Exhibit 99.1
FEDERAL INCOME TAX CONSIDERATIONS
INTRODUCTION
The following discussion summarizes the federal income tax considerations
reasonably anticipated to be material to a stockholder in connection with the
purchase, ownership and disposition of common stock. The applicable prospectus
supplement will contain information about additional federal income tax
considerations, if any, relating to particular offerings. The following
discussion is intended to address only those federal income tax consequences
that are generally relevant to all stockholders. Accordingly, it does not
discuss all aspects of federal income taxation that might be relevant to a
specific stockholder in light of his particular investment or tax
circumstances. Therefore, it is imperative that a stockholder review the
following discussion and consult with his own tax advisors to determine the
interaction of his individual tax situation with the tax considerations
associated with the purchase, ownership and disposition of common stock.
The following discussion provides general information only, is not exhaustive
of all possible tax considerations and is not tax advice. For example, this
summary does not give a detailed description of any state, local or foreign tax
considerations. In addition, the discussion does not purport to deal with all
aspects of taxation that may be relevant to a stockholder subject to special
treatment under the federal income tax laws, including, without limitation,
insurance companies, financial institutions or broker-dealers, tax-exempt
organizations or foreign corporations and persons who are not citizens or
residents of the United States.
The information in this section is based on the Internal Revenue Code,
current, temporary and proposed regulations thereunder, the legislative history
of the Internal Revenue Code, current administrative interpretations and
practices of the IRS, including its practices and policies as endorsed in
private letter rulings,
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which are not binding on the IRS, and court decisions, all as of the date
hereof. No assurance can be given that future legislation, regulations,
administrative interpretations and court decisions will not significantly
change the current law or adversely affect existing interpretations of current
law. Any such change could apply retroactively to transactions preceding the
date of the change. No assurance can be provided that the statements set forth
herein will not be challenged by the IRS or will be sustained by a court if so
challenged.
The specific tax attributes of a particular stockholder could have a material
impact on the tax considerations associated with the purchase, ownership and
disposition of common stock. Therefore, it is essential that each prospective
stockholder consult with his own tax advisors with regard to the application of
the federal income tax laws to such stockholder's personal tax situation, as
well as any tax consequences arising under the laws of any state, local or
foreign taxing jurisdiction.
FEDERAL INCOME TAXATION OF HOST MARRIOTT
General. Host Marriott plans to make an election to be taxed as a REIT under
Sections 856 through 859 of the Internal Revenue Code, effective for the taxable
year beginning January 1, 1999. Host Marriott intends that, commencing with such
year, it will be organized and will operate in such a manner as to qualify for
taxation as a REIT, but no assurance can be given that it in fact will qualify
or remain qualified as a REIT. Host Marriott believes that it will be organized
in conformity with the requirements for qualification as a REIT, and, beginning
in 1999, its proposed method of operation will enable it to meet the
requirements for qualification and taxation as a REIT under the Internal Revenue
Code. It must be emphasized that this belief is based upon factual matters
relating to the organization and operation of Host Marriott and its
subsidiaries, Host Marriott, L.P. and its subsidiaries, the non-controlled
subsidiaries, the Host Employee/Charitable Trust and Crestline and its
subsidiaries, including the economic and other terms of each lease and the
expectations of Host Marriott and the lessees with respect thereto.
The sections of the Internal Revenue Code and the corresponding regulations
that govern the federal income tax treatment of a REIT and its stockholders are
highly technical and complex. The following discussion is a summary of the
material aspects of these rules, which is qualified in its entirety by the
applicable Internal Revenue Code provisions, rules and regulations promulgated
thereunder, and administrative and judicial interpretations thereof.
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If Host Marriott qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that it currently
distributes to its stockholders. This treatment substantially eliminates the
"double taxation" at the corporate and stockholder levels that generally
results from an investment in a regular corporation. However, Host Marriott
will be subject to federal income tax as follows:
1. Host Marriott will be taxed at regular corporate rates on any
undistributed "REIT taxable income," including undistributed net capital
gains; provided, however, that properly designated undistributed capital
gains will effectively avoid taxation at the stockholder level. A REIT's
"REIT taxable income" is the otherwise taxable income of the REIT subject
to certain adjustments, including a deduction for dividends paid.
2. Under certain circumstances, Host Marriott may be subject to the
"alternative minimum tax" on its items of tax preference.
3. If Host Marriott has net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income.
4. Host Marriott's net income from "prohibited transactions" will be
subject to a 100% tax. In general, "prohibited transactions" are certain
sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure
property.
5. If Host Marriott fails to satisfy the 75% gross income test or the 95%
gross income test discussed below, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will
be subject to a tax equal to (1) the gross income attributable to the
greater of the amount by which Host Marriott fails the 75% or 95% test
multiplied by (2) a fraction intended to reflect its profitability.
6. If Host Marriott fails to distribute during each calendar year at
least the sum of (1) 85% of its REIT ordinary income for such year, (2) 95%
of its REIT capital gain net income for such year and (3) any undistributed
taxable income from prior periods, Host Marriott will be subject to a 4%
excise tax on the excess of such required distribution over the sum of
amounts actually distributed and amounts retained but with respect to which
federal income tax was paid.
7. If Host Marriott acquires any asset from a taxable "C" corporation in
a transaction in which the basis of the asset in the hands of Host Marriott
is determined by reference to the basis of the asset in the hands of the
"C" corporation, and Host Marriott recognizes gain on the disposition of
such asset during the ten-year period beginning on the date on which such
asset was acquired by Host Marriott (the "Recognition Period"), then, to
the extent of the asset's "built-in gain," such gain will be subject to tax
at the highest regular corporate rate applicable. Built-in gain is the
excess of the fair market value of an asset over Host Marriott's adjusted
basis in the asset, determined when Host Marriott acquired the asset.
Host Marriott owns an indirect interest in appreciated assets that its
predecessors held before the REIT conversion. Such appreciated assets have a
"carryover" basis and thus have built-in gain with respect to Host Marriott. If
such appreciated property is sold within the ten-year period following the REIT
conversion, Host Marriott generally will be subject to regular corporate tax on
that gain to the extent of the built-in gain in that property at the time of
the REIT conversion. The total amount of gain on which Host Marriott can be
taxed is limited to the excess of the aggregate fair market value of its assets
on January 1, 1999 over the adjusted tax bases of those assets at that time.
This tax could be very material, however, and may result in the Host Marriott,
L.P. and Host Marriott seeking to avoid a taxable disposition of any
significant asset owned by
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Host Marriott's predecessors at the time of the REIT conversion for the ten
taxable years following the REIT conversion even though such disposition might
otherwise be in the best interests of Host Marriott.
Notwithstanding Host Marriott's status as a REIT, it is likely that
substantial deferred liabilities of its predecessors will be recognized over
the next ten years. Deferred liabilities include, but are not limited to, tax
liabilities attributable to built-in gain assets and deferred tax liabilities
attributable to taxable income for which neither Host Marriott nor Host
Marriott, L.P. will receive corresponding cash. In addition, the IRS could
assert substantial additional liabilities for taxes against Host Marriott's
predecessors for taxable years prior to the time Host Marriott qualifies as a
REIT. Under the terms of the REIT conversion and the partnership agreement of
Host Marriott, L.P., Host Marriott, L.P. will be responsible for paying, or
reimbursing Host Marriott for the payment of all such tax liabilities as well
as any other liabilities, including contingent liabilities and liabilities
attributable to litigation that Host Marriott may incur, whether such
liabilities are incurred by reason of activities prior to the REIT conversion
or activities subsequent thereto.
Host Marriott, L.P. will pay, or reimburse Host Marriott for the payment of
all taxes incurred by Host Marriott, except for taxes imposed on Host Marriott
by reason of its failure to qualify as a REIT or to distribute to its
stockholders an amount equal to its "REIT taxable income," including net
capital gains. This obligation by Host Marriott, L.P. includes any federal
corporate income tax imposed on built-in gain.
Requirements for Qualification. The Internal Revenue Code defines a REIT as a
corporation, trust or association
(1) which is managed by one or more directors or trustees;
(2) the beneficial ownership of which is evidenced by transferable shares
or by transferable certificates of beneficial interest;
(3) which would be taxable as a domestic corporation, but for Sections 856
through 859 of the Internal Revenue Code;
(4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year not more than 50% in value of
the outstanding stock of which is owned, actually or constructively, by
five or fewer individuals (as defined in the Internal Revenue Code to
include certain entities); and
(7) which meets certain other tests, described below, regarding the nature
of its income and assets.
Conditions (1) to (4), inclusive, must be met during the entire taxable year
and condition (5) must be met during at least 335 days of a taxable year of
twelve months, or during a proportionate part of a taxable year of less than
twelve months. Conditions (5) and (6) will not apply until after the first
taxable year for which Host Marriott makes the election to be taxed as a REIT.
For purposes of conditions (5) and (6), pension funds and certain other tax-
exempt entities are treated as individuals, subject to a "look-through"
exception in the case of condition (6). Compliance with condition (5) shall be
determined by disregarding the ownership of Host Marriott shares by any
person(s) who: (a) acquired such shares as a gift or bequest or pursuant to a
legal separation or divorce; (b) is the estate of any person making such
transfer to the estate; or (c) is a company established exclusively for the
benefit of (or wholly owned by) either the person making such transfer or a
person described in (a) or (b).
