SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
CONSENT SOLICITATION STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
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[_] Preliminary consent solicitation statement
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Rule 14a-6(e)(2))
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DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
(Name of Registrant as Specified in Its Charter)
MARRIOTT DESERT SPRINGS CORPORATION
(Name of Person(s) Filing Consent Solicitation Statement, if other than the
Registrant)
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DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
301/380-2070
NOTICE TO UNITHOLDERS
Background. As we have reported to you, the previously existing mortgage
debt of the Desert Springs Marriott Limited Partnership (the "Partnership"),
secured by Marriott's Desert Springs Resort and Spa (including a leased golf
course) and the land on which it is located (the "Hotel"), matured in July
1996. Prior to and following the maturity of such mortgage debt, we explored a
number of alternative means of refinancing the mortgage debt. On December 23,
1996, pursuant to an agreement with the Partnership, GMAC Commercial Mortgage
Corporation ("GMAC") purchased the existing mortgage debt of the Partnership
from a group of banks, and amended and restated certain terms thereof (as
amended and restated, the "Bridge Loan"). The Bridge Loan consists of $160
million of mortgage debt and will mature on October 31, 1997. Failure to
refinance or extend the Bridge Loan upon maturity could result in foreclosure
on the Hotel by the Bridge Loan lender.
Marriott Desert Springs Corporation (the "General Partner") is currently
pursuing two alternatives to refinance the Bridge Loan. Each alternative would
require that certain amendments be made to the Partnership's Amended and
Restated Agreement of Limited Partnership (the "Partnership Agreement").
Loan Alternative A. One of the two alternatives to refinance the Bridge Loan
would involve a loan from Goldman Sachs Mortgage Company ("GSMC") consisting
of two tranches of debt: (i) a senior loan to a newly formed 100% owned
subsidiary of the Partnership that would own the Hotel, which senior loan
would be secured by a first mortgage lien on the Hotel in an amount up to $103
million (with the final amount to be determined based upon the net cash flow
at the Hotel and prevailing interest rates) and (ii) a junior loan to the
Partnership, which junior loan would be secured by the Partnership's 100%
direct and indirect ownership interests in the Partnership's newly formed
subsidiary, in an amount equal to $57 million or such greater amount that,
when combined with the principal amount of the senior loan, would total $160
million ("Alternative A"). Alternative A would enable the Partnership to
refinance the Bridge Loan. In connection with the closing of the Bridge Loan
on December 23, 1996, the General Partner entered into a commitment letter
with GSMC setting forth the terms of Alternative A.
Loan Alternative B. The other alternative ("Alternative B") would involve a
refinancing consisting of the senior loan from GSMC as described in
Alternative A, a subordinate tranche of debt from GSMC to the Partnership in
the amount of $20 million (the "Mezzanine Loan") secured by the Partnership's
100% direct and indirect ownership interests in the Partnership's newly formed
subsidiary that would hold the Hotel, and a subordinate junior tranche to the
Partnership (the "HM Junior Loan") from DSM Finance LLC (the "Junior Lender"),
a Maryland limited liability company and wholly owned subsidiary of the
General Partner. The HM Junior Loan would be in the amount of $59.7 million,
and if consented to by the lender of the Mezzanine Loan would be secured by a
subordinated pledge of the Partnership's 100% direct and indirect ownership
interests in the Partnership's newly formed subsidiary that would hold the
Hotel. Alternative B is expected to result in $22.7 million of proceeds in
excess of that needed to refinance the Bridge Loan, which would be distributed
by the Partnership to its partners, resulting in a distribution to holders
(the "Unitholders") of units of limited partnership interest in the
Partnership ("Units") of $25,000 per Unit.
Consents Solicited. The General Partner is soliciting the consent of the
Limited Partners to approve:
1. the incurrence by the Partnership of the HM Junior Loan indebtedness
described in Alternative B above (See Proposal No. 1--The HM Junior Loan
Proposal);
2. an amendment to the Partnership Agreement that would authorize the
General Partner to form or organize one or more subsidiaries of the
Partnership, to contribute assets of the Partnership to any such subsidiary
i
in exchange for the equity interests of such subsidiary, and to delegate its
authority to manage any such subsidiary to a governing entity or other body
(such as a board of directors) in order to effect a structured refinancing
such as the proposed refinancing in both Alternative A and Alternative B. (See
Proposal No. 2--Amendment to Authority of General Partner Relating to
Subsidiaries);
3. an amendment to the Partnership Agreement that would amend the definition
of "Affiliate" to make clear that a publicly-traded entity (such as Marriott
International, Inc.) will not be deemed an affiliate of the General Partner or
any of its affiliates unless a person or group of persons directly or
indirectly owns twenty percent (20%) or more of the outstanding common stock
of both the General Partner (or its affiliates) and such other entity. (See
Proposal No. 3--Amendment to the Definition of Affiliate);
4. an amendment to the Partnership Agreement that would revise the
provisions relating to the authority of the General Partner to permit the
General Partner, without obtaining the consent of the Limited Partners, to
sell or otherwise transfer the Hotel to an independent third party. (See
Proposal No. 4--Amendment to the Authority of the General Partner);
5. an amendment to the Partnership Agreement that would allow the General
Partner to incur indebtedness in order to capitalize the Junior Lender (which
will make the HM Junior Loan to the Partnership). (See Proposal No. 5--
Amendment to the Authority of the General Partner Relating to Indebtedness);
6. an amendment to the Partnership Agreement that would (a) revise the
provisions limiting the voting rights of the General Partner and its
affiliates to permit the General Partner and its affiliates to have full
voting rights with respect to all Units held by the General Partner or
acquired by its affiliates except on matters where the General Partner or its
affiliates have an actual economic interest other than as a Unitholder or
general partner (an "Interested Transaction"), and (b) establish special
voting standards with respect to those Interested Transactions requiring a
vote of Limited Partners to permit action to be taken only if (i) a majority
of outstanding Units held by Limited Partners other than the General Partner
or its affiliates are present in person or by proxy or consent for the vote on
an Interested Transaction and (ii) the Interested Transaction is approved by
Limited Partners holding a majority of the outstanding Units, with all Units
held by the General Partner and its affiliates being voted in the same manner
as a majority of the Units actually voted by Limited Partners other than the
General Partner and its affiliates. (See Proposal No. 6--Amendment to Voting
Provisions);
7. amendments to certain terms and sections of the Partnership Agreement in
order to (a) reflect the fact that after the division of Marriott
Corporation's operations into two separate public companies in 1993, Host
Marriott, as the successor to Marriott Corporation, no longer owns the
management business conducted by Marriott International, Inc., (b) delete
certain obsolete references to entities and agreements that are no longer in
existence and (c) update the Partnership Agreement to reflect the passage of
time since the formation of the Partnership. (See Proposal No. 7--Clarifying
Amendments); and
8. an amendment that would permit the General Partner, without the consent
of the Limited Partners, to make any amendment to the Partnership Agreement as
is necessary to clarify or update the provisions thereof so long as such
amendment does not adversely affect the rights of Unitholders under the
Partnership Agreement in any material respect. (See Proposal No. 8--Amendment
to Amendment Provisions)
Approvals Required. Approval of Proposal No. 2--Amendment to Authority of
General Partner Relating to Subsidiaries, is required in order to consummate
either Alternative A or Alternative B to refinance the Bridge Loan. Approval
of the amendments set forth in Proposal Nos. 3, 4, 5 and 6 are conditions to
the Junior Lender making the HM Junior Loan and together with the amendments
set forth in Proposal No. 2 (collectively, the "Required Amendments") and
Proposal No. 1--The HM Junior Loan Proposal, are required in order to
consummate Alternative B to refinance the Bridge Loan and distribute to
Unitholders $25,000 per Unit. Approval of Proposal Nos. 7 and 8 (the
"Additional Amendments") is not required to consummate either Alternative A or
Alternative B to refinance the Bridge Loan. (Together, the Required Amendments
and the Additional Amendments are sometimes hereinafter referred to as the
"Amendments.") It is the current intention of the
ii
General Partner to enter into the HM Junior Loan if the Required Amendments
and Proposal No. 1--The HM Junior Loan Proposal are approved. It is the
current intention of the General Partner to enter into the refinancing
described in Alternative A if Proposal No. 2--Amendment to Authority of
General Partner Relating to Subsidiaries is approved and Proposal No. 1--The
HM Junior Loan Proposal is not approved.
The close of business on August 28, 1997 has been set by the General Partner
as the record date for determining Units entitled to vote upon the HM Junior
Loan and the Amendments. A Consent Solicitation Statement and Consent Form are
enclosed with this notice. The Consent Solicitation Statement contains a
detailed description of the HM Junior Loan and the Amendments. A copy of the
Partnership Agreement, as proposed to be amended, is attached as Appendix A to
the Consent Solicitation Statement.
THE GENERAL PARTNER RECOMMENDS THAT LIMITED PARTNERS VOTE FOR PROPOSAL NO.
2--AMENDMENT TO AUTHORITY OF GENERAL PARTNER RELATING TO SUBSIDIARIES, THE
APPROVAL OF WHICH IS REQUIRED IN ORDER TO CONSUMMATE EITHER ALTERNATIVE A OR
ALTERNATIVE B TO REFINANCE THE BRIDGE LOAN.
THE GENERAL PARTNER MAKES NO RECOMMENDATION TO ANY LIMITED PARTNER AS TO
WHETHER TO VOTE FOR OR AGAINST PROPOSAL NO. 1--THE HM JUNIOR LOAN PROPOSAL OR
THE AMENDMENTS OTHER THAN PROPOSAL NO. 2. EACH LIMITED PARTNER MUST MAKE HIS
OR HER OWN DECISION WHETHER OR NOT TO VOTE FOR OR AGAINST THE HM JUNIOR LOAN
AND THE AMENDMENTS.
THE GENERAL PARTNER IS A WHOLLY OWNED SUBSIDIARY OF HOST MARRIOTT AND THE
SOLE MEMBER OF THE JUNIOR LENDER AND, THEREFORE, HAS SUBSTANTIAL CONFLICTS OF
INTEREST WITH RESPECT TO THE HM JUNIOR LOAN AND THE AMENDMENTS OTHER THAN
PROPOSAL NO. 2. THE GENERAL PARTNER BELIEVES THAT THE TERMS OF THE HM JUNIOR
LOAN ARE FAIR TO THE PARTNERSHIP, AND HAS OBTAINED AN OPINION OF BT SECURITIES
CORPORATION, AN INDEPENDENT INVESTMENT BANKING FIRM, THAT THE TERMS OF THE HM
JUNIOR LOAN ARE FAIR TO THE PARTNERSHIP AND ITS LIMITED PARTNERS FROM A
FINANCIAL POINT OF VIEW.
Approval of the HM Junior Loan and the Amendments requires the affirmative
consent of Limited Partners (excluding the General Partner and certain of its
affiliates) holding a majority of the issued and outstanding Units. Your vote
on this matter is very important. Abstentions or failure to return the
enclosed Consent Form will have the same effect as voting AGAINST the HM
Junior Loan and the Amendments. Therefore, you are requested to complete, sign
and return the Consent Form in the enclosed pre-paid envelope at your earliest
convenience and, in any event, by 5:00 p.m., New York City time, on Friday,
September 26, 1997 to GEMISYS, Inc., Attention: Proxy Department, 7103 South
Revere Parkway, Englewood, Colorado 80112. CONSENT FORMS THAT ARE EXECUTED BUT
CONTAIN NO VOTING INSTRUCTIONS WILL BE DEEMED TO HAVE CONSENTED TO THE HM
JUNIOR LOAN AND ALL OF THE AMENDMENTS.
Marriott Desert Springs Corporation
General Partner
/s/ Anna Mary Coburn
-----------------------------------
Anna Mary Coburn
Secretary
Date: August 29, 1997
Bethesda, Maryland
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DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
CONSENT SOLICITATION STATEMENT
This Consent Solicitation Statement is being furnished to you as a holder of
units of limited partnership interest ("Units") of Desert Springs Marriott
Limited Partnership, a Delaware limited partnership (the "Partnership"), in
connection with the solicitation of consents of limited partners of the
Partnership (the "Limited Partners") by Marriott Desert Springs Corporation, a
Delaware corporation and the general partner of the Partnership (the "General
Partner"), to approve (i) the incurrence by the Partnership of $59.7 million
of subordinated indebtedness (the "HM Junior Loan") to DSM Finance LLC (the
"Junior Lender"), a Maryland limited liability company which is a wholly owned
subsidiary of the General Partner and an affiliate of Host Marriott
Corporation ("Host Marriott"), as more fully described below, and (ii) certain
amendments (described below) to the Partnership's Amended and Restated
Agreement of Limited Partnership (the "Partnership Agreement"). The General
Partner is soliciting your consent to the HM Junior Loan and the amendments in
connection with refinancing of the Partnership's existing $160 million
mortgage debt which matures on October 31, 1997. See "Background--The Proposed
Refinancing" below. This Consent Solicitation Statement is first being sent or
furnished to holders of Units ("Unitholders") on or about September 2, 1997.
SUMMARY
THE PROPOSED REFINANCING
Background. The Partnership's principal asset is Marriott's Desert Springs
Resort and Spa (including a leased golf course) and the land on which it is
located (the "Hotel"). As has been reported to the Limited Partners, the
previously existing $168.2 million mortgage debt of the Partnership secured by
the Hotel (the "Mortgage Debt") matured in July 1996. Prior to and following
the maturity of such Mortgage Debt, the General Partner pursued a number of
alternative means of refinancing the Mortgage Debt. On December 23, 1996,
pursuant to an agreement with the Partnership, GMAC Commercial Mortgage
Corporation ("GMAC") purchased the Mortgage Debt of the Partnership from a
group of banks and amended and restated certain terms thereof (as amended and
restated, the "Bridge Loan"). The Bridge Loan consists of $160 million of
mortgage debt and matures on October 31, 1997. Failure to refinance or extend
the Bridge Loan upon maturity will constitute a default and could result in
foreclosure on the Hotel by the Bridge Loan lender.
The General Partner currently is pursuing two alternatives to refinance the
Bridge Loan. Each alternative would require that certain amendments be made to
the Partnership Agreement.
Loan Alternative A. One of the two alternatives to refinance the Bridge Loan
would involve a loan from Goldman Sachs Mortgage Company ("GSMC") consisting
of two tranches of debt: (i) a senior loan to a newly formed wholly owned
subsidiary of the Partnership that would own the Hotel, which senior loan
would be secured by a first mortgage lien on the Hotel, in a principal amount
up to $103 million (with the final amount to be determined based upon the net
cash flow at the Hotel and prevailing interest rates) (the "Senior Loan") and
(ii) a junior loan to the Partnership, which junior loan would be secured by
the Partnership's direct and indirect ownership interests in the Partnership's
newly formed subsidiary, in a principal amount equal to $57 million or such
greater amount that, when combined with the principal amount of the Senior
Loan, would total $160 million ("Alternative A"). Alternative A would enable
the Partnership to refinance the Bridge Loan. In connection with the closing
of the Bridge Loan, on December 23, 1996, the General Partner entered into a
commitment letter with GSMC setting forth the terms of Alternative A. Under
Alternative A, the funds used to refinance the Bridge Loan would come from
GSMC, which is not an affiliate of the Partnership.
Loan Alternative B. The other alternative ("Alternative B") would involve a
refinancing consisting of the Senior Loan from GSMC as described in
Alternative A, a subordinate tranche of debt from GSMC to the Partnership in
the principal amount of $20 million (the "Mezzanine Loan") secured by the
Partnership's direct and indirect ownership interests in the Partnership's
newly formed subsidiary, and the HM Junior Loan in the amount of $59.7 million
from the Junior Lender to the Partnership as a subordinate junior tranche
secured, if consented to by the lender of the Mezzanine Loan, on a
subordinated basis by the Partnership's direct and
1
indirect ownership interests in the Partnership's newly formed subsidiary.
Alternative B is expected to result in $22.7 million of proceeds in excess of
that needed to refinance the Bridge Loan, which would be distributed by the
Partnership to its partners, resulting in a distribution to Unitholders of
$25,000 per Unit. Under the terms of the HM Junior Loan, the Junior Lender
would receive 30% of any "excess cash flow"/1/ available annually, plus 30% of
any net capital/residual proceeds after full repayment of the Senior Loan, the
Mezzanine Loan and the HM Junior Loan. Under Alternative B, the funds for the
HM Junior Loan would come from an affiliate of the Partnership, but the Senior
Loan and Mezzanine Loan would come from GSMC, which is not an affiliate of the
Partnership.
The Senior Loan. Under both Alternative A and Alternative B, the senior
tranche of debt would consist of the Senior Loan by GSMC to a newly formed,
wholly owned bankruptcy remote subsidiary of the Partnership (the "New Sub").
The New Sub would be a limited partnership or a limited liability company. The
Senior Loan would be secured by a first mortgage lien on the Hotel in the
principal amount up to $103 million (with the final amount to be determined
based upon the net cash flow at the Hotel and prevailing interest rates). For
the first 12.5 years of its 25-year term, the Senior Loan would bear interest
at a fixed rate equal to the yield on 12-year U.S. Treasury securities plus
1.9 percentage points (8.6%, based on the average rate for 12-year U.S.
Treasury securities during the first six months of 1997) and would amortize
over a 25-year schedule. After 12.5 years, if the Senior Loan has not been
repaid, the interest rate would increase by 2 percentage points above the
greater of the interest rate at closing or the then current yield on 12 year
U.S. Treasury Securities and all revenues in excess of the debt service
payments on the Senior Loan and payments for certain reserve accounts, capital
expenditures and Partnership administrative expenses would be applied to
amortize the principal balance of the Senior Loan.
The terms of the Senior Loan under both Alternative A and Alternative B
contemplate that, consistent with applicable rating agency requirements, the
Partnership would contribute the Hotel to the New Sub in exchange for 100% of
the direct and indirect interests in the New Sub. This structure would create
a bankruptcy remote entity (i.e., the New Sub) which would be the borrower
under the Senior Loan. The Partnership Agreement does not currently permit
this contribution, and accordingly each of Alternative A and Alternative B is
contingent on the approval by the Limited Partners of an amendment that would
permit such a contribution. See Proposal No. 2--Amendment to Authority of
General Partner Relating to Subsidiaries, for a discussion of the amendments
to the Partnership Agreement needed to effect the contribution.
Subordinated Debt under Alternative A. Under Alternative A, the principal
amount of the junior loan would be equal to $57 million or such greater amount
that, when combined with the Senior Loan amount, totals $160 million (the
"GSMC Junior Loan"). The GSMC Junior Loan would be secured by the
Partnership's direct and indirect ownership interests in the New Sub.
Approximately $35.1 million of the GSMC Junior Loan would bear interest at a
fixed rate equal to the yield on 12-year U.S. Treasury securities plus 6.5
percentage points (13.2%, based on the average rate for 12-year U.S. Treasury
securities during the first six months of 1997) with an amortization schedule
based upon a 12.5-year term. The remaining approximately $21.9 million of the
GSMC Junior Loan would bear interest at 20% with amortization to be paid from
all remaining "excess cash flow." As a result of the amortization provisions
of the GSMC Junior Loan, all of the Partnership's remaining cash flow after
paying interest and principal payments on the Senior Loan and the $35.1
million tranche of the GSMC Junior Loan and interest on the $21.9 million
tranche of the GSMC Junior Loan would be utilized to service this debt and,
accordingly, no funds would be available for distribution by the Partnership
to the partners during the time the $21.9 million tranche of the GSMC Junior
Loan is outstanding (estimated to be approximately 8 years, assuming annual
profit growth of 2.5% and the indicated interest rates). The weighted average
interest rate for the GSMC Junior Loan would be 15.8% based on current
conditions.
- --------
/1/"Excess cash flow" is defined for purposes of the GSMC Junior Loan and the
HM Junior Loan as amounts remaining after deductions from gross revenues as
permitted under the Operating Lease or Management Agreement, golf course
ground lease payments, monthly scheduled debt service on the Senior Loan,
capital expenditures, deposits to maintain six months of debt service
payments for the Senior Loan into the debt service liquidity reserve, monthly
scheduled debt service on the $35.1 million tranche of the GSMC Junior Loan
or the Mezzanine Loan, as the case may be, interest on the $21.9 million
tranche of the GSMC Junior Loan, if applicable, Partnership administrative
expenses, deposits to maintain six months of debt service payments for the
$35.1 million tranche of the GSMC Junior Loan or the Mezzanine Loan, as the
case may be, deposits to maintain six months of debt service payments for the
$21.9 million tranche of the GSMC Junior Loan, if applicable, and debt
service payments for the HM Junior Loan, if applicable.
2
Subordinated Debt under Alternative B. Under Alternative B, the junior
portion of the refinancing also would consist of two tranches of debt. The
first tranche would be the Mezzanine Loan of approximately $20 million of debt
from GSMC to the Partnership secured by a lien on the Partnership's 100%
direct and indirect ownership interests in the New Sub, bearing interest at a
fixed rate equal to the yield on 12-year U.S. Treasury securities plus 4.5
percentage points (11.2%, based on the average rate for 12-year U.S. Treasury
securities during the first six months of 1997) and amortizing over 12.5
years. The second tranche of debt under Alternative B would consist of the HM
Junior Loan. The HM Junior Loan would be in the principal amount of $59.7
million from the Junior Lender to the Partnership and if consented to by the
lender of the Mezzanine Loan would be secured by a subordinate lien on the
Partnership's direct and indirect ownership interests in the New Sub, and
would bear interest at a rate of 13%. The HM Junior Loan would be for a term
of 30 years and would provide for payments of interest only of $7,765,000 per
year with no amortization of principal for the first 12.5 years with a 17.5
year amortization schedule providing for payments of principal and interest in
the amount of $8,801,000 per year thereafter. The weighted average interest
rate for the Mezzanine Loan and the HM Junior Loan would be 12.6% based on
current conditions. To the extent that the Partnership's cash flow remaining
after payment of the interest and principal payments due on the Senior Loan
and the Mezzanine Loan is insufficient to pay interest on the HM Junior Loan,
interest on the HM Junior Loan would be deferred and would accrue and compound
and be payable from future cash flow. Based on recent operating performance
and cash flows of the Partnership, the General Partner believes that it is
reasonably likely that the Partnership will generate sufficient cash flow to
allow for debt service on the HM Junior Loan.
The General Partner believes that the combination of a lower stated interest
rate and reduced amortization requirements under Alternative B will increase
the possibility that the Partnership will generate cash flow for distribution.
In exchange for the lower stated interest rate and reduced amortization
requirements, however, the Junior Lender would receive 30% of any "excess cash
flow" available annually, plus 30% of any net capital/residual proceeds after
full repayment of the Senior Loan, the Mezzanine Loan and the HM Junior Loan.
This 30% participation would reduce the amount of "excess cash flow" available
to the Partnership for distribution or other uses (such as capital
expenditures or a reserve for future refinancing costs) in accordance with the
Partnership Agreement. Based on the recent operating performance and cash
flows of the Partnership, and assuming the proposed refinancing described as
Alternative B were in place for the full fiscal year 1997, the General Partner
estimates that the 30% participation would reduce the amount available for
distribution or other uses in accordance with the Partnership Agreement by
approximately $9,000 ($10 per Unit) for the year ending December 31, 1997. The
HM Junior Loan would not require "excess cash flow" to be used to amortize
principal, and amounts paid to the Junior Lender pursuant to the 30%
participation provision would not reduce the amount of outstanding principal.
Alternative B is expected to result in $22.7 million of proceeds in excess
of that needed to refinance the Bridge Loan, which would be distributed by the
Partnership to its partners, resulting in a distribution to Unitholders of
$25,000 per Unit. The General Partner estimates that a Limited Partner who
acquired its Unit on the date of closing of the original private placement of
the Units will not currently owe taxes on the $25,000 distribution. The
General Partner believes that, if approved, the HM Junior Loan would:
. permit a distribution of $25,000 per Unit to Unitholders;
. increase the possibility of cash being available for distribution to
Limited Partners during the term of the HM Junior Loan.
. result in sharing with the Junior Lender (and indirectly the General
Partner and Host Marriott) a portion of any "excess cash flow" and a
portion of any net capital/residual proceeds after full payment of the
Senior Loan, the Mezzanine Loan and the HM Junior Loan as well as the
payment of interest on the HM Junior Loan to the Junior Lender;
. result in lower interest rates (including the costs of the Junior
Lender's participation in excess cash flow and any net capital/residual
proceeds) for the Partnership than under Alternative A;
. result in lower loan origination fees for the Partnership than under
Alternative A; and
. provide more flexible payment terms which will reduce the likelihood of
a subsequent default on the outstanding indebtedness of the Partnership.
3
FLOW OF LOAN PROCEEDS
(IN MILLIONS)
[FLOW CHART APPEARS HERE]
[FLOW CHART APPEARS HERE]
SUMMARY OF THE PROPOSALS
Pursuant to this Consent Solicitation Statement, the General Partner is
asking Limited Partners to consider and vote upon:
(1) incurrence of the HM Junior Loan (See Proposal No. 1--The HM Junior
Loan Proposal);
(2) an amendment to the Partnership Agreement to authorize the General
Partner to form or organize one or more subsidiaries of the Partnership, to
contribute assets of the Partnership to any such subsidiary in exchange for
the equity interests in such subsidiary, and to delegate its authority to
manage any such subsidiary to a governing entity or other body (such as a
board of directors) in order to effect a structured refinancing such as the
proposed refinancing in each of Alternative A and Alternative B (See
Proposal No. 2--Amendment to Authority of General Partner Relating to
Subsidiaries);
(3) an amendment to the Partnership Agreement to amend the definition of
"Affiliate" to make clear that a publicly-traded entity (such as Marriott
International, Inc. ("Marriott International")) will not be deemed an
affiliate (referred to herein as "Affiliates" as defined in the Partnership
Agreement) of the General Partner or any of its Affiliates unless a person
or group of persons directly or indirectly owns twenty percent (20%) or
more of the outstanding common stock of both the General Partner (or any of
its Affiliates) and such other entity (See Proposal No. 3--Amendment to the
Definition of Affiliate);
(4) an amendment to the Partnership Agreement to revise the provisions
relating to the authority of the General Partner to permit the General
Partner, without obtaining the consent of the Limited Partners, to sell or
otherwise transfer the Hotel to an independent third party (See Proposal
No. 4--Amendments to the Authority of the General Partner);
(5) an amendment to the Partnership Agreement that would allow the
General Partner to incur indebtedness in order to capitalize the Junior
Lender (which will make the HM Junior Loan to the Partnership) (See
Proposal No. 5--Amendment to the Authority of the General Partner Relating
to Indebtedness);
(6) amendments to the Partnership Agreement to (a) revise the provisions
limiting the voting rights of the General Partner and its Affiliates to
permit the General Partner and its Affiliates to have full voting rights
with respect to all Units acquired by the General Partner and its
Affiliates except on matters where the General Partner or its Affiliates
have an actual economic interest other than as a Unitholder or general
partner or other than as a result of a person or persons directly or
indirectly owning less than twenty percent (20%) of the outstanding common
stock of (i) the General Partner or any of its Affiliates and (ii) a
publicly traded company (an "Interested Transaction"), and (b) establish
special voting standards with respect to those Interested Transactions
requiring a vote of Limited Partners to permit action to be taken only if
(i) a majority of Units held by Limited Partners other than the General
Partner and its Affiliates are present in person or by proxy or consent for
the vote on an Interested Transaction and (ii) the Interested Transaction
4
is approved by Limited Partners holding a majority of the outstanding
Units, with all Units held by the General Partner and its Affiliates being
voted in the same manner as a majority of the Units actually voted by
Limited Partners other than the General Partner and its Affiliates (See
Proposal No. 6--Amendments to Voting Provisions);
(7) amendments to the Partnership Agreement to amend certain terms and
sections of the Partnership Agreement in order to (a) reflect the fact that
after the division of Marriott Corporation's operations into two separate
public companies in 1993, Host Marriott (formerly known as Marriott
Corporation) no longer owns the management business conducted by Marriott
International, (b) delete certain obsolete references to entities and
agreements that are no longer in existence and (c) update the Partnership
Agreement to reflect the passage of time since the formation of the
Partnership (See Proposal No. 7--Clarifying Amendments); and
(8) an amendment to the Partnership Agreement to permit the General
Partner, without the consent of the Limited Partners, to make any amendment
to the Partnership Agreement as is necessary to clarify or update the
provisions thereof so long as such amendment does not adversely affect the
rights of Unitholders under the Partnership Agreement in any material
respect (See Proposal No. 8--Amendment to the Amendment Provisions).
Approval of Proposal No. 2--Amendment to Authority of General Partner
Relating to Subsidiaries is required in order to consummate both Alternative A
and Alternative B to refinance the Bridge Loan. Approval of Proposal Nos. 3,
4, 5 and 6 are conditions to the Junior Lender making the HM Junior Loan and
together with Proposal No. 2 (collectively, the "Required Amendments") and
Proposal No. 1--The HM Junior Loan Proposal are required in order to
consummate Alternative B to refinance the Bridge Loan and distribute to
Unitholders $25,000 per Unit. Approval of Proposal Nos. 7 and 8 (the
"Additional Amendments") is not required to consummate either Alternative A or
Alternative B to refinance the Bridge Loan. (Together, the Required Amendments
and the Additional Amendments are sometimes hereinafter referred to as the
"Amendments.") It is the current intention of the General Partner to enter
into the HM Junior Loan if Proposal No. 1--The HM Junior Loan Proposal and the
Required Amendments are approved.
See "Proposal No. 1--The HM Junior Loan Proposal" for a description and
discussion of the effects of the HM Junior Loan. See Proposal Nos. 2 through 8
for a description and discussion of the effects of the proposed Amendments.
For the actual text of all the Amendments, see the copy of the Partnership
Agreement, as proposed to be amended, attached hereto as Appendix A.
For a discussion of the procedures and requirements for voting, see "Voting
Rights and Information."
THE GENERAL PARTNER RECOMMENDS THAT LIMITED PARTNERS VOTE FOR PROPOSAL NO.
2--AMENDMENT TO AUTHORITY OF GENERAL PARTNER RELATING TO SUBSIDIARIES, THE
APPROVAL OF WHICH IS REQUIRED IN ORDER TO CONSUMMATE EITHER ALTERNATIVE A OR
ALTERNATIVE B TO REFINANCE THE BRIDGE LOAN.
THE GENERAL PARTNER MAKES NO RECOMMENDATION TO ANY LIMITED PARTNER AS TO
WHETHER TO VOTE FOR OR AGAINST THE HM JUNIOR LOAN OR THE AMENDMENTS OTHER THAN
PROPOSAL NO. 2--AMENDMENT TO AUTHORITY OF GENERAL PARTNER RELATING TO
SUBSIDIARIES. EACH LIMITED PARTNER MUST MAKE HIS OR HER OWN DECISION WHETHER
OR NOT TO VOTE FOR OR AGAINST PROPOSAL NO. 1--THE HM JUNIOR LOAN PROPOSAL AND
THE AMENDMENTS.
THE GENERAL PARTNER IS A WHOLLY OWNED SUBSIDIARY OF HOST MARRIOTT AND THE
SOLE MEMBER OF THE JUNIOR LENDER AND, THEREFORE, HAS SUBSTANTIAL CONFLICTS OF
INTEREST WITH RESPECT TO THE HM JUNIOR LOAN AND THE AMENDMENTS OTHER THAN
PROPOSAL NO. 2--AMENDMENT TO AUTHORITY OF GENERAL PARTNER RELATING TO
SUBSIDIARIES. THE GENERAL PARTNER BELIEVES THAT THE TERMS OF THE HM JUNIOR
LOAN ARE FAIR TO THE PARTNERSHIP AND HAS OBTAINED AN OPINION OF BT SECURITIES
CORPORATION, AN INDEPENDENT INVESTMENT BANKING FIRM, THAT THE TERMS OF THE HM
JUNIOR LOAN ARE FAIR TO THE PARTNERSHIP AND ITS LIMITED PARTNERS FROM A
FINANCIAL POINT OF VIEW.
THE DATE OF THIS CONSENT SOLICITATION STATEMENT IS AUGUST 29, 1997.
5
VOTING RIGHTS AND INFORMATION
RECORD DATE
The General Partner has set the close of business on August 28, 1997 as the
Record Date for the determination of Limited Partners entitled to notice of
and to vote upon Proposal No. 1--The HM Junior Loan Proposal and the proposed
Amendments (collectively, the "Proposals"). Only Unitholders of record as of
the Record Date who have been admitted to the Partnership as Limited Partners
will be entitled to vote upon the Proposals. On the Record Date, there were
900 Units issued and outstanding, held of record by 1,136 Unitholders. The
Partnership has no other class of securities.
REQUIRED VOTE
Under the Partnership Agreement, Limited Partner approval of the Proposals
requires the affirmative consent of Limited Partners (excluding the General
Partner and certain of its Affiliates) holding a majority of the issued and
outstanding Units. Accordingly, an abstention or failure to return the
enclosed Consent Form will have the same effect as a vote AGAINST the
Proposals. With the exception of (i) the General Partner and its Affiliates
and (ii) Limited Partners who have any unpaid capital contributions or any
unpaid late or interest charges related thereto ("Defaulting Limited
Partners"), each Unitholder who has been admitted to the Partnership as a
Limited Partner is entitled to cast one vote for each Unit held of record on
each of the Proposals. Holders of half-Units are entitled to cast half a vote
for each half-Unit held of record as a Limited Partner. Units held by the
General Partner and its Affiliates, if any, or by a Unitholder who has not
been admitted as a Limited Partner cannot be voted. As of the date hereof, no
Units are owned by the General Partner or its Affiliates, one-half Unit is
held by a Defaulting Limited Partner, and all Unitholders of record have been
admitted as Limited Partners.
SOLICITATION PERIOD
The Solicitation Period is the time during which Limited Partners may vote
for or against the Proposals. The Solicitation Period will commence upon
delivery of this Consent Solicitation Statement and the Consent Form and will
continue until the later of 5:00 p.m., New York City time, on Friday,
September 26, 1997, or such later date chosen by the General Partner and as to
which notice is given to Unitholders. The General Partner, in its sole
discretion, may elect to extend the Solicitation Period. Notice to Unitholders
of such an extension will be by written notice mailed or otherwise provided to
Unitholders.
EXECUTION AND REVOCATION OF CONSENTS
A Consent Form is included with this Consent Solicitation Statement. All
Consent Forms that are properly executed and returned to GEMISYS, Inc.
("GEMISYS") prior to the expiration of the Solicitation Period will be voted
in accordance with the instructions contained therein. ALL PROPERLY EXECUTED
CONSENT FORMS THAT CONTAIN NO VOTING INSTRUCTIONS WILL BE DEEMED TO HAVE
CONSENTED TO THE HM JUNIOR LOAN AND ALL OF THE AMENDMENTS. Consent Forms will
be effective only when actually received by GEMISYS at the address or
facsimile number set forth below. Consent Forms may be withdrawn at any time
prior to the expiration of the Solicitation Period. In addition, subsequent to
the submission of a Consent Form, but prior to the expiration of the
Solicitation Period, Limited Partners may change their votes. For a withdrawal
or change of vote to be effective, Limited Partners must execute and deliver,
prior to the expiration of the Solicitation Period, a subsequently dated
Consent Form or a written notice stating that the consent is withdrawn to
GEMISYS, Inc., Attention: Proxy Department, 7103 South Revere Parkway,
Englewood, Colorado 80112, facsimile number (800) 387-7365. Consent Forms and
notices of withdrawal or change of vote dated or received after the expiration
of the Solicitation Period will not be valid. Questions concerning (i) how to
complete the Consent Form, (ii) where to remit the Consent Form and (iii)
obtaining additional Consent Forms should be directed to Trust Company of
America (the "Information Agent"), 7103 South Revere Parkway, Englewood,
Colorado 80112, (800) 955-9033. Substantive questions concerning the Consent
Form should be directed to Investor Relations at Host Marriott, at (301) 380-
2070.
6
CONSUMMATION OF THE REFINANCING ALTERNATIVES AND THE HM JUNIOR LOAN
If Proposal No. 2--Amendment to Authority of General Partner Relating to
Subsidiaries is not approved, neither Alternative A nor Alternative B will be
consummated. This could result in a default under the Bridge Loan and
foreclosure on the Hotel by the Bridge Loan lender.
If Proposal No. 1--The HM Junior Loan Proposal and the Required Amendments
are approved by the Limited Partners, the HM Junior Loan, the Mezzanine Loan
and the Senior Loan will be entered into as soon as practicable following the
expiration date of the Solicitation Period. If, for any reason, the Required
Amendments do not receive Limited Partner approval, however, the HM Junior
Loan will not be implemented, even if it receives Limited Partner Approval,
and no cash distribution will be made to the Unitholders.
If Proposal No. 1--The HM Junior Loan Proposal is not approved and Proposal
No. 2--Amendment to Authority of General Partner Relating to Subsidiaries is
approved, the General Partner will enter into the refinancing described as
Alternative A as soon as practicable following the expiration of the
Solicitation Period.
EFFECTIVE TIME OF AMENDMENTS
If approved by the Limited Partners, each approved Amendment will become
effective when the General Partner executes a Second Amended and Restated
Agreement of Limited Partnership incorporating such Amendments in accordance
with the Partnership Agreement, which will occur as soon as practicable
following the expiration date of the Solicitation Period.
NO SPECIAL MEETING
The Partnership Agreement does not require a special meeting of Limited
Partners to consider the Proposals. Accordingly, no such meeting will be held.
COST OF SOLICITATION
Host Marriott has retained the Information Agent at an estimated cost of
$4,500 plus reimbursement of expenses to assist in the solicitation of
consents. The total cost of the solicitation is expected to be approximately
$15,000. Expenses of this solicitation, including the cost of preparing and
mailing this Consent Solicitation Statement, will be borne 85% by Host
Marriott (representing the approximate cost of Proposal No. 1 and Proposal
Nos. 3 through 8) and 15% by the Partnership (representing the approximate
cost of Proposal No. 2). In addition, consents may be solicited by directors,
officers and employees of Host Marriott in person or by mail, telephone,
telegram or other means of communication. These directors, officers and
employees will not be additionally compensated, but may be reimbursed for out-
of-pocket expenses incurred in connection with the solicitation. Arrangements
also will be made to furnish copies of solicitation materials to custodians,
nominees, fiduciaries and brokerage houses for forwarding to beneficial owners
of Units. Such persons will be reimbursed for reasonable expenses incurred in
connection therewith.
POTENTIAL CONFLICTS OF INTEREST RELATING TO THE HM JUNIOR LOAN PROPOSAL
The General Partner is a wholly owned subsidiary of Host Marriott and the
sole member of the Junior Lender, and, therefore, has substantial conflicts of
interest with respect to the HM Junior Loan and the Amendments other than
Proposal No. 2--Amendment to Authority of the General Partner Relating to
Subsidiaries. In the event Proposal No. 1--The HM Junior Loan Proposal and the
Required Amendments are approved and the HM Junior Loan is consummated, the
terms of the HM Junior Loan provide for the Junior Lender, a wholly owned
subsidiary of the General Partner and an affiliate of Host Marriott, to
receive 30% of any excess cash flow available annually, plus 30% of any net
capital/residual proceeds after full repayment of the Senior Loan, the
Mezzanine Loan and the HM Junior Loan. Under the terms of the HM Junior Loan,
the Junior Lender would be paid interest on the principal amount of the HM
Junior Loan. The General Partner believes that the terms of the HM Junior Loan
are fair to the Partnership and has obtained an opinion of BT
7
Securities Corporation, an independent investment banking firm, that the terms
of the HM Junior Loan are fair to the Partnership and its Limited Partners
from a financial point of view. For a discussion of potential conflicts of
interest relating to the ongoing business of the Partnership, see "Conflicts
of Interest Relating to Ongoing Business of the Partnership."
BACKGROUND
THE PROPOSED REFINANCING
As has been reported to the Limited Partners, the previously existing $168.2
million Mortgage Debt of the Partnership, secured by the Hotel, matured in
July 1996. During the period from April 1995 until the closing of the Bridge
Loan, the General Partner pursued a number of alternative means to refinance
the Mortgage Debt. During this time, the General Partner contacted
approximately twelve different lenders active in the hotel lending market.
With the exception of the Bridge Loan lender and the commitment letter from
GSMC, the General Partner was unable to identify any lender or group of
lenders that would refinance the entire Mortgage Debt as a single loan or
combination of loans. The General Partner believes that the limited interest
in refinancing the Mortgage Debt was because the loan to value relationship
for the Mortgage Debt (approximately 84% as of December 23, 1996) greatly
exceeds the loan to value relationship in the range of approximately 50% for
first mortgage financing that the General Partner believes lenders active in
the current financial market generally are willing to accept for loans of this
type. (The loan to value relationship of the Bridge Loan was approximately 75%
as of May 31, 1997.) Additionally, the potential lenders expressed
reservations concerning the Hotel's seasonality and the susceptibility of the
resort hotel market to economic fluctuations.
On December 23, 1996, pursuant to an agreement with the Partnership, GMAC
funded the Bridge Loan by purchasing the Partnership's existing Mortgage Debt
secured by the Hotel from a group of banks, including the First National Bank
of Chicago, Credit Lyonnais (New York and Cayman Islands branches), Societe
Generale and Sumitomo Trust & Banking Co., Ltd., and amending and restating
certain terms thereof. The Bridge Loan required that approximately $8.2
million of the Partnership's cash reserves be applied to the principal of the
existing Mortgage Debt, so that the outstanding balance of the Bridge Loan was
reduced to $160 million. The Bridge Loan matures on October 31, 1997. Failure
to refinance or extend the Bridge Loan upon maturity will constitute a default
and could result in foreclosure on the Hotel by the Bridge Loan lender.
In connection with the closing of the Bridge Loan, on December 23, 1996, the
General Partner entered into a commitment letter with GSMC on the terms
described as Alternative A below. The commitment letter from GSMC was the only
proposal presented to the Partnership during the General Partner's search for
refinancing of the Mortgage Debt that would provide for the refinancing of
substantially all of the Mortgage Debt.
The General Partner currently is pursuing two alternatives to refinance the
Bridge Loan. Each alternative would require that certain amendments be made to
the Partnership Agreement. The General Partner currently is not exploring any
alternatives to refinance the Bridge Loan other than the two alternatives
presented below. Accordingly, failure to consummate Alternative A or
Alternative B would necessitate finding a new means of refinancing the Bridge
Loan and, if such alternative was not found, would result in default under the
Bridge Loan.
Loan Alternative A. The first alternative, Alternative A, would involve a
loan from GSMC consisting of two tranches of debt: (i) a senior loan to a
newly formed wholly owned subsidiary of the Partnership that would hold the
Hotel, which senior loan would be secured by a first mortgage lien on the
Hotel, in a principal amount up to $103 million (with the final amount to be
determined based upon the net cash flow at the Hotel and prevailing interest
rates) and (ii) a junior loan to the Partnership, which junior loan would be
secured by the Partnership's 100% direct and indirect ownership interests in
the newly formed subsidiary, in a principal amount equal to $57 million or
such greater amount that, when combined with the principal amount of the
senior loan, would total $160 million. Under Alternative A, the funds used to
refinance the Bridge Loan would come from GSMC, which is not an affiliate of
the Partnership.
