EXHIBIT 10.6
[Colorado]
COMFORT LETTER
June 30, 2000
Apple Suites, Inc.
306 East Main Street
Richmond, Virginia 23219
Attention: Mr. Glade M. Knight
Re: Homewood Suites(R) hotel located at 4950 Baseline
Road, Boulder, Colorado (the "Hotel")
Gentlemen:
Promus Hotels, Inc. ("Promus") is about to execute with respect to the
Hotel (i) a License Agreement and the Rider, Attachment and Exhibits referenced
therein (the "License Agreement"), dated the date hereof, pertaining to the
licensing of Apple Suites Management, Inc., a Virginia corporation ("Lessee"),
to operate the Hotel as a Homewood Suites(R) hotel, and (ii) a management
agreement of even date herewith (the "Management Agreement") with respect to the
operation of the Hotel by Promus, as Manager. In addition, Promus has loaned to
Apple Suites, Inc. ("Fee Owner") the sum of $91,350,000 (the "Acquisition Loan")
as purchase money financing for the acquisition of certain properties (the
"Properties") conveyed pursuant to the Purchase Agreement (as defined in the
Management Agreement), that certain Agreement of Sale dated August 6, 1999 by
and among Hampton Inns, Inc., Promus Hotels Florida, Inc. and Promus, as
sellers, and Fee Owner, as buyer, as the same has been amended, and that certain
Agreement of Sale dated October 5, 1999 between Hampton Inns, Inc., as seller,
and Fee Owner, as buyer, as the same has been amended, which Acquisition Loan is
evidenced by (i) a note of Fee Owner dated September 20, 1999 in the amount of
$26,625,000, (ii) a note of Fee Owner dated October 5, 1999 in the amount of
$7,350,000, (iii) a note of Fee Owner dated November 29, 1999 in the amount of
$30,210,000, (iv) a note of Fee Owner dated December 22, 1999 in the amount of
$4,384,500, (v) a note of Fee Owner dated May 8, 2000 in the amount of
$11,616,750 and (vi) a note of even date herewith in the amount of $11,163,750
and is secured by, among other things, mortgage(s), deed(s) of trust or deed(s)
to secure debt dated September 20, 1999, October 5, 1999, November 29, 1999,
December 22, 1999, May 8, 2000 or of even date herewith from Fee Owner or its
wholly-owned subsidiary which encumbers some or all of the Properties, which may
include the Hotel (the documents evidencing and securing the Acquisition Loan
herein
referred to as the "Acquisition Mortgage Documents"). Lessee is the owner of a
leasehold estate in the Hotel pursuant to a Master Hotel Lease Agreement dated
September 20, 1999 (as supplemented, amended and modified, the "Percentage
Lease") with Fee Owner. Although the License Agreement is non-assignable, and is
not subject to any collateral assignment, Lessee and Fee Owner have requested
that Promus enter into this letter agreement with Fee Owner with respect to,
among other things, Fee Owner's rights with regard to the License Agreement, and
Promus has requested that Fee Owner enter into this letter agreement with Promus
with respect to, among other things, the Management Agreement and its continuing
rights to operate the Hotel for the term of the Management Agreement, subject to
the terms thereof and hereof, and to confirm certain understandings with respect
to the Acquisition Loan. No third party beneficiaries (other than Fee Owner) are
intended or implied. Fee Owner has requested that Promus inform you of the
procedures Promus agrees to follow in the event Lessee commits a breach under
the provisions of the License Agreement.
So long as Fee Owner is the owner of the Hotel, and the License
Agreement is in effect, Promus will notify Fee Owner by certified mail at the
above address (or such other address as you may specify in a written notice to
Promus pursuant hereto) of any default as a result of any breach of the License
Agreement or Management Agreement by Lessee, provided, however, that to the
extent the default is a default under, or termination of, the Percentage Lease
or a default under the Acquisition Loan, Promus shall have no obligation to
notify Fee Owner as contemplated above. This notice will be in the form of a
copy of the notice of such default that is sent to Lessee. In the notice, Promus
will give Fee Owner (i) ten (10) days to cure or cause to be cured monetary
defaults identified in Promus's default notice and (ii) thirty (30) days to cure
or cause to be cured the non-monetary breach(es) identified in Promus's default
notice, provided, however, that to the extent the default identified in Promus's
default notice is not capable of being cured by Fee Owner (i.e., the bankruptcy
of Lessee or a transfer in violation of the License Agreement), Fee Owner will
not be afforded an opportunity to cure such incurable defaults. If a breach
identified in the notice is of a curable non-monetary nature which is not
reasonably capable of being cured within such thirty (30) day period, Promus
shall extend the cure period for such length of time as Promus in its sole
discretion reasonably determines is necessary for such breach to be cured (not
to exceed in any event an additional period of ninety (90) days).
