agreements, on June 5, 2015:
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We entered into an amended and restated business management agreement with RMR LLC and an amended and restated property management agreement with RMR LLC. The amendments made by these agreements are described below in this Note under “—Management Agreements with RMR LLC.” Each Other REIT also entered amended and restated business and property management agreements with RMR LLC, which made similar amendments to their management agreements with RMR LLC.
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We entered into a registration rights agreement with RMR Inc. covering the class A common stock of RMR Inc. that we received in the Up-C Transaction, pursuant to which we received demand and piggyback registration rights, subject to certain limitations. Each Other REIT entered into a similar registration rights agreement with RMR Inc.
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We entered into a lock up and registration rights agreement with ABP Trust and Messrs. Barry and Adam Portnoy pursuant to which ABP Trust and Barry and Adam Portnoy agreed not to transfer the 1,490,000 of our common shares ABP Trust received in the Up-C Transaction for a period of 10 years and we granted them certain registration rights, subject to certain limited exceptions. Each Other REIT also entered into a similar lock up and registration rights agreement with ABP Trust and Messrs. Barry and Adam Portnoy.
As a result of the Up-C Transaction: RMR LLC became a subsidiary of RMR Inc.; RMR Inc. became the managing member of RMR LLC; through our ownership of class A common stock of RMR Inc., we became a holder of an indirect economic interest in RMR LLC; and through their ownership of class A common stock of RMR Inc., GOV, SIR and SNH also became holders of indirect economic interests in RMR LLC. Through its ownership of class B-1 common stock of RMR Inc., class B-2 common stock of RMR Inc. and class A membership units of RMR LLC, ABP Trust holds, directly and indirectly, a 51.6% economic interest in RMR LLC and controls 91.4% of the voting power of outstanding capital stock of RMR Inc.
Pursuant to the transaction agreements, on De cember 14, 2015 we distributed 2,515,344 shares of class A common stock of RMR Inc. to our shareholders as a special distribution, which represented approximately half of the shares of class A common stock of RMR Inc. we received in the Up-C Transaction; each Other REIT also distributed approximately half of the shares of class A common stock of RMR Inc. they received in the Up-C Transaction to their respective shareholders. RMR Inc. facilitated this distribution by filing a registration statement with the SEC to register the shares of class A common stock of RMR Inc. being distributed and by listing those shares on The NASDAQ Stock Market LLC. Following this distribution, we currently hold 2,503,777 shares of class A common stock of RMR Inc. and GOV, SIR and SNH currently hold 1,214,225 , 1,586,836 and 2,637,408 shares of class A common stock of RMR Inc., respectively. In connection with this distribution, we recognized a non-cash loss of $36,773 in the fourth quarter of 2015 as a result of the closing price of RMR Inc.’s class A common stock being lower than our carrying amount per RMR Inc. share on t he distribution date. See Note 13 for information regarding the fair value of our investment in RMR Inc. as of December 31, 2015.
On December 15, 2015, RMR Inc. paid a cash dividend to holders of its class A common stock and class B-1 common stock as of November 25, 2015 of $0.5260 per share to cover the period from and including June 5, 2015 up to but not including December 14, 2015. As a result of our ownership of class A common stock of RMR Inc., we received a cash dividend of $2,640 from RMR Inc.
The transactions contemplated by the transaction agreement and the terms thereof were negotiated and reviewed by a Joint Special Committee comprised solely of our Independent Trustees and the independent trustees of the Other REITs, or the Joint Special Committee, and were separately approved and adopted by our Independent Trustee who did not serve as an independent trustee of any of the Other REITs, by a Special Committee of our Board of Trustees, comprised solely of our Independent Trustees, or our Special Committee , and by our Board of Trustees. Morgan Stanley & Co. LLC acted as financial advisor to the Joint Special Committee and Houlihan Lokey Capital Inc. acted as financial advisor to our Special Committee.
Accounting for Investment in RMR Inc.: We concluded, for accounting purposes, that the cash and share consideration of $55,922 we paid for our investment in 5,019,121 shares of class A common stock of RMR Inc. represented a discount to the fair value of these shares. We initially accounted for this investment under the cost method of accounting and recorded this investment at its estimated fair value of $129,722 as of June 5, 2015, using Level 3 inputs as defined in the fair value hierarchy under GAAP. As a result, we recorded a liability for the amount by which the estimated fair value exceeded the price we paid for these shares and we are amortizing this amount as described below. As of December 31, 2015, the unamortized balance of this liability was $71,762 . This liability for our investment in class A common stock of RMR Inc. is included in accounts payable and other liabilities in our consolidated balance sheet and is being amortized on a straight line basis through December 31, 2035, the 20 year term of the business and property management agreements with RMR LLC entered on June 5, 2015, as an allocated reduction to business management fees and property management fees, which are included in general and administrative in our consolidated statements of comprehensive income. Amortization of this liability, which is included in general and administrative expense and other operating expenses, for the year ended December 31, 2015 totaled $2,038 .