8
Loan Alternative B. The other alternative, Alternative B, would involve a
refinancing consisting of the senior tranche of debt from GSMC as described in
Alternative A, the Mezzanine Loan from GSMC in the principal amount of $20
million, and the HM Junior Loan from the Junior Lender in the principal amount
of $59.7 million, as a subordinated junior tranche. Alternative B is expected
to result in $22.7 million of proceeds in excess of that needed to refinance
the Bridge Loan, which would be distributed by the Partnership to its
partners, resulting in a distribution to Unitholders of $25,000 per Unit.
Under the terms of the HM Junior Loan, the Junior Lender would receive 30% of
any "excess cash flow" available annually, plus 30% of any net
capital/residual proceeds after full repayment of the Senior Loan, the
Mezzanine Loan and the HM Junior Loan. Under Alternative B, the funds for the
HM Junior Loan would come from an affiliate of the Partnership, but the Senior
Loan and Mezzanine Loan would come from GSMC, which is not an affiliate of the
Partnership. If the HM Junior Loan Proposal and the Required Amendments are
approved, it is the current intention of the General Partner to refinance the
Bridge Loan under Alternative B.
The Senior Loan. Under both Alternative A and Alternative B, the senior
tranche of debt would consist of a senior loan by GSMC to the New Sub. The New
Sub would be a limited partnership or a limited liability company. The Senior
Loan would be secured by a first mortgage lien on the Hotel in a principal
amount up to $103 million (with the final amount to be determined based upon
the net cash flow at the Hotel and prevailing interest rates). For the first
12.5 years of its 25-year term, the Senior Loan would bear interest at a fixed
rate equal to the yield on 12-year U.S. Treasury securities plus 1.9
percentage points (8.6%, based on the average rate for 12-year U.S. Treasury
securities during the first six months of 1997) and would amortize over a 25-
year schedule. After 12.5 years, if the Senior Loan has not been repaid, the
interest rate would increase by 2 percentage points above the greater of the
interest rate at closing or the then current yield on 12 year U.S. Treasury
Securities and all revenues in excess of the debt service payments on the
Senior Loan and payments for certain reserve accounts, capital expenditures
and Partnership administrative expenses would be applied to amortize the
principal balance of the Senior Loan.
The terms of the Senior Loan under both Alternative A and Alternative B
contemplate that, consistent with applicable rating agency requirements, the
Partnership would contribute the Hotel to the New Sub in exchange for 100% of
the direct and indirect ownership interests in the New Sub. This structure
would create a bankruptcy remote entity (i.e., the New Sub) which would be the
borrower under the Senior Loan. This type of structure allows the Partnership
to separate the source of repayment of a loan (the Hotel) from the
Partnership, to insulate the lender to the bankruptcy remote subsidiary from
the claims of creditors to the Partnership and to increase the loan to value
relationship, thereby enabling the Partnership to obtain more favorable loan
terms than could be obtained otherwise. The Partnership Agreement does not
currently permit this contribution, and accordingly, each of Alternative A and
Alternative B is contingent on the approval by the Limited Partners of an
amendment that would authorize such a contribution. See Proposal No. 2--
Amendments to Authority of the General Partner Relating to Subsidiaries, for a
discussion of the amendments to the Partnership Agreement needed to effect the
contribution.
Subordinated Debt under Alternative A. Under Alternative A, the GSMC Junior
Loan would be in an aggregate principal amount equal to $57 million (or such
greater amount that, when combined with the principal amount of the Senior
Loan, would total $160 million) and would have a 12.5-year term. The GSMC
Junior Loan would be secured by the Partnership's 100% direct and indirect
ownership interests in the New Sub. Approximately $35.1 million of the GSMC
Junior Loan would bear interest at a fixed rate equal to the yield on 12-year
U.S. Treasury securities plus 6.5 percentage points (13.2%, based on the
average rate for 12-year U.S. Treasury securities during the first six months
of 1997) with an amortization schedule based upon a 12.5-year term. The
remaining approximately $21.9 million of the GSMC Junior Loan would bear fixed
interest at 20% with amortization to be paid from all remaining excess cash
flow. The weighted average interest rate of the GSMC Junior Loan would be
15.8% based on current conditions. As a result of the amortization provisions
of the GSMC Junior Loan, all of the Partnership's remaining cash flow would be
utilized to service this debt and, accordingly, no funds would be available
for distribution by the Partnership to its partners during the time the $21.9
million tranche of the GSMC Junior Loan is outstanding (estimated to be
approximately 8 years, assuming annual profit growth of 2.5% and the indicated
interest rates).
9
Subordinated Debt under Alternative B. Under Alternative B, the junior
portion of the refinancing would consist of two tranches of debt. The first
tranche would be the Mezzanine Loan of $20 million from GSMC to the
Partnership secured by a lien on the Partnership's 100% direct and indirect
ownership interests in the New Sub, bearing interest at a fixed rate equal to
the yield on 12-year U.S. Treasury securities plus 4.5 percentage points
(11.2%, based on the average rate for 12-year U.S. Treasury securities during
the first six months of 1997) and amortizing over 12.5 years. The interest
rate for the Mezzanine Loan could be increased by one percentage point if
certain conditions relating to the ownership structure of the New Sub are not
satisfied by March 31, 1998. See, Proposal No. 2--Amendment of Authority of
the General Partner Relating to Subsidiaries. GSMC also has retained the right
to place the Mezzanine Loan with a different lender on the same terms at some
time in the future.
The second tranche under Alternative B would consist of the HM Junior Loan.
The HM Junior Loan would be in a principal amount of $59.7 million from the
Junior Lender to the Partnership, would be secured if consented to by the
Lender of the Mezzanine Loan by a subordinated lien on the Partnership's 100%
direct and indirect ownership interests in the New Sub, and would bear
interest at a fixed rate of 13%. The weighted average interest rate of the
Mezzanine Loan and the HM Junior Loan would be 12.6% based on current
conditions. The HM Junior Loan would be for a term of 30 years and would
provide for payments of interest only of $7,765,000 per year with no
amortization of principal for the first 12.5 years, with a 17.5 year
amortization schedule providing for payments of principal and interest in the
amount of $8,801,000 per year thereafter. To the extent that the Partnership's
cash flow remaining after payment of the debt service due on the Senior Loan
and the Mezzanine Loan is insufficient to pay interest on the HM Junior Loan,
interest on the HM Junior Loan would be deferred and would accrue and compound
and be payable from future cash flow. Based on recent operating performance
and cash flows of the Partnership, the General Partner believes that it is
reasonably likely that the Partnership will generate sufficient cash flow to
allow for debt service on the HM Junior Loan.
The General Partner believes that the combination of a lower stated interest
rate and reduced amortization requirements under Alternative B will increase
the possibility that the Partnership will generate cash flow for distribution.
In exchange for the lower stated interest rate and reduced amortization
requirements, however, the Junior Lender would receive 30% of any "excess cash
flow" available annually, plus 30% of any net capital/residual proceeds after
full repayment of the Senior Loan, the Mezzanine Loan and the HM Junior Loan.
This 30% participation would reduce the amount of "excess cash flow" available
to the Partnership for distribution or other uses (such as capital
expenditures or a reserve for future refinancing costs) in accordance with the
Partnership Agreement. Based on the recent operating performance and cash
flows of the Partnership, and assuming the proposed refinancing described as
Alternative B were in place for the full fiscal year 1997, the General Partner
estimates that the 30% participation would reduce the amount available for
distribution or other uses in accordance with the Partnership Agreement by
approximately $9,000 ($10 per Unit) for the year ending December 31, 1997. The
HM Junior Loan would not require "excess cash flow" to be used to amortize
principal, and amounts paid to the Junior Lender pursuant to the 30%
participation provision would not reduce the amount of outstanding principal.
Alternative B is expected to result in $22.7 million of proceeds in excess
of that needed to refinance the Bridge Loan, which would be distributed by the
Partnership to its partners, resulting in a distribution to Unitholders of
$25,000 per Unit.
Commitment Fees. Pursuant to the commitment letter for Alternative A, the
Partnership is obligated to pay to GSMC a commitment fee equal to $2.7
million, representing $1.6 million (1.5% of the Senior Loan) plus $1.1 million
(2% of the GSMC Junior Loan) (the "Commitment Fee"). The Partnership paid
approximately $1.3 million of the Commitment Fee, in the form of a non-
refundable deposit, upon execution of the commitment letter. The balance of
the Commitment Fee, representing approximately $555,000 for the Senior Loan
and approximately $835,000 for the GSMC Junior Loan, will be due upon closing
of Alternative A. If the Partnership subsequently elects to obtain financing
from a source other than GSMC, Host Marriott or Marriott International, the
approximate $1.4 million unpaid balance of the Commitment Fee, plus $1.6
million (1% of the full amount
10
of the principal amount of the Alternative A loans), will be due as liquidated
damages. If the Partnership elects to consummate Alternative B, however, the
Partnership will be obligated to pay the unpaid portion of the Commitment Fee
for the Senior Loan ($555,000) and a 1.5% fee ($300,000) to GSMC as a
commitment fee for the Mezzanine Loan. Accordingly, the Partnership expects
that it could enter into the Mezzanine Loan and the HM Junior Loan under
Alternative B by paying to GSMC the additional fee of only $300,000 with
respect to the junior portion of the refinancing, whereas incurring the GSMC
Junior Loan portion of Alternative A would require payment of additional fees
of $835,000. Under both Alternative A and Alternative B, GSMC will be entitled
to retain the previously paid non-refundable deposit.
Comparison of Terms. The following table sets forth for comparison the
material provisions of the subordinated debt refinancing provisions of
Alternative A and Alternative B:
ALTERNATIVE A ALTERNATIVE B
------------- -------------
MEZZANINE LOAN AND
GSMC JUNIOR LOAN HM JUNIOR LOAN
---------------- ------------------
Cash Distribution to
Limited Partners........ None $25,000 per Unit
Loan Amount.............. $57 million $79.7 million
Base Interest Rate....... 15.8%(1) 12.6%(2)
Loan Fees................ $835,000 None HM Junior Loan
($300,000 Mezzanine)
Participation by lender
in excess cash flow and
residual proceeds or
value................... None 30% HM Junior Loan(3)
Comparative Annual Loan (None Mezzanine)
Cost(4)................. 15.8% 15.3%
Term..................... 12.5 years 30 years HM Junior
(12.5 years Mezzanine)
Target Amortization...... 12.5 year schedule 12.5 years interest only,
17.5 year schedule in
years 12.5 through 30 for
HM Junior Loan
(12.5 years Mezzanine)
Maximum Accrual(5)....... $4.4 million No Maximum
Debt Service Liquidity
Reserve(6).............. $5.2 million None HM Junior Loan
($1.5 million Mezzanine)
Security................. Partnership interests Partnership interests
in newly formed subsidiary in newly formed subsidiary
- --------
(1) Weighted average computed based upon the yield for 12-year U.S. Treasury
securities (6.7%, based on the average rate for 12-year U.S. Treasury
securities during the first six months of 1997) plus 6.5 percentage points
with respect to $35.1 million and the interest rate of 20% with respect to
$21.9 million.
(2) Weighted average computed based upon the yield for 12-year U.S. Treasury
securities (6.7%, based on the average rate for 12-year U.S. Treasury
securities during the first six months of 1997) plus 4.5 percentage points
with respect to the Mezzanine Loan of $20 million and the interest rate of
13% with respect to the HM Junior Loan of $59.7 million.
(3) Based on the recent operating performance and cash flows of the
Partnership, and assuming the proposed refinancing described as
Alternative B were in place for the full fiscal year 1997, the General
Partner estimates that the 30% participation would reduce the amount
available for distribution or other uses in accordance with the
Partnership Agreement by approximately $9,000 ($10 per Unit) for the year
ending December 31, 1997.
(4) Estimated effective cost of each alternative by calculating the internal
rate of return on each loan, recognizing the up-front loan points, the
ongoing debt service requirements and the participation in annual cash
flow and residual proceeds (assumes an annual growth rate of 2.5% applied
to 1997 budgeted income and a capitalization rate of 10%), if any,
applicable to each loan alternative over a ten-year period. The
11
Comparative Loan Cost for Alternative B will vary based upon the annual
growth rate of income of the Partnership; if the actual annual growth rate
is higher than the assumed growth rate, the cost of Alternative B will
increase (e.g., if the annual growth rate is 3.5% or 4.5%, the Comparative
Loan Cost of Alternative B would be 15.8% and 16.4%, respectively) and if
the actual annual growth rate is lower than the assumed growth rate, the
cost of Alternative B will decrease (e.g., if the annual growth rate is
1.5% or 0.5%, the Comparative Loan Cost of Alternative B would be 14.8% and
14.3%, respectively).
(5) The maximum amount of unpaid principal and interest that may be accrued
under the terms of the loan without causing a default.
(6) Reserve established for the benefit of the lender in the event of a
shortfall in monthly payments.
The following table sets forth a comparison of the capitalization of the
Partnership as of June 20, 1997 under Alternative A and under Alternative B.
The Partnership's historical financial statements and Management's Discussion
and Analysis of Financial Condition and Results of Operation are set forth in
Appendix D.
AS OF JUNE 20, 1997
(UNAUDITED)
-------------------------------------
(IN THOUSANDS)
ACTUAL ALTERNATIVE A ALTERNATIVE B
-------- ------------- -------------
Balance Sheet Data:
Mortgage Debt........................... $160,000 $103,000 $103,000
Note Payable............................ -- 57,000 20,000
Due to Host Marriott and Affiliates..... -- -- 59,727
-------- -------- --------
Total Debt............................ 160,000 160,000 182,727
======== ======== ========
General Partner......................... (79) (79) (306)
Limited Partners........................ (20,359) (20,359) (42,859)
-------- -------- --------
Total Partners Deficit................ $(20,438) $(20,438) $(43,165)
======== ======== ========
Although the GSMC Junior Loan is expected to amortize sooner than the HM
Junior Loan, based on recent operating performance and cash flows of the
Partnership and the combination of a lower stated interest rate and reduced
amortization under Alternative B, the General Partner believes that
Alternative B will increase the possibility that the Partnership will generate
cash flow for distribution, particularly during the 12.5 year interest only
period of the HM Junior Loan. Under Alternative A, during the time the $21.9
million tranche of the GSMC Junior Loan is outstanding (estimated to be
approximately 8 years, assuming annual profit growth of 2.5% and the indicated
interest rates) no cash flow for distribution would be available. However,
following amortization of the $21.9 million tranche of the GSMC Junior Loan
under Alternative A, the Partnership may generate cash flow for distribution
and the amount of such cash flow for distribution could exceed the amount of
cash flow for distribution that could be available under Alternative B.
Fairness of the Alternatives. After evaluating the proposed terms of the
GSMC Junior Loan, the Mezzanine Loan and the HM Junior Loan, the General
Partner believes that the proposed terms of these loans are fair to the
Partnership and the Limited Partners from a financial point of view. The
General Partner believes, however, that the terms of the HM Junior Loan and
the Mezzanine Loan, taken together, are more advantageous to the Partnership
and the Limited Partners than the GSMC Junior Loan under Alternative A. The
primary reason for this belief is the comparison of the terms of the GSMC
Junior Loan with the HM Junior Loan and Mezzanine Loan taken together. In this
regard, the General Partner notes that as of August 28, 1997, based on the
average rate for 12-year U.S. Treasury securities during the first six months
of 1997, the weighted average base interest rate for the HM Junior Loan and
Mezzanine Loan taken together would be 12.6% whereas the weighted average
interest rate for the GSMC Junior Loan would be 15.8%.
In addition, the HM Junior Loan would:
(i) allow for the distribution of $25,000 per Unit to the Unitholders
upon consummation of the HM Junior Loan;
12
(ii) increase the possibility of cash being available for distribution to
Limited Partners during the term of the HM Junior Loan;
(iii) result in lower interest rates (including the estimated costs of
the Junior Lender's participation in excess cash flow and net
capital/residual proceeds) for the Partnership than under Alternative A;
(iv) result in lower loan origination fees for the Partnership than under
Alternative A;
(v) provide the Partnership with more flexible payment terms which will
reduce the likelihood of a subsequent default on the outstanding
indebtedness of the Partnership; and
(vi) result in the Junior Lender receiving a portion of any "excess cash
flow" and a portion of any net capital/residual proceeds after full
repayment of the Senior Loan, the Mezzanine Loan and the HM Junior Loan as
well as the payment of interest on the HM Junior Loan to the Junior Lender.
The allocation of a portion of "excess cash flow" to the Junior Lender
would reduce the amount of cash flow available to the Partnership for
distribution or other uses in accordance with the terms of the Partnership
Agreement.
The General Partner's belief also is based upon an opinion from a third
party investment banking firm, BT Securities Corporation ("BTSC"), that the
proposed terms of the HM Junior Loan are fair to the Partnership and its
Limited Partners (as a separate class) from a financial point of view. Other
than as described in the foregoing paragraphs, the General Partner has not
performed an analysis of the financial fairness of the GSMC Junior Loan, the
Mezzanine Loan and the HM Junior Loan and has relied on the BTSC opinion as to
the financial fairness of the HM Junior Loan. A copy of the opinion of BTSC is
attached hereto as Appendix C. In its opinion, BTSC consented to the use of
its opinion in this Consent Solicitation Statement and the filing of its
opinion with the Securities and Exchange Commission in connection with such
use. The BTSC opinion assumed (i) that the financial information it reviewed
in connection with rendering its opinion was accurate and complete and
reasonably prepared on bases reflecting the best currently available
information, (ii) that the terms and conditions of the Senior Loan, the
Mezzanine Loan and the HM Junior Loan reviewed by BTSC accurately summarize
all material terms and conditions and contain no omissions of material terms
and conditions; (iii) the consummation of the Senior Loan, the Mezzanine Loan
and the HM Junior Loan on identical terms and conditions to those reviewed by
BTSC, and (iv) receipt of all necessary governmental and regulatory approvals.
In arriving at its opinion, BTSC reviewed the terms and conditions of the
Senior Loan, the Mezzanine Loan, and the HM Junior Loan, the historical
financial statements of the Hotel and the Partnership, certain interim
financial and operating information regarding the Hotel and the Partnership, a
Partnership overview including a description of the Property and an ownership
summary, the terms, interest rates and trading prices of public and private
subordinated loans BTSC believed to be relevant, and a valuation analysis of
the Hotel by CB Commercial Real Estate Group, Inc. BTSC also discussed the
business and financial condition of the Partnership and the Hotel with certain
officers and certain members of management of the General Partner of the
Partnership and performed such other analyses and examinations and considered
such other information, financial studies, analyses, investigations and
financial, economic and market data as BTSC considered relevant (which
analyses and examinations the General Partner does not believe were material
to the determination made by BTSC). BTSC received a fee of $50,000 for
rendering its opinion. Payment of the fee is not contingent upon approval of
Alternative B. BTSC was not requested to, and did not, evaluate the fairness
of Alternative A, the Consent Solicitation Statement or any of the Amendments
or any other alternative transactions.
In order to effect the proposed refinancing under either Alternative A or
Alternative B, the General Partner has proposed the Amendments set forth in
Proposal No. 2 below. The General Partner also is seeking Limited Partner
Approval of the HM Junior Loan as set forth in "Proposal No. 1--The HM Junior
Loan Proposal" and the Required Amendments to permit the refinancing under
Alternative B. A more detailed summary of the terms of the HM Junior Loan is
set forth in such proposal.
Other Related Matters. In connection with the refinancing of the Mortgage
Debt, the General Partner also has negotiated with Marriott Hotel Services,
Inc., which is the operating tenant of the Hotel (the "Operating Tenant"), to
amend the operating lease for the Hotel (the "Operating Lease") in certain
respects for the Partnership's fiscal year 1997 and to convert the Operating
Lease thereafter to a management agreement (the "Management Agreement") on
substantially the same economic terms as the Operating Lease, with certain
13
exceptions noted below. Upon such conversion, the Operating Tenant would
become the manager of the Hotel (the "Manager"). The Management Agreement
would become effective only in the event the Bridge Loan is refinanced. Under
the terms of the original Operating Lease, the first $20 million of operating
profit, as defined, was payable to the Partnership as the owner's priority,
the next $5 million of operating profit was payable to the Operating Tenant.
Any operating profit in excess of $25 million was divided 75% to the
Partnership and 25% to the Operating Tenant. The Operating Lease has been
amended for 1997 to provide that the first $20.5 million of operating profit
is payable to the Partnership as the owner's priority, the next $2.0 million
of operating profit is payable to the Operating Tenant, and any operating
profit in excess of $22.5 million is payable 100% to the Partnership. For
years after 1997, the Management Agreement would provide that the first $21.5
million of operating profit would be retained by the Partnership as an owner's
priority, the next $1.8 million of operating profit would be paid to the
Manager, and any operating profit in excess of $23.3 million would be divided
75% to the Partnership and 25% to the Manager. Other changes to the Management
Agreement may be required in connection with refinancing the Bridge Loan. In
connection with the conversion of the Operating Lease to the Management
Agreement, the Operating Tenant has agreed to waive its right to the
approximately $25 million of deferred fees owed pursuant to the Operating
Lease. The Operating Tenant is a subsidiary of Marriott International. For
information with regard to the relationship between Host Marriott and Marriott
International, see "Proposal No. 3--Amendment to Definition of Affiliate."
INTERESTS OF CERTAIN PERSONS
In considering whether to vote for or against the Proposals, Limited
Partners should be aware that the General Partner is a wholly owned direct
subsidiary of Host Marriott and the sole member of the Junior Lender.
Accordingly, the General Partner has substantial conflicts of interest with
respect to this consent solicitation and makes no recommendation to any
Limited Partner as to whether to vote for or against the HM Junior Loan or the
Amendments other than Proposal No. 2--Amendment to Authority of General
Partner Relating to Subsidiaries. Assuming the approval of Proposal No. 1--The
HM Junior Loan Proposal and the Required Amendments, Host Marriott, through
the General Partner and the Junior Lender, will have a claim to the assets of
the Partnership superior to that of the Limited Partners in the event of a
default on the HM Junior Loan.
PURPOSE OF THIS CONSENT SOLICITATION
The General Partner is soliciting the consents of the Limited Partners in
connection with the proposed refinancing of the Bridge Loan to permit the
restructuring necessary to implement such refinancing and to permit Host
Marriott greater control of the assets of the Partnership given the scale of
its increased investment in the Partnership upon consummation of the HM Junior
Loan.
14
PROPOSAL NO. 1
THE HM JUNIOR LOAN PROPOSAL
SUMMARY OF MATERIAL TERMS OF THE HM JUNIOR LOAN
In connection with the Proposed Refinancing, the Limited Partners are being
asked to vote on a proposal to permit the Partnership to incur the HM Junior
Loan indebtedness that would allow the Partnership to effect the refinancing
of the Partnership's Bridge Loan pursuant to Alternative B.
Set forth below is a summary of the material terms of the HM Junior Loan.
This summary is qualified by reference to the commitment letter from DSM
Finance LLC to the Partnership for the HM Junior Loan, a copy of which is
attached hereto as Appendix B and should be reviewed in its entirety before
voting on the HM Junior Loan Proposal.
The HM Junior Loan would be made by DSM Finance LLC to the Partnership, and
would rank junior to the Senior Loan and the Mezzanine Loan. The HM Junior
Loan would have a principal amount of $59.7 million, a fixed interest rate of
13%, and would mature 30 years from the date of closing on the HM Junior Loan.
The repayment schedule would provide for monthly payments of interest only,
subject to certain restrictions on the priority of payments, for the first
12.5 years with a 17.5 year amortization schedule thereafter. The HM Junior
Loan would be prepayable at any time without penalty. To the extent that
Partnership cash flow is not sufficient to satisfy the Partnership's debt
service, monthly payments on the HM Junior Loan would be deferred and would
accrue and compound (until the HM Junior Loan is repaid) and be payable from
subsequent available proceeds. Based on recent operating performance and cash
flows of the Partnership, the General Partner believes that it is reasonably
likely that the Partnership will generate sufficient cash flow to allow for
debt service on the HM Junior Loan. The HM Junior Loan would be secured if
consented to by the lender of the Mezzanine Loan by the Partnership's direct
and indirect equity interests in the New Sub and by the Partnership's 100%
direct and indirect ownership interests in the newly formed general partner of
such partnership (or manager of such limited liability company, if
applicable).
The terms of the HM Junior Loan also would provide for participation by the
Junior Lender in the results of operations of the Partnership. Under the terms
of such participation, the Junior Lender would be paid 30% of any "excess cash
flow" available annually as additional interest, plus 30% of any net
capital/residual proceeds after full repayment of the Senior Loan, the
Mezzanine Loan and the HM Junior Loan./2/ The HM Junior Loan would not require
"excess cash flow" to be used to amortize principal, and amounts paid to the
Junior Lender pursuant to the 30% participation provision would not reduce the
amount of outstanding principal.
- --------
/2/For purposes of determining such participation, "excess cash flow" would
have the meaning defined in footnote/1/ above and "net capital/residual"
would mean (i) at the time of a sale of the Hotel, amounts remaining after
payment of costs related to the sale, repayment of all mortgage indebtedness
and other indebtedness of the New Sub and the Partnership and other amounts
required to be paid pursuant to the Partnership Agreement (collectively, the
"Outstanding Obligations"), or (ii) at the time of a refinancing, repayment
or maturity of the HM Junior Loan (each, an "Appraisal Event"), the excess
of the Appraised Value (defined below) of the Hotel over the then current
Outstanding Obligations. The "Appraised Value" shall be determined as
follows: (i) upon the occurrence of an Appraisal Event, the Junior Lender
shall select an M.A.I. appraiser with at least five years of experience in
the hospitality industry (the "Initial Appraiser"); and (ii) within ten days
after such appointment the Initial Appraiser shall select two additional
M.A.I. appraisers, each with at least five years of experience in the
hospitality industry (together with the Initial Appraiser, the
"Appraisers"). Within 30 days after selection of the last Appraiser (the
"Appraisal Period"), the Appraisers each shall conduct and complete an
appraisal to determine the fair value of the Hotel. If any Appraiser fails
to render its appraisal within the Appraisal Period, it shall be
disregarded. The "Appraisal Value" shall be the average of the fair market
value determined by each Appraiser which completes an appraisal during the
Appraisal Period. The fees charged by the Appraisers shall be paid by the
Partnership.
15
Costs and expenses of the HM Junior Loan (primarily related to attorneys'
fees and expenses in connection with the preparation of the loan
documentation) would be the responsibility of the Partnership (estimated to be
approximately $50,000), but there would be no origination or placement fees or
other fees payable to the Junior Lender in connection with the origination or
closing of the HM Junior Loan. The Junior Lender would finance the Junior Loan
through a capital investment by Host Marriott in the Junior Lender through the
General Partner. Such capital investment would come from Host Marriott's (or
an affiliate's) working capital.
USE OF HM JUNIOR LOAN PROCEEDS
All proceeds of the HM Junior Loan would be used by the General Partner to
pay down a portion of the Bridge Loan, thereby providing the ability of the
Partnership to refinance the remaining portion of such indebtedness with
proceeds of the Senior Loan and Mezzanine Loan and the distribution to the
Partnership of approximately $22.7 million cash. For a more detailed
discussion of the Partnership's refinancing plans, see "Background--The
Proposed Refinancing" above.
MATERIAL EFFECTS OF THE HM JUNIOR LOAN
The terms of the Junior Loan would provide for participation by the Junior
Lender in the results of operations of the Partnership. Under the terms of
such participation, the Junior Lender would be paid 30% of any "excess cash
flow" available annually as additional interest, plus 30% of any net
capita/residual proceeds after full repayment of the Senior Loan, the
Mezzanine Loan and the HM Junior Loan. See, "The HM Junior Loan Proposal--
Summary of Material Terms of the HM Junior Loan." The participation by the
Junior Lender would reduce the amount of "excess cash flow," if any, available
to the Partnership for distribution to the Limited Partners and the General
Partner or other uses (such as capital expenditures or a reserve for future
refinancing costs) in accordance with the terms of the Partnership Agreement.
16
PROPOSAL NO. 2
AMENDMENT TO AUTHORITY OF THE
GENERAL PARTNER RELATING TO SUBSIDIARIES
SUMMARY OF THE AMENDMENTS
These proposed Amendments would add a new Section 5.01.F to Article 5 of the
Partnership Agreement, which governs the rights, powers and duties of the
General Partner. The Amendments would confer upon the General Partner express
authority to form or organize one or more direct or indirect subsidiaries of
the Partnership and to contribute assets of the Partnership to any such
subsidiary. The General Partner also would be authorized to exercise any of
its powers under the Partnership Agreement on behalf of, or in connection
with, any such subsidiary, or jointly with such subsidiary, including by way
of delegation of management authority for a subsidiary to a governing entity
or other body (such as a board of directors). No subsidiary would be less than
99% owned, directly or indirectly, by the Partnership, and for the purposes of
the Partnership Agreement would not be deemed an Affiliate of the General
Partner. Any subsidiary that directly owns the Hotel is required to be a
partnership, limited liability company, or other entity entitled to flow-
through tax treatment under the Internal Revenue Code, and no subsidiary that
is treated as a corporation for tax purposes can own a greater than 1%
interest in another subsidiary that owns the Hotel. In addition, Section 2.03
of the Partnership Agreement would be amended to clarify that the Partnership
can own the Hotel directly or indirectly.
PURPOSE OF THE AMENDMENTS
These proposed Amendments are necessary in order to permit the General
Partner to create the special purpose entities required to implement any
structured refinancing. The New Sub that would hold the Hotel would have no
material liabilities other than the Senior Loan and very little likelihood of
being substantively consolidated with any other affiliate in a bankruptcy
proceeding against that affiliate. This type of entity is referred to as a
bankruptcy remote, special purpose entity. This type of structure allows the
Partnership to separate the source of repayment of a loan (the Hotel) from the
Partnership, to insulate the lender to the bankruptcy remote subsidiary from
the claims of creditors of the Partnership and to increase the loan to value
relationship, thereby enabling the Partnership to obtain more favorable loan
terms than could be obtained otherwise. This type of structure is generally
referred to as a structured financing.
The General Partner believes that the proposed Amendments are in the best
interests of the Limited Partners in that they will permit the Partnership to
pursue refinancing alternatives, such as Alternative A or Alternative B, that
would otherwise be unavailable. With these Amendments, the Partnership will be
able to obtain structured financing. The General Partner has explored sources
of capital available to the Partnership to refinance the Bridge Loan and
believes that the use of a senior tranche of structured financing (such as the
Senior Loan), together with a subordinate tranche of debt of the Partnership
(such as the Mezzanine Loan together with the HM Junior Loan or the GSMC
Junior Loan), is in the best interests of the Partnership and its Limited
Partners. The General Partner believes that the use of structured refinancing
will allow the Partnership to obtain better loan terms than could be obtained
otherwise. If these Amendments are approved, the General Partner would be able
to enter into the Senior Loan contemplated by Alternative A, even if Proposal
No. 1--The HM Junior Loan Proposal is not approved.
The proposed Amendments also would allow the Partnership to reorganize the
ownership structure of the Hotel to provide additional tiers of structured
financing. GSMC has indicated that it would prefer a structured financing
under Alternative B whereby (i) the New Sub would own the Hotel and would be
the debtor on the Senior Loan, (ii) a new bankruptcy remote subsidiary of the
Partnership (the "Tier 2 Sub") would be formed to own the New Sub and be the
debtor on the Mezzanine Loan, and (iii) the Partnership would own the Tier 2
Sub (and indirectly own the New Sub and the Hotel) and would be the debtor on
the HM Junior Loan. As of the date of this Consent Solicitation Statement, no
determination has been made as to whether a tiered subsidiary structure would
be utilized under Alternative B. However, under the currently proposed terms
of the Mezzanine Loan, the interest rate for the Mezzanine Loan may be
increased by one percentage point if a tiered subsidiary structure
17
has not been implemented on or before March 31, 1998. The effect of the
refinancing to the Limited Partners would be the same under either structure.
If these proposed Amendments are approved, the General Partner would be able
to create new wholly owned subsidiaries such as the Tier 2 Sub to provide for
the current or future restructuring of the Partnership's mortgage debt.
EFFECT OF THE AMENDMENTS
The proposed Amendments add to the powers of the General Partner currently
enumerated in Article 5 of the Partnership Agreement by granting to the
General Partner the authority to form or organize subsidiaries of the
Partnership, to contribute assets to a subsidiary, including the Partnership's
right, title and interest in the Hotel, and to delegate its authority to
manage a subsidiary. The Amendments grant the General Partner broad authority
so that the General Partner may take any action with respect to the
Partnership's investments in such subsidiaries. If approved, these Amendments
would permit:
. A reorganization of the Partnership's structure, with the Partnership
owning the Hotel indirectly through one or more subsidiaries, rather
than directly.
. The formation of special purpose subsidiaries to incur and/or issue
indebtedness secured by a mortgage of the Partnership's Hotel or its
ownership interest in the special purpose subsidiaries.
. The transfer, without any further approval of the Limited Partners, of
the Hotel to a subsidiary and the assignment of the Hotel's Operating
Lease (or Management Agreement, if applicable) to such subsidiary. Any
subsequent transfer, sale or disposition by a subsidiary to a third
party would be subject to the provisions of the Partnership Agreement.
(See "Proposal No. 4--Amendments to the Authority of the General Partner
and the Partnership Agreement" for the provisions applicable to a
transfer, sale or disposition to a third party.) In addition, such a
transfer would mean that the Partnership's right and the right of its
creditors to participate in the assets of such subsidiary upon a
liquidation or recapitalization of such subsidiary would be subject to
the prior claims of the subsidiary's creditors.
. The management of the subsidiary by a governing entity or other body
(such as a board of directors that has an independent director) other
than the General Partner, subject to the provisions of the Partnership
Agreement.
If the Amendments are adopted, the General Partner intends to form one or
more special purpose subsidiaries of the Partnership, and to contribute all or
substantially all the assets of the Partnership to such subsidiaries in order
to facilitate the proposed refinancing under either Alternative A or
Alternative B.
TEXT OF THE AMENDMENTS
1. Section 5.01 of the Partnership Agreement would be amended to add a new
Section 5.01.F, which would read as follows:
Notwithstanding anything to the contrary contained in this Agreement, the
General Partner shall have full power and authority, without the Consent of
the Limited Partners, (i) to form or organize one or more Subsidiaries of
the Partnership; (ii) to contribute any properties and assets or interests
therein to one or more Subsidiaries of the Partnership; (iii) to undertake
any action in connection with the Partnership's direct or indirect
investment in any such Subsidiary; (iv) to delegate authority to manage the
business and affairs of any Subsidiary of the Partnership to a governing
entity or other body (including, without limitation, a board of directors)
other than the General Partner; and (v) to exercise any of the powers of
the General Partner enumerated in this Agreement on behalf of, or in
connection with, any Subsidiary of the Partnership, or jointly with any
such Subsidiary, or delegate the exercise thereof pursuant to clause (iv)
above. The term "Subsidiary" shall mean any partnership, corporation,
trust, limited liability company or other entity that is not less than 99%
owned, directly or indirectly, by the Partnership, provided that no
Subsidiary that is a corporation or otherwise is not entitled to flow-
through tax treatment under the Code can own directly the Hotel or an
interest that is greater than 1% in another Subsidiary that owns the Hotel.
A Subsidiary shall
18
not be deemed an Affiliate of the General Partner for the purposes of this
Agreement. The term "Partnership" shall, as the context requires, include
each Subsidiary of the Partnership.
2. Section 2.03 of the Partnership Agreement would be amended to add the
underlined language and delete the bracketed language set forth below:
Section 2.03. Purpose. The purpose of the Partnership is, without
limitation, to DIRECTLY OR INDIRECTLY, (i) acquire, own, and then lease to,
OR ENTER INTO A MANAGEMENT AGREEMENT WITH, an operator the Hotel and a golf
course adjacent to the Hotel, (ii) lease a second golf course and sublease
the course to an operator, (iii) sell or otherwise dispose of the Hotel,
[(iv) acquire and own the Equipment, lease the Equipment and sell or
otherwise dispose of the Equipment,] and (iv) to engage in any other
activities related or incidental thereto as more fully set forth in Section
5.01 hereof.
PROPOSAL NO. 3
AMENDMENT TO DEFINITION OF AFFILIATE
SUMMARY OF THE AMENDMENTS
Under the current definition of "Affiliate" in Section 1.01 of the
Partnership Agreement, Marriott International, the parent of the Operating
Tenant (or Manager, if applicable) of the Hotel, would be deemed an Affiliate
of the General Partner because Messrs. J.W. Marriott, Jr. and Richard E.
Marriott, together with their families (the "Marriott Family"), beneficially
own more than 10% of the common stock of both the General Partner (through
their ownership in Host Marriott, which owns all of the common stock of the
General Partner) and Marriott International. The proposed Amendment would
revise this definition to provide that a publicly traded entity such as
Marriott International, although an "affiliate" under the Federal securities
laws, will not be deemed to be an Affiliate of the General Partner or any of
its Affiliates for purposes of the Partnership Agreement unless a person or
group of persons directly or indirectly owns twenty percent (20%) or more of
the outstanding common stock of the General Partner or its Affiliates and such
other entity without regard to the presence or absence of other indices of
"control" commonly evaluated in an affiliation analysis.
PURPOSE OF THE AMENDMENTS
The proposed Amendment to the definition of "Affiliate" in the Partnership
Agreement is designed to exclude Marriott International from the definition of
an Affiliate of the General Partner unless or until such time as the Marriott
Family or some other person or group of persons directly or indirectly owns
20% or more of the outstanding common stock of both the General Partner
(through Host Marriott) and Marriott International. The Amendment has been
proposed because of the division on October 8, 1993 of Marriott Corporation's
operations into two separate companies. Prior to October 8, 1993, Host
Marriott was named "Marriott Corporation." In addition to conducting the
business now operated by Host Marriott of owning lodging properties and senior
living facilities, Marriott Corporation engaged in lodging and senior living
services management, timeshare resort development, and operation, food service
and facilities management and other contract service businesses (the
"Management Business"), as well as operating restaurants, cafeterias, gift
shops and related facilities at airports, stadiums, arenas and tourist
attractions and on highway systems. On October 8, 1993, however, Marriott
Corporation issued a special dividend consisting of the distribution to
holders of its outstanding common stock, on a share-for-share basis, of all of
the outstanding shares of its wholly owned subsidiary, Marriott International,
which had succeeded to Marriott Corporation's Management Business. Marriott
International now conducts that Management Business as a separate publicly
traded company. A subsidiary of Marriott International is the Operating Tenant
of the Hotel and manages the day-to-day business of the Hotel.
Host Marriott and Marriott International share an ongoing relationship. J.W.
Marriott, Jr. serves as Chairman of the Board of Directors and President of
Marriott International and also serves as a director of Host Marriott. Richard
E. Marriott serves as Chairman of the Board of Directors of Host Marriott and
also serves as a director of Marriott International. In addition, as of
January 31, 1997, the Marriott Family beneficially owned
19
approximately 13% of the outstanding common stock of Host Marriott, and
approximately 20% of the common stock of Marriott International. In addition
to the lodging management agreements between Host Marriott and Marriott
International, the companies also have entered into, among other things, a
distribution agreement, a noncompetition agreement, a mortgage debt agreement,
a debt allocation agreement, a consulting agreement and senior living services
lease agreements.
Notwithstanding the foregoing relationship between and mutual ownership of
Host Marriott and Marriott International, the two companies operate as
separate and distinct organizations with substantially distinct board members,
executive officers and stockholders. Because of this independence, each public
company has its own business goals and objectives, which are separate and
distinct from those of the other. The potential exists for disagreements as to
the quality of services provided by Marriott International to the Partnership
(the General Partner of which is a direct wholly owned subsidiary of Host
Marriott). In addition, the possible desire of the General Partner, from time
to time, to finance, refinance or effect a sale of a hotel property leased to
or managed by Marriott International may result, depending upon the structure
of such transactions, in a need to modify the management agreement with
respect to such property. Any such modification proposed may not be acceptable
to Marriott International, and the lack of consent from Marriott International
could adversely affect the ability of the Partnership to consummate such
financing or sale. Moreover, subject to certain restrictions imposed by the
noncompetition agreement, certain situations could arise in which actions
taken by Marriott International in its capacity as manager of competing
lodging properties would not necessarily be in the best interests of the
Partnership. Because of the independent nature of the operations of the
General Partner and Host Marriott, on the one hand, and Marriott
International, on the other hand, Host Marriott believes that it would be
inappropriate to include Marriott International within the definition of an
"Affiliate" of the General Partner until such time that the Marriott Family or
some other person or group of persons own at least 20% of the outstanding
common stock of the General Partner and Marriott International.
EFFECTS OF THE AMENDMENTS
The proposed Amendment to the definition of Affiliate would exclude Marriott
International from such definition for so long as the Marriott Family or some
other person or group of persons does not own 20% or more of the outstanding
common stock of the General Partner (through Host Marriott) and Marriott
International. Section 10.02.A of the Partnership Agreement currently permits
Limited Partners to terminate any agreement (including the Operating Lease
(or, if applicable, the Management Agreement) with a subsidiary of Marriott
International), pursuant to which operating management of any of the
Partnership's property is vested in the General Partner or an Affiliate, that
the Partnership has the right to terminate as a result of the failure of the
operation of such property to achieve specifically defined objectives.
Termination by the Limited Partners under such circumstances can occur without
the consent of the General Partner upon the affirmative vote of Limited
Partners holding a majority of the outstanding Units. Because the revised
definition of Affiliate would exclude Marriott International unless or until
the Marriott Family or some other person or persons owns 20% or more of the
outstanding common stock of both the General Partner (through Host Marriott)
and Marriott International, the Operating Lease (or, if applicable, the
Management Agreement) would be deemed to be vested in a third party, rather
than an Affiliate. However, Section 10.02.A is proposed to be amended to
maintain the Limited Partners' right under the Partnership Agreement to
terminate a management agreement or operating lease with Marriott
International or its Affiliates for cause.
Section 5.02.B(iii) of the Partnership Agreement currently prohibits the
General Partner, without the consent of Limited Partners holding a majority of
the outstanding Units, from causing the Partnership to amend any agreement,
contract or arrangement with the General Partner or any Affiliate in a manner
that reduces the responsibilities or duties of the General Partner as a
general partner of the Partnership, or any of its Affiliates, increases the
compensation payable to the General Partner or its Affiliates, or adversely
affects the rights of the Limited Partners. As discussed above, the proposed
Amendment to the definition of Affiliate would exclude Marriott International
unless or until the Marriott Family or some other person or group of persons
owns 20% or more of the outstanding common stock of both the General Partner
(through Host Marriott) and Marriott International. Therefore, the Operating
Lease would be deemed to be vested in a third party, rather than an
20
Affiliate, until such time in the future (if ever) that Marriott International
becomes an Affiliate under the new definition. Consequently, until such time,
the General Partner could cause the Partnership to amend the Operating Lease
so as to increase the compensation payable thereunder to Marriott
International or otherwise change the terms of such agreements. The General
Partner currently has no plans to amend the Operating Lease in any manner
which would be prohibited by Section 5.02.B(iii) of the Partnership Agreement
if Marriott International were to continue to be deemed an Affiliate of the
General Partner. However, as discussed above, the General Partner anticipates
converting the Operating Lease to the Management Agreement in connection with
the proposed refinancing under either Alternative A or Alternative B. This
conversion would not reduce the responsibilities or duties of Marriott
International, increase the compensation payable to Marriott International, or
adversely affect the rights of the Limited Partners.
