Filed Pursuant to Rule 424(b)(3)
Registration Number 333-78091
PROSPECTUS SUPPLEMENT
(to Prospectus dated July 2, 1999)
[LOGO OF HOST MARRIOTT]
18,200,000 Shares
Host Marriott Corporation
Common Stock
$13.10 per Share
------------
The selling shareholders named in this prospectus supplement are selling
18,200,000 shares of common stock. We will not receive any proceeds from the
sale of the shares by the selling shareholders.
Our common stock is listed on the New York Stock Exchange under the symbol
"HMT." The last reported sale price of our common stock on the New York Stock
Exchange on May 29, 2001, was $13.71 per share.
------------
Investing in our common stock involves risks. See "Risk Factors" beginning
on page S-16.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus are truthful or
complete. Any representation to the contrary is a criminal offense.
------------
Per
Share Total
------ ------------
Public Offering Price $13.10 $238,420,000
Underwriting Discount $ 0.10 $ 1,820,000
Proceeds to the Selling Shareholders, before expenses $13.00 $236,600,000
In addition to the underwriting discount, the underwriter will receive a
commission from all investors in the amount of $.05 for each share of common
stock sold to those investors in this offering.
The underwriter expects to deliver the shares to purchasers on or about June
4, 2001.
------------
Salomon Smith Barney
May 2, 2001
You should rely only on the information contained in, or incorporated by
reference into, this prospectus supplement and the accompanying prospectus. We
have not authorized anyone to provide you with different information. We are
not making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in this
prospectus supplement or the accompanying prospectus is accurate as of any date
other than their respective dates.
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TABLE OF CONTENTS
Page
----
Prospectus Supplement
Disclosure Regarding Forward-Looking Statements............................ S-3
Note Regarding Industry Information........................................ S-4
The Company................................................................ S-5
Recent Developments........................................................ S-6
Risk Factors............................................................... S-16
Selling Shareholders....................................................... S-27
Material Federal Income Tax Consequences................................... S-28
Underwriting............................................................... S-53
Experts.................................................................... S-54
Legal Matters.............................................................. S-54
Prospectus
About this Prospectus...................................................... 1
Where You Can Find More Information........................................ 1
Special Note Regarding Forward-Looking Statements.......................... 2
The Company................................................................ 3
No Proceeds to the Company................................................. 3
Selling Shareholders....................................................... 3
Plan of Distribution....................................................... 5
Experts.................................................................... 6
Legal Matters.............................................................. 6
S-2
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the information
incorporated by reference into them include forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. We identify forward-looking statements in this
prospectus supplement, the accompanying prospectus and the information
incorporated by reference into them by using words or phrases such as
"anticipate," "believe," "estimate," "expect," "intend," "may be," "objective,"
"plan," "predict," "project" and "will be" and similar words or phrases, or the
negative thereof.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by us in those statements include, among
others, the following:
. national and local economic and business conditions that will affect,
among other things, demand for products and services at our hotels and
other properties, the level of room rates and occupancy that can be
achieved by such properties and the availability and terms of financing;
. our ability to maintain the properties in a first-class manner, including
meeting capital expenditure requirements;
. our ability to compete effectively in areas such as access, location,
quality of accommodations and room rate structures;
. our degree of leverage, which may affect our ability to obtain financing
in the future or maintain compliance with current debt covenants;
. our ability to acquire or develop additional properties and the risk that
potential acquisitions or developments may not perform in accordance with
expectations;
. changes in travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures and costs;
. government approvals, actions and initiatives, including the need for
compliance with environmental and safety requirements, and changes in
laws and regulations or the interpretation thereof;
. our ability to satisfy complex rules in order for us to qualify as a real
estate investment trust, or "REIT," for federal income tax purposes, our
operating partnership's ability to satisfy the rules in order for it to
qualify as a partnership for federal income tax purposes, and the ability
of certain of our subsidiaries to qualify as taxable REIT subsidiaries
for federal income tax purposes, and our ability and the ability of our
subsidiaries to operate effectively within the limitations imposed by
these rules; and
. other factors discussed under the headings "Risk Factors" in this
prospectus supplement and elsewhere in this prospectus supplement and in
the accompanying prospectus, and in our filings with the Securities and
Exchange Commission.
Although we believe the expectations reflected in our forward-looking
statements are based upon reasonable assumptions, we can give you no assurance
that we will attain these expectations or that any deviations will not be
material. We disclaim any obligation or undertaking to disseminate to you any
updates or revisions to any forward-looking statement contained in this
prospectus supplement, the accompanying prospectus and the information
incorporated by reference into them to reflect any change in our expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
S-3
NOTE REGARDING INDUSTRY INFORMATION
The information contained in, or incorporated by reference into, this
prospectus supplement or the accompanying prospectus concerning the lodging
industry is derived principally from publicly available information and from
industry sources. Although we believe that this publicly available information
and the information provided by these industry sources is reliable, we have not
independently verified the accuracy of any of this information.
S-4
THE COMPANY
We are a self-managed and self-administered REIT owning full-service hotel
properties. Through our subsidiaries, we currently own or hold controlling
interests in 125 hotels, containing approximately 60,000 rooms located
throughout the United States, in Toronto and Calgary, Canada and in Mexico
City, Mexico. These hotels are generally operated under the Marriott, Ritz-
Carlton, Hyatt, Four Seasons, Hilton and Swissotel brand names. We believe that
these brands are among the most respected and widely recognized names in the
lodging industry.
We were formed as a Maryland corporation in 1998. As part of our efforts to
reorganize our business operations to qualify as a REIT for federal income tax
purposes, which we refer to as the "REIT conversion," on December 29, 1998 we
succeeded by merger to the hotel ownership business formerly conducted by Host
Marriott Corporation, a Delaware corporation. We conduct our business as an
umbrella partnership REIT, or UPREIT, through Host Marriott, L.P., a Delaware
limited partnership, of which we are the sole general partner and in which we
hold approximately 86% of the partnership interests (or approximately 92% after
giving effect to this offering). As used in this prospectus supplement,
references to "we," "our," the "Company" and "Host Marriott" and similar
references are to Host Marriott Corporation, a Maryland corporation, and its
consolidated subsidiaries from and after December 29, 1998 and to Host Marriott
Corporation, a Delaware corporation, and its consolidated subsidiaries before
December 29, 1998, unless otherwise expressly stated or the context otherwise
requires. References to the "operating partnership" are to Host Marriott, L.P.
Also in this prospectus supplement, we sometimes refer to HMT Lessee LLC as
"HMT Lessee."
Under the law in effect prior to 2001, a REIT was required to lease its
hotels to unrelated third parties. As a result of REIT tax law changes under
the specific provisions of the Work Incentives Improvement Act of 1999 relating
to REITs (we refer to these provisions as the "REIT Modernization Act") that
became effective January 1, 2001, a REIT now is permitted to lease its hotels
to "taxable REIT subsidiaries," which are subsidiaries of the REIT that are
subject to regular corporate tax. However, the hotels must be operated on
behalf of the taxable REIT subsidiary by managers that are unrelated third
parties. Accordingly, prior to 2001 we leased substantially all of our hotels
to certain entities we refer to as the "lessees," which were principally
subsidiaries of Crestline Capital Corporation. Effective January 1, 2001, HMT
Lessee, a wholly owned subsidiary of the operating partnership that has elected
to be a taxable REIT subsidiary, acquired direct or indirect ownership of all
but one of the leasehold interests owned by the Crestline lessees through the
transactions discussed below. HMT Lessee, our subsidiary, operates the hotels
pursuant to management agreements with unaffiliated hotel managers such as
Marriott International, Inc., who are responsible for the day-to-day management
of the hotels. However, we are responsible for, among other things, decisions
with respect to sales and purchases of hotels, the financing of the hotels, the
leasing of the hotels and capital expenditures for the hotels, although some
matters relating to capital expenditures are addressed by management
agreements. Crestline and Marriott International are both publicly traded
companies, separate from Host Marriott.
Our principal executive offices are located at 10400 Fernwood Road,
Bethesda, Maryland 20817-1109, and our telephone number is (301) 380-9000.
S-5
RECENT DEVELOPMENTS
First Quarter Results
On May 2, 2001, we announced our results of operations for the first quarter
2001. Our results reflected gross hotel sales and expenses for 117 properties
and rental income for five properties leased to third parties at and for the
twelve weeks ended March 23, 2001. Effective March 24, 2001 we acquired the
voting stock of Rockledge Hotel Assets, Inc., the owner of three hotel
properties, which increased our total of owned full-service hotels to 125. The
results of these three hotels will be included in gross hotel sales beginning
with the second quarter of 2001. See "--Acquisition of Former Non-Controlled
Subsidiaries."
As a result of the acquisition described below under "--Crestline Leasehold
Interest Acquisition", our results of operations for the first quarter of 2001
are not comparable to our results of operations for the first quarter of 2000.
We reported first quarter 2001 hotel sales of $838 million and rental income of
$29 million compared to rental income of $173 million in first quarter 2000.
Assuming that we reported gross hotel sales for our entire portfolio for the
twelve week periods ended March 23, 2001 and March 24, 2000, we would have
recorded $901 million and $891 million of hotel sales for the first quarter
2001 and first quarter 2000, respectively. Net income for the first quarter
2001 was $32 million, an increase of $89 million over the prior year first
quarter. Net income available to common shareholders was $27 million compared
to a net loss of $58 million in the first quarter 2000. For further detail see
the unaudited condensed consolidated financial statements beginning on page S-
8.
Room revenue per available room, which we refer to as "RevPAR" as defined
below, for our comparable hotels increased 0.2% to $119.64 for the first
quarter 2001 compared to $119.44 in the first quarter 2000. The increase
reflects a growth in average daily rates of over 4% for the first quarter 2001
compared to the first quarter 2000, which was partially offset by a decline in
occupancy of nearly three percentage points over the same periods, in each case
for our comparable properties. The slowdown in the economy negatively impacted
our operating results for the first quarter of 2001. To the extent that
economic conditions do not improve, our results of operations will likely be
adversely affected.
Twelve weeks ended
-------------------
Comparable Hotel Operating March 23, March 24,
Data (unaudited)(a) 2001 2000
-------------------------- --------- ---------
Number of Properties........................................ 118 118
Number of Rooms............................................. 54,804 54,804
Average occupancy........................................... 73.3% 76.2%
Average daily rate.......................................... $163.32 $156.86
RevPAR(b)................................................... $119.64 $119.44
--------
(a) Comparable properties consist of the 118 properties owned directly or
indirectly by us for the same period of time in each period covered,
excluding two properties where significant expansion at the hotels affected
operations, one property that sustained substantial damage from a fire in
the fourth quarter of 2000 and Tampa Waterside Marriott which opened in
February 2000.
(b) RevPAR represents room revenue per available room, which measures daily
room revenues generated on a per room basis, excluding food and beverage
revenues and other ancillary revenues generated by the property.
Crestline Leasehold Interest Acquisition
On November 13, 2000, the operating partnership and Crestline announced the
execution of a definitive agreement for the purchase and sale of the lessees of
112 of our full-service hotel properties and the purchase and sale of the
leasehold interests in an additional four of our full-service hotel properties.
Under the terms of the transaction, which was consummated effective as of
January 1, 2001, HMT Lessee purchased from Crestline such equity interests in
the lessees of 112 of our hotels and such leasehold interests in four of our
hotels for $207 million in cash, including legal fees and transfer taxes. As a
result of this transaction, we recorded a non-recurring loss of $207 million
during the fourth quarter of 2000, and recognized a deferred tax asset of
$82 million, because the acquisition is recognized for income tax purposes as
an asset that will be amortized over the next six years. Therefore, our
consolidated results of operations as presented for the first
S-6
quarter of 2001 represent the gross hotel sales and expenses from these 116
full-service hotels, rather than rental income from third party lessees that we
previously reported as revenue. In addition, the income earned by HMT Lessee
LLC, which is a taxable REIT subsidiary, is subject to federal and state income
taxes. Of the 125 full-service hotel properties we owned as of May 29, 2001, we
continue to lease one hotel property to Crestline and five to third parties.
The remaining three hotels (including two owned by Rockledge) have not been
leased.
Courtyard Settlement and Tender Offers
The operating partnership, Rockledge Hotel Properties, Inc., which is one of
our subsidiaries as discussed below, and Marriott International, Inc. are
parties to a settlement agreement with respect to lawsuits brought by and on
behalf of the limited partners of Courtyard by Marriott Limited Partnership,
Courtyard by Marriott II Limited Partnership and several other partnerships
that own limited service hotels. Pursuant to the settlement, subsidiaries of
CBM Joint Venture LLC, a joint venture between Rockledge and Marriott
International, launched tender offers to acquire all of the outstanding units
of limited partnership interest of Courtyard by Marriott Limited Partnership
and Courtyard by Marriott II Limited Partnership. These tender offers were
completed on December 8, 2000, at which time the remaining units not acquired
in the tender offers were acquired in mergers in which each unitholder received
the same amount per unit as was paid to unitholders who tendered their units in
the tender offers.
As a result of the acquisition by subsidiaries of CBM Joint Venture LLC of
the units of Courtyard by Marriott II Limited Partnership, CBM Joint Venture
LLC was required to offer to purchase the 10 3/4% Series B Senior Secured Notes
due 2008 issued by Courtyard by Marriott II Limited Partnership at a purchase
price equal to 101% of the principal amount of such notes. The purchase offer
was undertaken by CBM Joint Venture LLC on behalf of Courtyard by Marriott II
Limited Partnership and was completed on January 26, 2001. Approximately $11.6
million of notes were purchased, representing approximately 9% of the
outstanding notes. The notes purchased by CBM Joint Venture LLC remain
outstanding.
Acquisition of Former Non-Controlled Subsidiaries
Prior to the enactment of the REIT Modernization Act, Host Marriott was not
permitted to own (directly or through the operating partnership) more than
10 percent of the outstanding voting securities of any entity. Prior to April
2001, the operating partnership did not own any of the voting stock for
Rockledge Hotel Properties, Inc. or Fernwood Hotel Assets, Inc. but it did own
all of the nonvoting stock of each of them. This nonvoting stock gave the
operating partnership a 95% economic interest in each of Rockledge and
Fernwood. Pursuant to the provisions of the REIT Modernization Act, a REIT is
now permitted to own, on or after January 1, 2001, up to 100% of the voting
securities of an entity that elects to be a taxable REIT subsidiary. Effective
January 1, 2001, each of Rockledge and Fernwood elected to be a taxable REIT
subsidiary, and, in April 2001, our operating partnership acquired the voting
stock in Rockledge and Fernwood held by the Host Marriott Statutory
Employee/Charitable Trust for approximately $2 million. Prior to the
acquisition of this voting stock, Host Marriott recorded its 95% interest in
the earnings of the two corporations as equity in earnings of affiliates.
Effective from and after March 24, 2001, our consolidated results of operations
will reflect the results of operations of Rockledge and Fernwood, including
federal and state income taxes payable by these corporations. The assets of
these subsidiaries primarily consist of three full service properties as well
as certain joint venture interests, property leases and the related
liabilities, including approximately $54 million of outstanding indebtedness
owed to third parties as of March 23, 2001. At March 23, 2001, Host Marriott's
investment in the two corporations was $90 million.
Preferred Stock Offering
On March 27, 2001, we sold approximately 6 million shares of our 10%
cumulative redeemable Class C preferred stock for net proceeds of approximately
$144 million. Holders of the Class C preferred stock are entitled to receive
cumulative cash dividends at a rate of 10% per annum of the $25 per share
liquidation preference. Dividends are payable quarterly in arrears commencing
April 15, 2001, on which date a pro rata dividend of $0.03 per share was
distributed. Beginning March 27, 2006, we have the option to redeem the Class C
preferred stock for $25 per share, plus accrued and unpaid dividends to the
date of redemption. The
S-7
Class C preferred stock ranks senior to the common stock and the authorized but
unissued Series A Junior Participating preferred stock and on a parity with the
outstanding Class A preferred stock and Class B preferred stock. The preferred
stockholders generally have no voting rights.
