e424b5
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 it is
not soliciting an offer to buy these securities in any state
where the offer or sale is not permitted.
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Subject to Completion
Preliminary Prospectus Supplement
dated January 12, 2010
Filed pursuant to Rule 424(b)(5)
Registration No. 333-163121
PROSPECTUS SUPPLEMENT
(To prospectus dated December 15, 2009)
35,000,000 Shares
Hersha Hospitality Trust
Class A Common Shares
We are offering 35,000,000 Class A common shares. Real
Estate Investment Group L.P., or REIG, which is controlled by
IRSA Inversiones y Representaciones Sociedad Anónima, or
IRSA, has indicated to us that it intends to purchase 9.9%, or
3,465,000, of the common shares being offered by this prospectus
supplement at the public offering price (without payment by us
of any underwriting discount) pursuant to the investor rights
and option agreement that we entered into with REIG and IRSA in
August 2009.
Our common shares trade on the New York Stock Exchange, or the
NYSE, under the symbol HT. On January 8, 2010,
the last sale price of our common shares as reported on the NYSE
was $3.52 per share.
Investing in our common shares involves risks. See Risk
Factors beginning on page S-7 of this prospectus
supplement, on page 2 of the accompanying prospectus and on
page 10 of our Annual Report on
Form 10-K
for the year ended December 31, 2008, which is incorporated
by reference in this prospectus supplement and the accompanying
prospectus.
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Per Share
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Total
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Public offering price
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$
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$
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Underwriting
discount(1)
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$
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$
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Proceeds, before expenses, to us
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$
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$
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(1) |
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No underwriting discount will be paid by us on any common shares
that REIG may purchase in the offering. |
The underwriters may also purchase up to an additional 5,250,000
common shares from us, at the public offering price, less the
underwriting discount (except as described below), within
30 days from the date of this prospectus supplement solely
to cover overallotments, if any. REIG has the right to purchase
a portion of these common shares (without payment by us of any
underwriting discount) if the underwriters overallotment
option is exercised so that REIG purchases 9.9% of the total
common shares sold in this offering.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement and the
accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The common shares will be ready for delivery on or about
January , 2010.
The date of this prospectus supplement is
January , 2010.
TABLE OF
CONTENTS
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Page
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Prospectus Supplement
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S-ii
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S-ii
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S-iv
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S-iv
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S-1
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S-6
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S-7
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S-8
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S-9
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S-11
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S-17
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S-17
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Prospectus
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ABOUT THIS PROSPECTUS
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ii
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FORWARD-LOOKING STATEMENTS
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ii
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CERTAIN DEFINITIONS
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iv
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THE COMPANY
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1
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RISK FACTORS
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2
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RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED SHARE
DIVIDENDS
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3
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USE OF PROCEEDS
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3
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DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
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4
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DESCRIPTION OF DEPOSITARY SHARES
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8
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DESCRIPTION OF WARRANTS
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11
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DESCRIPTION OF UNITS
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12
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LEGAL OWNERSHIP OF SECURITIES
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13
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RESTRICTIONS ON OWNERSHIP AND TRANSFER
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15
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CERTAIN PROVISIONS OF MARYLAND LAW, OUR DECLARATION OF TRUSTAND
BYLAWS
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PARTNERSHIP AGREEMENT
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22
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STRATEGIC INVESTOR
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27
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FEDERAL INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT
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29
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PLAN OF DISTRIBUTION
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55
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LEGAL MATTERS
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57
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EXPERTS
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57
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
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57
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WHERE YOU CAN OBTAIN MORE INFORMATION
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58
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ABOUT
THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first part is this prospectus
supplement, which describes the specific terms of the offering
and certain other matters relating to us and also adds to or
updates information contained in the accompanying prospectus and
the documents incorporated by reference into the accompanying
prospectus. The second part is the accompanying prospectus,
which gives more general information, some of which may not
apply to this offering. Any statement herein or in a document
incorporated or deemed to be incorporated herein by reference
shall be deemed to be modified or superseded for purposes of
this prospectus supplement and the accompanying prospectus to
the extent that a statement contained in any subsequently filed
document, which also is incorporated or deemed to be
incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement or the
accompanying prospectus.
You should rely only on the information contained in or
incorporated by reference in this prospectus supplement, the
accompanying prospectus and any free writing prospectus prepared
by us. We have not, and the underwriters have not, authorized
anyone to provide you with information that is different from or
additional to that contained or incorporated by reference in
this prospectus supplement and the accompanying prospectus. We
are not making an offer of these securities in any jurisdiction
where the offer or sale is not permitted. You should not assume
that the information contained or incorporated by reference in
this prospectus supplement and the accompanying prospectus is
accurate as of any date other than the date on the front cover
of this prospectus supplement or the date of the document
containing the incorporated information, regardless of the time
of delivery of this prospectus supplement, the accompanying
prospectus or any sale of our common shares. Our business,
financial condition, results of operations and prospects may
have changed since that date.
All brand names, trademarks and service marks appearing in this
prospectus supplement and the accompanying prospectus are the
property of their respective owners. This prospectus supplement
and the accompanying prospectus, as well as the information
incorporated by reference in those documents, may contain
registered trademarks owned or licensed to companies other than
us, including, but not limited to, Comfort
Inn®,
Courtyard®
by
Marriott®,
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®,
Sleep
Inn®
Springhill
Suites®
and Springhill Suites by Marriott. None of the owners or
licensees of any trademarks contained or incorporated by
reference in this prospectus supplement and the accompanying
prospectus or any of their respective present and future owners,
subsidiaries, affiliates, officers, directors, agents or
employees are in any way participating in or endorsing this
offering, and none of them shall in any way be deemed an issuer
or underwriter of the shares being offered by this prospectus
supplement and the accompanying prospectus or have any liability
or responsibility for any financial statements or other
financial information contained or incorporated by reference in
this prospectus supplement and the accompanying prospectus.
FORWARD-LOOKING
INFORMATION
This prospectus supplement and the accompanying prospectus,
including the information we have incorporated by reference,
contain forward-looking statements within the meaning of the
federal securities laws. These statements include statements
about our plans, strategies and prospects and involve known and
unknown risks that are difficult to predict. The statements in
this prospectus supplement related to the anticipated closing of
the acquisitions described in Summary Proposed
Times Square Acquisitions and those related to our
anticipated consolidated hotel revenue per available room, or
RevPAR, are forward-looking statements. Our actual results,
performance or achievements may differ materially from those
expressed in or implied by these forward-looking statements. In
some cases, you can identify forward-looking statements by the
use of words such as may, could,
expect, intend, plan,
seek, anticipate, believe,
estimate, predict, forecast,
potential, continue, likely,
will, would and variations of these
terms and similar
S-ii
expressions, or the negative of these terms or similar
expressions. You should not place undue reliance on
forward-looking statements. Factors that may cause our actual
results to differ materially from our current expectations
include, but are not limited to:
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financing risks, including the risk of leverage and the
corresponding risk of default on our mortgage loans and other
debt and potential inability to refinance or extend the maturity
of existing indebtedness;
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the depth and duration of the current economic downturn;
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levels of spending in the business, travel and leisure
industries, as well as consumer confidence;
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declines in occupancy, average daily rate and RevPAR and other
hotel operating metrics;
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hostilities, including future terrorist attacks, or fear of
hostilities that affect travel;
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financial condition of, and our relationships with, our joint
venture partners, third-party property managers, franchisors and
hospitality joint venture partners;
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the degree and nature of our competition;
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increased interest rates and operating costs;
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risks associated with potential acquisitions, including the
ability to ramp up and stabilize newly acquired hotels with
limited or no operating history, and dispositions of hotel
properties;
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risks associated with our development loan portfolio, including
the ability of borrowers to repay outstanding principal and
accrued interest at maturity;
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availability of and our ability to retain qualified personnel;
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our failure to maintain our qualification as a real estate
investment trust, or REIT, under the Internal Revenue Code of
1986, as amended;
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changes in our business or investment strategy;
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availability, terms and deployment of capital;
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general volatility of the capital markets and the market price
of our common shares;
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environmental uncertainties and risks related to natural
disasters;
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changes in real estate and zoning laws and increases in real
property tax rates; and
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the factors referenced or incorporated by reference in this
prospectus supplement, the accompanying prospectus and our
Annual Report on
Form 10-K
for the year ended December 31, 2008 under the heading
Risk Factors.
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These factors are not necessarily all of the important factors
that could cause our actual results, performance or achievements
to differ materially from those expressed in or implied by any
of our forward-looking statements. Other unknown or
unpredictable factors, many of which are beyond our control,
also could harm our results, performance or achievements.
All forward-looking statements contained in this prospectus
supplement and the accompanying prospectus, including the
information we have incorporated by reference, are expressly
qualified in their entirety by the cautionary statements set
forth above. Forward-looking statements speak only as of the
date they are made, and we do not undertake or assume any
obligation to update publicly any of these statements to reflect
actual results, new information or future events, changes in
assumptions or changes in other factors affecting
forward-looking statements, except to the extent required by
applicable laws. If we update one or more forward-looking
statements, no inference should be drawn that we will make
additional updates with respect to those or other
forward-looking statements.
S-iii
INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE
The Securities and Exchange Commission, or SEC, allows us to
incorporate by reference into this prospectus
supplement and the accompanying 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
supplement and the accompanying prospectus, unless and until
that information is updated and superseded by any information
incorporated later. We incorporate by reference the documents
listed below that we have filed, or will file, with the SEC:
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our Annual Report on
Form 10-K
for the year ended December 31, 2008;
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the information specifically incorporated by reference into our
Annual Report on Form
10-K for the
year ended December 31, 2008 from our definitive proxy
statement on Schedule 14A filed with the SEC on April 15,
2009;
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our Quarterly Reports on
Form 10-Q
for the quarterly periods ended September 30, 2009,
June 30, 2009 and March 31, 2009;
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our Current Reports on
Form 8-K
filed with the SEC on January 7, 2009, May 29, 2009
(excluding the information furnished under Item 7.01),
June 12, 2009, August 6, 2009, November 12, 2009,
December 15, 2009 and January 12, 2010;
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the description of our common shares contained in our
Registration Statement on Form
8-A filed
with the SEC on May 2, 2008 and any amendments or reports
filed for the purpose of updating such description;
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the description of our Series A preferred shares contained
in our Registration Statement on
Form 8-A
filed with the SEC on May 2, 2008 and any amendments or
reports filed for the purpose of updating such
description; and
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all documents we file with the SEC pursuant to
Sections 13(a), 13(c) 14 or 15(d) of the Exchange Act from
the date of this prospectus supplement prior to the date upon
which the offering is terminated.
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You may obtain copies of these filings (other than exhibits and
schedules to such filings, unless such exhibits or schedules are
specifically incorporated by reference into this prospectus or
any applicable prospectus supplement) at no cost, by requesting
them from us by writing or telephoning us at: Hersha Hospitality
Trust, 501 Walnut Street, 9th Floor, Philadelphia,
Pennsylvania 19106, Telephone:
(215) 238-1046,
Attention: Ashish R. Parikh, Chief Financial Officer.
WHERE YOU
CAN 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 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 New York 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 our 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 available
on or through our website is not, and shall not be deemed to be,
a part of this prospectus supplement and the accompanying
prospectus or incorporated into any other filings we make with
the SEC.
S-iv
SUMMARY
The information below is a summary of the more detailed
information included elsewhere in, or incorporated by reference
in, this prospectus supplement. You should read carefully the
following summary in conjunction with the more detailed
information contained in this prospectus supplement, the
accompanying prospectus and the information incorporated by
reference. This summary is not complete and does not contain all
of the information you should consider before purchasing our
common shares. You should carefully read the Risk
Factors section beginning on
page S-7
of this prospectus supplement, on page 2 of the
accompanying prospectus and on page 10 of our Annual Report
on
Form 10-K
for the year ended December 31, 2008 to determine whether
an investment in our common shares is appropriate for you.
Unless the context otherwise requires, references in this
prospectus supplement to: our company,
we, us and our mean Hersha
Hospitality Trust and its consolidated subsidiaries, including
Hersha Hospitality Limited Partnership, taken as a whole;
HHLP and our operating partnership mean
Hersha Hospitality Limited Partnership; common
shares mean our Class A common shares of beneficial
interest, $0.01 par value per share; and you
refers to a potential investor in the securities described in
this prospectus.
Unless otherwise indicated, the information in this
prospectus supplement assumes: (1) the common shares to be
sold in this offering, including 3,465,000 common shares that
REIG has indicated to us that it intends to purchase (without
payment by us of any underwriting discount), are sold at $3.52
per share, which is the last reported sale price of our common
shares on the NYSE on January 8, 2010; and (2) no
exercise by the underwriters of their overallotment option to
purchase up to an additional 5,250,000 common shares.
Hersha
Hospitality Trust
Hersha Hospitality Trust is a self-advised Maryland statutory
real estate investment trust that was organized in 1998 and
completed its initial public offering in January 1999. Our
common shares are traded on the NYSE 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. We have
operated and intend to continue to operate so as to qualify as a
REIT for federal income tax purposes.
In addition to the direct acquisition of hotels, historically we
have made investments in hotels through joint ventures with
strategic partners or through equity contributions, secured
mezzanine loans and land leases. Although we may invest in
hotels through secured development loans and land leases, we do
not expect to continue to originate any new secured mezzanine
loans or enter into any new land leases as part of our hotel
investment strategy.
We seek to identify acquisition candidates located in markets
with economic, demographic and supply dynamics favorable to
hotel owners and operators. Through our extensive due diligence
process, we select those acquisition targets where we believe
selective capital improvements and intensive management will
increase the hotels ability to attract key demand
segments, enhance hotel operations and increase long-term value.
As of December 31, 2009, our portfolio consisted of 57
wholly-owned limited and full service properties and 17 limited
and full service properties owned through joint venture
investments. Of the 17 limited and full service properties owned
through our investments in joint ventures, two are consolidated
with us for financial reporting purposes. These 74 properties,
with a total of 9,392 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®,
Courtyard®
by
Marriott®,
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
S-1
Suites®,
Homewood Suites by
Hilton®,
Hyatt Summerfield
Suites®,
Mainstay
Suites®,
Marriott®,
Marriott Hotels &
Resorts®,
Residence
Inn®,
Residence
Inn®
by
Marriott®,
Sleep
Inn®
Springhill
Suites®
and Springhill Suites by Marriott.
We are structured as an umbrella partnership REIT, or UPREIT,
and we own our hotels through our operating partnership, Hersha
Hospitality Limited Partnership, for which we serve as the sole
general partner. As of December 31, 2009, we owned an
approximate 86.9% partnership interest, including a 1.0% general
partnership interest, in our operating partnership. Our
wholly-owned hotels are managed by independent, third party
qualified management companies, including Hersha Hospitality
Management, L.P., or HHMLP, a private management company owned
by certain of our affiliated trustees and executive officers and
other unaffiliated third party investors. Third party qualified
management companies, including HHMLP, manage the hotels that we
own through joint venture interests. We lease our wholly-owned
hotels to 44 New England Management Company, or 44 New England,
our wholly-owned taxable REIT subsidiary, or TRS. Each of the
hotels that we own through a joint venture investment is leased
to another TRS that is owned by the respective joint venture or
an entity owned in part by 44 New England.
Since our initial public offering in January 1999 and through
December 31, 2009, we have acquired, wholly or through
joint ventures, a total of 86 hotels, including 28 hotels
acquired from entities controlled by certain of our affiliated
trustees and executive officers. Of the 28 acquisitions from
entities controlled by certain of our affiliated trustees and
executive officers, 25 were newly constructed or substantially
renovated by these entities prior to our acquisition. Because we
do not develop properties, we take advantage of our
relationships with entities that are developing or substantially
renovating hotels, including entities controlled by certain of
our affiliated trustees and executive officers, to identify
future hotel acquisitions that we believe may be attractive to
us. We intend to continue to acquire hotels from entities
controlled by certain of our affiliated trustees and executive
officers if approved by our independent trustees in accordance
with our related party transaction policy.
Our principal executive office is located at 44 Hersha Drive,
Harrisburg, Pennsylvania 17102. Our telephone number is
(717) 236-4400.
Our website address is www.hersha.com. The information
found on, or otherwise accessible through, our website is not
incorporated into, and does not form a part of, this prospectus
supplement or the accompanying prospectus.
Proposed
Times Square Acquisitions
On November 11, 2009, we entered into a definitive purchase
agreement to purchase from an unaffiliated seller a
newly-constructed, 184-room Hampton Inn located at
337 West 39th Street, New York, New York, which we
refer to in this prospectus supplement as the Hampton Inn, Times
Square. The purchase price for the Hampton Inn, Times Square is
approximately $54.3 million, which will be comprised of
cash and may include units of limited partnership interest in
our operating partnership, or limited partnership units, with a
value no greater than $1.5 million to be valued at the
average closing price of our common shares on the NYSE for the
20 trading days ending two trading days prior to closing on the
acquisition.
On the same date, we entered into a definitive purchase
agreement with the same seller to acquire a newly-constructed,
188-room Candlewood Suites located adjacent to the Hampton
Inn, Times Square at 339 West 39th Street, New York,
New York, which we refer to in this prospectus supplement as the
Candlewood Suites, Times Square. The purchase price for the
Candlewood Suites, Times Square is approximately
$55.5 million, which will be comprised of cash and may
include limited partnership units with a value no greater than
$1.5 million to be valued at the average closing price of
our common shares on the NYSE for the 20 trading days ending two
trading days prior to closing on the acquisition.
On December 15, 2009, we entered into amendments to the
definitive purchase agreements to extend the closing date of the
transactions from December 31, 2009 to February 1,
2010, subject to our right to postpone the closing in certain
circumstances.
As discussed in Use of Proceeds below, we intend to
use a significant portion of the net proceeds from this offering
to acquire the Hampton Inn, Times Square and the Candlewood
Suites, Times Square. We
S-2
anticipate that the closing of these acquisitions will occur
during the first quarter of 2010. The proposed acquisitions are
subject to a variety of conditions described below. As a result,
there can be no assurance that we will be able to consummate the
acquisitions on the schedule or on the terms described in this
prospectus supplement and in our Current Report on
Form 8-K
filed on January 12, 2010 or at all. See
Forward-Looking Information.
Both the Hampton Inn, Times Square and the Candlewood Suites,
Times Square are newly constructed and opened on July 14,
2009 and July 17, 2009, respectively. Both hotels are
constructed of concrete and reinforced steel with brick
façade exteriors and soundproof windows surrounded by metal
windowpanes. The Hampton Inn, Times Square offers a business
center, a breakfast area serving complimentary breakfast, a
fitness room and laundry and valet services. The Candlewood
Suites, Times Square offers a business center, high-speed
internet access in guest rooms, courier service, a fitness room,
a same-day
dry cleaning service and a guest self-serve laundry service.
Since their original openings in 2009, both hotels have been
managed by HHMLP and will continue to be managed by HHMLP
following completion of the acquisitions.
The hotels are located at the south end of Times Square, a
heavily visited tourist destination in New York City, between
8th and 9th Avenues. In the area in close proximity to
8th Avenue, major commercial redevelopment is ongoing. This
redevelopment includes a substantial number of Class A
office buildings, including 11 Times Square and One Bryant Park,
within four blocks. Further, 8th Avenue abuts a key
redevelopment initiative in Manhattan known as the Hudson Yards
Development Zone, an extensive mixed-use development project
that is expected to include substantial new commercial office
space and to have accessibility to the subway when completed. We
also believe that the location of the hotels benefits from its
proximity to numerous local and worldwide corporations.
Except as otherwise noted herein, the material terms and
conditions of the Hampton Inn, Times Square purchase agreement
and the Candlewood Suites, Times Square purchase agreement are
identical.
The purchase agreements contain customary representations and
warranties that generally survive for one year, and the parties
have agreed to customary indemnification obligations related to
losses arising from, among other things, breaches of
representations, warranties, covenants and agreements. The
parties have also agreed to various covenants, including
covenants prohibiting both parties from entering into
discussions concerning any alternative transactions during the
term of the purchase agreements and requiring the seller to
conduct its business in the ordinary course and not to engage in
certain transactions between the execution of the purchase
agreements and closing of the transactions contemplated by the
purchase agreements.
As described above, the closing of the transactions contemplated
by the purchase agreements is to occur no later than
February 1, 2010, subject to our right to postpone the
closing in certain circumstances, and is subject to certain
conditions, including, among others:
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|
our completion of the due diligence process;
|
|
|
|
the simultaneous closing of the transactions contemplated by
both purchase agreements;
|
|
|
|
the absence of the occurrence of a substantial condemnation
proceeding or casualty loss during the term of the purchase
agreements;
|
|
|
|
our receipt of written approval from the franchisor of each of
the hotels for the issuance of a new franchise license to us for
each hotel;
|
|
|
|
the accuracy of representations and warranties made by the
seller and us;
|
|
|
|
compliance by the seller and us with our respective obligations
under the purchase agreements; and
|
|
|
|
the sellers delivery of customary real estate
deliverables, including certificates of occupancy or temporary
certificates of occupancy, a title policy that complies with the
terms of the purchase agreements and a general assignment of the
assets comprising the properties.
|
S-3
Our liability for terminating the purchase agreements for any
reason prior to closing will not exceed our total earnest money
deposit of $10,100 under each of the purchase agreements.