As discussed below under "Conflicts of Interest--Policies with Respect to
Conflicts of Interest," Section 5.01.E of the Partnership Agreement sets forth
certain conflict of interest policies which require that agreements, contracts
or arrangements between the Partnership and the General Partner or its
Affiliates be on commercially reasonable terms and subject to certain other
specific criteria. Because the proposed Amendment to the definition of
Affiliate would exclude Marriott International, it would not be subject to the
conflict of interest policies until such time in the future (if ever) that
Marriott International becomes an Affiliate under the new definition.
Nevertheless, the General Partner will not enter into any new, or amend any
existing, agreement, contract or arrangement with Marriott International on
terms that are unfair to the Partnership or commercially unreasonable.
TEXT OF THE AMENDMENTS
1. Section 1.01 of the Partnership Agreement would be amended to add the
underlined language set forth below:
"Affiliate," "AFFILIATES" or "Affiliated Person" means, when used with
reference to a specified Person, (i) any Person that directly or indirectly
through one or more intermediaries controls or is controlled by or is under
common control with the specified Person, (ii) any Person that is an
officer of, partner in or trustee of, or serves in a similar capacity with
respect to, the specified Person or of which the specified Person is an
officer, partner or trustee, or with respect to which the specified Person
serves in a similar capacity, (iii) any Person that, directly or
indirectly, is the beneficial owner of 10% or more of any class of equity
securities of the specified Person or of which the specified Person is
directly or indirectly the owner of 10% or more of any class of equity
securities, and (iv) any relative or spouse of the specified Person who
makes his or her home with that of the specified Person. Affiliate or
Affiliated Person of the Partnership or the General Partner does not
include a Person who is a partner of, or in a partnership or joint venture
with, the Partnership or any other Affiliated Person, if such Person is not
otherwise an Affiliate or Affiliated Person of the Partnership or the
General Partner. NOTWITHSTANDING THE FOREGOING, NO CORPORATION WHOSE COMMON
STOCK IS LISTED ON A NATIONAL SECURITIES EXCHANGE OR AUTHORIZED FOR
INCLUSION ON THE NASDAQ NATIONAL MARKET, OR ANY SUBSIDIARY THEREOF, SHALL
BE AN "AFFILIATE" OF THE GENERAL PARTNER OR ANY AFFILIATE THEREOF UNLESS A
PERSON (OR PERSONS IF SUCH PERSONS WOULD BE TREATED AS PART OF THE SAME
GROUP FOR PURPOSES OF SECTION 13(D) OR 13(G) OF THE SECURITIES EXCHANGE ACT
OF 1934) DIRECTLY OR INDIRECTLY OWNS TWENTY PERCENT (20%) OR MORE OF THE
OUTSTANDING COMMON STOCK OF THE GENERAL PARTNER AND SUCH OTHER CORPORATION.
2. Section 10.02.A of the Partnership Agreement would be amended to delete
the bracketed language and add the underlined language set forth below:
A. If at any time any agreement (including the Hotel operating lease[)],
IF THE OPERATING TENANT IS AN AFFILIATE OF THE GENERAL PARTNER) pursuant to
which operating management of any property of the Partnership is vested in
the General Partner or an Affiliate of the General Partner OR IN MARRIOTT
INTERNATIONAL, INC. OR ANY OF ITS AFFILIATES and if pursuant to the terms
of such agreement the Partnership has a right to terminate such agreement
as a result of the failure of the operation of such property to attain any
economic objective, the Limited Partners, without the Consent of the
General Partner, may, upon the affirmative vote of [the holders of] LIMITED
PARTNERS HOLDING a majority of the Units, take action to exercise the right
of the Partnership to terminate such agreement.
21
PROPOSAL NO. 4
AMENDMENTS TO AUTHORITY OF THE GENERAL PARTNER
SUMMARY OF THE AMENDMENTS
Section 5.02.B of the Partnership Agreement provides that the General
Partner shall not, without the consent of Limited Partners holding a majority
of the Units, sell or otherwise dispose of or consent to the sale or
disposition of (collectively, a "Sale") the Hotel (collectively, these
transactions are sometimes referred to as the "Sale Transactions"). The
Amendments to Section 5.01.C and 5.02.B would grant the General Partner the
authority, without obtaining the consent of the Limited Partners, to engage in
Sale Transactions with persons ("Third Parties") other than the General
Partner or any Affiliate of the General Partner ("Affiliated Parties"). The
Sale of the Hotel to any Affiliated Party would continue to require the
consent of Limited Partners holding a majority of the Units and would, if the
amendments described in "Proposal No. 5--Amendments to Voting Provisions" are
approved, be an Interested Transaction under the Partnership Agreement and
require the consent of a majority of a quorum of the disinterested Limited
Partners.
PURPOSE OF THE AMENDMENTS
The purpose of these Amendments is to give the General Partner greater
control of the Partnership by providing the General Partner with the
unilateral right to sell the Hotel to an unaffiliated third party at its sole
discretion. The General Partner believes that such greater control is
appropriate given its increased investment in the Partnership if the HM Junior
Loan is consummated.
EFFECTS OF THE AMENDMENTS
These proposed Amendments would eliminate Limited Partner consent
requirements relating to Sale Transactions with Third Parties and vest the
sole authority with respect to such transactions in the General Partner. These
Amendments would not alter the Limited Partner consent requirements relating
to Sale Transactions with Affiliated Parties. In addition, the General Partner
has no current intention of selling any asset of the Partnership, including
the Hotel (other than as described herein).
TEXT OF THE AMENDMENTS
1. Section 5.01.C of the Partnership Agreement would be amended to add new
subsection (vi) set forth below:
(vi) sell or otherwise dispose of or consent to the sale or disposition
of any assets of the Partnership to any Person provided that such Person is
not a general partner of the Partnership or an Affiliate of any such
general partner; and
2. Section 5.02.B(ii) of the Partnership Agreement, would be amended to
delete the bracketed language and add the underlined language set forth below:
sell or otherwise dispose of or consent to the sale or disposition of the
Hotel [and provided,] TO THE GENERAL PARTNER OR AN AFFILIATE OF THE GENERAL
PARTNER; PROVIDED, HOWEVER, that if it is proposed that the Partnership
sell the Hotel [or the Equipment] to the General Partner or an Affiliate of
the General Partner, the following procedures shall also be followed: (a)
the General Partner shall first give notice of the proposed sale to the
Limited Partners who shall thereafter have 30 days within which to elect a
nationally recognized appraiser having the approval of [the holders of]
LIMITED PARTNERS HOLDING a majority of the Units, (b) the appraiser elected
under clause (a) above shall have 30 days from the date of election to
prepare and submit to the General Partner an appraisal of the fair market
value of the Hotel [or the Equipment], (c) the purchaser shall submit to
the General Partner an appraisal of the fair market value of the Hotel [or
the Equipment], such appraisal to be submitted within the time limit
provided by clause (b) above in the case of the appraisal to be submitted
by the appraiser elected by the Limited Partners, and (d) the General
Partner
22
shall thereafter make formal request for the required Consent and in
connection therewith shall submit to the Limited Partners the two
appraisals contemplated by clauses (b) and (c) above; provided, further,
however, that if the Limited Partners do not elect an appraiser as
contemplated by clause (a) above or if such appraiser does not supply an
appraisal within the time period required by clause (b) above, the General
Partner will not request the Consent to the sale of the Hotel [or the
Equipment] to the General Partner or an Affiliate of the General Partner
unless such request is accompanied by three appraisals as to market value
of the Hotel [or the Equipment], one such appraisal to be prepared by an
appraiser elected by the purchaser and the other two appraisals to be
prepared by appraisers elected by the first such appraiser, the cost of all
such appraisals to be borne by the purchaser;
PROPOSAL NO. 5
AMENDMENT TO THE AUTHORITY OF THE
GENERAL PARTNER RELATING TO INDEBTEDNESS
SUMMARY OF THE AMENDMENT
This Amendment would modify Section 5.03.B of the Partnership Agreement,
which governs the duties and obligations of the General Partner. This
amendment would confer upon the General Partner express authority to incur
indebtedness in order to capitalize the Junior Lender (which will make the HM
Junior Loan to the Partnership), but would not otherwise alter the duties and
obligations of the General Partner.
PURPOSE OF THE AMENDMENT
This Amendment is necessary to clarify the ability of the General Partner to
borrow funds to capitalize the Junior Lender (which will make the HM Junior
Loan). Section 5.03.B of the Partnership Agreement currently provides that the
General Partner shall not borrow any funds, subject to certain exceptions.
Because the Junior Lender will be a wholly owned subsidiary of the General
Partner, and the General Partner will borrow funds from Host Marriott (or one
of its subsidiaries) in order to capitalize the Junior Lender (which will fund
the HM Junior Loan), the General Partner believes that it is appropriate to
amend this section to clarify that the borrowing by the General Partner to
capitalize the Junior Lender does not contravene the terms of the Partnership
Agreement.
EFFECTS OF THE AMENDMENT
The proposed Amendment would expressly permit the General Partner to borrow
funds to be used to capitalize the Junior Lender, which in turn will fund a
loan to the Partnership. The duties and obligations of the General Partner
would not otherwise be altered by this Amendment. The General Partner would
continue to be prohibited from borrowing funds other than as currently
permitted in accordance with the terms of the Partnership Agreement. The loan
to the General Partner from Host Marriott (or one of its subsidiaries) will be
serviced by the General Partner from debt service payments made by the
Partnership to the Junior Lender (a wholly owned subsidiary of the General
Partner) pursuant to the terms of the HM Junior Loan.
TEXT OF THE AMENDMENT
Section 5.03.B(v) of the Partnership Agreement would be amended to add the
underlined language set forth below:
OTHER THAN IN CONNECTION WITH BORROWING FUNDS FROM HOST (OR ONE OF ITS
SUBSIDIARIES) IN ORDER TO CAPITALIZE AN ENTITY WHICH WILL FUND A LOAN TO
THE PARTNERSHIP IN CONNECTION WITH A REFINANCING OF THE MORTGAGE
INDEBTEDNESS OF THE PARTNERSHIP TO GMAC COMMERCIAL MORTGAGE CORPORATION,
DATED DECEMBER 23, 1996, borrow any funds or become liable for any
obligations of third parties except to the extent that any such borrowings
or liabilities are directly related to meeting the financial needs of the
Partnership.
23
PROPOSAL NO. 6
AMENDMENTS TO VOTING PROVISIONS
The Partnership Agreement contains various provisions that inhibit the
ability of the General Partner and its Affiliates to vote Units beneficially
owned by them. In the event the General Partner or its Affiliates become the
owners of outstanding Units in the future, such parties believe it would be
appropriate to amend the voting provisions of the Partnership Agreement to
provide such parties with the voting rights described below.
SUMMARY OF THE AMENDMENTS
Section 10.01.G of the Partnership Agreement currently provides that the
General Partner or its Affiliates are not entitled to any voting,
determinative or consensual rights with respect to any Units owned or
controlled by them and such Units held by the General Partner or certain of
its Affiliates are not taken into account in determining the presence or
absence of a quorum. The proposed Amendments to this provision and to Section
10.01.B of the Partnership Agreement would (a) revise the provisions limiting
the voting rights of the General Partner and its Affiliates to permit the
General Partner and its Affiliates to have full voting rights with respect to
all Units acquired by the General Partner or its Affiliates on all matters
affecting the Partnership (other than Interested Transactions) in the same
manner as other Limited Partners are entitled and (b) establish special voting
standards with respect to those Interested Transactions subject to Limited
Partners approval to permit action to be taken only if (i) a majority of Units
held by Limited Partners other than the General Partner and its Affiliates are
present in person or by proxy or consent for the vote on an Interested
Transaction and (ii) the Interested Transaction is approved by Limited
Partners holding a majority of the outstanding Units, with all Units held by
the General Partner and its Affiliates being voted in the same manner as a
majority of the Units actually voted by Limited Partners other than the
General Partner and its Affiliates.
PURPOSE OF THE AMENDMENTS
The General Partner currently does not own any Units, but anticipates that
it and/or its Affiliates may acquire Units in the future (although it has no
specific plans to do so as of the date hereof). Accordingly, the General
Partner has proposed the amendment of Sections 10.01.G and 10.01.B to allow
the General Partner and its Affiliates to have full voting rights with respect
to all Units they acquire on the limited number of decisions affecting the
Partnership (other than Interested Transactions) upon which Limited Partners
are entitled to vote. These Amendments would allow the General Partner and its
Affiliates to vote Units they acquire on all matters affecting the Partnership
(other than Interested Transactions) in the same manner as other Limited
Partners are entitled. As part of this proposal, the General Partner has also
proposed an amendment to allow Interested Transactions which are subject to
Limited Partner vote to be approved by Limited Partners holding a majority of
the outstanding Units, with all Units held by the General Partner and its
Affiliates being voted in the same manner as a majority of the Units actually
voted by Limited Partners other than the General Partner and its Affiliates
(other than officers, directors or employees of the General Partner or any of
its Affiliates), provided that a majority of the Units held by Limited
Partners other than the General Partner and its Affiliates are present in
person or by proxy or consent for the vote on the Interested Transaction. This
change has been proposed because, absent the proposed Amendments the General
Partner and its Affiliates would not be permitted to vote such Units on an
Interested Transaction, even if they held a significant portion of the
outstanding Units. Therefore, it might not be possible to obtain the approval
of a majority of the outstanding Units for an Interested Transaction, even if
a significant majority of the remaining Limited Partners were strongly in
favor of such a transaction. Under the proposed Amendments, the outcome of the
Interested Transaction vote would still be determined by the disinterested
Limited Partners who vote, because the Units held by the General Partner and
its Affiliates would be voted in accordance with the desires of the majority
of such disinterested Limited Partners. These quorum requirements would ensure
that in order for such Interested Transaction to be acted upon by Limited
Partners, a majority of the disinterested Limited Partners must be present or
represented at the meeting or in the written consent pursuant to which the
action is to be taken.
24
EFFECTS OF THE AMENDMENTS
The proposed voting Amendments would affect the voting rights of the General
Partner and its Affiliates with respect to transactions not involving such
parties and transactions in which any such party would have a direct or
indirect actual economic interest.
Transactions Not Involving the General Partner or its Affiliates. Under the
Partnership Agreement in its current form, the General Partner has
substantially all the management discretion over the business of the
Partnership. These Amendments would not restrict the authority currently
granted to the General Partner under the Partnership Agreement. The
Partnership Agreement, however, prevents the General Partner from undertaking
certain activities without the consent of Limited Partners holding a majority
of the outstanding Units, and prevents the General Partner and certain of its
Affiliates from voting any Units they own. The proposed Amendments would
permit the General Partner and its Affiliates to vote any Units they own on
these certain activities in the same manner as all other Limited Partners are
entitled (except in the case of Interested Transactions). These matters
currently include the following:
(i) having the Partnership acquire interests in other hotel properties in
addition to the Hotel or in other entities;
(ii) selling or otherwise disposing of or consenting to the sale or
disposition of the Hotel (for a discussion of the effects caused by the
changes in the authority of the General Partner, see "Proposal No. 4--
Amendments to Authority of the General Partner" above);
(iii) effecting any amendment to any agreement, contract or arrangement
with the General Partner or any of its Affiliates which reduces the
responsibilities or duties of the General Partner as a general partner of
the Partnership or any of its Affiliates or which increases the
compensation payable to the General Partner or any of its Affiliates, or
which adversely affects the rights of the Limited Partners;
(iv) incurring debt of the Partnership in excess of the limitations set
forth in the Partnership Agreement;
(v) agreeing to the addition of transient guest rooms at the Hotel unless
(a) the Hotel has had an average occupancy rate of at least 68% for a
period consisting of at least 12 consecutive months and (b) the Partnership
has obtained debt financing to finance the costs of the addition on a
nonrecourse basis as to all the Partners and the Partnership (including the
General Partner), except as otherwise provided in the Partnership
Agreement;
(vi) incurring any debt of the Partnership which does not provide by its
terms that it shall be nonrecourse as to all of the Partners of the
Partnership, except as otherwise provided in the Partnership Agreement;
(vii) making any election to continue beyond its term, discontinue or
dissolve the Partnership;
(viii) admitting any other Person as a general partner of the
Partnership; or
(ix) guaranteeing, becoming personally liable or otherwise bearing the
risk of loss, or permitting any Affiliate to take any such action, with
respect to any portion of any Partnership debt otherwise permitted to be
incurred pursuant to the terms of the Partnership Agreement, unless certain
enumerated conditions are satisfied.
Although the General Partner currently has no plans to undertake such
activities, it may do so in the future if a majority of Units are voted by the
Limited Partners (including, to the extent they acquire Units, the General
Partner and its Affiliates) in favor of such actions.
Interested Transactions. The Partnership Agreement prohibits the General
Partner and its Affiliates from voting and provides that Units owned or
controlled by the General Partner and its Affiliates are not taken into
account in determining the presence or absence of a quorum. Thus, the General
Partner cannot cause the Partnership to engage in an Interested Transaction
unless it is approved by Limited Partners (not including the
25
General Partner and its Affiliates other than officers, directors or employees
of the General Partner or any of its Affiliates (collectively, the "Affiliated
Limited Partners")) holding a majority of the Units entitled to vote on such
matter. The proposed Amendments to the voting requirements would not reduce
the percentage of Partners that is required to consent to any Interested
Transaction requiring Limited Partner approval under the Partnership
Agreement, but would require the Affiliated Limited Partners to vote all of
their Units on such Interested Transaction in the same manner as a majority of
the Units actually voted by Limited Partners other than the Affiliated Limited
Partners, provided that a majority of the Units held by Limited Partners other
than the Affiliated Limited Partners are present in person or by proxy or
consent for the vote on the Interested Transaction. Accordingly, if Limited
Partners holding a majority of the outstanding Units (not including Units
owned by Affiliated Limited Partners) are present in person or by proxy or
consent for the vote on an Interested Transaction which is subject to approval
by Limited Partners and a majority of such Units actually are voted in favor
of such Interested Transaction, then the Affiliated Limited Partners would
vote all of their Units in favor of the Interested Transaction. Conversely, if
Limited Partners holding a majority of the outstanding Units (not including
Units owned by the Affiliated Limited Partners) are present in person or by
proxy or consent for the vote on an Interested Transaction which is subject to
approval by Limited Partners and a majority of such Units actually are voted
against such Interested Transaction, then the Affiliated Limited Partners
would vote all of their Units against the Interested Transaction as well. In
the absence of the proposed Amendments, fewer than a majority of the
outstanding Units could be entitled to vote on Interested Transaction because
the General Partner and its Affiliates may in the future hold a substantial
portion of the outstanding Units. The proposed Amendments require decisions
regarding Interested Transactions which are subject to approval by the Limited
Partners to be determined by a majority of the disinterested Limited Partners
who vote, because the Units held by the Affiliated Limited Partners would be
voted on such transactions in accordance with the desires of the majority of
such disinterested Limited Partners. The amendments to the quorum requirements
ensure that in order for an Interested Transaction requiring Limited Partner
approval to be acted upon by Limited Partners, a majority of the disinterested
Limited Partners must be present or represented at the meeting or in the
written consent pursuant to which the action is to be taken. In the event that
"Proposal No. 3--Amendment to Definition of Affiliate" is approved by the
Limited Partners, transactions between the Partnership and Marriott
International would not be Interested Transactions under the Partnership
Agreement. (For a more detailed discussion of the effects caused by the change
in the definition of Affiliate, see "Proposal No. 3--Amendment to Definition
of Affiliate" above.) Examples of Interested Transactions subject to Limited
Partner approval would include:
(i) selling or otherwise disposing of or consenting to the sale or
disposition of the Hotel to the General Partner or an Affiliate;
(ii) effecting any amendment to any agreement, contract or arrangement
with the General Partner or any of its Affiliates which reduces the
responsibilities or duties of the General Partner as a general partner of
the Partnership or any of its Affiliates or which increases the
compensation payable to the General Partner or any of its Affiliates, or
which adversely affects the rights of the Limited Partners;
(iii) voluntarily withdrawing as a General Partner;
(iv) causing the Partnership to borrow any funds from the General Partner
or an Affiliate except as set forth in the Partnership Agreement; or
(v) causing the Partnership to acquire any property from the General
Partner and any Affiliate of the General Partner in exchange for interests
in the Partnership.
This list of Interested Transactions, however, is not exclusive. Any matter
that is required to be presented to the Limited Partners for a vote, depending
upon the particular circumstances involved, could constitute an Interested
Transaction.
26
TEXT OF THE AMENDMENTS
1. Section 10.01.G of the Partnership Agreement would be amended to delete
the bracketed language and add the underlined language set forth below:
If any Consents, determinations or votes of Limited Partners, with or
without a meeting, are to be requested, made or taken [,] WITH RESPECT TO
AN INTERESTED TRANSACTION, UNITS HELD BY the General Partner or any of its
Affiliates (other than officers, directors or employees of the General
Partner or its Affiliates) shall [not be entitled to any voting,
determinative or consensual rights with respect to any Interests owned or
controlled by any of them nor shall any such Interests be taken into
account in determining the presence or absence of a quorum.] BE VOTED IN
THE SAME MANNER AS THE VOTE OF LIMITED PARTNERS HOLDING, IN THEIR CAPACITY
AS LIMITED PARTNERS AND NOT AS ASSIGNEES, A MAJORITY OF THE OUTSTANDING
UNITS ACTUALLY VOTING ON THE INTERESTED TRANSACTION (NOT INCLUDING THOSE
UNITS HELD BY THE GENERAL PARTNER OR ANY OF ITS AFFILIATES OTHER THAN
OFFICERS, DIRECTORS OR EMPLOYEES OF THE GENERAL PARTNER OR ANY OF ITS
AFFILIATES); PROVIDED, HOWEVER, THAT NO INTERESTED TRANSACTION SHALL BE
DEEMED TO BE APPROVED UNLESS A MAJORITY OF THE UNITS HELD BY LIMITED
PARTNERS OTHER THAN THE GENERAL PARTNER AND ITS AFFILIATES ARE PRESENT IN
PERSON OR BY PROXY AT THE MEETING AT WHICH SUCH INTERESTED TRANSACTION IS
CONSIDERED, OR, IF WRITTEN CONSENTS ARE SOUGHT WITH RESPECT TO SUCH
INTERESTED TRANSACTION, CONSENTS REPRESENTING A MAJORITY OF THE UNITS HELD
BY LIMITED PARTNERS OTHER THAN THE GENERAL PARTNER AND ITS AFFILIATES ARE
RETURNED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE CONSENT
SOLICITATION PERIOD. WITH RESPECT TO ALL MATTERS OTHER THAN AN INTERESTED
TRANSACTION, THE GENERAL PARTNER AND ITS AFFILIATES MAY VOTE UNITS HELD BY
THEM AS LIMITED PARTNERS IN THEIR SOLE AND ABSOLUTE DISCRETION.
2. Section 10.01.B of the Partnership Agreement would be amended to delete
the bracketed language and add the underlined language set forth below:
Notification of any such meeting shall be given not less than 10 days nor
more than 60 days before the date of the meeting, to the Limited Partners
at their record addresses, or at such other address which they may have
furnished in writing to the General Partner. Such Notification shall be in
writing, and shall state the place, date, hour and purpose of the meeting,
and shall indicate that it is being issued at or by the direction of the
Partner or Partners calling the meeting. If a meeting is adjourned to
another time or place, and if any announcement of the adjournment of time
or place is made at the meeting, it shall not be necessary to give
Notification of the adjourned meeting. The presence in person or by proxy
of [holders of] LIMITED PARTNERS HOLDING a majority of the Units (WHICH, IN
THE CASE OF AN INTERESTED TRANSACTION, MUST INCLUDE A MAJORITY OF THE UNITS
HELD BY LIMITED PARTNERS OTHER THAN THE GENERAL PARTNER AND ITS AFFILIATES)
shall constitute a quorum at all meetings of the Limited Partners;
provided, however, that if there be no such quorum, [holders of] LIMITED
PARTNERS HOLDING a majority of the Units so present or so represented may
adjourn the meeting from time to time without further notice, until a
quorum shall have been obtained. No Notification of the time, place or
purpose of any meeting of Limited Partners need be given to any Limited
Partner who attends in person or is represented by proxy (except when a
Limited Partner attends a meeting for the express purpose of objecting at
the beginning of the meeting to the transaction of any business on the
ground that the meeting is not lawfully called or convened), or to any
Limited Partner entitled to such notice who, in a writing executed and
filed with the records of the meeting, either before or after the time
thereof, waives such Notification.
3. The definition of "Consent" in Section 1.01 of the Partnership Agreement
would be amended to delete the bracketed language set forth below:
"Consent" means either (a) the approval given by vote at a meeting called
and held in accordance with the provisions of Section 10.01, or (b) a prior
written approval required or permitted to be given pursuant to this
Agreement or the act granting such approval, as the context may require.
Unless otherwise specified, Consent of the Limited Partners shall mean
Consent of a majority in interest of the Limited Partners. [However, if the
General Partner or any Affiliate of the General Partner (other than
officers, directors or employees of the General Partner or its Affiliates)
purchases any Units, it shall have no voting rights with respect to such
Units.]
27
PROPOSAL NO. 7
CLARIFYING AMENDMENTS
SUMMARY OF THE AMENDMENTS
Amendments to certain terms and sections of the Partnership Agreement would
be made in order to (a) reflect the fact that after the division of Marriott
Corporation's operations into two separate public companies, Host Marriott, as
the successor to Marriott Corporation, no longer owns the management business
conducted by Marriott International, (b) delete certain obsolete references to
entities and agreements that are no longer in existence and (c) update the
Partnership Agreement to reflect the passage of time since the formation of
the Partnership. The General Partner does not believe that these amendments
would affect the rights of the Unitholders in any material respect. These
changes are included, along with the other proposed Amendments, in the copy of
the Partnership Agreement, as proposed to be amended, which is attached as
Appendix A to this Consent Solicitation Statement. The amended Partnership
Agreement is marked to indicate the revisions made to the existing Partnership
Agreement and should be read in its entirety. Deleted provisions are contained
in brackets and struck through, and added provisions are in bold type and
underlined.
PROPOSAL NO. 8
AMENDMENT TO AMENDMENT PROVISIONS
SUMMARY OF THE AMENDMENT
In addition to certain amendments specifically authorized in the Partnership
Agreement, the Partnership Agreement may be amended from time to time by the
General Partner with the consent of Limited Partners holding a majority of
Units. Thus, Limited Partner approval is required to amend the Partnership
Agreement in any manner, even if the amendment would not have a material
effect on the rights of Unitholders. The General Partner believes that it
would be beneficial to have the ability to amend the Partnership Agreement
from time to time, without the consent of the Limited Partners, to reflect the
occurrence of events that render provisions of the Partnership Agreement
unclear or obsolete, provided that any such amendment would not adversely
affect the rights of Unitholders in any material respect. The General Partner
would determine whether any such amendment satisfies this test. In making this
determination, there may be conflicts of interest between the General Partner
and the Limited Partners. However, the General Partner would be bound by, and
intends to fulfill, its fiduciary duties to the Partnership and the Limited
Partners, including its duties of good faith and loyalty.
PURPOSE OF THE AMENDMENT
This proposed Amendment would give the General Partner the ability to amend
the Partnership Agreement from time to time, without the consent of the
Limited Partners, to reflect the occurrence of events that render provisions
of the Partnership Agreement unclear or obsolete, provided that any such
amendment would not adversely affect the rights of Unitholders under the
Partnership Agreement in any material respect. The General Partner believes
that this type of provision is contained in the partnership agreements of many
widely-held limited partnerships, including certain other Host Marriott
sponsored limited partnerships, and would enhance the ability of the General
Partner to keep the Partnership Agreement updated.
EFFECTS OF THE AMENDMENT
This proposed Amendment would give the General Partner the ability to amend
the Partnership Agreement from time to time, without the consent of the
Limited Partners, in order to clarify or update provisions of the Partnership
Agreement, provided that any such amendment would not adversely affect the
rights of Unitholders under the Partnership Agreement in any material respect.
For example, if the Partnership Agreement, as currently in effect, contained
this proposed Amendment, the Amendments set forth in Proposal No. 7 would not
require the consent of the Limited Partners. The General Partner would still
be required to seek the consent of Limited Partners in order to amend the
Partnership Agreement (i) as specifically set forth in the Partnership
Agreement and (ii) in any way which would adversely affect the rights of
Unitholders under the Partnership Agreement in any material respect.
28
TEXT OF THE AMENDMENTS
Section 11.02 of the Partnership Agreement would be amended to add a new
subsection 11.02F, the text of which is set forth below:
F. The General Partner may, without the Consent of the Limited Partners,
make any amendment to this Agreement as is necessary to clarify the
provisions hereof so long as such amendment does not adversely affect the
rights of the Limited Partners or assignees of their Interests under this
Agreement in any material respect.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following discussion summarizes certain federal income tax
considerations that may be relevant to a Unitholder in the event that the
Amendments to the Partnership Agreement are adopted and the transactions
contemplated by either Alternative A or Alternative B are consummated. The
summary is based upon the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury Regulations thereunder, rulings and other pronouncements and
decisions now in effect, all of which are subject to change. Hogan & Hartson
L.L.P., which has acted as tax counsel to the Partnership in connection with
this solicitation, has reviewed the following discussion and is of the opinion
that it fairly summarizes the federal income tax considerations that are
likely to be material to a Unitholder.
The following description is not intended to be exhaustive of all possible
tax considerations. For example, this summary does not give a detailed
discussion of any state, local, or foreign tax considerations. Nor does it
discuss all aspects of federal income taxation that may be relevant to
specific Unitholders in light of their particular circumstances. Except where
indicated, the discussion below describes general federal income tax
considerations applicable to individuals who are citizens or residents of the
United States. Accordingly, the following discussion has limited application
to domestic corporations and persons subject to specialized federal income tax
treatment, such as foreign persons, tax-exempt entities, regulated investment
companies and insurance companies.
UNITHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE TAX
CONSEQUENCES TO THEM OF THE TRANSACTIONS CONTEMPLATED BY ALTERNATIVE A AND
ALTERNATIVE B IN LIGHT OF THEIR SPECIFIC TAX SITUATION.
PARTNERSHIP STATUS.
The General Partner believes that neither the adoption of the Amendments nor
the implementation of either Alternative A or Alternative B should adversely
affect the status of whether the Partnership is classified as a partnership
for federal income tax purposes. The Partnership will obtain an opinion from
Hogan & Hartson L.L.P. to that effect.
ALTERNATIVE A
The consummation of the transactions contemplated by Alternative A is not
expected to have any current federal income tax consequences to a Unitholder.
As discussed below under "--Alternative B--Possible Application of More
Recent Tax Regulations and Resulting Recapture of Depreciation Deductions," it
is possible that the adoption of the Amendments could cause Treasury
Regulations that are not currently applicable to the Partnership to apply to
the Partnership. The Partnership intends to take the position that adoption of
the Amendments do not cause such Treasury Regulations to apply to the
Partnership, but there can be no assurance that the IRS might not contend
otherwise. Even if such Treasury Regulations were to apply to the Partnership,
their application would not have an immediate
29
consequence adverse to the Unitholders under Alternative A. These Treasury
Regulations, however, could require Unitholders to recapture previously
claimed depreciation deductions in the future in the event that a substantial
portion of the indebtedness owed by the Partnership to GSMC were to be repaid
or were to be refinanced with indebtedness either provided by the General
Partner or an Affiliate of the General Partner or guaranteed by the General
Partner or an Affiliate of the General Partner. See "--Alternative B--Possible
Application of More Recent Tax Regulations and Resulting Recapture of
Depreciation Deductions" for a further discussion of this issue. The General
Partner does not anticipate that even if these Treasury Regulations were to
become applicable to the Partnership by reason of the adoption of the
Amendments, their application would have a material adverse impact on the
Unitholders under Alternative A in the reasonably foreseeable future.
ALTERNATIVE B
The consummation of the transactions contemplated by Alternative B is not
expected to cause the recognition of any current federal income tax
consequences to a Unitholder who acquired its Unit on the Unit Offering
Closing Date (as defined below) and has held that Unit continuously since that
time. However, the determination of the tax consequences of the transactions
contemplated by Alternative B could vary depending on the time of acquisition
of a Unit and the method of payment for the Unit, as described below.
TAX TREATMENT OF DISTRIBUTION OF PROCEEDS OF REFINANCING TO HOLDERS OF
UNITS. Under Alternative B, $22.7 million of proceeds are expected to be
available for distribution to the partners, resulting in a distribution to
Unitholders of approximately $25,000 per Unit. Under the Code and the
applicable Treasury Regulations, this distribution would be taxable currently
to a recipient Unitholder only to the extent that either (i) the amount
distributed to the Unitholder exceeds the Unitholder's adjusted tax basis in
its Units, or (ii) the distribution causes the Unitholder to have a deficit
capital account balance that exceeds its "share" of the Partnership's "minimum
gain" attributable to "partnership nonrecourse debt" (i.e., partnership debt
for which no partner is individually liable) (as determined under the
applicable Treasury Regulations).
The General Partner estimates that, as of December 31, 1997 and assuming
that a Unitholder acquired its Unit on the date of the closing of the original
private placement offering of Units (the "Unit Offering Closing Date") and has
held that Unit continuously since that time, the Unitholder would have an
adjusted basis in that Unit at the time of the contemplated distribution of
refinancing proceeds substantially in excess of the amount of the expected
distribution per Unit. The General Partner also estimates that, as of December
31, 1997, and after giving effect to the planned distribution of cash proceeds
pursuant to Alternative B, a Unitholder would have a deficit capital account
balance of approximately $18,600 per Unit, which amount would not exceed its
"share" of the Partnership's "minimum gain" (as determined under the
applicable Treasury Regulations), which the General Partner estimates would be
$20,400 per Unit as of the same date. Based upon these estimates, a Unitholder
who acquired its Unit on the Unit Offering Closing Date and has held that Unit
continuously since that time is not expected to recognize taxable income
currently as a result of the cash distribution to be made pursuant to
Alternative B. These estimates, however, are based upon a number of variables,
including (i) an estimate of the Partnership's adjusted tax basis in its
assets at the time the transactions contemplated by Alternative B are
consummated and at the end of fiscal year 1997; (ii) an estimate of the
Partnership's profit and loss during 1997; and (iii) the assumption that the
IRS will respect the Partnership's treatment of the cash distribution as
having been made from the proceeds of the Mezzanine Loan and not from the
proceeds of the HM Junior Loan. Hence, there can be no assurance that the IRS
will not contend that Unitholders must recognize gain under Alternative B in
an amount equal to a majority of the cash distributed.
Even if the proposed distribution of loan proceeds under Alternative B does
not result in the current recognition of gain to a Unitholder, a Unitholder
will be required to recognize income as the principal amount of the Senior
Loan and the Mezzanine Loan are amortized to the extent that the Unitholder's
deficit capital account balance, which for a Unitholder who acquired its Units
on the Unit Offering Closing Date will have been created by the planned
distribution, exceeds the Unitholder's "share" of the Partnership's "minimum
gain" attributable to "partnership nonrecourse debt." The General Partner
currently estimates that the deficit capital account
30
balance of such a Unitholder should not exceed the Unitholder's "share" of the
Partnership's "minimum gain" attributable to "partnership nonrecourse debt" in
the reasonably foreseeable future. (It is important to note that under the
Partnership Agreement 90% of any net taxable income of the Partnership would
be allocated to the Limited Partners in any event without regard to whether
the transactions contemplated by Alternative B were undertaken.)
A Unitholder who acquired its Unit other than on the Unit Offering Closing
Date should consult with its tax advisor as to its current adjusted tax basis
in its Unit and whether, and the extent to which, the proposed distribution of
loan proceeds under Alternative B will result in the current recognition of
gain.
POSSIBLE APPLICATION OF MORE RECENT TREASURY REGULATIONS AND RECAPTURE OF
DEPRECIATION DEDUCTIONS. Since 1991, the Partnership has allocated
approximately $15 million of nonrecourse deductions (approximately $16,700 per
Unit) to the Unitholders with respect to partnership nonrecourse debt. If the
Partnership implements Alternative B and accepts the HM Junior Loan from the
General Partner, the amount of partnership nonrecourse debt of the Partnership
would decrease. Accordingly, the amount of partnership nonrecourse debt of the
Partnership attributable to the Unitholders also would decrease.
Under the Treasury Regulations that are presently applicable to the
Partnership (the "Old Regulations"), the Unitholders would not be required to
recapture deductions previously taken with respect to partnership nonrecourse
debt of the Partnership when their share of such debt decreases so long as the
capital accounts of the Unitholders either remain positive or were not
negative by more than their "share" of the Partnership's "minimum gain"
attributable to nonrecourse debt. The capital accounts of the Unitholders
currently are positive and are not expected to become negative as a result of
implementation of Alternative B by more than a Unitholder's "share" of the
Partnership's "minimum gain" (assuming, as outlined above, that the IRS will
respect the Partnership's treatment of the cash distribution as having been
made from the proceeds of the Mezzanine Loan and not from the proceeds of the
HM Junior Loan).
Under Treasury Regulations promulgated after the Partners entered into the
Partnership Agreement (the "New Regulations"), however, partners must
recapture deductions previously taken with respect to partnership nonrecourse
debt if their share of that debt decreases, without regard to the partners'
capital account balances at the time of that reduction. The New Regulations
are not presently applicable to the Partnership, but they would become
applicable to the Partnership if there were to be a "material modification" of
the Partnership Agreement. Even if the New Regulations were to become
applicable to the Partnership, it is not clear whether they would operate to
require the recapture of deductions previously taken with respect to
partnership nonrecourse debt under the Old Regulations or only affect
deductions claimed in the future.
The Partnership intends to take the position under either Alternative A or
Alternative B that the New Regulations would not apply to the Partnership
(that is, that there has not been a "material modification" of the Partnership
Agreement in that the proposed amendments do not change the relative economic
interests of the Partners, in their capacity as Partners in the Partnership).
The Partnership also intends to take the position, in the alternative, that
even if the New Regulations were to apply, such regulations would not require
the Unitholders to recapture deductions previously taken with respect to
partnership nonrecourse debt of the Partnership prior to the date the New
Regulations became applicable to the Partnership. The positions of the General
Partner, however, are not binding upon the IRS, and there is no clear guidance
as to when a "material modification" of a partnership agreement occurs or how
the New Regulations apply to deductions previously claimed under the Old
Regulations. Thus, no assurance can be given that the IRS might not seek to
assert that the New Regulations do apply to the Partnership and that they do
result in the recapture of the $15 million of deductions previously taken by
the Unitholders with respect to partnership nonrecourse debt.
PASSIVE ACTIVITY INCOME AND LOSS. Any income recognized by the Unitholders
in connection with the transactions contemplated under Alternative B will
constitute "passive activity income" for purposes of the passive activity loss
limitation rules of Section 469 of the Code. Passive activity income generally
may be offset by losses from all sources, including suspended passive activity
losses with respect to the Partnership and passive
31
or active losses from other activities. The General Partner estimates that as
of January 1, 1997, a Unitholder that purchased its Unit on the Unit Offering
Closing Date and has held that Unit continuously since that time and whose
Unit is and has been its only investment in a passive activity would have a
passive activity loss carryforward equal to $13,800.
Each Unitholder should consult with its own tax advisor concerning whether,
and the extent to which, the Unitholder has available suspended passive
activity losses from either the Partnership or other investments that may be
used to offset any gain that may be required to be recognized under
Alternative B.
* * *
BECAUSE THE INCOME TAX CONSEQUENCES OF ALTERNATIVE B WILL NOT NECESSARILY BE
THE SAME FOR ALL UNITHOLDERS, UNITHOLDERS SHOULD CONSULT THEIR TAX ADVISORS
WITH SPECIFIC REFERENCE TO THEIR OWN TAX SITUATIONS.
CONFLICTS OF INTEREST RELATING TO ONGOING BUSINESS OF THE PARTNERSHIP
Because Host Marriott and its Affiliates own hotels other than the Hotel
owned by the Partnership, potential conflicts of interest exist. With respect
to these potential conflicts of interest, Host Marriott and its Affiliates
retain a free right to compete with the Partnership's Hotel, including the
right to develop competing hotels now and in the future, in addition to those
existing hotels that may compete directly or indirectly.
Because Host Marriott, through the Junior Lender, will have a claim to the
assets of the Partnership superior to the claims of the Limited Partners in
the event of default, potential conflicts of interest exist. The terms of the
HM Junior Loan provide for the HM Junior Loan to be secured by a subordinated
pledge of the Partnership's ownership interest in the New Sub, if consented to
by the lender of the Mezzanine Loan. As a secured lender, in the event of
default, Host Marriott, through the Junior Lender, could influence and control
decisions concerning the Partnership's assets that do not fully reflect the
interests of the Limited Partners of the Partnership.
Under Delaware law, the General Partner has unlimited liability for
obligations of the Partnership, unless those obligations are, by contract,
without recourse to the partners thereof. Since the General Partner is
entitled to manage and control the business and operations of the Partnership,
this control could lead to a conflict of interest.
POLICIES WITH RESPECT TO CONFLICTS OF INTEREST
The Partnership Agreement permits the General Partner, without the consent
of the Limited Partners, to engage in various transactions with its Affiliates
in conducting the business and affairs of the Partnership. Such transactions
include, subject to certain restrictions, borrowing money from itself or any
Affiliate, engaging in business with, or providing services to and receiving
compensation from, persons or entities that have provided or may in the future
provide various services to the General Partner or its Affiliates, and
entering into agreements to employ agents, attorneys, accountants, engineers,
appraisers or other consultants or contractors who may be Affiliates of the
General Partner to provide services to the General Partner. The Partnership
Agreement requires agreements, contracts or arrangements between the
Partnership and the General Partner or its Affiliates, other than arrangements
for rendering legal, tax, accounting, procurement and engineering services to
the Partnership by the General Partner or its Affiliates (and except for
arrangements between the Partnership and an Affiliate of Marriott
International pertaining to the development of property surrounding golf
courses adjoining the Hotel and the sharing of Hotel facilities with
purchasers of such property), to be on commercially reasonable terms and
subject to the following conditions:
(i) the General Partner or any such Affiliate must be actively engaged in
the business of rendering such services or selling or leasing such goods
independently of its dealings with the Partnership and as an ordinary
ongoing business or must enter into and engage in such business with
Marriott system hotels or hotel owners generally and not exclusively with
the Partnership;
32
(ii) such agreements, contracts or arrangements must be fair to the
Partnership and reflect commercially reasonable terms and shall be embodied
in a written contract which precisely describes the subject matter thereof
and all compensation to be paid therefor;
(iii) no rebates or give-ups may be received by the General Partner or
any such Affiliate, nor may the General Partner or any such Affiliate
participate in any reciprocal business arrangements which would have the
effect of circumventing any of the provisions of the Partnership Agreement;
(iv) no such agreement, contract or arrangement as to which the Limited
Partners had previously given approval may be amended in such manner as to
increase the fees or other compensation payable by the Partnership to the
General Partner or any of its Affiliates or to decrease the
responsibilities or duties of the General Partner or any such Affiliates in
the absence of the consent of Limited Partners holding a majority of the
Units; and
(v) any such agreement, contract or arrangement which relates to or
secures any funds advanced or loaned to the Partnership by the General
Partner or any Affiliate of the General Partner must reflect commercially
reasonable terms.