Proceeds from the offering of the Class C preferred stock were used in part
to pay down $115 million outstanding under the revolver portion of our credit
facility on April 2, 2001. As a result of this payment, we increased the
remaining availability under the credit facility to $625 million.
First Quarter Financial Data
The following summary condensed consolidated statements of operations and
cash flows for Host Marriott for the twelve weeks ended March 23, 2001 and
March 24, 2000 and the condensed consolidated balance sheet as of March 23,
2001 is unaudited. Our results of operation and financial condition as of and
for the twelve weeks ended March 23, 2001 do not purport to be indicative of
the results of operations or financial condition to be expected as of or for
the fiscal year ending December 31, 2001.
As a result of the transactions described above under "--Crestline Leasehold
Interest Acquisition," our results of operations for the twelve weeks ended
March 23, 2001 are not comparable to our results of operations for the twelve
weeks ended March 24, 2000. Because of the significant changes resulting from
this transaction, we believe that our pro forma results of operations data for
the twelve weeks ended March 24, 2000 is meaningful and relevant to investors.
Accordingly, the pro forma consolidated statements of operations data set forth
below is based upon our unaudited consolidated statement of operations for the
twelve weeks ended March 24, 2000, adjusted to reflect the Crestline
transaction as described in note (b) below. We consummated a number of
significant transactions subsequent to December 31, 1999 in addition to the
Crestline transaction, none of which is reflected in this pro forma statement
of operations. As a result, the pro forma statement is not presented in
accordance with Article 11 of Securities and Exchange Commission Regulation S-
X. The pro forma statement of operations set forth below is unaudited, is based
upon a number of assumptions and estimates and does not purport to be
indicative of the operating results that we would have achieved had the
transactions reflected in that pro forma statement actually been consummated on
the date specified, nor does that statement purport to be indicative of future
results of operations.
The summary financial data set forth below should be read in conjunction
with our financial statements which are included in the documents incorporated
by reference in this prospectus supplement and the accompanying prospectus.
S-8
Condensed Consolidated Balance Sheets (a)
(unaudited, in millions)
March 23, December 31,
2001 2000
--------- ------------
ASSETS
Property and equipment, net............................. $7,097 $7,110
Notes and other receivables (including amounts due from
affiliates of $98 million and $164 million,
respectively).......................................... 146 211
Due from Manager........................................ 174 --
Rent receivable......................................... 11 65
Investments in affiliates............................... 131 128
Other assets............................................ 452 444
Restricted cash......................................... 128 125
Cash and cash equivalents............................... 112 313
------ ------
$8,251 $8,396
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt
Senior notes........................................... $2,790 $2,790
Mortgage debt.......................................... 2,269 2,275
Other.................................................. 372 257
------ ------
5,431 5,322
Accounts payable and accrued expenses................... 174 381
Other liabilities....................................... 308 312
------ ------
Total liabilities..................................... 5,913 6,015
------ ------
Minority interest....................................... 410 485
Company-obligated mandatorily redeemable convertible
preferred securities of a subsidiary whose sole assets
are the convertible subordinated debentures due 2026
("Convertible Preferred Securities")................... 475 475
Shareholders' equity
Cumulative redeemable preferred stock (liquidation
preference $25.00 per share), 50 million shares
authorized; 8.2 million shares issued and
outstanding........................................... 196 196
Common stock, 750 million shares authorized;
234.1 million shares and 221.3 million shares issued
and outstanding, respectively......................... 2 2
Additional paid-in capital............................. 1,902 1,824
Accumulated other comprehensive loss................... (4) (1)
Retained deficit....................................... (643) (600)
------ ------
Total shareholders' equity............................ 1,453 1,421
------ ------
$8,251 $8,396
====== ======
S-9
Condensed Consolidated Statements of Operations (a)
(unaudited, in millions, except per share amounts)
Historical Pro Forma (b)
------------------- -------------
Twelve weeks ended
---------------------------------
March 23, March 24, March 24,
2001 2000 2000
--------- --------- -------------
Revenues
Hotel sales
Rooms..................................... $521 $ -- $ 512
Food and beverage......................... 253 -- 250
Other..................................... 64 -- 64
---- ----- -----
Total hotel sales........................ 838 -- 826
Rental income (c).......................... 29 173 31
Other...................................... 5 3 3
---- ----- -----
Total revenues........................... 872 176 860
---- ----- -----
Expenses
Hotel operating expenses
Rooms..................................... 121 -- 121
Food and beverage......................... 191 -- 183
Other departmental costs and deductions... 208 -- 200
Management fees and other................. 52 -- 51
Other property-level expenses............. 61 59 59
Depreciation and amortization............. 77 74 74
---- ----- -----
Total operating costs and expenses....... 710 133 688
Operating profit before minority interest,
corporate expenses, interest and other..... 162 43 172
Minority interest (expense) benefit (c).... (15) 11 (16)
Interest income............................ 8 9 8
Interest expense........................... (103) (96) (101)
Dividends on Convertible Preferred
Securities of subsidiary trust............ (7) (7) (7)
Corporate expenses......................... (8) (10) (10)
Other expense.............................. (2) (6) (6)
---- ----- -----
Income (loss) before income taxes........... 35 (56) 40
Provision for income taxes.................. (3) (1) (5)
---- ----- -----
Net income (loss)........................... $ 32 $ (57) $ 35
==== ===== =====
Less: preferred dividends................... (5) (5) (5)
Add: gain on repurchase of Convertible
Preferred Securities....................... -- 4 4
---- ----- -----
Net income (loss) available to common
shareholders............................... $ 27 $(58) $ 34
==== ===== =====
Basic earnings (loss) per common share...... $.12 $(.26) $ .16
==== ===== =====
Diluted earnings (loss) per common share.... $.12 $(.26)
==== =====
S-10
Condensed Consolidated Statements of Cash Flows (a)
Twelve Weeks Ended March 23, 2001 and March 24, 2000
(unaudited, in millions)
Twelve Weeks Ended
-------------------
March 23, March 24,
2001 2000
--------- ---------
Operating Activities
Net income (loss)......................................... $ 32 $ (57)
Adjustments to reconcile to cash from operations:
Depreciation and amortization............................ 77 74
Income taxes............................................. (19) (21)
Deferred contingent rental income........................ 7 123
Net gains on property transactions....................... (1) (1)
Equity in earnings of affiliates......................... (2) --
Purchase of Crestline leases............................. (204) --
Changes in other operating accounts...................... (47) (27)
Other.................................................... (8) (23)
----- -----
Cash (used in) from operations......................... (165) 68
----- -----
Investing Activities
Capital expenditures:
Capital expenditures for renewals and replacements....... (56) (54)
New investment capital expenditures...................... (20) (34)
Other investments........................................ (5) (11)
Note receivable collections, net.......................... 3 --
----- -----
Cash used in investing activities...................... (78) (99)
----- -----
Financing Activities
Issuances of debt, net.................................... 118 83
Scheduled principal repayments............................ (9) (9)
Debt prepayments.......................................... -- (80)
Issuances of common stock................................. 1 1
Repurchases of common stock............................... -- (44)
Dividends................................................. (62) (51)
Repurchases of Convertible Preferred Securities........... -- (15)
Repurchases and redemptions of operating partnership
units.................................................... -- (3)
Other..................................................... (6) (2)
----- -----
Cash from (used in) financing activities............... 42 (120)
----- -----
Decrease in Cash and Cash Equivalents..................... $(201) $(151)
===== =====
Supplemental schedule of noncash investing and financing activities:
During the first quarters of 2001 and 2000, approximately 12,954,000 shares and
66,000 shares respectively, of common stock were issued upon the conversion of
partnership interests in the operating partnership, which we refer to as "OP
Units", held by third parties valued on the date of redemption of the then
current market price of common stock at $173,105,000 and $612,000,
respectively.
S-11
Notes to Condensed Consolidated Financial Statements
Twelve Weeks Ended March 23, 2001 and March 24, 2000
(unaudited)
--------
(a) Our unaudited condensed consolidated financial statements have been
prepared without audit. Certain information and footnote disclosures
normally included in financial statements presented in accordance with
accounting principles generally accepted in the United States have been
omitted. The unaudited consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in our annual report on Form 10-K for the year ended December 31,
2000 and our Form 10-Q for the twelve weeks ended March 23, 2001.
(b) As a result of acquiring certain leases from Crestline Capital Corporation,
effective January 1, 2001, the operating partnership leases 116 of its
full-service hotels to HMT Lessee, which is a taxable REIT subsidiary.
Therefore, our consolidated results of operations for first quarter 2001
represent the gross hotel sales and expenses from our properties rather
than rental income from third party lessees that we previously reported as
revenues. In addition, the income earned by HMT Lessee will be subject to
federal and state income taxes.
Because of the significant changes to our corporate structure as a result of
the January 2001 transactions with Crestline described above under "--
Crestline Leasehold Interest Acquisition", our results of operations for the
twelve weeks ended March 23, 2001 are not comparable to our results of
operations for the twelve weeks ended March 24, 2000. Accordingly, we
believe that a discussion of our pro forma results of operations is
meaningful and relevant to an investor. The pro forma results of operations
set forth above are based on our unaudited condensed consolidated statement
of operations for the twelve weeks ended March 24, 2000 and are only
adjusted to reflect our January 2001 acquisition from Crestline of the
lessees of 112 of our full-service hotel properties and the leasehold
interests in an additional four of our full-service hotel properties for
$207 million in cash as if the transaction occurred at the beginning of
2000. Of the 125 full-service hotel properties we owned as of May 29, 2001,
we continue to lease one hotel property to Crestline and five to third
parties. The remaining three hotels (including two owned by Rockledge) have
not been leased.
As a result of the Crestline transaction, in the fourth quarter of 2000 we
recognized a non-recurring pre-tax loss of $207 million net of the minority
interest effect of $28 million related to the minority owners' share in the
lease repurchase expense and a tax benefit of $82 million. The pro forma
results of operations for the twelve weeks ended March 24, 2000 appearing
above have been adjusted to eliminate this pre-tax loss and tax benefit. In
addition, the above pro forma statement of operations also includes the
following adjustments:
-- Record hotel-level revenues and expenses and reduce historical rental
income with respect to the 116 properties;
-- Reduce historical interest income for amounts related to the working
capital note with Crestline;
-- Reduce historical equity in earnings of affiliates for interest
earned at our non-controlled subsidiary on the related furniture,
fixtures and equipment loans to Crestline;
-- Record interest expense related to the additional borrowings from the
issuance of our 9 1/4% Series F senior notes to fund the $207 million
cash payment;
-- Record the minority interest effect related to the outside ownership
in the operating partnership; and
-- Record the tax provision attributable to the income of HMT Lessee, a
taxable REIT subsidiary, at an effective tax rate of 39.5%.
The unaudited pro forma financial information does not purport to represent
what our results of operations would actually have been if the Crestline
transaction had in fact occurred at the beginning of 2000, or to project our
results of operations for any future period. The unaudited pro forma
financial information is based upon available information and upon
assumptions and estimates that we believe are reasonable under the
circumstances. Further, the pro forma results of operations do not include
adjustments for any
S-12
transactions other than the Crestline transaction and are not presented in
accordance with Article 11 of Securities and Exchange Commission Regulation
S-X. The unaudited pro forma financial information should be read in
conjunction with our audited financial statements contained in our annual
report on Form 10-K, for the year ended December 31, 2000 and our unaudited
quarterly financial statements contained in our quarterly report on Form
10-Q for the quarter ended March 23, 2001.
(c) The staff of the Securities and Exchange Commission issued Staff
Accounting Bulletin 101 "Revenue Recognition" (SAB 101) in December 1999.
SAB 101 discusses factors to consider in determining when contingent
revenue should be recognized during interim periods. As a result of the
adoption of SAB 101, contingent rental income of $7 million and $123
million, respectively, for the twelve weeks ended March 23, 2001 and March
24, 2000 was deferred because they are contingent upon achieving annual
thresholds of hotel sales. The deferral of contingent rental income also
caused a reduction in minority interest expense, which ultimately resulted
in a minority interest benefit in 2000, reflecting the minority owners'
share in the net loss for the quarter.
S-13
Comparative Funds from Operations(a)
(unaudited, in millions)
Twelve weeks ended
-------------------
March 23, March 24,
2001 2000
--------- ---------
Net income (loss)......................................... $ 32 $(57)
Depreciation and amortization............................ 76 72
Partnership adjustments.................................. 16 (14)
----- ----
Funds from operations of Host Marriott, L.P............... 124 1
Effect on funds from operations of SAB 101 (b)........... 7 123
----- ----
Comparative funds from operations of Host Marriott, L.P... 131 124
Dividends on preferred stock............................. (5) (5)
----- ----
Comparative funds from operations of Host Marriott, L.P.
available to holders of its common units................. 126 119
Comparative funds from operations of minority partners of
Host Marriott, L.P. (c).................................. (25) (27)
----- ----
Comparative funds from operations available to common
shareholders of Host Marriott............................ $ 101 $ 92
===== ====
--------
(a) Comparative FFO represents Funds From Operations, for all Host Marriott
operations, as defined by the National Association of Real Estate
Investment Trusts, adjusted for contingent rental revenues and substantial
non-recurring items. We consider Comparative FFO to be an indicative
measure of our operating performance due to the significance of our long-
lived assets and because such data is considered useful by the investment
community to better understand our result of operations, and can be used to
measure our ability to service debt, fund capital expenditures and expand
our business. However, such information should not be considered as an
alternative to net income, operating profit, cash from operations, or any
other operating or liquidity performance measure prescribed by accounting
principles generally accepted in the United States. Cash expenditures for
various long-term assets and income taxes have been, and will be incurred,
which are not reflected in the Comparative FFO. In addition, Comparative
FFO as presented may not be comparable to amounts calculated by other
companies.
(b) Results are adjusted to include contingent rent which is deferred under
Staff Accounting Bulletin 101. This adjustment reflects revenues based on
payment amounts calculated under our hotels leases.
(c) The $25 million and $27 million, respectively, deducted for the twelve
weeks ended March 23, 2001 and March 24, 2000, respectively, represent the
Comparative FFO attributable to the interests in Host Marriott, L.P. held
by its minority partners in the 2001 and 2000 periods, respectively. For
additional detail regarding operating structure and operating partnership
units, investors should read our annual report on Form 10-K for the year
ended December 31, 2000.
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EBITDA (a)
(unaudited, in millions)
Twelve weeks ended
-------------------
March 23, March 24,
2001 2000
--------- ---------
EBITDA
Hotels..................................................... $235 $113
Office buildings and other investments..................... -- 1
Interest income............................................ 8 9
Corporate and other expenses............................... (12) (15)
Effect on revenue of Staff Accounting Bulletin 101......... 7 123
---- ----
EBITDA of Host Marriott, L.P................................ 238 231
Distributions to minority interest partners of Host
Marriott, L.P. (b)......................................... (13) (13)
---- ----
EBITDA of Host Marriott..................................... $225 $218
==== ====
Twelve weeks ended
-------------------
March 23, March 24,
2001 2000
--------- ---------
EBITDA...................................................... $225 $218
Effect on revenue of Staff Accounting Bulletin 101......... (7) (123)
Interest expense........................................... (103) (96)
Dividends on Convertible Preferred Securities.............. (7) (7)
Depreciation and amortization.............................. (77) (74)
Minority interest (expense) benefit........................ (15) 11
Income taxes............................................... (3) (1)
Distributions to minority interest partners of
Host Marriott, L.P........................................ 13 13
Other non-cash changes, net................................ 6 2
---- ----
Net income (loss).......................................... $ 32 $(57)
==== ====
--------
(a) We consider our consolidated earnings before interest expense, income
taxes, depreciation, amortization, and other non-cash items (including
contingent rental revenue) ("EBITDA") to be an indicative measure of our
operating performance due to the significance of our long-lived assets and
because such data is considered useful by the investment community to
better understand our results, and can be used to measure our ability to
service debt, fund capital expenditures and expand our business. However,
such information should not be considered as an alternative to net income,
operating profit, cash from operations, or any other operating or liquidity
performance measure prescribed by accounting principles generally accepted
in the United States. Cash expenditures for various long-term assets and
income taxes have been, and will be incurred, which are not reflected in
EBITDA presentations. In addition, EBITDA as presented may not be
comparable to amounts calculated by other companies.