In the event a default occurs under the Percentage Lease (other than a
default under the Acquisition Loan) and, as a consequence thereof, Fee Owner
elects to terminate the Percentage Lease, or remove Lessee from possession of
the Hotel without terminating the Percentage Lease or if Lessee does not elect
to extend the Percentage Lease term through the full term of the License
Agreement (any such event being referred to herein as a "Triggering Event")
while the License Agreement and/or the Management Agreement are in effect, Fee
Owner shall give Promus written notice of such termination ("Triggering Event
Notice"). Fee Owner shall have a ninety (90) day period from the date such
Triggering Event Notice is given to elect to enter into a lease agreement with a
substitute lessee of the Hotel satisfying the conditions set forth in Paragraph
1 below (a "Successor Lessee") and to obtain a new license agreement for such
Hotel in the name of such Successor Lessee, for a term equal to the balance of
the original term of the License Agreement and otherwise on the terms and
conditions set forth in the License Agreement,
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except that it shall be issued to Successor Lessee without the payment of any
application fee or transfer fee. Promus's obligations to issue a new license
agreement pursuant to this paragraph are subject to and conditioned upon the
satisfaction of the following:
1. Successor Lessee shall (i) be a "Permitted Transferee" (as
hereinafter defined) and (ii) either (y) be (1) at least fifty percent (50%)
owned by Fee Owner or persons that are its "Affiliates" (as hereinafter defined)
and (2) controlled by Fee Owner or its Affiliates or (z) have complied with the
requirements of Section 11 of the applicable License Agreement.
For purposes of this letter agreement the following terms shall have
the respective meanings assigned thereto:
(a) The term "Permitted Transferee" means a person or entity
that (i) has adequate financial resources to perform all of Lessee's
obligations under and in accordance with the terms of the License
Agreement, the Percentage Lease, and/or the Management Agreement, (ii)
is not the franchisor or an operator of a chain of hotels (i.e., a
group of hotels marketed under the same brand name) which competes with
the Homewood Suites(R)system of hotels, and (iii) enjoys a favorable
reputation for integrity in his or its community; provided, however,
that an entity the stock of which is not traded on a national stock
exchange shall not qualify as a "Permitted Transferee" unless (A) all
officers, directors, managing members and general partners of such
entity and all persons having, directly or indirectly, a ten percent
(10%) or more equity or profit-sharing interest in such entity would
qualify as Permitted Transferees under clauses (ii) and (iii) of this
sentence, and (B) all officers, directors, managing members and general
partners of any entity having, directly or indirectly, a ten percent
(10%) or more equity or profit-sharing interest in such entity, the
stock of which is not traded on a national stock exchange, would
qualify as Permitted Transferees under clauses (ii) and (iii) of this
sentence. For purposes of the foregoing, it is agreed that any person
or entity who or which, because of reputation or past conduct, has been
denied or would be likely to be denied a gaming license by any
governmental authority shall not qualify as a "Permitted Transferee".
(b) The term "Affiliate" means, with respect to any person or
entity, any other person or entity which, directly or indirectly,
controls, is controlled by, or is under common control with, such first
person or entity. For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlled by" and
"under common control with"), shall mean the possession, directly or
indirectly, of the power (i) to vote more than fifty percent (50%) of
the securities having ordinary voting power for the election of
directors of the controlled person, or (ii) to direct or cause the
direction of the management and policies of the controlled person,
whether through the ownership of voting shares or by contract or
otherwise, and shall be deemed to include the directors and executive
officers of Fee Owner.
2. Successor Lessee shall also enter into a management agreement with
Promus covering the Hotel for a term equal to the balance of the original term
of the
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Management Agreement covering the Hotel and otherwise on the terms and
conditions set forth in such Management Agreement.
