EXHIBIT 10.3
Execution Version
SECOND AMENDMENT
TO
MANAGEMENT AGREEMENT
This Amendment ("Amendment") is effective as of the 13th day of
January, 1997 ("Amendment Date") by FAIRFIELD INN BY MARRIOTT LIMITED
PARTNERSHIP ("Owner"), a Delaware limited partnership, with a mailing address at
10400 Fernwood Road, Bethesda, Maryland 20817 and FAIRFIELD FMC CORPORATION
("Manager") a Delaware corporation, with a mailing address at 10400 Fernwood
Road, Bethesda, Maryland 20817.
WHEREAS, Owner and Manager have entered into that certain Management
Agreement dated as of November 17, 1989, as amended by the First Amendment to
Management Agreement dated July 31, 1990 (as amended, the "Management
Agreement") for the operation and management of the Inns;
WHEREAS, Owner has entered into a Loan Agreement of even date herewith
with Nomura Asset Capital Corporation ("NACC") to refinance the Permanent Loan;
and
WHEREAS, the parties desire to modify the Management Agreement in
connection with such refinancing.
NOW, THEREFORE, the parties agree to amend the Management Agreement as
follows:
1. Section 1.01, "Definition of Terms," is amended as follows:
a. The following definitions are added:
"Cash Management Procedures" shall mean the procedures set forth
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in the exhibit entitled "Cash Management Procedures", which is an
exhibit to that certain Modification, Subordination and Non-
Disturbance Agreement, Estoppel, Assignment and Consent Among
Manager, Owner, and NACC dated as of the Amendment Date.
"Computer Lease" shall mean a lease or other agreement under
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which computer equipment located in one or more Inns is leased to
Owner or to Manager, as agent for Owner (including the license,
if any, of operating software therefor).
"Debt Service Reserve Account" shall have the meaning ascribed to
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it in the Cash Management Procedures.
"Equipment Leases" shall mean all or any FF&E Leases, Telephone
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Leases, Computer Leases, TV System Leases and leases of motor
vehicles used primarily for transporting Inn guests.
"FF&E Lease" shall mean a lease of any FF&E located in one or
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more Inns other than a TV System Lease, a Telephone Lease, a
Computer Lease, or a lease of a motor vehicle used primarily for
transporting Inn guests.
"FF&E Replacements" shall mean the items described in Sections
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8.02 A 1 and 2."
"Manager" shall mean Management Company.
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"Manager Loans" shall have the meaning ascribed to it in Section
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5.06 (which is added to this Management Agreement by this
Amendment.)
"Servicer" shall have the meaning ascribed to it in the Cash
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Management Procedures.
"Telephone Lease" means any lease of the telephones and/or other
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telecommunication systems and equipment located in an Inn.
"TV System Lease" means a lease or other agreement under which
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equipment (excluding television sets) for the transmission into
Inn rooms or televised programming is leased or otherwise
provided, regardless of whether such lease or other agreement
contains a right or option to purchase such equipment.
b. The definition of "Development Inns" is amended in its entirety to read
as follows:
"Development Inns" shall mean those Inns that were under
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development by Marriott as of the Effective Date of the
Management Agreement and which have been subsequently acquired by
Owner. As of the Amendment Date, there are no Inns that are under
development to be acquired by Owner as part of the Management
Agreement.
c. The definition of "Lender" is amended in its entirety to read as
follows:
"Lender" shall mean Nomura Asset Capital Corporation, its
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successors and assigns.
d. The definitions of "Limited Debt Service Guarantee" and "Limited Debt
Service Guarantee Advance" are deleted, and any references to those
terms shall be of no force or effect.
e. The definition of "Marriott" is amended in its entirety to read as
follows:
"Marriott" shall mean Marriott International, Inc., a Delaware
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corporation, the corporate parent of Manager.
f. The definition of "Permanent Loan," is amended in its entirety to read
as follows:
"Permanent Loan" shall mean the first mortgage indebtedness
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secured by the Inns to be provided to Owner by Lender pursuant to
a Loan Agreement dated as of the Amendment Date, secured by
mortgages dated as of the Amendment Date in an initial amount not
to exceed the principal amount of One Hundred Sixty Five Million
Four Hundred Thousand Dollars ($165,400,000).
g. The definition of "Qualified Debt" is amended to delete the following
phrase in clause (ii): "any remaining unpaid Ground Rent under Section
4.02(d) of the Ground Leases."
h. The definition of "Qualifying Debt Service" is amended by inserting
the following at the end thereof:
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Upon the Termination of this Agreement with respect to a given
Inn or Inns (whether in connection with a Sale of the Inn or
Inns, or pursuant to other applicable provisions of this
Agreement), Qualifying Debt Service shall be reduced by interest
and principal on any (or any portion of any) Additional Inn
Investment Loans attributable to such Inn or Inns.
i. The definition of "Stipulated Debt Service" is amended in its entirety
to read as follows:
"Stipulated Debt Service" shall mean Seventeen Million Ninety
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Nine Thousand One Hundred Forty One Dollars and Twenty Eight
Cents ($17,099,141.28).