(b) Host Marriott holds approximately 82% and 77%, without giving effect to
this offering, of the outstanding operating partnership units of Host
Marriott, L.P. at March 23, 2001 and March 24, 2000, respectively. The
distributions to minority interest partners of Host Marriott, L.P. reflect
distributions to minority holders of operating partnership units and
holders of certain preferred operating partnership units. These units are
convertible into cash or common stock of Host Marriott at Host Marriott's
option. A quarterly distribution of $0.26 and $0.21 per unit was declared
March 23, 2001 and March 24, 2000, respectively. On May 8, 2001, the
selling shareholders sold 10,000,000 shares of common stock issued upon the
conversion of operating partnership units, which increased Host Marriott's
ownership of the operating partnership to approximately 86%.
S-15
RISK FACTORS
Prospective investors should carefully consider, among other factors, the
material risks described below.
Risks of Ownership of our Common Stock
There are limitations on the acquisition of our common stock and changes in
control. Our charter and bylaws, the partnership agreement of the operating
partnership, our shareholder rights plan and the Maryland General Corporation
Law contain a number of provisions that could delay, defer or prevent a
transaction or a change in control of us that might involve a premium price
for our shareholders or otherwise be in their best interests, including the
following:
Ownership limit. The 9.8% ownership limit described under "Risk
Factors--Risks of Ownership of our Common Stock--There are possible adverse
consequences of limits on ownership of our common stock" below may have the
effect of precluding a change in control of us by a third party without the
consent of our Board of Directors, even if the change in control would be
in the interest of our shareholders, and even if the change in control
would not reasonably jeopardize our REIT status.
Staggered board. Our Board of Directors consists of nine members but our
charter provides that our number of directors may be increased or decreased
according to our bylaws, provided that the total number of directors is not
less than three nor more than 13. Pursuant to our bylaws, the number of
directors will be fixed by our Board of Directors within the limits in our
charter. Our Board of Directors is divided into three classes of directors.
Directors for each class are chosen for a three-year term when the term of
the current class expires. The staggered terms for directors may affect
shareholders' ability to effect a change in control of us, even if a change
in control would be in the interest of our shareholders. Currently, there
are nine directors.
Removal of board of directors. Our charter provides that, except for any
directors who may be elected by holders of a class or series of shares of
capital stock other than our common stock, directors may be removed only
for cause and only by the affirmative vote of shareholders holding at least
two-thirds of our outstanding shares entitled to be cast for the election
of directors. Vacancies on the Board of Directors may be filled by the
concurring vote of a majority of the remaining directors and, in the case
of a vacancy resulting from the removal of a director by the shareholders,
by at least two-thirds of all the votes entitled to be cast in the election
of directors.
Preferred shares; classification or reclassification of unissued shares
of capital stock without shareholder approval. Our charter provides that
the total number of shares of stock of all classes which we have authority
to issue is 800,000,000, initially consisting of 750,000,000 shares of
common stock and 50,000,000 shares of preferred stock, of which 14,140,000
shares of preferred stock were issued and outstanding as of May 1, 2001.
Our Board of Directors has the authority, without a vote of shareholders,
to classify or reclassify any unissued shares of stock, including common
stock into preferred stock or vice versa, and to establish the preferences
and rights of any preferred or other class or series of shares to be
issued. The issuance of preferred shares or other shares having special
preferences or rights could delay or prevent a change in control even if a
change in control would be in the interests of our shareholders. Because
our Board of Directors has the power to establish the preferences and
rights of additional classes or series of shares without a shareholder
vote, our Board of Directors may give the holders of any class or series
preferences, powers and rights, including voting rights, senior to the
rights of holders of our common stock.
Consent rights of the limited partners. Under the partnership agreement
of the operating partnership, we generally will be able to merge or
consolidate with another entity with the consent of partners holding
percentage interests that are more than 50% of the aggregate percentage
interests of the outstanding limited partnership interests entitled to vote
on the merger or consolidation, including any limited
S-16
partnership interests held by us, as long as the holders of limited
partnership interests either receive or have the right to receive the same
consideration as our shareholders. We, as holder of a majority of the
limited partnership interests, would be able to control the vote. Under our
charter, holders of at least two-thirds of our outstanding shares of common
stock generally must approve the merger or consolidation.
Maryland business combination law. Under the Maryland General
Corporation Law, specified "business combinations," including specified
issuances of equity securities, between a Maryland corporation and any
person who owns 10% or more of the voting power of the corporation's then
outstanding shares, or an "interested shareholder," or an affiliate of the
interested shareholder are prohibited for five years after the most recent
date in which the interested shareholder becomes an interested shareholder.
Thereafter, any of these specified business combination must be approved by
80% of outstanding voting shares, and by two-thirds of voting shares other
than voting shares held by an interested shareholder unless, among other
conditions, the corporation's common shareholders receive a minimum price,
as defined in the Maryland General Corporation Law, for their shares and
the consideration is received in cash or in the same form as previously
paid by the interested shareholder. We are subject to the Maryland business
combination statute.
Maryland control share acquisition law. Under the Maryland General
Corporation Law, "control shares" acquired in a "control share acquisition"
have no voting rights except to the extent approved by a vote of two-thirds
of the votes entitled to be cast on the matter, excluding shares owned by
the acquiror and by officers or directors who are employees of the
corporation. "Control shares" are voting shares which, if aggregated with
all other voting shares previously acquired by the acquiror or over which
the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror
to exercise voting power in electing directors within one of the following
ranges of voting power: (1) one-fifth or more but less than one-third, (2)
one-third or more but less than a majority or (3) a majority or more of the
voting power. Control shares do not include shares the acquiring person is
then entitled to vote as a result of having previously obtained shareholder
approval. A "control share acquisition" means the acquisition of control
shares, subject to specified exceptions. We are subject to these control
share provisions of Maryland law, subject to an exemption for Marriott
International pursuant to its purchase right discussed below. See "Risk
Factors--Risks of Ownership of our Common Stock--There are limitations on
the acquisition of our common stock and changes in control--Marriott
International purchase right."
Merger, consolidation, share exchange and transfer of our
assets. Pursuant to our charter, subject to the terms of any outstanding
class or series of capital stock, we can merge with or into another entity,
consolidate with one or more other entities, participate in a share
exchange or transfer our assets within the meaning of the Maryland General
Corporation Law if approved (1) by our Board of Directors in the manner
provided in the Maryland General Corporation Law and (2) by our
shareholders holding two-thirds of all the votes entitled to be cast on the
matter, except that any merger of us with or into a trust organized for the
purpose of changing our form of organization from a corporation to a trust
requires only the approval of our shareholders holding a majority of all
votes entitled to be cast on the merger. Under the Maryland General
Corporation Law, specified mergers may be approved without a vote of
shareholders and a share exchange is only required to be approved by a
Maryland corporation by its Board of Directors. Our voluntary dissolution
also would require approval of shareholders holding two-thirds of all the
votes entitled to be cast on the matter.
Amendments to our charter and bylaws. Our charter contains provisions
relating to restrictions on transferability of our common stock, the
classified Board of Directors, fixing the size of our Board of Directors
within the range set forth in our charter, removal of directors and the
filling of vacancies, all of which may be amended only by a resolution
adopted by the Board of Directors and approved by our shareholders holding
two-thirds of the votes entitled to be cast on the matter. As permitted
under the Maryland General Corporation Law, our charter and bylaws provide
that directors have the exclusive right
S-17
to amend our bylaws. Amendments of this provision of our charter also would
require action of our Board of Directors and approval by shareholders
holding two-thirds of all the votes entitled to be cast on the matter.
Marriott International purchase right. As a result of our spin-off of
Marriott International in 1993, Marriott International has the right to
purchase up to 20% of each class of our outstanding voting shares at the
then fair market value when specific change of control events involving us
occur, subject to specified
limitations to protect our REIT status. The Marriott International purchase
right may have the effect of discouraging a takeover of us, because any
person considering acquiring a substantial or controlling block of our
common stock will face the possibility that its ability to obtain or
exercise control would be impaired or made more expensive by the exercise
of the Marriott International purchase right.
Shareholder rights plan. We adopted a shareholder rights plan which
provides, among other things, that when specified events occur, our
shareholders will be entitled to purchase from us a newly created series of
junior preferred shares, subject to our ownership limit described below.
The preferred share purchase rights are triggered by the earlier to occur
of (1) ten days after the date of a public announcement that a person or
group acting in concert has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of our outstanding shares of common
stock or (2) ten business days after the commencement of or announcement of
an intention to make a tender offer or exchange offer, the consummation of
which would result in the acquiring person becoming the beneficial owner of
20% or more of our outstanding common stock. The preferred share purchase
rights would cause substantial dilution to a person or group that attempts
to acquire us on terms not approved by our Board of Directors.
There are possible adverse consequences of limits on ownership of our common
stock. To maintain our qualification as a REIT for federal income tax purposes,
not more than 50% in value of our outstanding shares of capital stock may be
owned, directly or indirectly, by five or fewer individuals, as defined in the
Internal Revenue Code to include some entities. In addition, a person who owns,
directly or by attribution, 10% or more of an interest in a tenant of ours, or
a tenant of any partnership in which we are a partner, cannot own, directly or
by attribution, 10% or more of our shares without jeopardizing our
qualification as a REIT. Primarily to facilitate maintenance of our
qualification as a REIT for federal income tax purposes, the ownership limit
under our charter prohibits ownership, directly or by virtue of the attribution
provisions of the Internal Revenue Code, by any person or persons acting as a
group, of more than 9.8% of the issued and outstanding shares of our common
stock, subject to an exception for shares of our common stock held prior to our
conversion into a REIT so long as the holder would not own more than 9.9% in
value of our outstanding shares after the REIT conversion, and prohibits
ownership, directly or by virtue of the attribution provisions of the Internal
Revenue Code, by any person, or persons acting as a group, of more than 9.8% of
the issued and outstanding shares of any class or series of our preferred
shares. Together, these limitations are referred to as the "ownership limit."
Our Board of Directors, in its sole and absolute discretion, may waive or
modify the ownership limit with respect to one or more persons who would not be
treated as "individuals" for purposes of the Internal Revenue Code if the Board
of Directors is satisfied, based upon information required to be provided by
the party seeking the waiver and, if it determines necessary or advisable, upon
an opinion of counsel satisfactory to our Board of Directors, that ownership in
excess of this limit will not cause a person who is an individual to be treated
as owning shares in excess of the ownership limit, applying the applicable
constructive ownership rules, and will not otherwise jeopardize our status as a
REIT for federal income tax purposes (for example, by causing any of our
tenants to be considered a "related party tenant" for purposes of the REIT
qualification rules). Common stock acquired or held in violation of the
ownership limit will be transferred automatically to a trust for the benefit of
a designated charitable beneficiary, and the person who acquired the common
stock in violation of the ownership limit will not be entitled to any
distributions thereon, to vote those shares of common stock or to receive any
proceeds from the subsequent sale of the common stock in excess of the lesser
of the price paid for the common stock or the amount realized from the sale. A
transfer of shares of our common stock to a person who, as a result of the
transfer, violates the ownership limit may be void under certain circumstances,
and, in any event, would deny that person any of the economic benefits of
owning shares of our common stock in excess of the ownership limit. The
ownership limit may have the effect
S-18
of delaying, deferring or preventing a change in control and, therefore, could
adversely affect the shareholders' ability to realize a premium over the then-
prevailing market price for our common stock in connection with such
transaction.
We depend on external sources of capital for future growth. As with other
REITs, but unlike corporations generally, our ability to reduce our debt and
finance our growth largely must be funded by external sources of capital
because we generally will have to distribute to our shareholders 90% of our
taxable income in order to qualify as a REIT, including taxable income we
recognize for tax purposes but with regard to which we do not receive
corresponding cash. Our access to external capital will depend upon a number of
factors, including general market conditions, the market's perception of our
growth potential, our current and potential future earnings, cash distributions
and the market price of our common stock. Currently, our access to external
capital has been limited to the extent that our common stock is trading at what
we believe is a discount to our estimated net asset value.
Shares of our common stock that are or become available for sale could
affect the price for shares of our common stock. Sales of a substantial number
of shares of our common stock, or the perception that sales could occur, could
adversely affect prevailing market prices for our common stock. In addition,
holders of units of limited partnership interest in the operating partnership
(referred to as "OP Units"), who redeem their OP Units and receive common stock
upon redemption will be able to sell those shares freely, unless the person is
our affiliate and resale of the affiliate's shares is not covered by an
effective registration statement. After giving effect to the conversion of OP
Units into the shares of common stock which are being offered by this
prospectus supplement, as of May 29, 2001 there were approximately 23 million
OP Units outstanding, all of which are currently redeemable. Further, a
substantial number of shares of our common stock have been and will be issued
or reserved for issuance from time to time under our employee benefit plans,
including shares of our common stock reserved for options, and these shares of
common stock would be available for sale in the public markets from time to
time pursuant to exemptions from registration or upon registration. Moreover,
the issuance of additional shares of our common stock by us in the future would
be available for sale in the public markets. We can make no prediction about
the effect that future sales of our common stock would have on the market price
of our common stock.
Our earnings and cash distributions will affect the market price of shares
of our common stock. We believe that the market value of a REIT's equity
securities is based primarily upon the market's perception of the REIT's growth
potential and its current and potential future cash distributions, whether from
operations, sales, acquisitions, development or refinancings, and is
secondarily based upon the value of the underlying assets. For that reason,
shares of our common stock may trade at prices that are higher or lower than
the net asset value per share. To the extent we retain operating cash flow for
investment purposes, working capital reserves or other purposes rather than
distributing the cash flow to shareholders, these retained funds, while
increasing the value of our underlying assets, may negatively impact the market
price of our common stock. Our failure to meet the market's expectation with
regard to future earnings and cash distributions would likely adversely affect
the market price of our common stock.
Market interest rates may affect the price of shares of our common stock. We
believe that one of the factors that investors consider important in deciding
whether to buy or sell shares of a REIT is the distribution rate on the shares,
considered as a percentage of the price of the shares, relative to market
interest rates. If market interest rates increase, prospective purchasers of
REIT shares may expect a higher distribution rate. Thus, higher market interest
rates could cause the market price of our shares to go down.
Risks of Operation
We do not control our hotel operations, and we are dependent on the managers
of our hotels. Because federal income tax laws restrict REITs and their
subsidiaries from operating a hotel, we do not manage our hotels. Instead, we
retain managers to manage our hotels pursuant to management agreements. Our
income
S-19
from the hotels may be adversely affected if the managers fail to provide
quality services and amenities and competitive room rates at our hotels or fail
to maintain the quality of the hotel brand names. While HMT Lessee LLC, a
taxable REIT subsidiary of the operating partnership that is the lessee of
substantially all of our full-service properties, oversees the hotel managers'
performance, we have limited specific recourse if we believe that the hotel
managers are not performing adequately. Underperformance by our hotel managers
could adversely affect our results of operations.