If Fee Owner fails to provide a written notice to Promus of Successor
Lessee's intention to obtain a new license within such ninety (90) day period,
the License Agreement shall, at Promus's option, terminate upon the date of
expiration of such ninety (90) day period, in which event Fee Owner shall pay to
Promus an amount, as liquidated damages, equal to the aggregate amount owed
under the License Agreement (including liquidated damages attributable to such
termination as provided in Paragraph 13 of the License Agreement) and the
Management Agreement.
If Fee Owner enters into a new lease with a Successor Lessee who
intends to obtain a new license, all existing breaches under the License
Agreement and the Management Agreement (collectively, the "Hotel Agreements") of
which Promus notifies Fee Owner must be cured on or before the final day of the
ninety (90) day period, provided, however, if such breach(es) are of the type
set forth in paragraph 13.d.(3) and (4) of the License Agreement or Section 9.01
of the Management Agreement and are not capable of being cured by Fee Owner or a
Successor Lessee within such ninety (90) day period, such breach(es) need not be
cured if Fee Owner or a Successor Lessee cures all other breaches of the Hotel
Agreements. With regard to any breaches of a non-monetary nature which are not
reasonably capable of being cured within said ninety (90) day period, Promus
shall extend the cure period for such period of time as Promus in its sole
discretion reasonably determines is necessary for such breaches to be cured.
In the event Fee Owner exercises its rights under the terms of this
letter agreement to enable a Successor Lessee to obtain a new license agreement,
Lessee shall not be released from its obligations under the applicable Hotel
Agreements accruing prior to the date such Successor Lessee obtains a new
license and enters into a new management agreement with Promus.
In addition, in the event the provisions of Internal Revenue Code, as
amended, applicable to real estate investment trusts ("REIT") are amended to
permit REITs, such as Fee Owner, to operate hotels or otherwise render the
structure embodied by the Percentage Lease to be obsolete as economically
unnecessary, Fee Owner may give Promus written notice thereof (the "Tax Event
Notice") and of Fee Owner's election to terminate the Percentage Lease and of
its desire to obtain a new license agreement for the Hotel in Fee Owner's name
for a term equal to the balance of the original term of the License Agreement
and otherwise on the terms and conditions set forth in the License Agreement,
except that it shall be issued to Fee Owner without the payment of any
application fee or transfer fee. The Tax Event Notice shall, in addition,
contain Lessee's consent to the termination of the Management Agreement and the
License Agreement and acknowledgment of the provisions of the immediately
succeeding paragraph. Promus's obligations to issue a new license agreement
pursuant to this paragraph are subject to and conditioned upon the satisfaction
of the following:
1. Fee Owner shall be a "Permitted Transferee", except that clause (i)
thereof shall be amended to read "(i) has adequate financial resources to
perform all of
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owner's obligations under and in accordance with the terms of the License
Agreement and/or the Management Agreement".
2. Fee Owner shall also enter into a management agreement with Promus
covering the Hotel for a term equal to the balance of the original term of the
Management Agreement covering the Hotel and otherwise on the terms and
conditions set forth in the Management Agreement.
In the event Fee Owner exercises its right under the terms of the
immediately preceding paragraph of this letter agreement to enable it to obtain
a new license agreement, Lessee shall not be released from its obligations under
the applicable Hotel Agreements accruing prior to the date Fee Owner obtains a
new license and enters into a new management agreement with Promus.
In connection with Lessee's execution and delivery of the License
Agreement, Apple Suites, Inc. has executed and delivered for the benefit of
Promus that certain Guaranty of even date herewith with respect to the License
Agreement (the "Guaranty"). Promus acknowledges that, in the event of actual
conflict, the terms and provisions of this letter agreement shall control over
the terms and provisions of the Guaranty. Without limiting the generality of the
foregoing, and in order to provide Apple Suites, Inc. with the full benefits
intended by the provisions of the immediately preceding sentence, Promus shall
notify Apple Suites, Inc. by certified mail not less than ten (10) days prior to
Promus's execution and delivery of any amendment or modification of the License
Agreement or of its acceptance of any voluntary surrender or termination by
Lessee of the License Agreement, other than amendments or modifications or
surrender or termination which has been requested by Fee Owner or Apple Suites,
Inc. or to which Fee Owner is a party. Nothing in the foregoing sentence shall
be deemed or construed to limit or restrict Promus's rights to terminate or
exercise any other remedy under the License Agreement in the event of a default
by Lessee thereunder, subject to the other terms and provisions of this letter
agreement.
