Hersha Hospitality S-3 4-10-2007
As
filed
with the Securities and Exchange Commission on April 12, 2007
Registration
No. 333-_____
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
___________
FORM
S-3
REGISTRATION
STATEMENT UNDER
THE
SECURITIES ACT OF 1933
HERSHA
HOSPITALITY TRUST
(Exact
Name of Registrant as Specified in its Charter)
MARYLAND
|
251811499
|
(State
or other jurisdiction of incorporation or
organization)
|
(I.R.S.
Employer Identification No.)
|
44
Hersha Drive
Harrisburg,
Pennsylvania 17102
(717)
236-4400
(Address,
Including Zip Code, and Telephone Number, including
Area
Code, of Registrant’s Principal Executive Offices)
Ashish
R. Parikh
Chief
Financial Officer
44
Hersha Drive
Harrisburg,
Pennsylvania 17102
(717)
236-4400
(Name,
Address, Including Zip Code, and Telephone
Number,
Including Area Code, of Agent for Service)
_________________________
Copies
To:
Cameron
N. Cosby, Esq.
James
S. Seevers, Jr., Esq.
|
Hunton
& Williams LLP
|
Riverfront
Plaza, East Tower
|
951
E. Byrd Street
|
Richmond,
Virginia 23219-4074
|
(804)
788-8200
|
(804)
788-8218 (Facsimile)
|
_____________________________
Approximate
date of commencement of proposed sale to the public:
From
time to time after the effective date of this Registration
Statement.
If
the
only securities being registered on this Form are being offered pursuant to
dividend or interest reinvestment plans, please check the following box.
¨
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, other
than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act of 1933, please check the following box and
list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act of 1933, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ¨
If
this
Form is a registration statement pursuant to General Instruction I.D. or a
post-effective amendment thereto that shall become effective upon filing with
the Commission pursuant to Rule 462(e) under the Securities Act, check the
following box. ¨
If
this
Form is a post-effective amendment to a registration statement filed pursuant
to
General Instruction I.D. filed to register additional securities or additional
classes of securities pursuant to Rule 413(b) under the Securities Act,
check the following box. ¨
CALCULATION
OF REGISTRATION FEE
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|
|
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Title
of Each Class of Securities
To
Be Registered
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Amount
Being
Registered(1)
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Proposed
Maximum Offering Price Per Share(2)
|
Proposed
Maximum Aggregate Offering Price(2)
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Amount
of
Registration
Fee(2)
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Common
Shares of Beneficial Interest, par value $0.01 per share, issuable
upon
redemption of units of limited partnership interest
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425,486(3)
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$11.97
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$5,093,068
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$157
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(1)
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Pursuant
to Rule 416 promulgated under the Securities Act of 1933, as amended
(the
"Securities Act"), this Registration Statement shall also cover any
additional common shares which become issuable by reason of any share
dividend, share split or similar
transaction.
|
(2)
|
In
accordance with Rule 457(c) under the Securities Act, the maximum
aggregate offering price is estimated solely for the purpose of
determining the registration fee and is calculated based on the average
of
the high and low sales price of the Registrant's common share on
April 9, 2007, as reported by the American Stock
Exchange.
|
(3)
|
This
registration statement registers 425,486 common shares issuable to
the
holders of units of limited partnership interest in Hersha Hospitality
Limited Partnership, the registrant’s operating partnership
subsidiary.
|
The
registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933, as amended, or until this Registration Statement shall
become effective on such date as the Securities and Exchange Commission, acting
pursuant to such Section 8(a), may determine.
The
information in this prospectus is not complete and may be changed.
We may
not sell these securities until the registration statement filed
with the
Securities and Exchange Commission is effective. This prospectus
is not an
offer to sell these securities and is not soliciting an offer to
buy these
securities in any state where the offer or sale is not
permitted.
|
SUBJECT
TO COMPLETION, DATED APRIL 12, 2007
Hersha
Hospitality Trust
425,486
Common Shares of Beneficial Interest
This
prospectus relates to the sale of 425,486 common shares of beneficial interest
which may be offered from time to time by the holders of units of limited
partnership interest in our operating partnership, Hersha Hospitality Limited
Partnership, which have been redeemed in exchange for our common shares.
We
may
issue the 425,486 common shares covered by this prospectus to holders of units
of limited partnership interest to the extent that they tender their operating
partnership units for redemption in accordance with the partnership agreement
of
our operating partnership and we elect to issue common shares upon such
redemption. We may also elect to pay cash for operating partnership units
tendered for redemption in lieu of issuing common shares. We will not receive
any of the proceeds from sales of common shares issued upon conversion of
operating partnership units.
We
are
registering these common shares of beneficial interest for sale by the selling
shareholders named in this prospectus, or their transferees, pledgees, donees
or
successors. We will not receive any proceeds from the sale of these shares
by
the selling shareholders. The
selling shareholders may sell the common shares directly to purchasers or
through underwriters, dealers, brokers or agents designated from time to time.
Sales of common shares in a particular offering may be made on the American
Stock Exchange or in the over-the-counter market or otherwise at prices and
on
terms then prevailing, at prices related to the then current market price,
at
fixed prices or in negotiated transactions. To the extent required for any
offering, a prospectus supplement will set forth the number of common shares
then being offered, the initial offering price, the names of any underwriters,
dealers, brokers or agents and the applicable sales commission or discount.
For
a discussion of the selling shareholders and the selling shareholders’ plan of
distribution, see “The Selling Shareholders” and “Plan of Distribution” on
pages 18 and 53, respectively.
Our
common shares are listed on the American Stock Exchange under the symbol “HT.”
The last reported sale price of our common shares on April 11, 2007 was $12.06
per share.
For
a
discussion of certain risks associated with an investment in our securities,
see
“Risk Factors” beginning on page 4 of this prospectus and in our Annual
Report on Form 10-K for the year ended December 31, 2006 and our other periodic
reports and other information that we file from time to time with the Securities
and Exchange Commission.
____________________
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
____________________
The
date
of this prospectus is April __, 2007.
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1
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1
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2
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2
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4
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18
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18
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20
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23
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28
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53
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55
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55
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55
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56
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____________________
You
should rely only on the information contained or incorporated by reference
in
this prospectus and any applicable prospectus supplement. We have not authorized
anyone else to provide you with different information. If anyone provides you
with different or inconsistent information, you should not rely on it. We will
not make an offer to sell these securities in any state where the offer or
sale
is not permitted. You should assume that the information appearing in this
prospectus, as well as the information we previously filed with the Securities
and Exchange Commission and incorporated by reference, is accurate only as
of
the date of the documents containing the information.
This
prospectus is part of a shelf registration statement. The selling shareholders
named in this prospectus may sell, from time to time, in one or more offerings,
common shares of beneficial interest described in this prospectus. To the extent
required for any offering, a prospectus supplement will set forth the number
of
common shares being offered, the initial offering price, the names of any
underwriters, dealers, brokers or agents and the applicable sales commission
or
discount. The prospectus supplement may also add, update or change information
contained in this prospectus. You should read both this prospectus and any
prospectus supplement together with the additional information described under
the heading "How to Obtain More Information.”
You
should rely only on the information contained or incorporated by reference
into
this prospectus and any applicable prospectus supplement. We have not authorized
anyone to provide you with different information. If anyone provides you with
different or inconsistent information, you should not rely on it. We will not
make an offer to sell the common shares described in this prospectus or any
applicable prospectus supplement in any state where the offer or sale is not
permitted. You should assume that the information appearing in this prospectus,
as well as the information we previously filed with the SEC and incorporate
by
reference, is accurate only as of the date of the documents containing the
information.
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING
STATEMENTS
This
prospectus and the information incorporated by reference into it contains
certain “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933, as amended, or Securities Act, and Section 21E of the
Securities Exchange Act of 1934, as amended, or Exchange Act, including, without
limitation, statements containing the words “believes,” “anticipates,”
“expects,” “estimates,” “intends,” “plans,” “projects,” “will continue” or other
words that describe our expectations of the future. We have based these
forward-looking statements on our current expectations and projections about
future events and trends affecting the financial condition of our business,
which may prove to be incorrect. These forward-looking statements relate to
future events and our future financial performance, and involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance, achievements or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. You should specifically consider
the
factors identified under the caption “Risk Factors” in this prospectus and in
our Annual Report on Form 10-K and the various other factors identified in
or
incorporated by reference into this prospectus and any other documents filed
by
us with the Securities and Exchange Commission (SEC) that could cause actual
results to differ materially from our forward-looking statements.
Except
to
the extent required by applicable law, we undertake no obligation to, and do
not
intend to, update any forward-looking statements or any statements included
in
the “Risk Factors” section of this prospectus or to publicly announce the result
of any revisions to any of the forward-looking statements contained herein
to
reflect future events or developments. A number of risk factors are associated
with the conduct of our business, and the risks discussed in the “Risk Factors”
section of this prospectus and in our Annual Report on Form 10-K may not be
exhaustive. New risks and uncertainties arise from time to time, and we cannot
predict these events or how they may affect us. All forward-looking statements
should be read with caution.
References
to “our company,” “we,” and “our” in this prospectus mean Hersha Hospitality
Trust, including, unless the context otherwise requires (including the
discussion of the federal income tax treatment of Hersha Hospitality Trust
and
its shareholders), our operating partnership and other direct and indirect
subsidiaries. Our “operating partnership” or “HHLP” refers to Hersha Hospitality
Limited Partnership, a Virginia limited partnership. “HHMLP” refers to Hersha
Hospitality Management, L.P. and its subsidiaries, which are the entities that
manage many of our wholly owned hotels and many of the hotels owned by our
joint
ventures. “Common shares” means our common shares of beneficial interest, par
value $0.01 per share. The term “you” refers to a potential investor in the
securities described in this prospectus.
All
brand
names, trademarks and service marks appearing in this prospectus are the
property of their respective owners. This prospectus contains registered
trademarks owned or licensed to companies other than us, including but not
limited to Comfort Inn®, Comfort Suites®, Courtyard® by Marriott®, DoubleTree®,
Doubletree Suites®, Fairfield Inn ®, Fairfield Inn® by Marriott®, Four Points by
Sheraton ®, Hampton Inn®, Hawthorne Suites®, Hilton ®, Hilton Garden Inn ®,
Hilton Hotels®, Holiday Inn®, Holiday Inn Express®, Homewood Suites®, Homewood
Suites by Hilton®, Hyatt Summerfield Suites®, Mainstay Suites®, Marriott ®,
Marriott Hotels & Resorts®, Residence Inn ®, Residence Inn® by Marriott®,
Sheraton Four Points®, Sleep Inn®, Springhill Suites ®, and Springhill Suites by
Marriott®, none of which, in any way, are participating in or endorsing this
offering and shall not in any way be deemed an issuer or underwriter of the
securities issued under this prospectus, and shall not have any liability or
responsibility for any financial statements or other financial information
contained or incorporated by reference in this prospectus.
Hersha
Hospitality Trust is a self-advised Maryland real estate investment trust,
or
REIT, that was organized in 1998 and completed its initial public offering
in
January of 1999. Our common shares are traded on the American Stock Exchange
under the symbol “HT”. We invest primarily in institutional grade hotels in
central business districts, primary suburban office markets and stable
destination and secondary markets in the Northeastern United States and select
markets on the West Coast. Our primary strategy is to continue to acquire high
quality, upscale, mid-scale and extended-stay hotels in metropolitan markets
with high barriers to entry in the Northeastern United States and other markets
with similar characteristics.
As
of
December 31, 2006, our portfolio consisted of 48 wholly owned limited and full
service properties and 18 limited and full service properties in which we have
joint venture investments. Of the 18 limited and full service properties in
which we have our joint ventures investments, four are consolidated. These
66
properties, with a total of 8,641 rooms, are located in Arizona, California,
Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New York, North
Carolina, Pennsylvania, Rhode Island and Virginia and operate under leading
brands, such as Comfort Inn®, Comfort Suites®, Courtyard® by Marriott®,
DoubleTree®, Doubletree Suites®, Fairfield Inn ®, Fairfield Inn® by Marriott®,
Four Points by Sheraton ®, Hampton Inn®, Hawthorne Suites®, Hilton ®, Hilton
Garden Inn ®, Hilton Hotels®, Holiday Inn®, Holiday Inn Express®, Homewood
Suites®, Homewood Suites by Hilton®, Hyatt Summerfield Suites®, Mainstay
Suites®, Marriott ®, Marriott Hotels & Resorts®, Residence Inn ®, Residence
Inn® by Marriott®, Sheraton Four Points®, Sleep Inn®, Springhill Suites ®, and
Springhill Suites by Marriott®.
We
are
structured as an umbrella partnership REIT, or UPREIT, and we own our hotels
and
our investments in joint ventures through our operating partnership, for
which
we serve as general partner. Our hotels are managed by qualified independent
management companies, including HHMLP. HHMLP is a private management company
owned by certain of our trustees, officers and other third party investors.
All
but one of our wholly owned hotels are leased to 44 New England Management
Company, or 44 New England, our wholly-owned taxable REIT subsidiary, or
TRS. In
addition, all of the hotels we own through investments in joint ventures
are
leased to TRSs owned by the respective venture or to corporations owned in
part
by our wholly owned TRS. We lease one hotel to a third party
operator/lessee.
Our
principal executive office is located at 44 Hersha Drive, Harrisburg,
Pennsylvania 17102. Our telephone number is (717) 236-4400.
Investment
in our securities involves risk. Before acquiring any securities offered
pursuant to this prospectus and any accompanying prospectus supplement, you
should carefully consider the risks described below as well as the information
contained, or incorporated by reference, in this prospectus and any accompanying
prospectus supplement, including, without limitation, the risks described in
our
most recent Annual Report on Form 10-K, in our Quarterly Reports on
Form 10-Q, and as described in our other filings with the SEC. The
occurrence of any of these risks might cause you to lose all or a part of your
investment in our securities. Please also refer to the section above entitled
“Cautionary Statement Concerning Forward-Looking Statements.”
RISKS
RELATING TO OUR BUSINESS AND OPERATIONS
We
have previously determined that we had material weaknesses related to our
internal control over financial reporting.
In
connection with our annual assessment of internal control over financial
reporting for the year ended December 31, 2005, management identified certain
material weaknesses in internal control over financial reporting, which are
described in our Annual Report on Form 10-K for the year ended December 31,
2005. In response to the material weaknesses identified by the Company, the
Company and HHMLP have taken certain remedial measures. As a result of these
remedial measures, we believe such internal controls are designed and operating
effectively; however, we cannot guarantee that in the future we will not
discover additional material weaknesses in internal control over financial
reporting.
We
may be unable to integrate acquired hotels into our operations or otherwise
manage our planned growth, which may adversely affect our operating
results.
We
have
recently acquired a substantial number of hotels. We cannot assure you that
we,
HHMLP or other management companies we employ will be able to adapt our
management, administrative, accounting and operational systems and arrangements,
or hire and retain sufficient operational staff to successfully integrate these
investments into our portfolio and manage any future acquisitions of additional
assets without operational disruptions or unanticipated costs. Acquisition
of
hotels generates additional operating expenses that we will be required to
pay.
As we acquire additional hotels, we will be subject to the operational risks
associated with owning new lodging properties. Our failure to integrate
successfully any future acquisitions into our portfolio could have a material
adverse effect on our results of operations and financial condition and our
ability to pay dividends to shareholders or make other payments in respect
of
securities issued by us.
Acquisition
of hotels with limited operating history may not achieve desired
results.
Many
of
our recent acquisitions are newly-developed hotels. Newly-developed or
newly-renovated hotels do not have the operating history that would allow our
management to make pricing decisions in acquiring these hotels based on
historical performance. The purchase prices of these hotels are based upon
management’s expectations as to the operating results of such hotels, subjecting
us to risks that such hotels may not achieve anticipated operating results
or
may not achieve these results within anticipated time frames. As a result,
we
may not be able to generate enough cash flow from these hotels to make debt
payments or pay operating expenses. In addition, room revenues may be less
than
that required to provide us with our anticipated return on investment. In either
case, the amounts available for distribution to our shareholders could be
reduced.
Our
acquisitions may not achieve expected performance, which may harm our financial
condition and operating results.
We
anticipate that acquisitions will largely be financed with the net proceeds
of
securities offerings and through externally generated funds such as borrowings
under credit facilities and other secured and unsecured debt financing.
Acquisitions entail risks that investments will fail to perform in accordance
with expectations and that estimates of the cost of improvements necessary
to
acquire and market properties will prove inaccurate, as well as general
investment risks associated with any new real estate investment. Because we
must
distribute annually at least 90% of our taxable income each year to maintain
our
qualification as a REIT, our ability to rely upon income or cash flow from
operations to finance our growth and acquisition activities will be limited.
Accordingly, were we unable to obtain funds from borrowings or the capital
markets to finance our growth and acquisition activities, our ability to grow
could be curtailed, amounts available for distribution to shareholders could
be
adversely affected and we could be required to reduce
distributions.
We
own a limited number of hotels and significant adverse changes at one hotel
may
impact our ability to make distributions to
shareholders.
As
of
December 31, 2006, our portfolio consisted of 48 wholly-owned limited and full
service properties and joint venture investments in 18 hotels with a total
of
8,641 rooms. Significant adverse changes in the operations of any one hotel
could have a material adverse effect on our financial performance and,
accordingly, on our ability to make expected distributions to our
shareholders.
We
focus on acquiring hotels operating under a limited number of franchise brands,
which creates greater risk as the investments are more
concentrated.
We
place
particular emphasis in our acquisition strategy on hotels similar to our current
hotels. We invest in hotels operating under a few select franchises and
therefore will be subject to risks inherent in concentrating investments in
a
particular franchise brand, which could have an adverse effect on amounts
available for distribution to shareholders. These risks include, among others,
the risk of a reduction in hotel revenues following any adverse publicity
related to a specific franchise brand.
Most
of our hotels are located in the Eastern United States and many are located
in
the area from Pennsylvania to Connecticut, which may increase the effect of
any
regional or local economic conditions.
Most
of
our hotels are located in the Eastern United States. Twenty-eight of our wholly
owned hotels and twelve of our joint venture hotels are located in the states
of
Pennsylvania, New Jersey, New York and Connecticut. As a result, regional or
localized adverse events or conditions, such as an economic recession around
these hotels, could have a significant adverse effect on our operations, and
ultimately on the amounts available for distribution to
shareholders.
We
face risks associated with the use of debt, including refinancing
risk.
At
December 31, 2006, we had long-term debt, excluding capital leases, outstanding
of $556.5 million. We may borrow additional amounts from the same or other
lenders in the future. Some of these additional borrowings may be secured by
our
hotels. Our strategy is to maintain target debt levels of approximately 60%
of
the total purchase price of our hotels both on an individual and aggregate
basis, and our Board of Trustees’ policy is to limit indebtedness to no more
than 67% of the fair market value of the hotels in which we have invested.
However, our declaration of trust (as amended and restated, our “Declaration of
Trust”) does not limit the amount of indebtedness we may incur. We cannot assure
you that we will be able to meet our debt service obligations and, to the extent
that we cannot, we risk the loss of some or all of our hotels to foreclosure.
There is also a risk that we may not be able to refinance existing debt or
that
the terms of any refinancing will not be as favorable as the terms of the
existing debt. If principal payments due at maturity cannot be refinanced,
extended or repaid with proceeds from other sources, such as new equity capital
or sales of properties, our cash flow may not be sufficient to repay all
maturing debt in years when significant “balloon” payments come
due.
We
do not operate our hotels and, as a result, we do not have complete control
over
implementation of our strategic decisions.
In
order
for us to satisfy certain REIT qualification rules, we cannot directly operate
any of our hotels. Instead, we must engage an independent management company
to
operate our hotels. As of December 31, 2006, our TRSs and our joint venture
partnerships have engaged independent management companies as the property
managers for all of our wholly owned hotels leased to our TRSs and the
respective hotels for the joint ventures, as required by the REIT qualification
rules. The management companies operating the hotels make and implement
strategic business decisions with respect to these hotels, such as decisions
with respect to the repositioning of a franchise or food and beverage operations
and other similar decisions. Decisions made by the management companies
operating the hotels may not be in the best interests of a particular hotel
or
of our company. Accordingly, we cannot assure you that the management companies
will operate our hotels in a manner that is in our best interests.
We
depend on a limited number of key personnel.
We
depend
on the services of our existing senior management team, including Jay H. Shah,
Neil H. Shah, Ashish R. Parikh and Michael R. Gillespie, to carry out our
business and investment strategies. As we expand, we will continue to need
to
attract and retain qualified additional senior management. We have employment
contracts with certain of our senior management; however, the employment
agreements may be terminated under certain circumstances. The termination of
an
employment agreement and the loss of the services of any of our key management
personnel, or our inability to recruit and retain qualified personnel in the
future, could have an adverse effect on our business and financial
results.
We
face increasing competition for the acquisition of hotel properties and other
assets, which may impede our ability to make future acquisitions or may increase
the cost of these acquisitions.
We
face
competition for investment opportunities in high quality, upscale and mid-scale
limited service and extended-stay hotels from entities organized for purposes
substantially similar to our objectives, as well as other purchasers of hotels.
We compete for such investment opportunities with entities that have
substantially greater financial resources than we do, including access to
capital or better relationships with franchisors, sellers or lenders. Our
competitors may generally be able to accept more risk than we can manage
prudently and may be able to borrow the funds needed to acquire hotels.
Competition may generally reduce the number of suitable investment opportunities
offered to us and increase the bargaining power of property owners seeking
to
sell.
We
may engage in hedging transactions, which can limit our gains and increase
exposure to losses.
We
may
enter into hedging transactions to protect us from the effects of interest
rate
fluctuations on floating rate debt and also to protect our portfolio of mortgage
assets from interest rate and prepayment rate fluctuations. Our hedging
transactions may include entering into interest rate swaps, caps, and floors,
options to purchase such items, and futures and forward contracts. Hedging
activities may not have the desired beneficial impact on our results of
operations or financial condition. No hedging activity can completely insulate
us from the risks associated with changes in interest rates and prepayment
rates. Moreover, interest rate hedging could fail to protect us or could
adversely affect us because, among other things:
· Available
interest rate hedging may not correspond directly with the interest rate risk
for which protection is sought.