Additionally, the purchase agreements contemplate that the
seller will deliver to us at the closing a right of first offer
agreement memorializing our right to make a first offer to
purchase the Holiday Inn Express Times Square South located at
343 West 39th Street, New York, New York, which was
constructed together with the Hampton Inn, Times Square and the
Candlewood Suites, Times Square.
For more information regarding these proposed acquisitions,
please see our Current Report on
Form 8-K
filed on January 12, 2010, which is incorporated by
reference in this prospectus supplement.
Recent
Developments
Acquisition
of Remaining Interest in Hilton Garden Inn Glastonbury; Sale of
Minority Interest in Homewood Suites Glastonbury
Effective as of January 1, 2010, we acquired our joint
venture partners 52% membership interest in PRA
Glastonbury, LLC, the owner of the Hilton Garden Inn Glastonbury
located in Glastonbury, Connecticut, and this hotel became one
of our wholly-owned hotels. The consideration provided to our
joint venture partner in exchange for its 52% membership
interest consisted of:
|
|
|
|
|
our 48% minority membership interest in PRA Suites at
Glastonbury, LLC, the owner of the Homewood Suites Glastonbury
located in Glastonbury, Connecticut, at an agreed to value of
approximately $2.8 million;
|
|
|
|
our forgiveness of a $1.4 million loan made to our former
joint venture partner; and
|
|
|
|
our assumption of the outstanding mortgage debt secured by the
Hilton Garden Inn Glastonbury, which has an outstanding
principal balance of approximately $13.1 million as of
December 31, 2009, bears interest at a fixed rate of 5.98%
per annum and has an anticipated maturity date of April 1,
2016.
|
As described above, effective as of January 1, 2010, our
joint venture partner acquired our minority membership interest
in PRA Suites at Glastonbury, LLC, the entity owning the
Homewood Suites Glastonbury. The consideration provided by our
joint venture partner in exchange for our minority membership
interest consisted of:
|
|
|
|
|
our joint venture partners 52% membership interest in the
entity owning the Hilton Garden Inn Glastonbury, at an agreed to
value of approximately $2.8 million; and
|
|
|
|
our joint venture partners assumption of the outstanding
mortgage debt secured by the Homewood Suites Glastonbury, which
has an outstanding principal balance of $12.4 million as of
December 31, 2009, bears interest at a fixed rate of 7.49%
per annum and matures on August 1, 2016.
|
Fourth
Quarter Cash Distributions
On December 4, 2009, our board of trustees declared a
quarterly cash distribution of $0.05 per common share and
limited partnership unit for the quarter ended December 31,
2009 payable on January 15, 2010 to shareholders and
unitholders of record on January 4, 2010. Our board of
trustees also declared a cash distribution of $0.50 per
Series A preferred share for the quarter ended
December 31, 2009 payable on January 15, 2010 to
preferred shareholders of record on January 1, 2010.
Acquisition
of Hampton Inn and Suites West Haven
On November 4, 2009, we entered into a contribution
agreement and closed on the acquisition of 100% of the
membership interests in 44 West Haven Hospitality, LLC, or
44 West Haven, the indirect owner
S-4
of the land, hotel and improvements associated with the Hampton
Inn and Suites located in West Haven, Connecticut.
We paid an aggregate purchase price for the membership interests
in 44 West Haven of approximately $13.0 million, including:
|
|
|
|
|
our assumption of the outstanding mortgage debt secured by the
Hampton Inn and Suites West Haven, which has an outstanding
principal balance of approximately $7.7 million as of
December 31, 2009, bears interest at a fixed rate of 6.0%
per annum and matures on November 1, 2012, with a three
year extension, subject to approval by the lenders;
|
|
|
|
the release of $2.0 million of existing mezzanine financing
provided by us to 44 West Haven;
|
|
|
|
the cancellation of approximately $200,000 in accrued interest
related to the existing mezzanine financing; and
|
|
|
|
approximately $3.1 million of cash.
|
Certain of our officers and affiliated trustees had direct or
indirect interests in 44 West Haven. As a related party
transaction, the transaction was approved by all of our
independent trustees. HHMLP has been managing and will continue
to manage the Hampton Inn and Suites West Haven.
For more information regarding our purchase of the Hampton Inn
and Suites West Haven, see our Quarterly Report on
Form 10-Q
for the period ended September 30, 2009, which is
incorporated by reference in this prospectus supplement.
Capital
Raising Activity
During the fourth quarter of 2009, we issued approximately
1.2 million common shares through our at the
market equity offering program, or ATM program, at a
weighted average purchase price of $3.14 per share, generating
net proceeds of approximately $3.6 million. We ceased
offering common shares through our ATM program in October 2009.
Anticipated
Consolidated Hotel RevPAR for the Fourth Quarter of
2009
While our results of operations for the fourth quarter and year
ended December 31, 2009 are not yet available, we
anticipate that RevPAR for our consolidated hotel portfolio
declined in the fourth quarter of 2009 by approximately 10%
compared to the prior year period. In comparison to the first,
second and third quarters of 2009, we believe that our
consolidated portfolio of hotels is showing that the pace of
RevPAR declines is abating.
As of the date of this prospectus supplement, we are completing
the financial statement closing process for the quarter and year
ended December 31, 2009. Our actual results of operations
may differ materially from our anticipated results. Our actual
consolidated hotel RevPAR for the fourth quarter of
2009 may decline by more than 10% compared to the prior
year period. You should not rely on our anticipated consolidated
hotel RevPAR for the fourth quarter of 2009 or our belief that
the pace of RevPAR declines is abating in making your investment
decision. See Forward-Looking Information above.
S-5
THE
OFFERING
|
|
|
Common shares offered by
us(1) |
|
35,000,000 shares |
|
Total common shares outstanding after this
offering(2)
|
|
92,682,917 shares |
|
Use of proceeds |
|
We expect to receive approximately $118.1 million (or
approximately $135.7 million if the underwriters exercise
their overallotment option in full) in estimated net proceeds
from the sale of our common shares in this offering after
deducting the underwriting discount and estimated expenses of
this offering payable by us. |
|
|
|
As required by the partnership agreement of our operating
partnership, we will contribute all of the net proceeds to our
operating partnership in exchange for additional limited
partnership units. Our operating partnership intends to use
approximately $109.8 million of the net proceeds of this
offering to fund the cash portion of the contractual purchase
price under the purchase agreements governing the acquisitions
of the Hampton Inn, Times Square and the Candlewood Suites,
Times Square, as described above under Summary
Proposed Times Square Acquisitions (assuming no limited
partnership units are issued by our operating partnership to the
seller of these hotels). Any net proceeds not used for these
acquisitions (or all net proceeds in the event we are unable to
complete the acquisitions of the Hampton Inn, Times Square and
the Candlewood Suites, Times Square) will be used to reduce
indebtedness outstanding under our $135.0 million revolving
credit facility arranged by T.D. Bank, NA and for general
corporate purposes. |
|
Risk Factors |
|
Investing in our common shares involves risks. See Risk
Factors beginning on page S-7 of this prospectus
supplement, on page 2 of the accompanying prospectus and on
page 10 of our Annual Report on
Form 10-K
for the year ended December 31, 2008, which is incorporated
by reference in this prospectus supplement and the accompanying
prospectus. |
|
|
|
(1) |
|
Includes 3,465,000 common shares, or 9.9% of the total number of
common shares we are offering, that REIG has indicated to us
that it intends to purchase (without payment by us of any
underwriting discount). |
|
(2) |
|
This number is based on 57,682,917 common shares outstanding at
December 31, 2009, and does not include: |
|
|
|
|
|
up to 5,250,000 common shares that may be issued by us upon
exercise of the underwriters overallotment option,
including up to 519,750 common shares that REIG has the right to
purchase (without payment by us of any underwriting discount) if
the underwriters overallotment option is exercised in full
so that REIG purchases 9.9% of the total common shares sold in
this offering;
|
|
|
|
up to 5,700,000 common shares that REIG has the right to
purchase from us at an exercise price of $3.00 per share
pursuant to the exercise of an option that it was granted on
August 4, 2009;
|
|
|
|
up to 8,701,810 common shares issuable upon redemption of
outstanding limited partnership units owned by management,
trustees and other contributors of properties to our operating
partnership, which limited partnership units are currently
redeemable; and
|
|
|
|
up to 1,660,364 common shares reserved for future issuance
pursuant to our 2008 Equity Incentive Plan.
|
S-6
RISK
FACTORS
Investing in our common shares involves risk. Before making a
decision to invest in our common shares, you should carefully
consider the risks described below and in Risk
Factors beginning on page 2 of the accompanying prospectus
and on page 10 of our Annual Report on
Form 10-K
for the year ended December 31, 2008, which is incorporated
by reference in this prospectus supplement and the accompanying
prospectus. These risks and uncertainties are not the only ones
facing us. Additional risks and uncertainties that we are
unaware of, or that we currently deem immaterial, also may
become important factors that affect us. See Incorporation
of Certain Documents by Reference and Where You Can
Obtain More Information above.
There can
be no assurance that we will be able to consummate the
acquisitions of the Hampton Inn, Times Square and the Candlewood
Suites, Times Square on the schedule or on the terms described
in this prospectus supplement and in our Current Report on
Form 8-K filed on January 12, 2010 or at
all.
We intend to use a significant portion of the net proceeds from
this offering to acquire the Hampton Inn, Times Square and the
Candlewood Suites, Times Square. We anticipate that the closing
of these acquisitions will occur during the first quarter of
2010, but after the date of the expected closing of this
offering. However, the proposed acquisitions are subject to a
variety of conditions, including the satisfaction of closing
conditions and the receipt of third party consents and
approvals, including the written approval of the franchisor of
each of the hotels for the issuance of a new franchise license
to us. As a result, there can be no assurance that we will be
able to consummate the acquisitions on the schedule or on the
terms described in this prospectus supplement and in our Current
Report on
Form 8-K
filed on January 12, 2010 or at all.
If we are unable to complete the acquisitions of the Hampton
Inn, Times Square and the Candlewood Suites, Times Square, we
will use the net proceeds from this offering to reduce
indebtedness under our revolving credit facility and for general
corporate purposes, including future hotel acquisitions. This
would result in significant dilution to the investors in this
offering and may cause our future operating results to fall
short of expectations. If we are unable to complete the purchase
of the Hampton Inn, Times Square and the Candlewood Suites,
Times Square, we will have no specific designated use for the
net proceeds from this offering other than repayment of
borrowings drawn on our revolving credit facility and investors
will be unable to evaluate in advance the manner in which we
invest the net proceeds remaining after the repayment of these
borrowings or the economic merits of the investments we may
ultimately acquire with the remaining net proceeds.
The
Hampton Inn, Times Square and the Candlewood Suites, Times
Square are newly-opened hotels with limited operating
history.
The Hampton Inn, Times Square and the Candlewood Suites, Times
Square are both newly-constructed hotels that opened for
business in July 2009 and have limited operating history. Our
ability to forecast future operations accurately is limited. As
a result, there is considerable risk these hotels may not
generate sufficient revenue to cover the costs of their
operations or provide attractive returns on our investment. Our
ability to ramp up and stabilize operations at these hotels
could have a material adverse impact on our results of
operations.
The
acquisition of the Hampton Inn, Times Square and the Candlewood
Suites, Times Square adds market concentration and other risks
to our portfolio.
If we are able to close on the Hampton Inn, Times Square and the
Candlewood Suites, Times Square, these assets will collectively
represent approximately 10.5% of our investment in hotel
properties (net of accumulated depreciation), and hotels in New
York City (including the Hampton Inn, Times Square and the
Candlewood Suites, Times Square) will represent approximately
40.3% of our investment in hotel properties (net of accumulated
depreciation), in each case as of September 30, 2009. As a
result, the operations of the Times Square hotels, once these
hotels are stabilized, and our other hotels in the New York City
market generally, are expected to have a significant impact on
our overall results of operations. In the event of an economic
downturn in New York City, or should we adopt an unsuccessful
strategy to manage these hotels, our overall results of
operations may be adversely affected.
S-7
USE OF
PROCEEDS
We expect to receive approximately $118.1 million (or
approximately $135.7 million if the underwriters exercise
their overallotment option in full) in estimated net proceeds
from the sale of our common shares in this offering after
deducting the underwriting discount and estimated expenses of
this offering payable by us.
As required by the partnership agreement of our operating
partnership, we will contribute all of the net proceeds to our
operating partnership in exchange for additional limited
partnership units. Our operating partnership intends to use
approximately $109.8 million of the net proceeds of this
offering to fund the cash portion of the contractual purchase
price under the purchase agreements governing the acquisitions
of the Hampton Inn, Times Square and the Candlewood Suites,
Times Square, as described above under Summary
Proposed Times Square Acquisitions (assuming no limited
partnership units are issued to the seller of these hotels). Any
net proceeds not used for these acquisitions (or all net
proceeds in the event we are unable to complete the acquisitions
of the Hampton Inn, Times Square and the Candlewood Suites,
Times Square) will be used to reduce indebtedness outstanding
under our $135.0 million revolving credit facility arranged
by T.D. Bank, NA and for general corporate purposes.
We used a substantial portion of the borrowings drawn on our
revolving credit facility to fund acquisitions and development
loans. As of September 30, 2009, the outstanding balance on
our revolving credit facility arranged by T.D. Bank, NA was
approximately $80.0 million. The outstanding principal
balance must be repaid on or prior to December 31, 2011 and
borrowings drawn on the revolving credit facility accrue
interest, at our discretion, at an annual rate equal to either:
|
|
|
|
|
the Wall Street Journal prime rate of interest plus
1.50%; or
|
|
|
|
the greater of (i) LIBOR available for the periods of one,
two, three or six months plus 3.50% or (ii) 4.25%.
|
We anticipate drawing down our revolving line of credit from
time to time for future acquisitions, to fund future development
loans and for general corporate purposes.
S-8
CAPITALIZATION
The following table sets forth our capitalization as of
September 30, 2009:
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis to reflect (i) our acquisition of the
remaining interest in the Hilton Garden Inn Glastonbury from,
and our sale of our minority interest in the Homewood Suites
Glastonbury to, our joint venture partner effective
January 1, 2010, (ii) the issuance during the fourth
quarter of 2009 of approximately 1.2 million common shares
through our ATM program, and (iii) our acquisition on
November 4, 2009 of 100% of the membership interests in 44
West Haven; and
|
|
|
|
on a pro forma, as adjusted basis to give effect to (i) the
transactions described in the immediately preceding bullet
point, (ii) the sale of 35,000,000 common shares in this
offering, including 3,465,000 common shares that REIG has
indicated to us that it intends to purchase (without payment by
us of any underwriting discount), at an assumed offering price
of $3.52 per share (the last reported sale price of our common
shares on the NYSE on January 8, 2010) after deducting
the underwriting discount and estimated expenses of this
offering payable by us, and (iii) the expected use of the
net proceeds from this offering as described under Use of
Proceeds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2009
|
|
|
|
|
|
|
|
|
|
Pro Forma
|
|
|
|
Actual
|
|
|
Pro Forma
|
|
|
As Adjusted
|
|
|
|
(Dollars in thousands)
|
|
|
Cash
|
|
$
|
12,494
|
|
|
$
|
13,073
|
|
|
$
|
13,073
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
80,000
|
|
|
$
|
80,000
|
|
|
$
|
71,945
|
|
Mortgages payable
|
|
|
640,470
|
|
|
|
661,311
|
|
|
|
661,311
|
|
Liabilities related to hotel assets held for sale
|
|
|
20,908
|
|
|
|
20,908
|
|
|
|
20,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
741,378
|
|
|
$
|
762,219
|
|
|
$
|
754,164
|
|
Redeemable non-controlling interests
|
|
$
|
15,391
|
|
|
$
|
15,391
|
|
|
$
|
15,391
|
|
Shareholders equity(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares, $0.01 par value, 29,000,000 shares
authorized, 2,400,000 Series A preferred shares issued and
outstanding ($60,000,000 aggregate liquidation preference)
|
|
$
|
24
|
|
|
$
|
24
|
|
|
$
|
24
|
|
Class A common shares, $0.01 par value,
150,000,000 shares authorized, 56,473,120 shares
issued and outstanding, 92,663,920 shares issued and
outstanding, as adjusted
|
|
|
564
|
|
|
|
576
|
|
|
|
926
|
|
Class B common shares, $0.01 par value,
1,000,000 shares authorized, no shares issued and
outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
(160
|
)
|
|
|
(160
|
)
|
|
|
(160
|
)
|
Additional paid-in capital
|
|
|
483,226
|
|
|
|
486,852
|
|
|
|
604,557
|
|
Distributions in excess
|
|
|
(171,752
|
)
|
|
|
(171,752
|
)
|
|
|
(171,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
311,902
|
|
|
|
315,540
|
|
|
|
433,595
|
|
Non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest common units
|
|
|
28,329
|
|
|
|
28,329
|
|
|
|
28,329
|
|
Non-controlling interest consolidated joint ventures
|
|
|
276
|
|
|
|
276
|
|
|
|
276
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-controlling interests
|
|
|
28,605
|
|
|
|
28,605
|
|
|
|
28,605
|
|
Total equity
|
|
$
|
340,507
|
|
|
$
|
344,145
|
|
|
$
|
462,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
1,097,276
|
|
|
$
|
1,121,755
|
|
|
$
|
1,231,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S-9
|
|
|
|
|
up to 5,250,000 common shares that may be issued by us upon
exercise of the underwriters overallotment option,
including up to 519,750 common shares that REIG has the right to
purchase (without payment by us of any underwriting discount) if
the underwriters overallotment option is exercised in full
so that REIG purchases 9.9% of the total common shares sold in
this offering;
|
|
|
|
up to 5,700,000 common shares that REIG has the right to
purchase from us at an exercise price of $3.00 per share
pursuant to the exercise of an option that it was granted on
August 4, 2009;
|
|
|
|
up to 8,701,810 common shares issuable upon redemption of
outstanding limited partnership units owned by management,
trustees and other contributors of properties to our operating
partnership, which limited partnership units are currently
redeemable;
|
|
|
|
up to 1,660,364 common shares reserved for future issuance
pursuant to our 2008 Equity Incentive Plan;
|
|
|
|
18,000 common shares issued to our independent trustees on
December 31, 2009; and
|
|
|
|
997 common shares issued pursuant to our dividend reinvestment
plan.
|
The information set forth above should be read in conjunction
with the section captioned Managements Discussion
and Analysis of Financial Condition and Results of
Operations and our financial statements and related notes
in our Annual Report on
Form 10-K
for the year ended December 31, 2008 and our Quarterly
Report on
Form 10-Q
for the quarter ended September 30, 2009, both of which are
incorporated by reference in this prospectus supplement and the
accompanying prospectus.
S-10
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Raymond James & Associates, Inc. and UBS Securities
LLC are acting as representatives of each of the underwriters
named below. Subject to the terms and conditions set forth in an
underwriting agreement among us, our operating partnership and
the underwriters, we have agreed to sell to the underwriters,
and each of the underwriters has agreed, severally and not
jointly, to purchase from us, the number of our common shares
set forth opposite its name below.
|
|
|
|
|
|
|
Number
|
|
Underwriter
|
|
of Shares
|
|
|
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
|
|
|
|
|
Raymond James & Associates, Inc.
|
|
|
|
|
UBS Securities LLC
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
35,000,000
|
|
|
|
|
|
|
Subject to the terms and conditions set forth in the
underwriting agreement, the underwriters have agreed, severally
and not jointly, to purchase all 35,000,000 of the common shares
sold under the underwriting agreement if any of these common
shares are purchased. If an underwriter defaults, the
underwriting agreement provides that the purchase commitments of
the nondefaulting underwriters may be increased or the
underwriting agreement may be terminated.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to
make in respect of those liabilities.
The underwriters are offering the common shares, subject to
prior sale, when, as and if issued to and accepted by them,
subject to approval of legal matters by their counsel, including
the validity of the common shares, and other conditions
contained in the underwriting agreement, such as the receipt by
the underwriters of officers certificates and legal
opinions. The underwriters reserve the right to withdraw, cancel
or modify offers to the public and to reject orders in whole or
in part.
Commissions
and Discounts
The representatives have advised us that the underwriters
propose initially to offer the common shares to the public at
the public offering price set forth on the cover page of this
prospectus and to dealers at that price less a concession not in
excess of $ per share. After
the initial offering, the public offering price, concession or
any other term of the offering may be changed.
The following table shows the underwriting discount we are to
pay to the underwriters in connection with this offering. This
amount is shown assuming both no exercise and full exercise by
the underwriters of their overallotment option. We will not pay
an underwriting discount on any common shares that REIG may
purchase in this offering.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
Without Option
|
|
With Option
|
|
Public offering price
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Underwriting discount
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Proceeds, before expenses, to us
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The expenses of the offering, not including the underwriting
discount, are estimated at $150,000 and are payable by us.