In connection with condition (6), Host Marriott is required to send annual
letters to its stockholders requesting information regarding the actual
ownership of its shares. If Host Marriott complies with this requirement, and
it does not know, or exercising reasonable diligence would not have known,
whether it failed to meet condition (6), then it will be treated as having met
condition (6). If Host Marriott fails to send such annual letters, it will be
required to pay either a $25,000 penalty or, if the failure is intentional, a
$50,000
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penalty. The IRS may require Host Marriott, under those circumstances, to take
further action to ascertain actual ownership of its shares, and failure to
comply with such an additional requirement would result in an additional
$25,000 (or $50,000) penalty. No penalty would be assessed in the first
instance, however, if the failure to send the letters is due to reasonable
cause and not to willful neglect.
Host Marriott believes that it meets and will continue to meet conditions (1)
through (4). In addition, Host Marriott believes that it will have outstanding
(commencing with its first taxable year as a REIT) common stock with sufficient
diversity of ownership to allow it to satisfy conditions (5) and (6). With
respect to condition (6), Host Marriott intends to comply with the requirement
that it send annual letters to its stockholders requesting information
regarding the actual ownership of its shares. In addition, the Host Marriott
charter contains an ownership limit, which is intended to assist Host Marriott
in continuing to satisfy the share ownership requirements described in (5) and
(6) above. The ownership limit, together with compliance with the annual
stockholder letter requirement described above, however, may not ensure that
Host Marriott will, in all cases, be able to satisfy the share ownership
requirements described above. If Host Marriott fails to satisfy such share
ownership requirements, Host Marriott will not qualify as a REIT. See "--
Failure of Host Marriott to Qualify as a REIT."
A corporation may not elect to become a REIT unless its taxable year is the
calendar year. Although Host Marriott previously had a 52-53 week year ending
on the Friday closest to January 1, it adopted a calendar year taxable year in
connection with the REIT conversion.
Distribution of "Earnings and Profits" Attributable to "C" Corporation
Taxable Years. A REIT cannot have at the end of any taxable year any
undistributed earnings and profits ("E&P") that are attributable to a "C"
corporation taxable year, which includes all undistributed E&P of Host
Marriott's predecessors. Accordingly, Host Marriott has until December 31, 1999
to distribute such E&P. In connection with the REIT conversion, Host Marriott
declared dividends intended to eliminate the substantial majority, if not all,
of such E&P. To the extent, however, that any such E&P remains (the "Acquired
Earnings"), Host Marriott is required to distribute such E&P prior to the end
of 1999. Failure to do so would result in disqualification of Host Marriott as
a REIT at least for 1999. If Host Marriott should be so disqualified for 1999,
subject to the satisfaction by Host Marriott of certain "deficiency dividend"
procedures described below in "--Annual Distribution Requirements Applicable to
REITs" and assuming that Host Marriott otherwise satisfies the requirements for
qualification as a REIT, Host Marriott should qualify as a REIT for 2000 and
thereafter. Host Marriott believes that the dividends it has already declared
will be sufficient to distribute all of the Acquired Earnings as of December
31, 1999. However, there are substantial uncertainties relating to both the
estimate of the Acquired Earnings, as described below, and the value of noncash
consideration that Host Marriott has distributed or will distribute.
Accordingly, there can be no assurance this requirement will be met.
The estimated amount of the Acquired Earnings will be based on the allocated
consolidated E&P of Host Marriott's predecessors accumulated from 1929 through
and including 1998 and taking into account the allocation, as a matter of law,
of 81% of Host Marriott's predecessors' accumulated E&P to Marriott
International on October 8, 1993 in connection with the spin-off of Marriott
International. The estimate was determined based on the available tax returns
and certain assumptions with respect to both such returns and other matters.
The calculation of the Acquired Earnings, however, depends upon a number of
factual and legal interpretations related to the activities and operations of
Host Marriott's predecessors during their entire corporate existence and is
subject to review and challenge by the IRS. There can be no assurance that the
IRS will not examine the tax returns of Host Marriott's predecessors and
propose adjustments to increase their taxable income. The impact of such
proposed adjustments, if any, may be material. If the IRS examines Host
Marriott's calculation of its E&P, the IRS can consider all taxable years of
Host Marriott's predecessors as open for review for purposes of such
determination.
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Qualified REIT Subsidiary. If a REIT owns a corporate subsidiary that is a
"qualified REIT subsidiary," that subsidiary will be disregarded for federal
income tax purposes, and all assets, liabilities and items of income, deduction
and credit of the subsidiary will be treated as assets, liabilities and items
of the REIT itself. Generally, a qualified REIT subsidiary is a corporation all
of the capital stock of which is owned by one REIT. Host Marriott holds several
qualified REIT subsidiaries that hold de minimis indirect interests in the
partnerships that own hotels. These entities will not be subject to federal
corporate income taxation, although they may be subject to state and local
taxation in certain jurisdictions.
Ownership of Partnership Interests by a REIT. A REIT which is a partner in a
partnership will be deemed to own its proportionate share of the assets of the
partnership and will be deemed to be entitled to the income of the partnership
attributable to such share. In addition, the character of the assets and gross
income of the partnership shall retain the same character in the hands of the
REIT for purposes of Section 856 of the Internal Revenue Code, including
satisfying the gross income tests and the asset tests. Thus, Host Marriott's
proportionate share of the assets and items of income of Host Marriott, L.P.,
including Host Marriott, L.P.'s share of such items of any subsidiaries that
are partnerships or LLCs, are treated as assets and items of income of Host
Marriott for purposes of applying the requirements described herein. A summary
of the rules governing the federal income taxation of partnerships and their
partners is provided below in "--Tax Aspects of Ownership of Interests in Host
Marriott, L.P." As the sole general partner of Host Marriott, L.P., Host
Marriott has direct control over Host Marriott, L.P. and indirect control over
the subsidiaries in which Host Marriott, L.P. or a subsidiary has a controlling
interest. Host Marriott intends to operate these entities consistent with the
requirements for qualification of Host Marriott as a REIT.
Income Tests Applicable to REITs. In order to maintain qualification as a
REIT, Host Marriott must satisfy two gross income requirements. First, at least
75% of Host Marriott's gross income, excluding gross income from "prohibited
transactions," for each taxable year must be derived directly or indirectly
from investments relating to real property or mortgages on real property,
including "rents from real property" and, in certain circumstances, interest,
or from certain types of temporary investments. Second, at least 95% of Host
Marriott's gross income, excluding gross income from "prohibited transactions,"
for each taxable year must be derived from any combination of such real
property investments, dividends, interest, certain hedging instruments and gain
from the sale or disposition of stock or securities, including certain hedging
instruments.
Rents paid pursuant to Host Marriott's leases, together with dividends and
interest received from the non-controlled subsidiaries, will constitute
substantially all of the gross income of Host Marriott. Several conditions must
be satisfied in order for rents received by Host Marriott, including the rents
received pursuant to the leases, to qualify as "rents from real property."
First, the amount of rent must not be based in whole or in part on the income
or profits of any person. However, an amount received or accrued generally will
not be excluded from the term "rents from real property" solely by reason of
being based on a fixed percentage or percentages of receipts or sales. Second,
rents received from a tenant will not qualify as "rents from real property" if
Host Marriott, or an actual or constructive owner of 10% or more of Host
Marriott, actually or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property
leased in connection with a lease of real property is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property."
Finally, if Host Marriott operates or manages a property or furnishes or
renders services to the tenants at the property other than through an
independent contractor from whom Host Marriott derives no revenue, excluding
for these purposes services "usually or customarily rendered" in connection
with the rental of real property and not otherwise considered "rendered to the
occupant," and the income derived from such services (the "Impermissible
Service Income") exceeds one percent of the total amount received by Host
Marriott with respect to the property, then no amount received by Host Marriott
with respect to the property will qualify as "rents from real property." For
these purposes, Impermissible Service Income cannot be less than 150% of the
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cost of providing the service. If the Impermissible Service Income is one
percent or less of the total amount received by the REIT with respect to the
property, then only the Impermissible Service Income will not qualify as "rents
from real property." To the extent that services other than those customarily
furnished or rendered in connection with the rental of real property are
rendered to the tenants of the property by an independent contractor, the cost
of the services must be borne by the independent contractor.
Host Marriott, L.P. and each subsidiary that owns hotels have entered into
leases with subsidiaries of Crestline, pursuant to which the hotels are leased
for a term ranging generally from seven to ten years commencing on January 1,
1999. Each lease provides for thirteen payments per annum of a specified base
rent plus, to the extent that it exceeds the base rent, additional rent which,
in each case other than the Harbor Beach Report lease, is calculated based upon
the gross sales of the hotels subject to the lease, plus certain other amounts.
Neither Host Marriott nor Host Marriott, L.P. intends to do any of the
following:
. provide any services to the lessees with respect to the operation of the
hotels;
. charge rent for any hotel that would be considered to be based in whole
or in part on the income or profits of any person, except for the Harbor
Beach Resort, where the lease provides for rent based upon net profits,
but which Host Marriott believes will not jeopardize its status as a
REIT;
. rent any hotel to a Related Party Tenant unless the Board of Directors
determines in its discretion that the rent received from such Related
Party Tenant is not material and will not jeopardize Host Marriott's
status as a REIT; or
. derive rental income attributable to personal property other than
personal property leased in connection with the lease of real property,
the amount of which is less than 15% of the total rent received under
the lease, unless the Board of Directors determines in its discretion
that the amount of such rent attributable to personal property is not
material and will not jeopardize Host Marriott's status as a REIT.