The foregoing policies with respect to conflicts of interest would not be
changed by any of the Amendments except that such policies would not apply to
Marriott International under the proposed Amendment to the definition of
Affiliate until such time in the future (if ever) that Marriott International
becomes an Affiliate under the new definition. Nevertheless, the General
Partner will not enter into any new, or amend any existing, agreement,
contract or arrangement with Marriott International on terms that are unfair
to the Partnership or commercially unreasonable. In this regard note that, as
discussed above, the General Partner does anticipate converting the Operating
Lease to the Management Agreement. This conversion would not reduce the
responsibilities or duties of Marriott International, increase the
compensation payable to Marriott International, or adversely affect the rights
of the Limited Partners.
OTHER MATTERS
PRICE RANGE OF UNITS
The Units are not listed on any national securities exchange or quoted in
the over the counter market, and there is no established public trading market
for the Units. Based upon information available to the General Partner, there
have been 31 secondary sales of the Units during 1997, with an average sale
price in such transactions of $22,444 per Unit. The General Partner monitors
transfers of the Units (i) because transfers of Units are subject to various
conditions under the Partnership Agreement and admission of the transferee as
a substitute limited partner requires the consent of the General Partner, in
its sole and absolute discretion, under the Partnership Agreement and (ii) in
order to track compliance with safe harbor provisions to avoid treatment as a
"publicly traded partnership" for tax purposes. However, the General Partner
does not have information regarding the prices at which all secondary sales
transactions in the Units have been effectuated. On the Record Date, there
were 1,136 Unitholders of record of the 900 outstanding Units.
The General Partner has been advised that as of the date of this Consent
Solicitation Statement, certain persons have made offers to certain
Unitholders to acquire Units. The General Partner believes that such offers
are being made (or were made) for prices ranging from $15,000 to $22,500 per
Unit. The General Partner is not aware whether such persons continue to make
such offers.
OPERATIONS AFTER THE HM JUNIOR LOAN AND THE AMENDMENTS
The General Partner currently intends that, upon the consummation of the
refinancing of the Bridge Loan and the effectiveness of the Amendments, the
Partnership will continue its businesses and operations substantially as they
are currently being conducted other than as contemplated herein. The General
Partner has no present plans or proposals regardless of the outcome of the HM
Junior Loan transaction or the Amendments
33
that would result in an extraordinary transaction, such as a merger,
reorganization, liquidation, or sale or transfer of a material amount of
assets, involving the Partnership or its subsidiaries, or any material changes
in the Partnership capitalization, distribution policy, structure or business,
other than as contemplated by the proposed refinancing described above under
the caption "Background--The Proposed Refinancing."
Marriott Desert Springs Corporation
GENERAL PARTNER
By: /s/ Bruce F. Stemerman
---------------------------------
Bruce F. Stemerman
President and Director
Date: August 29, 1997
34
APPENDIX A
AMENDED PARTNERSHIP AGREEMENT
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
DESERT SPRINGS MARRIOTT
LIMITED PARTNERSHIP
TABLE OF CONTENTS
PAGE
----
ARTICLE ONE Defined Terms................................................. D-1
ARTICLE TWO Formation, Name, Place of Business, Purpose and Term
2.01 Formation.......................................................... D-6
2.02 Name and Offices................................................... D-6
2.03 Purpose............................................................ D-6
2.04 Term............................................................... D-7
2.05 Agent for Service of Process....................................... D-7
ARTICLE THREE Partners and Capital
3.01 General Partner.................................................... D-7
3.02 [Initial Limited Partner] [INTENTIONALLY OMITTED].................. D-7
3.03 Limited Partners................................................... D-7
3.04 Capital [Contributions] CONTRIBUTION by the General Partner........ D-7
3.05 Capital Contributions by the Limited Partners...................... D-7
3.06 Partnership Capital................................................ D-10
3.07 Liability of the Limited Partners.................................. D-10
3.08 Liability of the General Partner................................... D-10
ARTICLE FOUR Allocation of Profits and Losses; Distributions of Cash and
Certain Proceeds
4.01 Allocation of Net Profits.......................................... D-10
4.02 Allocation of Net Losses and Losses................................ D-10
4.03 Allocation of Gain................................................. D-11
4.04 Allocation Among Limited Partners of Net Profits, Gains, Net Losses
and Losses............................................................. D-11
4.05 Allocation of Recapture Income..................................... D-11
4.06 Distribution of Cash Available for Distribution.................... D-12
4.07 Distribution of Refinancing Proceeds............................... D-12
4.08 Distribution of Sale Proceeds...................................... D-12
4.09 Allocation Among Limited Partners of Cash Available for
Distribution, Refinancing Proceeds and Sale Proceeds................... D-12
4.10 Section 754 Adjustments............................................ D-12
4.11 Special Allocation of [Selling Commissions] SYNDICATION EXPENSES... D-13
4.12 Contingent Adjustments............................................. D-13
4.13 Special Allocation of Interest on Purchase Debt.................... D-13
4.14 Special [Allocations] ALLOCATION in Event of Advances by General
Partner................................................................ D-14
ARTICLE FIVE Rights, Powers and Duties of the General Partner
5.01 Authority of the General Partner to Manage the Partnership......... D-14
5.02 Restrictions on Authority of the General Partner................... D-16
5.03 Duties and Obligations of the General Partner...................... D-18
5.04 Compensation of the General Partner................................ D-19
5.05 Other Business of Partners......................................... D-19
5.06 Limitation on Liability of General Partner; Indemnification........ D-19
5.07 Designation of Tax Matters Partner and Designated Person for
Purposes of Investor List.............................................. D-21
ARTICLE SIX Withdrawal and Removal of General Partner
6.01 Limitation on Voluntary Withdrawal................................. D-22
6.02 Bankruptcy or Dissolution of the General Partner................... D-22
6.03 Liability of Withdrawn General Partner............................. D-22
6.04 Removal of General Partner......................................... D-22
6.05 Substitute General Partner......................................... D-22
ARTICLE SEVEN Assignability Of Units
7.01 Restrictions on Assignments........................................ D-23
7.02 Assignees and Substituted Limited Partners......................... D-23
i
PAGE
----
ARTICLE EIGHT Dissolution And Liquidation Of The Partnership
8.01 Events Causing Dissolution......................................... D-24
8.02 Liquidation........................................................ D-25
ARTICLE NINE Books And Records, Accounting, Reports, Tax Elections, Etc.
9.01 Books and Records.................................................. D-25
9.02 Accounting and Fiscal Year......................................... D-26
9.03 Bank Accounts and Investments...................................... D-26
9.04 Reports............................................................ D-26
9.05 Tax Depreciation and Elections..................................... D-27
9.06 Interim Closing of the Books....................................... D-27
ARTICLE TEN Meetings And Voting Rights Of Limited Partners
10.01 Meetings.......................................................... D-27
10.02 Special Voting Rights of Limited Partners......................... D-28
ARTICLE ELEVEN Miscellaneous Provisions
11.01 Appointment of General Partner as Attorney-in-Fact................ D-29
11.02 Amendments........................................................ D-30
11.03 General Partner Representations and Warranties.................... D-30
11.04 Binding Provisions................................................ D-30
11.05 Applicable Law.................................................... D-30
11.06 Counterparts...................................................... D-31
11.07 Separability of Provisions........................................ D-31
11.08 Article and Section Titles........................................ D-31
11.09 Short Form Filings................................................ D-31
EXHIBIT A Limited Partner Note............................................ D-34
ii
SECOND AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP OF
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
This SECOND Amended and Restated Agreement of Limited Partnership, dated as
of [24 APRIL, 1987] , 1997 is made and entered into by and among Marriott
Desert Springs Corporation, a Delaware corporation, as general partner (the
"General Partner"), AND THOSE PERSONS WHO HAVE BEEN ADMITTED AS LIMITED
PARTNERS OF THE PARTNERSHIP IN ACCORDANCE WITH THE PROVISIONS OF THE AMENDED
AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF DESERT SPRINGS MARRIOTT
LIMITED PARTNERSHIP (THE "PARTNERSHIP") DATED AS OF APRIL 24, 1987 (THE
"ORIGINAL AGREEMENT") OR THIS AGREEMENT AND ARE IDENTIFIED IN THE BOOKS AND
RECORDS OF THE PARTNERSHIP AS THE LIMITED PARTNERS.
THE PARTNERSHIP WAS FORMED PURSUANT TO A CERTIFICATE OF LIMITED PARTNERSHIP
FILED WITH THE OFFICE OF THE SECRETARY OF STATE OF THE STATE OF DELAWARE ON
FEBRUARY 26, 1987. ON APRIL 27, 1987, THE GENERAL PARTNER, Christopher G.
Townsend, as initial limited partner [(the "Initial Limited Partner") and
those Persons who have executed this Agreement and are identified in the books
and records of the Partnership as], AND the Limited Partners WHO PURCHASED
UNITS OF LIMITED PARTNERSHIP INTEREST (THE "UNITS") IN THE PARTNERSHIP IN THE
PRIVATE PLACEMENT EFFECTED PURSUANT TO A PRIVATE PLACEMENT MEMORANDUM DATED
MARCH 20, 1987 ENTERED INTO THE ORIGINAL AGREEMENT. THE PARTNERS ARE ADOPTING
THIS SECOND AMENDED AND RESTATED AGREEMENT[.Desert Springs Marriott Limited
Partnership (the "Partnership") was formed pursuant to a Certificate] of
Limited Partnership [filed with the Office of the Secretary of State of the
State of Delaware on February 26, 1987. ]IN ORDER TO EFFECT CERTAIN AMENDMENTS
TO THE ORIGINAL AGREEMENT APPROVED BY THE GENERAL PARTNER AND THE LIMITED
PARTNERS.
In consideration of the mutual agreements made herein, the parties hereby
agree to [constitute] CONTINUE THE PARTNERSHIP AS a limited partnership UNDER
THE ACT as follows:
ARTICLE ONE
DEFINED TERMS
Section 1.01. The defined terms used in this Agreement shall, unless the
context otherwise requires, have the respective meanings specified in this
Section 1.01.
"Accounting Period" means the four week accounting periods having the same
beginning and ending dates as the General Partner's four week accounting
periods, except that an Accounting Period may occasionally contain up to five
weeks when necessary to conform the accounting system to the calendar year.
"Act" means the Delaware Revised Uniform Limited Partnership Act (6 Del. C.
(S) 17-101, et seq.), AS AMENDED FROM TIME TO TIME.
"Adjustments" means the after-tax present values to the General Partner and
the Limited Partners of the Affected Items, as determined by the Expert.
"Affected Items" means those items of tax benefits that, because of the
Proposed Regulations, are lost by the Limited Partners or are received by the
General Partner.
"Affected Year" means any Fiscal Year of the Partnership in which there are
Affected Items.
"Affiliate," "AFFILIATES" or "Affiliated Person" means, when used with
reference to a specified Person, (i) any Person that directly or indirectly
through one or more intermediaries controls or is controlled by or is under
common control with the specified Person, (ii) any Person that is an officer
of, partner in or trustee of, or serves in a similar capacity with respect to,
the specified Person or of which the specified Person is an officer, partner
or trustee, or with respect to which the specified Person serves in a similar
capacity, (iii) any Person that,
D-1
directly or indirectly, is the beneficial owner of 10% or more of any class of
equity securities of the specified Person or of which the specified Person is
directly or indirectly the owner of 10% or more of any class of equity
securities, and (iv) any relative or spouse of the specified Person who makes
his or her home with that of the specified Person. Affiliate or Affiliated
Person of the Partnership or the General Partner does not include a Person who
is a partner of, or in a partnership or joint venture with, the Partnership or
any other Affiliated Person, if such Person is not otherwise an Affiliate or
Affiliated Person of the Partnership or the General Partner. NOTWITHSTANDING
THE FOREGOING, NO CORPORATION WHOSE COMMON STOCK IS LISTED ON A NATIONAL
SECURITIES EXCHANGE OR AUTHORIZED FOR INCLUSION ON THE NASDAQ NATIONAL MARKET,
OR ANY SUBSIDIARY THEREOF, SHALL BE AN "AFFILIATE" OF THE GENERAL PARTNER OR
ANY AFFILIATE THEREOF UNLESS A PERSON (OR PERSONS IF SUCH PERSONS WOULD BE
TREATED AS PART OF THE SAME GROUP FOR PURPOSES OF SECTION 13(D) OR 13(G) OF
THE SECURITIES EXCHANGE ACT OF 1934) DIRECTLY OR INDIRECTLY OWNS TWENTY
PERCENT (20%) OR MORE OF THE OUTSTANDING COMMON STOCK OF THE GENERAL PARTNER
AND SUCH OTHER CORPORATION.
"Agreement" means this SECOND Amended and Restated Agreement of Limited
Partnership, as originally executed and as hereafter amended or modified from
time to time.
"Capital Account" or "Capital Accounts" means, with respect to a Partner,
the account maintained for such Partner which is determined and maintained in
a manner which the General Partner determines is in accordance with section
1.704-1(b)(2)(iv) of the Treasury Regulations, as amended.
"Capital Contribution" or "Capital Contributions" means, with respect to any
Partner, the total amount of money (and the agreed value of any property
contributed to the Partnership by the General Partner) contributed and agreed
to be contributed to the Partnership (prior to the deduction of any selling
commissions or expenses) by such Partner; provided, however, that as and to
the extent any placement agent retained by the General Partner to assist in
the private placement of the Units foregoes any portion of its fees or selling
commission with a consequent reduction in the offering price of any Units so
placed or as and to the extent any Limited Partner receives a discount of
$12,285 per Unit as a result his making a payment of $87,715 per Unit in cash
($77,715 per Unit if purchased in cash by the General Partner, its Affiliates,
or officers, directors or employees of the General Partner or its Affiliates,
or by the Placement Agents) upon execution of the subscription documents as
full payment of his Capital Contribution, the Limited Partners purchasing any
such Units shall nevertheless be deemed to have contributed to the Partnership
the full amount of the offering price without deduction on account of such
reduced purchase price.
"Capital Receipts" means Sale Proceeds and/or Refinancing Proceeds.
"Cash Available for Distribution" means, with respect to any fiscal period,
the cash revenues of the Partnership from all sources during such fiscal
period other than Capital Receipts less (i) all cash expenditures of the
Partnership during such fiscal period, including, without limitation,
repayment of all Partnership indebtedness to the extent required to be paid,
but not including expenditures of Capital Receipts plus any fees for
management services and administrative expenses and (ii) such reserves as may
be determined by the General Partner, in its sole discretion, to be necessary
to provide for the foreseeable needs of the Partnership.
"Code" means the Internal Revenue Code of 1986, as amended (or any
corresponding provision or provisions of succeeding law).
"Consent" means either (a) the approval given by vote at a meeting called
and held in accordance with the provisions of Section 10.01, or (b) a prior
written approval required or permitted to be given pursuant to this Agreement
or the act granting such approval, as the context may require. Unless
otherwise specified, Consent of the Limited Partners shall mean Consent of a
majority in interest of the Limited Partners. [However, if the General Partner
or any Affiliate of the General Partner (other than officers, directors or
employees of the General Partner or its Affiliates) purchases any Units, it
shall have no voting rights with respect to such Units.]
"Cumulative Capital" means, with respect to any Partner, the amount of
Capital Contributions actually contributed to the Partnership as of the date
in question (prior to the deduction of any selling commissions or
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expenses) by such Partner; provided, however, that as and to the extent any
placement agent retained by the General Partner to assist in the private
placement of the Units foregoes any portion of its fees or selling commission
with a consequent reduction in the offering price of any Units so placed or as
and to the extent any Limited Partner receives a discount of $12,285 per Unit
as a result of his paying $87,715 per Unit in cash ($77,715 if purchased in
cash by the General Partner, its Affiliates, or officers, directors and
employees of the General Partner or its Affiliates, or by the Placement
Agents) upon execution of the subscription documents as full payment of the
purchase price for such Unit the Limited Partners purchasing any such Unit
shall nevertheless be deemed to have contributed to the Partnership the full
amount of the offering price without deduction on account of such reduced
purchase price, provided, further that at the time of any calculation of
Cumulative Capital, there shall only be credited to the Cumulative Capital of
a Limited Partner an amount per Unit not in excess of the amount of Capital
Contribution required to be paid by Limited Partners who pay for their Units
in installments.
"Debt Service Guarantees" means the guarantees by Marriott and the General
Partner in an amount not exceeding $21,875,000 of interest and principal
payments owing by the Partnership under the Mortgage Debt.
"Defaulting Limited Partner" means a Limited Partner who fails to pay all or
any portion of any installment of his Capital Contribution for a period of 20
days after the date such installment was due.
"Defaulting Limited Partner Allocation" means allocations of Net Losses, Net
Profits, Gains, Losses, and tax credits to a Defaulting Limited Partner.
"Default Notice" means the notice given by the General Partner to the
Partnership of its desire to purchase all or a portion of a Defaulting Limited
Partner's Interest in the Partnership.
"Designated Person" means the General Partner.
["Equipment" means the equipment purchased from TWA pursuant to the
Equipment Purchase Agreement and leased back to TWA pursuant to the Equipment
Lease.
"Equipment Appraisal" means that appraisal prepared by Simat, Helliesen &
Eichner, Inc., as described in Exhibit H to the Private Placement Memorandum.
"Equipment Lease" means that lease agreement between the Partnership as
lessor and TWA as lessee providing for the leasing of the Equipment.
"Equipment Purchase Agreement" means that purchase agreement pursuant to
which the Partnership will purchase the Equipment from TWA.
"Equipment Rental" means the rent under the Equipment Lease.]
"Expert" means that independent expert retained by the General Partner who
will determine the respective after-tax present values to the General Partner
and the Limited Partners of the Affected Items.
"FF&E" means (i) furniture, fixtures and furnishings and equipment and (ii)
routine repairs and maintenance undertaken subsequent to the opening date of
the Hotel, the cost of which would not be expensed under generally accepted
accounting principles.
"Fiscal Quarter" means, for the respective fiscal periods in any year, (i)
the period beginning on January 1, and having the same ending date as the
General Partner's 12-week fiscal first quarter, (ii) the same period of time
as the General Partner's second fiscal quarter, (iii) the same period of time
as the General Partner's third fiscal quarter, and (iv) the period from the
end of the General Partner's third fiscal quarter through December 31 in such
Fiscal Year.
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"Fiscal Year" means the fiscal year of the Partnership as established in
Section 9.02.
"Foreclosure Guarantee" means the guarantee of the General Partner in an
amount not exceeding $50 million of principal upon a foreclosure of the Hotel.
"Gain" or "Gains" means the gain or gains recognized by the Partnership for
Federal income tax purposes upon the sale or disposition of Partnership
property (other than the routine sale of used FF&E being replaced at the
Hotel[, and other than the sale or other disposition of Equipment except in
connection with a sale or other disposition of all or substantially all the
assets of the Partnership).]).
"General Partner" means Marriott Desert Springs Corporation, a Delaware
corporation and wholly owned subsidiary of Host, in its capacity as general
partner of the Partnership and its permitted successors or assigns.
"Host" means Host [International, Inc.] MARRIOTT CORPORATION, a Delaware
corporation [and wholly owned subsidiary of Marriott].
"Hotel" means Marriott's Desert Springs Resort and Spa in Palm Desert,
California and the land on which the hotel and a golf course is located.
"Hotel Operating Lease" means that certain agreement with the Operating
Tenant, [to be] executed as of the closing of the offering pursuant to the
Private Placement Memorandum, whereby the Operating Tenant leases the Hotel
and subleases a golf course from the Partnership.
["Hotel Purchase Agreement" means the purchase agreement to be entered into
between the Partnership as purchaser and the Operating Tenant as seller
providing for the purchase of the Hotel and certain related materials and
personal property including FF&E.
"Initial Limited Partner" means Christopher G. Townsend.]
"Interest" means the entire interest of a Partner in the Partnership at any
particular time, including the right of such Partner to any and all benefits
to which a Partner may be entitled as provided in this Agreement, together
with the obligations of such Partner to comply with all the terms and
provisions of this Agreement.
"INTERESTED TRANSACTION" MEANS ANY MATTER IN WHICH THE GENERAL PARTNER OR
ITS AFFILIATES HAS AN ACTUAL ECONOMIC INTEREST, OTHER THAN AN INTEREST SOLELY
AS A RESULT OF ITS OR AN AFFILIATE'S OWNERSHIP OF UNITS OR A GENERAL PARTNER
INTEREST OR AS A RESULT OF ITS OR AN AFFILIATE'S (AND ANY GROUP OF WHICH IT IS
A PART FOR PURPOSES OF SECTION 13(D) OR 13(G) OF THE SECURITIES EXCHANGE ACT
OF 1934) DIRECT OR INDIRECT OWNERSHIP OF LESS THAN TWENTY PERCENT (20%) OF THE
OUTSTANDING COMMON STOCK OF BOTH THE GENERAL PARTNER AND A CORPORATION WHOSE
COMMON STOCK IS LISTED ON A NATIONAL SECURITIES EXCHANGE OR AUTHORIZED FOR
INCLUSION IN THE NASDAQ NATIONAL MARKET, OR ANY SUBSIDIARY THEREOF.
"Invested Capital" means the excess, if any, of Cumulative Capital of a
Partner over cumulative distributions to him of Capital Receipts.
"Investor List" means that list, required by the Tax Reform Act of 1984, AS
AMENDED, identifying Persons to whom Interests in the Partnership were sold,
such Persons' addresses and taxpayer identification numbers, the dates on
which the Interests were acquired and the name and tax shelter registration
number of the Partnership.
"IRS" means the Internal Revenue Service.
"Limited Partner" means any Person admitted to the Partnership pursuant to
Section 3.03 including any Substituted Limited Partner.
"Loss" or "Losses" means the loss or losses recognized by the Partnership
for Federal income tax purposes upon the sale or disposition of Partnership
property [(]other than the routine sale of used FF&E being
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replaced at the Hotel[, and other than the sale or other disposition of
Equipment except in connection with a sale or other disposition of all or
substantially all the assets of the Partnership)].
["Marriott" means Marriott Corporation, a Delaware corporation.]
"Minimum Gain" means the Gain that would be recognized by the Partnership,
if property of the Partnership which is secured by a nonrecourse debt, were
foreclosed upon and such property were transferred to the creditor in
satisfaction thereof.
"Mortgage Debt" means the loan provided to the Partnership by The First
National Bank of Chicago and any other commercial banks in the principal
amount of $175 million.
"Net Profits" or "Net Losses" means, for any period, the net profits or net
losses of the Partnership for Federal income tax purposes during such period
as determined under section 702 of the Code, including gain or loss on the
routine sale of used FF&E not in connection with the sale of a Hotel, and from
the sale or other disposition of Equipment except in connection with a sale or
other disposition of all or substantially all the assets of the Partnership,
and excluding Gains and Losses and items specially allocated under Sections
4.05, 4.11, 4.13 and 4.14.
"Note" or "Notes" means the promissory note or notes given to the
Partnership by the Limited Partners pursuant to Section 3.05.
"Notification" means a written notice, containing the information required
by this Agreement to be communicated to any Person, sent by registered,
certified or regular mail to such Person; provided, however, that any
communication containing such information sent to such Person and actually
received by such Person shall constitute Notification for all purposes of this
Agreement.
"Operating Tenant" means [Desert Springs Hotel Services, a joint venture
between Marriott and Host] MARRIOTT HOTEL SERVICES, INC., A DELAWARE
CORPORATION AND WHOLLY OWNED SUBSIDIARY OF MARRIOTT INTERNATIONAL INC., as
lessee and operator of the Hotel.
"ORIGINAL LIMITED PARTNER" MEANS ANY LIMITED PARTNER WHO ACQUIRED UNITS IN
THE INITIAL OFFERING OF UNITS PURSUANT TO THE PRIVATE PLACEMENT MEMORANDUM.
"Partners" means, collectively, the Limited Partners as constituted from
time to time and the General Partner.
"Partnership" means the limited partnership formed UNDER THE ACT AND
CONTINUED pursuant to this Agreement by the parties hereto, as said
Partnership may from time to time be constituted.
"Partnership Debt" means any indebtedness for borrowed money incurred by the
Partnership.
"Person" means any individual, partnership, LIMITED LIABILITY COMPANY,
corporation, trust or other legal entity.
"Placement Agents" means Smith Barney, Harris Upham & Co. Incorporated and
Mutual Benefit Financial Service Company.
"Prime Rate" means the base rate of interest announced from time-to-time by
Bankers Trust Company, New York, New York.
"Private Placement Memorandum" means the Partnership's confidential private
placement memorandum dated March 20, 1987, concerning the offering of the
Units.
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"Proposed Regulations" means, for purposes of computing Affected Items,
regulations proposed by the Department of the Treasury as directed by section
79 of the Tax Reform Act of 1984, AS AMENDED, or otherwise pursuant to section
704 or section 752 of the Code.
"Purchase Debt" means a loan in the maximum amount of up to $56,442,000
borrowed by the Partnership from Marriott CORPORATION to finance, AMONG OTHER
THINGS, a portion of the purchase price of the Hotel [and the purchase price
of the Equipment].
"Refinancing Proceeds" means the net proceeds from any refinancing or
borrowing by the Partnership, the proceeds of which are applied to the
repayment of previously incurred debt of the Partnership, or borrowed for
distributions to the Partners including the proceeds of a sale and leaseback
on which no taxable gain is recognized for Federal income tax purposes.
"Sale Proceeds" means any net proceeds received by the Partnership from (i)
the exchange, condemnation, eminent domain taking, casualty, sale or other
disposition of all or a portion of the Partnership's assets, or (ii) the
liquidation of the Partnership's property in connection with a dissolution of
the Partnership (in excess of the outstanding indebtedness and other
liabilities of the Partnership). Sale Proceeds shall not include the proceeds
from the routine sale of used FF&E not in connection with the disposition of
the Hotel.
"Substituted Limited Partner" means any Person admitted to the Partnership
as a Limited Partner pursuant to the provisions of Section 7.02 and who is
listed as such in the books and records of the Partnership.
"Tax-Exempt Entity" means an entity or person defined in section 168(h)(2)
of the Code.
"Tax Matters Partner" means the General Partner.
"Total Partnership Distributions" means the total amount of cash and the
fair market value of any property (net of any associated liabilities)
distributed to the Partners pursuant to Sections 4.07 through 4.10.
"Treasury Regulations" means the regulations promulgated by the Department
of the Treasury as in effect as of the date of this Agreement.
["TWA" means Trans World Airlines, Inc.]
"Unit" means the Interest of a Limited Partner represented by a Capital
Contribution of $100,000.
ARTICLE TWO
FORMATION, NAME, PLACE OF BUSINESS, PURPOSE AND TERM
Section 2.01. Formation. The parties have formed and do hereby continue the
Partnership pursuant to the provisions of the Act.
Section 2.02. Name and Offices. The name of the Partnership is and shall be
Desert Springs Marriott Limited Partnership. The principal offices of the
Partnership shall be located at 10400 Fernwood Road, Bethesda, Maryland
[20058] 20817 or at such other place or places as the General Partner may from
time to time determine. The address of the registered office of the
Partnership in the State of Delaware is at [229 South State Street, Dover,]
1013 CENTRE ROAD, WILMINGTON, County of [Kent,] NEW CASTLE, Delaware [19901]
19805.
Section 2.03. Purpose. The purpose of the Partnership is, without
limitation, to DIRECTLY OR INDIRECTLY, (i) acquire, own, and then lease to, OR
ENTER INTO A MANAGEMENT AGREEMENT WITH, an operator the Hotel and a golf
course adjacent to the Hotel, (ii) lease a second golf course and sublease the
course to an operator, (iii) sell or otherwise dispose of the Hotel,[(iv)
acquire and own the Equipment, lease the Equipment and sell or otherwise
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dispose of the Equipment,] and (iv) to engage in any other activities related
or incidental thereto as more fully set forth in Section 5.01 hereof.
Section 2.04. Term. The term of the Partnership shall continue in full force
and effect from the date of the filing of the original Certificate of Limited
Partnership until December 31, 2087, or until dissolution prior thereto
pursuant to the provisions of Article Eight.
Section 2.05. Agent for Service of Process. The name and address of the
agent for service of process on the Partnership in the State of Delaware is
The Prentice-Hall Corporation System, Inc., [229 South State Street, Dover,]
1013 CENTRE ROAD, WILMINGTON, County of [Kent,] NEW CASTLE, Delaware [19901]
19805.
ARTICLE THREE
PARTNERS AND CAPITAL
Section 3.01. General Partner. The General Partner of the Partnership is and
shall be Marriott Desert Springs Corporation, a Delaware Corporation and
wholly-owned subsidiary of Host, having its principal executive offices at
10400 Fernwood Road, Bethesda, Maryland [20058.] 20817.
Section 3.02. [INTENTIONALLY OMITTED] [Initial Limited Partner. The initial
limited partner of the Partnership is Christopher G. Townsend, 10 Paramus
Court, Gaithersburg, Maryland 20878. Upon admission to the Partnership of the
Limited Partners, the Initial Limited Partner will withdraw from the
Partnership and receive a return of his Capital Contribution.]
Section 3.03. Limited Partners. The names and addresses of the Limited
Partners, the amount of their agreed upon Capital Contributions and the number
of Units held by them are set forth in the books and records of the
Partnership and a Person shall be deemed to be admitted as a Limited Partner
when the General Partner has accepted such Person as a Limited Partner of the
Partnership, the books and records reflect such Person as admitted to the
Partnership as a Limited Partner and such Person has executed this Agreement.
Section 3.04. Capital Contribution by the General Partner. The General
Partner has made a Capital Contribution in the amount of $909,100 in cash.
Section 3.05. Capital Contributions by the Limited Partners.
A. The number of Units subscribed for by each Limited Partner is set forth
in the subscription documents executed and delivered by such Limited Partner.
Each ORIGINAL Limited Partner's contribution in respect of the Units
subscribed for [shall be] WAS MADE (i) in cash and a fully recourse promissory
note (the "Note") of such Limited Partner payable as set forth in Section
3.05B or (ii) in cash in the amount of $87,715 as full payment of the
subscription price ($77,715 per Unit in cash if purchased by the General
Partner, its Affiliates, or officers, directors or employees of the General
Partner or its Affiliates, or by the Placement Agents). No Partner shall be
paid interest on any Capital Contribution.
[The Partnership may pledge the aforesaid Notes and its interest in the
Units to Marriott or its Affiliates as security for payment of the Purchase
Debt and may not further pledge or assign such Notes without the consent of
Marriott.]
B. [The Limited Partners shall make] THE ORIGINAL LIMITED PARTNERS MADE
Capital Contributions totaling up to $90 million for which each such Limited
Partner [shall subscribe] SUBSCRIBED in Units of $100,000 [each] unless the
General Partner in its sole discretion [shall accept] ACCEPTED subscriptions
for less than a full Unit. For each Unit purchased, [a] AN ORIGINAL Limited
Partner [shall make] MADE a Capital Contribution either by paying $87,715 per
Unit in cash ($77,715 per Unit in cash if purchased by the General Partner,
its Affiliates, or officers, directors or employees of the General Partner or
its Affiliates, or the Placement Agents) on execution of
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the subscription documents as full payment of the subscription price or
$100,000 in the following installments: (i) a first installment in the amount
of $25,000 payable on execution of the subscription documents; (ii) a second
installment in the amount of $30,000 payable on June 15, 1988; (iii) a third
installment in the amount of $25,000 payable on June 15, 1989; and (iv) a
fourth installment in the amount of $20,000 payable on June 15, 1990. ORIGINAL
Limited Partners [purchasing] WHO PURCHASED more or less than a full Unit
[shall be] WERE required to make proportionate installments on the dates
aforesaid. ORIGINAL Limited Partners [may] COULD prepay, without any reduction
in the amount thereof, the foregoing installments, in whole or in part, at any
time prior to their respective due date.
C. The obligation of each ORIGINAL Limited Partner to pay the installments
required by Section 3.05B, other than the first installment, [shall be] WAS
evidenced by the delivery to the Partnership concurrently with payment of the
first installment of the Note in the form of Exhibit A attached hereto payable
to the Partnership in the amount of $75,000 for each Unit purchased (adjusted
if less than a full Unit is purchased) representing the amount of the
remaining unpaid Capital Contribution of such ORIGINAL Limited Partner. Such
ORIGINAL Limited Partners [may] COULD prepay in whole, or in part, all of the
installments. If [a] AN ORIGINAL Limited Partner [pays] PAID $87,715 in cash
per Unit at the time he [delivers] DELIVERED an executed subscription
agreement, then there [shall be] WAS no obligation to deliver a Note to the
Partnership. That portion of such $87,715 payment in excess of the amount that
would have been paid upon subscription had the ORIGINAL Limited Partner
selected the installment method of paying the subscription price [will be] WAS
used by the Partnership to reduce the Purchase Debt.
D. Each ORIGINAL Limited Partner paying in installments [pledges] PLEDGED to
the Partnership his Interest as security for payment of the installments
payable under such ORIGINAL Limited Partner's Note. The Partnership, acting
through the General Partner, shall have all rights and remedies granted to a
secured party under the Uniform Commercial Code as adopted in Delaware,
including, but not limited to, the right to sell such Interest, and such
Limited Partner agrees to execute such instruments, including, without
limitation, a financing statement on Form UCC-1, as the General Partner may
from time to time require to perfect such security interest. [In addition, the
General Partner shall have the right, at any time through the date of payment
of the fourth installment of Capital Contributions specified in Section 3.05B
above, to have a credit check performed for any Limited Partner making payment
of Capital Contributions in installments.] For purposes of the said Uniform
Commercial Code, this Agreement shall also be deemed to be a security
agreement.
E. The following provisions [shall apply] APPLIED in the event a Limited
Partner [fails] FAILED to make installment payments when due:
(i) A Limited Partner who [fails] FAILED to pay when due all or any
portion of any installment (a "Defaulting Limited Partner") for a period of
20 days and such default continues, the Defaulting Limited Partner shall be
required to pay the Partnership a late payment charge equal to five percent
(5%) of such unpaid installment or portion thereof. At any time prior to
any sale of all or any portion of the Defaulting Limited Partner's Interest
as provided in this subsection E, the General Partner may but shall not be
obligated to accept full payment from the Defaulting Limited Partner of any
unpaid installment then overdue. The acceptance of such payment by the
General Partner shall extinguish the further right (as hereafter defined)
of the General Partner to purchase the Defaulting Limited Partner's
Interest. If a default shall continue for more than 30 days after notice to
the Defaulting Limited Partner, in addition to the aforesaid late charge,
the unpaid portion of such installment or portion thereof shall bear
interest from the date due until paid in full at a rate equal to the lesser
of (a) four percentage points in excess of the Prime Rate or (b) the
maximum rate permitted by law. If the late charge is deemed to be interest
under law, it may only be imposed to the extent it does not cause total
interest to exceed the rate permitted by law. A Defaulting Limited Partner
shall have no voting rights with respect to his Interest for so long as any
unpaid installments plus any late charge or interest attributable to such
unpaid installment or portion thereof remains unpaid. The General Partner
will deduct the amount of any delinquent installments, late penalty or
interest from any cash distributions to Limited Partners.
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(ii) If a default shall continue for more than 30 days after notice to
the Defaulting Limited Partner, the General Partner shall have the option
of accelerating the payment of the entire unpaid balance of the Notes of
the Defaulting Limited Partner and the additional option of purchasing (for
the price set forth below) all or a portion of the Defaulting Limited
Partner's Interest. Such option may be exercised by the General Partner by
giving the Partner a Default Notice. The purchase price to be paid to the
Defaulting Limited Partner shall be an amount equal to the greater of (x)
10% of the amount of Cumulative Capital of the Defaulting Limited Partner
in respect of the Interest being purchased less the sum of (i) the total
amount of cash distributions, if any, theretofore made to the Defaulting
Limited Partner in respect of the Interest being purchased, (ii) any
reasonable expenses incurred by the Partnership and by the General Partner
in connection with such purchase, (iii) all tax credits previously reported
by the Partnership for all Fiscal Years then ended allocable to the
Interest being purchased, and (iv) 50% of the Net Losses previously
reported by the Partnership for all Fiscal Years then ended allocable to
the Interest being purchased, or (y) three percent (3%) of the amount of
the Cumulative Capital of the Defaulting Limited Partner in respect of the
Interest being purchased. Such purchase price shall be paid in cash within
30 days after the date of the consummation of the purchase. The General
Partner shall also pay to the Partnership an amount equal to all Capital
Contribution installments in respect of the Interest being purchased then
due and not theretofore paid by the Defaulting Limited Partner (including
the unpaid installment giving rise to the default) and shall assume all
other obligations of the Defaulting Limited Partner in respect of the
Interest being purchased, if any, to the Partnership.
(iii) In the event that the General Partner does not acquire all of the
Interest of a Defaulting Limited Partner and after the exercise of due
diligence, the General Partner is unable to find a purchaser for all or the
balance of the Defaulting Limited Partner's Interest for the price set
forth in clause (ii) above, then the Defaulting Limited Partner shall sell
such Interest or the balance of such Interest, as the case may be, on such
terms and conditions as the General Partner deems reasonable under the
circumstances; provided that any purchaser shall be required to agree to
assume the obligation of the Defaulting Limited Partner to make payment of
the unpaid balance of the installments to the extent of the Interest so
acquired. At the closing of any purchase and sale pursuant to this clause
(iii), the purchaser shall pay to the Partnership the unpaid balance of the
installments then due and owing by the Defaulting Limited Partner and shall
agree to thereafter make payment of any future installments as and when the
same shall become due and payable. The Defaulting Limited Partner shall pay
all of the Partnership's and General Partner's costs and expenses incurred
in connection with any purchase and sale of a Defaulting Limited Partner's
interest pursuant to this clause (iii).
(iv) A purchaser of all or any part of the Interest of a Defaulting
Limited Partner will receive all of the cash allocable to such Interest
from and after the date of default and not actually distributed to the
Defaulting Limited Partner prior to default. All Net Profits and Net Losses
that would otherwise be allocated in accordance with Sections 4.01, 4.02
and 4.03 to a Defaulting Limited Partner ("Defaulting Limited Partner
Allocation") shall be allocated, from and after the date of default to, but
not including, the date, if any, on which the Interest of such Defaulting
Limited Partner shall be purchased, among the non-Defaulting Limited
Partners in proportion to the number of Units owned by each. All Defaulting
Limited Partner Allocations from and after the date of purchase of the
Defaulting Limited Partner's Interest until the expiration of the Fiscal
Year in which such purchase date falls shall be allocated to the purchaser.
In the following Fiscal Year or Fiscal Years, all Net Profits and Net
Losses of the Partnership allocable to the Limited Partners under Article
Four shall first be allocated until the purchaser's capital account balance
shall be equal in amount to the capital account balance of a non-Defaulting
Partner owning the same number of Units as the purchaser.
(v) Notwithstanding the foregoing provisions of this Section 3.05E, the
obligations of the Defaulting Limited Partner hereunder shall not be
extinguished by the existence of any option of the General Partner to
purchase the Interest of the Defaulting Limited Partner, or by its
exercise, or by any agreement by any Person to purchase such Interest, but
only to the extent of payment of the unpaid installments together with
interest thereon made in the Defaulting Limited Partner's stead by any
purchaser of such Interest.
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(vi) In addition to the other rights of the Partnership against the
Defaulting Limited Partner, the Partnership may avail itself of appropriate
legal remedies at law or in equity to compel payment of any portion of the
installments remaining unpaid together with any interest thereon remaining
unpaid, together with reasonable court costs and legal fees in the event of
litigation against the Defaulting Limited Partner.
Section 3.06. Partnership Capital.
A. The Capital Contribution of each Limited Partner and the General Partner
shall be credited to each such Partner's Capital Account; provided, however,
that the deemed increase in the Capital Contribution of any Partner due to (i)
any relinquished selling commission or other fees with respect to such Partner
or (ii) any discount of $12,285 per Unit for any Limited Partner making full
payment of such Limited Partner's Capital Contribution ($22,285 for the
General Partner or any of its Affiliates of for officers, directors or
employees of the General Partner or any of its Affiliates, or the Placement
Agents) upon execution of the subscription agreement shall not be credited to
such Partner's Capital Account and a Limited Partner's obligation to make
additional contributions in installments shall not be credited to his Capital
Account until the installments are actually contributed. A Partner's Capital
Account shall also be credited with the amount of Net Profits or Gain
allocable to the Partner, and shall be debited with (x) such Partner's share
of Total Partnership Distributions and (y) the amount of Net Losses, Losses or
deductions allocated to such Partner.
B. For purposes of this Section 3.06, upon a distribution in kind of
Partnership property, the Capital Accounts of Partners will be debited or
credited as though the property had been sold for an amount equal to its fair
market value, and gain or loss which would have been recognized for Federal
income tax purposes had the property actually been sold will be allocated to
the Partners under Article Four.
Section 3.07. Liability of the Limited Partners. Except as otherwise
required by the Act, no Limited Partner shall be liable for the debts,
liabilities, contracts or any other obligations of the Partnership. Except as
otherwise required by the Act, a Limited Partner has no liability in excess of
his Capital Contribution and his share of the Partnership's assets and
undistributed profits, and shall not be required to lend any funds to the
Partnership or, after his Capital Contribution has been paid, to make any
further Capital Contributions to the Partnership or to repay to the
Partnership, any Partner or to any creditor of the Partnership any portion or
all of any negative balance of his Capital Account.
Section 3.08. Liability of the General Partner. Except as provided in the
Act, the General Partner has the liabilities of a partner in a partnership
without limited partners to Persons other than the Partnership and the other
Partners. Except as provided in the Act or herein, the General Partner has the
liabilities of a general partner in a partnership without limited partners to
the Partnership and to the other Partners. This Agreement shall not be amended
to limit such liability of the General Partner.
ARTICLE FOUR
ALLOCATION OF PROFITS AND LOSSES; DISTRIBUTIONS OF CASH AND CERTAIN PROCEEDS
Section 4.01. Allocation of Net Profits. Net Profits for each Fiscal Year
shall be allocated to the Partners in the following order of priority:
(i) first, through and including the year ending on December 31, 1990,
99% to the General Partner and 1% to the Limited Partners;
(ii) next, through and including the year ending December 31, 1992, 70%
to the General Partner and 30% to the Limited Partners; and
(iii) thereafter, 10% to the General Partner and 90% to the Limited
Partners.
Section 4.02. Allocation of Net Losses and Losses. Net Losses and Losses for
each Fiscal Year shall be allocated through December 31, 1990, 100% to the
General Partner, and in Fiscal Years thereafter, 70% to the
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General Partner and 30% to the Limited Partners; provided, however, that if
and to the extent the allocation of Net Losses and Losses in this manner would
cause the negative balances, if any, in the Capital Accounts of Limited
Partners (deemed, for purposes of this Section 4.02, to include the amount of
any obligation to make additional contributions to the capital of the
Partnership) to exceed the portions of the Minimum Gain which would be
respectively allocated to such Partners at the end of such Fiscal Year, then
such Net Losses and Losses shall instead be allocated to the General Partner.