With reference to Licensee's representation in the last sentence of
Section 1(a) of the License Agreement, Promus acknowledges that the Percentage
Lease is for a base term of less than twenty (20) years and that only upon
exercising all extension options available to Licensee, including certain
options requiring negotiation of fair market rental, will the term of the
Percentage Lease extend to the full twenty (20) years of the term of the License
Agreement. Fee Owner and Lessee acknowledge that the failure for any reason to
exercise the extension options will result in the application of the liquidated
damages provisions of Paragraph 13.f of the License Agreement if, upon the
termination of the Percentage Lease, Fee Owner or a Successor Lessee does not
obtain a new license agreement for the Hotel for a term equal to the balance of
the original term of the License Agreement, as contemplated herein.
Promus hereby confirms for the benefit of Fee Owner and Lessee that the
License Agreement shall be read with the following clarifications:
(i) with respect to the provisions of Paragraph 1.d. of the
License Agreement relating to the requirement to use particular
Supplies or that particular
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Supplies be purchased from Promus or a source designated by Promus,
such requirements shall only be imposed on the licensee under the
License Agreement to the extent Promus is imposing such requirements on
substantially all of its licensees of the System, but that with respect
to other Supplies if Lessee determines that it can purchase Supplies of
a quality at least equal to that which Promus is requiring at a price
lower than the price then being charged by Promus or its designated
supplier, Lessee may purchase such Supplies from its vendor;
(ii) with respect to the provisions of Paragraph 6.a.(19) of
the License Agreement, such provisions are not intended to preclude
Lessee or any member of an affiliated group from owning licensed hotels
of other, even competing, brands, but from owning a hotel brand,
tradename, system or chain;
(iii) with respect to the provisions of Paragraph 11 of the
License Agreement relating to change in ownership or a transfer of the
hotel, the provisions are intended to apply only to Lessee's beneficial
or equity interests or its interest in the hotel; and
(iv) with respect to the language of the second sentence of
Paragraph 13.f. of the License Agreement reading "If this Agreement is
terminated other than by the expiration of the term described in
Paragraph 13.a.,", this language is not intended to modify other
provisions of the License Agreement relating to whether or not
liquidated damages are payable under other circumstances and
accordingly shall be read as if preceded by the phrase "Subject to the
other provisions of this Agreement". In addition, liquidated damages
shall not be payable if the License Agreement is terminated as a result
of Promus's default under the License Agreement.
Promus acknowledges that, in the event of actual conflict between this
letter agreement and the License Agreement, the terms and provisions of this
letter agreement shall control over the terms and provisions of the License
Agreement. Without limiting the generality of the foregoing, (i) no transfer of
any interest in Fee Owner, or of fee ownership of the Hotel to an affiliate of
Fee Owner, shall constitute a prohibited change of ownership under the License
Agreement, subject, however, to the penultimate paragraph of this letter
agreement, (ii) no transfer of the leasehold interest of Lessee in the Hotel to
a Successor Lessee shall constitute a prohibited change of ownership under the
License Agreement, and (iii) in no event shall the initial Licensee be liable
for liquidated damages as the result of termination of the Percentage Lease or
default under the License Agreement if a Successor Lessee is supplied by Fee
Owner or Fee Owner enters into a new License Agreement following a Tax Event
Notice, and all prior curable defaults under the License Agreement are cured by
Fee Owner, as contemplated herein.
