Filed pursuant to Rule 424(b)(5)
Registration No. 333-67907
PROSPECTUS SUPPLEMENT
(To Prospectus dated December 30, 1998)
5,200,000 Shares
Host Marriott Corporation
10% Class C Cumulative Redeemable Preferred Stock
(Liquidation Preference $25 Per Share)
---------------
Dividends on the Class C preferred stock will be cumulative from the date of
original issuance and will be payable quarterly in arrears at the rate of 10%
of the liquidation preference per year, starting April 15, 2001. The Class C
preferred stock will not be redeemable before March 27, 2006, except under
limited circumstances intended to preserve our status as a real estate
investment trust and the status of our operating partnership as a partnership
for federal income tax purposes. Beginning March 27, 2006, we may redeem any
Class C preferred stock at $25 per share, plus accrued and unpaid dividends.
---------------
The Class C preferred stock has been approved for listing on the New York
Stock Exchange under the symbol "HMTPrC", subject to official notice of
issuance. We expect that trading on the NYSE will commence within 30 days
after the initial delivery of the Class C preferred stock.
---------------
Investing in the Class C preferred stock involves risks. See "Risk Factors"
beginning on page S-13.
---------------
PRICE $25 PER SHARE
---------------
Underwriting
Price to Discounts and Proceeds to
Public Commissions Company
-------- ------------- ------------
Per Share............................... $25.00 $.8125 $24.1875
Total................................... $130,000,000 $4,225,000 $125,775,000
For sales of 375,000 or more shares of Class C preferred stock to a single
purchaser, underwriting discounts and commissions will be $.50 per share.
---------------
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities or determined if this prospectus
supplement or the accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
We have granted the underwriters the right to purchase up to an additional
780,000 shares of Class C preferred stock to cover over-allotments, if any.
The underwriters expect to deliver the Class C preferred stock to purchasers
on March 27, 2001.
---------------
MORGAN STANLEY DEAN WITTER
BEAR, STEARNS & CO. INC.
DEUTSCHE BANC ALEX. BROWN
PRUDENTIAL SECURITIES
UBS WARBURG LLC
March 22, 2001
We have not authorized any person to make a statement that differs from what
is in this prospectus supplement and the accompanying prospectus. If any person
does make a statement that differs from what is in this prospectus supplement
and the accompanying prospectus, you should not rely on it. This prospectus
supplement and the accompanying prospectus are not, together or individually,
an offer to sell, nor are they seeking an offer to buy, these securities in any
jurisdiction where the offer or sale is not permitted. The information in this
prospectus supplement and the accompanying prospectus is complete and accurate
as of their respective dates, but the information may change after those dates.
----------------
TABLE OF CONTENTS
Prospectus Supplement
Page
----
Forward-Looking Statements............................................... S-3
Prospectus Supplement Summary............................................ S-4
Recent Developments...................................................... S-9
Risk Factors............................................................. S-13
Use of Proceeds.......................................................... S-22
Capitalization........................................................... S-23
Pro Forma Financial Information.......................................... S-24
Business................................................................. S-32
Description of the Class C Preferred Stock............................... S-45
Description of Common Stock.............................................. S-55
Federal Income Tax Considerations........................................ S-56
Underwriters............................................................. S-79
Legal Matters............................................................ S-81
Experts.................................................................. S-81
Where You Can Find More Information...................................... S-81
Prospectus
Risk Factors............................................................. 2
About This Prospectus.................................................... 14
Where You Can Find More Information...................................... 14
Forward-Looking Statements............................................... 15
The Company.............................................................. 16
Use of Proceeds.......................................................... 17
ERISA Matters............................................................ 17
Ratio of Earnings to Combined Fixed Charges and Preferred Stock Divi-
dends................................................................... 18
Ratio of Earnings to Fixed Charges....................................... 18
Description of Common Stock.............................................. 19
Description of Preferred Stock........................................... 21
Restrictions on Ownership and Transfer................................... 27
Description of Depositary Shares......................................... 30
Description of Warrants.................................................. 34
Description of Subscription Rights....................................... 35
Federal Income Tax Considerations........................................ 36
Plan of Distribution..................................................... 58
Legal Matters............................................................ 59
Experts.................................................................. 59
S-2
FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the information
incorporated by reference into the accompanying prospectus include forward-
looking statements. We have based these forward-looking statements on our
current expectations and projections about future events. We identify forward-
looking statements in this prospectus supplement, the accompanying prospectus
and the information incorporated by reference into the accompanying prospectus
by using words or phrases such as "anticipate", "believe", "estimate",
"expect", "intend", "may be", "objective", "plan", "predict", "project" and
"will be" and similar words or phrases, or the negative thereof.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by us in those statements include, among
others, the following:
. national and local economic and business conditions that will affect,
among other things, demand for products and services at our hotels and
other properties, the level of room rates and occupancy that can be
achieved by such properties and the availability and terms of financing;
. our ability to maintain the properties in a first-class manner, including
meeting capital expenditure requirements;
. our ability to compete effectively in areas such as access, location,
quality of accommodations and room rate structures;
. our degree of leverage, which may affect our ability to obtain financing
in the future or maintain compliance with current debt covenants;
. our ability to acquire or develop additional properties and the risk that
potential acquisitions or developments may not perform in accordance with
expectations;
. changes in travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures and costs;
. government approvals, actions and initiatives including the need for
compliance with environmental and safety requirements, and change in laws
and regulations or the interpretation thereof;
. our ability to satisfy complex rules in order to qualify as a REIT for
federal income tax purposes, in order for the operating partnership to
qualify as a partnership for federal income tax purposes and in order for
HMT Lessee LLC to qualify as a taxable REIT subsidiary for federal income
tax purposes, and our ability to operate effectively within the
limitations imposed by these rules; and
. other factors discussed under the headings "Risk Factors" and "Forward
Looking Statements" in this prospectus supplement and in our filings with
the Securities and Exchange Commission.
Although we believe the expectations reflected in our forward-looking
statements are based upon reasonable assumptions, we can give no assurance that
we will attain these expectations or that any deviations will not be material.
Except as otherwise required by the federal securities laws, we disclaim any
obligations or undertakings to publicly release any updates or revisions to any
forward-looking statement contained in this prospectus supplement, the
accompanying prospectus and the information incorporated by reference into the
accompanying prospectus to reflect any change in our expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
Note Regarding Industry Information
The information contained in, or incorporated by reference into, the
accompanying prospectus concerning the lodging industry is derived principally
from publicly available information and from industry sources. Although we
believe that this publicly available information and the information provided
by these industry sources is reliable, we have not independently verified the
accuracy of any of this information.
S-3
PROSPECTUS SUPPLEMENT SUMMARY
The following summary may not contain all the information that may be
important to you. You should read this summary together with the more detailed
information included elsewhere in this prospectus supplement and the
accompanying prospectus. In addition, important information is incorporated by
reference into the accompanying prospectus. Unless otherwise expressly stated
or the context otherwise requires, the information in this prospectus
supplement assumes that the underwriters do not exercise their option to
purchase additional shares of Class C preferred stock to cover over-allotments.
The Company
We are a self-managed and self-administered REIT owning full-service hotel
properties. Through our subsidiaries, we currently own 122 hotels, containing
approximately 58,000 rooms located throughout the United States and in Toronto
and Calgary, Canada. These hotels are generally operated under the Marriott,
Ritz-Carlton, Four Seasons, Swissotel, Hyatt and Hilton brand names. These
brands are among the most respected and widely recognized names in the lodging
industry.
We were formed as a Maryland corporation in 1998, under the name HMC Merger
Corporation, as a wholly owned subsidiary of Host Marriott Corporation, a
Delaware corporation, in connection with Host Marriott's efforts to reorganize
its business operations to qualify as a REIT for federal income tax purposes.
As part of this reorganization, which we refer to as the REIT conversion, on
December 29, 1998 we merged with Host Marriott and changed our name to Host
Marriott Corporation. As a result, we have succeeded to the hotel ownership
business formerly conducted by Host Marriott, the Delaware corporation. We
conduct our business as an umbrella partnership REIT, or UPREIT, through Host
Marriott, L.P., a Delaware limited partnership, of which we are the sole
general partner and in which we hold approximately 82% of the partnership
interests. As used in this prospectus supplement, references to "we," "our,"
the "company" and "Host Marriott" and similar references are to Host Marriott
Corporation, a Maryland corporation, and its consolidated subsidiaries from and
after December 29, 1998 and to Host Marriott Corporation, a Delaware
corporation, and its consolidated subsidiaries before December 29, 1998, unless
otherwise expressly stated or the context otherwise requires. References to the
"operating partnership" are to Host Marriott, L.P.
Under the law in effect prior to 2001, a REIT was required to lease its
hotels to unrelated third parties. As a result of REIT tax law changes under
the specific provisions of the Work Incentives Improvement Act of 1999 relating
to REITs (we refer to the provisions as the "REIT Modernization Act") that
became effective January 1, 2001, a REIT now is permitted to lease its hotels
to "taxable REIT subsidiaries," which are subsidiaries of the REIT that are
subject to regular corporate tax. However, the hotels must be operated on
behalf of the taxable REIT subsidiary by managers that are unrelated third
parties. Accordingly, prior to 2001, we leased substantially all of our hotels
to certain entities we refer to as the "lessees," which were principally
subsidiaries of Crestline Capital Corporation. Effective January 1, 2001, a
wholly owned subsidiary of the operating partnership that will elect to be
treated as a taxable REIT subsidiary, HMT Lessee LLC, acquired direct or
indirect ownership of all but one of the full-service hotel leasehold interests
owned by the Crestline lessees through the transactions discussed further in
this prospectus supplement. The lessees operate the hotels pursuant to
management agreements with unaffiliated hotel managers, such as Marriott
International, Inc., which are responsible for the day-to-day management of the
hotels. However, we are responsible for, among other things, decisions with
respect to sales and purchases of hotels, the financing of the hotels, the
leasing of the hotels and capital expenditures for the hotels, although some
matters relating to capital expenditures are addressed by the management
agreements. Crestline and Marriott International are both publicly traded
companies, separate from Host Marriott.
Our principal executive offices are located at 10400 Fernwood Road,
Bethesda, Maryland 20817-1109, and our telephone number is (301) 380-9000.
S-4
The Offering
Issuer................ Host Marriott Corporation
Securities Offered.... 5,200,000 shares of 10% Class C Cumulative Redeemable
Preferred Stock, par value $.01 per share. We may sell
up to 780,000 additional shares of Class C preferred
stock to the underwriters to cover over-allotments, if
any.
Maturity.............. The Class C preferred stock does not have any maturity
date nor are we required to redeem the Class C
preferred stock. Accordingly, the Class C preferred
stock will remain outstanding unless we decide to
redeem it. In addition, we are not required to set
aside funds to redeem the Class C preferred stock.
Dividends............. Investors will be entitled to receive cumulative cash
dividends on the Class C preferred stock at a rate of
10% per year of the $25.00 per share liquidation
preference (equivalent to $2.50 per year per share).
Dividends on the Class C preferred stock will be
payable quarterly in arrears on January 15, April 15,
July 15 and October 15 of each year, commencing April
15, 2001. Dividends on the Class C preferred stock will
be cumulative from the date of original issuance, which
is expected to be March 27, 2001. Because the first
dividend payment date is April 15, 2001, the dividend
payable on each share of Class C preferred stock on
that date will be less than the amount of a full
quarterly dividend.
Optional Redemption... We may not redeem the Class C preferred stock prior to
March 27, 2006 except under limited circumstances
intended to preserve our status as a real estate
investment trust for federal income tax purposes and
the operating partnership's status as a partnership for
federal income tax purposes. On and after March 27,
2006 we may, at our option, redeem the Class C
preferred stock, in whole or from time to time in part,
for cash in the amount of $25.00 per share, plus
accrued and unpaid dividends to, but not including, the
date of redemption.
Liquidation
Preference............ If we liquidate, dissolve or wind up, holders of the
Class C preferred stock will have the right to receive
$25.00 per share, plus accrued and unpaid dividends to,
but not including, the date of payment. Payment of this
liquidation preference must be made before any payment
is made to the holders of our common stock with respect
to the distribution of assets upon our liquidation,
dissolution or winding up.
Ranking............... The Class C preferred stock will rank, with respect to
the payment of dividends and the distribution of assets
upon our liquidation, dissolution or winding up: (1)
senior to our common stock and (2) on a parity with our
10% Class A Cumulative Redeemable Preferred Stock, par
value $.01 per share and our 10% Class B Cumulative
Redeemable Preferred Stock, par value $.01 per share.
Voting Rights......... Holders of Class C preferred stock will generally have
no voting rights. However, if we do not pay dividends
on the Class C preferred stock for six or more
quarterly dividend periods (whether or not
consecutive), the holders
S-5
of the Class C preferred stock, voting as a class with
the holders of any other class or series of our capital
stock which has similar voting rights, will be entitled
to vote for the election of two additional directors to
serve on our board of directors until we pay all
dividends which we owe on the Class C preferred stock.
In addition, the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Class C
preferred stock is required for us to issue capital
stock ranking senior to the Class C preferred stock or
to amend our articles of incorporation in a manner that
materially and adversely affects the Class C preferred
stock.
Listing............... The Class C preferred stock has been approved for
listing on the New York Stock Exchange under the symbol
"HMTPrC", subject to official notice of issuance. We
expect that trading of the Class C preferred stock on
the NYSE will commence within 30 days after initial
delivery of the Class C preferred stock.
Restrictions on
Ownership and
Transfer.............. The Class C preferred stock will be subject to certain
restrictions on ownership and transfer intended to
assist us in maintaining our status as a REIT for
federal income tax purposes and the status of the
operating partnership as a partnership for federal
income tax purposes. In general, no person may own, or
be deemed to own under the attribution rules of the
Internal Revenue Code, more than 9.8% of the Class C
preferred stock that is outstanding. A detailed
description of these restrictions is contained in the
accompanying prospectus under "Restrictions on
Ownership and Transfer".
Conversion............ The Class C preferred stock will not be convertible
into or exchangeable for any other securities or
property.
Use of Proceeds....... We will contribute the net proceeds from the offering
of the Class C preferred stock to the operating
partnership in exchange for preferred partnership
interests in the operating partnership which will have
economic terms substantially similar to those of the
Class C preferred stock. The operating partnership will
use these net proceeds for general business purposes,
which may include:
. the repayment of indebtedness (including amounts
outstanding under our bank credit facility); and
. the acquisition or development of hotel properties.
Risk Factors
You should carefully consider the matters set forth under "Risk Factors"
beginning on page S-13.
S-6
Summary Historical and Pro Forma Financial Data
In the following table we set forth summary historical consolidated
financial data for us and our subsidiaries for the three fiscal years ended
December 31, 1999 and for the thirty-six weeks ended September 8, 2000 (our
first three quarters of 2000) and September 10, 1999 (our first three quarters
of 1999). The summary historical consolidated financial data as of and for the
three fiscal years ended December 31, 1999 have been derived from our audited
financial statements. The summary historical consolidated financial data as of
and for the first three quarters of 2000 and 1999 are unaudited but, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of such data. Interim
results are not indicative of fiscal year performance because of the impact of
seasonal and short term variations.
Under the law in effect prior to 2001, in order to qualify as a REIT, we
were restricted from operating hotels directly and, as part of the REIT
conversion, we leased substantially all of our hotels to subsidiaries of
Crestline Capital Corporation. Effective January 1, 2001, HMT Lessee, a wholly
owned subsidiary of the operating partnership that will elect to be a taxable
REIT subsidiary effective January 1, 2001, acquired direct or indirect
ownership of the leasehold interests in 116 of our full-service hotel
properties from Crestline. As a result of the acquisition of the Crestline
leases, beginning with the first quarter of 2001 for the 116 of our hotels that
are now leased by HMT Lessee, we will present on our consolidated statements of
operations hotel-level revenues and expenses (e.g. room and food and beverage
revenues and expenses and management fees) as well as owner expenses (e.g.
property taxes, ground leases and insurance) rather than rental income, which
was calculated based on hotel-level revenues and expenses. This is the way that
we presented our consolidated statement of operations through 1998, prior to
the REIT conversion. Six leases, including the one still held by Crestline,
have not been purchased and therefore results of these hotels will continue to
be reported as rental income. See "Recent Developments" for a description of
the acquisition of the Crestline leases.
The summary pro forma consolidated financial data set forth below reflect
numerous transactions including:
. the issuance of Class C preferred stock in this offering;
. several hotel acquisitions and dispositions consummated by us and our
subsidiaries and various financing transactions;
. the conversion of 12.5 million units of the operating partnership for
Host Marriott common stock described in "Recent Developments";
. the settlement of litigation described in "Recent Developments"; and
. the purchase in January 2001 of leasehold interests in 116 of our hotels
from Crestline.
The summary pro forma statement of operations and other data reflects the
foregoing transactions as if the transactions had been completed at the
beginning of the periods presented. As discussed further in the "Pro Forma
Financial Information", certain of these transactions occurred prior to
September 8, 2000 and therefore were included in the September 8, 2000
historical balance sheet. Consequently, no pro forma adjustments to the pro
forma balance sheet data are required for these transactions. Our pro forma
statement of operations and other data presented below include only income from
continuing operations and, therefore, they exclude the operations of the
discontinued senior living business and the effect of extraordinary items.
The summary pro forma financial data set forth below are unaudited, are
based upon a number of assumptions and estimates and do not purport to be
indicative of the operating results or financial position that we would have
achieved had the transactions actually been consummated on the dates specified,
nor do they purport to be indicative of our operating results or financial
position for any future periods or dates.
The summary historical and pro forma financial data should be read in
conjunction with the audited and unaudited consolidated financial statements
which we incorporate by reference into the accompanying prospectus and the "Pro
Forma Financial Information" beginning on page S-24. For additional details
concerning the transactions reflected in the pro forma financial data,
investors should also carefully review the documents which we incorporate by
reference.
S-7
Summary Historical and Pro Forma Financial Data
First Three Quarters Fiscal Year
-------------------------- ------------------------------------------------
Pro Forma Historical Pro Forma Historical
---------- --------------- --------- --------------------------------------
2000(4)(5) 2000(5) 1999(5) 1999(4) 1999(3)(4) 1998(1)(2)(3) 1997(1)(2)(3)
---------- ------- ------- --------- ---------- ------------- -------------
(unaudited)
(in millions, except ratio data)
Statement of operations
data:
Rental income........... $ 102 $ 580 $ 546 $ 168 $1,295 $ -- $ --
Hotel revenues..........
Rooms................. 1,671 -- -- 2,267 -- 2,220 1,850
Food and beverage..... 798 -- -- 1,129 -- 984 776
Other................. 199 -- -- 263 -- 238 180
------ ------- ------- ------ ------ ------ ------
Total hotel revenues.... 2,668 -- -- 3,659 -- 3,442 2,806
Interest income......... 22 26 26 24 39 51 52
Other................... 6 17 26 1 42 71 17
------ ------- ------- ------ ------ ------ ------
Total revenues and in-
terest income.......... 2,798 623 598 3,852 1,376 3,564 2,875
Income (loss) from
continuing operations.. 142 (124) (120) 189 196 194 47
Income (loss) before
extraordinary items.... 142 (124) (120) 189 196 195 47
Net income (loss)....... -- (127) (103) -- 211 47 50
Balance sheet data:
Total assets(6)......... $8,405 $ 8,188 $ 8,330 $ -- $8,202 $8,268 $6,141
Debt.................... $5,365 $ 5,101 $ 5,150 -- $5,069 $5,131 $3,466
Other data(7):
Ratio of earnings to
combined fixed charges
and preferred stock
dividends.............. 1.5x -- -- 1.4x 1.5x 1.5x 1.3x
Deficiency of earnings
to fixed charges and
preferred stock
dividends ............. -- $ 145 $ 139 -- -- -- --
- --------
(1) The Internal Revenue Code requires REITs to file their income tax return on
a calendar year basis. Accordingly, in 1998 we changed our fiscal year end
to December 31 for both financial and tax reporting requirements.
Previously, our fiscal year ended on the Friday nearest to December 31. As
a result of this change, the results of operations for 15 hotels not
managed by Marriott International were adjusted in 1998 to include 13
months of operations (December 1997 through December 1998) and therefore
are not comparable to fiscal year 1997 which included 12 months of
operations. The additional month of operations in 1998 increased our
revenues by $44 million.
(2) The historical financial data for fiscal years 1998 and 1997 reflect as
discontinued operations our senior living business that we formerly
conducted but disposed of in the spin-off of Crestline as part of the REIT
conversion. We recorded income from the discontinued operations, net of
taxes, of $6 million and $0 in fiscal years 1998 and 1997, respectively.
(3) For 1999 and 1997 we incurred extraordinary gains of $15 million and $3
million, net of taxes, respectively. In 1998 we incurred an extraordinary
loss of $148 million, net of taxes.
(4) The 2000 pro forma statement of operations does not include a one-time
non-recurring loss of $207 million on the acquisition of leases from
Crestline and the corresponding deferred tax asset of $82 million. The
1999 pro forma and historical statements of operations include a $40
million non-recurring loss on the settlement of litigation for seven
limited partnerships in which we were the general partner.
(5) Historical revenue for the First Three Quarters 2000 and 1999 primarily
represent lease income generated by our leases with Crestline. We deferred
$366 million and $339 million, respectively, of contingent rent which is
based on a percentage of hotel sales until certain annual thresholds have
been met in accordance with Staff Accounting Bulletin 101. This percentage
rent was recognized as income during the fourth quarter of 2000 and 1999,
respectively, once the specified hotel sales thresholds had been achieved.
Effective January 1, 2001, HMT Lessee acquired direct or indirect
ownership of the leasehold interests in 116 of our full-service hotels
from Crestline. Accordingly, the pro forma results of operations for the
First Three Quarters 2000 have been adjusted to reflect the impact of the
reversal of the contingent rent. The pro forma results of operations have
also been adjusted to reflect this acquisition by presenting hotel-level
revenues for these leasehold interests rather than rental income. Rental
income on a pro forma basis includes the rental income for one hotel that
is leased by Crestline and five hotels that are leased by other entities.
See "Recent Developments" for a description of the acquisition of the
leasehold interests from Crestline.
(6) Total assets for fiscal year 1997 include $236 million, related to net
investment in discontinued operations.
(7) The ratio of earnings to combined fixed charges and preferred stock
dividends is computed by dividing income from continuing operations before
income taxes, fixed charges and preferred stock dividends by total fixed
charges and preferred stock dividends. Fixed charges represent interest
expense (including capitalized interest), amortization of debt issuance
costs and the portion of rent expense that is deemed to represent
interest. The deficiency of earnings to fixed charges is largely the
result of the timing of recognition of contingent rental income which has
been recognized in the fourth quarter of 2000 and 1999.
S-8
RECENT DEVELOPMENTS
Crestline Leasehold Interest Acquisition
Effective as of January 1, 2001, HMT Lessee, a wholly owned subsidiary of
the operating partnership that will elect to be treated as a taxable REIT
subsidiary effective January 1, 2001, purchased from Crestline the equity
interests in the lessees of 112 of our full-service hotels and the leasehold
interests in four of our full-service hotels for $207 million in cash,
including legal fees and transfer taxes. As a result of this transaction, we
recorded a non-recurring loss of $207 million during the fourth quarter of
2000, reflecting the payment to Crestline and the payment of certain
transaction expenses. We also recognized a deferred tax asset of $82 million
because the assets acquired are recognized, for income tax purposes, as assets
that will be amortized over the next seven years. As a result of the
acquisition, HMT Lessee, through its subsidiaries, including the newly-acquired
lessees, will replace Crestline as lessee and assume the obligations of
Crestline under the management agreements with respect to those 116 full-
service hotels. A subsidiary of Crestline will remain the lessee of one of our
full-service properties.
As a result of the acquisition of the leases from Crestline, any changes in
earnings and cash flow levels at each specific hotel now leased by HMT Lessee
will have a corresponding direct effect on our consolidated earnings and cash
flows. Additionally, beginning with the first quarter of 2001, applicable
accounting principles require us to present on our consolidated statement of
operations hotel-level revenues and expenses (e.g., room and food and beverage
revenues and expenses and management fees) as well as owner expenses (e.g.
property taxes, ground leases and insurance) rather than rental income for the
116 hotels that are now leased by HMT Lessee. This is the way that we presented
our consolidated statement of operations through 1998, prior to the REIT
conversion.
We believe that we will benefit from this new corporate structure by
receiving the incremental earnings and cash flows previously paid to Crestline
in its capacity as lessee. However, because Crestline used to guarantee a
limited portion of the rental income, we no longer have this protection against
a significant reduction in hotel revenues. For a discussion of the risks
related to the acquisition of the leasehold interests from Crestline, see "Risk
Factors--A reduction in hotel revenues would directly affect our earnings and
cash flows".
Courtyard Settlement and Tender Offers
The operating partnership, Rockledge Hotel Properties, Inc., which is one of
our non-controlled subsidiaries that will elect to be treated as a taxable REIT
subsidiary effective January 1, 2001, and Marriott International, Inc. are
parties to a settlement agreement with respect to lawsuits brought by and on
behalf of the limited partners of Courtyard by Marriott Limited Partnership,
Courtyard by Marriott II Limited Partnership and several other partnerships
that own limited service hotels in which we act, or acted, as general partner.
Pursuant to the settlement, in exchange for a general release of all claims,
(1) the operating partnership and Rockledge Hotel Properties paid $31 million
in the aggregate to the limited partners of four of the partnerships and (2)
subsidiaries of CBM Joint Venture LLC, a joint venture between Rockledge Hotel
Properties and Marriott International and their affiliates, acquired all of the
outstanding units of limited partnership interest of Courtyard by Marriott
Limited Partnership and Courtyard by Marriott II Limited Partnership pursuant
to two tender offers that were completed on December 8, 2000. The operating
partnership also owns a de minimis general partner interest in CBM Joint
Venture. In connection with the settlement with Courtyard by Marriott Limited
Partnership and Courtyard by Marriott Limited Partnership II, the operating
partnership and Rockledge Hotel Properties made payments of approximately $79
million. As part of a separate settlement in connection with the same set of
lawsuits, the operating partnership paid $2 million to the limited partners of
another limited partnership in exchange for a general release of all claims.
As a result of the acquisition by subsidiaries of CBM Joint Venture of the
units of limited partnership interests in Courtyard by Marriott II Limited
Partnership, CBM Joint Venture was required to offer to purchase the 10 3/4%
Series B Senior Secured Notes due 2008 issued by Courtyard by Marriott II
Limited Partnership at a purchase price equal to 101% of the principal amount
of such notes. The purchase offer was undertaken by CBM Joint Venture on behalf
of Courtyard by Marriott II Limited Partnership and was completed on January
26, 2001. Approximately
S-9
$11.6 million of notes were purchased, representing approximately 9% of the
outstanding notes. Rockledge Hotel Properties has approximately a 50% non-
controlling interest in the CBM Joint Venture which owns 120 Courtyard by
Marriott limited-service properties totalling 17,554 rooms.
Credit Facility Borrowing
We borrowed approximately $90 million under the revolving loan portion of
our credit facility in the first quarter of 2001. We have used these funds for
general corporate purposes as well as for the partial funding of our Crestline
leasehold interest acquisition described above and the payment of certain tax
obligations. As of February 2, 2001, there was $150 million outstanding under
the term loan portion of the credit facility and $90 million outstanding under
the revolving loan portion of the credit facility, with an additional $535
million available under the revolving portion of the credit facility, subject
to its terms and conditions.
Blackstone Sale
On February 7, 2001, we issued to various entities affiliated with The
Blackstone Group (the "Blackstone Entities") 12.5 million shares of our common
stock upon their surrender of 12.5 million units of the operating partnership
for redemption. This increased our ownership interest in the operating
partnership from 78% to approximately 82%. The Blackstone Entities continue to
own approximately 30.5 million units of the operating partnership, or a 11%
minority interest in the operating partnership. In addition, the Blackstone
Entities sold the 12.5 million shares for $12.45 per share in an underwritten
public offering. We received no proceeds from the sale of these shares. The
shares represented approximately 4.4% of the total number of shares of our
common stock outstanding as of January 31, 2001, assuming the redemption of all
outstanding units of the operating partnership not held by us for shares of
common stock.
2000 Year End Results
On March 6, 2001, we announced the results of operations for the fourth
quarter and full year 2000. Our revenues reflect rental income from leases,
which are calculated based on hotel-level sales of our leased hotels. As
discussed above, beginning with the first quarter of 2001, we will report gross
hotel-level sales as revenue for 116 of our hotels that are now leased by HMT
Lessee. Six leases, including one still held by Crestline, have not been
purchased and, therefore, results of these hotels will continue to be reported
as rental income. Fourth quarter 2000 hotel-level sales were $1.44 billion, a
5.6% increase over fourth quarter 1999 hotel-level sales of $1.37 billion. Full
year 2000 hotel-level sales were $4.51 billion, a 5.4% increase over full year
1999 hotel-level sales of $4.28 billion. The hotel-level sales were reported to
us by our lessees. We reported fourth quarter 2000 rental income of $810
million versus $749 million for fourth quarter 1999 and full year 2000 rental
income of $1.4 billion versus $1.3 billion for full year 1999. The reported
rental income amounts include the recognition of contingent rent deferred under
Commission regulations (Staff Accounting Bulletin 101) of $366 million and $339
million for the fourth quarter 2000 and 1999, respectively, because they were
contingent upon achieving annual levels of hotel-level sales. Staff Accounting
Bulletin 101 has no impact on the full year 2000 and 1999 results.
These increases are primarily the result of strong increases in revenue per
available room, or REVPAR, for both the quarter and the full year. REVPAR at
our comparable properties (defined below) increased 6.7% and 6.6% for the
quarter and the full year, respectively, primarily as a result of strong
increases in room rates and slight increases in occupancy.
The net income available to common shareholders for the fourth quarter 2000
decreased to $279 million compared to $320 million for the fourth quarter 1999.
The net income available to common shareholders for full year 2000 decreased to
$141 million compared to $216 million for full year 1999. The decreases in both
fourth quarter and full year 2000 include a non-recurring loss, net of taxes,
of $125 million recognized on the acquisition of leases from Crestline. Fourth
quarter and full year 2000 results include $5 million and $20 million,
respectively, in dividends on our preferred stock, which were issued during the
second half of 1999.
S-10
In connection with our announcement outlining the results of operations for
the fourth quarter and full year 2000, we indicated that due to economic
conditions, particularly in Atlanta and the Northeast, our REVPAR growth rate
for the first two months of 2001 was considerably less than our REVPAR growth
rate of 6.6% for comparable properties for full year 2000.
The following table presents unaudited financial data regarding the results
of fourth quarter and full year 2000 and 1999. We also present certain hotel-
level operating data.
Summary Historical Financial Data
Fourth Quarter Fiscal Year
------------------------- -------------------------
December 31, December 31, December 31, December 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(Unaudited)
Statement of operations
data:
Revenue
Rental Income............. $ 810 $ 749 $ 1,390 $ 1,295
Other..................... 40 29 83 81
------- ------- ------- -------
Total Revenue............ 850 778 1,473 1,376
Income before extraordinary
items(1).................. 283 316 159 196
Net Income(2).............. 283 314 156 211
Less: preferred
dividends................ (5) (5) (20) (6)
Add: gain on repurchase of
convertible preferred
securities............... 1 11 5 11
------- ------- ------- -------
Net Income available to
common shareholders....... $ 279 $ 320 $ 141 $ 216
======= ======= ======= =======
Basic earnings per common
share(3).................. $ 1.26 $ 1.42 $ 0.64 $ 0.95
======= ======= ======= =======
Diluted earnings per common
share(3).................. $ 1.14 $ 1.24 $ 0.63 $ 0.92
======= ======= ======= =======
Balance sheet data:
Total Assets............... $ 8,396 $ 8,202
Debt....................... 5,311 5,069
Minority interest.......... 485 508
Convertible preferred
securities of subsidiary
trust (QUIPs)............. 475 497
Total shareholders'
equity.................... $ 1,421 $ 1,505
Other Data:
Ratio of earnings to
combined fixed charges and
preferred stock
dividends(4).............. 1.2x 1.5x
Hotel Operating
Statistics(5):
Average daily rate......... $164.46 $154.92 $157.96 $148.61
Average occupancy
percentage................ 75.1% 74.7% 78.2% 77.9%
Comparable REVPAR.......... $123.52 $115.79 $123.50 $115.82
REVPAR growth year-over-
year...................... 6.7% 6.6%
- --------
(1) In the fourth quarter of 2000 we recorded a non-recurring loss of $207
million and an $82 million benefit for income taxes in connection with HMT
Lessee's acquisition of the leasehold interests from Crestline described
above. In the fourth quarter of 1999 we recorded a non-recurring loss on
litigation settlement of $40 million.
(2) In 2000 we recorded an extraordinary loss of approximately $2 million
representing the write off of deferred financing costs and certain fees
paid to our lender in connection with the renegotiation of our bank credit
facility. An extraordinary loss of approximately $1 million representing
the write-off of deferred financing fees occurred during the first quarter
of 2000 when approximately .4 million shares of our convertible preferred
securities were repurchased and subsequently retired.
In 1999 we recorded an extraordinary gain of $14 million on the forgiveness
of debt in the form of accrued incentive management fees in connection with
the refinancing of the mortgage and renegotiation of the management
agreement on the New York Marriott Marquis hotel. An extraordinary loss of
$3 million representing the write-off of deferred financing fees occurred in
July 1999 when the mortgage debt for eight properties, including the New
York Marriott Marquis hotel, was refinanced. In connection with this
refinancing, the interest rate swap agreements associated with some of the
original debt were terminated and an extraordinary gain of $8 million was
recognized. An extraordinary loss of $2 million representing the write-off
of deferred financing fees occurred during the fourth quarter of 1999 when
prepayments totaling $225 million were made to permanently reduce the
outstanding balance of the term loan portion of the bank credit facility to
$125 million. An extraordinary loss of $2 million representing the write-off
of deferred financing fees occurred during the first quarter of 1999 when
approximately 1.1 million shares of our convertible preferred securities
were repurchased and subsequently retired.
S-11
(3) Basic earnings per common share is computed by dividing net income adjusted
for dividends on preferred stock and gains on repurchases of convertible
preferred securities by the weighted average number of shares of common
stock outstanding. Diluted earnings per share is computed by dividing net
income adjusted for dividends on preferred stock, gains on repurchases of
convertible preferred securities, and potentially dilutive securities, by
the weighted average number of shares of common stock outstanding plus
other potentially dilutive securities. Dilutive securities may include
shares granted under comprehensive stock plans and the convertible
preferred securities. Dilutive securities also include those common and
preferred operating partnership units issuable or outstanding that are held
by minority partners which are assumed to be converted.
(4) The ratio of earnings to combined fixed charges and preferred stock
dividends is computed by dividing income from continuing operations before
income taxes, fixed charges and preferred stock dividends by total fixed
charges and preferred stock dividends. Fixed charges represent interest
expense (including capitalized interest), amortization of debt issuance
costs and the portion of rent expense that is deemed to represent interest.
Calculation of the ratio for both years includes certain non-recurring
losses. If these losses were not included ($207 million loss on acquisition
of Crestline leases and $40 million loss on litigation settlement in 2000
and 1999, respectively) then the ratios would be 1.7x and 1.6x for 2000 and
1999, respectively.
(5) The hotel operating statistics presented relate to comparable properties
which consist of 118 properties owned, directly or indirectly, by us in
each period covered, net of two properties where significant expansion at
the hotels affected operations, one property that sustained substantial
damage from a fire in the fourth quarter of 2000 and Tampa Waterside
Marriott which opened in February 2000. Average daily rate represents the
average rate charged daily for the periods presented for the comparable
hotels. Average occupancy percentage represents the average number of rooms
occupied for the periods presented for the comparable hotels on a
percentage basis. REVPAR represents room revenue per available room, which
measures daily room revenues generated on a per room basis, excluding food
and beverage revenues or other ancillary revenues generated by the
property. REVPAR growth for all our properties for the fourth quarter and
full year 2000 over the prior periods was 5.2% and 5.4%, respectively. The
reader should note that comparable properties as discussed in the remainder
of this prospectus supplement are different as they address different
reporting periods.
S-12
RISK FACTORS
The disclosure set forth below supersedes in its entirety the risks
described in the section entitled "Risk Factors" in the accompanying
prospectus. You should consider the following risks before deciding whether to
purchase shares of Class C preferred stock.
Risks of operation
We do not control our hotel operations, and we are dependent on the managers
of our hotels.
Because federal income tax laws currently restrict REITs from deriving
revenues directly from managing a hotel, we do not manage our hotels. Instead,
we retain managers to manage our hotels pursuant to management agreements. Our
income from the hotels may be adversely affected if the managers fail to
provide quality services and amenities and competitive room rates at our hotels
or fail to maintain the quality of the hotel brand names. We have very limited
recourse if we believe that the hotel managers do not maximize the revenues
from our hotels, which in turn would maximize our results of operations and
cash flows on a consolidated basis.
We do not control the assets held by the non-controlled subsidiaries.
The operating partnership owns economic interests in two taxable
corporations, Rockledge Hotel Properties and Fernwood Hotel Assets, Inc., which
we refer to as "non-controlled subsidiaries". These non-controlled subsidiaries
hold various assets which, under our credit facility, may not exceed, in the
aggregate, 15% of the value of our assets. The assets held by the non-
controlled subsidiaries consist primarily of interests in partnerships which
own hotels that are not leased to third parties, hotels that are not leased to
third parties, some furniture, fixtures, and equipment (FF&E) used in our
hotels and some international hotels. For example, Rockledge Hotel Properties
owns approximately a 50% non-controlling interest in the CBM Joint Venture
which owns 120 Courtyard by Marriott properties. If the operating partnership
owned more than a de minimis amount of any of these assets, it could jeopardize
our REIT status and/or the status of the operating partnership as a partnership
for federal income tax purposes. Although the operating partnership owns
approximately 95% of the total economic interests of the non-controlled
subsidiaries, it owns none of the voting stock of the non-controlled
subsidiaries. The Host Marriott Statutory Employee/Charitable Trust, the
beneficiaries of which are (1) a trust formed for the benefit of a number of
our employees and (2) the J. Willard and Alice S. Marriott Foundation, owns all
of the voting common stock, representing approximately 5% of the total economic
interests in the non-controlled subsidiaries. The Host Marriott Statutory
Employee/Charitable Trust elects the directors who are responsible for
overseeing the operations of the non-controlled subsidiaries. The directors are
currently our employees, although this is not required. As a result, we have no
control over the operation or management of the hotels or other assets owned by
the non-controlled subsidiaries, even though we depend upon the non-controlled
subsidiaries for a portion of our revenues. Also, the activities of the non-
controlled subsidiaries could cause us to be in default under our principal
credit facilities. Effective January 1, 2001, we are able to own all of the
voting stock of the non-controlled subsidiaries without adversely affecting our
REIT status so long as they elect to be "taxable REIT subsidiaries" as defined
under the REIT Modernization Act. We are considering pursuing a transaction
with the Host Marriott Statutory Employee/Charitable Trust that would allow us
to acquire control of the non-controlled subsidiaries, although we have not
reached any such agreement and cannot assure you that any such agreement will
be reached or that a transaction will be consummated. Whether or not such an
agreement is reached, effective January 1, 2001, each of the non-controlled
subsidiaries will elect to be treated as a taxable REIT subsidiary. See "--REIT
Modernization Act changes to the REIT asset tests".
Our relationship with Marriott International may result in conflicts of
interest.
Marriott International, a public hotel management company, manages a
significant number of our hotels. In addition, Marriott International manages
hotels that compete with our hotels. As a result, Marriott International may
make decisions regarding competing lodging facilities which it manages that
would not necessarily be in our best interests. J.W. Marriott, Jr. is a member
of our Board of Directors and his brother, Richard E. Marriott, is our Chairman
of the Board. Both J.W. Marriott, Jr. and Richard E. Marriott serve as
S-13
directors, and J.W. Marriott, Jr. also serves as an officer, of Marriott
International. J.W. Marriott, Jr. and Richard E. Marriott beneficially own, as
determined for securities law purposes, as of January 31, 2001, approximately
10.8% and 10.6%, respectively, of the outstanding shares of common stock of
Marriott International. As a result, J.W. Marriott, Jr. and Richard E. Marriott
have potential conflicts of interest as our directors when making decisions
regarding Marriott International, including decisions relating to the
management agreements involving the hotels and Marriott International's
management of competing lodging properties.
Both our Board of Directors and the Board of Directors of Marriott
International follow appropriate policies and procedures to limit the
involvement of Messrs. J.W. Marriott, Jr. and Richard E. Marriott in conflict
situations, including requiring them to abstain from voting as directors of
either us or Marriott International or our or their subsidiaries on matters
which present a conflict between the companies. If appropriate, these policies
and procedures will apply to other directors and officers. See "--We may
acquire hotel properties through joint ventures with third parties that could
result in conflicts".
Some of our hotel revenues are subject to the prior rights of lenders.
The mortgages on 28 of our hotels require that revenues from these hotels be
used first to pay the debt service on the mortgage loans. Consequently, only
the cash flow remaining after debt service on those mortgage loans will be
available to satisfy other obligations, including property taxes and insurance,
FF&E reserves for the hotels and capital improvements, and to make
distributions to our shareholders (including the payment of dividends to
holders of the Class C preferred stock).
We have substantial indebtedness.
Our degree of leverage could affect our ability to:
. obtain financing in the future for working capital, capital
expenditures, acquisitions, development or other general business
purposes;
. undertake financings on terms and conditions acceptable to us;
. pursue our acquisition strategy; or
. compete effectively or operate successfully under adverse economic
conditions.
If our cash flow and working capital are not sufficient to fund our
expenditures or service our indebtedness, we would have to raise additional
funds through:
. the sale of equity;
. the refinancing of all or part of our indebtedness;
. the incurrence of additional permitted indebtedness; or
. the sale of assets.
We cannot assure you that any of these sources of funds would be available
in amounts sufficient for us to meet our obligations or fulfill our business
plans. Additionally, our debt contains performance related covenants that, if
not achieved, could require immediate repayment of our debt or significantly
increase the rate of interest on our debt.
A reduction in hotel revenues would directly affect our earnings and cash
flows.
Prior to January 1, 2001, we received rental income from our hotels leased
to Crestline subsidiaries which was based on hotel-level sales of rooms, food
and beverage and other items. A portion of this rental income was guaranteed by
Crestline. Beginning January 1, 2001, as a result of HMT Lessee's acquisition
of the
S-14
Crestline leasehold interests, HMT Lessee, through its subsidiaries, will
receive the earnings and cash flows from hotel-level sales directly and we
will no longer have the protection of the Crestline guarantee. Accordingly, a
reduction in hotel revenues or an increase in hotel expenses would have a
direct effect on our earnings and cash flows and could have an adverse impact
on our ability to make payments on our obligations including debt service,
operating expenses, capital improvements and dividends to our shareholders
(including the payment of dividends to holders of the Class C preferred
stock).
There is no limitation on the amount of debt we may incur.
There are no limitations in our organizational documents or those of the
operating partnership that limit the amount of indebtedness that we may incur.
However, our existing debt instruments contain restrictions on the amount of
indebtedness that we may incur. Accordingly, we could incur indebtedness to
the extent permitted by our debt agreements. If we became more highly
leveraged, our debt service payments would increase and our cash flow and our
ability to service our debt and make distributions to our shareholders
(including the payment of dividends to holders of the Class C preferred stock)
would be adversely affected.
Our management agreements could impair the sale or other disposition of our
hotels.
Under the terms of the management agreements, we generally may not sell,
lease or otherwise transfer the hotels unless the transferee assumes the
related management agreements and meets other specified conditions. Our
ability to finance, refinance or sell any of our hotel properties subject to a
management agreement may, depending upon the structure of such transactions,
require the manager's consent. If the manager did not consent, we would be
prohibited from financing, refinancing or selling the property without
breaching the management agreement.
The acquisition contracts relating to some hotels limit our ability to sell
or refinance those hotels.
For reasons relating to federal income tax considerations of the former
owners of some of our hotels, we have agreed to restrictions on selling some
hotels or repaying or refinancing the mortgage debt on those hotels for
varying periods depending on the hotel. We anticipate that, in specified
circumstances, we may agree to similar restrictions in connection with future
hotel acquisitions. As a result, even if it were in our best interests to sell
or refinance the mortgage debt on hotels for which we have agreed to such
restrictions, it may be difficult or impossible to do so during their
respective lock-out periods.
Our ground lease payments may increase faster than the revenues we receive
on the hotels.
As of February 1, 2001, we lease 46 of our hotels pursuant to ground leases
with third parties. These ground leases generally require increases in ground
rent payments every five years. Our ability to make distributions to
shareholders (including the payment of dividends to holders of the Class C
preferred stock) could be adversely affected to the extent that our revenues
do not increase at the same or a greater rate as the increases under the
ground leases. In addition, if we were to sell a hotel encumbered by a ground
lease, the buyer would have to assume the ground lease, which could result in
a lower sales price. Moreover, to the extent that such ground leases are not
renewed at their expiration, there could be a material adverse effect on our
business.
New acquisitions may fail to perform as expected or we may be unable to
make acquisitions on favorable terms.
We intend to acquire additional full-service hotels. Newly acquired
properties may fail to perform as expected, which could adversely affect our
financial condition. We may underestimate the costs necessary to bring an
acquired property up to standards established for its intended market
position. We expect to acquire hotels with cash from secured or unsecured
financings and proceeds from offerings of equity or debt, to the extent
available. We may not be in a position or have the opportunity in the future
to make suitable property acquisitions on favorable terms.
S-15
We may be unable to sell properties when appropriate because real estate
investments are illiquid.
Real estate investments generally cannot be sold quickly. We may not be
able to vary our portfolio promptly in response to economic or other
conditions. The inability to respond promptly to changes in the performance of
our investments could adversely affect our financial condition and ability to
service debt and make distributions to shareholders (including the payment of
dividends to holders of the Class C preferred stock). In addition, there are
limitations under the federal tax laws applicable to REITs and, as discussed
above, there are acquisition contracts that we entered into when we acquired
some of our properties that may limit our ability to recognize the full
economic benefit from a sale of our assets.
The reliability of market data included in this prospectus supplement is
uncertain.
The market data included in this prospectus supplement, including
information relating to our relative position in the industry, is based on
independent industry publications, other publicly available information,
studies performed for us by independent consultants or our management's good
faith beliefs. Although we believe that such independent sources are reliable,
the accuracy and completeness of such information is not guaranteed and has
not been independently verified.
Competition for acquisitions may result in increased prices for hotels.
Other major investors with significant capital compete with us for
attractive investment opportunities. These competitors include other REITs and
hotel companies, investment banking firms and private institutional investment
funds. This competition may increase prices for hotel properties, thereby
decreasing the potential return on our investments.
Our revenues and the value of our properties are subject to conditions
affecting the lodging industry.
If our assets do not generate income sufficient to pay our expenses,
service our debt and maintain our properties, we will be unable to make
distributions to our shareholders (including the payment of dividends to
holders of the Class C preferred stock). Our revenues and the value of our
properties are subject to conditions affecting the lodging industry. These
include:
. changes in the national, regional and local economic climate;
. local conditions such as an oversupply of hotel properties or a
reduction in demand for hotel rooms;
. the attractiveness of our hotels to consumers and competition from
comparable hotels;
. the quality, philosophy and performance of the managers of our hotels;
. changes in room rates and increases in operating costs due to inflation
and other factors; and
. the need to periodically repair and renovate our hotels.
If there is an adverse changes in any of these conditions, it could
adversely affect our financial performance and the value of our properties.
Our expenses may remain constant even if our revenue drops.
The expenses of owning real estate property are not necessarily reduced
when circumstances like market factors and competition cause a reduction in
income from the property. If a property is mortgaged and we are unable to meet
the mortgage payments, the lender could foreclose and take the property. Our
financial condition could be adversely affected by:
. interest rate levels;
. the availability of financing;
S-16
. the cost of compliance with government regulation, including zoning and
tax laws; and
. changes in governmental regulations, including those governing usage,
zoning and taxes.
We depend on key personnel.
We depend on the efforts of our executive officers and other key personnel.
While we believe that we could find replacements for these key personnel, the
loss of their services could have a significant adverse effect on our
operations. The operating partnership does not intend to obtain key-man life
insurance with respect to any of our personnel.
Partnership and other litigation judgments or settlements could have a
material adverse effect on our financial condition.
We could be subject to judgments or enter into settlements with respect to
litigation resulting from our investments in partnerships that could have a
material adverse effect on our financial condition.
We have made several investments in partnerships that own hotel properties.
Prior to the REIT conversion, we and several of our subsidiaries maintained
these investments and conducted the partnerships' businesses through general
and limited partnership interests in the partnerships. In connection with the
REIT conversion, most of these interests were either contributed to our non-
controlled subsidiaries or were acquired by the operating partnership. We and
our subsidiaries have been parties to various lawsuits brought by limited
partners in these partnerships relating to our management of the partnerships'
businesses and certain previous transactions entered into with or on behalf of
the partnerships, including the REIT conversion. We have settled many of these
lawsuits. However, we continue to be subject to several such lawsuits. While we
believe all of the lawsuits in which we are a defendant are without merit and
we are vigorously defending against such claims, we can give no assurance as to
the outcome of any of the lawsuits. Additionally, there can be no assurance
that we or our subsidiaries have not taken or will not, from time to time, take
an action, or have not caused or will not cause a partnership in which we are
the general partner to take an action, that will result in a lawsuit being
brought against us or our subsidiaries by limited partners in such partnership.
For a discussion of the settlements, see "Recent Developments" and for a
discussion of our ongoing lawsuits, see "Business--Legal Proceedings" and the
documents which are incorporated by reference in the accompanying prospectus.
In connection with the REIT conversion, the operating partnership has
assumed all liability arising under legal proceedings filed against us and will
indemnify us as to all such matters. If any current or future lawsuit were to
be determined adversely to us or a settlement involving a payment of a material
sum of money were to occur, there could be a material adverse effect on our
financial condition.
We may acquire hotel properties through joint ventures with third parties
that could result in conflicts.
Instead of purchasing hotel properties directly, we may invest as a co-
venturer. Joint venturers often share control over the operation of the joint
venture assets. For example, in December 2000 our non-controlled subsidiary,
Rockledge Hotel Properties, entered into the CBM Joint Venture with Marriott
International and their affiliates. Rockledge Hotel Properties has
approximately a 50% non-controlling interest in this entity, which owns 120
Courtyard by Marriott properties. Actions by a co-venturer could subject the
assets to additional risk, including:
. our co-venturers might have economic or business interests or goals that
are inconsistent with our interests or goals;
. our co-venturers may be in a position to take actions contrary to our
instructions or requests or contrary to our policies or objectives; or
. our co-venturers could go bankrupt, leaving us liable for its share of
joint venture liabilities.
S-17
Although we generally will seek to maintain sufficient control of any joint
venture to permit our objectives to be achieved, we might not be able to take
action without the approval of our joint venture partners. Also, our joint
venture partners could take actions binding on the joint venture without our
consent.
Environmental problems are possible and can be costly.
We believe that the properties that we own are in compliance in all material
respects with applicable environmental laws. Unidentified environmental
liabilities could arise, however, and could have a material adverse effect on
our financial condition and performance. Federal, state and local laws and
regulations relating to the protection of the environment may require a current
or previous owner or operator of real estate to investigate and clean up
hazardous or toxic substances or petroleum product releases at the property.
The owner or operator may have to pay a governmental entity or third parties
for property damage and for investigation and clean-up costs incurred by the
parties in connection with the contamination. These laws typically impose
clean-up responsibility and liability without regard to whether the owner or
operator knew of or caused the presence of the contaminants. Even if more than
one person may have been responsible for the contamination, each person covered
by the environmental laws may be held responsible for all of the clean-up costs
incurred. In addition, third parties may sue the owner or operator of a site
for damages and costs resulting from environmental contamination emanating from
that site. Environmental laws also govern the presence, maintenance and removal
of asbestos. These laws require that owners or operators of buildings
containing asbestos properly manage and maintain the asbestos, they notify and
train those who may come into contact with asbestos and they undertake special
precautions, including removal or other abatement, if asbestos would be
disturbed during renovation or demolition of a building. These laws may impose
fines and penalties on building owners or operators who fail to comply with
these requirements and may allow third parties to seek recovery from owners or
operators for personal injury associated with exposure to asbestos fibers.
Compliance with government regulations can be costly.
Our hotels are subject to various forms of regulation, including Title III
of the Americans with Disabilities Act (ADA), building codes and regulations
pertaining to fire safety. Compliance with those laws and regulations could
require substantial capital expenditures. These regulations may be changed from
time to time, or new regulations adopted, resulting in additional or unexpected
costs of compliance. In addition, noncompliance with the ADA could result in
the imposition of fines or an award of damages to private litigants. Any
increased costs to comply with applicable regulations or to pay fines or
damages could reduce the cash available for servicing debt and making
distributions to our shareholders (including the payment of dividends to
holders of the Class C preferred stock).
Some potential losses are not covered by insurance.
We carry comprehensive liability, fire, flood, extended coverage and rental
loss, for rental losses extending up to 12 months, insurance with respect to
all of our hotels. We believe the policy specifications and insured limits of
these policies are of the type customarily carried for similar hotels. Some
types of losses, such as from earthquakes and environmental hazards, however,
may be either uninsurable or too expensive to justify insuring against. Should
an uninsured loss or a loss in excess of insured limits occur, we could lose
all or a portion of the capital we have invested in a hotel, as well as the
anticipated future revenue from the hotel. In that event, we might nevertheless
remain obligated for any mortgage debt or other financial obligations related
to the property.
We depend on external sources of capital for future growth.