In order for the rent paid pursuant to the leases to constitute "rents from
real property," the lessees must not be regarded as Related Party Tenants, and
the leases must be respected as true leases for federal income tax purposes.
Accordingly the lessee cannot be treated as service contracts, joint ventures
or some other type of arrangement. A lessee will be regarded as a Related Party
Tenant only if Host Marriott and/or one or more actual or constructive owners
of 10% or more of Host Marriott, actually or constructively, own 10% or more of
such lessee through an ownership interest in Crestline. In order to help
preclude the lessees from being regarded as Related Party Tenants, the
following organizational documents contain the following ownership limits:
. the articles of incorporation of Crestline expressly prohibit any person
or persons acting as a group, including Host Marriott and/or any 10% or
greater stockholder of Host Marriott, from owning more than 9.8% of the
lesser of the number or value of the shares of capital stock of
Crestline;
. the Host Marriott charter expressly prohibits any person or persons
acting as a group or entity from owning, actually and/or constructively,
more than 9.8% of the lesser of the number or value of capital stock of
Host Marriott (subject to a limited exception for a holder of shares of
capital stock of Host Marriott solely by reason of the Merger in excess
of the ownership limit so long as the holder thereof did not own,
directly or by attribution under the Internal Revenue Code, more than
9.9% in value of the outstanding shares of capital stock of Host
Marriott) or any other class or series of shares of Host Marriott; and
. Host Marriott, L.P.'s partnership agreement expressly prohibits any
person, or persons acting as a group, or entity, other than Host
Marriott and an affiliate of the The Blackstone Group and a series of
related funds controlled by Blackstone Real Estate Partners (the
"Blackstone Entities"), from owning more than 4.9% by value of any class
of interests in Host Marriott, L.P. Each of these prohibitions
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contains self-executing enforcement mechanisms. Assuming that these
prohibitions are enforced at all times and no waivers thereto are
granted, the lessees should not be regarded as Related Party Tenants.
There can be no assurance, however, that these ownership restrictions will be
enforced in accordance with their terms in all circumstances or otherwise will
ensure that the lessees will not be regarded as Related Party Tenants.
The determination of whether the leases are true leases depends upon an
analysis of all the surrounding facts and circumstances. In making such a
determination, courts have considered a variety of factors, including the
following:
. the intent of the parties;
. the form of the agreement;
. the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the
operation of the property or whether the lessee was required simply to
use its best efforts to perform its obligations under the agreement);
and
. the extent to which the property owner retains the risk of loss with
respect to the property (e.g., whether the lessee bears the risk of
increases in operating expenses or the risk of damage to the property)
or the potential for economic gain (e.g., appreciation) with respect to
the property.
In addition, Section 7701(e) of the Internal Revenue Code provides that a
contract that purports to be a service contract or a partnership agreement is
treated instead as a lease of property if the contract is properly treated as
such, taking into account all relevant factors. Since the determination of
whether a service contract should be treated as a lease is inherently factual,
the presence or absence of any single factor may not be dispositive in every
case. Some of the relevant factors include whether:
. the service recipient is in physical possession of the property;
. the service recipient controls the property;
. the service recipient has a significant economic or possessory interest
in the property (e.g., the property's use is likely to be dedicated to
the service recipient for a substantial portion of the useful life of
the property, the recipient shares the risk that the property will
decline in value, the recipient shares in any appreciation in the value
of the property, the recipient shares in savings in the property's
operating costs or the recipient bears the risk of damage to or loss of
the property);
. the service provider does not bear any risk of substantially diminished
receipts or substantially increased expenditures if there is
nonperformance under the contract;
. the service provider does not use the property concurrently to provide
significant services to entities unrelated to the service recipient; and
. the total contract price does not substantially exceed the rental value
of the property for the contract period.
Host Marriott's leases have been structured with the intent to qualify as
true leases for federal income tax purposes. For example, with respect to each
lease:
. Host Marriott, L.P. or the applicable subsidiary or other lessor entity
and the lessee intend for their relationship to be that of a lessor and
lessee and such relationship is documented by a lease agreement,
. the lessee has the right to exclusive possession and use and quiet
enjoyment of the hotels covered by the lease during the term of the
lease,
. the lessee bears the cost of, and will be responsible for, day-to-day
maintenance and repair of the hotels other than the cost of certain
capital expenditures, and will dictate through the hotel managers, who
work for the lessees during the terms of the leases, how the hotels are
operated and maintained,
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. the lessee bears all of the costs and expenses of operating the hotels,
including the cost of any inventory used in their operation, during the
term of the lease, other than the cost of certain furniture, fixtures
and equipment, and certain capital expenditures,
. the lessee benefits from any savings and bears the burdens of any
increases in the costs of operating the hotels during the term of the
lease,
. in the event of damage or destruction to a hotel, the lessee is at
economic risk because it will bear the economic burden of the loss in
income from operation of the hotels subject to the right, in certain
circumstances, to terminate the lease if the lessor does not restore the
hotel to its prior condition,
. the lessee has indemnified Host Marriott, L.P. or the applicable
subsidiary against all liabilities imposed on Host Marriott, L.P. or the
applicable subsidiary during the term of the lease by reason of (A)
injury to persons or damage to property occurring at the hotels or (B)
the lessee's use, management, maintenance or repair of the hotels,
. the lessee is obligated to pay, at a minimum, substantial base rent for
the period of use of the hotels under the lease,
. the lessee stands to incur substantial losses or reap substantial gains
depending on how successfully it, through the hotel managers, who work
for the lessees during the terms of the leases, operates the hotels,
. Host Marriott and Host Marriott, L.P. believe that each lessee
reasonably expects to derive a meaningful profit, after expenses and
taking into account the risks associated with the lease, from the
operation of the hotels during the term of its leases, and
. upon termination of each lease, the applicable hotel is expected to have
a remaining useful life equal to at least 20% of its expected useful
life on the date of the consummation of the REIT conversion, and a fair
market value equal to at least 20% of its fair market value on the date
of the consummation of the REIT conversion.
If, however, the leases were recharacterized as service contracts or
partnership agreements, rather than true leases, or disregarded altogether for
tax purposes, all or part of the payments that Host Marriott, L.P. receives
from the lessees would not be considered rent or would not otherwise satisfy
the various requirements for qualification as "rents from real property." In
that case, Host Marriott very likely would not be able to satisfy either the
75% or 95% gross income tests and, as a result, would lose its REIT status.
As indicated above, "rents from real property" must not be based in whole or
in part on the income or profits of any person. Payments made pursuant to Host
Marriott's leases should qualify as "rents from real property" since they are
based on either fixed dollar amounts or on specified percentages of gross sales
fixed at the time the leases were entered into, except for the Harbor Beach
Resort lease, which provides for rents based upon net profits. The foregoing
assumes that the leases are not renegotiated during their term in a manner that
has the effect of basing either the percentage rent or base rent on income or
profits. The foregoing also assumes that the leases are not in reality used as
a means of basing rent on income or profits. More generally, the rent payable
under the leases will not qualify as "rents from real property" if, considering
the leases and all the surrounding circumstances, the arrangement does not
conform with normal business practice. Host Marriott intends that it will not
renegotiate the percentages used to determine the percentage rent during the
terms of the leases in a manner that has the effect of basing rent on income or
profits. In addition, Host Marriott believes that the rental provisions and
other terms of the leases conform with normal business practice and, other than
the Harbor Beach Resort lease, were not intended to be used as a means of
basing rent on income or profits. Furthermore, Host Marriott intends that, with
respect to other properties that it acquires in the future, it will not charge
rent for any property that is based in whole or in part on the income or
profits of any person, except by reason of being based on a fixed percentage of
gross revenues, as described above.
Host Marriott leases certain items of personal property to the lessees in
connection with its leases. Under the Internal Revenue Code, if a lease
provides for the rental of both real and personal property and the portion of
the rent attributable to personal property is 15% or less of the total rent due
under the lease, then all rent
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paid pursuant to such lease qualifies as "rent from real property." If,
however, a lease provides for the rental of both real and personal property,
and the portion of the rent attributable to personal property exceeds 15% of
the total rent due under the lease, then the portion of the rent that is
attributable to personal property does not qualify as "rent from real
property." The amount of rent attributable to personal property is that amount
which bears the same ratio to total rent for the taxable year as the average of
the adjusted tax bases of the personal property at the beginning and end of the
year bears to the average of the aggregate adjusted tax bases of both the real
and personal property at the beginning and end of such year. Host Marriott has
represented that, with respect to each of its leases that includes a lease of
items of personal property, the amount of rent attributable to personal
property with respect to such lease, determined as set forth above, will not
exceed 15% of the total rent due under the lease (except for a relatively small
group of leases where the rent attributable to personal property, which would
constitute non-qualifying income for purposes of the 75% and 95% gross income
tests, would not be material relative to the overall gross income of Host
Marriott). Each lease permits Host Marriott, L.P. to take certain measures,
including requiring the lessee to purchase certain furniture, fixtures and
equipment or to lease such property from a third party, including a non-
controlled subsidiary, if necessary to ensure that all of the rent attributable
to personal property with respect to such lease will qualify as "rent from real
property." In order to protect Host Marriott's ability to qualify as a REIT,
Host Marriott, L.P. sold substantial personal property associated with a number
of hotels acquired in connection with the REIT conversion to a non-controlled
subsidiary. The non-controlled subsidiary separately leases all such personal
property directly to the applicable lessee and receives rental payments which
Host Marriott believes represent the fair rental value of such personal
property directly from the lessees. If such arrangements are not respected for
federal income tax purposes, Host Marriott likely would not qualify as a REIT.