Section 4.03. Allocation of Gain. Gain recognized by the Partnership shall
be allocated (after giving effect to the allocations referred to in Sections
4.01 and 4.02 and all distributions other than distributions pursuant to
Section 4.08B) with respect to any Fiscal Year in the following order of
priority:
(i) first, to all Partners whose Capital Accounts have a negative
balance, in the ratio of such negative balances until such negative
balances are brought to zero; provided, however, if there is insufficient
Gain to bring such negative balances to zero, then: (a) if the sum of such
negative balances is less than or equal to the Partnership Minimum Gain at
the end of the Fiscal Year, then Gain shall be allocated in the ratio of
the negative balances; and (b) if the sum of such negative balances exceeds
the Partnership Minimum Gain at the end of the Fiscal Year, then Gain shall
be allocated in the ratio of the deficit balance of the General Partner as
reduced by such excess to the deficit balances of the Limited Partners,
until the deficit balances of the Limited Partners are brought to zero, and
then to the General Partner until its deficit balance is brought to zero;
provided further, however, that solely for purposes of this Section
4.03(i), the Capital Account balance of a Limited Partner shall be deemed
to include the amount of any obligation to make additional contributions to
the capital of the Partnership;
(ii) second, to all Partners up to the amount necessary to bring their
respective Capital Account balances to an amount equal to their respective
Invested Capital; provided, however, that in calculating Invested Capital
solely for purpose of this Section 4.03(ii), Cumulative Capital of a
Limited Partner who paid $87,715 per Unit in cash ($77,715 if purchased by
the General Partner, its Affiliates, or officers, directors or employees of
the General Partner or its Affiliates), upon his execution of the
subscription documents as full payment of the purchase price of his Unit
shall be deemed to be $100,000;
(iii) third, in the case of Gain arising from the sale or disposition (or
from a related series of sales or dispositions) of all or substantially all
the Hotel or of all or substantially all the assets of the Partnership: (a)
to the Limited Partners in an amount equal to the excess, if any, of (1)
the sum of the product of 12% times the weighted average of the Limited
Partners' Invested Capital each year, over (2) the sum of distributions to
the Limited Partners of Cash Available for Distribution each year, and (b)
next, to the General Partner until it has been allocated an amount equal to
10/90 times the amount allocated to the Limited Partners under clause (a);
and
(iv) thereafter, 12% to the General Partner and 88% to the Limited
Partners.
Section 4.04. Allocation Among Limited Partners of Net Profits, Gains, Net
Losses and Losses. [Any] Net Profits or Net Losses for any Fiscal Year
allocable to the Limited Partners shall be allocated among the Limited
Partners pro rata in accordance with the number of Units owned by each as of
the end of such Fiscal Year; provided that if any Unit is assigned during the
Fiscal Year in accordance with this Agreement, the Net Profits or Net Losses
that are so allocable to such Unit shall be allocated between the assignor and
assignee of such Unit according to the number of Accounting Periods in such
Fiscal Year each owned such Unit. Any Gains or Losses allocable to the Limited
Partners shall be allocated among the Limited Partners who held Units on the
last day of the Accounting Periods in which the sale or disposition giving
rise to such Gains or Losses occurred, pro rata in accordance with the number
of Units owned by each such Limited Partner. If any Unit is assigned by a
Limited Partner other than on the first day of an Accounting Period (in
contravention of the Agreement), then the Partnership shall recognize such
assignment for the purposes of allocating Net Profits, Gains, Net Losses or
Losses if, and to the extent, it is legally required to so do in the opinion
of legal counsel.
Section 4.05. Allocation of Recapture Income. Notwithstanding Sections 4.01,
4.02 and 4.03, "recapture income," if any, realized by the Partnership
pursuant to section 1245 or section 1250 of the Code shall be
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allocated to the Partners to whom the prior corresponding depreciation
deductions were allocated, such allocations to be made pro rata to the
Partners in accordance with the manner in which such depreciation deductions
were allocated.
Section 4.06. Distribution of Cash Available for Distribution. Cash
Available for Distribution with respect to each Fiscal Year shall be
distributed at least annually as follows:
(i) through and including the end of the Accounting Period during which
the General Partner and the Limited Partners shall have received cumulative
distributions of Capital Receipts equal to $45,454,545, 1% to the General
Partner and 99% to the Limited Partners;
(ii) thereafter, 10% to the General Partner and 90% to the Limited
Partners.
Section 4.07. Distribution of Refinancing Proceeds. Refinancing Proceeds
shall, unless the General Partner, in its sole discretion, shall determine to
retain any such amounts in the Partnership, be distributed as follows:
(i) first, 1% to the General Partner and 99% to the Limited Partners,
until the Partners shall have received cumulative distributions of Capital
Receipts equal to $90,909,100; and
(ii) thereafter, 10% to the General Partner and 90% to the Limited
Partners.
Section 4.08. Distribution of Sale Proceeds.
A. Sale Proceeds from the sale or other disposition of less than
substantially all of the assets of the Partnership, other than from the sale
or other disposition of all or substantially all the Hotel, shall, unless the
General Partner, in its sole discretion, shall determine to retain any such
amounts in the Partnership, be distributed:
(i) first, until the Partners shall have received cumulative
distributions of Capital Receipts equal to $90,909,100, 1% to the General
Partner and 99% to the Limited Partners; and
(ii) thereafter, 10% to the General Partner and 90% to the Limited
Partners.
B. Sale Proceeds from the sale or other disposition (or from a related
series of sales or dispositions) of all or substantially all of the assets of
the Partnership or all or substantially all the Hotel shall be distributed in
accordance with Section 8.02.
Section 4.09. Allocation Among Limited Partners of Cash Available for
Distribution, Refinancing Proceeds and Sale Proceeds. Cash Available for
Distribution distributable with respect to any Accounting Period to the
Limited Partners pursuant to Section 4.06, shall be distributed to the Limited
Partners pro rata in accordance with the number of Units owned by each as of
the end of such Accounting Period. Proceeds distributable to the Limited
Partners pursuant to Section 4.07 or Section 4.08A shall be distributed to the
Limited Partners pro rata in accordance with the number of Units owned by each
such Limited Partner on the last day of the Accounting Period in which the
transaction giving rise to such proceeds was completed. If a Unit is assigned
by a Limited Partner other than on the first day of an Accounting Period (in
contravention of this Agreement), then the Partnership shall recognize such
assignment for the purpose of distributing amounts pursuant to Sections 4.06,
4.07 and 4.08 if, and to the extent, it is legally required to do so in the
opinion of legal counsel.
Section 4.10. Section 754 Adjustments. For income tax purposes (but not for
purposes of adjusting the Capital Accounts of the Partnership, except as
otherwise provided in section 1.704-1(b)(2)(iv) of the Treasury Regulations),
appropriate adjustments shall be made in the allocations to Limited Partners
under this Article Four in order to reflect adjustments in the basis of
Partnership property permitted pursuant to any election under section 754 of
the Code, provided by the General Partner, in its sole discretion, makes such
election. If such an election is made, the Partnership will make the basis
adjustments and calculate depreciation deductions in accordance with such
adjustments for those transferee Limited Partners who advise the Partnership
of this obligation with sufficient information to enable the Partnership to
determine when, and at what price, such
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transferee Limited Partners acquired Units. In the case of a transferee
Limited Partner who does not advise the Partnership of such information, the
Partnership will attempt to supply such Limited Partner with reasonably
available information that will permit such Limited Partner to make the
required basis adjustment calculation.
Section 4.11. Special Allocation of Syndication Expenses. Any "syndication
expenses," as described in the regulations under section 709 of the Code, paid
or incurred by the Partnership in any Accounting Period in respect of any Unit
shall be specially allocated to and charged to the Capital Account of the
Limited Partner owning such Unit during such Accounting Period.
Section 4.12. Contingent Adjustments.
A. If prior to 1992, regulations shall have been proposed by the Department
of the Treasury, as directed by section 79 of the Deficit Reduction Act of
1984 or otherwise pursuant to sections 704 or 752 of the Code (the "Proposed
Regulations"), and the General Partner (i) is of the opinion (based upon
advice of counsel) taking into account the Proposed Regulations for any Fiscal
Year of the Partnership (an "Affected Year"), that the amount of Net Losses
allocated to the General Partner should be increased, that the amount of Net
Profits allocated to the General Partner should be decreased or that the
General Partner or its Affiliates receive tax benefits (including the
avoidance or delay of the recognition of income) (the "Affected Items") and
(ii) shall have taken such steps to ameliorate the potential adverse effect of
the Proposed Regulations on the tax consequences of an investment in the
Partnership by Limited Partners that the General Partner (upon advice of
counsel) shall consider reasonable under the circumstances (taking into
account economic, financial, accounting, regulatory and any other facts or
circumstances existing at the time), then to the extent that a change in the
allocations is still required, the adjustments required by the Proposed
Regulations shall be made and the General Partner shall retain a qualified
expert (the "Expert"), the fees and expenses of which shall be paid by the
Partnership, which will be requested to determine at the beginning of each
Affected Year the respective after-tax present values to the General Partner
or its Affiliates and the Limited Partners of the Affected Items for such
Affected Year (the "Adjustments").
B. In determining such Adjustments the Expert shall (i) assume that the
Hotel will be sold in 2002 for an amount equal to its original cost, or
outstanding indebtedness, if greater, and that the Limited Partners and the
General Partner are subject to Federal income tax at the highest marginal tax
rates (for individual taxpayers in the case of the Limited Partners and for
corporate taxpayers in the case of the General Partner) in effect at the times
relevant to such determination and (ii) use such cash flow forecasts and other
economic data that the General Partner shall provide to assist the Expert in
making such determination. For each Affected Year, the General Partner will
make a Capital Contribution to the Partnership at the end of the Affected Year
equal to the adjustment to the General Partner or to the Limited Partners,
whichever is less. Each such Capital Contribution made by the General Partner
shall be promptly distributed to the Limited Partners in accordance with the
ratios in which Cash Available for Distribution would be distributed pursuant
to Section 4.06 for such Affected Year; and provided further that,
notwithstanding the foregoing proviso, if the Proposed Regulations shall be
promulgated in a form other than the form in which they shall have been
proposed, then the General Partner shall make such reasonable adjustments to
the amount of any such Capital Contribution as it shall consider appropriate
under the circumstances. Any contribution or distribution of cash required by
this Section 4.12 shall be appropriately reflected in the Capital Accounts of
the Partners but shall not affect the amount or computation of Capital
Contributions, Cumulative Capital or Invested Capital and shall not be deemed
a distribution of Capital Receipts or Cash Available for Distribution for
purposes of Article Four of this Agreement.
Section 4.13. Special Allocation of Interest on Purchase
Debt. Notwithstanding Sections 4.01, 4.02, and 4.04, the deduction for
interest on the Purchase Debt incurred in each Fiscal Year shall be allocated
to the Limited Partners owning the Units during each Fiscal Year with respect
to which Capital Contributions are being paid in installments pro rata in
proportion to the number of Units held by each such Partner on each day of the
Fiscal Year; provided, however, that the total allocation under this Section
4.13 with respect to any Unit since the formation of the Partnership shall not
exceed $12,285.
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Section 4.14. Special Allocation in Event of Advances by General
Partner. Notwithstanding any other provision of this Article, in the event of
the General Partner makes an advance which is described in Section 5.06C, then
before any Net Losses or Losses attributable to the Accounting Period in which
such an advance is made, or any subsequent Accounting Period, are allocated
pursuant to Section 4.02, there shall first be allocated to the General
Partner an amount of Net Losses or Losses equal to the amount of any advance.
ARTICLE FIVE
RIGHTS, POWERS AND DUTIES OF THE GENERAL PARTNER
Section 5.01. Authority of the General Partner to Manage the Partnership.
A. The General Partner shall have the exclusive right and power to conduct
the business and affairs of the Partnership and to do all things necessary to
carry on the business of the Partnership, and is hereby authorized to take any
action of any kind and to do anything and everything it deems necessary or
appropriate in accordance with the provisions of this Agreement and applicable
law. Except as expressly provided herein, the authority of the General Partner
to conduct the business of the Partnership shall be exercised only by the
General Partner.
B. No Limited Partner shall participate in or have any control whatsoever
over the Partnership's business or have any authority or right to act for or
bind the Partnership. The Limited Partners hereby unanimously Consent to the
exercise by the General Partner of the powers conferred on it by this
Agreement.
C. Except to the extent otherwise provided herein, the General Partner is
hereby authorized, without Consent of the Limited Partners, to:
(i) execute any and all agreements[(including the Hotel Purchase
Agreement, the Equipment Purchase Agreement, the Equipment Lease, the Golf
Course Lease, the Hotel Purchase Agreement, Homeowners Agreement,
agreements with owners of residences adjoining the Hotel and the Hotel
Operating Lease)], contracts, documents, certifications and instruments
necessary or convenient in connection with the development, expansion,
improvement, financing, management, maintenance, operation, re-leasing,
sale or other disposition of the Partnership's properties and assets,[
including the Equipment,] except as otherwise limited by this Agreement;
(ii) borrow money from itself or others (including Affiliates of any
general partner of the Partnership) and issue evidences of indebtedness
necessary, convenient or incidental to the accomplishment of the [purpose]
PURPOSES of the Partnership and to secure the same by mortgage, pledge or
other lien on the assets of the Partnership, such borrowing and security to
be only with respect to the following: (a) the Purchase Debt, (b) any
amounts advanced by the General Partner or an Affiliate of the General
Partner (which amounts may or may not be secured) or any other lender to
enable the Partnership to satisfy its obligations arising in the normal
course of its business, to make payments of principal, interest, premium or
penalty on any debt of the Partnership or to make capital repairs,
improvements and expansions, provided any required Consents of Partners are
obtained, (c) the Mortgage Debt, (d) amounts incurred for the purpose of a
distribution to the Partners of the Partnership, (e) any indebtedness the
incurrence of which must be specifically Consented to by the Limited
Partners under Section 5.02B and (f) any indebtedness incurred to refinance
(and thereafter further refinance as often as shall be necessary) the
unamortized portion of any of the foregoing from time to time outstanding.
In connection with the borrowing of money on a nonrecourse basis, no lender
shall be granted or acquire, at any time as a result of making such a loan,
any direct or indirect interest in the profits, capital or property of the
Partnership other than as a secured creditor;
(iii) prepay in whole or in part, refinance (to the extent permitted by
clause (ii) above), fix the interest rate on, recast, modify or extend any
debt and in connection therewith execute any extensions, consolidations,
modifications or renewals of mortgages on any assets of the Partnership;
(iv) deal with, or otherwise engage in business with, or provide services
to and receive compensation therefor from, any Person who has provided or
may in the future provide any services, lend money or sell
D-14
property to or purchase property from the General Partner or any Affiliate
of the General Partner. No such dealing, engaging in business or providing
of services may involve any direct or indirect payment by the Partnership
of any rebate or any reciprocal arrangement for the purpose of
circumventing any restriction set forth herein upon dealings with the
General Partner or any Affiliate of the General Partner. The General
Partner may on behalf of the Partnership enter into agreements to employ
agents, attorneys, accountants, engineers, appraisers, or other consultants
or contractors who may be Affiliates of the General Partner and may enter
into agreements to employ Affiliates of the General Partner to provide
further or additional services to the Partnership; provided that any
employment of such Persons is on terms not less favorable to the
Partnership than those offered by Persons who are not Affiliates of the
General Partner for comparable services;
(v) engage in any kind of activity and perform and carry out contracts of
any kind necessary to, or in connection with, or incidental to the
accomplishment of the purposes of the Partnership, as may be lawfully
carried on or performed by a limited partnership under the laws of the
State of Delaware and State of California and in each state where the
Partnership has been qualified to do business;
(vi) SELL OR OTHERWISE DISPOSE OF OR CONSENT TO THE SALE OR DISPOSITION
OF ANY ASSETS OF THE PARTNERSHIP TO ANY PERSON PROVIDED THAT SUCH PERSON IS
NOT A GENERAL PARTNER OF THE PARTNERSHIP OR AN AFFILIATE OF ANY SUCH
GENERAL PARTNER; AND
(vii) take such actions as the General Partner determines are advisable
or necessary, and will not result in any material adverse effect on the
economic position of holders of a majority of the Units, to preserve the
tax status of the Partnership as a partnership for Federal income tax
purposes.
D. Any Person dealing with the Partnership or the General Partner may rely
upon a certificate signed by the Secretary or Assistant Secretary, Controller
or Treasurer of the General Partner, thereunto duly authorized, as to:
(i) the identity of the General Partner or any Limited Partner;
(ii) the existence or non-existence of any fact or facts which constitute
a condition precedent to the acts by the General Partner or in any other
manner germane to the affairs of the Partnership;
(iii) the Persons who are authorized to execute and deliver any
instrument or document of the Partnership; and
(iv) any act or failure to act by the Partnership or as to any other
matter whatsoever involving the Partnership or any Partner.
E. Any agreements, contracts and arrangements between the Partnership and
the General Partner or any of its Affiliates, except for rendering legal, tax,
accounting, procurement and engineering services by employees of the General
Partner and Affiliates of the General Partner and [except for arrangements
between the Partnership and Marriott or Affiliates of Marriott pertaining to
the development of property surrounding golf courses adjoining the Hotel and
the sharing of Hotel facilities with purchasers of such property,] which
agreements will be on commercially reasonable terms, shall be subject to the
following additional conditions:
(i) the General Partner or any such Affiliate must be actively engaged in
the business of rendering such services or selling or leasing such goods[,]
independently of its dealings with the Partnership and as an ordinary
ongoing business or must enter into and engage in such business with
Marriott SYSTEM hotels or hotel owners generally and not exclusively with
the Partnership;
(ii) such agreements, contracts or arrangements must be fair to the
Partnership and reflect commercially reasonable terms and shall be embodied
in a written contract which precisely describes the subject matter thereof
and all compensation to be paid therefor;
(iii) no rebates or give-ups may be received by the General Partner or
any such Affiliate, nor may the General Partner or any such Affiliate
participate in any reciprocal business arrangements which would have the
effect of circumventing any of the provisions of this Agreement;
D-15
(iv) no such agreement, contract or arrangement as to which the Limited
Partners had previously given approval may be amended in such a manner as
to increase the fees or other compensation payable by the Partnership to
the General Partner or any of its Affiliates or to decrease the
responsibilities or duties of the General Partner or any such Affiliates in
the absence of the Consent contemplated by Section [5.02B(ii)] 5.02B(III);
and
(v) any such agreement, contract or arrangement which relates to or
secures any funds advanced or loaned to the Partnership by the General
Partner or any Affiliate of the General Partner must reflect commercially
reasonable terms.
F. NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS AGREEMENT, THE
GENERAL PARTNER SHALL HAVE FULL POWER AND AUTHORITY, WITHOUT THE CONSENT OF
THE LIMITED PARTNERS, (I) TO FORM OR ORGANIZE ONE OR MORE SUBSIDIARIES OF THE
PARTNERSHIP; (II) TO CONTRIBUTE ANY PROPERTIES AND ASSETS OR INTERESTS THEREIN
TO ONE OR MORE SUBSIDIARIES OF THE PARTNERSHIP; (III) TO UNDERTAKE ANY ACTION
IN CONNECTION WITH THE PARTNERSHIP'S DIRECT OR INDIRECT INVESTMENT IN ANY SUCH
SUBSIDIARY; (IV) TO DELEGATE AUTHORITY TO MANAGE THE BUSINESS AND AFFAIRS OF
ANY SUBSIDIARY OF THE PARTNERSHIP TO A GOVERNING ENTITY OR OTHER BODY
(INCLUDING, WITHOUT LIMITATION, A BOARD OF DIRECTORS) OTHER THAN THE GENERAL
PARTNER; AND (V) TO EXERCISE ANY OF THE POWERS OF THE GENERAL PARTNER
ENUMERATED IN THIS AGREEMENT ON BEHALF OF, OR IN CONNECTION WITH, ANY
SUBSIDIARY OF THE PARTNERSHIP, OR JOINTLY WITH ANY SUCH SUBSIDIARY, OR
DELEGATE THE EXERCISE THEREOF PURSUANT TO CLAUSE (IV) ABOVE. THE TERM
"SUBSIDIARY" SHALL MEAN ANY PARTNERSHIP, CORPORATION, TRUST, LIMITED LIABILITY
COMPANY OR OTHER ENTITY THAT IS NOT LESS THAN 99% OWNED, DIRECTLY OR
INDIRECTLY, BY THE PARTNERSHIP, PROVIDED THAT NO SUBSIDIARY THAT IS A
CORPORATION OR OTHERWISE IS NOT ENTITLED TO FLOW-THROUGH TAX TREATMENT UNDER
THE CODE CAN OWN DIRECTLY THE HOTEL OR AN INTEREST THAT IS GREATER THAN 1% IN
ANOTHER SUBSIDIARY THAT OWNS THE HOTEL. A SUBSIDIARY SHALL NOT BE DEEMED AN
AFFILIATE OF THE GENERAL PARTNER FOR THE PURPOSES OF THIS AGREEMENT. THE TERM
"PARTNERSHIP" SHALL, AS THE CONTEXT REQUIRES, INCLUDE EACH SUBSIDIARY OF THE
PARTNERSHIP.
Section 5.02. Restrictions on Authority of the General Partner.
A. Without the Consent of all the Limited Partners, the General Partner
shall not have authority on behalf of the Partnership to:
(i) do any willful act in contravention of this Agreement;
(ii) do any willful act which would make it impossible to carry on the
ordinary business of the Partnership;
(iii) confess a judgment in a material amount against the Partnership;
(iv) convert property of the Partnership to its own use, or assign any
rights in specific property of the Partnership for other than a purpose of
the Partnership;
(v) admit a Person as a Limited Partner, except as provided in this
Agreement; or
(vi) perform any act that would subject any Limited Partner to liability
as a general partner in any jurisdiction or any other liability except as
provided for herein or under the Act.
B. Without the Consent of [the holders of] LIMITED PARTNERS HOLDING a
majority of the Units, the General Partner shall not have the authority on
behalf of the Partnership to:
(i) have the Partnership acquire interests in other hotel properties [or
equipment] in addition to the Hotel [and the Equipment] or in other
entities;
(ii) sell or otherwise dispose of or consent to the sale or disposition
of the Hotel [and provided, ]TO THE GENERAL PARTNER OR AN AFFILIATE OF THE
GENERAL PARTNER; PROVIDED, HOWEVER, that if it is proposed that the
Partnership sell the Hotel [or the Equipment] to the General Partner or an
Affiliate of the General Partner, the following procedures shall also be
followed: (a) the General Partner shall first give notice of the proposed
sale to the Limited Partners who shall thereafter have 30 days within which
to elect a nationally recognized appraiser having the approval of [the
holders of] LIMITED PARTNERS HOLDING a
D-16
majority of the Units, (b) the appraiser elected under clause (a) above
shall have 30 days from the date of election to prepare and submit to the
General Partner an appraisal of the fair market value of the Hotel [or the
Equipment], (c) the purchaser shall submit to the General Partner an
appraisal of the fair market value of the Hotel [or the Equipment], such
appraisal to be submitted within the time limit provided by clause (b)
above in the case of the appraisal to be submitted by the appraiser elected
by the Limited Partners, and (d) the General Partner shall thereafter make
formal request for the required Consent and in connection therewith shall
submit to the Limited Partners the two appraisals contemplated by clauses
(b) and (c) above; provided, further, however, that if the Limited Partners
do not elect an appraiser as contemplated by clause (a) above or if such
appraiser does not supply an appraisal within the time period required by
clause (b) above, the General Partner will not request the Consent to the
sale of the Hotel [or the Equipment] to the General Partner or an Affiliate
of the General Partner unless such request is accompanied by three
appraisals as to market value of the Hotel [or the Equipment], one such
appraisal to be prepared by an appraiser elected by the purchaser and the
other two appraisals to be prepared by appraisers elected by the first such
appraiser, the cost of all such appraisals to be borne by the purchaser;
(iii) effect any amendment to any agreement, contract or arrangement with
the General Partner or any of its Affiliates which reduces the
responsibilities or duties of the General Partner as a general partner of
the Partnership or any of its Affiliates or which increases the
compensation payable to the General Partner or any of its Affiliates, or
which adversely affects the rights of the Limited Partners;
(iv) incur debt of the Partnership in excess of the limitations set forth
in Section 5.01C(ii);
(v) agree to the addition of transient guest rooms at the Hotel unless
(a) the Hotel has had an average occupancy rate of at least 68% for a
period consisting of at least 12 consecutive months and (b) the Partnership
has obtained debt financing to finance the costs of the addition on a
nonrecourse basis as to all the Partners and the Partnership (including the
General Partner) except as provided in Section 5.02B(ix) below;
(vi) except as otherwise provided in Section 5.02B(ix), incur any debt of
the Partnership which does not provide by its terms that it shall be
nonrecourse as to all the Partners;
(vii) make any election to continue beyond its term, discontinue or
dissolve the Partnership;
(viii) admit any other Person as a General Partner or voluntarily
withdraw as a General Partner except as necessary to alleviate the negative
effect of any Affected Items pursuant to Section 4.12; and
(ix) guaranty, become personally liable or otherwise bear the risk of
loss, or permit any Affiliate to take any such action, with respect to any
portion of any Partnership debt otherwise permitted to be incurred pursuant
to the terms of this Agreement unless (a) the General Partner, in
accordance with its fiduciary duties as General Partner and taking into
consideration the tax consequences to the Limited Partners, determines that
such actions are in the best interests of the Partnership and the Limited
Partners, (b) assuming operating results then projected through 2001 by the
General Partner, such action (1) will not cause any deficit in the Capital
Account of any Limited Partner at any time to exceed the sum of such
Limited Partner's obligation to make additional capital contributions and
the portion at such time of Minimum Gain that would be allocated to him on
sale of the Hotel and (2) in the opinion of tax counsel, will not at any
time cause the recognition or allocation of income or gain to the Limited
Partners not within the parameters of the forecast allocations of income,
gain, loss and deduction set forth in the Financial Forecast in the Private
Placement Memorandum, or (c) with respect to a guarantee or incurrence of
personal liability or a risk of loss by the General Partner or its
Affiliates aggregating $71,875,000 million or less, the General Partner
agrees to apply the procedures set forth in Section 4.12 as if any benefit
to the General Partner (including the delay or avoidance of the recognition
of income) and any adverse tax consequences to the Limited Partners
resulting from such guaranty, personal liability or bearing of risk of loss
were attributable to Proposed Regulations prior to 1992; provided, however,
that the General Partner's rights pursuant to this clause (c) are
contingent on the General Partner's ability to fully meet its obligations
to make Capital Contributions required under Section 4.12.
D-17
[Nothing contained in this Section 5.02 shall require the Consent of the
Limited Partners to a sale or sales of all or any portion of the Equipment
except a sale to the General Partner or an Affiliate of the General Partner as
provided in Section 5.02B(ii).]
Section 5.03. Duties and Obligations of the General Partner.
A. The General Partner shall take all action which may be necessary or
appropriate for the development, maintenance, preservation and operation of
the properties and assets of the Partnership in accordance with the provisions
of this Agreement and applicable laws and regulations (it being understood and
agreed, however, that the direct performance of day-to-day management or
operational services for the Hotel[, the Equipment] and other properties of
the Partnership is not an obligation of the General Partner as general partner
of the Partnership).
B. The General Partner shall not (i) directly or through a subsidiary engage
in any business other than that of acting as general partner of the
Partnership, (ii) pay dividends or make other distributions or payments on its
stock or incur any obligations if, as a result, its net worth would be reduced
below the requirement of Section 5.03C, (iii) merge or consolidate with
another corporation [accept Marriott] EXCEPT HOST or a wholly-owned direct or
indirect subsidiary of [Marriott] HOST, (iv) dissolve, or (v) OTHER THAN IN
CONNECTION WITH BORROWING FUNDS FROM HOST (OR ONE OF ITS SUBSIDIARIES) IN
ORDER TO CAPITALIZE AN ENTITY WHICH WILL FUND A LOAN TO THE PARTNERSHIP IN
CONNECTION WITH A REFINANCING OF THE MORTGAGE INDEBTEDNESS OF THE PARTNERSHIP
TO GMAC COMMERCIAL MORTGAGE CORPORATION DATED DECEMBER 23, 1996, borrow any
funds or become liable for any obligations of third parties except to the
extent that any such borrowings or liabilities are directly related to meeting
the financial needs of the Partnership. The General Partner further agrees
that so long as the General Partner is the general partner of the Partnership,
its parent company, Host, will not transfer its stock of the General Partner
except to a wholly-owned, direct or indirect, subsidiary of [Marriott and that
Marriott will not sell the stock of Host unless the stock of the General
Partner is thereafter owned by Marriott or a wholly-owned, direct or indirect,
subsidiary of Marriott.] HOST.
The General Partner shall devote to the Partnership such time as may be
necessary for the proper performance of its duties hereunder, but the officers
and directors of the General Partner shall not be required to devote their
full time to the performance of duties of the General Partner.
C. The General Partner shall use its reasonable best efforts to maintain at
all times a net worth at a level sufficient to meet all requirements of the
Code and applicable regulations, rulings and revenue procedures of the IRS and
to meet any future requirements set by Congress, the IRS, any agency of the
Federal government or any court of competent jurisdiction, to assure that the
Partnership will be classified for Federal income tax purposes as a
partnership and not as an association taxable as a corporation. These
provisions are designed to ensure that the equity capitalization of the
General Partner will be available to meet any legal obligations which the
General Partner may have in its role as the general partner of the
Partnership.
D. The General Partner shall take such action as may be necessary or
appropriate in order to form or qualify the Partnership under the laws of any
jurisdiction in which the Partnership is doing business or owns property or in
which such formation or qualification is necessary in order to protect the
limited liability of the Limited Partners or in order to continue in effect
such formation or qualification. If required by law, the General Partner shall
file or cause to be filed for recordation in the office of the appropriate
authorities of the State of Delaware, and in the proper office or offices in
each other jurisdiction in which the Partnership is formed or qualified, such
certificates (including limited partnership and fictitious name certificates)
and other documents as are required by the applicable statutes, rules or
regulations of any such jurisdiction or as are necessary to reflect the
identity of the Partners and the amounts of their respective Capital
Contributions.
E. The General Partner shall be obligated to use its best efforts to remove
any General Partner or Affiliate guaranty, personal liability, and other risk
of loss with respect to any Partnership debt, which was permitted under
Section 5.02B(ix) hereof when such action was incurred, but which subsequently
results in adverse tax
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consequences to the Limited Partners and which would no longer be permitted if
first being incurred at the time of such adverse consequences. The General
Partner shall use its best efforts, in the conduct of the Partnership's
business, to put all suppliers and other Persons with whom the Partnership
does business on notice that the Limited Partners are not liable for
Partnership obligations, and all agreements to which the Partnership is a
party shall include a statement to the effect that the Partnership is a
limited partnership organized under the Act; but the General Partner shall not
be liable to any Limited Partner for any failure to give such notice to such
suppliers or other Persons or to have any such agreement fail to contain such
statement.
F. The General Partner shall prepare or cause to be prepared and shall file
on or before the due date (or any extension thereof) any Federal, state or
local tax returns required to be filed by the Partnership. The General Partner
shall cause the Partnership to pay any taxes payable by the Partnership.
G. The General Partner shall be under a duty to conduct the affairs of the
Partnership in good faith and in accordance with the terms of this Agreement
and in a manner consistent with the purposes set forth in Section 2.03.
H. The General Partner shall use its best efforts to ensure that the
Partnership shall not be deemed an investment company as such term is defined
in the Investment Company Act of 1940.
Section 5.04. Compensation of the General Partner. The General Partner as
general partner of the Partnership shall not in such capacity receive any
salary, fees, profits or distributions except for such allocations or
distributions to which it may be entitled under Article Four, Article Five or
Article Eight. Notwithstanding the foregoing, however, the Partnership shall
reimburse the General Partner for the cost of providing any administrative or
other services required or contemplated by this Agreement.
Section 5.05. Other Business of Partners. Any Limited Partner may engage
independently or with others in other business ventures of every nature and
description. Nothing in this Agreement shall be deemed to prohibit any
Affiliate of the General Partner from dealing, or otherwise engaging in
business with Persons transacting business with the Partnership or from
providing services relating to the purchase, sale, financing, management,
development or operation of hotels, motels, restaurants catering operations,
including airline catering operations, or other food and lodging facilities
and receiving compensation therefor. The relationship created hereby in or to
such other ventures or activities or to the income or proceeds derived
therefrom, and the pursuit of such ventures, even if competitive with the
business of the Partnership, shall not be deemed wrongful or improper. Neither
the General Partner nor any Affiliate of the General Partner shall be
obligated to present any particular opportunity to the Partnership even if
such opportunity is of a character which, if presented to the Partnership,
could be taken by the Partnership, and any Affiliate of the General Partner
shall have the right to take for its own account (individually or as a
trustee, partner or fiduciary) or to recommend to others any such particular
opportunity.
Section 5.06. Limitation on Liability of General Partner; Indemnification.
A. Other than pursuant to Section 5.07, the General Partner shall not be
liable to the Partnership or any Limited Partner because any taxing authority
disallows or adjusts any deductions or credits in the Partnership income tax
return unless such action by the taxing authority is due to the negligence of
the General Partner. The indemnification under this subsection is not broader
than any other indemnification contained in this Section 5.06. The General
Partner shall not be liable for the return of the Capital Contributions of the
Limited Partners or for any portion thereof, it being expressly understood
that any return of capital shall be made solely from the assets of the
Partnership; nor shall the General Partner be required to pay to the
Partnership or to any Limited Partner any deficit in the Capital Account of
any Partner upon dissolution or otherwise, except as otherwise provided in
Section 8.02E.
B. The General Partner shall have no liability, responsibility or
accountability in damages or otherwise to any other Partner or to the
Partnership for, and the Partnership agrees to indemnify, pay, protect and
hold harmless the General Partner (on the demand of and to the reasonable
satisfaction of the General Partner and to
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the extent permitted by law) from and against any and all liabilities, losses,
judgments, and expenses of any kind or nature whatsoever (including, without
limitation, all costs and expenses of defense, appeal and settlement of any
and all suits, actions or proceedings threatened or instituted against the
General Partner or the Partnership and all costs of investigations in
connection therewith) which may be imposed on, incurred by, or assessed
against the General Partner or the Partnership in any way relating to or
arising out of, or alleged to relate to or arise out of, any action or
inaction on the part of the Partnership, or on the part of the General Partner
as the General Partner of the Partnership including any action or inaction in
connection with the General Partner acting as Tax Matters Partner or
Designated Person under Section 5.07; provided, that the General Partner shall
be liable, responsible and accountable, and the Partnership shall not be
liable to the General Partner for any portion of such liabilities, losses,
judgments, or expenses (including, without limitation, all costs and expenses
of defense, appeal and settlement of any and all suits, actions or proceedings
threatened or instituted against the General Partner or the Partnership and
all costs of investigations in connection therewith) which resulted from the
General Partner's own fraud, negligence, or other breach of fiduciary duty to
the Partnership or any Partner. The indemnification set forth above shall not
include advances by the Partnership to the General Partner for legal expenses
and other costs incurred by the General Partner as a result of any legal
action initiated against the General Partner by a Limited Partner. Said
indemnification shall include, however, advances by the Partnership to the
General Partner for legal fees and other costs incurred by the General Partner
as a result of a legal action initiated by a third party, who is not a Limited
Partner, which relates to the performance of the General Partner's duties or
services. The General Partner hereby agrees to repay any advances if the
General Partner is not otherwise entitled to be indemnified under this
Agreement. The satisfaction of the obligations of the Partnership under this
Section 5.06 shall be from and limited to the assets of the Partnership and no
Limited Partner shall have any personal liability on account thereof. The
provisions of this indemnification shall also extend to any person performing
services on behalf of the Partnership who is an officer, director, employee or
owner of 10% or more of the voting securities of the General Partner.
C. The General Partner shall have no liability or responsibility hereunder
to make loans, advances or additional Capital Contributions to the Partnership
except as specified in Section 3.04 and Section 4.12 and except as may
otherwise be provided as a matter of law or under the Mortgage Debt. However,
except for advances made pursuant to the Debt Service Guarantees and
Foreclosure Guarantee which will be repaid as noted below, to the extent the
General Partner advances any funds to meet any liabilities or obligations of
the Partnership, any such advances shall be deemed loans to the Partnership by
the General Partner and shall accrue interest per annum at one percentage
point in excess of the Prime Rate payable in arrears on the first day of each
Fiscal Quarter and such amounts shall be due and payable upon that date which
is the fifth anniversary of the date on which any such advances were made;
provided, however, that any and all such advances shall be paid prior to
distributions to Partners out of any Cash Available for Distribution to the
Partners, upon the liquidation of the Partnership, or the sale of the Hotel
and the receipt by the Partnership of the proceeds of such sale. Advances, if
any, to the Partnership by the General Partner or its Affiliates pursuant to
the Debt Service Guarantees or Foreclosure Guarantee will bear interest at one
percentage point in excess of the Prime Rate and will be paid as follows: (i)
out of Partnership cash flow after payment of Debt Service on the Mortgage
Debt; (ii) out of Capital Receipts before any distribution to the Partners;
and (iii) in any event, not later than December 31, 1997. Advances under the
Debt Service Guarantees may be secured by a mortgage on the Hotel junior to
the Mortgage Debt.
D. Notwithstanding the foregoing, the General Partner shall not be
indemnified by the Partnership for any losses, liabilities or expenses arising
from or out of an alleged violation of Federal and state securities laws
unless (i) there has been a successful adjudication in favor of the General
Partner on the merits of each count involving alleged securities law
violations; or (ii) such claims against the General Partner have been
dismissed with prejudice on the merits by a court of competent jurisdiction;
or (iii) a settlement of the claims is approved by a court of competent
jurisdiction. Pursuant to that certain Agency Agreement among the Partnership,
the General Partner, the Placement Agents and others, the Placement Agents are
to receive certain indemnifications. Such indemnifications, however, shall be
limited to the same extent that the General Partner's indemnifications are
limited by this subsection D. In any claim for indemnification for Federal or
state securities law violations, the
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party seeking indemnification shall place before the court the position, if
available, of the Securities and Exchange Commission and the Massachusetts
Securities Division with respect to the issue of indemnification for
securities law violation.
Section 5.07. Designation of Tax Matters Partner and Designated Person for
Purposes of Investor List.
A. The General Partner shall act as the Tax Matters Partner of the
Partnership, as provided in regulations pursuant to section 6231 of the Code
and as the Designated Person for purposes of maintaining the Investor List.
Each Partner hereby approves of such designation and agrees to execute,
certify, acknowledge, deliver, swear to, file and record at the appropriate
public offices such documents as may be deemed necessary or appropriate to
evidence such approval.
B. To the extent and in the manner provided by applicable Code sections and
regulations thereunder, the Tax Matters Partner shall furnish the name,
address, profits, interest and taxpayer identification number of each Partner
to the IRS.
C. To the extent and in the manner provided by applicable Code sections and
regulations thereunder, the Tax Matters Partner shall inform each Partner of
administrative or judicial proceeding for the adjustment of Partnership items
required to be taken into account by a Partner for income tax purposes (such
administrative proceedings being referred to as a "tax audit" and such
judicial proceedings being referred to as "judicial review").
D. The Tax Matters Partner is authorized, but not required:
(a) to enter into any settlement with the IRS with respect to any tax
audit or judicial review, and in the settlement agreement the Tax Matters
Partner may expressly state that such agreement shall bind all Partners
except that such settlement agreement shall not bind any Partner who
(within the time prescribed pursuant to the Code and regulations
thereunder) files a statement with the IRS providing that the Tax Matters
Partner shall not have the authority to enter into a settlement agreement
on behalf of such Partner;
(b) in the event that a notice of a final administrative adjustment at
the Partnership level of any item required to be taken into account by a
Partner for tax purposes (a "final adjustment") is mailed to the Tax
Matters Partner, to seek judicial review of such final adjustment,
including the filing of a petition for readjustment with the Tax Court [of]
OR the United States Claims Court, or the filing of a complaint for refund
with the District Court of the United States for the district in which the
Partnership's principal place of business is located;
(c) to intervene in any action brought by any other Partner for judicial
review of a final adjustment;
(d) to file a request for an administrative adjustment with the IRS at
any time and, if any part of such request is not allowed by the IRS to file
an appropriate pleading (petition or complaint) for judicial review with
respect to such request;
(e) to enter into an agreement with the IRS to extend the period for
assessing any tax which is attributable to any item required to be taken
into account by a Partner for tax purposes, or an item affected by such
item; and
(f) to take any other action on behalf of the Partners or the Partnership
in connection with any tax audit or judicial review proceeding to the
extent permitted by applicable law or regulations.
E. Notwithstanding any other provision of this Agreement, the Partnership
shall indemnify and reimburse, to the full extent provided by law, the Tax
Matters Partner for all expenses, including legal and accounting fees (as such
fees are incurred), claims, liabilities, losses and damages incurred in
connection with any tax audit or judicial review proceeding with respect to
the tax liability of the Partners, the payment of all such expense [to] SHALL
be made before the distribution of Cash Available for Distribution to the
Partners. Neither the General Partner nor any of its Affiliates nor other
person shall be obligated to provide funds for such purpose.
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The taking of any action and the incurring of any expense by the Tax Matters
Partner in connection with any such proceeding, except to the extent required
by law, is a matter in the sole discretion of the Tax Matters Partner and the
provisions on limitations of liability of the General Partner and
indemnification set forth in Section 5.06 of this Agreement shall be fully
applicable to the Tax Matters Partner in its capacity as such. The
indemnification under this subsection is no broader than any other
indemnification contained in Section 5.06.
ARTICLE SIX
WITHDRAWAL AND REMOVAL OF GENERAL PARTNER
Section 6.01. Limitation on Voluntary Withdrawal. Except as permitted in
Section 5.02B, the General Partner shall not retire or withdraw voluntarily
from the Partnership. The General Partner shall not sell, transfer or assign
its entire general partnership Interest or any portion thereof other than as
provided below. The General Partner shall be permitted to assign its rights to
up to 80% of its interest in the Net Profits, Net Losses, Losses, Gain, Cash
Available for Distribution, Capital Receipts and other allocations and
distributions. The General Partner shall not be permitted to assign such
rights unless the General Partner receives an opinion of counsel that such
assignment shall not cause any adverse tax consequences to the Partnership or
the Limited Partners or cause a default under any Partnership debt obligation.
Notwithstanding anything to the contrary set forth in this Agreement,
notwithstanding the assignment by the General Partner of its Interest in the
Partnership, upon any such assignment (i) the General Partner shall not cease
to be a general partner of the Partnership, and shall continue to be a general
partner of the Partnership, and (ii) the General Partner shall not cease to
have any and all rights and powers of a general partner under this Agreement
and the Act and the power to exercise any and all rights and powers of a
general partner under this Agreement and the Act and shall continue to have
any and all such rights and powers and the assignee shall not acquire any such
rights and powers of a general partner.
Section 6.02. Bankruptcy or Dissolution of the General Partner. In the event
of the bankruptcy or dissolution of the General Partner, the General Partner
shall immediately cease to be the General Partner and its Interest shall
terminate; provided, however, that such termination shall not affect any
rights or liabilities of the General Partner which matured prior to such
event, or the value, if any, at the time of such event of the Interest of the
General Partner.
Section 6.03. Liability of Withdrawn General Partner. If the General Partner
shall cease to be the General Partner of the Partnership, it shall be and
remain liable for all obligations and liabilities incurred by it as General
Partner prior to the time such withdrawal shall have become effective, but it
shall be free of any obligation or liability incurred on account of the
activities of the Partnership from and after the time such withdrawal shall
have become effective.