Our relationship with Marriott International may result in conflicts of
interest. Marriott International, a public hotel management company, manages a
significant number of our hotels. In addition, Marriott International manages
and in some cases may own or be invested in hotels that compete with our
hotels. As a result, Marriott International may make decisions regarding
competing lodging facilities which it manages that would not necessarily be in
our best interests. J.W. Marriott, Jr. is a member of our Board of Directors
and his brother, Richard E. Marriott, is our Chairman of the Board. Both J.W.
Marriott, Jr. and Richard E. Marriott serve as directors, and J.W. Marriott,
Jr. also serves as an officer, of Marriott International. J.W. Marriott, Jr.
and Richard E. Marriott beneficially owned, as determined for securities law
purposes, as of January 31, 2001, approximately 12.6% and 12.2%, respectively,
of the outstanding shares of common stock of Marriott International. As a
result, J.W. Marriott, Jr. and Richard E. Marriott have potential conflicts of
interest as our directors when making decisions regarding Marriott
International, including decisions relating to the management agreements
involving the hotels and Marriott International's management of competing
lodging properties.
Our Board of Directors follows appropriate policies and procedures intended
to limit the involvement of Messrs. J.W. Marriott, Jr. and Richard E. Marriott
in conflict situations, including requiring them to abstain from voting as
directors on matters which present a conflict between the companies. If
appropriate, these policies and procedures will apply to other directors and
officers.
We have substantial indebtedness. Our degree of leverage could adversely
affect our ability to:
. obtain financing in the future for working capital, capital expenditures,
acquisitions, development or other general business purposes
. undertake financings on terms and conditions acceptable to us
. pursue our acquisition strategy or
. compete effectively or operate successfully under adverse economic
conditions.
If our cash flow and working capital are not sufficient to fund our
expenditures or service our indebtedness, we would have to raise additional
funds through:
. the sale of equity
. the refinancing of all or part of our indebtedness
. the incurrence of additional permitted indebtedness or
. the sale of assets.
We cannot assure you that any of these sources of funds would be available
in amounts sufficient for us to meet our obligations or fulfill our business
plan. Additionally, our debt contains performance related covenants that, if
not achieved, could require immediate repayment of our debt or significantly
increase the rate of interest on our debt.
S-20
There is no limitation on the amount of debt we may incur. There are no
limitations in our organizational documents or the operating partnership's
organizational documents that limit the amount of indebtedness that we may
incur. However, our existing debt instruments contain restrictions on the
amount of indebtedness that we may incur. Accordingly, we could incur
indebtedness to the extent permitted by our debt agreements. If we became more
highly leveraged, our debt service payments would increase and our cash flow
and our ability to service our debt and make distributions to our shareholders
would be adversely affected.
Our management agreements could impair the sale or other disposition of our
hotels. Under the terms of the management agreements, we generally may not
sell, lease or otherwise transfer the hotels unless the transferee assumes the
related management agreements and meets specified other conditions. Our ability
to finance, refinance or sell any of the properties may, depending upon the
structure of a particular transaction, require the manager's consent. If the
manager did not consent, we would be prohibited from financing, refinancing or
selling the property without breaching the management agreement.
The acquisition contracts relating to some hotels limit our ability to sell
or refinance those hotels. For reasons relating to federal income tax
considerations of the former owners of some of our hotels, we agreed to
restrictions on selling some hotels or repaying or refinancing the mortgage
debt on those hotels for varying periods depending on the hotel. We anticipate
that, in specified circumstances, we may agree to similar restrictions in
connection with future hotel acquisitions. As a result, even if it were in our
best interests to sell or refinance the mortgage debt on these hotels, it may
be difficult or impossible to do so during their respective lock-out periods.
Our ground lease payments may increase faster than the revenues we receive
on the hotels. As of January 31, 2001, we leased, as lessee, 46 of our hotels
pursuant to ground leases. These ground leases generally require increases in
ground rent payments every five years. Our ability to make distributions to
shareholders could be adversely affected to the extent that our revenues do not
increase at the same or a greater rate as the increases under the ground
leases. In addition, if we were to sell a hotel encumbered by a ground lease,
the buyer would have to assume the ground lease, which could result in a lower
sales price. Moreover, to the extent that the ground leases are not renewed at
their expiration, our revenues could be adversely affected.
New acquisitions may fail to perform as expected or we may be unable to make
acquisitions on favorable terms. We intend to acquire additional full-service
hotels. Newly acquired properties may fail to perform as expected, which could
adversely affect our financial condition and operating results. We may
underestimate the costs necessary to bring an acquired property up to standards
established for its intended market position. We expect to acquire hotels with
cash from secured or unsecured financings and proceeds from offerings of equity
or debt, to the extent available. We may not be in a position or have the
opportunity in the future to make suitable property acquisitions on favorable
terms or at all. Competition for attractive investment opportunities may
increase prices for hotel properties, thereby decreasing the potential return
on our investment.
We may be unable to sell properties when appropriate because real estate
investments are illiquid. Real estate investments generally cannot be sold
quickly. We may not be able to vary our portfolio promptly in response to
economic or other conditions. The inability to respond promptly to changes in
the performance of our investments could adversely affect our financial
condition, and ability to service debt and make distributions to shareholders.
In addition, there are limitations under the federal tax laws applicable to
REITs and agreements that we have entered into when we acquired some of our
properties that may limit our ability to recognize the full economic benefit
from a sale of our assets.
Our revenues and the value of our properties are subject to conditions
affecting the lodging industry. If our assets do not generate income sufficient
to pay our expenses, service our debt and maintain our properties, we will be
unable to make distributions to our shareholders. Our revenues and the value of
our properties are subject to conditions affecting the lodging industry. These
include:
. changes in the national, regional and local economic climate
. local conditions such as an oversupply of hotel properties or a reduction
in demand for hotel rooms
S-21
. the attractiveness of our hotels to consumers and competition from
comparable hotels
. the quality, philosophy and performance of the managers of our hotels
. changes in room rates and increases in operating costs due to inflation
and other factors and
. the need to periodically repair and renovate our hotels.
Adverse changes in these conditions could adversely affect our financial
performance.
Our expenses may remain constant even if our revenue drops. The expenses of
owning property are not necessarily reduced when circumstances like market
factors and competition cause a reduction in income from the property. If a
property is mortgaged and we are unable to meet the mortgage payments, the
lender could foreclose and take the property. Our financial condition could be
adversely affected by:
. interest rate levels
. the availability of financing
. the cost of compliance with government regulation, including zoning and
tax laws and
. changes in governmental regulations, including those governing usage,
zoning and taxes.
We depend on our key personnel. We depend on the efforts of our executive
officers and other key personnel. While we believe that we could find
replacements for these key personnel, the loss of their services could have a
significant adverse effect on our operations. We do not intend to obtain key-
man life insurance with respect to any of our personnel.
Partnership and other litigation judgments or settlements could have a
material adverse effect on our financial condition. We and the operating
partnership are parties to various lawsuits relating to previous partnership
transactions, including transactions relating to the REIT conversion. While we
and the other defendants to these lawsuits believe all of the lawsuits in which
we are a defendant are without merit and we are vigorously defending against
the asserted claims, we can give no assurance as to the outcome of any of the
lawsuits. If any of the lawsuits were to be determined adversely to us or
settlement involving a payment of a material sum of money were to occur, there
could be a material adverse effect on our financial condition.
We may acquire hotel properties through joint ventures with third parties
that could result in conflicts. Instead of purchasing hotel properties
directly, we may invest as a co-venturer. Joint venturers often share control
over the operation of the joint venture assets. Actions by a co-venturer could
subject the assets to additional risk, including:
. our co-venturer in an investment might have economic or business
interests or goals that are inconsistent with our interests or goals
. our co-venturers may be in a position to take action contrary to our
instructions or requests or contrary to our policies or objectives or
. a joint venture partner could go bankrupt, leaving us liable for its
share of joint venture liabilities.
Although we generally will seek to maintain sufficient control of any joint
venture to permit our objectives to be achieved, we might not be able to take
action without the approval of our joint venture partners. Also, our joint
venture partners could take actions binding on the joint venture without our
consent.
Environmental problems are possible and can be costly. We believe that our
properties are in compliance in all material respects with applicable
environmental laws. Unidentified environmental liabilities
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could arise, however, and could have a material adverse effect on our financial
condition and performance. Federal, state and local laws and regulations
relating to the protection of the environment may require a current or previous
owner or operator of real estate to investigate and clean up hazardous or toxic
substances or petroleum product releases at the property. The owner or operator
may have to pay a governmental entity or third parties for property damage and
for investigation and clean-up costs incurred by the parties in connection with
the contamination. These laws typically impose clean-up responsibility and
liability without regard to whether the owner or operator knew of or caused the
presence of the contaminants. Even if more than one person may have been
responsible for the contamination, each person covered by the environmental
laws may be held responsible for all of the clean-up costs incurred. In
addition, third parties may sue the owner or operator of a site for damages and
costs resulting from environmental contamination emanating from that site.
Environmental laws also govern the presence, maintenance and removal of
asbestos. These laws require that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, that they notify and train
those who may come into contact with asbestos and that they undertake special
precautions, including removal or other abatement, if asbestos would be
disturbed during renovation or demolition of a building. These laws may impose
fines and penalties on building owners or operators who fail to comply with
these requirements and may allow third parties to seek recovery from owners or
operators for personal injury associated with exposure to asbestos fibers.
Compliance with other government regulations can also be costly. Our hotels
are subject to various forms of regulation, including Title III of the
Americans with Disabilities Act, building codes and regulations pertaining to
fire safety. Compliance with those laws and regulations could require
substantial capital expenditures. These regulations may be changed from time to
time, or new regulations adopted, resulting in additional or unexpected costs
of compliance. Any increased costs could reduce the cash available for
servicing debt and making distributions to our shareholders.
Some potential losses are not covered by insurance. We carry comprehensive
liability, fire, flood, extended coverage and rental loss, for rental losses
extending up to 12 months, insurance with respect to all of our hotels. We
believe the policy specifications and insured limits of these policies are of
the type customarily carried for similar hotels. Some types of losses, such as
from earthquakes and environmental hazards, however, may be either uninsurable
or too expensive to justify insuring against. Should an uninsured loss or a
loss in excess of insured limits occur, we could lose all or a portion of the
capital we have invested in a hotel, as well as the anticipated future revenue
from the hotel. In that event, we might nevertheless remain obligated for any
mortgage debt or other financial obligations related to the property.
Federal Income Tax Risks
To qualify as a REIT, we are required to distribute at least 90% of our
taxable income, irrespective of our available cash or outstanding
obligations. To continue to qualify as a REIT, we currently are required to
distribute to our shareholders with respect to each year at least 90% of our
taxable income, excluding net capital gain (with respect to our taxable years
that ended prior to January 1, 2001, we were required to distribute 95% of the
amount to so qualify). In addition, we will be subject to a 4% nondeductible
excise tax on the amount, if any, by which distributions made by us with
respect to the calendar year are less than the sum of 85% of our ordinary
income and 95% of our capital gain net income for that year and any
undistributed taxable income from prior periods. We intend to make
distributions to our shareholders to comply with the distribution requirement
and to avoid the nondeductible excise tax and will rely for this purpose on
distributions from the operating partnership. However, there are differences in
timing between our recognition of taxable income and our receipt of cash
available for distribution due to, among other things, the seasonality of the
lodging industry and the fact that some taxable income will be "phantom"
income, which is taxable income that is not matched by cash flow or EBITDA to
us. Due to some transactions entered into in years prior to the REIT
conversion, we expect to recognize substantial amounts of "phantom" income.
There is a distinct possibility that these timing differences could require us
to borrow funds or to issue additional equity to enable us to meet the
distribution requirement and, therefore, to maintain our REIT status, and to
avoid the nondeductible excise tax. In addition, because the REIT distribution
requirements prevent us from retaining
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earnings, we will generally be required to refinance debt that matures with
additional debt or equity. We cannot assure you that any of these sources of
funds, if available at all, would be sufficient to meet our distribution and
tax obligations.
Adverse tax consequences would apply if we failed to qualify as a REIT. We
believe that we have been organized and have operated in such a manner so as to
qualify as a REIT under the Internal Revenue Code, commencing with our taxable
year beginning January 1, 1999, and we currently intend to continue to operate
as a REIT during future years. No assurance can be provided, however, that we
qualify as a REIT or that new legislation, Treasury Regulations, administrative
interpretations or court decisions will not significantly change the tax laws
with respect to our qualification as a REIT or the federal income tax
consequences of our REIT qualification. If we fail to qualify as a REIT, we
will be subject to federal and state income tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates. In
addition, unless entitled to statutory relief, we would not qualify as a REIT
for the four taxable years following the year during which REIT qualification
is lost. The additional tax burden on us would significantly reduce the cash
available for distribution by us to our shareholders and we would no longer be
required to make any distributions to shareholders. Our failure to qualify as a
REIT could reduce materially the value of our common stock and would cause any
distributions to shareholders that otherwise would have been subject to tax as
capital gain dividends to be taxable as ordinary income to the extent of our
current and accumulated earnings and profits, or "E&P." However, subject to
limitations under the Internal Revenue Code, corporate distributees may be
eligible for the dividends received deduction with respect to our
distributions. Our failure to qualify as a REIT also would cause an event of
default under our credit facility that could lead to an acceleration of the
amounts due under the credit facility, which, in turn, would constitute an
event of default under our outstanding debt securities.
We will be disqualified as a REIT at least for taxable year 1999 if we
failed to distribute all of our E&P attributable to our non-REIT taxable
years. In order to qualify as a REIT, we cannot have at the end of any taxable
year any undistributed E&P that is attributable to one of our non-REIT taxable
years. A REIT has until the close of its first taxable year as a REIT in which
it has non-REIT E&P to distribute its accumulated E&P. We were required to have
distributed this E&P prior to the end of 1999, the first taxable year for which
our REIT election was effective. If we failed to do this, we will be
disqualified as a REIT at least for taxable year 1999. We believe that
distributions of non-REIT E&P that we made were sufficient to distribute all of
the non-REIT E&P as of December 31, 1999, but we cannot guarantee that we met
this requirement.
If our leases are not respected as true leases for federal income tax
purposes, we would fail to qualify as a REIT. To qualify as a REIT, we must
satisfy two gross income tests, under which specified percentages of our gross
income must be passive income, like rent. For the rent paid pursuant to the
leases, which constitutes substantially all of our gross income, to qualify for
purposes of the gross income tests, the leases must be respected as true leases
for federal income tax purposes and not be treated as service contracts, joint
ventures or some other type of arrangement. In addition, the lessees must not
be regarded as "related party tenants," as defined in the Internal Revenue
Code. We believe that the leases will be respected as true leases for federal
income tax purposes. There can be no assurance, however, that the IRS will
agree with this view. We also believe that Crestline was not a "related party
tenant" and, as a result of the changes in tax laws effective January 1, 2001,
HMT Lessee will not be treated as a "related party tenant" so long as it
qualifies as a "taxable REIT subsidiary." If the leases were not respected as
true leases for federal income tax purposes or if the lessees were regarded as
"related party tenants," we would not be able to satisfy either of the two
gross income tests applicable to REITs and we would lose our REIT status. See
"Risk Factors--Federal Income Tax Risks--Adverse tax consequences would apply
if we failed to qualify as a REIT" above.