Overallotment
Option
The underwriters may also purchase up to an additional 5,250,000
common shares from us, at the public offering price, less the
underwriting discount (except as described below), within
30 days from the date of this prospectus supplement solely
to cover overallotments, if any. REIG has the right to purchase
a portion of these common shares (without payment by us of any
underwriting discount) if the underwriters overallotment
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option is exercised so that REIG purchases 9.9% of the total
common shares sold in this offering. If the underwriters
exercise this option, each will be obligated, subject to
conditions contained in the underwriting agreement, to purchase
a number of additional common shares proportionate to that
underwriters initial amount reflected in the above table.
No Sales
of Similar Securities
We, our executive officers, our trustees, and REIG have entered
into lock-up
agreements with the underwriters. Under these agreements,
subject to certain permitted exceptions, including, among
others, an exception that permits us to issue common shares
pursuant to our 2008 Equity Incentive Plan to participants in
that plan, we and each of these persons may not, without the
prior written consent of the representatives, sell, offer to
sell, contract or agree to sell, hedge or otherwise dispose of,
directly or indirectly, any of our common shares or securities
convertible into or exchangeable or exercisable for common
shares during the period from the date of this prospectus
supplement continuing through the date 60 days after the
date of this prospectus supplement. The representatives, in
their sole discretion, may permit early release of our common
shares subject to the restrictions detailed above prior to the
expiration of the
60-day lock
up period and without public notice. The
60-day lock
up period may be extended for up to 15 calendar days plus three
business days under certain circumstances where we announce or
pre-announce earnings or material news or a material event
within 15 calendar days plus three business days prior to, or
approximately 16 days after, the termination of the
60-day lock
up period.
New York
Stock Exchange Listing
Our common shares are listed on the NYSE under the symbol
HT.
Price
Stabilization and Short Positions
Until the distribution of our common shares is completed, SEC
rules may limit underwriters and selling group members from
bidding for and purchasing our common shares. However, the
representatives may engage in transactions that stabilize the
price of our common shares, such as bids or purchases to peg,
fix or maintain that price.
In connection with the offering, the underwriters may purchase
and sell our common shares in the open market. These
transactions may include short sales, purchases on the open
market to cover positions created by short sales and stabilizing
transactions. Short sales involve the sale by the underwriters
of a greater number of common shares than they are required to
purchase in the offering. Covered short sales are
sales made in an amount not greater than the underwriters
option to purchase additional common shares in the offering. The
underwriters may close out any covered short position by either
exercising their overallotment option or purchasing common
shares in the open market. In determining the source of common
shares to close out the covered short position, the underwriters
will consider, among other things, the price of common shares
available for purchase in the open market as compared to the
price at which they may purchase common shares through the
overallotment option. Naked short sales are sales in
excess of the overallotment option. The underwriters must close
out any naked short position by purchasing common shares in the
open market. A naked short position is more likely to be created
if the underwriters are concerned that there may be downward
pressure on the price of our common shares in the open market
after pricing that could adversely affect investors who purchase
in the offering. Stabilizing transactions consist of various
bids for or purchases of common shares made by the underwriters
in the open market prior to the completion of the offering.
Similar to other purchase transactions, the underwriters
purchases to cover the syndicate short sales may have the effect
of raising or maintaining the market price of our common shares
or preventing or retarding a decline in the market price of our
common shares. As a result, the price of our common shares may
be higher than the price that might otherwise exist in the open
market.
Neither we nor any of the underwriters make any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
our common shares. In
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addition, neither we nor any of the underwriters make any
representation that the representatives will engage in these
transactions or that these transactions, once commenced, will
not be discontinued without notice.
Electronic
Offer, Sale and Distribution of Shares
In connection with the offering, certain of the underwriters may
distribute prospectuses by electronic means, such as
e-mail. In
addition, the underwriters may facilitate Internet distribution
for this offering to certain of their Internet subscription
customers. The underwriters may allocate a limited number of
common shares for sale to their online brokerage customers. An
electronic prospectus may be available on an Internet web site
maintained by any of the underwriters. Other than the prospectus
in electronic format, the information on any of the
underwriters web sites is not part of this prospectus.
Other
Relationships
Some of the underwriters and their affiliates have engaged in,
and may in the future engage in, investment banking and other
commercial dealings in the ordinary course of business with us
or our affiliates. They have received, or may in the future
receive, customary fees and commissions for these transactions.
An affiliate of Raymond James & Associates, Inc. is a
lender under our revolving line of credit, and it will receive a
portion of the proceeds of this offering as repayment of
indebtedness incurred thereunder. In addition, other prospective
members of the underwriting syndicate may be lenders under our
revolving line of credit.
Notice to
Prospective Investors in the EEA
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a
Relevant Member State), an offer to the public of
any common shares which are the subject of the offering
contemplated by this prospectus supplement may not be made in
that Relevant Member State, except that an offer to the public
in that Relevant Member State of any common shares may be made
at any time under the following exemptions under the Prospectus
Directive, if they have been implemented in that Relevant Member
State:
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to legal entities which are authorized or regulated to operate
in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities;
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(b)
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to any legal entity which has two or more of (1) an average
of at least 250 employees during the last financial year;
(2) a total balance sheet of more than 43,000,000 and
(3) an annual net turnover of more than 50,000,000,
as shown in its last annual or consolidated accounts; or
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(c)
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to fewer than 100 natural or legal persons (other than
qualified investors as defined in the Prospectus
Directive) subject to obtaining the prior consent of the
underwriters; or
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in any other circumstances falling within Article 3(2) of
the Prospectus Directive;
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provided that no such offer of common shares shall result in a
requirement for the publication by us or any underwriter of a
prospectus pursuant to Article 3 of the Prospectus
Directive.
For the purposes of this provision, and your representation
below, the expression an offer to the public in
relation to any common shares in any Relevant Member State means
the communication in any form and by any means of sufficient
information on the terms of the offer and any common shares to
be offered so as to enable an investor to decide to purchase any
common shares, as the same may be varied in that Relevant Member
State by any measure implementing the Prospectus Directive in
that Relevant Member State and the expression Prospectus
Directive means Directive 2003/71/EC and includes any
relevant implementing measure in each Relevant Member State.
Each person in a Relevant Member State who receives any
communication in respect of, or who acquires any common shares
under, the offer of common shares contemplated by this
prospectus supplement will be deemed to have represented,
warranted and agreed to and with us and each underwriter that:
(a) it is a qualified investor within the
meaning of the law in that Relevant Member State implementing
Article 2(1)(e) of the Prospectus Directive; and
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(b) in the case of any common shares acquired by it as a
financial intermediary, as that term is used in
Article 3(2) of the Prospectus Directive, (i) the
common shares acquired by it in the offering have not been
acquired on behalf of, nor have they been acquired with a view
to their offer or resale to, persons in any Relevant Member
State other than qualified investors (as defined in
the Prospectus Directive), or in circumstances in which the
prior consent of the representatives has been given to the offer
or resale; or (ii) where common shares have been acquired
by it on behalf of persons in any Relevant Member State other
than qualified investors, the offer of those common shares to it
is not treated under the Prospectus Directive as having been
made to such persons.
Notice to
Prospective Investors in the United Kingdom
Each underwriter has represented and agreed that:
(a) it has only communicated or caused to be communicated
and will only communicate or cause to be communicated an
invitation or inducement to engage in investment activity
(within the meaning of Section 21 of the FSMA) received by
it in connection with the issue or sale of the common shares in
circumstances in which Section 21(1) of the FSMA does not
apply to the issuer; and
(b) it has complied and will comply with all applicable
provisions of the FSMA with respect to anything done by it in
relation to the common shares in, from or otherwise involving
the United Kingdom.
Notice to
Prospective Investors in Hong Kong
The common shares may not be offered or sold in Hong Kong by
means of any document other than (i) in circumstances which
do not constitute an offer to the public within the meaning of
the Companies Ordinance (Cap.32, Laws of Hong Kong), or
(ii) to professional investors within the
meaning of the Securities and Futures Ordinance (Cap.571, Laws
of Hong Kong) and any rules made thereunder, or (iii) in
other circumstances which do not result in the document being a
prospectus within the meaning of the Companies
Ordinance (Cap.32, Laws of Hong Kong). In addition, no
advertisement, invitation or document relating to the common
shares may be issued or may be in the possession of any person
for the purpose of the issue (in each case whether in Hong Kong
or elsewhere), which is directed at, or the contents of which
are likely to be accessed or read by, the public in Hong Kong
(except if permitted to do so under the laws of Hong Kong) other
than with respect to common shares which are or are intended to
be disposed of only to persons outside Hong Kong or only to
professional investors within the meaning of the
Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)
and any rules made thereunder.
Notice to
Prospective Investors in Singapore
This prospectus has not been registered as a prospectus with the
Monetary Authority of Singapore. Accordingly, each underwriter
has represented and agreed that it has not and will not
circulate or distribute this prospectus and any other document
or material in connection with the offer or sale, or invitation
for subscription or purchase, of the common shares and each
underwriter has represented and agreed that it has not and will
not circulate or distribute the common shares or make the common
shares the subject of an invitation for subscription or
purchase, whether directly or indirectly, to persons in
Singapore other than (i) to an institutional investor under
Section 274 of the Securities and Futures Act,
Chapter 289 of Singapore (the SFA),
(ii) to a relevant person pursuant to Section 275(1),
or any person pursuant to Section 275(1A), and in
accordance with the conditions specified in Section 275 of
the SFA or (iii) otherwise pursuant to, and in accordance
with the conditions of, any other applicable provision of the
SFA.
Where the common shares are subscribed or purchased under
Section 275 of the SFA by a relevant person which is:
(a) a corporation (which is not an accredited investor (as
defined in Section 4A of the SFA)) the sole business of
which is to hold investments and the entire share capital of
which is owned by one or more individuals, each of whom is an
accredited investor; or (b) a trust (where the trustee is
not an accredited investor) whose sole purpose is to hold
investments and each beneficiary of the trust is an individual
who is an
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accredited investor, shares, debentures and units of shares and
debentures of that corporation or the beneficiaries rights
and interest in that trust (howsoever described) shall not be
transferable for 6 months after that corporation or that
trust has acquired the shares pursuant to an offer made under
Section 275 except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person
defined in Section 275(2) of the SFA, or to any person
pursuant to Section 275(1A) pursuant to an offer that is
made on terms that such common shares, debentures and units of
common shares and debentures of that corporation or such rights
and interest in that trust are acquired at a consideration of
not less than $200,000 (or its equivalent in a foreign currency)
for each transaction, whether such amount is paid for in cash or
by exchange of securities or other assets, and further for
corporations in accordance with the conditions, specified in
Section 275 of the SFA; (2) where no consideration is
or will be given for the transfer; or (3) where the
transfer is made by operation of law.
Notice to
Prospective Investors in Japan
The common shares have not been and will not be registered under
the Financial Instruments and Exchange Law of Japan (Law
No. 25, as amended) (the Securities and Exchange Law) and
each underwriter has represented, warranted and agreed that the
common shares which it purchases (if any) will be purchased by
it as principal and that, in connection with the offering made
by this prospectus, agreed that it will not offer or sell any
common shares, directly or indirectly, in Japan or to, or for
the benefit of, any resident of Japan (which term as used herein
means any person resident in Japan, including any corporation or
other entity organized under the laws of Japan), or to others
for re-offering or resale, directly or indirectly, in Japan or
to a resident of Japan, except pursuant to an exemption from the
registration requirements of, and otherwise in compliance with,
the Financial Instruments and Exchange Law and any other
applicable laws, regulations and ministerial guidelines of Japan.
Notice to
Prospective Investors in Switzerland
We have not and will not register with the Swiss Financial
Market Supervisory Authority (FINMA) as a foreign collective
investment scheme pursuant to Article 119 of the Federal
Act on Collective Investment Scheme of 23 June 2006, as
amended (CISA), and accordingly the shares being offered
pursuant to this prospectus have not and will not be approved,
and may not be licenseable, with FINMA. Therefore, the shares
have not been authorized for distribution by FINMA as a foreign
collective investment scheme pursuant to Article 119 CISA
and the shares offered hereby may not be offered to the public
(as this term is defined in Article 3 CISA) in or from
Switzerland. The shares may solely be offered to qualified
investors, as this term is defined in Article 10
CISA, and in the circumstances set out in Article 3 of the
Ordinance on Collective Investment Scheme of 22 November
2006, as amended (CISO), such that there is no public offer.
Investors, however, do not benefit from protection under CISA or
CISO or supervision by FINMA. This prospectus and any other
materials relating to the shares are strictly personal and
confidential to each offeree and do not constitute an offer to
any other person. This prospectus may only be used by those
qualified investors to whom it has been handed out in connection
with the offer described herein and may neither directly or
indirectly be distributed or made available to any person or
entity other than its recipients. It may not be used in
connection with any other offer and shall in particular not be
copied
and/or
distributed to the public in Switzerland or from Switzerland.
This prospectus does not constitute an issue prospectus as that
term is understood pursuant to Article 652a
and/or 1156
of the Swiss Federal Code of Obligations. We have not applied
for a listing of the shares on the SIX Swiss Exchange or any
other regulated securities market in Switzerland, and
consequently, the information presented in this prospectus does
not necessarily comply with the information standards set out in
the listing rules of the SIX Swiss Exchange and corresponding
prospectus schemes annexed to the listing rules of the SIX Swiss
Exchange.
Notice to
Prospective Investors in the Dubai International Financial
Centre
This document relates to an exempt offer in accordance with the
Offered Securities Rules of the Dubai Financial Services
Authority. This document is intended for distribution only to
persons of a type specified in those rules. It must not be
delivered to, or relied on by, any other person. The Dubai
Financial Services Authority has no responsibility for reviewing
or verifying any documents in connection with exempt
S-15
offers. The Dubai Financial Services Authority has not approved
this document nor taken steps to verify the information set out
in it, and has no responsibility for it. The common shares which
are the subject of the offering contemplated by this prospectus
may be illiquid
and/or
subject to restrictions on their resale. Prospective purchasers
of the common shares offered should conduct their own due
diligence on the common shares. If you do not understand the
contents of this document you should consult an authorised
financial adviser.
The common shares may not be, are not and will not be sold,
subscribed for, transferred or delivered, directly or
indirectly, to any person in the Dubai International Financial
Centre who is not a Professional Client within the meaning set
out in Rule 2.3.2 of the Conduct of Business Module of the
Dubai Financial Services Authority.
S-16
LEGAL
MATTERS
Certain legal matters in connection with this offering will be
passed upon for us by Hunton & Williams LLP. In
addition, the summaries of legal matters contained in the
section of the accompanying prospectus under the heading
Federal Income Tax Consequences of Our Status as a
REIT are based on the opinion of Hunton &
Williams LLP. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Clifford
Chance US LLP.
EXPERTS
The consolidated financial statements and schedule of Hersha
Hospitality Trust as of December 31, 2008 and 2007 and for
each of the years in the three-year period ended
December 31, 2008 and managements assessment of the
effectiveness of internal control over financial reporting as of
December 31, 2008 have been incorporated by reference
herein in reliance upon the report of KPMG LLP, independent
registered public accounting firm, and, with respect to the
consolidated statements of operations, of changes in
members (deficiency) equity and of cash flows of Mystic
Partners, LLC as of December 31, 2006 have been so
incorporated in reliance on the report by PricewaterhouseCoopers
LLP, independent registered public accounting firm, given on the
authority of said firms as experts in accounting and auditing.
KPMG LLPs report dated March 5, 2009, except as to
notes 1, 4, 10, and 12 which are as of November 11, 2009 on
the consolidated financial statements refers to an accounting
change as the result of the Companys adoption of new
accounting standards related to noncontrolling interests.
The consolidated statements of operations, of changes in
members (deficiency) equity and of cash flows of Mystic
Partners, LLC and subsidiaries for the year ended
December 31, 2006 incorporated in this prospectus by
reference to the Annual Report on
Form 10-K
of Hersha Hospitality Trust for the year ended December 31,
2008 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
S-17
PROSPECTUS
$500,000,000
HERSHA HOSPITALITY TRUST
Class A Common Shares of
Beneficial Interest
Preferred Shares of Beneficial Interest
Depositary Shares
Warrants
Units
Hersha Hospitality Trust intends to offer and sell, from time to
time, in one or more series or classes, the securities described
in this prospectus. The total offering price of these securities
will not exceed $500,000,000, in the aggregate. The securities
may be offered separately or together in any combination and as
separate series. We will provide the specific terms of any
securities we may offer in a supplement to this prospectus. You
should read carefully this prospectus and any applicable
prospectus supplement before deciding to invest in these
securities.
We may offer and sell these securities through one or more
underwriters, dealers and agents, or directly to purchasers, on
a continuous or delayed basis. If any underwriters, dealers or
agents are involved in the sale of any securities, their names,
and any applicable purchase price, fee, commission or discount
arrangement between or among them will be set forth or will be
calculable from the information set forth in the applicable
prospectus supplement.
Our common shares are listed on the New York Stock Exchange, or
the NYSE, under the symbol HT. The closing sale
price of our common shares on the NYSE on November 12,
2009, was $2.56 per share.
Investing in our securities involves risks. Before investing
in our securities, you should carefully read and consider the
information appearing under Risk Factors beginning
on page 2 of this prospectus.
Neither the SEC 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 December 15, 2009
TABLE OF
CONTENTS
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You should rely only on the information contained or
incorporated by reference in this prospectus and any applicable
prospectus supplements. We have not authorized anyone to provide
you with information different from that contained or
incorporated by reference in this prospectus or any applicable
prospectus supplement. No dealer, salesperson or other person is
authorized to give any information or to represent anything not
contained or incorporated by reference in this prospectus or any
applicable prospectus supplement. You must not rely on any
unauthorized information or representation. We are offering to
sell only the securities described in this prospectus or any
applicable prospectus supplement only under circumstances and in
jurisdictions where it is lawful to do so. You should assume
that the information in this prospectus or any applicable
prospectus supplement is accurate only as of the date on the
front of the document and that any information incorporated by
reference is accurate only as of the date of the document
containing the incorporated information. Our business, financial
condition, results of operations and prospects may have changed
since that date.
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ABOUT
THIS PROSPECTUS
This prospectus is part of a registration statement that we
filed with the SEC under the Securities Act using a
shelf registration process. Under this shelf
registration process, we may sell, from time to time, in one or
more offerings, any combination of the securities described in
this prospectus.
This prospectus provides you with a general description of the
securities we may offer from time to time. Each time we offer
for sale securities under this prospectus, we will provide a
prospectus supplement that contains specific information about
the terms of the securities we are offering as well as other
information. The prospectus supplement may also add, update or
change information contained in this prospectus. This
prospectus, together with any applicable prospectus supplements,
includes or incorporates by reference all material information
relating to the offering of the securities described herein.
Please read carefully both this prospectus and any applicable
prospectus supplements together with the information described
below under Where You Can Obtain More Information.
The SEC allows us to incorporate by reference information that
we file with it, which means that we can disclose important
information to you by referring you to those documents. The
information incorporated by reference is considered to be a part
of this prospectus, and information that we file later with the
SEC will automatically update and supersede this information.
See Incorporation of Certain Documents By Reference.
All brand names, trademarks and service marks appearing in this
prospectus are the property of their respective owners. This
prospectus and any applicable prospectus supplements, as well as
the information incorporated by reference in those documents,
may contain registered trademarks owned or licensed to companies
other than us, including, but not limited to, Comfort
Inn®,
Courtyard®
by
Marriott®,
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®,
Sleep
Inn®
Springhill
Suites®
and Springhill Suites by
Marriott®.
None of the owners or licensees of any trademarks contained or
incorporated by reference in this prospectus or any applicable
prospectus supplement or any of their respective present and
future owners, subsidiaries, affiliates, officers, directors,
agents or employees are in any way participating in or endorsing
the offering of the securities described in this prospectus or
any applicable prospectus supplement, and none of them shall in
any way be deemed an issuer or underwriter of these securities
or have any liability or responsibility for any financial
statements or other financial information contained or
incorporated by reference in this prospectus or any applicable
prospectus supplement.
FORWARD-LOOKING
STATEMENTS
This prospectus, including the information we have incorporated
by reference, contains forward-looking statements within the
meaning of the federal securities laws. These statements include
statements about our plans, strategies and prospects and involve
known and unknown risks that are difficult to predict.
Therefore, our actual results, performance or achievements may
differ materially from those expressed in or implied by these
forward-looking statements. In some cases, you can identify
forward-looking statements by the use of words such as
may, could, expect,
intend, plan, seek,
anticipate, believe,
estimate, predict, forecast,
potential, continue, likely,
will, would and variations of these
terms and similar expressions, or the negative of these terms or
similar expressions. You should not place undue reliance on
forward-looking statements. Factors that may cause our actual
results to differ materially from our current expectations
include, but are not limited to:
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financing risks, including the risk of leverage and the
corresponding risk of default on our mortgage loans and other
debt and potential inability to refinance or extend the maturity
of existing indebtedness;
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the depth and duration of the current economic downturn;
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levels of spending in the business, travel and leisure
industries, as well as consumer confidence;
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declines in occupancy, average daily rate and revenue per
available room and other hotel operating metrics;
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hostilities, including future terrorist attacks, or fear of
hostilities that affect travel;
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financial condition of, and our relationships with, our joint
venture partners, third-party property managers, franchisors and
hospitality joint venture partners;
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the degree and nature of our competition;
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increased interest rates and operating costs;
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risks associated with potential acquisitions, including the
ability to ramp up and stabilize newly acquired hotels with
limited or no operating history, and dispositions of hotel
properties;
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risks associated with our development loan portfolio, including
the ability of borrowers to repay outstanding principal and
accrued interest at maturity;
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availability of and our ability to retain qualified personnel;
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our failure to maintain our qualification as a real estate
investment trust, or REIT, under the Internal Revenue Code of
1986, as amended, or the Code;
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changes in our business or investment strategy;
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availability, terms and deployment of capital;
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general volatility of the capital markets and the market price
of our common shares;
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environmental uncertainties and risks related to natural
disasters;
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changes in real estate and zoning laws and increases in real
property tax rates; and
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the factors referenced or incorporated by reference in this
prospectus supplement or the accompanying prospectus under the
heading Risk Factors.