As with other REITs, but unlike corporations generally, our ability to
reduce our debt and finance our growth largely must be funded by external
sources of capital because we generally will have to distribute to our
shareholders 90% of our taxable income in order to qualify as a REIT, including
taxable income where we do not receive corresponding cash. For taxable years
prior to January 1, 2001, we were required to distribute 95%
S-18
of our taxable income to qualify as a REIT. Our access to external capital will
depend upon a number of factors, including general market conditions, the
market's perception of our growth potential, our current and potential future
earnings, cash distributions and the market price of our common stock.
Currently, our access to external capital has been limited to the extent that
our common stock is trading at what we believe is a discount to our estimated
net asset value.
Federal income tax risks
General.
We believe that we have been organized and have operated in such a manner so
as to qualify as a REIT under the Internal Revenue Code, commencing with our
taxable year beginning January 1, 1999. A REIT generally is not taxed at the
corporate level on income it currently distributes to its shareholders as long
as it distributes at least 90% of its taxable income, excluding net capital
gain. No assurance can be provided, however, that we qualify as a REIT or that
new legislation, Treasury Regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to our
qualification as a REIT or the federal income tax consequences of such
qualification.
Required distributions and payments.
To continue to qualify as a REIT, we currently are required each year to
distribute to our shareholders at least 90% of our taxable income, excluding
net capital gain (for our taxable years that ended prior to January 1, 2001, we
were required to distribute 95% of this amount to so qualify). Due to some
transactions entered into in years prior to the REIT conversion, we expect to
recognize substantial amounts of "phantom" income, which is taxable income that
is not matched by cash flow. In addition, we will be subject to a 4%
nondeductible excise tax on the amount, if any, by which our distributions in
any calendar year are less than the sum of 85% of our ordinary income and 95%
of our capital gain net income for that year and any undistributed taxable
income from prior periods. We intend to make distributions to our shareholders
to comply with the distribution requirement and to avoid the nondeductible
excise tax and will rely for this purpose on distributions from the operating
partnership. However, differences in timing between taxable income and cash
available for distribution due to, among other things, the cyclical nature of
the lodging industry and the fact that some taxable income will be "phantom"
income could require us to borrow funds or to issue additional equity to enable
us to meet the distribution requirement and, therefore, to maintain our REIT
status, and to avoid the nondeductible excise tax. The operating partnership is
required to pay, or reimburse us, as its general partner, for some taxes and
other liabilities and expenses that we incur, including all taxes and
liabilities attributable to periods and events prior to the REIT conversion. In
addition, because the REIT distribution requirements prevent us from retaining
earnings, we will generally be required to refinance debt that matures with
additional debt or equity. We cannot assure you that any of these sources of
funds, if available at all, would be sufficient to meet our distribution and
tax obligations.
Adverse consequences of our failure to qualify as a REIT.
If we fail to qualify as a REIT, we will be subject to federal income tax,
including any applicable alternative minimum tax, on our taxable income at
regular corporate rates. In addition, unless entitled to statutory relief, we
will not qualify as a REIT for the four taxable years following the year during
which REIT qualification is lost. The additional tax burden on us would
significantly reduce the cash available for distributions to our shareholders
(including the payment of dividends to holders of the Class C preferred stock)
and we would no longer be required by the rules applicable to REITs to make any
distributions to holders of our stock. Our failure to qualify as a REIT could
reduce materially the value of our stock and would cause any distributions to
shareholders that otherwise would have been subject to tax as capital gain
dividends to be taxable as ordinary income to the extent of our current and
accumulated earnings and profits, or E&P. However, in this case, subject to
limitations under the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction with respect to our
distributions. Our failure to qualify as a REIT also would result in a default
under our senior notes and our credit facility.
S-19
Our earnings and profits attributable to our non-REIT taxable years.
In order to qualify as a REIT, we cannot have at the end of any taxable year
any undistributed E&P that is attributable to one of our non-REIT taxable
years. A REIT has until the close of its first taxable year as a REIT in which
it has non-REIT E&P to distribute such accumulated E&P. We were required to
have distributed this E&P prior to the end of 1999, the first taxable year for
which our REIT election was effective. If we failed to do this, we will be
disqualified as a REIT at least for taxable year 1999. We believe that
distributions of non-REIT E&P that we made were sufficient to distribute all of
the non-REIT E&P as of December 31, 1999, but there could be uncertainties
relating to the estimate of our non-REIT E&P and the value of the Crestline
stock that we distributed to our shareholders. Therefore, we cannot guarantee
that we met this requirement.
Treatment of leases.
To qualify as a REIT, we must satisfy two gross income tests, under which
specified percentages of our gross income must be passive income, like rent.
For the rent paid pursuant to the leases, which constitutes substantially all
of our gross income, to qualify for purposes of the gross income tests, the
leases must be respected as true leases for federal income tax purposes and not
be treated as service contracts, joint ventures or some other type of
arrangement. In addition, the lessees must not be regarded as "related party
tenants," as defined in the Internal Revenue Code. We believe, taking into
account both the terms of the leases and the expectations that we and the
lessees have with respect to the leases, that the leases will be respected as
true leases for federal income tax purposes. There can be no assurance,
however, that the IRS will agree with this view. If the leases were not
respected as true leases for federal income tax purposes or if the lessees were
regarded as "related party tenants," we would not be able to satisfy either of
the two gross income tests applicable to REITs and we would lose our REIT
status. See "--Adverse consequences of our failure to qualify as a REIT" above.
For our taxable years beginning on and after January 1, 2001, as a result of
the REIT Modernization Act, we are permitted to lease our hotels to a
subsidiary of the operating partnership that is taxable as a corporation and
that elects to be treated as a "taxable REIT subsidiary." Accordingly,
effective January 1, 2001, HMT Lessee, a newly created, wholly owned subsidiary
of the operating partnership, directly or indirectly acquired all but one of
the full-service hotel leasehold interests formerly held by Crestline. So long
as HMT Lessee qualifies as a taxable REIT subsidiary of ours, it will not be
treated as a "related party tenant." We believe that, effective January 1,
2001, HMT Lessee will qualify to be treated as a taxable REIT subsidiary for
federal income tax purposes. We cannot assure you, however, that the IRS will
not challenge its status as a taxable REIT subsidiary for federal income tax
purposes, or that a court would not sustain such a challenge. If the IRS were
successful in disqualifying HMT Lessee from treatment as a taxable REIT
subsidiary, we would fail to meet the asset tests applicable to REITs and,
accordingly, cease to qualify as a REIT. See "--Adverse consequences of our
failure to qualify as a REIT" above.
Other tax liabilities; our substantial deferred and contingent tax
liabilities.
Notwithstanding our status as a REIT, we are subject, through our ownership
interest in the operating partnership, to certain federal, state and local
taxes on our income and property. In addition, we will be required to pay
federal tax at the regular maximum corporate rate, currently 35%, upon our
share of any "built-in gain" recognized as a result of any sale before January
1, 2009, by the operating partnership of assets, including the hotels, in which
interests were acquired by the operating partnership from our predecessor and
its subsidiaries as part of the REIT conversion. Built-in gain is the amount by
which an asset's fair market value exceeded our adjusted basis in the asset on
January 1, 1999, the first day of our first taxable year as a REIT. At the time
of the REIT conversion, we expected that we or a non-controlled subsidiary
likely would recognize substantial built-in gain and deferred tax liabilities
in the next ten years without any corresponding receipt of cash by us or the
operating partnership. We recognized a substantial amount of these built-in
gains and deferred tax liabilities in 1999. Accordingly, our potential tax
exposure on these gains and deferred liabilities for the future is
significantly less than it was at the time of our REIT conversion. The
operating partnership is
S-20
obligated under its partnership agreement to pay all such taxes incurred by us,
as well as any liabilities that the IRS may assert against us for corporate
income taxes for taxable years prior to the time we qualified as a REIT. The
non-controlled subsidiaries and any of our taxable REIT subsidiaries, including
HMT Lessee, are fully taxable as corporations and will pay federal and state
income tax on their net income at the applicable corporate rates.
The operating partnership's failure to qualify as a partnership.
We believe that the operating partnership qualifies as a partnership for
federal income tax purposes. No assurance can be provided, however, that the
IRS will not challenge its status as a partnership for federal income tax
purposes, or that a court would not sustain such a challenge. If the IRS were
successful in treating the operating partnership as a corporation for tax
purposes, we would fail the asset tests applicable to REITs and, accordingly,
cease to qualify as a REIT. See "--Adverse consequences of our failure to
qualify as a REIT" above. Also, the imposition of a corporate tax on the
operating partnership would reduce significantly the amount of cash available
for distribution to its limited partners, including us. Finally, the
classification of the operating partnership as a corporation would cause us to
recognize gain at least equal to our "negative capital accounts," and possibly
more, depending upon the circumstances.
REIT Modernization Act changes to the REIT asset tests.
Subject to the exceptions discussed in this paragraph, a REIT is prohibited
from owning securities in any one issuer if the value of those securities
exceeds 5% of the value of the REIT's total assets or the securities owned by
the REIT represent more than 10% of the issuer's outstanding voting securities
or, for taxable years beginning on or after January 1, 2001, more than 10% of
the value of the issuer's outstanding securities. For taxable years beginning
on or after January 1, 2001, as a result of the REIT Modernization Act, a REIT
is permitted to own securities of a subsidiary that exceed the 5% value test
and the 10% vote or value test if the subsidiary elects to be a "taxable REIT
subsidiary," which is fully taxable as a corporation. However, a REIT may not
own securities of taxable REIT subsidiaries that represent in the aggregate
more than 20% of the value of the REIT's total assets. Effective January 1,
2001, each of the non-controlled subsidiaries and HMT Lessee will elect to be
treated as a taxable REIT subsidiary.
Several provisions of the REIT Modernization Act ensure that a taxable REIT
subsidiary is subject to an appropriate level of federal income taxation. For
example, a taxable REIT subsidiary is limited in its ability to deduct interest
payments made to an affiliated REIT. In addition, the REIT has to pay a 100%
penalty tax on some payments that it receives if the economic arrangements
between the REIT and the taxable REIT subsidiary are not comparable to similar
arrangements between unrelated parties.
We may be required to pay a penalty tax upon the sale of a hotel.
The federal income tax provisions applicable to REITs provide that any gain
realized by a REIT on the sale of property held as inventory or other property
held primarily for sale to customers in the ordinary course of business is
treated as income from a "prohibited transaction" that is subject to a 100%
penalty tax. Under existing law, whether property, including hotels, is held as
inventory or primarily for sale to customers in the ordinary course of business
is a question of fact that depends upon all of the facts and circumstances with
respect to the particular transaction. The operating partnership intends that
it and its subsidiaries will hold the hotels for investment with a view to
long-term appreciation, to engage in the business of acquiring and owning
hotels and to make occasional sales of hotels as are consistent with the
operating partnership's investment objectives. We cannot assure you, however,
that the IRS might not contend that one or more of these sales is subject to
the 100% penalty tax, particularly if the hotels that are sold have been held
for a relatively short period of time.
S-21
USE OF PROCEEDS
We expect our net proceeds from the offering, after deducting the
underwriting discounts and commissions and estimated expenses payable by us,
will be approximately $125 million, or approximately $144 million if the over-
allotment option granted to the underwriters is exercised in full. We will
contribute the net proceeds from the offering to the operating partnership in
exchange for preferred units of the operating partnership which will have
economic terms substantially similar to those of the Class C preferred stock.
The operating partnership will use these net proceeds for general business
purposes, which may include:
. the repayment of indebtedness (including amounts outstanding under our bank
credit facility); and
. the acquisition or development of hotel properties.
Pending application of the net proceeds by the operating partnership for the
foregoing purposes, the operating partnership may invest the net proceeds in
short-term interest bearing investment grade securities.
S-22
CAPITALIZATION
In the following table we set forth our cash and cash equivalents and our
capitalization as of September 8, 2000 on an historical basis and on a pro
forma basis after giving effect to the transactions described under "Pro Forma
Financial Information" that have occurred or are expected to occur subsequent
to September 8, 2000, including the issuance and sale of the Class C preferred
stock offered hereby, as if such transactions had occurred as of September 8,
2000. The following table should be read in conjunction with our condensed
consolidated financial statements and the notes thereto as of September 8, 2000
incorporated by reference in the accompanying prospectus and "Pro Forma
Financial Information" beginning on page S-24.
As of September 8, 2000
-------------------------------
Pro
Historical Forma(1)
------------- ------------
(unaudited, in millions)
Cash and cash equivalents...... $ 188 $ 253
============ ============
Debt
Senior notes of the operating
partnership
7 7/8% Series A Senior
Notes due 2005............ 500 500
7 7/8% Series B Senior
Notes due 2008............ 1,194 (2) 1,194 (2)
8.45% Series C Senior Notes
due 2008.................. 499 (3) 499 (3)
8 3/8% Series E Senior
Notes due 2006............ 300 300
9 1/4% Series F Senior
Notes due 2007............ -- 250
Other senior notes........... 47 47
Mortgage debt................ 2,289 2,289
Bank credit facility(4)...... 176 190
Other debt................... 96 96
------------ ------------
Total debt..................... 5,101 5,365
------------ ------------
Minority interest(5)........... 431 411
Company-obligated mandatorily
redeemable convertible
preferred securities of a
subsidiary trust whose sole
assets are the convertible
subordinated debentures due
2026 (QUIPs).................. 475 475
Shareholders' equity
Class A Cumulative Redeemable
Preferred Stock (liquidation
preference $25.00 per share),
4.16 million shares issued
and outstanding............. 100 100
Class B Cumulative Redeemable
Preferred Stock (liquidation
preference $25.00 per
share), 4 million shares
issued and outstanding...... 96 96
Class C Cumulative Redeemable
Preferred Stock (liquidation
preference $25.00 per
share), 0 and 5.2 million
shares issued and
outstanding, historical and
pro forma, respectively..... -- 125
Common Stock, $.01 par value
per share, 750 million
shares authorized;
220.8 million shares and
232.2 million shares issued
and outstanding, historical
and pro forma, respectively
............................ 2 2
Additional paid-in
capital(5).................. 1,822 1,842
Accumulated other
comprehensive income........ 1 1
Retained deficit............. (774) (556)
------------ ------------
Total shareholders' equity..... 1,247 1,610
------------ ------------
Total capitalization........... $ 7,254 $ 7,861
============ ============
- --------
(1) Pro forma reflects the estimated net proceeds to us from this offering of
Class C preferred stock, acquisitions, dispositions, the payment for
settlement of certain litigation, the purchase of the Crestline leases and
other financing transactions that occurred subsequent to September 8, 2000.
(2) Amount is net of a $6 million discount.
(3) Amount is net of a $1 million discount.
(4) Represents outstanding borrowings under our bank credit facility at
September 8, 2000. At that date, an additional $599 million was available
under the revolving portion of the bank credit facility, subject to the
terms and conditions thereof. As of February 2, 2001 the outstanding
balance of the term loan portion of the bank credit facility was
$150 million with $90 million outstanding under the revolving portion of
the bank credit facility. $40 million of the amount drawn under the
revolving portion of the bank credit facility was used toward the purchase
of the Crestline leases and accordingly was included in the pro forma
adjustments, while the remaining $50 million was used for general corporate
purposes and therefore no pro forma adjustment was made.
(5) Represents (a) minority interest related to the operating partnership of
approximately 63.8 million and 51.3 million common and preferred operating
partnership units on a historical and pro forma basis, respectively, held
by unaffiliated parties which represents approximately 22% and 18% of the
operating partnership units outstanding on a historical and pro forma
basis, respectively, and (b) minority interests in consolidated investments
of the operating partnership of $133 million on both a historical and pro
forma basis. The result of the decrease in minority interest related to the
operating partnership is a corresponding increase in additional paid-in
capital.
S-23
PRO FORMA FINANCIAL INFORMATION
The pro forma financial information of Host Marriott set forth below is
based on the unaudited consolidated financial statements as of and for the
thirty-six weeks ended September 8, 2000 ("First Three Quarters 2000") and
audited consolidated financial statements for the fiscal year ended December
31, 1999.
The pro forma financial statements reflect the following transactions:
2001 Transactions:
. Offering of Class C preferred stock made hereby;
. The February 2001 exchange of 12.5 million units of the operating
partnership for Host Marriott common stock by The Blackstone Entities,
which increases our ownership of the operating partnership from 78% to
82%, thereby affecting the calculation of minority interest; and
. Acquisition by HMT Lessee, effective January 1, 2000, of the equity
interests in the lessees of 112 of our full-service hotels and the
leasehold interests in four of our full-service hotels from Crestline for
approximately $207 million, of which $40 million was funded through
additional borrowings under the bank credit facility. See "Recent
Developments" for a description of this transaction, including the
changes in our income statement presentation.
2000 Transactions:
. November cash payments of $81 million by the operating partnership in
settlement of certain litigation described under "Recent Developments".
The settlement of the litigation includes an investment in Rockledge
Hotel Properties of $26 million by the operating partnership, a loan to
Rockledge Hotel Properties of $39 million by the operating partnership
and the payment of $14 million owed to Rockledge Hotel Properties by the
operating partnership. Rockledge Hotel Properties used a portion of these
amounts to acquire approximately a 50% non-controlling interest in CBM
Joint Venture. The settlement of the litigation also includes a cash
payment of $2 million by the operating partnership to the plaintiffs in
one affiliated partnership;
. October issuance of $250 million of Series F senior notes and application
of a portion of the proceeds from the issuance to repay $26 million debt
outstanding under the bank credit facility;
. September cash payment of $31 million by the operating partnership in
settlement of litigation with plaintiffs in four affiliated partnerships
described under "Recent Developments" ($19 million of the $31 million
payment was paid to Rockledge Hotel Properties and then paid to the
plaintiffs);
. Repurchases of 4.9 million shares of our common stock, 0.4 million shares
of our convertible preferred securities and 0.3 million units of the
operating partnership for an aggregate consideration of approximately $62
million; and
. June modifications to our bank credit facility to extend the term for two
additional years and to permanently reduce the total line from $1.25
billion at origination to $775 million as of June 16, 2000, consisting of
a $150 million term loan and a $625 million revolver.
1999 Transactions:
. November 1999 issuance of Class B preferred stock;
. Fourth quarter repurchases of 5.8 million shares of our common stock, 1.1
million shares of our convertible preferred securities and 0.3 million
units of the operating partnership for an aggregate consideration of
approximately $89 million;
. Repayments of $225 million on a term loan entered into as part of our
bank credit facility;
. Third quarter prepayment on mortgages of two hotels;
. August 1999 issuance of Class A preferred stock;
. July 1999 refinancing of the mortgages on eight hotels;
S-24
. April 1999 refinancing of the mortgage on the New York Marriott Marquis
Hotel;
. February 1999 issuance of Series D senior notes and their subsequent
exchange for Series E senior notes, and the application of proceeds from
the issuance to repay, refinance, or acquire certain debt; and
. Disposition of five hotels during 1999.
All of the above transactions except for this offering of Class C preferred
stock, the acquisition of the leasehold interests from Crestline, the
litigation settlements, the exchange of 12.5 million operating partnership
units by the Blackstone Entities for 12.5 million shares of our common stock
and the issuance of Series F senior notes and the application of the proceeds
therefrom are already reflected in our condensed consolidated balance sheet as
of September 8, 2000 and, therefore, no pro forma adjustments for these
transactions were necessary in the unaudited pro forma balance sheet.
Our unaudited pro forma statements of operations reflect the transactions
described above for the fiscal year ended December 31, 1999 and the First Three
Quarters 2000 as if those transactions had been completed at the beginning of
the periods presented. Our unaudited pro forma statements of operations which
we present below include only income before extraordinary items.
Our unaudited pro forma financial statements do not purport to represent
what our results of operations or financial condition would actually have been
if these transactions had in fact occurred at the beginning of the periods
presented, or purport to project our results of operations or financial
condition for any future period.
Our unaudited pro forma financial statements are based upon available
information and upon assumptions and estimates, some of which are set forth in
the notes to the unaudited pro forma financial statements, that we believe are
reasonable under the circumstances. The unaudited pro forma financial
statements and accompanying notes should be read in conjunction with the
financial statements and notes thereto incorporated by reference in this
prospectus supplement.
S-25
UNAUDITED PRO FORMA BALANCE SHEET
September 8, 2000
(in millions, except share amounts)
(A) (B) (C,D) (E) (N)
Host Preferred Series F Blackstone
Marriott Stock Lease Litigation Debt OP Unit Pro
Historical Offering Purchase Settlements Issuance Exchange Forma
---------- --------- -------- ----------- -------- ---------- ------
ASSETS
Property and equipment,
net.................... $7,101 $-- $-- $-- $ -- $-- $7,101
Notes and other
receivables, net....... 172 -- (86) 39 -- -- 125
Due from hotel
managers............... -- -- 86 -- -- -- 86
Rent receivable......... 72 -- -- -- -- -- 72
Investments in and
advances to
affiliates............. 99 -- -- 26 -- -- 125
Other assets............ 556 -- 82 -- 5 -- 643
Cash and cash
equivalents ........... 188 125 (207) (31) 245 -- 253
40 (81) (26)
------ ---- ---- ---- ----- ---- ------
$8,188 $125 $(85) $(47) $ 224 $-- $8,405
====== ==== ==== ==== ===== ==== ======
LIABILITIES AND EQUITY
Debt.................... $5,101 $-- $40 $-- $ 250 $-- $5,365
(26)
Accounts payable and
accrued expenses....... 147 -- -- -- -- -- 147
Deferred income taxes... 48 -- -- -- -- -- 48
Deferred rent........... 366 -- (343) -- -- -- 23
Other liabilities....... 373 -- -- (16) -- -- 326
(31)
------ ---- ---- ---- ----- ---- ------
Total liabilities....... 6,035 -- (303) (47) 224 -- 5,909
Minority interests...... 431 -- -- -- -- (20) 411
Convertible preferred
securities of
subsidiary trust
(QUIPs)................ 475 -- -- -- -- -- 475
Equity
Class A preferred
stock.................. 100 -- -- -- -- -- 100
Class B preferred
stock.................. 96 -- -- -- -- -- 96
Class C preferred stock
(on a pro forma basis
5.2 million shares
outstanding)........... -- 125 -- -- -- -- 125
Common stock............ 2 -- -- -- -- -- 2
Additional paid-in
capital................ 1,822 -- -- -- -- 20 1,842
Accumulated other
comprehensive income... 1 -- -- -- -- -- 1
Retained deficit........ (774) -- (125) -- -- -- (556)
343
------ ---- ---- ---- ----- ---- ------
$8,188 $125 $(85) $(47) $ 224 $-- $8,405
====== ==== ==== ==== ===== ==== ======
See Notes to Unaudited Pro Forma Financial Statements.
S-26
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
For the fiscal year ended December 31, 1999
(in millions, except per share amounts)
(F) (G,H) (I) (J) (K) (N)
Debt
Host Issuances Blackstone
Marriott Lease Litigation and OP Unit OP Unit Pro
Historical Purchase Settlements Refinancings Dispositions Repurchases Exchange Forma
---------- -------- ----------- ------------ ------------ ----------- ---------- -------
REVENUE
Rental income........... $1,295 $(1,107) $-- $-- $(20) $-- $-- $ 168
Hotel revenues
Rooms.................. -- 2,267 -- -- -- -- -- 2,267
Food and beverage...... -- 1,129 -- -- -- -- -- 1,129
Other.................. -- 263 -- -- -- -- -- 263
------ ------- ---- ---- ---- ---- ---- -------
Total hotel revenues.... -- 3,659 -- -- -- -- -- 3,659
Net gains on property
transactions........... 28 -- -- -- (24) -- -- 4
Equity in earnings of
affiliates and other... 14 (23) 6 -- -- -- -- (3)
------ ------- ---- ---- ---- ---- ---- -------
Total revenues.......... 1,337 2,529 6 -- (44) -- -- 3,828
------ ------- ---- ---- ---- ---- ---- -------
OPERATING COSTS AND EXPENSES
Hotel property-level
costs and expenses
Rooms.................. -- (542) -- -- -- -- -- (542)
Food and beverage...... -- (832) -- -- -- -- -- (832)
Other.................. -- (129) -- -- -- -- -- (129)
Management fees........ -- (209) -- -- -- -- -- (209)
Other property-level
costs and expenses.... (553) (766) -- -- 8 -- -- (1,311)
------ ------- ---- ---- ---- ---- ---- -------
Total hotel property-
level costs and
expenses............... (553) (2,478) -- -- 8 -- -- (3,023)
------ ------- ---- ---- ---- ---- ---- -------
OPERATING PROFIT (LOSS)
BEFORE MINORITY
INTEREST, CORPORATE
EXPENSES, INTEREST AND
OTHER EXPENSES......... 784 51 6 -- (36) -- -- 805
Minority interest
benefit (expense)...... (82) (5) (1) 4 6 1 15 (62)
Dividends on convertible
preferred securities... (37) -- -- -- -- 5 -- (32)
Corporate expenses...... (37) -- -- -- -- -- -- (37)
Interest expense........ (430) -- -- (23) -- -- -- (453)
Interest income......... 39 (4) (2) -- -- (9) -- 24
Loss on litigation
settlement............. (40) -- -- -- -- -- -- (40)
Other................... (17) -- -- -- -- -- -- (17)
------ ------- ---- ---- ---- ---- ---- -------
Income (loss) before
income taxes........... 180 42 3 (19) (30) (3) 15 188
Benefit (provision) for
income taxes........... 16 (20) -- -- 5 -- -- 1
------ ------- ---- ---- ---- ---- ---- -------
Income (loss) before
extraordinary items.... $ 196 $ 22 $ 3 $(19) $(25) $ (3) $ 15 $ 189
====== ======= ==== ==== ==== ==== ==== =======
Less:
Dividends on preferred
stock (L).............. (6) (33)
Gain on repurchase of
convertible preferred
securities............. 11 11
------ -------
Income before
extraordinary items
available to common
shareholders........... $ 201 $ 167
====== =======
Basic earnings per share
before extraordinary
items available to
common shareholders
(M).................... $ .89 $ .73
====== =======
See Notes to Unaudited Pro Forma Financial Statements.
S-27
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
First Three Quarters 2000
(in millions, except per share amounts)
(F) (G,H) (I) (N)
Debt
Host Issuances Blackstone
Marriott Lease Litigation and OP Unit Pro
Historical Purchase Settlements Refinancings Exchange Forma
---------- -------- ----------- ------------ ---------- -------
REVENUE
Rental income........... $ 580 $ (478) $-- $-- $-- $ 102
Hotel property-level
revenues
Rooms.................. -- 1,671 -- -- -- 1,671
Food and beverage...... -- 798 -- -- -- 798
Other.................. -- 199 -- -- -- 199
----- ------- ---- ---- ---- -------
Total hotel property-
level revenues......... -- 2,668 -- -- -- 2,668
Net gains on property
transactions........... 4 -- -- -- -- 4
Equity in earnings of
affiliates and other... 13 (18) 7 -- -- 2
----- ------- ---- ---- ---- -------
Total revenues.......... 597 2,172 7 -- -- 2,776
----- ------- ---- ---- ---- -------
OPERATING COSTS AND
EXPENSES
Hotel property-level
costs and expenses
Rooms.................. -- (396) -- -- -- (396)
Food and beverages..... -- (594) -- -- -- (594)
Other.................. -- (97) -- -- -- (97)
Management fees........ -- (160) -- -- -- (160)
Other property-level
costs and expenses.... (415) (559) -- -- -- (974)
----- ------- ---- ---- ---- -------
Total hotel property-
level costs and
expenses............... (415) (1,806) -- -- -- (2,221)
----- ------- ---- ---- ---- -------
OPERATING PROFIT BEFORE
MINORITY INTEREST,
CORPORATE EXPENSES,
INTEREST AND OTHER
EXPENSES............... 182 366 7 -- -- 555
Minority interest
benefit (expense)...... 26 (63) (1) 4 (8) (42)
Dividends on convertible
preferred securities... (22) -- -- -- -- (22)
Corporate expenses...... (27) -- -- -- -- (27)
Interest expense........ (293) -- -- (20) -- (313)
Interest income......... 26 (3) (1) -- -- 22
Other................... (9) -- -- -- -- (9)
----- ------- ---- ---- ---- -------
Income (loss) before
income taxes........... (117) 300 5 (16) (8) 164
Provision for income
taxes.................. (7) (15) -- -- -- (22)
----- ------- ---- ---- ---- -------
Income (loss) before
extraordinary items.... $(124) $ 285 $ 5 $(16) $ (8) $ 142
===== ======= ==== ==== ==== =======
Less:
Dividends on preferred
stock (L).............. (15) (25)
Gain on repurchase of
convertible preferred
securities............. 4 4
----- -------
Income (loss) before
extraordinary items
available to common
shareholders........... $(135) $ 121
===== =======
Basic earnings (loss)
per share before
extraordinary items
available to common
shareholders (M)....... $(.61) $ .52
===== =======
See Notes to Unaudited Pro Forma Financial Statements.
S-28
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
A. Represents the adjustment to record the issuance of approximately 5.2
million shares of Class C preferred stock:
. Record net cash proceeds of $125 million.
. Record preferred stock of $125 million, net of $5 million of estimated
transaction costs.
B. Represents the adjustment to record the acquisition by HMT Lessee, a
wholly owned subsidiary of the operating partnership that will elect to be
treated as a taxable REIT subsidiary effective January 1, 2001, of the equity
interests in the lessees of 112 of our full-service hotels and the leasehold
interests in four of our full-service hotels from Crestline for approximately
$207 million:
. Record the transfer of working capital of approximately $86 million from
Crestline to HMT Lessee by increasing the amount due from hotel managers
and decreasing notes receivable.
. Record a deferred tax asset of approximately $82 million.
. Record the decrease in cash and cash equivalents of $207 million.
. Record the $40 million increase in cash and cash equivalents and
corresponding $40 million increase in debt, representing the additional
borrowings under the bank credit facility.
. Record the $125 million increase in retained deficit as a result of the
non-recurring loss on the acquisition.
. Record the decrease in deferred rent of $343 million, and a
corresponding increase in the retained deficit.
C. Represents the adjustment to record the November 2000 settlement of
certain litigation:
. Record an affiliate note receivable of $39 million for cash loaned to
Rockledge Hotel Properties by the operating partnership.
. Record the increase in investment in affiliates of $26 million.
. Record the decrease in cash of $81 million.
. Record the decrease in other liabilities of $16 million.
D. Represents the adjustment to record the September 2000 settlement of
litigation with plaintiffs from four partnerships:
. Record the decrease in cash and cash equivalents of $31 million.
. Record the decrease in other liabilities of $31 million.
E. Represents the adjustment to record the offering of Series F senior notes
and partial application of the proceeds therefrom to paydown the bank credit
facility:
. Record the issuance of $250 million of notes.
. Record the deferred financing fees of $5 million.
. Record net cash proceeds of $245 million.
. Record the $26 million use of cash to repay the revolver portion of the
bank credit facility.
F. Represents the adjustment for the acquisition by HMT Lessee discussed in
note B above. A non-recurring loss of approximately $125 million net of tax is
not presented in the pro forma results of operations:
. Reduce rental income by $1,107 million and $478 million for fiscal year
1999 and the First Three Quarters 2000, respectively.
S-29
. Reduce equity in earnings of affiliates by $23 million and $18 million
for fiscal year 1999 and the First Three Quarters 2000, respectively, to
reverse FF&E rental income paid by Crestline to a non-controlled
subsidiary of the operating partnership.
. Record hotel property revenues of $3,659 million and $2,668 million and
hotel operating costs and expenses of $2,478 million and $1,806 million
for fiscal year 1999 and the First Three Quarters 2000, respectively.
Historical rental income for the First Three Quarters 2000 does not
include approximately $343 million of contingent rent related to the 116
leased hotels, which has been deferred in accordance with Staff
Accounting Bulletin 101. The pro forma statements for the First Three
Quarters 2000 have been adjusted to reflect the impact of the reversal
of the contingent rent.
. Reduce interest income by $4 million and $3 million for fiscal year 1999
and the First Three Quarters 2000, respectively, to eliminate the
interest income earned on the $86 million in working capital notes
receivable due from Crestline.
. Record the minority interest effect representing Host Marriott's 18%
outside owners' share in the net income of HMT Lessee.
. Record a provision for federal and state income taxes applicable to HMT
Lessee of $20 million and $15 million, respectively, for fiscal year
1999 and the First Three Quarters, 2000, using an effective tax rate of
39.5%.
G. Represents the adjustment to record equity in earnings of affiliates of
$6 million and $7 million for fiscal year 1999 and the First Three Quarters
2000, respectively, as well as the minority interest effect related to the 18%
outside ownership of Host Marriott, associated with the operating partnership's
share of the earnings of CBM Joint Venture through Rockledge Hotel Properties.
H. Represents the adjustment to reduce interest income for the cash payment
of approximately $31 million made during September 2000 to settle litigation
with plaintiffs from four partnerships. The adjustment also reflects the
minority interest effect related to the 18% outside ownership of Host Marriott.
I. Represents the adjustment to record interest expense and related
amortization of deferred financing fees as a result of the $40 million net
borrowings under the bank credit facility to partially fund the acquisition of
the leases, the issuance of the Series F senior notes, the refinancing of the
New York Marriott Marquis, the prepayment or refinancing of the various
mortgages, and the paydowns and modifications to the bank credit facility. The
adjustment also reflects the minority interest effect related to the 18%
outside ownership of Host Marriott. The adjustments exclude net extraordinary
gains of $3 million for the First Three Quarters 2000 and $29 million for the
fiscal year ended December 31, 1999 resulting from the early extinguishments of
debt.
The following table represents the adjustment to decrease (increase)
interest expense, including amortization of deferred financing fees for the
respective periods (in millions):
First Three
Quarters Fiscal Year
2000 1999
----------- -----------
Issuance of Series F senior notes..................... $(17) $(24)
Series D senior notes and subsequent exchange for
Series E senior notes................................ -- (4)
Debt repaid, refinanced, or acquired with proceeds of
Series D senior notes................................ -- 4
Bank credit facility, as amended...................... (3) 7
New York Marriott Marquis refinancing................. -- (4)
$665 million mortgage refinancing for eight hotel
properties........................................... -- (6)
Prepayments on mortgages for two hotel properties..... -- 4
---- ----
$(20) $(23)
==== ====
S-30
J. Represents the adjustment to reduce the historical revenues and hotel-
level expenses for the 1999 sales of the Minneapolis/Bloomington Airport
Marriott, the Saddle Brook Marriott, Marriott's Grand Hotel and Golf Resort,
The Ritz-Carlton, Boston, and the El Paso Marriott, including the elimination
of the non-recurring gains and taxes on the sales totaling $24 million and $5
million, respectively, in fiscal year 1999. The adjustment also reflects the
minority interest effect related to the 18% outside ownership of Host Marriott.
K. Represents the adjustment to reduce interest income for $150 million in
cash payments made during 1999 and 2000 to repurchase common stock, units of
the operating partnership and convertible preferred securities in connection
with our stock buyback plan, and to reduce dividends on convertible preferred
securities by $5 million for fiscal year 1999 related to the 1.5 million shares
of convertible preferred securities repurchased during 1999 and 2000. The
adjustment also reflects the minority interest effect related to the 18%
outside ownership of Host Marriott.
L. Represents the adjustment to record dividends on 4.16 million shares of
Class A cumulative redeemable preferred stock and 4 million shares of Class B
cumulative redeemable preferred stock, each of which were issued in 1999, and
5.2 million shares of Class C cumulative redeemable preferred stock on a pro
forma basis. Holders of the shares of Class A preferred stock, Class B
preferred stock and Class C preferred stock are entitled to receive a cash
dividend of $2.50 per share annually.
M. The historical basic weighted average shares outstanding was 227.1
million and 220.7 million for fiscal year 1999 and the First Three Quarters
2000, respectively. On a pro forma basis, basic weighted average shares
outstanding for fiscal year 1999 and the First Three Quarters 2000 would be
229.2 million and 232.2 million, respectively, to reflect repurchases in
conjunction with the stock repurchase plan.
N. Represents the conversion of 12.5 million units of the operating
partnership by the Blackstone Entities for common stock of Host Marriott and
the reduction of $20 million in minority interest liability and corresponding
increase in additional paid-in capital. This conversion also resulted in a
decrease in minority interest expense of $15 million for fiscal year 1999 and a
decrease of $8 million in minority interest benefit for the First Three
Quarters 2000.
S-31
BUSINESS
The disclosure set forth below amends and supplements the discussion of our
business contained in the documents which are incorporated by reference into
the accompanying prospectus.
We are a self-managed and self-administered real estate investment trust, or
"REIT," owning full service hotel properties. We were formed as a Maryland
corporation in 1998, under the name HMC Merger Corporation, as a wholly owned
subsidiary of Host Marriott Corporation, a Delaware corporation, in connection
with its efforts to reorganize its business operations to qualify as a REIT for
federal income tax purposes. As part of this reorganization, which we refer to
as the REIT conversion, and which is described below in more detail, on
December 29, 1998, we merged with Host Marriott and changed our name to Host
Marriott Corporation. As a result, we have succeeded to the hotel ownership
business formerly conducted by Host Marriott. We conduct our business as an
umbrella partnership REIT, or UPREIT, through Host Marriott, L.P., or the
"operating partnership", a Delaware limited partnership, of which we are the
sole general partner and in which we held approximately 78% of the outstanding
partnership interests at September 8, 2000. On February 7, 2001, affiliates of
The Blackstone Group converted 12.5 million units of the operating partnership
to common stock and immediately sold the 12.5 million shares of common stock in
an underwritten public offering. As a result, we now own approximately 82% of
the operating partnership and we have an additional 12.5 million shares of
common stock outstanding. See the section entitled "Recent Developments" for a
more detailed discussion of this transaction.
Together with the operating partnership, we were formed primarily to
continue, in an UPREIT structure, the full service hotel ownership business
formerly conducted by Host Marriott and its subsidiaries. Our primary business
objective is to provide superior total returns to our shareholders through a
combination of dividends, appreciation in net asset value per share, and growth
in funds from operations per share, or FFO, as defined by the National
Association of Real Estate Investment Trusts (i.e., net income computed in
accordance with generally accepted accounting principles, excluding gains or
losses from debt restructuring and sales of properties, plus real estate-
related depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures), by focusing on aggressive asset management
and disciplined capital allocation. In addition, we endeavor to:
. maximize the value of our existing portfolio through an aggressive asset
management program which focuses on selectively improving and expanding
our hotels;
. acquire additional existing and newly developed upscale and luxury full
service hotels in targeted markets primarily focusing on downtown hotels
in core business districts in major metropolitan markets and select
airport and resort/convention locations;
. complete our current development and expansion program, and selectively
develop and construct new upscale and luxury full service hotels;
. regenerate capital through opportunistic asset sales and selectively
dispose of noncore assets;
. repurchase our stock under our buyback program as market conditions
permit; and
. opportunistically pursue other real estate investments.
Our operations are conducted solely through the operating partnership and
its subsidiaries. As of February 1, 2001, we own 122 full-service hotels,
containing approximately 58,000 rooms, located throughout the United States and
Canada. The hotels are generally operated under the Marriott, Ritz-Carlton,
Four Seasons, Hilton, Hyatt and Swissotel brand names. These brand names are
among the most respected and widely recognized brand names in the lodging
industry.
We are the sole general partner of the operating partnership and manage all
aspects of the business of the operating partnership. This includes decisions
with respect to:
. sales and purchases of hotels;
. the financing of the hotels;
S-32
. the leasing of the hotels; and
. capital expenditures for the hotels subject to the terms of the leases
and the management agreements.
We are managed by our Board of Directors and have no employees who are not
also employees of the operating partnership.
Due to certain tax laws restricting REITs from deriving revenues directly
from the operations of hotels, our hotels were leased by the operating
partnership and its subsidiaries to third party lessees, including primarily
Crestline and its subsidiaries, and managed on behalf of the lessees by
nationally recognized hotel operators such as Marriott International, Four
Seasons, Hyatt, Interstate and other companies.
The REIT Modernization Act, which was enacted in December 1999 and is
discussed in more detail below, amended the tax laws to permit REITs, effective
January 1, 2001, (1) to lease hotels to a subsidiary that qualifies as a
taxable REIT subsidiary, which is a subsidiary of the REIT that is subject to
regular corporate tax, and (2) to own all of the voting stock of such taxable
REIT subsidiary, although the hotels must be operated on behalf of the taxable
REIT subsidiary by managers that are unrelated third parties. Accordingly,
effective January 1, 2001, a newly created wholly owned subsidiary of the
operating partnership, HMT Lessee, that will elect to be treated as a taxable
REIT subsidiary effective January 1, 2001, purchased the equity interests in
the lessees of 112 of our full-service hotels and the leasehold interests in
four of our full-service hotels from Crestline. See "Recent Developments" for a
description of the acquisition of the leasehold interests from Crestline.
The economic trends affecting the hotel industry and the overall economy
will be a major factor in generating growth in revenues, and the abilities of
the managers will also have a material impact on future hotel level sales and
operating profit growth. Our hotel properties may be impacted by inflation
through its effect on increasing costs, as well as recent increases in energy
costs. Unlike other real estate, hotels have the ability to change room rates
on a daily basis, so the impact of higher inflation often can be passed on to
customers, particularly in the transient segment. However, an economic downturn
may affect the managers' ability to increase room rates. Through our strategic
restructuring of our balance sheet, nearly 95% of our debt bears interest at
fixed rates, which mitigates the impact of rising interest rates.
We endeavor to selectively acquire upscale and luxury full-service hotel
lodging properties that complement our existing portfolio of high-end hotels.
Based upon data provided by Smith Travel Research, we believe that our full-
service hotels outperform the industry's average occupancy rate by a
significant margin, averaging 79.5% and 79.3% occupancy for our comparable
properties for the First Three Quarters 2000 and 1999, respectively, compared
to a 72.1% and 70.3% average occupancy for our competitive set for the same
periods in 2000 and 1999, respectively. Our "comparable properties" consist of
114 hotels, owned directly or indirectly by us for the First Three Quarters
2000 and 1999, respectively, net of one property that sustained substantial
fire damage during 2000, two properties where significant expansion at the
hotels affected operations, five properties where reported results were
affected by a change in reporting period, and the Tampa Waterside Marriott,
which opened in February 2000. Our "competitive set" refers to hotels in the
upscale and luxury full-service segment of the lodging industry, the segment
which is most representative of our full service hotels, and consists of Crowne
Plaza; Doubletree; Hyatt; Hilton; Radisson; Renaissance; Sheraton; Westin; and
Wyndham.
In addition to external growth generated by new acquisitions, we intend to
aggressively manage our existing assets by carefully and periodically reviewing
our portfolio to identify opportunities to selectively enhance operating
performance through major capital improvements.
In 2000, the relatively high occupancy rates of our hotels, along with
increased demand for full-service hotel rooms, allowed the managers of our
hotels to increase average daily room rates by selectively raising room rates
for certain types of bookings and by minimizing, in specified cases, discounted
group business, replacing it with higher-rate group and transient business. As
a result, on a comparable basis, room revenue per available room ("REVPAR") for
our full-service properties increased approximately 6.6% in the First Three
S-33
Quarters 2000 over the comparable period in 1999. There can be no assurance
that our managers will be able to continue using this mix of business to
increase average daily room rates.
Business Strategy
Our primary business objective is to provide superior total returns to our
shareholders through a combination of dividends, appreciation in net asset
value per share, and growth in FFO per share. In order to achieve this
objective we employ the following strategies:
. acquire existing upscale and luxury full-service hotels as market
conditions permit, including Marriott and Ritz-Carlton hotels and other
hotels operated by leading management companies such as Four Seasons,
Hyatt, and Hilton which satisfy our investment criteria--these
acquisitions may be completed through various means including
acquisitions in which we are already a partner, public and private
portfolio transactions, and entering into joint ventures when we believe
our return on investment will be maximized by doing so;
. complete the development of our existing pipeline, including the 295-room
Ritz-Carlton, Naples, Golf Resort, the 50,000 square-foot spa also at the
Ritz-Carlton, Naples, and the 200-room expansion of the Memphis Marriott,
as well as selectively expand existing properties and develop new upscale
and luxury full-service hotels, operated by leading management companies,
which satisfy our investment criteria and employ transaction structures
which mitigate our risk;
. maximize the value of our existing portfolio through aggressive asset
management, including completing selective capital improvements and
expansions that are designed to increase gross hotel sales or improve
operations; and
. regenerate capital through opportunistic asset sales and selectively
dispose of noncore assets, including older assets with significant
capital needs, assets that are at risk given potential new supply, or
assets in slower-growth markets.
HMT Lessee's acquisition of the leasehold interests from Crestline
simplifies our corporate structure, enables us to better control our portfolio
of hotels, and is expected to be accretive to future earnings and cash flows,
as the lessees have recorded substantial earnings and cash flow in the First
Three Quarters 2000 and Full Year 1999, although there can be no guarantee that
such trends will continue. For a discussion of the risks related to HMT
Lessee's acquisition of the leasehold interests, see "Risk Factors--A reduction
in hotel revenues would directly affect our earnings and cash flows".
Competition for acquisitions has increased and the availability of suitable
acquisition candidates that complement our portfolio of high-end hotels has
been limited recently due to market conditions. Most products in the market
consist of smaller, suburban hotels, and, as many luxury hotel owners are
choosing to hold on to their assets at this time, competition for the limited
number of available properties in the top markets has caused them to be
generally not competitively priced. However, we believe that acquisitions that
meet our stringent criteria will provide the highest and best use of our
capital as they become available.
Our acquisition strategy focuses on the upscale and luxury full-service
segments of the market, which we believe will continue to offer opportunities
over time to acquire assets at attractive multiples of cash flow and at
discounts to replacement value. Our acquisition criteria continues to focus on:
. properties in difficult to duplicate locations with high costs to
prospective competitors, such as hotels located in urban, airport and
resort/convention locations;
. premium brand names, such as Marriott, Ritz-Carlton, Four Seasons,
Hilton, and Hyatts;
. underperforming hotels which can be improved by conversion to high
quality brands; and
. properties which are operated by leading management companies such as
Marriott, Ritz-Carlton, Four Seasons, Hilton, and Hyatt.
S-34
In recent years, we have increased our pool of potential acquisition
candidates to include select non-Marriott and non-Ritz-Carlton branded hotels
which offer long-term growth potential, have high quality managers and are
consistent with the overall quality of our portfolio. For example, in December
1998 we acquired a portfolio of hotels consisting of two Ritz-Carlton
properties, two Four Seasons properties, one Grand Hyatt property, three Hyatt
Regency properties and four Swissotel properties.
Our current portfolio of hotels are operated under the Marriott, Ritz-
Carlton, Four Seasons, Hilton, Hyatt and Swissotel brand names. In general,
based upon data provided by Smith Travel Research, we believe that these
premium brands have consistently outperformed the industry. Demonstrating the
strength of our portfolio, our comparable properties, as previously defined on
page S-33, generated a 30% and 32% REVPAR premium over our competitive set for
the First Three Quarters 2000 and 1999, respectively.
Based on the strength of our portfolio of premium hotels, management
anticipates that any additional full- service properties acquired in the future
and converted from other brands to one of our premium brands should achieve
increases in occupancy rates and average room rates as the properties begin to
benefit from brand name recognition, national reservation systems and group
sales organizations. Since the beginning of fiscal year 1994, we have acquired
15 hotels that we have converted to premium brands.
We believe we are well qualified to pursue our acquisition and development
strategy. Management has extensive experience in acquiring and financing
lodging properties and believes its industry knowledge, relationships and
access to market information provide a competitive advantage with respect to
identifying, evaluating and acquiring hotel assets.
Our asset management team, which is comprised of individuals with
exceptional industry knowledge and relationships, focuses on maximizing the
value of our existing portfolio through:
. monitoring property and brand performance;
. pursuing expansion and repositioning opportunities;
. overseeing capital expenditure budgets and forecasts;
. assessing return on investment expenditure opportunities; and
. analyzing competitive supply conditions in each market.
In September 1999, our board of directors approved the repurchase, from time
to time on the open market and/or in privately negotiated transactions, of up
to 22 million of the outstanding shares of our common stock, operating
partnership units or preferred securities convertible into a like number of
shares of common stock. Through March 2000, we spent, in the aggregate,
approximately $150 million, $62 million of which we spent in the first three
months of 2000, on repurchases for a total reduction of 16.2 million equivalent
shares on a fully diluted basis. We have not made any repurchases since that
time, but will continue to evaluate the stock repurchase program based on
changes in market conditions and the stock price.
The REIT Conversion and Other Related Transactions
During 1998, Host Marriott and its subsidiaries and affiliates consummated a
series of transactions intended to enable us to qualify as a REIT for federal
income tax purposes. As a result of these transactions, the hotels formerly
owned by Host Marriott and its subsidiaries and other affiliates are now owned
by the operating partnership and its subsidiaries; the operating partnership
and its subsidiaries leased substantially all of these hotels to Crestline
Capital Corporation, and Marriott International and other hotel operators
conducted the day to day management of the hotels pursuant to management
agreements with Crestline. We have elected to be treated as a REIT for federal
income tax purposes effective January 1, 1999. The important transactions
comprising the REIT conversion are summarized below.
S-35
As discussed above during 1998, Host Marriott reorganized its hotels and
certain other assets so that they were owned by the operating partnership and
its subsidiaries. Host Marriott and its subsidiaries received a number of units
of the operating partnership equal to the number of then outstanding shares of
Host Marriott common stock, and the operating partnership and its subsidiaries
assumed substantially all of the liabilities of Host Marriott and its
subsidiaries. As a result of this reorganization and the related transactions
described below, we are the sole general partner in the operating partnership
and as of September 8, 2000 held approximately 78% of the outstanding units of
the operating partnership. The operating partnership and its subsidiaries
conduct our hotel ownership business. Units of the operating partnership owned
by holders other than us are redeemable at the option of the holder, generally
commencing one year after the issuance of their units of the operating
partnership. Upon redemption of a unit of the operating partnership, the holder
would receive from the operating partnership cash in an amount equal to the
market value of one share of our common stock. However, in lieu of a cash
redemption by the operating partnership, we have the right to acquire any unit
of the operating partnership offered for redemption directly from the holder
thereof in exchange for either one share of our common stock or cash in an
amount equal to the market value of one share of our common stock. On February
7, 2001, we issued to the Blackstone Entities 12.5 million shares of our common
stock upon surrender of 12.5 million units of the operating partnership for
redemption. As a result, our ownership of the operating partnership increased
from 78% to approximately 82%. The Blackstone Entities immediately sold these
shares in an underwritten public offering.
In connection with the REIT conversion, two taxable corporations, Rockledge
Hotel Properties and Fernwood Hotel Assets, were formed in which the operating
partnership owns approximately 95% of the economic interest but none of the
voting interest. We refer to these two subsidiaries as the non-controlled
subsidiaries. The non-controlled subsidiaries hold various assets which were
originally contributed by Host Marriott and its subsidiaries to the operating
partnership, but whose direct ownership by the operating partnership or its
other subsidiaries generally would jeopardize our status as a REIT and the
operating partnership's status as a partnership for federal income tax
purposes. These assets primarily consist of interests in partnerships or other
interests in three hotels which are not leased, and specified furniture,
fixtures and equipment--also known as FF&E--used in the hotels. For example,
Rockledge Hotel Properties owns approximately a 50% non-controlling interest in
the CBM Joint Venture which owns 120 Courtyard by Marriott properties. The
operating partnership has no control over the operation or management of the
hotels or other assets owned by the non-controlled subsidiaries. The Host
Marriott Statutory Employee/Charitable Trust acquired all of the voting common
stock of each non-controlled subsidiary, representing, in each case, the
remaining approximately 5% of the total economic interests in each non-
controlled subsidiary. The beneficiaries of the Employee/Charitable Trust are
(1) a trust formed for the benefit of specified employees of the operating
partnership and (2) the J. Willard and Alice S. Marriott Foundation. Effective
January 1, 2001, we are able to own all of the voting stock of the non-
controlled subsidiaries without adversely affecting our REIT status so long as
they elect to be taxable REIT subsidiaries. We are considering pursuing a
transaction with the Host Marriott Statutory Employee/Charitable Trust that
would allow us to acquire control of the non-controlled subsidiaries, although
we have not reached any such agreement and cannot assure you that any such
agreement will be reached or that a transaction will be consummated. Whether or
not such an agreement is reached, effective January 1, 2001, each of the non-
controlled subsidiaries will elect to be treated as a taxable REIT subsidiary.
In December 1999, the REIT Modernization Act was enacted (with most
provisions effective for taxable years beginning after December 31, 2000),
which significantly amends the REIT laws applicable to us. Under the applicable
sections of the Internal Revenue Code, as amended by the REIT Modernization
Act, and the corresponding regulations that govern the federal income tax
treatment of REITs and their shareholders, a REIT must meet certain tests
regarding the nature of its income and assets, as described, in part, below and
in more detail under "Federal Income Tax Considerations".
Prior to the enactment of the REIT Modernization Act, REITs were restricted
in their ability to derive revenues directly from the operation of hotels.
However, they were permitted to derive rental income by leasing hotels.
Therefore, the operating partnership and its subsidiaries leased virtually all
of their hotel properties to third party lessees during 1999 and 2000,
primarily Crestline and its subsidiaries. Beginning January 1, 2001, a
S-36
REIT is permitted to own up to 100% of the voting stock of one or more taxable
REIT subsidiaries subject to limitations on the value of those subsidiaries.
Rents received from such subsidiaries will not be disqualified from being
"rents from real property" by reason of the REIT's (or, in our case, the
operating partnership's) ownership interest in the subsidiary so long as the
properties are operated on behalf of the taxable REIT subsidiary by an
"eligible independent contractor." This enables the operating partnership to
lease its hotels to wholly owned taxable REIT subsidiaries if the hotels are
operated and managed on behalf of such subsidiaries by an independent third
party. Under the REIT Modernization Act, taxable REIT subsidiaries are subject
to federal income tax.
