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As
filed with the Securities and Exchange Commission on November 2,
2007
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Registration
No. 333-______
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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)
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MARYLAND
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251811499
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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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. £
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. £
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CALCULATION
OF REGISTRATION FEE
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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)
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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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2,066,189(3)
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$10.60
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$21,901,603
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$673
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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.
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(2)
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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 shares on
October 30, 2007, as reported by the American Stock
Exchange.
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(3)
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This
registration statement registers 2,066,189 common shares issuable
to the
holders of units of limited partnership interest in Hersha Hospitality
Limited Partnership, the registrant’s operating partnership
subsidiary.
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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 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said 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 NOVEMBER 2, 2007
Hersha
Hospitality Trust
2,066,189
Common Shares of Beneficial Interest
This
prospectus relates to the sale of 2,066,189 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 such common
shares.
We
may
issue the 2,066,189 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 15 and 46, 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 November
1, 2007 was $10.55 per share.
For
a discussion of certain risks associated with an investment in our securities,
see “Risk Factors” beginning on page 3 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 ,
2007.
TABLE
OF CONTENTS
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1
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2
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3
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15
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15
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16
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20
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24
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46
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47
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47
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48
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48
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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.
ABOUT
THIS PROSPECTUS
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.
CERTAIN
DEFINITIONS
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.
THE
COMPANY
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
September 30, 2007, our portfolio consisted of 54 wholly owned limited and
full
service properties and 19 limited and full service properties in which we have
joint venture investments. Of the 19 limited and full service
properties in which we have joint ventures investments, four are
consolidated. These 73 properties, with a total of 9,395 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.
RISK FACTORS
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
September 30, 2007, our portfolio consisted of 54 wholly-owned limited and
full
service properties and joint venture investments in 19 hotels with a total
of
9,395 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. As of September
30, 2007, 29 of our wholly owned hotels and 12 of our joint venture hotels
were
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
June
30, 2007, we had debt, excluding capital leases, outstanding of $680.4
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 September 30, 2007, 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.
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The
duration of the hedge may not match the duration of the related
liability.
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The
party owning money in the hedging transaction may default on its
obligation to pay.
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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.
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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.
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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 and development loans made to entities
controlled by our officers or trustees 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 70% of HHMLP:
Hasu P. Shah, Jay H. Shah, Neil H. Shah, David L. Desfor and Kiran P.
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 7.58% 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 2009, 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 September 30, 2007, 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:
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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;
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cause
us to issue additional authorized but unissued common shares or preferred
shares; and
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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.
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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:
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85%
of our net ordinary income for that
year;
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95%
of our net capital gain net income for that year;
and
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100%
of our undistributed taxable income from prior
years.
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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 investors taxed at individual rates
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 investors taxed at individual rates 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 investors taxed at individual rates 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 investor’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.
USE
OF PROCEEDS
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
SELLING SHAREHOLDERS
The
following table lists the names of the selling shareholders, the number of
common shares beneficially owned by each of the selling shareholders, and the
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 September 30, 2007, there were
41,197,876 common shares outstanding. Direct and indirect
owners of the operating partnership units and shares, as noted below, include
Hasu P. Shah, our Chairman and former Chief Executive Officer, Jay H. Shah,
our
Chief Executive Officer, Neil H. Shah, our President and Chief Operating
Officer, Kiran P. Patel, a Trustee on our Board and our Chief Investment
Officer, David L. Desfor, our Treasurer and Corporate Secretary, Ashish R.
Parikh, our Chief Financial Officer, Kanti D. Patel, a Trustee on our Board
until May 2007, Bharat C. Mehta, a Director of HHMLP, and Sal Shahriar, the
Executive Vice President of Operations of HHMLP. 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.