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These factors are not necessarily all of the important factors
that could cause our actual results, performance or achievements
to differ materially from those expressed in or implied by any
of our forward-looking statements. Other unknown or
unpredictable factors, many of which are beyond our control,
also could harm our results, performance or achievements.
All forward-looking statements contained in this prospectus,
including the information we have incorporated by reference, are
expressly qualified in their entirety by the cautionary
statements set forth above. Forward-looking statements speak
only as of the date they are made, and we do not undertake or
assume any obligation to update publicly any of these statements
to reflect actual results, new information or future events,
changes in assumptions or changes in other factors affecting
forward-looking statements, except to the extent required by
applicable laws. If we update one or more forward-looking
statements, no inference should be drawn that we will make
additional updates with respect to those or other
forward-looking statements.
iii
CERTAIN
DEFINITIONS
Unless the context otherwise requires, references in this
prospectus to:
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our company, we, us and
our mean Hersha Hospitality Trust and its
consolidated subsidiaries, including Hersha Hospitality Limited
Partnership, taken as a whole;
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HHLP and our operating partnership mean
Hersha Hospitality Limited Partnership;
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common shares mean our Class A common shares of
beneficial interest, $0.01 par value per share;
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preferred shares mean our preferred shares of
beneficial interest, $0.01 par value per share; and
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you refers to a potential investor in the securities
described in this prospectus.
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iv
THE
COMPANY
Hersha Hospitality Trust is a self-advised, Maryland statutory
real estate investment trust that was organized in 1998. We
completed our initial public offering in January 1999. Our
common shares are traded on the NYSE 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. We are
structured as a REIT for federal income tax purposes.
As of September 30, 2009, our portfolio consisted of 56
wholly owned limited and full service properties and 17 limited
and full service properties owned through joint venture
investments. Of the 17 limited and full service properties
owned through our investments in joint ventures, two are
consolidated with us for financial reporting purposes. These 73
properties, with a total of 9,294 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, including, but not
limited to, Comfort
Inn®,
Courtyard®
by
Marriott®,
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®,
Sleep
Inn®
Springhill
Suites®
and Springhill Suites by
Marriott®.
In addition, several of our hotels operate as independent
boutique hotels.
In addition, as of September 30, 2009, we had made
$47,990,000 in first mortgage and mezzanine loans to hotel
developers and owners to enable such entities to construct
hotels and conduct related improvements on specific hotel
projects at interest rates ranging from 10% to 20%. We bear
economic risks through these development loans. In many
instances, we maintain a first right of refusal or first right
of offer to purchase the hotels for which we have provided
development loan financing. We intend to continue to acquire
hotels from these entities if approved by our independent
trustees.
We own our hotels and our joint venture investments through our
operating partnership, for which we serve as general partner.
Our hotels are managed by qualified independent management
companies, including, among others, Hersha Hospitality
Management, L.P., or HHMLP, a private management company owned
by certain of our trustees, officers and other third party
investors. We lease all of our wholly-owned hotels to 44 New
England Management Company, or 44 New England, our wholly-owned
taxable REIT subsidiary, or TRS. Each of the hotels that we own
through a joint venture investment is leased to another TRS that
is owned by the respective joint venture or an entity owned in
part by 44 New England.
Our principal executive office is located at 44 Hersha Drive,
Harrisburg, Pennsylvania 17102. Our telephone number is
(717) 236-4400.
1
RISK
FACTORS
Investing in our securities involves a high degree of risk.
Before making a decision to invest in our securities, you should
carefully consider the risks described below and the risks
described under Risk Factors in our most recent
Annual Report on
Form 10-K
and any subsequent Quarterly Reports on
Form 10-Q,
as well as the other information contained or incorporated by
reference in this prospectus or in any applicable prospectus
supplement. These risks and uncertainties are not the only ones
facing us. Additional risks and uncertainties that we are
unaware of, or that we currently deem immaterial, also may
become important factors that affect us. See Incorporation
of Certain Documents by Reference and Where You Can
Obtain More Information below.
We may
change our distribution policy for our common shares in the
future.
In the past we have reduced the quarterly distribution paid to
our shareholders, and we may reduce the quarterly distribution
paid to our shareholders in the future. The decision to declare
and pay distributions on our common shares in the future, as
well as the timing, amount and composition of any such future
distributions, will be at the sole discretion of our board of
trustees and will depend on our earnings, funds from operations,
liquidity, financial condition, capital requirements,
contractual prohibitions or other limitations under our
indebtedness and preferred shares, the annual distribution
requirements under the REIT provisions of the Code, state law
and such other factors as our board of trustees deems relevant.
Any change in our distribution policy could have a material
adverse effect on the market price of our common shares.
The
market price of our common shares could be volatile and could
decline, resulting in a substantial or complete loss of our
common shareholders investment.
The stock markets, including the NYSE, which is the exchange on
which we list our common shares, have experienced significant
price and volume fluctuations. As a result, the market price of
our common shares could be similarly volatile, and investors in
our common shares may experience a decrease in the value of
their shares, including decreases unrelated to our operating
performance or prospects. The price of our common shares could
be subject to wide fluctuations in response to a number of
factors, including:
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our operating performance and the performance of other similar
companies;
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actual or anticipated differences in our operating results;
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changes in our revenues or earnings estimates or recommendations
by securities analysts;
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publication of research reports about us or our industry by
securities analysts;
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additions and departures of key personnel;
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strategic decisions by us or our competitors, such as
acquisitions, divestments, spin-offs, joint ventures, strategic
investments or changes in business strategy;
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the passage of legislation or other regulatory developments that
adversely affect us or our industry;
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speculation in the press or investment community;
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actions by institutional shareholders;
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changes in accounting principles;
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terrorist acts; and
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general market conditions, including factors unrelated to our
performance.
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In the past, securities class action litigation has often been
instituted against companies following periods of volatility in
their stock price. This type of litigation could result in
substantial costs and divert our managements attention and
resources.
2
Future
sales of our common shares or securities convertible into or
exchangeable or exercisable for our commons shares could depress
the market price of our common shares.
We cannot predict whether future sales of our common shares or
securities convertible into or exchangeable or exercisable for
our commons shares or the availability of these securities for
resale in the open market will decrease the market price of our
common shares. Sales of a substantial number of these securities
in the public market, including sales up to 11,909,587 of our
common shares effected by Real Estate Investment Group L.P., or
REIG, and certain other selling shareholders affiliated with
REIG in the public market from time to time (as further
described under Strategic Investor below), or upon
the redemption of units of limited partnership interest in our
operating partnership, or limited partnership units, held by the
limited partners of our operating partnership (other than us and
our subsidiaries) or the perception that these sales might
occur, may cause the market price of our common shares to
decline and you could lose all or a portion of your investment.
Future issuances of our common shares or other securities
convertible into or exchangeable or exercisable for our common
shares, including, without limitation, partnership units in our
operating partnership in connection with property, portfolio or
business acquisitions and issuances of equity-based awards to
participants in our 2008 Equity Incentive Plan, could have an
adverse effect on the market price of our common shares. Future
issuances of these securities also could adversely affect the
terms upon which we obtain additional capital through the sale
of equity securities. In addition, future sales or issuances of
our common shares may be dilutive to existing shareholders.
RATIO OF
EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED SHARE DIVIDENDS
The following table sets forth the ratio of earnings to combined
fixed charges and preferred share dividends for the nine months
ended September 30, 2009, and for each of the last five
fiscal years.
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Nine Months Ended
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September 30,
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Year Ended December 31,
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2009
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2008
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2007
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2006
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2005
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2004
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Ratio of earnings to combined fixed charges and preferred share
dividends
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*
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*
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1.2
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1.1
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1.2
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1.6X
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For the nine months ended September 30, 2009, combined
fixed charges and preferred share dividends exceeded earnings by
approximately $32.4 million. For the year ended
December 31, 2008, combined fixed charges and preferred
share dividends exceeded earnings by approximately
$16.0 million. |
The ratio of earnings to combined fixed charges and preferred
share dividends was computed by dividing earnings by the sum of
fixed charges and preferred share dividends. For these purposes,
earnings have been calculated by adding pre-tax income or loss
from continuing operations (before income or loss from equity
investees), fixed charges (excluding interest capitalized),
amortization of capitalized interest, extraordinary items and
preferred share dividends. Fixed charges consist of interest
costs, whether expensed or capitalized, amortization of line of
credit fees and amortization of interest rate caps and swap
agreements. Preferred share dividends consist of the amount of
pre-tax earnings that is required to pay the dividends on our
outstanding preferred shares.
USE OF
PROCEEDS
Unless indicated otherwise in a prospectus supplement, we expect
to use the net proceeds from the sale of the securities for
general corporate purposes, including, but not limited to,
repaying existing indebtedness; acquiring or developing
additional hotel properties, including through joint ventures
and strategic partnerships; renovating, expanding and improving
our existing hotel properties; and investing in hotel
development projects by providing a variety of financing
arrangements to developers. Further details
3
regarding the use of the net proceeds of a specific series or
class of the securities will be set forth in the prospectus
supplement related to those securities or in our periodic or
current reports incorporated by reference in this prospectus.
DESCRIPTION
OF SHARES OF BENEFICIAL INTEREST
The following is only a summary of some of the rights of
shareholders that may be important to you. The description of
our shares of beneficial interest set forth below describes
certain general terms and provisions of our shares of beneficial
interest. The following description does not purport to be
complete and is qualified in its entirety by reference to our
declaration of trust and our bylaws. See Where You Can
Obtain More Information.
Overview
Our amended and restated declaration of trust, as amended and
supplemented, or our declaration of trust, provides that we may
issue up to 150,000,000 Class A common shares of beneficial
interest, $0.01 par value per share, 1,000,000 Class B
common shares of beneficial interest, $0.01 par value per
share, and 29,000,000 preferred shares of beneficial interest,
$0.01 par value per share. As of September 30, 2009,
56,473,120 Class A common shares were issued and
outstanding, no Class B common shares were issued and
outstanding, 2,400,000 preferred shares designated as 8.00%
Series A cumulative redeemable preferred shares, or
Series A preferred shares, were issued and outstanding,
8,701,810 Class A common shares were reserved for issuance
upon redemption of units of limited partnership interest in our
operating partnership, or limited partnership units, held by the
limited partners (other than us and our subsidiaries) and
1,678,364 Class A common shares were available for future
issuance under our 2008 Equity Incentive Plan.
Our common shares currently trade on the NYSE under the symbol
HT, and our Series A preferred shares currently
trade on the NYSE under the symbol HT PrA. The
transfer agent for these shares is American Stock
Transfer & Trust Company. Our common shares and
our Series A preferred shares are subject to certain
restrictions on ownership and transfer which were adopted for
the purpose of enabling us to preserve our status as a REIT. For
a description of these restrictions, see Restrictions on
Ownership and Transfer below.
As permitted by the Maryland statute governing real estate
investment trusts formed under the laws of that state, which is
referred to as the Maryland REIT Law, our declaration of trust
contains a provision permitting our board of trustees, without
any action by our shareholders, to amend our declaration of
trust to increase or decrease the aggregate number of shares of
beneficial interest or the number of shares of any class of
shares of beneficial interest that we have authority to issue.
Maryland law and our declaration of trust provide that none of
our shareholders is personally liable for any of our debts,
claims, demands, judgments or obligations solely by reason of
that shareholders status as a shareholder.
Common
Shares
Upon issuance, common shares being offered pursuant to this
prospectus will be duly authorized, validly issued, fully paid
and nonassessable.
Voting
Rights of Common Shares
Subject to the provisions of our declaration of trust regarding
the restrictions on the transfer and ownership of shares of
beneficial interest, each outstanding common share entitles the
holder to one vote on all matters submitted to a vote of
shareholders, including the election of trustees. Except as may
be provided with respect to any other class or series of our
shares of beneficial interest, including our Series A
preferred shares, only holders of our common shares possess
voting rights. There is no cumulative voting in the election of
trustees, which means that, subject to certain voting rights of
our Series A preferred shares, the holders of a plurality
of the outstanding common shares, voting as a single class, can
elect all of the trustees then standing for election.
4
Under the Maryland REIT Law, a real estate investment
trusts declaration of trust may permit the trustees by a
two-thirds vote to amend the declaration of trust from time to
time to qualify as a REIT under the Code without the affirmative
vote or written consent of the shareholders. Our declaration of
trust permits such action by a majority vote of the trustees.
See Certain Provisions of Maryland Law, Our Declaration of
Trust and Bylaws below for more information about voting
rights of owners of our common shares.
Dividends,
Liquidation and Other Rights
Holders of our common shares are entitled to receive dividends
when authorized by our board of trustees out of assets legally
available for the payment of dividends. They also are entitled
to share ratably in our assets legally available for
distribution to our shareholders in the event of our
liquidation, dissolution or winding up, after payment of or
adequate provision for all of our known debts and liabilities.
These rights are subject to the preferential rights of any other
class or series of our shares that may be created and to the
provisions of our declaration of trust regarding restrictions on
transfer of our shares.
Except as described under Strategic Investor below,
the holders of our common shares have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights and have
no preemptive rights to subscribe for any additional common
shares. Subject to the restrictions on transfer of shares
contained in our declaration of trust and to the ability of the
board of trustees to create common shares with differing voting
rights, all common shares will have equal dividend, liquidation
and other rights.
Preferred
Shares
We may offer and sell preferred shares from time to time, in one
or more series (including additional Series A preferred
shares), as authorized by our board of trustees. Upon issuance,
all preferred shares being offered by this prospectus will be
duly authorized, validly issued, fully paid and nonassessable.
Our declaration of trust authorizes our board of trustees to
classify any unissued preferred shares and to reclassify any
previously classified but unissued preferred shares of any
series from time to time in one or more series, as authorized by
our board of trustees. Prior to issuance of shares of each
series, our board of trustees is required by the Maryland REIT
Law and our declaration of trust to set for each such series,
subject to the provisions of our declaration of trust regarding
the restriction on ownership and transfer of shares of
beneficial interest, the terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends
or other distributions, qualifications and terms or conditions
of redemption for each such series. Our board of trustees could
authorize the issuance of preferred shares with terms and
conditions that could have the effect of delaying, deterring or
preventing a transaction or a change in control that might
involve a premium price for holders of common shares or
otherwise be in their best interest.
The prospectus supplement governing the offering of any
preferred shares will describe the specific terms of such
securities, including:
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the title and stated value of the preferred shares;
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the number of preferred shares offered and the offering price of
the preferred shares;
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the dividend rate(s), period(s)
and/or
payment date(s) or method(s) of calculation of any of those
terms that apply to the preferred shares;
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the date from which dividends on the preferred shares will
accumulate, if applicable;
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the terms and amount of a sinking fund, if any, for the purchase
or redemption of the preferred shares;
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the redemption rights, including conditions and the redemption
price(s), if applicable, of the preferred shares;
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any listing of the preferred shares on any securities exchange;
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the terms and conditions, if applicable, upon which the
preferred shares will be convertible into common shares or any
of our other securities, including the conversion price or rate
(or manner of calculation thereof);
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the relative ranking and preference of the preferred shares as
to dividend rights and rights upon liquidation, dissolution or
the winding up of our affairs;
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any limitations on issuance of any series of preferred shares
ranking senior to or on a parity with that series of preferred
shares as to dividend rights and rights upon liquidation,
dissolution or the winding up of our affairs;
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the procedures for any auction and remarketing, if any, for the
preferred shares;
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any other specific terms, preferences, rights, limitations or
restrictions of the preferred shares;
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a discussion of federal income tax consequences applicable to
the preferred shares; and
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any limitations on direct or beneficial ownership and
restrictions on transfer in addition to those described in
Restrictions on Ownership and Transfer, in each case
as may be appropriate to preserve our status as a real estate
investment trust.
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The terms of any preferred shares we issue through this
prospectus will be set forth in an articles supplementary or
amendment to our declaration of trust. We will file the articles
supplementary or amendment as an exhibit to the registration
statement that includes this prospectus, or as an exhibit to a
filing with the SEC that is incorporated by reference into this
prospectus. The description of preferred shares in any
prospectus supplement will not describe all of the terms of the
preferred shares in detail. You should read the applicable
articles supplementary or amendment to our declaration of trust
for a complete description of all of the terms.
Rank
Unless otherwise indicated in the applicable prospectus
supplement, the preferred shares offered through that supplement
will, with respect to dividend rights and rights upon our
liquidation, dissolution or winding up, rank:
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senior to all classes or series of our common shares, and to all
other equity securities ranking junior to those preferred
shares; and
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on a parity with all of our equity securities ranking on a
parity with the preferred shares; and junior to all of our
equity securities ranking senior to the preferred shares.
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The term equity securities does not include
convertible debt securities.
Dividends
Subject to any preferential rights of any outstanding shares or
series of shares, including the Series A preferred shares,
and to the provisions of our declaration of trust regarding
ownership of shares in excess of the ownership limitation
described below under Restrictions on Ownership and
Transfer, our preferred shareholders are entitled to
receive dividends, when and as authorized by our board of
trustees, out of legally available funds.
Redemption
If we provide for a redemption right in a prospectus supplement,
the preferred shares offered through that supplement will be
subject to mandatory redemption or redemption at our option, in
whole or in part, in each case upon the terms, at the times and
at the redemption prices set forth in that supplement.
6
Liquidation
Preference
As to any preferred shares offered through this prospectus, the
applicable supplement shall provide that, upon the voluntary or
involuntary liquidation, dissolution or winding up of our
affairs, the holders of those preferred shares shall receive,
before any distribution or payment shall be made to the holders
of any other class or series of shares ranking junior to those
preferred shares in our distribution of assets upon any
liquidation, dissolution or winding up, and after payment or
provision for payment of our debts and other liabilities, out of
our assets legally available for distribution to shareholders,
liquidating distributions in the amount of any liquidation
preference per share (set forth in the applicable supplement),
plus an amount, if applicable, equal to all distributions
accrued and unpaid thereon (not including any accumulation in
respect of unpaid distributions for prior distribution periods
if those preferred shares do not have a cumulative
distribution). After payment of the full amount of the
liquidating distributions to which they are entitled, the
holders of those preferred shares will have no right or claim to
any of our remaining assets. In the event that, upon our
voluntary or involuntary liquidation, dissolution or winding up,
the legally available assets are insufficient to pay the amount
of the liquidating distributions on all of those outstanding
preferred shares and the corresponding amounts payable on all of
our shares of other classes or series of equity security ranking
on a parity with those preferred shares in the distribution of
assets upon liquidation, dissolution or winding up, then the
holders of those preferred shares and all other such classes or
series of equity security shall share ratably in any such
distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively
entitled.
If the liquidating distributions are made in full to all holders
of preferred shares entitled to receive those distributions
prior to any other classes or series of equity security ranking
junior to the preferred shares upon our liquidation, dissolution
or winding up, then our remaining assets shall be distributed
among the holders of those junior classes or series of equity
shares, in each case according to their respective rights and
preferences and their respective number of shares.
Voting
Rights
Unless otherwise indicated in the applicable supplement, holders
of our preferred shares will not have any voting rights, except
as may be required by applicable law or any applicable rules and
regulations of the NYSE.
Conversion
Rights
The terms and conditions, if any, upon which any series of
preferred shares is convertible into common shares will be set
forth in the prospectus supplement relating to the offering of
those preferred shares. These terms typically will include:
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the number of common shares into which the preferred shares are
convertible;
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the conversion price (or manner of calculation thereof);
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the conversion period;
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provisions as to whether conversion will be at the option of the
holders of the preferred shares or at our option;
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the events requiring an adjustment of the conversion
price; and
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provisions affecting conversion in the event of the redemption
of that series of preferred shares.
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Series A
Preferred Shares
The Series A preferred shares generally provide for the
following rights, preferences and obligations:
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Dividend Rights. The Series A preferred
shares accrue a cumulative cash dividend at an annual rate of
8.00% on the $25.00 per share liquidation preference, equivalent
to a fixed annual amount of $2.00 per share per year.
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Liquidation Rights. Upon any voluntary or
involuntary liquidation, dissolution or winding up of our
company, the holders of Series A preferred shares will be
entitled to receive a liquidation preference of $25.00 per
share, plus an amount equal to all accrued and unpaid dividends
to the date of payment, before any payment or distribution will
be made or set aside for holders of any junior shares, including
our common shares.