· The
duration of the hedge may not match the duration of the related
liability.
· The
party
owning money in the hedging transaction may default on its obligation to
pay.
· The
credit quality of the party owing money on the hedge may be downgraded to such
an extent that it impairs our ability to sell or assign our side of the hedging
transaction.
· The
value
of derivatives used for hedging may be adjusted from time to time in accordance
with accounting rules to reflect changes in fair value.
Downward
adjustments, or “mark-to-market losses,” would reduce our shareholders’
equity.
Hedging
involves risk and typically involves costs, including transaction costs, which
may reduce returns on our investments. These costs increase as the period
covered by the hedging increases and during periods of rising and volatile
interest rates. These costs will also limit the amount of cash available for
distribution to shareholders. The REIT qualification rules may also limit our
ability to enter into hedging transactions. We generally intend to hedge as
much
of our interest rate risk as our management determines is in our best interests
given the cost of such hedging transactions and the requirements applicable
to
REITs. If we are unable to hedge effectively because of the cost of such hedging
transactions or the limitations imposed by the REIT rules, we will face greater
interest risk exposure than may be commercially prudent.
If
we cannot access the capital markets, we may not be able to grow our Company
at
our historical growth rates.
We
may
not be able to access the capital markets to obtain capital to fund future
acquisitions and investments. If we lack the capital to make future acquisitions
or investments, we may not be able to continue to grow at historical
rates.
RISKS
RELATING TO CONFLICTS OF INTEREST
Due
to conflicts of interest, many of our existing agreements may not have been
negotiated on an arm’s-length basis and may not be in our best
interest.
Some
of
our officers and trustees have ownership interests in HHMLP and in entities
with
which we have entered into transactions, including hotel acquisitions and
dispositions and certain financings. Consequently, the terms of our agreements
with those entities, including hotel contribution or purchase agreements, the
Administrative Services Agreement between us and HHMLP pursuant to which HHMLP
provides certain administrative services, the Option Agreement between the
operating partnership and some of the trustees and officers and our property
management agreements with HHMLP may not have been negotiated on an arm’s-length
basis and may not be in the best interest of all our shareholders.
Conflicts
of interest with other entities may result in decisions that do not reflect
our
best interests.
The
following officers and trustees own collectively approximately 94% of HHMLP:
Hasu P. Shah, Jay H. Shah, Neil H. Shah, David L. Desfor, K.D. Patel and Kiran
P. Patel. The following officers and trustees serve as officers of HHMLP: David
L. Desfor, Kiran P. Patel and K.D. Patel. Conflicts of interest may arise in
respect of the ongoing acquisition, disposition and operation of our hotels
including, but not limited to, the enforcement of the contribution and purchase
agreements, the Administrative Services Agreement, the Option Agreement and
our
property management agreements with HHMLP. Consequently, the interests of
shareholders may not be fully represented in all decisions made or actions
taken
by our officers and trustees.
Conflicts
of interest relating to sales or refinancing of hotels acquired from some of
our
trustees and officers may lead to decisions that are not in our best
interest.
Some
of
our trustees and officers have unrealized gains associated with their interests
in the hotels we have acquired from them and, as a result, any sale of these
hotels or refinancing or prepayment of principal on the indebtedness assumed
by
us in purchasing these hotels may cause adverse tax consequences to such of
our
trustees and officers. Therefore, our interests and the interests of these
individuals may be different in connection with the disposition or refinancing
of these hotels.
Additional
hotels owned or acquired by some of our trustees and officers may hinder these
individuals from spending adequate time on our
business.
Some
of
our trustees and officers own hotels and may develop or acquire new hotels,
subject to certain limitations. Such ownership, development or acquisition
activities may materially affect the amount of time these officers and trustees
devote to our affairs. Some of our trustees and officers operate hotels that
are
not owned by us, which may materially affect the amount of time that they devote
to managing our hotels. Pursuant to the Option Agreement, as amended, we have
an
option to acquire any hotels developed by our officers and
trustees.
Need
for certain consents from the limited partners may not result in decisions
advantageous to shareholders.
Under
our
operating partnership’s amended and restated partnership agreement, the holders
of at least two-thirds of the interests in the partnership must approve a sale
of all or substantially all of the assets of the partnership or a merger or
consolidation of the partnership. Some of our officers and trustees own an
approximate 7.96% interest in the operating partnership on a fully-diluted
basis. Their large ownership percentage may make it less likely that a merger
or
sale of our company that would be in the best interests of our shareholders
will
be approved.
RISKS
RELATING TO OUR CORPORATE STRUCTURE
Our
ownership limitation may restrict business combination
opportunities.
To
qualify as a REIT under the Internal Revenue Code, no more than 50% of the
value
of our outstanding shares of beneficial interest may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Internal Revenue
Code to include certain entities) during the last half of each taxable year.
To
preserve our REIT qualification, our Declaration of Trust generally prohibits
direct or indirect ownership of more than 9.9% of (i) the number of outstanding
common shares of any class or series of common shares or (ii) the number of
outstanding preferred shares of any class or series of preferred shares.
Generally, common shares owned by affiliated owners will be aggregated for
purposes of the ownership limitation. The ownership limitation could have the
effect of delaying, deterring or preventing a change in control or other
transaction in which holders of common shares might receive a premium for their
common shares over the then prevailing market price or which such holders might
believe to be otherwise in their best interests.
The
Declaration of Trust contains a provision that creates staggered terms for
our
Board of Trustees.
Our
Board
of Trustees is divided into two classes. The terms of the first and second
classes expire in 2008 and 2007, respectively. Trustees of each class are
elected for two-year terms upon the expiration of their current terms and each
year one class of trustees will be elected by the shareholders. The staggered
terms of trustees may delay, deter or prevent a tender offer, a change in
control of us or other transaction, even though such a transaction might be
in
the best interest of the shareholders.
Maryland
Business Combination Law may discourage a third party from acquiring
us.
Under
the
Maryland General Corporation Law, as amended (MGCL), as applicable to REITs,
certain “business combinations” (including certain issuances of equity
securities) between a Maryland REIT and any person who beneficially owns ten
percent or more of the voting power of the trust’s shares, or an affiliate
thereof, are prohibited for five years after the most recent date on which
this
shareholder acquired at least ten percent of the voting power of the trust’s
shares. Thereafter, any such business combination must be approved by two
super-majority shareholder votes unless, among other conditions, the trust’s
common shareholders receive a minimum price (as defined in the MGCL) for their
shares and the consideration is received in cash or in the same form as
previously paid by the interested shareholder for its common shares. These
provisions could delay, deter or prevent a change of control or other
transaction in which holders of our equity securities might receive a premium
for their shares above then-current market prices or which such shareholders
otherwise might believe to be in their best interests.
Our
Board of Trustees may change our investment and operational policies without
a
vote of the common shareholders.
Our
major
policies, including our policies with respect to acquisitions, financing,
growth, operations, debt limitation and distributions, are determined by our
Board of Trustees. The Trustees may amend or revise these and other policies
from time to time without a vote of the holders of the common
shares.
Our
Board of Trustees and management make decisions on our behalf, and shareholders
have limited management rights.
Our
shareholders have no right or power to take part in our management except
through the exercise of voting rights on certain specified matters. The board
of
trustees is responsible for our management and strategic business direction,
and
our management is responsible for our day-to-day operations. Certain policies
of
our board of trustees may not be consistent with the immediate best interests
of
our securityholders.
Holders
of our outstanding Series A preferred shares have dividend, liquidation, and
other rights that are senior to the rights of the holders of our common
shares.
Our
Board
of Trustees has the authority to designate and issue preferred shares with
liquidation, dividend and other rights that are senior to those of our common
shares. As of December 31, 2006, 2,400,000 shares of our Series A preferred
shares were issued and outstanding. The aggregate liquidation preference with
respect to the outstanding preferred shares is approximately $60.0 million,
and
annual dividends on our outstanding preferred shares are approximately $4.8
million. Holders of our Series A preferred shares are entitled to cumulative
dividends before any dividends may be declared or set aside on our common
shares. Upon our voluntary or involuntary liquidation, dissolution or winding
up, before any payment is made to holders of our common shares, holders of
our
Series A preferred shares are entitled to receive a liquidation preference
of
$25.00 per share plus any accrued and unpaid distributions. This will reduce
the
remaining amount of our assets, if any, available to distribute to holders
of
our common shares. In addition, holders of our Series A preferred shares have
the right to elect two additional trustees to our Board of Trustees whenever
dividends are in arrears in an aggregate amount equivalent to six or more
quarterly dividends, whether or not consecutive.
Our
Board of Trustees may issue additional shares that may cause dilution or prevent
a transaction that is in the best interests of our
shareholders.
Our
Declaration of Trust authorizes the Board of Trustees, without shareholder
approval, to:
· amend
the
Declaration of Trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of beneficial interest of any class
or series that we have the authority to issue;
· cause
us
to issue additional authorized but unissued common shares or preferred shares;
and
· classify
or reclassify any unissued common or preferred shares and to set the
preferences, rights and other terms of such classified or reclassified shares,
including the issuance of additional common shares or preferred shares that
have
preference rights over the common shares with respect to dividends, liquidation,
voting and other matters.
Any
one
of these events could cause dilution to our common shareholders, delay, deter
or
prevent a transaction or a change in control that might involve a premium price
for the common shares or otherwise not be in the best interest of holders of
common shares.
Future
offerings of equity securities, which would dilute our existing shareholders
and
may be senior to our common shares for the purposes of dividend distributions,
may adversely affect the market price of our common
shares.
In
the
future, we may attempt to increase our capital resources by making additional
offerings of equity securities, including classes of preferred or common shares.
Upon liquidation, holders of our preferred shares and lenders with respect
to
other borrowings will receive a distribution of our available assets prior
to
the holders of our common shares. Additional equity offerings may dilute the
holdings of our existing shareholders or reduce the market price of our common
shares, or both. Our preferred shares, if issued, could have a preference on
liquidating distributions or a preference on dividend payments that could limit
our ability to make a dividend distribution to the holders of our common shares.
Because our decision to issue securities in any future offering will depend
on
market conditions and other factors beyond our control, we cannot predict or
estimate the amount, timing or nature of our future offerings. Thus, our
shareholders bear the risk of our future offerings reducing the market price
of
our common shares and diluting their share holdings in us.
There
are no assurances of our ability to make distributions in the
future.
We
intend
to pay quarterly dividends and to make distributions to our shareholders in
amounts such that all or substantially all of our taxable income in each year,
subject to certain adjustments, is distributed. However, our ability to pay
dividends may be adversely affected by the risk factors described in this
prospectus. All distributions will be made at the discretion of our Board of
Trustees and will depend upon our earnings, our financial condition, maintenance
of our REIT status and such other factors as our board may deem relevant from
time to time. There are no assurances of our ability to pay dividends in the
future. In addition, some of our distributions may include a return of
capital.
An
increase in market interest rates may have an adverse effect on the market
price
of our securities.
One
of
the factors that investors may consider in deciding whether to buy or sell
our
securities is our dividend rate as a percentage of our share or unit price,
relative to market interest rates. If market interest rates increase,
prospective investors may desire a higher dividend or interest rate on our
securities or seek securities paying higher dividends or interest. The market
price of our common shares likely will be based primarily on the earnings and
return that we derive from our investments and income with respect to our
properties and our related distributions to shareholders, and not from the
market value or underlying appraised value of the properties or investments
themselves. As a result, interest rate fluctuations and capital market
conditions can affect the market price of our common shares. For instance,
if
interest rates rise without an increase in our dividend rate, the market price
of our common shares could decrease because potential investors may require
a
higher dividend yield on our common shares as market rates on interest-bearing
securities, such as bonds, rise. In addition, rising interest rates would result
in increased interest expense on our variable rate debt, thereby adversely
affecting cash flow and our ability to service our indebtedness and pay
dividends.
RISKS
RELATED TO OUR TAX STATUS
If
we fail to qualify as a REIT, our dividends will not be deductible to us, and
our income will be subject to taxation.
We
have
operated and intend to continue to operate so as to qualify as a REIT for
federal income tax purposes. Our continued qualification as a REIT will depend
on our continuing ability to meet various requirements concerning, among other
things, the ownership of our outstanding shares of beneficial interest, the
nature of our assets, the sources of our income, and the amount of our
distributions to our shareholders. If we were to fail to qualify as a REIT
in
any taxable year and do not qualify for certain statutory relief provisions,
we
would not be allowed a deduction for distributions to our shareholders in
computing our taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on our taxable income at
regular corporate rates. Unless entitled to relief under certain Internal
Revenue Code provisions, we also would be disqualified from treatment as a
REIT
for the four taxable years following the year during which qualification was
lost. As a result, amounts available for distribution to shareholders would
be
reduced for each of the years involved. Although we currently intend to operate
in a manner designed to qualify as a REIT, it is possible that future economic,
market, legal, tax or other considerations may cause the trustees, with the
consent of holders of two-thirds of the outstanding shares, to revoke the REIT
election.
Failure
to make required distributions would subject us to
tax.
In
order
to qualify as a REIT, each year we must distribute to our shareholders at least
90% of our REIT taxable income, determined without regard to the deduction
for
dividends paid and excluding any net capital gain. To the extent that we satisfy
the distribution requirement, but distribute less than 100% of our taxable
income, we will be subject to federal corporate income tax on our undistributed
income. In addition, we will incur a 4% nondeductible excise tax on the amount,
if any, by which our distributions in any year are less than the sum
of:
|
·
|
85%
of our net ordinary income for that
year;
|
|
·
|
95%
of our net capital gain net income for that year;
and
|
|
·
|
100%
of our undistributed taxable income from prior
years.
|
We
have
paid out, and intend to continue to pay out, our income to our shareholders
in a
manner intended to satisfy the distribution requirement and to avoid corporate
income tax and the 4% nondeductible excise tax. Differences in timing between
the recognition of income and the related cash receipts or the effect of
required debt amortization payments could require us to borrow money or sell
assets to pay out enough of our taxable income to satisfy the distribution
requirement and to avoid corporate income tax and the 4% nondeductible excise
tax in a particular year. In the past we have borrowed, and in the future we
may
borrow, to pay distributions to our shareholders and the limited partners of
our
operating partnership. Such borrowings subject us to risks from borrowing as
described herein.
The
taxation of corporate dividends may adversely affect the value of our common
shares.
Legislation
enacted in 2003 and 2006, among other things, generally reduced to 15% the
maximum marginal rate of tax payable by domestic noncorporate taxpayers on
dividends received from a regular C corporation and certain Foreign corporations
through 2010. This reduced tax rate, however, does not apply to dividends paid
to domestic noncorporate taxpayers by a REIT on its shares, except for certain
limited amounts. Although the earnings of a REIT that are distributed to its
shareholders are still generally subject to less federal income taxation than
earnings of a non-REIT C corporation that are distributed to its shareholders
net of corporate-level income tax, this legislation could cause domestic
noncorporate investors to view the shares of regular C corporations as more
attractive relative to the shares of a REIT than was the case prior to the
enactment of the legislation, because the dividends from regular C corporations
are generally taxed at a lower rate while dividends from REITs are generally
taxed at the same rate as the individual’s other ordinary income. We cannot
predict what effect, if any, the enactment of this legislation may have on
the
value of the shares of REITs in general or on our shares in particular, either
in terms of price or relative to other investments.
The
U.S. federal income tax laws governing REITs are
complex.
We
intend
to continue to operate in a manner that will qualify us as a real estate
investment trust, or REIT, under the U.S. federal income tax laws. The REIT
qualification requirements are extremely complex, however, and interpretations
of the U.S. federal income tax laws governing qualification as a REIT are
limited. Accordingly, we cannot be certain that we will be successful in
operating so we can continue to qualify as a REIT. At any time, new laws,
interpretations, or court decisions may change the federal tax laws or the
U.S.
federal income tax consequences of our qualification as a REIT.
Complying
with REIT requirements may force us to sell otherwise attractive
investments.
To
qualify as a REIT, we must satisfy certain requirements with respect to the
character of our assets. If we fail to comply with these requirements at the
end
of any calendar quarter, we must correct such failure within 30 days after
the
end of the calendar quarter (by, possibly, selling assets not withstanding
their
prospects as an investment) to avoid losing our REIT status. If we fail to
comply with these requirements at the end of any calendar quarter, and the
failure exceeds a de minimis threshold, we may be able to preserve our REIT
status if (a) the failure was due to reasonable cause and not to willful
neglect, (b) we dispose of the assets causing the failure within six months
after the last day of the quarter in which we identified the failure, (c) we
file a schedule with the IRS describing each asset that caused the failure,
and
(d) we pay an additional tax of the greater of $50,000 or the product of the
highest applicable tax rate multiplied by the net income generated on those
assets. As a result, we may be required to liquidate otherwise attractive
investments.
Our
share ownership limitation may prevent certain transfers of our
shares.
In
order
to maintain our qualification as a REIT, not more than 50% in value of our
outstanding shares of beneficial interest may be owned, directly or indirectly,
by five or fewer individuals (as defined in the Internal Revenue Code to include
certain entities). Our Declaration of Trust prohibits direct or indirect
ownership (taking into account applicable ownership provisions of the Internal
Revenue Code) of more than (a) 9.9% of the aggregate number of outstanding
common shares of any class or series or (b) 9.9% of the aggregate number of
outstanding preferred shares of any class or series of outstanding preferred
shares by any shareholder or group (the “Ownership Limitation”). Generally, the
shares of beneficial interest owned by related or affiliated owners will be
aggregated for purposes of the Ownership Limitation. Any transfer of shares
of
beneficial interest that would violate the Ownership Limitation, cause us to
have fewer than 100 shareholders, cause us to be “closely held” within the
meaning of Section 856(h) of the Internal revenue Code or cause us to own,
directly or indirectly, 10% or more of the ownership interest in any tenant
(other than a taxable REIT subsidiary) will be void, the intended transferee
of
such shares will be deemed never to have had an interest in such shares, and
such shares will be designated “shares-in-trust.” Further, we will be deemed to
have been offered shares-in-trust for purchase at the lesser of the market
price
(as defined in the Declaration of Trust) on the date we accept the offer and
the
price per share in the transaction that created such shares-in-trust (or, in
the
case of a gift, devise or non-transfer event (as defined in the Declaration
of
Trust), the market price on the date of such gift, devise or non-transfer
event). Therefore, the holder of shares of beneficial interest in excess of
the
Ownership Limitation will experience a financial loss when such shares are
purchased by us, if the market price falls between the date of purchase and
the
date of redemption.
We
have,
in limited instances from time to time, permitted certain owners to own shares
in excess of the Ownership Limitation. The Board of Trustees has waived the
Ownership Limitation for such owners after following procedures set out in
our
Declaration of Trust, under which the owners requesting the waivers provided
certain information and our counsel provided certain legal opinions. These
waivers established levels of permissible share ownership for the owners
requesting the waivers that are higher than the Ownership Limitation. If the
owners acquire shares in excess of the higher limits, those shares are subject
to the risks described above in the absence of further waivers. The Board of
Trustees is not obligated to grant such waivers and has no current intention
to
do so with respect to any owners who (individually or aggregated as the
Declaration of Trust requires) do not currently own shares in excess of the
Ownership Limitation.
RISKS
RELATED TO THE HOTEL INDUSTRY
The
value of our hotels depends on conditions beyond our
control.
Our
hotels are subject to varying degrees of risk generally incident to the
ownership of hotels. The underlying value of our hotels, our income and ability
to make distributions to our shareholders are dependent upon the operation
of
the hotels in a manner sufficient to maintain or increase revenues in excess
of
operating expenses. Hotel revenues may be adversely affected by adverse changes
in national economic conditions, adverse changes in local market conditions
due
to changes in general or local economic conditions and neighborhood
characteristics, competition from other hotels, changes in interest rates and
in
the availability, cost and terms of mortgage funds, the impact of present or
future environmental legislation and compliance with environmental laws, the
ongoing need for capital improvements, particularly in older structures, changes
in real estate tax rates and other operating expenses, adverse changes in
governmental rules and fiscal policies, civil unrest, acts of terrorism, acts
of
God, including earthquakes, hurricanes and other natural disasters, acts of
war,
adverse changes in zoning laws, and other factors that are beyond our control.
In particular, general and local economic conditions may be adversely affected
by the recent terrorist incidents in New York and Washington, D.C. Our
management is unable to determine the long-term impact, if any, of these
incidents or of any acts of war or terrorism in the United States or worldwide,
on the U.S. economy, on us or our hotels or on the market price of our common
shares.
Our
hotels are subject to general hotel industry operating risks, which may impact
our ability to make distributions to shareholders.
Our
hotels are subject to all operating risks common to the hotel industry. The
hotel industry has experienced volatility in the past, as have our hotels,
and
there can be no assurance that such volatility will not occur in the future.
These risks include, among other things, competition from other hotels;
over-building in the hotel industry that could adversely affect hotel revenues;
increases in operating costs due to inflation and other factors, which may
not
be offset by increased room rates; reduction in business and commercial travel
and tourism; strikes and other labor disturbances of hotel employees; increases
in energy costs and other expenses of travel; adverse effects of general and
local economic conditions; and adverse political conditions. These factors
could
reduce revenues of the hotels and adversely affect our ability to make
distributions to our shareholders.
Competition
for guests is highly competitive.
The
hotel
industry is highly competitive. Our hotels compete with other existing and
new
hotels in their geographic markets. Many of our competitors have substantially
greater marketing and financial resources than we do. If their marketing
strategies are effective, we may be unable to make distributions to our
shareholders.
Our
investments are concentrated in a single segment of the hotel
industry.
Our
current business strategy is to own and acquire hotels primarily in the high
quality, upscale and mid-scale limited service and extended-stay segment of
the
hotel industry. We are subject to risks inherent in concentrating investments
in
a single industry and in a specific market segment within that industry. The
adverse effect on amounts available for distribution to shareholders resulting
from a downturn in the hotel industry in general or the mid-scale segment in
particular could be more pronounced than if we had diversified our investments
outside of the hotel industry or in additional hotel market
segments.