As a result of the passage of the REIT Modernization Act, effective January
1, 2001, HMT Lessee acquired the equity interests in the lessees of 112 of our
full-service hotels and the leasehold interests in four of our full-service
hotels from Crestline. In connection with this acquisition, our non-competition
agreement with Crestline relating to activities with respect to senior living
communities was terminated effective January 1, 2001. For a description of the
acquisition of the leasehold interests from Crestline, see "Recent
Developments".
Hotel Lodging Industry
The lodging industry posted moderate gains in the First Three Quarters 2000
and Full Year 1999 as higher average daily rates drove strong increases in
REVPAR, which measures daily room revenues generated on a per room basis. This
does not include food and beverage or other ancillary revenues generated by the
property. REVPAR represents the product of the average daily room rate charged
and the average daily occupancy achieved. Previously, the upper-upscale sector
of the lodging industry benefited from a favorable supply/demand imbalance,
driven in part by low construction levels combined with high gross domestic
product, or GDP, growth. However, during 1998 through First Three Quarters 2000
supply moderately outpaced demand, causing slight declines in occupancy rates
in the sector in which we operate. According to Smith Travel Research, supply
in our brands' competitive set consisting of Crowne Plaza; Doubletree; Hyatt;
Hilton; Radisson; Renaissance; Sheraton; Westin; and Wyndham increased 1.5% and
1.1% for the years ended December 31, 1999 and 1998, respectively, while demand
in our competitive set increased 0.9% and decreased 0.9% for the same periods,
respectively. During the First Three Quarters 2000, demand in our competitive
set increased 4.6%, moderately exceeding supply growth of 2.0%. At the same
time, occupancy increased 2.6% in our competitive set for the First Three
Quarters 2000 versus the same period one year ago.
The current amount of excess supply growth in the upper-upscale and luxury
portions of the full-service segments of the lodging industry is beginning to
moderate and has been much less severe than that experienced in the lodging
industry in other economic downturns, in part because of the greater financial
discipline and lending practices imposed by financial institutions and public
markets today relative to those during the late 1980's.
Our hotels have outperformed both the industry as a whole and the upper-
upscale and luxury full-service segments. The attractive locations of our
hotels, the limited availability of new building sites for new construction of
competing full service hotels, and the lack of availability of financing for
new full service hotels has allowed us to maintain REVPAR and average daily
rate premiums over our competitors in these service segments. For our
comparable properties as defined on page S-33, the increase in average daily
rate premiums helped generate a strong increase in REVPAR of 6.6% for the First
Three Quarters. Furthermore, because our lodging operations have a high fixed-
cost component, increases in REVPAR generally yield greater percentage
increases in our earnings and cash flows. As a result of HMT Lessee's
acquisition of the leasehold interests from Crestline with respect to 116 of
our full-service hotels, any change in earnings and cash flow levels at those
properties will have a direct effect on our consolidated earnings and cash
flows.
The relative balance between supply and demand growth may be influenced by a
number of factors including growth of the economy, interest rates, unique local
considerations and the relatively long lead time to develop urban, convention
and resort hotels. We believe that growth in room supply in the upper-upscale
sector
S-37
in which we operate will continue to exceed growth in room demand through 2001.
However, we believe that during 2001 and 2002 supply growth will begin to
decrease as the lack of availability of development financing slows new
construction. We believe that demand growth will begin to increase during 2001
and 2002. However, some economists are predicting an economic slowdown in 2001,
which could lead to substantial decreases in demand. There can be no assurance
that growth in supply will decrease, that growth in demand will increase or
that REVPAR and earnings and cash flows will continue to improve.
Hotel Lodging Properties
Our lodging portfolio, as of February 1, 2001, consists of 122 upscale and
luxury full-service hotels containing approximately 58,000 rooms. Our hotel
lodging properties represent quality upscale and luxury assets in the full
service segment. Our hotel properties are currently operated under various
premium brands including Marriott, Ritz-Carlton, Four Seasons, Hilton, Hyatt
and Swissotel.
Our hotels average approximately 478 rooms. Thirteen of our hotels have more
than 750 rooms. Hotel facilities typically include meeting and banquet
facilities, a variety of restaurants and lounges, swimming pools, gift shops
and parking facilities. Our hotels primarily serve business and pleasure
travelers and group meetings at locations in urban, airport, resort/convention
and suburban locations throughout the United States. The properties are
generally well situated in locations where there are significant barriers to
entry by competitors including downtown areas of major metropolitan cities, at
airports and resort/convention locations where there are limited or no
development sites. The average age of the properties is 16.7 years, although
many of the properties have had substantial renovations or major additions.
To maintain the overall quality of our lodging properties, each property
undergoes refurbishments and capital improvements on a regularly scheduled
basis. Typically, refurbishing has been provided at intervals of five years,
based on an annual review of the condition of each property. For fiscal years
1998, 1999 and First Three Quarters 2000 we spent $165 million, $197 million
and $155 million, respectively, on capital improvements to existing properties.
As a result of these expenditures, we expect to maintain high quality rooms,
restaurants and meeting facilities at our properties.
In addition to acquiring and maintaining superior assets, a key part of our
strategy is to have the hotels managed by leading management companies. As of
February 1, 2001, 100 of our 122 hotel properties were managed by subsidiaries
of Marriott International as Marriott or Ritz-Carlton brand hotels and an
additional nine hotels are part of Marriott International's full-service hotel
system through franchise agreements. The remaining hotels are managed by
leading management companies including Four Seasons, Hilton and Hyatt. Our
properties have reported annual increases in REVPAR since 1993. Based upon data
provided by Smith Travel Research, our comparable properties, as previously
defined, have more than a 7 and 10 percentage point occupancy premium and an
approximate 30% and 32% REVPAR premium over the competitive set for First Three
Quarters 2000 and fiscal year 1999, respectively.
S-38
The chart below presents performance information for our comparable
properties:
First Three
Quarters Year Ended
---------------- ----------------
2000 1999 1999 1998
------- ------- ------- -------
Comparable Full-Service Hotels(1)
Number of properties........................ 114 114 84 84
Number of rooms............................. 52,426 52,426 40,868 40,868
Average daily rate.......................... $156.40 $147.13 $146.74 $141.41
Occupancy percentage........................ 79.5% 77.3% 78.5% 78.2%
REVPAR...................................... $124.31 $116.64 $115.13 $110.57
REVPAR % change............................. 6.6% -- 4.1% --
- --------
(1) Consists of 114 and 84 properties owned, directly or indirectly, by us for
the entire First Three Quarters of 2000 and 1999, and the 1999 and 1998
fiscal years, respectively, net of five properties where reported results
were affected by a change in reporting period for the First Three Quarters
2000 and 1999, and net of two properties where significant expansion at the
hotels affected operations for the 1999 and 1998 fiscal years. These
properties, for the respective periods, represent the "comparable
properties."
The chart below presents performance information for our entire portfolio
of full-service hotels:
First Three
Quarters Year Ended
---------------- -------------------------
2000(1) 1999(2) 1999(2) 1998(3) 1997
------- ------- ------- ------- -------
Number of properties............... 122 124 121 126 95
Number of rooms.................... 58,369 57,966 57,086 58,445 45,718
Average daily rate................. $155.22 $146.79 $149.51 $140.36 $133.74
Occupancy percentage............... 79.0% 79.2% 77.7% 77.7% 78.4%
REVPAR............................. $122.64 $116.19 $116.13 $109.06 $104.84
- --------
(1) Number of properties and rooms is as of September 8, 2000 and includes the
Tampa Waterside Marriott (717 rooms), which opened in February 2000.
(2) The property statistics and operating results include operations for the
Minneapolis/Bloomington Marriott, the Saddle Brook Marriott, Marriott's
Grand Hotel Resort and Golf Club, The Ritz-Carlton, Boston, and the El Paso
Marriott, which were sold at various times throughout 1999, through the
date of sale.
(3) Number of properties and rooms is as of December 31, 1998 and includes 25
properties (9,965 rooms) acquired in that month.
S-39
The following tables present performance information for our entire
portfolio by geographic region:
As of September 8, 2000 First Three Quarters 2000(1)
------------------------ --------------------------------------
Number Average Number Average Average
Geographic Region of Hotels of Guest Rooms Occupancy Daily Rate REVPAR
- ----------------- --------- -------------- ----------- ------------ -----------
Atlanta................. 11 487 74.0% $ 158.29 $ 117.12
Florida................. 13 584 77.8 154.03 119.81
Mid-Atlantic............ 17 364 77.1 142.41 109.84
Midwest................. 14 358 76.5 137.17 104.95
New York................ 10 719 83.7 209.08 174.98
Northeast............... 11 390 77.3 135.20 104.56
South Central........... 19 497 78.7 125.74 98.93
Western................. 27 492 81.8 163.20 133.42
---
Average--All regions.... 122 478 79.0 155.22 122.64
===
As of December 31, 1999 Year Ended December 31, 1999(2)
------------------------ --------------------------------------
Number Average Number Average Average
Geographic Region of Hotels of Guest Rooms Occupancy Daily Rate REVPAR
- ----------------- --------- -------------- ----------- ------------ -----------
Atlanta................. 11 486 74.7% $ 148.78 $ 111.12
Florida................. 12 531 77.1 149.75 115.51
Mid-Atlantic............ 17 364 75.8 132.80 100.69
Midwest................. 14 358 76.6 132.19 101.24
New York................ 10 716 84.0 203.16 170.70
Northeast............... 11 390 77.4 140.99 109.07
South Central........... 19 497 76.2 123.25 93.89
Western................. 27 491 78.2 154.26 120.60
---
Average--All regions.... 121 472 77.7 149.51 116.13
===
- --------
(1) The property statistics and operating results include operations for the
Tampa Waterside Marriott, which opened in February 2000.
(2) The property statistics and operating results include operations for the
five hotels which were sold at various times throughout 1999, through the
date of sale.
During 2000, in connection with the Courtyard Settlement described under
"Recent Developments", the CBM Joint Venture, which was formed by our non-
controlled subsidiary, Rockledge Hotel Properties, and Marriott International
and their affiliates, acquired the partnership interests in Courtyard by
Marriott Limited Partnership and Courtyard by Marriott II Limited Partnership,
which collectively own 120 Courtyard by Marriott limited-service properties
totaling 17,554 rooms. Rockledge Hotel Properties owns approximately a 50% non-
controlling interest in the CBM Joint Venture. These properties have had a
significant increase in operations in 2000 and we expect that they will have a
positive impact on our earnings in 2001. However, there can be no assurance
that they will have a positive impact on our earnings.
S-40
The following table sets forth as of February 1, 2001, the location and
number of rooms of each of our 122 full-service hotels. As of February 1, 2001,
all of the properties are leased to HMT Lessee and operated under Marriott
brands by Marriott International, unless otherwise indicated.
Number
Location of Rooms
- -------- --------
Arizona
Mountain Shadows Resort................................................ 337
Scottsdale Suites...................................................... 251
The Ritz-Carlton, Phoenix.............................................. 281
California
Coronado Island Resort(1).............................................. 300
Costa Mesa Suites...................................................... 253
Desert Springs Resort and Spa.......................................... 884
Fullerton(1)........................................................... 224
Hyatt Regency, Burlingame.............................................. 793
Manhattan Beach(1)(2).................................................. 380
Marina Beach(1)........................................................ 370
Newport Beach.......................................................... 586
Newport Beach Suites................................................... 250
Ontario Airport(2)..................................................... 299
Sacramento Airport(3).................................................. 85
San Diego Marriott Hotel and Marina(1)(2)(3)........................... 1,355
San Diego Mission Valley(2)(3)......................................... 350
San Francisco Airport.................................................. 684
San Francisco Fisherman's Wharf........................................ 285
San Francisco Moscone Center(1)........................................ 1,498
San Ramon(1)........................................................... 368
Santa Clara(1)......................................................... 755
The Ritz-Carlton, Marina del Rey(1).................................... 306
The Ritz-Carlton, San Francisco........................................ 336
Torrance............................................................... 487
Colorado
Denver Southeast(1).................................................... 590
Denver Tech Center..................................................... 625
Denver West(1)......................................................... 305
Marriott's Mountain Resort at Vail..................................... 349
Connecticut
Hartford/Farmington.................................................... 380
Hartford/Rocky Hill(1)................................................. 251
Florida
Fort Lauderdale Marina................................................. 580
Harbor Beach Resort(1)(2)(3)........................................... 637
Jacksonville(1)........................................................ 256
Miami Airport(1)....................................................... 782
Miami Biscayne Bay(1).................................................. 605
Orlando World Center................................................... 2,000
Palm Beach Gardens..................................................... 279
Singer Island Hilton................................................... 223
Tampa Airport(1)....................................................... 295
Tampa Waterside........................................................ 717
Number
Location of Rooms
- -------- --------
Tampa Westshore(1)..................................................... 309
The Ritz-Carlton, Amelia Island........................................ 449
The Ritz-Carlton, Naples............................................... 463
Georgia
Atlanta Marriott Marquis............................................... 1,671
Atlanta Midtown Suites(1).............................................. 254
Atlanta Norcross....................................................... 222
Atlanta Northwest...................................................... 401
Atlanta Perimeter(1)................................................... 400
Four Seasons, Atlanta.................................................. 246
Grand Hyatt, Atlanta................................................... 438
JW Marriott Hotel at Lenox(1).......................................... 371
Swissotel, Atlanta..................................................... 348
The Ritz-Carlton, Atlanta.............................................. 447
The Ritz-Carlton, Buckhead............................................. 553
Illinois
Chicago/Deerfield Suites............................................... 248
Chicago/Downers Grove Suites........................................... 254
Chicago/Downtown Courtyard............................................. 334
Chicago O'Hare......................................................... 681
Chicago O'Hare Suites(1)............................................... 256
Swissotel, Chicago..................................................... 630
Indiana
South Bend(1).......................................................... 300
Louisiana
New Orleans............................................................ 1,290
Maryland
Bethesda(1)............................................................ 407
Gaithersburg/Washingtonian Center...................................... 284
Massachusetts
Boston/Newton.......................................................... 430
Hyatt Regency, Cambridge............................................... 469
Swissotel, Boston...................................................... 498
Michigan
The Ritz-Carlton, Dearborn............................................. 308
Detroit Livonia........................................................ 224
Detroit Romulus........................................................ 245
Detroit Southfield..................................................... 226
Minnesota
Minneapolis City Center................................................ 583
Minneapolis Southwest(2)(3)............................................ 320
Missouri
Kansas City Airport(1)................................................. 382
New Hampshire
Nashua................................................................. 251
S-41
Number
Location of Rooms
- -------- --------
New Jersey
Hanover................................................................ 353
Newark Airport(1)...................................................... 591
Park Ridge(1).......................................................... 289
New Mexico
Albuquerque(1)......................................................... 411
New York
Albany(2)(3)........................................................... 359
New York Marriott Financial Center..................................... 504
New York Marriott Marquis(1)........................................... 1,944
Marriott World Trade Center (1)........................................ 820
Swissotel, The Drake................................................... 494
North Carolina
Charlotte Executive Park............................................... 298
Greensboro/Highpoint(1)................................................ 299
Raleigh Crabtree Valley................................................ 375
Research Triangle Park................................................. 224
Ohio
Dayton................................................................. 399
Oklahoma
Oklahoma City.......................................................... 354
Oklahoma City Waterford(2)............................................. 197
Oregon
Portland............................................................... 503
Pennsylvania
Four Seasons, Philadelphia............................................. 364
Philadelphia Convention Center(2)...................................... 1,408
Philadelphia Airport(1)................................................ 419
Pittsburgh City Center(1)(2)........................................... 400
Tennessee
Memphis................................................................ 403
Number
Location of Rooms
- -------- --------
Texas
Dallas/Fort Worth Airport.............................................. 492
Dallas Quorum(1)....................................................... 547
Houston Airport(1)..................................................... 565
Houston Medical Center(1).............................................. 386
JW Marriott Houston.................................................... 514
Plaza San Antonio(1)................................................... 252
San Antonio Rivercenter(1)............................................. 1,001
San Antonio Riverwalk(1)............................................... 513
Utah
Salt Lake City(1)...................................................... 510
Virginia
Dulles Airport(1)...................................................... 368
Fairview Park.......................................................... 395
Hyatt Regency, Reston.................................................. 514
Key Bridge(1).......................................................... 588
Norfolk Waterside(1)................................................... 404
Pentagon City Residence Inn............................................ 300
The Ritz-Carlton, Tysons Corner(1)..................................... 398
Washington Dulles Suites............................................... 254
Westfields............................................................. 335
Williamsburg........................................................... 295
Washington
Seattle SeaTac Airport................................................. 459
Washington, DC
Washington Metro Center................................................ 456
Canada
Calgary(1)............................................................. 380
Toronto Airport(2)..................................................... 423
Toronto Eaton Center(1)................................................ 459
Toronto Delta Meadowvale............................................... 374
------
TOTAL.................................................................. 58,373
======
- --------
(1) The land on which this hotel is built is leased under one or more long-term
lease agreements.
(2) This property is not wholly owned by the operating partnership.
(3) This property is not leased to HMT Lessee.
Investments in Affiliated Partnerships
We also maintain investments in several partnerships that own hotel
properties. Typically, the operating partnership and certain of its
subsidiaries manage our partnership investments and through a combination of
general and limited partnership interests, conduct the partnership services
business. As previously discussed, in connection with the REIT conversion,
Rockledge Hotel Properties and Fernwood Hotel Assets were formed as non-
controlled subsidiaries to hold various assets, the direct ownership of which
by us or the operating partnership could jeopardize our status as a REIT or the
operating partnership's treatment as a partnership for federal income tax
purposes. As of December 31, 2000, substantially all of our general and limited
partner interests in partnerships owning 208 limited-service properties
(including nearly all of our interests in the CBM Joint Venture) were held by
our two non-controlled subsidiaries.
S-42
The partnership hotels are currently operated under management agreements
with Marriott International or its subsidiaries. As the general partner, we
oversee and monitor Marriott International and its subsidiaries' performance
pursuant to these agreements. Additionally, we are responsible for the payment
of partnership obligations from partnership funds, preparation of financial
reports and tax returns and communications with lenders, limited partners and
regulatory bodies. As the general partner, we are reimbursed for the cost of
providing these services subject to limitations in certain cases.
Cash distributions provided from these partnerships are tied to the overall
performance of the underlying properties and the overall level of debt. There
were no distributions in the First Three Quarters 2000 and Full Year 1999.
Distributions from these partnerships to us were $2 million in 1998. All debt
of these partnerships is nonrecourse to us and our subsidiaries, except that we
are contingently liable under various guarantees of debt obligations of certain
of the limited-service partnerships.
Marketing
As of February 1, 2001, 100 of our 122 hotel properties are managed by
subsidiaries of Marriott International as Marriott or Ritz-Carlton brand hotels
and an additional nine hotels are part of Marriott International's full-service
hotel system through franchise agreements. The remaining hotels are managed
primarily by Four Seasons, Hilton, Hyatt and Swissotel.
We believe that our properties will continue to enjoy competitive advantages
arising from their participation in the Marriott, Ritz-Carlton, Four Seasons,
Hilton, Hyatt and Swissotel hotel systems. The national marketing programs and
reservation systems of each of these managers, as well as the advantages of
strong customer preference for these upper-upscale and luxury brands should
also help these properties to maintain or increase their premium over
competitors in both occupancy and room rates. Repeat guest business is enhanced
by guest rewards programs offered by Marriott, Ritz-Carlton, Hilton, Hyatt and
Swissotel. Each of the managers maintains national reservation systems that
provide reservation agents with complete descriptions of the rooms available
and up-to-date rate information from the properties. Our website
(www.hostmarriott.com) currently permits users to connect to the Marriott,
Ritz-Carlton, Four Seasons, Hilton, Hyatt, and Swissotel reservation systems to
reserve rooms in our hotels. Our website is not a part of this prospectus
supplement or the accompanying prospectus.
Competition
Our hotels compete with several other major lodging brands in each segment
in which they operate. Competition in the industry is based primarily on the
level of service, quality of accommodations, convenience of locations and room
rates. Although the competitive position of each of our hotel properties
differs from market to market, we believe that our properties compare favorably
to their competitive set in the markets in which they operate on the basis of
these factors. The following table presents key participants in segments of the
lodging industry in which we compete:
Segment Representative Participants
- ------- ---------------------------
Luxury Full-Service Ritz-Carlton; Four Seasons
Upscale Full-Service Crown Plaza; Doubletree; Hyatt; Hilton; Marriott Hotels, Resort and Suites; Radisson;
Renaissance; Sheraton; Swissotel; Westin; Wyndham
Seasonality
Our individual hotel revenues have traditionally experienced significant
seasonality. However, this is mitigated to some extent by the geographic
diversity of our hotels. In addition, hotel revenues in the fourth quarter
S-43
reflect sixteen weeks of results compared to twelve weeks for the first three
quarters of the fiscal year. Average hotel sales by quarter over the three
years 1997 through 1999 for our lodging properties are as follows:
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
22% 23% 22% 33%
Legal Proceedings
Tampa Waterside Hotel. On January 23, 2001, Tampa Convention Hotel
Associates, Inc. ("TCHA") filed a lawsuit, Tampa Convention Hotel Associates,
Inc. v. The City of Tampa, Florida, et al., Case No. 01000668, Division G, in
the Circuit Court for Hillsborough County, Florida against the City of Tampa
(the "City"), Faison & Associates 2000, L.L.C. ("Faison"), Sodexho Marriott
Services, Inc., f/k/a Marriott International, Inc. ("Marriott International"),
Host Marriott, and HMC Hotel Development LLC ("HMC Development"). TCHA was one
of several groups who had submitted development proposals in response to the
City's 1995 request for a proposal ("RFP") to develop a convention center hotel
in downtown Tampa. Each of the proposals submitted was ranked under the terms
of the RFP. The City's Hotel Review Committee ranked the TCHA proposal second,
and commenced negotiations with the top-ranked bidder ("Faison/Sheraton").
Faison/Sheraton failed to fulfill certain contingencies by a May 27, 1997
deadline and the parties terminated their negotiations.
TCHA alleges that it relied on the May 27, 1997 deadline, and that the City
engaged in negotiations with other bidders prior to its expiration to the
detriment of TCHA. On May 29, 1997, the City cancelled the RFP. HMC Development
subsequently entered into development agreements with the City to develop the
convention center hotel in October of 1997, and closed on the Tampa hotel site
in January of 1998.
TCHA is suing the City on promissory estoppel grounds for failing to comply
with the Florida Sunshine Law by conducting private negotiations with the other
defendants. TCHA alleges that the other defendants tortiously interfered with
its business relationship with the City. TCHA is seeking unspecified actual,
compensatory, and special damages. All of the defendants have filed motions to
dismiss this lawsuit. A hearing on these motions has not yet been set.
We believe all of the lawsuits in which we are a defendant are without merit
and we are vigorously defending against such claims. For information on
additional legal proceedings affecting our business, please refer to our
Quarterly Report on Form 10-Q for the quarter ended September 8, 2000 (filed on
October 23, 2000), which is incorporated by reference into the accompanying
prospectus.
S-44
DESCRIPTION OF THE CLASS C PREFERRED STOCK
This description of material terms of the 10% Class C Cumulative Redeemable
Preferred Stock, par value $.01 per share, offered hereby supplements, and to
the extent inconsistent therewith or as expressly provided herein replaces, the
description of certain general terms and provisions of our preferred stock, par
value $.01 per share, set forth in the accompanying prospectus. As used under
this caption "Description of the Class C Preferred Stock" and in the
accompanying prospectus under "Description of Preferred Stock", all references
to "Host Marriott" or the "company" mean Host Marriott Corporation, excluding,
unless otherwise expressly stated or the context otherwise requires, our
subsidiaries.
The following summary of material terms of the Class C preferred stock does
not purport to be complete and is subject to and qualified in its entirety by
reference to all of the provisions of our Articles of Amendment and Restatement
of Articles of Incorporation--which we refer to as our Charter--and the form of
articles supplementary relating to the Class C preferred stock, all of which
have been or will be filed as exhibits to or incorporated by reference in the
registration statement of which the accompanying prospectus is a part. You may
obtain copies of these documents in the manner described under "Where You Can
Find More Information".
Prospective investors should carefully review the information in the
accompanying prospectus under "Restrictions on Ownership and Transfer" for
important information concerning the restrictions on ownership and transfer
applicable to the Class C preferred stock.
General
Our Charter provides that the total number of shares of stock, which we
refer to as capital stock, of all classes which we are authorized to issue is
800,000,000, 750,000,000 of which initially were classified as common stock,
par value $.01 per share, and 50,000,000 of which initially were classified as
preferred stock, par value $.01 per share. Currently, 750,000,000 shares are
classified as common stock, 50,000,000 shares are classified as preferred
stock, 4,600,000 shares of which are classified as Class A Cumulative
Redeemable Preferred Stock, par value $.01 per share, 4,600,000 shares of which
are classified as Class B Cumulative Redeemable Preferred Stock, par value $.01
per share, and 650,000 shares of which are classified as Series A Junior
Participating Preferred Stock, par value $.01 per share. Under our Charter, our
board of directors is authorized, without a vote of the stockholders, to
classify or reclassify any unissued shares of capital stock by setting or
changing the preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or terms or
conditions of redemption of such shares of capital stock. The board of
directors also has the power to classify or reclassify any unissued shares of
capital stock (including shares initially classified as common stock or
preferred stock) into any other class or series of capital stock, and to divide
and classify shares of any class into one or more series of such class. Thus,
the board of directors could authorize the issuance of a class or series of
capital stock with terms and conditions which could have the effect of
delaying, deferring or preventing a transaction or a change in control of Host
Marriott that might involve a premium price for holders of shares of common
stock, Class A preferred stock, Class B preferred stock or Class C preferred
stock or otherwise be in their respective best interests.
We have previously authorized the issuance of shares of Class A preferred
stock and Class B preferred stock. As of the date of this prospectus
supplement, there were 4,160,000 shares of Class A preferred stock and
4,000,000 shares of Class B preferred stock issued and outstanding. We have
previously authorized the issuance of shares of Series A junior preferred stock
in connection with our stockholder rights plan. As of the date of this
prospectus supplement, no shares of Series A junior preferred stock were
outstanding, although we have reserved for issuance 650,000 shares of Series A
junior preferred stock. For a description of our stockholder rights plan, see
the accompanying prospectus under "Description of Common Stock--Stockholder
Rights Plan/Preferred Stock Purchase Rights".
We have authorized the issuance of a class of preferred stock, consisting of
5,200,000 shares, plus up to an additional 780,000 shares issuable upon
exercise of the underwriters' over-allotment option, designated as the 10%
Class C Cumulative Redeemable Preferred Stock.
S-45
The Class C preferred stock has been approved for listing on the New York
Stock Exchange under the symbol "HMTPrC", subject to notice of official
issuance. We expect that trading of the Class C preferred stock on the NYSE
will commence within 30 days after the initial delivery of the Class C
preferred stock.
The Class C preferred stock does not contain any provisions affording
holders of the Class C preferred stock protection in the event of a highly
leveraged or other transaction that might adversely affect holders of the Class
C preferred stock, except to the limited extent described below under "--Voting
Rights".
The transfer agent, registrar and paying agent for the Class C preferred
stock will be First Chicago Trust Company of New York. The articles
supplementary for the Class C preferred stock will provide that we will at all
times maintain an office or agency in the Borough of Manhattan, The City of New
York, where shares of Class C preferred stock may be surrendered for payment
(including upon redemption, if any), registration of transfer or exchange.
The certificates evidencing the Class C preferred stock will initially be
issued in the form of temporary certificates. Holders of temporary certificates
will be entitled to exchange them for definitive certificates as soon as
definitive certificates are available, which we anticipate will be within 150
days after the original issuance of the Class C preferred stock.
Ranking
The Class C preferred stock will rank, with respect to the payment of
dividends and the distribution of assets upon our liquidation, dissolution or
winding up: (1) senior to our common stock, senior to our Series A junior
preferred stock, and senior to any other class or series of our capital stock
other than capital stock referred to in clauses (2) and (3) of this sentence;
(2) on a parity with our Class A preferred stock and Class B preferred stock
and on a parity with any class or series of our capital stock the terms of
which specifically provide that such class or series of capital stock ranks on
a parity with the Class C preferred stock as to the payment of dividends and
the distribution of assets upon our liquidation, dissolution or winding up; and
(3) junior to any class or series of our capital stock the terms of which
specifically provide that such class or series of capital stock ranks senior to
the Class C preferred stock as to the payment of dividends and the distribution
of assets upon our liquidation, dissolution or winding up. The term "capital
stock" does not include convertible debt securities. The description of the
ranking of the Class C preferred stock set forth in this paragraph supersedes
and replaces, insofar as it concerns the Class C preferred stock, the
discussion set forth in the accompanying prospectus under "Description of
Preferred Stock--Rank".
Our board of directors may, from time to time, without stockholder approval,
authorize the issuance of one or more additional classes or series of capital
stock ranking on a parity with the Class C preferred stock. See "--General"
above and "--Voting Rights" below. In addition, with the affirmative vote or
consent of the holders of at least two-thirds of the shares of Class C
preferred stock outstanding at the time, as described below under "--Voting
Rights", we may issue one or more classes or series of capital stock which rank
senior to the Class C preferred stock as to the payment of dividends and/or the
distribution of assets upon our liquidation, dissolution or winding up, and the
rights of holders of Class C preferred stock to receive dividends and amounts
due upon our liquidation, dissolution or winding up will be subject to the
preferential rights of any such senior class or series of our capital stock.
However, no such senior capital stock is currently outstanding.
In addition, because our operations are conducted primarily through the
operating partnership and its subsidiaries, our cash flow and our consequent
ability to pay dividends on our capital stock (including the payment of
dividends to holders of the Class C preferred stock) are dependent upon the
results of operations of those subsidiaries and the distribution of monies by
those subsidiaries to us.
Dividend and Redemption Restrictions Under Debt Instruments
We and our subsidiaries are, and may in the future become, parties to
agreements and instruments which restrict or prevent the payment of dividends
on, or the purchase or redemption of, Class C preferred stock and
S-46
any other class or series of our capital stock, including indirect restrictions
(for example, through covenants requiring maintenance of specified levels of
net worth) and direct restrictions. The operating partnership's credit
facility, to which we are a party, provides that distributions may only be paid
to holders of equity interests of the operating partnership, including Host
Marriott as a partner of the operating partnership, and we may only pay
dividends on our capital stock, including the Class C preferred stock, so long
as (1) no default or event of default under the credit facility exists at the
time of the payment or would exist immediately after giving effect to such
payment and (2) we qualify or have taken all actions necessary to qualify as a
REIT for federal income tax purposes. Assuming the foregoing conditions are
met, during any four consecutive fiscal quarters, the operating partnership may
distribute to us and the other holders of the units of the operating
partnership, and we may pay dividends to our shareholders (including the
payment of dividends to holders of the Class C preferred stock), in an amount
not to exceed the greater of (A) 85% of our adjusted funds from operations (as
defined in the credit facility) for those four consecutive fiscal quarters and
(B) the minimum amount necessary for us to maintain our status as a REIT for
federal income tax purposes.
In addition, the indenture governing the operating partnership's outstanding
senior debt provides that no distributions may be made to holders of its equity
interests, including Host Marriott as a partner of the operating partnership,
(1) during the continuance of defaults or events of defaults under the
indenture, (2) if the operating partnership could not incur at least $1.00 of
indebtedness (as defined) under the terms of the indebtedness covenant of the
indenture or (3) if all restricted payments (as defined) made since the issue
date of the debt securities generally exceed the sum of (a) 95% of the
aggregate funds from operations (as defined) beginning on the first day of the
fiscal quarter in which the relevant debt securities were issued, (b) 100% of
the net cash proceeds from the permitted issuance of certain equity interests
of the operating partnership and from the issuance of specified convertible
indebtedness upon conversion thereof, or otherwise received as capital
contributions (as defined), (c) the total net reduction in certain investments
resulting from payments to the operating partnership or the sale of those
investments, (d) the fair market value of noncash tangible assets or capital
stock (other than that of the operating partnership or Host Marriott) acquired
in exchange for qualified capital stock (as defined), and (e) fair market value
of noncash tangible assets or capital stock (other than that of the operating
partnership or Host Marriott) contributed to the operating partnership as a
capital contribution (as defined). However, notwithstanding the foregoing
restrictions on distributions by the operating partnership, it may make
distributions as required to allow us to make all dividend payments necessary
to maintain our status as a REIT for federal income tax purposes unless (1) it
is during the continuance of a default or event of default under the indenture
or (2) the aggregate principal amount of all outstanding debt of the operating
partnership and its restricted subsidiaries (as defined) other than specified
convertible indebtedness at such time is equal to or greater than 80% of the
value of the operating partnership's adjusted total assets (as defined).
In the event of a deterioration in our financial condition or results of
operations or the financial condition or results of operations of our
subsidiaries, the terms of the debt instruments or agreements to which we or
our subsidiaries are, or in the future may become, parties could limit or
prohibit the payment of dividends on shares of Class C preferred stock and any
other class or series of our capital stock. Our failure to pay dividends as
required by the Internal Revenue Code, whether as a result of restrictive
covenants in debt instruments or otherwise, would result in the loss of our
status as a REIT for federal income tax purposes. As described in "Risk
Factors--Adverse consequences of our failure to qualify as a REIT", this loss
of our status as a REIT would likely have a material adverse effect on us.
Dividends
Subject to the preferential rights of holders of any class or series of our
capital stock ranking senior to the Class C preferred stock as to dividends,
holders of the Class C preferred stock will be entitled to receive, when, as
and if authorized by our board of directors and declared by us, out of our
funds legally available for the payment of dividends, cumulative cash dividends
at the rate of 10% per annum of the $25.00 per share liquidation preference
(equivalent to an annual rate of $2.50 per share). Dividends will accrue and be
cumulative from the first date on which any shares of Class C preferred stock
are originally issued and will be
S-47
payable quarterly in arrears on January 15, April 15, July 15 and October 15 of
each year or, if such day is not a Business Day, as defined in the articles
supplementary for the Class C preferred stock, the next succeeding Business
Day. The first dividend, which will be payable on April 15, 2001 (or, if such
day is not a Business Day, on the next succeeding Business Day), will be for
less than a full quarterly dividend period. Dividends payable on the Class C
preferred stock, including dividends payable for partial dividend periods, will
be computed on the basis of a 360-day year consisting of twelve 30-day months.
Dividends will be payable to holders of record as they appear in our stock
transfer books at the close of business on the applicable dividend record date,
which will be the 1st day of the calendar month in which the applicable
dividend payment date falls or such other date designated by our board of
directors that is not more than 30 nor less than ten days prior to such
dividend payment date.
If any dividend payment date or redemption date for the Class C preferred
stock falls on a day which is not a Business Day, the payment which would
otherwise be due on such dividend payment date or redemption date, as the case
may be, may be made on the next succeeding Business Day with the same force and
effect as if made on such dividend payment date or redemption date, as the case
may be, and no interest or additional dividends or other sum will accrue on the
amount so payable for the period from and after such dividend payment date or
redemption date, as the case may be, to such next succeeding Business Day.
If any shares of Class C preferred stock are outstanding, no full dividends
will be declared or paid or set apart for payment on any shares of our capital
stock of any other class or series ranking, as to dividends, on a parity with,
or junior to, the Class C preferred stock for any period unless full cumulative
dividends have been or contemporaneously are declared and paid or declared and
a sum sufficient for the payment thereof set apart for such payment on the
Class C preferred stock for all past dividend periods (including, without
limitation, any dividend period that terminates on any date upon which
dividends on such other class or series of our capital stock are declared or
paid or set apart for payment, as the case may be). When such cumulative
dividends are not paid in full, or a sum sufficient for such full payment is
not so set apart, upon the Class C preferred stock and the shares of any other
class or series of our capital stock ranking on a parity as to dividends with
the Class C preferred stock, all dividends declared upon the Class C preferred
stock and any other class or series of our capital stock ranking on a parity as
to dividends with the Class C preferred stock shall be declared pro rata so
that the amount of dividends declared per share of Class C preferred stock and
such other class or series of our capital stock shall in all cases bear to each
other the same ratio that accrued and unpaid dividends per share on the Class C
preferred stock and such other class or series of capital stock, which will not
include any accrual in respect of unpaid dividends for prior dividend periods
if the other class or series of capital stock does not provide for cumulative
dividends, bear to each other.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Class C preferred stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for payment for all past dividend periods
(including, without limitation, any dividend period that terminates on a date
that also is a Subject Date (as defined below)), then
. no dividends, other than in common stock or shares of any other class or
series of our capital stock ranking junior to the Class C preferred stock
as to dividends and as to the distribution of assets upon our
liquidation, dissolution or winding up, shall be declared or paid or set
aside for payment and no other distribution shall be declared or made
upon our common stock or any other class or series of our capital stock
ranking junior to or on a parity with the Class C preferred stock as to
dividends or as to the distribution of assets upon our liquidation,
dissolution or winding up, and
. no common stock, or shares of any other class or series of our capital
stock ranking junior to or on parity with the Class C preferred stock as
to dividends or as to the distribution of assets upon our liquidation,
dissolution or winding up, shall be redeemed, purchased or otherwise
acquired for any consideration or any money paid to or made available for
a sinking fund for the redemption of any such shares by us, (1) except by
conversion into or exchange for shares of any other class or series of
our capital stock ranking junior to the shares of Class C preferred stock
as to dividends and as to the distributions of assets upon our
liquidation, dissolution or winding up and (2) except for the redemption,
S-48
purchase or acquisition by us of our capital stock of any class or series
in order to preserve our status as a REIT for federal income tax purposes
or the operating partnership's status as a partnership for federal income
tax purposes.
As used in this paragraph, the term "Subject Date" means (1) any date on which
any dividends are declared or paid or set apart for payment or other
distribution declared or made upon our common stock or any other class or
series of our capital stock ranking junior to or on a parity with the Class C
preferred stock as to dividends or as to the distribution of assets upon our
liquidation, dissolution or winding up, and (2) any date on which any shares
of our common stock or any other class or series of our capital stock ranking
junior to or on a parity with the Class C preferred stock as to dividends or
as to the distribution of assets upon our liquidation, dissolution or winding
up are redeemed, purchased or otherwise acquired for any consideration or any
money paid to or made available for a sinking fund for the redemption of any
such shares by us.
Our Charter provides that our ability to pay dividends on any class or
series of our capital stock is not limited by the amount that would be needed,
if we were to be dissolved at the time of the dividend, to satisfy the
preferential rights upon our liquidation, dissolution or winding up of classes
or series of capital stock ranking senior to the capital stock receiving the
dividends, unless otherwise specifically provided for in the terms of any
class or series of capital stock. The terms of the Class C preferred stock do
not provide otherwise and, accordingly, the Class C preferred stock will be
subject to the foregoing provisions.
No dividends on any shares of Class C preferred stock will be declared or
paid or set apart for payment at such time as any agreement, including any
agreement relating to our indebtedness, prohibits such declaration, payment or
setting apart for payment or provides that such declaration, payment or
setting apart for payment would constitute a breach thereof or a default
thereunder, or if such declaration, payment or setting apart for payment will
be restricted or prohibited by applicable law.
Notwithstanding the foregoing, dividends on the Class C preferred stock
will accrue regardless of whether or not we have earnings, regardless of
whether or not there are funds legally available for the payment of such
dividends, and regardless of whether or not such dividends are declared. No
interest, or sum of money in lieu of interest, will be payable in respect of
any dividend payment or payments on the Class C preferred stock that may be in
arrears, and holders of the Class C preferred stock will not be entitled to
any dividends, whether payable in cash, securities or other property, in
excess of the full cumulative dividends described above. Any dividend payment
made on the Class C preferred stock will first be credited against the
earliest accrued but unpaid dividend due with respect to the Class C preferred
stock.
If for any taxable year, we elect to designate as "capital gain dividends",
as defined in the Internal Revenue Code, any portion of the dividends paid or
made available for the year to holders of all classes and series of our
capital stock, then the portion of the dividends designated as capital gain
dividends that will be allocable to the holders of the Class C preferred stock
will be an amount equal to the total capital gain dividends multiplied by a
fraction, the numerator of which will be the total dividends, within the
meaning of the Internal Revenue Code, paid or made available to the holders of
the Class C preferred stock for the year, and the denominator of which will be
the total dividends paid or made available to holders of all classes and
series of our capital stock for that year.
Information contained under this caption "Dividends" supersedes and
replaces, insofar as it concerns the Class C preferred stock, the discussion
set forth in the accompanying prospectus under "Description of Preferred
Stock--Distributions".
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the company, then, before any distribution or payment will be made to the
holders of any common stock or any other class or series of our capital stock
ranking junior to the Class C preferred stock as to the distribution of assets
upon the liquidation,
S-49
dissolution or winding up of the company, but subject to the preferential
rights of the holders of any other class or series of our capital stock ranking
senior to the Class C preferred stock as to such distribution of assets, the
holders of Class C preferred stock will be entitled to receive and to be paid
out of our assets legally available for distribution to stockholders
liquidating distributions in the amount of $25.00 per share, plus an amount
equal to all accrued and unpaid dividends to, but not including, the date of
payment. After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of shares of Class C preferred stock, as
such, will have no right or claim to any of our remaining assets. If, upon any
such voluntary or involuntary liquidation, dissolution or winding up, our
assets legally available for distribution to stockholders are insufficient to
pay the full amount of the liquidating distributions on all outstanding shares
of Class C preferred stock and the full amount of the liquidating distributions
payable on all shares of any other classes or series of our capital stock
ranking on a parity with the Class C preferred stock as to the distribution of
assets upon our liquidation, dissolution or winding up, then the holders of the
Class C preferred stock and all other such classes and series of capital stock
will share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
If liquidating distributions shall have been made in full to all holders of
Class C preferred stock and any other classes or series of our capital stock
ranking on a parity with the Class C preferred stock as to the distribution of
assets upon our liquidation, dissolution or winding up, then our remaining
assets will be distributed among the holders of any other classes or series of
our capital stock ranking junior to the Class C preferred stock as to the
distribution of assets upon our liquidation, dissolution or winding up,
according to their respective rights and preferences.
For purposes of the two preceding paragraphs, neither the consolidation or
merger of the company with or into any other corporation, trust or entity, nor
the sale, lease or conveyance of all or substantially all of our property or
business, will be deemed to constitute a liquidation, dissolution or winding up
of the company.
The information contained under this caption "--Liquidation Preference"
supersedes and replaces, insofar as it concerns the Class C preferred stock,
the discussion set forth in the accompanying prospectus under "Description of
Preferred Stock--Liquidation Preference".
Optional Redemption
The Class C preferred stock is not redeemable prior to March 27, 2006,
except that we will be entitled, pursuant to provisions of our Charter, to
redeem, repurchase or acquire shares of Class C preferred stock in order to
preserve our status as a REIT for federal income tax purposes or the status of
the operating partnership as a partnership for federal income tax purposes. For
a description of these provisions, see "--Other" below and "Restrictions on
Ownership and Transfer" in the accompanying prospectus.
On and after March 27, 2006, we may, at our option upon not less than 30 nor
more than 60 days' prior written notice to the holders of the Class C preferred
stock, redeem the Class C preferred stock, in whole or from time to time in
part, for a cash redemption price equal to $25.00 per share plus, except as
described below with respect to redemption after a dividend record date and on
or prior to the corresponding dividend payment date, accrued and unpaid
dividends to, but not including, the date fixed for redemption.
Notwithstanding anything to the contrary in this prospectus supplement or in
the accompanying prospectus, unless full cumulative dividends on the Class C
preferred stock have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods (including, without limitation, any dividend period
that terminates on the date of any redemption of shares of Class C preferred
stock referred to below or on the date of any direct or indirect purchase or
other acquisition of shares of Class C preferred stock referred to below, as
the case may be), then
. no shares of Class C preferred stock will be redeemed unless all
outstanding shares of Class C preferred stock are simultaneously
redeemed; provided, however, that the foregoing will not prevent our
redemption, repurchase or acquisition of shares of Class C preferred
stock (a) to preserve our status as a
S-50
REIT for federal income tax purposes or the status of the operating
partnership as a partnership for federal income tax purposes or (b)
pursuant to a purchase or exchange offer made on the same terms to holders
of all outstanding shares of Class C preferred stock, and
. we will not purchase or otherwise acquire directly or indirectly any
shares of Class C preferred stock, except by conversion into or exchange
for other capital stock ranking junior to the Class C preferred stock as
to dividends and with respect to the distribution of assets upon our
liquidation dissolution and winding up; provided, however, that the
foregoing will not prevent our redemption, purchase or acquisition of
shares of Class C preferred stock (a) to preserve our status as a REIT
for federal income tax purposes or the status of the operating
partnership as a partnership for federal income tax purposes or (b)
pursuant to a purchase or exchange offer made on the same terms to
holders of all outstanding shares of Class C preferred stock.
If fewer than all of the outstanding shares of Class C preferred stock are
to be redeemed, the number of shares to be redeemed will be determined by us
and the shares to be so redeemed will be selected by us pro rata from the
holders of record of the Class C preferred stock in proportion to the number of
shares held of record by the holders, as nearly as may be practicable without
creating fractional shares, or by lot or by any other equitable method
determined by us that will not result in the transfer of any shares of Class C
preferred stock to a trust for the benefit of a charitable beneficiary as
described in the accompanying prospectus under "Restrictions on Ownership and
Transfer". If fewer than all of the shares of Class C preferred stock evidenced
by a stock certificate are to be redeemed, we will issue one or more new
certificates for the unredeemed shares.
We will give notice of redemption by publication in The Wall Street Journal,
or if such newspaper is not then published, a newspaper of general circulation
in The City of New York, such publication to be made once a week for two
successive weeks commencing not less than 30 nor more than 60 days prior to the
redemption date. Notice of redemption also will be mailed, not less than 30 nor
more than 60 days prior to the applicable redemption date, to each holder of
record of shares of Class C preferred stock at the holder's address in our
share transfer records. Each such notice shall state:
. the redemption price and the redemption date;
. the number of shares of Class C preferred stock to be redeemed;
. the place or places, which will include a place in the Borough of
Manhattan, The City of New York, where the Class C preferred stock is to
be surrendered for payment of the redemption price; and
. that dividends on the shares of Class C preferred stock to be redeemed
will cease to accrue on the applicable redemption date.
If fewer than all of the outstanding shares of Class C preferred stock are
to be redeemed, the notice mailed to each holder will also specify the number
of shares to be redeemed from that holder. No failure to mail or defect in any
mailed notice or in the mailing thereof will affect the validity of the
proceedings for the redemption of any shares of Class C preferred stock except
as to the holder to whom notice was defective or not given.
If notice of redemption has been given and if funds necessary for such
redemption have been irrevocably set aside in trust for the benefit of the
holders of the shares of Class C preferred stock called for redemption, then
from and after the date fixed for redemption, dividends will cease to accrue on
the shares of Class C preferred stock so called for redemption, such shares of
Class C preferred stock will no longer be deemed outstanding, and all rights of
the holders of such shares of Class C preferred stock will terminate, except
the right to receive the redemption price, including, if applicable, any
accrued and unpaid dividends to, but not including, the redemption date.
If any redemption date is not a Business Day, then payment of the redemption
price may be made on the next Business Day with the same force and effect as if
made on the redemption date, and no interest, additional dividends or other
sums will accrue on the amount payable from the redemption date to the next
Business Day.
S-51
The holders of record of shares of Class C preferred stock at the close of
business on a dividend record date will be entitled to receive the dividend
payable with respect to those shares on the corresponding dividend payment date
notwithstanding the redemption of those shares after that dividend record date
and on or prior to the dividend payment date or our default in the payment of
the dividend due on that payment date. If a redemption date falls after a
dividend record date and on or prior to the corresponding dividend payment
date, the amount payable upon redemption will not include the dividend payable
on that dividend payment date and the full amount of that dividend will instead
be paid on the applicable dividend payment date to the holders of record on the
corresponding dividend record date. Except as provided in this paragraph and
except to the extent that accrued and unpaid dividends are payable as part of
the redemption price, we will make no payment or allowance for unpaid
dividends, regardless of whether or not in arrears, on shares of Class C
preferred stock called for redemption.
The Class C preferred stock has no stated maturity and is not subject to any
sinking fund or mandatory redemption.
The information under this caption "--Optional Redemption" supersedes and
replaces, insofar as it concerns the Class C preferred stock, the discussion in
the accompanying prospectus under "Description of Preferred Stock--Redemption".
Voting Rights
Holders of Class C preferred stock will not have any voting rights, except
as set forth in the articles supplementary creating the Class C preferred stock
which terms are described below or as otherwise from time to time required by
law.
Whenever dividends on any shares of Class C preferred stock are in arrears
for six or more quarterly dividend periods, whether or not consecutive:
. The board of directors of the company will be automatically increased by
two, if not already increased by two by reason of the election of
directors by the holders of any other class or series of our capital
stock upon which like voting rights have been conferred and are
exercisable and with which the Class C preferred stock is entitled to
vote as a class with respect to the election of those two directors, and
. the holders of Class C preferred stock, voting together as single class
with all other classes or series of our capital stock upon which like
voting rights have been conferred and are exercisable and which are
entitled to vote as a class with the Class C preferred stock in the
election of those two directors, will be entitled to vote for the
election of a total of two additional directors at a special meeting
called by an officer of the company at the request of holders of record
of at least 10% of the outstanding Class C preferred stock or by the
holders of any such other class or series of our capital stock, unless
such request is received less than 90 days before the date fixed for the
next annual or special meeting of our stockholders, in which case the
vote will be held at the earlier of the next annual or special meeting of
our stockholders, and at each subsequent annual meeting, until all
dividends accumulated on the Class C preferred stock for all prior
dividend periods and the then current dividend period have been fully
paid or declared and a sum sufficient for the payment thereof set aside
for payment in full.
If and when full cumulative dividends on the Class C preferred stock for all
prior dividend periods and the then current dividend period have been paid in
full or declared and a sum sufficient for the payment thereof set aside for
payment in full, the right of holders of Class C preferred stock to elect those
two directors will cease and, unless there are other classes and series of our
capital stock upon which like voting rights have been conferred and are
exercisable, the term of office of each of the two directors so elected will
immediately and automatically terminate.
If a special meeting for the election of the additional directors is not
called by one of our officers within 30 days after request, then the holders of
record of at least 10% of the outstanding shares of Class C preferred
S-52
stock may designate a holder of Class C preferred stock to call that meeting at
our expense. At all times that the voting rights described above are
exercisable, the holders of Class C preferred stock will have access to our
stock transfer records. We will pay all costs and expenses of calling and
holding any meeting and of electing directors as described above.
So long as any shares of Class C preferred stock remain outstanding, we will
not, without the affirmative vote or consent of the holders of at least two-
thirds of the Class C preferred stock outstanding at the time, given in person
or by proxy either in writing or at a meeting, with the Class C preferred stock
voting separately as a class,
. authorize, create or issue, or increase the authorized or issued amount
of, any class or series of our capital stock ranking senior to the Class
C preferred stock as to the payment of dividends or the distribution of
assets upon our liquidation, dissolution or winding up, or reclassify any
authorized capital stock into such shares, or create, authorize or issue
any obligation or security convertible into, exchangeable or exercisable
for, or evidencing the right to purchase, any such shares; or
. amend, alter or repeal the provisions of our Charter, including, without
limitation, the articles supplementary creating the Class C preferred
stock, whether by merger, consolidation or otherwise (an "Event"), so as
to materially and adversely affect any right, preference, privilege or
voting power of the Class C preferred stock or the holders thereof;
provided, however, with respect to the occurrence of any Event, so long
as shares of Class C preferred stock remain outstanding or are converted
into like securities of the surviving entity, in each case with the
preferences, rights, privileges, voting powers and other terms thereof
materially unchanged, taking into account that upon the occurrence of an
Event we may not be the surviving entity and that the surviving entity
may be a non-corporate entity, such as a limited liability company,
limited partnership or business trust, in which case the Class C
preferred stock would be converted into an equity interest, other than
capital stock, having preferences, rights, privileges, voting powers and
other terms which are materially unchanged from those of the Class C
preferred stock, the occurrence of such Event will not be deemed to
materially and adversely affect such rights, preferences, privileges or
voting powers of the Class C preferred stock or the holders thereof; and
provided further that any increase in the amount of authorized preferred
stock or common stock or increase in the amount of authorized shares of
Class C preferred stock or the creation, issuance or increase in the
amount of authorized shares of any other class or series of capital
stock, in each case ranking on a parity with or junior to the Class C
preferred stock as to dividends and the distribution of assets upon our
liquidation, dissolution or winding up, will not be deemed to materially
and adversely affect such rights, preferences, privileges or voting
powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required will
be effected, all outstanding shares of Class C preferred stock have been
redeemed or called for redemption and sufficient funds will have been deposited
in trust to effect such redemption.
In any matter in which the Class C preferred stock is entitled to vote,
including any action by written consent, each share of Class C preferred will
be entitled to one vote, except that when shares of any other class or series
of our preferred stock have the right to vote with the Class C preferred stock
as a single class on any matter, the Class C preferred stock and the shares of
each such other class or series will have one vote for each $25.00 of
liquidation preference (excluding accrued dividends).
The description of the voting rights set forth above supersedes and
replaces, insofar as it concerns the Class C preferred stock, the discussion
set forth in the accompanying prospectus under "Description of Preferred
Stock--Voting Rights".
Other
The Class C preferred stock will not be exchangeable for or convertible into
any other property or securities of Host Marriott. The Class C preferred stock
will not be entitled to any preemptive rights.
S-53
Except as expressly stated in the articles supplementary creating the Class
C preferred stock or as required by law, the holders of the Class C preferred
stock will not have any relative, participating, optional or other special
voting rights or powers, and the consent of such holders shall not be required
for the taking of any corporate actions.