If any of the hotels were to be operated directly by Host Marriott, L.P. or a
subsidiary as a result of a default by a lessee under the applicable lease,
such hotel would constitute foreclosure property until the close of the third
tax year following the tax year in which it was acquired, or for up to an
additional three years if an extension is granted by the IRS, provided that:
(1) the operating entity conducts operations through an independent
contractor, which might, but would not necessarily in all
circumstances, include Marriott International and its subsidiaries,
within 90 days after the date the hotel is acquired as the result of a
default by a lessee,
(2) the operating entity does not undertake any construction on the
foreclosed property other than completion of improvements that were
more than 10% complete before default became imminent, and
(3) foreclosure was not regarded as foreseeable at the time the applicable
partnership entered into such lease. For as long as any of these
hotels constitute foreclosure property, the income from the hotels
would be subject to tax at the maximum corporate rates, but it would
qualify under the 75% and 95% gross income tests.
However, if any of these hotels does not constitute foreclosure property at any
time in the future, income earned from the disposition or operation of such
property will not qualify under the 75% and 95% gross income tests.
"Interest" generally will not qualify under the 75% or 95% gross income tests
if it depends in whole or in part on the income or profits of any person.
However, interest will not fail to so qualify solely by reason of being based
upon a fixed percentage or percentages of receipts or sales. Host Marriott does
not expect to derive significant amounts of interest that will not qualify
under the 75% and 95% gross income tests.
The non-controlled subsidiaries hold various assets, the ownership of which
by Host Marriott, L.P. might jeopardize Host Marriott's status as a REIT. These
assets primarily consist of partnership or other interests in hotels that are
not leased, certain foreign hotels, and approximately $75 million in value of
personal property associated with certain Hotels. Host Marriott, L.P. owns 100%
of the nonvoting stock of each non-controlled subsidiary but none of the voting
stock or control of that non-controlled subsidiary. Each non-controlled
subsidiary is taxable as a regular "C" corporation. Host Marriott, L.P.'s share
of any dividends received from a non-controlled subsidiary should qualify for
purposes of the 95% gross income test, but not for purposes of
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the 75% gross income test. Host Marriott, L.P. does not anticipate that it will
receive sufficient dividends from the non-controlled subsidiaries to cause it
to fail the 75% gross income test.
Host Marriott inevitably will have some gross income from various sources
that fails to constitute qualifying income for purposes of one or both of the
75% or 95% gross income tests. These include, but are not limited to, the
following:
. ""safe harbor" leases,
. the lease of the Harbor Beach Resort, which provides for rent based upon
net profits,
. the operation of the hotel that is located in Sacramento,
. minority partnership interests in partnerships that own hotels that are
not leased under leases that produce rents qualifying as "rents from real
property," and
. rent attributable to personal property at a relatively small group of
hotels that does not satisfy the 15% personal property test.
Host Marriott, however, believes that, even taking into account the anticipated
sources of non-qualifying income, its aggregate gross income from all sources
will satisfy the 75% and 95% gross income tests applicable to REITs for each
taxable year commencing subsequent to the date of the REIT conversion.
If Host Marriott fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Internal Revenue
Code. These relief provisions will be generally available if Host Marriott's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, Host Marriott attaches a schedule of the sources of its income to its
federal income tax return and any incorrect information on the schedule was not
due to fraud with intent to evade tax. It is not possible, however, to state
whether in all circumstances Host Marriott would be entitled to the benefit of
these relief provisions. For example, if Host Marriott fails to satisfy the
gross income tests because nonqualifying income that Host Marriott
intentionally incurs exceeds the limits on such income, the IRS could conclude
that Host Marriott's failure to satisfy the tests was not due to reasonable
cause. If these relief provisions are inapplicable to a particular set of
circumstances involving Host Marriott, Host Marriott will not qualify as a
REIT. As discussed above in "--General," even if these relief provisions apply,
a tax would be imposed with respect to the excess net income.
Any gain realized by Host Marriott on the sale of any property held as
inventory or other property held primarily for sale to customers in the
ordinary course of business, including Host Marriott's share of any such gain
realized by Host Marriott, L.P., will be treated as income from a "prohibited
transaction" that is subject to a 100% penalty tax. Such prohibited transaction
income may also have an adverse effect upon Host Marriott's ability to satisfy
the income tests for qualification as a REIT. Under existing law, whether
property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that depends upon
all the facts and circumstances with respect to the particular transaction.
Host Marriott, L.P. intends that both it and its subsidiaries will hold hotels
for investment with a view to long-term appreciation, to engage in the business
of acquiring and owning hotels and to make such occasional sales of hotels as
are consistent with Host Marriott, L.P.'s investment objectives. There can be
no assurance, however, that the IRS might not contend that one or more of such
sales is subject to the 100% penalty tax.
Asset Tests Applicable to REITs. Host Marriott, at the close of each quarter
of its taxable year, must satisfy three tests relating to the nature of its
assets. First, at least 75% of the value of Host Marriott's total assets must
be represented by real estate assets. Host Marriott's real estate assets
include, for this purpose, its allocable share of real estate assets held by
Host Marriott, L.P. and the non-corporate subsidiaries of Host Marriott, L.P.,
as well as stock or debt instruments held for less than one year purchased with
the proceeds of a stock offering, or long-term (at least five years) debt
offering of Host Marriott, cash, cash items and government securities. Second,
no more than 25% of Host Marriott's total assets may be represented by
securities other than those in the 75% asset class. Third, of the investments
included in the 25% asset class, the value of any one issuer's securities owned
by Host Marriott may not exceed 5% of the value of Host Marriott's total assets
and Host Marriott may not own more than 10% of any one issuer's outstanding
voting securities.
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Host Marriott, L.P. does not own any of the voting stock of any of non-
controlled subsidiaries but it does own 100% of the nonvoting stock of each
non-controlled subsidiary. Host Marriott, L.P. may also own nonvoting stock,
representing substantially all of the equity, in other corporate entities that
serve as partners or members in the various entities that hold title to the
hotels. Neither Host Marriott, Host Marriott, L.P., nor any of the non-
corporate subsidiaries of Host Marriott, L.P., own more than 10% of the voting
securities of any entity that is treated as a corporation for federal income
tax purposes. In addition, Host Marriott believes that the securities of any
one issuer owned by Host Marriott, Host Marriott, L.P., or any of the non-
corporate subsidiaries of Host Marriott, L.P., including Host Marriott's pro
rata share of the value of the securities of each non-controlled subsidiary do
not exceed 5% of the total value of Host Marriott's assets. There can be no
assurance, however, that the IRS might not contend that the value of such
securities exceeds the 5% value limitation or that nonvoting stock of a non-
controlled subsidiary or another corporate entity owned by Host Marriott, L.P.
should be considered "voting stock" for this purpose.
After initially meeting the asset tests at the close of any quarter, Host
Marriott will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. An example of such an acquisition would be an increase in Host
Marriott's interest in Host Marriott, L.P. as a result of the exercise of a
limited partner's unit redemption right or an additional capital contribution
of proceeds from an offering of capital stock by Host Marriott. Host Marriott
to maintains adequate records of the value of its assets to ensure compliance
with the asset tests and to take such other actions within 30 days after the
close of any quarter as may be required to cure any noncompliance. If Host
Marriott fails to cure noncompliance with the asset tests within such time
period, Host Marriott would cease to qualify as a REIT.
Clinton Administration's Proposed Changes to REIT Asset Test. The Clinton
Administration's fiscal year 1999 budget proposal, announced on February 2,
1998, includes a proposal to amend the 10% voting securities test. The proposal
would require a REIT to own no more than 10% of the vote or value of all
classes of stock of any corporation (except for qualified REIT subsidiaries or
corporations that qualify as REITs). Corporations existing prior to the
effective date of the proposal generally would be "grandfathered"; i.e., the
REIT would be subject to the existing 10% voting securities test described
above with respect to grandfathered corporations. However, such "grandfathered"
status would terminate with respect to a corporation if the corporation engaged
in a new trade or business or acquired substantially new assets.
Because Host Marriott, L.P. owns 100% of the nonvoting stock of each non-
controlled subsidiary, and Host Marriott is deemed to own an interest in each
non-controlled subsidiary equal to its proportionate interest in Host Marriott,
L.P., Host Marriott would not satisfy the proposed 10% value limitation with
respect to any of the non-controlled subsidiaries. Whether any of the non-
controlled subsidiaries would qualify as a grandfathered corporation as the
proposal is currently drafted would depend upon the effective date of the
proposal, which is not yet known. If a non-controlled subsidiary otherwise
eligible for "grandfathered" status were to engage in a new trade or business
or were to acquire substantial new assets, or if Host Marriott were to make a
capital contribution to a non-controlled subsidiary otherwise eligible for
"grandfathered" status, its "grandfathered" status would terminate and Host
Marriott would fail to qualify as a REIT. Moreover, Host Marriott would not be
able to own, directly or indirectly, more than 10% of the vote or value of any
corporation formed or acquired after the effective date of the proposal. Thus,
the proposal, if enacted, would materially impede Host Marriott's ability to
engage in new third-party management or similar activities.