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Redemption Provisions. The Series A
preferred shares are not redeemable prior to August 5,
2010, except in certain limited circumstances relating to our
ability to qualify as a REIT. On and after August 5, 2010,
the Series A preferred shares may be redeemed for cash at
our option, in whole or in part, at any time and from time to
time, at a redemption price equal to $25.00 per share plus an
amount equal to all accrued and unpaid dividends to and
including the date fixed for redemption. The Series A
preferred shares have no stated maturity and are not subject to
any sinking fund or mandatory redemption provisions.
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Voting Rights. Holders of Series A
preferred shares generally have no voting rights, except as
required by law. However, if we fail to pay dividends on any
Series A preferred shares for six or more quarterly
periods, whether or not consecutive, the holders of the
Series A preferred shares will be entitled to elect two
directors to serve on our board of trustees until all dividends
accumulated on the Series A preferred shares have been
fully paid or declared and a sum sufficient for the payment
thereof set aside for payment. In addition, the issuance of
senior shares or certain changes to the terms of the
Series A preferred shares that would be materially adverse
to the rights of holders of Series A preferred shares
cannot be made without the affirmative vote of holders of at
least
662/3%
of the outstanding Series A preferred shares and shares of
any class or series of shares ranking on a parity with the
Series A preferred shares which are entitled to similar
voting rights, if any, voting as a single class.
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Conversion and Preemptive Rights. The
Series A preferred shares are not convertible or
exchangeable for any of our other securities or property, and
holders of our Series A preferred shares have no preemptive
rights to subscribe for any securities of our company.
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Classification
or Reclassification of Common Shares or Preferred
Shares
Our declaration of trust authorizes our board of trustees to
classify or reclassify any unissued common shares or preferred
shares into one or more classes or series of shares of
beneficial interest by setting or changing the preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends or distributions, qualifications or
terms or conditions of redemption of such new class or series of
shares of beneficial interest.
DESCRIPTION
OF DEPOSITARY SHARES
We may, at our option, elect to offer depositary shares rather
than full preferred shares. Each depositary share will represent
ownership and entitlement to all rights and preferences of a
fraction of a preferred share of a specified series (including
dividend, redemption, liquidation and voting rights). We will
specify the applicable fraction in a prospectus supplement
governing the offering of any depositary shares. We will deposit
with a depositary named in a prospectus supplement governing the
offering of any depositary shares the preferred shares
represented by the depositary shares, under a deposit agreement,
among us, the depositary and the holders from time to time of
the certificates evidencing depositary shares, or depositary
receipts. Depositary receipts will be delivered to those persons
purchasing depositary shares in the offering. The depositary
will be the transfer agent, registrar and dividend disbursing
agent for the depositary shares.
Dividends
and Distributions
The depositary will distribute all cash dividends or other cash
distributions received in respect of the series of preferred
shares represented by the depositary shares to the record
holders of depositary receipts in proportion to the number of
depositary shares owned by the holders on the relevant record
date, which will be the same date as the record date fixed by us
for the applicable series of preferred shares. The depositary,
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however, will distribute only such amount as can be distributed
without attributing to any depositary share a fraction of one
cent, and any balance not so distributed will be added to and
treated as part of the next sum received by the depositary for
distribution to record holders of depositary receipts then
outstanding.
If a distribution is other than in cash, the depositary will
distribute property it receives to the record holders of
depositary receipts entitled thereto, in proportion, as nearly
as may be practicable, to the number of depositary shares owned
by the holders on the relevant record date, unless the
depositary determines (after consultation with us) that it is
not feasible to make such distribution, in which case the
depositary may (with our approval) adopt any other method for
such distribution as it deems equitable and appropriate,
including the sale of such property (at such place or places and
upon such terms as it may deem equitable and appropriate) and
distribution of the net proceeds from such sale to the holders.
Withdrawal
of Preferred Shares
Upon surrender of depositary receipts at the principal office of
the depositary and payment of any unpaid amount due the
depositary, and subject to the terms of the deposit agreement,
the owner of the depositary shares evidenced by the depositary
receipts is entitled to delivery of the number of whole
preferred shares and all money and other property, if any,
represented by such depositary shares. Fractional preferred
shares will not be issued. If the depositary receipts delivered
by the holder evidence a number of depositary shares in excess
of the number of depositary shares representing the number of
whole preferred shares to be withdrawn, the depositary will
deliver to such holder at the same time a new depositary receipt
evidencing such excess number of depositary shares. Holders of
preferred shares thus withdrawn will not thereafter be entitled
to deposit such shares under the deposit agreement or to receive
depositary receipts evidencing depositary shares therefor.
Liquidation
Preference
In the event of the liquidation, dissolution or winding up of
the affairs of the Company, whether voluntary or involuntary,
the holders of each depositary share will be entitled to the
fraction of the liquidation preference accorded each share of
the applicable series of preferred shares as set forth in the
prospectus supplement.
Redemption
If the series of preferred shares represented by the applicable
series of depositary shares is redeemable, such depositary
shares will be redeemed from the proceeds received by the
depositary resulting from the redemption, in whole or in part,
of preferred shares held by the depositary. Whenever we redeem
any preferred shares held by the depositary, the depositary will
redeem as of the same redemption date the corresponding number
of depositary shares representing the preferred shares so
redeemed. The depositary will mail the notice of redemption
promptly upon receipt of such notice from us and not less than
30 nor more than 90 days prior to the date fixed for
redemption of the preferred shares and the depositary shares to
the record holders of the depositary receipts.
Voting
Rights
Promptly upon receipt of notice of any meeting at which the
holders of the series of preferred shares represented by the
applicable series of depositary shares are entitled to vote, the
depositary will mail the information contained in such notice of
meeting to the record holders of the depositary receipts as of
the record date for such meeting. Each record holder of
depositary receipts will be entitled to instruct the depositary
as to the exercise of the voting rights pertaining to the number
of preferred shares represented by that record holders
depositary shares. The depositary will, to the extent
practicable, vote the preferred shares represented by the
depositary shares in accordance with the instructions, and we
will agree to take all action which may be deemed necessary by
the depositary in order to enable the depositary to do so. The
depositary will abstain from voting any of the preferred shares
to the extent that it does not receive specific instructions
from the holders of depositary receipts. The depositary will not
be responsible for any failure to carry out any instruction to
vote so long as any such action or inaction is in good faith and
does not result from negligence or willful misconduct of the
depositary.
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Conversion
Rights
If we specify in a prospectus supplement governing any
depositary shares that the depositary shares are convertible
into our common shares or any of our other securities or
property, the holders of depositary receipts may surrender them
to the depositary with written instructions to instruct us to
cause the conversion of the preferred shares represented by the
depositary shares evidenced by such depositary receipts into
whole shares of common shares or other shares of our preferred
shares. Upon receipt of such instructions and any amounts
payable related to the conversion, we will cause the conversion
of the depositary shares using the same procedures as those
provided for delivery of preferred shares to effect the
conversion. If the depositary shares evidenced by depositary
receipt are to be converted in part only, a new depositary
receipt or receipts will be issued for any depositary shares not
to be converted. We will not issue fractional shares of our
common shares upon conversion, and if such conversion would
result in a fractional share being issued, we will pay an amount
in cash equal to the value of the fractional interest based upon
the closing price of our common shares on the last business day
prior to the conversion.
Amendment
and Termination of Deposit Agreement
We and the depositary may agree from time to time to amend the
form of depositary receipt evidencing the depositary shares and
any provision of the deposit agreement between us and the
depositary. However, the holders of at least a majority of the
depositary shares then outstanding must approve any amendment
that materially and adversely alters the rights of those holders
(other than any change in fees). No amendment may impair the
right, subject to the terms of the deposit agreement, of any
owner of any depositary shares to surrender the depositary
receipt evidencing the depositary shares with instructions to
the depositary to deliver to the holder of preferred shares and
all money and other property, if any, represented thereby,
except in order to comply with mandatory provisions of
applicable law.
We will be permitted to terminate the deposit agreement upon not
less than 30 days prior written notice to the
depositary if (i) the termination is necessary to preserve
our qualification as a REIT under the Code or (ii) a
majority of each series of preferred shares affected by the
termination consents to it, at which time the depositary will be
required to deliver or make available to each holder of
depositary receipts, upon surrender of the depositary receipts
held by each holder, that number of whole or fractional
preferred shares as are represented by the depositary shares
evidenced by those depositary receipts together with any other
property held by such depositary with respect to those
depositary receipts. We will agree that if we terminate the
deposit agreement to preserve our qualification as a REIT under
the Code, then we will use our best efforts to list the
preferred shares issued upon surrender of the related depositary
shares on a national securities exchange. In addition, the
deposit agreement will automatically terminate if (i) all
outstanding depositary shares under the agreement have been
redeemed, (ii) there has been a final distribution in
respect of the related preferred shares in connection with any
liquidation, dissolution or winding up of Hersha Hospitality
Trust and such distribution shall have been distributed to the
holders of depositary receipts evidencing the depositary shares
representing the preferred shares or (iii) each preferred
share has been converted into shares of Hersha Hospitality Trust
not so represented by depositary shares.
Charges
of Depositary
We will pay all transfer and other taxes and governmental
charges arising solely from the existence of the depositary
arrangements. We will pay charges of the depositary in
connection with the initial deposit of the preferred shares, the
initial issuance of the depositary shares, the redemption of the
preferred shares and all withdrawals of preferred shares by
owners of depositary shares. Holders of depositary receipts will
pay transfer, income and other taxes and governmental charges
and certain other charges specified in the deposit agreement to
be for their accounts. In certain circumstances, the depositary
may refuse to transfer depositary shares, may withhold dividends
and distributions and may sell the depositary shares evidenced
by such depositary receipt if the charges are not paid.
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Miscellaneous
The depositary will forward to the holders of depositary
receipts all reports and communications from us that we deliver
to the depositary and that we are required to furnish to the
holders of the preferred shares. In addition, the depositary
will make available for inspection by holders of depositary
receipts at the principal office of the depositary, and at such
other places as it may from time to time deem advisable, any
reports and communications it receives from us in its capacity
as the holder of preferred shares. Neither we nor the depositary
assumes any obligation, nor will we be subject to any liability
under the deposit agreement, to holders of depositary receipts
other than for either of our negligence or willful misconduct.
Neither we nor the depositary will be liable if either of us is
prevented or delayed by law or any circumstance beyond our
respective control in performing our respective obligations
under the deposit agreement. Ours and the depositarys
obligations under the deposit agreement will be limited to
performance in good faith of our respective duties thereunder,
and neither of us will be obligated to prosecute or defend any
legal proceeding in respect of any depositary shares or
preferred shares unless satisfactory indemnity is furnished. We
and the depositary may rely on written advice of counsel or
accountants, on information provided by holders of the
depositary receipts or other persons believed in good faith to
be competent to give such information and on documents believed
to be genuine and to have been signed or presented by the proper
party or parties. In the event the depositary shall receive
conflicting claims, requests or instructions from any holders of
depositary receipts, on the one hand, and we, on the other hand,
the depositary shall be entitled to act on such claims, requests
or instructions received from us.
Resignation
and Removal of Depositary
The depositary may resign at any time by delivering to us notice
of its election to do so, and we may at any time remove the
depositary. Any such resignation or removal will take effect
upon the appointment of a successor depositary and its
acceptance of such appointment. Any successor depositary must be
appointed within 60 days after delivery of the notice for
resignation or removal and must be a bank or trust company
having its principal office in the United States of America and
having a combined capital and surplus of at least $150,000,000.
Restrictions
on Ownership and Transfer
In order to enable us to preserve our status as a REIT, we may
take certain actions to restrict ownership and transfer of our
outstanding securities, including any depositary shares. The
prospectus supplement related to the offering of any depositary
shares will specify any additional ownership limitation relating
to the warrants being offered thereby. For a description of
these restrictions, see Restrictions on Ownership and
Transfer below.
DESCRIPTION
OF WARRANTS
We may issue warrants for the purchase of common shares or
preferred shares. Warrants may be issued independently or
together with any securities and may be attached to or separate
from the securities. Each series of warrants will be issued
under a separate warrant agreement to be entered into between us
and a warrant agent specified in the prospectus supplement
governing the offering of any warrants.
The agent for warrants will act solely for us in connection with
warrants of the series and will not assume any obligation or
relationship of agency or trust for or with any holders or
beneficial owners of warrants.
The prospectus supplement governing the issuance of any series
of warrants will include specific terms relating to the
offering, including, if applicable:
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the title of the warrants;
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the aggregate number of warrants;
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the price or prices at which the warrants will be issued;
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the currencies in which the price or prices of the warrants may
be payable;
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the designation, amount and terms of the offered securities
purchasable upon exercise of the warrants;
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the designation and terms of the other offered securities, if
any, with which the warrants are issued and the number of
warrants issued with the security;
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if applicable, the date on and after which the warrants and the
offered securities purchasable upon exercise of the warrants
will be separately transferable;
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the price or prices at which, and currency or currencies in
which, the offered securities purchasable upon exercise of the
warrants may be purchased;
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the date on which the right to exercise the warrants shall
commence and the date on which the right shall expire;
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the minimum or maximum amount of the warrants which may be
exercised at any one time;
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information with respect to book-entry procedures, if any;
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any listing of warrants on any securities exchange;
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if appropriate, a discussion of federal income tax consequences
applicable to the warrants; and
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any other material term of the warrants, including terms,
procedures and limitations relating to the exchange and exercise
of the warrants.
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Additionally, in order to enable us to preserve our status as a
REIT, we may take certain actions to restrict ownership and
transfer of our outstanding securities, including any warrants.
The prospectus supplement related to the offering of any
warrants will specify any additional ownership limitation
relating to the warrants being offered thereby. For a
description of these restrictions, see Restrictions on
Ownership and Transfer below.
DESCRIPTION
OF UNITS
We may issue units consisting of one or more common shares,
preferred shares, depositary shares, warrants or any combination
of such securities.
The prospectus supplement governing the issuance of any units
will specify the following terms in respect of which this
prospectus is being delivered:
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the terms of the units and of any of the common shares,
preferred shares, depositary shares or warrants constituting the
units, including whether and under what circumstances the
securities comprising the units may be traded separately;
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the terms of any unit agreement governing the units;
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if appropriate, a discussion of federal income tax consequences
applicable to the units; and
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the provisions for the payment, settlement, transfer or exchange
of the units.
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Additionally, in order to enable us to preserve our status as a
REIT, we may take certain actions to restrict ownership and
transfer of our outstanding securities, including any units. The
prospectus supplement related to the offering of any units will
specify any additional ownership limitation relating to the
units being offered thereby. For a description of these
restrictions, see Restrictions on Ownership and
Transfer below.
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LEGAL
OWNERSHIP OF SECURITIES
We can issue securities in registered form or in the form of one
or more global securities. We describe global securities in
greater detail below. We refer to those persons who have
securities registered in their own names on the books that we or
any applicable trustee maintain for this purpose as the
holders of those securities. These persons are the
legal holders of the securities. We refer to those persons who,
indirectly through others, own beneficial interests in
securities that are not registered in their own names, as
indirect holders of those securities. As we discuss
below, indirect holders are not legal holders, and investors in
securities issued in book-entry form or in street name will be
indirect holders.
Book-Entry
Holders
We may issue securities in book-entry form only, as we will
specify in the applicable prospectus supplement. This means
securities may be represented by one or more global securities
registered in the name of a financial institution that holds
them as depositary on behalf of other financial institutions
that participate in the depositarys book-entry system.
These participating institutions, which are referred to as
participants, in turn, hold beneficial interests in the
securities on behalf of themselves or their customers.
Only the person in whose name a security is registered is
recognized as the holder of that security. Securities issued in
global form will be registered in the name of the depositary or
its participants. Consequently, for securities issued in global
form, we will recognize only the depositary as the holder of the
securities, and we will make all payments on the securities to
the depositary. The depositary passes along the payments it
receives to its participants, which in turn pass the payments
along to their customers who are the beneficial owners. The
depositary and its participants do so under agreements they have
made with one another or with their customers; they are not
obligated to do so under the terms of the securities.
As a result, investors in a book-entry security will not own
securities directly. Instead, they will own beneficial interests
in a global security, through a bank, broker or other financial
institution that participates in the depositarys
book-entry system or holds an interest through a participant. As
long as the securities are issued in global form, investors will
be indirect holders, and not holders, of the securities.
Street
Name Holders
We may terminate a global security or issue securities in
non-global form. In these cases, investors may choose to hold
their securities in their own names or in street
name. Securities held by an investor in street name would
be registered in the name of a bank, broker or other financial
institution that the investor chooses, and the investor would
hold only a beneficial interest in those securities through an
account he or she maintains at that institution.
For securities held in street name, we will recognize only the
intermediary banks, brokers and other financial institutions in
whose names the securities are registered as the holders of
those securities, and we will make all payments on those
securities to them. These institutions pass along the payments
they receive to their customers who are the beneficial owners,
but only because they agree to do so in their customer
agreements or because they are legally required to do so.
Investors who hold securities in street name will be indirect
holders, not holders, of those securities.
Legal
Holders
Our obligations run only to the legal holders of the securities.
We do not have obligations to investors who hold beneficial
interests in global securities, in street name or by any other
indirect means. This will be the case whether an investor
chooses to be an indirect holder of a security or has no choice
because we are issuing the securities only in global form. For
example, once we make a payment or give a notice to the holder,
we have no further responsibility for the payment or notice even
if that holder is required, under agreements with depositary
participants or customers or by law, to pass it along to the
indirect holders but does not do so. Whether and how the holders
contact the indirect holders is up to the holders.
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Special
Considerations for Indirect Holders
If you hold securities through a bank, broker or other financial
institution, either in book-entry form or in street name, you
should check with your own institution to find out:
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how it handles securities payments and notices;
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whether it imposes fees or charges;
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how it would handle a request for the holders consent, if
ever required;
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whether and how you can instruct it to send you securities
registered in your own name so you can be a holder, if that is
permitted in the future;
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how it would exercise rights under the securities if there were
a default or other event triggering the need for holders to act
to protect their interests; and
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if the securities are in book-entry form, how the
depositarys rules and procedures will affect these matters.
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Global
Securities
A global security is a security held by a depositary that
represents one or any other number of individual securities.
Generally, all securities represented by the same global
securities will have the same terms.
Each security issued in book-entry form will be represented by a
global security that we deposit with and register in the name of
a financial institution or its nominee that we select. The
financial institution that we select for this purpose is called
the depositary. Unless we specify otherwise in the applicable
prospectus supplement, The Depository Trust Company, New
York, New York, or DTC, will be the depositary for all
securities issued in book-entry form.
A global security may not be transferred to or registered in the
name of anyone other than the depositary, its nominee or a
successor depositary, unless special termination situations
arise. We describe those situations below under
Special Situations When a Global Security Will
Be Terminated. As a result of these arrangements, the
depositary, or its nominee, will be the sole registered owner
and holder of all securities represented by a global security,
and investors will be permitted to own only beneficial interests
in a global security. Beneficial interests must be held by means
of an account with a broker, bank or other financial institution
that in turn has an account with the depositary or with another
institution that does. Thus, an investor whose security is
represented by a global security will not be a holder of the
security, but only an indirect holder of a beneficial interest
in the global security.
If the prospectus supplement for a particular security indicates
that the security will be issued in global form only, then the
security will be represented by a global security at all times
unless and until the global security is terminated. If
termination occurs, we may issue the securities through another
book-entry clearing system or decide that the securities may no
longer be held through any book-entry clearing system.
Special
Considerations for Global Securities
As an indirect holder, an investors rights relating to a
global security will be governed by the account rules of the
investors financial institution and of the depositary, as
well as general laws relating to securities transfers. We do not
recognize an indirect holder as a holder of securities and
instead deal only with the depositary that holds the global
security.
If securities are issued only in the form of a global security,
an investor should be aware of the following:
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An investor cannot cause the securities to be registered in his
or her name, and cannot obtain non-global certificates for his
or her interest in the securities, except in the special
situations we describe below;
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An investor will be an indirect holder and must look to his or
her own bank or broker for payments on the securities and
protection of his or her legal rights relating to the
securities, as we describe under Ownership of
Securities above;
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An investor may not be able to sell interests in the securities
to some insurance companies and to other institutions that are
required by law to own their securities in non-book-entry form;
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An investor may not be able to pledge his or her interest in a
global security in circumstances where certificates representing
the securities must be delivered to the lender or other
beneficiary of the pledge in order for the pledge to be
effective;
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The depositarys policies, which may change from time to
time, will govern payments, transfers, exchanges and other
matters relating to an investors interest in a global
security. We and any applicable trustee have no responsibility
for any aspect of the depositarys actions or for its
records of ownership interests in a global security. We and the
trustee also do not supervise the depositary in any way;
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The depositary may, and we understand that DTC will, require
that those who purchase and sell interests in a global security
within its book-entry system use immediately available funds,
and your broker or bank may require you to do so as
well; and
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Financial institutions that participate in the depositarys
book-entry system, and through which an investor holds its
interest in a global security, may also have their own policies
affecting payments, notices and other matters relating to the
securities. There may be more than one financial intermediary in
the chain of ownership for an investor. We do not monitor and
are not responsible for the actions of any of those
intermediaries.
