1
EXHIBIT 8.3
April 30, 1997
Sunstone Hotel Investors, Inc.
115 Calle De Industrias, Suite 201
San Clemente, CA 92672
Re: Sunstone Hotel Investors, Inc./Tax Opinion
Gentlemen:
We have acted as counsel to Sunstone Hotel Investors, Inc., a
Maryland corporation (the "Company"), in connection with the preparation of the
Registration Statement on Form S-3 filed with the Securities and Exchange
Commission (as amended, the "Registration Statement") and the Prospectus
Supplement, with respect to the offering and sale (the "Offering") of up to 4.6
million shares of the Company's common shares (the "Common Shares"), and the
Company's contribution of substantially all of the net proceeds of the Offering
to Sunstone Hotel Investors, L.P., a Delaware limited partnership (the
"Partnership"), in exchange for an additional interest in the Partnership.
The Partnership currently owns several hotels and associated
personal property. In addition, the Partnership has an indirect ownership
interest in a hotel owned by a limited partnership between the Partnership and
a qualified REIT subsidiary of the Company. (All of the foregoing hotels are
referred to herein as the "Current Hotels.") Each of the Current Hotels is
leased to Sunstone Hotel Properties, Inc., a Colorado corporation (the
"Lessee"), pursuant to a percentage lease (the "Leases"). Sunstone Hotel
Management, Inc. (the "Management Company") is managing the Current Hotels and
will continue to do so. Robert A. Alter and Charles L. Biederman are 80% and
20% shareholders, respectively, of the Lessee and Mr. Alter is the sole
shareholder of the Management Company. Mr. Alter is the Chairman of the Board
of Directors and President of the Company and will continue to serve as such.
Terms not defined in this letter have the meaning ascribed to
them in the Registration Statement and the Prospectus Supplement.
The Company has requested our opinion as to:
A. Whether, since the inception of its taxable year
ended on December 31, 1995, the Company has been organized and operated in
conformity with the requirements for qualification as a real estate investment
trust (a "REIT") pursuant to Sections 856 through 860
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of the Internal Revenue Code of 1986, as amended (the "Code"), and whether the
Company's organization and contemplated method of operation will enable it to
continue to meet the requirements for qualification and taxation as a REIT
under the Code in 1996 and subsequent years.
B. Whether the description of law and legal conclusions
contained in the Registration Statement with respect to the Offering under the
caption "Federal Income Tax Considerations" are correct in all material
respects, and whether the discussion therein fairly summarizes the federal
income tax considerations that are material to a holder of Common Shares.
C. Whether the Partnership has been and will continue to
be treated for federal income tax purposes as a partnership and not as an
association taxable as a corporation.
In connection with the opinions rendered below, we have
examined the following:
1. The Amended Articles of Incorporation of the Company.
2. The Company's By-Laws.
3. The Registration Statement of the Company declared
effective January 6, 1997.
4. The Prospectus Supplement of the Company dated April
30, 1997.
5. The form of First Amended and Restated Limited
Partnership Agreement of the Partnership, as amended
through the date hereof.
6. The form of Percentage Leases.
7. The cost segmentation analysis dated August 15, 1995,
the cost segmentation analysis as of December 31,
1995, the cost segmentation analysis as of May 31,
1996, and the cost segmentation analysis as of
December 31, 1996 (collectively, the "Cost
Segmentation Analyses") prepared by Coopers & Lybrand
L.L.P., and supplemental tax basis information
provided by the Company and Coopers & Lybrand L.L.P.
with respect to hotels acquired since December 31,
1996.
8. The Articles of Incorporation, Bylaws and Action by
Written Consent of the Board of Directors in lieu of
an Organizational Meeting (dated March 7, 1997) of
Kent Hotel Investors, Inc.
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9. The Agreement of Limited Partnership and Form LP-1
(Certificate of Limited Partnership) dated March 4,
1997, of Sunstone/Kent Associates, L.P., a California
limited partnership.
10. Such other documents as we have deemed necessary or
appropriate for purposes of this opinion.