Annual Distribution Requirements Applicable to REITs. Host Marriott, in order
to qualify as a REIT, is required to distribute dividends, other than capital
gain dividends, to its stockholders in an amount at least equal to
(i) the sum of (a) 95% of REIT taxable income, computed without regard to
the dividends paid deduction and Host Marriott's net capital gain, and
(b) 95% of the net income, after tax, if any, from foreclosure
property, minus
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(ii) the sum of certain items of noncash income.
In addition, if Host Marriott disposes of any built-in gain asset during its
Recognition Period, Host Marriott is required, pursuant to federal regulations
which have not yet been promulgated, to distribute at least 95% of the built-in
gain, after tax, if any, recognized on the disposition of such asset. See "--
General" above for a discussion of built-in gain assets. Such distributions
must be paid in the taxable year to which they relate, or in the following
taxable year if declared before Host Marriott timely files its tax return for
such year and if paid on or before the first regular dividend payment date
after such declaration. Host Marriott intends to make timely distributions
sufficient to satisfy these annual distribution requirements. In this regard,
Host Marriott, L.P.'s partnership agreement authorizes Host Marriott, as
general partner, to take such steps as may be necessary to cause Host Marriott,
L.P. to distribute to its partners an amount sufficient to permit Host Marriott
to meet these distribution requirements.
To the extent that Host Marriott does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its REIT taxable
income, as adjusted, it is subject to tax thereon at regular ordinary and
capital gain corporate tax rates. Host Marriott, however, may designate some or
all of its retained net capital gain, so that, although the designated amount
will not be treated as distributed for purposes of this tax, a stockholder
would include its proportionate share of such amount in income, as capital
gain, and would be treated as having paid its proportionate share of the tax
paid Host Marriott with respect to such amount. The stockholder's basis in its
capital stock of Host Marriott would be increased by the amount the stockholder
included in income and decreased by the amount of the tax the stockholder is
treated as having paid. Host Marriott would make an appropriate adjustment to
its earnings and profits. For a more detailed description of the federal income
tax consequences to a stockholder of such a designation, see "--Taxation of
Taxable U.S. Stockholders Generally."
There is a significant possibility that Host Marriott's REIT taxable income
will exceed its cash flow, due in part to certain "non-cash" or "phantom"
income expected to be taken into account in computing Host Marriott's REIT
taxable income. Host Marriott anticipates, however, that it will generally have
sufficient cash or liquid assets to enable it to satisfy the distribution
requirements described above. It is possible, however, that Host Marriott, from
time to time, may not have sufficient cash or other liquid assets to meet these
distribution requirements. In such event, in order to meet the distribution
requirements, Host Marriott may find it necessary to arrange for short-term, or
possibly long-term, borrowings to fund required distributions and/or to pay
dividends in the form of taxable stock dividends.
Host Marriott calculates its REIT taxable income based upon the conclusion
that the non-corporate subsidiaries of Host Marriott, L.P. or Host Marriott,
L.P. itself, as applicable, is the owner of the hotels for federal income tax
purposes. As a result, Host Marriott expects that the depreciation deductions
with respect to the hotels will reduce its REIT taxable income. This conclusion
is consistent with the conclusion above that the leases entered into with the
Crestline subsidiaries will be treated as true leases for federal income tax
purposes. If the IRS were to challenge successfully this position, in addition
to failing in all likelihood the 75% and 95% gross income tests described
above, Host Marriott also might be deemed retroactively to have failed to meet
the REIT distribution requirements and would have to rely on the payment of a
"deficiency dividend" in order to retain its REIT status.
Under certain circumstances, Host Marriott may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in Host
Marriott's deduction for dividends paid for the earlier year. Thus, Host
Marriott may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Host Marriott would be required to pay interest based upon
the amount of any deduction taken for deficiency dividends.
Furthermore, if Host Marriott should fail to distribute during each calendar
year at least the sum of 85% of its REIT ordinary income for such year, 95% of
its REIT capital gain income for such year, and any
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undistributed taxable income from prior periods, it would be subject to an
excise tax. The excise tax would equal 4% of the excess of such required
distribution over the sum of amounts actually distributed and amounts retained
with respect to which the REIT pays federal income tax.
Failure of Host Marriott to Qualify as a REIT. If Host Marriott fails to
qualify for taxation as a REIT in any taxable year, and if the relief
provisions do not apply, Host Marriott will be subject to tax, including any
applicable alternative minimum tax, on its taxable income at regular corporate
rates. Distributions to stockholders in any year in which Host Marriott fails
to qualify will not be deductible by Host Marriott nor will they be required to
be made. As a result, Host Marriott's failure to qualify as a REIT would
significantly reduce the cash available for distribution by Host Marriott to
its stockholders and could materially reduce the value of its capital stock. In
addition, if Host Marriott fails to qualify as a REIT, all distributions to
stockholders will be taxable as ordinary income, to the extent of Host
Marriott's current and accumulated E&P, although, subject to certain
limitations of the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction with respect to these
distributions. Unless entitled to relief under specific statutory provisions,
Host Marriott also will be disqualified from taxation as a REIT for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether in all circumstances Host Marriott would be entitled
to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY
Distributions by Host Marriott. As long as Host Marriott qualifies as a REIT,
distributions made by Host Marriott out of its current or accumulated E&P, and
not designated as capital gain dividends constitute dividends taxable to its
taxable U.S. stockholders as ordinary income. Such distributions are not
eligible for the dividends received deduction in the case of U.S. stockholders
that are corporations. To the extent that Host Marriott makes distribution not
designated as capital gain dividends in excess of its current and accumulated
E&P, such distributions are treated first as a tax-free return of capital to
each U.S. stockholder, reducing the adjusted basis which such U.S. stockholder
has in its common stock for tax purposes by the amount of such distribution but
not below zero, with distributions in excess of a U.S. stockholder's adjusted
basis in its common stock taxable as capital gains, provided that the common
stock has been held as a capital asset. Dividends declared by Host Marriott in
October, November or December of any year and payable to a stockholder of
record on a specified date in any such month shall be treated as both paid by
Host Marriott and received by the stockholder on December 31 of such year,
provided that the dividend is actually paid by Host Marriott on or before
January 31 of the following year.
Distributions made by Host Marriott that are properly designated by Host
Marriott as capital gain dividends are taxable to taxable non-corporate U.S.
stockholders, i.e., individuals, estates or trusts. They are taxed as gain from
the sale or exchange of a capital asset held for more than one year to the
extent that they do not exceed Host Marriott's actual net capital gain for the
taxable year, without regard to the period for which such non-corporate U.S.
stockholder has held his common stock. In the event that Host Marriott
designates any portion of a dividend as a "capital gain dividend," a U.S.
stockholder's share of such capital gain dividend would be an amount which
bears the same ratio to the total amount of dividends paid to such U.S.
stockholder for the year as the aggregate amount designated as a capital gain
dividend bears to the aggregate amount of all dividends paid on all classes of
shares for the year. On November 10, 1997, the IRS issued Notice 97-64, which
provides generally that Host Marriott may classify portions of its designated
capital gain dividend as either a 20% gain distribution, which would be taxable
to non-corporate U.S. stockholders at a maximum rate of 20%, an unrecaptured
Section 1250 gain distribution, which would be taxable to non-corporate U.S.
stockholders at a maximum rate of 25%, or a 28% rate gain distribution, which
would be taxable to non-corporate U.S. stockholders at a maximum rate of 28%.
If no designation is made, the entire designated capital gain dividend will be
treated as a 28% rate gain distribution. Notice 97-64 provides that a REIT must
determine the maximum amounts that it may designate as 20% and 25% rate capital
gain dividends by performing the computation required by the Internal Revenue
Code as if the REIT were an individual whose ordinary income
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were subject to a marginal tax rate of at least 28%. Notice 97-64 further
provides that designations made by the REIT only will be effective to the
extent that they comply with Revenue Ruling 89-81, which requires that
distributions made to different classes of shares be composed proportionately
of dividends of a particular type. On July 22, 1998, as part of the IRS
Restructuring Act, the holding period requirement for the application of the
20% and 25% capital gain tax rates was reduced to 12 months from 18 months for
sales of capital gain assets on or after January 1, 1998. Although Notice 97-64
will apply to sales of capital gain assets after July 28, 1997 and before
January 1, 1998, it is expected that the IRS will issue clarifying guidance,
most likely applying the same principles set forth in Notice 97-64, regarding a
REIT's designation of capital gain dividends in light of the new holding period
requirements. For a discussion of the capital gain tax rates applicable to non-
corporate U.S. stockholders, see "--Taxpayer Relief Act and IRS Restructuring
Act Changes to Capital Gain Taxation" below.
Distributions made by Host Marriott that are properly designated by Host
Marriott as capital gain dividends will be taxable to taxable corporate U.S.
stockholders as long-term gain to the extent that they do not exceed Host
Marriott's actual net capital gain for the taxable year at a maximum rate of
35% without regard to the period for which such corporate U.S. stockholder has
held its common stock. Such U.S. stockholders may, however, be required to
treat up to 20% of certain capital gain dividends as ordinary income.
U.S. stockholders may not include in their individual income tax returns any
net operating losses or capital losses of Host Marriott. Instead, such losses
would be carried over by Host Marriott for potential offset against future
income, subject to certain limitations. Distributions made by Host Marriott and
gain arising from the sale or exchange by a U.S. stockholder of common stock
will not be treated as passive activity income, and, as a result, U.S.
stockholders generally will not be able to apply any "passive losses" against
such income or gain. In addition, taxable distributions from Host Marriott
generally will be treated as investment income for purposes of the investment
interest limitation. Capital gain dividends and capital gains from the
disposition of shares, including distributions treated as such, however, will
be treated as investment income only if the U.S. stockholder so elects, in
which case such capital gains will be taxed at ordinary income rates.