Fee Owner and Lessee agree with Promus as follows with respect to the
relationship of Promus and Lessee under the Management Agreement:
(a) Pursuant to the terms of the Percentage Lease, Fee Owner
has agreed to pay, among other things, (i) land, building and personal
property taxes
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and assessments applicable to the Hotel, (ii) premiums and charges for
property casualty insurance coverages specified in Exhibit "D" to the
Management Agreement, (iii) expenditures for capital replacements, (iv)
expenditures for maintenance and repair of underground utilities and
structural elements of the Hotel and (v) the payments of principal,
interest and other sums payable under the Acquisition Loan
(collectively, "Fee Owner Costs"). To the extent the Management
Agreement obligates or authorizes Promus to pay any Fee Owner Costs,
Promus shall pay such Fee Owner Costs on behalf of Lessee to the extent
of funds in the Hotel's bank account(s) (collectively, the "Hotel
Accounts"), including, without limitation, the Bank Account(s) and the
Reserve Fund (as such terms are defined in the Management Agreement)
subject to any limitations contained in the Management Agreement and
Fee Owner and Lessee shall make such adjustments and payments to each
other as may be necessary from time to time to take into account any
such payments. Promus shall have no duty, obligation or liability to
Fee Owner (x) to make any determination as to whether any expense
required to be paid by Promus under the Management Agreement is a Fee
Owner Cost or a cost of Lessee, or (y) to make any determination as to
whether funds in the Hotel Accounts belong to Fee Owner or Lessee, or
(z) to require that Fee Owner Costs be paid from funds which can be
identified as belonging to Fee Owner, or other costs and expenses
required to be paid by Lessee be paid from funds which can be
identified as belonging to Lessee; it being the intent of this
provision that (i) Fee Owner and Lessee shall look only to each other
and not to Promus with respect to moneys that may be owed one to the
other as consequence of Promus's performance of the Management
Agreement and (ii) Promus need only look to Lessee to pay operating
costs, including, without limitation, those designated herein as Fee
Owner Costs.
(b) Promus shall be permitted (and is hereby authorized) to
set off against any amounts owed to Promus by Lessee under the
Management Agreement and the License Agreement any funds held by Promus
pursuant to the Management Agreement, including amounts in the Hotel
Accounts, whether or not amounts are due to Fee Owner by Lessee under
the Percentage Lease.
(c) Fee Owner has approved the form of the Management
Agreement and License Agreement and agrees that Fee Owner's consent or
approval is not required with respect to the performance of any of its
rights, duties or obligations under the Management Agreement or the
License Agreement.
(d) Fee Owner hereby approves the deposit of funds into the
Reserve Account and the expenditure of funds from the Reserve Account
by Promus in accordance with the terms of the Management Agreement.
(e) To the extent required by applicable laws, Fee Owner shall
obtain and maintain (or cooperate in obtaining and maintaining) any
licenses, permits or approvals of any governmental authority necessary
to operate and manage the Hotel in accordance with the Management
Agreement.
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(f) Fee Owner acknowledges and agrees that, unless it enters
into a license agreement pursuant to a Tax Event Notice, it has no
right to use the Homewood Suites(R) "System" except as expressly set
forth in the License Agreement nor any right to use the name "Homewood
Suites" or the Homewood Suites(R) "System" as a result of Lessee
entering into the Hotel Agreements.
(g) Fee Owner acknowledges and agrees that any amounts owed to
Promus under the License Agreement and the Management Agreement are
superior to any amounts owed by Lessee to Fee Owner under the
Percentage Lease, other than amounts owed in respect of the
Subordinated Management Fee, as defined in the Management Agreement, to
the extent Lessee applies amounts received in respect of Owner's Basic
Return, as defined in the Management Agreement, in respect of amounts
owed by Lessee to Fee Owner under the Percentage Lease.
(h) Fee Owner agrees not to amend or modify the Percentage
Lease in any manner that would (i) reduce the term of the Percentage
Lease, (ii) increase the amount of rent payable by Lessee thereunder
(except as contemplated by the provisions of the Percentage Lease), or
(iii) have a material adverse effect on any of the rights, duties and
privileges of Promus under the Management Agreement. Nothing in this
paragraph (h) shall be deemed or construed to limit or restrict Fee
Owner's rights to terminate or exercise any other remedy under the
Percentage Lease in the event of a default by Lessee thereunder.
(i) Fee Owner acknowledges and agrees that Promus has no duty
or obligation to comply with any of the terms of the Percentage Lease
and that Fee Owner will look solely to Lessee with respect to such
matters.