The
hotel industry is seasonal in nature.
The
hotel
industry is seasonal in nature. Generally, hotel revenues are greater in the
second and third quarters than in the first and fourth quarters. Our hotels’
operations historically reflect this trend. We believe that we will be able
to
make distributions necessary to maintain REIT status through cash flow from
operations; but if we are unable to do so, we may not be able to make the
necessary distributions or we may have to generate cash by a sale of assets,
increasing indebtedness or sales of securities to make the distributions.
Risks
of operating hotels under franchise licenses, which may be terminated or not
renewed, may impact our ability to make distributions to
shareholders.
The
continuation of the franchise licenses is subject to specified operating
standards and other terms and conditions. All of the franchisors of our hotels
periodically inspect our hotels to confirm adherence to their operating
standards. The failure of our partnership or HHMLP to maintain such standards
or
to adhere to such other terms and conditions could result in the loss or
cancellation of the applicable franchise license. It is possible that a
franchisor could condition the continuation of a franchise license on the
completion of capital improvements that the trustees determine are too expensive
or otherwise not economically feasible in light of general economic conditions,
the operating results or prospects of the affected hotel. In that event, the
trustees may elect to allow the franchise license to lapse or be
terminated.
There
can
be no assurance that a franchisor will renew a franchise license at each option
period. If a franchisor terminates a franchise license, we, our partnership,
and
HHMLP may be unable to obtain a suitable replacement franchise, or to
successfully operate the hotel independent of a franchise license. The loss
of a
franchise license could have a material adverse effect upon the operations
or
the underlying value of the related hotel because of the loss of associated
name
recognition, marketing support and centralized reservation systems provided
by
the franchisor. Our loss of a franchise license for one or more of the hotels
could have a material adverse effect on our partnership’s revenues and our
amounts available for distribution to shareholders.
Operating
costs and capital expenditures for hotel renovation may be greater than
anticipated and may adversely impact distributions to
shareholders.
Hotels
generally have an ongoing need for renovations and other capital improvements,
particularly in older structures, including periodic replacement of furniture,
fixtures and equipment. Under the terms of our management agreements with HHMLP,
we are obligated to pay the cost of expenditures for items that are classified
as capital items under GAAP that are necessary for the continued operation
of
our hotels. If these expenses exceed our estimate, the additional cost could
have an adverse effect on amounts available for distribution to shareholders.
In
addition, we may acquire hotels in the future that require significant
renovation. Renovation of hotels involves certain risks, including the
possibility of environmental problems, construction cost overruns and delays,
uncertainties as to market demand or deterioration in market demand after
commencement of renovation and the emergence of unanticipated competition from
hotels.
The
increasing use of Internet travel intermediaries by consumers may adversely
affect our profitability.
Some
of
our hotel rooms are booked through Internet travel intermediaries such as
Travelocity.com, Expedia.com and Priceline.com. As these Internet bookings
increase, these intermediaries may be able to obtain higher commissions, reduced
room rates or other significant concessions from us. Moreover, some Internet
travel intermediaries offer hotel rooms as a commodity, by increasing the
importance of price and general indicators of quality (such as “three-star
downtown hotel”) at the expense of brand identification. These intermediaries
hope that consumers will eventually develop brand loyalties to their reservation
systems rather than to the lodging brands with which our hotels are affiliated.
Although most of the business for our hotels is expected to be derived from
traditional channels, if the amount of sales made through Internet
intermediaries increases significantly, room revenues may flatten or decrease
and our profitability may be adversely affected.
RISKS
RELATED TO REAL ESTATE INVESTMENT GENERALLY
Illiquidity
of real estate investments could significantly impede our ability to respond
to
adverse changes in the performance of our properties and harm our financial
condition.
Real
estate investments are relatively illiquid. Our ability to vary our portfolio
in
response to changes in operating, economic and other conditions will be limited.
No assurances can be given that the fair market value of any of our hotels
will
not decrease in the future.
If
we suffer losses that are not covered by insurance or that are in excess of
our
insurance coverage limits, we could lose investment capital and anticipated
profits.
We
require comprehensive insurance to be maintained on each of the our hotels,
including liability and fire and extended coverage in amounts sufficient to
permit the replacement of the hotel in the event of a total loss, subject to
applicable deductibles. However, there are certain types of losses, generally
of
a catastrophic nature, such as earthquakes, floods, hurricanes and acts of
terrorism, that may be uninsurable or not economically insurable. Inflation,
changes in building codes and ordinances, environmental considerations and
other
factors also might make it impracticable to use insurance proceeds to replace
the applicable hotel after such applicable hotel has been damaged or destroyed.
Under such circumstances, the insurance proceeds received by us might not be
adequate to restore our economic position with respect to the applicable hotel.
If any of these or similar events occur, it may reduce the return from the
attached property and the value of our investment.
REITs
are subject to property taxes.
Each
hotel is subject to real and personal property taxes. The real and personal
property taxes on hotel properties in which we invest may increase as property
tax rates change and as the properties are assessed or reassessed by taxing
authorities. Many state and local governments are facing budget deficits which
has led many of them, and may in the future lead others to, increase assessments
and/or taxes. If property taxes increase, our ability to make expected
distributions to our shareholders could be adversely affected.
Environmental
matters could adversely affect our results.
Operating
costs may be affected by the obligation to pay for the cost of complying with
existing environmental laws, ordinances and regulations, as well as the cost
of
future legislation. Under various federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of removal or remediation of hazardous
or
toxic substances on, under or in such property. Such laws often impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. The cost of complying with
environmental laws could materially adversely affect amounts available for
distribution to shareholders. Phase I environmental assessments have been
obtained on all of our hotels. Nevertheless, it is possible that these reports
do not reveal all environmental liabilities or that there are material
environmental liabilities of which we are unaware.
Costs
associated with complying with the Americans with Disabilities Act may adversely
affect our financial condition and operating results.
Under
the
Americans with Disabilities Act of 1993 (ADA), all public accommodations are
required to meet certain federal requirements related to access and use by
disabled persons. While we believe that our hotels are substantially in
compliance with these requirements, a determination that we are not in
compliance with the ADA could result in imposition of fines or an award of
damages to private litigants. In addition, changes in governmental rules and
regulations or enforcement policies affecting the use and operation of the
hotels, including changes to building codes and fire and life-safety codes,
may
occur. If we were required to make substantial modifications at the hotels
to
comply with the ADA or other changes in governmental rules and regulations,
our
ability to make expected distributions to our shareholders could be adversely
affected.
The
selling shareholders will receive all of the proceeds from the sale of the
common shares offered by this prospectus. We will not receive any of the
proceeds from the sale of common shares by the selling
shareholders.
The
following table lists the names of the selling shareholders, the maximum number
of common shares each selling shareholder is entitled to received upon
redemption of units of limited partnership interest, which is also the maximum
number of shares that may be offered for sale by this prospectus. Because the
selling shareholders may tender for redemption all, some or none of their
operating partnership units, and may receive, at our option, cash rather than
common shares upon redemption, we cannot give a definitive estimate as to the
number of common shares that will be sold by the selling shareholder in the
offering or held by the selling shareholders after the offering. In preparing
the table below, we have assumed that the selling shareholders will sell all
of
the common shares covered by this prospectus. At March 15, 2007, there were
40,676,593 common shares outstanding. All of the holders of operating
partnership units listed below had contractual rights to require us to file
the
registration statement of which this prospectus is a part.
The
selling shareholders received their units of limited partnership interest in
connection with the Company’s acquisition, completed on July 27, 2006, of the
96-suite Residence Inn in Norwood, Massachusetts. This hotel property was
contributed to HHLP by KW Norwood, LLC, a Massachusetts limited liability
company, for approximately $15.0 million, which consisted of $2.9 million in
cash, the assumption of $8.0 million of debt and the issuance of 425,486
operating partnership units valued at approximately $3.9 million. Following
the
contribution of the Residence Inn to the limited partnership, KW Norwood, LLC
distributed all of its assets, including the operating partnership units, to
its
members. The selling shareholders listed below represent the members of KW
Norwood, LLC who received these operating partnership units.
We
prepared the following table based on the information supplied to us by the
selling shareholders named in the table.
Name
of Selling Shareholder
|
Number
of Shares Beneficially Owned Prior to Offering
|
Number
of Shares Registered for Sale
|
Shares
Owned After Sale of Registered Shares
|
|
|
|
Number
|
Percentage
|
David
A. Bamel
|
8,900
|
8,900
|
0
|
0%
|
William
J. Faccone, Sr. Revocable Trust
|
8,900
|
8,900
|
0
|
0%
|
Arthur
S. Loring
|
8,900
|
8,900
|
0
|
0%
|
Graywood
Partners
|
17,790
|
17,790
|
0
|
0%
|
Frederick
E. Penn Insurance Agency
|
8,900
|
8,900
|
0
|
0%
|
Robert
E. and Kathleen E.K. Bowers
|
4,450
|
4,450
|
0
|
0%
|
Anki
Wolf Javitch
|
8,900
|
8,900
|
0
|
0%
|
Norwood
Park South IV Trust
|
80,280
|
80,280
|
0
|
0%
|
Gordon
Romer
|
44,490
|
44,490
|
0
|
0%
|
Mel
A. Shaftel
|
4,450
|
4,450
|
0
|
0%
|
Steve
Shulman
|
6,670
|
6,670
|
0
|
0%
|
Natalie
W. Wolf Revocable Trust 1989
|
17,790
|
17,790
|
0
|
0%
|
Laird
P. Pendleton Trust
|
23,860
|
23,860
|
0
|
0%
|
Jill
Prichett
|
8,900
|
8,900
|
0
|
0%
|
Leon
M. Shulman
|
4,450
|
4,450
|
0
|
0%
|
William
S. and Janet Wesson
|
8,900
|
8,900
|
0
|
0%
|
Herbert
W. Staniszewski
|
8,360
|
8,360
|
0
|
0%
|
Jill
P. Prichett Trust
|
22,240
|
22,240
|
0
|
0%
|
Gordon
Prichett
|
8,900
|
8,900
|
0
|
0%
|
Joan
P. Lynch Trust
|
17,790
|
17,790
|
0
|
0%
|
Heath
Pendleton UTMA
|
4,450
|
4,450
|
0
|
0%
|
C.
Blake Pendleton UTMA
|
4,890
|
4,890
|
0
|
0%
|
G.
Owen Cole Trust
|
4,450
|
4,450
|
0
|
0%
|
Daniel
H. Wolf Trust
|
33,038
|
33,038
|
0
|
0%
|
Devon
Pendleton
|
4,450
|
4,450
|
0
|
0%
|
Brooke
Pendleton UTMA
|
4,890
|
4,890
|
0
|
0%
|
Haden
Lynch
|
3,560
|
3,560
|
0
|
0%
|
Dandridge
Woodworth
|
8,900
|
8,900
|
0
|
0%
|
Robert
J. Karol
|
33,038
|
33,038
|
0
|
0%
|
Total:
|
425,486
|
425,486
|
0
|
0%
|
CERTAIN
PROVISIONS OF MARYLAND LAW, OUR
DECLARATION
OF
TRUST AND BYLAWS
Classification
of the Board of Trustees
Our
Bylaws provide that the number of our trustees may be established by the Board
of Trustees but may not be fewer than three nor more than nine. As of December
31, 2006, we have seven trustees. The trustees may increase or decrease the
number of trustees by a vote of at least 80% of the members of the Board of
Trustees, provided that the number of trustees shall never be less than the
number required by Maryland law and that the tenure of office of a trustee
shall
not be affected by any decrease in the number of trustees. Any vacancy will
be
filled, including a vacancy created by an increase in the number of trustees,
at
any regular meeting or at any special meeting called for that purpose, by a
majority of the remaining trustees or, if no trustees remain, by a majority
of
our shareholders.
Pursuant
to our Declaration of Trust, the Board of Trustees is divided into two classes
of trustees. Trustees of each class are chosen for two-year terms and each
year
one class of trustees will be elected by the shareholders. We believe that
classification of the Board of Trustees helps to assure the continuity and
stability of our business strategies and policies as determined by the trustees.
Holders of common shares have no right to cumulative voting in the election
of
trustees. Consequently, at each annual meeting of shareholders, the holders
of a
majority of the common shares are able to elect all of the successors of the
class of trustees whose terms expire at that meeting.
The
classified board provision could have the effect of making the replacement
of
incumbent trustees more time consuming and difficult. The staggered terms of
trustees may delay, defer or prevent a tender offer or an attempt to change
control in us or other transaction that might involve a premium price for
holders of common shares that might be in the best interest of the
shareholders.
Removal
of Trustees
The
Declaration of Trust provides that a trustee may be removed with or without
cause upon the affirmative vote of at least two-thirds of the votes entitled
to
be cast in the election of trustees. This provision, when coupled with the
provision in the Bylaws authorizing the Board of Trustees to fill vacant
trusteeships, precludes shareholders from removing incumbent trustees, except
upon a substantial affirmative vote, and filling the vacancies created by such
removal with their own nominees.
Business Combinations
Maryland
law prohibits “business combinations” between us and an interested shareholder
or an affiliate of an interested shareholder for five years after the most
recent date on which the interested shareholder becomes an interested
shareholder. These business combinations include a merger, consolidation, share
exchange, or, in circumstances specified in the statute, an asset transfer
or
issuance or reclassification of equity securities. Maryland law defines an
interested shareholder as:
|
·
|
any
person who beneficially owns 10% or more of the voting power of our
shares; or
|
|
·
|
an
affiliate
or
associate of ours who, at any time within the two-year period prior
to the
date in question, was the beneficial owner of 10% or more of the
voting
power of our then outstanding voting
shares.
|
A
person
is not an interested shareholder if our Board of Trustees approved in advance
the transaction by which the
person
otherwise would have become an interested shareholder.
After
the
five-year prohibition, any business combination between us and an interested
shareholder generally must be recommended by our board of trustees and approved
by the affirmative vote of at least:
|
·
|
80%
of the votes entitled to be cast by holders of our then outstanding
shares
of beneficial interest; and
|
|
·
|
two-thirds
of the votes entitled to be cast by holders of our voting shares
other
than shares held by the interested shareholder with whom or with
whose
affiliate the business combination is to be effected or shares held
by an
affiliate or associate of the interested
shareholder.
|
These
super-majority vote requirements do not apply if our common shareholders receive
a minimum price, as
defined
under Maryland law, for their shares in the form of cash or other consideration
in the same form as previously paid by the interested shareholder for its
shares.
The
statute permits various exemptions from its provisions, including business
combinations that are approved or exempted by the
Board of
Trustees before the time that the interested shareholder becomes an interested
shareholder.
Control
Share Acquisitions
Maryland
law provides that “control shares” of a Maryland REIT acquired in a “control
share acquisition” have no voting rights unless approved by a vote of two-thirds
of the votes entitled to be cast on the matter. Shares owned by the acquiror,
or
by officers or by trustees who are employees of the REIT are excluded from
shares entitled to vote on the matter. “Control shares” are voting shares which,
if aggregated with all other shares previously acquired by the acquiring person,
or in respect of which the acquiring person is able to exercise or direct the
exercise of voting power (except solely by virtue of a revocable proxy), would
entitle the acquiring person to exercise voting power in electing trustees
within one of the following ranges of voting power:
|
·
|
one-tenth
or more but less than one-third;
|
|
·
|
one-third
or more but less than a
majority; or
|
|
·
|
a
majority
or
more of all voting power.
|
Control
shares do not include shares the acquiring person is then entitled to vote
as a
result of having previously obtained shareholder approval. A “control share
acquisition” means the acquisition of control shares, subject to certain
exceptions.
A
person
who has made or proposes to make a control share acquisition may compel the
board of trustees of a Maryland REIT to call a special meeting of shareholders
to be held within 50 days of demand to consider the voting rights of the
shares. The right to compel the calling of a special meeting is subject to
the
satisfaction of certain conditions, including an undertaking to pay the expenses
of the meeting. If no request for a meeting is made, REIT may present the
question at any shareholders’ meeting.
If
voting
rights are not approved at the shareholders’ meeting or if the acquiring person
does not deliver the statement required by Maryland law, then, subject to
certain conditions and limitations, the REIT may redeem any or all of the
control shares, except those for which voting rights have previously been
approved, for fair value. Fair value is determined without regard to the absence
of voting rights for the control shares and as of the date of the last control
share acquisition or of any meeting of shareholders at which the voting rights
of the shares were considered and not approved. If voting rights for control
shares are approved at a shareholders’ meeting and the acquiror may then vote a
majority of the shares entitled to vote, then all other shareholders may
exercise appraisal rights. The fair value of the shares for purposes of these
appraisal rights may not be less than the highest price per share paid by the
acquiror in the control share acquisition. The control share acquisition statute
does not apply to shares acquired in a merger, consolidation or share exchange
if we are a party to the transaction, nor does it apply to acquisitions approved
or exempted by our Declaration of Trust or Bylaws.
Our
Bylaws contain a provision exempting from the control share acquisition act
any
and all acquisitions by any person of our shares. There can be no assurance
that
this provision will not be amended or eliminated at any time in the
future.
Amendment
Our
Declaration of Trust provides that it may be amended with the approval of at
least a majority of all of the votes entitled to be cast on the matter, but
that
certain provisions of the Declaration of Trust regarding (i) our Board of
Trustees, including the provisions regarding independent trustee requirements,
(ii) the restrictions on transfer of the common shares and the preferred shares,
(iii) amendments to the Declaration of Trust by the trustees and our
shareholders and (iv) our termination may not be amended, altered, changed
or
repealed without the approval of two-thirds of all of the votes entitled to
be
cast on these matters. In addition, the Declaration of Trust provides that
it
may be amended by the Board of Trustees, without shareholder approval to (a)
increase or decrease the aggregate number of shares of beneficial interest
or
the number of shares of any class of beneficial interest that the Trust has
authority to issue or (b) qualify as a REIT under the Code or under the Maryland
REIT law. Our Bylaws may be amended or altered exclusively by the Board of
Trustees.
Limitation
of Liability and Indemnification
Our
Declaration of Trust limits the liability of our trustees and officers for
money
damages, except for liability resulting from:
|
·
|
actual
receipt of an improper benefit or profit in money, property or services;
or
|
|
·
|
a
final judgment based upon a finding of active and deliberate dishonesty
by
the trustees or others that was material to the cause of action
adjudicated.
|
Our
Declaration of Trust authorizes us, to the maximum extent permitted by Maryland
law, to indemnify, and to pay or reimburse reasonable expenses to, any of our
present or former trustees or officers or any individual who, while a trustee
or
officer and at our request, serves or has served another entity, employee
benefit plan or any other enterprise as a trustee, director, officer, partner
or
otherwise. The indemnification covers any claim or liability against the person.
Our Bylaws and Maryland law require us to indemnify each trustee or officer
who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he or she is made a party by reason of his or her service
to
us.
Maryland
law permits a Maryland REIT to indemnify its present and former trustees and
officers against liabilities and reasonable expenses actually incurred by them
in any proceeding unless:
|
·
|
the
act or omission of the trustee or officer was material to the matter
giving rise to the proceeding; and
|
|
·
|
was
committed in bad faith; or
|
|
·
|
was
the result of active and deliberate dishonesty;
or
|
|
·
|
the
trustee or officer actually received an improper personal benefit
in
money, property or services; or
|
|
·
|
in
a criminal proceeding, the trustee or officer had reasonable cause
to
believe that the act or omission was
unlawful.
|
However,
Maryland law prohibits us from indemnifying our present and former trustees
and
officers for an adverse judgment in a derivative action or for a judgment of
liability on the basis that personal benefit was improperly received, unless
in
either case a court orders indemnification and then only for expenses. Our
Bylaws and Maryland law require us, as a condition to advancing expenses in
certain circumstances, to obtain:
|
·
|
a
written affirmation by the trustee or officer of his or her good
faith
belief that he or she has met the standard of conduct necessary for
indemnification; and
|
|
·
|
a
written
undertaking to repay the amount reimbursed if the standard of conduct
is
not met.
|
Possible
Anti-takeover Effect of Certain Provisions of Maryland Law and of our
Declaration of Trust and Bylaws
The
business combination provisions and, if the applicable exemption in the Bylaws
is rescinded, the control share acquisition provisions of the MGCL, the
provisions of our Declaration of Trust on classification of the Board of
Trustees, the removal of trustees and the restrictions on the transfer of shares
of beneficial interest and the advance notice provisions of the Bylaws could
have the effect of delaying, deferring or preventing a transaction or a change
in control that might involve a premium price for holders of the common shares
or otherwise be in their best interest.
Management
Hersha
Hospitality Limited Partnership, our operating partnership, has been organized
as a Virginia limited partnership. Pursuant to the partnership agreement, we,
as
the sole general partner of the operating partnership, have, subject to certain
protective rights of limited partners described below, full, exclusive and
complete responsibility and discretion in the management and control of the
partnership, including the ability to cause the operating partnership to enter
into certain major transactions including acquisitions, dispositions,
refinancings and selection of lessees and to cause changes in the partnership’s
line of business and distribution policies. However, any amendment to the
partnership agreement that would affect the redemption rights requires the
consent of limited partners holding more than 50% of the operating partnership
units held by such partners.
The
affirmative vote of more than fifty percent of the limited partnership units
(other than limited partnership units owned by the general partner or owned
by a
subsidiary of the general partner) in our operating partnership, is required
for
a sale of all or substantially all of the assets of the partnership, or to
approve a merger or consolidation of the partnership; provided, however, that
the affirmative vote of at least two-thirds of the limited partnership units
in
our operating partnership is required if we fail to pay a distribution of $0.72
per share to the holders of the Class A common shares for any 12-month period.
As of March 15, 2007, we owned a 92.04% interest and other limited partners
owned a 7.96% interest in the operating partnership.