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Special
Situations when a Global Security will be Terminated
In a few special situations described below, the global security
will terminate and interests in it will be exchanged for
physical certificates representing those interests. After that
exchange, the choice of whether to hold securities directly or
in street name will be up to the investor. Investors must
consult their own banks or brokers to find out how to have their
interests in securities transferred to their own name, so that
they will be direct holders. We have described the rights of
holders and street name investors above.
The global security will terminate when the following special
situations occur:
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if the depositary notifies us that it is unwilling, unable or no
longer qualified to continue as depositary for that global
security and we do not appoint another institution to act as
depositary within 90 days;
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if we notify any applicable trustee that we wish to terminate
that global security; or
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if an event of default has occurred with regard to securities
represented by that global security and has not been cured or
waived.
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The prospectus supplement may also list additional situations
for terminating a global security that would apply only to the
particular series of securities covered by the prospectus
supplement. When a global security terminates, the depositary,
and not we or any applicable trustee, is responsible for
deciding the names of the institutions that will be the initial
direct holders.
RESTRICTIONS
ON OWNERSHIP AND TRANSFER
Our declaration of trust, subject to certain exceptions
described below, provides that no person may own, or be deemed
to own by virtue of the attribution provisions of the Code, more
than 9.9% of the number of outstanding common shares of any
class or series of common shares or the number of outstanding
preferred shares of any class or series of preferred shares. For
this purpose, a person includes a group and a
beneficial owner as those terms are used for
purposes of Section 13(d)(3) of the Securities Exchange Act
of
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1934, as amended, or the Exchange Act. Any transfer of common or
preferred shares that would result in any person owning,
directly or indirectly, common or preferred shares in excess of
the ownership limitation, result in the common and preferred
shares 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 Code, or cause us to own, actually or
constructively, 10% or more of the ownership interests in a
tenant (other than a TRS) of our or our partnerships
real property, within the meaning of Section 856(d)(2)(B)
of the Code, will be null and void, and the intended transferee
will acquire no rights in such common or preferred shares.
Subject to certain exceptions described below, any common shares
or preferred shares the purported transfer of which would result
in a violation of any of the limitations described above will be
designated as
shares-in-trust
and transferred automatically to a trust effective on the day
before the purported transfer of such common shares or preferred
shares. The record holder of the common or preferred shares that
are designated as
shares-in-trust
will be required to submit such number of common shares or
preferred shares to us for registration in the name of the
trust. The trustee will be designated by us, but will not be
affiliated with us. The beneficiary of a trust will be one or
more charitable organizations that are named by us.
Shares-in-trust
will remain issued and outstanding common shares or preferred
shares and will be entitled to the same rights and privileges as
all other shares of the same class or series. The trust will
receive all dividends and distributions on the
shares-in-trust
and will hold such dividends or distributions in trust for the
benefit of the beneficiary. The trust will vote all
shares-in-trust.
The trust will designate a permitted transferee of the
shares-in-trust,
provided that the permitted transferee purchases such
shares-in-trust
for valuable consideration and acquires such
shares-in-trust
without such acquisition resulting in a transfer to another
trust.
The prohibited owner with respect to
shares-in-trust
will be required to repay to the record holder the amount of any
dividends or distributions received by the prohibited owner that
are attributable to any
shares-in-trust
and the record date of which was on or after the date that such
shares became
shares-in-trust.
The prohibited owner generally will receive from the record
holder the lesser of the price per share such prohibited owner
paid for the common shares or preferred shares that were
designated as
shares-in-trust
(or, in the case of a gift or devise, the market price (as
defined below) per share on the date of such transfer), or the
price per share received by the record holder from the sale of
such shares- in-trust. Any amounts received by the record holder
in excess of the amounts to be paid to the prohibited owner will
be distributed to the beneficiary.
The
shares-in-trust
will be deemed to have been offered for sale to us, or its
designee, at a price per share equal to the lesser of the price
per share in the transaction that created such
shares-in-trust
(or, in the case of a gift or devise, the market price per share
on the date of such transfer), or the market price per share on
the date that we, or our designee, accepts such offer. We will
have the right to accept such offer for a period of 90 days
after the later of the date of the purported transfer which
resulted in such
shares-in-trust,
or the date we determine in good faith that a transfer resulting
in such
shares-in-trust
occurred.
Market price on any date means the average of the
last quoted sale price as reported by the NYSE for the five
consecutive trading days ending on such date. Trading
day means a day on which the applicable principal national
securities exchange on which the securities are listed or
admitted to trading is open for the transaction of business or,
if the securities are not listed or admitted to trading on any
national securities exchange, means any day other than a
Saturday, a Sunday or a day on which banking institutions in the
State of New York are authorized or obligated by law or
executive order to close.
Any person who acquires or attempts to acquire common or
preferred shares in violation of the foregoing restrictions, or
any person who owned common or preferred shares that were
transferred to a trust, will be required to give written notice
immediately to us of such event and provide us with such other
information as we may request in order to determine the effect,
if any, of such transfer on our status as a REIT.
All persons who own, directly or indirectly, more than 5% (or
such lower percentages as required pursuant to regulations under
the Code) of the outstanding common and preferred shares must,
within 30 days
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after December 31 of each year, provide to us a written
statement or affidavit stating the name and address of such
direct or indirect owner, the number of common and preferred
shares owned directly or indirectly, and a description of how
such shares are held. In addition, each direct or indirect
shareholder shall provide to us such additional information as
we may request in order to determine the effect, if any, of such
ownership on our status as a REIT and to ensure compliance with
the ownership limitation.
The ownership limitation generally does not apply to the
acquisition of common or preferred shares by an underwriter that
participates in a public offering of such shares.
In addition, the trustees, upon receipt of advice of counsel or
other evidence satisfactory to the trustees, in their sole and
absolute discretion, may, in their sole and absolute discretion,
exempt a person from the ownership limitation under certain
circumstances. The foregoing restrictions continue to apply
until the trustees determine that it is no longer in our best
interests to attempt to qualify, or to continue to qualify, as a
REIT and there is an affirmative vote of two-thirds of the
number of common and preferred shares entitled to vote on such
matter at a regular or special meeting of our shareholders.
All certificates representing common or preferred shares bear a
legend referring to the restrictions described above.
The restrictions on ownership and transfer described above could
have the effect of delaying, deterring or preventing a change in
control or other transaction in which holders of some, or a
majority, of our common shares might receive a premium for their
shares over the then-prevailing market price or which such
holders might believe to be otherwise in their best interest.
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CERTAIN
PROVISIONS OF MARYLAND LAW,
OUR DECLARATION OF TRUST AND BYLAWS
The following description of certain provisions of Maryland law
and of our declaration of trust and bylaws is only a summary.
For a complete description, we refer you to Maryland law, our
declaration of trust and our bylaws. Copies of our declaration
of trust and our bylaws are incorporated by reference as
exhibits to this registration statement.
Classification
of Our Board of Trustees
Our bylaws provide that the number of our trustees may be
established by our board of trustees but may not be fewer than
three nor more than nine. As of the date of this prospectus, we
have nine trustees. The trustees may increase or decrease the
number of trustees by a vote of at least 80% of the members of
our 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, our 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 our 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.
The classification of our board of trustees 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
Our 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 our
bylaws authorizing our board of trustees to fill vacant
trusteeships, may preclude 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:
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any person who beneficially owns 10% or more of the voting power
of our shares; or
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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.
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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.
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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:
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80% of the votes entitled to be cast by holders of our then
outstanding shares of beneficial interest; and
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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.
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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
our board of trustees before the time that the interested
shareholder becomes an interested shareholder. Pursuant to a
resolution adopted by our board of trustees, REIGs
ownership of our securities is exempt from the Maryland business
combination statute.
The provisions of the business combination statute 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.
Control
Share Acquisitions
Maryland law provides that control shares of a
Maryland real estate investment trust 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 Maryland real
estate investment trust are excluded from the 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:
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one-tenth or more but less than one-third;
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one-third or more but less than a majority; or
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a majority or more of all voting power.
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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 real
estate investment trust 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,
the Maryland real estate investment trust 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 Maryland real estate investment
trust 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
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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.
Merger,
Amendment of Declaration of Trust
Under the Maryland REIT Law, a Maryland real estate investment
trust generally cannot amend its declaration of trust or merge
unless approved by the affirmative vote of shareholders holding
at least two-thirds of the shares entitled to vote on the matter
unless a lesser percentage (but not less than a majority of all
the votes entitled to be cast on the matter) is set forth its
declaration of trust subject to the terms of any other class or
series of shares of beneficial interest. In accordance with
Maryland REIT Law, our declaration of trust allows our merger or
consolidation or sale or disposition of all or substantially all
of our assets if our board of trustees declares such action
advisable and if a majority of shareholders entitled to vote on
the matter approves the action. Our declaration of trust
provides for approval by a majority of all the votes entitled to
be cast on the matter in all situations permitting or requiring
action by the shareholders except with respect to:
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our intentional disqualification as a REIT or revocation of our
election to be taxed as a REIT (which requires the affirmative
vote of two-thirds of the number of common shares entitled to
vote on such matter at a meeting of our shareholders);
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the election of trustees (which requires a plurality of all the
votes cast at a meeting of our shareholders at which a quorum is
present);
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the removal of trustees (which requires the affirmative vote of
the holders of two-thirds of our outstanding voting shares);
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the amendment or repeal of certain designated sections of our
declaration of trust (which require the affirmative vote of
two-thirds of the outstanding shares entitled to vote on such
matters);
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the amendment of our declaration of trust by shareholders (which
requires the affirmative vote of a majority of votes entitled to
be cast on the matter, except under certain circumstances
specified in our declaration of trust that require the
affirmative vote of two-thirds of all the votes entitled to be
cast on the matter); and
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our termination (which requires the affirmative vote of
two-thirds of all the votes entitled to be cast on the matter).
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Under the Maryland REIT Law, a declaration of trust may permit
the trustees by a two-thirds vote to amend the declaration of
trust from time to time to qualify as a REIT under the Code or
the Maryland REIT Law without the affirmative vote or written
consent of the shareholders. Our declaration of trust permits
such action by a majority vote of the trustees. As permitted by
the Maryland REIT Law, our declaration of trust contains a
provision permitting our trustees, without any action by our
shareholders, to amend our declaration of trust to increase or
decrease the aggregate number of shares of beneficial interest
or the number of shares of any class of shares of beneficial
interest that we have authority to issue.
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:
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actual receipt of an improper benefit or profit in money,
property or services; or
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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.
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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 real estate investment trust to
indemnify its present and former trustees and officers against
liabilities and reasonable expenses actually incurred by them in
any proceeding unless:
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the act or omission of the trustee or officer was material to
the matter giving rise to the proceeding; and
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was committed in bad faith; or
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was the result of active and deliberate dishonesty; or
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the trustee or officer actually received an improper personal
benefit in money, property or services; or
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in a criminal proceeding, the trustee or officer had reasonable
cause to believe that the act or omission was unlawful.
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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:
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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
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a written undertaking to repay the amount reimbursed if the
standard of conduct is not met.
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Term and
Termination
Our declaration of trust provides for us to have a perpetual
existence. Pursuant to our declaration of trust, and subject to
the provisions of any class or series of our shares of
beneficial interest then outstanding and the approval by a
majority of the entire board of trustees, our shareholders, at
any meeting thereof, by the affirmative vote of two-thirds of
all of the votes entitled to be cast on the matter, may approve
our termination.
Meetings
of Shareholders
Under our bylaws, annual meetings of shareholders are to be held
in May of each year or at a date and time as determined by our
board of trustees in accordance with our bylaws. Special
meetings of shareholders may be called only by the chairman of
our board of trustees, our president or one-third of the
trustees then in office, or by our secretary upon the written
request of the shareholders entitled to cast not less 25% of all
the votes entitled to be cast at such meeting. Only matters set
forth in the notice of the special meeting may be considered and
acted upon at such a meeting.
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Advance
Notice of Trustee Nominations and New Business
Our bylaws provide that, with respect to an annual meeting of
shareholders, nominations of persons for election to our board
of trustees and the proposal of business to be considered by
shareholders at the annual meeting may be made only:
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pursuant to our notice of the meeting;
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by or at the direction of our board of trustees; or
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by a shareholder who was a shareholder of record at the time of
the provision of notice who is entitled to vote at the meeting
and has complied with the advance notice procedures set forth in
our bylaws.
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With respect to special meetings of shareholders, only the
business specified in our notice of meeting may be brought
before the meeting of shareholders and nominations of persons
for election to our board of trustees may be made only:
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pursuant to our notice of the meeting;
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by or at the direction of our board of trustees; or
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provided that our board of trustees has determined that trustees
shall be elected at such meeting, by a shareholder who was a
shareholder of record at the time of the provision of notice who
is entitled to vote at the meeting and has complied with the
advance notice provisions set forth in our bylaws.
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The purpose of requiring shareholders to give advance notice of
nominations and other proposals is to afford our board of
trustees the opportunity to consider the qualifications of the
proposed nominees or the advisability of the other proposals
and, to the extent considered necessary by our board of
trustees, to inform shareholders and make recommendations
regarding the nominations or other proposals. The advance notice
procedures also permit a more orderly procedure for conducting
our shareholder meetings. Although the bylaws do not give our
board of trustees the power to disapprove timely shareholder
nominations and proposals, they may have the effect of
precluding a contest for the election of trustees or proposals
for other action if the proper procedures are not followed, and
of discouraging or deterring a third party from conducting a
solicitation of proxies to elect its own slate of trustees to
our board of trustees or to approve its own proposal.
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 our bylaws is rescinded, the control share
acquisition provisions applicable under Maryland law, the
provisions of our declaration of trust on classification of our
board of trustees, removal of trustees, restrictions on the
ownership and transfer of shares of beneficial interest and the
advance notice provisions of our 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
The following is a summary of the material terms of the amended
and restated agreement of limited partnership, or the
partnership agreement, of Hersha Hospitality Limited
Partnership, our operating partnership. This summary is not
complete. For more detail, you should refer to the partnership
agreement itself, a copy of which is incorporated by reference
as an exhibit to the registration statement of which this
prospectus is a part. For purposes of this section, references
to we, us, and our company
refer only to Hersha Hospitality Trust.
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Management
Hersha Hospitality Limited Partnership, our operating
partnership, is organized as a Virginia limited partnership. As
of September 30, 2009, we owned an 86.4% interest,
including a 1.0% general partnership interest, and the other
limited partners owned a 13.6% interest in our operating
partnership. As the sole general partner of our operating
partnership, we have, subject to certain protective rights of
limited partners described below, full, exclusive and complete
responsibility and discretion in the management and control of
our operating partnership, including the ability to cause our
operating partnership to enter into certain major transactions,
including acquisitions, dispositions, refinancings and selection
of lessees, and to cause changes in our operating
partnerships line of business and distribution policies.
In general, we may amend the partnership agreement without the
consent of the limited partners. However, any amendment to the
partnership agreement that would:
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adversely affect certain redemption or conversion rights of the
limited partners;
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adversely affect the rights of the limited partners to receive
distributions payable to them;
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alter our operating partnerships allocation of profit and
loss to the limited partners; or
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impose any obligation to make additional capital contributions
upon the limited partners
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requires the affirmative vote of the holders of a majority of
the limited partnership units, excluding those held by us and
our subsidiaries. As the sole general partner of our operating
partnership, we may also, without the consent of the limited
partners, approve a merger, consolidation or similar corporate
transaction the result of which is a change in control of our
operating partnership.
Transferability
of Interests
In general, we may not voluntarily withdraw as the general
partner of our operating partnership or assign our general
partnership interest in our operating partnership. We may,
however, enter into a merger, consolidation or similar corporate
transaction the result of which is a transfer of or change in
the general partner if:
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we receive the consent of the holders of a majority of the
limited partnership units, excluding those held by us and our
subsidiaries;
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the contemplated transaction 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
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our successor contributes substantially all of its assets to the
partnership in return for a general partnership interest in the
partnership.
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With certain limited exceptions, the limited partners may not
transfer their limited partnership units, 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 an association
taxable as a corporation (other than a qualified REIT subsidiary
within the meaning of Section 856(i) of the Code), would
adversely affect our ability to continue to qualify as a REIT
for federal income tax purposes, would subject us to any
additional taxes under Sections 857 or 4981 of the Code or
would be effected through an established securities
market or a secondary market (or the
substantial equivalent thereof) within the meaning of
Section 7704 of the Code.
Capital
Contributions
If we determine that it is in the best interests of our
operating partnership to provide for additional funds for any
operating partnership purpose, the partnership agreement
provides that we may cause our operating partnership to obtain
additional funds from outside borrowings. In addition, we may
elect to provide the additional funds, either directly or
through a subsidiary, to our operating partnership through loans
or otherwise.
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We will transfer the proceeds of any offering of our shares of
beneficial interest to our operating partnership as an
additional capital contribution. Our operating partnership will
be deemed to have paid simultaneously the underwriting
discounts, selling commissions and other costs associated with
the offering. We are authorized to cause our operating
partnership to issue additional operating partnership interests,
in the form of operating partnership units, for less than fair
market value if we have concluded in good faith that such
issuance is in both our operating partnerships and our
best interests. If we contribute additional capital to our
operating partnership, we will receive additional operating
partnership units, and our percentage interest will be increased
on a proportionate basis based upon the amount of any additional
capital contribution and the value of the assets of our
operating partnership at the time of the contribution.
Conversely, the percentage interests of the other limited
partners will be decreased on a proportionate basis in the event
of an additional capital contribution by us.
In addition, if we contribute additional capital to our
operating partnership, we will revalue the property of our
operating 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.
Our operating partnership could issue preferred partnership
interests, in the form of preferred partnership units, in
connection with the acquisition of property or otherwise.
Preferred partnership units could have priority over classes or
series of outstanding operating partnership units with respect
to distribution rights and rights upon liquidation, dissolution
or winding up.
Redemption Rights
Subject to certain limitations and exceptions, the limited
partners of our operating partnership, other than us and our
subsidiaries, have the right to cause our operating partnership
to redeem their limited partnership units for cash equal to the
market value of an equivalent number of our common shares, or,
at our option, we may purchase their limited partnership units
by issuing one common share for each limited partnership unit
redeemed. The market value of the limited partnership units for
this purpose will equal the average of the daily sale price of
our common shares on the NYSE for the
ten-consecutive-trading-day period immediately preceding the
date that the limited partner provides notice of redemption. If
we do not exercise our option to purchase the limited
partnership units by issuing our common shares, then the limited
partner may make a written demand that we redeem the units for
common shares. Notwithstanding the foregoing, a limited partner
will not be entitled to exercise its redemption rights to the
extent that the issuance of common shares to the redeeming
limited partner would:
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result in any person owning, directly or indirectly, common
shares in excess of the ownership limitation as per our
declaration of trust;
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result in the shares of our beneficial interest being owned by
fewer than 100 persons (determined without reference to any
rules of attribution);
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result in our being closely held within the meaning
of Section 856(h) of the Code;
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cause any person who operates property on behalf of any of our
TRSs, as defined in Section 856(l) of the Code, which
property is a qualified lodging facility within the
meaning of Section 856(d)(9)(D) of the Code that is leased
to such TRS, to fail to qualify as an eligible independent
contractor within the meaning of Section 856(d)(9)(A)
of the Code with respect to such TRS;
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cause us to own, actually or constructively, 10% or more of the
ownership interests in a tenant (other than a TRS) of ours or
our operating partnerships real property, within the
meaning of Section 856(d)(2)(B) of the Code; or
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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.
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The redemption rights may be exercised by a limited partner at
any time after one year following the issuance of the limited
partnership units, unless otherwise agreed by us. In all cases,
however:
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each limited partner may not exercise the redemption right for
fewer than 1,000 limited partnership units or, if such limited
partner holds fewer than 1,000 limited partnership units, all of
the limited partnership units held by such limited partner;
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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
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each limited partner may not exercise the redemption right more
than two times annually.
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Operations
The partnership agreement requires that our operating
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 Code
(other than any federal income tax liability associated with our
retained capital gains), and to ensure that our operating
partnership will not be classified as a publicly traded
partnership for purposes of Section 7704 of the Code.
In addition to the administrative and operating costs and
expenses incurred by our operating partnership, our operating
partnership will pay all of our administrative costs and
expenses and these expenses will be treated as expenses of our
operating partnership. Our expenses generally include:
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all expenses relating to our continuity of existence;
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all expenses relating to offerings and registration of
securities;
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all expenses associated with the preparation and filing of any
of our periodic reports under federal, state or local laws or
regulations;
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all expenses associated with our compliance with laws, rules and
regulations promulgated by any regulatory body; and
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all of our other operating or administrative costs incurred in
the ordinary course of its business on behalf of our operating
partnership.
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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 our operating
partnership will distribute cash from operations (including net
sale or refinancing proceeds, but excluding net proceeds from
the sale of our operating partnerships property in
connection with the liquidation of our operating 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 our operating partnership.
The partnership agreement provides that upon a liquidation of
our operating partnership after payment of, or adequate
provision for, debts and obligations of our operating
partnership, including any partner loans, any remaining assets
of our operating partnership will be distributed to us and the
limited partners with positive capital accounts in accordance
with their respective positive capital account balances.