If HMT Lessee LLC fails to qualify as a taxable REIT subsidiary, we would
fail to qualify as a REIT. For our taxable years beginning on and after January
1, 2001, as a result of REIT tax law changes under the REIT Modernization Act,
we are permitted to lease our hotels to a subsidiary of the operating
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partnership that is taxable as a corporation and that elects to be treated as a
taxable REIT subsidiary. Accordingly, effective January 1, 2001, HMT Lessee,
directly or indirectly acquired all but one of the full-service hotel leasehold
interests formerly held by Crestline. So long as HMT Lessee and other
affiliated lessees qualify as taxable REIT subsidiaries of ours and certain
other conditions are satisfied, they will not be treated as "related party
tenants." We believe that HMT Lessee qualifies to be treated as a taxable REIT
subsidiary for federal income tax purposes. We cannot assure you, however, that
the IRS will not challenge its status as a taxable REIT subsidiary for federal
income tax purposes, or that a court would not sustain such a challenge. If the
IRS were successful in disqualifying HMT Lessee from treatment as a taxable
REIT subsidiary, we would fail to meet the asset tests applicable to REITs and
substantially all of our income would fail to qualify for the gross income
tests and, accordingly, we would cease to qualify as a REIT. See "Risk
Factors--Federal Income Tax Risks--Adverse tax consequences would apply if we
failed to qualify as a REIT" above.
Despite our REIT status, we remain subject to various taxes, including
substantial deferred and contingent tax liabilities. Notwithstanding our status
as a REIT, we are subject, through our ownership interest in the operating
partnership, to certain federal, state, local and foreign taxes on our income
and property. In addition, we will be required to pay federal tax at the
highest regular corporate rate, currently 35%, upon our share of any "built-in
gain" recognized as a result of any sale before January 1, 2009, by the
operating partnership of assets, including the hotels, in which interests were
acquired by the operating partnership from our predecessor and its subsidiaries
as part of the REIT conversion. Built-in gain is the amount by which an asset's
fair market value exceeded our adjusted basis in the asset on January 1, 1999,
the first day of our first taxable year as a REIT. The total amount of gain on
which we would be subject to corporate income tax if the assets that we held at
the time of the REIT conversion were sold in a taxable transaction prior to
January 1, 2009 would be material to us. In addition, at the time of the REIT
conversion, we expected that we or Rockledge Hotel Properties, Inc. or Fernwood
Hotel Assets, Inc. (each of which is a taxable corporation in which the
operating partnership owned a 95% nonvoting interest until April, 2001 when the
operating partnership purchased the remaining 5% voting interest) likely would
recognize substantial built-in gain and deferred tax liabilities in the next
ten years without any corresponding receipt of cash by us or the operating
partnership. We may have to pay certain state income taxes because not all
states treat REITs the same as they are treated for federal income tax
purposes. We may also have to pay certain foreign taxes to the extent we own
assets or conduct operations in foreign jurisdictions. The operating
partnership is obligated under its partnership agreement to pay all such taxes
(and any related interest and penalties) incurred by us, as well as any
liabilities that the IRS may assert against us for corporate income taxes for
taxable years prior to the time we qualified as a REIT. Our taxable REIT
subsidiaries, including Rockledge, Fernwood and HMT Lessee, are taxable as
corporations and will pay federal, state and local income tax on their net
income at the applicable corporate rates, and foreign taxes to the extent they
own assets or conduct operations in foreign jurisdictions.
If the IRS were to challenge successfully the operating partnership's status
as a partnership for federal income tax purposes, we would cease to qualify as
a REIT and suffer other adverse consequences. We believe that the operating
partnership qualifies to be treated as a partnership for federal income tax
purposes. As a partnership, it is not subject to federal income tax on its
income. Instead, each of its partners, including us, is required to pay tax on
its allocable share of the operating partnership's income. No assurance can be
provided, however, that the IRS will not challenge its status as a partnership
for federal income tax purposes, or that a court would not sustain such a
challenge. If the IRS were successful in treating the operating partnership as
a corporation for tax purposes, we would fail to meet the income tests and
certain of the asset tests applicable to REITs and, accordingly, cease to
qualify as a REIT. If the operating partnership fails to qualify as a
partnership for federal income tax purposes or we fail to qualify as a REIT,
either failure would cause an event of default under our credit facility that,
in turn, could constitute an event of default under our outstanding debt
securities. Also, the failure of the operating partnership to qualify as a
partnership would cause it to become subject to federal and state corporate
income tax, which would reduce significantly the amount of cash available for
debt service and for distribution to its partners, including us. Finally, the
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classification of the operating partnership as a corporation would cause us to
recognize gain at least equal to our "negative capital account," if any.
As a REIT, we are subject to limitations on our ownership of debt and equity
securities. Subject to the exceptions discussed in this paragraph, a REIT is
prohibited from owning securities in any one issuer if the value of those
securities exceeds 5% of the value of the REIT's total assets or the securities
owned by the REIT represent more than 10% of the issuer's outstanding voting
securities or more than 10% of the value of the issuer's outstanding
securities. A REIT is permitted to own securities of a subsidiary in an amount
that exceeds the 5% value test and the 10% vote or value test if the subsidiary
elects to be a "taxable REIT subsidiary," which is taxable as a corporation.
However, a REIT may not own securities of taxable REIT subsidiaries that
represent in the aggregate more than 20% of the value of the REIT's total
assets. Effective January 1, 2001, each of Fernwood, Rockledge and HMT Lessee
has elected to be treated as a taxable REIT subsidiary.
Our taxable REIT subsidiaries are subject to special rules that may result
in increased taxes. Several Internal Revenue Code provisions ensure that a
taxable REIT subsidiary is subject to an appropriate level of federal income
taxation. For example, a taxable REIT subsidiary is limited in its ability to
deduct interest payments made to an affiliated REIT. In addition, the REIT has
to pay a 100% penalty tax on some payments that it receives if the economic
arrangements between the REIT and the taxable REIT subsidiary are not
comparable to similar arrangements between unrelated parties.
We may be required to pay a penalty tax upon the sale of a hotel. The
federal income tax provisions applicable to REITs provide that any gain
realized by a REIT on the sale of property held as inventory or other property
held primarily for sale to customers in the ordinary course of business is
treated as income from a "prohibited transaction" that is subject to a 100%
penalty tax. Under existing law, whether property, including hotels, is held as
inventory or primarily for sale to customers in the ordinary course of business
is a question of fact that depends upon all of the facts and circumstances with
respect to the particular transaction. The operating partnership intends that
it and its subsidiaries will hold the hotels for investment with a view to
long-term appreciation, to engage in the business of acquiring and owning
hotels and to make occasional sales of hotels as are consistent with the
operating partnership's investment objectives. We cannot assure you, however,
that the IRS might not contend that one or more of these sales is subject to
the 100% penalty tax.
S-26
SELLING SHAREHOLDERS
The selling shareholders named in this prospectus supplement currently own
20,988,657 OP Units which they acquired on December 30, 1998 in exchange for
properties and assets. We will issue the offered shares to the selling
shareholders upon their surrender of 18,200,000 of these OP Units for
redemption. The following table provides the name of each selling shareholder,
the number of shares that will be issued to and offered by such selling
shareholder in this offering and the number of shares that such shareholder
will continue to own following this offering. The address for each selling
shareholder is 345 Park Avenue, New York, New York 10154. The shares of common
stock owned following this offering represent shares of common stock that may
be issued by us upon the redemption of each selling shareholder's OP Units. The
offered shares represent approximately 6.4% of the total number of shares
outstanding as of May 29, 2001, assuming the redemption of all outstanding OP
Units that are not held by Host Marriott for shares of common stock. The number
of shares owned by the selling shareholders in the aggregate following this
offering represents approximately 1% of the total number of shares outstanding
as of May 29, 2001, assuming the redemption of all outstanding OP Units that
are not held by Host Marriott for shares of common stock.
John G. Schreiber is a director of Host Marriott and, directly or through an
affiliate, is a special limited partner of Blackstone Real Estate Associates
L.P. and Blackstone Real Estate Associates II L.P. (collectively, "BREA"),
which together are the general partner of all of the selling shareholders other
than Blackstone Real Estate Holdings L.P., BRE Logan Hotel Inc., RTZ Management
Corp. and BRE/Ceriale LLC (collectively, the "Blackstone Funds"). In his
capacity as a special limited partner of BREA, Mr. Schreiber is entitled to
exercise certain approval rights with respect to, among other things,
acquisition, disposition and financing transactions by the Blackstone Funds.
Number of Shares
Number of of Common Stock
Shares of Owned Following
Common Stock this Offering
Name of Selling Shareholder Offered Hereby (1)
--------------------------- -------------- ----------------
Blackstone Real Estate Partners I L.P.......... 1,934,258 0
Blackstone Real Estate Partners Two L.P........ 126,834 0
Blackstone Real Estate Partners Three L.P...... 1,230,545 0
Blackstone Real Estate Partners IV L.P......... 38,684 0
Blackstone RE Capital Partners L.P............. 201,766 0
Blackstone RE Capital Partners II L.P.......... 22,146 0
Blackstone RE Offshore Capital Partners L.P.... 38,965 0
Blackstone Real Estate Holdings L.P............ 488,531 860,674
Blackstone Real Estate Partners II L.P......... 5,489,080 1,152,862
Blackstone Real Estate Holdings II L.P......... 1,306,014 736,659
Blackstone Real Estate Partners II.TE.1 L.P.... 4,990,565 0
Blackstone Real Estate Partners II.TE.2 L.P.... 214,596 0
Blackstone Real Estate Partners II.TE.3 L.P.... 1,025,959 0
Blackstone Real Estate Partners II.TE.4 L.P.... 208,693 0
Blackstone Real Estate Partners II.TE.5 L.P.... 438,980 0
BRE Logan Hotel, Inc........................... 14,362 0
RTZ Management Corp. .......................... 14 0
BRE/Ceriale LLC................................ 430,008 38,462
---------- ---------
Total........................................ 18,200,000 2,788,657
========== =========
--------
(1) Assuming the redemption of all OP Units held by the selling shareholders
and the issuance of shares of common stock by Host Marriott upon the
redemption of such OP Units.
S-27
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
Introduction
The following discussion describes the federal income tax consequences
reasonably anticipated to be material to prospective holders in connection with
the purchase, ownership and disposition of the common stock of Host Marriott
Corporation. The following discussion is intended to address only those federal
income tax consequences that are generally relevant to all shareholders, is not
exhaustive of all possible tax consequences and is not tax advice. For example,
it does not give a detailed description of any state, local or foreign tax
consequences. In addition, the discussion does not purport to deal with all
aspects of taxation that may be relevant to a shareholder subject to special
treatment under the federal income tax laws, including, without limitation,
insurance companies, financial institutions or broker-dealers, tax-exempt
organizations or foreign corporations and persons who are not citizens or
residents of the United States.
Hogan & Hartson L.L.P. has given opinions to the effect that this
discussion, to the extent that it contains descriptions of applicable federal
income tax law or legal conclusions with respect thereto, is correct in all
material respects and that, although Hogan & Hartson has not undertaken to
determine independently the accuracy, completeness, or fairness, on a factual
basis, of the statements set forth herein, on the basis of its activities as
counsel for Host Marriott, no facts have come to Hogan & Hartson's attention
that cause it to believe that this discussion, as of the date hereof, contains
an untrue statement of a material fact or omits to state a material fact
required to be stated herein or necessary to make the statements herein, in
light of the circumstances under which they are made, not misleading. The
opinion, however, does not purport to address the actual tax consequences of
the purchase, ownership and disposition of the securities to any particular
purchaser. The opinion, and the information in this section, is based on the
Internal Revenue Code and regulations in effect on the date hereof, current
administrative interpretations and positions of the IRS and existing court
decisions. No assurance can be given that future legislation, regulations,
administrative interpretations and court decisions will not significantly
change, perhaps retroactively, the law on which the above opinion, and the
information in this section, is based. Any such change could adversely affect
the opinion. Moreover, opinions of counsel merely represent counsel's best
judgment with respect to the probable outcome on the merits and are not binding
on the IRS or the courts. Accordingly, even if there is no change in applicable
law, no assurance can be provided that such opinion, which does not bind the
IRS or the courts, or the statements set forth in this Section, will not be
challenged by the IRS or will be sustained by a court if so challenged.
Because the specific tax attributes of a prospective purchaser could have a
material impact on the tax consequences associated with the purchase, ownership
and disposition of the securities of Host Marriott, it is essential that each
prospective purchaser consult with his or her own tax advisors with regard to
the application of the federal income tax laws to his or her personal tax
situation, as well as any tax consequences arising under the laws of any state,
local or foreign taxing jurisdiction.
Federal Income Taxation of Host Marriott
General
Host Marriott is a self-managed and self-administered real estate investment
trust, or REIT, owning full service hotel properties. Host Marriott was formed
as a Maryland corporation in 1998, under the name HMC Merger Corporation, as a
wholly owned subsidiary of Host Marriott Corporation (a Delaware corporation
which is referred to in this section as "Delaware Host Marriott"), in
connection with its efforts to reorganize its business operations to qualify as
a REIT for federal income tax purposes. As part of this reorganization, which
is referred to in this discussion as the "REIT conversion," on December 29,
1998, HMC Merger Corporation merged with Delaware Host Marriott and changed its
name to Host Marriott Corporation. As a result, Host Marriott has succeeded to
the hotel ownership business formerly conducted by Delaware Host Marriott. Host
Marriott conducts its business as an umbrella partnership REIT, through the
operating partnership, of which we are the sole general partner.
Host Marriott made an election to be taxed as a REIT under the Internal
Revenue Code, effective for the taxable year beginning January 1, 1999. Host
Marriott believes that it is organized and has operated in a
manner that permitted it to qualify as a REIT for 1999 and 2000, and Host
Marriott currently intends to continue to operate as a REIT for future years.
No assurance, however, can be given that it in fact has qualified or will
remain qualified as a REIT. See "--Failure of Host Marriott to Qualify as a
REIT" below.
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The sections of the Internal Revenue Code and the corresponding regulations
that govern the federal income tax treatment of a REIT and its shareholders are
highly technical and complex. The following discussion is qualified in its
entirety by the applicable Internal Revenue Code provisions, rules and
regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
Hogan & Hartson L.L.P. has provided to Host Marriott an opinion to the
effect that Host Marriott is organized and has operated in conformity with the
requirements for qualification as a REIT effective for its taxable years ended
December 31, 1999 and December 31, 2000, and its current organization and
intended method of operation will enable it to continue to meet the
requirements for qualification and taxation as a REIT under the Internal
Revenue Code for taxable year 2001 and thereafter. It must be emphasized that
this opinion is conditioned upon certain assumptions and representations made
by Host Marriott and the operating partnership as to factual matters relating
to the organization and operation of Host Marriott and its subsidiaries, the
operating partnership and its subsidiaries, Rockledge and Fernwood (which are
referred to in this section as the "non-controlled subsidiaries" for periods
prior to January 1, 2001) and their subsidiaries, taxable REIT subsidiaries
after December 31, 2000, Host Marriott Statutory Employee/Charitable Trust and
Crestline and its subsidiaries, including the economic and other terms of each
of Host Marriott's hotel leases and the expectations of Host Marriott and the
lessees with respect thereto. In addition, this opinion is based upon the
factual representations of Host Marriott concerning its business and properties
as described in the reports filed by Host Marriott under the federal securities
laws.
Qualification and taxation as a REIT depends upon Host Marriott's ability to
meet the various qualification tests imposed under the Internal Revenue Code,
which are discussed below. Hogan & Hartson L.L.P. will not review Host
Marriott's operating results. Accordingly, no assurance can be given that the
actual results of Host Marriott's operations for any particular taxable year
will satisfy such requirements.
If Host Marriott qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that it currently
distributes to its shareholders. This treatment substantially eliminates the
"double taxation" at the corporate and shareholder levels that generally
results from an investment in a regular corporation. However, Host Marriott
will be subject to federal income tax as follows:
1. Host Marriott will be taxed at regular corporate rates on any
undistributed "REIT taxable income" including undistributed net capital
gains; provided, however, that properly designated undistributed capital
gains will effectively avoid taxation at the shareholder level. A REIT's
"REIT taxable income" is the otherwise taxable income of the REIT subject
to certain adjustments, including a deduction for dividends paid.