Section 6.04. Removal of General Partner. In the event of the removal of the
General Partner pursuant to Section 10.02B, the removed General Partner's
Interest as General Partner in the Partnership shall become a limited
partnership interest but without any voting or consensual rights which other
Limited Partners may have.
Section 6.05. Substitute General Partner. If the General Partner shall
withdraw, be removed, dissolve or become bankrupt, it shall promptly notify
the Limited Partners and thereafter the Limited Partners may elect by written
vote of [holders of] LIMITED PARTNERS HOLDING all of the Units within 90 days
of such withdrawal, removal, dissolution or bankruptcy to continue the
Partnership and appoint a substitute general partner effective as of the
withdrawal, removal, dissolution or bankruptcy of the retiring General
Partner. Within 120 days following the withdrawal, removal, dissolution or
bankruptcy of the General Partner, in the event action pursuant to this
Section 6.05 is not taken, the Limited Partners, acting by affirmative vote of
a majority in interest thereof, may elect in writing to reconstitute and
continue the business of the Partnership by forming a new partnership upon
terms identical to the terms set forth in this Agreement. Any such election
must also provide for the election of a general partner to the new
partnership. If such an election is made, all of the Limited Partners of the
Partnership shall continue as Limited Partners of the new limited partnership.
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ARTICLE SEVEN
ASSIGNABILITY OF UNITS
Section 7.01. Restrictions on Assignments.
After the admission to the Partnership of the Limited Partners, no Limited
Partner shall have the right to assign any Interest except with the Consent of
the General Partner, the giving or withholding of which is exclusively within
the discretion of the General Partner, and provided further that:
A. No assignment of any Interest may be made other than on the first day
of an Accounting Period.
B. No assignment of any Interest may be made if the assignment is
pursuant to a sale or exchange of the Interest and if the Interest sought
to be assigned, when added to the total of all other Interests assigned
within a period of 12 consecutive months prior thereto, would, in the
opinion of legal counsel for the Partnership, result in the Partnership
being deemed to have been terminated within the meaning of section 708 of
the Code. The General Partner shall give Notification to all Limited
Partners in the event that sales or exchanges should be suspended for such
reason. Any deferred sales or exchanges shall be made (in chronological
order to the extent practicable) as of the first day of an Accounting
Period after the end of any such 12-month period, subject to the provisions
of this Article Seven.
C. The General Partner may require that any assignment of an Interest in
the Partnership be made only if the assignor or assignee provides an
opinion of counsel that such assignment would not require filing of a
registration statement under the Securities Act of 1933, as amended, and
would otherwise not be in violation of any Federal or state securities or
Blue Sky laws (including any investment suitability standards) applicable
to the Partnership. At any time within one year of the closing of the sale
of the Units, the General Partner will require such an opinion of counsel
for any assignment.
D. No purported assignment by [a Limited Partner] THE HOLDER of any Unit
after which the assignor or the assignee would hold a fraction of a Unit
(other than a one-half Unit)[,] will be permitted or recognized (except for
assignments by gift, inheritance or family dissolution or assignments to
Affiliates of the assignor).
E. No assignment of any Interest may be made if, in the opinion of legal
counsel to the Partnership, it would result in the Partnership being
treated as an association taxable as a corporation.
F. No assignment of any Interest may be made if, in the opinion of legal
counsel to the Partnership, it would result in the Partnership not being
able to obtain or continue in effect any license permitting the service or
sale of alcoholic beverages in the Hotel.
G. No assignment of any Interest may be made to a Tax-Exempt Entity
including, without limitation, foreign persons and entities.
Section 7.02. Assignees and Substituted Limited Partners.
A. If a Limited Partner dies, the executor, administrator or trustee, or, if
[such] A LIMITED Partner is adjudicated incompetent or insane, the committee,
guardian or conservator, or, if [such] A LIMITED Partner becomes bankrupt, the
trustee or receiver of the estate, shall have all the rights of a Limited
Partner for the purpose of settling or managing the estate and such power as
the decedent or incompetent possessed to assign all or any part of the Units
and to join with the assignee thereof in satisfying conditions precedent to
such assignee becoming a Substituted Limited Partner. The death, dissolution,
adjudication of incompetence or bankruptcy of a Limited Partner in and of
itself shall not dissolve the Partnership.
B. The Partnership need not recognize for any purpose any assignment of any
Interest unless there shall have been filed with the Partnership a duly
executed and acknowledged counterpart of the instrument making such assignment
signed by both the assignor and the assignee and such instrument evidences the
written acceptance by the assignee of all of the terms and provisions of this
Agreement and represents that such
D-23
assignment was made in accordance with all applicable laws and regulations
(including investment suitability requirements).
C. Limited Partners who shall assign all their Interests shall cease to be
Limited Partners of the Partnership except that unless and until a Substituted
Limited Partner is admitted in his stead, the assigning Limited Partner shall
not cease to be a Limited Partner of the Partnership and shall retain the
statutory rights and powers of a limited partner under the Act.
D. Any Person who is an assignee of any of the Interests of a Limited
Partner and who has satisfied the requirements of Section 7.01 and Section
7.02B shall become a Substituted Limited Partner when the General Partner has
accepted such Person as a Limited Partner of the Partnership and the books and
records of the Partnership reflect such Person as admitted to the Partnership
as a Limited Partner and when such Person shall have satisfied the conditions
of Section 11.02A and shall have paid all reasonable legal fees and filing
costs in connection with the substitution as a Limited Partner; provided,
however, that the General Partner's consent to the substitution of any
assignee of an Interest as a Substituted Limited Partner may be granted or
withheld in its sole discretion.
E. Any Person who is the assignee of an Interest of a Limited Partner, but
who does not become a Substituted Limited Partner and desires to make a
further assignment of any such Interests, shall be subject to all the
provisions of this Article Seven to the same extent and in the same manner as
any Limited Partner desiring to make an assignment of the Interests.
F. There shall be no restrictions on the assignments of Interests except as
provided in Article Six or this Article Seven.
ARTICLE EIGHT
DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP
Section 8.01. Events Causing Dissolution.
A. The Partnership shall be dissolved on the first to occur of the following
events:
(i) the bankruptcy of the Partnership;
(ii) the withdrawal or removal of the General Partner, unless the
Partnership is continued pursuant to Section 6.05;
(iii) the dissolution or bankruptcy of the General Partner, unless the
Partnership is continued pursuant to Section 6.05;
(iv) the sale or other disposition of all of the property of the
Partnership; or
(v) the expiration of the term of the Partnership.
Dissolution of the Partnership shall be effective on the day on which the
event occurs giving rise to the dissolution. The Partnership shall not
terminate until the assets of the Partnership shall have been liquidated as
provided in Section 8.02. Notwithstanding the dissolution of the Partnership,
prior to the termination of the Partnership, as aforesaid, the business of the
Partnership and the affairs of the Partners as such, shall continue to be
governed by this Agreement.
B. Except as otherwise provided in Section 8.02E, Partners shall look solely
to the assets of the Partnership for all distributions with respect to the
Partnership and their Capital Contribution thereto, and shall have no recourse
therefor (upon dissolution or otherwise) against the General Partner or any
Limited Partner.
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Section 8.02. Liquidation.
A. Upon dissolution of the Partnership, the General Partner shall liquidate
the assets of the Partnership and the proceeds of such liquidation shall be
applied and distributed in the following order of priority:
(i) to the payment of the expenses of the liquidation;
(ii) to the payments of Partnership Debt and all other liabilities of the
Partnership owing to creditors of the Partnership other than Partners who
are creditors;
(iii) to the payment of any loans or advances that may have been made by
any of the Partners to the Partnership; and
(iv) pro rata to the General Partner and to the Limited Partners to
reduce any net balances then existing in the Capital Accounts of the
Partners.
B. Notwithstanding the foregoing, in the event the General Partner shall
determine that an immediate sale of all or part of the Partnership assets
would cause undue loss to the Partners, the General Partner, in order to avoid
such loss, may, after having given notification to all the Limited Partners,
to the extent not then prohibited by the limited partnership act of any
jurisdiction in which the Partnership is then formed or qualified and
applicable in the circumstances, either defer liquidation of and withhold from
distribution for a reasonable time any assets of the Partnership except those
necessary to satisfy the Partnership's debts and obligations, or distribute
the assets of the Partnership in kind.
C. If any assets of the Partnership are to be distributed in kind, such
assets shall be distributed on the basis of the fair market value thereof, and
any Partner entitled to any interest in such assets shall receive such
interest therein as a tenant-in-common with all other Partners so entitled.
The fair market value of such assets shall be determined by an independent
appraiser to be selected by the General Partner by random number from a list
of three qualified appraisers obtained by the General Partner from the
American Institute of Real Estate Appraisers[(for the Hotel) and three
qualified appraisers obtained by the General Partner from a qualified
equipment appraisal organization (for the Equipment)].
D. The General Partner shall cause the liquidation and distribution of all
the Partnership's assets and shall cause the cancellation of the Partnership's
certificate of limited partnership upon completion of winding up the business
of the Partnership.
E. Upon a dissolution of the Partnership if, after giving effect to Sections
8.02A through 8.02D hereof for the Fiscal Year in which such dissolution
occurs, there shall be a deficit in the Capital Account of the General
Partner, while there is a positive balance in the capital account of any other
Partner, the General Partner shall contribute to the Partnership (in cash) the
amount of such deficit, which thereupon shall be distributed by the
Partnership pro rata to any Partner possessing a positive balance in his
capital account. Such contribution by the General Partner is to be made to the
Partnership not later than the close of the taxable year in which the
dissolution occurs.
ARTICLE NINE
BOOKS AND RECORDS, ACCOUNTING, REPORTS, TAX ELECTIONS, ETC.
Section 9.01. Books and Records. The books and records of the Partnership
shall be maintained by the General Partner in accordance with applicable law
at the principal office of the Partnership and shall be available for
examination at such location by any Partner or such Partner's duly authorized
representatives at any and all reasonable times for any purpose reasonably
related to the Partner's interest in the Partnership. Any Partner, upon paying
the costs of collating, duplication and mailing, shall be entitled, upon
written application to the General Partner, to a copy of the list of the names
and addresses of the Limited Partners and the number of Units owned by each of
them for any purpose reasonably related to the Partners' interests in the
Partnership.
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Section 9.02. Accounting and Fiscal Year. The books of the Partnership will
be kept on the accrual basis. The Partnership will report its operations for
tax purposes on the accrual method. The Fiscal Year of the Partnership shall
end December 31 in each year.
Section 9.03. Bank Accounts and Investments. The bank accounts of the
Partnership shall be maintained in such banking institutions as the General
Partner shall determine, and withdrawals shall be made only in the regular
course of Partnership business on such signature or signatures as the General
Partner may determine. All deposits and other funds not needed in the
operation of the business or not yet invested may be invested as provided in
Section 5.01C or in U.S. government securities, securities issued or
guaranteed by U.S. government agencies, securities issued or guaranteed by
states or municipalities, certificates of deposit and time or demand deposits
in commercial banks, bankers' acceptances, savings and loan association
deposits or deposits in members of the Federal Home Loan Bank [Systems]
SYSTEM. The funds of the Partners shall not be commingled with the funds of
any other Person.
Section 9.04. Reports. The General Partner shall deliver to each Partner the
following:
A. As soon as practicable but in no event later than 75 days after the end
of each Fiscal Year of the Partnership, such information as shall be necessary
for the preparation by such Partner of a Federal income tax return, and state
income or other tax returns with regard to the jurisdictions in which the
Hotel [and Equipment] is located. Such information shall include computation
of the distributions to such Partner and the allocation to such Partner of the
Net Profits or Net Losses, as the case may be, the Gain or Loss, as the case
may be, recognized by or allocated to the Partnership on the sale of the
Hotel[, Equipment] or other Partnership properties during such Fiscal Year;
and
B. Within 120 days after the end of each Fiscal Year of the Partnership, a
statement prepared by the General Partner on an accrual basis of accounting
which statement is to be audited and certified by a firm of independent public
accountants selected by the General Partner, setting forth its opinion as to
the items in clauses (i) and (ii) below, which statement shall set forth the
following:
(i) a statement of assets, liabilities and Partners' capital, a statement
of income and expenses on an accrual basis and a statement of [sources and
uses of funds] CASH FLOWS, and a statement of changes in Partners' capital;
(ii) the balances in the Capital Accounts of the Limited Partners in the
aggregate and of the General Partner;
(iii) a report (which need not be audited) summarizing the fees,
commissions, compensation and other remuneration and reimbursed expenses
paid by the Partnership for such Fiscal Year to the General Partner or any
Affiliate of the General Partner and the services performed; and
(iv) a budget (which need not be audited) setting forth the expected Net
Profits and Net Losses per Unit, for the current Fiscal Year.
C. Within 75 days after the end of each of the first three Fiscal Quarters
of each Fiscal Year of the Partnership, the General Partner shall send to each
Person who was a Limited Partner at any time during the Fiscal Quarter then
ended (i) a balance sheet (which need not be audited) and (ii) a profit and
loss statement (which need not be audited) and any other pertinent information
regarding the Partnership and its activities during the period covered by the
report.
D. Concurrent with the report sent pursuant to Section 9.04C for the third
Fiscal Quarter of each Fiscal Year, the Partner will be furnished an estimate
of Net Profits or Net Losses per Unit for such Fiscal Year.
E. The General Partner may prepare and deliver to the Limited Partners from
time to time in its sole discretion during each Fiscal Year, in connection
with cash distributions, unaudited statements showing the results of
operations of the Partnership to the date of such statement.
D-26
F. The General Partner shall prepare and file such registration statements,
annual reports, quarterly reports, current reports, proxy statements and other
documents, if any, as may be required under the Securities Exchange Act of
1934 and the rules and regulations of the Securities and Exchange Commission
thereunder.
Section 9.05. Tax Depreciation and Elections.
A. With respect to all depreciable assets of the Partnership, the General
Partner may, in its sole discretion, elect to use such depreciation method for
Federal tax purposes as it deems appropriate and in the best interest of the
Partners generally.
B. The General Partner shall be permitted in any Fiscal Year to make an
election under section 754 of the Code and such other tax elections as it may
from time to time deem necessary or appropriate.
Section 9.06. Interim Closing of the Books. There shall be an interim
closing of the books of account of the Partnership (i) at the date of the
admission to the Partnership of THE ORIGINAL Limited Partners [as of the date
of this Agreement], (ii) at any time a taxable year of the Partnership ends
pursuant to the Code and (iii) at such other times as the General Partner
shall determine are required by good accounting practice or may be appropriate
under the circumstances.
ARTICLE TEN
MEETINGS AND VOTING RIGHTS OF LIMITED PARTNERS
Section 10.01. Meetings.
A. Meetings of the Limited Partners for any purpose may be called by the
General Partner and shall be called by the General Partner upon receipt of a
request in writing signed by [holders of] LIMITED PARTNERS HOLDING 10% or more
of the Units. Notification of any such meeting shall be sent to the Limited
Partners within 10 business days after receipt of such a request. Such request
or any notification from the General Partner shall state the purpose of the
proposed meeting and the matters proposed to be acted upon thereat. Such
meeting may be held at the principal office of the Partnership or at such
other location within the United States as the General Partner may deem
appropriate or desirable. In addition, the General Partner may, and upon
receipt of a request in writing signed by [holders of] LIMITED PARTNERS
HOLDING 25% or more of the Units, the General Partner shall submit any matter
(upon which the Limited Partners are entitled to act) to the Limited Partners
for a vote by written Consent without a meeting.
B. Notification of any such meeting shall be given not less than 10 days nor
more than 60 days before the date of the meeting, to the Limited Partners at
their record addresses, or at such other address which they may have furnished
in writing to the General Partner. Such Notification shall be in writing, and
shall state the place, date, hour and purpose of the meeting, and shall
indicate that it is being issued at or by the direction of the Partner or
Partners calling the meeting. If a meeting is adjourned to another time or
place, and if any announcement of the adjournment of time or place is made at
the meeting, it shall not be necessary to give Notification of the adjourned
meeting. The presence in person or by proxy of [holders of] LIMITED PARTNERS
HOLDING a majority of the Units (WHICH, IN THE CASE OF AN INTERESTED
TRANSACTION, MUST INCLUDE A MAJORITY OF THE UNITS HELD BY LIMITED PARTNERS
OTHER THAN THE GENERAL PARTNER AND ITS AFFILIATES) shall constitute a quorum
at all meetings of the Limited Partners; provided, however, that if there be
no such quorum, [holders of] LIMITED PARTNERS HOLDING a majority of the Units
so present or so represented may adjourn the meeting from time to time without
further notice, until a quorum shall have been obtained. No Notification of
the time, place or purpose of any meeting of Limited Partners need be given to
any Limited Partner who attends in person or is represented by proxy (except
when a Limited Partner attends a meeting for the express purpose of objecting
at the beginning of the meeting to the transaction of any business on the
ground that the meeting is not lawfully called or convened), or to any Limited
Partner entitled to such notice who, in a writing executed and filed with the
records of the meeting, either before or after the time thereof, waives such
Notification.
D-27
C. For the purpose of determining the Limited Partners entitled to vote at
any meeting of the Partnership or any adjournment thereof, OR ENTITLED TO
CONSENT TO ANY MATTER UPON WHICH THE LIMITED PARTNERS ARE ENTITLED TO ACT BY
WRITTEN CONSENT WITHOUT A MEETING, the General Partner OR THE LIMITED PARTNERS
REQUESTING SUCH MEETING may fix, in advance, a date as the record date for any
such determination of Limited Partners. Such date shall be not more than 60
days nor less than 10 days before any such meeting.
D. The Limited Partners may authorize any Person to act for them by proxy in
all matters in which a Limited Partner is entitled to participate, whether by
waiving notice of any meeting, or voting or participating at a meeting. Every
proxy must be signed by the Limited Partner or the Partner's attorney-in-fact.
No proxy shall be valid beyond the period permitted by law. Every proxy shall
be revocable at the pleasure of the Limited Partner executing it.
E. At each meeting of Limited Partners, the General Partner shall appoint
such officers and adopt such rules for the conduct of such meeting as the
General Partner shall deem appropriate.
F. As and to the extent that the Securities Exchange Act of 1934 is
applicable to the procedural rules governing any meeting of Limited Partners
(including any proxies or proxy statement related thereto), the provisions of
such Act shall take precedence over any provision of this Section 10.01 which
may be inconsistent therewith.
G. If any Consents, determinations or votes of Limited Partners, with or
without a meeting, are to be requested, made or taken WITH RESPECT TO AN
INTERESTED TRANSACTION, UNITS HELD BY, the General Partner or any of its
Affiliates (other than officers, directors or employees of the General Partner
or any of its Affiliates) shall [not be entitled to any voting, determinative
or consensual rights with respect to any Interests owned or controlled by any
of them nor shall any such Interests be taken into account in determining the
presence or absence of a quorum] BE VOTED IN THE SAME MANNER AS THE VOTE OF
LIMITED PARTNERS HOLDING, IN THEIR CAPACITY AS LIMITED PARTNERS AND NOT AS
ASSIGNEES, A MAJORITY OF THE OUTSTANDING UNITS ACTUALLY VOTING ON THE
INTERESTED TRANSACTION (NOT INCLUDING THOSE UNITS HELD BY THE GENERAL PARTNER
OR ANY OF ITS AFFILIATES OTHER THAN OFFICERS, DIRECTORS OR EMPLOYEES OF THE
GENERAL PARTNER OR ANY OF ITS AFFILIATES); PROVIDED, HOWEVER, THAT NO
INTERESTED TRANSACTION SHALL BE DEEMED TO BE APPROVED UNLESS A MAJORITY OF THE
UNITS HELD BY LIMITED PARTNERS OTHER THAN THE GENERAL PARTNER AND ITS
AFFILIATES ARE PRESENT IN PERSON OR BY PROXY AT THE MEETING AT WHICH SUCH
INTERESTED TRANSACTION IS CONSIDERED, OR, IF WRITTEN CONSENTS ARE SOUGHT WITH
RESPECT TO SUCH INTERESTED TRANSACTION, CONSENTS REPRESENTING A MAJORITY OF
THE UNITS HELD BY LIMITED PARTNERS OTHER THAN THE GENERAL PARTNER AND ITS
AFFILIATES ARE RETURNED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE
CONSENT SOLICITATION PERIOD. WITH RESPECT TO ALL MATTERS OTHER THAN AN
INTERESTED TRANSACTION, THE GENERAL PARTNER AND ITS AFFILIATES MAY VOTE UNITS
HELD BY THEM AS LIMITED PARTNERS IN THEIR SOLE AND ABSOLUTE DISCRETION.
Section 10.02. Special Voting Rights of Limited Partners.
A. If at any time any agreement (including the Hotel Operating Lease[)], IF
THE OPERATING TENANT IS AN AFFILIATE OF THE GENERAL PARTNER) pursuant to which
operating management of any property of the Partnership is vested in the
General Partner or an Affiliate of the General Partner OR IN MARRIOTT
INTERNATIONAL, INC. OR ANY OF ITS AFFILIATES and if pursuant to the terms of
such agreement the Partnership has a right to terminate such agreement as a
result of the failure of the operation of such property to attain any economic
objective, the Limited Partners, without the Consent of the General Partner,
may, upon the affirmative vote of [the holders of] LIMITED PARTNERS HOLDING a
majority of the Units, take action to exercise the right of the Partnership to
terminate such agreement.
B. To the extent not inconsistent with applicable law, in the event that the
General Partner has breached its obligations under Section 5.03B, has
committed any act of fraud or has committed and not, within a reasonable
period of time, remedied any act of bad faith or gross negligence in carrying
out its duties as the general partner,
D-28
[holders of] LIMITED PARTNERS HOLDING a majority of the Units may, without the
Consent of the General Partner, vote to:
(i) amend this Agreement, provided, however, that the allocable
percentage interests of the Partners in the allocations set forth in
Article [IV] FOUR may not be altered, and no new material obligation may be
imposed on any Partner without such Partner's approval;
(ii) dissolve the Partnership; or
(iii) remove the General Partner.
ARTICLE ELEVEN
MISCELLANEOUS PROVISIONS
Section 11.01. Appointment of General Partner as Attorney-in-Fact.
A. Each Limited Partner, including each Substituted Limited Partner, by the
execution and delivery of this Agreement, irrevocably constitutes and appoints
the General Partner and the President, any Vice President, Secretary,
Treasurer, Assistant Secretary and Assistant Treasurer of any corporate
General Partner as his true and lawful attorney-in-fact with full power and
authority in such Limited Partner's name, place, and stead to execute,
acknowledge, deliver, swear to, file, and record at the appropriate public
offices such documents as may be necessary or appropriate to carry out the
provisions of this Agreement, including but not limited to:
(i) all counterparts of this Agreement, and any amendment or restatement
thereof, including all certificates and instruments, which the General
Partner deems appropriate to form, qualify or continue the Partnership as a
limited partnership (or a partnership in which the Limited Partners will
have limited liability comparable to that provided by the Act) in the
jurisdictions in which the Partnership may conduct business or in which
such formation, qualification or continuation is, in the opinion of the
General Partner, necessary or desirable to protect the limited liability of
the Limited Partners;
(ii) all amendments to this Agreement adopted in accordance with the
terms hereof and all instruments which the General Partner deems
appropriate to reflect a change or modification of the Agreement in
accordance with the terms hereof;
(iii) all documents or instruments which the General Partner deems
appropriate to reflect the admission of a Limited Partner (including any
Substituted Limited Partner), in accordance with this Agreement, the
dissolution of the Partnership, sales or transfers of Partnership property,
sales or transfers of Interests, or the initial amount or increase or
reduction in amount of any Partner's Capital Contribution or reduction in
any Partner's Capital Account;
(iv) any instrument or document requested by the Partnership or any
purchaser of the Interest of a Defaulting Limited Partner under the
provisions of Section 3.05 of this Agreement;
(v) all documents, including but not limited to financing statements,
necessary or appropriate to perfect and continue the Partnership's security
interest in such Limited Partner's Interest; and
(vi) any instrument, certificate or document to implement the provisions
of Section [5.01C(vi)] 5.01C(VII).
B. The appointment by all Limited Partners of the General Partner and the
aforesaid officers of any corporate General Partner as attorney-in-fact shall
be deemed to be a power coupled with an interest, in recognition of the fact
that each of the Partners under this Agreement will be relying upon the power
of the General Partner to act as contemplated by this Agreement in any filing
and other action by it on behalf of the Partnership, and shall survive, and
not be affected by the subsequent bankruptcy, death, incapacity, disability,
adjudication of incompetence or insanity, or dissolution of any Person hereby
giving such power and the transfer or assignment of all or any part of the
Units or Interest of such Person; provided, however, that in the event of the
transfer by a Limited Partner of all OF such Limited Partner's Interest, the
foregoing power of attorney of a
D-29
[transferee] TRANSFEROR Partner shall survive such transfer only until such
time as the transferee shall have been admitted to the Partnership as a
Substituted Limited Partner and all required documents and instruments shall
have been duly executed, filed and recorded to effect such substitution.
Section 11.02 Amendments.
A. Each Limited Partner, Substituted Limited Partner and any successor
General Partner shall become a signatory hereof by signing such number of
counterpart signature pages to this Agreement and such other instrument or
instruments, and in such manner, as the General Partner shall determine. By so
signing, each Limited Partner, Substituted Limited Partner or successor
General Partner, as the case may be, shall be deemed to have adopted, and to
have agreed to be bound by all the provisions of, this Agreement subject to
the provisions of Section 7.02D.
B. In addition to the amendments otherwise authorized herein, amendments may
be made to this Agreement from time to time by the General Partner with the
Consent of the holders of a majority of the Units; provided, however, that
without the Consent of all Partners, this Agreement may not be amended so as
to (i) convert the Interest of a Limited Partner into a general partner's
Interest; (ii) modify the limited liability of a Limited Partner; (iii) alter
the Interest of a Partner in Net Profits, Net Losses, or Gain or Loss or
distributions of Cash Available for Distribution, Sale Proceeds, Refinancing
Proceeds or change the percentage of Partners which is required to Consent to
any action hereunder; (iv) modify the liability of the General Partner as
provided in Section 3.08; (v) permit the General Partner to take any action
prohibited by Section 5.02; (vi) cause the Partnership to be treated for
Federal income tax purposes as an association taxable as a corporation; or
(vii) effect any amendment or modification to this Section 11.02B.
C. If this Agreement shall be amended as a result of adding or substituting
a Limited Partner, the amendment to this Agreement shall be signed by the
General Partner and by the Person to be substituted or added and, if a Limited
Partner is to be substituted, by the assigning Limited Partner. If this
Agreement shall be amended to reflect the withdrawal or removal of the General
Partner when the business of the Partnership is being continued, such
amendment shall be signed by the withdrawing General Partner (and the General
Partner hereby so agrees) and by the successor General Partner.
D. In making any amendments, there shall be prepared and filed for
recordation by the General Partner such documents and certificates as shall be
required to be prepared and filed, no such filing being required solely by
reason of this Agreement, under the Act and under the laws of the other
jurisdictions under the laws of which the Partnership is then formed or
qualified, not less frequently, in the case of a substitution of a Limited
Partner, than once each calendar quarter.
F. THE GENERAL PARTNER MAY, WITHOUT THE CONSENT OF THE LIMITED PARTNERS,
MAKE ANY AMENDMENT TO THIS AGREEMENT AS IS NECESSARY TO CLARIFY THE PROVISIONS
HEREOF SO LONG AS SUCH AMENDMENT DOES NOT ADVERSELY AFFECT THE RIGHTS OF THE
LIMITED PARTNERS OR ASSIGNEES OF THEIR INTERESTS UNDER THIS AGREEMENT IN ANY
MATERIAL RESPECT.
Section 11.03. General Partner Representations and Warranties The General
Partner represents that the Partnership shall not incur the cost of any
insurance which insures any party against any liability as to which such party
is prohibited from being indemnified under this Agreement.
Section 11.04. Binding Provisions. The covenants and agreements contained
herein shall be binding upon, and inure to the benefit of, the heirs,
executors, administrators, personal representatives, successors and assigns of
the respective parties hereto.
Section 11.05. Applicable Law. This Agreement shall be construed and
enforced in accordance with the laws of the State of Delaware.
D-30
Section 11.06. Counterparts. This Agreement may be executed in several
counterparts, all of which together shall constitute one agreement binding on
all parties hereto, notwithstanding that all the parties have not signed the
same counterpart.
Section 11.07. Separability of Provisions. Each provision of this Agreement
shall be considered separable and if for any reason any provision or
provisions hereof are determined to be invalid and contrary to any existing or
future law, such invalidity shall not impair the operation of or [effect]
AFFECT those portions of this Agreement which are valid.
Section 11.08. Article and Section Titles. Article and section titles are
for descriptive purposes only and shall not control or alter the meaning of
this Agreement as set forth in the text.
Section 11.09. Short-Form Filings. The General Partner shall have authority
to sign any short-form Certificate of Limited Partnership or restated or
amended Certificate of Limited Partnership meeting the requirement of
applicable law which reflects this Agreement, as same may be amended.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
General Partner:
Marriott Desert Springs Corporation
By __________________________________
[Withdrawing Initial Limited
Partner: Christopher G. Townsend]
Limited Partners:
All Limited Partners now and
hereafter admitted to the
Partnership as limited partners of
the Partnership pursuant to powers
of attorney now and hereafter
executed in favor of and delivered
to the General Partner.
Marriott Desert Springs Corporation
By: _________________________________
as Attorney-in-Fact for all the
Limited Partners
By __________________________________
D-31
ACKNOWLEDGEMENT
State of [New York]
Maryland
County of H ss.:
On this day of , [1987] 1997, before me personally appeared ,
to me known, who, first by me duly sworn, did depose and say that he is the
Vice President of Marriott Desert Springs Corporation that he knows the seal
of such corporation and that such seal hereto affixed is such seal and that it
was so affixed by order of the Board of Directors of Marriott Desert Springs
Corporation and that he signed his name thereof on behalf of the General
Partner by order of the Board of Directors of Marriott Desert Springs
Corporation.
In Witness Whereof, I have hereunto set my hand and affixed my official seal
the day and year in this certificate first above written.
_____________________________________
(SEAL) Notary Public for:
My Commission Expires:
[ACKNOWLEDGEMENT
State of New York
County of___________H ss.:
On this day of , 1987, before me personally appeared Christopher G.
Townsend, to me known, who, first by me duly sworn, did depose and say that he
is the Initial Limited Partner of Desert Springs Marriott Limited Partnership
and that he signed his name to the foregoing instrument and acknowledged that
he executed the same as his free act and deed.
In Witness Whereof, I have hereunto set my hand and affixed my official seal
the day and year in this certificate first above written.
_____________________________________
(5EAL) Notary Public for:
My Commission Expires:]
D-32
ACKNOWLEDGEMENT
State of [New York]
Maryland
County of H ss.:
On this day of , [1986] 1997, before me personally appeared ,
to me known, who, first by me duly sworn, did depose and say that he is the
Vice President of Marriott Desert Springs Corporation that he knows the seal
of such corporation and that such seal hereto affixed is such seal and that it
was so affixed by order of the Board of Directors of Marriott Desert Springs
Corporation, and that he signed his name thereto on behalf of the General
Partner as attorney in fact for all the Limited Partners of the Partnership.
In Witness Whereof, I have hereunto set my hand and affixed my official seal
the day and year in this certificate first above written.
_____________________________________
(SEAL) Notary Public for:
My Commission Expires:
D-33
EXHIBIT A
$75,000 per Unit , 1987
Units
LIMITED PARTNER NOTE
For Value Received, the undersigned promises to pay to the order of Desert
Springs Marriott Limited Partnership, a Delaware limited partnership (the
"Partnership") at its offices at 10400 Fernwood Road, Bethesda, MD 20058, or
at such other place as the holder hereof from time to time shall designate in
writing to the undersigned, the principal sum of Seventy Five Thousand Dollars
($75,000) per Unit for the number of Units set forth above, without interest,
in the following installments per Unit at the following times:
DUE DATE AMOUNT
-------- ------
June 15, 1988.... $30,000 per Unit for the number of Units set forth above
June 15, 1989.... $25,000 per Unit for the number of Units set forth above
June 15, 1990.... $20,000 per Unit for the number of Units set forth above
In the event the undersigned fails to pay in lawful money of the United
States of America any amount which he is required to pay to the Partnership on
or before the 20th day following the date when such amount is due and payable,
a late payment fee of five percent (5%) of the amount of the overdue payment
shall be added to the amount due. If default shall continue beyond 30 days
after notice thereof to the undersigned, in addition to the aforesaid late
charge, the unpaid portion of such installment shall bear interest from the
due date of such installment until paid in full at a rate equal to the lesser
of four percentage points in excess of the base rate of interest announced
from time-to-time by Bankers Trust Company, New York, New York, charged to its
best commercial customers, or the maximum rate permitted by law. In no event
may the late charge, if deemed to be interest under law, when added to any
interest exceed the rate permitted by law. If the default continues beyond 30
days after notice thereof to the undersigned, the general partner of the
Partnership (the "General Partner") shall also have the option of accelerating
the payment of the entire unpaid balance of the note, and exercising all of
the Partnership's rights and remedies under the provisions of the Amended and
Restated Agreement of Limited Partnership (the "Partnership Agreement"), as
hereinafter defined.
The undersigned shall have the right to repay, in whole or in part, at any
time, the unpaid principal balance to this note.
All the provisions of the Partnership Agreement regarding this note are
incorporated herein by reference.
The undersigned agrees that in the event his subscription for a limited
partnership interest in the Partnership is reduced, this note may be modified
by the General Partner in its sole discretion, to reflect a corresponding
reduction of the principal amount hereof, and the General Partner shall
allocate such reduction equally among the installment payments due under this
note.
This note may not be modified orally, and shall be governed by, enforced,
determined and construed in accordance with the laws of the State of Delaware.
The undersigned hereby consents to the non-exclusive jurisdiction and venue of
the courts of the State of Delaware and of the United States for the District
of Delaware in connection with the collection of this note or any matter
relating thereto and hereby irrevocably appoints the General Partner as its
agent to receive service of process in the State of Delaware in connection
with any such matter.
In the event of default, the undersigned agrees to pay the costs of
collection, including, without limitation, reasonable attorneys' fees and
disbursements and court costs.
D-34
The undersigned waives presentment, demand for payment, notice of dishonor,
notice of protest, protest and all other notices or demands in connection with
the delivery, acceptance, performance, default, endorsement or guaranty of
this instrument, except as set forth in the Partnership Agreement. No failure
or delay by the holder of this note in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise thereof or course of dealing preclude any other or further
exercise thereof or the exercise of any other right, power or privilege.
To secure repayments of the outstanding amounts hereunder, the undersigned
has, pursuant to the Partnership Agreement, hereby granted to the Partnership
a security interest in all of the undersigned's right, title and interest in
the undersigned's limited partnership interest in the Partnership. In the
event that this note is negotiated, endorsed, assigned, transferred and/or
pledged, all references to the Partnership shall apply to the one which
receives the Partnership's interest as if the one instead of the Partnership
was named as the original payee under this note.
If any part of this note is determined by any court to be invalid or
unenforceable, the remaining portions of this note will remain in effect. Any
ambiguity or uncertainty in the note will be construed in favor of the
Partnership.
The terms of this note shall be binding upon and inure to the benefit of the
respective successors and assigns of the Partnership and the undersigned.
All definitions as used herein shall have the same meaning as such terms are
used in the Partnership Agreement:
If Subscriber is an individual:
_________________________________ _________________________________
Print Name of Subscriber Signature of Subscriber
_________________________________ _________________________________
Print Name of Co-Subscriber (if any) Signature of Co-Subscriber (if
any)
If Subscriber is a corporation, partnership or trust:
By: ___________________________________________________________________________
Print Name of Subscribing Entity
_________________________________ _________________________________
Print Name of Authorized Officer, Signature of Authorized Officer,
Partner or Trustee Partner or Trustee
_________________________________
Print Title of Authorized Partner or Trustee
_________________________________ _________________________________
Print Name of Co-Trustee Signature of Co-Trustee
(if required by trust instrument) (if required by trust
instrument)
D-35
APPENDIX B
HM JUNIOR LOAN COMMITMENT LETTER
HOST MARRIOTT CORPORATION
10400 FERNWOOD ROAD
BETHESDA, MARYLAND 20817
August 28, 1997
CONFIDENTIAL
Desert Springs Marriott Limited Partnership
c/o Marriott Desert Springs Corporation
10400 Fernwood Road
Bethesda, MD 20817-1109
Attn: Mr. Bruce D. Wardinski Vice President
Dear Sirs and Ladies:
Subject to the terms and conditions set forth herein, this letter represents
a commitment by Host Marriott Corporation ("HMC") to refinance, in part, the
existing mortgage debt of Desert Springs Marriott Limited Partnership (the
"Partnership") in the approximate amount of $160.0 million (the "Existing
Loan"), which currently is secured by Marriott's Desert Springs Resort and Spa
(the "Property"). Such refinancing would be effected by three loans (each, a
"Loan," and collectively, the "Loans"). One loan (the "Senior Loan") will be a
mortgage loan secured by the Property and made by Goldman Sachs Mortgage
Company ("GSMC"), to a new, single-purpose, bankruptcy-remote limited
partnership, limited liability company or other entity (the "Borrower")
controlled by the Partnership, as described in greater detail below. The
Partnership and GSMC have executed a commitment letter dated December 23,
1996, as may be amended (the "GSMC Commitment") describing, in greater detail,
the Senior Loan. The second loan (the "Mezzanine Loan") will be a loan made by
GSMC initially to the Partnership and will be secured by the Partnership's
100% ownership interests (direct or indirect) in the Borrower. The other loan
(the "HM Junior Loan") will be made by the Junior Lender (defined below) to
the Partnership and, if consented to by GSMC, will be secured by a subordinate
pledge of the Partnership's 100% ownership interests (direct or indirect) in
the Borrower.
Borrower:
Senior Loan: The Partnership shall form and wholly own
(directly or indirectly) "Borrower", a single
purpose, bankruptcy-remote entity with no
operations, assets or activities other than the
Property and no debts other than the Senior Note
(defined below), except as permitted under the
GSMC Commitment.
Mezzanine Loan: Initially, the Partnership. At the option of the
Junior Lender, the Partnership shall form and
directly own a new "Mezzanine Borrower," which
will be a single purpose, bankruptcy remote
entity with no operations, assets or activities
other than the interests in the Borrower and no
debts other than the Mezzanine Loan. The
Partnership shall own, directly or indirectly,
all of the interests in the Mezzanine Borrower,
which will be pledged, as collateral for the HM
Junior Loan.
HM Junior Loan: The Partnership.
Junior Lender:
DSM Finance LLC, a Maryland limited liability
company of which Marriott Desert Springs
Corporation, the general partner of the
Partnership (the "General Partner") and an
affiliate of HMC, is the sole member.
B-1
Loan Structure:
Three notes will be issued--each note
representing a Loan (collectively, the "Notes"
and individually, a "Note"). The "Senior Note"
will be issued by the Borrower and secured by a
first deed of trust lien on the Property. The
"Mezzanine Note" will initially be issued by the
Partnership and secured by a lien on the
Partnership's 100% ownership interests (direct or
indirect) in the Borrower. The "HM Junior Note"
will be issued by the Partnership and, if
permitted by GSMC, initially secured by a
subordinate lien on the Partnership's 100%
ownership interests (direct or indirect) in the
Borrower (and after formation of the Mezzanine
Borrower, by a lien on the Partnership's 100%
ownership interests (direct or indirect) in the
Mezzanine Borrower). The terms of the Notes are
explained below in further detail.
Senior Note Amount: $103 million or such other amount as determined
in accordance with the GSMC Commitment.
Mezzanine Note Amount: $20 million.
HM Junior Note Amount: $59.7 million.
Financing Rates:
Senior Note: 12-yr. U.S. Treasuries plus a spread (the "Senior
Note Spread") of 1.9%. If the Loans do not close
prior to the 75th day following the initiation of
the Partnership's solicitation of its Limited
Partners, the spread can be adjusted by GSMC.
At the end of year 12.5, the rate will be reset
to 200 basis points above the greater of the rate
at closing or the then current yield on 12 year
U.S. Treasury Securities (the difference between
the initially established Financing Rate and the
reset Financing Rate, hereinafter the "Senior
Additional Interest").
Mezzanine Note: 12-yr. U.S. Treasuries plus 4.50%. If the
Mezzanine Borrower is not created prior to March
31, 1998, the financing rate on the Mezzanine
Note increases by 1%. If the Loans do not close
prior to the 75th day following the initiation of
the Partnership's solicitation of its Limited
Partners, the spread can be adjusted by GSMC.
HM Junior Note: 13%.
Term:
Senior Note: 25 years.
Mezzanine Note:
12.5 years.
HM Junior Note:
30 years.
B-2
Amortization:
Senior Note: Initially, a 25 year schedule, payable monthly.
After year 12.5, Property revenues shall be
applied to amortize the Senior Loan and to pay
Senior Additional Interest in accordance with the
priorities of cash flow applications set forth
below in "Application of Revenues" or "Lockbox",
as applicable. Borrower's failure to amortize at
a rate greater than the 25-year schedule in place
as of the origination of the Senior Loan, and
Borrower's failure to pay Senior Additional
Interest, in each case by reason of the
insufficiency of Property cash flow to pay the
same, shall not be a default. To the extent such
Property cash flow is insufficient to pay Senior
Additional Interest, Senior Additional Interest
will accrue and compound. As described in the
GSMC Commitment, in certain circumstances, a
lock-box also will be required by GSMC to control
the allocation of funds.
Mezzanine Note: 12.5 year schedule.
HM Junior Note: Interest only, payable monthly, for the first
12.5 years, thereafter principal will amortize
over a 17.5 year schedule, but subject to the
restrictions on payments on the HM Junior Loan
described below in "Application of Revenues" or
"Lockbox", as applicable. The Partnership's
failure to make payments on the HM Junior Loan by
reason of the insufficiency of Property cash flow
to pay the same, shall not be a default. To the
extent such Property cash flow is insufficient to
pay such amounts, all unpaid amounts shall accrue
and compound.
Participation: As additional interest on the HM Junior Loan, the
Junior Lender shall be paid 30% of any Excess
Cash Flow available annually, plus 30% of any net
capital/residual proceeds, as described below,
after allowing for full repayment of the Loans.
The "net capital/residual proceeds" would mean
(i) at the time of a sale of the Property,
amounts remaining after payment of costs related
to the sale, repayment of all mortgage
indebtedness or other indebtedness of Borrower,
the Mezzanine Borrower (if applicable) and the
Partnership and other amounts required to be paid
pursuant to the Partnership's partnership
agreement (collectively, the "Outstanding
Obligations") or (ii) at the time of a
refinancing, prepayment or maturity of the HM
Junior Loan (each, an "Appraisal Event"), the
excess of the Appraised Value (defined below) of
the Property over the then current Outstanding
Obligations.
The Appraised Value shall be determined as
follows: (i) upon the occurrence of an Appraisal
Event, the Junior Lender shall select an M.A.I.
appraiser with at least five (5) years of
experience in the hospitality industry (the
"Initial Appraiser"); and (ii) within ten (10)
days after such appointment, the Initial
Appraiser shall select two (2) additional M.A.I.
appraisers, each with at least five (5) years of
experience in the hospitality industry (together
with the Initial Appraiser, the "Appraisers").