Transferability
of Interests
We
may
not voluntarily withdraw from the partnership or transfer or assign our interest
in the partnership unless the transaction in which such withdrawal or transfer
occurs results in the limited partners receiving property in an amount equal
to
the amount they would have received had they exercised their redemption rights
immediately prior to such transaction, or unless our successor contributes
substantially all of its assets to the partnership in return for a general
partnership interest in the partnership. With certain limited exceptions, the
limited partners may not transfer their interests in the partnership, in whole
or in part, without our written consent, which consent we may withhold in our
sole discretion. We may not consent to any transfer that would cause the
partnership to be treated as a corporation for federal income tax
purposes.
Capital Contributions
The
partnership agreement provides that if the partnership requires additional
funds
at any time in excess of funds available to the partnership from borrowing
or
capital contributions, we may borrow such funds from a financial institution
or
other lender and lend such funds to the partnership on the same terms and
conditions as are applicable to our borrowing of such funds. Under the
partnership agreement, we are obligated to contribute the proceeds of any
offering of shares of beneficial interest as additional capital to the
partnership. We are authorized to cause the partnership to issue partnership
interests for less than fair market value if we have concluded in good faith
that such issuance is in both the partnership’s and our best interests. If we
contribute additional capital to the partnership, we will receive additional
limited partnership units and our percentage interest will be increased on
a
proportionate basis based upon the amount of such additional capital
contributions and the value of the partnership at the time of such
contributions. Conversely, the percentage interests of the limited partners
will
be decreased on a proportionate basis in the event of additional capital
contributions by us. In addition, if we contribute additional capital to the
partnership, we will revalue the property of the partnership to its fair market
value (as determined by us) and the capital accounts of the partners will be
adjusted to reflect the manner in which the unrealized gain or loss inherent
in
such property (that has not been reflected in the capital accounts previously)
would be allocated among the partners under the terms of the partnership
agreement if there were a taxable disposition of such property for such fair
market value on the date of the revaluation.
Redemption Rights
Pursuant
to the partnership agreement, the limited partners receive redemption rights,
which enables them to cause the partnership to redeem their interests therein
in
exchange for cash or, at our option, common shares on a one-for-one basis.
If we
do not exercise our option to redeem such interests for common shares, then
the
limited partner may make a written demand that we redeem such interests for
common shares. Notwithstanding the foregoing, a limited partner shall not be
entitled to exercise its redemption rights to the extent that the issuance
of
common shares to the redeeming limited partner would
|
·
|
result
in any person owning, directly or indirectly, common shares in excess
of
the ownership limitation as per our Declaration of
Trust,
|
|
·
|
result
in the shares of our beneficial interest being owned by fewer than
100
persons (determined without reference to any rules of
attribution),
|
|
·
|
result
in our being “closely held” within the meaning of Section 856(h) of the
Internal Revenue Code,
|
|
·
|
cause
any person who operates Property on behalf of a “taxable REIT subsidiary”
of the Company, as defined in Section 856(l) of the Internal Revenue
Code,
which Property is a “qualified lodging facility” within the meaning of
Section 856(d)(9)(D) of the Internal Revenue Code that is leased
to such
taxable REIT subsidiary, to fail to qualify as an “eligible independent
contractor” within the meaning of Section 856(d)(9)(A) of the Internal
Revenue Code with respect to such taxable REIT
subsidiary,
|
|
·
|
cause
us to own, actually or constructively, 10% or more of the ownership
interests in a tenant of ours or the partnership’s real property (other
than a TRS), within the meaning of Section 856(d)(2)(B) of the Internal
Revenue Code, or
|
|
·
|
cause
the acquisition of common shares by such redeeming limited partner
to be
“integrated” with any other distribution of common shares for purposes of
complying with the Securities Act.
|
With
respect to the limited partnership units that were issued in connection with
the
acquisition of our hotels, the redemption rights may be exercised by the limited
partners at any time after one year following the issuance of such units, unless
otherwise agreed by us. In all cases, however,
|
·
|
each
limited partner may not exercise the redemption right for fewer than
1,000
units or, if such limited partner holds fewer than 1,000 limited
partnership units, all of the units held by such limited
partner,
|
|
·
|
each
limited partner may not exercise the redemption right for more than
the
number of limited partnership units that would, upon redemption,
result in
such limited partner or any other person owning, directly or indirectly,
common shares in excess of the ownership limitation
and
|
|
·
|
each
limited partner may not exercise the redemption right more than two
times
annually.
|
The
aggregate number of common shares currently issuable upon exercise of the
redemption rights is, as of March 15, 2007, approximately 4,665,186. The number
of common shares issuable upon exercise of the redemption rights will be
adjusted on account of share splits, mergers, consolidations or similar pro
rata
share transactions.
The
partnership agreement requires that the partnership be operated in a manner
that
enables us to satisfy the requirements for being classified as a REIT, to avoid
any federal income or excise tax liability imposed by the Internal Revenue
Code
(other than any federal income tax liability associated with our retained
capital gains) and to ensure that the partnership will not be classified as
a
“publicly traded partnership” for purposes of Section 7704 of the Internal
Revenue Code.
In
addition to the administrative and operating costs and expenses incurred by
the
partnership, the partnership will pay all of our administrative costs and
expenses and these expenses will be treated as expenses of the partnership.
Our
expenses generally include
|
·
|
all
expenses relating to our continuity of
existence,
|
|
·
|
all
expenses relating to offerings and registration of
securities,
|
|
·
|
all
expenses associated with the preparation and filing of any of our
periodic
reports under federal, state or local laws or
regulations,
|
|
·
|
all
expenses associated with our compliance with laws, rules and regulations
promulgated by any regulatory body
and
|
|
·
|
all
of our other operating or administrative costs incurred in the ordinary
course of its business on behalf of the
partnership.
|
The
company expenses, however, do not include any of our administrative and
operating costs and expenses incurred that are attributable to hotel properties
that are owned by us directly.
Distributions
The
partnership agreement provides that the partnership will distribute cash from
operations (including net sale or refinancing proceeds, but excluding net
proceeds from the sale of the partnership’s property in connection with the
liquidation of the partnership) on a quarterly (or, at our election, more
frequent) basis, in amounts determined by us in our sole discretion, to us
and
the limited partners in accordance with their respective percentage interests
in
the partnership.
The
partnership agreement provides that upon a liquidation of the partnership after
payment of, or adequate provision for, debts and obligations of the partnership,
including any partner loans, any remaining assets of the partnership will be
distributed to us and the limited partners with positive capital accounts in
accordance with their respective positive capital account balances.
Allocations
Net
profits of the partnership for each fiscal year are allocated in the following
order of priority:
(a)
first, to us in respect of our Series A Preferred Partnership Units to the
extent that net loss previously allocated to us pursuant to clause (iii) below
for all prior fiscal years or other applicable periods exceeds net profit
previously allocated to us pursuant to this clause (a) for all prior fiscal
years or other applicable periods,
(b) second,
to us and the holders of operating partnership units in proportion to their
respective percentage interests to the extent that net loss previously allocated
to such holders pursuant to clause (ii) below for all prior fiscal years or
other applicable periods exceeds net profit previously allocated to such holders
pursuant to this clause (b) for all prior fiscal years or other applicable
periods,
(c)
third, to us in respect of our Series A Preferred Partnership Units until we
have been allocated net profit equal to the excess of (x) the cumulative amount
of distributions we have received for all fiscal years or other applicable
period to the date of redemption, to the extent such Series A Preferred Units
are redeemed during such period, over (y) the cumulative net profit allocated
to
us pursuant to this clause (c) for all prior fiscal years or other applicable
periods, and
(d) thereafter,
to the holders of operating partnership units in accordance with their
respective percentage interests.
Net
losses of the partnership for each fiscal year are allocated to us and the
limited partners in accordance with the following order of
priority:
(i) first,
to the holders of operating partnership units in accordance with their
respective percentage interests to the extent of net profit previously allocated
to such holders pursuant to (d) above for all prior fiscal years or other
applicable period exceeds net loss previously allocated to such holders pursuant
to this clause (i) for all prior fiscal years or other applicable
periods,
(ii) second,
to us and the holders of operating partnership units in proportion to their
respective percentage interests until the adjusted capital account of each
holder with respect to such operating partnership units is reduced to zero;
and
(iii)
thereafter, to us in respect of our Series A Preferred Partnership Units, until
our adjusted capital account with respect to the Series A Preferred Partnership
Units is reduced to zero.
All
of
the foregoing allocations are subject to compliance with the provisions of
Sections 704(b) and 704(c) of the Internal Revenue Code and Treasury Regulations
promulgated thereunder.
Term
The
partnership will continue until December 31, 2050, or until sooner dissolved
upon:
|
·
|
our
bankruptcy, dissolution or withdrawal (unless the limited partners
elect
to continue the partnership),
|
|
·
|
the
sale or other disposition of all or substantially all the assets
of the
partnership,
|
|
·
|
the
redemption of all operating partnership units (other than those held
by
us, if any) or
|
|
·
|
an
election by us as the General
Partner.
|
Tax Matters
Pursuant
to the partnership agreement, we are the tax matters partner of the partnership
and, as such, have authority to handle tax audits and to make tax elections
under the Internal Revenue Code on behalf of the partnership.
FEDERAL
INCOME TAX CONSEQUENCES OF OUR STATUS AS A
REIT
This
section summarizes the federal income tax issues that you, as a holder of our
common shares of beneficial interest, may consider relevant. Hunton &
Williams LLP has acted as our counsel, has reviewed this summary and is of
the
opinion that the discussion contained herein fairly summarizes the federal
income tax consequences that are likely to be material to a holder of our common
shares of beneficial interest. Because this section is a summary, it does not
address all of the tax issues that may be important to you. In addition, this
section does not address the tax issues that may be important to certain types
of holders of our common shares of beneficial interest that are subject to
special treatment under the federal income tax laws, such as insurance
companies, tax-exempt organizations, financial institutions or broker-dealers,
and non-U.S. individuals and foreign corporations.
The
statements in this section and the opinion of Hunton & Williams LLP are
based on the current federal income tax laws governing qualification as a REIT.
We cannot assure you that new laws, interpretations of law or court decisions,
any of which may take effect retroactively, will not cause any statement in
this
section to be inaccurate.
We
urge you to consult your own tax advisor regarding the specific tax consequences
to you of investing in our common shares of beneficial interest and of our
election to be taxed as a REIT. Specifically, you should consult your own tax
advisor regarding the federal, state, local, foreign and other tax consequences
of such investment and election, and regarding potential changes in applicable
tax laws.
Taxation
of Our Company
We
elected to be taxed as a REIT under the federal income tax laws beginning with
our taxable year ended December 31, 1999. We believe that we have operated
in a
manner qualifying us as a REIT since our election and intend to continue to
so
operate. This section discusses the laws governing the federal income tax
treatment of a REIT and its shareholders. These laws are highly technical and
complex.
In
the
opinion of Hunton & Williams LLP, we qualified to be taxed as a REIT under
the federal income tax laws for our taxable years ended December 31, 2003
through December 31, 2006, and our organization and current and proposed method
of operation will enable us to continue to qualify as a REIT for our taxable
year ending December 31, 2007 and in the future. You should be aware that the
opinion is based on current law and is not binding on the Internal Revenue
Service or any court. In addition, the opinion is based on customary assumptions
and on our representations as to factual matters, all of which are described
in
the opinion. Our qualification as a REIT depends on our ability to meet, on
a
continuing basis, qualification tests in the federal tax laws. Those
qualification tests involve the percentage of our income that we earn from
specified sources, the percentages of our assets that fall within specified
categories, the diversity of our share ownership and the percentage of our
earnings that we distribute. Hunton & Williams LLP will not review our
compliance with those tests on a continuing basis. Accordingly, no assurance
can
be given that the actual results of our operation for any particular taxable
year will satisfy such requirements. For a discussion of the tax consequences
of
our failure to qualify as a REIT, see “-Failure to Qualify.”
If
we
qualify as a REIT, we generally will not be subject to federal income tax on
the
taxable income that we distribute to our shareholders. The benefit of that
tax
treatment is that it avoids the “double taxation,” or taxation at both the
corporate and shareholder levels, that generally results from owning shares
in a
corporation. However, we will be subject to federal tax in the following
circumstances:
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We
will pay federal income tax on taxable income, including net capital
gain,
that we do not distribute to shareholders during, or within a specified
time period after, the calendar year in which the income is
earned.
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We
may be subject to the “alternative minimum tax” on any items of tax
preference that we do not distribute or allocate to
shareholders.
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We
will pay income tax at the highest corporate rate
on:
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o
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net
income from the sale or other disposition of property acquired through
foreclosure (“foreclosure property”) that we hold primarily for sale to
customers in the ordinary course of business,
and
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o
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other
non-qualifying income from foreclosure
property.
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We
will pay a 100% tax on net income from sales or other dispositions
of
property, other than foreclosure property, that we hold primarily
for sale
to customers in the ordinary course of
business.
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If
we fail to satisfy the 75% gross income test or the 95% gross income
test,
as described below under “Requirements for Qualification-Income Tests,”
and nonetheless continue to qualify as a REIT because we meet other
requirements, we will pay a 100% tax
on:
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o
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the
gross income attributable to the greater of (1) the amount by which
we
fail the 75% gross income test, and (2) the amount by which 95% (or
90%
for our 2004 and prior taxable years) of our gross income exceeds
the
amount of income qualifying under the 95% gross income test, in each
case,
multiplied by
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o
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a
fraction intended to reflect our
profitability.
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If
we fail to distribute during a calendar year at least the sum of
(1) 85%
of our REIT ordinary income for the year, (2) 95% of our REIT capital
gain
net income for the year, and (3) any undistributed taxable income
from
earlier periods, we will pay a 4% nondeductible excise tax on the
excess
of the required distribution over the amount we actually
distributed.
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We
may elect to retain and pay income tax on our net long-term capital
gain.
In that case, a U.S. shareholder would be taxed on its proportionate
share
of our undistributed long-term capital gain (to the extent that we
made a
timely designation of such gain to the shareholders) and would receive
a
credit or refund for its proportionate share of the tax we
paid.
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We
will be subject to a 100% excise tax on transactions with a TRS that
are
not conducted on an arm’s-length
basis.
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In
the event of a failure of any of the asset tests occurring during
our 2005
and subsequent taxable years, other than a de minimis failure of
the 5%
asset test or the 10% vote or value test, as described below under
“-Requirements for Qualification-Asset Tests,” as long as the failure was
due to reasonable cause and not to willful neglect, we file a description
of each asset that caused such failure with the Internal Revenue
Service,
and we dispose of the assets or otherwise comply with the asset tests
within six months after the last day of the quarter in which we identify
such failure, we will pay a tax equal to the greater of $50,000 or
35% of
the net income from the nonqualifying assets during the period in
which we
failed to satisfy the asset tests.
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In
the event we fail to satisfy one or more requirements for REIT
qualification during our 2005 and subsequent taxable years, other
than the
gross income tests and the asset tests, and such failure is due to
reasonable cause and not to willful neglect, we will be required
to pay a
penalty of $50,000 for each such
failure.
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If
we acquire any asset from a C corporation, or a corporation that
generally
is subject to full corporate-level tax, in a merger or other transaction
in which we acquire a basis in the asset that is determined by reference
either to the C corporation’s basis in the asset or to another asset, we
will pay tax at the highest regular corporate rate applicable if
we
recognize gain on the sale or disposition of the asset during the
10-year
period after we acquire the asset provided no election is made for
the
transaction to be taxable on a current basis. The amount of gain
on which
we will pay tax is the lesser of:
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the
amount of gain that we recognize at the time of the sale or disposition,
and
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the
amount of gain that we would have recognized if we had sold the asset
at
the time we acquired it.
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Requirements
for Qualification
A
REIT is
a corporation, trust, or association that meets each of the following
requirements:
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1.
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It
is managed by one or more trustees or
directors.
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2.
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Its
beneficial ownership is evidenced by transferable shares, or by
transferable certificates of beneficial
interest.
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3.
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It
would be taxable as a domestic corporation, but for the REIT provisions
of
the federal income tax laws.
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4.
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It
is neither a financial institution nor an insurance company subject
to
special provisions of the federal income tax
laws.
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5.
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At
least 100 persons are beneficial owners of its shares or ownership
certificates.
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6.
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Not
more than 50% in value of its outstanding shares or ownership certificates
is owned, directly or indirectly, by five or fewer individuals, which
the
Internal Revenue Code define to include certain entities, during
the last
half of any taxable year.
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7.
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It
elects to be a REIT, or has made such election for a previous taxable
year, and satisfies all relevant filing and other administrative
requirements established by the Internal Revenue Service that must
be met
to elect and maintain REIT status.
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8.
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It
meets certain other qualification tests, described below, regarding
the
nature of its income and assets and the amount of its distributions
to
shareholders.
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9.
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It
uses a calendar year for federal income tax purposes and complies
with the
recordkeeping requirements of the federal income tax
laws.
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We
must
meet requirements 1 through 4 during our entire taxable year and must meet
requirement 5 during at least 335 days of a taxable year of 12 months, or during
a proportionate part of a taxable year of less than 12 months. If we comply
with
all the requirements for ascertaining the ownership of our outstanding shares
in
a taxable year and have no reason to know that we violated requirement 6, we
will be deemed to have satisfied requirement 6 for that taxable year. For
purposes of determining share ownership under requirement 6, an “individual”
generally includes a supplemental unemployment compensation benefits plan,
a
private foundation, or a portion of a trust permanently set aside or used
exclusively for charitable purposes. An “individual,” however, generally does
not include a trust that is a qualified employee pension or profit sharing
trust
under the federal income tax laws, and beneficiaries of such a trust will be
treated as holding our shares in proportion to their actuarial interests in
the
trust for purposes of requirement 6. We have issued sufficient common shares
with sufficient diversity of ownership to satisfy requirements 5 and 6. In
addition, our Declaration of Trust restricts the ownership and transfer of
our
shares of beneficial interest so that we should continue to satisfy these
requirements.
A
corporation that is a “qualified REIT subsidiary” (i.e., a corporation that is
100% owned by a REIT with respect to which no TRS election has been made) is
not
treated as a corporation separate from its parent REIT. All assets, liabilities,
and items of income, deduction, and credit of a “qualified REIT subsidiary” are
treated as assets, liabilities, and items of income, deduction, and credit
of
the REIT. Thus, in applying the requirements described herein, any “qualified
REIT subsidiary” that we own will be ignored, and all assets, liabilities, and
items of income, deduction, and credit of such subsidiary will be treated as
our
assets, liabilities, and items of income, deduction, and credit.
An
unincorporated domestic entity, such as a limited liability company, that has
a
single owner, generally is not treated as an entity separate from its parent
for
federal income tax purposes. An unincorporated domestic entity with two or
more
owners is generally treated as a partnership for federal income tax purposes.
In
the case of a REIT that is a partner in a partnership that has other partners,
the REIT is treated as owning its proportionate share of the assets of the
partnership and as earning its allocable share of the gross income of the
partnership for purposes of the applicable REIT qualification tests. Thus,
our
proportionate share of the assets, liabilities and items of income of our
operating partnership and any other partnership, joint venture, or limited
liability company that is treated as a partnership for federal income tax
purposes in which we have acquired or will acquire an interest, directly or
indirectly (a “subsidiary partnership”), will be treated as our assets and gross
income for purposes of applying the various REIT qualification
requirements.
A
REIT
may own up to 100% of the shares of one or more TRSs. A TRS is a fully taxable
corporation that may earn income that would not be qualifying income if earned
directly by the parent REIT. However, a TRS may not directly or indirectly
operate or manage any hotels or health care facilities or provide rights to
any
brand name under which any hotel or health care facility is operated. The
subsidiary and the REIT must jointly elect to treat the subsidiary as a TRS.
A
TRS will pay income tax at regular corporate rates on any income that it earns.
In addition, the TRS rules limit the deductibility of interest paid or accrued
by a TRS to its parent REIT to assure that the TRS is subject to an appropriate
level of corporate taxation. Further, the rules impose a 100% excise tax on
transactions between a TRS and its parent REIT or the REIT’s tenants that are
not conducted on an arm’s-length basis. We lease all but one of our hotels to
TRSs. We lease all but one of our wholly owned hotels to 44 New England, a
TRS
owned by our operating partnership. All of our hotels owned by joint ventures
are leased (1) to joint ventures, in which we hold equity interests through
a
TRS, or (2) to a TRS wholly owned or substantially owned by the joint venture.
We have formed seven TRSs in connection with the financing of certain of our
hotels. Those TRSs own a 1% general partnership interest in the partnerships
that own those hotels. See “-Taxable REIT Subsidiaries.”
Income
Tests
We
must
satisfy two gross income tests annually to maintain our qualification as a
REIT.
First, at least 75% of our gross income for each taxable year must consist
of
defined types of income that we derive, directly or indirectly, from investments
relating to real property or mortgages on real property or qualified temporary
investment income. Qualifying income for purposes of that 75% gross income
test
generally includes:
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rents
from real property;
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interest
on debt secured by mortgages on real property, or on interests in
real
property;
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dividends
or other distributions on, and gain from the sale of, shares in other
REITs;
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gain
from the sale of real estate assets;
and
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income
derived from the temporary investment of new capital that is attributable
to the issuance of our shares or a public offering of our debt with
a
maturity date of at least five years and that we receive during the
one-year period beginning on the date on which we received such new
capital.
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Second,
in general, at least 95% of our gross income for each taxable year must consist
of income that is qualifying income for purposes of the 75% gross income test,
other types of interest and dividends, gain from the sale or disposition of
shares or securities, income from hedging instruments (during our 2004 and
prior
taxable years) or any combination of these. Gross income from our sale of
property that we hold primarily for sale to customers in the ordinary course
of
business is excluded from both the numerator and the denominator in both income
tests. In addition, commencing with our 2005 taxable year, income and gain
from
“hedging transactions,” as defined in “-Hedging Transactions,” that are clearly
and timely identified as such are excluded from both the numerator and the
denominator for purposes of the 95% gross income test, but not the 75% gross
income test. The following paragraphs discuss the specific application of the
gross income tests to us.
Rents
from Real Property.