2. Under certain circumstances, Host Marriott (or its shareholders) may
be subject to the "alternative minimum tax" due to its items of tax
preference and alternative minimum tax adjustments.
3. If Host Marriott has net income from the sale or other disposition of
"foreclosure property" which is held primarily for sale to customers in the
ordinary course of business or other nonqualifying income from foreclosure
property, it will be subject to tax at the highest corporate rate on such
income.
4. Host Marriott's net income from "prohibited transactions" will be
subject to a 100% tax. In general, "prohibited transactions" are certain
sales or other dispositions of property held primarily for sale to
customers in the ordinary course of business other than foreclosure
property.
5. If Host Marriott fails to satisfy the 75% gross income test or the 95%
gross income test discussed below, but nonetheless maintains its
qualification as a REIT because certain other requirements are met, it will
be subject to a tax equal to (a) the gross income attributable to the
greater of (i) the amount by which 75% of its gross income exceeds the
amount qualifying under the 75% gross income test described below under "--
Income Tests Applicable to REITs" and (ii) the amount by which 90% of its
gross income exceeds the amount qualifying under the 95% gross income test
described below multiplied by (b) a fraction intended to reflect its
profitability.
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6. If Host Marriott fails to distribute during each calendar year at
least the sum of (a) 85% of its REIT ordinary income for such year, (b) 95%
of its REIT capital gain net income for such year, and (c) any
undistributed taxable income from prior periods, Host Marriott will be
subject to a 4% excise tax on the excess of such required distribution over
the sum of amounts actually distributed and amounts retained but with
respect to which federal income tax was paid.
7. If Host Marriott acquires any asset from a taxable "C" corporation in
a transaction in which the basis of the asset in the hands of Host Marriott
is determined by reference to the basis of the asset in the hands of the
"C" corporation, and Host Marriott recognizes gain on the disposition of
such asset during the ten-year period beginning on the date on which such
asset was acquired by Host Marriott, then, to the extent of the asset's
"built-in gain," such gain will be subject to tax at the highest regular
corporate rate applicable. Built-in gain is the excess of the fair market
value of an asset over Host Marriott's adjusted basis in the asset,
determined when Host Marriott acquired the asset.
Host Marriott owns an indirect interest in appreciated assets that its
predecessors held before the REIT conversion. Such appreciated assets have a
"carryover" basis and thus have built-in gain with respect to Host Marriott. If
such appreciated property is sold within the ten-year period following the REIT
conversion, or prior to January 1, 2009, Host Marriott generally will be
subject to regular corporate tax on that gain to the extent of the built-in
gain in that property at the time of the REIT conversion. The total amount of
gain on which Host Marriott can be taxed is limited to the excess of the
aggregate fair market value of its assets on January 1, 1999 over the adjusted
tax bases of those assets at that time. This tax could be very material. As a
result, the operating partnership and Host Marriott might decide to seek to
avoid a taxable disposition prior to January 1, 2009 of any significant asset
owned by Host Marriott's predecessors at the time of the REIT conversion. This
could be true with respect to a particular disposition even though the
disposition might otherwise be in the best interests of Host Marriott and its
shareholders. On the other hand, neither Host Marriott nor the operating
partnership is obligated to avoid such dispositions.
At the time of the REIT conversion, Host Marriott expected that it or one of
the non-controlled subsidiaries likely would recognize substantial deferred
liabilities prior to January 1, 2009. Deferred liabilities include, but are not
limited to, tax liabilities attributable to built-in gain assets and deferred
tax liabilities attributable to taxable income for which neither Host Marriott
nor the operating partnership will receive corresponding cash. In addition, the
IRS could assert substantial additional liabilities for taxes against Host
Marriott's predecessors for taxable years prior to the time Host Marriott
qualified as a REIT. Furthermore, notwithstanding Host Marriott's status as a
REIT, Host Marriott may also have to pay (i) certain state income taxes,
because not all states treat REITs the same as they are treated for federal
income tax purposes, and (ii) certain foreign taxes to the extent that it owns
assets or conducts operations in foreign jurisdictions.
Under the terms of the REIT conversion and the partnership agreement of the
operating partnership, the operating partnership is responsible for paying, or
reimbursing Host Marriott for the payment of, certain tax liabilities, as
described in the next paragraph, as well as contingent liabilities and
liabilities attributable to litigation that Host Marriott may incur, whether
such liabilities are incurred by reason of activities prior to the REIT
conversion or activities subsequent thereto.
Accordingly, the operating partnership will pay, or reimburse Host Marriott
for the payment of, all taxes (and any interest and penalties associated
therewith) incurred by Host Marriott, except for taxes imposed on Host Marriott
by reason of its failure to qualify as a REIT or to distribute to its
shareholders an amount equal to its "REIT taxable income," including net
capital gains. The reimbursed taxes would include any taxes on built-in gains,
as described above.
Requirements for Qualification
The Internal Revenue Code defines a REIT as a corporation, trust or
association
(1) which is managed by one or more directors or trustees;
(2) the beneficial ownership of which is evidenced by transferable shares
or by transferable certificates of beneficial interest;
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(3) which would be taxable as a domestic corporation, but for Sections
856 through 859 of the Internal Revenue Code;
(4) which is neither a financial institution nor an insurance company
subject to certain provisions of the Internal Revenue Code;
(5) the beneficial ownership of which is held by 100 or more persons;
(6) during the last half of each taxable year, not more than 50% in value
of the outstanding stock of which is owned, actually or constructively, by
five or fewer individuals (as defined in the Internal Revenue Code to
include certain entities);
(7) which makes an election to be taxable as a REIT, or has made this
election for a previous taxable year which has not been revoked or
terminated, and satisfies all relevant filing and other administrative
requirements established by the Internal Revenue Service that must be met
to elect and maintain REIT status; and
(8) which meets certain other tests, described below, regarding the
nature of its income and assets.
Conditions (1) to (4) must be met during the entire taxable year and
condition (5) must be met during at least 335 days of a taxable year of twelve
months, or during a proportionate part of a taxable year of less than twelve
months. Conditions (5) and (6) did not apply to Host Marriott's 1999 taxable
year. Compliance with condition (5) is determined by disregarding the
ownership of shares of stock of Host Marriott by any person(s) who:
(a) acquired such shares of stock as a gift or bequest or pursuant to a
legal separation or divorce;
(b) is the estate of any person making such transfer to the estate; or
(c) is a company established exclusively for the benefit of, or wholly
owned by, either the person making such transfer or a person described in
(a) or (b).
For purposes of determining stock ownership under condition (6) above, a
supplemental unemployment compensation benefits plan, a private foundation or
a portion of a trust permanently set aside or used exclusively for charitable
purposes generally is considered an individual. However, a trust that is a
qualified trust under Internal Revenue Code Section 401(a) generally is not
considered an individual, and beneficiaries of a qualified trust are treated
as holding shares of a REIT in proportion to their actuarial interests in the
trust for purposes of condition (6) above.
In connection with condition (6), Host Marriott is required to send annual
letters to its shareholders requesting information regarding the actual
ownership of its shares of stock. If Host Marriott complies with this
requirement, and it does not know, or exercising reasonable diligence would
not have known, whether it failed to meet condition (6), then it will be
treated as having met condition (6). If Host Marriott fails to send such
annual letters, it will be required to pay either a $25,000 penalty or, if the
failure is intentional, a $50,000 penalty. The IRS may require Host Marriott,
under those circumstances, to take further action to ascertain actual
ownership of its shares of stock, and failure to comply with such an
additional requirement would result in an additional $25,000 (or $50,000)
penalty. No penalty would be assessed in the first instance, however, if the
failure to send the letters is due to reasonable cause and not to willful
neglect.
Host Marriott believes that it meets and currently intends to continue to
meet conditions (1) through (4), (7) and (8). In addition, Host Marriott
believes that it has had and currently intends to continue to have outstanding
common stock with sufficient diversity of ownership to allow it to satisfy
conditions (5) and (6). With respect to condition (6), Host Marriott has
complied and currently intends to continue to comply with the requirement that
it send annual letters to its shareholders requesting information regarding
the actual ownership of its shares of stock. In addition, Host Marriott's
charter contains an ownership limit that is intended to assist Host Marriott
in continuing to satisfy the share ownership requirements described in (5) and
(6) above. The
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ownership limit, together with compliance with the annual shareholder letter
requirement described above, however, may not ensure that Host Marriott will,
in all cases, be able to satisfy the share ownership requirements described
above. If Host Marriott fails to satisfy such share ownership requirements,
Host Marriott will not qualify as a REIT. See "-- Failure of Host Marriott to
Qualify as a REIT" below.
A corporation may not elect to become a REIT unless its taxable year is the
calendar year. Although Host Marriott previously had a 52-53 week year ending
on the Friday closest to January 1, it adopted a calendar year taxable year in
connection with the REIT conversion.
Distribution of "Earnings and Profits" Attributable to "C" Corporation Taxable
Years
A REIT cannot have at the end of any taxable year any undistributed earnings
and profits ("E&P") that are attributable to a "C" corporation taxable year,
which includes all undistributed E&P of Host Marriott's predecessors.
Accordingly, Host Marriott had until December 31, 1999 to distribute such E&P.
In connection with the REIT conversion, Host Marriott declared dividends,
consisting of cash, stock of Host Marriott, and stock of Crestline, intended to
eliminate the substantial majority, if not all, of such E&P. To the extent,
however, that any such E&P remained (the "Acquired Earnings") and Host Marriott
failed to distribute such Acquired Earnings prior to the end of 1999, Host
Marriott would be disqualified as a REIT at least for 1999. If Host Marriott
should be so disqualified for 1999, subject to the satisfaction by Host
Marriott of certain "deficiency dividend" procedures described below in "--
Annual Distribution Requirements Applicable to REITs" and assuming that Host
Marriott otherwise satisfies the requirements for qualification as a REIT, Host
Marriott should qualify as a REIT for 2000 and thereafter. Host Marriott
believes that the dividends it paid prior to December 31, 1999 were sufficient
to distribute all of the Acquired Earnings as of December 31, 1999. However,
there are uncertainties relating to both the estimate of the Acquired Earnings
and the value of noncash consideration that Host Marriott distributed in
connection with the REIT conversion. Accordingly, there can be no assurance
this requirement was met.
Qualified REIT Subsidiary
If a REIT owns a corporate subsidiary that is a "qualified REIT subsidiary,"
that subsidiary will be disregarded for federal income tax purposes, and all
assets, liabilities and items of income, deduction and credit of the subsidiary
will be treated as assets, liabilities and tax items of the REIT itself.
Generally, a qualified REIT subsidiary is a corporation all of the capital
stock of which is owned by one REIT and that is not a taxable REIT subsidiary.
Host Marriott holds several qualified REIT subsidiaries that hold indirect
interests in the partnerships that own hotels. These entities are not subject
to federal corporate income taxation, although they may be subject to state and
local taxation in certain jurisdictions.
Ownership of Partnership Interests by a REIT
A REIT which is a partner in a partnership will be deemed to own its
proportionate share of the assets of the partnership and will be deemed to be
entitled to the income of the partnership attributable to such share. In
addition, the character of the assets and gross income of the partnership
retains the same character in the hands of the REIT for purposes of the gross
income tests and the asset tests applicable to REITs, as described below. Thus,
Host Marriott's proportionate share of the assets and items of income of the
operating partnership, including the operating partnership's share of such
items of any subsidiaries that are partnerships or LLCs that have not elected
to be treated as corporations for federal income tax purposes, are treated as
assets and items of income of Host Marriott for purposes of applying the
requirements described herein. A summary of the rules governing the federal
income taxation of partnerships and their partners is provided below in "--Tax
Aspects of Host Marriott's Ownership of Interests in the operating
partnership." As the sole general partner of the operating partnership, Host
Marriott has direct control over the operating partnership and indirect control
over the subsidiaries in which the operating partnership or a subsidiary has a
controlling interest. Host Marriott currently intends to operate these entities
in a manner consistent with the requirements for qualification of Host Marriott
as a REIT.
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Income Tests Applicable to REITs
In order to maintain qualification as a REIT, Host Marriott must satisfy the
following two gross income requirements:
. At least 75% of Host Marriott's gross income, excluding gross income from
"prohibited transactions," for each taxable year must be derived directly
or indirectly from investments relating to real property or mortgages on
real property, including "rents from real property," gains on the
disposition of real estate, dividends paid by another REIT and interest
on obligations secured by mortgages on real property or on interests in
real property, or from some types of temporary investments.
. At least 95% of Host Marriott's gross income, excluding gross income from
"prohibited transactions," for each taxable year must be derived from any
combination of income qualifying under the 75% test, dividends, interest,
some payments under hedging instruments and gain from the sale or
disposition of stock or securities, including some hedging instruments.
Rents paid pursuant to Host Marriott's leases, together with gain on the
disposition of assets and dividends and interest received from Host Marriott's
"taxable REIT subsidiaries," currently constitute substantially all of the
gross income of Host Marriott. A taxable REIT subsidiary is an entity taxable
for federal and state income tax purposes as a corporation in which a REIT
directly or indirectly holds stock or other equity interests that has made a
joint election with the REIT to be treated as a taxable REIT subsidiary and
that does not engage in certain prohibited activities, including, without
limitation, operating or managing hotels, except through an "eligible
independent contractor." For a more detailed discussion of taxable REIT
subsidiaries, see "--Qualification of an Entity as a Taxable REIT Subsidiary"
below. Some of Host Marriott's subsidiaries have elected, and Host Marriott
currently intends that these subsidiaries will operate in a manner so as to
qualify, to be treated as taxable REIT subsidiaries for federal income tax
purposes.
Several conditions must be satisfied in order for rents received by Host
Marriott, including the rents received pursuant to the leases, to qualify as
"rents from real property." First, the amount of rent must not be based in
whole or in part on the income or profits of any person. An amount received or
accrued generally will not be excluded from the term "rents from real property"
solely by reason of being based on a fixed percentage or percentages of
receipts or sales.
Second, rents received from a tenant will not qualify as "rents from real
property" if Host Marriott, or an actual or constructive owner of 10% or more
of Host Marriott, actually or constructively owns 10% or more of the tenant.
This type of tenant will be referred to below as a related party tenant. As a
result of the passage of the REIT Modernization Act, however, for taxable years
beginning after December 31, 2000, Host Marriott is able to lease its hotel
properties to a taxable REIT subsidiary and the rents received from that
subsidiary will not be disqualified from being "rents from real property" by
reason of Host Marriott's direct or indirect ownership interest in the
subsidiary.
Third, if rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will not
qualify as "rents from real property." Under prior law, this 15% test was based
on relative adjusted tax bases. For taxable years beginning after December 31,
2000, however, the test is based on relative fair market values.
Fourth, if Host Marriott operates or manages a property or furnishes or
renders certain "impermissible services" to the tenants at the property, and
the income derived from the services exceeds one percent of the total amount
received by Host Marriott with respect to the property, then no amount received
by Host Marriott with respect to the property will qualify as "rents from real
property." Impermissible services are services other than services (1) "usually
or customarily rendered" in connection with the rental of real property and (2)
not otherwise considered "rendered to the occupant." For these purposes, the
income that Host Marriott is considered to receive from the provision of
"impermissible services" will not be less than 150% of the cost of providing
the service. If the amount so received is one percent or less of the total
amount received by the REIT
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with respect to the property, then only the income from the impermissible
services will not qualify as "rents from real property."