Restrictions on Ownership and Transfer
Our Charter contains certain provisions intended to help preserve our status
as a REIT for federal income tax purposes and the status of the operating
partnership as a partnership for federal income tax purposes. Our board of
directors, or a committee thereof, is authorized to take such actions as it
deems advisable to refuse to give effect to or to prevent transfers of capital
stock which would endanger our status as a REIT or the status of the operating
partnership as a partnership. Such actions could include, among other things,
redeeming shares of our capital stock, including Class C preferred stock. In
the event of any such redemption of Class C preferred stock, the redemption
price will be $25.00 per share plus accrued and unpaid dividends unless the
redemption date falls after a dividend record date and on or prior to the
corresponding dividend payment date, in which case the amount payable upon
redemption will not include the dividend payable on that dividend payment date
and the full amount of that dividend will instead be paid on the applicable
dividend payment date to the holder of record on the corresponding dividend
record date.
In addition to the above powers of our board of directors, or a committee
thereof, other provisions of our Charter which are described in the
accompanying prospectus under "Restrictions on Ownership and Transfer" apply
irrespective of any action or inaction by the board of directors or a committee
thereof. The Class C preferred stock will be subject to such provisions. All
certificates representing shares of Class C preferred stock will bear a legend
referring to these restrictions.
S-54
DESCRIPTION OF COMMON STOCK
The disclosure set forth below amends and supplements the section entitled
"Description of Common Stock" in the accompanying prospectus.
Maryland Unsolicited Takeovers Act
The Maryland Unsolicited Takeovers Act applies to any Maryland corporation
that is a public reporting company with at least three independent directors.
Pursuant to the Maryland Unsolicited Takeovers Act, the board of directors of
such a Maryland corporation, without obtaining shareholder approval and
notwithstanding a contrary provision in its charter or bylaws, may elect to
provide that: (1) the number of directors may be fixed only by a vote of the
board of directors; (2) each vacancy on the board of directors (including a
vacancy resulting from the removal of a director by the shareholders) may be
filled only by the affirmative vote of a majority of the remaining directors in
office, even if the remaining directors do not constitute a quorum; and/or
(3) any director elected to fill a vacancy shall hold office for the full
remainder of the term, rather than until the next election of directors. The
Maryland Unsolicited Takeovers Act does not limit the power of a corporation to
confer on the holders of any class or series of preferred stock the right to
elect one or more directors.
Host Marriott has more than three independent directors and therefore our
board of directors could elect to provide for any of the foregoing provisions.
As of the date of this prospectus supplement, our board of directors has not
made any such election.
S-55
FEDERAL INCOME TAX CONSIDERATIONS
The disclosure set forth below supersedes in its entirety the section
entitled "Federal Income Tax Considerations" in the accompanying prospectus.
Introduction
The following is a summary of the federal income tax considerations
anticipated to be material to purchasers of our Class C preferred stock. This
summary is based on current law, is for general information only and is not tax
advice. Your tax treatment will vary depending on your particular situation and
this discussion does not purport to deal with all aspects of taxation that may
be relevant to a holder of Class C preferred stock in light of the holder's
personal investments or tax circumstances, or to stockholders who receive
special treatment under the federal income tax laws. Stockholders receiving
special treatment include, without limitation:
. insurance companies,
. financial institutions or broker-dealers,
. tax-exempt organizations,
. stockholders holding securities as part of a conversion transaction, or
as part of a hedge or hedging transaction or as a position in a straddle
for tax purposes, and
. foreign corporations or partnerships and persons who are not citizens or
residents of the United States.
This discussion is also limited to persons who hold the Class C preferred
stock as a capital asset (generally property held for investment). In addition,
the summary below does not consider the effect of any foreign, state, local or
other tax laws that may be applicable to you as a holder of Class C preferred
stock.
The information in this section is based on:
. the Internal Revenue Code,
. current, temporary and proposed Treasury Regulations promulgated under
the Internal Revenue Code,
. the legislative history of the Internal Revenue Code,
. current administrative interpretations and practices of the Internal
Revenue Service, including its practices and policies as expressed in
private letter rulings which are not binding on the Internal Revenue
Service except with respect to the particular taxpayers who requested and
received such rulings, and
. court decisions.
in each case as of the date of this prospectus supplement. There is no
assurance that future legislation, Treasury Regulations, administrative
interpretations and practices or court decisions will not adversely affect
existing interpretations. Any change could apply retroactively to transactions
preceding the date of the change. We have not requested, and do not plan to
request, any rulings from the Internal Revenue Service concerning the tax
treatment discussed below, and the statements in this prospectus supplement are
not binding on the Internal Revenue Service or a court. Thus, there is no
assurance that these statements will not be challenged by the Internal Revenue
Service or sustained by a court if challenged by the Internal Revenue Service.
The specific tax attributes of a particular shareholder could have a
material impact on the tax consequences associated with the purchase, ownership
and disposition of the Class C preferred stock. Therefore, it is essential that
each prospective shareholder consult with his own tax advisors with regard to
the application of the federal income tax laws to such shareholder's personal
tax situation, as well as any tax consequences arising under the laws of any
state, local or foreign taxing jurisdiction.
S-56
Federal income taxation of Host Marriott
General. Host Marriott made an election to be taxed as a REIT under the
Internal Revenue Code, effective for the taxable year beginning January 1,
1999. Host Marriott believes that it is organized and has
operated in a manner that will permit it to qualify as a REIT for 1999 and
2000, and we intend to continue to operate as a REIT for future years. No
assurance, however, can be given that we in fact will qualify or remain
qualified as a REIT.
The sections of the Internal Revenue Code and the corresponding regulations
that govern the federal income tax treatment of a REIT and its shareholders are
highly technical and complex. The following discussion is qualified in its
entirety by the applicable Internal Revenue Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
Hogan & Hartson L.L.P. has provided to us an opinion to the effect that we
are organized and have operated in conformity with the requirements for
qualification as a REIT, and our intended method of operation will enable us to
continue to meet the requirements for qualification and taxation as a REIT
under the Internal Revenue Code. It must be emphasized that this opinion is
conditioned upon certain assumptions and representations made by Host Marriott
and the operating partnership as to factual matters relating to the
organization and operation of Host Marriott and its subsidiaries, the operating
partnership and its subsidiaries, the non-controlled subsidiaries, taxable REIT
subsidiaries after January 1, 2001 (including HMT Lessee), the Host
Employee/Charitable Trust and Crestline and its subsidiaries, including the
economic and other terms of each lease and the expectations of Host Marriott
and the lessees with respect thereto.
In addition, this opinion is based upon the factual representations of Host
Marriott concerning its business and properties as described in, or
incorporated by reference into, this prospectus supplement and the accompanying
prospectus. Moreover, qualification and taxation as a REIT depends upon Host
Marriott's ability to meet the various qualification tests imposed under the
Internal Revenue Code discussed below. Hogan & Hartson L.L.P. will not review
Host Marriott's operating results. Accordingly, no assurance can be given that
the actual results of Host Marriott's operations for any particular taxable
year will satisfy such requirements. Further, the anticipated income tax
treatment described below may be changed, perhaps retroactively, by
legislative, administrative or judicial action at any time. See "--Failure of
Host Marriott to qualify as a REIT" below.
If Host Marriott qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that it currently
distributes to its shareholders. This treatment substantially eliminates the
"double taxation" at the corporate and shareholder levels that generally
results from an investment in a regular corporation. However, Host Marriott
will be subject to federal income tax as follows:
1. Host Marriott will be taxed at regular corporate rates on any
undistributed "REIT taxable income" including undistributed net capital
gains; provided, however, that properly designated undistributed capital
gains will effectively avoid taxation at the shareholder level. A REIT's
"REIT taxable income" is the otherwise taxable income of the REIT subject
to certain adjustments, including a deduction for dividends paid.
2. Under certain circumstances, Host Marriott may be subject to the
"alternative minimum tax" due to its items of tax preference and
alternative minimum tax adjustments.
3. If Host Marriott has net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income.
4. Host Marriott's net income from "prohibited transactions" will be
subject to a 100% tax. In general, "prohibited transactions" are certain
sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure
property.
S-57
5. If Host Marriott fails to satisfy the 75% gross income test or the
95% gross income test discussed below, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will
be subject to a tax equal to (a) the gross income attributable to the
greater of (i) the amount by which 75% of its gross income exceeds the
amount qualifying under the 75% gross income test described below under "--
Income tests applicable to REITs" and (ii) the amount by which 90% of its
gross income
exceeds the amount qualifying under the 95% gross income test described
below multiplied by (b) a fraction intended to reflect its profitability.
6. If Host Marriott fails to distribute during each calendar year at
least the sum of (a) 85% of its REIT ordinary income for such year, (b) 95%
of its REIT capital gain net income for such year and (c) any undistributed
taxable income from prior periods, Host Marriott will be subject to a 4%
excise tax on the excess of such required distribution over the sum of
amounts actually distributed and amounts retained but with respect to which
federal income tax was paid.
7. If Host Marriott acquires any asset from a taxable "C" corporation in
a transaction in which the basis of the asset in the hands of Host Marriott
is determined by reference to the basis of the asset in the hands of the
"C" corporation, and Host Marriott recognizes gain on the disposition of
such asset during the ten-year period beginning on the date on which such
asset was acquired by Host Marriott, then, to the extent of the asset's
"built-in gain," such gain will be subject to tax at the highest regular
corporate rate applicable. Built-in gain is the excess of the fair market
value of an asset over Host Marriott's adjusted basis in the asset,
determined when Host Marriott acquired the asset.
Host Marriott owns an indirect interest in appreciated assets that its
predecessors held before the REIT conversion. Such appreciated assets have a
"carryover" basis and thus have built-in gain with respect to Host Marriott. If
such appreciated property is sold within the ten-year period following the REIT
conversion, or prior to January 1, 2009, Host Marriott generally will be
subject to regular corporate tax on that gain to the extent of the built-in
gain in that property at the time of the REIT conversion. The total amount of
gain on which Host Marriott can be taxed is limited to the excess of the
aggregate fair market value of its assets on January 1, 1999 over the adjusted
tax bases of those assets at that time. This tax could be very material. As a
result, the operating partnership and Host Marriott may seek to avoid a taxable
disposition prior to January 1, 2009 of any significant asset owned by Host
Marriott's predecessors at the time of the REIT conversion. This could be true
with respect to a particular disposition even though the disposition might
otherwise be in the best interests of Host Marriott and its shareholders.
Notwithstanding Host Marriott's status as a REIT, it is likely that
substantial deferred liabilities of its predecessors will be recognized prior
to January 1, 2009. Deferred liabilities include, but are not limited to, tax
liabilities attributable to built-in gain assets and deferred tax liabilities
attributable to taxable income for which neither Host Marriott nor the
operating partnership will receive corresponding cash. In addition, the IRS
could assert substantial additional liabilities for taxes against Host
Marriott's predecessors for taxable years prior to the time Host Marriott
qualified as a REIT. Under the terms of the REIT conversion and the partnership
agreement of the operating partnership, the operating partnership will be
responsible for paying, or reimbursing Host Marriott for the payment of, any
federal corporate income tax imposed on built-in gain as well as any other
liabilities, including contingent liabilities and liabilities attributable to
litigation that Host Marriott may incur, whether such liabilities are incurred
by reason of activities prior to the REIT conversion or activities subsequent
thereto.
Accordingly, the operating partnership will pay, or reimburse Host Marriott
for the payment of, all taxes incurred by Host Marriott, except for taxes
imposed on Host Marriott by reason of its failure to qualify as a REIT or to
distribute to its shareholders an amount equal to its "REIT taxable income,"
including net capital gains.
Requirements for qualification. The Internal Revenue Code defines a REIT as
a corporation, trust or association
(1) which is managed by one or more directors or trustees;
S-58
(2) the beneficial ownership of which is evidenced by transferable
shares or by transferable certificates of beneficial interest;
(3) which would be taxable as a domestic corporation, but for Sections
856 through 859 of the Internal Revenue Code;
(4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year, not more than 50% in
value of the outstanding stock of which is owned, actually or
constructively, by five or fewer individuals (as defined in the Internal
Revenue Code to include certain entities);
(7) which makes an election to be taxable as a REIT, or has made this
election for a previous taxable year which has not been revoked or
terminated, and satisfies all relevant filing and other administrative
requirements established by the Internal Revenue Service that must be met
to elect and maintain REIT status;
(8) which uses a calendar year for federal income tax purposes and
complies with the recordkeeping requirements of the Internal Revenue Code
and regulations promulgated thereunder; and
(9) which meets certain other tests, described below, regarding the
nature of its income and assets.
Conditions (1) to (4) must be met during the entire taxable year and
condition (5) must be met during at least 335 days of a taxable year of twelve
months, or during a proportionate part of a taxable year of less than twelve
months. Conditions (5) and (6) did not apply to Host Marriott's 1999 taxable
year. Compliance with condition (5) is determined by disregarding the
ownership of shares of stock of Host Marriott by any person(s) who:
(a) acquired such shares of stock as a gift or bequest or pursuant to a
legal separation or divorce;
(b) is the estate of any person making such transfer to the estate; or
(c) is a company established exclusively for the benefit of, or wholly
owned by, either the person making such transfer or a person described in
(a) or (b).
For purposes of determining stock ownership under condition (6) above, a
supplemental unemployment compensation benefits plan, a private foundation or
a portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. However, a trust that is a
qualified trust under Internal Revenue Code Section 401(a) generally is not
considered an individual, and beneficiaries of a qualified trust are treated
as holding shares of a REIT in proportion to their actuarial interests in the
trust for purposes of condition (6) above.
In connection with condition (6), Host Marriott is required to send annual
letters to its shareholders requesting information regarding the actual
ownership of its shares of stock. If Host Marriott complies with this
requirement, and it does not know, or exercising reasonable diligence would
not have known, whether it failed to meet condition (6), then it will be
treated as having met condition (6). If Host Marriott fails to send such
annual letters, it will be required to pay either a $25,000 penalty or, if the
failure is intentional, a $50,000 penalty. The IRS may require Host Marriott,
under those circumstances, to take further action to ascertain actual
ownership of its shares of stock, and failure to comply with such an
additional requirement would result in an additional $25,000 (or $50,000)
penalty. No penalty would be assessed in the first instance, however, if the
failure to send the letters is due to reasonable cause and not to willful
neglect.
Host Marriott believes that it meets and will continue to meet conditions
(1) through (4). In addition, Host Marriott believes that it has had and
continues to have outstanding common stock with sufficient diversity of
S-59
ownership to allow it to satisfy conditions (5) and (6). With respect to
condition (6), Host Marriott has complied and intends to continue to comply
with the requirement that it send annual letters to its shareholders requesting
information regarding the actual ownership of its shares of stock. In addition,
Host Marriott's charter contains an ownership limit that is intended to assist
Host Marriott in continuing to satisfy the share ownership requirements
described in (5) and (6) above. The ownership limit, together with compliance
with the annual shareholder letter requirement described above, however, may
not ensure that Host Marriott will, in all cases, be able to satisfy the share
ownership requirements described above. If Host Marriott fails to satisfy such
share ownership requirements, Host Marriott will not qualify as a REIT. See "--
Failure of Host Marriott to qualify as a REIT" below.
A corporation may not elect to become a REIT unless its taxable year is the
calendar year. Although Host Marriott previously had a 52-53 week year ending
on the Friday closest to January 1, it adopted a calendar year taxable year in
connection with the REIT conversion.
Distribution of "earnings and profits" attributable to "C" corporation
taxable years. A REIT cannot have at the end of any taxable year any
undistributed earnings and profits ("E&P") that are attributable to a "C"
corporation taxable year, which includes all undistributed E&P of Host
Marriott's predecessors. Accordingly, Host Marriott had until December 31, 1999
to distribute such E&P. In connection with the REIT conversion, Host Marriott
declared dividends intended to eliminate the substantial majority, if not all,
of such E&P. To the extent, however, that any such E&P remained (the "Acquired
Earnings") and Host Marriott failed to distribute such Acquired Earnings prior
to the end of 1999, Host Marriott would be disqualified as a REIT at least for
1999. If Host Marriott should be so disqualified for 1999, subject to the
satisfaction by Host Marriott of certain "deficiency dividend" procedures
described below in "--Annual distribution requirements applicable to REITs" and
assuming that Host Marriott otherwise satisfies the requirements for
qualification as a REIT, Host Marriott should qualify as a REIT for 2000 and
thereafter. Host Marriott believes that the dividends it paid prior to December
31, 1999 were sufficient to distribute all of the Acquired Earnings as of
December 31, 1999. However, there are substantial uncertainties relating to
both the estimate of the Acquired Earnings, as described below, and the value
of noncash consideration that Host Marriott distributed. Accordingly, there can
be no assurance this requirement was met.
The estimated amount of the Acquired Earnings is based on the allocated
consolidated E&P of Host Marriott's predecessors accumulated from 1929 through
and including 1998 and takes into account the allocation, as a matter of law,
of 81% of Host Marriott's predecessors' accumulated E&P to Marriott
International on October 8, 1993 in connection with the spin-off of Marriott
International. The estimate was determined based on the available tax returns
and certain assumptions with respect to both such returns and other matters.
The calculation of the Acquired Earnings, however, depends upon a number of
factual and legal interpretations related to the activities and operations of
Host Marriott's predecessors during their entire corporate existence and is
subject to review and challenge by the IRS. There can be no assurance that the
IRS will not examine the tax returns of Host Marriott's predecessors and
propose adjustments to increase their taxable income. The impact of such
proposed adjustments, if any, may be material. If the IRS examines Host
Marriott's calculation of its E&P, the IRS can consider all taxable years of
Host Marriott's predecessors as open for review for purposes of such
determination.
Hogan & Hartson L.L.P. has expressed no opinion as to the amount of E&P of
Host Marriott and Host Marriott's predecessors. Accordingly, for purposes of
its opinion as to the qualification of Host Marriott as a REIT, Hogan & Hartson
L.L.P. relied upon a representation from Host Marriott that as of the end of
1999 it had eliminated all Acquired Earnings.
Qualified REIT subsidiary. If a REIT owns a corporate subsidiary that is a
"qualified REIT subsidiary," that subsidiary will be disregarded for federal
income tax purposes, and all assets, liabilities and items of income, deduction
and credit of the subsidiary will be treated as assets, liabilities and items
of the REIT itself. Generally, a qualified REIT subsidiary is a corporation all
of the capital stock of which is owned by one REIT and that is not a taxable
REIT subsidiary. Host Marriott holds several qualified REIT subsidiaries
S-60
that hold de minimis indirect interests in the partnerships that own hotels.
These entities are not subject to federal corporate income taxation, although
they may be subject to state and local taxation in certain jurisdictions.
Ownership of partnership interests by a REIT. A REIT which is a partner in a
partnership will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership retains the same character in the hands of the REIT
for purposes of the gross income tests and the asset tests applicable to REITs,
as described below. Thus, Host Marriott's proportionate share of the assets and
items of income of the operating partnership, including the operating
partnership's share of such items of any subsidiaries that are partnerships or
LLCs, are treated as assets and items of income of Host Marriott for purposes
of applying the requirements described herein. A summary of the rules governing
the federal income taxation of partnerships and their partners is provided
below in "--Tax aspects of Host Marriott's ownership of interests in the
operating partnership." As the sole general partner of the operating
partnership, Host Marriott has direct control over the operating partnership
and indirect control over the subsidiaries in which the operating partnership
or a subsidiary has a controlling interest. Host Marriott intends to operate
these entities consistent with the requirements for qualification of Host
Marriott as a REIT.
Income tests applicable to REITs. In order to maintain qualification as a
REIT, Host Marriott must satisfy the following two gross income requirements:
. At least 75% of Host Marriott's gross income, excluding gross income from
"prohibited transactions," for each taxable year must be derived directly
or indirectly from investments relating to real property or mortgages on
real property, including "rents from real property," gains on the
disposition of real estate, dividends paid by another REIT and interest
on obligations secured by mortgages on real property or on interests in
real property, or from some types of temporary investments.
. At least 95% of Host Marriott's gross income, excluding gross income from
"prohibited transactions," for each taxable year must be derived from any
combination of income qualifying under the 75% test, dividends, interest,
some payments under hedging instruments and gain from the sale or
disposition of stock or securities, including some hedging instruments.
Rents paid pursuant to Host Marriott's leases, together with gain on the
disposition of assets and dividends and interest received from the non-
controlled subsidiaries and HMT Lessee will constitute substantially all of the
gross income of Host Marriott. Several conditions must be satisfied in order
for rents received by Host Marriott, including the rents received pursuant to
the leases, to qualify as "rents from real property." First, the amount of rent
must not be based in whole or in part on the income or profits of any person.
However, an amount received or accrued generally will not be excluded from the
term "rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales.
Second, rents received from a tenant will not qualify as "rents from real
property" if Host Marriott, or an actual or constructive owner of 10% or more
of Host Marriott, actually or constructively owns 10% or more of the tenant.
This type of tenant will be referred to below as a related party tenant. As a
result of the passage of the REIT Modernization Act, however, for taxable years
beginning after December 31, 2000, Host Marriott is able to lease its hotel
properties to a taxable REIT subsidiary, HMT Lessee, and the rents received
from that subsidiary will not be disqualified from being "rents from real
property" by reason of Host Marriott's ownership interest in the subsidiary so
long as the property is a "qualified lodging facility" and is operated on
behalf of the taxable REIT subsidiary by an "eligible independent contractor."
A taxable REIT subsidiary, which is subject to federal income tax, is an entity
taxable as a corporation other than a REIT in which a REIT directly or
indirectly holds stock or other equity interests, that has made a joint
election with the REIT to be treated as a taxable REIT subsidiary and that does
not engage in certain activities, including, without limitation, operating or
managing hotels, except through an "eligible independent contractor." For a
more detailed discussion of taxable REIT subsidiaries, see "--Qualification of
an entity as a taxable REIT subsidiary,"
S-61
below. HMT Lessee and each of the non-controlled subsidiaries will elect and,
Host Marriott believes, will qualify to be treated as a taxable REIT subsidiary
for federal income tax purposes, effective January 1, 2001.
Third, if rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal
property will not qualify as "rents from real property." Under prior law, this
15% test was based on relative adjusted tax bases. For taxable years beginning
after December 31, 2000, however, the test is based on relative fair market
values.
Fourth, if Host Marriott operates or manages a property or furnishes or
renders certain "impermissible services" to the tenants at the property, and
the income derived from the services exceeds one percent of the total amount
received by Host Marriott with respect to the property, then no amount received
by Host Marriott with respect to the property will qualify as "rents from real
property." Impermissible services are services other than services (1) "usually
or customarily rendered" in connection with the rental of real property and (2)
not otherwise considered "rendered to the occupant." For these purposes, the
income that Host Marriott is considered to receive from the provision of
"impermissible services" will not be less than 150% of the cost of providing
the service. If the amount so received is one percent or less of the total
amount received by the REIT with respect to the property, then only the income
from the impermissible services will not qualify as "rents from real property."
There are two exceptions to this rule. First, impermissible services can be
provided to tenants through an independent contractor from whom Host Marriott
derives no income. To the extent that impermissible services are provided by an
independent contractor, the cost of the services must be borne by the
independent contractor. Second, for Host Marriott's taxable years beginning
after December 31, 2000, impermissible services can be provided to tenants at a
property by a taxable REIT subsidiary.
The operating partnership and each subsidiary that owns hotels entered into
leases with subsidiaries of Crestline that commenced on January 1, 1999 and
pursuant to which the hotels are leased for an initial term ranging generally
from seven to ten years. Each lease provides for thirteen payments per annum of
a specified base rent plus, to the extent that it exceeds the base rent,
additional rent which is calculated based upon the gross sales of the hotels
subject to the lease, plus certain other amounts. Effective November 15, 1999,
we amended substantially all of our leases with Crestline to give Crestline the
right to renew each of these leases for up to four additional terms of seven
years each at a fair rental value, to be determined either by agreement between
us and Crestline or through arbitration at the time the renewal option is
exercised. These amendments provided that Crestline was under no obligation to
exercise these renewal options, and we had the right to terminate the renewal
options during certain time periods specified in the amendments.
As a result of the REIT Modernization Act, beginning January 1, 2001, we are
permitted to lease our hotel properties to a taxable REIT subsidiary so long as
each hotel property is a "qualified lodging facility" and is operated by an
"eligible independent contractor." Our leases with Crestline provided that,
following the enactment of the REIT Modernization Act, we had the right,
beginning on January 1, 2001, to purchase, or have our taxable REIT subsidiary
purchase, the leases for a purchase price equal to the fair market value of
Crestline's interests in the leases, excluding any renewal period provided for
in the leases. On November 13, 2000, HMT Lessee, which will elect to be taxed
as a taxable REIT subsidiary effective as of January 1, 2001, agreed to
purchase from Crestline the entities owning the leasehold interests in 112 of
our hotels (and the leasehold interests in an additional four hotels) for
approximately $207 million. We consummated this acquisition, effective as of
January 1, 2001. We believe that, as of January 1, 2001, each of our hotel
properties is a "qualified lodging facility" and that each manager of our hotel
properties qualifies as an "eligible independent contractor."
Neither Host Marriott nor the operating partnership has done or intends to
do any of the following:
. provide any services to the lessees with respect to the operation of the
hotels, including lessees that are taxable REIT subsidiaries of Host
Marriott, that would be considered "impermissible services" if the
S-62
resulting income considered attributable to such services would cause Host
Marriott to fail to satisfy the 95% gross income test described above;
. charge rent to the lessee of any hotel, including a lessee that is a
taxable REIT subsidiary of Host Marriott, that is based in whole or in
part on the income or profits of any person, other than by reason of
being based on a fixed percentage or percentages of receipts or sales
(except for the lease of the
Harbor Beach Resort, where the lease provides for rent based upon net
profits but which rent Host Marriott currently believes will not
jeopardize Host Marriott's status as a REIT);
. rent any hotel to a related party tenant (except for leases to a taxable
REIT subsidiary, including HMT Lessee, after December 31, 2000 of hotel
properties that are "qualified lodging facilities" that are operated and
managed by "eligible independent contractors"), unless the rent received
from the related party tenant and will not jeopardize Host Marriott's
status as a REIT; or
. derive rental income attributable to personal property other than
personal property leased in connection with the lease of real property,
the amount of which is less than 15% of the total rent received under the
lease, unless the amount of such rent attributable to personal property
will not jeopardize Host Marriott's status as a REIT.
As discussed above, in order for the rent paid pursuant to the leases to
constitute "rents from real property," the leases must be respected as true
leases for federal income tax purposes. Accordingly the leases cannot be
treated as service contracts, joint ventures or some other type of
arrangement.
The determination of whether the leases are true leases depends upon an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following:
. the intent of the parties;
. the form of the agreement;
. the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the
operation of the property or whether the lessee was required simply to
use its best efforts to perform its obligations under the agreement); and
. the extent to which the property owner retains the risk of loss with
respect to the property (e.g., whether the lessee bears the risk of
increases in operating expenses or the risk of damage to the property) or
the potential for economic gain (e.g., appreciation) with respect to the
property.
In addition, Section 7701(e) of the Internal Revenue Code provides that a
contract that purports to be a service contract or a partnership agreement is
treated instead as a lease of property if the contract is properly treated as
such, taking into account all relevant factors. Since the determination of
whether a service contract should be treated as a lease is inherently factual,
the presence or absence of any single factor may not be dispositive in every
case. Some of the relevant factors include whether:
. the service recipient is in physical possession of the property;
. the service recipient controls the property;
. the service recipient has a significant economic or possessory interest
in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of the
property, the recipient shares the risk that the property will decline in
value, the recipient shares in any appreciation in the value of the
property, the recipient shares in savings in the property's operating
costs or the recipient bears the risk of damage to or loss of the
property);
. the service provider does not bear any risk of substantially diminished
receipts or substantially increased expenditures if there is
nonperformance under the contract;
. the service provider does not use the property concurrently to provide
significant services to entities unrelated to the service recipient; and
S-63
. the total contract price does not substantially exceed the rental value
of the property for the contract period.
Host Marriott's leases have been structured with the intent to qualify as
true leases for federal income tax purposes. For example, with respect to each
lease:
. the operating partnership or the applicable subsidiary or other lessor
entity and the lessee intend for their relationship to be that of a
lessor and lessee and such relationship is documented by a lease
agreement;
. the lessee has the right to exclusive possession and use and quiet
enjoyment of the hotels covered by the lease during the term of the
lease;
. the lessee bears the cost of, and will be responsible for, day-to-day
maintenance and repair of the hotels other than the cost of certain
capital expenditures, and will dictate through the hotel managers, who
work for the lessees during the terms of the leases, how the hotels are
operated and maintained;
. the lessee bears all of the costs and expenses of operating the hotels,
including the cost of any inventory used in their operation, during the
term of the lease, other than the cost of certain furniture, fixtures and
equipment, and certain capital expenditures;
. the lessee benefits from any savings and bears the burdens of any
increases in the costs of operating the hotels during the term of the
lease;
. in the event of damage or destruction to a hotel, the lessee is at
economic risk because it will bear the economic burden of the loss in
income from operation of the hotels subject to the right, in certain
circumstances, to terminate the lease if the lessor does not restore the
hotel to its prior condition;
. the lessee has indemnified the operating partnership or the applicable
subsidiary against all liabilities imposed on the operating partnership
or the applicable subsidiary during the term of the lease by reason of
(A) injury to persons or damage to property occurring at the hotels or
(B) the lessee's use, management, maintenance or repair of the hotels;
. the lessee is obligated to pay, at a minimum, substantial base rent for
the period of use of the hotels under the lease;
. the lessee stands to incur substantial losses or reap substantial gains
depending on how successfully it, through the hotel managers, who work
for the lessees during the terms of the leases, operates the hotels;
. Host Marriott and the operating partnership believe that each lessee
reasonably expected at the time the leases were entered into to derive a
meaningful profit, after expenses and taking into account the risks
associated with the lease, from the operation of the hotels during the
term of its leases; and
. upon termination of each lease, the applicable hotel is expected to have
a remaining useful life equal to at least 20% of its expected useful life
on the date of the consummation of the REIT conversion, and a fair market
value equal to at least 20% of its fair market value on the date of the
consummation of the REIT conversion.
If, however, the leases were recharacterized as service contracts or
partnership agreements, rather than true leases, or disregarded altogether for
tax purposes, all or part of the payments that the operating partnership
receives from the lessees would not be considered rent or would not otherwise
satisfy the various requirements for qualification as "rents from real
property." In that case, Host Marriott very likely would not be able to satisfy
either the 75% or 95% gross income tests and, as a result, would lose its REIT
status.
In addition, except for permitted leases to a taxable REIT subsidiary of
"qualified lodging facilities" operated by "eligible independent contractors,"
the lessees must not be regarded as related party tenants. A lessee of Host
Marriott (including for years ending prior to January 1, 2001, all of the
Crestline lessees and, for the years beginning on or after January 1, 2001, the
Crestline lessees owning the hotel leasehold interests not acquired from
Crestline by HMT Lessee) will be regarded as a related party tenant only if
Host Marriott and/or one or more actual or constructive owners of 10% or more
of Host Marriott actually or constructively own 10%
S-64
or more of such lessee (including, with regard to a Crestline lessee, through
an ownership interest in Crestline). In order to help preclude our lessees from
being regarded as related party tenants, the following organizational documents
contain the following ownership limits:
. the articles of incorporation of Crestline expressly prohibit any person
or persons acting as a group, including Host Marriott and/or any 10% or
greater shareholder of Host Marriott, from owning more than 9.8% of the
lesser of the number or value of the shares of capital stock of
Crestline;
. Host Marriott's charter expressly prohibits any person or persons acting
as a group or entity from owning, actually and/or constructively, more
than 9.8% of the lesser of the number or value of the shares of capital
stock of Host Marriott (subject to a limited exception for a holder of
shares of capital stock of Host Marriott in excess of the ownership limit
solely by reason of the merger of Host Marriott's predecessor into Host
Marriott, which exception applied, to the extent that the holder thereof
did not own, directly or by attribution under the Internal Revenue Code,
more than 9.9% in value of the outstanding shares of capital stock of
Host Marriott as a result of the merger) or any other class or series of
shares of stock of Host Marriott; and
. the operating partnership's partnership agreement expressly prohibits any
person, or persons acting as a group, or entity, other than Host Marriott
and an affiliate of The Blackstone Group and a series of related funds
controlled by Blackstone Real Estate Partners (the "Blackstone
Entities"), from owning more than 4.9% by value of any class of interests
in the operating partnership.
Each of these prohibitions contains self-executing enforcement mechanisms.
Assuming that these prohibitions are enforced at all times and no waivers
thereto are granted, the lessees should not be regarded as related party
tenants. There can be no assurance, however, that these ownership restrictions
will be enforced in accordance with their terms in all circumstances or
otherwise will ensure that the lessees will not be regarded as related party
tenants.
As indicated above, "rents from real property" must not be based in whole or
in part on the income or profits of any person. Payments made pursuant to Host
Marriott's leases should qualify as "rents from real property" since they are
based on either fixed dollar amounts or on specified percentages of gross sales
fixed at the time the leases were entered into, except for the lease of the
Harbor Beach Resort, which lease provides for rents based upon net profits. The
foregoing assumes that the leases are not renegotiated during their term in a
manner that has the effect of basing either the percentage rent or base rent on
income or profits. The foregoing also assumes that the leases are not in
reality used as a means of basing rent on income or profits. More generally,
the rent payable under the leases will not qualify as "rents from real
property" if, considering the leases and all the surrounding circumstances, the
arrangement does not conform with normal business practice. Host Marriott
intends that it will not renegotiate the percentages used to determine the
percentage rent during the terms of the leases in a manner that has the effect
of basing rent on income or profits. In addition, Host Marriott believes that
the rental provisions and other terms of the leases conform with normal
business practice and, other than the Harbor Beach Resort lease, were not
intended to be used as a means of basing rent on income or profits.
Furthermore, Host Marriott intends that, with respect to other properties that
it acquires in the future, it will not charge rent for any property that is
based in whole or in part on the income or profits of any person, except by
reason of being based on a fixed percentage of gross revenues, as described
above.
Host Marriott leases certain items of personal property to the lessees in
connection with its leases. Under the Internal Revenue Code, if a lease
provides for the rental of both real and personal property and the portion of
the rent attributable to personal property is 15% or less of the total rent due
under the lease, then all rent paid pursuant to such lease qualifies as "rent
from real property." If, however, a lease provides for the rental of both real
and personal property, and the portion of the rent attributable to personal
property exceeds 15% of the total rent due under the lease, then no portion of
the rent that is attributable to personal property will qualify as "rent from
real property." Under the law in effect prior to January 1, 2001, the amount of
rent attributable to personal property is that amount which bears the same
ratio to total rent for the taxable year as the average of the adjusted tax
bases of the personal property at the beginning and end of the year bears to
the
S-65
average of the aggregate adjusted tax bases of both the real and personal
property at the beginning and end of such year. Host Marriott has represented
that, with respect to each of its leases that includes a lease of items of
personal property, the amount of rent attributable to personal property with
respect to such lease will not exceed 15% of the total rent due under the lease
(determined under the law in effect for the applicable period), except for a
relatively small group of leases where the rent attributable to personal
property, which would constitute non-qualifying income for purposes of the 75%
and 95% gross income tests, would not be material relative to the overall gross
income of Host Marriott. For Host Marriott's taxable years beginning after
December 31, 2000, the personal property test is based on fair market value as
opposed to adjusted tax basis.
Each lease permits the operating partnership to take certain measures,
including requiring the lessee to purchase certain furniture, fixtures and
equipment or to lease such property from a third party, including a non-
controlled subsidiary, if necessary to ensure that all of the rent attributable
to personal property with respect to such lease will qualify as "rent from real
property." In order to protect Host Marriott's ability to qualify as a REIT,
the operating partnership sold substantial personal property associated with a
number of hotels acquired in connection with the REIT conversion to a non-
controlled subsidiary. The non-controlled subsidiary separately leases all such
personal property directly to the applicable lessee and receives rental
payments that Host Marriott believes represent the fair rental value of such
personal property directly from the lessees. If such arrangements are not
respected for federal income tax purposes, Host Marriott likely would not
qualify as a REIT.
If any of the hotels were to be operated directly by the operating
partnership or a subsidiary as a result of a default by a lessee under the
applicable lease, such hotel would constitute foreclosure property until the
close of the third tax year following the tax year in which it was acquired, or
for up to an additional three years if an extension is granted by the IRS,
provided that:
(1) the operating entity conducts operations through an independent
contractor, which might, but would not necessarily in all circumstances,
include Marriott International and its subsidiaries, within 90 days after
the date the hotel is acquired as the result of a default by a lessee;
(2) the operating entity does not undertake any construction on the
foreclosed property other than completion of improvements that were more
than 10% complete before default became imminent;
(3) foreclosure was not regarded as foreseeable at the time the
applicable lessor entered into such lease; and
(4) Host Marriott elects on its federal income tax return filed for the
year in which the foreclosure occurred to treat the hotel as "foreclosure
property."
For as long as such hotel constitutes foreclosure property, the income from
the hotel would be subject to tax at the maximum corporate rates, but it would
qualify under the 75% and 95% gross income tests. However, if such hotel does
not constitute foreclosure property at any time in the future, income earned
from the disposition or operation of such hotel will not qualify under the 75%
and 95% gross income tests. For Host Marriott's taxable years beginning after
December 31, 2000, if a lessee defaults under a lease, the operating
partnership would be permitted to lease the hotel to a taxable REIT subsidiary,
subject to the limitations described above, and the hotel would not become
foreclosure property.
"Interest" generally will be nonqualifying income for purposes of the 75% or
95% gross income tests if it depends in whole or in part on the income or
profits of any person. However, interest will not fail so to qualify solely by
reason of being based upon a fixed percentage or percentages of receipts or
sales. Host Marriott has received and will continue to receive interest
payments from the non-controlled subsidiaries and, with regard to its taxable
years beginning on or after January 1, 2001, expects to receive interest
payments from HMT Lessee. These amounts of interest will be qualifying income
for purposes of the 95% gross income test but not the 75% gross income test.
Host Marriott does not anticipate that the amounts of interest derived from the
non-controlled subsidiaries and HMT Lessee will be sufficiently substantial to
affect its ability to continue to satisfy the 75% gross income test.
S-66
The non-controlled subsidiaries and HMT Lessee hold various assets, the
ownership of which by the operating partnership might jeopardize Host
Marriott's status as a REIT. The assets owned by the non-controlled
subsidiaries primarily consist of partnership or other interests in hotels that
are not leased, certain foreign hotels, and the personal property associated
with certain hotels. The assets owned by HMT Lessee primarily consist of the
equity interests in the entities owning the leasehold interests in
substantially all of Host Marriott's full-service hotel properties. Each non-
controlled subsidiary is, and HMT Lessee will start effective January 1, 2001,
to be, taxable as a regular "C" corporation. The operating partnership's share
of any dividends received from a non-controlled subsidiary or HMT Lessee should
qualify for purposes of the 95% gross income test but not for purposes of the
75% gross income test. The operating partnership does not anticipate that it
will receive sufficient dividends from the non-controlled subsidiaries and HMT
Lessee to cause it to fail the 75% gross income test. Each non-controlled
subsidiary and HMT Lessee intends to elect, with Host Marriott, to be treated
as a taxable REIT subsidiary effective January 1, 2001.
Host Marriott inevitably will have some gross income from various sources
that fails to constitute qualifying income for purposes of one or both of the
75% or 95% gross income tests. These include, but are not limited to, the
following:
. "safe harbor" leases;
. the lease of the Harbor Beach Resort, which provides for rent based upon
net profits;
. the operation of the hotel that is located in Sacramento;
. minority partnership interests in partnerships that own hotels that are
not leased under leases that produce rents qualifying as "rents from real
property";
. rent attributable to personal property at a relatively small group of
hotels that does not satisfy the 15% personal property test; and
. interest and dividends paid by the non-controlled subsidiaries and HMT
Lessee, which amounts will qualify for purposes of the 95% gross income
test but not for purposes of the 75% gross income test.
Host Marriott believes that, taking into account the anticipated sources of
non-qualifying income, its aggregate gross income from all sources will satisfy
the 75% and 95% gross income tests applicable to REITs for each taxable year
commencing subsequent to the date of the REIT conversion.
If Host Marriott fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Internal Revenue
Code. These relief provisions will be generally available if Host Marriott's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, Host Marriott attaches a schedule of the sources of its income to its
federal income tax return, and any incorrect information set forth on the
schedule was not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances Host Marriott would be entitled
to the benefit of these relief provisions. For example, if Host Marriott fails
to satisfy the gross income tests because nonqualifying income that Host
Marriott intentionally incurs exceeds the limits on such income, the IRS could
conclude that Host Marriott's failure to satisfy the tests was not due to
reasonable cause. If these relief provisions are inapplicable to a particular
set of circumstances involving Host Marriott, Host Marriott will not qualify as
a REIT. As discussed above under "--General" even if these relief provisions
apply, a tax would be imposed with respect to the excess net income.
Any gain realized by Host Marriott on the sale of any property held as
inventory or other property held primarily for sale to customers in the
ordinary course of business, including Host Marriott's share of any such gain
realized by the operating partnership, will be treated as income from a
"prohibited transaction" that is subject to a 100% penalty tax. Under existing
law, whether property is held as inventory or primarily for sale to customers
in the ordinary course of a trade or business is a question of fact that
depends upon all the facts and circumstances with respect to the particular
transaction. The operating partnership intends that both it and its
subsidiaries will hold hotels for investment with a view to long-term
appreciation, to engage in the business of acquiring and owning hotels and to
make occasional sales of hotels as are consistent with the operating
S-67
partnership's investment objectives. There can be no assurance, however, that
the IRS might not contend that one or more of these sales is subject to the
100% penalty tax, particularly if the hotels that are sold have been held for a
relatively short period of time.
Asset tests applicable to REITs. At the close of each quarter of its taxable
year, Host Marriott must satisfy the following four tests relating to the
nature of its assets:
. First, at least 75% of the value of Host Marriott's total assets must be
represented by real estate assets. Host Marriott's real estate assets
include, for this purpose, its allocable share of real estate assets held
by the operating partnership and the non-corporate subsidiaries of the
operating partnership, as well as stock or debt instruments held for less
than one year purchased with the proceeds of a stock offering or a long-
term (at least five years) debt offering of Host Marriott, cash, cash
items and government securities. Host Marriott's real estate assets do
not include stock or debt instruments issued by its non-controlled
subsidiaries or HMT Lessee (other than mortgages).
. Second, no more than 25% of Host Marriott's total assets may be
represented by securities other than those in the 75% asset class.
. Third, of the investments included in the 25% asset class, the value of
any one issuer's securities owned by Host Marriott may not exceed 5% of
the value of Host Marriott's total assets and Host Marriott may not own
more than 10% of either the outstanding voting securities or the value of
the outstanding securities of any one issuer. For 2001 and later years,
this limit does not apply to securities of a taxable REIT subsidiary. For
years prior to 2001, the 10% limit applies only with respect to voting
securities of any issuer and not to the value of the securities of any
issuer.
. Fourth, for taxable years beginning after December 31, 2000, not more
than 20% of the value of Host Marriott's total assets may be represented
by securities of taxable REIT subsidiaries. HMT Lessee and each of the
non-controlled subsidiaries will elect to be a taxable REIT subsidiary,
effective as of January 1, 2001.
For years prior to 2001, the operating partnership did not own any of the
voting stock of the non-controlled subsidiaries but it did own 100% of the
nonvoting stock of each non-controlled subsidiary. Neither Host Marriott, the
operating partnership, nor any of the non-corporate subsidiaries of the
operating partnership has owned or will own more than 10% of the voting
securities of any entity that is treated as a corporation for federal income
tax purposes, except for, with regard to periods beginning after December 31,
2000, corporations or other entities that qualify and elect to be treated as
taxable REIT subsidiaries. In addition, Host Marriott believes that the value
of the securities of any one issuer owned by Host Marriott, the operating
partnership, or any of the non-corporate subsidiaries of the operating
partnership, including Host Marriott's pro rata share of the value of the
securities of each non-controlled subsidiary, has not exceeded 5% of the total
value of Host Marriott's assets for years prior to January 1, 2001 and will not
exceed that percentage threshold in subsequent years unless the issuer is a
taxable REIT subsidiary. There can be no assurance, however, that the IRS might
not contend that the value of such securities exceeds one or more of the value
limitations or that nonvoting stock of a non-controlled subsidiary or another
corporate entity owned by the operating partnership should be considered
"voting stock" for this purpose.
After initially meeting the asset tests at the close of any quarter, Host
Marriott will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. An example of such an acquisition would be an increase in Host
Marriott's interest in the operating partnership as a result of the exercise of
a limited partner's unit redemption right or an additional capital contribution
of proceeds from an offering of capital stock by Host Marriott. Host Marriott
maintains
adequate records of the value of its assets to ensure compliance with the asset
tests and intends to take such other actions within 30 days after the close of
any quarter as may be required to cure any noncompliance. If
S-68
Host Marriott fails to cure noncompliance with the asset tests within such time
period, Host Marriott would cease to qualify as a REIT.
Qualification of an entity as a taxable REIT subsidiary. To qualify as a
"taxable REIT subsidiary," an entity must be taxable as a corporation and must
satisfy the following additional requirements:
. a REIT must own an interest in the entity, whether directly or
indirectly;
. the entity must elect, together with the REIT that owns its stock, to be
treated as a taxable REIT subsidiary under the Code; and
. the entity must not directly or indirectly operate or manage a lodging
facility or a health care facility or, generally, provide to another
person, under a franchise, license or otherwise, rights to any brand name
under which any lodging facility or health care facility is operated.
Although a taxable REIT subsidiary may not operate or manage a lodging
facility, it may lease such a facility so long as the facility is a "qualified
lodging facility" and is operated on behalf of the taxable REIT subsidiary by
an "eligible independent contractor." A "qualified lodging facility" is,
generally, a hotel or motel at which no authorized gambling activities are
conducted, and the customary amenities and facilities operated as part of, or
associated with, the hotel or motel. An "eligible independent contractor" is an
independent contractor that, at the time a management agreement is entered into
with a taxable REIT subsidiary to operate a "qualified lodging facility," is
actively engaged in the trade or business of operating "qualified lodging
facilities" for a person or persons unrelated to either the taxable REIT
subsidiary or any REITs with which the taxable REIT subsidiary is affiliated. A
hotel management company that otherwise would qualify as an "eligible
independent contractor" with regard to a taxable REIT subsidiary of Host
Marriott will not so qualify if the hotel management company and/or one or more
actual or constructive owners of 10% or more of the hotel management company
actually or constructively own more than 35% of Host Marriott, or one or more
actual or constructive owners of more than 35% of the hotel management company
own 35% or more of Host Marriott (determined taking into account only the stock
held by persons owning, directly or indirectly, more than 5% of the outstanding
common stock of Host Marriott and, if the stock of the eligible independent
contractor is publicly-traded, 5% of the publicly-traded stock of the eligible
independent contractor). Host Marriott believes, and will take all steps
reasonably practicable to ensure, that neither HMT Lessee nor any of the non-
controlled subsidiaries will be considered engaged in "operating" or "managing"
its hotels and that the hotel management companies engaged to operate and
manage its hotels, including Marriott International and Crestline Hotels and
Resorts, Inc., qualify as "eligible independent contractors" with regard to HMT
Lessee and the non-controlled subsidiaries.
Certain restrictions imposed on taxable REIT subsidiaries are intended to
ensure that such entities will be subject to an appropriate level of federal
income taxation. First, a taxable REIT subsidiary may not deduct interest
payments made in any year to an affiliated REIT to the extent that such
payments exceed, generally, 50% of the taxable REIT subsidiary's adjusted
taxable income for that year (although the taxable REIT subsidiary may carry
forward to, and deduct in, a succeeding year the disallowed interest amount if
the 50% test is satisfied). In addition, if a taxable REIT subsidiary pays
interest, rent or another amount to a REIT that exceeds the amount that would
be paid to an unrelated party in an arm's length transaction, the REIT
generally will be subject to an excise tax equal to 100% of such excess. HMT
Lessee and the non-controlled subsidiaries (which will elect to be taxed as
taxable REIT subsidiaries, effective January 1, 2001) will make substantial
interest and other payments to Host Marriott, including payments of rent under
the hotel leases that have been acquired from Crestline by HMT Lessee. There
can be no assurance that the limitation on interest deductions applicable to
taxable REIT subsidiaries will not apply to the interest payments made to Host
Marriott by HMT Lessee or the non-controlled subsidiaries after January 1,
2001, resulting in an increase in the corporate tax liability of each such
subsidiary. Moreover, there can be no assurance that the terms establishing the
payments made by the taxable REIT subsidiary or the non-controlled subsidiaries
to Host Marriott will not result in the imposition of the 100% excise tax to a
portion of any such payment.
S-69
Annual distribution requirements applicable to REITs. Host Marriott, in
order to qualify as a REIT, is required to distribute dividends, other than
capital gain dividends, to its shareholders in an amount at least equal to
(i) the sum of (a) 90% (95% for taxable years ending before January 1,
2001) of "REIT taxable income," computed without regard to the dividends
paid deduction and Host Marriott's net capital gain, and (b) 90% (95% for
taxable years ending before January 1, 2001) of the net income, after tax,
if any, from foreclosure property, minus
(ii) the sum of certain items of noncash income.
In addition, if Host Marriott disposes of any built-in gain asset during the
ten-year period beginning when Host Marriott acquired the asset, Host Marriott
is required to distribute at least 90% (95% for taxable years ending before
January 1, 2001) of the built-in gain, after tax, if any, recognized on the
disposition of such asset. See "--General" above for a discussion of built-in
gain assets. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before Host Marriott
timely files its tax return for such year and if paid on or before the first
regular dividend payment date after such declaration. Host Marriott intends to
make timely distributions sufficient to satisfy these annual distribution
requirements. In this regard, the operating partnership's partnership agreement
authorizes Host Marriott, as general partner, to take such steps as may be
necessary to cause the operating partnership to distribute to its partners an
amount sufficient to permit Host Marriott to meet these distribution
requirements.
To the extent that Host Marriott does not distribute all of its net capital
gain or distributes at least 90% (95% for taxable years ending before January
1, 2001), but less than 100%, of its "REIT taxable income," as adjusted, it is
subject to tax thereon at regular capital gain and ordinary corporate tax
rates. Host Marriott, however, may designate some or all of its retained net
capital gain, so that, although the designated amount will not be treated as
distributed for purposes of this tax, a shareholder would include its
proportionate share of such amount in income, as capital gain, and would be
treated as having paid its proportionate share of the tax paid by Host Marriott
with respect to such amount. The shareholder's basis in its capital stock of
Host Marriott would be increased by the amount the shareholder included in
income and decreased by the amount of the tax the shareholder is treated as
having paid. Host Marriott would make an appropriate adjustment to its earnings
and profits. For a more detailed description of the federal income tax
consequences to a shareholder of such a designation, see "--Taxation of taxable
U.S. shareholders generally" below.
There is a significant possibility that Host Marriott's "REIT taxable
income" will exceed its cash flow, due in part to certain "non-cash" or
"phantom" income expected to be taken into account in computing Host Marriott's
"REIT taxable income." Host Marriott anticipates, however, that it will
generally have sufficient cash or liquid assets to enable it to satisfy the
distribution requirements described above. It is possible, however, that Host
Marriott, from time to time, may not have sufficient cash or other liquid
assets to meet these distribution requirements. In such event, in order to meet
the distribution requirements, Host Marriott may find it necessary to arrange
for short-term, or possibly long-term, borrowings to fund required
distributions and/or to pay dividends in the form of taxable stock dividends.
Host Marriott calculates its "REIT taxable income" based upon the conclusion
that the non-corporate subsidiaries of the operating partnership or the
operating partnership itself, as applicable, is the owner of the hotels for
federal income tax purposes. As a result, Host Marriott expects that the
depreciation deductions with respect to the hotels will reduce its "REIT
taxable income." This conclusion is consistent with the conclusion above that
the leases entered into with the Crestline subsidiaries, all of which leases
for full-service hotels but one were acquired by HMT Lessee, have been and will
continue to be treated as true leases for federal income tax purposes. If the
IRS were to challenge successfully this position, in addition to failing in all
likelihood the 75% and 95% gross income tests described above, Host Marriott
also might be deemed retroactively to have failed to meet the REIT distribution
requirements and would have to rely on the payment of a "deficiency dividend"
in order to retain its REIT status.
S-70
Under certain circumstances, Host Marriott may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in Host
Marriott's deduction for dividends paid for the earlier year. Thus, Host
Marriott may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Host Marriott would be required to pay interest based upon
the amount of any deduction taken for deficiency dividends.
Furthermore, if Host Marriott should fail to distribute during each calendar
year at least the sum of 85% of its REIT ordinary income for such year, 95% of
its REIT capital gain income for such year, and any undistributed taxable
income from prior periods, it would be subject to an excise tax. The excise tax
would equal 4% of the excess of such required distribution over the sum of
amounts actually distributed and amounts retained with respect to which the
REIT pays federal income tax.
Failure of Host Marriott to qualify as a REIT. If Host Marriott fails to
qualify for taxation as a REIT in any taxable year, and if the relief
provisions do not apply, Host Marriott will be subject to tax, including any
applicable alternative minimum tax, on its taxable income at regular corporate
rates. Distributions to shareholders in any year in which Host Marriott fails
to qualify will not be deductible by Host Marriott nor will they be required to
be made. As a result, Host Marriott's failure to qualify as a REIT would
significantly reduce the cash available for distribution by Host Marriott to
its shareholders and could materially reduce the value of its capital stock. In
addition, if Host Marriott fails to qualify as a REIT, all distributions to
shareholders will be taxable as ordinary income, to the extent of Host
Marriott's current and accumulated E&P, although, subject to certain
limitations of the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction with respect to these
distributions. Unless entitled to relief under specific statutory provisions,
Host Marriott also will be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether in all circumstances Host Marriott would be entitled
to such statutory relief.