Management Agreements with RMR LLC : For 2013, our business management agreement provided for the base business management fee to be paid to RMR LLC at an annual rate equal to the sum of (a) 0.5% of the historical cost of the real estate assets acquired from a REIT to which RMR LLC provided business management or property management services, or the Transferred Assets, plus (b) with respect to other properties we acquired excluding the Transferred Assets, 0.7% of our aggregate cost of those properties up to and including $250,000 , and 0.5% thereafter. In addition, for 2013, our business management agreement also provided for RMR LLC to be paid an incentive fee equal to 15% of the product of (i) the weighted average of our common shares outstanding on a fully diluted basis during a fiscal year and (ii) the excess, if any, of the Normalized FFO Per Share, as defined in that business management agreement, for such fiscal year over the Normalized FFO Per Share for the preceding fiscal year. This incentive fee was payable in common shares and it was subject to a cap on the value of the incentive fee being no greater than $0.02 per share of our total shares outstanding.
On December 23, 2013, we and RMR LLC amended and restated our business management agreement, effective with respect to services performed on or after January 1, 2014. After these amendments, our business ma nagement agreement provides that:
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Revised Base Management Fee . The annual amount of the base management fee to be paid to RMR LLC by us for each applicable period is equal to the lesser of:
o
the sum of (a) 0.7% of the average aggregate historical cost of our real estate investments up to $250,000 , plus (b) 0.5% of the average historical cost of our real estate investments exceeding $250,000; and
o
the sum of (a) 0.7% of the average closing price per share of our common shares on the NYSE, during such period, multiplied by the average number of our common shares outstanding during such period, plus the daily weighted average of the aggregate liquidation preference of each class of our preferred shares outstanding during such period, plus the daily weighted average of the aggregate principal amount of our consolidated indebtedness during such period, or, together, our Average Market Capitalization, up to $250,000 , plus (b) 0.5% of our Average Market Capitalization exceeding $250,000 .
The average aggregate historical cost of our real estate investments includes our consolidated assets invested, directly or indirectly, in equity interests in or loans secured by real estate and personal property owned in connection with such real estate (including acquisition related costs and costs which may be allocated to intangibles or are unallocated), all before reserves for depreciation, amortization, impairment charges or bad debts or other similar noncash reserves.
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Revised Incentive Fee . The incentive fee which may be earned by RMR LLC for an annual period is an amount, subject to a cap based on the value of our outstanding common shares, equal to 12% of the product of (a) our equity market capitalization on the last trading day on the year immediately prior to the relevant measurement period and (b) the amount (expressed as a percentage) by which the total returns per share realized by the holders of our common shares (i.e., share price appreciation plus dividends) exceeds the total shareholder return of the SNL US REIT Hotel Index (in each case subject to certain adjustments) for the relevant measurement period. The measurement periods are generally three -year periods ending with the year for which the incentive fee is being calculated, with shorter periods applicable in the case of the calculation of the incentive fee for 2014 ( one year) and 2015 ( two years). The terms of the revised incentive fee were developed by our Compensation Committee, which is comprised solely of Independent Trustees, in consultation with FTI Consulting, Inc., a nationally recognized compensation consultant experienced in REIT compensation programs.
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Partial Payment in Common Shares . The base management fee would be paid monthly to RMR LLC, 90% in cash and 10% in our common shares, which are fully vested when issued. The number of our common shares to be issued in payment of the base management fee for each month would equal the value of 10% of the total base management fee for that month divided by the average daily closing price of our common shares during that month. The incentive fee would be payable in our common shares, with one -third of our common shares issued in payment of an incentive fee vested on the date of issuance, and the remaining two -thirds vesting thereafter in two equal annual installments. All common shares issued in payment of the incentive fee would be fully vested upon termination of the business management agreement, subject to certain exceptions. In addition, RMR LLC would, in certain circumstances, be required to return to us or forfeit some or all of the common shares paid or payable to it in payment of the incentive management fee. RMR LLC and certain eligible transferees of our common shares issued in payment of the base management fee or incentive fee would be entitled to demand registration rights, exercisable not more frequently than twice |