Rent
that we receive from our real property will qualify as “rents from real
property,” which is qualifying income for purposes of the 75% and 95% gross
income tests, only if the following conditions are met:
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First,
the rent must not be based, in whole or in part, on the income or
profits
of any person, but may be based on a fixed percentage or percentages
of
receipts or sales.
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·
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Second,
neither we nor a direct or indirect owner of 10% or more of our shares
may
own, actually or constructively, 10% or more of a tenant from whom
we
receive rent other than a TRS. If the tenant is a TRS, such TRS may
not
directly or indirectly operate or manage the related property. Instead,
the property must be operated on behalf of the TRS by a person who
qualifies as an “independent contractor” and who is, or is related to a
person who is, actively engaged in the trade or business of operating
lodging facilities for any person unrelated to us and the TRS. See
“-Taxable REIT Subsidiaries.”
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·
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Third,
if the rent attributable to personal property leased in connection
with a
lease of real property is 15% or less of the total rent received
under the
lease, then the rent attributable to personal property will qualify
as
rents from real property. However, if the 15% threshold is exceeded,
the
rent attributable to personal property will not qualify as rents
from real
property.
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Fourth,
we generally must not operate or manage our real property or furnish
or
render services to our tenants, other than through an “independent
contractor” who is adequately compensated and from whom we do not derive
revenue. However, we need not provide services through an “independent
contractor,” but instead may provide services directly to our tenants, if
the services are “usually or customarily rendered” in connection with the
rental of space for occupancy only and are not considered to be provided
for the tenants’ convenience. In addition, we may provide a minimal amount
of “noncustomary” services to the tenants of a property, other than
through an independent contractor, as long as our income from the
services
(valued at not less than 150% of our direct cost of performing such
services) does not exceed 1% of our income from the related property.
Furthermore, we may own up to 100% of the stock of a TRS which may
provide
customary and noncustomary services to our tenants without tainting
our
rental income for the related properties. See “-Taxable REIT
Subsidiaries.”
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Pursuant
to percentage leases, our TRS lessees lease the land, buildings, improvements,
furnishings and equipment comprising our hotels, for terms ranging from 5 years
to 20 years, with options to renew for terms of five years at the expiration
of
the initial lease term. We
lease
one hotel to a third party operator/lessee pursuant to a lease providing for
fixed rental payments. We lease one hotel to a joint venture in which we own
our
interest through a TRS, pursuant to a lease providing for rent based on payments
under related financing, set at fixed rates, which are not based in whole or
in
part on the income or profits of any person. The percentage leases with
our TRS lessees provide that the lessees are obligated to pay (1) the
greater of a minimum base rent or percentage rent and (2) “additional charges”
or other expenses, as defined in the leases. Percentage rent is calculated
by
multiplying fixed percentages by gross room revenues and gross food and beverage
revenues for each of the hotels. Both base rent and the thresholds in the
percentage rent formulas are adjusted for inflation. Base rent and percentage
rent accrue and are due monthly or quarterly.
In
order
for the base rent, percentage rent, fixed rent, and additional charges to
constitute “rents from real property,” the percentage and other leases must
be respected as true leases for federal income tax purposes and not treated
as
service contracts, joint ventures or some other type of arrangement. The
determination of whether the percentage and other leases are true leases
depends on an analysis of all the surrounding facts and circumstances. In making
such a determination, courts have considered a variety of factors, including
the
following:
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the
intent of the parties;
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the
form of the agreement;
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·
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the
degree of control over the property that is retained by the property
owner, or whether the lessee has substantial control over the operation
of
the property or is required simply to use its best efforts to perform
its
obligations under the agreement;
and
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·
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the
extent to which the property owner retains the risk of loss with
respect
to the property, or 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 or appreciation with respect to the
property.
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In
addition, federal income tax law provides that a contract that purports to
be a
service contract or a partnership agreement will be treated instead as a lease
of property if the contract is properly treated as such, taking into account
all
relevant factors, including whether or not:
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the
service recipient is in physical possession of the
property;
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·
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the
service recipient controls the
property;
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·
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the
service recipient has a significant economic or possessory interest
in the
property, or whether 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;
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·
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the
service provider bears the risk of substantially diminished receipts
or
substantially increased expenditures if there is nonperformance under
the
contract;
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·
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the
service provider uses the property concurrently to provide significant
services to entities unrelated to the service recipient;
and
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·
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the
total contract price substantially exceeds the rental value of the
property for the contract period.
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Since
the
determination whether a service contract should be treated as a lease is
inherently factual, the presence or absence of any single factor will not be
dispositive in every case.
Hunton
& Williams LLP is of the opinion that the percentage and other leases
will be treated as true leases for federal income tax purposes. Such opinion
is
based, in part, on the following facts:
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we
and the lessees intend for our relationship to be that of a lessor
and
lessee and such relationship is documented by lease
agreements;
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the
lessees have the right to the exclusive possession, use and quiet
enjoyment of the hotels during the term of the percentage leases;
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the
lessees bear the cost of, and are responsible for, day-to-day maintenance
and repair of the hotels, other than the cost of maintaining underground
utilities, structural elements and capital improvements, and generally
dictate how the hotels are operated, maintained and
improved;
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·
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the
lessees generally bear the costs and expenses of operating the hotels,
including the cost of any inventory used in their operation, during
the
term of the percentage leases;
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·
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the
lessees benefit from any savings in the cost of operating the hotels
during the term of the percentage
leases;
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·
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the
lessees generally have indemnified us against all liabilities imposed
on
us during the term of the percentage leases by reason of (1) injury
to
persons or damage to property occurring at the hotels, (2) the lessees’
use, management, maintenance or repair of the hotels, (3) any
environmental liability caused by acts or grossly negligent failures
to
act of the lessees, (4) taxes and assessments in respect of the hotels
that are the obligations of the lessees or (5) any breach of the
percentage leases or of any sublease of a hotel by the
lessees;
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·
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the
lessees are obligated to pay substantial fixed rent for the period
of use
of the hotels;
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·
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the
lessees stand to incur substantial losses or reap substantial gains
depending on how successfully they operate the hotels;
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·
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we
cannot use the hotels concurrently to provide significant services
to
entities unrelated to the lessees;
and
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·
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the
total contract price under the percentage leases does not substantially
exceed the rental value of the hotels for the term of the percentage
leases.
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Investors
should be aware that there are no controlling Treasury regulations, published
rulings or judicial decisions involving leases with terms substantially the
same
as the percentage leases that discuss whether such leases constitute true leases
for federal income tax purposes. If the percentage leases are characterized
as
service contracts or partnership agreements, rather than as true leases, part
or
all of the payments that our operating partnership and its subsidiaries receive
from the lessees may not be considered rent or may not otherwise satisfy the
various requirements for qualification as “rents from real property.” In that
case, we likely would not be able to satisfy either the 75% or 95% gross income
test and, as a result, would lose our REIT status unless we qualify for relief,
as described below under “-Failure to Satisfy Gross Income Tests”.
As
described above, in order for the rent that we receive to constitute “rents from
real property,” several other requirements must be satisfied. One requirement is
that the percentage rent must not be based in whole or in part on the income
or
profits of any person. The percentage rent, however, will qualify as “rents from
real property” if it is based on percentages of receipts or sales and the
percentages:
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are
fixed at the time the percentage leases are entered
into;
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·
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are
not renegotiated during the term of the percentage leases in a manner
that
has the effect of basing percentage rent on income or profits;
and
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·
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conform
with normal business practice.
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More
generally, the percentage rent will not qualify as “rents from real property”
if, considering the percentage leases and all the surrounding circumstances,
the
arrangement does not conform with normal business practice, but is in reality
used as a means of basing the percentage rent on income or profits. Since the
percentage rent is based on fixed percentages of the gross revenue from the
hotels that are established in the percentage leases, and we have represented
that the percentages (1) will not be renegotiated during the terms of the
percentage leases in a manner that has the effect of basing the percentage
rent
on income or profits and (2) conform with normal business practice, the
percentage rent should not be considered based in whole or in part on the income
or profits of any person. Furthermore, we have represented that, with respect
to
other hotel properties that we acquire in the future, we 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.
Second,
we must not own, actually or constructively, 10% or more of the shares or the
assets or net profits of any lessee (a “related party tenant”) other than a TRS.
The constructive ownership rules generally provide that, if 10% or more in
value
of our shares is owned, directly or indirectly, by or for any person, we are
considered as owning the shares owned, directly or indirectly, by or for such
person. We do not own any shares or any assets or net profits of any lessee
directly or indirectly, other than our indirect ownership of our TRS lessees.
We
currently lease all but one of our hotels to TRS lessees, and intend to lease
any hotels we acquire in the future to a TRS. Our Declaration of Trust prohibits
transfers of our shares that would cause us to own actually or constructively,
10% or more of the ownership interests in a non-TRS lessee. Based on the
foregoing, we should never own, actually or constructively, 10% or more of
any
lessee other than a TRS. Furthermore, we have represented that, with respect
to
other hotel properties that we acquire in the future, we will not rent any
property to a related party tenant (other than a TRS). However, because the
constructive ownership rules are broad and it is not possible to monitor
continually direct and indirect transfers of our shares, no absolute assurance
can be given that such transfers or other events of which we have no knowledge
will not cause us to own constructively 10% or more of a lessee other than
a TRS
at some future date.
As
described above, we may own up to 100% of the shares of one or more TRSs. A
TRS
is a fully taxable corporation that is permitted to lease hotels from the
related REIT as long as it does not directly or indirectly operate or manage
any
hotels or health care facilities or provide rights to any brand name under
which
any hotel or health care facility is operated. However, rent that we receive
from a TRS will qualify as “rents from real property” as long as the property is
operated on behalf of the TRS by an “independent contractor” who is adequately
compensated, who does not, directly or through its shareholders, own more than
35% of our shares, taking into account certain ownership attribution rules,
and
who is, or is related to a person who is, actively engaged in the trade or
business of operating “qualified lodging facilities” for any person unrelated to
us and the TRS lessee (an “eligible independent contractor”). A “qualified
lodging facility” is a hotel, motel, or other establishment more than one-half
of the dwelling units in which are used on a transient basis, unless wagering
activities are conducted at or in connection with such facility by any person
who is engaged in the business of accepting wagers and who is legally authorized
to engage in such business at or in connection with such facility. A “qualified
lodging facility” includes customary amenities and facilities operated as part
of, or associated with, the lodging facility as long as such amenities and
facilities are customary for other properties of a comparable size and class
owned by other unrelated owners. See “-Taxable REIT Subsidiaries.”
We
have
formed several TRSs to lease our hotels. We lease all but one of our
wholly owned hotels to 44 New England, a TRS owned by our operating partnership.
HHMLP, an “eligible independent contractor,” or other management companies that
qualify as eligible independent contractors, manage those hotels. All of our
hotels owned by joint ventures are leased (1) to joint venture, in which we
hold
our equity interest through a TRS, or (2) to a TRS wholly owned or substantially
owned by the joint venture. Those hotels are operated and managed by HHMLP
or
other hotel managers that qualify as “eligible independent contractors.” We have
represented that, with respect to properties that we lease to our TRSs in the
future, each such TRS will engage an “eligible independent contractor” to manage
and operate the hotels leased by such TRS.
Third,
the rent attributable to the personal property leased in connection with the
lease of a hotel must not be greater than 15% of the total rent received under
the lease. The rent attributable to the personal property contained in a hotel
is the amount that bears the same ratio to total rent for the taxable year
as
the average of the fair market values of the personal property at the beginning
and at the end of the taxable year bears to the average of the aggregate fair
market values of both the real and personal property contained in the hotel
at
the beginning and at the end of such taxable year (the “personal property
ratio”). With respect to each hotel, we believe either that the personal
property ratio is less than 15% or that any rent attributable to excess personal
property will not jeopardize our ability to qualify as a REIT. There can be
no
assurance, however, that the Internal Revenue Service would not challenge our
calculation of a personal property ratio, or that a court would not uphold
such
assertion. If such a challenge were successfully asserted, we could fail to
satisfy the 75% or 95% gross income test and thus potentially lose our REIT
status.
Fourth,
we cannot furnish or render noncustomary services to the tenants of our hotels,
or manage or operate our hotels, other than through an independent contractor
who is adequately compensated and from whom we do not derive or receive any
income. However, we need not provide services through an “independent
contractor,” but instead may provide services directly to our tenants, if the
services are “usually or customarily rendered” in connection with the rental of
space for occupancy only and are not considered to be provided for the tenants’
convenience. Provided that the percentage leases are respected as true leases,
we should satisfy that requirement, because we do not perform any services
other
than customary ones for the lessees. In addition, we may provide a minimal
amount of “noncustomary” services to the tenants of a property, other than
through an independent contractor, as long as our income from the services
does
not exceed 1% of our income from the related property. Finally, we may own
up to
100% of the shares of one or more TRSs, which may provide noncustomary services
to our tenants without tainting our rents from the related hotels. We will
not
perform any services other than customary ones for our lessees, unless such
services are provided through independent contractors or TRSs. Furthermore,
we
have represented that, with respect to other hotel properties that we acquire
in
the future, we will not perform noncustomary services for the lessee of the
property to the extent that the provision of such services would jeopardize
our
REIT status.
If
a
portion of the rent that we receive from a hotel does not qualify as “rents from
real property” because the rent attributable to personal property exceeds 15% of
the total rent for a taxable year, the portion of the rent that is attributable
to personal property will not be qualifying income for purposes of either the
75% or 95% gross income test. Thus, if such rent attributable to personal
property, plus any other income that is nonqualifying income for purposes of
the
95% gross income test, during a taxable year exceeds 5% of our gross income
during the year, we would lose our REIT qualification. If, however, the rent
from a particular hotel does not qualify as “rents from real property” because
either (1) the percentage rent is considered based on the income or profits
of
the related lessee, (2) the lessee either is a related party tenant or fails
to
qualify for the exception to the related party tenant rule for qualifying TRSs
or (3) we furnish noncustomary services to the tenants of the hotel, or manage
or operate the hotel, other than through a qualifying independent contractor
or
a TRS, none of the rent from that hotel would qualify as “rents from real
property.” In that case, we might lose our REIT qualification because we would
be unable to satisfy either the 75% or 95% gross income test. In addition to
the
rent, the lessees are required to pay certain additional charges. To the extent
that such additional charges represent either (1) reimbursements of amounts
that
we are obligated to pay to third parties, such as a lessee’s proportionate share
of a property’s operational or capital expenses, or (2) penalties for nonpayment
or late payment of such amounts, such charges should qualify as “rents from real
property.” However, to the extent that such charges do not qualify as “rents
from real property,” they instead will be treated as interest that qualifies for
the 95% gross income test.
Interest.
The term
“interest” generally does not include any amount received or accrued, directly
or indirectly, if the determination of such amount depends in whole or in part
on the income or profits of any person. However, interest generally includes
the
following:
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an
amount that is based on a fixed percentage or percentages of receipts
or
sales; and
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an
amount that is based on the income or profits of a debtor, as long
as the
debtor derives substantially all of its income from the real property
securing the debt from leasing substantially all of its interest
in the
property, and only to the extent that the amounts received by the
debtor
would be qualifying “rents from real property” if received directly by a
REIT.
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If
a loan
contains a provision that entitles a REIT to a percentage of the borrower’s gain
upon the sale of the real property securing the loan or a percentage of the
appreciation in the property’s value as of a specific date, income attributable
to that loan provision will be treated as gain from the sale of the property
securing the loan, which generally is qualifying income for purposes of both
gross income tests.
From
time
to time, we have made mortgage loans in connection with the development of
hotel
properties. Our loans are directly secured by an interest in real property,
and
we believe that the income from those mortgage loans is qualifying income for
purposes of both gross income tests.
We
make
mezzanine loans that are not secured by a direct interest in real property.
Rather, those mezzanine loans likely are secured by ownership interests in
an
entity owning real property. In Revenue Procedure 2003-65, the Internal Revenue
Service established a safe harbor under which interest from loans secured by
a
first priority security interest in an ownership interest in a partnership
or
limited liability company owning real property will be treated as qualifying
income for both the 75% and 95% gross income tests, provided several
requirements are satisfied. Although the Revenue Procedure provides a safe
harbor on which taxpayers may rely, it does not prescribe rules of substantive
tax law. Moreover, our mezzanine loans typically do not meet all of the
requirements for reliance on this safe harbor. We have made and will make
mezzanine loans in a manner that we believe will enable us to continue to
satisfy the REIT gross income and asset tests. Any loan fees that we receive
in
making a loan, other than commitment fees for a mortgage loan, will not be
qualifying income for purposes of the 75% and the 95% gross income
tests.
Prohibited
Transactions.
A REIT
will incur a 100% tax on the net income derived from any sale or other
disposition of property, other than foreclosure property, that the REIT holds
primarily for sale to customers in the ordinary course of a trade or business.
We believe that none of our assets are held primarily for sale to customers
and
that a sale of any of our assets will not be in the ordinary course of our
business. Whether a REIT holds an asset “primarily for sale to customers in the
ordinary course of a trade or business” depends, however, on the facts and
circumstances in effect from time to time, including those related to a
particular asset. Nevertheless, we will attempt to comply with the terms of
safe-harbor provisions in the federal income tax laws prescribing when an asset
sale will not be characterized as a prohibited transaction. We cannot assure
you, however, that we can comply with the safe-harbor provisions or that we
will
avoid owning property that may be characterized as property that we hold
“primarily for sale to customers in the ordinary course of a trade or
business.”
Foreclosure
Property.
We will
be subject to tax at the maximum corporate rate on any income from foreclosure
property, other than income that otherwise would be qualifying income for
purposes of the 75% gross income test, less expenses directly connected with
the
production of that income. However, gross income from foreclosure property
will
qualify under the 75% and 95% gross income tests. Foreclosure property is any
real property, including interests in real property, and any personal property
incident to such real property:
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that
is acquired by a REIT as the result of the REIT having bid on such
property at foreclosure, or having otherwise reduced such property
to
ownership or possession by agreement or process of law, after there
was a
default or default was imminent on a lease of such property or on
indebtedness that such property
secured;
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for
which the related loan was acquired by the REIT at a time when the
default
was not imminent or anticipated;
and
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for
which the REIT makes a proper election to treat the property as
foreclosure property.
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We
have
no foreclosure property as of the date of this prospectus. Property generally
ceases to be foreclosure property at the end of the third taxable year following
the taxable year in which the REIT acquired the property, or longer if an
extension is granted by the Secretary of the Treasury. However, this grace
period terminates and foreclosure property ceases to be foreclosure property
on
the first day:
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on
which a lease is entered into for the property that, by its terms,
will
give rise to income that does not qualify for purposes of the 75%
gross
income test, or any amount is received or accrued, directly or indirectly,
pursuant to a lease entered into on or after such day that will give
rise
to income that does not qualify for purposes of the 75% gross income
test;
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on
which any construction takes place on the property, other than completion
of a building or any other improvement, where more than 10% of the
construction was completed before default became imminent;
or
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which
is more than 90 days after the day on which the REIT acquired the
property
and the property is used in a trade or business which is conducted
by the
REIT, other than through an independent contractor from whom the
REIT
itself does not derive or receive any
income.
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Hedging
Transactions.
From
time to time, we or our operating partnership may enter into hedging
transactions with respect to one or more of our assets or liabilities. Our
hedging activities may include entering into interest rate swaps, caps, and
floors, options to purchase such items, and futures and forward contracts.
Prior
to our 2005 taxable year, any periodic income or gain from the disposition
of
any financial instrument for those or similar transactions to hedge indebtedness
we or our operating partnership incurred to acquire or carry “real estate
assets” was qualifying income for purposes of the 95% gross income test, but not
the 75% gross income test. To the extent that we or our operating partnership
hedged with other types of financial instruments, or in other situations, it
is
not entirely clear how the income from those transactions should have been
treated for the gross income tests. Commencing with our 2005 taxable year,
income and gain from “hedging transactions” is excluded from gross income for
purposes of the 95% gross income test, but not the 75% gross income test. For
those taxable years, a “hedging transaction” means any transaction entered into
in the normal course of our or our operating partnership’s trade or business
primarily to manage the risk of interest rate, price changes, or currency
fluctuations with respect to borrowings made or to be made, or ordinary
obligations incurred or to be incurred, to acquire or carry real estate assets.
We are required to clearly identify any such hedging transaction before the
close of the day on which it was acquired, originated, or entered into and
to
satisfy other identification requirements. We intend to structure any hedging
transactions in a manner that does not jeopardize our qualification as a
REIT.
Failure
to Satisfy Gross Income Tests.
If we
fail to satisfy one or both of the gross income tests for any taxable year,
we
nevertheless may qualify as a REIT for that year if we qualify for relief under
certain provisions of the federal income tax laws. Prior to our 2005 taxable
year, those relief provisions generally were available if:
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our
failure to meet such tests was due to reasonable cause and not due
to
willful neglect;
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we
attached a schedule of the sources of our income to our tax return;
and
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any
incorrect information on the schedule was not due to fraud with intent
to
evade tax.
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Commencing
with our 2005 taxable year, those relief provisions are available
if:
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our
failure to meet those tests is due to reasonable cause and not to
willful
neglect; and
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following
such failure for any taxable year, we file a schedule of the sources
of
our income with the Internal Revenue
Service.
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We
cannot
predict, however, whether in all circumstances we would qualify for the relief
provisions. In addition, as discussed above in “-Taxation of Our Company,” even
if the relief provisions apply, we would incur a 100% tax on the gross income
attributable to the greater of (1) the amount by which we fail the 75% gross
income test and (2) the amount by which 95% (or 90% for our 2004 and prior
taxable years) of our income exceeds the amount of income qualifying under
the
95% gross income test, in each case, multiplied by a fraction intended to
reflect our profitability.
Asset
Tests
To
maintain our qualification as a REIT, we also must satisfy the following asset
tests at the end of each quarter of each taxable year. First, at least 75%
of
the value of our total assets must consist of:
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cash
or cash items, including certain
receivables;
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interests
in real property, including leaseholds and options to acquire real
property and leaseholds;
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interests
in mortgages on real property;
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shares
in other REITs; and
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investments
in shares or debt instruments during the one-year period following
our
receipt of new capital that we raise through equity offerings or
public
offerings of debt with at least a five-year
term.