Tax aspects of Host Marriott's ownership of interests in the operating
partnership
General. Substantially all of Host Marriott's investments are held through
the operating partnership, which holds the hotels either directly or through
certain subsidiaries. In general, partnerships are "pass-through" entities that
are not subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit
of a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. Host Marriott
includes in its income its proportionate share of the foregoing partnership
items for purposes of the various REIT income tests and in the computation of
its REIT taxable income. Moreover, for purposes of the REIT asset tests, Host
Marriott includes its proportionate share of assets held through the operating
partnership and certain of its subsidiaries. See "--Federal income taxation of
Host Marriott--Ownership of partnership interests by a REIT" above.
Entity classification. If the operating partnership or any non-corporate
subsidiary were treated as an association, the entity would be taxable as a
corporation and therefore would be subject to an entity level tax on its
income. In such a situation, the character of Host Marriott's assets and items
of gross income would change and could preclude Host Marriott from qualifying
as a REIT (see "--Federal income taxation of Host Marriott--Asset tests
applicable to REITs" and "--Income tests applicable to REITs" above).
The entire discussion of the federal income tax consequences of the
ownership of common stock is based on the assumption that the operating
partnership and all of its non-corporate subsidiaries (other than HMT Lessee
and any subsidiaries held by a non-controlled subsidiary or HMT Lessee) are
classified as partnerships or disregarded as separate entities for federal
income tax purposes. Pursuant to regulations under Section 7701 of the Internal
Revenue Code, a partnership will be treated as a partnership for federal income
tax purposes unless it elects to be treated as a corporation or would be
treated as a corporation because it is a "publicly traded partnership." Neither
the operating partnership nor any of the non-corporate subsidiaries (other than
HMT Lessee, which will elect to be treated as a corporation and a taxable REIT
subsidiary, effective January 1,
S-71
2001) has elected or will elect to be treated as a corporation, and therefore,
subject to the disclosure below, each will be treated as a partnership for
federal income tax purposes (or, if such an entity has only one partner or
member, disregarded entirely for federal income tax purposes).
Pursuant to Section 7704 of the Internal Revenue Code, however, a
partnership that does not elect to be treated as a corporation nevertheless
will be treated as a corporation for federal income tax purposes if it is a
"publicly traded partnership," unless at least 90% of its income consists of
"qualifying income" within the meaning of that section. A "publicly traded
partnership" is any partnership (i) the interests in which are traded on an
established securities market or (ii) the interests in which are readily
tradable on a "secondary market or the substantial equivalent thereof." Units
of the operating partnership will not be traded on an established securities
market. There is a significant risk, however, that after the right to redeem
the units of the operating partnership becomes exercisable, such interests
would be considered readily tradable on the substantial equivalent of a
secondary market. In this regard, the income requirements generally applicable
to REITs and the definition of "qualifying income" under Section 7704 of the
Internal Revenue Code are similar in most key respects. There is one
significant difference, however, that is relevant to the operating partnership.
For a REIT, rent from a tenant does not qualify as "rents from real property"
if the REIT and/or one or more actual or constructive owners of 10% or more of
the REIT actually or constructively own 10% or more of the tenant (subject to
an exception, applicable for taxable years beginning after December 31, 2000,
for rents from a tenant that is a taxable REIT subsidiary); under Section 7704
of the Internal Revenue Code, rent from a tenant is not qualifying income if a
partnership and/or one or more actual or constructive owners of 5% or more of
the partnership actually or constructively own 10% or more of the tenant.
A substantial majority of the operating partnership's income, for periods
prior to the acquisition of the hotel leases by HMT Lessee, came from rent
payments by subsidiaries of Crestline. Accordingly, because the Blackstone
Entities, Host Marriott and any owner of 10% or more of Host Marriott would own
or would be deemed to own 5% or more of the operating partnership, if the
Blackstone Entities, Host Marriott and/or any owner of 10% or more of Host
Marriott were to have owned or be deemed to own collectively 10% or more of
Crestline, none of the rent from the Crestline lessees during those time
periods would have been qualifying income for purposes of determining whether
the operating partnership should be taxed as a corporation. In order to avoid
this result, the Crestline articles of incorporation have expressly provided
that no person (or persons acting as a group), including the Blackstone
Entities, Host Marriott and any owner of 10% or more of Host Marriott, may own,
actually and/or constructively, more than 9.8% by value of the equity in
Crestline and the Crestline articles of incorporation contain self-executing
mechanisms intended to enforce this prohibition. In addition, the operating
partnership's partnership agreement prohibits any person, or persons acting as
a group, or entity, other than an affiliate of the Blackstone Entities and Host
Marriott, from owning, actually and/or constructively, more than 4.9% of the
value of the operating partnership, and the Host Marriott charter prohibits any
person, or persons acting as a group, or entity, including the Blackstone
Entities and the Marriott family and their affiliated entities as a group,
from, subject to certain limited exceptions, owning, actually and/or
constructively, more than 9.8% of the lesser of the number or value of the
total outstanding shares of common stock of Host Marriott. If these
prohibitions were not enforced during the period that Crestline owned the
lessees of Host Marriott's hotels, there is a significant likelihood that the
operating partnership would have been treated as a corporation for federal
income tax purposes if the operating partnership were considered a publicly
traded partnership under the Internal Revenue Code. As described above, as a
result of the passage of the REIT Modernization Act, for taxable years
beginning after December 31, 2000, the operating partnership is able to lease
its hotel properties to a taxable REIT subsidiary and the rents received from
that subsidiary would not be disqualified from being "rents from real property"
under the REIT rules by reason of the operating partnership's ownership
interest in the subsidiary. See "--Federal income taxation of Host Marriott--
Income tests applicable to REITs" above. As noted above, effective January 1,
2001, HMT Lessee, a wholly owned subsidiary of Host Marriott that will elect to
be treated as a taxable REIT subsidiary, purchased from Crestline the lessees
of 112 of Host Marriott's hotels and the leasehold interests in an additional
four hotels. It is unclear at this time whether the change in law pursuant to
the REIT Modernization Act that permits a REIT to treat as "rents from real
property" rents received from a related party tenant if such tenant is a
taxable REIT
S-72
subsidiary applies to such rents received by a partnership for purposes of
determining "qualifying income." In the absence of definitive guidance on the
matter, Host Marriott will take such actions, if any, that are necessary to
prevent the operating partnership from being classified as a publicly traded
partnership, including exercising its authority, as general partner, under the
partnership agreement to impose limitations on the exercise of the right to
redeem units of the operating partnership so that the operating partnership may
qualify for certain safe harbors regarding transfers provided in the "publicly
traded partnership" regulations. These limitations could adversely affect the
interests of holders of units of the operating partnership. If, however, Host
Marriott were not to take these steps (or the steps were ineffective in
preventing the operating partnership from being classified as a publicly traded
partnership under the applicable regulations), there would be a significant
risk that the operating partnership could be treated as a corporation for
federal income tax purposes.
If the operating partnership were taxable as a corporation, most, if not
all, of the tax consequences described herein would be inapplicable. In
particular, Host Marriott would not qualify as a REIT because the value of Host
Marriott's ownership interest in the operating partnership would exceed 5% of
Host Marriott's assets and Host Marriott would be considered to hold more than
10% of the voting securities (and 10% of the value of the outstanding
securities) of another corporation (see "--Federal income taxation of Host
Marriott--Asset tests applicable to REITs" above). In this event, the value of
Host Marriott common stock could be adversely affected (see "--Federal income
taxation of Host Marriott--Failure of Host Marriott to qualify as a REIT"
above).
Allocations of operating partnership income, gain, loss and deduction. The
partnership agreement of the operating partnership provides that if the
operating partnership operates at a net loss, net losses shall be allocated to
Host Marriott and the limited partners in proportion to their respective
percentage ownership interests in the operating partnership, provided that net
losses that would have the effect of creating a deficit balance in a limited
partner's capital account as specially adjusted for such purpose ("Excess
Losses") will be reallocated to Host Marriott, as general partner of the
operating partnership. The partnership agreement also provides that, if the
operating partnership operates at a net profit, net income shall be allocated
first to Host Marriott to the extent of Excess Losses with respect to which
Host Marriott has not previously been allocated net income. Any remaining net
income shall be allocated in proportion to the respective percentage ownership
interests of Host Marriott and the limited partners. Finally, the partnership
agreement provides that if the operating partnership has preferred units of the
operating partnership outstanding, income will first be allocated to such
preferred units of the operating partnership to the extent necessary to reflect
and preserve the economic rights associated with such preferred units of the
operating partnership.
Although a partnership agreement will generally determine the allocation of
income and loss among partners, such allocations will be disregarded for tax
purposes if they do not comply with the provisions of Section 704(b) of the
Internal Revenue Code and the applicable regulations. Generally, Section 704(b)
and the applicable regulations require that partnership allocations respect the
economic arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The allocations of taxable income and loss
provided for in the operating partnership partnership agreement and the
partnership agreements and operating agreements of the non-corporate
subsidiaries are intended to comply with the requirements of Section 704(b) of
the Internal Revenue Code and the regulations promulgated thereunder.
Tax allocations with respect to the hotels. Pursuant to Section 704(c) of
the Internal Revenue Code, income, gain, loss and deduction attributable to
appreciated or depreciated property, such as the hotels, that is contributed to
a partnership in exchange for an interest in the partnership must be allocated
in a manner such that the contributing partner is charged with, or benefits
from, respectively, the difference between the adjusted tax basis and the fair
market value of such property at the time of contribution associated with the
property at the time of the contribution. This difference is known as built-in
gain. The operating partnership agreement
S-73
requires that such allocations be made in a manner consistent with Section
704(c) of the Internal Revenue Code. In general, the partners of the operating
partnership, including Host Marriott, who contributed depreciated assets having
built-in gain are allocated depreciation deductions for tax purposes that are
lower than such deductions would be if determined on a pro rata basis. Thus,
the carryover basis of the contributed assets in the hands of the operating
partnership may cause Host Marriott to be allocated lower depreciation and
other deductions, and therefore to be effectively allocated more income, which
might adversely affect Host Marriott's ability to comply with the REIT
distribution requirements and/or cause a higher proportion of Host Marriott's
distributions to its shareholders to be taxed as dividends. See "--Federal
income taxation of Host Marriott--Annual distribution requirements applicable
to REITs" above.
In addition, in the event of the disposition of any of the contributed
assets which have built-in gain, all income attributable to the built-in gain
generally will be allocated to the contributing partners, even though the
proceeds of such sale would be allocated proportionately among all the partners
and likely would be retained by the operating partnership, rather than
distributed. Thus, if the operating partnership were to sell a hotel with
built-in gain that was contributed to the operating partnership by Host
Marriott's predecessors or Host Marriott, Host Marriott generally would be
allocated all of the income attributable to the built-in gain, which could
exceed the economic or book income allocated to it as a result of such sale.
Such an allocation might cause Host Marriott to recognize taxable income in
excess of cash proceeds, which might adversely affect Host Marriott's ability
to comply with the REIT distribution requirements. In addition, Host Marriott
will be subject to a corporate level tax on such gain to the extent the gain is
recognized prior to January 1, 2009. See "--Federal income taxation of Host
Marriott--Annual distribution requirements applicable to REITs" and "--Federal
income taxation of Host Marriott--General" above. It should be noted in this
regard that as the general partner of the operating partnership, Host Marriott
will determine whether or not to sell a hotel contributed to the operating
partnership by Host Marriott.
The operating partnership and Host Marriott generally use the traditional
method, with a provision for a curative allocation of gain on sale to the
extent prior allocations of depreciation with respect to a specific hotel were
limited by the "ceiling rule" applicable under the traditional method, to
account for built-in gain with respect to the hotels contributed to the
operating partnership in connection with the REIT conversion. This method is
generally a more favorable method for accounting for built-in gain from the
perspective of those partners, including Host Marriott, who received units of
the operating partnership in exchange for property with a low basis relative to
value at the time of the REIT conversion and is a less favorable method from
the perspective of those partners who contributed cash or "high basis" assets
to the operating partnership, including Host Marriott, to the extent it
contributes cash to the operating partnership.
Any property purchased by the operating partnership subsequent to the REIT
conversion will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Internal Revenue Code will not apply.
Other tax consequences for Host Marriott and its shareholders
Host Marriott and its shareholders are subject to state or local taxation in
various state or local jurisdictions, including those in which the operating
partnership or Host Marriott's shareholders transact business or reside. The
state and local tax treatment of Host Marriott and its shareholders may not
conform to the federal income tax consequences discussed above. Consequently,
prospective shareholders of Host Marriott should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in Host
Marriott.
A portion of the cash to be used by Host Marriott to fund distributions
comes from dividends from the non-controlled subsidiaries and HMT Lessee and,
in some cases, interest on notes held by the operating partnership. Each non-
controlled subsidiary and HMT Lessee is subject to federal and state income tax
at the full applicable corporate rates.
As described above in "--Federal income taxation of Host Marriott--Income
tests applicable to REITs" and "--Asset tests applicable to REITs" above, both
of the non-controlled subsidiaries and HMT Lessee will
S-74
elect to be treated as a taxable REIT subsidiary for years commencing after
December 31, 2000. As a taxable REIT subsidiary, each of the non-controlled
subsidiaries and HMT Lessee will be fully taxable as a corporation and will be
subject to certain rules intended to restrict its ability to reduce its tax
liability. For a more detailed discussion of taxable REIT subsidiaries, see "--
Federal income taxation of Host Marriott--Qualification of an entity as a
taxable REIT subsidiary" above.
To the extent that any of the non-controlled subsidiaries or HMT Lessee is
required to pay federal, state or local taxes, Host Marriott will receive less
dividend income from the relevant entity and will have less cash available for
distribution to shareholders.
Taxation of Taxable U.S. Shareholders
When we use the term "U.S. shareholder", we mean a holder of shares of Class
C preferred stock who is, for United States federal income tax purposes:
. a citizen or resident of the United States,
. a corporation, partnership, or other entity treated as a corporation or
partnership for United States federal income tax purposes, created or
organized in or under the laws of the United States or of a state
thereof or in the District of Columbia, unless, in the case of a
partnership, Treasury Regulations provide otherwise,
. an estate the income of which is subject to United States federal income
taxation regardless of its source or
. a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
Regulations, some trusts in existence on August 20, 1996, and treated as United
States persons prior to this date that elect to continue to be treated as
United States persons, shall also be considered U.S. shareholders.
Distributions Generally. Distributions out of our current or accumulated
earnings and profits, other than capital gain dividends discussed below, will
constitute dividends taxable to our taxable U.S. shareholders as ordinary
income. As long as we qualify as a real estate investment trust, these
distributions will not be eligible for the dividends-received deduction in the
case of U.S. shareholders that are corporations. For purposes of determining
whether distributions to holders of our Class C preferred stock are made out of
our current or accumulated earnings and profits for federal income tax
purposes, our earnings and profits will be allocated first to the Class C
preferred stock, Class B preferred stock and Class A preferred stock on a pro
rata basis and then to our common stock.
To the extent that we make distributions, other than capital gain dividends
discussed below, in excess of our current and accumulated earnings and profits,
these distributions will be treated first as a tax-free return of capital to
each U.S. stockholder. This treatment will reduce the adjusted tax basis which
each U.S. shareholder has in his Class C preferred stock by the amount of the
distribution in excess of earnings and profits, but not below zero.
Distributions in excess of a U.S. shareholder's adjusted tax basis in his
shares will be taxable as capital gain. Such gain will be taxable as long-term
capital gain if the shares have been held for more than one year. Dividends we
declare in October, November, or December of any year and payable to a
shareholder of record on a specified date in any of these months will be
treated as both paid by us and received by the shareholder on December 31 of
that year, provided we actually pay the dividend on or before January 31 of the
following year. Shareholders may not include in their own income tax returns
any of our net operating losses or capital losses.
Capital Gain Distributions. Distributions that we properly designate as
capital gain dividends will be taxable to our taxable U.S. shareholders as
gain, to the extent that such gain does not exceed our actual net
S-75
capital gain for the taxable year from the sale or disposition of capital
assets. Depending on the characteristics of the assets which produced these
gains, and on specific designations, if any, which we make, these gains may be
taxable to non-corporate U.S. shareholders at a 20% or 25% rate. U.S.
shareholders that are corporations may, however, be required to treat up to 20%
of some capital gain dividends as ordinary income. If we properly designate any
portion of a dividend as a capital gain dividend, then any portion of the total
capital gain dividends paid or made available to holders of all classes of our
stock for the year shall be allocable to the holders of Class C preferred stock
in proportion to the amount that the total dividends, as determined for federal
income tax purposes, paid or made available to the holders of the Class C
preferred stock for the year bears to the total dividends paid or made
available to holders of all classes of our stock for the year.
Passive Activity Losses and Investment Interest Limitations. Distributions
we make and gain arising from the sale or exchange by a U.S. shareholder of
shares of Class C preferred stock will not be treated as passive activity
income. As a result, U.S. shareholders generally will not be able to apply any
"passive losses" against this income or gain. Distributions we make, to the
extent they do not constitute a return of capital, generally will be treated as
investment income for purposes of computing the investment interest limitation.
Gain arising from the sale or other disposition of shares of Class C preferred
stock, however, may not be treated as investment income depending upon your
particular situation.
Retention of Net Long-Term Gains. We may elect to retain, rather than
distribute as a capital gain dividend, our net long-term capital gains. If we
make this election, we would pay tax on our retained net long-term capital
gains. In addition, to the extent we designate, a U.S. shareholder generally
would:
. include its proportionate share of our undistributed long-term capital
gains in computing its long-term capital gains in its return for its
taxable year in which the last day of our taxable year falls;
. be deemed to have paid the capital gains tax imposed on us on the
designated amounts included in the U.S. shareholder's long-term capital
gains;
. receive a credit or refund for the amount of tax deemed paid by it;
. increase the adjusted basis of its shares of Class C preferred stock by
the difference between the amount of includable gains and the tax deemed
to have been paid by it; and
. in the case of U.S. shareholder that is a corporation, appropriately
adjust its earnings and profits for the retained capital gains as
required by Treasury Regulations to be prescribed by the Internal
Revenue Service.
Dispositions of Class C Preferred Stock. If you are a U.S. shareholder and
you sell or dispose of your shares of Class C preferred stock to a person other
than Host Marriott, you will recognize gain or loss for federal income tax
purposes in an amount equal to the difference between (i) the amount of cash
and the fair market value of any property you receive on the sale or other
disposition, less any portion thereof attributable to accumulated and declared
but unpaid distributions that you are entitled to receive, which would have
been characterized as a dividend to the extent of our current and accumulated
earnings and profits, and (ii) your adjusted basis in the shares of Class C
preferred stock for tax purposes. This gain or loss will be capital gain or
loss. This gain or loss, except as provided below, will be long-term capital
gain or loss if you have held the Class C preferred stock for more than one
year. In general, if you are a U.S. shareholder and you recognize loss upon the
sale or other disposition of shares of Class C preferred stock that you have
held for six months or less, the loss you recognize will be treated as a long-
term capital loss, to the extent you received distributions from us which were
required to be treated as long-term capital gains.
Redemption of Class C Preferred Stock. A redemption of shares of Class C
preferred stock for cash will be a taxable event.
A redemption of Class C preferred stock for cash generally will be treated
as a sale or exchange if the U.S. shareholder does not own, actually or
constructively, within the meaning of Section 318 of the Internal Revenue Code,
any of our stock other than the stock that is redeemed. If the U.S. shareholder
owns, actually or constructively, other stock, including Class C preferred
stock that is not redeemed, a redemption of Class C
S-76
preferred stock may be treated as a dividend to the extent of our current or
accumulated earnings and profits for federal income tax purposes. Dividend
treatment, however, would not apply if the redemption:
. is "substantially disproportionate" with respect to the shareholder
under section 302(b)(2) of the Internal Revenue Code; or
. is "not essentially equivalent to a dividend" with respect to the
shareholder under section 302(b)(1) of the Internal Revenue Code.
In determining whether these tests have been met, a U.S. shareholder must
take into account not only stock he actually owns, but also stock he
constructively owns within the meaning of Section 318 of the Internal Revenue
Code. A distribution to a shareholder is "not essentially equivalent to a
dividend" if it results in a "meaningful reduction" in the shareholder's
interest in our stock. If, as a result of a redemption of the Class C preferred
stock, a shareholder whose relative stock interest in us is minimal and who
exercises no control over our corporate affairs suffers a significant reduction
in its proportionate interest in us, taking into account constructive
ownership, that shareholder should be regarded as having suffered a meaningful
reduction in its interest in our stock. There can be no certainty, however, as
to when a meaningful reduction has occurred because the applicable test is not
based on numerical criteria. Satisfaction of the "substantially
disproportionate" exception is dependent upon compliance with the objective
tests set forth in section 302(b)(2) of the Internal Revenue Code.
If the redemption of Class C preferred stock is not treated as a
distribution taxable as a dividend, the redemption of the Class C preferred
stock would be taxed as described above under the heading "Dispositions of
Class C Preferred Stock."
Backup Withholding
We report to our U.S. shareholders and the Internal Revenue Service the
amount of dividends paid during each calendar year, and the amount of any tax
withheld. Under the backup withholding rules, a shareholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless the
holder is a corporation or is otherwise exempt and, when required, demonstrates
this fact, or provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies with the
backup withholding rules. A U.S. shareholder that does not provide us with his
correct taxpayer identification number may also be subject to penalties imposed
by the Internal Revenue Service. Backup withholding is not an additional tax.
Any amount paid as backup withholding will be creditable against the
stockholder's income tax liability. In addition, we may be required to withhold
a portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status.
Taxation of Tax-Exempt Shareholders
The Internal Revenue Service has ruled that amounts distributed as dividends
by qualified real estate investment trust do not constitute unrelated business
taxable income when received by a tax-exempt entity. Based on that ruling,
except as described below, dividend income from us and gain arising upon your
sale of Class C preferred stock generally will not be unrelated business
taxable income to a tax-exempt shareholder. This income or gain will be
unrelated business taxable income, however, if the tax-exempt shareholder holds
its Class C preferred stock as "debt financed property" within the meaning of
the Internal Revenue Code or if the Class C preferred stock is used in a trade
or business of the tax-exempt shareholder. Generally, debt financed property is
property, the acquisition or holding of which was financed through a borrowing
by the tax-exempt shareholder.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17) and (c)(20) of the Internal Revenue Code,
respectively, income from an investment in our Class C preferred stock will
constitute unrelated business taxable income unless the organization is able to
properly claim a deduction for amounts set aside or placed in reserve for
specific purposes so as to offset the income generated by its investment in our
Class C preferred stock. These prospective investors should consult their tax
advisors concerning these "set aside" and reserve requirements.
S-77
Notwithstanding the above, however, a portion of the dividends paid by a
"pension-held real estate investment trust" shall be treated as unrelated
business taxable income as to any trust which:
.is described in Section 401(a) of the Internal Revenue Code;
.is tax-exempt under Section 501(a) of the Internal Revenue Code; and
.holds more than 10%, by value, of the interests in the real estate
investment trust.
Tax-exempt pension funds that are described in Section 401(a) of the
Internal Revenue Code and exempt from tax under Section 501(a) of the Internal
Revenue Code are referred to below as "qualified trusts."
A real estate investment trust is a "pension-held real estate investment
trust" if:
. it would not have qualified as a real estate investment trust but for the
fact that Section 856(h)(3) of the Internal Revenue Code provides that
stock owned by qualified trusts shall be treated, for purposes of the
"not closely held" requirement, as owned by the beneficiaries of the
trust, rather than by the trust itself; and
. either at least one such qualified trust holds more than 25%, by value,
of the interests in the real estate investment trust, or one of more such
qualified trusts, each of which owns more than 10%, by value, of the
interests in the real estate investment trust, holds in the aggregate
more than 50%, by value, of the interests in the real estate investment
trust.
The percentage of any real estate investment trust dividend treated as
unrelated business taxable income is equal to the ratio of:
. the unrelated business taxable income earned by the real estate
investment trust, treating the real estate investment trust as if it were
a qualified trust and therefore required to pay tax on unrelated business
taxable income, to
. the total gross income of the real estate investment trust.
A de minimis exception applies where the percentage is less than 5% for any
year. The provisions requiring qualified trusts to treat a portion of real
estate investment trust distributions as unrelated business taxable income will
not apply if the real estate investment trust is able to satisfy the "not
closely held" requirement without relying upon the "look-through" exception
with respect to qualified trusts. Based on the current estimated ownership of
our stock and as a result of limitations on the transfer and ownership of our
stock contained in our charter, we should not be classified as a "pension-held
real estate investment trust."
Taxation of Non-U.S. Shareholders
The preceding discussion does not address the rules governing United States
federal income taxation of the ownership and disposition of Class C preferred
stock by persons that are non-U.S. shareholders. When we use the term "non-U.S.
shareholder" we mean shareholders who are not U.S. shareholders. In general,
non-U.S. shareholders may be subject to special tax withholding requirements on
distributions from us and with respect to their sale or other disposition of
our Class C preferred stock, except to the extent reduced or eliminated by an
income tax treaty between the United States and the non-U.S. shareholder's
country. A non-U.S. shareholder who is a shareholder of record and is eligible
for reduction or elimination of withholding must file an appropriate form with
us in order to claim such treatment. Non-U.S. shareholders should consult their
own tax advisors concerning the federal income tax consequences to them of an
acquisition of shares of Class C preferred stock, including the federal income
tax treatment of dispositions of interests in and the receipt of distributions
from us.
Other Tax Consequences
Your state and local tax treatment may not conform to the federal income tax
consequences summarized above. Consequently, you should consult your tax
advisor regarding the effect of state and local tax laws on an investment in
our shares.
S-78
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus supplement, the underwriters named
below, for whom Morgan Stanley & Co. Incorporated, Bear, Stearns & Co. Inc.,
Deutsche Banc Alex. Brown Inc., Prudential Securities Incorporated and UBS
Warburg LLC are acting as representatives, have severally agreed to purchase,
and we have agreed to sell to them, severally, the number of shares of Class C
preferred stock indicated below:
Number of
Name Shares
---- ---------
Morgan Stanley & Co. Incorporated.................................. 885,000
Bear, Stearns & Co., Inc. ......................................... 885,000
Deutsche Banc Alex. Brown Inc. .................................... 885,000
Prudential Securities Incorporated................................. 885,000
UBS Warburg LLC.................................................... 885,000
A.G. Edwards & Sons, Inc........................................... 50,000
CIBC World Markets Corp............................................ 50,000
Credit Suisse First Boston Corporation............................. 50,000
Legg Mason Wood Walker, Incorporated............................... 50,000
Lehman Brothers Inc................................................ 50,000
Tucker Anthony Incorporated........................................ 50,000
Advest Inc......................................................... 25,000
BB&T Capital Markets, a Division of Scott & Stringfellow........... 25,000
Fahnestock & Co. Inc............................................... 25,000
Ferris, Baker Watts, Incorporated.................................. 25,000
Janney Montgomery Scott LLC........................................ 25,000
Johnston, Lemon & Co. Incorporated................................. 25,000
Josephthal & Co. Inc............................................... 25,000
CL King & Associates, Inc.......................................... 25,000
McDonald Investments Inc., a KeyCorp Company....................... 25,000
Mesirow Financial, Inc............................................. 25,000
Parker/Hunter Incorporated......................................... 25,000
Pershing/Division of Donaldson, Lufkin & Jenrette.................. 25,000
The Robinson-Humphrey Company, LLC................................. 25,000
Southwest Securities, Inc.......................................... 25,000
Stifel, Nicolaus & Company Incorporated............................ 25,000
U.S. Bancorp Piper Jaffray Inc..................................... 25,000
Wachovia Securities, Inc........................................... 25,000
Wedbush Morgan Securities.......................................... 25,000
Wells Fargo/Van Kasper & Co........................................ 25,000
---------
Total............................................................ 5,200,000
=========
The underwriters are offering the shares of Class C preferred stock subject
to their acceptance of the shares from us and subject to prior sale. The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of Class C preferred
stock offered by this prospectus supplement are subject to the approval of
certain legal matters by their counsel and to certain other conditions. The
underwriters are obligated to take and pay for all of the shares of Class C
preferred stock offered by this prospectus supplement if any such shares are
taken. However, the underwriters are not required to take or pay for the shares
covered by the underwriters' over-allotment option described below.
The underwriters initially propose to offer part of the shares of Class C
preferred stock directly to the public at the public offering price set forth
on the cover page of this prospectus supplement and part to certain dealers at
a price that represents a concession not in excess of $.50 a share under the
public offering price. Any underwriter may allow, and such dealers may re-
allow, a concession not in excess of $.45 a share to other underwriters or to
certain dealers. After the initial offering of the shares of Class C preferred
stock, the offering price and other selling terms may from time to time be
varied by the representatives.
S-79
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to an aggregate of
780,000 additional shares of Class C preferred stock at the public offering
price set forth on the cover page of this prospectus supplement less
underwriting discounts and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if any, made in
connection with the offering of the shares of Class C preferred stock offered
by this prospectus supplement. To the extent the option is exercised, each
underwriter will become obligated, subject to certain conditions, to purchase
about the same percentage of the additional shares of Class C preferred stock
as the number set forth next to the underwriter's name in the preceding table
bears to the total number of shares of Class C preferred stock listed next to
the names of all underwriters in the preceding table. If the underwriters'
option is exercised in full, the total price to public would be $149,500,000,
the total underwriting discounts and commissions would be $4,858,750 and the
total proceeds to us would be $144,641,250. Underwriting discounts and
commissions for sales of 375,000 or more shares of Class C preferred stock to
a single purchaser will be $.50 per share. If any of these sales occurs, the
total underwriting discounts and commissions will be less than the amounts set
forth on the cover page of this prospectus supplement and, if applicable, in
the preceding sentence.
The Class C preferred stock has been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange under the symbol
"HMTPrC". We expect that trading of shares of Class C preferred stock on the
NYSE will commence within the 30-day period after initial delivery of the
shares. The underwriters have advised us that they intend to make a market in
the shares of Class C preferred stock prior to the commencement of trading on
the NYSE. The underwriters will have no obligation to make a market in the
shares of Class C preferred stock, however, and may cease market-making
activities, if commenced, at any time.
We have agreed that, without the prior written consent of Morgan Stanley &
Co. Incorporated on behalf of the underwriters, we will not, during the period
ending 30 days after the date of this prospectus supplement:
. offer, issue, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of,
directly or indirectly, any shares of Class C preferred stock or other
preferred stock, any shares of any other class or series of our capital
stock which is substantially similar to the Class C preferred stock, any
preferred securities of a subsidiary trust or similar financing vehicle
or any depositary shares or depositary receipts representing or
evidencing any of the foregoing, or any securities convertible into or
exercisable or exchangeable for any of the foregoing, or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of any
Class C preferred stock or other preferred stock, any shares of any other
class or series of our capital stock which is substantially similar to
the Class C preferred stock, any preferred securities of a subsidiary
trust or similar financing vehicle or any depositary shares or depositary
receipts representing or evidencing any of the foregoing or any
securities convertible into or exercisable or exchangeable for any of the
foregoing;
whether any transaction described above is to be settled by delivery of Class
C preferred stock, other securities, in cash or otherwise. The restrictions
described in this paragraph do not apply to the sale of shares of Class C
preferred stock to the underwriters.
In order to facilitate the offering of the shares of Class C preferred
stock, the underwriters may engage in transactions that stabilize, maintain or
otherwise affect the price of the shares of Class C preferred stock.
Specifically, the underwriters may over-allot in connection with the offering,
creating a short position in the shares of Class C preferred stock for their
own account. In addition, to cover over-allotments or to stabilize the price
of the shares of Class C preferred stock, the underwriters may bid for, and
purchase, shares of Class C preferred stock in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an
underwriter or a dealer for distributing the shares of Class C preferred stock
in the offering, if the syndicate repurchases previously distributed shares of
Class C preferred stock in transactions to cover syndicate
S-80
short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the shares of Class C
preferred stock above independent market levels. The underwriters are not
required to engage in these activities, and may end any of these activities at
any time.
Certain of the underwriters and their affiliates have from time to time
provided investment banking and other services to us, including acting as
underwriters for offerings by us or our subsidiaries, and may continue to do so
in the future. In that regard, affiliates of certain of the underwriters act as
agents and/or lenders under the operating partnership's bank credit facility
and, in addition, affiliates of certain underwriters provided the operating
partnership and its subsidiaries with certain mortgage financing.
We and the underwriters have agreed to indemnify each other against certain
liabilities, including liabilities under the Securities Act of 1933. In
addition, we have agreed to pay expenses incurred by the underwriters in
connection with the offering of Class C preferred stock in an amount not to
exceed $370,000.
LEGAL MATTERS
Certain legal matters in connection with the offering of the Class C
preferred stock will be passed upon for us by internal counsel to Host Marriott
and by Latham & Watkins, Washington, D.C. Certain Maryland law matters relating
to the offering will be passed upon by Ballard Spahr Andrews & Ingersoll, LLP,
special Maryland counsel to Host Marriott. Brown & Wood LLP, San Francisco,
California, will act as counsel for the underwriters.
EXPERTS
The audited consolidated financial statements and schedules of Host Marriott
Corporation and subsidiaries, CCHP I Corporation and subsidiaries, CCHP II
Corporation and subsidiaries, CCHP III Corporation and subsidiaries, CCHP IV
Corporation and subsidiaries incorporated by reference in the accompanying
prospectus and elsewhere in the registration statement to the extent and for
the periods indicated in their reports have been audited by Arthur Andersen
LLP, independent public accountants, and are incorporated by reference therein
in reliance upon the authority of said firm as experts in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
This section supersedes listed items 1 through 6 of the section entitled
"Where You Can Find More Information" in the accompanying prospectus.
The following documents, which we have filed with the Securities and
Exchange Commission since the date of the accompanying prospectus, have been
incorporated by reference into the accompanying prospectus:
1. Annual Report on Form 10-K of Host Mariott Corporation for the year ended
December 31, 1999 (filed on March 16, 2000)
2. Quarterly Reports on Form 10-Q of Host Marriott Corporation for the
quarters ended:
. March 24, 2000 (filed on May 8, 2000)
. June 16, 2000 (filed on July 25, 2000)
. September 8, 2000 (filed on October 23, 2000)
3. Current Reports on Form 8-K dated:
. February 24, 2000 (as filed on February 25, 2000)
. November 28, 2000 (as amended by Form 8K/A on December 14, 2000)
. February 1, 2001 (as filed on February 7, 2001)
4. Proxy Statement on Schedule 14A dated April 17, 2000.
S-81
PROSPECTUS
$1,050,000,000
HOST MARRIOTT CORPORATION
Common Stock, Preferred Stock, Depositary Shares,
Warrants and Subscription Rights
By this prospectus, we may offer, from time to time, in one or more series
or classes the following securities:
. shares of our common stock,
. shares of our preferred stock,
. shares of preferred stock represented by depositary shares,
. our warrants exercisable for common stock, preferred stock or depositary
shares and
. subscription rights evidencing the right to purchase any of the above
securities.
The offered securities have an aggregate initial offering price of
$1,050,000,000. We may offer the offered securities in amounts, at prices and
on terms determined at the time of the offering. We will provide you with
specific terms of the applicable offered securities in supplements to this
prospectus.
You should read this prospectus and any supplement carefully before you
decide to invest. This prospectus may not be used to consummate sales of the
offered securities unless it is accompanied by a prospectus supplement
describing the method and terms of the offering of those offered securities.
Investing in the offered securities involves risks. See "Risk Factors"
beginning on page 2.
----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these offered securities or
determined if this prospectus is truthful or complete. It is illegal for any
person to tell you otherwise.
----------------
The date of this prospectus is December 30, 1998.
As used herein and in the accompanying prospectus supplement, "Host
Marriott" means Host Marriott Corporation, a Maryland corporation, and/or its
subsidiary Host Marriott, L.P., a Delaware limited partnership and its
subsidiaries.
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
material risks described below.
We Do Not Control Our Hotel Operations
Because federal income tax laws restrict real estate investment trusts from
deriving revenues directly from operating a hotel, we do not operate any of
our hotels. Instead, we lease virtually all of our hotels to subsidiaries of
Crestline Capital Corporation which, in turn, retain managers to manage our
hotels pursuant to management agreements. Under the hotel leases, we have
little influence over how the lessees operate our hotels. Similarly, we have
virtually no influence over how the managers manage our hotels. As a result,
our revenue depends upon the ability of the lessees and the managers to
operate and manage our hotels. We have no recourse if we believe that the
hotel managers do not maximize the revenues from our hotels, which in turn
will maximize the rental payments we receive under the leases. We may seek
redress under most leases only if the lessee violates the terms of the lease
and then only to the extent of the remedies set forth in the lease. We may
terminate a lease if the lessee defaults, but terminating a lease could impair
our ability to qualify as a REIT for federal income tax purposes unless
another suitable lessee is found.
We Do Not Control Certain Assets Held by the Non-Controlled Subsidiaries
We own economic interests in certain taxable corporations, which we refer
to as the "non-controlled subsidiaries," that hold various assets not
exceeding, in the aggregate, 15% in value of our assets. These assets consist
primarily of interests in hotels which are not leased, certain furniture,
fixtures and equipment ("FF&E") used in our hotels, and certain international
hotels that could jeopardize our REIT status. Although we own 95% of the
economic interests of the non-controlled subsidiaries, the Host Marriott
Statutory Employee/Charitable Trust owns all of the voting common stock, which
represents the remaining 5% of the economic interest, of the non-controlled
subsidiaries. This voting stockholder elects the directors who are responsible
for overseeing the operations of the non-controlled subsidiaries. As a result,
we have no control over the operation or management of the hotels or other
assets owned by the non-controlled subsidiaries, even though we depend upon
the non-controlled subsidiaries for a significant portion of our revenues.
We Are Dependent on the Lessees' Rent Payments As Our Primary Source of
Revenues
Subsidiaries of Crestline lease virtually all of our hotels. The lessees'
rent payments are the primary source of our revenues. Crestline guarantees the
obligations of its subsidiaries under the hotel leases, but Crestline's
liability is limited to a relatively small portion of the aggregate rent
obligation of its subsidiaries. Crestline's and each of its subsidiaries'
ability to meet its obligations under the leases will determine the amount of
our revenue and, likewise, our ability to make distributions to stockholders.
We have no control over Crestline or any of its subsidiaries and cannot assure
you that Crestline or any of its subsidiaries will have sufficient assets,
income and access to financing to enable them to satisfy their obligations
under the leases or to make payments of fees under the management agreements.
Because of our dependence on Crestline, our credit rating will be affected by
its general creditworthiness.
We Are Dependent on the Hotel Managers to Operate the Hotels Effectively
Our revenue will be affected by the performance of the managers of our
hotels. It also will be affected by the relationships between the managers and
the lessees. Their decisions involving hotel management may not
2
necessarily be in our best interests, and disagreements between them could
adversely affect us. We have no control over these relationships. Moreover,
each lessee's ability to pay rent accrued under its lease depends to a large
extent on the ability of the hotel manager to operate the hotel effectively
and to generate gross sales in excess of its operating expenses. Our rental
income from the hotels may therefore be adversely affected if the managers
fail to provide quality services and amenities and competitive room rates at
our hotels or fail to maintain the quality of the hotel brand names. Although
the lessees have primary liability under the management agreements while the
leases are in effect, we remain liable under the leases for all obligations
that the lessees do not perform.
Our Revenues and the Value of Our Properties Could be Adversely Affected by
Conditions Affecting the Lodging Industry
If our assets do not generate income sufficient to pay our expenses,
service our debt and maintain our properties, we will be unable to make
expected distributions to our stockholders. Factors that could adversely
affect our revenues and the economic performance and value of our properties
include:
. changes in the national, regional and local economic climate,
. local conditions such as an oversupply of hotel properties or a reduction
in demand for hotel properties,
. the attractiveness of our hotels to consumers and competition from
comparable hotels,
. the quality, philosophy and performance of the hotel managers (primarily
Marriott International, Inc.),
. the ability of any hotel lessee to maximize rental payments,
. changes in room rates and increases in operating costs due to inflation
and other factors and
. the need to periodically repair and renovate our hotels.
Our Expenses May Remain Constant Even If Our Revenues Drop
The expenses of owning a property are not necessarily reduced when
circumstances such as market factors and competition cause a reduction in
income from the property. If a property is mortgaged and we are unable to meet
the mortgage payments, the lender could foreclose and take the property. Our
financial condition and ability to service debt and make distributions to our
stockholders could be adversely affected by:
. interest rate levels,
. the availability of financing,
. the cost of compliance with government regulation, including zoning and
tax laws and
. changes in laws and governmental regulations, including those governing
usage, zoning and taxes.
New Acquisitions May Fail to Perform as Expected and We May Be Unable to Make
Any Acquisitions
We intend to acquire additional full-service hotels and other types of real
estate. Newly acquired properties may fail to perform as expected, which could
adversely affect our financial condition. We may underestimate the costs
necessary to bring an acquired property up to standards established for its
intended market position. We expect to acquire hotels and other types of real
estate with cash from secured or unsecured financings and proceeds from
offerings of equity or debt, to the extent available. We may not be in a
position or have the opportunity in the future to make suitable property
acquisitions on favorable terms. In addition, we cannot guarantee that the
leases for newly acquired hotels will be as favorable to us as the Leases.
3
Competition for Acquisitions May Result in Increased Prices for Hotels
Other major investors with significant capital compete with us for
attractive investment opportunities. These competitors include other REITs and
hotel companies, investment banking firms and private institutional investment
funds. This competition may increase prices for hotel properties, thereby
decreasing the potential return on our investment.
The Seasonality of the Hotel Industry May Affect the Ability of the Lessees to
Make Timely Rent Payments
The seasonality of the hotel industry may, from time to time, affect either
the amount of rent that accrues under the hotel leases or the ability of the
lessees to make timely rent payments under the leases. A lessee's or
Crestline's inability to make timely rent payments to us could adversely affect
our financial condition and ability to service debt and make distributions to
our stockholders.
We May Be Unable to Sell Properties When Appropriate Because Real Estate
Investments Are Illiquid
Real estate investments generally cannot be sold quickly. We may not be able
to vary our portfolio promptly in response to economic or other conditions.
This inability to respond promptly to changes in the performance of our
investments could adversely affect our financial condition and ability to
service debt and make distributions to our stockholders.
We May Be Unable to Renew Leases or Find Other Lessees
Our current hotel leases have terms of seven to ten years. There can be no
assurance that the affected hotels will be relet to Crestline or the current
lessees, or if relet, will be relet on terms as favorable to us. If our hotels
are not relet, we will be required to find other lessees who meet certain
requirements of the management agreements and of the REIT tax rules. We cannot
assure you that we would be able to find satisfactory lessees or that the terms
of any new leases would be as favorable as under the current leases. Failure to
find satisfactory lessees could cause us to lose our REIT status, and failure
to enter leases on satisfactory terms could result in reduced cash available
for distribution.
Terms of the Hotel Ground Leases May Adversely Affect Our Revenues
As of December 30, 1998, we lease 54 of our hotels pursuant to ground
leases. These ground leases generally require increases in ground rent payments
every five years. Our ability to make cash distributions to our stockholders
could be adversely affected to the extent that the rents payable by the lessees
under the leases do not increase at the same or a greater rate as the increases
under the ground leases. In addition, if we were to sell a hotel encumbered by
a ground lease, the buyer would have to assume the ground lease, which could
result in a lower sales price.
Some Potential Losses Are Not Covered By Insurance
We carry comprehensive liability, fire, flood, extended coverage and rental
loss (for rental losses extending up to 12 months) insurance with respect to
all of our hotels. We believe the policy specifications and insured limits of
these policies are of the type customarily carried for similar hotels. Certain
types of losses, such as from earthquakes and environmental hazards, however,
may be either uninsurable or too expensive to justify insuring against. Should
an uninsured loss or a loss in excess of insured limits occur, we could lose
all or a portion of the capital we have invested in a hotel, as well as the
anticipated future revenue from the hotel. In such an event, we might
nevertheless remain obligated for any mortgage debt or other financial
obligations related to the property.
4
Leases Could Impair the Sale or Other Disposition of Our Hotels
Each lease with a subsidiary of Crestline generally requires us to make a
termination payment to the lessee if we terminate the lease prior to the
expiration of its term. A termination payment is required even if we terminate
a lease because of a change in the federal income tax laws that either would
make continuation of the lease jeopardize our REIT status or would enable us to
operate our hotels ourselves. The termination fee generally is equal to the
fair market value of the lessee's leasehold interest in the remaining term of
the lease, which could be a significant amount. In addition, if we decide to
sell a hotel, we may be required to terminate its lease, and the payment of the
termination fee under such circumstances could impair our ability to sell the
hotel and would reduce the net proceeds of any sale.
Management Agreements Could Impair the Sale or Other Disposition of Our Hotels
Under the terms of the management agreements, we generally may not sell,
lease or otherwise transfer the hotels unless the transferee assumes the
related management agreements and meets certain other conditions. Our ability
to finance, refinance or effect a sale of any of the properties managed by
Marriott International or another manager may, depending upon the structure of
such transactions, require the manager's consent. If Marriott International or
other manager did not consent, we would be prohibited from consummating the
financing, refinancing or sale without breaching the management agreement.
The Acquisition Contracts Relating to Certain Hotels Limit Our Ability to Sell
or Refinance Such Hotels
For reasons relating to federal income tax considerations of the former
owners of certain of our hotels, we have agreed to restrictions on selling
certain hotels or repaying or refinancing the mortgage debt thereon for lock-
out periods which vary depending on the hotel. We anticipate that, in certain
circumstances, we may agree to similar restrictions in connection with future
hotel acquisitions. As a result, even if it were in our best interests to sell
such hotels or refinance their mortgage debt, it may be difficult or impossible
to do so during their respective lock-out periods.
Marriott International's and Crestline's Operation of Their Respective
Businesses Could Result in Decisions Not in Our Best Interest
Marriott International, a public company in the business of hotel
management, manages a significant number of our hotels. In addition, Marriott
International manages hotels owned by others that compete with our hotels. As a
result, Marriott International may make decisions regarding competing lodging
facilities which it manages that would not necessarily be in our best
interests. Further, J.W. Marriott, Jr., a member of our Board of Directors, and
Richard E. Marriott, our Chairman of the Board and J.W. Marriott, Jr.'s
brother, serve as directors, and, in the case of J.W. Marriott, Jr., also an
officer, of Marriott International. As of December 30, 1998, J.W. Marriott, Jr.
and Richard E. Marriott also beneficially own approximately 10.6% and 10.3%,
respectively, of the outstanding shares of common stock of Marriott
International, and will beneficially own approximately 6.1% and 6.0%,
respectively, of the outstanding shares of common stock of Crestline, but
neither will serve as an officer or director of Crestline. As a result, J.W.
Marriott, Jr. and Richard E. Marriott have potential conflicts of interest when
making decisions regarding Marriott International, including decisions relating
to the management agreements involving the hotels, Marriott International's
management of competing lodging properties and Crestline's leasing and other
businesses.
The Boards of Directors of both Host Marriott and Marriott International
follow appropriate policies and procedures to limit the involvement of Messrs.
J.W. Marriott, Jr. and Richard E. Marriott in conflict situations, including
requiring them to abstain from voting as directors of either Host Marriott or
Marriott International or their subsidiaries on certain matters which present a
conflict between the companies. If appropriate, these policies and procedures
will apply to other directors and officers.
5
Provisions of Our Charter and Bylaws Could Inhibit Changes in Control
Certain provisions of our charter and bylaws may delay or prevent a change
in control of Host Marriott or other transaction that could provide our
stockholders with a premium over the then-prevailing market price of their
shares or which might otherwise be in their best interests. These include a
staggered Board of Directors and the ownership limit described below. Also, any
future class or series of stock may have certain voting provisions that could
delay or prevent a change in control or other transaction that might involve a
premium price or otherwise be good for our stockholders.
The Marriott International Purchase Right May Discourage a Takeover of Host
Marriott
Marriott International has the right to purchase up to 20% of each class of
our outstanding voting shares at the then fair market value upon the occurrence
of certain change of control events involving Host Marriott. We refer to this
right as the "Marriott International purchase right." The Marriott
International purchase right will continue in effect until June 2017, subject
to certain limitations intended to protect the our REIT status. The Marriott
International purchase right may have the effect of discouraging a takeover of
Host Marriott, because any person considering acquiring a substantial or
controlling block of our common stock will face the possibility that its
ability to obtain or exercise control would be impaired or made more expensive
by the exercise of the Marriott International purchase right.
We Have Adopted Maryland Law Limitations on Changes in Control
Maryland corporate law prohibits certain "business combinations" between a
Maryland corporation and any person who owns 10% or more of the voting power of
the corporation's then outstanding shares of stock (an "Interested
Stockholder") or an affiliate of the Interested Stockholder unless a business
combination is approved by the board of directors any time before an Interested
Stockholder first becomes an Interested Stockholder. The prohibition lasts for
five years after the Interested Stockholder becomes an Interested Stockholder.
Thereafter, any such business combination must be approved by stockholders
under certain special voting requirements. We will be subject to such
provisions although we may elect to "opt-out" in the future. As a result, a
change in control of Host Marriott or other transaction that could provide our
stockholders with a premium over the then-prevailing market price of their
shares or which might otherwise be in their best interests may be prevented or
delayed. Our Board of Directors has exempted from this statute the acquisition
of shares by Marriott International pursuant to the terms of the Marriott
International purchase right as well as any other transactions involving Host
Marriott and Marriott International or our respective subsidiaries, or J.W.
Marriott, Jr. or Richard E. Marriott, provided that, if any such transaction is
not in the ordinary course of business, it must be approved by a majority of
our directors present at a meeting at which a quorum is present, including a
majority of the disinterested directors, in addition to any vote of
stockholders required by other provisions of Maryland corporate law.
Maryland Control Share Acquisition Law Could Delay or Prevent a Change in
Control
Under Maryland corporate law, unless a corporation elects not to be subject
thereto, "control shares" acquired in a "control share acquisition" have no
voting rights except to the extent approved by stockholders by a vote of two-
thirds of the votes entitled to be cast on the matter, excluding shares owned
by the acquiror and by officers or directors who are employees of the
corporation. "Control shares" are voting shares which would entitle the
acquiror to exercise voting power in electing directors within certain
specified ranges of voting power. A "control share acquisition" means the
acquisition of control shares, subject to certain exceptions. We are subject to
these control share provisions of Maryland law and, as a result, a change in
control of Host Marriott or other transaction that could provide our
stockholders with a premium over the then-prevailing market price of their
shares or which might otherwise be in their best interests may be delayed or
prevented. Our bylaws contain an exemption from this statute for any shares
acquired by Marriott International, together with its successors and permitted
assignees, pursuant to the Marriott International purchase right.
6
We Have Adopted a Rights Agreement Which Could Delay or Prevent a Change in
Control
Our Rights Agreement provides, among other things, that upon the occurrence
of certain events, stockholders will be entitled to purchase shares of our
stock, subject to the ownership limit. These purchase rights would cause
substantial dilution to a person or group that acquires or attempts to acquire
20% or more of our common stock on terms not approved by the Board of Directors
and, as a result, could delay or prevent a change in control of Host Marriott
or other transaction that could provide our stockholders with a premium over
the then-prevailing market price of their shares or which might otherwise be in
their best interests. See "Description of Common Stock--Stockholder Rights
Plan/Preferred Stock Purchase Rights."
We Have a Stock Ownership Limit Primarily for REIT Tax Purposes
Primarily to facilitate maintenance of our REIT qualification, our charter
imposes an ownership limit on our common stock and preferred stock. See
"Restrictions on Ownership and Transfer." The attribution provisions of the
federal tax laws that are used in applying the ownership limit are complex.
They may cause one stockholder to be considered to own the stock of a number of
related stockholders. As a result, these provisions may cause a stockholder
whose direct ownership of stock does not exceed the ownership limit to, in
fact, exceed the ownership limit.
The ownership limit could delay or prevent a change in control and,
therefore, could adversely affect stockholders' ability to realize a premium
over the then-prevailing market price for the common stock in connection with
such transaction.
The Large Number of Shares Available for Future Sale Could Adversely Affect the
Market Price of Our Publicly Traded Securities
In connection with the REIT conversion, we have reserved approximately 96.4
million shares of our common stock for future issuance. Up to approximately
48.2 million shares of this common stock may be issued in January 1999. Such
common stock will be freely transferable upon receipt. The balance of the
reserved common stock may be issued upon the redemption of units of limited
partnership interest in Host Marriott, L.P. These limited partnership units
will become redeemable at various times over the next year, with approximately
21.7 million limited partnership units becoming redeemable beginning on July 1,
1999, pursuant to each holder's right under Host Marriott, L.P.'s partnership
agreement to redeem them for shares of our common stock or, at Host Marriott's
election, the cash equivalent thereof. In addition, we have reserved a
substantial number of shares of our common stock for issuance pursuant to
benefit plans or outstanding options, and such shares of our common stock will
be available for sale in the public markets from time to time. Moreover, we may
issue additional shares of our common stock in the future. We cannot predict
the effect that future sales of shares of our common stock, or the perception
that such sales could occur, will have on the market prices of our equity
securities.
Our FFO and Cash Distributions Will Affect the Market Price of Our Publicly
Traded Securities
We believe that the market value of a REIT's equity securities is based
primarily upon the market's perception of the REIT's growth potential,
including its prospects for accretive acquisitions and development, and its
current and potential future cash distributions, and is secondarily based upon
the real estate market value of the underlying assets. For that reason, our
common stock may trade at prices that are higher or lower than the net asset
value per share. To the extent we retain operating cash flow for investment
purposes, working capital reserves or other purposes, these retained funds,
while increasing the value of our underlying assets, may not correspondingly
increase the market price of our common stock. Our failure to meet the market's
expectations with regard to future FFO and cash distributions would likely
adversely affect the market price of our publicly traded securities.