Host Marriott will notify stockholders after the close of its taxable year as
to the portions of distributions attributable to that year that constitute
ordinary income, return of capital and capital gain. Host Marriott may
designate, by written notice to its stockholders, its net capital gain so that
with respect to retained net capital gains, a U.S. stockholder would include
its proportionate share of such gain in income, as long-term capital gain, and
would be treated as having paid its proportionate share of the tax paid by Host
Marriott with respect to the gain. The U.S. stockholder's basis in its common
stock would be increased by its share of such gain and decreased by its share
of such tax. With respect to such long-term capital gain of a U.S. stockholder
that is an individual or an estate or trust, the IRS, as described above in
this section, has authority to issue regulations that could apply the special
tax rate applicable generally to the portion of the long-term capital gains of
an individual or an estate or trust attributable to deductions for depreciation
taken with respect to depreciable real property. IRS Notice 97-64, described
above in this section, did not address the taxation of non-corporate REIT
stockholders with respect to retained net capital gains.
Sales of Common Stock. Upon any sale or other disposition of common stock, a
U.S. stockholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between (i) the amount of cash and the fair
market value of any property received on such sale or other disposition and
(ii) the holder's adjusted basis in such common stock for tax purposes. Such
gain or loss will be capital gain or loss if the common stock has been held by
the U.S. stockholder as a capital asset. In the case of a U.S. stockholder who
is an individual or an estate or trust, such gain or loss will be long-term
capital gain or loss, and any such long-term capital gain shall be subject to
the maximum capital gain rate of 20%. In the case of a U.S. stockholder that is
a corporation, such gain or loss will be long-term capital gain or loss if such
shares have been held for more than one year, and any such capital gain shall
be subject to the maximum capital gain rate of 35%. In general, any loss
recognized by a U.S. stockholder upon the sale or other disposition of common
stock that has been held for six months or less, after applying certain holding
period rules, will be treated as a
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long-term capital loss, to the extent of distributions received by such U.S.
stockholder from Host Marriott that were required to be treated as long-term
capital gains.
Taxpayer Relief Act and IRS Restructuring Act Changes to Capital Gain
Taxation. The Taxpayer Relief Act of 1997 altered the taxation of capital gain
income. Under the Act, individuals, trusts and estates that hold certain
investments for more than 18 months may be taxed at a maximum long-term capital
gain rate of 20% on the sale or exchange of those investments. Individuals,
trusts and estates that hold certain assets for more than one year but not more
than 18 months may be taxed at a maximum long-term capital gain rate of 28% on
the sale or exchange of those investments. The Taxpayer Relief Act also
provides a maximum rate of 25% for "unrecaptured Section 1250 gain" for
individuals, trusts and estates, special rules for "qualified 5-year gain" and
other changes to prior law. The recently enacted IRS Restructuring Act of 1998,
however, reduced the holding period requirement established by the Taxpayer
Relief Act for the application of the 20% and 25% capital gain tax rates to 12
months from 18 months for sales of capital gain assets after December 31, 1997.
The Taxpayer Relief Act allows the IRS to prescribe regulations on how the
Taxpayer Relief Act's capital gain rates will apply to sales of capital assets
by "pass-through entities," including REITs, such as Host Marriott, and to
sales of interests in "pass-through entities." For a discussion of the rules
under the Taxpayer Relief Act that apply to the taxation of distributions by
Host Marriott to its stockholders that are designated by Host Marriott as
"capital gain dividends," see "--Distributions by Host Marriott" above.
Stockholders are urged to consult with their own tax advisors with respect to
the rules contained in the Taxpayer Relief Act and the IRS Restructuring Act.
BACKUP WITHHOLDING FOR HOST MARRIOTT'S DISTRIBUTIONS
Host Marriott reports to its U.S. stockholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if
any. Under the backup withholding rules, a U.S. stockholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder either is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. stockholder that does not provide Host Marriott with
a correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding is creditable against
the stockholder's income tax liability. In addition, Host Marriott may be
required to withhold a portion of its capital gain distributions to any U.S.
stockholders who fail to certify their non-foreign status to Host Marriott. See
"--Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Provided that a tax-exempt stockholder has not held its common stock as "debt
financed property" within the meaning of the Internal Revenue Code and such
common stock are not otherwise used in a trade or business, the dividend income
from Host Marriott will not be unrelated business taxable income ("UBTI") to a
tax-exempt stockholder. Similarly, income from the sale of common stock will
not constitute UBTI unless such tax-exempt stockholder has held such common
stock as "debt financed property" within the meaning of the Internal Revenue
Code or has used the common stock in a trade or business.
However, for a tax-exempt stockholder that is a social club, voluntary
employee benefit association, supplemental unemployment benefit trust or
qualified group legal services plan exempt from federal income taxation under
Internal Revenue Code Sections 501 (c)(7), (c)(9), (c)(17) and (c)(20),
respectively, income from an investment in Host Marriott will constitute UBTI
unless the organization is properly able to deduct amounts set aside or placed
in reserve for certain purposes so as to offset the income generated by its
investment in Host Marriott. Such a prospective stockholder should consult its
own tax advisors concerning these "set aside" and reserve requirements.
Notwithstanding the above, however, the Omnibus Budget Reconciliation Act of
1993 provides that, effective for taxable years beginning in 1994, a portion of
the dividends paid by a "pension held REIT" shall
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be treated as UBTI as to any trust which is described in Section 401(a) of the
Internal Revenue Code, is tax-exempt under Section 501(a) of the Internal
Revenue Code and holds more than 10%, by value, of the interests in the REIT.
Tax-exempt pension funds that are described in Section 401(a) of the Internal
Revenue Code are referred to below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Internal Revenue Code, added by
the 1993 Act, provides that stock owned by qualified trusts shall be treated,
for purposes of the "not closely held" requirement, as owned by the
beneficiaries of the trust rather than by the trust itself, and (ii) either (a)
at least one such qualified trust holds more than 25% by value, of the
interests in the REIT, or (b) one or more such qualified trusts, each of which
owns more than 10%, by value, of the interests in the REIT, hold in the
aggregate more than 50%, by value, of the interests in the REIT. The percentage
of any REIT dividend treated as UBTI is equal to the ratio of the UBTI earned
by the REIT, treating the REIT as if it were a qualified trust and therefore
subject to tax on UBTI, to the total gross income of the REIT. A de minimis
exception applies where the percentage is less than 5% for any year. The
provisions requiring qualified trusts to treat a portion of REIT distributions
as UBTI will not apply if the REIT is able to satisfy the "not closely held"
requirement without relying upon the "look-through" exception with respect to
qualified trusts.
Based on the current estimated ownership of Host Marriott common stock and as
a result of certain limitations on transfer and ownership of common stock
contained in the Host Marriott Articles of Incorporation, Host Marriott should
not be classified as a "pension held REIT."
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing federal income taxation of the ownership and disposition
of common stock by non-U.S. stockholders are complex and no attempt is made
herein to provide more than a brief summary of such rules. Accordingly, the
discussion does not address all aspects of federal income tax and does not
address state, local or foreign tax consequences that may be relevant to a non-
U.S. stockholder in light of its particular circumstances. In addition, this
discussion is based on current law, which is subject to change, and assumes
that Host Marriott qualifies for taxation as a REIT. Prospective non-U.S.
stockholders should consult with their own tax advisers to determine the impact
of federal, state, local and foreign income tax laws with regard to an
investment in common stock, including any reporting requirements.
Distributions by Host Marriott. Distributions by Host Marriott to a non-U.S.
stockholder that are neither attributable to gain from sales or exchanges by
Host Marriott of United States real property interests nor designated by Host
Marriott as capital gains dividends will be treated as dividends of ordinary
income to the extent that they are made out of current or accumulated E&P of
Host Marriott. Such distributions ordinarily will be subject to withholding of
United States federal income tax on a gross basis (that is, without allowance
of deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the non-U.S. stockholder of a United States trade
or business. Under certain treaties, however, lower withholding rates generally
applicable to dividends do not apply to dividends from a REIT, such as Host
Marriott. Certain certification and disclosure requirements must be satisfied
to be exempt from withholding under the effectively connected income exemption.
Dividends that are effectively connected with such a trade or business will be
subject to tax on a net basis (that is, after allowance of deductions) at
graduated rates, in the same manner as U.S. stockholders are taxed with respect
to such dividends and are generally not subject to withholding. Any such
dividends received by a non-U.S. stockholder that is a corporation may also be
subject to an additional branch profits tax at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty. Host Marriott expects to
withhold United States income tax at the rate of 30% on any distribution made
to a non-U.S. stockholder unless (i) a lower treaty rate applies and any
required form or certification evidencing eligibility for that lower rate is
filed with Host Marriott or (ii) a non-U.S. stockholder files an IRS Form 4224
with Host Marriott claiming that the distribution is effectively connected
income.
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Distributions in excess of the current or accumulated E&P of Host Marriott
will not be taxable to a non-U.S. stockholder to the extent that they do not
exceed the adjusted basis of the stockholder's common stock, but rather will
reduce the adjusted basis of such common stock. To the extent that such
distributions exceed the adjusted basis of a non-U.S. stockholder's common
stock, they will give rise to gain from the sale or exchange of its common
stock, the tax treatment of which is described below.