Within thirty (30) days after the selection of
the last Appraiser (the "Appraisal Period"), the
Appraisers each shall conduct and complete an
appraisal to determine the fair market value of
the Property. If any Appraiser fails to render
its appraisal within the Appraisal Period, it
shall be disregarded. The
B-3
"Appraised Value" shall be the average of the
fair market value determined by each Appraiser
which completes an appraisal during the Appraisal
Period. The fees charged by the Appraisers shall
be paid by the Partnership.
Payments: Interest payments will be due and payable on the
HM Junior Loan on the eleventh day of each month
(the "Payment Date"), and will be computed on an
actual/360 day basis. With respect to any Payment
Date, the interest period will be the period from
(and including) the preceding Payment Date to
(but excluding) such Payment Date.
Prepayment: Permitted at any time, provided that, at the time
of prepayment, the Appraised Value shall be
determined as described above to establish the
amount of the Junior Lender's 30% participation
interest in capital/residual proceeds.
Debt Service Liquidity There shall be no debt service liquidity reserve
Reserve: ("DSLR") required for the HM Junior Loan.
Management: Marriott International, Inc. or its (direct or
indirect) wholly-owned subsidiary (the "Manager")
will manage the Property. The current lease
arrangement (the "Operating Lease") will be
changed to a management contract. In connection
with the refinancing of the existing mortgage
debt, the management contract shall provide,
among other things, that Operating Profit (as
defined in the current Operating Lease) shall be
paid (i) first, to the Partnership, in the
maximum amount of the Owner's Priority (as
defined below), (ii) second, to the Manager, in
the maximum amount of $1,800,000, and (iii)
third, 75% to the Partnership and 25% to the
Manager. The amounts payable to Manager pursuant
to the foregoing causes (ii) and (iii) are
referred to herein as the "Incentive Management
Fee." As used herein, "Owner's Priority" shall
mean: (A) for all fiscal years after 1997, the
greater of $21,500,000 or the scheduled annual
debt service on the Senior Note, the Mezzanine
Note (excluding cash sweeps and the DSLRs),
calculated as of the date of the funding of the
Loans; and (B) for fiscal year 1997, the greater
of $20,500,000 and the annual scheduled debt
service for the Senior Note and the Mezzanine
Note (excluding cash sweeps and the DSLRs).
Notwithstanding the foregoing, for fiscal year
1997, the maximum Incentive Management Fee shall
be $2,000,000 and there shall be no sharing of
Operating Profit in excess of the Owner's
Priority plus $2,000,000.
Costs and Expenses: The Partnership will be responsible for, and
shall pay on demand, all reasonable expenses and
costs incurred by Junior Lender in connection
with the Loans.
Indemnification: The Partnership shall indemnify and hold harmless
HMC and the Junior Lender from liabilities
related to environmental matters.
Closing:
Concurrently with Closing under the Senior Loan
and the Mezzanine Loan.
B-4
Application of Revenues:
Prior to Year 12.5: Subject to GSMC's rights under the Senior Loan
and the Mezzanine Loan, prior to year 12.5,
during any period in which a lockbox is not
required by GSMC, gross revenues from the
Property shall be applied as follows:
(i) Deductions from gross revenues as currently
permitted in calculating Operating Profit
under the Operating Lease (including tax and
insurance escrows, if applicable);
(ii) Golf course ground lease payments;
(iii) Monthly scheduled debt service on the
Senior Loan;
(iv) Capital expenditures;
(v) Deposits into the Senior Loan DSLR in the
maximum amount of six (6) months' debt
service for the Senior Loan;
(vi) Monthly scheduled debt service on the
Mezzanine Loan;
(vii) Partnership, Mezzanine Borrower, and
Borrower administrative expenses (as
approved by GSMC); and
(viii) Deposits into the Mezzanine DSLR in the
maximum amount of six (6) months' debt
service for the Mezzanine Loan.
Any amounts remaining after the application of
moneys in accordance with clauses (i) through
(viii) above shall be defined as "Excess Cash
Flow." Excess Cash Flow shall be held in an
escrow account maintained with GSMC throughout
the fiscal year, and after the annual audit
determining Operating Profit for such fiscal
year, shall be paid: first, to the Manager for
the Incentive Management Fee and second, to
Junior Lender for interest due under the HM
Junior Loan (if any), as well as any other
amounts (including the Junior Lender's
participation interest) payable thereunder, and
thereafter, the excess, if any, to Borrower or
its designee in the amount of 70% of such excess
and the Junior Lender in the amount of 30% of
such excess.
After Year 12.5: Subject to GSMC's rights under the Senior Loan,
after year 12.5, during any period in which a
lockbox is not required by GSMC, gross revenues
from the Property shall be applied as follows:
(i) Deductions from gross revenues as currently
permitted in calculating Operating Profit
under the Operating Lease (including tax and
insurance escrows, if applicable);
(ii) Golf course ground lease payments;
(iii) Monthly scheduled debt service on the
Senior Loan;
(iv) Capital expenditures;
(v) Deposits into the Senior Loan DSLR in the
maximum amount of six (6) months' debt
service for the Senior Loan;
(vi) Partnership, Mezzanine Borrower and Borrower
administrative expenses (as approved by
GSMC);
(vii) After Operating Profit shall have exceeded
Owner's Priority, deposits into the
Management Incentive Reserve Account;
(viii) To the amortization of all remaining
principal on the Senior Loan;
B-5
(ix) Accrued Senior Additional Interest;
(x) Monthly scheduled debt service on the HM
Junior Loan; and
Pursuant to the GSMC Commitment, under certain
circumstances, GSMC has the right to require that
all revenues from Property operations be
deposited in a "Lockbox Account." All revenues in
the Lockbox Account shall be applied in the same
manner set forth above in "Application of
Revenues--Prior to Year 12.5" or "Application of
Revenues--After Year 12.5," as applicable based
on the year in question, except that the
following shall be substituted for clause (i) in
each of said paragraphs:
(i) First, to the funding of tax and insurance
escrows; second, to the funding of FF&E
reserves; and third, to the payment of
deductions from gross revenues (except as
listed above in first and second) as
currently permitted in calculating Operating
Profit under the Operating Lease."
Any amounts remaining after the application of
moneys in accordance with "Application of
Revenues--Prior to Year 12.5," as modified in
accordance with the foregoing paragraph, shall be
defined as "Excess Cash Flow."
Documentation: All documentation and information shall be in
form and content appropriate and customary for
transactions of this type and otherwise
acceptable to HMC and its counsel in their sole
discretion.
Due Diligence: All due diligence information and materials, and
each provider thereof, shall be provided to HMC
in a reasonably prompt manner and shall be
satisfactory to HMC, in its sole discretion.
HMC's Conditions: In addition to any other condition specified
herein, HMC's obligation to make the HM Junior
Loan shall be subject to confirmation by HMC
that:
(i) there shall exist no default under the Golf
Course B Lease or the Operating Lease (or the
successor management contract);
(ii) as of the Closing, there has not been any
material adverse change or any development
involving a prospective material adverse
change to the physical condition of the
Property or financial condition or
operations of the Partnership, Mezzanine
Borrower or Borrower;
(iii) (a) there has been no general suspension or
material limitation of trading on the NYSE;
(b) there shall have been no banking
moratorium declared by either Federal or
New York State authorities; (c) there shall
have been no significant outbreak or
escalation of hostilities involving the
United States; no declaration by the United
States of a national emergency or war; and
no change in international or national
financial, banking, capital markets or
economic conditions or currency exchange
rates or controls which, with respect to
any event described in
B-6
this clause (c), in the reasonable good faith
judgment of HMC would make it impracticable or
inadvisable for HMC to proceed with making the
HM Junior Loan, in the manner currently
contemplated; and (d) there shall have been no
default under the GSMC Commitment; and
(iv) the partners of the Partnership shall have
approved the creation of Borrower and any
other matters under the Partnership Agreement
which HMC determines are necessary or
desirable in connection with the making of the
HM Junior Loan.
Assignability: Any approval of the HM Junior Loan that may be
issued by HMC, and this Commitment, are personal to
the Partnership and Borrower, and the rights of the
Partnership and Borrower, if any, thereunder and
hereunder may not be assigned to, and may not be
enforced by, any other person or entity unless HMC
otherwise agrees in writing.
[SIGNATURES APPEAR ON THE FOLLOWING PAGE]
B-7
Very truly yours,
Host Marriott Corporation
By: /s/ W. Edward Walter____________
Name: W. Edward Walter_______________
Its: Senior Vice President__________
AGREED AND ACCEPTED:
Desert Springs Marriott Limited
Partnership
By: Marriott Desert Springs Corporation
Its: General Partner
By: /s/ Patricia K. Brady________
Name: Patricia K. Brady__________
Its:Vice President_______________
B-8
APPENDIX C
BT SECURITIES CORPORATION FAIRNESS OPINION
[BT SECURITIES CORPORATION LETTERHEAD]
BT SECURITIES CORPORATION
130 Liberty Street
New York, New York
10006
July 1, 1997
Desert Springs Marriott Limited Partnership
c/o Marriott Desert Springs Corporation
10400 Fernwood Road
Bethesda, MD 20817-1109
Attn.: Mr. Bruce D. Wardinski
Senior Vice President and Treasurer
Attention: Marriott Desert Springs Corporation, as General Partner
Ladies and Gentlemen:
Marriott Desert Springs Corporation, the General Partner (the "General
Partner") of Desert Springs Marriott Limited Partnership (the "Partnership"),
has informed us that DSM Finance LLC (the "Host Lender"), a single member
Delaware limited liability company of which the General Partner is the sole
member and of which Host Marriott Corporation ("Host"), a Delaware corporation
and the corporate parent of the General Partner, is also an affiliate, will
lend on a subordinated basis $59.7 million to the Partnership. The purpose of
the loan (the "Subordinated Loan") is to refinance a portion of the
Partnership's outstanding third-party mortgage debt and to allow a
distribution of approximately $22.7 million to the partners of the
Partnership. The Subordinated Loan will be (i) structurally subordinated to a
$103 million first mortgage loan (the "First Senior Loan") to be made by
Goldman Sachs Mortgage Company ("GSMC") to a single purpose entity (intended
to be bankruptcy remote) (the "Borrower") to be created and wholly owned by
the Partnership, which First Senior Loan will be secured by a mortgage on the
Marriott Desert Springs Resort and Spa (the "Property") and (ii) contractually
subordinated to a loan of $20 million ( the "Second Senior Loan" and
collectively with the First Senior Loan, the "Senior Loans") to be made by
GSMC, which Second Senior Loan will be secured by a first priority lien on the
Partnership's ownership interest in the Borrower. The Subordinated Loan will
be secured by a junior lien on the Partnership's ownership interest in the
Borrower. Summary terms of the Senior Loans and of the Subordinated Loan are
outlined in Exhibit I and Exhibit II, respectively.
You have requested the opinion of BT Securities Corporation ("BTSC" or
"we"), as investment bankers, as to the fairness, from a financial point of
view, to the Partnership and its limited partners of the Subordinated Loan
terms and conditions, including the interest rate to be paid by the
Partnership to the Host Lender on the Subordinated Loan.
BTSC, in connection with arriving at its opinion, has, among other things:
(i) reviewed the terms and conditions of the First Senior Loan and
Second Senior Loan (outlined in Exhibit I);
(ii) reviewed the terms and conditions of the Subordinated Loan
(outlined in Exhibit II);
(iii) reviewed the historical financial statements of the Property and
of the Partnership;
(iv) reviewed certain internal financial and operating information
regarding the Property and the Partnership;
(v) reviewed a Partnership overview provided by the General Partner
which included a Property description and an ownership summary;
(vi) reviewed the terms, interest rates and trading prices of public
and private subordinated loans which BTSC believes to be relevant;
(vii) reviewed and specifically relied upon valuation analysis prepared
by CB Commercial Real Estate Group, Inc. ("CB"), indicating the
current value of the Property, cash flow projections for the
years 1997 to 2006 and projected residual value in 2006;
C-1
(viii) discussed the business and financial condition of, and other
material information relating to, the Partnership and the
Property with certain officers and certain members of
management; and
(ix) performed such analyses and examination and considered such other
information, financial studies, analyses, investigations and
financial economic and market data as BTSC deemed relevant.
BTSC has not assumed responsibility for independently verifying, and has not
independently verified, any information, whether publicly available or
otherwise furnished to it, concerning the Partnership or the Property,
including, without limitation, any financial information, forecasts or
projections, considered in connection with the rendering of its opinion.
Accordingly, for purposes of its opinion, BTSC has assumed and relied upon the
accuracy and completeness of all such information, and BTSC has not conducted
a physical inspection of the properties or other assets of the Partnership,
including without limitation, the Property, and has not prepared or obtained
any independent evaluation or appraisal of any of the assets or liabilities of
the Partnership. Without limiting the foregoing, we have specifically relied
upon the capitalization rate and residual value arrived at by CB and referred
to above in arriving at our opinion. With respect to the financial forecasts
and projections made available to BTSC and used in its analysis, BTSC has
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of the management of the General
Partner and the Partnership as to the matters covered thereby, and in
rendering its opinion BTSC expresses no view as to the reasonableness of such
forecasts and projections or the assumptions on which they are based. BTSC's
opinion is necessarily based upon economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof.
This opinion is addressed to, and for the sole use and benefit of, the
Partnership and its limited partners. BTSC has assumed that the making of the
Subordinated Loan is a self-contained transaction, except with respect to the
Senior Loans, and the opinion expressed herein by BTSC gives no consideration
to any other material transaction, announced or contemplated, other than the
making of the Senior Loans and the Subordinated Loan. Except as provided
herein, the opinion contained herein may not be reproduced, summarized or
referred to in any public document or given to any other person without the
prior written consent of BTSC.
In connection with its opinion, BTSC has assumed that the terms and conditions
of the Senior Loans and the Subordinated Loan described in Exhibits I and II,
respectively, accurately summarize all material terms and conditions thereof
and contain no omissions of material terms or conditions. BTSC has assumed
that the Partnership will consummate the Senior Loans and the Subordinated
Loan in all material respects on terms and conditions identical to the terms
and conditions described in Exhibits I and II, respectively, and that any
terms or conditions contained in the actual Subordinated Loan which are not
described in Exhibit II will be no less favorable to the Partnership that
those in Exhibit II. BTSC has also assumed that all necessary governmental and
regulatory approvals and consents of third parties will be obtained on terms
and conditions that will not have a material adverse effect on the
Partnership.
BTSC will receive a fee and is being indemnified in connection with the
delivery of this opinion. BTSC also draws your attention to the fact that BTSC
and its affiliates have and have had various relationships, including, without
limitation, credit and advisory relationships, with Host, Marriott
International, Inc. ("Marriott") (which manages the Property) and their
respective affiliates. Moreover, BTSC and its affiliates, as full service
financial institutions, may hold, from time to time and as principal and/or
agent, positions and other interests in securities and other obligations of
Host, Marriott and their respective affiliates.
Based upon and subject to the forgoing, it is BTSC's opinion, as investment
bankers, that the terms and conditions of the Subordinated Loan, including the
interest rate (as described in Exhibit II) to be paid by the Partnership to
the Host Lender on the Subordinated Loan, are fair, from a financial point of
view, to the Partnership and the limited partners.
Very truly yours,
/s/ BTSC
BT Securities Corporation
C-2
EXHIBIT I
SENIOR LOAN TERMS
FIRST SENIOR LOAN
LENDER: Goldman Sachs Mortgage Company
BORROWER: A single purpose, bankruptcy remote entity (the
"Entity") with no operations, assets or
activities other than the ownership of the
Property. The Entity will be owned by the
Partnership.
AMOUNT:
$103 million.
INTEREST RATE: Fixed, 12-year Treasury rate plus 1.90%.
TERM: 12.5 years.
AMORTIZATION: 25 year schedule (12.5 year balloon).
PREPAYMENT:
Permitted in whole at certain times prior to year
12.5 through defeasance with Treasuries. After
the 12.5 year anniversary, prepayment permitted
at par.
LATE PAYMENT: Payments due on 11th day of month, if not paid by
the due day, subject to a late charge equal to 2%
of the delinquent amount.
SECURITY:
First mortgage on real and personal property
owned by the Borrower, non-recourse, except for
certain bad acts--fraud, misapplication of funds,
failure to pay taxes or insurance.
ADDITIONAL FINANCING: Permitted by the Borrower or the Partnership
provided that such funds are for the replacement
of furniture, fixtures and equipment or other
costs of operating the Property. The Partnership
shall be allowed to have the Second Senior Loan
and the Subordinated Loan.
C-3
SECOND SENIOR LOAN
LENDER: Goldman Sachs Mortgage Company
BORROWER: The Partnership.
AMOUNT:
$20 million.
INTEREST RATE: Fixed, 12-year Treasury rate plus 4.50%.
TERM: 12.5 years
AMORTIZATION: 12.5 year schedule
PREPAYMENT:
Permitted at any time subject to the following
prepayment penalties: Year 1=4.0%, Year 2=3.0%,
Year 3=2.0%, Year 4=1.0%, and thereafter no
penalty.
LATE PAYMENT: Payments due on 11th day of month, if not paid by
the due date, subject to a late charge equal to
2% of the delinquent amount.
SECURITY:
First lien on the Partnership's ownership
interest in the Entity, non-recourse, except for
certain bad acts--fraud, misapplication of funds,
failure to pay taxes or insurance.
ADDITIONAL FINANCING: Permitted by the Partnership provided that such
debt is unsecured and incurred in the ordinary
course of business for Property purposes. The
Partnership shall be allowed to have the
Subordinated Loan.
C-4
EXHIBIT II
SUBORDINATED LOAN TERMS
JUNIOR LENDER: The Host Lender.
BORROWER: The Partnership.
AMOUNT: $59.7 million.
INTEREST RATE: 13.0%.
TERM: 30 years.
AMORTIZATION: Interest only for 12.5 years, 17.5 year schedule
in years 12 through 30 (limited to excess
cashflow) with a final payment of unpaid
principal at final maturity.
PREPAYMENT: None permitted until repayment in full of the
Second Senior Loan.
DEBT SERVICE LIMITATION: Annual debt service will not exceed cash flow
remaining after payment of Second Senior Loan and
Subordinated Loan debt service, any shortfall
will be accrued and repaid from available
proceeds.
SECURITY: Junior lien on the Partnership's 100% ownership
interest in the Entity, non-recourse, except for
certain bad acts--fraud, misapplication of funds,
failure to pay taxes or insurance.
PARTICIPATION: 30% of cash flow after all debt service has been
paid, plus 30% of sale/refinance proceeds after
repayment of all debt.
ESTIMATED LTV: 85.6% (including Second Senior Loan and
Subordinated Loan).
ADDITIONAL FINANCING: Unless otherwise agreed to by the Host Lender, no
additional financing besides the Second Senior
Loan shall be permitted.
PAYMENT DEFAULT: The Borrower's failure to pay scheduled debt
service shall not be a default. Unpaid amounts
shall accrue and compound.
C-5
APPENDIX D
FINANCIAL STATEMENTS
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX PAGE
- ----- ----
Report of Independent Public Accountants.................................. 1
Statement of Operations................................................... 2
Balance Sheet............................................................. 3
Statement of Changes in Partners' (Deficit) Capital....................... 4
Statement of Cash Flows................................................... 5
Notes to Financial Statements............................................. 6
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 13
i
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Desert Springs Marriott
Limited Partnership (a Delaware limited partnership) as of December 31, 1996
and 1995, and the related statements of operations, changes in partners'
(deficit) capital and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements and the schedule referred
to below are the responsibility of the General Partner's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Desert Springs Marriott
Limited Partnership as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at
Item 14(a)(2) (Schedule III Real Estate and Accumulated Depreciation) is
presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
Washington, D.C.
March 21, 1997
1
STATEMENT OF OPERATIONS
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
1996 1995 1994
------- ------- --------
INCOME
Rentals
Hotel........................................... $23,433 $19,851 $18,676
Airline equipment (Note 6)...................... 1,248 2,837 2,731
Other............................................. 1,100 1,663 1,234
------- ------- --------
25,781 24,351 22,641
------- ------- --------
EXPENSES
Interest.......................................... 15,501 13,371 13,371
Depreciation...................................... 7,732 7,823 8,932
Property taxes.................................... 1,965 1,219 1,914
Partnership administration and other.............. 474 353 688
------- ------- --------
25,672 22,766 24,905
------- ------- --------
NET INCOME (LOSS)................................... $ 109 $ 1,585 $ (2,264)
======= ======= ========
ALLOCATION OF NET INCOME (LOSS)
General Partner................................... $ 1 $ 16 $ (23)
Limited Partners.................................. 108 1,569 (2,241)
------- ------- --------
$ 109 $ 1,585 $ (2,264)
======= ======= ========
NET INCOME (LOSS) PER LIMITED PARTNER UNIT (900
Units)............................................. $ 120 $ 1,743 $ (2,490)
======= ======= ========
The accompanying notes are an integral part of these financial statements.
2
BALANCE SHEET
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
1996 1995
-------- --------
ASSETS
Property and equipment, net............................... $155,441 $153,184
Due from Marriott International, Inc...................... 8 2,295
Property improvement fund................................. 1,041 5,425
Deferred financing, net of accumulated amortization....... 2,637 83
Rent receivable from airline equipment lessee............. -- 2,542
Cash and cash equivalents................................. 5,755 10,213
-------- --------
$164,882 $173,742
======== ========
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES
Mortgage debt............................................. $160,000 $168,239
Additional rental paid by hotel lessee.................... 25,013 21,848
Due to Marriott International, Inc........................ 1,022 122
Accounts payable and accrued interest..................... 484 2,451
Deferred gain on equipment lease.......................... -- 1,281
-------- --------
Total Liabilities....................................... 186,519 193,941
-------- --------
PARTNERS' DEFICIT
General Partner
Capital contribution...................................... 909 909
Capital distributions..................................... (602) (587)
Cumulative net losses..................................... (398) (399)
-------- --------
(91) (77)
-------- --------
Limited Partners
Capital contributions, net of offering costs of $10,576... 77,444 77,444
Investor notes receivable................................. (22) (22)
Capital distributions..................................... (59,584) (58,052)
Cumulative net losses..................................... (39,384) (39,492)
-------- --------
(21,546) (20,122)
-------- --------
Total Partners' Deficit................................. (21,637) (20,199)
-------- --------
$164,882 $173,742
======== ========
The accompanying notes are an integral part of these financial statements.
3
STATEMENT OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
GENERAL LIMITED
PARTNER PARTNERS TOTAL
------- -------- --------
Balance, December 31, 1993.......................... $ 21 $(10,511) $(10,490)
Payments received on investor notes receivable.... -- 45 45
Net loss.......................................... (23) (2,241) (2,264)
Capital distributions............................. (40) (3,964) (4,004)
----- -------- --------
Balance, December 31, 1994.......................... (42) (16,671) (16,713)
Net income........................................ 16 1,569 1,585
Capital distributions............................. (51) (5,020) (5,071)
----- -------- --------
Balance, December 31, 1995.......................... (77) (20,122) (20,199)
Net income........................................ 1 108 109
Capital distributions............................. (15) (1,532) (1,547)
----- -------- --------
Balance, December 31, 1996.......................... $ (91) $(21,546) $(21,637)
===== ======== ========
The accompanying notes are an integral part of these financial statements.
4
STATEMENT OF CASH FLOWS
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
1996 1995 1994
-------- -------- --------
OPERATING ACTIVITIES
Net income (loss).............................. $ 109 $ 1,585 $ (2,264)
Noncash items:
Depreciation................................. 7,732 7,823 8,932
Amortization of deferred financing costs as
interest expense............................ 104 135 135
(Gain) loss on dispositions of property and
equipment................................... (1,248) (1,972) 408
Changes in operating accounts:
Due to/from Marriott International, Inc. and
affiliates.................................. 2,287 (2,241) (113)
Due from airline equipment lessee............ -- 1,357 (1,122)
Accounts payable and accrued interest........ (1,967) 37 (117)
-------- -------- --------
Cash provided by operations................. 7,017 6,724 5,859
-------- -------- --------
INVESTING ACTIVITIES
Additions to property and equipment............ (9,989) (3,979) (2,851)
Change in property improvement fund............ 4,384 (2,035) (1,628)
Proceeds from sales of airline equipment....... 2,509 3,964 42
-------- -------- --------
Cash used in investing activities............ (3,096) (2,050) (4,437)
-------- -------- --------
FINANCING ACTIVITIES
Repayment of mortgage debt..................... (168,239) -- --
Proceeds from mortgage loan.................... 160,000 -- --
Refinancing costs.............................. (2,658) -- --
Capital distributions to partners.............. (1,547) (5,071) (4,004)
Additional rental paid by hotel lessee......... 3,165 3,672 3,219
Advances from Marriott International, Inc...... 1,700 -- --
Repayment of note payable to Marriott Interna-
tional, Inc................................... (800) -- --
Payments received on investor notes receiv-
able.......................................... -- -- 45
-------- -------- --------
Cash used in financing activities............ (8,379) (1,399) (740)
-------- -------- --------
(DECREASE) INCREASE IN CASH AND CASH EQUIVA-
LENTS........................................... (4,458) 3,275 682
CASH AND CASH EQUIVALENTS at beginning of year... 10,213 6,938 6,256
-------- -------- --------
CASH AND CASH EQUIVALENTS at end of year......... $ 5,755 $ 10,213 $ 6,938
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest................ $ 17,372 $ 13,237 $ 13,237
======== ======== ========
The accompanying notes are an integral part of these financial statements.
5
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Desert Springs Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire and own Marriott's Desert Springs
Resort and Spa and the land on which the 884-room hotel and a golf course are
located (the "Hotel") and airline equipment. On December 29, 1995, Host
Marriott Corporation's operations were divided into two separate companies:
Host Marriott Corporation ("Host Marriott") and Host Marriott Services
Corporation. The sole general partner of the Partnership, with a 1% interest,
is Marriott Desert Springs Corporation (the "General Partner"), a wholly-owned
subsidiary of Host Marriott. The Hotel is leased to Marriott Hotel Services,
Inc. (the "Tenant"), a wholly-owned indirect subsidiary of MII, along with a
second golf course leased by the Partnership from Marriott Desert Springs
Development Corporation, also a wholly-owned subsidiary of MII. The airline
equipment was leased to Trans World Airlines, Inc. ("TWA") pursuant to the
terms of an operating lease through April 20, 1995. On April 20, 1995, the
Partnership entered into a new sales-type lease agreement which was due to
expire on June 24, 1996. On April 24, 1996, TWA exercised its early
termination option under the airline equipment lease and paid the rent due on
that date of $847,000 along with the termination value of $780,000 plus the $1
purchase option (see Note 6).
The Partnership was formed on February 26, 1987, and operations commenced on
April 24, 1987 (the "Unit Offering Closing Date"). Between March 20, 1987, and
the Unit Offering Closing Date, 900 limited partnership interests (the
"Units") were subscribed pursuant to a private placement offering. The
offering price per Unit was $100,000; $25,000 payable at subscription with the
balance due in three annual installments through June 15, 1990, or, as an
alternative, $87,715 in cash at closing as full payment of the subscription
price. Of the total 900 Units, 740.5 were purchased on the installment basis
and 159.5 Units were paid in full. The General Partner contributed $909,100 in
cash for its 1% general partnership interest.
Partnership Allocations and Distributions
Under the partnership agreement, Partnership allocations, for Federal income
tax purposes, and distributions are generally made as follows:
a. Cash available for distribution will generally be distributed (i)
first, 1% to the General Partner and 99% to the limited partners until the
General Partner and the limited partners (collectively, the "Partners")
have received cumulative distributions of sale or refinancing proceeds
("Capital Receipts") equal to $45,454,545; and (ii) thereafter, 10% to the
General Partner and 90% to the limited partners.
b. Refinancing proceeds and proceeds from the sale or other disposition
of less than substantially all of the assets of the Partnership, not
retained by the Partnership, will be distributed (i) first, 1% to the
General Partner and 99% to the limited partners, until the Partners have
received cumulative distributions of Capital Receipts equal to $90,909,100;
and (ii) thereafter, 10% to the General Partner and 90% to the limited
partners.
Proceeds from the sale or other disposition of all or substantially all
of the assets of the Partnership or from the sale or other disposition of
all or substantially all of the Hotel will be distributed to the Partners
pro rata in accordance with their capital account balances as defined in
the partnership agreement.
c. Net profits will be allocated as follows: (i) first, through and
including the year ended December 31, 1990, 99% to the General Partner and
1% to the limited partners; (ii) next, through and including the year
ending December 31, 1992, 70% to the General Partner and 30% to the limited
partners; and (iii) thereafter, 10% to the General Partner and 90% to the
limited partners.
6
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
d. Net losses will be allocated 100% to the General Partner through
December 31, 1990, and thereafter, 70% to the General Partner and 30% to
the limited partners, subject to certain limitations, as specified in the
partnership agreement, regarding allocations to the limited partners.
e. The deduction for interest on the Purchase Note, as defined, which
cumulatively will not exceed $12,285 per Unit will be allocated to those
limited partners owning the Units purchased on the installment basis.
f. In general, gain recognized by the Partnership will be allocated as
follows: (i) first, to all Partners whose capital accounts have negative
balances until such negative balances are brought to zero; (ii) next, to
all Partners up to the amount necessary to bring their respective capital
account balances to an amount equal to their respective invested capital,
as defined; (iii) third, in the case of gain arising from the sale or other
disposition (or from a related series of sales or dispositions) of all or
substantially all of the assets of the Partnership, (a) to the limited
partners in an amount equal to the excess, if any, of (1) the sum of the
product of 12% times the weighted-average of the limited partners' invested
capital, as defined, each year, minus (2) the sum of cumulative
distributions to the limited partners of cash available for distribution,
and (b) next, to the General Partner until it has been allocated an amount
equal to 10/90 times the amount allocated to the limited partners in (a);
and (iv) thereafter, 12% to the General Partner and 88% to the limited
partners.
For financial reporting purposes, profits and losses are allocated among the
Partners based upon their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting
and its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the following estimated useful lives of the
assets less an estimated residual value of 10% on the original building cost
and 20% on the airline equipment cost:
Building and improvements................ 50 years
Furniture and equipment.................. 4 to 10 years
Airline equipment........................ 8 years
All Hotel property and equipment is pledged as security for the Mortgage
Debt described in Note 5.
The Partnership assesses impairment of its real estate property based on
whether estimated undiscounted future cash flow from the hotel will be less
than its net book value. If the property is impaired, its basis is adjusted to
fair market value.
7
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with
obtaining debt financing and are amortized over the term thereof. The original
Mortgage Debt (see Note 5) matured on July 27, 1996. Deferred financing costs
associated with that debt, totaling $943,000, were fully amortized at maturity
and removed from the Partnership's books. Costs associated with the refinanced
Mortgage Debt totaled $2,658,000 at December 31, 1996. At December 31, 1996
and 1995, accumulated amortization of deferred financing costs totalled
$21,000 and $859,000, respectively.
Additional Rental
Under the terms of the Hotel operating lease (see Note 7), the Tenant pays
Additional Rental to the Partnership which is subject to possible repayment
under defined conditions; therefore, Additional Rental has been recorded as a
liability in the financial statements.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of
less than three months at date of purchase to be cash equivalents.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes, but rather, allocates its profits and losses to the individual
partners. Significant differences exist between the net loss/net income for
financial reporting purposes and the net loss/net income reported in the
Partnership's tax return. These differences are due primarily to the use for
income tax purposes of accelerated depreciation methods, shorter depreciable
lives for the assets and differences in the timing of recognition of rental
income. As a result of these differences, the excess of the tax basis in net
Partnership liabilities and the net liabilities reported in the accompanying
financial statements at December 31, 1996 and 1995 was $26.0 million and $24.5
million, respectively.
New Statements of Financial Accounting Standards
The Partnership adopted Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities,"
during 1994. Adoption of this statement did not have a material effect on the
Partnership's financial statements.
The Partnership adopted SFAS No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of" during 1996.
Adoption of SFAS No. 121 did not have any effect on the Partnership's
financial statements.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1996 1995
--------- ---------
Land and land improvements............................. $ 13,690 $ 13,551
Building and improvements.............................. 155,570 153,388
Furniture and equipment................................ 47,800 40,132
--------- ---------
217,060 207,071
Less accumulated depreciation.......................... (61,619) (53,887)
--------- ---------
$ 155,441 $ 153,184
========= =========
8
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are shown below. Fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts (in thousands):
AS OF DECEMBER 31, 1996 AS OF DECEMBER 31, 1995
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ------------ ----------- ------------
Financial Assets:
Property improvement fund... $ 1,041 $ 1,041 $ 5,425 $ 5,425
Financial Liabilities:
Mortgage debt............... $ 160,000 $ 160,000 $ 168,239 $ 168,239
Note Payable to MII......... $ 900 $ 900 $ -- $ --
Additional rental paid by
Hotel lessee............... $ 25,013 $ -- $ 21,848 $ --
The estimated fair value of Mortgage Debt obligations is based on the
expected future debt service payments discounted at estimated market rates.
Additional rental paid by the Hotel lessee is valued based on the expected
future payments from operating cash flow discounted at a risk-adjusted rate.
As further explained in Note 7, upon closing of the permanent financing to
take place in 1997, MII agreed to waive all claims to Additional Rental that
has accrued prior to the consummation of the loan. Consequently, the estimated
fair value of Additional Rental paid by the Hotel lessee is zero.
As further explained in Note 7, the Partnership is required to maintain a
property improvement fund for the purpose of funding capital expenditures. As
of December 31, 1995, a portion of the Partnership's property improvement fund
was invested in debt securities which matured in 1996. Pursuant to the
provisions of SFAS No. 115, the securities were classified as held-for-sale
and adjusted to their fair market value. The proceeds from the sale of the
securities were used to fund a portion of the rooms refurbishment project
which was completed in the fourth quarter of 1996.
NOTE 5. DEBT
Mortgage Debt
As of December 31, 1995, Partnership debt consisted of a $168.2 million
nonrecourse mortgage loan (the "Mortgage Debt") which matured on July 27,
1996. The Mortgage Debt bore interest at a fixed rate of 7.76% and required no
amortization of principal prior to maturity.
The Mortgage Debt matured on July 27, 1996, and went into default on the
maturity date as the Partnership was unable to secure replacement financing or
negotiate a forbearance agreement with the lender. Pursuant to the loan
documents, the Mortgage Debt began to accrue interest at the Default Rate, as
defined, of 10.75% which is 2.5 percentage points above the Lender's Corporate
Base Rate, as defined, from the maturity date through December 23, 1996.
The Partnership's debt was refinanced on December 23, 1996. The Mortgage
Debt was fully repaid with the proceeds from a $160 million nonrecourse
mortgage loan (the "Bridge Loan") combined with a principal paydown in the
amount of $8.2 million from the Partnership's refinancing reserve. The new
loan was originated by Goldman, Sachs & Co. ("Goldman Sachs") and the lender
is GMAC Commercial Mortgage Corporation. The debt refinancing will take place
in two stages. The first stage, which took effect on December 23, provides an
interim $160 million mortgage loan that matures on October 31, 1997. This debt
will bear interest at LIBOR
9
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
plus 2.75 percentage points and requires that all excess cash from Hotel
operations, if any, be held in a debt service reserve for future debt service
or to reduce the outstanding principal balance upon maturity. For the year,
the weighted-average interest rate on the Partnership's Mortgage Debt was
9.0%. In 1995 the weighted-average interest rate on the Mortgage Debt was
7.8%. At December 31, 1996, the interest rate on the Bridge Loan was 8.4%.
The second stage of the refinancing will involve securing long-term
financing for the Hotel. Concurrently with entering into the interim loan
agreement, the Partnership signed a commitment letter with Goldman Sachs which
outlines the possible terms of a long-term loan to be finalized prior to
October 31, 1997. Under the terms of the commitment letter, the long-term debt
would consist of two notes: a $99 million "Senior Note" and a $61 million
"Junior Note." Pursuant to the terms of the commitment, the Senior Note will
be provided by Goldman Sachs, will bear interest at 12-year U.S. Treasuries
plus 1.9 percentage points (currently 8.7%) and will require principal
amortization on a 25-year term.
Pursuant to the terms of the commitment letter, the Partnership has certain
options available to finance the Junior Note. One option is for Goldman Sachs
to provide the Junior Note in two tranches of debt. The first tranche of $39.1
million would bear interest at 12-year U.S. Treasuries plus 6.5 percentage
points with amortization based upon a 12.5 year term. The second tranche of
debt approximating $21.9 million would bear interest at 20% with principal
amortization to be paid from excess cash flow as defined in the commitment
letter. Other options available to finance the Junior Note amount include Host
Marriott or a subsidiary or MII providing a loan to the Partnership.
The Partnership utilized $2.6 million from the refinancing reserve to pay
costs associated with the financing including lender or a subsidiary fees,
property appraisals, environmental studies and legal fees. Approximately half
of the $2.6 million was for fees related to the long-term financing.
The Bridge Loan is secured by the Partnership's fee interest in the Hotel, a
security interest in certain personal property associated with the Hotel
including furniture and equipment, contracts and other general intangibles and
a security interest in the Partnership's rights under the Hotel operating
lease, the Hotel purchase agreement and other related agreements.
Pursuant to the terms of the debt refinancing there are no continuing
requirements for a debt service guarantee. Host Marriott and the General
Partner were released of their obligations to the Partnership under their
original debt service guarantee with the refinancing of the Partnership
Mortgage Debt.
In conjunction with the refinancing of the Mortgage Debt, the General
Partner reaffirmed a foreclosure guarantee to the lender in the amount of $50
million. Pursuant to the terms of the foreclosure guarantee, amounts would be
payable only upon a foreclosure of the Hotel and only to the extent that the
gross proceeds from a foreclosure sale were less than $50 million.
Debt to MII
On April 30, 1996, the Partnership entered into a short-term loan with MII
in the amount of $1,700,000 to fund a portion of the Hotel's rooms
refurbishment project. The loan matures on June 13, 1997, bears interest at
8.5% and will be repaid from the property improvement fund as contributions
are made during the year. The Partnership was required to make principal
payments of $200,000 on the last day of each Accounting Period in 1996, as
defined, beginning on October 4, 1996. Thereafter, principal payments of
$300,000 per Accounting Period are scheduled to be paid. At December 31, 1996,
the loan balance was $900,000.
10
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
NOTE 6. AIRLINE EQUIPMENT LEASE
The Partnership leased airline equipment to TWA under the terms of an
operating lease which expired in April 1995. Pursuant to the terms of the
airline equipment lease, TWA was obligated to make semi-annual payments, in
arrears, based upon specified percentages of the Partnership's cost of the
airline equipment. Rental income under the operating lease is included in
"Airline equipment income" in the statement of operations and was $852,000 in
1995, and $2,731,000 in 1994.
On April 20, 1995, the Partnership reached an agreement with TWA whereby TWA
was obligated to pay renewal rents under a 15-month lease agreement. The
renewal rents consisted of quarterly payments of $780,000 plus 17% interest
paid in arrears, all of which totalled $6.5 million. At the end of the lease
term, TWA had the option to purchase the equipment for one dollar ($1). The
Partnership classified the new lease as a sales-type lease and recorded a
receivable for the future lease payments due from TWA, along with a deferred
gain on the transaction. The deferred gain is recognized as income as lease
payments are received on the installment method as a component of the line
item "Airline Equipment Income" in the statement of operations. Deferred gain
amortization was $1,248,000 in 1996 and $1,985,000 in 1995. On April 24, 1996,
TWA exercised its early termination option under the airline equipment lease
and paid the rent due on that date of $847,000 along with the termination
value of $780,000 plus the $1 purchase option.
NOTE 7. OPERATING LEASE
The Partnership leases the Hotel to the Tenant pursuant to an agreement
which commenced on April 24, 1987, with an initial term of 25 years (the
"Operating Lease"). The lease may be renewed at the Tenant's option for five
successive periods of 10 years each.
Annual Rental is equal to the greater of Basic Rental or Owner's Priority, as
described below:
1. Basic Rental equals 85% of Operating Profit, as defined, until
December 31, 1993, and 80% thereafter.
2. Owner's Priority equals the greater of (i) $20 million plus debt
service on certain additional debt to expand the Hotel ("Expansion Debt
Service") or (ii) Debt Service, as defined. If there is a new mortgage (in
an amount which exceeds the outstanding balance of the existing mortgage by
at least $45,455,000), Owner's Priority will equal the greater of (i) $20
million plus Expansion Debt Service, (ii) Debt Service or (iii) the lesser
of Debt Service on the new mortgage or $24 million plus Expansion Debt
Service. In no event will Owner's Priority for any year exceed Operating
Profit.
3. Additional Rental equals the cumulative amount by which Owner's
Priority exceeds Basic Rental plus $268,000 and is recorded as a liability
in the accompanying financial statements. If in any year Basic Rental
exceeds Owner's Priority, Annual Rental will be reduced to equal Basic
Rental minus the lower of (i) Additional Rental then outstanding or (ii)
25% of the amount by which Basic Rental exceeds Owner's Priority.
Rental income for 1996 included Basic Rental of $16,836,000 and Additional
Rental of $3,164,000. Operating Profit in 1996 totaled $21,045,000. In
accordance with the lease agreement, the Partnership was entitled to receive
Owner's Priority of $20,000,000 and MII was entitled to the remaining
$1,045,000.
Pursuant to an agreement reached with MII, for fiscal year 1997 the $20
million Owner's Priority will be increased to $20.5 million. MII will be
entitled only to the next $2 million of Operating Profit. Any additional
Operating Profit in excess of $22.5 million will be remitted entirely to the
Partnership as additional rent. MII has also agreed once the long-term
refinancing with Goldman Sachs is consummated, Owner's Priority will be
11
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1996 AND 1995
increased to $21.5 million and MII will be entitled only to the next $1.8
million of Operating Profit. Any additional Operating Profit in excess of
$23.3 million will be shared 75% to the Partnership and 25% to MII. In
connection with and concurrently with the consummation of the long-term
financing in 1997, MII agreed to waive any and all claims to Additional Rental
that have accrued prior to the consummation of such loan.
In addition to the Annual Rental, the Tenant is required to pay property
taxes, make annual contributions equal to a percentage of Hotel sales to a
property improvement fund (4.5% through 1997 and 5.5% thereafter) and pay
rental on the second golf course.
Pursuant to the terms of the Hotel purchase agreement, the Tenant and its
affiliates may utilize a portion of the land adjacent to the Hotel for
development of residences and timeshare condominiums. Purchasers of the
residences have the opportunity to use certain Hotel facilities and services
for a fee. Purchasers of the timeshare condominiums also have the ability to
use the Hotel's facilities but such use is subject to the same fees charged to
Hotel guests.
During 1995, the Hotel's main swimming pool was expanded at a cost of
approximately $2.1 million. The project was funded partially by proceeds
received from Marriott Vacation Club International ("MVCI"), a wholly-owned
indirect subsidiary of MII, pursuant to an agreement between the Partnership
and MVCI for the development of additional timeshare units on land adjacent to
the Hotel. As part of this agreement, the Hotel's spa was also expanded during
1994. Pursuant to the terms of the agreement, MVCI contributed a total of $1.3
million towards the pool expansion and the spa expansion projects; the
remaining costs were funded by Partnership cash reserves. Amounts funded by
MVCI in 1995 and 1994 were $692,000 and $623,000, respectively, and were
included in "Other Income" in the statement of operations.