7
Market Interest Rates May Have an Effect on the Value of Our Publicly Traded
Securities
One of the factors that investors consider important in deciding whether to
buy or sell shares of a REIT is the distribution rate on such shares, as a
percentage of the price of such shares relative to market interest rates. If
market interest rates go up, prospective purchasers of our equity securities
may expect a higher dividend yield. Higher interest rates would not, however,
result in more funds for us to distribute and, in fact, would likely increase
our borrowing costs and potentially decrease cash available for distribution to
the extent that our indebtedness has floating interest rates. Thus, higher
market interest rates could cause the market price of our publicly traded
securities to go down.
We are Dependent on External Sources of Capital
To qualify as a REIT, we must distribute to our stockholders each year at
least 95% of our net taxable income, excluding any net capital gain. Because of
these distribution requirements, it is not likely that we will be able to fund
all future capital needs, including acquisitions, from income from operations.
We therefore will have to rely on third-party sources of capital, which may or
may not be available on favorable terms or at all. Our access to third-party
sources of capital depends upon a number of factors, including general market
conditions, the market's perception of our growth potential, our current and
potential future earnings and cash distributions and the market price of our
common stock. Moreover, additional equity offerings may result in substantial
dilution of stockholders' interests, and additional debt financing may
substantially increase our leverage.
Our Degree of Leverage Could Limit Our Ability to Obtain Additional Financing
Our debt-to-total market capitalization ratio was approximately 55% on a pro
forma basis as of December 23, 1998. We have a policy of incurring debt only
if, immediately following such incurrence, our debt-to-total market
capitalization ratio on a pro forma basis would be 60% or less. Our degree of
leverage could affect our ability to obtain financing in the future for working
capital, capital expenditures, acquisitions, development or other general
corporate purposes and to refinancing borrowings on favorable terms. Our
leveraged capital structure also makes us more vulnerable to a downturn in our
business or in the economy generally. Moreover, there are no limitations in our
organizational documents that limit the amount of indebtedness that we may
incur, although our existing debt instruments contain certain restrictions on
the amount of indebtedness that we may incur. Accordingly, our Board of
Directors could alter or eliminate the 60% policy without stockholder approval
to the extent permitted by our debt agreements. If this policy were changed, we
could become more highly leveraged, resulting in an increase in debt service
payments that could adversely affect our cash flow and consequently our ability
to service our debt and make distributions to stockholders.
Rental Revenues from Hotels Are Subject to Prior Rights of Lenders
The mortgages on certain of our hotels require that rent payments under the
leases on such hotels be used first to pay the debt service on such mortgage
loans. Consequently, only the cash flow remaining after debt service will be
available to satisfy other obligations, including property taxes and insurance,
FF&E reserves for the hotels and capital improvements, and debt service on
unsecured debt, and to make distributions to stockholders.
We Depend on Our Key Personnel
We depend on the efforts of our executive officers. While we believe we
could find replacements for these key personnel, the loss of their services
could have a significant adverse effect on our operations. We do not intend to
obtain key-man life insurance with respect to any of our executive officers.
The REIT Conversion Could Result in Litigation
Over the last several years, business reorganizations involving the
combination of several partnerships into a single entity have occasionally
given rise to investor lawsuits. These lawsuits have involved claims against
8
the general partners of the participating partnerships, the partnerships
themselves and related persons involved in the structuring of, or benefiting
from, the conversion or reorganization, as well as claims against the surviving
entity and its directors and officers. If any lawsuits are filed in connection
with the partnership mergers or other transactions in connection with our REIT
conversion, such lawsuits could result in substantial damage claims against us,
as successor to the liabilities of our predecessors. Such lawsuits, if
successful, could adversely affect our financial condition and our ability to
service our debt and make distributions to stockholders.
Joint Venture Investments Have Additional Risks
Instead of purchasing hotel properties directly, we may invest as a co-
venturer. Joint venturers often share control over the operation of the joint
venture assets. Actions by a co-venturer could subject such assets to
additional risk. Our co-venturer in an investment might have economic or
business interests or goals that are inconsistent with our interests or goals,
or be in a position to take action contrary to our instructions or requests or
contrary to our policies or objectives. Although we generally will seek to
maintain sufficient control of any joint venture to permit our objectives to be
achieved, we might not be able to take action without the approval of our joint
venture partners. Also, our joint venture partners could take actions binding
on the joint venture without our consent. A joint venture partner could go
bankrupt, leaving us liable for its share of joint venture liabilities. Also,
the requirement that we lease our assets to qualify as a REIT may make it more
difficult for us to enter into joint ventures in the future.
The Year 2000 Problem May Adversely Impact Our Business and Financial Condition
Year 2000 issues have arisen because many existing computer programs and
chip-based embedded technology systems use only the last two digits to refer to
a year, and therefore do not properly recognize a year that begins with "20"
instead of the familiar "19." If not corrected, many computer applications
could fail or create erroneous results. Our potential year 2000 problems
include issues relating to our in-house hardware and software computer systems,
as well as issues relating to third parties with which we have a material
relationship or whose systems are material to the operations of our hotels.
In-House Systems
Since October of 1993, we have invested in the implementation and
maintenance of accounting and reporting systems and equipment that are
intended to enable us to provide adequately for our information and
reporting needs and which are also year 2000 compliant. Substantially all
of our in-house systems have already been certified as year 2000 compliant
through testing and other mechanisms. We have not delayed any systems
projects due to the year 2000 issue. We have engaged a third party to
review our year 2000 in-house compliance.
Third-Party Systems
We rely upon operational and accounting systems provided by third
parties, primarily the managers of our hotels, to provide the appropriate
property-specific operating systems, including reservation, phone,
elevator, security, HVAC and other systems, and to provide us with
financial information. We will continue to monitor the efforts of these
third parties to become year 2000 compliant and will take appropriate steps
to address any non-compliance issues.
Risks
Management believes that future costs associated with year 2000 issues
for its in-house systems will be insignificant and therefore not impact our
business, financial condition and results of operations. However, the
actual effect that year 2000 issues will have on our business will depend
significantly on whether other companies and governmental entities properly
and timely address year 2000 issues and whether broad-based or systemic
failures occur. We cannot predict the severity or duration of any such
9
failures, which could include disruptions in passenger transportation or
transportation systems generally, loss of utility and/or telecommunications
services, the loss or disruption of hotel reservations made on centralized
reservation systems and errors or failures in financial transactions or
payment processing systems such as credit cards.
Moreover, we are dependent upon Crestline to interface with third parties
in addressing year 2000 issues at our hotels leased to its subsidiaries.
Due to the general uncertainty inherent with respect to year 2000 issues
and our dependence on third parties, including Crestline, we are unable to
determine at this time whether the consequences of year 2000 failures will
have a material impact on Host Marriott. Although our joint year 2000
compliance program with Crestline is expected to significantly reduce
uncertainties arising out of year 2000 issues and the possibility of
significant interruptions of normal operations, we cannot assure you that
this will be the case.
Compliance with the Americans with Disabilities Act Can Be Costly
The hotels must comply with Title III of the Americans with Disabilities
Act to the extent that such hotels are "public accommodations" or "commercial
facilities" as defined by the ADA. The ADA requires removal of structural
barriers to access by persons with disabilities in certain public areas of
hotels where such removal is readily achievable. We do not believe that
substantial non-budgeted capital expenditures will be required in the future
to comply with the ADA. Our existing hotel leases would require us to fund any
such expenditures. Noncompliance with the ADA could also result in the
imposition of fines or an award of damages to private litigants. Unexpected
capital expenditures or the payment of fines or damages would decrease our
cash available for distribution and potentially adversely affect our ability
to make distributions to stockholders.
Compliance With Other Regulations Can Also Be Costly
Hotels are subject to various forms of regulation in addition to the ADA,
including building codes and fire safety regulations. Such regulations may be
changed from time to time, or new regulations adopted, resulting in additional
or unexpected costs of compliance. Any such increased costs could reduce our
cash available for debt service and distributions to stockholders.
Environmental Problems are Possible and Can Be Costly
We believe that our properties are in compliance in all material respects
with applicable environmental laws. Unidentified environmental liabilities
could arise, however, and could have a material adverse effect on our
financial condition and performance. Federal, state and local laws and
regulations relating to the protection of the environment may require a
current or previous owner or operator of real estate to investigate and clean
up hazardous or toxic substances or petroleum product releases at such
property. The owner or operator may have to pay a governmental entity or third
parties for property damage and for investigation and clean-up costs incurred
by such parties in connection with the contamination. These laws typically
impose clean-up responsibility and liability without regard to whether the
owner or operator knew of or caused the presence of the contaminants. Even if
more than one person may have been responsible for the contamination, each
person covered by the environmental laws may be held responsible for all of
the clean-up costs incurred. In addition, third parties may sue the owner or
operator of a site for damages and costs resulting from environmental
contamination emanating from that site. Environmental laws also govern the
presence, maintenance and removal of asbestos. These laws require that owners
or operators of buildings containing asbestos properly manage and maintain the
asbestos, that they notify and train those who may come into contact with
asbestos and that they undertake special precautions, including removal or
other abatement, if asbestos would be disturbed during renovation or
demolition of a building. These laws may impose fines and penalties on
building owners or operators who fail to comply with these requirements and
may allow third parties to seek recovery from owners or operators for personal
injury associated with exposure to asbestos fibers.
10
We Intend to Qualify as a REIT, but We Cannot Guarantee that We Will Qualify
We intend to operate to qualify as a REIT for tax purposes beginning in
1999. If we qualify as a REIT, we generally will not be taxed on our income
that we distribute to our stockholders so long as we distribute currently at
least 95% of our income, excluding our net capital gain. We cannot guarantee,
however, that we will qualify as a REIT in 1999 or in any future year. In
addition, it is possible that even if we do qualify as a REIT, new tax rules
will change the way we are taxed. Hogan & Hartson L.L.P., a law firm, has given
us an opinion that we are organized in conformity with the requirements for
qualification as a REIT and that beginning January 1, 1999, our proposed method
of operation will enable us to satisfy the requirements for qualification and
taxation as a REIT. However, Hogan & Hartson based its opinion on a number of
assumptions and conditions, including the accuracy of factual representations
that we and Host Marriott, L.P. made. These representations relate to a large
number of matters, including how we and our subsidiaries operate and will
operate in the future and how the hotels are leased. With respect to how the
hotels are leased, we made representations to Hogan & Hartson about the
economic terms of the leases and the other terms of the leases. We also made
representations to Hogan & Hartson about our expectations and the expectations
of the lessees regarding the leases. It is important that you understand that
Hogan & Hartson's opinion only represents its judgment based on the facts
represented by us and does not bind the IRS or the courts. Neither we nor Hogan
& Hartson can guarantee that the IRS or a court will agree that we qualify as a
REIT.
Host Marriott, L.P. May Need to Borrow Money or Issue Additional Equity in
Order for Us to Qualify as a REIT
A REIT must distribute to its shareholders at least 95% of its net taxable
income, excluding any net capital gain. The source of the distributions we make
to our stockholders will be money distributed to us by Host Marriott, L.P. We
intend to meet this 95% requirement, but there are a number of reasons why Host
Marriott, L.P.'s cash flow alone may be insufficient for it to distribute to us
the funds we will need. First, as a result of some of the transactions of the
Host Predecessors, we expect to recognize large amounts of taxable income in
future years for which Host Marriott, L.P. will have no corresponding cash flow
or EBITDA. This type of income is often referred to as "phantom income."
Second, in order to qualify as a REIT in 1999, we need to distribute to our
stockholders, prior to the end of 1999, all of the "earnings and profits" that
accumulated prior to 1999. If we do not meet this requirement when the
distributions declared in connection with the REIT conversion are paid, we will
be required to make further distributions prior to the end of 1999. Host
Marriott, L.P. will not have cash flow that corresponds to these distributions
and may not be able to borrow or otherwise obtain the funds necessary to
distribute to us an amount necessary to make these distributions. Third, the
seasonality of the hospitality industry could cause a further mismatch of Host
Marriott, L.P.'s income and its cash flow.
In addition, even if a REIT meets the 95% requirement, it may still be
subject to a 4% nondeductible excise tax. This excise tax applies to the amount
by which certain of the REIT's distributions in a given calendar year are less
than the sum of 85% of its ordinary income, 95% of its capital gain net income
and any undistributed taxable income from prior years. We intend to make
distributions so that we will not be subject to this excise tax, but for the
reasons described above, Host Marriott, L.P.'s cash flow alone may be
insufficient for it to distribute to us the funds we will need.
If Host Marriott, L.P.'s cash flow alone is insufficient for it to
distribute to us the money we need to meet the 95% distribution requirement or
to avoid the 4% excise tax, it will need to issue additional equity or borrow
money. We cannot guarantee that these sources of funds will be available to
Host Marriott, L.P. on favorable terms or even at all. Any problems Host
Marriott, L.P. has in borrowing money could be exacerbated by two factors.
First, it will need to distribute most if not all of its earnings to us and so
it will be unable to retain these earnings. Accordingly, it generally will need
to refinance its maturing debt with additional debt or equity and rely on
third-party sources to fund future capital needs. Second, the borrowing needs
of Host Marriott, L.P.
11
will be increased if we are required to pay taxes or liabilities attributable
to prior years. If Host Marriott, L.P. is unable to raise the money necessary
for us to meet the 95% distribution requirement, we will fail to qualify as a
REIT. If it is able to raise the money, but only on unfavorable terms, then our
financial performance may be hurt.
Our Failure to Qualify as a REIT Would Have Serious Adverse Consequences
If we fail to qualify as a REIT, we will be subject to federal income tax at
regular corporate rates. This additional tax would significantly reduce the
cash we would have available to distribute to our stockholders and it could
reduce the value of our common stock by a significant amount. Furthermore, if
we fail to qualify as a REIT, we will go into default under some of our debt
instruments. If we fail to qualify as a REIT, we may be disqualified from
treatment as a REIT for the next four taxable years.
We Are Required to Distribute All of Our Prior Earnings and Profits, but We
Cannot Guarantee that We Will Be Able to Do So
In order to qualify as a REIT for 1999, we are required to distribute to our
stockholders, prior to the end of 1999, all of our earnings and profits that we
accumulated prior to 1999. We believe that we will meet this requirement.
However, it is very hard to determine the exact level of our pre-1999 earnings
and profits because the determination depends on an extremely large number of
factors. The complexity of the determination is compounded by the fact that we
started accumulating earnings and profits in 1929. Also, it is difficult to
value our distributions which have not been cash, such as the distribution of
Crestline common stock we made this past December. Therefore, we cannot
guarantee that we will meet this requirement. If we do not meet this
requirement, then we will not qualify as a REIT at least for 1999. Hogan &
Hartson is not providing us with an opinion regarding the amount of our
earnings and profits or whether we meet this requirement. Moreover, for
purposes of their opinion that we qualify as a REIT, they relied on our
statement that we will meet this requirement.
We Will Qualify as a REIT Only if the Rent from the Leases Meets a Number of
Tests, but We Cannot Guarantee that It Will
A REIT's income must meet certain tests relating to its source. If the
income meets the tests, it is called "good income." Almost all of our income
will be rent from the hotel leases. This rent will be good income only if the
leases are respected as true leases for federal income tax purposes. If the
leases are treated as service contracts, joint ventures or some other type of
arrangement, then this rent will not be good income and we will fail to qualify
as a REIT. See "Federal Income Tax Considerations--Federal Income Taxation of
Host Marriott--Income Tests Applicable to REITs."
In addition, the rent from any particular hotel lease will be good income
only if we own less than 10% of the lessee of the hotel. For purposes of this
test, we are treated as owning both any interests that we hold directly and the
interests owned by a person who owns more than 10% of our stock. In determining
who owns more than 10% of our stock, a person may be treated as owning the
stock of another person who is either a relative or has common financial
interests. We will not directly own more than 10% of any of the lessees. In
addition, we intend to enforce the ownership limit in our charter, which
restricts the amount of our capital stock that any person can own. If the
ownership limit is effective, then no person will ever own more than 10% of our
capital stock and we should never own more than 10% of the lessees. However, we
cannot guarantee that the ownership limit will be effective. If the ownership
limit is not effective, our ownership in the lessees may exceed the 10% limit.
As a result, the rent from our leases would not be good income and we would
fail to qualify as a REIT.
Furthermore, rent from any particular hotel lease will be good income only
if no portion of the rent is based on the income or profits of the lessee of
the hotel. The rent, however, can be based on the gross revenues of the
lessees, unless the arrangement does not conform to normal business practice or
is being used as a
12
device to base rent on the income or profits of the lessees. The rent from the
current leases, other than the Harbor Beach Resort lease, is based on the gross
revenues of the lessees. We believe that the leases conform to normal business
practice and, other than the Harbor Beach Resort lease, are not being used as a
device to base rent on the income or profits of the lessees. Hogan & Hartson
has not given us an opinion on this issue, and we cannot guarantee that the IRS
will agree with our position. If rent from leases in addition to the Harbor
Beach Resort lease is found to be based on the income or profits of the
lessees, the rent would not be good income and we would fail to qualify as a
REIT.
We Will Qualify as a REIT Only If the Personal Property Arrangements Are
Respected
Rent that is attributable to personal property is not good income under the
REIT rules. Hotels contain significant personal property. Therefore, in order
to protect our ability to qualify as a REIT, Host Marriott, L.P. is selling an
estimated $75 million of personal property associated with some of our hotels
to the non-controlled subsidiaries. The non-controlled subsidiaries lease the
personal property associated with each hotel directly to the lessee that is
leasing the hotel. Under each personal property lease, the non-controlled
subsidiary receives rent payments directly from the applicable lessee. We
believe the amount of the rent represents the fair rental value of the personal
property. If for any reason these lease arrangements are not respected for
federal income tax purposes, we likely would not qualify as a REIT.
We Will Be Subject to Taxes Even if We Qualify as a REIT
Even if we qualify as a REIT, we will be subject to some federal, state and
local taxes on our income and property. For example, we will have to pay tax on
income that we do not distribute. We also will be liable for any tax that the
IRS successfully asserts against Host Marriott's predecessors for corporate
income taxes for years prior to 1999. Furthermore, we will derive income from
the non-controlled subsidiaries and they will be subject to regular corporate
taxes.
In addition, we and our subsidiaries contributed a large number of assets to
Host Marriott, L.P. with a value that was substantially greater than our tax
basis in the assets. We refer to these assets as assets with "built-in gain."
We will be subject to tax on the built-in gain if Host Marriott, L.P. sells
these assets prior to the end of 2008. We also have substantial deferred tax
liabilities that we or a non-controlled subsidiary will recognize, without the
receipt by us of any corresponding cash. Even if Host Marriott, L.P. does not
sell the built-in gain assets prior to the end of 2008, there are a number of
other transactions that likely would cause us to be subject to the tax on the
built-in gain. For example, we are likely to recognize gain if Host Marriott,
L.P. sells a hotel contributed to it after 2008, refinances a loan secured by a
hotel contributed to it, spends money to improve a hotel contributed to it, or
issues additional limited partnership units. Lastly, over time, Host Marriott,
L.P. will allocate income and depreciation to its partners in such a way that
it will eliminate the built-in gain in its assets. As a result of these various
events, it is likely that over the next several years, we will recognize a
large amount of the built-in gain associated with the assets that we
contributed to Host Marriott, L.P. In connection with this gain, neither we nor
Host Marriott, L.P. will receive any corresponding cash.
If the Operating Partnership Is Treated as a Corporation, We Will Fail to
Qualify as a REIT
A REIT cannot own more than 10% of the voting securities of a corporation.
We own more than 10% of the voting securities of Host Marriott, L.P.
Accordingly, if Host Marriott, L.P. is treated as a corporation, we will fail
to qualify as a REIT. See "Federal Income Tax Consideration--Tax Aspects of
Host Marriott's Ownership of Interests in Host Marriott, L.P.--Entity
Classification.
We also should point out that if Host Marriott, L.P. is treated as a
corporation, it will be subject to corporate income tax. This would
significantly reduce the amount of cash it would have available to distribute
to us, which would in turn reduce the amount of cash we would have available to
distribute to our stockholders.
13
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission using a "shelf" registration process under
the Securities Act of 1933. Under the shelf process, we may, from time to time,
sell any combination of the offered securities described in this prospectus in
one or more offerings up to a total dollar amount of $1,050,000,000.
This prospectus and the accompanying prospectus supplement do not contain
all of the information included in the registration statement. We have omitted
parts of the registration statement in accordance with the rules and
regulations of the Commission. For further information, we refer you to the
registration statement on Form S-3, including its exhibits. Statements
contained in this prospectus and any accompanying prospectus supplement about
the provisions or contents of any agreement or other document are not
necessarily complete. If the Commission rules and regulations require that such
agreement or document be filed as an exhibit to the registration statement,
please see such agreement or document for a complete description of these
matters. You should not assume that the information in this prospectus or any
prospectus supplement is accurate as of any date other than the date on the
front of each document.
This prospectus provides you with a general description of the offered
securities. Each time we sell offered securities, we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change any
information contained in this prospectus. You should read both this prospectus
and any prospectus supplement together with additional information described
under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You may read and copy materials that we have
filed with the Commission, including the registration statement, at the
following Commission public reference rooms:
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms.
Our Commission filings can also be read at the following address:
New York Stock Exchange
20 Broad Street
New York, New York 10005
Our Commission filings are also available to the public on the Commission's
Web Site at http://www.sec.gov.
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is an important part of this prospectus, and information that we file later
with the Commission will automatically update and supersede this information.
We incorporate be reference the documents listed below and any future filings
made with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until we have sold all of the offered
securities to which this prospectus relates or the offering is otherwise
terminated.
1. Annual Report on Form 10-K of Host Marriott Corporation, a Delaware
corporation and predecessor of Host Marriott, for the fiscal year ended
January 2, 1998 (filed on March 27, 1998).
14
2. Quarterly Reports on Form 10-Q of Host Marriott Corporation, a
Delaware corporation and predecessor of the Company, for the quarters
ended:
. March 27, 1998 (filed on May 11, 1998 and amended on May 11, 1998),
. June 19, 1998 (filed on July 21, 1998) and
. September 11, 1998 (filed on October 26, 1998).
3. Current Reports on Form 8-K filed by Host Marriott Corporation, a
Delaware corporation and predecessor of Host Marriott, dated:
. April 17, 1998 (filed on April 17, 1998),
. July 29, 1998 (filed on August 6, 1998),
. August 5, 1998 (filed on September 11, 1998),
. November 24, 1998 (filed on November 25, 1998 and superseding the
Current Reports on Form 8-K dated July 15, 1998 (filed on July 17,
1998), July 17, 1998 (filed on July 28, 1998), July 29, 1998 (filed
on July 30, 1998), and July 29, 1998 (filed on July 31, 1998)) and
. December 18, 1998 (filed on December 22, 1998)
4. Current Reports on Form 8-K filed by Host Marriott, dated:
. November 23, 1998 (filed on December 11, 1998),
. December 18, 1998 (filed on December 24, 1998) and
. December 29, 1998 (filed on December 29, 1998).
5. Description of Host Marriott's Common Stock included in a
Registration Statement on Form 8-A filed on November 18, 1998 (as amended
on December 28, 1998).
6. Description of Host Marriott's Rights included in a Registration
Statement on Form 8-A filed on December 11, 1998 (as amended on December
24, 1998).
You may request a copy of these filings, at no cost, by writing us at the
following address or telephoning us at (301) 380-2070 between the hours of 9:00
a.m. and 4:00 p.m., Eastern Time:
Corporate Secretary
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. In addition to historical
information, this prospectus and other materials filed or to be filed by us
with the Commission and incorporated by reference in this prospectus contain or
will contain forward-looking statements within the meaning of the federal
securities law. Forward-looking statements include information relating to our
intent, belief or current expectations, primarily, but not exclusively, with
respect to:
. capital expenditures,
. cost reduction,
. cash flow,
. economic outlook,
. operating performance or
. improvements and related industry developments.
We intend to identify forward-looking statements in this prospectus and
other materials filed or to be filed by us with the Commission and incorporated
by reference in this prospectus by using words or phrases such as "anticipate,"
"believe," "estimate," "expect," "intend," "may be," "objective," "plan,"
"predict," "project" and "will be" and similar words or phrases (or the
negative thereof).
15
The forward-looking information involves important risks and uncertainties
that could cause our actual results, performance or achievements to differ
materially from our anticipated results, performance or achievements expressed
or implied by such forward-looking statements. These risks and uncertainties
include, but are not limited to:
. national and local economic and business conditions that will, among
other things, affect demand for hotels and other properties, the level
of rates and occupancy that can be achieved by such properties and the
availability and terms of financing;
. the ability to maintain the properties in a first-class manner,
including meeting capital expenditure requirements;
. our ability to compete effectively in areas such as access, location,
quality of accommodations and room rate structures;
. our ability to acquire or develop additional properties and the risk
that potential acquisitions or developments may not perform in
accordance with expectations;
. changes in travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures and costs;
. governmental approvals, actions and initiatives including the need for
compliance with environmental and safety requirements, and changes in
laws and regulations or the interpretation thereof;
. the effects of tax legislative action;
. the effect on us and our operations of the year 2000 issue; and
. the timing of our election to be taxed as a REIT, if it occurs, and our
ability to satisfy complex rules in order to qualify as a REIT for
federal income tax purposes and to operate effectively within the
limitations imposed by these rules.
Although we believe the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, we can give you no assurance
that such expectations will be attained or that any deviations will not be
material. We disclaim any obligation or undertaking to disseminate to you any
updates or revisions to any forward-looking statement contained in this
prospectus or other materials that we have filed or will file with the
Commission and incorporated by reference in this prospectus to reflect any
change in our expectations or any changes in events, conditions or
circumstances on which any statement is based.
THE COMPANY
Host Marriott was formed to continue and expand the hotel lodging property
ownership business of its predecessors. Host Marriott succeeded to this
business as a result of its merger with Host Marriott Corporation, a Delaware
corporation, and other restructuring transactions consummated in December 1998
which we refer to as the "REIT conversion." Host Marriott is one of the largest
owners of hotels in the world, with ownership of or controlling interests in
approximately 126 upscale and luxury full-service hotel lodging properties in
its portfolio as of December 30, 1998. Virtually all of these properties are
leased to subsidiaries of Crestline, formerly a wholly owned subsidiary of Host
Marriott, and are generally operated under the Marriott and Ritz-Carlton brand
names and managed by Marriott International. Host Marriott intends to make an
election to be taxed as a REIT for federal income tax purposes effective for
its taxable year beginning January 1, 1999. Host Marriott owns all of its
assets and conducts substantially all of its business through Host Marriott,
L.P. and its subsidiaries. Host Marriott is the sole general partner of Host
Marriott, L.P.
Host Marriott's principal executive offices are located at 10400 Fernwood
Road, Bethesda, Maryland 20817-1109, and its telephone number is (301) 380-
9000.
16
USE OF PROCEEDS
Unless otherwise indicated in the applicable prospectus supplement, we
anticipate that any net proceeds from the sale of offered securities will be
used for general operational purposes, which may include, but are not limited
to, working capital, capital expenditures, acquisitions and the repayment or
repurchase of the indebtedness of Host Marriott or our subsidiaries or our
capital stock. The factors which we will consider in any repayment or
repurchase of its indebtedness will include the amount and characteristics of
any offered securities issued and may include, among others, the impact of such
refinancing on the liquidity of Host Marriott or on our debt-to-capital ratio
and funds from operations ("FFO") per share. When a particular series of
offered securities is offered, the prospectus supplement relating thereto will
set forth the intended use for the net proceeds received from the sale of such
offered securities. Pending the application of the net proceeds, we expect to
invest such proceeds in short-term, interest-bearing instruments or other
investment-grade debt securities or to reduce indebtedness under our bank
credit agreement.
ERISA MATTERS
Host Marriott and our subsidiaries may each be considered a "party in
interest," within the meaning of the Employee Retirement Income Security Act,
or a "disqualified person," within the meaning of Section 4975 of the Internal
Revenue Code, with respect to many employee benefit plans that are subject to
ERISA. The purchase of offered securities by an ERISA plan, including an
individual retirement plan, that is subject to the fiduciary responsibility
provisions of ERISA or the prohibited transaction provisions of the Internal
Revenue Code and with respect to which Host Marriott or any of our affiliates
is a service provider, or otherwise is a party in interest or a disqualified
person, may constitute or result in a prohibited transaction under ERISA or the
Internal Revenue Code, unless such offered securities are acquired pursuant to
and in accordance with an applicable federal statutory exemption, or
administrative exemption issued on a class-wide basis by the United States
Department of Labor. Any pension or other employee benefit plan proposing to
acquire any offered securities should consult with its counsel.
17
RATIO OF EARNINGS TO COMBINED
FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth Host Marriott's ratio of earnings to combined
fixed charges and preferred stock dividends on a historical basis for the
periods indicated.
3rd Quarter Fiscal Year
----------- --------------------------------------
1998 1997 1997 1996 1995 1994 1993
----- ----- ------- ------- ------ ------ ------
(in millions, except ratio data)
Ratio of earnings to combined
fixed charges and preferred
stock dividends(a)........... 1.7x 1.4x 1.3x 1.0x -- -- --
Deficiency of earnings to com-
bined fixed charges and pre-
ferred stock dividends(b).... -- -- -- -- $ 70 $ 12 $ 45
- --------
(a) The ratio of earnings to fixed charges and preferred stock dividends is
computed by dividing income from continuing operations before income taxes
and fixed charges and preferred stock dividends by total fixed charges and
preferred stock dividends. Fixed charges represent interest expense
(including capitalized interest), the amortization of debt issuance costs,
and the portion of rental expense that represents interest.
(b) The deficiency of earnings to fixed charges and preferred stock dividends
in 1995, 1994 and 1993 is largely the result of depreciation and
amortization of $122 million in 1995, $113 million in 1994 and $196 million
in 1993. In addition, the deficiency for 1995 was impacted by the $60
million pre-tax charge to write-down the carrying value of one undeveloped
land parcel to its estimated sales value.
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth Host Marriott's ratio of earnings to fixed
charges on a historical basis for the periods indicated.
3rd Quarter Fiscal Year
----------- --------------------------------------
1998 1997 1997 1996 1995 1994 1993
----- ----- ------- ------- ------ ------ ------
(in millions, except ratio data)
Ratio of earnings to fixed
charges(a)................ 1.7x 1.4x 1.3x 1.0x -- -- --
Deficiency of earnings to
fixed charges(b).......... -- -- -- -- $ 70 $ 12 $ 45
- --------
(a) The ratio of earnings to fixed charges is computed by dividing income from
continuing operations before income taxes and fixed charges by total fixed
charges. Fixed charges represent interest expense (including capitalized
interest), the amortization of debt issuance costs, and the portion of
rental expense that represents interest.
(b) The deficiency of earnings to fixed charges in 1995, 1994 and 1993 is
largely the result of depreciation and amortization of $122 million in
1995, $113 million in 1994 and $196 million in 1993. In addition, the
deficiency for 1995 was impacted by the $60 million pre-tax charge to write
down the carrying value of one undeveloped land parcel to its estimated
sales value.
18
DESCRIPTION OF COMMON STOCK
The following description sets forth the general terms of the common stock
which Host Marriott may issue. The description set forth below and in any
prospectus supplement does not purport to be complete and is subject to and
qualified in its entirety by reference to Host Marriott's Articles of Amendment
and Restatement of Articles of Incorporation and Bylaws, each of which will be
made available upon request.
General
Our Articles of Incorporation provide that the total number of shares of
stock of all classes which Host Marriott has authority to issue is 800,000,000
shares of stock, initially consisting of 750,000,000 shares of common stock and
50,000,000 shares of preferred stock. The Board of Directors is authorized,
without a vote of stockholders, to classify or reclassify any unissued shares
of capital stock and to establish the preferences and rights of any preferred
or other class or series of capital stock to be issued. At December 28, 1998,
205,262,058 shares of our common stock were issued and outstanding.
Subject to the preferential rights of any other classes or series of shares
of capital stock and to the provisions of the Articles of Incorporation
regarding restrictions on transfers of shares of capital stock, holders of our
common stock are entitled to receive distributions if, as and when authorized
and declared by the Board of Directors, out of assets legally available
therefor and to share ratably in the assets of Host Marriott legally available
for distribution to its stockholders in the event of its liquidation,
dissolution or winding-up after payment of, or adequate provision for, all
known debts and liabilities of Host Marriott. Host Marriott currently intends
to pay regular quarterly distributions.
Subject to the provisions of the Articles of Incorporation regarding
restrictions on the transfer of shares of capital stock, each outstanding share
of common stock entitles the holder to one vote on all matters submitted to a
vote of stockholders, including the election of directors, and, except as
provided with respect to any other class or series of shares of Host Marriott's
capital stock, the holders of shares of common stock will possess the exclusive
voting power. There is no cumulative voting in the election of directors, which
means that the holders of a majority of the outstanding common stock can elect
all of the directors then standing for election.
Holders of shares of common stock have no preferences, conversion, sinking
fund, redemption rights or preemptive rights to subscribe for any securities of
Host Marriott. Subject to the provisions of the Articles of Incorporation
regarding restrictions on transfer of capital stock, shares of common stock
have equal distribution, liquidation and other rights.
Under Maryland corporate law, a Maryland corporation generally cannot
dissolve, amend its charter, merge, consolidate, effect a share exchange or
transfer its assets unless approved by the Board of Directors and by
stockholders holding at least two-thirds of the shares entitled to vote on the
matter unless a greater or lesser percentage, but not less than a majority, is
set forth in the corporation's charter. Under our Articles of Incorporation,
any merger, consolidation, share exchange or transfer of assets must be
approved by the Board of Directors and by stockholders. The Articles of
Incorporation generally provide for stockholder approval of such transactions
by a two-thirds vote of all the votes entitled to be cast, except that any
merger of Host Marriott with or into a trust organized for the purpose of
changing Host Marriott's form of organization from a corporation to a trust
will require the approval of stockholders of Host Marriott by the affirmative
vote only of a majority of all the votes entitled to be cast on the matter. In
addition, under the MGCL, certain mergers may be accomplished without a vote of
stockholders. For example, no stockholder vote is required for a merger of a
subsidiary of a Maryland corporation into its parent, provided the parent owns
at least 90% of the subsidiary. In addition, a merger need not be approved by
stockholders of a Maryland successor corporation if the merger does not
reclassify or change the outstanding shares or otherwise amend the charter, and
the number of shares to be issued or delivered in the merger is not more than
20% of the number of its shares of the same class or series outstanding
immediately before the merger becomes effective. A share exchange need be
approved by a Maryland successor only by its Board of Directors. Any amendments
to the provisions contained in the Articles
19
of Incorporation relating to restrictions on transferability of stock, the
classified Board and fixing the size of the Board within the range set forth
in the Articles of Incorporation, as well as the provisions relating to
removal of directors, the filling of Board vacancies and the exclusive
authority of the Board of Directors to amend the Bylaws will require the
approval of the Board of Directors and stockholders by the affirmative vote of
the holders of not less than two-thirds of the votes entitled to be cast on
the matter. Other amendments to the Articles of Incorporation may be effected
by requisite action of the Board of Directors and approval by stockholders by
the affirmative vote of not less than a majority of the votes entitled to be
cast on the matter.
The Articles of Incorporation authorize the Board of Directors to
reclassify any unissued shares of common stock into other classes or series of
capital stock, including preferred stock, and to establish the number of
shares in each class or series and to set the preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends or
other distributions, qualifications or terms or conditions of redemption for
each such class or series.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock will be First Chicago
Trust Company of New York.
Stockholder Rights Plan/Preferred Stock Purchase Rights
The Board of Directors has adopted a stockholder rights plan pursuant to a
Rights Agreement dated as of November 23, 1998 between Host Marriott and The
Bank of New York, as rights agent. Each share of common stock issued by Host
Marriott between the date of adoption of the Rights Agreement and the Rights
Distribution Date or the date, if any, on which the Rights are redeemed, would
have one preferred stock purchase right (a "Right") attached to it. The Rights
will expire on November 22, 2008, unless earlier redeemed or exchanged. Each
Right, when exercisable, would entitle the holder to purchase one unit of Host
Marriott Series A Junior Participating Preferred Stock, equal to one one-
thousandth of a share of such stock, at a purchase price equal to $55.00 per
unit, subject to adjustment. Until a Right is exercised, the holder thereof,
as such, would have no rights as a stockholder of Host Marriott, including,
without limitation, the right to vote or to receive dividends.
The Rights Agreement provides that the Rights initially attach to all
certificates representing common stock then outstanding. The Rights would
separate from the common stock and a distribution of Rights certificates would
occur (a "Rights Distribution Date") upon the earlier to occur of
. ten days following a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person") has acquired,
or obtained the right to acquire, beneficial ownership of 20% or more of
the outstanding common stock (the "Stock Acquisition Date") or
. ten business days, or such later date as the Board of Directors may
determine, following the commencement of a tender offer or exchange
offer, the consummation of which would result in the beneficial
ownership by a person of 20% or more of the outstanding common stock.
For the purposes of determining the 20% threshold amount, the following
shares of Host Marriott common stock are not included:
. shares received pursuant to the Agreement and Plan of Merger, dated
November 23, 1998, pursuant to which Host Marriott Corporation, a
Delaware corporation, was merged into Host Marriott, in exchange for
shares of common stock of Host Marriott Corporation, which such person
beneficially owned on February 3, 1989 and owned continuously
thereafter;
. shares acquired by a person pursuant to a gift, bequest, inheritance or
distribution from a trust or from a corporation controlled by such
person where such shares of common stock were exempt shares under the
Rights Agreement immediately prior to such acquisition and where such
shares of common stock were beneficially owned by such person
continuously after such acquisition;
. shares acquired as a result of a stock dividend, stock distribution or
other recapitalization with respect to exempt shares under the Rights
Agreement; and
20
. shares that can be acquired by Marriott International pursuant to the
Marriott International purchase right.
Until the Rights Distribution Date, the Rights will be evidenced by the
common stock certificates, and will be transferred with, and only with, the
common stock certificates. The Rights are not exercisable until the Rights
Distribution Date.
If a person becomes the beneficial owner of 20% or more of the then
outstanding common stock, except pursuant to an offer for all outstanding
common stock which the directors by a two-thirds vote determine to be fair to
and otherwise in the best interests of Host Marriott and its stockholders, each
holder of a Right would, after the end of a redemption period, have the right
to exercise the Right by purchasing, for an amount equal to the purchase price,
shares of common stock having a value equal to two times the purchase price,
subject to the ownership limit. All Rights acquired by the Acquiring Person
will be null and void.
Each holder of a Right would have the right to receive, upon exercise,
common shares of the acquiring company having a value equal to two times the
purchase price of the Right if, at any time following the Stock Acquisition
Date,
. Host Marriott is acquired in a merger or other business combination
transaction in which it is not the surviving corporation, other than a
merger which follows an offer described in the preceding paragraph, or
. 50% or more of Host Marriott's assets or earning power is sold or
transferred.
At any time after a person becomes an Acquiring Person, the Board of
Directors may exchange the Rights at an exchange ratio of one share of Host
Marriott common stock per Right.
In general, the Board of Directors may redeem the Rights at a price of $.005
per Right at any time until ten days after an Acquiring Person has been
identified as such. If the decision to redeem the Rights occurs after a person
becomes an Acquiring Person, the decision will require a two-thirds vote of
directors.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire Host
Marriott. The Rights, however, would not interfere with any merger or other
business combination approved by the Board of Directors since the Board may, at
its option, at any time prior to any person becoming an Acquiring Person,
redeem all rights or amend the Rights Agreement to exempt the person from the
Rights Agreement.
DESCRIPTION OF PREFERRED STOCK
The following description sets forth the general terms of the preferred
stock which Host Marriott may issue. The description set forth below and in any
prospectus supplement does not purport to be complete and is subject to and
qualified in its entirety by reference to the Articles of Incorporation, the
applicable Articles Supplementary to the Articles of Incorporation determining
the terms of the related series of preferred stock and the Bylaws, each of
which will be made available upon request.
General
The Articles of Incorporation authorize the Board of Directors to issue 50
million shares of preferred stock and to classify or reclassify any unissued
preferred shares into one or more classes or series of capital stock, including
common stock. Prior to issuance of shares of any class or series of stock other
than common stock, the Board of Directors is required, under the MGCL, to set,
subject to the provisions of the Articles of Incorporation regarding the
restriction on transfer of capital stock, the terms, preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or
21
conditions of redemption for each such class or series. Thus, the Board of
Directors could authorize the issuance of preferred stock or other capital
stock with terms and conditions which could have the effect of delaying,
deferring or preventing a transaction or a change in control of Host Marriott
that might involve a premium price for holders of shares of common stock or
otherwise be in their best interest. As of the date hereof, only common stock
is outstanding, but the Company may issue preferred stock or other capital
stock in the future.
Reference is made to the prospectus supplement relating to the class or
series of preferred stock being offered for the specific terms thereof,
including:
(a) The title and stated value of such preferred stock;
(b) The number of shares of such preferred stock offered, the
liquidation preference per share and the purchase price of such preferred
stock;
(c) The dividend rate(s), period(s) and/or payment date(s) or method(s)
of calculation thereof applicable to such preferred stock;
(d) Whether dividends shall be cumulative or non-cumulative and, if
cumulative, the date from which dividends on such preferred stock shall
accumulate;
(e) The procedures for any auction and remarketing, if any, for such
preferred stock;
(f) The provisions for a sinking fund, if any, for such preferred stock;
(g) The provisions for redemption, if applicable, of such preferred
stock;
(h) Any listing of such preferred stock on any securities exchange or
market;
(i) The terms and conditions, if applicable, upon which such preferred
stock will be convertible into common stock of Host Marriott, including the
conversion price or manner of calculation thereof and conversion period;
(j) The terms and conditions, if applicable, upon which preferred stock
will be exchangeable into debt securities, including the exchange price or
manner of calculation thereof and exchange period;
(k) Voting rights, if any, of such preferred stock;
(l) Whether interests in such preferred stock will be represented by
depositary shares;
(m) A discussion of any material and/or special United States federal
income tax considerations applicable to such preferred stock;
(n) The relative ranking and preferences of such preferred stock as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of Host Marriott;
(o) Any limitations on issuance of any class or series of preferred
stock ranking senior to or on a parity with such series of preferred stock
as to dividend rights and rights upon liquidation, dissolution or winding
up of the affairs of Host Marriott; and
(p) Any other specific terms, preferences, rights, limitations or
restrictions of such preferred stock.
Rank
Unless otherwise specified in the applicable prospectus supplement, the
preferred stock will, with respect to distribution rights and rights upon
liquidation, dissolution or winding up of Host Marriott, rank
(i) senior to all classes or series of common stock of Host Marriott and
to all equity securities the terms of which specifically provide that such
equity securities rank junior to such preferred stock;
(ii) on a parity with all equity securities issued by Host Marriott
other than referred to in clauses (i) and (iii); and
(iii) junior to all equity securities issued by Host Marriott the terms
of which specifically provide that such equity securities rank senior to
such preferred stock.
The term "equity securities" does not include convertible debt securities.
22
Distributions
Holders of the preferred stock of each series will be entitled to receive,
when, as and if declared by the Board of Directors, out of assets of Host
Marriott legally available for payment to stockholders, cash distributions, or
distributions in kind or in other property if expressly permitted and described
in the applicable prospectus supplement, at such rates and on such dates as
will be set forth in the applicable prospectus supplement. Each such
distribution shall be payable to holders of record as they appear on the stock
transfer books of Host Marriott on such record dates as shall be fixed by the
Board of Directors.
Distributions on any series of preferred stock, if cumulative, will be
cumulative from and after the date set forth in the applicable prospectus
supplement. If the Board of Directors fails to declare a distribution payable
on a distribution payment date on any series of the preferred stock for which
distributions are non-cumulative, then the holders of such series of preferred
stock will have no right to receive a distribution in respect of the
distribution period ending on such distribution payment date, and Host Marriott
will have no obligation to pay the distribution accumulated for such period,
whether or not distributions on such series are declared payable on any future
distribution payment date.
Unless otherwise specified in the applicable prospectus supplement, if any
shares of preferred stock of any series are outstanding, no full distributions
shall be declared or paid or set apart for payment on any shares of capital
stock of Host Marriott of any other series ranking, as to distributions, on a
parity with or junior to the shares of preferred stock of such series for any
period unless full distributions, including any cumulative amount if
applicable, have been or contemporaneously are declared and paid or declared
and a sum sufficient for the payment thereof set apart for such payment on the
preferred stock of such series. When distributions are not paid in full, or a
sum sufficient for such full payment is not so set apart, upon preferred stock
of any series and the shares of any other series of preferred stock ranking on
a parity as to distributions with the shares of preferred stock of such series,
all distributions declared upon preferred stock of such series and any other
series of preferred stock ranking on a parity as to distributions with such
shares of preferred stock shall be declared pro rata so that the amount of
distributions declared per share of preferred stock of such series and such
other series of preferred stock shall in all cases bear to each other the same
ratio that accumulated distributions per share on the preferred stock of such
series and such other series of preferred stock, which shall not include any
accumulation in respect of unpaid distributions for prior distribution periods
if such shares of preferred stock do not have a cumulative distribution, bear
to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any distribution payment or payments on shares of
preferred stock of such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
distributions, including any cumulative amount if applicable, on the shares of
preferred stock have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
the then current distribution period, then
. no distributions, other than in common stock or other shares of capital
stock ranking junior to the shares of preferred stock of such series as
to distributions and upon liquidation, shall be declared or paid or set
aside for payment or other distribution upon the common stock, or any
other shares of capital stock of Host Marriott ranking junior to or on a
parity with the shares of preferred stock of such series as to
distributions or upon liquidation, and
. no common stock, or any other shares of capital stock of Host Marriott
ranking junior to or on a parity with the shares of preferred stock of
such series as to distributions or upon liquidation shall be redeemed,
purchased or otherwise acquired for any consideration or any money paid
to or made available for a sinking fund for the redemption of any such
shares, by Host Marriott, except by conversion into or exchange for
other shares of capital stock of Host Marriott ranking junior to the
shares of preferred stock of such series as to distributions and upon
liquidation.
If, for any taxable year, Host Marriott elects to designate as "capital gain
dividends" any portion (the "Capital Gains Amount") of the dividends paid or
made available for the year to holders of all classes of
23
capital stock (the "Total Dividends"), then the portion of the Capital Gains
Amount that will be allocable to the holders of preferred stock will be the
Capital Gains Amount multiplied by a fraction, the numerator of which will be
the total dividends paid or made available to the holders of the preferred
stock for the year and the denominator of which shall be the Total Dividends.
Redemption
If so provided in the applicable prospectus supplement, the preferred stock
will be subject to mandatory redemption or redemption at the option of Host
Marriott, in whole or in part, in each case upon the terms, at the times and at
the redemption prices set forth in such prospectus supplement.
The prospectus supplement relating to a series of preferred stock that is
subject to mandatory redemption will specify the number of such shares of
preferred stock that shall be redeemed by Host Marriott on the date(s) or
during the period(s) to be specified, at a redemption price per share to be
specified therein. Notwithstanding the foregoing, the holders of record of
preferred stock at the close of business on a dividend record date will be
entitled to receive the dividend payable on such preferred stock on the
corresponding dividend payment date notwithstanding the redemption of such
preferred stock after such record date and on or prior to such payment date, in
which case the redemption price shall not include such dividend. The redemption
price may be payable in cash or other property, as specified in the applicable
prospectus supplement. If the redemption price for preferred stock of any
series is payable only from the net proceeds of the issuance of shares of
capital stock of Host Marriott, the terms of such preferred stock may provide
that, if no such shares of capital stock shall have been issued or to the
extent the net proceeds from any issuance are insufficient to pay in full the
aggregate redemption price then due, such preferred stock shall automatically
and mandatorily be converted into the applicable shares of capital stock of
Host Marriott pursuant to conversion provisions specified in the applicable
prospectus supplement.
Notwithstanding the foregoing, unless full distributions, including any
cumulative amount if applicable, on the shares of preferred stock of such
series have been or contemporaneously are declared and paid or declared and a
sum sufficient for the payment thereof set apart for payment for the then
current distribution period, then
. no preferred stock of any series shall be redeemed unless all outstanding
shares of preferred stock of such series are simultaneously redeemed
provided, however, that the foregoing shall not prevent the redemption,
purchase or acquisition of shares of preferred stock of such series to
preserve the REIT status of Host Marriott or pursuant to a purchase or
exchange offer made on the same terms to holders of all outstanding
preferred stock of such series, and
. Host Marriott shall not purchase or otherwise acquire directly or
indirectly any shares of preferred stock of such series, except by
conversion into or exchange for shares of capital stock of Host Marriott
ranking junior to the preferred stock of such series as to distributions
and upon liquidation; provided, however, that the foregoing shall not
prevent the redemption, purchase or acquisition of shares of preferred
stock of such series to assist in maintaining the REIT status of Host
Marriott or pursuant to a purchase or exchange offer made on the same
terms to holders of all outstanding shares of preferred stock of such
series.
If fewer than all of the outstanding shares of preferred stock of any series
are to be redeemed, the number of shares to be redeemed will be determined by
Host Marriott and such shares may be redeemed pro rata from the holders of
record of such shares in proportion to the number of such shares held or for
which redemption is requested by such holder or by lot in a manner determined
by Host Marriott.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of preferred stock of
any series to be redeemed at the address shown on the stock transfer books of
Host Marriott. Each notice shall state:
(a) the redemption date;
(b) the number and series of shares of preferred stock to be redeemed;
24
(c) the place or places where certificates for such preferred stock are
to be surrendered for payment of the redemption price;
(d) that distributions on the shares to be redeemed will cease to accrue
on such redemption date; and
(e) the date upon which the holders' conversion rights, if any, as to
such shares shall terminate.
If fewer than all of the shares of preferred stock of any series are to be
redeemed, the notice mailed to each such holder thereof shall also specify the
number of shares of preferred stock to be redeemed from each such holder. If
notice of redemption of any preferred stock has been given and if the funds
necessary for such redemption have been set aside by Host Marriott in trust
for the benefit of the holders of any preferred stock so called for
redemption, then from and after the redemption date distributions will cease
to accumulate on such preferred stock, and all rights of the holders of such
shares will terminate, except the right to receive the redemption price.
Liquidation Preference
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of Host Marriott, then, before any distribution or payment shall
be made to the holders of any common stock or any other class or series of
shares of capital stock of Host Marriott ranking junior to the preferred stock
in the distribution of assets upon any liquidation, dissolution or winding up
of Host Marriott, the holders of each series of preferred stock shall be
entitled to receive out of assets of Host Marriott legally available for
distribution to shareholders liquidating distributions in the amount of the
liquidation preference set forth in the applicable prospectus supplement, plus
an amount equal to all accumulated and unpaid distributions. After payment of
the full amount of the liquidating distributions to which they are entitled,
the holders of shares of preferred stock will have no right or claim to any of
the remaining assets of Host Marriott. If, upon any such voluntary or
involuntary liquidation, dissolution or winding up, the available assets of
Host Marriott are insufficient to pay the amount of the liquidating
distributions on all outstanding shares of preferred stock and the
corresponding amounts payable on all shares of other classes or series of
shares of capital stock of Host Marriott ranking on a parity with the
preferred stock in the distribution of assets, then the holders of the
preferred stock and all other such classes or series of shares of capital
stock shall share ratably in any such distribution of assets in proportion to
the full liquidating distributions to which they would otherwise be
respectively entitled.
If liquidating distributions shall have been made in full to all holders of
preferred stock, the remaining assets of Host Marriott shall be distributed
among the holders of any other classes or series of shares of capital stock
ranking junior to the preferred stock upon liquidation, dissolution or winding
up, according to their respective rights and preferences and in each case
according to their respective number of shares. For such purposes, the
consolidation or merger of Host Marriott with or into any other corporation,
trust or entity, or the sale, lease or conveyance of all or substantially all
of the property or business of Host Marriott, shall not be deemed to
constitute a liquidation, dissolution or winding up of Host Marriott.
Voting Rights
Holders of preferred stock will not have any voting rights, except as set
forth below or as otherwise from time to time required by law or as indicated
in the applicable prospectus supplement.
Whenever distributions on any shares of preferred stock shall be in arrears
for six or more quarterly periods, whether or not consecutive:
. the holders of such preferred stock, voting together as a single class
with all other series of preferred stock upon which like voting rights
have been conferred and are exercisable, will be entitled to vote for the
election of two additional Directors of Host Marriott at a special
meeting called by the holders of record of at least 10% of any series of
preferred stock so in arrears, unless such request is received less than
90 days before the date fixed for the next annual or special meeting of
the stockholders, or at the next annual meeting of stockholders, and at
each subsequent annual meeting and
25
. such voting rights will continue until all distributions accumulated on a
series of cumulative preferred stock for the past distribution periods
and the then current distribution period shall have been fully paid or
declared and a sum sufficient for the payment thereof set aside for
payment or four consecutive quarterly distributions on a non-cumulative
preferred series shall have been fully paid or declared and a sum
sufficient for the payment thereof set aside for payment.