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Allocations
Net profit of our operating partnership for any fiscal year or
other applicable period will be allocated in the following order
and priority:
(a) first, to us as the general partner 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 as the general
partner in respect of our Series A preferred partnership
units for all prior fiscal years or other applicable periods;
(b) second, to us as the general partner and the limited
partners in proportion to our respective percentage interests to
the extent that net loss previously allocated to such partners
pursuant to clause (ii) below for all prior fiscal years or
other applicable periods exceeds net profit previously allocated
to such partners pursuant to this clause (b) for all prior
fiscal years or other applicable periods;
(c) third, to us as the general partner 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
partnership units are redeemed during such period, over
(y) the cumulative net profit allocated to us as the
general partner in respect of our Series A preferred
partnership units for all prior fiscal years or other applicable
periods; and
(d) thereafter, to the partners holding partnership units
(other than Series A preferred partnership units) in
accordance with their respective percentage interests.
Net loss of our operating partnership for any fiscal year or
other applicable period will be allocated in the following order
and priority:
(i) first, to the partners holding partnership units (other
than Series A preferred partnership units) in accordance
with their respective percentage interests to the extent of net
profit previously allocated to such partners pursuant to
clause (d) above for all prior fiscal years or other
applicable period exceeds net loss previously allocated to such
partners pursuant to this clause (i) for all prior fiscal
years or other applicable periods;
(ii) second, to us as the general partner and the limited
partners in proportion to our respective percentage interests
until the adjusted capital account of each partner with respect
to the partners partnership units is reduced to
zero; and
(iii) thereafter, to us as the general partner in respect
of our Series A preferred partnership units, until our
adjusted capital account with respect to our 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 Code
and Treasury Regulations promulgated thereunder.
Fiduciary
Responsibilities
Our trustees and officers have duties under applicable Maryland
law to manage us in a manner consistent with the best interests
of our shareholders. At the same time, we, as the general
partner of our operating partnership, have fiduciary duties to
manage our operating partnership in a manner beneficial to our
operating partnership and its partners. Our duties, as general
partner to our operating partnership and its limited partners,
therefore, may come into conflict with the duties of our
trustees and officers to our shareholders. We will be under no
obligation to give priority to the separate interests of the
limited partners of our operating partnership or our
shareholders in deciding whether to cause our operating
partnership to take or decline to take any actions.
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The limited partners of our operating partnership have expressly
acknowledged that as the general partner of our operating
partnership, we are acting for the benefit of our operating
partnership, the limited partners and our shareholders
collectively. In the event of a conflict between the interests
of our shareholders and the interests of our limited partners,
we will endeavor in good faith to resolve the conflict in a
manner that is not adverse to either our shareholders or the
limited partners; however, for so long as we own a controlling
interest in our operating partnership, any conflict between the
interests of our shareholders and the interests of the limited
partners that we cannot resolved in a manner that is not adverse
to either our shareholders or the limited partners will be
resolved in favor of our shareholders.
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 Code on
behalf of the partnership.
STRATEGIC
INVESTOR
Overview
REIG is a Bermuda limited partnership that is majority-owned and
indirectly controlled by IRSA Inversiones y Representaciones
Sociedad Anynima, or IRSA, a publicly-traded Argentine company
whose global depositary shares are listed on the NYSE under the
symbol IRS. Tyrus S.A., a stock corporation
organized under the laws of the Republic of Uruguay and a wholly
owned subsidiary of IRSA, is the sole general partner and
majority limited partner of REIG. On August 4, 2009,
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we issued and sold 5,700,000 of our common shares to REIG in a
registered direct offering; and
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we granted REIG an option to purchase up to 5,700,000 common
shares pursuant to the investor rights and option agreement we
entered into with REIG and IRSA in connection with our August
2009 registered direct offering.
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In connection with the August 2009 registered direct offering,
we also entered into a series of agreements with REIG and IRSA,
including, among others, a purchase agreement, an investor
rights and option agreement, a trustee designation agreement and
a registration rights agreement. Each of the agreements we
entered into with REIG is described below, along with further
information regarding REIGs ownership of our common shares.
Purchase
Agreement
Pursuant to the purchase agreement, REIG purchased 5,700,000
common shares from us at a price of $2.50 per share. We agreed
to indemnify REIG and its affiliates against certain claims or
losses for the periods specified in the purchase agreement,
including losses under the Securities Act and losses resulting
from our breach of the representations and warranties contained
in the purchase agreement.
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Investor
Rights and Option Agreement; Preemptive Rights
Pursuant to the investor rights and option agreement, we granted
REIG an option to purchase an additional 5,700,000 common shares
from us at an exercise price of $3.00 per share, subject to
certain adjustments. REIGs purchase option is exercisable,
in whole or in part, at any time prior to August 4, 2014.
If at any time after August 4, 2011, the closing price for
our common shares on the NYSE exceeds $5.00 for
20 consecutive trading days, we have the right, exercisable
at any time thereafter, to call in and cancel REIGs
purchase option in exchange for the issuance of common shares
with an aggregate value equal to the volume weighted average
price per common share for the 20 trading days prior to our
exercise of the call option, less the then-current exercise
price of REIGs purchase option, multiplied by the number
of common shares remaining under REIGs purchase option. To
extent REIG exercises its purchase option or we exercise our
call option, we expect to issue the common shares to REIG in one
or more transactions exempt from the registration requirements
of the Securities Act.
We also granted REIG preemptive rights under the investor rights
and option agreement. If at any time after August 4, 2009,
we make any public or private offering of common shares,
preferred shares, options, convertible or exchangeable debt
securities or other equity security (other than equity
securities issued pursuant to a stock incentive, stock
compensation, employee stock purchase or other similar plans or
arrangements or as consideration for the acquisition of
properties), we are required to give REIG an opportunity to
acquire the equity security we are proposing to offer to other
investors on the same terms and at the same price. The
preemptive rights are exercisable by REIG only to the extent it
continues to own at least a 5% qualifying ownership
interest in our common shares, which, as defined in the
investor rights and option agreement, means beneficial ownership
(as determined pursuant to
Rule 13d-3
under the Exchange Act) by REIG or any of its affiliates of at
least 5% of our common shares (excluding common shares issued
after the date of the investor rights and option agreement upon
redemption of limited partnership units held at any time at or
prior to such redemption by our trustees or officers or the
entities they control or of which they beneficially own of 100%
of the outstanding equity securities). The number of equity
securities that REIG will be entitled to purchase in any
offering will be equal to the product of:
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the total number of equity securities we are proposing to offer,
multiplied by
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a fraction, the numerator of which is the number of common
shares held by REIG, and the denominator of which is the number
of common shares then outstanding.
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Trustee
Designation Agreement
We also entered into a trustee designation agreement with REIG
and IRSA, pursuant to which we appointed Eduardo S. Elsztain,
Chairman and Chief Executive Officer of IRSA, to our board of
trustees as a Class II trustee upon completion of the
August 2009 registered direct offering. The trustee designation
agreement also permits IRSA to designate one of two non-voting
observers to attend any meeting of our board of trustees if
Mr. Elsztain is unable to attend. For so long as REIG
beneficially owns (as determined pursuant to
Rule 13d-3
under the Exchange Act) at least 10% of our outstanding common
shares, we will recommend to our shareholders the election of
Mr. Elsztain or a qualified replacement to our board of
trustees.
Registration
Rights Agreement
We are obligated to file a shelf registration statement to
register the resale by REIG of up to 11,909,587 of our common
shares, including up to 5,700,000 common shares issuable upon
the exercise of the option described above. The registration
rights agreement also grants REIG the right to participate in
certain primary underwritten offerings of our common shares,
subject to customary cutbacks and other conditions, and the
right to require our participation in underwritten offerings
conducted by it. In the registration rights agreement, we agreed
to indemnify REIG and certain of its affiliates, as well as any
underwriters participating in the distribution of the
registrable shares (as defined in the registration rights
agreement), against various liabilities, including liabilities
under the Securities Act.
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Exemption
from our Ownership Limitations
In connection with the August 2009 registered direct offering,
our board of trustees exempted REIG from the ownership
limitation, provided that (1) REIG does not beneficially or
constructively own (each as defined in our declaration of trust)
more than 24% of our outstanding common shares, (2) as a
result of such exemption, no individual (as defined in the Code
to include certain entities) will beneficially or constructively
own more than 9.9% of our outstanding common shares,
(3) REIG does not constructively own 10% or more of certain
of our joint venture partners and (4) as a result of such
exemption, none of the eligible independent
contractors that have been engaged by our TRSs to operate
our hotels will fail to qualify as such.
FEDERAL
INCOME TAX CONSEQUENCES OF OUR STATUS AS A REIT
This section summarizes the current material federal income tax
consequences to our Company and to our shareholders generally
resulting from the treatment of our Company as a REIT that you,
as a holder of our securities, may consider relevant. Because
this section is a summary, it does not address all of the
potential tax issues that may be relevant to you in light of
your particular circumstances. In addition, this section does
not address the tax issues that may be relevant to certain types
of holders of our securities that are subject to special
treatment under the federal income tax laws, such as:
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insurance companies;
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tax-exempt organizations (except to the limited extent discussed
in Taxation of Tax-Exempt Shareholders
below);
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financial institutions or broker-dealers;
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non-U.S. individuals
and foreign corporations (except to the limited extent discussed
in Taxation of
Non-U.S. Shareholders
below);
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U.S. expatriates;
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persons who
mark-to-market
our common shares;
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subchapter S corporations;
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U.S. shareholders (as defined below) whose functional
currency is not the U.S. dollar;
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regulated investment companies and REITs;
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trusts and estates;
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holders who receive our common shares through the exercise of
employee stock options or otherwise as compensation;
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persons holding our common shares as part of a
straddle, hedge, conversion
transaction, synthetic security or other
integrated investment;
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persons subject to the alternative minimum tax provisions of the
Code;
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persons holding our common shares through a partnership or
similar pass-through entity; and
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persons holding a 10% or more (by vote or value) beneficial
interest in our capital shares.
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This summary assumes that shareholders hold shares as capital
assets for federal income tax purposes, which generally means
property held for investment.
The statements in this section and the opinion of
Hunton & Williams LLP, described below, 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.
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We urge you to consult your own tax advisor regarding the
specific tax consequences to you of investing in our 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, 2006 through
December 31, 2008, 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,
2009 and in the future. You should be aware that
Hunton & Williams LLPs opinion is based on
existing federal income tax law governing qualification as a
REIT, which is subject to change, possibly on a retroactive
basis, is not binding on the Internal Revenue Service, or IRS,
or any court, and speaks of the date issued. In addition,
Hunton & Williams LLPs opinion is based on
customary assumptions and is conditioned upon certain
representations made by us 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. Moreover, our continued qualification and taxation
as a REIT depends on our ability to meet, on a continuing basis,
through actual operating results, certain qualification tests in
the federal income 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 operations 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 any 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 including any deductions of net
operating losses.
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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 one or both of the 75% gross income test
or the 95% gross income test, as described below under
Income Tests, and nonetheless continue
to qualify as a REIT because we meet other requirements, we will
pay a 100% tax on the gross income attributable
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to the greater of the amount by which we fail the 75% gross
income test or the 95% gross income test, multiplied, in either
case, by 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 required to be
distributed 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 arms-length basis.
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In the event of a failure of any of the asset tests other than a
de minimis failure of the 5% asset test or the 10% vote or value
test, as described below under 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 IRS, 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, other than the gross income tests and the
asset tests, and such failure is due to reasonable cause and not
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 subchapter 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 corporations 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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We may be required to pay monetary penalties to the IRS in
certain circumstances, including if we fail to meet
record-keeping requirements intended to monitor our compliance
with rules relating to the composition of a REITs
shareholders, as described below in
Recordkeeping Requirements.
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The earnings of our lower-tier entities that are subchapter C
corporations, including TRSs, are subject to federal corporate
income tax.
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In addition, we may be subject to a variety of taxes, including
payroll taxes and state, local and foreign income, property and
other taxes on our assets and operations. We could also be
subject to tax in situations and on transactions not presently
contemplated.
Requirements
for Qualification
A REIT is a corporation, trust, or association that meets each
of the following requirements:
1. It is managed by one or more trustees or directors.
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2. Its beneficial ownership is evidenced by transferable
shares, or by transferable certificates of beneficial interest.
3. It would be taxable as a domestic corporation, but for
the REIT provisions of the federal income tax laws.
4. It is neither a financial institution nor an insurance
company subject to special provisions of the federal income tax
laws.
5. At least 100 persons are beneficial owners of its
shares or ownership certificates.
6. 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 Code defines to include certain
entities, during the last half of any taxable year.
7. 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 IRS that
must be met to elect and maintain REIT status.
8. It meets certain other qualification tests, described
below, regarding the nature of its income and assets and the
amount of its distributions to shareholders.
9. It uses a calendar year for federal income tax purposes
and complies with the recordkeeping requirements of the federal
income tax laws.
We must meet requirements 1 through 4, 7, 8 and 9 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 believe 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 and 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 partnership or
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. For purposes of the
10% value test (described in Asset
Tests), our
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proportionate share is based on our proportionate interest in
the equity interests and certain debt securities issued by the
partnership. For all of the other asset and income tests, our
proportionate share is based on our proportionate interest in
the capital interests in the partnership.
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, unless such rights are provided to an eligible
independent contractor to operate or manage a hotel if
such rights are held by the TRS as a franchisee, licensee, or in
a similar capacity and such hotel is either owned by the TRS or
leased to the TRS by its parent REIT. Beginning with our 2009
taxable year, a TRS will not be considered to operate or manage
a qualified lodging facility solely because the TRS directly or
indirectly possesses a license, permit, or similar instrument
enabling it to do so. Additionally, beginning with our 2009
taxable year, a TRS that employs individuals working at a
qualified health care property or qualified lodging facility
located outside of the United States will not be considered to
operate or manage such property or facility, as long as an
eligible independent contractor is responsible for
the daily supervision and direction of such individuals on
behalf of the TRS pursuant to a management agreement or similar
service contract. The subsidiary and the REIT must jointly elect
to treat the subsidiary as a TRS. Additionally, a corporation of
which a TRS directly or indirectly owns more than 35% of the
voting power or value of the stock will automatically be treated
as a TRS. We are not treated as holding the assets of a TRS or
as receiving any income that the subsidiary earns. Rather, the
stock issued by a TRS to us is an asset in our hands, and we
treat the distributions paid to us from such taxable subsidiary,
if any, as income. 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 REITs tenants that are not conducted on
an arms-length basis. We lease all of our hotels to TRSs.
We lease all 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 several 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, 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
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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. Income and gain
from hedging transactions entered into after
July 30, 2008 that are clearly and timely identified as
such will also be excluded from both the numerator and the
denominator for purposes of the 75% gross income test. In
addition, certain foreign currency gains recognized after
July 30, 2008 will be excluded from gross income for
purposes of one or both of the gross income tests. See
Foreign Currency Gain. 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 five 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 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
34
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 propertys 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
propertys 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.
We believe that our percentage and other leases will be treated
as true leases for federal income tax purposes. Such belief 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, 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 of our hotels to TRS lessees,
and intend to lease any hotels we acquire in
36
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 (or a subtenant, in which case only rent attributable
to the subtenant is disqualified) 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, unless such
rights are provided to an eligible independent
contractor to operate or manage a hotel if such rights are
held by the TRS as a franchisee, licensee, or in a similar
capacity and such hotel is either owned by the TRS or leased to
the TRS by its parent REIT. Beginning with our 2009 taxable
year, a TRS will not be considered to operate or manage a
qualified lodging facility solely because the TRS directly or
indirectly possesses a license, permit, or similar instrument
enabling it to do so. Additionally, beginning with our 2009
taxable year, a TRS that employs individuals working at a
qualified health care property or qualified lodging facility
located outside of the United States will not be considered to
operate or manage such property or facility, as long as an
eligible independent contractor is responsible for
the daily supervision and direction of such individuals on
behalf of the TRS pursuant to a management agreement or similar
service contract. 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 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 the 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 IRS would not
challenge our calculation of a personal property ratio, or that
a court would not uphold
37
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 (including as a result of a hotel
management company engaged by our TRS lessees to operate our
hotels failing to qualify as an eligible independent contractor)
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 lessees proportionate share of
a propertys 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 borrowers gain upon the sale of the real
property securing the loan or a percentage of the appreciation
in the propertys 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.
38
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
IRS 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 IRS 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. A
safe harbor to the characterization of the sale of property by a
REIT as a prohibited transaction and the 100% prohibited
transaction tax is available if the following requirements are
met:
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the REIT has held the property for not less than two years (or,
for sales made on or before July 30, 2008, four years);
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the aggregate expenditures made by the REIT, or any partner of
the REIT, during the two-year period (or, for sales made on or
before July 30, 2008, four-year period) preceding the date
of the sale that are includable in the basis of the property do
not exceed 30% of the selling prince of the property;
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either (1) during the year in question, the REIT did not
make more than seven sales of property other than foreclosure
property or sales to which Section 1033 of the Code
applies, (2) the aggregate adjusted bases of all such
properties sold by the REIT during the year did not exceed 10%
of the aggregate bases of all of the assets of the REIT at the
beginning of the year or (3) for sales made after
July 30, 2008, the aggregate fair market value of all such
properties sold by the REIT during the year did not exceed 10%
of the aggregate fair market value of all of the assets of the
REIT at the beginning of the year;
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in the case of property not acquired through foreclosure or
lease termination, the REIT has held the property for at least
two years (or, for sales made on or before July 30, 2008,
four years) for the production of rental income; and
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if the REIT has made more than seven sales of non-foreclosure
property during the taxable year, substantially all of the
marketing and development expenditures with respect to the
property were made through an independent contractor from whom
the REIT derives no income.
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We will attempt to comply with the terms of safe-harbor
provision 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 provision 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.
39
Foreclosure Property. We will be subject to
tax at the maximum corporate rate on any income from foreclosure
property, which includes certain foreign currency gains and
related deductions recognized subsequent to July 30, 2008,
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 hedging transactions entered into
after July 30, 2008, income and gain from hedging
transactions will be excluded from gross income for
purposes of both the 75% and 95% gross income tests. A
hedging transaction means either (1) any
transaction entered into in the normal course of our or our
operating partnerships 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 and (2) for transactions entered
into after July 30, 2008, any transaction entered into
primarily to manage the risk of currency fluctuations with
respect to any item of income or gain that would be qualifying
income under the 75% or 95% gross income test (or any property
which generates such income or gain). 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
40
requirements. We intend to structure any hedging transactions in
a manner that does not jeopardize our qualification as a REIT.
Foreign Currency Gain. Certain foreign
currency gains recognized after July 30, 2008 will be
excluded from gross income for purposes of one or both of the
gross income tests. Real estate foreign exchange
gain will be excluded from gross income for purposes of
the 75% gross income test. Real estate foreign exchange gain
generally includes foreign currency gain attributable to any
item of income or gain that is qualifying income for purposes of
the 75% gross income test, foreign currency gain attributable to
the acquisition or ownership of (or becoming or being the
obligor under) obligations secured by mortgages on real property
or on interest in real property and certain foreign currency
gain attributable to certain qualified business
units of a REIT. Passive foreign exchange gain
will be excluded from gross income for purposes of the 95% gross
income test. Passive foreign exchange gain generally includes
real estate foreign exchange gain as described above, and also
includes foreign currency gain attributable to any item of
income or gain that is qualifying income for purposes of the 95%
gross income test and foreign currency gain attributable to the
acquisition or ownership of (or becoming or being the obligor
under) debt obligations. Because passive foreign exchange gain
includes real estate foreign exchange gain, real estate foreign
exchange gain is excluded from gross income for purposes of both
the 75% and 95% gross income tests. These exclusions for real
estate foreign exchange gain and passive foreign exchange gain
do not apply to any certain foreign currency gain derived from
dealing, or engaging in substantial and regular trading, in
securities. Such gain is treated as nonqualifying income for
purposes of both the 75% and 95% gross income tests.
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 IRS.
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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 the amount by which we fail the 75% gross income test or the
95% gross income test multiplied, in each case, 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 issuers 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 issuers outstanding securities (the 10% vote or
value test).
Fourth, no more than 25% of the value of our total assets (or,
prior to our 2009 taxable year, 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. The term
securities, however, generally includes debt
securities issued by a partnership or another REIT, except that
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 borrowers 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 issuers 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 issuers 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 partnerships gross
income,
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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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For purposes of the 10% value test, our proportionate share of
the assets of a partnership is our proportionate interest in any
securities issued by the partnership, without regard to the
securities described in the last two bullet points above.
We believe that our existing hotels and mortgage 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
under Income Tests, 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. Although our
mezzanine loans typically do not qualify for that safe harbor,
we believe our mezzanine loans should either be treated as
qualifying assets for the 75% asset test or be excluded from the
definition of securities for purposes of the 10%
value 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 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
IRS, and (3) pay a tax equal to the greater of $50,000 or
35% of the net income from the nonqualifying assets during the
period in which we failed to satisfy the asset tests.
Distribution
Requirements
Each taxable year, we must distribute dividends, other than
capital gain dividends and deemed distributions of retained
capital gain, to our shareholders in an aggregate amount at
least equal to:
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90% of our REIT taxable income, computed without
regard to the dividends paid deduction and our net capital gain
or loss, and
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90% of our after-tax net income, if any, from foreclosure
property, minus
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the sum of certain items of non-cash income.