2. Section 4.01, "Term," is amended as follows:
a. In the first sentence, "December 31, 2009" is replaced with "December
31, 2019."
b. In the third sentence, "for each of five (5) successive periods" is
replaced with "for each of four (4) successive periods".
3. Section 5.02, "Incentive Management Fees," is amended as follows:
a. Paragraph B is amended to add the following at the end thereof:
less the amount of any outstanding Manager Loans, which amount
shall be paid to Manager for repayment of such loans out of the
amount otherwise being retained by Owner pursuant to this
paragraph B.
b. Paragraph D is amended to add the following at the end thereof:
, provided that such additional amounts shall not include an
adjustment relating to the number of days in the Fiscal Year.
4. Section 5.03, "Application of Capital Proceeds," is amended by
inserting the following at the end of the first sentence:
; provided, however, that any such amounts retained by Owner
pursuant to this Section 5.03 shall be less the amount of any
outstanding Manager Loans, which amount shall be paid by Owner to
Manager out of the amount otherwise being retained by Owner
pursuant to this Section.
5. Section 5.05, "Accounting and Interim Payment," Paragraph B, is
amended as follows:
a. The following is inserted at the end of the first sentence: ", taking
into account the provisions of Section 8.02 B regarding any `Excess
Amounts'(as that term is defined therein)."
b. The following is inserted at the end of the second sentence: "and
which shall include an accounting with respect to any `Excess Amounts'
under Section 8.02 B (as that term is defined therein)."
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6. A new Section 5.06 is added as follows:
5.06 Manager Loans.
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Manager shall have the right, but not the obligation, at any time
and from time to time, to advance funds reasonably needed for
additional Working Capital and to fund any shortfalls in the Debt
Service Reserve Account in an amount which when added to the
outstanding balance of previous such advances shall not exceed
the average amount of the Deductions for each Accounting Period
during the preceding full thirteen (13) Accounting Periods. Any
such advances shall be deemed a loan by Manager to Owner in such
amount (each, a "Manager Loan"), shall bear interest at one
percent (1%) above the Prime Rate, and shall be repayable by
Owner out of Operating Profit in the priority set forth in
Section 5.02, and Capital Proceeds in the priority set forth in
Section 5.03, and as required by Section 19.02 I, or out of other
funds available to Owner. Owner shall evidence any such loan by
executing a promissory note payable to Manager in the principal
amount of each such loan and bearing interest as aforesaid. Each
such note shall be payable upon the earlier of (i) ten (10) years
from the date of such advance, or (ii) the sale of substantially
all of the Inns; and, during the term of this Agreement, shall be
payable out of Operating Profit, Capital Proceeds, and as
required by Section 19.02 I.
7. Section 7.01, "Working Capital and Inventories" is amended by deleting the
third sentence through the end of the provision, and replacing it with the
following:
Owner shall from time to time after the Amendment Date advance
within fifteen (15) days after receipt of Manager's written
request any additional funds necessary to maintain Working
Capital and Inventories at levels reasonably determined by
Manager to be necessary to satisfy the needs of each Inn as its
operations may from time to time require. In the event Owner
fails to advance additional Working Capital within said fifteen
(15) day period, Manager may, in addition to any other rights or
remedies available to it at law or in equity: (i) retain or be
paid the required amounts from any portion of Operating Profit
otherwise to be retained by or be paid to Owner (consistent with
the Cash Management Procedures, if applicable), (ii) make a
Manager Loan to Owner in accordance with Section 5.06, or (iii)
terminate this Agreement upon not less than thirty (30) days
written notice to Owner. With the exception of the outstanding
balance of all Working Capital advances made as Manager Loans,
funds for Working Capital and Inventories advanced by Owner shall
remain the property of Owner throughout the term of this
Agreement. Upon Termination, Manager shall return to Owner any
unused Working Capital and Inventories except for Inventories
purchased by Manager pursuant to Section 10.02, and except for
the outstanding balance of all Working Capital advances by
Manager made as Manager Loans.