In connection with the opinions rendered below, we have
assumed generally that:
a. Each of the documents referred to above has been duly
authorized, executed, and delivered, is authentic, if an original, or accurate,
if a copy, and has not been amended.
b. Commencing with its 1995 taxable year and in all
subsequent years, the Company has been operated and will operate in such a
manner that will make the representations set forth below true for all such
years.
c. The Company will not make any amendments to its
organizational documents after the date of this opinion that would affect its
qualification as a REIT for any taxable year.
d. No actions will be taken by the Company, the
Partnership, the Partners, Kent Hotel Investors, Inc. or Sunstone/Kent
Associates, L.P., after the date hereof that would have the effect of altering
the facts upon which the opinions set forth below are based.
e. The Cost Segmentation Analyses are accurate in all
material respects. There have been no material changes in the information
reflected in the cost segmentation analysis as of December 31, 1996, since the
date of the preparation of said analysis. The aforementioned supplemental tax
basis information relating to hotels acquired by the Company since December 31,
1996, is accurate in all material respects.
Furthermore, we have relied upon the correctness of the
following representations of the Company and its authorized representatives on
behalf of itself and the Partnership:
(1) The following requirements have been and will be met
by the Lessee, the Management Company and any other person who leases, manages,
or operates the Current Hotels or other hotel properties in which the Company
owns, or may in the future own, an interest, either directly or through a
qualified REIT subsidiary (a "QRS") within the meaning of Section 856(i) of the
Code ("Other Hotel Properties"):
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(a) Such person will not own, directly or
indirectly (within the meaning of Section 856(d)(5) of the Code), more
than 35% of the shares of the Company.
(b) If such person is a corporation, not more
than 35% of its stock, measured by voting power or number of shares,
or, if such person is a noncorporate entity, not more than 35% of the
interest in its assets or net profits will be owned, directly or
indirectly (within the meaning of Section 856(d)(5) of the Code), by
one or more persons who own 35% or more of the shares of the Company.
(c) The Company and any QRS of the Company will
not derive or receive any income, directly or indirectly, from such
person, other than rents from the Current Hotels or Other Hotel
Properties.
(d) Such person will be adequately compensated for
its services.
(e) If such person is an individual, he or she
will not be an officer or employee of the Company.
(f) If such person is a corporation, none of its
officers or employees will be officers or employees of the Company.
(g) If an individual serves as both (i) one of
such person's directors and (ii) a director and officer or employee of
the Company, that individual will not receive any compensation for
serving as one of such person's directors.
(h) If an individual serves as both (i) one of
such person's directors and officers (or employees) and (ii) a
director of the Company, that individual will not receive any
compensation for serving as a director of the Company.
(i) If an individual serves as a director,
officer or employee of the Company, such person will not be engaged in
the day-to-day management of the Current Hotels or Other Hotel
Properties and will confine his or her activities as a shareholder or
director of any corporate entity which leases or manages the Current
Hotels or Other Hotel Properties to such activities as are consistent
with his or her status as a shareholder and/or director (as opposed to
an officer or employee) of such entity.
(2) The Company (and any QRS of the Company or
partnership in which the Company owns an interest) will not furnish or render,
or bear the cost of furnishing or rendering, any services to tenants of the
Current Hotels or Other Hotel Properties, other than the payment of real and
personal property taxes, ground lease rent (where applicable), insurance (other
than workers' compensation insurance), capital improvements, and the cost of
repairing,
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replacing or refurbishing furniture, fixtures and equipment with respect to
such hotel property (to the extent prescribed in the Percentage Leases). The
payments described in the preceding sentence are usually or customarily borne
by lessors of hotel properties in the geographic areas in which the Current
Hotels or Other Hotel Properties are located.
(3) The following requirements will be met by the Lessee,
the Management Company and any other person who furnishes or renders services
("Noncustomary Services") to the tenants of the Current Hotels or Other Hotel
Properties, other than services that are usually or customarily rendered in
connection with the rental of space for occupancy only and are not otherwise
considered rendered to the occupant:
(a) The Lessee, the Management Company and each
such other person will satisfy the requirements described in paragraph
(1) above.
(b) The cost of the Noncustomary Services will be
borne by the Lessee, the Management Company or such other person.
(c) Any charge for such Noncustomary Services
will be made, received and retained by the Lessee, the Management
Company or such other person.