Unless provided otherwise for any series of preferred stock, so long as any
shares of preferred stock remain outstanding, Host Marriott will not, without
the affirmative vote or consent of the holders of at least two-thirds of each
series of preferred stock outstanding at the time, given in person or by proxy,
either in writing or at a meeting,
. authorize or create, or increase the authorized or issued amount of, any
class or series of shares of capital stock ranking senior to such series
of preferred stock with respect to the payment of distributions or the
distribution of assets upon liquidation, dissolution or winding up or
reclassify any authorized shares of capital stock of Host Marriott into
such shares, or create, authorize or issue any obligation or security
convertible into or evidencing the right to purchase any such shares; or
. amend, alter or repeal the provisions of Host Marriott's charter or the
Articles Supplementary for such series of preferred stock, whether by
merger, consolidation or otherwise (an "Event"), so as to materially and
adversely affect any right, preference, privilege or voting power of such
series of preferred stock or the holders thereof; provided, however, with
respect to the occurrence of any Event, so long as the shares of
preferred stock remain outstanding or are converted into like securities
of the surviving entity, in each case with the terms thereof materially
unchanged, taking into account that upon the occurrence of an Event, Host
Marriott may not be the surviving entity and that the surviving entity
may be a non-corporate entity, such as a limited liability company,
limited partnership or business trust in which case the preferred stock
would be converted into an equity interest, other than stock, having
substantially equivalent terms, the occurrence of any such Event shall
not be deemed to materially and adversely affect such rights,
preferences, privileges or voting powers of holders of preferred stock;
and provided further that any increase in the amount of the authorized
preferred stock or any increase in the amount of authorized shares of
such series or any other series of preferred stock, in each case ranking
on a parity with or junior to the preferred stock of such series with
respect to payment of distributions and the distribution of assets upon
liquidation, dissolution or winding up of Host Marriott, shall not be
deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of preferred stock of such series shall
have been converted or redeemed or called for redemption and sufficient funds
shall have been deposited in trust to effect such redemption.
Conversion Rights
The terms and conditions, if any, upon which any series of preferred stock
is convertible into common stock will be set forth in the applicable prospectus
supplement relating thereto. Such terms will include the number of shares of
common stock into which the shares of preferred stock are convertible, the
conversion price or the manner of calculating the conversion price, the
conversion date(s) or period(s), provisions as to whether conversion will be at
the option of the holders of the preferred stock or Host Marriott, the events
requiring an adjustment of the conversion price and provisions affecting
conversion in the event of the redemption of such series of preferred stock.
Transfer Agent and Registrar
The transfer agent and registrar for the preferred stock will be set forth
in the applicable prospectus supplement.
26
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For Host Marriott to qualify as a REIT under the Internal Revenue Code, no
more than 50% in value of its outstanding shares of stock may be owned,
actually or constructively, by five or fewer individuals, as defined in the
Internal Revenue Code to include certain entities
. during the last half of a taxable year other than the first year for
which an election to be treated as a REIT has been made or
. during a proportionate part of a shorter taxable year.
In addition, if Host Marriott, or one or more owners of 10% or more of Host
Marriott, actually or constructively owns 10% or more of a tenant of Host
Marriott or a tenant of any partnership in which Host Marriott is a partner,
the rent received by Host Marriott either directly or through any such
partnership from such tenant will not be qualifying income for purposes of the
REIT gross income tests of the Internal Revenue Code. A REIT's shares also must
be beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months or during a proportionate part of a shorter
taxable year other than the first year for which an election to be treated as a
REIT has been made.
Primarily because the Board of Directors believes it is desirable for Host
Marriott to qualify as a REIT, the Articles of Incorporation provide that,
subject to certain exceptions, no person or persons acting as a group may own,
or be deemed to own by virtue of the attribution provisions of the Internal
Revenue Code, more than
. 9.8% of the lesser of the number or value of shares of common stock
outstanding or
. 9.8% of the lesser of the number or value of the issued and outstanding
preferred or other shares of any class or series of Host Marriott's
stock.
The foregoing are subject to
. an exception for a holder of shares of common stock solely by reason of
the Merger in excess of the ownership limit so long as such holder would
not own, directly or by attribution under the Internal Revenue Code, more
than 9.9% by value of the outstanding capital stock of Host Marriott as
of December 30, 1998, and
. a limitation on the application of the "group" limitation, but no other
element of the ownership limit, to any "group" that otherwise would
exceed the ownership limit at the effective time of the Merger solely by
reason of its status as a "group."
The ownership limit prohibits Marriott International and its subsidiaries
and affiliates, including members of the Marriott family, from collectively
owning shares of capital stock in excess of the ownership limit, but the Board
of Directors will grant an exception that will permit Marriott International to
exercise its right to purchase up to 20% of each class of Host Marriott's
voting stock in connection with a change in control of Host Marriott, but only
in the event that
. Marriott International and its subsidiaries and affiliates, including
members of the Marriott family, do not own at such time or thereafter,
directly and by attribution, 10% or more of Crestline or any of the
lessees and
. such ownership of Host Marriott's shares would not cause Host Marriot,
L.P. to be considered to own, directly or by attribution, 10% or more of
Crestline or any of the lessees.
The ownership attribution rules under the Internal Revenue Code are complex
and may cause capital stock owned actually or constructively by a group of
related individuals and/or entities to be owned constructively by one
individual or entity. As a result, the acquisition of less than 9.8% of the
common stock or the acquisition or ownership of an interest in an entity that
owns, actually or constructively, common stock, by an individual or entity
could nevertheless cause that individual or entity, or another individual or
entity, to own constructively in excess of 9.8% of the outstanding common stock
and thus subject such common stock to the remedy provision
27
under the ownership limit. The Board of Directors may grant an exemption from
the ownership limit with respect to one or more persons who would not be
treated as "individuals" for purposes of the Internal Revenue Code if it is
satisfied, based upon an opinion of counsel and such other evidence as is
satisfactory to the Board of Directors in its sole discretion, that
. such ownership will not cause a person who is an individual to be treated
as owning capital stock in excess of the ownership limit, applying the
applicable constructive ownership rules, and
. will not otherwise jeopardize Host Marriott's status as a REIT by, for
example, causing any tenant of Host Marriott, L.P., including Crestline
and the lessees, to be considered a "related party tenant" for purposes
of the REIT qualification rules.
As a condition of such waiver, the Board of Directors may require
undertakings or representations from the applicant with respect to preserving
the REIT status of Host Marriott.
The Board of Directors will have the authority to increase the ownership
limit from time to time, but will not have the authority to do so to the extent
that after giving effect to such increase, five beneficial owners of capital
stock could beneficially own in the aggregate more than 49.5% of the
outstanding capital stock.
The Articles of Incorporation further prohibit
. any person from actually or constructively owning shares of beneficial
interest of Host Marriott that would result in Host Marriott being
"closely held" under Section 856(h) of the Internal Revenue Code or
otherwise cause Host Marriott to fail to qualify as a REIT and
. any person from transferring shares of Host Marriott's capital stock if
such transfer would result in shares of Host Marriott's capital stock
being owned by fewer than 100 persons.
Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of Host Marriott's capital stock that will or
may violate any of the foregoing restrictions on transferability and ownership
is required to give notice immediately to Host Marriott and provide Host
Marriott with such other information as Host Marriott may request in order to
determine the effect of such transfer on Host Marriott's status as a REIT.
If any purported transfer of shares of Host Marriott's capital stock or any
other event would otherwise result in any person violating the ownership limit
or the other restrictions in the Articles of Incorporation, then any such
purported transfer will be void and of no force or effect with respect to the
purported transferee (the "Prohibited Transferee") as to that number of shares
that exceeds the ownership limit (referred to as "excess shares") and
. the Prohibited Transferee shall acquire no right or interest in such
excess shares and
. in the case of any event other than a purported transfer, the person or
entity holding record title to any such shares in excess of the ownership
limit (the "Prohibited Owner") shall cease to own any right or interest
in such excess shares.
Any such excess shares described above will be transferred automatically, by
operation of law, to a trust, the beneficiary of which will be a qualified
charitable organization selected by Host Marriott (the "Beneficiary"). Such
automatic transfer shall be deemed to be effective as of the close of business
on the business day prior to the date of such violating transfer. Within 20
days of receiving notice from Host Marriott of the transfer of shares to the
trust, the trustee of the trust, who shall be designated by Host Marriott and
be unaffiliated with Host Marriott and any Prohibited Transferee or Prohibited
Owner, will be required to sell such excess shares to a person or entity who
could own such shares without violating the ownership limit, and distribute to
the Prohibited Transferee an amount equal to the lesser of the price paid by
the Prohibited Transferee for such excess shares or the sales proceeds received
by the trust for such excess shares. In the case of any excess shares resulting
from any event other than a transfer, or from a transfer for no consideration,
such as a gift, the trustee will be required to sell such excess shares to a
qualified person or entity and distribute to
28
the Prohibited Owner an amount equal to the lesser of the fair market value of
such excess shares as of the date of such event or the sales proceeds received
by the trust for such excess shares. In either case, any proceeds in excess of
the amount distributable to the Prohibited Transferee or Prohibited Owner, as
applicable, will be distributed to the Beneficiary. Prior to a sale of any such
excess shares by the trust, the trustee will be entitled to receive, in trust
for the Beneficiary, all dividends and other distributions paid by Host
Marriott with respect to such excess shares, and also will be entitled to
exercise all voting rights with respect to such excess shares. Subject to
Maryland law, effective as of the date that such shares have been transferred
to the trust, the trustee shall have the authority to rescind as void any vote
cast by a Prohibited Transferee prior to the discovery by Host Marriott that
such shares have been transferred to the trust and to recast such vote in
accordance with the desires of the trustee acting for the benefit of the
Beneficiary.
However, if Host Marriott has already taken irreversible corporate action,
then the trustee shall not have the authority to rescind and recast such vote.
Any dividend or other distribution paid to the Prohibited Transferee or
Prohibited Owner, prior to the discovery by Host Marriott that such shares had
been automatically transferred to a trust as described above, will be required
to be repaid to the trustee upon demand for distribution to the Beneficiary. If
the transfer to the trust as described above is not automatically effective to
prevent violation of the ownership limit, then the Articles of Incorporation
provides that the transfer of the excess shares will be void.
In addition, shares of Host Marriott's stock held in the trust shall be
deemed to have been offered for sale to Host Marriott, or its designee, at a
price per share equal to the lesser of the price per share in the transaction
that resulted in such transfer to the trust or, in the case of a devise or
gift, the market value at the time of such devise or gift and the market value
of such shares on the date Host Marriott, or its designee, accepts such offer.
Host Marriott will have the right to accept such offer until the trustee has
sold the shares held in the trust. Upon such a sale to Host Marriott, the
interest of the Beneficiary in the shares sold will terminate and the trustee
will distribute the net proceeds of the sale to the Prohibited Owner.
The foregoing restrictions on transferability and ownership will not apply
if the Board of Directors determines that it is no longer in the best interests
of Host Marriott to attempt to qualify, or to continue to qualify, as a REIT.
All certificates representing shares of Host Marriott's capital stock will
bear a legend referring to the restrictions described above.
All persons who own, directly or by virtue of the attribution provisions of
the Internal Revenue Code, more than 5%, or such other percentage between 1/2
of 1% and 5% as provided in the rules and regulations under the Internal
Revenue Code, of the lesser of the number or value of the outstanding shares of
Host Marriott's capital stock must give a written notice to Host Marriott
within 30 days after the end of each taxable year. In addition, each
stockholder will, upon demand, be required to disclose to Host Marriott in
writing such information with respect to the direct, indirect and constructive
ownership of shares of Host Marriott's capital stock as the Board of Directors
deems reasonably necessary to comply with the provisions of the Internal
Revenue Code applicable to a REIT, to comply with the requirements of any
taxing authority or governmental agency or to determine any such compliance.
These ownership limitations could have the effect of delaying, deferring or
preventing a takeover or other transaction in which holders of some, or a
majority, of the common stock might receive a premium for their common stock
over the then prevailing market price or which such holders might believe to be
otherwise in their best interest.
29
DESCRIPTION OF DEPOSITARY SHARES
General
Host Marriott may issue depositary receipts for depositary shares, each of
which will represent a fractional interest of a share of a particular series of
preferred stock, as specified in the applicable prospectus supplement. Shares
of preferred stock of each series represented by depositary shares will be
deposited under a separate Deposit Agreement among Host Marriott and the
depositary named therein. Subject to the terms of the Deposit Agreement, each
owner of a depositary receipt will be entitled, in proportion to the fractional
interest of a share of a particular series of preferred stock represented by
the depositary shares evidenced by such depositary receipt, to all the rights
and preferences of the preferred stock represented by such depositary shares,
including dividend, voting, conversion, redemption and liquidation rights.
The depositary shares will be evidenced by depositary receipts issued
pursuant to the applicable Deposit Agreement. Immediately following the
issuance and delivery of the preferred stock by Host Marriott to the
depositary, Host Marriott will cause the depositary to issue, on behalf of Host
Marriott, the depositary receipts. Copies of the applicable form of Deposit
Agreement and depositary receipt may be obtained from Host Marriott upon
request, and the statements made hereunder relating to the Deposit Agreement
and the depositary receipts to be issued thereunder are summaries of certain
provisions thereof and do not purport to be complete and are subject to, and
qualified in their entirety by reference to, all of the provisions of the
applicable Deposit Agreement and related depositary receipts.
Dividends and Other Distributions
The depositary will distribute all cash dividends or other cash
distributions received in respect of the preferred stock to the record holders
of depositary receipts evidencing the related depositary shares in proportion
to the number of such depositary receipts owned by such holders, subject to
certain obligations of holders to file proofs, certificates and other
information and to pay certain charges and expenses to the depositary.
In the event of a distribution other than in cash, the depositary will
distribute property received by it to the record holders of depositary receipts
entitled thereto, subject to certain obligations of holders to file proofs,
certificates and other information and to pay certain charges and expenses to
the depositary, unless the depositary determines that it is not feasible to
make such distribution, in which case the depositary may, with the approval of
Host Marriott, sell such property and distribute the net proceeds from such
sale to such holders.
No distribution will be made in respect of any depositary share to the
extent that it represents any preferred stock converted into other securities.
Withdrawal of Stock
Upon surrender of the depositary receipts at the corporate trust office of
the depositary (unless the related depositary shares have previously been
called for redemption or converted into other securities), the holders thereof
will be entitled to delivery at such office, to or upon such holder's order, of
the number of whole or fractional shares of the preferred stock and any money
or other property represented by the depositary shares evidenced by such
depositary receipts. Holders of depositary receipts will be entitled to receive
whole or fractional shares of the related preferred stock on the basis of the
proportion of preferred stock represented by such depositary share as specified
in the applicable prospectus supplement, but holders of such shares of
preferred stock will not thereafter be entitled to receive depositary shares
therefor. If the depositary receipts delivered by the holder evidence a number
of depositary shares in excess of the number of depositary shares representing
the number of shares of preferred stock to be withdrawn, the depositary will
deliver to such holder at the same time a new depositary receipt evidencing
such excess number of depositary shares.
30
Redemption of Depositary Shares
Whenever Host Marriott redeems shares of preferred stock held by the
depositary, the depositary will redeem, as of the same redemption date, the
number of depositary shares representing shares of the preferred stock so
redeemed, provided Host Marriott shall have paid in full to the depositary the
redemption price of the preferred stock to be redeemed plus an amount equal to
any accrued and unpaid dividends thereon to the date fixed for redemption. The
redemption price per depositary share will be equal to the corresponding
proportion of the redemption price and any other amounts per share payable with
respect to the preferred stock. If fewer than all the depositary shares are to
be redeemed, the depositary shares to be redeemed will be selected pro rata (as
nearly as may be practicable without creating fractional depositary shares) or
by any other equitable method determined by Host Marriott.
From and after the date fixed for redemption, all dividends in respect of
the shares of preferred stock so called for redemption will cease to accrue,
the depositary shares so called for redemption will no longer be deemed to be
outstanding and all rights of the holders of the depositary receipts evidencing
the depositary shares so called for redemption will cease, except the right to
receive any moneys payable upon such redemption and any money or other property
to which the holders of such depositary receipts were entitled upon such
redemption and surrender thereof to the depositary.
Voting of the Preferred Stock
Upon receipt of notice of any meeting at which the holders of the preferred
stock are entitled to vote, the depositary will mail the information contained
in such notice of meeting to the record holders of the depositary receipts
evidencing the depositary shares which represent such preferred stock. Each
record holder of depositary receipts evidencing depositary shares on the record
date, which will be the same date as the record date for the preferred stock,
will be entitled to instruct the depositary as to the exercise of the voting
rights pertaining to the amount of preferred stock represented by such holder's
depositary shares. The depositary will vote the amount of preferred stock
represented by such depositary shares in accordance with such instructions, and
Host Marriott will agree to take all reasonable action which may be deemed
necessary by the depositary in order to enable the depositary to do so. The
depositary will abstain from voting the amount of preferred stock represented
by such depositary shares to the extent it does not receive specific
instructions from the holders of depositary receipts evidencing such depositary
shares. The depositary shall not be responsible for any failure to carry out
any instruction to vote, or for the manner or effect of any such vote made, as
long as such action or non-action is in good faith and does not result from
negligence or willful misconduct of the depositary.
Liquidation Preference
In the event of the liquidation, dissolution or winding up of Host Marriott,
whether voluntary or involuntary, the holders of each depositary receipt will
be entitled to the fraction of the liquidation preference accorded each share
of preferred stock represented by the depositary shares evidenced by such
depositary receipt, as set forth in the applicable prospectus supplement.
Conversion of Preferred Stock
The depositary shares, as such, are not convertible into common stock or any
other securities or property of Host Marriott. Nevertheless, if so specified in
the applicable prospectus supplement relating to an offering of depositary
shares, the depositary receipts may be surrendered by holders thereof to the
depositary with written instructions to the depositary to instruct Host
Marriott to cause conversion of the preferred stock represented by the
depositary shares evidenced by such depositary receipts into whole shares of
common stock, other shares of preferred stock of Host Marriott or other shares
of stock, and Host Marriott has agreed that upon receipt of such instructions
and any amounts payable in respect thereof, it will cause the conversion
thereof utilizing the same procedures as those provided for delivery of
preferred stock to effect such conversion. If the depositary shares evidenced
by a depositary receipt are to be converted in part only, a new depositary
receipt or receipts will be issued for any depositary shares not to be
converted. No fractional shares of common stock will be
31
issued upon conversion, and if such conversion would result in a fractional
share being issued, an amount will be paid in cash by Host Marriott equal to
the value of the fractional interest based upon the closing price of the common
stock on the last business day prior to the conversion.
Amendment and Termination of the Deposit Agreement
The form of depositary receipt evidencing the depositary shares which
represent the preferred stock and any provision of the Deposit Agreement may at
any time be amended by agreement between Host Marriott and the depositary.
However, any amendment that materially and adversely alters the rights of the
holders of depositary receipts or that would be materially and adversely
inconsistent with the rights granted to the holders of the related preferred
stock will not be effective unless such amendment has been approved by the
existing holders of at least 66% of the depositary shares evidenced by the
depositary receipts then outstanding. No amendment shall impair the right,
subject to certain exceptions in the Deposit Agreement, of any holder of
depositary receipts to surrender any depositary receipt with instructions to
deliver to the holder the related preferred stock and all money and other
property, if any, represented thereby, except in order to comply with law.
Every holder of an outstanding depositary receipt at the time any such
amendment becomes effective shall be deemed, by continuing to hold such
receipt, to consent and agree to such amendment and to be bound by the Deposit
Agreement as amended thereby.
The Deposit Agreement may be terminated by Host Marriott upon not less than
30 days prior written notice to the depositary if a majority of each series of
preferred stock affected by such termination consents to such termination,
whereupon the depositary shall deliver or make available to each holder of
Depositary Receipts, upon surrender of the depositary receipts held by such
holder, such number of whole or fractional shares of preferred stock as are
represented by the depositary shares evidenced by such depositary receipts
together with any other property held by the depositary with respect to such
depositary receipt. In addition, the Deposit Agreement will automatically
terminate if
. all outstanding depositary shares shall have been redeemed,
. there shall have been a final distribution in respect of the related
preferred stock in connection with any liquidation, dissolution or
winding up of Host Marriott and such distribution shall have been
distributed to the holders of depositary receipts evidencing the
depositary shares representing such preferred stock or
. each share of the related preferred stock shall have been converted into
securities of Host Marriott not so represented by depositary shares.
Charges of Preferred Stock Depositary
Host Marriott will pay all transfer and other taxes and governmental charges
arising solely from the existence of the Deposit Agreement. In addition, Host
Marriott will pay the fees and expenses of the depositary in connection with
the performance of its duties under the Deposit Agreement. However, holders of
depositary receipts will pay the fees and expenses of the depositary for any
duties requested by such holders to be performed which are outside of those
expressly provided for in the Deposit Agreement.
Resignation and Removal of Depositary
The depositary may resign at any time by delivering to Host Marriott notice
of its election to do so, and Host Marriott may at any time remove the
depositary, any such resignation or removal to take effect upon the appointment
of a successor depositary. A successor depositary must be appointed within 60
days after delivery of the notice of resignation or removal and must be a bank
or trust company having its principal office in the United States and having a
combined capital and surplus of at least $50,000,000.
Miscellaneous
The depositary will forward to holders of depositary receipts any reports
and communications from Host Marriott which are received by the depositary with
respect to the related preferred stock.
32
Neither the depositary nor Host Marriott will be liable if it is prevented
from or delayed in, by law or any circumstances beyond its control, performing
its obligations under the Deposit Agreement. The obligations of Host Marriott
and the depositary under the Deposit Agreement will be limited to performing
their duties thereunder in good faith and without negligence, in the case of
any action or inaction in the voting of preferred stock represented by the
depositary shares, gross negligence or willful misconduct, and Host Marriott
and the depositary will not be obligated to prosecute or defend any legal
proceeding in respect of any depositary receipts, depositary shares or shares
of preferred stock represented thereby unless satisfactory indemnity is
furnished. Host Marriott and the depositary may rely on written advice of
counsel or accountants, or information provided by persons presenting shares of
preferred stock represented thereby for deposit, holders of depositary receipts
or other persons believed in good faith to be competent to give such
information, and on documents believed in good faith to be genuine and signed
by a proper party.
In the event the depositary shall receive conflicting claims, requests or
instructions from any holders of depositary receipts, on the one hand, and Host
Marriott, on the other hand, the depositary shall be entitled to act on such
claims, requests or instructions received from Host Marriott.
33
DESCRIPTION OF WARRANTS
General
Host Marriott may issue warrants to purchase preferred stock, depositary
shares or common stock. Warrants may be issued independently or together with
any offered securities and may be attached to or separate from such offered
securities. The warrants are to be issued under Warrant Agreements to be
entered into between Host Marriott and a bank or trust company, as warrant
agent, all as shall be set forth in the prospectus supplement relating to the
warrants being offered pursuant thereto. The warrant agent will act solely as
an agent of Host Marriott in connection with the warrants of such series and
will not assume any obligation or relationship of agency or trust for or with
any holders or beneficial owners of warrants.
The applicable prospectus supplement will describe the following terms of
warrants in respect of which this prospectus is being delivered:
(i) the title of such warrants;
(ii) the securities for which such warrants are exercisable;
(iii) the price or prices at which such warrants will be issued;
(iv) the number of such warrants issued with each share of preferred
stock or common stock;
(v) any provisions for adjustment of the number or amount of shares of
preferred stock or common stock receivable upon exercise of such warrants
or the exercise price of such warrants;
(vi) if applicable, the date on and after which such warrants and the
related preferred stock or common stock will be separately transferable;
(vii) if applicable, a discussion of the material United States federal
income tax considerations applicable to the exercise of such warrants;
(viii) any other terms of such warrants, including terms, procedures and
limitations relating to the exchange and exercise of such warrants;
(ix) the date on which the right to exercise such warrants shall
commence, and the date on which such right shall expire; and
(x) the maximum or minimum number of such warrants which may be
exercised at any time.
Exercise of Warrants
Each warrant will entitle the holder of warrants to purchase for cash such
amount of shares of preferred stock, shares of common stock or depositary
shares at such exercise price as shall in each case be set forth in, or be
determinable as set forth in, the prospectus supplement relating to the
warrants offered thereby. Warrants may be exercised at any time up to the close
of business on the expiration date set forth in the prospectus supplement
relating to the warrants offered thereby. After the close of business on the
expiration date, unexercised warrants will become void.
Warrants may be exercised as set forth in the prospectus supplement relating
to the warrants offered thereby. Upon receipt of payment and the warrant
certificate properly completed and duly executed at the corporate trust office
of the warrant agent or any other office indicated in the prospectus
supplement, Host Marriott will, as soon as practicable, forward the shares of
preferred stock, shares of common stock or depositary shares purchasable upon
such exercise. If less than all of the warrants represented by such warrant
certificate are exercised, a new warrant certificate will be issued for the
remaining warrants.
34
DESCRIPTION OF SUBSCRIPTION RIGHTS
General
Host Marriott may issue subscription rights to purchase common stock,
preferred stock, depositary shares or warrants to purchase preferred stock or
common stock. Subscription rights may be issued independently or together with
any other offered security and may or may not be transferable by the purchaser
receiving the subscription rights. In connection with any subscription rights
offering to Host Marriott's stockholders, Host Marriott may enter into a
standby underwriting arrangement with one or more underwriters pursuant to
which such underwriter will purchase any offered securities remaining
unsubscribed for after such subscription rights offering. In connection with a
subscription rights offering to Host Marriott's stockholders, certificates
evidencing the subscription rights and a prospectus supplement will be
distributed to Host Marriott's stockholders on the record date for receiving
subscription rights in such subscription rights offering set by Host Marriott.
The applicable prospectus supplement will describe the following terms of
subscription rights in respect of which this prospectus is being delivered:
(i) the title of such subscription rights;
(ii) the securities for which such subscription rights are exercisable;
(iii) the exercise price for such subscription rights;
(iv) the number of such subscription rights issued to each stockholder;
(v) the extent to which such subscription rights are transferable;
(vi) if applicable, a discussion of the material United States federal
income tax considerations applicable to the issuance or exercise of such
subscription rights;
(vii) any other terms of such subscription rights, including terms,
procedures and limitations relating to the exchange and exercise of such
subscription rights;
(viii) the date on which the right to exercise such subscription rights
shall commence, and the date on which such right shall expire.
(ix) the extent to which such subscription rights includes an over-
subscription privilege with respect to unsubscribed securities.
(x) if applicable, the material terms of any standby underwriting
arrangement entered into by Host Marriott in connection with the
subscription rights offering.
Exercise of Subscription Rights
Each subscription right will entitle the holder of subscription rights to
purchase for cash such principal amount of shares of preferred stock,
depository shares, common stock, warrants or any combination thereof, at such
exercise price as shall in each case be set forth in, or be determinable as set
forth in, the prospectus supplement relating to the subscription rights offered
thereby. Subscription rights may be exercised at any time up to the close of
business on the expiration date for such subscription rights set forth in the
prospectus supplement. After the close of business on the expiration date, all
unexercised subscription rights will become void.
Subscription rights may be exercised as set forth in the prospectus
supplement relating to the subscription rights offered thereby. Upon receipt of
payment and the subscription rights certificate properly completed and duly
executed at the corporate trust office of the subscription rights agent or any
other office indicated in the prospectus supplement, Host Marriott will, as
soon as practicable, forward the shares of preferred stock or common stock,
depository shares or warrants purchasable upon such exercise. In the event that
not all of the subscription rights issued in any offering are exercised, Host
Marriott may determine to offer any unsubscribed
35
offered securities directly to persons other than stockholders, to or through
agents, underwriters or dealers or through a combination of such methods,
including pursuant to standby underwriting arrangements, as set forth in the
applicable prospectus supplement.
FEDERAL INCOME TAX CONSIDERATIONS
Introduction
The following discussion summarizes the federal income tax considerations
reasonably anticipated to be material to a stockholder in connection with the
purchase, ownership and disposition of common stock. The applicable prospectus
supplement will contain information about additional federal income tax
considerations, if any, relating to particular offerings. The following
discussion is intended to address only those federal income tax consequences
that are generally relevant to all stockholders. Accordingly, it does not
discuss all aspects of federal income taxation that might be relevant to a
specific stockholder in light of his particular investment or tax
circumstances. Therefore, it is imperative that a stockholder review the
following discussion and consult with his own tax advisors to determine the
interaction of his individual tax situation with the tax considerations
associated with the purchase, ownership and disposition of common stock.
The following discussion provides general information only, is not
exhaustive of all possible tax considerations and is not tax advice. For
example, this summary does not give a detailed description of any state, local
or foreign tax considerations. In addition, the discussion does not purport to
deal with all aspects of taxation that may be relevant to a stockholder subject
to special treatment under the federal income tax laws, including, without
limitation, insurance companies, financial institutions or broker-dealers, tax-
exempt organizations or foreign corporations and persons who are not citizens
or residents of the United States.
The information in this section is based on the Internal Revenue Code,
current, temporary and proposed regulations thereunder, the legislative history
of the Internal Revenue Code, current administrative interpretations and
practices of the IRS, including its practices and policies as endorsed in
private letter rulings, which are not binding on the IRS, and court decisions,
all as of the date hereof. No assurance can be given that future legislation,
regulations, administrative interpretations and court decisions will not
significantly change the current law or adversely affect existing
interpretations of current law. Any such change could apply retroactively to
transactions preceding the date of the change. No assurance can be provided
that the statements set forth herein will not be challenged by the IRS or will
be sustained by a court if so challenged.
Hogan & Hartson has given Host Marriott an opinion to the effect that the
discussion herein under the heading "Federal Income Tax Considerations," to the
extent that it contains descriptions of applicable federal income tax law, is
correct in all material respects. The opinion, however, does not purport to
address the actual tax consequences of the purchase, ownership and disposition
of common stock to any particular stockholder. The opinion is based on the
Internal Revenue Code and regulations in effect on the date hereof, current
administrative interpretations and positions of the IRS and existing court
decisions. No assurance can be given that future legislation, regulations,
administrative interpretations and court decisions will not significantly
change the law on which the above opinion is based. Any such change could
adversely affect the opinion. In addition, any such change could apply
retroactively. Moreover, opinions of counsel merely represent counsel's best
judgment with respect to the probable outcome on the merits and are not binding
on the IRS or the courts. Accordingly, even if there is no change in applicable
law, no assurance can be provided that such opinion, which does not bind the
IRS or the courts, will not be challenged by the IRS or will be sustained by a
court if so challenged.
The specific tax attributes of a particular stockholder could have a
material impact on the tax considerations associated with the purchase,
ownership and disposition of common stock. Therefore, it is essential that each
prospective stockholder consult with his own tax advisors with regard to the
application of the federal income tax laws to such stockholder's personal tax
situation, as well as any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction.
36
Federal Income Taxation of Host Marriott
General. Host Marriott plans to make an election to be taxed as a REIT under
Sections 856 through 859 of the Internal Revenue Code, effective for the
taxable year beginning January 1, 1999. Host Marriott intends that, commencing
with such year, it will be organized and will operate in such a manner as to
qualify for taxation as a REIT, but no assurance can be given that it in fact
will qualify or remain qualified as a REIT.
The sections of the Internal Revenue Code and the corresponding regulations
that govern the federal income tax treatment of a REIT and its stockholders are
highly technical and complex. The following discussion is a summary of the
material aspects of these rules, which is qualified in its entirety by the
applicable Internal Revenue Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof.
Hogan & Hartson has provided to Host Marriott an opinion to the effect that
Host Marriott will be organized in conformity with the requirements for
qualification as a REIT, and, beginning in 1999, its proposed method of
operation will enable it to meet the requirements for qualification and
taxation as a REIT under the Internal Revenue Code. It must be emphasized that
this opinion is conditioned upon certain assumptions and representations made
by Host Marriott and Host Marriott, L.P. as to factual matters relating to the
organization and operation of Host Marriott and its subsidiaries, Host
Marriott, L.P. and its subsidiaries, the non-controlled subsidiaries, the Host
Employee/Charitable Trust and Crestline and its subsidiaries, including the
economic and other terms of each lease and the expectations of Host Marriott
and the lessees with respect thereto. This opinion also is based on the timely
completion of all of the transactions comprising the REIT conversion, which are
described in detail in certain documents that are incorporated by reference
into this prospectus. See "Where You Can Find More Information." This generally
means that all of the transactions are completed prior to end of 1998, except
for those transactions that clearly are contemplated to be completed afterward.
In addition, this opinion is based upon the factual representations of Host
Marriott concerning its business and properties as described in, or
incorporated by reference into, this prospectus. Moreover, qualification and
taxation as a REIT depends upon Host Marriott's ability to meet the various
qualification tests imposed under the Internal Revenue Code discussed below.
Hogan & Hartson will not review Host Marriott's operating results. Accordingly,
no assurance can be given that the actual results of Host Marriott's operations
for any particular taxable year will satisfy such requirements. Further, the
anticipated income tax treatment described below may be changed, perhaps
retroactively, by legislative, administrative or judicial action at any time.
See "--Failure of Host Marriott to Qualify as a REIT" below.
If Host Marriott qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that it currently
distributes to its stockholders. This treatment substantially eliminates the
"double taxation" at the corporate and stockholder levels that generally
results from an investment in a regular corporation. However, Host Marriott
will be subject to federal income tax as follows:
1. Host Marriott will be taxed at regular corporate rates on any
undistributed "REIT taxable income," including undistributed net capital
gains; provided, however, that properly designated undistributed capital
gains will effectively avoid taxation at the stockholder level. A REIT's
"REIT taxable income" is the otherwise taxable income of the REIT subject
to certain adjustments, including a deduction for dividends paid.
2. Under certain circumstances, Host Marriott may be subject to the
"alternative minimum tax" on its items of tax preference.
3. If Host Marriott has net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income.
4. Host Marriott's net income from "prohibited transactions" will be
subject to a 100% tax. In general, "prohibited transactions" are certain
sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure
property.
37
5. If Host Marriott fails to satisfy the 75% gross income test or the
95% gross income test discussed below, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will
be subject to a tax equal to (1) the gross income attributable to the
greater of the amount by which Host Marriott fails the 75% or 95% test
multiplied by (2) a fraction intended to reflect its profitability.
6. If Host Marriott fails to distribute during each calendar year at
least the sum of (1) 85% of its REIT ordinary income for such year, (2) 95%
of its REIT capital gain net income for such year and (3) any undistributed
taxable income from prior periods, Host Marriott will be subject to a 4%
excise tax on the excess of such required distribution over the sum of
amounts actually distributed and amounts retained but with respect to which
federal income tax was paid.
7. If Host Marriott acquires any asset from a taxable "C" corporation in
a transaction in which the basis of the asset in the hands of Host Marriott
is determined by reference to the basis of the asset in the hands of the
"C" corporation, and Host Marriott recognizes gain on the disposition of
such asset during the ten-year period beginning on the date on which such
asset was acquired by Host Marriott (the "Recognition Period"), then, to
the extent of the asset's "built-in gain," such gain will be subject to tax
at the highest regular corporate rate applicable. Built-in gain is the
excess of the fair market value of an asset over Host Marriott's adjusted
basis in the asset, determined when Host Marriott acquired the asset.
Host Marriott owns an indirect interest in appreciated assets that its
predecessors held before the REIT conversion. Such appreciated assets have a
"carryover" basis and thus have built-in gain with respect to Host Marriott. If
such appreciated property is sold within the ten-year period following the REIT
conversion, Host Marriott generally will be subject to regular corporate tax on
that gain to the extent of the built-in gain in that property at the time of
the REIT conversion. The total amount of gain on which Host Marriott can be
taxed is limited to the excess of the aggregate fair market value of its assets
on January 1, 1999 over the adjusted tax bases of those assets at that time.
This tax could be very material, however, and may result in the Host Marriott,
L.P. and Host Marriott seeking to avoid a taxable disposition of any
significant asset owned by the Host Predecessors at the time of the REIT
conversion for the ten taxable years following the REIT conversion even though
such disposition might otherwise be in the best interests of Host Marriott.
Notwithstanding Host Marriott's status as a REIT, it is likely that
substantial deferred liabilities of its predecessors will be recognized over
the next ten years. Deferred liabilities include, but are not limited to, tax
liabilities attributable to built-in gain assets and deferred tax liabilities
attributable to taxable income for which neither Host Marriott nor Host
Marriott, L.P. will receive corresponding cash. In addition, the IRS could
assert substantial additional liabilities for taxes against Host Marriott's
predecessors for taxable years prior to the time Host Marriott qualifies as a
REIT. Under the terms of the REIT conversion and the partnership agreement of
Host Marriott, L.P., Host Marriott, L.P. will be responsible for paying, or
reimbursing Host Marriott for the payment of all such tax liabilities as well
as any other liabilities, including contingent liabilities and liabilities
attributable to litigation that Host Marriott may incur, whether such
liabilities are incurred by reason of activities prior to the REIT conversion
or activities subsequent thereto.
Host Marriott, L.P. will pay, or reimburse Host Marriott for the payment of
all taxes incurred by Host Marriott, except for taxes imposed on Host Marriott
by reason of its failure to qualify as a REIT or to distribute to its
stockholders an amount equal to its "REIT taxable income," including net
capital gains. This obligation by Host Marriott, L.P. includes any federal
corporate income tax imposed on built-in gain.
Requirements for Qualification. The Internal Revenue Code defines a REIT as
a corporation, trust or association
(1) which is managed by one or more directors or trustees;
(2) the beneficial ownership of which is evidenced by transferable shares
or by transferable certificates of beneficial interest;
(3) which would be taxable as a domestic corporation, but for Sections 856
through 859 of the Internal Revenue Code;
38
(4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in value of
the outstanding stock of which is owned, actually or constructively, by
five or fewer individuals (as defined in the Internal Revenue Code to
include certain entities); and
(7) which meets certain other tests, described below, regarding the nature
of its income and assets.
Conditions (1) to (4), inclusive, must be met during the entire taxable year
and condition (5) must be met during at least 335 days of a taxable year of
twelve months, or during a proportionate part of a taxable year of less than
twelve months. Conditions (5) and (6) will not apply until after the first
taxable year for which Host Marriott makes the election to be taxed as a REIT.
For purposes of conditions (5) and (6), pension funds and certain other tax-
exempt entities are treated as individuals, subject to a "look-through"
exception in the case of condition (6). Compliance with condition (5) shall be
determined by disregarding the ownership of Host Marriott shares by any
person(s) who: (a) acquired such shares as a gift or bequest or pursuant to a
legal separation or divorce; (b) is the estate of any person making such
transfer to the estate; or (c) is a company established exclusively for the
benefit of (or wholly owned by) either the person making such transfer or a
person described in (a) or (b).
In connection with condition (6), Host Marriott is required to send annual
letters to its stockholders requesting information regarding the actual
ownership of its shares. If Host Marriott complies with this requirement, and
it does not know, or exercising reasonable diligence would not have known,
whether it failed to meet condition (6), then it will be treated as having met
condition (6). If Host Marriott fails to send such annual letters, it will be
required to pay either a $25,000 penalty or, if the failure is intentional, a
$50,000 penalty. The IRS may require Host Marriott, under those circumstances,
to take further action to ascertain actual ownership of its shares, and failure
to comply with such an additional requirement would result in an additional
$25,000 (or $50,000) penalty. No penalty would be assessed in the first
instance, however, if the failure to send the letters is due to reasonable
cause and not to willful neglect.
Host Marriott believes that it meets and will continue to meet conditions
(1) through (4). In addition, Host Marriott believes that it will have
outstanding (commencing with its first taxable year as a REIT) common stock
with sufficient diversity of ownership to allow it to satisfy conditions (5)
and (6). With respect to condition (6), Host Marriott intends to comply with
the requirement that it send annual letters to its stockholders requesting
information regarding the actual ownership of its shares. In addition, the Host
Marriott Articles of Incorporation contains an ownership limit, which is
intended to assist Host Marriott in continuing to satisfy the share ownership
requirements described in (5) and (6) above. See "Restrictions on Ownership and
Transfer." The ownership limit, together with compliance with the annual
stockholder letter requirement described above, however, may not ensure that
Host Marriott will, in all cases, be able to satisfy the share ownership
requirements described above. If Host Marriott fails to satisfy such share
ownership requirements, Host Marriott will not qualify as a REIT. See "--
Failure of Host Marriott to Qualify as a REIT."
A corporation may not elect to become a REIT unless its taxable year is the
calendar year. Although Host Marriott previously had a 52-53 week year ending
on the Friday closest to January 1, it adopted a calendar year taxable year in
connection with the REIT conversion.
Distribution of "Earnings and Profits" Attributable to "C" Corporation
Taxable Years. A REIT cannot have at the end of any taxable year any
undistributed earnings and profits ("E&P") that are attributable to a "C"
corporation taxable year, which includes all undistributed E&P of Host
Marriott's predecessors. Accordingly, Host Marriott has until December 31, 1999
to distribute such E&P. In connection with the REIT conversion, Host Marriott
declared dividends intended to eliminate the substantial majority, if not all,
of such E&P. To the extent, however, that any such E&P remains (the "Acquired
Earnings"), Host Marriott is required to distribute such E&P prior to the end
of 1999. Failure to do so would result in disqualification of Host
39
Marriott as a REIT at least for 1999. If Host Marriott should be so
disqualified for 1999, subject to the satisfaction by Host Marriott of certain
"deficiency dividend" procedures described below in "--Annual Distribution
Requirements Applicable to REITs" and assuming that Host Marriott otherwise
satisfies the requirements for qualification as a REIT, Host Marriott should
qualify as a REIT for 2000 and thereafter. Host Marriott believes that the
dividends it has already declared will be sufficient to distribute all of the
Acquired Earnings as of December 31, 1999. However, there are substantial
uncertainties relating to both the estimate of the Acquired Earnings, as
described below, and the value of noncash consideration that Host Marriott has
distributed or will distribute. Accordingly, there can be no assurance this
requirement will be met.
The estimated amount of the Acquired Earnings will be based on the allocated
consolidated E&P of Host Marriott's predecessors accumulated from 1929 through
and including 1998 and taking into account the allocation, as a matter of law,
of 81% of Host Marriott's predecessors' accumulated E&P to Marriott
International on October 8, 1993 in connection with the spin-off of Marriott
International. The estimate was determined based on the available tax returns
and certain assumptions with respect to both such returns and other matters.
The calculation of the Acquired Earnings, however, depends upon a number of
factual and legal interpretations related to the activities and operations of
Host Marriott's predecessors during their entire corporate existence and is
subject to review and challenge by the IRS. There can be no assurance that the
IRS will not examine the tax returns of Host Marriott's predecessors and
propose adjustments to increase their taxable income. The impact of such
proposed adjustments, if any, may be material. If the IRS examines Host
Marriott's calculation of its E&P, the IRS can consider all taxable years of
Host Marriott's predecessors as open for review for purposes of such
determination.
Hogan & Hartson has expressed no opinion as to the amount of E&P of Host
Marriott and Host Marriott's predecessors. Accordingly, for purposes of its
opinion as to the qualification of Host Marriott as a REIT following the REIT
conversion, Hogan & Hartson is relying upon a representation from Host Marriott
that by the end of 1999 it will have eliminated all Acquired Earnings.
Qualified REIT Subsidiary. If a REIT owns a corporate subsidiary that is a
"qualified REIT subsidiary," that subsidiary will be disregarded for federal
income tax purposes, and all assets, liabilities and items of income, deduction
and credit of the subsidiary will be treated as assets, liabilities and items
of the REIT itself. Generally, a qualified REIT subsidiary is a corporation all
of the capital stock of which is owned by one REIT. Host Marriott holds several
qualified REIT subsidiaries that hold de minimis indirect interests in the
partnerships that own hotels. These entities will not be subject to federal
corporate income taxation, although they may be subject to state and local
taxation in certain jurisdictions.
Ownership of Partnership Interests by a REIT. A REIT which is a partner in a
partnership will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership shall retain the same character in the hands of the
REIT for purposes of Section 856 of the Internal Revenue Code, including
satisfying the gross income tests and the asset tests. Thus, Host Marriott's
proportionate share of the assets and items of income of Host Marriott, L.P.,
including Host Marriott, L.P.'s share of such items of any subsidiaries that
are partnerships or LLCs, are treated as assets and items of income of Host
Marriott for purposes of applying the requirements described herein. A summary
of the rules governing the federal income taxation of partnerships and their
partners is provided below in "--Tax Aspects of Ownership of Interests in Host
Marriott, L.P." As the sole general partner of Host Marriott, L.P., Host
Marriott has direct control over Host Marriott, L.P. and indirect control over
the subsidiaries in which Host Marriott, L.P. or a subsidiary has a controlling
interest. Host Marriott intends to operate these entities consistent with the
requirements for qualification of Host Marriott as a REIT.
Income Tests Applicable to REITs. In order to maintain qualification as a
REIT, Host Marriott must satisfy two gross income requirements. First, at least
75% of Host Marriott's gross income, excluding gross income from "prohibited
transactions," for each taxable year must be derived directly or indirectly
from
40
investments relating to real property or mortgages on real property, including
"rents from real property" and, in certain circumstances, interest, or from
certain types of temporary investments. Second, at least 95% of Host Marriott's
gross income, excluding gross income from "prohibited transactions," for each
taxable year must be derived from any combination of such real property
investments, dividends, interest, certain hedging instruments and gain from the
sale or disposition of stock or securities, including certain hedging
instruments.
Rents paid pursuant to Host Marriott's leases, together with dividends and
interest received from the non-controlled subsidiaries, will constitute
substantially all of the gross income of Host Marriott. Several conditions must
be satisfied in order for rents received by Host Marriott, including the rents
received pursuant to the leases, to qualify as "rents from real property."
First, the amount of rent must not be based in whole or in part on the income
or profits of any person. However, an amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
rents received from a tenant will not qualify as "rents from real property" if
Host Marriott, or an actual or constructive owner of 10% or more of Host
Marriott, actually or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property
leased in connection with a lease of real property is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property."
Finally, if Host Marriott operates or manages a property or furnishes or
renders services to the tenants at the property other than through an
independent contractor from whom Host Marriott derives no revenue, excluding
for these purposes services "usually or customarily rendered" in connection
with the rental of real property and not otherwise considered "rendered to the
occupant," and the income derived from such services (the "Impermissible
Service Income") exceeds one percent of the total amount received by Host
Marriott with respect to the property, then no amount received by Host Marriott
with respect to the property will qualify as "rents from real property." For
these purposes, Impermissible Service Income cannot be less than 150% of the
cost of providing the service. If the Impermissible Service Income is one
percent or less of the total amount received by the REIT with respect to the
property, then only the Impermissible Service Income will not qualify as "rents
from real property." To the extent that services other than those customarily
furnished or rendered in connection with the rental of real property are
rendered to the tenants of the property by an independent contractor, the cost
of the services must be borne by the independent contractor.
Host Marriott, L.P. and each subsidiary that owns hotels have entered into
leases with subsidiaries of Crestline, pursuant to which the hotels are leased
for a term ranging generally from seven to ten years commencing on January 1,
1999. Each lease provides for thirteen payments per annum of a specified base
rent plus, to the extent that it exceeds the base rent, additional rent which
is calculated based upon the gross sales of the hotels subject to the lease,
plus certain other amounts.
Neither Host Marriott nor Host Marriott, L.P. intends to do any of the
following:
. provide any services to the lessees with respect to the operation of the
hotels;
. charge rent for any hotel that is based in whole or in part on the
income or profits of any person, except for the Harbor Beach Resort,
where the lease provides for rent based upon net profits, but which Host
Marriott currently believes will not jeopardize Host Marriott's status
as a REIT;
. rent any hotel to a Related Party Tenant unless the Board of Directors
determines in its discretion that the rent received from such Related
Party Tenant is not material and will not jeopardize Host Marriott's
status as a REIT; or
. derive rental income attributable to personal property other than
personal property leased in connection with the lease of real property,
the amount of which is less than 15% of the total rent received under
the lease, unless the Board of Directors determines in its discretion
that the amount of such rent attributable to personal property is not
material and will not jeopardize Host Marriott's status as a REIT.
41
In order for the rent paid pursuant to the leases to constitute "rents from
real property," the lessees must not be regarded as Related Party Tenants, and
the leases must be respected as true leases for federal income tax purposes.
Accordingly the lessee cannot be treated as service contracts, joint ventures
or some other type of arrangement. A lessee will be regarded as a Related Party
Tenant only if Host Marriott and/or one or more actual or constructive owners
of 10% or more of Host Marriott, actually or constructively, own 10% or more of
such lessee through an ownership interest in Crestline. In order to help
preclude the lessees from being regarded as Related Party Tenants, the
following organizational documents contain the following ownership limits:
. the articles of incorporation of Crestline expressly prohibit any person
or persons acting as a group, including Host Marriott and/or any 10% or
greater stockholder of Host Marriott, from owning more than 9.8% of the
lesser of the number or value of the shares of capital stock of
Crestline;
. the Host Marriott Articles of Incorporation expressly prohibits any
person or persons acting as a group or entity from owning, actually
and/or constructively, more than 9.8% of the lesser of the number or
value of capital stock of Host Marriott (subject to a limited exception
for a holder of shares of capital stock of Host Marriott solely by
reason of the Merger in excess of the ownership limit so long as the
holder thereof did not own, directly or by attribution under the
Internal Revenue Code, more than 9.9% in value of the outstanding shares
of capital stock of Host Marriott) or any other class or series of
shares of Host Marriott; and
. Host Marriott, L.P.'s partnership agreement expressly prohibits any
person, or persons acting as a group, or entity, other than Host
Marriott and an affiliate of the The Blackstone Group and a series of
related funds controlled by Blackstone Real Estate Partners (the
"Blackstone Entities"), from owning more than 4.9% by value of any class
of interests in Host Marriott, L.P. Each of these prohibitions contains
self-executing enforcement mechanisms. Assuming that these prohibitions
are enforced at all times and no waivers thereto are granted, the
lessees should not be regarded as Related Party Tenants.
There can be no assurance, however, that these ownership restrictions will
be enforced in accordance with their terms in all circumstances or otherwise
will ensure that the lessees will not be regarded as Related Party Tenants.
The determination of whether the leases are true leases depends upon an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following:
. the intent of the parties;
. the form of the agreement;
. the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the
operation of the property or whether the lessee was required simply to
use its best efforts to perform its obligations under the agreement);
and
. the extent to which the property owner retains the risk of loss with
respect to the property (e.g., whether the lessee bears the risk of
increases in operating expenses or the risk of damage to the property)
or the potential for economic gain (e.g., appreciation) with respect to
the property.
In addition, Section 7701(e) of the Internal Revenue Code provides that a
contract that purports to be a service contract or a partnership agreement is
treated instead as a lease of property if the contract is properly treated as
such, taking into account all relevant factors. Since the determination of
whether a service contract should be treated as a lease is inherently factual,
the presence or absence of any single factor may not be dispositive in every
case. Some of the relevant factors include whether:
. the service recipient is in physical possession of the property;
. the service recipient controls the property;
. the service recipient has a significant economic or possessory interest
in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful
42
life of the property, the recipient shares the risk that the property
will decline in value, the recipient shares in any appreciation in the
value of the property, the recipient shares in savings in the property's
operating costs or the recipient bears the risk of damage to or loss of
the property);
. the service provider does not bear any risk of substantially diminished
receipts or substantially increased expenditures if there is
nonperformance under the contract;
. the service provider does not use the property concurrently to provide
significant services to entities unrelated to the service recipient; and
. the total contract price does not substantially exceed the rental value
of the property for the contract period.
Host Marriott's leases have been structured with the intent to qualify as
true leases for federal income tax purposes. For example, with respect to each
lease:
. Host Marriott, L.P. or the applicable subsidiary or other lessor entity
and the lessee intend for their relationship to be that of a lessor and
lessee and such relationship is documented by a lease agreement,
. the lessee has the right to exclusive possession and use and quiet
enjoyment of the hotels covered by the lease during the term of the
lease,
. the lessee bears the cost of, and will be responsible for, day-to-day
maintenance and repair of the hotels other than the cost of certain
capital expenditures, and will dictate through the hotel managers, who
work for the lessees during the terms of the leases, how the hotels are
operated and maintained,
. the lessee bears all of the costs and expenses of operating the hotels,
including the cost of any inventory used in their operation, during the
term of the lease, other than the cost of certain furniture, fixtures
and equipment, and certain capital expenditures,
. the lessee benefits from any savings and bears the burdens of any
increases in the costs of operating the hotels during the term of the
lease,
. in the event of damage or destruction to a hotel, the lessee is at
economic risk because it will bear the economic burden of the loss in
income from operation of the hotels subject to the right, in certain
circumstances, to terminate the lease if the lessor does not restore the
hotel to its prior condition,
. the lessee has indemnified Host Marriott, L.P. or the applicable
subsidiary against all liabilities imposed on Host Marriott, L.P. or the
applicable subsidiary during the term of the lease by reason of (A)
injury to persons or damage to property occurring at the hotels or (B)
the lessee's use, management, maintenance or repair of the hotels,
. the lessee is obligated to pay, at a minimum, substantial Base Rent for
the period of use of the hotels under the lease,
. the lessee stands to incur substantial losses or reap substantial gains
depending on how successfully it, through the hotel managers, who work
for the lessees during the terms of the leases, operates the hotels,
. Host Marriott and Host Marriott, L.P. believe that each lessee
reasonably expects to derive a meaningful profit, after expenses and
taking into account the risks associated with the lease, from the
operation of the hotels during the term of its leases, and
. upon termination of each lease, the applicable hotel is expected to have
a remaining useful life equal to at least 20% of its expected useful
life on the date of the consummation of the REIT conversion, and a fair
market value equal to at least 20% of its fair market value on the date
of the consummation of the REIT conversion.
If, however, the leases were recharacterized as service contracts or
partnership agreements, rather than true leases, or disregarded altogether for
tax purposes, all or part of the payments that Host Marriott, L.P. receives
from the lessees would not be considered rent or would not otherwise satisfy
the various requirements for qualification as "rents from real property." In
that case, Host Marriott very likely would not be able to satisfy either the
75% or 95% gross income tests and, as a result, would lose its REIT status.
43
As indicated above, "rents from real property" must not be based in whole or
in part on the income or profits of any person. Payments made pursuant to Host
Marriott's leases should qualify as "rents from real property" since they are
based on either fixed dollar amounts or on specified percentages of gross sales
fixed at the time the leases were entered into, except for the Harbor Beach
Resort, which lease provides for rents based upon net profits. The foregoing
assumes that the leases are not renegotiated during their term in a manner that
has the effect of basing either the percentage rent or base rent on income or
profits. The foregoing also assumes that the leases are not in reality used as
a means of basing rent on income or profits. More generally, the rent payable
under the leases will not qualify as "rents from real property" if, considering
the leases and all the surrounding circumstances, the arrangement does not
conform with normal business practice. Host Marriott intends that it will not
renegotiate the percentages used to determine the percentage rent during the
terms of the leases in a manner that has the effect of basing rent on income or
profits. In addition, Host Marriott believes that the rental provisions and
other terms of the leases conform with normal business practice and, other than
the Harbor Beach Resort lease, were not intended to be used as a means of
basing rent on income or profits. Furthermore, Host Marriott intends that, with
respect to other properties that it acquires in the future, it will not charge
rent for any property that is based in whole or in part on the income or
profits of any person, except by reason of being based on a fixed percentage of
gross revenues, as described above.