We
prepared the following table based on the information supplied to us by the
selling shareholders named in the table.
|
Number
of Shares
Beneficially
Owned
|
Number
of Shares
|
Shares
Beneficially Owned
After
Sale of Registered
Shares†
|
||
|
Name
of Selling Shareholder
|
Prior
to Offering†
|
Registered
for Sale Pursuant
to
this Registration Statement
|
Number
|
Percentage**
|
|
Hasu
P. Shah
|
463,401
|
25,905
|
437,496
|
1.05%
|
|
Jay
H. Shah
|
1,403,942
|
185,985
|
1,217,958
|
2.88%
|
|
Neil
H. Shah
|
1,302,071
|
149,366
|
1,152,705
|
2.73%
|
|
Kiran
P. Patel
|
330,227
|
117,784
|
212,443
|
*
|
|
David
L. Desfor
|
172,678
|
33,091
|
139,587
|
*
|
|
Ashish
R. Parikh
|
93,165
|
24,288
|
68,877
|
*
|
|
Sal
Shahriar
|
18,106
|
14,817
|
3,289
|
*
|
|
Naveen
Kakarla
|
14,817
|
14,817
|
0
|
*
|
|
Shanti
III Associates (1)
|
604,497
|
146,851
|
457,646
|
1.10%
|
|
Devi
Associates (2)
|
573,832
|
56,937
|
516,896
|
1.24%
|
|
Sam
Chang
|
1,000,000
|
1,000,000
|
0
|
*
|
|
Kirit
Patel
|
118,540
|
118,540
|
0
|
*
|
|
Ashwin
Shah
|
88,905
|
88,905
|
0
|
*
|
|
K&D
Investment Associates (3)
|
88,905
|
88,905
|
0
|
*
|
|
†
|
Includes
common shares of beneficial interest of Hersha and common shares
of
beneficial interest of Hersha that may be acquired upon redemption of
units of limited partnership interest in
HHLP.
|
|
*
|
Less
than 1%.
|
| ** | Assumes the selling shareholder redeems all units of limited partnership interest in HHLP held by such selling shareholder but no other owner of units of limited partnership interest in HHLP redeems their units. |
|
(1)
|
Shanti
III Associates is a family limited partnership controlled by Kanti
D.
Patel and his family.
|
|
(2)
|
Devi
Associates is a family limited partnership controlled by Bharat
C. Mehta
and his family.
|
|
(3)
|
K&D
Investment Associates is a limited liability company controlled
by Kanti
Shah and his family.
|
The
common shares registered for sale by this prospectus were acquired through
the
following transactions:
|
|
·
|
On
June 1, 2007, HHLP acquired 100% of the outstanding membership interests
in The Inn @ Fifth Avenue, LLC, the owner of the land and improvements
of
the Hotel 373 located at 373 Fifth Avenue, New York, New
York. The purchase price for the membership interests was
approximately $34.3 million, which included the assumption
of $22.0 million in debt and the issuance of 1,000,000 units of
limited partnership interest in HHLP at a per unit value of $12.32,
representing an aggregate value of approximately $12.3
million. These units of limited partnership interest in HHLP
were issued to Sam Chang, who is not affiliated with the
Company.
|
|
|
·
|
On
July 1, 2007, HHLP acquired 100% of the outstanding membership interests
in 44 Hersha Norwich Associates LLC, the owner of the land and
improvements of the Holiday Inn Norwich situated at 10 Laura Boulevard,
Norwich, Connecticut (the “Norwich Holiday Inn”). The purchase
price for the membership interests was approximately $16.1 million,
which
included the assumption of approximately $8.2 million in existing
debt and
the issuance of 659,312 units of limited partnership interest in
HHLP at a
per unit value of $12.01, representing an aggregate value of approximately
$7.9 million. The affiliates of Hersha that sold their
interests are Shree Associates (“Shree”), Kunj Associates (“Kunj”), Trust
FBO Neil H. Shah Under The Hasu and Hersha Shah 2004 Trust (“FBO Neil”),
Trust FBO Jay H. Shah Under The Hasu and Hersha Shah 2004 Trust (“FBO
Jay”), Shreenathji Enterprises, LTD (“SEL”), David L. Desfor, our
Treasurer and Corporate Secretary (“Desfor”) and Ashish R. Parikh, our
Chief Financial Officer (“Parikh”).
|
|
|
·
|
On
October 1, 2007, HHLP acquired the remaining 20% of the limited
partnership interests in Affordable Hospitality Associates, LP (the
“AHA
Partnership”), the owner of the land, improvements and certain personal
property of the Hampton Inn (Center City) situated at 1301 Race Street,
Philadelphia, Pennsylvania (the “Hampton Inn”). The purchase price for the
limited partnership interests in the AHA Partnership was approximately
$4.2 million, which was paid in the form of 406,877 units of limited
partnership interest of HHLP at a per unit value of $10.23. The affiliates
of Hersha that sold their interests are Hasu P. Shah, our Chairman
of the
Board of Trustees and former Chief Executive Officer; Kiran P. Patel,
a
member of our Board of Trustees; Jay H. Shah, our Chief Executive
Officer;
Neil H. Shah, our President and Chief Operating Officer; Ashish R.