NOTE 8. COMPARATIVE HOTEL OPERATING RESULTS
The following is a summary of Hotel Operating Profit, as defined in the
Hotel lease agreement, for the three years ended December 31, 1996 (in
thousands):
1996 1995 1994
-------- -------- --------
REVENUES
Rooms............................................. $ 37,031 $ 33,495 $ 33,101
Food and beverage................................. 38,431 33,453 31,701
Other............................................. 22,437 18,450 17,281
-------- -------- --------
97,899 85,398 82,083
-------- -------- --------
EXPENSES
Departmental direct costs
Rooms............................................. 8,545 7,715 8,156
Food and beverage................................. 26,623 23,335 22,243
Other operating expenses........................... 41,686 35,987 35,589
-------- -------- --------
76,854 67,037 65,988
-------- -------- --------
OPERATING PROFIT.................................... $ 21,045 $ 18,361 $ 16,095
======== ======== ========
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The following discussion and analysis addresses the results of operations of
the Partnership for the fiscal years ended December 31, 1996, 1995 and 1994.
Growth in the Partnership's total Hotel room sales, and thus rental income,
is primarily a function of average occupancy and average room rates, as well
as control of hotel operating costs. In addition, due to the amount of
meeting/convention business at the Hotel, food and beverage and golf and spa
operations have a direct effect on the Partnership's rental income. REVPAR, or
revenue per available room, represents the combination of the average daily
room rate charged and the average daily occupancy achieved and is a commonly
used indicator of hotel performance (although it is not a GAAP measure of
revenue). REVPAR does not include food and beverage or other ancillary
revenues generated by the Hotel. REVPAR for the years ended December 31, 1994,
1995 and 1996 was $102, $104 and $113, respectively. Food and beverage sales
increased from $31.7 million in 1994 to $33.5 million in 1995 and to $38.4
million in 1996 due to increased group sales.
Net rental income from the Hotel and Equipment rental is applied to debt
service, property taxes, partnership administrative costs, Partnership funded
capital expenditures and cash distributions to the partners.
RESULTS OF OPERATIONS
1996 Compared to 1995
Hotel Rental Income. Hotel rental income for 1996 increased 18% from $19.9
million in 1995 to $23.4 million in 1996. For the year, total Hotel revenues
increased 15% due to increases in all areas of the Hotel including rooms, food
and beverage, golf and spa and other ancillary revenues. REVPAR improved 9% to
$113 due to a 5% increase in average room rate to approximately $158 and a 2.0
percentage point increase in average daily occupancy to approximately 71%.
Food and beverage revenues increased 15% from $33.5 million in 1995 to $38.4
million in 1996.
Airline Equipment Rental Income. Airline equipment rental income decreased
56% from $2.8 million in 1995 to $1.2 million in 1996 due to the termination
of the airline equipment lease in April 1996. On April 24, 1996, TWA, the
lessee, terminated the lease and purchased the equipment, as permitted under
the lease agreement.
Other Income. Other income decreased 34% from $1.6 million in 1995 to $1.1
million in 1996. The decrease is primarily due to $692,000 of income
recognized in 1995 on the funding of the pool expansion by Marriott Vacation
Club International ("MVCI") offset by a $108,000 increase in interest income
earned in 1996 on the Partnership's cash held for refinancing.
Interest Expense. Interest expense increased 16% from $13.4 million in 1995
to $15.5 million in 1996 due to an increase in the interest rate. The mortgage
debt matured on July 27, 1996 and went into default on the maturity date.
Pursuant to the loan documents, the mortgage debt accrued interest at the
default rate of 10.75% until the refinancing on December 23, 1996. The
weighted average interest rate on the first mortgage debt was 9.0% in 1996 and
7.8% in 1995.
Depreciation and amortization. Depreciation and amortization decreased by
$100,000 due to the write-off in 1995 of the airline equipment partially
offset by an increase in building and equipment depreciation due to the $9.1
million rooms renovation.
Property Taxes. Property tax expense increased 61% to $2.0 million in 1996
from $1.2 million in 1995 primarily due to a nonrecurring $600,000 refund
received in 1995 related to property taxes paid in prior years.
13
Partnership administration and other. Partnership administration and other
increased 34% primarily due to an increase in administrative costs due to the
refinancing of the mortgage debt.
1995 Compared to 1994
Hotel Rental Income. Hotel rental income for 1995 increased 6.4% from $18.7
million in 1994 to $19.9 million in 1995. For the year, total Hotel revenues
increased 4% driven primarily by a 6% increase in food and beverage revenue
from $31.7 million in 1994 to $33.5 million in 1995. Room rates in the desert
market increased only slightly and occupancies remained virtually flat when
compared to 1994 due to the sluggish regional economy and continued
competitive constraints. Despite these factors, Hotel management was able to
increase REVPAR to $104 as a result of a 1.3% increase in average room rate to
approximately $150 and a slight increase in average occupancy to 69%. The
Hotel benefitted from a significant increase in ancillary sales to group
guests, particularly in catering, golf and spa, with sales in these areas
increasing $2.4 million over 1994. In addition, profit margins improved
significantly over 1994 as a result of a 7% labor productivity increase. As a
result, hotel operating results (hotel sales net of hotel operating expenses)
increased 10% over the prior year.
Other Income. During 1995, other income increased 30% from $1.2 million in
1994 to $1.6 million in 1995. The increase is due primarily to $700,000 of
income recognized on MVCI's funding of the pool expansion and increased
interest income earned on the Partnership's refinancing reserve.
Depreciation and amortization. Depreciation and amortization decreased by
$1.1 million or 12.4%, when compared to 1994 due to the decrease in airline
equipment depreciation.
Property Taxes. Property tax expense decreased 36%, from $1.9 million in
1994 to $1.2 million in 1995, primarily due to reduced property tax
assessments combined with a $600,000 refund received in 1995 related to
property taxes paid in prior years.
Partnership administration and other. Partnership administration and other
decreased 49% primarily due to a $400,000 loss on the retirement of fixed
assets recorded in 1994.
CAPITAL RESOURCES AND LIQUIDITY
Principal Sources and Uses of Cash
The Partnership's continuing principal source of cash is from the Hotel
Operating Lease. Prior to the Equipment Lease termination, the Partnership's
principal sources of cash included rents received under the Equipment Lease
and proceeds from Equipment sales. Its principal uses of cash are to fund the
property improvement fund, pay interest on mortgage debt and cash
distributions to the partners.
The Hotel Operating Lease provides for the payment of the greater of Basic
Rental or Owner's Priority. Basic Rental equals 80% of Operating Profit, as
defined. Owner's Priority equals the greater of (i) $20 million plus debt
service on certain additional debt to expand the Hotel or (ii) Debt Service,
as defined. (In no event will Owner's Priority for any year exceed operating
profit.)
The basis for computing the amounts paid pursuant to the Operating Lease is
expected to change in future periods. Pursuant to an agreement reached with
MII on December 23, 1996, for fiscal year 1997, the $20 million Owner's
Priority will be increased to $20.5 million. MII will be entitled only to the
next $2 million of Operating Profit, as defined. Any additional Operating
Profit in excess of $22.5 million will be remitted entirely to the Partnership
as additional rent. MII has also agreed that once long-term refinancing of the
existing mortgage debt is consummated, Owner's Priority will be increased to
$21.5 million and MII will be entitled only to the next $1.8 million of
Operating Profit. Any additional Operating Profit in excess of $23.3 million
will be shared 75% to the Partnership and 25% to MII. In connection with and
concurrently with the consummation of the long-term financing in 1997, MII
agreed to waive any and all claims to Additional Rental, as defined, that have
accrued prior to the consummation of such loan.
14
Total cash provided by operations of the Hotel was $5.9 million, $6.7
million and $7.0 million for the years ended December 31, 1994, 1995 and 1996,
respectively. Proceeds from the sale of airline equipment were less than
$100,000 for the year ended December 31, 1994, $4.0 million for the year ended
December 31, 1995 and $2.5 million for the year ended December 31, 1996. There
will be no sales in future periods due to the sale of the Equipment. Cash
contributed to the property improvement fund of the Hotel was $3.7 million,
$3.8 million and $4.4 million for the years ended December 31, 1994, 1995 and
1996, respectively. Cash distributed to the partners was $4.0 million, $5.0
million and $1.5 million during the years ended December 31, 1994, 1995 and
1996, respectively.
The General Partner expects that contributions to the property improvement
fund will be a sufficient reserve for the future capital repair and
replacement needs of the Hotel's property and equipment.
Pursuant to the terms of the Hotel Operating Lease, the Partnership is
obligated to fund major improvements for the Hotel's mechanical and heating
systems. During 1998, the Partnership expects to fund approximately $1.5
million for improvements to the Hotel's HVAC system (heating, ventilating and
air conditioning). The Partnership has a reserve established to pay for these
improvements which is expected to be sufficient. There are currently no
additional Partnership funded capital expenditure items planned for 1997 or
1998.
DEBT FINANCING
As of December 31, 1995, the Partnership's nonrecourse mortgage debt (the
"Mortgage Debt") balance was $168.2 million. The weighted average interest
rate was 7.76% through maturity on July 27, 1996. Debt service on the Mortgage
Debt required no principal amortization prior to maturity. Debt service was
funded by rental payments received from the Hotel.
The Mortgage Debt was secured by the Partnership's fee interest in the
Hotel, leasehold interest in the Second Golf Course, a security interest in
certain personal property associated with the Hotel including furniture and
equipment, contracts and other general intangibles, and a security interest in
the Partnership's rights under the Hotel operating lease, the Hotel purchase
agreement and other related agreements. The lender did not have a security
interest in the Equipment.
The Mortgage Debt matured on July 27, 1996. The General Partner's attempts
to negotiate a forbearance agreement with the lender were unsuccessful.
Pursuant to the terms of the Mortgage Debt, the debt was in default from the
Maturity Date until December 23, 1996, and carried interest at a rate of
10.75% which was 2.5 percentage points above the lender's corporate base rate.
On December 23, 1996, pursuant to an agreement with the Partnership, GMAC
Commercial Mortgage Corporation ("GMAC") purchased the existing Mortgage Debt
of the Partnership and amended and restated certain terms thereof (as amended
and restated, the "Bridge Loan"). The Bridge Loan consists of a $160 million
nonrecourse mortgage loan. The Partnership utilized $8.2 million from its
refinancing reserve to reduce the principal outstanding balance of the
Mortgage Debt to the $160 million outstanding under the Bridge Loan. In
addition, the Partnership utilized $2.6 million from the refinancing reserve
to pay costs associated with the financing including lender's fees, property
appraisals, environmental studies and legal fees. Approximately half of the
$2.6 million was for fees related to the long-term financing. The Bridge Loan
was originated by Goldman Sachs Mortgage Company ("GSMC"), matures on October
31, 1997 and bears interest at the London Interbank Offered Rate ("LIBOR")
plus 2.75 percentage points and requires that all excess cash from Hotel
operations, if any, be held in a debt service reserve for future debt service
or to reduce the outstanding principal balance of the Bridge Loan upon
maturity. For the year ended December 31, 1996, the weighted-average interest
rate on the Partnership's mortgage debt was 9.0%. In 1995, the weighted-
average interest rate on the Mortgage Debt was 7.8%. At December 31, 1996, the
interest rate on the Bridge Loan was 8.4%. Failure to refinance or extend the
Bridge Loan upon maturity could result in foreclosure of the Hotel by the
Bridge Loan lender.
15
The Bridge Loan is secured by the Partnership's fee interest in the Hotel, a
security interest in certain personal property associated with the Hotel
including furniture and equipment, contracts and other general intangibles and
a security interest in the Partnership's rights under the Hotel operating
lease, the Hotel purchase agreement and other related agreements.
Pursuant to the terms of the debt refinancing there are no continuing
requirements for a debt service guarantee. Host Marriott and the General
Partner were released of their obligations to the Partnership under their
original debt service guarantee with the refinancing of the Partnership's
Mortgage Debt.
In conjunction with the refinancing of the Mortgage Debt, the General
Partner reaffirmed a foreclosure guarantee to the lender in the amount of $50
million. Pursuant to the terms of the foreclosure guarantee, amounts would be
payable only upon a foreclosure of the Hotel and only to the extent that the
gross proceeds from a foreclosure sale were less than $50 million.
The General Partner is currently pursuing two alternatives to refinance the
Bridge Loan. Each alternative would require that certain amendments (the
"Amendments") be made to the Partnership's Amended and Restated Agreement of
Limited Partnership (the "Partnership Agreement").
Loan Alternative A. One of the two alternatives to refinance the Bridge Loan
would involve a loan from GSMC consisting of two tranches of debt: (i) a
senior loan to a newly formed 100% owned subsidiary ("New Sub") of the
Partnership that would own the Hotel, which senior loan would be secured by a
first mortgage lien on the Hotel in an amount up to $103 million (with the
final amount to be determined based upon the net cash flow at the Hotel and
prevailing interest rates) and (ii) a junior loan to the Partnership, which
junior loan would be secured by the Partnership's 100% direct and indirect
ownership interests in the Partnership's newly formed subsidiary, in an amount
equal to $57 million or such greater amount that, when combined with the
principal amount of the senior loan, would total $160 million ("Alternative
A"). Alternative A would enable the Partnership to refinance the Bridge Loan.
In connection with the closing of the Bridge Loan on December 23, 1996, the
General Partner entered into a commitment letter with GSMC setting forth the
terms of Alternative A.
Loan Alternative B. The other alternative ("Alternative B") would involve a
refinancing consisting of the senior loan from GSMC as described in
Alternative A, a subordinate tranche of debt from GSMC to the Partnership in
the amount of $20 million (the "Mezzanine Loan") secured by the Partnership's
100% direct and indirect ownership interests in the Partnership's newly formed
subsidiary, and a subordinate junior tranche to the Partnership (the "HM
Junior Loan") from DSM Finance LLC (the "Junior Lender"), a single member
Maryland limited liability company and wholly owned subsidiary of the General
Partner. The HM Junior Loan would be in the amount of $59.7 million, and if
consented to by the lender of the Mezzanine Loan would be secured by a
subordinate pledge of the Partnership's 100% direct and indirect ownership
interests in the New Sub. Alternative B is expected to result in $22.7 million
of proceeds in excess of that needed to refinance the Bridge Loan, which would
be distributed by the Partnership to its partners resulting in a distribution
to holders (the "Unitholders") of units of limited partnership interest in the
Partnership ("Units") of $25,000 per Unit.
The terms of the Senior Loan contemplate that, consistent with applicable
rating agency requirements, the Hotel would be contributed to the New Sub in
exchange for 100% of the direct and indirect interests in the New Sub. This
structure would create a bankruptcy remote entity which would be the borrower
under the Senior Loan. The Partnership Agreement does not currently permit
this contribution and, accordingly, each of Alternative A and Alternative B is
contingent on the approval by the Limited Partners of an amendment that would
permit such a contribution. On , 1997, the General Partner initiated the
solicitation of consents of the limited partners of the Partnership, pursuant
to which the General Partner has sought approval of amendments to refinance
the Bridge Loan under either Alternative A or Alternative B and proposed
Alternative B to fund the DSM Junior Loan together with other amendments to
the Partnership Agreement.
The proposed Amendments also would allow the Partnership to reorganize the
ownership structure of the Hotel to provide additional tiers of structured
financing. GSMC has indicated that it might prefer a structured
16
financing under Alternative B whereby (i) the New Sub would own the Hotel and
would be the Debtor on the Senior Loan, (ii) a new bankruptcy remote
subsidiary of the Partnership (the "Tier 2 Sub") would be formed to own the
New Sub and be the debtor on the Mezzanine Loan, and (iii) the Partnership
would own the Tier 2 Sub (and indirectly own the New Sub and the Hotel) and
would be the debtor on the HM Junior Loan. As of the date of the consent
solicitation statement, no determination has been made as to whether a tiered
subsidiary structure would be utilized under Alternative B. However, under the
currently proposed terms of the Mezzanine Loan, the interest rate for the
Mezzanine Loan would be increased one percentage point if a tiered subsidiary
structure has not been implemented on or before March 31, 1998. The effect of
the refinancing to the Limited Partners would be the same under either
structure. If these proposed Amendments are approved, the General Partner
would be able to create a new wholly owned subsidiary such as the Tier 2 Sub
to provide for the current or future restructuring of the Partnership's
mortgage debt.
Debt to MII
On April 30, 1996, the Partnership entered into a short-term loan with MII
in the amount of $1,700,000 to fund a portion of the Hotel's rooms
refurbishment project. The loan's stated maturity was June 13, 1997, bearing
interest at 8.5% and was to be repaid from the property improvement fund as
contributions are made during the year. At December 31, 1996, the loan balance
was $900,000. The loan was fully repaid on March 28, 1997.
Property Improvement Fund
The Partnership is required to maintain the Hotel in good repair and
condition. The Hotel Operating Lease agreement requires the Tenant to make
annual contributions to the property improvement fund for the Hotel on behalf
of the Partnership. Contributions to the fund are equal to 4.5% of Hotel gross
revenues through 1997 increasing to 5.5% thereafter. Total contributions to
the fund were $3.7 million for 1994, $3.8 million for 1995, and $4.4 million
in 1996. The balance of the Hotel's property improvement fund was $1.0 million
as of December 31, 1996.
During the summer of 1996, a $9.1 million rooms refurbishment was completed
at the Hotel. The property improvement fund was not sufficient to fund the
refurbishment. The Partnership arranged a short-term loan from MII of up to
$1.7 million at a fixed rate of 8.5% to finance the anticipated shortfall. The
loan was to be repaid from the property improvement fund, and the loan has
been fully repaid prior to its maturity on June 13, 1997. The General Partner
believes that funds available from the property improvement fund will be
adequate for anticipated renewal and replacement expenditures.
During 1995, the Hotel's main swimming pool was expanded. This $2.1 million
expansion was funded partially with $692,000 in proceeds received from MVCI
pursuant to an agreement between the Partnership and MVCI for the development
of additional time share units on land adjacent to the Hotel. The Partnership
funded the remaining $1.4 million from cash reserves.
Equipment Lease
The Partnership leased airline equipment to TWA under an operating lease
which expired in April 1995. On April 20, 1995, the Partnership reached an
agreement with TWA whereby TWA was obligated to pay quarterly payments of
$780,000 plus interest in arrears at 17%. At the end of the lease in July 1996
(or earlier if a termination option was exercised), TWA had the option to
purchase the equipment for one dollar ($1). The lease generated $5.4 million
in cash flow during the 1995 fiscal year. As a result of the lease renewal
terms, the Partnership recorded a receivable for the future lease payments due
from TWA and deferred the gain on the transaction. The deferred gain was
recognized as income as lease payments were received. Total rental income
recognized in 1995 and 1996 on the lease was $2.8 million and $1.2 million,
respectively. The original cost of the airline equipment was depreciated over
the life of the operating lease. Depreciation expense on the airline equipment
was $526,000 for the year ended December 31, 1995.
On April 24, 1996, TWA exercised its early termination option under the
airline equipment lease and paid the rent due on that date of $847,000 along
with the termination value of $780,000 plus the $1 purchase option. Rental
income of $1,248,000 was generated by the lease in 1996.
17
INFLATION
For the three fiscal years ended December 31, 1996, the rate of inflation
has been relatively low and, accordingly, has not had a significant impact on
the Partnership's gross income and net income. The Operating Tenant is
generally able to pass through increased costs to customers through higher
room rates. In 1996, the increase in average room rates at the Hotel exceeded
those of direct competitors as well as the general level of inflation.
SEASONALITY
Demand, and thus occupancy and room rates, is affected by normally recurring
seasonal patterns. Demand tends to be higher during the months of November
through April than during the remainder of the year. This seasonality tends to
affect the results of operations, increasing the revenue and rental income
during these months. In addition, this seasonality may also increase the
liquidity of the Partnership during these months.
NEW STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
During 1996, the Partnership adopted Statement of Financial Accounting
Standards ("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of." Adoption of SFAS No. 121 did not
have an effect on its financial statements.
FORWARD LOOKING STATEMENTS
Certain matters discussed in this Management's Discussion and Analysis
section are forward-looking statements within the meaning of the Private
Litigation Reform Act of 1995 and as such may involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of the Partnership to be different from any future
results, performance or achievements expressed or implied by such forward-
looking statements. Although the Partnership believes the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, it can give no assurance that its expectations will be attained.
The Partnership undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
18
CONSENT FORM
This Consent Form (the "Consent Form") must be completed and returned by
every limited partner who wishes to vote for or against the incurrence by the
Partnership of the HM Junior Loan and the certain Amendments to the Amended
and Restated Agreement of Limited Partnership (the "Partnership Agreement") of
Desert Springs Marriott Limited Partnership (the "Partnership") that are
described in the Consent Solicitation Statement. The General Partner is
soliciting your consent to the HM Junior Loan and the Amendments
(collectively, the "Proposals") in connection with refinancing of the
Partnership's existing $160 million mortgage debt which matures on October 31,
1997.
THIS CONSENT FORM MUST BE RETURNED TO AND RECEIVED BY:
GEMISYS
PROXY DEPARTMENT
7103 SOUTH REVERE PARKWAY
ENGLEWOOD, CO 80112
BY FACSIMILE: 1-800-387-7365
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON FRIDAY, SEPTEMBER 26, 1997, OR SUCH
LATER DATE AS MAY BE DESIGNATED IN A MAILING TO ALL LIMITED PARTNERS (THE
"EXPIRATION DATE"). The Consent Form will be effective only when it is
actually received by GEMISYS. A self-addressed return envelope has been
provided for your convenience, if you desire to mail this Consent Form.
All Consent Forms that are properly executed and returned to GEMISYS prior
to the Expiration Date will be voted in accordance with the elections set
forth therein. ANY LIMITED PARTNER WHO ABSTAINS OR FAILS TO RETURN A SIGNED
CONSENT FORM WILL BE DEEMED TO HAVE VOTED AGAINST THE PROPOSALS. PROPERLY
EXECUTED CONSENT FORMS THAT ARE NOT MARKED AS TO A PARTICULAR PROPOSAL WILL BE
DEEMED TO BE VOTED FOR THE PROPOSAL.
Before completing this Consent Form, you and your advisor, if any, should
carefully review the Consent Solicitation Statement, including the attached
copy of the Partnership Agreement, as proposed to be amended. Each of the
Proposals, including the text of the proposed amendments to the Partnership
Agreement, is set forth in detail in Proposal Nos. 1 through 8 of the Consent
Solicitation Statement.
THE GENERAL PARTNER OF THE PARTNERSHIP IS A WHOLLY OWNED SUBSIDIARY OF HOST
MARRIOTT CORPORATION AND THE SOLE MEMBER OF THE JUNIOR LENDER, AND THEREFORE,
HAS SUBSTANTIAL CONFLICTS OF INTEREST WITH RESPECT TO THE HM JUNIOR LOAN AND
THE AMENDMENTS OTHER THAN PROPOSAL NO. 2--AMENDMENT TO THE AUTHORITY OF THE
GENERAL PARTNER RELATING TO SUBSIDIARIES. ACCORDINGLY, THE GENERAL PARTNER
MAKES NO RECOMMENDATION TO ANY LIMITED PARTNER AS TO WHETHER TO VOTE FOR OR
AGAINST THE HM JUNIOR LOAN OR THE AMENDMENTS OTHER THAN PROPOSAL NO. 2. THE
GENERAL PARTNER RECOMMENDS THAT LIMITED PARTNERS VOTE FOR PROPOSAL NO. 2--
AMENDMENT TO THE AUTHORITY OF THE GENERAL PARTNER RELATING TO SUBSIDIARIES,
THE APPROVAL OF WHICH IS REQUIRED IN ORDER TO CONSUMMATE EITHER OF THE
CURRENTLY PROPOSED ALTERNATIVES TO REFINANCE THE PARTNERSHIP'S OUTSTANDING
MORTGAGE INDEBTEDNESS. EACH LIMITED PARTNER MUST MAKE HIS OR HER OWN DECISION
WHETHER OR NOT TO VOTE FOR OR AGAINST PROPOSAL NO. 1--THE HM JUNIOR LOAN
PROPOSAL AND THE AMENDMENTS.
IF YOU HAVE ANY QUESTIONS REGARDING THE PROPOSALS, PLEASE CONTACT HOST
MARRIOTT INVESTOR RELATIONS AT (301) 380-2070. IF YOU WOULD LIKE ASSISTANCE IN
COMPLETING THIS CONSENT FORM, PLEASE CONTACT TRUST COMPANY OF AMERICA (THE
"INFORMATION AGENT") AT (800) 955-9033.
Consent Forms may be withdrawn at any time prior to the Expiration Date. In
addition, you may change your vote subsequent to the submission of a Consent
Form, but prior to the Expiration Date. For a withdrawal or change of vote to
be effective, you must execute and deliver, prior to the Expiration Date, a
subsequently dated Consent Form or a written notice stating that the consent
is revoked to GEMISYS at the address set forth above. Consent Forms and
notices of withdrawal or change of vote dated or received after the Expiration
Date will not be valid.
FORM OF CONSENT
You may vote uniformly on all of the Proposals by marking the appropriate
box set forth in the first item below. Alternatively, you may vote
individually on any Proposal by marking the appropriate boxes relating to
Proposal Nos. 1 through 8 below. IN ORDER TO CONSUMMATE EITHER OF THE
CURRENTLY PROPOSED ALTERNATIVES TO REFINANCE THE PARTNERSHIP'S OUTSTANDING
MORTGAGE INDEBTEDNESS, PROPOSAL NO. 2 MUST BE APPROVED BY LIMITED PARTNERS
HOLDING A MAJORITY OF THE OUTSTANDING UNITS. IN ORDER TO CONSUMMATE THE HM
JUNIOR LOAN, PROPOSAL NOS. 1 THROUGH 6 MUST BE APPROVED BY LIMITED PARTNERS
HOLDING A MAJORITY OF THE OUTSTANDING UNITS. Abstentions on any or all of the
Proposals will have the same effect as votes AGAINST such Proposal(s).
UNIFORM VOTING
APPROVAL, REJECTION OR ABSTENTION OF ALL OF THE PROPOSALS
[_] FOR [_] AGAINST [_] ABSTAIN
NOTE: IF YOU CHOOSE TO VOTE UNIFORMLY ABOVE, YOU MAY NOT VOTE INDIVIDUALLY ON
ANY OF THE PROPOSALS BELOW.
PROPOSAL NO. 1 PROPOSAL NO. 5
(PAGE 15 OF CONSENT SOLICITATION (PAGE 23 OF CONSENT SOLICITATION
STATEMENT) STATEMENT)
THE HM JUNIOR LOAN PROPOSAL AMENDMENT TO THE AUTHORITY OF THE
[_] FOR [_] AGAINST [_] ABSTAIN GENERAL PARTNER RELATING TO
INDEBTEDNESS
PROPOSAL NO. 2 [_] FOR [_] AGAINST [_] ABSTAIN
(PAGE 17 OF CONSENT SOLICITATION STATEMENT)
PROPOSAL NO. 6
AMENDMENT TO AUTHORITY OF THE (PAGE 24 OF CONSENT SOLICITATION
GENERAL PARTNER RELATING TO STATEMENT)
SUBSIDIARIES
[_] FOR [_] AGAINST [_] ABSTAIN AMENDMENTS TO VOTING PROVISIONS
[_] FOR [_] AGAINST [_] ABSTAIN
PROPOSAL NO. 3
(PAGE 19 OF CONSENT SOLICITATION PROPOSAL NO. 7
STATEMENT) (PAGE 28 OF CONSENT SOLICITATION
STATEMENT)
AMENDMENT TO DEFINITION OF AFFILIATE
[_] FOR [_] AGAINST [_] ABSTAIN CLARIFYING AMENDMENTS
[_] FOR [_] AGAINST [_] ABSTAIN
PROPOSAL NO. 4
(PAGE 22 OF CONSENT SOLICITATION PROPOSAL NO. 8
STATEMENT) (PAGE 28 OF CONSENT SOLICITATION
STATEMENT)
AMENDMENT TO AUTHORITY OF THE
GENERAL PARTNER AMENDMENT TO AMENDMENT PROVISIONS
[_] FOR [_] AGAINST [_] ABSTAIN [_] FOR [_] AGAINST [_] ABSTAIN
The undersigned hereby acknowledges receipt of the Consent Solicitation
Statement, dated August 29, 1997. If Units are owned jointly, all joint owners
must sign below. ALL OWNERS MUST SIGN THEIR NAMES EXACTLY AS SET FORTH ON THE
STICKER BELOW. All Units represented by properly executed consent forms will
be voted in accordance with the choices specified in the forms. IF NO CHOICE
IS SPECIFIED, THE UNITS WILL BE VOTED FOR THE PROPOSAL(S).
DATE: _____________ SIGNATURE(S) OF PARTNER(S): _____________
SIGNATURE(S) OF PARTNER(S): _____________
[ATTACH IDENTIFICATION STICKER HERE]
Desert Springs Marriott
Limited Partnership ___________________________________________________________
10400 Fernwood Road 301/380-2070
Bethesda, Maryland 20817
August 29, 1997
Re: Consent Solicitation of Limited Partners of Desert Springs
Marriott Limited Partnership
Dear Limited Partner:
Among the documents enclosed with this letter is a Consent Solicitation
Statement describing two alternatives to refinance the mortgage debt of the
Partnership and certain proposed amendments to the Partnership Agreement. You
are encouraged to carefully review these materials and then vote on the
various proposals. Subject to approval of certain of the amendments to the
Partnership Agreement and Proposal No. 1--The HM Junior Loan Proposal, the
Partnership would enter into a refinancing that would include a loan from DSM
Finance LLC (the "Junior Lender"), a wholly owned subsidiary of Host Marriott
Corporation. Under the terms of the HM Junior Loan, the Partnership would
receive loan proceeds in excess of that needed to refinance the mortgage debt
and would result in a distribution to holders of units of limited partnership
interest of $25,000 per unit.
Because the General Partner is affiliated with both the Junior Lender and
Host Marriott Corporation, THE GENERAL PARTNER MAKES NO RECOMMENDATION TO ANY
LIMITED PARTNER AS TO WHETHER TO VOTE FOR OR AGAINST PROPOSAL NO. 1--THE HM
JUNIOR LOAN PROPOSAL OR THE PROPOSED AMENDMENTS OTHER THAN PROPOSAL NO. 2. The
General Partner recommends that you vote FOR Proposal No. 2--Amendment to
Authority of General Partner Relating to Subsidiaries, which is necessary to
consummate either alternative to refinance the mortgage debt.
To vote on the proposals, including the amendments to the Partnership
Agreement, simply mark the appropriate boxes on the enclosed Consent Form,
sign and date the Consent Form (green form). The Consent Form should be mailed
in the enclosed postage-paid envelope to the address set forth in the Consent
Solicitation Statement or faxed to (800) 387-7365. The Solicitation Period
will end at 5:00 p.m. New York City time, on Friday, September 26, 1997,
unless extended.
If you have any questions about completing the Consent Form or any other
document, please call the Information Agent:
Trust Company of America
(800) 955-9033
If you have questions about the Consent Solicitation beyond the basic terms,
the Information Agent can also direct you to the party best able to answer
your questions. In addition, as always, you may direct any questions to Host
Marriott Investor Relations at (301) 380-2070.
Very truly yours,
MARRIOTT DESERT SPRINGS CORPORATION
Bruce F. Stemerman
President
DESERT SPRINGS MARRIOTT LIMITED PARTNERSHIP
QUESTION AND ANSWER SHEET
Set forth below are some commonly asked questions relating to the
transactions described in the Consent Solicitation Statement. Please note that
this Question and Answer Sheet is not a substitute for the information set
forth in the Consent Solicitation Statement. Substantial conflicts of interest
exist with respect to the HM Junior Loan and the Amendments other than
Proposal No. 2 because the General Partner is a wholly owned indirect
subsidiary of Host Marriott and the sole member of the Junior Lender. Please
read the Consent Solicitation Statement in order to make an informed decision
as to how to vote the enclosed Consent Form.
1) WHAT ARE THE BENEFITS OF THE HM JUNIOR LOAN (ALTERNATIVE B)?
After evaluating the proposed loan terms of Alternatives A and B, the
General Partner believes that the proposed terms of both of these loans are
fair to the Partnership and the Limited Partners from a financial point of
view. The General Partner believes, however, that the terms of the HM
Junior Loan and Mezzanine Loan taken together (Alternative B), are more
advantageous to the Partnership and the Limited Partners than the GSMC
Junior Loan (Alternative A). The HM Junior Loan (Alternative B) would (i)
allow for the current distribution of $25,000 per Unit to the Limited
Partners; (ii) increase the possibility of cash being available for
distribution to the Limited Partners during the term of the HM Junior Loan;
(iii) result in a lower interest rate (including the costs of the Junior
Lender's participation in excess cash flow and net capital/residual
proceeds) for the Partnership than under Alternative A; (iv) result in
lower loan origination fees for the Partnership than under Alternative A;
and (v) provide the Partnership with more flexible payment terms which will
reduce the likelihood of a subsequent default on the outstanding
indebtedness of the Partnership. Please see the chart on page 11 of the
Consent Solicitation Statement for a summary of the differences between
Alternative A and Alternative B. The General Partner estimates that a
Limited Partner who acquired his/her Unit on the date of the closing of the
original private placement offering of the Units will not currently owe
federal income taxes on the $25,000 distribution of refinancing proceeds
(see question No. 7).
2) WHY DO I NEED TO VOTE FOR PROPOSAL NO. 2, REGARDLESS OF MY PREFERENCE FOR
EITHER ALTERNATIVE A OR B?
If Proposal No. 2 is not approved, neither Alternative A nor Alternative B
will be consummated. This could result in a default under the Bridge Loan
and foreclosure of the Hotel by the Bridge Loan lender.
Proposal No. 2 is necessary in order to permit the General Partner to
create the special purpose entities required to implement any structured
refinancing. The new subsidiary that would hold the Hotel would be a
bankruptcy remote, special purpose entity. This type of structure allows
the Partnership to obtain more favorable loan terms than could be obtained
otherwise.
3) WHAT ARE THE CONDITIONS FOR APPROVING THE HM JUNIOR LOAN (ALTERNATIVE B)?
Limited Partners holding a majority of the outstanding Units must vote in
favor of Proposals No. 1, 2, 3, 4, 5 and 6.
4) WHY ARE PROPOSALS NO. 3, 4, 5 AND 6 REQUIRED FOR THE APPROVAL OF THE HM
JUNIOR LOAN (ALTERNATIVE B)?
Due to the large investment Host Marriott, through its affiliates, is
making in the Partnership upon consummation of the HM Junior Loan,
Proposals 3, 4, 5 and 6 are conditions to the Junior Lender making the HM
Junior Loan.
5) IF LIMITED PARTNERS HOLDING A MAJORITY OF THE OUTSTANDING UNITS VOTE FOR
PROPOSAL NO. 1 (THE HM JUNIOR LOAN ALTERNATIVE B) AND PROPOSALS NO. 2, 3,
4, 5 AND 6, WHEN WILL I RECEIVE THE $25,000?
The $25,000 distribution per Unit will be made from the proceeds of the
refinancing. The General Partner expects that the refinancing will be
completed before the Bridge Loan matures on October 31, 1997. Payments to
the Limited Partners will be made within 5 business days of the completion
of the refinancing.
6) WHERE WILL THE $25,000 FOR MY UNIT BE SENT?
The $25,000 payment will be mailed to your address of record, which is the
same address that the Consent Solicitation materials were mailed. If you
would like to change the address where your payment will be mailed, please
notify the General Partner.
7) WILL I OWE TAXES ON THE $25,000 CASH DISTRIBUTION?
The General Partner ESTIMATES that a Limited Partner who acquired his/her
Unit on the date of the closing of the original private placement offering
of the Units will not currently owe federal income taxes on the $25,000
distribution of refinancing proceeds.
The distribution would only be taxable to Limited Partners to the extent
that either (i) the amount distributed to the Limited Partner exceeds the
Limited Partner's adjusted tax basis in his/her Units, or (ii) the
distribution causes the Limited Partner to have a deficit capital account
balance that exceeds his/her "share" of the Partnership's "minimum gain"
attributable to "partnership nonrecourse debt." The General Partner
estimates that a Limited Partner would have an adjusted basis in his/her
Unit at the time of the contemplated distribution of Refinancing proceeds
substantially in excess of the amount of the expected distribution per
Unit. In addition, the General Partner also estimates that a Limited
Partner would not have a deficit capital account balance (after giving
effect to the planned distribution) that exceeds his/her share of the
Partnership's minimum gain. The General Partner expects that Limited
Partners will receive $25,000 free of current federal income tax
consequences; HOWEVER, LIMITED PARTNERS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS TO DETERMINE THE TAX CONSEQUENCES TO THEM, IF ANY, OF THE
TRANSACTION.
8) HOW DO I KNOW THAT HOST MARRIOTT'S LOAN IS FAIR?
A third party investment banking firm, BT Securities Corporation, has
concluded that the proposed terms of the HM Junior Loan are fair from a
financial point of view to the Partnership and its Limited Partners. A copy
of the opinion of BT Securities Corporation is included in the Consent
Solicitation Statement in Appendix C. Except as described in the Consent
Solicitation Statement, the General Partner has not made a separate
analysis of the financial fairness of the HM Junior Loan.
9) WHAT CONFLICTS OF INTEREST EXIST IN CONNECTION WITH HOST MARRIOTT'S LOAN?
The General Partner is a wholly owned subsidiary of Host Marriott and the
sole member of the Junior Lender and, therefore, has substantial conflicts
of interest with respect to the HM Junior Loan and the Amendments other
than Proposal No. 2--Amendment to Authority of the General Partner relating
to Subsidiaries. In the event Proposal No. 1--The HM Junior Loan Proposal
and the Required Amendments are approved and the HM Junior Loan is
consummated, the terms of the HM Junior Loan provide for the Junior Lender,
a wholly owned subsidiary of the General Partner and an affiliate of Host
Marriott, to receive 30% of any excess cash flow available annually, plus
30% of any net capital/residual proceeds after full repayment of the Senior
Loan, the Mezzanine Loan and the HM Junior Loan. Under the terms of the HM
Junior Loan, the Junior Lender would be paid interest on the principal
amount of the HM Junior Loan. The General Partner believes that the terms
of the HM Junior Loan are fair to the Partnership and has obtained an
opinion of BT Securities Corporation, an independent investment banking
firm, that the terms of the HM Junior Loan are fair to the Partnership and
its Limited Partners from a financial point of view.
10) WILL THERE BE ANY FUTURE CASH DISTRIBUTIONS?
Under the GSMC Junior Loan (Alternative A), all remaining excess cash flow
will be used to pay principal on the GSMC Junior Loan's second tranche of
debt of $21.9 million. Until the $21.9 million is completely amortized
(estimated to be approximately 8 years, assuming annual profit growth of
2.5% and the indicated interest rates as set forth in the Consent
Solicitation Statement), there will not be any cash available for
distribution. The amount that would be available for distribution upon
amortization of the GSMC Junior Loan will depend on the results of
operations of the Hotel and the debt service requirements for senior
indebtedness.
Under the HM Junior Loan (Alternative B), 70% of all remaining excess cash
flow (after interest only payments on the HM Junior Loan) will be
distributed to the Partners in the Partnership. Therefore, there is an
increased possibility of future cash distributions to the Limited Partners
under Alternative B. Based on the recent operating performance and cash
flows of the Partnership, and assuming the proposed refinancing under
Alternative B were in place for the full fiscal year 1997, the General
Partner estimates that the approximately $21,000 ($23 per Unit) would be
available for distribution for the year ending December 31, 1997. Actual
distributions for 1998 and subsequent years will depend on the results of
operations of the Hotel and the debt service requirements for senior
indebtedness. To the extent that operating profits for the Hotel improves,
cash available for distribution should increase as well.
11) AFTER THE GSMC JUNIOR LOAN'S SECOND TRANCHE OF DEBT IS COMPLETELY
AMORTIZED, WILL THE CASH DISTRIBUTIONS UNDER ALTERNATIVE A EXCEED THE CASH
DISTRIBUTIONS UNDER ALTERNATIVE B?
Following amortization of the $21.9 million tranche of the GSMC Junior Loan
(estimated to be approximately 8 years, assuming annual profit growth of
2.5% and the indicated interest rates as set forth in the Consent
Solicitation Statement), the Partnership may generate cash flow for
distribution and the amount of such cash flow available for distribution
could exceed the amount of cash flow for distribution that could be
available under Alternative B. The amount available under either
Alternative A or Alternative B will depend on the results of operations of
the Hotel and the debt service requirements for senior indebtedness.
12) HOST MARRIOTT HAS TENDERED FOR UNITS IN OTHER PARTNERSHIPS; WILL THEY
TENDER FOR MY UNIT IN THE FUTURE?
Proposal No. 6 will enable Host Marriott or an affiliate to vote any units
it may purchase in the future; however, at this time Host Marriott does not
have current plans to tender for the Units of the Partnership.
13) WHAT IS THE AVERAGE PRICE THAT ONE UNIT IN THIS PARTNERSHIP HAS TRADED FOR
ON THE SECONDARY MARKET IN 1997?
In 1997, based on information reported to the General Partner, 31 Units
have traded at an average price of approximately $22,444 per Unit. In
addition, it has come to our attention that certain entities recently have
made offers to purchase Units at varying prices in the $15,000-$22,500
range per Unit.
14) WILL CONVERTING THE OPERATING LEASE FOR THE HOTEL TO A MANAGEMENT
AGREEMENT HAVE A POSITIVE EFFECT ON THE LIMITED PARTNERS?
Yes. In connection with the refinancing of the Mortgage Debt, the General
Partner has successfully reduced future incentive fees paid to Marriott
Hotel Services, Inc. ("MHS") and eliminated the deferred fees owed to MHS.
Under the terms of the original operating lease, the first $20 million of
operating profit was payable to the Partnership, the next $5 million of
operating profit was payable to MHS. Any operating profit in excess of $25
million was payable 75% to the Partnership and 25% to MHS.
The operating lease has been amended for 1997 to provide that the first
$20.5 million of operating profit is payable to the Partnership, the next
$2 million of operating profit is payable to MHS and any operating
profit in excess of $22.5 million is payable 100% to the Partnership. For
years after 1997, the new management agreement would provide that the first
$21.5 million of operating profit will be retained by the Partnership, the
next $1.8 million of operating profit will be paid to MHS and any operating
profit in excess of $23.3 million will be payable 75% to the Partnership
and 25% to MHS. In addition, MHS agreed to waive its right to approximately
$25 million of deferred fees owed pursuant to the operating lease. Note
that this new management agreement will become effective only in the event
that the Bridge Loan is refinanced.
15) WHO SHOULD I CONTACT IF I HAVE ANY QUESTIONS?
Please contact the Information Agent listed below if you have any questions
about (i) how to complete any document, (ii) which documents must be
completed, (iii) where documents should be sent, or (iv) if you require any
extra copies of any document.
Trust Company of America
Attn: Investor Services
7103 South Revere Parkway
Englewood, CO 80112-9523
Phone: (800) 955-9033
If you have more substantive questions about the refinancing, please
contact Host Marriott Investor Relations, at (301) 380-2070. A
representative from Host Marriott may be contacting you to further discuss
this transaction and respond to your questions.