There are two exceptions to this rule. First, impermissible services can be
provided to tenants through an independent contractor from whom Host Marriott
derives no income. To the extent that impermissible services are provided by an
independent contractor, the cost of the services generally must be borne by the
independent contractor. Second, for Host Marriott's taxable years beginning
after December 31, 2000, impermissible services can be provided to tenants at a
property by a taxable REIT subsidiary.
The operating partnership and each subsidiary that owns hotels entered into
leases with subsidiaries of Crestline that commenced on January 1, 1999 and
pursuant to which the hotels are leased for an initial term ranging generally
from seven to ten years. Each lease provides for periodic payments of a
specified base rent plus, to the extent that it exceeds the base rent,
additional rent which is calculated based upon the gross sales of the hotels
subject to the lease, plus certain other amounts.
As described above, beginning January 1, 2001, Host Marriott is permitted to
lease the hotel properties to a taxable REIT subsidiary so long as certain
conditions are satisfied. The leases with Crestline provided that, following a
change of law such as the enactment of the REIT Modernization Act, Host
Marriott had the right, beginning on January 1, 2001, to purchase, or have a
taxable REIT subsidiary of Host Marriott purchase, the leases for a purchase
price equal to the fair market value of Crestline's interests in the leases.
Effective as of January 1, 2001, a taxable REIT subsidiary of Host Marriott
purchased from Crestline the leasehold interests with regard to all but one of
Host Marriott's full-service hotels leased to Crestline for approximately
$207 million, including certain costs attributable to such purchase (and Host
Marriott currently expects that one of its taxable REIT subsidiaries will
purchase the remaining lease when certain conditions are satisfied).
As discussed above, in order for the rent paid pursuant to the leases to
constitute "rents from real property," the leases must be respected as true
leases for federal income tax purposes. Accordingly the leases cannot be
treated as service contracts, joint ventures or some other type of arrangement.
The determination of whether the leases are true leases for federal income
tax purposes depends upon an analysis of all the surrounding facts and
circumstances. In making such a determination, courts have considered a variety
of factors, including the following:
. the intent of the parties;
. the form of the agreement;
. the degree of control over the property that is retained by the property
owner (e.g., whether the lessee has substantial control over the
operation of the property or whether the lessee was required simply to
use its best efforts to perform its obligations under the agreement); and
. the extent to which the property owner retains the risk of loss with
respect to the property (e.g., whether the lessee bears the risk of
increases in operating expenses or the risk of damage to the property) or
the potential for economic gain (e.g., appreciation) with respect to the
property.
In addition, Section 7701(e) of the Internal Revenue Code provides that a
contract that purports to be a service contract or a partnership agreement is
treated instead as a lease of property if the contract is properly treated as
such, taking into account all relevant factors. Since the determination of
whether a service contract should be treated as a lease is inherently factual,
the presence or absence of any single factor may not be dispositive in every
case.
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Host Marriott's leases have been structured with the intent to qualify as
true leases for federal income tax purposes. For example, with respect to each
lease:
. the operating partnership or the applicable subsidiary or other lessor
entity and the lessee intend for their relationship to be that of a
lessor and lessee and such relationship is documented by a lease
agreement;
. the lessee has the right to exclusive possession and use and quiet
enjoyment of the hotels covered by the lease during the term of the
lease;
. the lessee bears the cost of, and will be responsible for, day-to-day
maintenance and repair of the hotels other than the cost of certain
capital expenditures, and will dictate through the hotel managers, who
work for the lessees during the terms of the leases, how the hotels are
operated and maintained;
. the lessee bears all of the costs and expenses of operating the hotels,
including the cost of any inventory used in their operation, during the
term of the lease, other than the cost of certain furniture, fixtures and
equipment, and certain capital expenditures;
. the lessee benefits from any savings and bears the burdens of any
increases in the costs of operating the hotels during the term of the
lease;
. in the event of damage or destruction to a hotel, the lessee is at
economic risk because it will bear the economic burden of the loss in
income from operation of the hotels subject to the right, in certain
circumstances, to terminate the lease if the lessor does not restore the
hotel to its prior condition;
. the lessee has indemnified the operating partnership or the applicable
subsidiary against all liabilities imposed on the operating partnership
or the applicable subsidiary during the term of the lease by reason of
(A) injury to persons or damage to property occurring at the hotels or
(B) the lessee's use, management, maintenance or repair of the hotels;
. the lessee is obligated to pay, at a minimum, substantial base rent for
the period of use of the hotels under the lease;
. the lessee stands to incur substantial losses or reap substantial gains
depending on how successfully it, through the hotel managers, who work
for the lessees during the terms of the leases, operates the hotels;
. Host Marriott and the operating partnership believe that each lessee
reasonably expected at the time the leases were entered into to derive a
meaningful profit, after expenses and taking into account the risks
associated with the lease, from the operation of the hotels during the
term of its leases; and
. upon termination of each lease, the applicable hotel is expected to have
a remaining useful life equal to at least 20% of its expected useful life
on the date of the consummation of the REIT conversion, and a fair market
value equal to at least 20% of its fair market value on the date of the
consummation of the REIT conversion.
If, however, the leases were recharacterized as service contracts or
partnership agreements, rather than true leases, or disregarded altogether for
tax purposes, all or part of the payments that the operating partnership
receives from the lessees would not be considered rent or would not otherwise
satisfy the various requirements for qualification as "rents from real
property." In that case, Host Marriott very likely would not be able to satisfy
either the 75% or 95% gross income tests and, as a result, would lose its REIT
status.
In addition, except for permitted leases to a taxable REIT subsidiary
beginning January 1, 2001, the lessees must not be regarded as related party
tenants. A lessee of Host Marriott (including for years ending prior to January
1, 2001, all of the Crestline lessees and, for years beginning on or after
January 1, 2001, the Crestline lessees owning the hotel leasehold interests not
acquired from Crestline by a taxable REIT subsidiary of Host Marriott) will be
regarded as a related party tenant only if Host Marriott and/or one or more
actual or constructive owners of 10% or more of Host Marriott actually or
constructively own 10% or more of
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such lessee (including, with regard to a Crestline lessee, through an ownership
interest in Crestline). In order to help preclude Host Marriott's lessees from
being regarded as related party tenants, the following organizational documents
contain the following ownership limits:
. the articles of incorporation of Crestline expressly prohibit any person
or persons acting as a group, including Host Marriott and/or any 10% or
greater shareholder of Host Marriott, from owning more than 9.8% of the
lesser of the number or value of the shares of capital stock of
Crestline;
. Host Marriott's charter expressly prohibits any person or persons acting
as a group or entity from owning, actually and/or constructively, more
than 9.8% of the lesser of the number or value of the shares of capital
stock of Host Marriott (subject to a limited exception for a holder of
shares of capital stock of Host Marriott in excess of the ownership limit
solely by reason of the merger of Host Marriott's predecessor corporation
into Host Marriott, which exception applied to the extent that the holder
thereof did not own, directly or by attribution under the Internal
Revenue Code, more than 9.9% in value of the outstanding shares of
capital stock of Host Marriott as a result of the merger) or any other
class or series of shares of stock of Host Marriott; and
. the operating partnership's partnership agreement expressly prohibits any
person, or persons acting as a group, or entity, other than Host Marriott
and an affiliate of The Blackstone Group and a series of related funds
controlled by Blackstone Real Estate Partners (the "Blackstone
Entities"), from owning more than 4.9% by value of any class of interests
in the operating partnership.
Each of these prohibitions contains self-executing enforcement mechanisms.
Assuming that these prohibitions are enforced at all times (subject to any
waivers permitted under the operative documents), the lessees of Host Marriott
that are not taxable REIT subsidiaries should not be regarded as related party
tenants. There can be no assurance, however, that these ownership restrictions
will be enforced in accordance with their terms in all circumstances or
otherwise will ensure that the lessees will not be regarded as related party
tenants.
As indicated above, "rents from real property" must not be based in whole or
in part on the income or profits of any person. Payments made pursuant to Host
Marriott's leases should qualify as "rents from real property" since they are
based on either fixed dollar amounts or on specified percentages of gross sales
fixed at the time the leases were entered into (with the exception of one lease
that provides for rents based upon net profits). The foregoing assumes that the
leases are not renegotiated during their term in a manner that has the effect
of basing either the percentage rent or base rent on income or profits. The
foregoing also assumes that the leases are not in reality used as a means of
basing rent on income or profits. More generally, the rent payable under the
leases will not qualify as "rents from real property" if, considering the
leases and all the surrounding circumstances, the arrangement does not conform
with normal business practice. Host Marriott currently intends that it will not
renegotiate the percentages used to determine the percentage rent during the
terms of the leases in a manner that has the effect of basing rent on income or
profits. In addition, Host Marriott believes that the rental provisions and
other terms of the leases conform with normal business practice and, other than
with regard to one lease that is not treated as producing qualified "rents from
real property," were not intended to be used as a means of basing rent on
income or profits. Furthermore, Host Marriott currently intends that, with
respect to other properties that it acquires in the future, it will not charge
rent for any property that is based in whole or in part on the income or
profits of any person, except by reason of being based on a fixed percentage of
gross revenues, as described above.
Host Marriott leases certain items of personal property to the lessees in
connection with its leases. Under the Internal Revenue Code, if a lease
provides for the rental of both real and personal property and the portion of
the rent attributable to personal property is 15% or less of the total rent due
under the lease, then all rent paid pursuant to such lease qualifies as "rent
from real property." If, however, a lease provides for the rental of both real
and personal property, and the portion of the rent attributable to personal
property exceeds 15% of the total rent due under the lease, then no portion of
the rent that is attributable to personal property will qualify as "rent from
real property." Under the law in effect prior to January 1, 2001, the amount of
rent attributable to personal property was that amount which bore the same
ratio to total rent for the taxable year as the average of
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the adjusted tax bases of the personal property at the beginning and end of the
year bore to the average of the aggregate adjusted tax bases of both the real
and personal property at the beginning and end of such year. Host Marriott
believes that, with respect to each of its leases that includes a lease of
items of personal property, either the amount of rent attributable to personal
property with respect to such lease will not exceed 15% of the total rent due
under the lease (determined under the law in effect for the applicable period),
or, with respect to leases where the rent attributable to personal property
constitutes non-qualifying income, such amounts, when taken together with all
other non-qualifying income earned by Host Marriott, will not jeopardize Host
Marriott's status as a REIT. For Host Marriott's taxable years beginning after
December 31, 2000, the personal property test is based on fair market value as
opposed to adjusted tax basis.
Each lease permits the operating partnership to take certain measures,
including requiring the lessee to purchase certain furniture, fixtures and
equipment or to lease such property from a third party, including a non-
controlled subsidiary or a taxable REIT subsidiary, if necessary to ensure that
all of the rent attributable to personal property with respect to such lease
will qualify as "rent from real property." In order to protect Host Marriott's
ability to qualify as a REIT, the operating partnership sold substantial
personal property associated with a number of hotels acquired in connection
with the REIT conversion to a non-controlled subsidiary. The non-controlled
subsidiary, which elected, effective January 1, 2001, to be a taxable REIT
subsidiary, separately leases all such personal property directly to the
applicable lessee and receives rental payments that Host Marriott believes
represent the fair rental value of such personal property directly from the
lessees. If, however, such arrangements are not respected for federal income
tax purposes, Host Marriott might not qualify as a REIT.
If any of the hotels were to be operated directly by the operating
partnership or a subsidiary as a result of a default by a lessee under the
applicable lease, such hotel would constitute foreclosure property until the
close of the third tax year following the tax year in which it was acquired, or
for up to an additional three years if an extension is granted by the IRS,
provided that:
(1) the operating entity conducts operations through an independent
contractor, which might, but would not necessarily in all circumstances,
include Marriott International and its subsidiaries, within 90 days after
the date the hotel is acquired as the result of a default by a lessee;
(2) the operating entity does not undertake any construction on the
foreclosed property other than completion of improvements that were more
than 10% complete before default became imminent;
(3) foreclosure was not regarded as foreseeable at the time the
applicable lessor entered into such lease; and
(4) Host Marriott elects on its federal income tax return filed for the
year in which the foreclosure occurred to treat the hotel as "foreclosure
property."
For as long as such hotel constitutes foreclosure property, the income from
the hotel would be subject to tax at the maximum corporate rates, but it would
qualify under the 75% and 95% gross income tests. However, if such hotel does
not constitute foreclosure property at any time in the future, income earned
from the disposition or operation of such hotel will not qualify under the 75%
and 95% gross income tests. For Host Marriott's taxable years beginning after
December 31, 2000, if a lessee defaults under a lease, the operating
partnership is permitted to lease the hotel to a taxable REIT subsidiary,
subject to the limitations described above, in which case the hotel would not
become foreclosure property.
"Interest" generally will be nonqualifying income for purposes of the 75% or
95% gross income tests if it depends in whole or in part on the income or
profits of any person. However, interest will not fail so to qualify solely by
reason of being based upon a fixed percentage or percentages of receipts or
sales. Host Marriott has received and expects to continue to receive interest
payments from its taxable REIT subsidiaries (and prior to January 1, 2001, its
non-controlled subsidiaries). These amounts of interest will be qualifying
income for purposes of the 95% gross income test but not the 75% gross income
test. Host Marriott does not anticipate that the amounts of interest derived
from its taxable REIT subsidiaries will affect its ability to continue to
satisfy the 75% gross income test.
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Host Marriott also receives dividends from its taxable REIT subsidiaries,
and it could realize capital gains with respect to its investments in its
taxable REIT subsidiaries (either due to distributions received from those
subsidiaries or upon a disposition of part or all of its interest in a taxable
REIT subsidiary). The operating partnership's share of any dividends received
from one or more of the taxable REIT subsidiaries or capital gains recognized
with respect thereto should qualify for purposes of the 95% gross income test
but not for purposes of the 75% gross income test. The operating partnership
does not anticipate that it will receive sufficient dividends from the taxable
REIT subsidiaries and/or capital gains with respect to the taxable REIT
subsidiaries to cause it to fail the 75% gross income test.
Host Marriott inevitably will have some gross income from various sources,
including the sources described in the preceding paragraphs, that fails to
constitute qualifying income for purposes of one or both of the 75% or 95%
gross income tests. Taking into account its actual and anticipated sources of
non-qualifying income, however, Host Marriott believes that its aggregate gross
income from all sources has satisfied, and Host Marriott currently intends that
its aggregate gross income will continue to satisfy, the 75% and 95% gross
income tests applicable to REITs for each taxable year commencing on or after
January 1, 1999.
If Host Marriott were to fail to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may nevertheless qualify as a REIT for
such year if it were entitled to relief under certain provisions of the
Internal Revenue Code. These relief provisions generally would be available if
Host Marriott's failure to meet such tests was due to reasonable cause and not
due to willful neglect, Host Marriott were to attach a schedule of the sources
of its income to its federal income tax return, and any incorrect information
set forth on the schedule was not due to fraud with intent to evade tax. It is
not possible, however, to state whether in all circumstances Host Marriott
would be entitled to the benefit of these relief provisions. If these relief
provisions were inapplicable to a particular set of circumstances involving
Host Marriott, Host Marriott would not qualify as a REIT. As discussed above
under "--General," even if these relief provisions were to apply, a tax would
be imposed with respect to the excess net income.
Any gain realized by Host Marriott on the sale of any property held as
inventory or other property held primarily for sale to customers in the
ordinary course of business, including Host Marriott's share of any such gain
realized by the operating partnership, will be treated as income from a
"prohibited transaction" that is subject to a 100% penalty tax. Under existing
law, whether property is held as inventory or primarily for sale to customers
in the ordinary course of a trade or business is a question of fact that
depends upon all the facts and circumstances with respect to the particular
transaction. The operating partnership currently intends that both it and its
subsidiaries will hold hotels for investment with a view to long-term
appreciation, to engage in the business of acquiring and owning hotels and to
make sales of hotels as are consistent with the operating partnership's
investment objectives. There can be no assurance, however, that the IRS might
not contend that one or more of these sales is subject to the 100% penalty tax.