Parikh,
our Chief Financial Officer; and David L. Desfor, our Treasurer and
Corporate Secretary.
|
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.
PARTNERSHIP
AGREEMENT
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 September 30, 2007, we owned a 87.16% interest and
other limited partners owned a 12.84% 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 September 30, 2007, approximately
6,023,038. 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:
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our
bankruptcy, dissolution or withdrawal (unless the limited partners
elect
to continue the partnership),
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the
sale or other disposition of all or substantially all the assets
of the
partnership,
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the
redemption of all operating partnership units (other than those held
by
us, if any) or
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an
election by us as the General
Partner.
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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, 2004
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 including
representations regarding the nature of our assets and the future conduct of
our
business, all of which are described in the opinion. Our
qualification as a REIT depends on our ability to meet, on a continuing basis,
through actual operating results, certain 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. While Hunton &
Williams LLP has reviewed those matters in connection with the foregoing
opinion, 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 undistributed
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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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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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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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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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 defines 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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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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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 on 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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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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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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the
service recipient controls the
property;
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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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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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the
service provider uses the property concurrently to provide significant
services to entities unrelated to the service recipient;
and
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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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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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the
lessees benefit from any savings in the cost of operating the hotels
during the term of the percentage
leases;
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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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the
lessees are obligated to pay substantial fixed rent for the period
of use
of the hotels;
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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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we
cannot use the hotels concurrently to provide significant services
to
entities unrelated to the lessees;
and
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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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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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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 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 by the Internal Revenue Service as a real estate asset for purposes
of the REIT asset tests described below, and interest derived from those loans
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.” The 100%
tax will not apply to gains from the sale of property that is held through
a TRS
or other taxable corporation, although such income will be taxed to the
corporation at regular corporate income tax rates.
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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government
securities;
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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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the
sum of
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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, 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:
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a
citizen or resident of the United
States;
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a
corporation created or organized in or under the laws of the United
States, any of its states or the District of
Columbia;
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an
estate whose income is subject to federal income taxation regardless
of
its source; or
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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.
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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 to offset
the income they derive from our common shares. 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 U.S. shareholders taxed at individual rates is 15% through
2010. 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 the Foreign Investment in Real
Property Act of 1980 (“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.
Notwithstanding
the foregoing, 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 in the United States 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 in the United States 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. Dispositions subject to FIRPTA may also be subject
to a 30% branch profits tax when received by a non-U.S. shareholder that is
a
corporation. 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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•
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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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•
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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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•
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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.
|
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.
PLAN
OF DISTRIBUTION
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:
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•
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ordinary brokerage
transactions and transactions in which the broker or dealer solicits
purchasers;
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•
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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;
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•
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purchases
by a broker or dealer as principal and resale by the broker or dealer
for
its account pursuant to this
prospectus;
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•
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privately
negotiated transactions;
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•
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any
combination of these methods of sale;
or
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•
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any
other legal method.
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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 this 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.
LEGAL
MATTERS
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.
EXPERTS
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 of Mystic Partners, LLC and Subsidiaries
as of
December 31, 2006 and 2005 and for the period ended December 31, 2006 and for
the period from June 15, 2005 (date of inception) to December 31, 2005, have
been so incorporated in reliance on the report
of PricewaterhouseCoopers LLP, independent registered public
accounting firm, given on the authority of said firms as experts in accounting
and auditing.
The
audited consolidated financial statements of Mystic Partners, LLC and
Subsidiaries not separately presented in this registration statement, have
been
audited by PricewaterhouseCoopers, LLP, independent registered public accounting
firm, whose report thereon is incorporated in this registration statement by
reference to the Hersha Hospitality Trust Annual Report on Form 10-K/A for
the
year ended December 31, 2006. Such consolidated financial statements,
to the extent they have been included in the financial statements of Hersha
Hospitality Trust, have been so included in reliance on the report of such
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.