(4) The Company is not chartered or supervised as a bank,
savings and loan, or similar association under state or federal law.
(5) The Company will not operate as a small business
investment company under the Small Business Investment Act of 1958.
(6) The Company was not created by or pursuant to an act
of a state legislature for the purpose of promoting, maintaining, and assisting
the economy within the state by making loans that generally would not be made
by banks.
(7) The Company will not engage in the business of
issuing life insurance, annuity contracts, or contracts of health or accident
insurance.
(8) Beginning with the Company's 1996 taxable year,
beneficial ownership of the Company has been and will be held by 100 or more
persons for at least 335 days of each taxable year. During the entire 1995 and
1996 taxable years as well as the 1997 taxable year to date, the Company has
been managed by one or more directors and the beneficial ownership of the
Company has been represented by transferable shares.
(9) At all times during the last half of each taxable
year beginning with the Company's 1996 taxable year no more than 50% in value
of the Company's outstanding shares
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has been or will be owned, directly or indirectly (within the meaning of
Section 544 of the Code, as modified by Section 856(h)(i)(B) of the Code), by
or for five or fewer individuals. For this purpose, a qualified stock bonus,
pension, or profit-sharing plan (as described in Section 401(a) of the Code), a
supplemental unemployment compensation benefits plan (as described in Section
501(c)(17) of the Code), a private foundation (as described in Section 509(a)
of the Code), or a portion of a trust permanently set aside or to be used
exclusively for charitable purposes (as described in Section 642(c) of the
Code) generally is considered an individual. However, stock held by a trust
described in Section 401(a) of the Code and exempt from tax under Section
501(a) of the Code (a "Qualified Trust") generally is treated as held directly
by the Qualified Trust's beneficiaries in proportion to their actuarial
interests in the Qualified Trust.
(10) The Company was organized on September 23, 1994. The
Company has not at any time been a party to a tax-free reorganization with
another corporation and does not hold any asset the disposition of which could
be subject to Section 1374 of the Code.
(11) The Company has elected to be a REIT for its taxable
year ending December 31, 1995 by computing its taxable income as a REIT on its
federal income tax return for that taxable year (i.e., I.R.S. Form 1120-REIT).
The Company will continue to so compute and report its income in 1996 and in
subsequent years as a REIT and will not terminate or revoke its REIT election.
(12) The Company has not had, and will not have, at the
end of any taxable year, and will not succeed to, any earnings and profits
accumulated during a non-REIT year of the Company or any other corporation.
(13) During 1995 and each subsequent taxable year, at
least 95% of the Company's gross income, including any gross income of any QRS
of the Company and excluding gross income from the sale of property held as
inventory or held primarily for sale to customers in the ordinary course of the
Company's (or any QRS's) trade or business ("Prohibited Income"), has been and
will be derived from:
(a) Dividends.
(b) Interest.
(c) "Rents from real property," within the
meaning of Section 856(d) of the Code.
(d) Gain from the sale or other disposition of
stock, securities, and real property (including interests in real
property and interests in mortgages on real property) that is not
Prohibited Income.
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(e) Abatements and refunds of taxes on real
property.
(f) Income and gain derived from real property
acquired directly by foreclosure or deed in lieu thereof ("Foreclosure
Property"), not including property acquired as a result of
indebtedness arising from the sale of property held as inventory or
primarily for sale to customers in the ordinary course of the
Company's business.
(g) Amounts (other than amounts based on the
income or profits of any person) received or accrued as consideration
for entering into agreements (i) to make loans secured by mortgages on
real property or on interests in real property or (ii) to purchase or
lease real property (including interests in real property and
interests in mortgages on real property).
(h) Gain from the sale or other disposition of
real estate assets that is not Prohibited Income.
(i) Payments under bona fide interest rate swap
or cap agreements entered into by the Company (or any QRS of the
Company) to hedge variable rate indebtedness it incurred to acquire or
carry real estate assets ("Qualified Hedging Contracts").
(j) Gain from the sale or other disposition of
Qualified Hedging Contracts.
(14) During 1995 and each subsequent taxable year, at
least 75% of the Company's gross income (including any gross income of any QRS
of the Company, but excluding Prohibited Income) has been and will be derived
from:
(a) "Rents from real property" as defined in
Section 856(d) of the Code.