8. Section 8.02, "FF&E Reserve," is amended as follows:
a. Paragraph B is amended by replacing "Section 5.06A" with "Section
5.05A" in the fourth line on page 49.
b. Paragraph B is further amended by deleting the clause following the
last semicolon in the first sentence (which clause begins with the
words "and commencing with the
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Fiscal Year 1994" on the third-to-the-last line of page 48), and
replacing it with the following:
during Fiscal Years 1994, 1995 and 1996, Management Company shall
transfer into the FF&E Reserve an amount equal to six percent
(6%) of Gross Revenues from the Inns for such Fiscal Year.
Commencing with the Fiscal Year 1997, and for all Fiscal Years
thereafter, Management Company shall transfer into the FF&E
Reserve an amount equal to seven percent (7%) of Gross Revenues
from the Inns for each of such Fiscal Years, subject to the
following:
(i) if Management Company determines that seven percent (7%) of
Gross Revenues exceeds the amounts necessary for making
FF&E Replacements under Section 8.02 for the then-current
Fiscal Year or subsequent Fiscal Years, and the amounts
transferred into the FF&E Reserve are not adjusted under
Section 8.02 E, then such excess amount, up to a maximum of
one percent (1%) of Gross Revenues, shall be deemed the
"Excess Amount", and Management Company shall so notify
Owner as part of the FF&E Replacement Estimate described in
Section 8.02 D;
(ii) Excess Amounts shall not be a Deduction for purposes of
calculating or paying Incentive Management Fees under
Article V, and shall be available for the purpose of
funding Owner-approved expenditures under Section 8.03; and
(iii) if Excess Amounts (including any Excess Amounts from prior
Fiscal Years that were not used for Owner-approved
expenditures under Section 8.03) are actually used for FF&E
Replacements under Section 8.02, then such Excess Amounts
shall be deemed a Deduction for purposes of calculating and
paying Incentive Management Fees under Article V, and any
necessary adjustments shall be made promptly thereafter
(but in any event not later than the annual accounting
described in Section 5.05 B).
c. Paragraph C is amended by inserting the following at the end thereof:
Manager, in its reasonable discretion, and subject to the
exceptions stated below, shall decide whether to purchase or
lease any FF&E Replacements or motor vehicles used in
transporting Inn guests. If Manager enters into any lease of FF&E
Replacements or motor vehicles used in transporting Inn guests,
it shall do so on Owner's behalf and as Owner's agent; or, upon
Manager's recommendation and request, Owner shall directly enter
into such leases. Notwithstanding the foregoing, Manager shall
not and shall not require Owner to enter into any lease other
than: (i) Telephone Leases, (ii) Computer Leases, (iii) TV System
Leases, (iv) FF&E Leases, and (v) leases of motor vehicles used
in transporting Inn guests. With respect to FF&E Leases only,
Manager shall be required to obtain Owner's prior written
approval before entering into or requesting that Owner enter into
any FF&E Lease, if (a) the fair market value of the FF&E with
respect to all FF&E Leases relating to each Inn (including those
being entered into) would exceed at any time Fifty Thousand
Dollars ($50,000) (as increased each Fiscal Year after Fiscal
Year 1997 by the CPI Percentage) in respect of such Inn, (b) the
FF&E to be covered by such FF&E Lease is FF&E that is not
customarily leased in
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the hotel industry in the United States, or (c) such FF&E Lease
is on payment terms (including the amounts and schedule of
payments) that would be materially more favorable to the lessor
thereof than payment terms customary in the hotel industry in the
United States for similar leases. With respect to TV System
Leases only, Manager shall be required to obtain Owner's prior
written approval before entering into or requesting the Owner
enter into any TV System Lease, if (a) the equipment to be
covered by such TV System Lease is not customarily leased in the
hotel industry in the United States or (b) such TV System Lease
is on payment terms (including the amounts and schedule of
payments) that would be materially more favorable to the lessor
thereof than payment terms customary in the hotel industry in the
United States for similar leases. In cases described in the
preceding two sentences, Owner's approval shall not be
unreasonably withheld; provided, however, that the failure of any
Lender to approve such leasing proposal shall justify Owner in
withholding its approval. Payments under the leases described in
this paragraph shall be made from the FF&E Reserve to the extent
so provided in paragraph G of this Section 8.02.
d. Paragraph E is amended by inserting the following at the end thereof:
If Owner agrees to obtain outside financing or provide additional
funding as described in Subsection 2 or 3 above but fails to
deposit such funds into the FF&E Reserve within sixty (60) days
after such agreement, then, in addition to any other remedies to
which it is entitled, Manager shall be entitled to (i) notify
Owner that it will terminate this Agreement as to those Inns for
which funds were not deposited as of a date three (3) months
after the date of Manager's notice, or (ii) continue to manage
the Inn or Inns without making such alterations, improvements,
renewals, or replacements.