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Annual
Report on Form 10-K for the year ended December 31, 2006, filed March
16,
2007, as amended by Form 10-K/A, filed October 31,
2007;
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Quarterly
Reports on Form 10-Q for the quarterly period ended March 31, 2007,
filed
May 7, 2007, and for the quarterly period ended June 30, 2007, filed
August 9, 2007;
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•
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Current
Reports on Form 8-K filed January 4, 2007, January 16, 2007, January
23,
2007, February 7, 2007, April 6, 2007, May 25, 2007, June 15, 2007;
July
3, 2007 and October 9, 2007 in each case as amended;
and
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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.
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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, or by telephone at (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.
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Amount
To
Be Paid
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SEC
registration fee
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$ |
663
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Printing
and mailing expenses
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$ |
0
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Legal
fees and expenses*
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$ |
12,500
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Accounting
fees and expenses*
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$ |
12,500
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Transfer
agent and custodian fees*
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$ |
0
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Miscellaneous*
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$ |
5,000
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Total*
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$ |
30,663
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*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
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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).
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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
|
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
|
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
|
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
|
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
|
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
|
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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5.1
|
Opinion
of Hunton & Williams LLP with respect to the legality of the common
shares being registered.**
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8.1
|
Opinion
of Hunton & Williams LLP with respect to tax
matters.**
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23.1
|
Consent
of Hunton & Williams LLP.** (included in Exhibit 5.1 and Exhibit
8.1)
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23.2
|
Consent
of KPMG LLP.**
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23.3
|
Consent
of PricewaterhouseCoopers LLP.**
|
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23.4
|
Consent
of Grant Thornton LLP.**
|
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24.1
|
Power
of Attorney (included on the signature page of this Registration
Statement).**
|
**
Filed
herewith.
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:
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(i)
|
To
include any prospectus required by Section 10(a)(3) of the Securities
Act
of 1933;
|
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(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
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|
(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:
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|
(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
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|
|
(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:
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|
(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 October 31, 2007.
|
HERSHA
HOSPITALITY TRUST
|
||
|
(Registrant)
|
||
|
/s/
Jay H. Shah
|
||
|
By:
|
Jay
H. Shah
Chief
Executive Officer
|
|
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 October
31, 2007.
|
Signature
|
Title
|
|
|
/s/
Hasu P. Shah
|
Chairman
and Trustee
|
|
|
Hasu
P. Shah
|
||
|
/s/
Jay H. Shah
|
Chief
Executive Officer and Trustee
|
|
|
Jay
H. Shah
|
(Principal
Executive Officer)
|
|
|
/s/
Neil H. Shah
|
President
and Chief Operating Officer
|
|
|
Neil
H. Shah
|
(Chief
Operating Officer)
|
|
|
/s/
Ashish R. Parikh
|
Chief
Financial Officer
|
|
|
Ashish
R. Parikh
|
(Principal
Financial Officer)
|
|
|
/s/
Michael R. Gillespie
|
Chief
Accounting Officer
|
|
|
Michael
R. Gillespie
|
(Principal
Accounting Officer)
|
|
|
/s/
Kiran P. Patel
|
Trustee
|
|
|
Kiran
P. Patel
|
||
|
/s/
John M. Sabin
|
Trustee
|
|
|
John
M. Sabin
|
||
|
/s/
Michael A. Leven
|
Trustee
|
|
|
Michael
A. Leven
|
||
|
/s/
Thomas S. Capello
|
Trustee
|
|
|
Thomas
S. Capello
|
||
|
/s/
Donald J. Landry
|
Trustee
|
|
|
Donald
J. Landry
|
EXHIBIT
INDEX
|
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).
|
|
Opinion
of Hunton & Williams LLP with respect to the legality of the common
shares being registered.**
|
|
|
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)
|
|
Consent
of KPMG LLP.**
|
|
|
Consent
of PricewaterhouseCoopers LLP.**
|
|
|
Consent
of Grant Thornton LLP.**
|
|
|
24.1
|
Power
of Attorney (included on the signature page of this Registration
Statement).**
|
**
Filed
herewith.
E-1