(b) Interest (as defined in Section 856(f) of the
Code) on obligations secured by mortgages on real property or on
interests in real property.
(c) Gain from the sale or other disposition of
real property (including interests in real property and interests in
mortgages on real property) that is not Prohibited Income.
(d) Dividends or other distributions on, and gain
(other than Prohibited Income) from the sale or other disposition of,
transferable shares in other REITs.
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(e) Abatements and refunds of taxes on real
property.
(f) Income and gain (other than Prohibited
Income) derived from Foreclosure Property.
(g) Amounts (other than amounts based on the
income or profits of any person) received or accrued as consideration
for entering into agreements (i) to make loans secured by mortgages on
real property or on interests in real property or (ii) to purchase or
lease real property (including interests in real property and
interests in mortgages on real property).
(h) Gain from the sale or other disposition of
real estate assets that is not Prohibited Income.
(i) Income that was (i) attributable to stock or
a debt instrument (with a maturity date of at least 5 years), (ii)
attributable to the temporary investment of new capital, and (iii)
received or accrued during the one-year period beginning on the date
on which the Company received such capital.
(15) To the extent that the Partnership acquired the
personal property contained in each of the Current Hotels for cash, the initial
adjusted basis of such personal property was equal to the estimated fair market
value of such personal property that is shown on the Cost Segmentation
Analyses. To the extent that the Partnership acquired the personal property
contained in a Current Hotel in exchange for interests in the Partnership, the
initial adjusted basis of such personal property was the same as the
transferor's basis in such personal property on the date of acquisition. With
respect to each Current Hotel for 1995 and each subsequent taxable year, the
ratio of (i) the average of the adjusted bases of the personal property
contained in the Current Hotel at the beginning and at the end of such taxable
year to (ii) the average of the aggregate adjusted bases of both the real
property and personal property comprising the Current Hotel at the beginning
and at the end of such taxable year (the "Adjusted Basis Ratio") has not
exceeded and will not exceed 15%. The Adjusted Basis Ratio for any Other Hotel
Properties of the Partnership (or any other partnership in which the
Partnership, the Company or a QRS of the Company owns an interest) also will
not exceed 15% for any taxable year.
(16) The Leases provide that rent is the greater of a
fixed amount or a percentage amount that is calculated by multiplying specified
percentages by the gross room revenues for each of the Current Hotels in excess
of certain levels (the "Percentage Rent"). The percentages used to compute the
Percentage Rent (i) have not been and will not be renegotiated during the term
of the Leases in a manner that bases the Percentage Rent on income or profits
of any person and (ii) conform with normal business practice. The Company and
the Lessee anticipate that the Lessee will have sufficient future revenue to
enable the Lessee to satisfy all
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of its liabilities (including payments under the Leases and payments to the
Management Company) and generate a reasonable profit to the Lessee.
(17) The Company has not received and will not receive or
accrue, directly or indirectly (including through any QRS of the Company, the
Partnership or any other partnership), any rent, interest, contingency fees, or
other amounts that were determined in whole or in part with reference to the
income or profits derived by any person (excluding amounts received (i) as
rents from Hotels (including under the Leases and any subsequent leases) that
are (A) based solely on a percentage or percentages of receipts or sales and
the percentage or percentages are fixed at the time the leases are entered
into, are not renegotiated during the term of the leases in a manner that has
the effect of basing rent on income or profits, and conform with normal
business practices or (B) attributable to qualified rents from subtenants as
provided by Section 856(d)(6) of the Code and (ii) as interest that was (A)
based solely on a fixed percentage or percentages of receipts or sales or (B)
attributable to qualified rents received or accrued by debtors as provided by
Section 856(f)(2) of the Code).
(18) The Company (and any QRS of the Company) has not
owned and will not own, directly or indirectly (within the meaning of Section
856(d)(5) of the Code), 10% or more of the stock, by voting power or number of
shares, of the Lessee, any other lessee of its properties, the Management
Company or any other manager of its properties. The Company (and any QRS of
the Company) will not receive or accrue, directly or indirectly, any rents from
any of the following parties:
(a) A corporation of which the Company (or any
QRS of the Company) owns, directly or indirectly (within the meaning
of Section 856(d)(5) of the Code), 10% or more of the stock, by voting
power or number of shares.