As a result of a legislative change made by the Small Business Job Protection
Act of 1996, it appears that Host Marriott will be required to withhold 10% of
any distribution in excess of its current and accumulated E&P. Consequently,
although Host Marriott intends to withhold at a rate of 30%, or a lower
applicable treaty rate, on the entire amount of any distribution, to the extent
that Host Marriott does not do so, any portion of a distribution not subject to
withholding at a rate of 30%, or lower applicable treaty rate, would be subject
to withholding at a rate of 10%. However, a non-U.S. stockholder may seek a
refund of such amounts from the IRS if it subsequently determined that such
distribution was, in fact, in excess of current or accumulated E&P of Host
Marriott, and the amount withheld exceeded the non-U.S. stockholder's United
States tax liability, if any, with respect to the distribution.
Distributions to a non-U.S. stockholder that are designated by Host Marriott
at the time of distribution as capital gain dividends, other than those arising
from the disposition of a United States real property interest, generally will
not be subject to United States federal income taxation, unless:
(i) the investment in the common stock is effectively connected with the
non-U.S. stockholder's United States trade or business, in which case
the non-U.S. stockholder will be subject to the same treatment as U.S.
stockholders with respect to such gain, except that a stockholder that
is a foreign corporation may also be subject to the 30% branch profits
tax, as discussed above, or
(ii) the non-U.S. stockholder is a nonresident alien individual who is
present in the United States for 183 days or more during the taxable
year and has a "tax home" in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the
individual's capital gains.
Pursuant to the federal law known as FIRPTA, distributions to a non-U.S.
stockholder that are attributable to gain from sales or exchanges by Host
Marriott of United States real property interests, whether or not designated as
capital gain dividends, will cause the non-U.S. stockholder to be treated as
recognizing such gain as income effectively connected with a United States
trade or business. non-U.S. stockholders would thus generally be taxed at the
same rates applicable to U.S. stockholders, subject to a special alternative
minimum tax in the case of nonresident alien individuals. Also, such gain may
be subject to a 30% branch profits tax in the hands of a non-U.S. stockholder
that is a corporation, as discussed above. Host Marriott is required to
withhold 35% of any such distribution. That amount is creditable against the
non-U.S. stockholder's federal income tax liability.
Although the law is not entirely clear on the matter, it appears that amounts
designated by Host Marriott pursuant to the Taxpayer Relief Act as
undistributed capital gains in respect of the common stock held by U.S.
Stockholders (see "--Annual Distribution Requirements Applicable to REITs"
above) would be treated with respect to non-U.S. stockholders in the manner
outlined in the preceding two paragraphs for actual distributions by Host
Marriott of capital gain dividends. Under that approach, the non-U.S.
stockholders would be able to offset as a credit against their United States
federal income tax liability resulting therefrom their proportionate share of
the tax paid by Host Marriott on such undistributed capital gains and to
receive from the IRS a refund to the extent their proportionate share of such
tax paid by Host Marriott were to exceed their actual United States federal
income tax liability.
Sales of Common Stock. Gain recognized by a non-U.S. stockholder upon the
sale or exchange of common stock generally will not be subject to United States
taxation unless such shares constitute a "United States real property interest"
within the meaning of FIRPTA. The common stock will not constitute a "United
States real property interest" so long as Host Marriott is a "domestically
controlled REIT." A "domestically
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controlled REIT" is a REIT in which at all times during a specified testing
period less than 50% in value of its stock is held directly or indirectly by
non-U.S. stockholders. Host Marriott believes, but cannot guarantee, that it is
a "domestically controlled REIT." Moreover, even if Host Marriott is a
"domestically controlled REIT," because the common stock is publicly traded, no
assurance can be given that Host Marriott will continue to be a "domestically
controlled REIT." Notwithstanding the foregoing, gain from the sale or exchange
of common stock not otherwise subject to FIRPTA will be taxable to a non-U.S.
stockholder if the non-U.S. stockholder is a nonresident alien individual who
is present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States. In such case, the nonresident alien
individual will be subject to a 30% United States withholding tax on the amount
of such individual's gain.
Even if Host Marriott does not qualify as or ceases to be a "domestically
controlled REIT," gain arising from the sale or exchange by a non-U.S.
stockholder of common stock would not be subject to United States taxation
under FIRPTA as a sale of a "United States real property interest" if:
(i) the common stock is "regularly traded," as defined by applicable
regulations, on an established securities market such as the NYSE, and
(ii) such non-U.S. stockholder owned 5% or less of the common stock
throughout the five-year period ending on the date of the sale or
exchange.
If gain on the sale or exchange of common stock were subject to taxation under
FIRPTA, the non-U.S. stockholder would be subject to regular United States
income tax with respect to such gain in the same manner as a taxable U.S.
stockholder (subject to any applicable alternative minimum tax, a special
alternative minimum tax in the case of nonresident alien individuals and the
possible application of the 30% branch profits tax in the case of foreign
corporations) and the purchaser of the common stock would be required to
withhold and remit to the IRS 10% of the purchase price.
Backup Withholding Tax and Information Reporting. Backup withholding tax
generally is a withholding tax imposed at the rate of 31% on certain payments
to persons that fail to furnish certain information under the United States
information reporting requirements. Backup withholding and information
reporting will generally not apply to distributions paid to non-U.S.
stockholders outside the United States that are treated as dividends subject to
the 30% (or lower treaty rate) withholding tax discussed above, capital gain
dividends or distributions attributable to gain from the sale or exchange by
Host Marriott of United States real property interests. As a general matter,
backup withholding and information reporting will not apply to a payment of the
proceeds of a sale of common stock by or through a foreign office of a foreign
broker. Generally, information reporting (but not backup withholding) will
apply, however, to a payment of the proceeds of a sale of common stock by a
foreign office of a broker that:
(a) is a United States person,
(b) derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States, or
(c) is a "controlled foreign corporation," which is, generally, a foreign
corporation controlled by United States stockholders.
If, however, the broker has documentary evidence in its records that the holder
is a non-U.S. stockholder and certain other conditions are met or the
stockholder otherwise establishes an exemption information reporting will not
apply. Payment to or through a United States office of a broker of the proceeds
of a sale of common stock is subject to both backup withholding and information
reporting unless the stockholder certifies under penalty of perjury that the
stockholder is a non-U.S. stockholder, or otherwise establishes an exemption. A
non-U.S. stockholder may obtain a refund of any amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
IRS.
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The IRS has recently finalized regulations regarding the withholding and
information reporting rules discussed above. In general, these regulations do
not alter the substantive withholding and information reporting requirements
but unify certification procedures and forms and clarify and modify reliance
standards. These regulations generally are effective for payments made after
December 31, 2000, subject to certain transition rules. Valid withholding
certificates that are held on December 31, 1999, will remain valid until the
earlier of December 31, 2000 or the date of expiration of the certificate under
rules currently in effect, unless otherwise invalidated due to changes in the
circumstances of the person whose name is on such certificate. A non-U.S.
stockholder should consult its own advisor regarding the effect of the new
regulations.
TAX ASPECTS OF HOST MARRIOTT'S OWNERSHIP OF INTERESTS IN HOST MARRIOTT, L.P.
General. Substantially all of Host Marriott's investments are held through
Host Marriott, L.P., which will hold the hotels either directly or through
certain subsidiaries. In general, partnerships are "pass-through" entities that
are not subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit
of a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. Host Marriott
includes in its income its proportionate share of the foregoing partnership
items for purposes of the various REIT income tests and in the computation of
its REIT taxable income. Moreover, for purposes of the REIT asset tests, Host
Marriott includes its proportionate share of assets held through Host Marriott,
L.P. and certain of its subsidiaries. See "--Federal Income Taxation of Host
Marriott--Ownership of Partnership Interests by a REIT."
Entity Classification. If Host Marriott, L.P. or any non-corporate subsidiary
other than a subsidiary held through an entity treated for federal income tax
purposes as a corporation were treated as an association, the entity would be
taxable as a corporation and therefore would be subject to an entity level tax
on its income. In such a situation, the character of Host Marriott's assets and
items of gross income would change and could preclude Host Marriott from
qualifying as a REIT (see "--Federal Income Taxation of Host Marriott--Asset
Tests Applicable to REITs" and "--Income Tests Applicable to REITs").
The entire discussion of the federal income tax consequences of the ownership
of common stock is based on Host Marriott, L.P. and all of its non-corporate
subsidiaries, other than a subsidiary held by an entity treated as a
corporation for federal income tax purposes, being classified as partnerships
for federal income tax purposes. Pursuant to regulations under Section 7701 of
the Internal Revenue Code, a partnership will be treated as a partnership for
federal income tax purposes unless it elects to be treated as a corporation or
would be treated as a corporation because it is a "publicly traded
partnership." Neither Host Marriott, L.P. nor any of the non-corporate
subsidiaries have elected or will elect to be treated as a corporation, and
therefore, subject to the disclosure below, each will be treated as a
partnership for federal income tax purposes (or if it has only one partner or
member, disregarded entirely for federal income tax purposes).