(j) Fee Owner acknowledges and agrees that (i) no sale,
transfer or conveyance of Fee Owner's fee estate in the Hotel shall
terminate the Management Agreement, (ii) except as provided below,
neither the termination of the Percentage Lease nor the assignment of
Lessee's interest therein shall terminate the Management Agreement, and
(iii) no merger of the leasehold and fee simple estates of the Hotel
shall terminate the Management Agreement; it being the intent of Fee
Owner and Promus that the Management Agreement shall continue in effect
for the term of the Management Agreement so long as the Hotel is
operating as a Homewood Suites(R) hotel pursuant to a license
agreement and Manager is not in default of its obligations under the
Management Agreement (subject, however, to any express rights of
termination contained in the Management Agreement).
(k) Fee Owner acknowledges and agrees that Manager shall have
a right to file a separate claim in any condemnation case in accordance
with Article VIII of the Management Agreement.
(l) Fee Owner agrees that so long as the License Agreement is
in effect the casualty insurance proceeds will be applied in the manner
provided in the License Agreement.
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(m) In the event that Fee Owner terminates the Percentage
Lease and as a consequence thereof Promus terminates the License
Agreement and does not enter into a new license agreement with any
successor operator of the Hotel, Promus and Fee Owner, subject to the
payment of all amounts owed under the Management Agreement and all
amounts owed under the Acquisition Loan, shall have the right to
terminate the Management Agreement covering the Hotel. Otherwise, the
successor operator shall assume in writing the remaining term of such
Management Agreement.
Fee Owner and Lessee further agree with Promus with respect to the
Acquisition Loan that the Percentage Lease shall be subject and subordinate to
the lien of the Acquisition Mortgage Documents and to all of the terms,
conditions and provisions thereof, to all advances made or to be made
thereunder, and to any renewals, extensions, modifications or replacements
thereof, including any increases therein or supplements thereto. The foregoing
provisions shall be self-operative. However, Fee Owner and Lessee agree to
execute and deliver to Promus such other instrument as Promus shall request in
order to effectuate said provisions.
It is acknowledged and agreed that (i) Promus shall be entitled to rely
upon any written notice or request by Fee Owner made pursuant to the provisions
hereof without requirement of investigating the accuracy or authenticity of such
written notice or any facts or allegations contained therein, and (ii) Fee Owner
shall be entitled to rely upon any written notice or request by Promus made
pursuant to the provisions hereof without requirement of investigating the
accuracy or authenticity of such written notice or any facts or allegations
contained therein.
You agree to notify Promus by certified mail at 755 Crossover Lane,
Memphis, Tennessee 38117-4900, Attention: General Counsel (or such other address
as Promus may specify in a written notice to you) of any action regarding the
Hotel to: (a) terminate the Percentage Lease; (b) petition for appointment of a
Receiver or Trustee for Lessee to take any action under Federal Bankruptcy law
or similar state laws; or (c) take possession of the Hotel, through a Successor
Lessee or otherwise, without termination of the Percentage Lease.
The rights, powers and interests of Promus hereunder may be transferred
and assigned by Promus, without the prior written consent of Fee Owner, Lessee
and, if applicable, any Successor Lessee, to any person to whom the License
Agreement and Management Agreement may be assigned. The rights and obligations
of Fee Owner, Lessee and, if applicable, Successor Lessee hereunder are not
transferable without the written consent of Promus.
Subject to the foregoing limitations, this letter agreement shall
extend to, and shall bind, the respective successors and assigns of Promus, Fee
Owner, Lessee and, if applicable, any Successor Lessee, provided, however, that
in the case of Fee Owner, this letter agreement shall not extend to any
transferee of Fee Owner's fee interest in the Hotel nor to Fee Owner if Apple
Suites, Inc. is not a publicly held REIT.
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Please indicate your agreement with the terms of this letter
agreement by signing and returning four executed copies to Promus. This letter
may be executed by original signature or by signature received by telecopy in
any number of counterparts, each of which shall be original and all of which
together shall constitute and be construed as one and the same instrument.
Very truly yours,
PROMUS HOTELS, INC.
By /s/ Mariel C. Albrecht
----------------------------------
Name: Mariel C. Albrecht
Title: Senior Vice President
cc: Franchise Administration
Accepted and Agreed:
APPLE SUITES, INC.
By /s/ Glade M. Knight
----------------------------------
Name: Glade M. Knight
Title: President and Chairman
Acknowledged and Agreed:
APPLE SUITES MANAGEMENT, INC.
By /s/ Glade M. Knight
----------------------------------
Name: Glade M. Knight
Title: President, CEO and Chairman