(b) A noncorporate entity in which the Company
(or any QRS of the Company) owns, directly or indirectly (within the
meaning of Section 856(d)(5) of the Code), an interest of 10% or more
of the assets or net profits.
(19) During each taxable year, less than 30% of the
Company's gross income (including any gross income of any QRS of the Company)
has been and will be derived from the sale or other disposition of:
(a) Stock, Qualified Hedging Contracts or other
securities held for less than one year.
(b) Property in a transaction that generates
Prohibited income.
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(c) Real property (including interests in real
property interests in mortgages on real property) held for less than
four years other than (i) property compulsorily or involuntarily
converted to another form as a result of its destruction (in whole or
in part), seizure, requisition, or condemnation (or the threat or
imminence thereof) and (ii) Foreclosure Property.
(20) At the close of each quarter of each taxable year
(including the taxable year commencing January 1, 1995), (i) at least 75% of
the value of the Company's total assets (including the assets of any QRS of the
Company) have and will be represented by real estate assets, cash and cash
items, and government securities (the "75% Basket") and (ii) with respect to
securities not included in the 75% Basket, (A) not more than 5% of the value of
the Company's total assets have or will consist of the securities of any one
issuer (excluding QRS's of the Company) and (B) the Company has not and will
not hold more than 10% of the outstanding voting securities of any one issuer
(excluding QRS's of the Company). For purposes of this representation, (i) the
term "securities" does not include the Company's interest in the Partnership
(or any other partnership in which the Company owns an interest), (ii) the
Company's proportionate share of the assets of the Partnership (and any other
partnership in which the Company owns an interest) are treated as assets of the
Company, and (iii) the term "value" means (A) fair value as determined in good
faith by the Board of Directors of the Company or (B) in the case of securities
for which market quotations are readily available, the market value of such
securities.
(21) The Company has and will maintain sufficient records
as to its investments to be able to show that it complies with the
diversification requirements described in the preceding paragraph.
(22) For each taxable year, the deduction for dividends
paid by the Company (as defined in Section 561 of the Code, but without regard
to capital gain dividends, as defined in Section 857(b)(3)(C) of the Code) has
and will equal or exceed (i) the sum of (A) 95% of the Company's real estate
investment trust taxable income (as defined in Section 857(b)(2) of the Code,
but without regard to the deduction for dividends paid and excluding any net
capital gain) and (B) 95% of the excess of its net income from Foreclosure
Property over the tax imposed on such income by Section 857(b)(4)(A) of the
Code, minus (ii) any excess noncash income (as defined in Section 857(e) of the
Code).
(23) The dividends paid by the Company have been and will
be made pro rata, with no preference to any share as compared with other shares
of the same class.
(24) Within 30 days after the end of each of the 1995
taxable year and the 1996 taxable year, and within 30 days after the end of
each subsequent taxable year, the Company has demanded and will demand written
statements from its shareholders that, at any time during the
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last six months of the taxable year, owned 5% or more of its shares (or if the
Company has less than 2,000 and more than 200 shareholders of record of its
shares on any dividend record date, 1% or more of its shares, or if the Company
has 200 or less shareholders of record on any dividend record date, one-half of
1% or more of its shares) setting forth the following information:
(a) The actual owners of the Company's stock
(i.e., the persons who are required to include in gross income in
their returns the dividends received on the stock).
(b) The maximum number of shares of the Company
(including the number and face value of securities convertible into
shares of the Company) that were considered owned, directly or
indirectly (within the meaning of Section 544 of the Code, as modified
by Section 856 (h)(1)(B) of the Code), by each of the actual owners of
any of the Company's shares at any time during the last half of the
Company's taxable year.
(25) The Company has maintained and will maintain the
written statements described in the preceding paragraph (and other information
required by Section 1.857-8(d) of the Regulations) in its principal office, and
the statements (and such other information) will be available for inspection by
the Internal Revenue Service (the "Service").
(26) The Company has and will use the calendar year as its
taxable year.