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Second,
of our investments not included in the 75% asset class, the value of our
interest in any one issuer’s securities may not exceed 5% of the value of our
total assets (the “5% asset test”).
Third,
of
our investments not included in the 75% asset class, we may not own more than
10% of the voting power or value of any one issuer’s outstanding securities (the
“10% vote or value test”).
Fourth,
no more than 20% of the value of our total assets may consist of the securities
of one or more TRSs.
Fifth,
no
more than 25% of the value of our total assets may consist of the securities
of
TRSs and other non-TRS taxable subsidiaries and other assets that are not
qualifying assets for purposes of the 75% asset test.
For
purposes of the 5% asset test and the 10% vote or value test, the term
“securities” does not include shares in another REIT, equity or debt securities
of a qualified REIT subsidiary or TRS, mortgage loans that constitute real
estate assets, or equity interests in a partnership. For purposes of the 10%
value test, the term “securities” does not include:
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“Straight
debt” securities, which is defined as a written unconditional promise to
pay on demand or on a specified date a sum certain in money if (i)
the
debt is not convertible, directly or indirectly, into shares, and
(ii) the
interest rate and interest payment dates are not contingent on profits,
the borrower’s discretion, or similar factors. “Straight debt” securities
do not include any securities issued by a partnership or a corporation
in
which we or any TRS in which we own more than 50% of the voting power
or
value of the shares hold non-“straight debt” securities that have an
aggregate value of more than 1% of the issuer’s outstanding securities.
However, “straight debt” securities include debt subject to the following
contingencies:
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a
contingency relating to the time of payment of interest or principal,
as
long as either (i) there is no change to the effective yield of the
debt
obligation, other than a change to the annual yield that does not
exceed
the greater of 0.25% or 5% of the annual yield, or (ii) neither the
aggregate issue price nor the aggregate face amount of the issuer’s debt
obligations held by us exceeds $1 million and no more than 12 months
of
unaccrued interest on the debt obligations can be required to be
prepaid;
and
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a
contingency relating to the time or amount of payment upon a default
or
prepayment of a debt obligation, as long as the contingency is consistent
with customary commercial practice.
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Any
loan to an individual or an estate.
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Any
“section 467 rental agreement,” other than an agreement with a related
party tenant.
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Any
obligation to pay “rents from real
property.”
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Certain
securities issued by governmental
entities.
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Any
security issued by a REIT.
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Any
debt instrument issued by an entity treated as a partnership for
federal
income tax purposes in which we are a partner to the extent of our
proportionate interest in the equity and debt securities of the
partnership.
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Any
debt instrument issued by an entity treated as a partnership for
federal
income tax purposes not described in the preceding bullet points
if at
least 75% of the partnership’s gross income, excluding income from
prohibited transactions, is qualifying income for purposes of the
75%
gross income test described above in “--Income
Tests.”
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We
believe that our existing hotels, mortgage loans, and mezzanine loans are
qualifying assets for purposes of the 75% asset test. We also believe that
any
additional real property that we acquire and temporary investments that we
make
generally will be qualifying assets for purposes of the 75% asset test. As
described above, Revenue Procedure 2003-65 provides a safe harbor pursuant
to
which certain mezzanine loans secured by a first priority security interest
in
ownership interests in a partnership or limited liability company will be
treated as qualifying assets for purposes of the 75% asset test, the 5% asset
test, and the 10% vote or value test. “-Income Tests.” Although our mezzanine
loans typically do not qualify for that safe harbor, we believe our mezzanine
loans should be treated as qualifying assets for the 75% asset test. We will
continue to make mezzanine loans and non-mortgage loans only to the extent
such
loans will not cause us to fail the asset tests described above.
We
intend
to continue monitoring the status of our acquired assets for purposes of the
various asset tests and will manage our portfolio in order to comply at all
times with such tests. If we fail to satisfy the asset tests at the end of
a
calendar quarter, we will not lose our REIT qualification if:
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we
satisfied the asset tests at the end of the preceding calendar quarter;
and
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the
discrepancy between the value of our assets and the asset test
requirements arose from changes in the market values of our assets
and was
not wholly or partly caused by the acquisition of one or more
non-qualifying assets.
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If
we did
not satisfy the condition described in the second item, above, we still could
avoid disqualification by eliminating any discrepancy within 30 days after
the
close of the calendar quarter in which it arose.
If
at the
end of any calendar quarter commencing with our 2005 taxable year, we violate
the 5% asset test or the 10% vote or value test described above, we will not
lose our REIT qualification if (1) the failure is de minimis (up to the lesser
of 1% of our assets or $10 million) and (2) we dispose of assets or otherwise
comply with the asset tests within six months after the last day of the quarter
in which we identify such failure. In the event of a failure of any of the
asset
tests (other than de minimis failures described in the preceding sentence),
as
long as the failure was due to reasonable cause and not to willful neglect,
we
will not lose our REIT status if we (1) dispose of assets or otherwise comply
with the asset tests within six months after the last day of the quarter in
which we identify the failure, (2) we file a description of each asset causing
the failure with the Internal Revenue Service and (3) pay a tax equal to the
greater of $50,000 or 35% of the net income from the nonqualifying assets during
the period in which we failed to satisfy the asset tests.
Distribution
Requirements
Each
taxable year, we must distribute dividends, other than capital gain dividends
and deemed distributions of retained capital gain, to our shareholders in an
aggregate amount at least equal to:
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90%
of our “REIT taxable income,” computed without regard to the dividends
paid deduction and our net capital gain or loss,
and
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90%
of our after-tax net income, if any, from foreclosure property,
minus
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the
sum of certain items of non-cash
income.
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We
must
pay such distributions in the taxable year to which they relate, or in the
following taxable year if we declare the distribution before we timely file
our
federal income tax return for the year and pay the distribution on or before
the
first regular dividend payment date after such declaration.
We
will
pay federal income tax on taxable income, including net capital gain, that
we do
not distribute to shareholders. Furthermore, if we fail to distribute during
a
calendar year, or by the end of January following the calendar year in the
case
of distributions with declaration and record dates falling in the last three
months of the calendar year, at least the sum of:
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85%
of our REIT ordinary income for such
year,
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95%
of our REIT capital gain income for such year,
and
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any
undistributed taxable income from prior
periods,
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we
will
incur a 4% nondeductible excise tax on the excess of such required distribution
over the amounts we actually distribute. We may elect to retain and pay income
tax on the net long-term capital gain we receive in a taxable year. If we so
elect, we will be treated as having distributed any such retained amount for
purposes of the 4% nondeductible excise tax described above. We have made,
and
we intend to continue to make, timely distributions sufficient to satisfy the
annual distribution requirements and to avoid corporate income tax and the
4%
nondeductible excise tax.
It
is
possible that, from time to time, we may experience timing differences between
the actual receipt of income and actual payment of deductible expenses and
the
inclusion of that income and deduction of such expenses in arriving at our
REIT
taxable income. For example, we may not deduct recognized capital losses from
our “REIT taxable income.” Further, it is possible that, from time to time, we
may be allocated a share of net capital gain attributable to the sale of
depreciated property that exceeds our allocable share of cash attributable
to
that sale. As a result of the foregoing, we may have less cash than is necessary
to distribute taxable income sufficient to avoid corporate income tax and the
excise tax imposed on certain undistributed income or even to meet the 90%
distribution requirement. In such a situation, we may need to borrow funds
or
issue additional common or preferred shares.
Under
certain circumstances, we may be able to correct a failure to meet the
distribution requirement for a year by paying “deficiency dividends” to our
shareholders in a later year. We may include such deficiency dividends in our
deduction for dividends paid for the earlier year. Although we may be able
to
avoid income tax on amounts distributed as deficiency dividends, we will be
required to pay interest to the Internal Revenue Service based upon the amount
of any deduction we take for deficiency dividends.
Taxable
REIT Subsidiaries
As
described above, we may own up to 100% of the shares of one or more TRSs. A
TRS
is a fully taxable corporation that may earn income that would not be qualifying
income if earned directly by us. A TRS may provide services to our lessees
and
perform activities unrelated to our lessees, such as third-party management,
development, and other independent business activities. However, a taxable
REIT
subsidiary may not directly or indirectly operate or manage any hotels or health
care facilities or provide rights to any brand name under which any hotel or
health care facility is operated.
We
and
our corporate subsidiary must elect for the subsidiary to be treated as a TRS.
A
corporation of which a qualifying TRS directly or indirectly owns more than
35%
of the voting power or value of the shares will automatically be treated as
a
TRS. Overall, no more than 20% of the value of our assets may consist of
securities of one or more TRSs, and no more than 25% of the value of our assets
may consist of the securities of TRSs and other taxable subsidiaries and other
assets that are not qualifying assets for purposes of the 75% asset
test.
Rent
that
we receive from our TRSs will qualify as “rents from real property” as long as
the property is operated on behalf of the TRS by a person who qualifies as
an
“independent contractor” and who is, or is related to a person who is, actively
engaged in the trade or business of operating “qualified lodging facilities” for
any person unrelated to us and the TRS lessee (an “eligible independent
contractor”). A “qualified lodging facility” is a hotel, motel, or other
establishment more than one-half of the dwelling units in which are used on
a
transient basis, unless wagering activities are conducted at or in connection
with such facility by any person who is engaged in the business of accepting
wagers and who is legally authorized to engage in such business at or in
connection with such facility. A “qualified lodging facility” includes customary
amenities and facilities operated as part of, or associated with, the lodging
facility as long as such amenities and facilities are customary for other
properties of a comparable size and class owned by other unrelated owners.
We
lease all but one of our hotels to TRSs, and all of those TRSs have
engaged “eligible independent contractors” to operate and manage those hotels.
We lease all but one of our wholly owned hotels to 44 New England, a
TRS owned by our operating partnership, and HHMLP, an “eligible independent
contractor,” or other management companies that qualify as eligible independent
contractors, which operate and manage those hotels. All of our hotels owned
by
joint ventures are leased (1) to joint ventures, in which we hold equity
interests through a TRS, or (2) to a TRS wholly owned or substantially owned
by
the joint venture and those hotels are operated and managed by HHMLP or other
hotel managers that qualify as “eligible independent contractors.” We have
formed seven TRSs in connection with the financing of certain of our hotels.
Those TRSs own a 1% general partnership interest in the partnerships that own
those hotels. We may form new TRSs in the future, and we have represented that,
with respect to properties that we lease to our TRSs in the future, each such
TRS will engage an “eligible independent contractor” to manage and operate the
hotels leased by such TRS.
The
TRS
rules limit the deductibility of interest paid or accrued by a TRS to us to
assure that the TRS is subject to an appropriate level of corporate taxation.
Further, the rules impose a 100% excise tax on certain transactions between
a
TRS and us or our tenants that are not conducted on an arm’s-length basis. We
believe that all transactions between us and each of our existing TRSs have
been
and will be conducted on an arm’s-length basis.
Recordkeeping
Requirements
We
must
maintain certain records in order to qualify as a REIT. In addition, to avoid
a
monetary penalty, we must request on an annual basis information from our
shareholders designed to disclose the actual ownership of our outstanding shares
of beneficial interest. We have complied, and we intend to continue to comply,
with these requirements.
Failure
to Qualify
Commencing
with our 2005 taxable year, if we fail to satisfy one or more requirements
for
REIT qualification, other than the gross income tests and the asset tests,
we
could avoid disqualification if our failure is due to reasonable cause and
not
to willful neglect and we pay a penalty of $50,000 for each such failure. In
addition, there are relief provisions for a failure of the gross income tests
and asset tests, as described in “Requirements for Qualification-Income Tests”
and “-Asset Tests.”
If
we
fail to qualify as a REIT in any taxable year, and no relief provision applies,
we would be subject to federal income tax and any applicable alternative minimum
tax on our taxable income at regular corporate rates. In calculating our taxable
income in a year in which we fail to qualify as a REIT, we would not be able
to
deduct amounts paid out to shareholders. In fact, we would not be required
to
distribute any amounts to shareholders in that year. In such event, to the
extent of our current and accumulated earnings and profits, distributions to
most domestic non-corporate shareholders would generally be taxable at capital
gains tax rates. Subject to certain limitations of the federal income tax laws,
corporate shareholders might be eligible for the dividends received deduction.
Unless we qualified for relief under specific statutory provisions, we also
would be disqualified from taxation as a REIT for the four taxable years
following the year during which we ceased to qualify as a REIT. We cannot
predict whether in all circumstances we would qualify for such statutory relief.
Taxation
of Taxable U.S. Shareholders
As
used
herein, the term "U.S. shareholder" means a holder of our common shares that
for
U.S. federal income tax purposes is:
· a
citizen
or resident of the United States;
· a
corporation created or organized in or under the laws of the United States,
any
of its states or the District of Columbia;
· an
estate
whose income is subject to federal income taxation regardless of its source;
or
· any
trust
if (1) a U.S. court is able to exercise primary supervision over the
administration of such trust and one or more U.S. persons have the authority
to
control all substantial decisions of the trust or (2) it has a valid election
in
place to be treated as a U.S. person.
If
a
partnership, entity or arrangement treated as a partnership for U.S. federal
income tax purposes holds our common shares, the federal income tax treatment
of
a partner in the partnership will generally depend on the status of the partner
and the activities of the partnership. If you are a partner in a partnership
holding our common shares, you should consult your tax advisor regarding the
consequences of the ownership and disposition of our common shares by the
partnership.
As
long
as we qualify as a REIT, a taxable U.S. shareholder must generally take into
account as ordinary income distributions made out of our current or accumulated
earnings and profits that we do not designate as capital gain dividends or
retained long-term capital gain. For purposes of determining whether a
distribution is made out of our current or accumulated earnings and profits,
our
earnings and profits will be allocated first to our preferred share dividends
and then to our common share dividends.
Dividends
paid to corporate U.S. shareholders will not qualify for the dividends received
deduction generally available to corporations. In addition, dividends paid
to a
U.S. shareholder generally will not qualify for the 15% tax rate for "qualified
dividend income." Legislation enacted in 2003 and 2006 reduced the maximum
tax
rate for qualified dividend income from 38.6% to 15% for tax years 2003 through
2010. Without future congressional action, the maximum tax rate on qualified
dividend income will be 39.6% in 2011. Qualified dividend income generally
includes dividends paid to U.S. shareholders taxed at individual rates by
domestic C corporations and certain qualified foreign corporations. Because
we
are not generally subject to federal income tax on the portion of our net
taxable income distributed to our shareholders (see "Taxation of Our Company"),
our dividends generally will not be eligible for the 15% rate on qualified
dividend income. As a result, our ordinary dividends will continue to be taxed
at the higher tax rate applicable to ordinary income, which currently is a
maximum rate of 35%. However, the 15% tax rate for qualified dividend income
will apply to our ordinary dividends to the extent attributable (i) to dividends
received by us from non-REIT corporations, such as a TRS, and (ii) to income
upon which we have paid corporate income tax (e.g., to the extent that we
distribute less than 100% of our taxable income). In general, to qualify for
the
reduced tax rate on qualified dividend income, a shareholder must hold our
common shares for more than 60 days during the 121-day period beginning on
the
date that is 60 days before the date on which our common shares become
ex-dividend.
A
U.S.
shareholder generally will take into account as long-term capital gain any
distributions that we designate as capital gain dividends without regard to
the
period for which the U.S. shareholder has held our common shares. We generally
will designate our capital gain dividends as either 15% or 25% rate
distributions. See "-- Capital Gains and Losses." A corporate U.S. shareholder,
however, may be required to treat up to 20% of certain capital gain dividends
as
ordinary income.
We
may
elect to retain and pay income tax on the net long-term capital gain that we
receive in a taxable year. In that case, to the extent that we designate such
amount in a timely notice to such shareholder, a U.S. shareholder would be
taxed
on its proportionate share of our undistributed long-term capital gain. The
U.S.
shareholder would receive a credit for its proportionate share of the tax we
paid. The U.S. shareholder would increase the basis in its stock by the amount
of its proportionate share of our undistributed long-term capital gain, minus
its share of the tax we paid.
To
the
extent that we make a distribution in excess of our current and accumulated
earnings and profits, such distribution will not be taxable to a U.S.
shareholder to the extent that it does not exceed the adjusted tax basis of
the
U.S. shareholder's common shares. Instead, such distribution will reduce the
adjusted tax basis of such shares. To the extent that we make a distribution
in
excess of both our current and accumulated earnings and profits and the U.S.
shareholder's adjusted tax basis in its common shares, such shareholder will
recognize long-term capital gain, or short-term capital gain if the common
shares have been held for one year or less, assuming the common shares are
capital assets in the hands of the U.S. shareholder. In addition, if we declare
a distribution in October, November, or December of any year that is payable
to
a U.S. shareholder of record on a specified date in any such month, such
distribution shall be treated as both paid by us and received by the U.S.
shareholder on December 31 of such year, provided that we actually pay the
distribution during January of the following calendar year.
Shareholders
may not include in their individual income tax returns any of our net operating
losses or capital losses. Instead, we would carry over such losses for potential
offset against our future income. Taxable distributions from us and gain from
the disposition of our common shares will not be treated as passive activity
income, and therefore, shareholders generally will not be able to apply any
"passive activity losses," such as losses from certain types of limited
partnerships in which the shareholder is a limited partner, against such income.
In addition, taxable distributions from us and gain from the disposition of
our
common shares generally may be treated as investment income for purposes of
the
investment interest limitations (although any capital gains so treated will not
qualify for the lower 15% tax rate applicable to capital gains of most domestic
non-corporate investors). We will notify shareholders after the close of our
taxable year as to the portions of the distributions attributable to that year
that constitute ordinary income, return of capital, and capital
gain.
Taxation
of U.S. Shareholders on the Disposition of Common Shares
In
general, a U.S. shareholder who is not a dealer in securities must treat any
gain or loss realized upon a taxable disposition of our common shares as
long-term capital gain or loss if the U.S. shareholder has held the common
shares for more than one year and otherwise as short-term capital gain or loss.
However, a U.S. shareholder must treat any loss upon a sale or exchange of
common shares held by such shareholder for six months or less as a long-term
capital loss to the extent of any actual or deemed distributions from us that
such U.S. shareholder previously has characterized as long-term capital gain.
All or a portion of any loss that a U.S. shareholder realizes upon a taxable
disposition of common shares may be disallowed if the U.S. shareholder purchases
other common shares within 30 days before or after the disposition.
Capital
Gains and Losses
A
taxpayer generally must hold a capital asset for more than one year for gain
or
loss derived from its sale or exchange to be treated as long-term capital gain
or loss. The highest marginal individual income tax rate is 35%. However, the
maximum tax rate on long-term capital gain applicable to most domestic
non-corporate taxpayers is 15% (after December 31, 2010, the maximum rate is
scheduled to increase to 20%). The maximum tax rate on long-term capital gain
from the sale or exchange of "section 1250 property," or depreciable real
property, is 25% computed on the lesser of the total amount of the gain or
the
accumulated Section 1250 depreciation. With respect to distributions that we
designate as capital gain dividends and any retained capital gain that we are
deemed to distribute, we generally may designate whether such a distribution
is
taxable to our non-corporate shareholders at a 15% or 25% rate. Thus, the tax
rate differential between capital gain and ordinary income for non-corporate
taxpayers may be significant. In addition, the characterization of income as
capital gain or ordinary income may affect the deductibility of capital losses.
A non-corporate taxpayer may deduct capital losses not offset by capital gains
against its ordinary income only up to a maximum annual amount of $3,000. A
non-corporate taxpayer may carry forward unused capital losses indefinitely.
A
corporate taxpayer must pay tax on its net capital gain at ordinary corporate
rates. A corporate taxpayer may deduct capital losses only to the extent of
capital gains, with unused losses being carried back three years and forward
five years.
Information
Reporting Requirements and Backup Withholding
We
will
report to our shareholders and to the Internal Revenue Service the amount of
distributions we pay during each calendar year, and the amount of tax we
withhold, if any. Under the backup withholding rules, a shareholder may be
subject to backup withholding at the rate of 28% with respect to distributions
unless such holder:
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is
a corporation or comes within certain other exempt categories and,
when
required, demonstrates this fact;
or
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provides
a taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with the applicable
requirements of the backup withholding
rules.
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A
shareholder who does not provide us with its correct taxpayer identification
number also may be subject to penalties imposed by the Internal Revenue Service.
Any amount paid as backup withholding will be creditable against the
shareholder's income tax liability. In addition, we may be required to withhold
a portion of capital gain distributions to any shareholders who fail to certify
their non-foreign status to us. See "--Taxation of Non-U.S.
Shareholders."
Taxation
Of Tax-Exempt Shareholders
Tax-exempt
entities, including qualified employee pension and profit sharing trusts and
individual retirement accounts and annuities, generally are exempt from federal
income taxation. However, they are subject to taxation on their unrelated
business taxable income. While many investments in real estate generate
unrelated business taxable income, the Internal Revenue Service has issued
a
published ruling that dividend distributions from a REIT to an exempt employee
pension trust do not constitute unrelated business taxable income, provided
that
the exempt employee pension trust does not otherwise use the shares of the
REIT
in an unrelated trade or business of the pension trust. Based on that ruling,
amounts that we distribute to tax-exempt shareholders generally should not
constitute unrelated business taxable income. However, if a tax-exempt
shareholder were to finance its acquisition of our common shares with debt,
a
portion of the income that it receives from us would constitute unrelated
business taxable income pursuant to the "debt-financed property" rules.