e. Paragraph F is amended in its entirety to read as follows:
F. Upon Termination of this Agreement with respect to any one or
more of the Inns, whether pursuant to Section 8.02 E above or
pursuant to other provisions of this Agreement, that portion of the
FF&E Reserve properly allocable to said Inn or Inns shall be
released from the FF&E Reserve and paid to Owner unless Manager will
continue operating some or all of the Inns being terminated from
this Management Agreement, in which case Manager shall transfer all
amounts held in the Reserve properly allocable to the Inns that
Manager will continue operating to one or more new accounts for the
benefit of the new owner or owners of such Inns.
9. Section 8.03, "Building Alterations, Improvements, Renewals, and
Replacements," is amended as follows:
a. Paragraph B is amended by inserting the following before the last
sentence:
If Owner approves the Building Estimate but fails to deliver
funds required by such Building Estimate on the later of sixty
(60) days after (A) such approval or (B) such later date Owner's
receipt of a request by Manager for the delivery of funds, then
Manager may, at its option and in addition to any other remedies
available to it, (i) notify Owner that it will terminate this
Agreement as to those Inns for which funds were not deposited as
of a date three (3) months after the date of Manager's notice,
(ii) use funds from the FF&E Reserve to pay for the expenditures
in the approved Building
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Estimate, or (iii) continue to manage the Inn or Inns without
making such alterations, improvements, renewals or replacements.
b. A new Paragraph C is added as follows:
C. From time to time Manager may, at Owner's request and with
Manager's prior consent (which may be withheld in Manager's sole
discretion), use funds in the FF&E Reserve for the purpose of
funding Owner-approved expenditures under this Section 8.03, it
being understood and agreed that, except for Excess Amounts under
Section 8.02 B (ii), such funds shall be repaid into the FF&E
Reserve out of Owner's funds (and not as a Deduction) at such time
as Manager shall request.
10. Section 12.05, "Loan Agreement Insurance Provisions," is amended by
inserting "A." at the beginning thereof, and adding a new paragraph B as
follows:
B. "Manager's Insurance Program" shall mean Manager's insurance
program in effect with respect to other similar inns that Manager or
Marriott Affiliates own, lease or manage under the Fairfield Inn
name in the United States. Section 12.05 A was agreed to in the
context of the loan agreement entered into by Owner and Sumitomo
Trust & Banking Co., Ltd., New York Branch, that was in effect prior
to the Amendment Effective Date. The Loan Agreement entered into by
Owner and Lender as of the Amendment Date contains insurance
provisions that in some instances require more extensive insurance
coverage than that which Manager's Insurance Program was required to
have in effect as of the Amendment Effective Date. Manager has not
provided its consent under Section 12.05 A to the extent the Loan
Agreement would require changes in Manager's Insurance Program
relating to: (i) earthquake insurance coverage; (ii) the
qualifications or eligibility of the insurers that are normally part
of Manager's Insurance Program; or (iii) the use of insurers at a
cost higher than that which Manager would normally have incurred
under Manager's Insurance Program. Accordingly, the parties
understand and agree that, notwithstanding the definition of "Loan
Agreement" in Section 1.01, as amended by the Second Amendment to
Management Agreement, the provision contained in the first sentence
of Section 12.05 A shall not apply with respect to any such
provisions in the Loan Agreement with Lender.
11. Section 19.02, "Effect of Sale or Refinancing of an Inn," is amended
as follows:
a. Paragraph C is amended in its entirety to read as follows:
That portion of the FF&E Reserve maintained pursuant to Section
8.02 hereof that is properly allocable to the Inns being so sold,
leased or refinanced shall be transferred to a new account for
the benefit of the purchaser of such Inn.
b. Paragraph D is amended in its entirety to read as follows:
Qualifying Debt Service, Owner's Priority Return, Owner's
Contributed Capital, Owner's 12% Priority and Capital Return,
Owner's Net Contributed Capital (and the 12% return component of
Owner's 12% Priority and Capital Return), the Operating Profit
Objective, Owner' s Net Cash Flow and the amounts set forth in
Section 5.01 D, and the amount set forth in Section 4.02
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A (i) shall be reduced by the percentage thereof allocable to
such IM set forth in Exhibit "B".
c. A new Paragraph I is added as follows:
I. Owner shall pay Manager an amount equal to a portion of the
outstanding balance of all Manager Loans determined by multiplying
the total outstanding balance of all Manager Loans by a fraction,
the numerator of which is the amount of Operating Profit
attributable to the Inn being sold for the immediately preceding
full Fiscal Year, and the denominator of which is the amount of
Operating Profit from all Inns for the immediately preceding full
Fiscal Year.