Pursuant to Section 7704 of the Internal Revenue Code, however, a partnership
that does not elect to be treated as a corporation nevertheless will be treated
as a corporation for federal income tax purposes if it is a "publicly traded
partnership," unless at least ninety percent (90%) of its income consists of
"qualifying income" within the meaning of that section. A "publicly traded
partnership" is any partnership (i) the interests in which are traded on an
established securities market or (ii) the interests in which are readily
tradable on a "secondary market or the substantial equivalent thereof." Units
of limited partnership interest in Host Marriott L.P. will not be traded on an
established securities market. There is a significant risk, however, that after
the right to redeem such units becomes exercisable, such interests would be
considered readily tradable on the substantial equivalent of a secondary
market. In this regard, the income requirements generally applicable to REITs
and the definition of "qualifying income" under Section 7704 of the Internal
Revenue Code are similar in most key respects. There is one significant
difference, however, that is relevant to Host Marriott, L.P. For a REIT, rent
from a tenant does not qualify as "rents from real property" if the REIT and/or
one or more actual or constructive owners of 10% or more of the REIT actually
or constructively own 10% or more of the tenant; under Section 7704 of the
Internal Revenue Code, rent from a tenant is not qualifying income if a
partnership
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and/or one or more actual or constructive owners of 5% or more of the
partnership actually or constructively own 10% or more of the tenant.
A substantial majority of Host Marriott, L.P. income comes from rent payments
by subsidiaries of Crestline. Accordingly, because The Blackstone Group, Host
Marriott and any owner of 10% or more of Host Marriott will own or be deemed to
own 5% or more of Host Marriott, L.P., if The Blackstone Group, Host Marriott
and/or any owner of 10% or more of Host Marriott were to own or be deemed to
own collectively 10% or more of Crestline, none of the rent from the lessees of
Host Marriott's hotels would be qualifying income for purposes of determining
whether Host Marriott, L.P. should be taxed as a corporation. In order to avoid
this result, the Crestline articles of incorporation expressly provide that no
person (or persons acting as a group), including The Blackstone Group, Host
Marriott and any owner of 10% or more of Host Marriott, may own, actually
and/or constructively, more than 9.8% by value of the equity in Crestline and
the Crestline articles of incorporation contain self-executing mechanisms
intended to enforce this prohibition. In addition, Host Marriott, L.P.'s
partnership agreement prohibits any person, or persons acting as a group, or
entity, other than an affiliate of The Blackstone Group and Host Marriott, from
owning, actually and/or constructively, more than 4.9% of the value of Host
Marriott, L.P., and the Host Marriott charter prohibits any person, or persons
acting as a group, or entity, including The Blackstone Group and the Marriott
family and their affiliated entities as a group, from, subject to certain
limited exceptions, owning, actually and/or constructively, more than 9.8% of
the lesser of the number or value of the total outstanding shares of Host
Marriott. Assuming that all of these prohibitions are enforced at all times in
accordance with their terms, then so long as Host Marriott, L.P.'s income is
such that Host Marriott could meet the gross income tests applicable to REITs
(see "--Federal Income Taxation of Host Marriott--Income Tests Applicable to
REITs" and "--Ownership of Partnership Interests by a REIT"), Host Marriott,
L.P.'s "qualifying income" should be sufficient for it to avoid being
classified as a corporation even if it were considered a publicly traded
partnership.
If Host Marriott, L.P. were taxable as a corporation, most, if not all, of
the tax consequences described herein would be inapplicable. In particular,
Host Marriott would not qualify as a REIT because the value of Host Marriott's
ownership interest in Host Marriott, L.P. would exceed 5% of Host Marriott's
assets and Host Marriott would be considered to hold more than 10% of the
voting securities of another corporation (see "--Federal Income Taxation of
Host Marriott--Asset Tests Applicable to REITs"), which would adversely affect
the value of the common stock (see "--Federal Income Taxation of Host
Marriott--Failure of Host Marriott to qualify as a REIT").
Allocations of Operating Partnership Income, Gain, Loss and Deduction. The
partnership agreement of the Host Marriott, L.P. provides that if Host
Marriott, L.P. operates at a net loss, net losses shall be allocated to Host
Marriott and the limited partners in proportion to their respective percentage
ownership interests in Host Marriott, L.P., provided that net losses that would
have the effect of creating a deficit balance in a limited partner's capital
account as specially adjusted for such purpose ("Excess Losses") will be
reallocated to Host Marriott, as general partner of Host Marriott, L.P. The
partnership agreement also provides that, if Host Marriott, L.P. operates at a
net profit, net income shall be allocated first to Host Marriott to the extent
of Excess Losses with respect to which Host Marriott has not previously been
allocated net income. Any remaining net income shall be allocated in proportion
to the respective percentage ownership interests of Host Marriott and the
limited partners. Finally, the partnership agreement provides that if Host
Marriott, L.P. has preferred units outstanding, income will first be allocated
to such preferred units to the extent necessary to reflect and preserve the
economic rights associated with such preferred units.
Although a partnership agreement will generally determine the allocation of
income and loss among partners, such allocations will be disregarded for tax
purposes if they do not comply with the provisions of Section 704(b) of the
Internal Revenue Code and the applicable regulations. Generally, Section 704(b)
and the applicable regulations require that partnership allocations respect the
economic arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into
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account all of the facts and circumstances relating to the economic arrangement
of the partners with respect to such item. The allocations of taxable income
and loss provided for in the Host Marriott, L.P. partnership agreement and the
partnership agreements and operating agreements of the non-corporate
subsidiaries are intended to comply with the requirements of Section 704(b) of
the Internal Revenue Code and the regulations promulgated thereunder.
Tax Allocations with Respect to the Hotels. Pursuant to Section 704(c) of the
Internal Revenue Code, income, gain, loss and deduction attributable to
appreciated or depreciated property, such as the hotels, that is contributed to
a partnership in exchange for an interest in the partnership must be allocated
in a manner such that the contributing partner is charged with, or benefits
from, respectively, the difference between the adjusted tax basis and the fair
market value of such property at the time of contribution associated with the
property at the time of the contribution. This difference is know as built-in
gain. The Host Marriott, L.P. partnership agreement requires that such
allocations be made in a manner consistent with Section 704(c) of the Internal
Revenue Code. In general, the partners of Host Marriott, L.P., including Host
Marriott, who contributed depreciated assets having built-in gain are allocated
depreciation deductions for tax purposes that are lower than such deductions
would be if determined on a pro rata basis. Thus, the carryover basis of the
contributed assets in the hands of Host Marriott, L.P. may cause Host Marriott
to be allocated lower depreciation and other deductions, and therefore to be
effectively allocated more income, which might adversely affect Host Marriott's
ability to comply with the REIT distribution requirements. See "--Federal
Income Taxation of Host Marriott--Annual Distribution Requirements Applicable
to REITs".
In addition, in the event of the disposition of any of the contributed assets
which have built-in gain, all income attributable to the built-in gain
generally will be allocated to the contributing partners, even though the
proceeds of such sale would be allocated proportionately among all the partners
and likely would be retained by Host Marriott, L.P., rather than distributed.
Thus, if Host Marriott, L.P. were to sell a hotel with built-in gain that was
contributed to Host Marriott, L.P. by Host Marriott's predecessors or Host
Marriott, Host Marriott generally would be allocated all of the income
attributable to the built-in gain, which could exceed the economic or book
income allocated to it as a result of such sale. Such an allocation might cause
Host Marriott to recognize taxable income in excess of cash proceeds, which
might adversely affect Host Marriott's ability to comply with the REIT
distribution requirements. In addition, Host Marriott will be subject to a
corporate level tax on such gain to the extent the gain is recognized within
the 10-year period after the first day of Host Marriott's first taxable year as
a REIT). See "--Federal Income Taxation of Host Marriott--Annual Distribution
Requirements Applicable to REITs" and "--Federal Income Taxation of Host
Marriott--General." It should be noted in this regard that as the general
partner of Host Marriott, L.P., Host Marriott will determine whether or not to
sell a hotel contributed to Host Marriott, L.P. by Host Marriott.
Host Marriott, L.P. and Host Marriott generally use the traditional method,
with a provision for a curative allocation of gain on sale to the extent prior
allocations of depreciation with respect to a specific hotel were limited by
the "ceiling rule" applicable under the traditional method, to account for
built-in gain with respect to the hotels contributed to Host Marriott, L.P. in
connection with the REIT conversion. This method is generally a more favorable
method for accounting for built-in gain from the perspective of those partners,
including Host Marriott, who received units of limited partnership interest in
Host Marriott, L.P. in exchange for property with a low basis relative to value
at the time of the REIT conversion and is a less favorable method from the
perspective of those partners who contributed cash or "high basis" assets to
Host Marriott, L.P., including Host Marriott, to the extent it contributes cash
to Host Marriott, L.P.
Any property purchased by Host Marriott, L.P. subsequent to the REIT
conversion will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Internal Revenue Code will not apply.
OTHER TAX CONSEQUENCES FOR HOST MARRIOTT AND ITS STOCKHOLDERS
Host Marriott and its stockholders are subject to state or local taxation in
various state or local jurisdictions, including those in which Host Marriott,
L.P. or they transact business or reside. The state and local tax treatment of
Host Marriott and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders of Host
Marriott should consult their own tax advisors regarding the effect of state and
local tax laws on an investment in Host Marriott.
A portion of the cash to be used by Host Marriott to fund distributions comes
from each non-controlled subsidiary through payments of dividends on the shares
of such corporation held by Host Marriott, L.P. and, in some cases, interest on
notes held by Host Marriott, L.P. Each non-controlled subsidiary pays federal
and state income tax at the full applicable corporate rates on its taxable
income computed without regard to any deduction for dividends. To the extent
that a non-controlled subsidiary is required to pay federal, state or local
taxes, the cash otherwise available for distribution by Host Marriott to its
stockholders will be reduced accordingly.
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