Host Marriott leases certain items of personal property to the lessees in
connection with its leases. Under the Internal Revenue Code, if a lease
provides for the rental of both real and personal property and the portion of
the rent attributable to personal property is 15% or less of the total rent due
under the lease, then all rent paid pursuant to such lease qualifies as "rent
from real property." If, however, a lease provides for the rental of both real
and personal property, and the portion of the rent attributable to personal
property exceeds 15% of the total rent due under the lease, then the portion of
the rent that is attributable to personal property does not qualify as "rent
from real property." The amount of rent attributable to personal property is
that amount which bears the same ratio to total rent for the taxable year as
the average of the adjusted tax bases of the personal property at the beginning
and end of the year bears to the average of the aggregate adjusted tax bases of
both the real and personal property at the beginning and end of such year. Host
Marriott has represented that, with respect to each of its leases that includes
a lease of items of personal property, the amount of rent attributable to
personal property with respect to such lease, determined as set forth above,
will not exceed 15% of the total rent due under the lease (except for a
relatively small group of leases where the rent attributable to personal
property, which would constitute non-qualifying income for purposes of the 75%
and 95% gross income tests, would not be material relative to the overall gross
income of Host Marriott). Each lease permits Host Marriott, L.P. to take
certain measures, including requiring the lessee to purchase certain furniture,
fixtures and equipment or to lease such property from a third party, including
a non-controlled subsidiary, if necessary to ensure that all of the rent
attributable to personal property with respect to such lease will qualify as
"rent from real property." In order to protect Host Marriott's ability to
qualify as a REIT, Host Marriott, L.P. sold substantial personal property
associated with a number of hotels acquired in connection with the REIT
conversion to a non-controlled subsidiary. The non-controlled subsidiary
separately leases all such personal property directly to the applicable lessee
and receives rental payments which Host Marriott believes represent the fair
rental value of such personal property directly from the lessees. If such
arrangements are not respected for federal income tax purposes, Host Marriott
likely would not qualify as a REIT.
If any of the hotels were to be operated directly by Host Marriott, L.P. or
a subsidiary as a result of a default by a lessee under the applicable lease,
such hotel would constitute foreclosure property until the close of the third
tax year following the tax year in which it was acquired, or for up to an
additional three years if an extension is granted by the IRS, provided that:
(1) the operating entity conducts operations through an independent
contractor, which might, but would not necessarily in all
circumstances, include Marriott International and its subsidiaries,
within 90 days after the date the hotel is acquired as the result of a
default by a lessee,
(2) the operating entity does not undertake any construction on the
foreclosed property other than completion of improvements that were
more than 10% complete before default became imminent, and
44
(3) foreclosure was not regarded as foreseeable at the time the applicable
partnership entered into such lease. For as long as any of these
hotels constitute foreclosure property, the income from the hotels
would be subject to tax at the maximum corporate rates, but it would
qualify under the 75% and 95% gross income tests.
However, if any of these hotels does not constitute foreclosure property at
any time in the future, income earned from the disposition or operation of such
property will not qualify under the 75% and 95% gross income tests.
"Interest" generally will not qualify under the 75% or 95% gross income
tests if it depends in whole or in part on the income or profits of any person.
However, interest will not fail to so qualify solely by reason of being based
upon a fixed percentage or percentages of receipts or sales. Host Marriott does
not expect to derive significant amounts of interest that will not qualify
under the 75% and 95% gross income tests.
The non-controlled subsidiaries hold various assets, the ownership of which
by Host Marriott, L.P. might jeopardize Host Marriott's status as a REIT. These
assets primarily consist of partnership or other interests in hotels that are
not leased, certain foreign hotels, and approximately $75 million in value of
personal property associated with certain Hotels. Host Marriott, L.P. owns 100%
of the nonvoting stock of each non-controlled subsidiary but none of the voting
stock or control of that non-controlled subsidiary. Each non-controlled
subsidiary is taxable as a regular "C" corporation. Host Marriott, L.P.'s share
of any dividends received from a non-controlled subsidiary should qualify for
purposes of the 95% gross income test, but not for purposes of the 75% gross
income test. Host Marriott, L.P. does not anticipate that it will receive
sufficient dividends from the non-controlled subsidiaries to cause it to fail
the 75% gross income test.
Host Marriott inevitably will have some gross income from various sources
that fails to constitute qualifying income for purposes of one or both of the
75% or 95% gross income tests. These include, but are not limited to, the
following:
. "safe harbor" leases,
. the lease of the Harbor Beach Resort, which provides for rent based upon
net profits,
. the operation of the hotel that is located in Sacramento,
. minority partnership interests in partnerships that own hotels that are
not leased under leases that produce rents qualifying as "rents from
real property," and
. rent attributable to personal property at a relatively small group of
hotels that does not satisfy the 15% personal property test.
Host Marriott, however, believes that, even taking into account the
anticipated sources of non-qualifying income, its aggregate gross income from
all sources will satisfy the 75% and 95% gross income tests applicable to REITs
for each taxable year commencing subsequent to the date of the REIT conversion.
If Host Marriott fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Internal Revenue
Code. These relief provisions will be generally available if Host Marriott's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, Host Marriott attaches a schedule of the sources of its income to its
federal income tax return and any incorrect information on the schedule was not
due to fraud with intent to evade tax. It is not possible, however, to state
whether in all circumstances Host Marriott would be entitled to the benefit of
these relief provisions. For example, if Host Marriott fails to satisfy the
gross income tests because nonqualifying income that Host Marriott
intentionally incurs exceeds the limits on such income, the IRS could conclude
that Host Marriott's failure to satisfy the tests was not due to reasonable
cause. If these relief provisions are inapplicable to a particular set of
circumstances involving Host Marriott, Host Marriott will not qualify as a
REIT. As discussed above in "--General," even if these relief provisions apply,
a tax would be imposed with respect to the excess net income.
45
Any gain realized by Host Marriott on the sale of any property held as
inventory or other property held primarily for sale to customers in the
ordinary course of business, including Host Marriott's share of any such gain
realized by Host Marriott, L.P., will be treated as income from a "prohibited
transaction" that is subject to a 100% penalty tax. Such prohibited transaction
income may also have an adverse effect upon Host Marriott's ability to satisfy
the income tests for qualification as a REIT. Under existing law, whether
property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that depends upon
all the facts and circumstances with respect to the particular transaction.
Host Marriott, L.P. intends that both it and its subsidiaries will hold hotels
for investment with a view to long-term appreciation, to engage in the business
of acquiring and owning hotels and to make such occasional sales of hotels as
are consistent with Host Marriott, L.P.'s investment objectives. There can be
no assurance, however, that the IRS might not contend that one or more of such
sales is subject to the 100% penalty tax.
Asset Tests Applicable to REITs. Host Marriott, at the close of each quarter
of its taxable year, must satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of Host Marriott's total assets must
be represented by real estate assets. Host Marriott's real estate assets
include, for this purpose, its allocable share of real estate assets held by
Host Marriott, L.P. and the non-corporate subsidiaries of Host Marriott, L.P.,
as well as stock or debt instruments held for less than one year purchased with
the proceeds of a stock offering, or long-term (at least five years) debt
offering of Host Marriott, cash, cash items and government securities. Second,
no more than 25% of Host Marriott's total assets may be represented by
securities other than those in the 75% asset class. Third, of the investments
included in the 25% asset class, the value of any one issuer's securities owned
by Host Marriott may not exceed 5% of the value of Host Marriott's total assets
and Host Marriott may not own more than 10% of any one issuer's outstanding
voting securities.
Host Marriott, L.P. does not own any of the voting stock of any of non-
controlled subsidiaries but it does own 100% of the nonvoting stock of each
non-controlled subsidiary. Host Marriott, L.P. may also own nonvoting stock,
representing substantially all of the equity, in other corporate entities that
serve as partners or members in the various entities that hold title to the
hotels. Neither Host Marriott, Host Marriott, L.P., nor any of the non-
corporate subsidiaries of Host Marriott, L.P., own more than 10% of the voting
securities of any entity that is treated as a corporation for federal income
tax purposes. In addition, Host Marriott believes that the securities of any
one issuer owned by Host Marriott, Host Marriott, L.P., or any of the non-
corporate subsidiaries of Host Marriott, L.P., including Host Marriott's pro
rata share of the value of the securities of each non-controlled subsidiary do
not exceed 5% of the total value of Host Marriott's assets. There can be no
assurance, however, that the IRS might not contend that the value of such
securities exceeds the 5% value limitation or that nonvoting stock of a non-
controlled subsidiary or another corporate entity owned by Host Marriott, L.P.
should be considered "voting stock" for this purpose.
After initially meeting the asset tests at the close of any quarter, Host
Marriott will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. An example of such an acquisition would be an increase in Host
Marriott's interest in Host Marriott, L.P. as a result of the exercise of a
limited partner's unit redemption right or an additional capital contribution
of proceeds from an offering of capital stock by Host Marriott. Host Marriott
to maintains adequate records of the value of its assets to ensure compliance
with the asset tests and to take such other actions within 30 days after the
close of any quarter as may be required to cure any noncompliance. If Host
Marriott fails to cure noncompliance with the asset tests within such time
period, Host Marriott would cease to qualify as a REIT.
Clinton Administration's Proposed Changes to REIT Asset Test. The Clinton
Administration's fiscal year 1999 budget proposal, announced on February 2,
1998, includes a proposal to amend the 10% voting securities test. The proposal
would require a REIT to own no more than 10% of the vote or value of all
classes of stock of any corporation (except for qualified REIT subsidiaries or
corporations that qualify as REITs). Corporations
46
existing prior to the effective date of the proposal generally would be
"grandfathered"; i.e., the REIT would be subject to the existing 10% voting
securities test described above with respect to grandfathered corporations.
However, such "grandfathered" status would terminate with respect to a
corporation if the corporation engaged in a new trade or business or acquired
substantially new assets.
Because Host Marriott, L.P. owns 100% of the nonvoting stock of each non-
controlled subsidiary, and Host Marriott is deemed to own an interest in each
non-controlled subsidiary equal to its proportionate interest in Host Marriott,
L.P., Host Marriott would not satisfy the proposed 10% value limitation with
respect to any of the non-controlled subsidiaries. Whether any of the non-
controlled subsidiaries would qualify as a grandfathered corporation as the
proposal is currently drafted would depend upon the effective date of the
proposal, which is not yet known. If a non-controlled subsidiary otherwise
eligible for "grandfathered" status were to engage in a new trade or business
or were to acquire substantial new assets, or if Host Marriott were to make a
capital contribution to a non-controlled subsidiary otherwise eligible for
"grandfathered" status, its "grandfathered" status would terminate and Host
Marriott would fail to qualify as a REIT. Moreover, Host Marriott would not be
able to own, directly or indirectly, more than 10% of the vote or value of any
corporation formed or acquired after the effective date of the proposal. Thus,
the proposal, if enacted, would materially impede Host Marriott's ability to
engage in new third-party management or similar activities.
Annual Distribution Requirements Applicable to REITs. Host Marriott, in
order to qualify as a REIT, is required to distribute dividends, other than
capital gain dividends, to its stockholders in an amount at least equal to
(i) the sum of (a) 95% of REIT taxable income, computed without regard to
the dividends paid deduction and Host Marriott's net capital gain, and
(b) 95% of the net income, after tax, if any, from foreclosure
property, minus
(ii) the sum of certain items of noncash income.
In addition, if Host Marriott disposes of any built-in gain asset during its
Recognition Period, Host Marriott is required, pursuant to Treasury Regulations
which have not yet been promulgated, to distribute at least 95% of the built-in
gain, after tax, if any, recognized on the disposition of such asset. See "--
General" above for a discussion of built-in gain assets. Such distributions
must be paid in the taxable year to which they relate, or in the following
taxable year if declared before Host Marriott timely files its tax return for
such year and if paid on or before the first regular dividend payment date
after such declaration. Host Marriott intends to make timely distributions
sufficient to satisfy these annual distribution requirements. In this regard,
Host Marriott, L.P.'s partnership agreement authorizes Host Marriott, as
general partner, to take such steps as may be necessary to cause Host Marriott,
L.P. to distribute to its partners an amount sufficient to permit Host Marriott
to meet these distribution requirements.
To the extent that Host Marriott does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its REIT taxable
income, as adjusted, it is subject to tax thereon at regular ordinary and
capital gain corporate tax rates. Host Marriott, however, may designate some or
all of its retained net capital gain, so that, although the designated amount
will not be treated as distributed for purposes of this tax, a stockholder
would include its proportionate share of such amount in income, as capital
gain, and would be treated as having paid its proportionate share of the tax
paid Host Marriott with respect to such amount. The stockholder's basis in its
capital stock of Host Marriott would be increased by the amount the stockholder
included in income and decreased by the amount of the tax the stockholder is
treated as having paid. Host Marriott would make an appropriate adjustment to
its earnings and profits. For a more detailed description of the federal income
tax consequences to a stockholder of such a designation, see "--Taxation of
Taxable U.S. Stockholders Generally."
There is a significant possibility that Host Marriott's REIT taxable income
will exceed its cash flow, due in part to certain "non-cash" or "phantom"
income expected to be taken into account in computing Host Marriott's REIT
taxable income. Host Marriott anticipates, however, that it will generally have
sufficient cash
47
or liquid assets to enable it to satisfy the distribution requirements
described above. It is possible, however, that Host Marriott, from time to
time, may not have sufficient cash or other liquid assets to meet these
distribution requirements. In such event, in order to meet the distribution
requirements, Host Marriott may find it necessary to arrange for short-term, or
possibly long-term, borrowings to fund required distributions and/or to pay
dividends in the form of taxable stock dividends.
Host Marriott calculates its REIT taxable income based upon the conclusion
that the non-corporate subsidiaries of Host Marriott, L.P. or Host Marriott,
L.P. itself, as applicable, is the owner of the hotels for federal income tax
purposes. As a result, Host Marriott expects that the depreciation deductions
with respect to the hotels will reduce its REIT taxable income. This conclusion
is consistent with the conclusion above that the leases entered into with the
Crestline subsidiaries will be treated as true leases for federal income tax
purposes. If the IRS were to challenge successfully this position, in addition
to failing in all likelihood the 75% and 95% gross income tests described
above, Host Marriott also might be deemed retroactively to have failed to meet
the REIT distribution requirements and would have to rely on the payment of a
"deficiency dividend" in order to retain its REIT status.
Under certain circumstances, Host Marriott may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in Host
Marriott's deduction for dividends paid for the earlier year. Thus, Host
Marriott may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Host Marriott would be required to pay interest based upon
the amount of any deduction taken for deficiency dividends.
Furthermore, if Host Marriott should fail to distribute during each calendar
year at least the sum of 85% of its REIT ordinary income for such year, 95% of
its REIT capital gain income for such year, and any undistributed taxable
income from prior periods, it would be subject to an excise tax. The excise tax
would equal 4% of the excess of such required distribution over the sum of
amounts actually distributed and amounts retained with respect to which the
REIT pays federal income tax.
Failure of Host Marriott to Qualify as a REIT. If Host Marriott fails to
qualify for taxation as a REIT in any taxable year, and if the relief
provisions do not apply, Host Marriott will be subject to tax, including any
applicable alternative minimum tax, on its taxable income at regular corporate
rates. Distributions to stockholders in any year in which Host Marriott fails
to qualify will not be deductible by Host Marriott nor will they be required to
be made. As a result, Host Marriott's failure to qualify as a REIT would
significantly reduce the cash available for distribution by Host Marriott to
its stockholders and could materially reduce the value of its capital stock. In
addition, if Host Marriott fails to qualify as a REIT, all distributions to
stockholders will be taxable as ordinary income, to the extent of Host
Marriott's current and accumulated E&P, although, subject to certain
limitations of the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction with respect to these
distributions. Unless entitled to relief under specific statutory provisions,
Host Marriott also will be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether in all circumstances Host Marriott would be entitled
to such statutory relief.
Taxation of Taxable U.S. Stockholders Generally
Distributions by Host Marriott. As long as Host Marriott qualifies as a
REIT, distributions made by Host Marriott out of its current or accumulated
E&P, and not designated as capital gain dividends constitute dividends taxable
to its taxable U.S. stockholders as ordinary income. Such distributions are not
eligible for the dividends received deduction in the case of U.S. stockholders
that are corporations. To the extent that Host Marriott makes distribution not
designated as capital gain dividends in excess of its current and accumulated
E&P, such distributions are treated first as a tax-free return of capital to
each U.S. stockholder, reducing the adjusted basis which such U.S. stockholder
has in its common stock for tax purposes by the amount of such distribution but
not below zero, with distributions in excess of a U.S. stockholder's adjusted
basis in its common stock taxable as capital gains, provided that the common
stock has been held as a capital asset.
48
Dividends declared by Host Marriott in October, November or December of any
year and payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by Host Marriott and received by the
stockholder on December 31 of such year, provided that the dividend is actually
paid by Host Marriott on or before January 31 of the following year.
Distributions made by Host Marriott that are properly designated by Host
Marriott as capital gain dividends are taxable to taxable non-corporate U.S.
stockholders, i.e., individuals, estates or trusts. They are taxed as gain from
the sale or exchange of a capital asset held for more than one year to the
extent that they do not exceed Host Marriott's actual net capital gain for the
taxable year, without regard to the period for which such non-corporate U.S.
stockholder has held his common stock. In the event that Host Marriott
designates any portion of a dividend as a "capital gain dividend," a U.S.
stockholder's share of such capital gain dividend would be an amount which
bears the same ratio to the total amount of dividends paid to such U.S.
stockholder for the year as the aggregate amount designated as a capital gain
dividend bears to the aggregate amount of all dividends paid on all classes of
shares for the year. On November 10, 1997, the IRS issued Notice 97-64, which
provides generally that Host Marriott may classify portions of its designated
capital gain dividend as either a 20% gain distribution, which would be taxable
to non-corporate U.S. stockholders at a maximum rate of 20%, an unrecaptured
Section 1250 gain distribution, which would be taxable to non-corporate U.S.
stockholders at a maximum rate of 25%, or a 28% rate gain distribution, which
would be taxable to non-corporate U.S. stockholders at a maximum rate of 28%.
If no designation is made, the entire designated capital gain dividend will be
treated as a 28% rate gain distribution. Notice 97-64 provides that a REIT must
determine the maximum amounts that it may designate as 20% and 25% rate capital
gain dividends by performing the computation required by the Internal Revenue
Code as if the REIT were an individual whose ordinary income were subject to a
marginal tax rate of at least 28%. Notice 97-64 further provides that
designations made by the REIT only will be effective to the extent that they
comply with Revenue Ruling 89-81, which requires that distributions made to
different classes of shares be composed proportionately of dividends of a
particular type. On July 22, 1998, as part of the IRS Restructuring Act, the
holding period requirement for the application of the 20% and 25% capital gain
tax rates was reduced to 12 months from 18 months for sales of capital gain
assets on or after January 1, 1998. Although Notice 97-64 will apply to sales
of capital gain assets after July 28, 1997 and before January 1, 1998, it is
expected that the IRS will issue clarifying guidance, most likely applying the
same principles set forth in Notice 97-64, regarding a REIT's designation of
capital gain dividends in light of the new holding period requirements. For a
discussion of the capital gain tax rates applicable to non-corporate U.S.
stockholders, see "--Taxpayer Relief Act and IRS Restructuring Act Changes to
Capital Gain Taxation" below.
Distributions made by Host Marriott that are properly designated by Host
Marriott as capital gain dividends will be taxable to taxable corporate U.S.
stockholders as long-term gain to the extent that they do not exceed Host
Marriott's actual net capital gain for the taxable year at a maximum rate of
35% without regard to the period for which such corporate U.S. stockholder has
held its common stock. Such U.S. stockholders may, however, be required to
treat up to 20% of certain capital gain dividends as ordinary income.
U.S. stockholders may not include in their individual income tax returns any
net operating losses or capital losses of Host Marriott. Instead, such losses
would be carried over by Host Marriott for potential offset against future
income, subject to certain limitations. Distributions made by Host Marriott and
gain arising from the sale or exchange by a U.S. stockholder of common stock
will not be treated as passive activity income, and, as a result, U.S.
stockholders generally will not be able to apply any "passive losses" against
such income or gain. In addition, taxable distributions from Host Marriott
generally will be treated as investment income for purposes of the investment
interest limitation. Capital gain dividends and capital gains from the
disposition of shares, including distributions treated as such, however, will
be treated as investment income only if the U.S. stockholder so elects, in
which case such capital gains will be taxed at ordinary income rates.
Host Marriott will notify stockholders after the close of its taxable year
as to the portions of distributions attributable to that year that constitute
ordinary income, return of capital and capital gain. Host Marriott may
designate, by written notice to its stockholders, its net capital gain so that
with respect to retained net capital
49
gains, a U.S. stockholder would include its proportionate share of such gain in
income, as long-term capital gain, and would be treated as having paid its
proportionate share of the tax paid by Host Marriott with respect to the gain.
The U.S. stockholder's basis in its common stock would be increased by its
share of such gain and decreased by its share of such tax. With respect to such
long-term capital gain of a U.S. stockholder that is an individual or an estate
or trust, the IRS, as described above in this section, has authority to issue
regulations that could apply the special tax rate applicable generally to the
portion of the long-term capital gains of an individual or an estate or trust
attributable to deductions for depreciation taken with respect to depreciable
real property. IRS Notice 97-64, described above in this section, did not
address the taxation of non-corporate REIT stockholders with respect to
retained net capital gains.
Sales of Common Stock. Upon any sale or other disposition of common stock, a
U.S. stockholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and
(ii) the holder's adjusted basis in such common stock for tax purposes. Such
gain or loss will be capital gain or loss if the common stock has been held by
the U.S. stockholder as a capital asset. In the case of a U.S. stockholder who
is an individual or an estate or trust, such gain or loss will be long-term
capital gain or loss, and any such long-term capital gain shall be subject to
the maximum capital gain rate of 20%. In the case of a U.S. stockholder that is
a corporation, such gain or loss will be long-term capital gain or loss if such
shares have been held for more than one year, and any such capital gain shall
be subject to the maximum capital gain rate of 35%. In general, any loss
recognized by a U.S. stockholder upon the sale or other disposition of common
stock that has been held for six months or less, after applying certain holding
period rules, will be treated as a long-term capital loss, to the extent of
distributions received by such U.S. stockholder from Host Marriott that were
required to be treated as long-term capital gains.
Taxpayer Relief Act and IRS Restructuring Act Changes to Capital Gain
Taxation. The Taxpayer Relief Act of 1997 altered the taxation of capital gain
income. Under the Act, individuals, trusts and estates that hold certain
investments for more than 18 months may be taxed at a maximum long-term capital
gain rate of 20% on the sale or exchange of those investments. Individuals,
trusts and estates that hold certain assets for more than one year but not more
than 18 months may be taxed at a maximum long-term capital gain rate of 28% on
the sale or exchange of those investments. The Taxpayer Relief Act also
provides a maximum rate of 25% for "unrecaptured Section 1250 gain" for
individuals, trusts and estates, special rules for "qualified 5-year gain" and
other changes to prior law. The recently enacted IRS Restructuring Act of 1998,
however, reduced the holding period requirement established by the Taxpayer
Relief Act for the application of the 20% and 25% capital gain tax rates to 12
months from 18 months for sales of capital gain assets after December 31, 1997.
The Taxpayer Relief Act allows the IRS to prescribe regulations on how the
Taxpayer Relief Act's capital gain rates will apply to sales of capital assets
by "pass-through entities," including REITs, such as Host Marriott, and to
sales of interests in "pass-through entities." For a discussion of the rules
under the Taxpayer Relief Act that apply to the taxation of distributions by
Host Marriott to its stockholders that are designated by Host Marriott as
"capital gain dividends," see "--Distributions by Host Marriott" above.
Stockholders are urged to consult with their own tax advisors with respect to
the rules contained in the Taxpayer Relief Act and the IRS Restructuring Act.
Backup Withholding for Host Marriott's Distributions
Host Marriott reports to its U.S. stockholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if
any. Under the backup withholding rules, a U.S. stockholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder either is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. stockholder that does not provide Host Marriott with
a correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding is creditable against
the stockholder's income tax liability. In addition, Host Marriott may be
required to withhold a portion of its capital gain distributions to any U.S.
stockholders who fail to certify their non-foreign status to Host Marriott. See
"--Taxation of Non-U.S. Stockholders."
50
Taxation of Tax-Exempt Stockholders
Provided that a tax-exempt stockholder has not held its common stock as
"debt financed property" within the meaning of the Internal Revenue Code and
such common stock are not otherwise used in a trade or business, the dividend
income from Host Marriott will not be unrelated business taxable income
("UBTI") to a tax-exempt stockholder. Similarly, income from the sale of common
stock will not constitute UBTI unless such tax-exempt stockholder has held such
common stock as "debt financed property" within the meaning of the Internal
Revenue Code or has used the common stock in a trade or business.
However, for a tax-exempt stockholder that is a social club, voluntary
employee benefit association, supplemental unemployment benefit trust or
qualified group legal services plan exempt from federal income taxation under
Internal Revenue Code Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20),
respectively, income from an investment in Host Marriott will constitute UBTI
unless the organization is properly able to deduct amounts set aside or placed
in reserve for certain purposes so as to offset the income generated by its
investment in Host Marriott. Such a prospective stockholder should consult its
own tax advisors concerning these "set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation Act of
1993 provides that, effective for taxable years beginning in 1994, a portion of
the dividends paid by a "pension held REIT" shall be treated as UBTI as to any
trust which is described in Section 401(a) of the Internal Revenue Code, is
tax-exempt under Section 501(a) of the Internal Revenue Code and holds more
than 10%, by value, of the interests in the REIT. Tax-exempt pension funds that
are described in Section 401(a) of the Internal Revenue Code are referred to
below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Internal Revenue Code, added by
the 1993 Act, provides that stock owned by qualified trusts shall be treated,
for purposes of the "not closely held" requirement, as owned by the
beneficiaries of the trust rather than by the trust itself, and (ii) either (a)
at least one such qualified trust holds more than 25% by value, of the
interests in the REIT, or (b) one or more such qualified trusts, each of which
owns more than 10%, by value, of the interests in the REIT, hold in the
aggregate more than 50%, by value, of the interests in the REIT. The percentage
of any REIT dividend treated as UBTI is equal to the ratio of the UBTI earned
by the REIT, treating the REIT as if it were a qualified trust and therefore
subject to tax on UBTI, to the total gross income of the REIT. A de minimis
exception applies where the percentage is less than 5% for any year. The
provisions requiring qualified trusts to treat a portion of REIT distributions
as UBTI will not apply if the REIT is able to satisfy the "not closely held"
requirement without relying upon the "look-through" exception with respect to
qualified trusts.
Based on the current estimated ownership of Host Marriott common stock and
as a result of certain limitations on transfer and ownership of common stock
contained in the Host Marriott Articles of Incorporation, Host Marriott should
not be classified as a "pension held REIT."
Taxation of Non-U.S. Stockholders
The rules governing federal income taxation of the ownership and disposition
of common stock by non-U.S. stockholders are complex and no attempt is made
herein to provide more than a brief summary of such rules. Accordingly, the
discussion does not address all aspects of federal income tax and does not
address state, local or foreign tax consequences that may be relevant to a non-
U.S. stockholder in light of its particular circumstances. In addition, this
discussion is based on current law, which is subject to change, and assumes
that Host Marriott qualifies for taxation as a REIT. Prospective non-U.S.
stockholders should consult with their own tax advisers to determine the impact
of federal, state, local and foreign income tax laws with regard to an
investment in common stock, including any reporting requirements.
Distributions by Host Marriott. Distributions by Host Marriott to a non-U.S.
stockholder that are neither attributable to gain from sales or exchanges by
Host Marriott of United States real property interests nor
51
designated by Host Marriott as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated E&P of Host Marriott. Such distributions ordinarily will be subject
to withholding of United States federal income tax on a gross basis (that is,
without allowance of deductions) at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty, unless the dividends are treated
as effectively connected with the conduct by the non-U.S. stockholder of a
United States trade or business. Under certain treaties, however, lower
withholding rates generally applicable to dividends do not apply to dividends
from a REIT, such as Host Marriott. Certain certification and disclosure
requirements must be satisfied to be exempt from withholding under the
effectively connected income exemption. Dividends that are effectively
connected with such a trade or business will be subject to tax on a net basis
(that is, after allowance of deductions) at graduated rates, in the same manner
as U.S. stockholders are taxed with respect to such dividends and are generally
not subject to withholding. Any such dividends received by a non-U.S.
stockholder that is a corporation may also be subject to an additional branch
profits tax at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty. Host Marriott expects to withhold United States
income tax at the rate of 30% on any distribution made to a non-U.S.
stockholder unless (i) a lower treaty rate applies and any required form or
certification evidencing eligibility for that lower rate is filed with Host
Marriott or (ii) a non-U.S. stockholder files an IRS Form 4224 with Host
Marriott claiming that the distribution is effectively connected income.
Distributions in excess of the current or accumulated E&P of Host Marriott
will not be taxable to a non-U.S. stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's common stock, but rather will
reduce the adjusted basis of such common stock. To the extent that such
distributions exceed the adjusted basis of a non-U.S. stockholder's common
stock, they will give rise to gain from the sale or exchange of its common
stock, the tax treatment of which is described below.
As a result of a legislative change made by the Small Business Job
Protection Act of 1996, it appears that Host Marriott will be required to
withhold 10% of any distribution in excess of its current and accumulated E&P.
Consequently, although Host Marriott intends to withhold at a rate of 30%, or a
lower applicable treaty rate, on the entire amount of any distribution, to the
extent that Host Marriott does not do so, any portion of a distribution not
subject to withholding at a rate of 30%, or lower applicable treaty rate, would
be subject to withholding at a rate of 10%. However, a non-U.S. stockholder may
seek a refund of such amounts from the IRS if it subsequently determined that
such distribution was, in fact, in excess of current or accumulated E&P of Host
Marriott, and the amount withheld exceeded the non-U.S. stockholder's United
States tax liability, if any, with respect to the distribution.
Distributions to a non-U.S. stockholder that are designated by Host Marriott
at the time of distribution as capital gain dividends, other than those arising
from the disposition of a United States real property interest, generally will
not be subject to United States federal income taxation, unless:
(i) the investment in the common stock is effectively connected with the
non-U.S. stockholder's United States trade or business, in which case
the non-U.S. stockholder will be subject to the same treatment as U.S.
stockholders with respect to such gain, except that a stockholder that
is a foreign corporation may also be subject to the 30% branch profits
tax, as discussed above, or
(ii) the non-U.S. stockholder is a nonresident alien individual who is
present in the United States for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the
individual's capital gains.
Pursuant to the federal law known as FIRPTA, distributions to a non-U.S.
stockholder that are attributable to gain from sales or exchanges by Host
Marriott of United States real property interests, whether or not designated as
capital gain dividends, will cause the non-U.S. stockholder to be treated as
recognizing such gain as income effectively connected with a United States
trade or business. non-U.S. stockholders would thus generally be taxed at the
same rates applicable to U.S. stockholders, subject to a special alternative
minimum tax in the case of nonresident alien individuals. Also, such gain may
be subject to a 30% branch profits tax in
52
the hands of a non-U.S. stockholder that is a corporation, as discussed above.
Host Marriott is required to withhold 35% of any such distribution. That amount
is creditable against the non-U.S. stockholder's federal income tax liability.
Although the law is not entirely clear on the matter, it appears that
amounts designated by Host Marriott pursuant to the Taxpayer Relief Act as
undistributed capital gains in respect of the common stock held by U.S.
Stockholders (see "--Annual Distribution Requirements Applicable to REITs"
above) would be treated with respect to non-U.S. stockholders in the manner
outlined in the preceding two paragraphs for actual distributions by Host
Marriott of capital gain dividends. Under that approach, the non-U.S.
stockholders would be able to offset as a credit against their United States
federal income tax liability resulting therefrom their proportionate share of
the tax paid by Host Marriott on such undistributed capital gains and to
receive from the IRS a refund to the extent their proportionate share of such
tax paid by Host Marriott were to exceed their actual United States federal
income tax liability.
Sales of Common Stock. Gain recognized by a non-U.S. stockholder upon the
sale or exchange of common stock generally will not be subject to United States
taxation unless such shares constitute a "United States real property interest"
within the meaning of FIRPTA. The common stock will not constitute a "United
States real property interest" so long as Host Marriott is a "domestically
controlled REIT." A "domestically controlled REIT" is a REIT in which at all
times during a specified testing period less than 50% in value of its stock is
held directly or indirectly by non-U.S. stockholders. Host Marriott believes,
but cannot guarantee, that it is a "domestically controlled REIT." Moreover,
even if Host Marriott is a "domestically controlled REIT," because the common
stock is publicly traded, no assurance can be given that Host Marriott will
continue to be a "domestically controlled REIT." Notwithstanding the foregoing,
gain from the sale or exchange of common stock not otherwise subject to FIRPTA
will be taxable to a non-U.S. stockholder if the non-U.S. stockholder is a
nonresident alien individual who is present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States. In
such case, the nonresident alien individual will be subject to a 30% United
States withholding tax on the amount of such individual's gain.
Even if Host Marriott does not qualify as or ceases to be a "domestically
controlled REIT," gain arising from the sale or exchange by a non-U.S.
stockholder of common stock would not be subject to United States taxation
under FIRPTA as a sale of a "United States real property interest" if:
(i) the common stock is "regularly traded," as defined by applicable
regulations, on an established securities market such as the NYSE, and
(ii) such non-U.S. stockholder owned 5% or less of the common stock
throughout the five-year period ending on the date of the sale or
exchange.
If gain on the sale or exchange of common stock were subject to taxation
under FIRPTA, the non-U.S. stockholder would be subject to regular United
States income tax with respect to such gain in the same manner as a taxable
U.S. stockholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations) and the purchaser of the common stock would be required to
withhold and remit to the IRS 10% of the purchase price.
Backup Withholding Tax and Information Reporting. Backup withholding tax
generally is a withholding tax imposed at the rate of 31% on certain payments
to persons that fail to furnish certain information under the United States
information reporting requirements. Backup withholding and information
reporting will generally not apply to distributions paid to non-U.S.
stockholders outside the United States that are treated as dividends subject to
the 30% (or lower treaty rate) withholding tax discussed above, capital gain
dividends or distributions attributable to gain from the sale or exchange by
Host Marriott of United States real property interests. As a general matter,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of common stock by or through a foreign office of a foreign
broker. Generally, information
53
reporting (but not backup withholding) will apply, however, to a payment of the
proceeds of a sale of common stock by a foreign office of a broker that:
(a) is a United States person,
(b) derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, or
(c) is a "controlled foreign corporation," which is, generally, a foreign
corporation controlled by United States stockholders.
If, however, the broker has documentary evidence in its records that the
holder is a non-U.S. stockholder and certain other conditions are met or the
stockholder otherwise establishes an exemption information reporting will not
apply. Payment to or through a United States office of a broker of the proceeds
of a sale of common stock is subject to both backup withholding and information
reporting unless the stockholder certifies under penalty of perjury that the
stockholder is a non-U.S. stockholder, or otherwise establishes an exemption. A
non-U.S. stockholder may obtain a refund of any amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
IRS.
The IRS has recently finalized regulations regarding the withholding and
information reporting rules discussed above. In general, these regulations do
not alter the substantive withholding and information reporting requirements
but unify certification procedures and forms and clarify and modify reliance
standards. These regulations generally are effective for payments made after
December 31, 2000, subject to certain transition rules. Valid withholding
certificates that are held on December 31, 1999, will remain valid until the
earlier of December 31, 2000 or the date of expiration of the certificate under
rules currently in effect, unless otherwise invalidated due to changes in the
circumstances of the person whose name is on such certificate. A non-U.S.
stockholder should consult its own advisor regarding the effect of the new
regulations.
Tax Aspects of Host Marriott's Ownership of Interests in Host Marriott, L.P.
General. Substantially all of Host Marriott's investments are held through
Host Marriott, L.P., which will hold the hotels either directly or through
certain subsidiaries. In general, partnerships are "pass-through" entities that
are not subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit
of a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. Host Marriott
includes in its income its proportionate share of the foregoing partnership
items for purposes of the various REIT income tests and in the computation of
its REIT taxable income. Moreover, for purposes of the REIT asset tests, Host
Marriott includes its proportionate share of assets held through Host Marriott,
L.P. and certain of its subsidiaries. See "--Federal Income Taxation of Host
Marriott--Ownership of Partnership Interests by a REIT."
Entity Classification. If Host Marriott, L.P. or any non-corporate
subsidiary other than a subsidiary held through an entity treated for federal
income tax purposes as a corporation were treated as an association, the entity
would be taxable as a corporation and therefore would be subject to an entity
level tax on its income. In such a situation, the character of Host Marriott's
assets and items of gross income would change and could preclude Host Marriott
from qualifying as a REIT (see "--Federal Income Taxation of Host Marriott--
Asset Tests Applicable to REITs" and "--Income Tests Applicable to REITs").
The entire discussion of the federal income tax consequences of the
ownership of common stock is based on Host Marriott, L.P. and all of its non-
corporate subsidiaries, other than a subsidiary held by an entity treated as a
corporation for federal income tax purposes, being classified as partnerships
for federal income tax purposes. Pursuant to regulations under Section 7701 of
the Internal Revenue Code, a partnership will be treated as a partnership for
federal income tax purposes unless it elects to be treated as a corporation or
would be treated as a corporation because it is a "publicly traded
partnership." Neither Host Marriott, L.P. nor any of the non-corporate
subsidiaries have elected or will elect to be treated as a corporation, and
therefore, subject to
54
the disclosure below, each will be treated as a partnership for federal income
tax purposes (or if it has only one partner or member, disregarded entirely for
federal income tax purposes).
Pursuant to Section 7704 of the Internal Revenue Code, however, a
partnership that does not elect to be treated as a corporation nevertheless
will be treated as a corporation for federal income tax purposes if it is a
"publicly traded partnership," unless at least ninety percent (90%) of its
income consists of "qualifying income" within the meaning of that section. A
"publicly traded partnership" is any partnership (i) the interests in which are
traded on an established securities market or (ii) the interests in which are
readily tradable on a "secondary market or the substantial equivalent thereof."
Units of limited partnership interest in Host Marriott L.P. will not be traded
on an established securities market. There is a significant risk, however, that
after the right to redeem such units becomes exercisable, such interests would
be considered readily tradable on the substantial equivalent of a secondary
market. In this regard, the income requirements generally applicable to REITs
and the definition of "qualifying income" under Section 7704 of the Internal
Revenue Code are similar in most key respects. There is one significant
difference, however, that is relevant to Host Marriott, L.P. For a REIT, rent
from a tenant does not qualify as "rents from real property" if the REIT and/or
one or more actual or constructive owners of 10% or more of the REIT actually
or constructively own 10% or more of the tenant; under Section 7704 of the
Internal Revenue Code, rent from a tenant is not qualifying income if a
partnership and/or one or more actual or constructive owners of 5% or more of
the partnership actually or constructively own 10% or more of the tenant.
A substantial majority of Host Marriott, L.P. income comes from rent
payments by subsidiaries of Crestline. Accordingly, because The Blackstone
Group, Host Marriott and any owner of 10% or more of Host Marriott will own or
be deemed to own 5% or more of Host Marriott, L.P., if The Blackstone Group,
Host Marriott and/or any owner of 10% or more of Host Marriott were to own or
be deemed to own collectively 10% or more of Crestline, none of the rent from
the lessees of Host Marriott's hotels would be qualifying income for purposes
of determining whether Host Marriott, L.P. should be taxed as a corporation. In
order to avoid this result, the Crestline articles of incorporation expressly
provide that no person (or persons acting as a group), including The Blackstone
Group, Host Marriott and any owner of 10% or more of Host Marriott, may own,
actually and/or constructively, more than 9.8% by value of the equity in
Crestline and the Crestline articles of incorporation contain self-executing
mechanisms intended to enforce this prohibition. In addition, Host Marriott,
L.P.'s partnership agreement prohibits any person, or persons acting as a
group, or entity, other than an affiliate of The Blackstone Group and Host
Marriott, from owning, actually and/or constructively, more than 4.9% of the
value of Host Marriott, L.P., and the Host Marriott charter prohibits any
person, or persons acting as a group, or entity, including The Blackstone Group
and the Marriott family and their affiliated entities as a group, from, subject
to certain limited exceptions, owning, actually and/or constructively, more
than 9.8% of the lesser of the number or value of the total outstanding shares
of Host Marriott. Assuming that all of these prohibitions are enforced at all
times in accordance with their terms, then so long as Host Marriott, L.P.'s
income is such that Host Marriott could meet the gross income tests applicable
to REITs (see "--Federal Income Taxation of Host Marriott--Income Tests
Applicable to REITs" and "--Ownership of Partnership Interests by a REIT"),
Host Marriott, L.P.'s "qualifying income" should be sufficient for it to avoid
being classified as a corporation even if it were considered a publicly traded
partnership.
If Host Marriott, L.P. were taxable as a corporation, most, if not all, of
the tax consequences described herein would be inapplicable. In particular,
Host Marriott would not qualify as a REIT because the value of Host Marriott's
ownership interest in Host Marriott, L.P. would exceed 5% of Host Marriott's
assets and Host Marriott would be considered to hold more than 10% of the
voting securities of another corporation (see "--Federal Income Taxation of
Host Marriott--Asset Tests Applicable to REITs"), which would adversely affect
the value of the common stock (see "--Federal Income Taxation of Host
Marriott--Failure of Host Marriott to qualify as a REIT").
Allocations of Operating Partnership Income, Gain, Loss and Deduction. The
partnership agreement of the Host Marriott, L.P. provides that if Host
Marriott, L.P. operates at a net loss, net losses shall be allocated to
55
Host Marriott and the limited partners in proportion to their respective
percentage ownership interests in Host Marriott, L.P., provided that net losses
that would have the effect of creating a deficit balance in a limited partner's
capital account as specially adjusted for such purpose ("Excess Losses") will
be reallocated to Host Marriott, as general partner of Host Marriott, L.P. The
partnership agreement also provides that, if Host Marriott, L.P. operates at a
net profit, net income shall be allocated first to Host Marriott to the extent
of Excess Losses with respect to which Host Marriott has not previously been
allocated net income. Any remaining net income shall be allocated in proportion
to the respective percentage ownership interests of Host Marriott and the
limited partners. Finally, the partnership agreement provides that if Host
Marriott, L.P. has preferred units outstanding, income will first be allocated
to such preferred units to the extent necessary to reflect and preserve the
economic rights associated with such preferred units.
Although a partnership agreement will generally determine the allocation of
income and loss among partners, such allocations will be disregarded for tax
purposes if they do not comply with the provisions of Section 704(b) of the
Internal Revenue Code and the applicable regulations. Generally, Section 704(b)
and the applicable regulations require that partnership allocations respect the
economic arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The allocations of taxable income and loss
provided for in the Host Marriott, L.P. partnership agreement and the
partnership agreements and operating agreements of the non-corporate
subsidiaries are intended to comply with the requirements of Section 704(b) of
the Internal Revenue Code and the regulations promulgated thereunder.
Tax Allocations with Respect to the Hotels. Pursuant to Section 704(c) of
the Internal Revenue Code, income, gain, loss and deduction attributable to
appreciated or depreciated property, such as the hotels, that is contributed to
a partnership in exchange for an interest in the partnership must be allocated
in a manner such that the contributing partner is charged with, or benefits
from, respectively, the difference between the adjusted tax basis and the fair
market value of such property at the time of contribution associated with the
property at the time of the contribution. This difference is know as built-in
gain. The Host Marriott, L.P. partnership agreement requires that such
allocations be made in a manner consistent with Section 704(c) of the Internal
Revenue Code. In general, the partners of Host Marriott, L.P., including Host
Marriott, who contributed depreciated assets having built-in gain are allocated
depreciation deductions for tax purposes that are lower than such deductions
would be if determined on a pro rata basis. Thus, the carryover basis of the
contributed assets in the hands of Host Marriott, L.P. may cause Host Marriott
to be allocated lower depreciation and other deductions, and therefore to be
effectively allocated more income, which might adversely affect Host Marriott's
ability to comply with the REIT distribution requirements. See "--Federal
Income Taxation of Host Marriott--Annual Distribution Requirements Applicable
to REITs".
In addition, in the event of the disposition of any of the contributed
assets which have built-in gain, all income attributable to the built-in gain
generally will be allocated to the contributing partners, even though the
proceeds of such sale would be allocated proportionately among all the partners
and likely would be retained by Host Marriott, L.P., rather than distributed.
Thus, if Host Marriott, L.P. were to sell a hotel with built-in gain that was
contributed to Host Marriott, L.P. by Host Marriott's predecessors or Host
Marriott, Host Marriott generally would be allocated all of the income
attributable to the built-in gain, which could exceed the economic or book
income allocated to it as a result of such sale. Such an allocation might cause
Host Marriott to recognize taxable income in excess of cash proceeds, which
might adversely affect Host Marriott's ability to comply with the REIT
distribution requirements. In addition, Host Marriott will be subject to a
corporate level tax on such gain to the extent the gain is recognized within
the 10-year period after the first day of Host Marriott's first taxable year as
a REIT). See "--Federal Income Taxation of Host Marriott--Annual Distribution
Requirements Applicable to REITs" and "--Federal Income Taxation of Host
Marriott--General." It should be noted in this regard that as the general
partner of Host Marriott, L.P., Host Marriott will determine whether or not to
sell a hotel contributed to Host Marriott, L.P. by Host Marriott.
56
Host Marriott, L.P. and Host Marriott generally use the traditional method,
with a provision for a curative allocation of gain on sale to the extent prior
allocations of depreciation with respect to a specific hotel were limited by
the "ceiling rule" applicable under the traditional method, to account for
built-in gain with respect to the hotels contributed to Host Marriott, L.P. in
connection with the REIT conversion. This method is generally a more favorable
method for accounting for built-in gain from the perspective of those partners,
including Host Marriott, who received units of limited partnership interest in
Host Marriott, L.P. in exchange for property with a low basis relative to value
at the time of the REIT conversion and is a less favorable method from the
perspective of those partners who contributed cash or "high basis" assets to
Host Marriott, L.P., including Host Marriott, to the extent it contributes cash
to Host Marriott, L.P.
Any property purchased by Host Marriott, L.P. subsequent to the REIT
conversion will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Internal Revenue Code will not apply.
Other Tax Consequences for Host Marriott and Its Stockholders
Host Marriott and its stockholders are subject to state or local taxation in
various state or local jurisdictions, including those in which Host Marriott,
L.P. or they transact business or reside. The state and local tax treatment of
Host Marriott and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders of Host
Marriott should consult their own tax advisors regarding the effect of state
and local tax laws on an investment in Host Marriott.
A portion of the cash to be used by Host Marriott to fund distributions
comes from each non-controlled subsidiary through payments of dividends on the
shares of such corporation held by Host Marriott, L.P. and, in some cases,
interest on notes held by Host Marriott, L.P. Each non-controlled subsidiary
pays federal and state income tax at the full applicable corporate rates on its
taxable income computed without regard to any deduction for dividends. To the
extent that a non-controlled subsidiary is required to pay federal, state or
local taxes, the cash otherwise available for distribution by Host Marriott to
its stockholders will be reduced accordingly.
57
PLAN OF DISTRIBUTION
Host Marriott may sell the offered securities being offered hereby: (i)
directly to purchasers; (ii) through agents; (iii) through dealers; (iv)
through underwriters; (v) directly to its stockholders; or (vi) through a
combination of any such methods of sale. In addition, the offered securities
may be issued by Host Marriott as a dividend or distribution.
The distribution of the offered securities may be effected from time to time
in one or more transactions either: (i) at a fixed price or prices, which may
be changed; (ii) at market prices prevailing at the time of sale; (iii) at
prices related to such prevailing market prices; or (iv) at negotiated prices.
Offers to purchase offered securities may be solicited directly by Host
Marriott. Offers to purchase offered securities may also be solicited by agents
designated by Host Marriott from time to time. Any such agent, who may be
deemed to be an "underwriter" as that term is defined in the Securities Act,
involved in the offer or sale of the offered securities in respect of which
this prospectus is delivered will be named, and any commissions payable by Host
Marriott to such agent will be set forth in the prospectus supplement.
If a dealer is utilized in the sale of the offered securities in respect of
which this prospectus is delivered, Host Marriott will sell such offered
securities to the dealer, as principal. The dealer, who may be deemed to be an
"underwriter" as that term is defined in the Securities Act, may then resell
such offered securities to the public at varying prices to be determined by
such dealer at the time of resale.
If an underwriter is, or underwriters are, utilized in the sale, Host
Marriott will execute an underwriting agreement with such underwriters at the
time of sale to them and the names of the underwriters will be set forth in the
prospectus supplement, which will be used by the underwriter to make resales of
the offered securities in respect of which this prospectus is delivered to the
public. In connection with the sale of offered securities, such underwriter may
be deemed to have received compensation from Host Marriott in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of offered securities for whom they may act as agents. Underwriters
may also sell offered securities to or through dealers, and such dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act
as agents. Any underwriting compensation paid by Host Marriott to underwriters
in connection with the offering of offered securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable prospectus supplement.
Pursuant to any standby underwriting agreement entered into in connection
with a subscription rights offering to Host Marriott's stockholders, persons
acting as standby underwriters may receive a commitment fee for all securities
underlying the subscription rights that the underwriter commits to purchase on
a standby basis. Additionally, prior to the expiration date with respect to any
subscription rights, any standby underwriters in a subscription rights offering
to Host Marriott's stockholders may offer such securities on a when-issued
basis, including securities to be acquired through the purchase and exercise of
subscription rights, at prices set from time to time by the standby
underwriters. After the expiration date with respect to such subscription
rights, the underwriters may offer securities of the type underlying the
subscription rights, whether acquired pursuant to a standby underwriting
agreement, the exercise of the subscription rights or the purchase of such
securities in the market, to the public at a price or prices to be determined
by the underwriters. The standby underwriters may thus realize profits or
losses independent of the underwriting discounts or commissions paid by Host
Marriott. If Host Marriott does not enter into a standby underwriting
arrangement in connection with a subscription rights offering to Host
Marriott's stockholders, Host Marriott may elect to retain a dealer-manager to
manage such a subscription rights offering for Host Marriott. Any such dealer-
manager may offer securities of the type underlying the subscription rights
acquired or to be acquired pursuant to the purchase and exercise of
subscription rights and may thus realize profits or losses independent of any
dealer-manager fee paid by Host Marriott.
58
Underwriters, dealers, agents and other persons may be entitled, under
agreements that may be entered into with Host Marriott, to indemnification by
Host Marriott against certain civil liabilities, including liabilities under
the Securities Act, or to contribution with respect to payments which they may
be required to make in respect thereof. Underwriters and agents may engage in
transactions with, or perform services for, Host Marriott in the ordinary
course of business.
If so indicated in the applicable prospectus supplement, Host Marriott will
authorize underwriters, dealers or other persons to solicit offers by certain
institutions to purchase offered securities pursuant to contracts providing for
payment and delivery on a future date or dates. Institutions with which such
contracts may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions and others. The obligations of any purchasers under any such
contract will not be subject to any conditions except that (i) the purchase of
the offered securities shall not at the time of delivery be prohibited under
the laws of the jurisdiction to which such purchaser is subject, and (ii) if
the offered securities are also being sold to underwriters, Host Marriott shall
have sold to such underwriters the offered securities not sold for delayed
delivery. The underwriters, dealers and such other persons will not have any
responsibility in respect of the validity or performance of such contracts. The
prospectus supplement relating to such contracts will set forth the price to be
paid for offered securities pursuant to such contracts, the commission payable
for solicitation of such contracts and the date or dates in the future for
delivery of offered securities pursuant to such contracts.
Any underwriter may engage in stabilizing and syndicate covering
transactions in accordance with Rule 104 under the Exchange Act. Rule 104
permits stabilizing bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. The underwriters may over-
allot shares of the offered securities in connection with an offering of
offered securities, thereby creating a short position in the underwriters'
account. Syndicate covering transactions involve purchases of the offered
securities in the open market after the distribution has been completed in
order to cover syndicate short positions. Stabilizing and syndicate covering
transactions may cause the price of the offered securities to be higher than it
would otherwise be in the absence of such transactions. These transactions, if
commenced, may be discontinued at any time.
The anticipated date of delivery of offered securities will be set forth in
the applicable prospectus supplement relating to each offer.
LEGAL MATTERS
The validity of the offered securities will be passed upon for Host Marriott
by Christopher G. Townsend, Esq., Vice President of Host Marriott or by other
counsel to Host Marriott. If the offered securities are distributed in an
underwritten offering or through agents, certain legal matters may be passed
upon for any agents or underwriters by counsel for such agents or underwriters
identified in the applicable prospectus supplement.
EXPERTS
The consolidated financial statements and schedules of Host Marriott, Host
Marriott Hotels, Host Marriott, L.P., HMC Senior Communities, Inc., Host
Marriott Corporation, a Delaware corporation, and the combined financial
statements of HMH Properties, Inc., and subsidiaries and HMC Capital Resources
Holding Corporation and subsidiaries and incorporated by reference in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are incorporated by reference herein in
reliance upon the authority of said firm as experts in giving said reports.
59
[LOGO OF HOST MARRIOTT CORPORATION]