12. A new Section 20.12, "Confidentiality," is added as follows:
20.12 Confidentiality
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The parties agree that matters set forth in and all information,
budgets and reports generated as a result of this Agreement are
strictly confidential and each party will make every effort to
ensure that the information is not disclosed to any outside person
or entities (including the press), other than such parties' lenders,
equity holders, bona fide prospective investors or purchasers, and
their respective accountants, counsel and other consultants or
advisors, and other than the holders of any securities to be issued
by Owner or by any lender pursuant to a securitization of the notes
evidencing the obligation of Owner (so long as all such information
sent to such holders is marked with a confidentiality notice that
refers to the provisions of this Section 20.11 and directs such
holders to comply with the provisions hereof reasonably acceptable
to Manager), without the written consent of the other party except
as may be reasonably necessary (i) to obtain licenses, permits and
other public approvals necessary for the refurbishment or operation
of any Inn (ii) in connection with Owner's financing of any Inn or
any sale of any Inn (subject to the limitations above with respect
to a securitization), (iii) in connection with a sale of a
controlling interest in Owner, Manager, or Marriott, (iv) in
connection with an audit or other investigation conducted pursuant
to this Agreement or the Owner's or Manager's interest in any Inn,
(v) in connection with a foreclosure sale on Owner's interest in any
Inn, or (vi) as required by any law, rule, regulation or judicial
process, or by any regulatory or supervisory authority having
jurisdiction over the parties or their Affiliates.
13. A new Section 20.13 is added as follows:
20.13 Offerings
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No reference to Manager, Marriott, or to any Marriott Affiliate
will be made in any prospectus, private placement memorandum,
offering circular or offering documentation related thereto (herein
collectively referred to as the "Prospectus"), issued by Owner or
one of its affiliates or lenders, which is designed to interest
potential investors (debt or equity) in one or more or all of the
Inns, or securities secured by the Inns, unless Manager has
previously received a copy of all such references. However,
regardless of whether Manager does or does not so receive a copy of
all such references, neither Manager, Marriott, nor any Marriott
Affiliate will be deemed an issuer or obligor or guarantor in
respect of any securities described in the Prospectus, nor will it
have any responsibility for the Prospectus, and Owner will not issue
or approve any
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Prospectus that does not so state. Unless Manager agrees in advance,
the Prospectus will not include: (i) any proprietary marks of
Manager, Marriott, or any Marriott Affiliate; or (ii) except as
required by applicable securities laws, the text of this Agreement.
Owner shall be entitled, however, to include in the Prospectus an
accurate summary of this Agreement. With respect to any offering not
registered under any federal or state securities law, if there are
no legal requirements pursuant to which such information must be
publicly disclosed, appropriate measures shall be taken to ensure
that entities or individuals receiving such Prospectus shall
acknowledge the confidentiality of such information. Owner shall
indemnify, defend and hold Manager, Marriott, and all Marriott
Affiliates (and their respective directors, officers, shareholders,
employees and agents) harmless from and against all loss, costs,
liability and damage (including reasonable attorneys' fees and
expenses, and the cost of litigation related thereto) arising out of
any Prospectus or the offering described therein for which Owner or
any of its affiliates is an issuer or sponsor. Owner shall, prior to
distribution of any Prospectus by any of its lenders, use
commercially reasonable best efforts to obtain such an
indemnification for the benefit of Manager, Marriott, and all
Marriott Affiliates from such lender.
14. A new Exhibit "B", attached hereto and incorporated by reference herein,
is added to the Management Agreement.
15. All other terms of the Management Agreement shall remain in full force
and effect.
16. Any term capitalized in this Amendment and not defined herein shall have
the meaning given to it in the Management Agreement.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the date and year first written above.
WITNESS: OWNER:
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
("Owner")
By: MARRIOTT FIBM ONE
CORPORATION, a Delaware
Corporation,
General Partner
/s/ David E. Reichmann By:
- - ----------------------- -----------------------------------
Vice President
Name: David E. Reichmann
WITNESS: MANAGER:
FAIRFIELD FMC CORPORATION
("Manager")
/s/ Alex Joel
- - - --------------------------
Name: Alex Joel By: /s/ Raymond G. Murphy
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Raymond G. Murphy
Vice President
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