(27) The Company will operate in such a manner that the
representations described in paragraphs 1 through 26 will continue to be true
throughout its existence.
(28) The Partnership has been duly formed as a limited
partnership under Delaware law and has been and will be operated in accordance
with applicable Delaware law and the Partnership Agreement.
(29) The Partnership Agreement will remain in
substantially the same form as its current form and will not be amended in any
material respect (except upon the substitution of partners in accordance with
the terms of the Partnership Agreement).
(30) The Company is not acting as an agent of the Limited
Partners in connection with the investment by the Limited Partners in, and
operation of, the Partnership.
(31) The investment in the Partnership by the Limited
Partners will not entail a mandatory purchase of any type of security of, or
interest in, the Company.
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(32) No Limited Partner (nor any affiliate of any Limited
Partner) has owned or will own, directly or indirectly (as defined in Section
856(d)(5) of the Code), 10% or more of the Company.
(33) A majority of the Company's Board of Directors at all
times will be independent directors.
(34) The Partnership has since its formation satisfied the
private placement "safe harbor" from publicly traded partnership status under
Notice 88-75 issued by the Service (including the requirement that the
Partnership not have more than 500 partners). If the Partnership should fail
to satisfy at least one of the safe harbors set forth in Notice 88-75, or the
Regulations under Section 7704 of the Code, whichever is applicable, in any
taxable year, the Partnership will satisfy the gross income test to avoid
corporate treatment, as set forth in Section 7704(c)(2) of the Code, for such
taxable year and all taxable years thereafter.
(35) The interests in the Partnership have not been and
will not be traded on an established securities market.
(36) The Partnership has not issued and will not issue any
Units in a transaction required to be registered under the Securities Act of
1933 (the "1933 Act").
(37) The Partnership has not elected and will not elect to
be taxable as a corporation under the Code.
(38) Sunstone/Kent Associates, L.P., a California limited
partnership ("Sunstone/Kent"), was duly formed in March, 1997, as a partnership
between Kent Hotel Investors, Inc., as the 1% general partner and the
Partnership, as the 99% limited partner. Sunstone/Kent has not elected and
will not elect to be treated as a corporation for tax purposes.
(39) The Company has owned all of the stock of Kent Hotel
Investors, Inc. at all times since its incorporation in March, 1997, and will
continue to own all such stock.
After reasonable inquiry, we are not aware of any facts
inconsistent with the representations set forth in paragraphs (1) through (39)
above. Furthermore, where such representations involve matters of law, we have
explained to the Company's representatives the relevant and material sections
of the Code, the Regulations thereunder, published rulings of the Service, and
other relevant authority to which such representations relate and are satisfied
that the Company's representatives understand such provisions and are capable
of making such representations.
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Based on the documents, assumptions and representations set
forth above, the discussion in the Registration Statement and Prospectus
Supplement under the caption "Federal Income Tax Considerations" (which is
incorporated herein by reference) and the discussion set forth below, we are of
the opinion that:
(a) Since the inception of its taxable year ended
on December 31, 1995, the Company has been organized and operated in
conformity with the requirements for qualification as a REIT pursuant
to Sections 856 through 860 of the Code, and the Company's
organization and contemplated method of operation will enable it to
continue to meet the requirements for qualification and taxation as a
REIT under the Code in 1996 and subsequent years.
(b) The description of law and legal conclusions
contained in the Registration Statement and the Prospectus Supplement
under the caption "Federal Income Tax Considerations" are correct in
all material respects, and the discussion therein fairly summarizes
the federal income tax considerations that are material to a holder of
Common Shares.
(c) The Partnership will be treated for federal
income tax purposes as a partnership and not as an association taxable
as a corporation.
We are assuming that each of the foregoing representations is
accurate as of the date of this letter. We will not review the Company's
compliance with the documents, assumptions, and representations set forth above
on a continuing basis. Accordingly, we can provide no assurance that the
Company's or Partnership's operations for any given taxable year will satisfy
the requirements for qualification and taxation as a REIT or partnership,
respectively.