Furthermore, social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans that
are
exempt from taxation under special provisions of the federal income tax laws
are
subject to different unrelated business taxable income rules, which generally
will require them to characterize distributions that they receive from us as
unrelated business taxable income. Finally, in certain circumstances, a
qualified employee pension or profit sharing trust that owns more than 10%
of
our shares of beneficial interest is required to treat a percentage of the
dividends that it receives from us as unrelated business taxable income. Such
percentage is equal to the gross income that we derive from an unrelated trade
or business, determined as if we were a pension trust, divided by our total
gross income for the year in which we pay the dividends. That rule applies
to a
pension trust holding more than 10% of our shares of beneficial interest only
if:
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the
percentage of our dividends that the tax-exempt trust would be required
to
treat as unrelated business taxable income is at least
5%;
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we
qualify as a REIT by reason of the modification of the rule requiring
that
no more than 50% of our shares of beneficial interest be owned by
five or
fewer individuals that allows the beneficiaries of the pension trust
to be
treated as holding our shares of beneficial interest in proportion
to
their actuarial interests in the pension trust (see "Requirements
for
Qualification"); and
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either
(1) one pension trust owns more than 25% of the value of our shares
of
beneficial interest or (2) a group of pension trusts individually
holding
more than 10% of the value of our shares of beneficial interest
collectively owns more than 50% of the value of our
shares.
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Taxation
of Non-U.S. Shareholders
The
rules
governing federal income taxation of nonresident alien individuals, foreign
corporations, foreign partnerships, and other foreign shareholders
(collectively, "non-U.S. shareholders") are complex. This section is only a
summary of such rules. WE URGE NON-U.S. SHAREHOLDERS TO CONSULT THEIR TAX
ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE, LOCAL AND FOREIGN INCOME
TAX
LAWS ON OWNERSHIP OF OUR COMMON SHARES, INCLUDING ANY REPORTING
REQUIREMENTS.
A
non-U.S. shareholder that receives a distribution that is not attributable
to
gain from our sale or exchange of a "United States real property interest,"
as
defined below, and that we do not designate as a capital gain dividend or
retained capital gain will recognize ordinary income to the extent that we
pay
such distribution out of our current or accumulated earnings and profits. A
withholding tax equal to 30% of the gross amount of the distribution ordinarily
will apply to such distribution unless an applicable tax treaty reduces or
eliminates the tax. However, if a distribution is treated as effectively
connected with the non-U.S. shareholder's conduct of a U.S. trade or business,
the non-U.S. shareholder generally will be subject to federal income tax on
the
distribution at graduated rates, in the same manner as U.S. shareholders are
taxed with respect to such distribution, and a non-U.S. shareholder that is
a
corporation also may be subject to the 30% branch profits tax with respect
to
the distribution. We plan to withhold U.S. income tax at the rate of 30% on
the
gross amount of any such distribution paid to a non-U.S. shareholder unless
either:
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a
lower treaty rate applies and the non-U.S. shareholder files an IRS
Form
W-8BEN evidencing eligibility for that reduced rate with us;
or
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the
non-U.S. shareholder files an IRS Form W-8ECI with us claiming that
the
distribution is effectively connected
income.
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A
non-U.S. shareholder will not incur tax on a distribution in excess of our
current and accumulated earnings and profits if the excess portion of such
distribution does not exceed the adjusted basis of its common shares. Instead,
the excess portion of such distribution will reduce the adjusted basis of such
shares. A non-U.S. shareholder will be subject to tax on a distribution that
exceeds both our current and accumulated earnings and profits and the adjusted
basis of its common shares, if the non-U.S. shareholder otherwise would be
subject to tax on gain from the sale or disposition of its common shares, as
described below. Because we generally cannot determine at the time we make
a
distribution whether the distribution will exceed our current and accumulated
earnings and profits, we normally will withhold tax on the entire amount of
any
distribution at the same rate as we would withhold on a dividend. However,
a
non-U.S. shareholder may claim a refund of amounts that we withhold if we later
determine that a distribution in fact exceeded our current and accumulated
earnings and profits.
We
may be
required to withhold 10% of any distribution that exceeds our current and
accumulated earnings and profits. Consequently, although we intend to withhold
at a rate of 30% on the entire amount of any distribution, to the extent that
we
do not do so, we will withhold at a rate of 10% on any portion of a distribution
not subject to withholding at a rate of 30%.
For
any
year in which we qualify as a REIT, a non-U.S. shareholder will incur tax on
distributions that are attributable to gain from our sale or exchange of a
"United States real property interest" under special provisions of the federal
income tax laws referred to as FIRPTA. The term "United States real property
interest" includes certain interests in real property and stock in corporations
at least 50% of whose assets consist of interests in real property. Under those
rules, a non-U.S. shareholder is taxed on distributions attributable to gain
from sales of United States real property interests as if such gain were
effectively connected with a U.S. business of the non-U.S. shareholder. A
non-U.S. shareholder thus would be taxed on such a distribution at the normal
capital gains rates applicable to U.S. shareholders, subject to applicable
alternative minimum tax and a special alternative minimum tax in the case of
a
nonresident alien individual. A non-U.S. corporate shareholder not entitled
to
treaty relief or exemption also may be subject to the 30% branch profits tax
on
such a distribution. We must withhold 35% of any distribution that we could
designate as a capital gain dividend. A non-U.S. shareholder may receive a
credit against its tax liability for the amount we withhold.
Capital
gain distributions to the holders of common shares that are attributable to
our
sale of real property will be treated as ordinary dividends rather than as
gain
from the sale of a United States real property interest, as long as (1) our
common shares continue to treated as being "regularly traded" on an established
securities market and (2) the non-U.S. shareholder did not own more than 5%
of
our common shares at any time during the one-year period preceding the
distribution. As a result, non-U.S. shareholders owning 5% or less of our common
shares generally will be subject to withholding tax on such capital gain
distributions in the same manner as they are subject to withholding tax on
ordinary dividends. If our common shares cease to be regularly traded on an
established securities market or the non-U.S. shareholder owned more than 5%
of
our common shares at any time during the one-year period preceding the
distribution, capital gain distributions that are attributable to our sale
of
real property would be subject to tax under FIRPTA, as described in the
preceding paragraph. Moreover, if a non-U.S. shareholder disposes of our common
shares during the 30-day period preceding a dividend payment, and such non-U.S.
shareholder (or a person related to such non-U.S. shareholder) acquires or
enters into a contract or option to acquire our common shares within 61 days
of
the 1st day of the 30-day period described above, and any portion of such
dividend payment would, but for the disposition, be treated as a United States
real property interest capital gain to such non-U.S. shareholder, then such
non-U.S. shareholder shall be treated as having United States real property
interest capital gain in an amount that, but for the disposition, would have
been treated as United States real property interest capital gain.
A
non-U.S. shareholder generally will not incur tax under FIRPTA with respect
to
gain realized upon a disposition of our common shares as long as at all times
non-U.S. persons hold, directly or indirectly, less than 50% in value of our
shares of beneficial interest. We cannot assure you that that test will be
met.
However, a non-U.S. shareholder that owned, actually or constructively, 5%
or
less of our common shares at all times during a specified testing period will
not incur tax under FIRPTA if the common shares are "regularly traded" on an
established securities market. Because our common shares are regularly traded
on
an established securities market, a non-U.S. shareholder will not incur tax
under FIRPTA with respect to any such gain unless it owns, actually or
constructively, more than 5% of our common shares. If the gain on the sale
of
the common shares were taxed under FIRPTA, a non-U.S. shareholder would be
taxed
in the same manner as U.S. shareholders with respect to such gain, subject
to
applicable alternative minimum tax or, a special alternative minimum tax in
the
case of nonresident alien individuals. Furthermore, a non-U.S. shareholder
will
incur tax on gain not subject to FIRPTA if (1) the gain is effectively connected
with the non-U.S. shareholder's U.S. trade or business, in which case the
non-U.S. shareholder will be subject to the same treatment as U.S. shareholders
with respect to such gain, or (2) the non-U.S. shareholder is a nonresident
alien individual who was 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 non-U.S. shareholder will incur a 30% tax on his capital gains.
Tax
Aspects of Our Investments in Our Operating Partnership and the Subsidiary
Partnerships
The
following discussion summarizes certain federal income tax considerations
applicable to our direct or indirect investments in our operating partnership
and any subsidiary partnerships or limited liability companies that we form
or
acquire (each individually a “Partnership” and, collectively, the
“Partnerships”). The discussion does not cover state or local tax laws or any
federal tax laws other than income tax laws.
Classification
as Partnerships.
We are
entitled to include in our income our distributive share of each Partnership’s
income and to deduct our distributive share of each Partnership’s losses only if
such Partnership is classified for federal income tax purposes as a partnership
(or an entity that is disregarded for federal income tax purposes if the entity
has only one owner or member) rather than as a corporation or an association
taxable as a corporation. An unincorporated entity with at least two owners
or
members will be classified as a partnership, rather than as a corporation,
for
federal income tax purposes if it:
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is
treated as a partnership under the Treasury regulations relating
to entity
classification (the “check-the-box regulations”);
and
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is
not a “publicly traded”
partnership.
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Under
the
check-the-box regulations, an unincorporated entity with at least two owners
or
members may elect to be classified either as an association taxable as a
corporation or as a partnership. If such an entity fails to make an election,
it
generally will be treated as a partnership (or an entity that is disregarded
for
federal income tax purposes if the entity has only one owner or member) for
federal income tax purposes. Each Partnership intends to be classified as a
partnership for federal income tax purposes and no Partnership will elect to
be
treated as an association taxable as a corporation under the check-the-box
regulations.
A
publicly traded partnership is a partnership whose interests are traded on
an
established securities market or are readily tradable on a secondary market
or
the substantial equivalent thereof. A publicly traded partnership will not,
however, be treated as a corporation for any taxable year if, for each taxable
year beginning after December 31, 1987 in which it was classified as a publicly
traded partnership, 90% or more of the partnership’s gross income for such year
consists of certain passive-type income, including real property rents, gains
from the sale or other disposition of real property, interest, and dividends
(the “90% passive income exception”). Treasury regulations (the “PTP
regulations”) provide limited safe harbors from the definition of a publicly
traded partnership. Pursuant to one of those safe harbors (the “private
placement exclusion”), interests in a partnership will not be treated as readily
tradable on a secondary market or the substantial equivalent thereof if (1)
all
interests in the partnership were issued in a transaction or transactions that
were not required to be registered under the Securities Act of 1933, as amended,
and (2) the partnership does not have more than 100 partners at any time during
the partnership’s taxable year. In determining the number of partners in a
partnership, a person owning an interest in a partnership, grantor trust, or
S
corporation that owns an interest in the partnership is treated as a partner
in
such partnership only if (1) substantially all of the value of the owner’s
interest in the entity is attributable to the entity’s direct or indirect
interest in the partnership and (2) a principal purpose of the use of the entity
is to permit the partnership to satisfy the 100-partner limitation. Each
Partnership qualifies for the private placement exclusion. We have not
requested, and do not intend to request, a ruling from the Internal Revenue
Service that the Partnerships will be classified as partnerships for federal
income tax purposes.
If
for
any reason a Partnership were taxable as a corporation, rather than as a
partnership, for federal income tax purposes, we likely would not be able to
qualify as a REIT. See “-Requirements for Qualification-Income Tests” and
“-Requirements for Qualification-Asset Tests.” In addition, any change in a
Partnership’s status for tax purposes might be treated as a taxable event, in
which case we might incur tax liability without any related cash distribution.
See “-Requirements for Qualification-Distribution Requirements.” Further, items
of income and deduction of such Partnership would not pass through to its
partners, and its partners would be treated as shareholders for tax purposes.
Consequently, such Partnership would be required to pay income tax at corporate
rates on its net income, and distributions to its partners would constitute
dividends that would not be deductible in computing such Partnership’s taxable
income.
Income
Taxation of the Partnerships and their Partners
Partners,
Not the Partnerships, Subject to Tax.
A
partnership is not a taxable entity for federal income tax purposes. Rather,
we
are required to take into account our allocable share of each Partnership’s
income, gains, losses, deductions, and credits for any taxable year of such
Partnership ending within or with our taxable year, without regard to whether
we
have received or will receive any distribution from such
Partnership.
Partnership
Allocations.
Although
a partnership agreement generally will determine the allocation of income and
losses among partners, such allocations will be disregarded for tax purposes
if
they do not comply with the provisions of the federal income tax laws governing
partnership allocations. If an allocation is not recognized for federal income
tax purposes, the item subject to the allocation will be reallocated in
accordance with the partners’ interests in the partnership, which will be
determined by taking into account all of the facts and circumstances relating
to
the economic arrangement of the partners with respect to such item. Each
Partnership’s allocations of taxable income, gain, and loss are intended to
comply with the requirements of the federal income tax laws governing
partnership allocations.
Tax
Allocations With Respect to Contributed Properties.
Income,
gain, loss, and deduction attributable to appreciated or depreciated property
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 unrealized gain or unrealized
loss associated with the property at the time of the contribution. The amount
of
such unrealized gain or unrealized loss (“built-in gain” or “built-in loss”) is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis
of
such property at the time of contribution (a “book-tax difference”). Such
allocations are solely for federal income tax purposes and do not affect the
book capital accounts or other economic or legal arrangements among the
partners. The U.S. Treasury Department has issued regulations requiring
partnerships to use a “reasonable method” for allocating items with respect to
which there is a book-tax difference and outlining several reasonable allocation
methods.
Under
our
operating partnership’s partnership agreement, depreciation or amortization
deductions of our operating partnership generally will be allocated among the
partners in accordance with their respective interests in our operating
partnership, except to the extent that our operating partnership is required
under the federal income tax laws governing partnership allocations to use
a
method for allocating tax depreciation deductions attributable to contributed
properties that results in our receiving a disproportionate share of such
deductions. In addition, gain or loss on the sale of a property that has been
contributed, in whole or in part, to our operating partnership will be specially
allocated to the contributing partners to the extent of any built-in gain or
loss with respect to such property for federal income tax purposes.
Basis
in Partnership Interest.
Our
adjusted tax basis in our partnership interest in our operating partnership
generally is equal to:
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the
amount of cash and the basis of any other property contributed by
us to
our operating partnership;
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increased
by our allocable share of our operating partnership’s income and our
allocable share of indebtedness of our operating partnership;
and
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reduced,
but not below zero, by our allocable share of our operating partnership’s
loss and the amount of cash distributed to us, and by constructive
distributions resulting from a reduction in our share of indebtedness
of
our operating partnership.
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If
the
allocation of our distributive share of our operating partnership’s loss would
reduce the adjusted tax basis of our partnership interest below zero, the
recognition of such loss will be deferred until such time as the recognition
of
such loss would not reduce our adjusted tax basis below zero. To the extent
that
our operating partnership’s distributions, or any decrease in our share of the
indebtedness of our operating partnership, which is considered a constructive
cash distribution to the partners, reduce our adjusted tax basis below zero,
such distributions will constitute taxable income to us. Such distributions
and
constructive distributions normally will be characterized as long-term capital
gain.
Depreciation
Deductions Available to Our Operating Partnership.
To the
extent that our operating partnership acquired its hotels in exchange for cash,
its initial basis in such hotels for federal income tax purposes generally
was
or will be equal to the purchase price paid by our operating partnership. Our
operating partnership depreciates such depreciable hotel property for federal
income tax purposes under the modified accelerated cost recovery system of
depreciation (“MACRS”). Under MACRS, our operating partnership generally
depreciates furnishings and equipment over a seven-year recovery period using
a
200% declining balance method and a half-year convention. If, however, our
operating partnership places more than 40% of its furnishings and equipment
in
service during the last three months of a taxable year, a mid-quarter
depreciation convention must be used for the furnishings and equipment placed
in
service during that year. A first-year “bonus” depreciation deduction equal to
50% of the adjusted basis of qualified property is available for qualified
property placed in service after May 5, 2003. “Qualified Property” includes
qualified leasehold improvement property and property with a recovery period
of
less than 20 years, such as furnishings and equipment at our hotels. “Qualified
leasehold improvement property” generally includes improvements made to the
interior of nonresidential real property that are placed in service more than
three years after the date the building was placed in service. In addition,
certain qualified leasehold improvement property placed in service before
January 1, 2006 will be depreciated over a 15-year recovery period using a
straight method and a half-year convention. Under MACRS, our operating
partnership generally depreciates buildings and improvements over a 39-year
recovery period using a straight line method and a mid-month convention. Our
operating partnership’s initial basis in hotels acquired in exchange for units
in our operating partnership should be the same as the transferor’s basis in
such hotels on the date of acquisition by our operating partnership. Although
the law is not entirely clear, our operating partnership generally depreciates
such depreciable hotel property for federal income tax purposes over the same
remaining useful lives and under the same methods used by the transferors.
Our
operating partnership’s tax depreciation deductions are allocated among the
partners in accordance with their respective interests in our operating
partnership, except to the extent that our operating partnership is required
under the federal income tax laws governing partnership allocations to use
a
method for allocating tax depreciation deductions attributable to contributed
properties that results in our receiving a disproportionate share of such
deductions.
Sale
of a Partnership’s Property
Generally,
any gain realized by a Partnership on the sale of property held by the
Partnership for more than one year will be long-term capital gain, except for
any portion of such gain that is treated as depreciation or cost recovery
recapture. Any gain or loss recognized by a Partnership on the disposition
of
contributed properties will be allocated first to the partners of the
Partnership who contributed such properties to the extent of their built-in
gain
or loss on those properties for federal income tax purposes. The partners’
built-in gain or loss on such contributed properties will equal the difference
between the partners’ proportionate share of the book value of those properties
and the partners’ tax basis allocable to those properties at the time of the
contribution. Any remaining gain or loss recognized by the Partnership on the
disposition of the contributed properties, and any gain or loss recognized
by
the Partnership on the disposition of the other properties, will be allocated
among the partners in accordance with their respective percentage interests
in
the Partnership.
Our
share
of any gain realized by a Partnership on the sale of any property held by the
Partnership as inventory or other property held primarily for sale to customers
in the ordinary course of the Partnership’s trade or business will be treated as
income from a prohibited transaction that is subject to a 100% penalty tax.
Such
prohibited transaction income also may have an adverse effect upon our ability
to satisfy the income tests for REIT status. See “-Requirements for
Qualification-Income Tests.” We, however, do not presently intend to acquire or
hold or to allow any Partnership to acquire or hold any property that represents
inventory or other property held primarily for sale to customers in the ordinary
course of our or such Partnership’s trade or business.
State
and Local Taxes
We
and/or
you may be subject to taxation by various states and localities, including
those
in which we or a shareholder transacts business, owns property or resides.
The
state and local tax treatment may differ from the federal income tax treatment
described above. Consequently, you should consult your own tax advisors
regarding the effect of state and local tax laws upon an investment in our
common shares.
This
prospectus covers the resale of shares of common shares by the selling
shareholders and their pledgees, donees, assignees and other successors in
interest. The common shares offered by the selling shareholders have been or
may
be issued to them by us upon redemption of operating partnership units or
exercise of outstanding warrants. These common shares have been or may be issued
to the selling shareholders pursuant to an exemption from the registration
provisions of the Securities Act. We are registering the common shares to which
this prospectus relates to provide the holders thereof with freely tradable
securities, but registration of these shares does not necessarily mean that
any
of these shares will be issued by us or offered or sold by the selling
shareholders. The selling shareholders may sell their common shares on the
American Stock Exchange or through any other facility on which the shares are
traded, or in private transactions. These sales may be at market prices or
at
negotiated prices. The selling shareholders may use the following methods when
selling common shares:
|
·
|
ordinary
brokerage transactions and transactions in which the broker or dealer
solicits purchasers;
|
|
·
|
block
trades in which the broker or dealer attempts to sell the common
shares as
agent, but may position and resell a portion of the block as principal
to
facilitate the transaction;
|
|
·
|
purchases
by a broker or dealer as principal and resale by the broker or dealer
for
its account pursuant to this
prospectus;
|
|
·
|
privately
negotiated transactions;
|
|
·
|
any
combination of these methods of sale;
or
|
|
·
|
any
other legal method.
|
The
selling shareholders may engage in short sales of the common shares and deliver
common shares to close out their short positions. The selling shareholders
may
also enter into put or call options or other transactions with broker-dealers
or
others which require delivery to those persons of common shares covered by
this
prospectus.
Brokers,
dealers or other agents participating in the distribution of the common shares
may receive compensation in the form of discounts or commissions from the
selling shareholders, as well as the purchaser if they act as agent for the
purchaser. The discount or commission in a particular transaction could be
more
than the customary amount. We know of no existing arrangements between the
selling shareholders and any underwriter, broker, dealer or agent relating
to
the sale or distribution of the common shares.
The
selling shareholders and any brokers or dealers that participate in the sale
of
the common shares may be deemed to be "underwriters" within the meaning of
the
Securities Act. It is the position of the Securities Exchange Commission that
a
registered broker-dealer that is a selling shareholder is presumed to be an
underwriter. Any discounts, commissions or other compensation received by these
persons and any profit on the resale of the common shares by them as principals
might be deemed to be underwriters' compensation. The selling shareholders
may
agree to indemnify any broker, dealer or agent that participates in the sale
of
the common shares against various liabilities, including liabilities under
the
Securities Act of 1933, as amended.
To
the
extent required by law, at the time a particular offer of common shares is
made,
we will file a supplement to this prospectus which identifies the number of
common shares being offered, the name of the selling shareholders, the name
of
any participating broker or dealer, the amount of discounts and commissions,
and
any other material information.
The
selling shareholders and any other person participating in a distribution will
be subject to the applicable provisions of the Exchange Act and its rules and
regulations. For example, the anti-manipulation provisions of Regulation M
may
limit the ability of the selling shareholders or others to engage in stabilizing
and other market making activities.
This
offering will terminate upon the date on which all shares offered
hereby have been sold by the selling shareholders.
The
selling shareholders may also sell their common shares from time to time
pursuant to Rule 144 under the Securities Act, rather than pursuant to this
prospectus, so long as they meet the criteria and conform to the requirements
of
the rule.
We
will
not receive any of the proceeds from the sale of the common shares by the
selling shareholders. We will pay the registration and other offering expenses
related to his offering, but the selling shareholders will pay all underwriting
discounts and brokerage commissions incurred in connection with the offering,
if
any. We have agreed to indemnify certain selling shareholders against various
liabilities, including liabilities under the Securities Act.
In
order
to comply with some states' securities laws, if applicable, the common shares
will be sold in those states only through registered or licensed brokers or
dealers. In addition, in some states the common shares may not be sold unless
they have been registered or qualified for sale or an exemption from
registration or qualification is available and is satisfied.