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Generally, 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 or,
if possible, pay taxable dividends of our shares of beneficial
interest or debt securities.
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 IRS 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 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, unless such rights are provided to an
eligible independent contractor (as described below)
to operate or manage a hotel if such rights are held by the TRS
as a franchisee, licensee, or in a similar capacity and such
hotel is either owned by the TRS or leased to the TRS by its
parent REIT. Beginning with our 2009 taxable year, a TRS will
not be considered to operate or manage a qualified lodging
facility solely because the TRS directly or indirectly possesses
a license, permit, or similar instrument enabling it to do so.
Additionally, beginning with our 2009 taxable year, a TRS that
employs individuals working at a qualified health care property
or qualified lodging facility located outside of the United
States will not be considered to operate or manage such property
or facility, as long as an eligible independent
contractor is responsible for the daily supervision and
direction of such individuals on behalf of the TRS pursuant to a
management agreement or similar service contract.
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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 25% (or, prior to our 2009 taxable year,
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 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 of our hotels to TRSs, and all of those TRSs have
engaged eligible independent contractors to operate
and manage those hotels. We lease all of our wholly owned hotels
to 44 New England, a TRS owned by our operating partnership.
HHMLP, which is an eligible independent contractor,
or other management companies that qualify as eligible
independent contractors, 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 several 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
arms-length basis. We believe that all transactions
between us and each of our existing TRSs have been and will be
conducted on an arms-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 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 (through 2010). Subject to
certain limitations of the federal income tax laws, corporate
shareholders
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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 shares of beneficial interest 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 (including an entity treated as a corporation for
federal income tax purposes) 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 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 shares, you should consult your tax
advisor regarding the consequences of the ownership and
disposition of our 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. The maximum tax
rate for qualified dividend income received by non-corporate
taxpayers is 15% through 2010. Qualified dividend income
generally includes dividends paid to U.S. shareholders
taxed at individual rates by domestic subchapter 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 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 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
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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. shareholders 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. shareholders adjusted tax basis in its shares,
such shareholder will recognize long-term capital gain, or
short-term capital gain if the shares have been held for one
year or less, assuming the 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 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 shares. In addition,
taxable distributions from us and gain from the disposition of
our 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 our 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 shares as long-term capital gain or loss if
the U.S. shareholder has held the shares for more than one
year and otherwise as short-term capital gain or loss. In
general, a U.S. shareholder will realize gain or loss in an
amount equal to the difference between the sum of the fair
market value of any property and the amount of cash received in
such disposition and the U.S. shareholders adjusted
tax basis. A U.S. shareholders adjusted tax basis
generally will equal the U.S. shareholders
acquisition cost, increased by the excess of net capital gains
deemed distributed to the U.S. shareholder less tax deemed
paid by it and reduced by any returns of capital. However, a
U.S. shareholder must treat any loss upon a sale or
exchange of 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 shares may be disallowed if the
U.S. shareholder purchases other shares within 30 days
before or after the disposition.
Taxation
of U.S. Shareholders on a Redemption of Preferred
Shares
A redemption of our preferred shares will be treated under
Section 302 of the Code as a distribution that is taxable
as dividend income (to the extent of our current or accumulated
earnings and profits), unless the redemption satisfies certain
tests set forth in Section 302(b) of the Code enabling the
redemption to be treated as a sale of the preferred shares (in
which case the redemption will be treated in the same manner as
a sale described above in Taxation of
U.S. Shareholders on the Disposition of Our Shares).
The redemption will satisfy such tests if it (i) is
substantially disproportionate with respect to the
U.S. shareholders interest in our shares,
(ii) results in a complete termination of the
U.S. shareholders interest in all of our classes of
shares, or (iii) is not essentially equivalent to a
dividend with respect to the shareholder, all within the
meaning of Section 302(b) of the Code. In determining
whether any of these tests have been met, shares
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considered to be owned by the holder by reason of certain
constructive ownership rules set forth in the Code, as well as
shares actually owned, generally must be taken into account.
Because the determination as to whether any of the three
alternative tests of Section 302(b) of the Code described
above will be satisfied with respect to any particular
U.S. shareholder of the preferred shares depends upon the
facts and circumstances at the time that the determination must
be made, prospective investors are urged to consult their tax
advisors to determine such tax treatment. If a redemption of our
preferred shares does not meet any of the three tests described
above, the redemption proceeds will be treated as a
distribution, as described above Taxation of
Taxable U.S. Shareholders. In that case, a
U.S. shareholders adjusted tax basis in the redeemed
preferred shares will be transferred to such
U.S. shareholders remaining share holdings in us. If
the U.S. shareholder does not retain any of our shares,
such basis could be transferred to a related person that holds
our shares or it may be lost.
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% (through 2010). 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.
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, or UBTI. While many investments in real
estate generate UBTI, the IRS has issued a published ruling that
dividend distributions from a REIT to an exempt employee pension
trust do not constitute UBTI, 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 UBTI. However, if a
tax-exempt shareholder were to finance its acquisition of our
shares with debt, a portion of the income that it receives from
us would constitute UBTI 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 UBTI rules, which generally will
require them to characterize distributions that they receive
from us as UBTI. Finally, in certain circumstances, a qualified
employee pension or profit sharing trust that owns more than 10%
of our shares is required to treat a percentage of the dividends
that it receives from us as UBTI. 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 only if:
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the percentage of our dividends that the tax-exempt trust would
be required to treat as UBTI 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 be owned by five
or fewer individuals that allows the beneficiaries of the
pension
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trust to be treated as holding our shares in proportion to their
actuarial interests in the pension trust; and
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either (1) one pension trust owns more than 25% of the
value of our shares or (2) a group of pension trusts
individually holding more than 10% of the value of our shares
collectively owns more than 50% of the value of our shares.
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Taxation
of Non-U.S.
Shareholders
The term
non-U.S. shareholder
means a holder of our shares that is not a U.S. shareholder
or a partnership (or entity treated as a partnership for federal
income tax purposes). The rules governing federal income
taxation of
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 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 (a USRPI) 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. shareholders
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 that 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
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 shares, if the
non-U.S. shareholder
otherwise would be subject to tax on gain from the sale or
disposition of its 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 may 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 USRPI under the Foreign
Investment in Real Property Act of 1980 (FIRPTA). A
USRPI includes certain interests in real property and stock in
corporations at least 50% of whose assets consist of interests
in real property. Under FIRPTA, a
non-U.S. shareholder
is taxed on distributions attributable to gain from sales of
USRPIs 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
49
taxed on such a distribution at the normal capital gains rates
applicable to U.S. shareholders, subject to applicable
alternative minimum tax and a special alternative minimum tax in
the case of a nonresident alien individual. A
non-U.S. corporate
shareholder not entitled to treaty relief or exemption also may
be subject to the 30% branch profits tax on such a distribution.
We must withhold 35% of any distribution that we could designate
as a capital gain dividend. A
non-U.S. shareholder
may receive a credit against its tax liability for the amount we
withhold.
Capital gain distributions to the holders of 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 USRPI,
as long as (1) our shares continue to be 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 the applicable class of our shares
at any time during the one-year period preceding the
distribution. As a result,
non-U.S. shareholders
owning 5% or less of the applicable class of our 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 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 the applicable class of our 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 the ex-dividend date of a dividend, 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
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 USRPI capital
gain to such
non-U.S. shareholder,
then such
non-U.S. shareholder
shall be treated as having USRPI capital gain in an amount that,
but for the disposition, would have been treated as USRPI
capital gain.
A
non-U.S. shareholder
generally will not incur tax under FIRPTA with respect to gain
realized upon a disposition of our shares as long as at all
times
non-U.S. persons
hold, directly or indirectly, less than 50% in value of our
shares. 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 the
applicable class of our shares at all times during a specified
testing period will not incur tax under FIRPTA if the applicable
class of our shares is regularly traded on an
established securities market. Because our shares are regularly
traded on an established securities market, we expect that 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 the
applicable class of our shares. If the gain on the sale of the
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. shareholders
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.
Information
Reporting Requirements and Backup Withholding
We will report to our shareholders and to the IRS 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 a rate of
28% with respect to distributions unless the holder:
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is a corporation or qualifies for 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 IRS. Any amount paid as backup withholding will be
creditable against the shareholders 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.
Backup withholding will generally not apply to payments of
dividends made by us or our paying agents, in their capacities
as such, to a
non-U.S. shareholder
provided that the
non-U.S. shareholder
furnishes to us or our paying agent the required certification
as to its
non-U.S. status,
such as providing a valid IRS
Form W-8BEN
or W-8ECI,
or certain other requirements are met. Notwithstanding the
foregoing, backup withholding may apply if either we or our
paying agent has actual knowledge, or reason to know, that the
holder is a U.S. person that is not an exempt recipient.
Payments of the proceeds from a disposition or a redemption
effected outside the U.S. by a
non-U.S. shareholder
made by or through a foreign office of a broker generally will
not be subject to information reporting or backup withholding.
However, information reporting (but not backup withholding)
generally will apply to such a payment if the broker has certain
connections with the U.S. unless the broker has documentary
evidence in its records that the beneficial owner is a
non-U.S. shareholder
and specified conditions are met or an exemption is otherwise
established. Payment of the proceeds from a disposition by a
non-U.S. shareholder
of shares made by or through the U.S. office of a broker is
generally subject to information reporting and backup
withholding unless the
non-U.S. shareholder
certifies under penalties of perjury that it is not a
U.S. person and satisfies certain other requirements, or
otherwise establishes an exemption from information reporting
and backup withholding.
Backup withholding is not an additional tax. Any amounts
withheld under the backup withholding rules may be refunded or
credited against the shareholders federal income tax
liability if certain required information is furnished to the
IRS. Shareholders should consult their own tax advisors
regarding application of backup withholding to them and the
availability of, and procedure for obtaining an exemption from,
backup withholding.
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
Partnerships income and to deduct our distributive share
of each Partnerships 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.
51
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 partnerships 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 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 partnerships
taxable year. In determining the number of partners in a
partnership, a person owning an interest in a partnership,
grantor trust, or a subchapter 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 owners interest in the entity is attributable to the
entitys 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.
Additionally, if our operating partnership were a publicly
traded partnership, we believe that our operating partnership
would have sufficient qualifying income to satisfy the 90%
passive income exception and thus would continue to be taxed as
a partnership for federal income tax purposes. We have not
requested, and do not intend to request, a ruling from the IRS
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 unless we
qualified for certain relief provisions. See Requirements
for Qualification Income Tests and
Requirements for Qualification Asset
Tests. In addition, any change in a Partnerships
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 Partnerships 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 Partnerships
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
Partnerships 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
52
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 partnerships partnership agreement,
depreciation or amortization deductions of our operating
partnership generally will be allocated among the partners in
accordance with their respective interests in our operating
partnership, except to the extent that our operating partnership
is required under the federal income tax laws governing
partnership allocations to use a method for allocating tax
depreciation deductions attributable to contributed properties
that results in our receiving a disproportionate share of such
deductions. In addition, gain or loss on the sale of a property
that has been contributed, in whole or in part, to our operating
partnership will be specially allocated to the contributing
partners to the extent of any built-in gain or loss with respect
to such property for federal income tax purposes.
Basis in Partnership Interest. Our adjusted
tax basis in our partnership interest in our operating
partnership generally is equal to:
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the amount of cash and the basis of any other property
contributed by us to our operating partnership;
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increased by our allocable share of our operating
partnerships income and our allocable share of
indebtedness of our operating partnership; and
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reduced, but not below zero, by our allocable share of our
operating partnerships loss and the amount of cash
distributed to us, and by constructive distributions resulting
from a reduction in our share of indebtedness of our operating
partnership.
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If the allocation of our distributive share of our operating
partnerships 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 partnerships 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 that is acquired after December 31, 2007
and before January 1, 2010, and that is placed in service
before January 1, 2010. Qualified property
includes qualified leasehold improvement property (as defined
below) and property with a recovery period of less than
20 years such as furnishings and equipment. 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
53
partnerships initial basis in hotels acquired in exchange
for units in our operating partnership should be the same as the
transferors 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
partnerships 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
Partnerships 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 Partnerships 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 Income
Tests. We do not presently intend, however, 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
Partnerships 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
shares.
54
PLAN OF
DISTRIBUTION
We may sell the securities being offered hereby in one or more
of the following ways from time to time:
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through agents to the public or to investors;
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to underwriters or dealers for resale to the public or to
investors;
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directly to agents;
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directly to investors;
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through a combination of any of these methods of sale; or
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in any manner, as provided in the applicable prospectus
supplement.
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We may also effect a distribution of the securities offered
hereby through the issuance of derivative securities, including
without limitation, warrants, forward delivery contracts and the
writing of options. In addition, the manner in which we may sell
some or all of the securities covered by this prospectus
includes, without limitation, through:
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a block trade in which a broker-dealer will attempt to sell as
agent, but may position or resell a portion of the block, as
principal, in order to facilitate the transaction;
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purchases by a broker-dealer, as principal, and resale by the
broker-dealer for its account;
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ordinary brokerage transactions and transactions in which a
broker solicits purchasers; or
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privately negotiated transactions.
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We may also enter into hedging transactions. For example, we may:
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enter into transactions with a broker-dealer or affiliate
thereof in connection with which such broker-dealer or affiliate
will engage in short sales of securities offered pursuant to
this prospectus, in which case such broker-dealer or affiliate
may use securities issued pursuant to this prospectus close out
its short positions;
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sell securities short and redeliver such shares to close out our
short positions;
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enter into option or other types of transactions that require us
to deliver securities to a broker-dealer or an affiliate
thereof, who will then resell or transfer securities under this
prospectus; or
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loan or pledge securities to a broker-dealer or an affiliate
thereof, who may sell the loaned securities or, in an event of
default in the case of a pledge, sell the pledged securities
pursuant to this prospectus.
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We will set forth in a prospectus supplement the terms of the
offering of securities, including:
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the name or names of any agents or underwriters;
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the purchase price of the securities being offered and the
proceeds we will receive from the sale;
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the terms of the securities offered;
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any over-allotment options under which underwriters or agents
may purchase or place additional securities;
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any agency fees or underwriting discounts and other items
constituting agents or underwriters compensation;
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any public offering price;
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any discounts or concessions allowed or reallowed or paid to
dealers; and
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any securities exchanges on which such securities may be listed.
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Agents
We may designate agents who agree to use their reasonable
efforts to solicit purchases for the period of their appointment
or to sell the securities being offered hereby on a continuing
basis, unless otherwise provided in a prospectus supplement.
We may from time to time engage a broker-dealer to act as our
offering agent for one or more offerings of our securities. If
we reach agreement with an offering agent with respect to a
specific offering, including the number of securities and any
minimum price below which sales may not be made, then the
offering agent will try to sell such common shares on the agreed
terms. The offering agent could make sales in privately
negotiated transactions
and/or any
other method permitted by law, including sales deemed to be an
at-the-market
offering as defined in Rule 415 promulgated under the
Securities Act, including sales made directly on the NYSE, or
sales made to or through a market maker other than on an
exchange. The offering agent will be deemed to be an
underwriter within the meaning of the Securities
Act, with respect to any sales effected through an
at-the-market
offering.
Underwriters
If we use underwriters for a sale of securities, the
underwriters will acquire the securities, and may resell the
securities in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying
prices determined at the time of sale. The obligations of the
underwriters to purchase the securities will be subject to the
conditions set forth in the applicable underwriting agreement.
We may change from time to time any public offering price and
any discounts or concessions the underwriters allow or reallow
or pay to dealers. We may use underwriters with whom we have a
material relationship. We will describe in the prospectus
supplement naming the underwriter the nature of any such
relationship.
Institutional
Purchasers
We may authorize underwriters, dealers or agents to solicit
certain institutional investors, approved by us, to purchase our
securities on a delayed delivery basis or pursuant to delayed
delivery contracts provided for payment and delivery on a
specified future date. These institutions may include commercial
and savings banks, insurance companies, pension funds,
investment companies and educational and charitable
institutions. We will describe in the prospectus supplement
details of any such arrangement, including the offering price
and applicable sales commissions payable on such solicitations.
Direct
Sales
We may also sell securities directly to one or more purchasers
without using underwriters or agents. Underwriters, dealers and
agents that participate in the distribution of the securities
may be underwriters as defined in the Securities Act and any
discounts or commissions they receive from us and any profit on
their resale of the securities may be treated as underwriting
discounts and commissions under the Securities Act. We will
identify in the applicable prospectus supplement any
underwriters, dealers or agents and will describe their
compensation. We may have agreements with the underwriters,
dealers and agents to indemnify them against specified civil
liabilities, including liabilities under the Securities Act.
Underwriters, dealers and agents may engage in transactions with
or perform services for us in the ordinary course of their
businesses from time to time.
Trading
Markets and Listing of Securities
Unless otherwise specified in the applicable prospectus
supplement, each class or series of securities will be a new
issue with no established trading market, other than our common
shares or our Series A preferred shares, each of which is
listed on the NYSE. We may elect to list any other class or
series of securities on any exchange, but we are not obligated
to do so. It is possible that one or more underwriters may make
a market in a class or series of securities, but the
underwriters will not be obligated to do so and may discontinue
any market making at any time without notice. We cannot give any
assurance as to the liquidity of the trading market for any of
the securities.
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Stabilization
Activities
In accordance with Regulation M under the Exchange Act,
underwriters may engage in over-allotment, stabilizing or short
covering transactions or penalty bids in connection with an
offering of our securities. Over-allotment transactions involve
sales in excess of the offering size, which create a short
position. Stabilizing transactions permit bids to purchase the
underlying security so long as the stabilizing bids do not
exceed a specified maximum price. Short covering transactions
involve purchases of the securities in the open market after the
distribution is completed to cover short positions. Penalty bids
permit the underwriters to reclaim a selling concession from a
dealer when the securities originally sold by the dealer are
purchased in a covering transaction to cover short positions.
Those activities may cause the price of the securities to be
higher than they would otherwise be. If commenced, the
underwriters may discontinue any of the activities at any time.
LEGAL
MATTERS
The validity of the securities covered by this prospectus has
been 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, 2008 and 2007 and for
each of the years in the three-year period ended
December 31, 2008 and managements assessment of the
effectiveness of internal control over financial reporting as of
December 31, 2008 have been incorporated by reference
herein in reliance upon the report of KPMG LLP, independent
registered public accounting firm, and, with respect to the
consolidated statements of operations, of changes in
members (deficiency) equity and of cash flows of Mystic
Partners, LLC as of December 31, 2006 have been so
incorporated in reliance on the report by PricewaterhouseCoopers
LLP, independent registered public accounting firm, given on the
authority of said firms as experts in accounting and auditing.
KPMG LLPs report dated November 11, 2009 on the
consolidated financial statements refers to an accounting change
as the result of the Companys adoption of new accounting
standards related to noncontrolling interests.
The consolidated statements of operations, of changes in
members (deficiency) equity and of cash flows of Mystic
Partners, LLC and subsidiaries for the year ended
December 31, 2006 incorporated in this prospectus by
reference to the Annual Report on
Form 10-K
of Hersha Hospitality Trust for the year ended December 31,
2008 have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, given on the authority of said firm as experts
in auditing and accounting.
INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE
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
that we have filed, or will file, with the SEC:
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our Annual Report on
Form 10-K
for the year ended December 31, 2008;
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the information specifically incorporated by reference into our
Annual Report on Form
10-K for the
year ended December 31, 2008 from our definitive proxy
statement on Schedule 14A filed with the SEC on April 15,
2009;
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our Quarterly Reports on
Form 10-Q
for the quarterly periods ended September 30, 2009,
June 30, 2009 and March 31, 2009;
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our Current Reports on
Form 8-K
filed with the SEC on January 7, 2009, May 29, 2009
(excluding the information furnished under Item 7.01),
June 12, 2009, August 6, 2009 and November 12,
2009;
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the description of our common shares contained in our
Registration Statement on Form
8-A filed
with the SEC on May 2, 2008 and any amendments or reports
filed for the purpose of updating such description;
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the description of our Series A preferred shares contained
in our Registration Statement on
Form 8-A
filed with the SEC on May 2, 2008 and any amendments or
reports filed for the purpose of updating such
description; and
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all documents we file with the SEC pursuant to
Sections 13(a), 13(c) 14 or 15(d) of the Exchange Act from
the date of this prospectus prior to the date upon which the
offering of the securities covered by this prospectus is
terminated.
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You may obtain copies of these filings (other than exhibits and
schedules to such filings, unless such exhibits or schedules are
specifically incorporated by reference into this prospectus or
any applicable prospectus supplement) at no cost, by requesting
them from us by writing or telephoning us at: Hersha Hospitality
Trust, 501 Walnut Street, 9th Floor, Philadelphia,
Pennsylvania 19106, Telephone: (215) 238 1046, Attention:
Ashish R. Parikh, Chief Financial Officer.
WHERE YOU
CAN 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 New York 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.
58
35,000,000 Shares
Hersha Hospitality
Trust
Class A Common
Shares
PROSPECTUS SUPPLEMENT
BofA Merrill Lynch
Raymond James
UBS Investment Bank
January , 2010