With regard to the opinion set forth in subparagraph (c)
above, Section 7704 of the Code generally provides that a "publicly traded
partnership" will be taxed as a corporation unless at least 90% of its gross
income in each year consists of "qualifying income" within the meaning of
Section 7704(c)(2) of the Code. Section 7704(b) defines a "publicly traded
partnership" as any partnership whose interests are traded on an established
securities market or are readily tradable on a secondary market (or the
substantial equivalent thereof). The Treasury Department recently issued
Regulations providing rules governing the meaning of the term "publicly traded
partnership." Prior to the issuance of those Regulations, the Service issued a
notice providing limited safe harbors from the definition of a "publicly traded
partnership." I.R.S. Notice 88-75, 1988-2 C.B. 386.
Pursuant to one of the safe harbors provided in Notice 88-75
(a "private placement" safe harbor), interests in a partnership will not be
treated as readily tradable on a secondary market or the substantial equivalent
thereof if (i) all of the partnership interests are
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issued in transactions that are not required to be registered under the 1933
Act and (ii) the partnership does not have more than 500 partners (as
calculated in the manner specified in Notice 88-75). Since the General Partner
has represented that (i) the Partnership has not and will not offer any Units
in a transaction required to be registered under the 1933 Act, (ii) the
Partnership does not currently have more than 500 partners, and (iii) the
interests in the Partnership are not traded on an established securities
market, we are of the opinion that the Partnership is not a publicly traded
partnership at present.
The Regulations under Section 7704 provide that Notice 88-75
will continue to apply to the Partnership through the year 2005 unless the
Partnership enters into a "substantial new line of business" prior to that
date. Commencing in the year 2006 (or in such earlier taxable year in which
the Partnership enters a substantial new line of business), the Partnership
would be required to have less than 100 partners in order to fall under the
private placement safe harbor. There is no assurance that the Partnership will
continue to satisfy either the 500-partner safe harbor provided in Notice 88-75
or that the Partnership will satisfy the 100-partner safe harbor provided in
the Regulations. However, the Partnership has represented that, if in any
taxable year the Partnership falls outside of an applicable safe harbor from
publicly traded partnership status, it will satisfy the gross income test set
forth in Section 7704(c)(2) of the Code in that taxable year and each
subsequent taxable year. (Among other things, this will require that Mr. Alter
(or any other substantial shareholder of the Lessee) own less than a 5%
interest in the Partnership in the particular taxable year. Mr. Alter
currently owns less than a 5% interest in the Partnership.)
Our opinion as to the classification of the Partnership is
based on an assumption that the Partnership will either (i) continue to fall
within a safe harbor from publicly traded partnership status, or (ii) if the
Partnership is ever treated as a publicly traded partnership, it will satisfy
the qualifying income test of Section 7704(c)(2) of the Code in the taxable
year in which such treatment commences and all years thereafter. If future
events prove to be inconsistent with our assumptions, our opinion would be
altered. Because the continuing treatment of the Partnership as a partnership
is based on subsequent events, we can provide no absolute assurance that the
Partnership will not be treated as a corporation at some time in the future.
# # #
The foregoing opinions are based on current provisions of the
Code and the Regulations, published administrative interpretations thereof, and
published court decisions. The Service has not issued Regulations or
administrative interpretations with respect to various provisions of the Code
relating to REIT qualification. No assurance can be given that the law will
not change in a way that will prevent the Company from qualifying as a REIT, or
the Partnership from being classified as a partnership for federal income tax
purposes.
15
Sunstone Hotel Investors, Inc. April 30, 1997
Montgomery Securities Page 15
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement. We also consent to the references to Brobeck,
Phleger & Harrison LLP under the captions "Federal Income Tax Considerations"
and "Legal Matters" in the Registration Statement and the Prospectus
Supplement.
The foregoing opinions are limited to the federal income tax
matters addressed herein, and no other opinions are rendered with respect to
other federal tax matters or to any issues arising under the tax laws of any
state or locality. We undertake no obligation to update the opinions expressed
herein after the date of this letter. This opinion letter is solely for the
information and use of the addressee and the purchasers of the Common Shares in
the Offering, and may not be relied upon for any purpose by any other person
without our express written consent.
Very truly yours,
/s/ BROBECK, PHLEGER & HARRISON LLP
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BROBECK, PHLEGER & HARRISON LLP