Certain
legal matters in connection with this offering will be passed upon for us by
Hunton & Williams LLP. In addition, the summary of legal matters contained
in the section of this Prospectus under the heading “Federal Income Tax
Consequences of Our Status as a REIT” is based on the opinion of Hunton &
Williams LLP.
The
consolidated financial statements and schedule of Hersha Hospitality Trust
as of
December 31, 2006, and 2005, and for each of the years in the three year period
ended December 31, 2006, and management’s assessment of the effectiveness of
internal control over financial reporting as of December 31, 2006 have been
incorporated by reference herein in reliance upon the reports of KPMG LLP,
independent registered public accounting firm, and, with respect to the
consolidated financial statements, PricewaterhouseCoopers LLP, independent
accountants, incorporated by reference herein, and upon the authority of said
firms as experts in accounting and auditing.
The
historical financial statements of Mystic Partners, LLC as of December 31,
2006
and 2005, and for the period ended December 31, 2006 and the period from June
15, 2005 (date of inception) to December 31, 2005, incorporated in this
prospectus by reference to our Annual Report on Form 10-K for the year ended
December 31, 2006, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority
of
said firm as experts in auditing and accounting.
The
audited historical financial statements of Hyatt Summerfield Suites Hotel
Partnerships as of December 31, 2005 and 2004 and for each of the three
years in the period ended December 31, 2005 incorporated by reference in
this prospectus have been so incorporated in reliance on the report of Grant
Thornton LLP, independent accountants, given on the authority of said firm
as
experts in auditing and accounting.
HOW
TO
OBTAIN MORE INFORMATION
We
file
annual, quarterly and special reports, proxy statements and other information
with the SEC. You may read and copy any reports, statements, or other
information we file with the SEC at its public reference room in Washington,
D.C. (100 F Street, N.E., 20549). Please call the SEC at 1-800-SEC-0330 for
further information on the public reference room. Our filings are also available
to the public on the internet, through a database maintained by the SEC at
http://www.sec.gov. In addition, you can inspect and copy reports, proxy
statements and other information concerning Hersha Hospitality Trust at the
offices of the American Stock Exchange, Inc., 86 Trinity Place, New York, New
York 10006, on which our common shares (symbol: “HT”) are listed.
We
also
make available through out internet website (www.hersha.com) our Annual Report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act, as soon as reasonably practicable after such
documents are electronically filed with, or furnished to, the SEC. The
information of our website is not, and shall not be deemed to be, a part of
this
report or incorporated into any other filings we make with the SEC.
INCORPORATION
OF INFORMATION FILED WITH THE
SEC
The
SEC
allows us to “incorporate by reference” into this prospectus the information we
file with the SEC, which means that we can disclose important business,
financial and other information to you by referring you to other documents
separately filed with the SEC. All information incorporated by reference is
part
of this prospectus, unless and until that information is updated and superseded
by the information contained in this prospectus or any information incorporated
later. We incorporate by reference the documents listed below and any future
filings we make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act prior to completion of this offering.
|
·
|
Annual
Report on Form 10-K for the year ended December 31, 2006, filed
March 16, 2007;
|
|
·
|
Current
Reports on Form 8-K filed January 4, 2007, January 16,
2007, January 23, 2007, February 7, 2007 and April 6, 2007, in
each case as amended; and
|
|
·
|
The
description of our common shares contained in our Registration Statement
on Form S-3 filed October 17, 2006, under the caption “DESCRIPTION OF
SHARES OF BENEFICIAL INTEREST” and any amendments or reports filed for the
purpose of updating such
description.
|
We
also
incorporate by reference all future filings we make with the SEC between the
date of this prospectus and the date upon which we sell all of the securities
we
offer with this prospectus and any applicable supplement.
You
may
obtain copies of these documents at no cost by requesting them from us in
writing at the following address: Hersha Hospitality Trust, 44 Hersha Drive,
Harrisburg, PA 17102, telephone (717) 236-4400.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
14. Other Expenses of Issuance and Distribution.
The
following table sets forth the costs and expense, other than underwriting
discounts and commissions, payable by the Registrant in connection with the
sale
of the securities being registered. All amounts are estimates.
|
|
Amount
To
Be Paid
|
|
|
|
|
|
SEC
registration fee
|
|
$
|
157
|
|
Printing
and mailing expenses
|
|
$
|
0
|
|
Legal
fees and expenses*
|
|
$
|
12,500
|
|
Accounting
fees and expenses*
|
|
$
|
12,500
|
|
Transfer
agent and custodian fees*
|
|
$
|
0
|
|
Miscellaneous*
|
|
$
|
5,000
|
|
Total*
|
|
$
|
30,157
|
|
*Estimated
Item
15. Indemnification of Officers and Directors.
The
Declaration of Trust and Bylaws of the Registrant provide that the Registrant
shall indemnify its directors, officers and certain other parties to the fullest
extent permitted from time to time by the Maryland General Corporation Law
(the
“MGCL”). The MGCL permits a corporation to indemnify its directors, officers and
certain other parties against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service to or at the
request of the Registrant, unless it is established that the act or omission
of
the indemnified party was material to the matter giving rise to the proceeding
and (i) the act or omission was committed in bad faith or was the result of
active and deliberate dishonesty, or (ii) in the case of any criminal
proceeding, the indemnified party had reasonable cause to believe that the
act
or omission was unlawful.
Maryland
law permits a Maryland real estate investment trust to include in its
Declaration of Trust a provision limiting the liability of its trustees and
officers to the trust and its shareholders for money damages except for
liability resulting from (a) actual receipt of an improper benefit or profit
in
money, property or services or (b) active and deliberate dishonesty established
by a final judgment and which is material to the cause of action. Our
Declaration of Trust contains such a provision which eliminates trustees’ and
officers’ liability to the maximum extent permitted by Maryland law.
Our
Declaration of Trust authorizes us, to the maximum extent permitted by Maryland
law, to indemnify any present or former trustee or officer or any individual
who, while a trustee of the Trust and at the request of the Trust, serves or
has
served another trust, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a trustee, officer,
partner or trustee, from and against any claim or liability to which that person
may become subject or which that person may incur by reason of his or her status
as a present or former trustee or officer of the Trust and to pay or reimburse
their reasonable expenses in advance of final disposition of a proceeding.
Our
Bylaws obligate us, to the maximum extent permitted by Maryland law, to
indemnify any present or former trustee or officer or any individual who, while
a trustee of the Trust and at the request of the Trust, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or other enterprise as a trustee, officer, partner
or trustee and who is made a party to the proceeding by reason of his service
in
that capacity from and against any claim or liability to which that person
may
become subject or which that person may incur by reason of his or her status
as
a present or former trustee or officer of the Trust and to pay or reimburse
their reasonable expenses in advance of final disposition of a proceeding.
The
Declaration of Trust and Bylaws also permit the Trust to indemnify and advance
expenses to any person who served a predecessor of the Trust in any of the
capacities described above and any employee or agent of the Trust or a
predecessor of the Trust.
Maryland
law permits a Maryland real estate investment trust to indemnify and advance
expenses to its trustees, officers, employees and agents to the same extent
as
permitted for directors and officers of Maryland corporations. Maryland law
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i)
was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the
act
or omission was unlawful. However, under Maryland law, a Maryland corporation
may not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In accordance with Maryland law, our Bylaws require
us, as a condition to advancing expenses, to obtain (a) a written affirmation
by
the trustee or officer of his good faith belief that he has met the standard
of
conduct necessary for indemnification and (b) a written undertaking by him
or on
his behalf to repay the amount paid or reimbursed if it is ultimately determined
that the standard of conduct was not met.
Item
16. Exhibits.
(a)
Financial Statements included in the prospectus.
(b)
Exhibits
3.1
|
Amended
and Restated Declaration of Trust of the Registrant (filed with the
SEC as
Exhibit 3.1 to Hersha Hospitality Trust’s Registration Statement on
Form S-2, filed on September 25, 2003 (SEC File No. 333-109100) and
incorporated by reference herein).
|
3.2
|
Articles
Supplementary to the Amended and Restated Declaration of Trust of
the
Registrant Designating the Terms of the 8.00% Series A Cumulative
Redeemable Preferred Shares of Beneficial Interest, $0.01 par value
per
share (filed with the SEC as Exhibit 3.2 to the Form 8-A filed on
August
3, 2005 (SEC File No. 001-14765) and incorporated by reference
herein).
|
3.3
|
Bylaws
of the Registrant (filed as an exhibit to Hersha Hospitality Trust’s
Registration Statement on Form S-11, as amended, filed June 5, 1998
(SEC
File No. 333-56087) and incorporated by reference
herein).
|
4.1
|
Form
of Common Share Certificate (filed as an exhibit to Hersha Hospitality
Trust’s Registration Statement on Form S-11, as amended, filed June 5,
1998 (SEC File No. 333-56087) and incorporated by reference
herein).
|
4.2
|
Junior
Subordinated Indenture, dated as of May 13, 2005, between the Company
and JPMorgan Chase Bank, National Association, as trustee (filed
as
Exhibit 4.1 to the Current Report on Form 8-K filed on May 17,
2005 (SEC File No. 001-14765) and incorporated by reference
herein).
|
4.3
|
Amended
and Restated Trust Agreement, dated as of May 13, 2005, among the
Company, as depositor, JPMorgan Chase Bank, National Association,
as
property trustee, Chase Bank USA, National Association, as Delaware
trustee, the Administrative Trustees named therein and the holders
of
undivided beneficial interests in the assets of the Trust (filed as
Exhibit 4.2 to the Current Report on Form 8-K filed on
May 17, 2005 (SEC File No. 001-14765) and incorporated by reference
herein).
|
4.4
|
Form
of Junior Subordinated Note (filed as Exhibit 4.1 to the Current
Report on Form 8-K filed on May 17, 2005 (SEC File No. 001-14765) and
incorporated by reference herein).
|
4.5
|
Form
of Trust Preferred Security Certificate (filed as Exhibit 4.2 to
the Current Report on Form 8-K filed on May 17, 2005 (SEC File
No. 001-14765) and incorporated by reference herein).
|
4.6
|
Junior
Subordinated Indenture, dated as of May 31, 2005, between the Company
and Wilmington Trust Company, as trustee (filed as Exhibit 4.1 to the
Current Report on Form 8-K filed on June 6, 2005 (SEC File No.
001-14765) and incorporated by reference herein).
|
4.7
|
Amended
and Restated Trust Agreement, dated as of May 31, 2005, among the
Company, as depositor, Wilmington Trust Company, as property trustee
and
Delaware trustee, the Administrative Trustees named therein and the
holders of undivided beneficial interests in the assets of the Trust
(filed as Exhibit 4.2 to the Current Report on Form 8-K filed on
June 6, 2005 (SEC File No. 001-14765) and incorporated by reference
herein).
|
4.8
|
Form
of Junior Subordinated Note (filed as Exhibit 4.1 to the Current
Report on Form 8-K filed on June 6, 2005 (SEC File No.
001-14765) and incorporated by reference herein).
|
4.9
|
Form
of Trust Preferred Security Certificate (filed as Exhibit 4.2 to the
Current Report on Form 8-K filed on June 6, 2005 (SEC File No.
001-14765) and incorporated by reference herein).
|
4.10
|
Form
of 8.00% Series A Cumulative Redeemable Preferred Share certificate
(filed as Exhibit 3.4 to the Form 8-A filed on August 3, 2005
(SEC File No. 001-14765) and incorporated by reference
herein).
|
5.1
|
Opinion
of Hunton & Williams LLP with respect to the legality of the common
shares being registered.**
|
8.1
|
Opinion
of Hunton & Williams LLP with respect to tax
matters.**
|
23.1
|
Consent
of Hunton & Williams LLP.** (included in Exhibit 5.1 and Exhibit
8.1)
|
23.2
|
Consent
of KPMG LLP.**
|
23.3
|
Consent
of PricewaterhouseCoopers LLP.**
|
23.4
|
Consent
of Grant Thornton LLP.**
|
24.1
|
Power
of Attorney (included on the signature page of this Registration
Statement).**
|
|
|
_____________________
Item
17. Undertakings.
(a) The
undersigned registrant hereby undertakes:
(1) To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
|
(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective
date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent
a
fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease
in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from
the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant
to
Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in
the effective registration statement;
and
|
|
(iii)
|
To
include any material information with respect to the plan of distribution
not previously disclosed in the registration statement or any material
change to such information in this registration
statement;
|
provided,
however, that
paragraphs (i), (ii) and (iii) do not apply if the information
required to be included in a post-effective amendment by those paragraphs is
contained in reports filed with or furnished to the Commission by the registrant
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in the registration statement or is
contained in a form of prospectus filed pursuant to Rule 424(b) that is part
of
this registration statement.
(2) That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering
thereof.
(3) To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
(4) That,
for the purpose of determining liability under the Securities Act of 1933 to
any
purchaser:
|
(i)
|
Each
prospectus filed by the registrant pursuant to Rule 424(b)(3) shall
be deemed to be part of the registration statement as of the date
the
filed prospectus was deemed part of and included in the registration
statement; and
|
|
(ii)
|
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5) or
(b)(7) as part of a registration statement in reliance on Rule 430B
for the purpose of providing the information required by Section
10(a) of
the Securities Act of 1933 shall be deemed to be part of and included
in
the registration statement as of the earlier of the date such form
of
prospectus is first used after effectiveness or the date of the first
contract of sale of securities in the offering described in the
prospectus. As provided in Rule 430B, for liability purposes of the
issuer and any person that is at that date an underwriter, such date
shall
be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which
the
prospectus relates, and the offering of such securities at that time
shall
be deemed to be the initial bona
fide
offering thereof; provided,
however, that
no statement made in a registration statement or prospectus that
is part
of the registration statement or made in a document incorporated
or deemed
incorporated by reference into the registration statement or prospectus
that is part of the registration statement will, as to a purchaser
with a
time of contract of sale prior to such effective date, supersede
or modify
any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document
immediately prior to such effective
date.
|
(5) That,
for the purpose of determining liability of the registrant under the Securities
Act of 1933 to any purchaser in the initial distribution of the securities,
in a
primary offering of securities of the registrant pursuant to this registration
statement, regardless of the underwriting method used to sell the securities
to
the purchaser, if the securities are offered or sold to such purchaser by means
of any of the following communications, the undersigned registrant will be
a
seller to the purchaser and will be considered to offer or sell such securities
to such purchaser:
|
(i)
|
Any
preliminary prospectus or prospectus of the registrant relating to
the
offering required to be filed pursuant to
Rule 424;
|
|
(ii)
|
Any
free writing prospectus relating to the offering prepared by or on
behalf
of the undersigned registrant or used or referred to by the
registrant;
|
|
(iii)
|
The
portion of any other free writing prospectus relating to the offering
containing material information about an undersigned registrant or
its
securities provided by or on behalf of the undersigned registrant;
and
|
|
(iv)
|
Any
other communication that is an offer in the offering made by the
registrant to the purchaser.
|
(b) The
registrant hereby undertakes that, for purposes of determining any liability
under the Securities Act of 1933, each filing of the registrant’s annual report
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan’s annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a
new registration statement relating to the securities offered therein, and
the
offering of such securities at that time shall be deemed to be the initial
bona
fide offering
thereof.
(c) Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of
such issue.
(d) The
undersigned registrant hereby further undertakes that:
(1)
For
purposes of determining any liability under the Securities Act of 1933 the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) under the Securities Act of 1933 shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2)
For
the purpose of determining any liability under the Securities Act of 1933,
each
post-effective amendment that contains a form of prospectus shall be deemed
to
be a new registration statement relating to the securities offered therein,
and
the offering of the securities at that time shall be deemed to be the initial
bona fide offering thereof.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant certifies
that
it has reasonable grounds to believe that it meets all of the requirements
for
filing on Form S-3 and has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City
of Philadelphia, State of Pennsylvania, on April 10, 2007.
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HERSHA
HOSPITALITY TRUST
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(Registrant)
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/s/
Jay H. Shah
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By:
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Jay
H. Shah
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Chief
Executive Officer
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POWER
OF ATTORNEY
Each
of
the trustees of Hersha Hospitality Trust whose signature appears below hereby
appoints Ashish R. Parikh as his true and lawful attorney-in-fact and agent
to
sign in his name and behalf, in any and all capacities stated below and to
file
with the Securities and Exchange Commission, any and all amendments, including
post-effective amendments to this registration statement, making such changes
in
the registration statement as appropriate, filing a Rule 462(b)
registration statement and generally to do all such things in their behalf
in
their capacities as trustees and/or officers to enable Hersha Hospitality Trust
to comply with the provisions of the Securities Act of 1933, as amended, and
all
requirements of the Securities and Exchange Commission.
Pursuant
to the requirements of the Securities Act of 1933, this registration statement
has been signed by the following persons in the capacities indicated on April
10, 2007.
Signature
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Title
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/s/
Hasu P. Shah
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Chairman
and Trustee
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Hasu
P. Shah
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/s/
Jay H. Shah
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Chief
Executive Officer and Trustee
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Jay
H. Shah
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(Principal
Executive Officer)
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/s/
Neil H. Shah
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President
and Chief Operating Officer
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Neil
H. Shah
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(Chief
Operating Officer)
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/s/
Ashish R. Parikh
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Chief
Financial Officer
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Ashish
R. Parikh
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(Principal
Financial Officer)
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/s/
Michael R. Gillespie
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Chief
Accounting Officer
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Michael
R. Gillespie
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(Principal
Accounting Officer)
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/s/
K.D. Patel
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Trustee
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K.D.
Patel
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/s/
John M. Sabin
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Trustee
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John
M. Sabin
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/s/
Michael A. Leven
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Trustee
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Michael
A. Leven
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|
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/s/
Thomas S. Capello
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Trustee
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Thomas
S. Capello
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/s/
Donald J. Landry
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Trustee
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Donald
J. Landry
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EXHIBIT
INDEX
3.1
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Amended
and Restated Declaration of Trust of the Registrant (filed with the
SEC as
Exhibit 3.1 to Hersha Hospitality Trust’s Registration Statement on
Form S-2, filed on September 25, 2003 (SEC File No. 333-109100) and
incorporated by reference herein).
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3.2
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Articles
Supplementary to the Amended and Restated Declaration of Trust of
the
Registrant Designating the Terms of the 8.00% Series A Cumulative
Redeemable Preferred Shares of Beneficial Interest, $0.01 par value
per
share (filed with the SEC as Exhibit 3.2 to the Form 8-A filed on
August
3, 2005 (SEC File No. 001-14765) and incorporated by reference
herein).
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3.3
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Bylaws
of the Registrant (filed as an exhibit to Hersha Hospitality Trust’s
Registration Statement on Form S-11, as amended, filed June 5, 1998
(SEC
File No. 333-56087) and incorporated by reference
herein).
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4.1
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Form
of Common Share Certificate (filed as an exhibit to Hersha Hospitality
Trust’s Registration Statement on Form S-11, as amended, filed June 5,
1998 (SEC File No. 333-56087) and incorporated by reference
herein).
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4.2
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Junior
Subordinated Indenture, dated as of May 13, 2005, between the Company
and JPMorgan Chase Bank, National Association, as trustee (filed
as
Exhibit 4.1 to the Current Report on Form 8-K filed on May 17,
2005 (SEC File No. 001-14765) and incorporated by reference
herein).
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4.3
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Amended
and Restated Trust Agreement, dated as of May 13, 2005, among the
Company, as depositor, JPMorgan Chase Bank, National Association,
as
property trustee, Chase Bank USA, National Association, as Delaware
trustee, the Administrative Trustees named therein and the holders
of
undivided beneficial interests in the assets of the Trust (filed as
Exhibit 4.2 to the Current Report on Form 8-K filed on
May 17, 2005 (SEC File No. 001-14765) and incorporated by reference
herein).
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4.4
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Form
of Junior Subordinated Note (filed as Exhibit 4.1 to the Current
Report on Form 8-K filed on May 17, 2005 (SEC File No. 001-14765) and
incorporated by reference herein).
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4.5
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Form
of Trust Preferred Security Certificate (filed as Exhibit 4.2 to
the Current Report on Form 8-K filed on May 17, 2005 (SEC File
No. 001-14765) and incorporated by reference herein).
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4.6
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Junior
Subordinated Indenture, dated as of May 31, 2005, between the Company
and Wilmington Trust Company, as trustee (filed as Exhibit 4.1 to the
Current Report on Form 8-K filed on June 6, 2005 (SEC File No.
001-14765) and incorporated by reference herein).
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4.7
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Amended
and Restated Trust Agreement, dated as of May 31, 2005, among the
Company, as depositor, Wilmington Trust Company, as property trustee
and
Delaware trustee, the Administrative Trustees named therein and the
holders of undivided beneficial interests in the assets of the Trust
(filed as Exhibit 4.2 to the Current Report on Form 8-K filed on
June 6, 2005 (SEC File No. 001-14765) and incorporated by reference
herein).
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4.8
|
Form
of Junior Subordinated Note (filed as Exhibit 4.1 to the Current
Report on Form 8-K filed on June 6, 2005 (SEC File No.
001-14765) and incorporated by reference herein).
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4.9
|
Form
of Trust Preferred Security Certificate (filed as Exhibit 4.2 to the
Current Report on Form 8-K filed on June 6, 2005 (SEC File No.
001-14765) and incorporated by reference herein).
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4.10
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Form
of 8.00% Series A Cumulative Redeemable Preferred Share certificate
(filed as Exhibit 3.4 to the Form 8-A filed on August 3, 2005
(SEC File No. 001-14765) and incorporated by reference
herein).
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Opinion
of Hunton & Williams LLP with respect to the legality of the common
shares being registered.**
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Opinion
of Hunton & Williams LLP with respect to tax
matters.**
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23.1
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Consent
of Hunton & Williams LLP.** (included in Exhibit 5.1 and Exhibit
8.1)
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Consent
of KPMG LLP.**
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Consent
of PricewaterhouseCoopers LLP.**
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Consent
of Grant Thornton LLP.**
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24.1
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Power
of Attorney (included on the signature page of this Registration
Statement).**
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_____________________
E-1