Asset Tests Applicable to REITs
At the close of each quarter of its taxable year, Host Marriott must satisfy
the following four tests relating to the nature of its assets:
. First, at least 75% of the value of Host Marriott's total assets must be
represented by real estate assets and certain cash items. Host Marriott's
real estate assets include, for this purpose, its allocable share of real
estate assets held by the operating partnership and the non-corporate
subsidiaries of the operating partnership, as well as stock or debt
instruments held for less than one year purchased with the proceeds of a
stock offering or a long- term (at least five years) debt offering of
Host Marriott, cash, cash items and government securities. Host
Marriott's real estate assets do not include stock or debt instruments
(other than mortgages) issued by its taxable REIT subsidiaries or their
subsidiaries.
. Second, no more than 25% of Host Marriott's total assets may be
represented by securities other than those in the 75% asset class.
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. Third, of the investments included in the 25% asset class, the value of
any one issuer's securities owned by Host Marriott may not exceed 5% of
the value of Host Marriott's total assets and Host Marriott may not own
more than 10% of either the outstanding voting securities or the value of
the outstanding securities of any one issuer. For 2001 and later years,
this limit does not apply to securities of a taxable REIT subsidiary. For
years prior to 2001, the 10% limit applied only with respect to voting
securities of any issuer and not to the value of the securities of any
issuer.
. Fourth, for taxable years beginning after December 31, 2000, not more
than 20% of the value of Host Marriott's total assets may be represented
by securities of taxable REIT subsidiaries.
For years prior to 2001, the operating partnership did not own any of the
voting stock of the non-controlled subsidiaries but it did own 100% of the
nonvoting stock of each of them. Neither Host Marriott, the operating
partnership, nor any of the non-corporate subsidiaries of the operating
partnership has owned or currently intends to own more than 10% of the voting
securities of any entity that is treated as a corporation for federal income
tax purposes, except for, with regard to periods beginning after December 31,
2000, corporations or other entities that qualify and elect to be treated as
taxable REIT subsidiaries. In addition, Host Marriott believes that the value
of the securities of any one issuer owned by Host Marriott, the operating
partnership, or any of the non-corporate subsidiaries of the operating
partnership, including Host Marriott's pro rata share of the value of the
securities of the non-controlled subsidiaries, has not exceeded 5% of the total
value of Host Marriott's assets for years prior to January 1, 2001, and Host
Marriott currently intends not to exceed that percentage threshold in
subsequent years unless the issuer is a taxable REIT subsidiary. There can be
no assurance, however, that the IRS might not contend that the value of such
securities exceeds one or more of the value limitations or that nonvoting stock
of the non-controlled subsidiaries should be considered "voting stock" for this
purpose.
After initially meeting the asset tests at the close of any quarter, Host
Marriott will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. An example of such an acquisition would be an increase in Host
Marriott's interest in the operating partnership as a result of the exercise of
a limited partner's unit redemption right or an additional capital contribution
of proceeds from an offering of capital stock by Host Marriott. Host Marriott
has monitored and currently intends to continue to monitor its compliance with
the asset tests and to take such actions within 30 days after the close of any
quarter, to the extent reasonably practicable, as may be required to cure any
noncompliance. If Host Marriott fails to cure noncompliance with the asset
tests within such time period, Host Marriott would cease to qualify as a REIT.
Qualification of an Entity as a Taxable REIT Subsidiary
To qualify as a "taxable REIT subsidiary," an entity must be taxable as a
corporation and must satisfy the following additional requirements:
. a REIT must own an interest in the entity, whether directly or
indirectly;
. the entity must elect, together with the REIT that owns its stock, to be
treated as a taxable REIT subsidiary under the Code; and
. the entity must not directly or indirectly operate or manage a lodging or
health care facility or, generally, provide to another person, under a
franchise, license or otherwise, rights to any brand name under which any
lodging facility or health care facility is operated.
Although a taxable REIT subsidiary may not operate or manage a lodging
facility, it may lease or own such a facility so long as the facility is a
"qualified lodging facility" and is operated on behalf of the taxable REIT
subsidiary by an "eligible independent contractor." A "qualified lodging
facility" is, generally, a hotel or motel at which no authorized gambling
activities are conducted, and the customary amenities and facilities
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operated as part of, or associated with, the hotel or motel. An "eligible
independent contractor" is an independent contractor that, at the time a
management agreement is entered into with a taxable REIT subsidiary to operate
a "qualified lodging facility," is actively engaged in the trade or business of
operating "qualified lodging facilities" for a person or persons unrelated to
either the taxable REIT subsidiary or any REITs with which the taxable REIT
subsidiary is affiliated. A hotel management company that otherwise would
qualify as an "eligible independent contractor" with regard to a taxable REIT
subsidiary of Host Marriott will not so qualify if the hotel management company
and/or one or more actual or constructive owners of 10% or more of the hotel
management company actually or constructively own more than 35% of Host
Marriott, or one or more actual or constructive owners of more than 35% of the
hotel management company own 35% or more of Host Marriott (determined taking
into account only the stock held by persons owning, directly or indirectly,
more than 5% of the outstanding common stock of Host Marriott and, if the stock
of the eligible independent contractor is publicly-traded, 5% of the publicly-
traded stock of the eligible independent contractor). Host Marriott believes,
and currently intends to take all steps reasonably practicable to ensure, that
none of its taxable REIT subsidiaries or any of their subsidiaries will engage
in "operating" or "managing " its hotels and that the hotel management
companies engaged to operate and manage hotels leased to or owned by its
taxable REIT subsidiaries qualify as "eligible independent contractors" with
regard to those taxable REIT subsidiaries.
Certain restrictions imposed on taxable REIT subsidiaries are intended to
ensure that such entities will be subject to an appropriate level of federal
income taxation. First, a taxable REIT subsidiary may not deduct interest
payments made in any year to an affiliated REIT to the extent that such
payments exceed, generally, 50% of the taxable REIT subsidiary's adjusted
taxable income for that year (although the taxable REIT subsidiary may carry
forward to, and deduct in, a succeeding year the disallowed interest amount if
the 50% test is satisfied). In addition, if a taxable REIT subsidiary pays
interest, rent or another amount to a REIT that exceeds the amount that would
be paid to an unrelated party in an arm's length transaction, the REIT
generally will be subject to an excise tax equal to 100% of such excess. Host
Marriott's taxable REIT subsidiaries will make substantial interest and other
payments to Host Marriott, including payments of rent under the hotel leases.
There can be no assurance that the limitation on interest deductions applicable
to taxable REIT subsidiaries will not apply to the interest payments made to
Host Marriott by its taxable REIT subsidiaries,
resulting in an increase in the corporate tax liability of each such
subsidiary. Moreover, there can be no assurance that the terms establishing the
payments made by the taxable REIT subsidiary to Host Marriott will not result
in the imposition of the 100% excise tax to a portion of any such payment.
Annual Distribution Requirements Applicable to REITs
To qualify as a REIT, Host Marriott is required to distribute dividends,
other than capital gain dividends, to its shareholders in an amount at least
equal to
(i) the sum of (a) 90% of its "REIT taxable income," computed without
regard to the dividends paid deduction and Host Marriott's net capital
gain, and (b) 90% of the net income, after tax, if any, from foreclosure
property, minus
(ii) the sum of certain items of noncash income.
For years prior to 2001, the applicable percentage was 95%, rather than 90%.
In addition, if Host Marriott disposes of any built-in gain asset during the
ten-year period beginning when Host Marriott acquired the asset, Host Marriott
is required to distribute at least 90% of the built-in gain, after tax, if any,
recognized on the disposition of such asset. See "--General" above for a
discussion of built-in gain assets. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if declared
before Host Marriott timely files its tax return for such year and if paid on
or before the first regular dividend payment date after such declaration. Host
Marriott currently intends to make timely distributions sufficient to satisfy
these annual distribution requirements. In this regard, the operating
partnership's partnership agreement authorizes Host Marriott, as general
partner, to take such steps as may be necessary to cause the
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operating partnership to distribute to its partners an amount sufficient to
permit Host Marriott to meet these distribution requirements.
To the extent that Host Marriott does not distribute all of its net capital
gain or distributes at least 90%, but less than 100%, of its "REIT taxable
income" within the periods described in the prior paragraph, it is subject to
income tax thereon at regular capital gain and ordinary corporate tax rates.
Host Marriott, however, may designate some or all of its retained net capital
gain, so that, although the designated amount will not be treated as
distributed for purposes of this tax, a shareholder would include its
proportionate share of such amount in income, as capital gain, and would be
treated as having paid its proportionate share of the tax paid by Host Marriott
with respect to such amount. The shareholder's basis in its capital stock of
Host Marriott would be increased by the amount the shareholder included in
income and decreased by the amount of the tax the shareholder is treated as
having paid. Host Marriott would make an appropriate adjustment to its earnings
and profits. For a more detailed description of the federal income tax
consequences to a shareholder of such a designation, see "--Taxation of Taxable
U.S. Shareholders Generally" below.
There is a significant possibility that Host Marriott's "REIT taxable
income" will exceed its cash flow, due in part to certain "non-cash" or
"phantom" income expected to be taken into account in computing Host Marriott's
"REIT taxable income." It is possible, because of these differences in timing
between Host Marriott's recognition of taxable income and its receipt of cash
available for distribution, that Host Marriott, from time to time, may not have
sufficient cash or other liquid assets to meet its distribution requirements.
In such event, in order to meet the distribution requirements, Host Marriott
may find it necessary to arrange for short-term, or possibly long-term,
borrowings to fund required distributions and/or to pay dividends in the form
of taxable stock dividends.
Host Marriott calculates its "REIT taxable income" based upon the conclusion
that the non-corporate subsidiaries of the operating partnership or the
operating partnership itself, as applicable, is the owner of the hotels for
federal income tax purposes. As a result, Host Marriott expects that the
depreciation deductions with respect to the hotels will reduce its "REIT
taxable income." This conclusion is consistent with the conclusion above that
the leases of Host Marriott's hotels have been and will continue to be treated
as true leases for federal income tax purposes. If, however, the IRS were to
challenge successfully this position, in addition to failing in all likelihood
the 75% and 95% gross income tests described above, Host Marriott also might be
deemed retroactively to have failed to meet the REIT distribution requirements
and would have to rely on the payment of a "deficiency dividend" in order to
retain its REIT status.
Under certain circumstances, Host Marriott may be able to rectify a failure
to meet the distribution requirement for a year by paying "deficiency
dividends" to shareholders in a later year, which may be included in Host
Marriott's deduction for dividends paid for the earlier year. Thus, Host
Marriott may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, Host Marriott would be required to pay to the IRS interest
based upon the amount of any deduction taken for deficiency dividends.
Furthermore, if Host Marriott should fail to distribute during each calendar
year at least the sum of 85% of its REIT ordinary income for such year, 95% of
its REIT capital gain income for such year, and any undistributed taxable
income from prior periods, it would be subject to an excise tax. The excise tax
would equal 4% of the excess of such required distribution over the sum of
amounts actually distributed and amounts retained with respect to which the
REIT pays federal income tax.
Failure of Host Marriott to Qualify as a REIT.
If Host Marriott were to fail to qualify for taxation as a REIT in any
taxable year, and if the relief provisions were not to apply, Host Marriott
would be subject to tax, including any applicable alternative minimum tax, on
its taxable income at regular corporate rates. Distributions to shareholders in
any year in which Host Marriott were to fail to qualify would not be deductible
by Host Marriott nor would they be required to be made. As a result, Host
Marriott's failure to qualify as a REIT would significantly reduce the
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cash available for distribution by Host Marriott to its shareholders and could
materially reduce the value of its capital stock. In addition, if Host Marriott
were to fail to qualify as a REIT, all distributions to shareholders would be
taxable as ordinary income, to the extent of Host Marriott's current and
accumulated E&P, although, subject to certain limitations of the Internal
Revenue Code, corporate distributees may be eligible for the dividends received
deduction with respect to these distributions. Unless entitled to relief under
specific statutory provisions, Host Marriott also would be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all
circumstances Host Marriott would be entitled to such statutory relief.
Tax Aspects of Host Marriott's Ownership of Interests in the Operating
Partnership
General
Substantially all of Host Marriott's investments are held through the
operating partnership, which holds the hotels either directly or through
certain subsidiaries. In general, partnerships are "pass-through" entities that
are not subject to federal income tax. Rather, partners are allocated their
proportionate shares of the items of income, gain, loss, deduction and credit
of a partnership, and are potentially subject to tax thereon, without regard to
whether the partners receive a distribution from the partnership. Host Marriott
includes in its income its proportionate share of the foregoing partnership
items for purposes of the various REIT income tests and in the computation of
its REIT taxable income. Moreover, for purposes of the REIT asset tests, Host
Marriott includes its proportionate share of assets held through the operating
partnership and those of its subsidiaries that are either disregarded as
separate entities or treated as partnerships for tax purposes. See "--Federal
Income Taxation of Host Marriott--Ownership of Partnership Interests by a REIT"
above.
Entity Classification
If the operating partnership or any non-corporate subsidiary were treated as
an association, the entity would be taxable as a corporation and therefore
would be subject to an entity level tax on its income. In such a situation, the
character of Host Marriott's assets and items of gross income would change and
could preclude Host Marriott from qualifying as a REIT (see "--Federal Income
Taxation of Host Marriott--Asset Tests Applicable to REITs" and "--Income Tests
Applicable to REITs" above).
The entire discussion of the tax treatment of Host Marriott and the federal
income tax consequences of the ownership of common stock of Host Marriott is
based on the assumption that the operating partnership and all of its
subsidiaries (other than Host Marriott's taxable REIT subsidiaries and their
subsidiaries) are classified as partnerships or disregarded as separate
entities for federal income tax purposes. Pursuant to regulations under Section
7701 of the Internal Revenue Code, a partnership will be treated as a
partnership for federal income tax purposes unless it elects to be treated as a
corporation or would be treated as a corporation because it is a "publicly
traded partnership." Neither the operating partnership nor any of its non-
corporate subsidiaries that is not a taxable REIT subsidiary has elected or
will elect to be treated as a corporation. Therefore, subject to the disclosure
below, the operating partnership and each such subsidiary will be treated as a
partnership for federal income tax purposes (or, if such an entity has only one
partner or member, disregarded entirely for federal income tax purposes).
Pursuant to Section 7704 of the Internal Revenue Code, a partnership that
does not elect to be treated as a corporation nevertheless will be treated as a
corporation for federal income tax purposes if it is a "publicly traded
partnership," and it does not derive at least 90% of its income from certain
specified sources of "qualifying income" within the meaning of that section. A
"publicly traded partnership" is any partnership (i) the interests in which are
traded on an established securities market or (ii) the interests in which are
readily tradable on a "secondary market or the substantial equivalent thereof."
OP Units will not be traded on an established securities market. There is a
significant risk, however, that the OP Units could be considered readily
tradable on the substantial equivalent of a secondary market. In that event,
the operating partnership could be treated as a "publicly traded partnership,"
but even then it would only be taxable as a corporation if less than
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90% of its gross income were to constitute "qualifying income." Treasury
Regulations under Section 7704 of the Internal Revenue Code sets forth certain
"safe harbors" under which interests will not be treated as "readily tradable
on a secondary market (or the substantial equivalent thereof)" within the
meaning of Section 7704 (the "Safe Harbors"). For purposes of determining
whether the "qualifying income" exception is satisfied, the income requirements
generally applicable to REITs and the definition of "qualifying income" under
Section 7704 of the Internal Revenue Code are similar in most key respects.
There is one significant difference, however, that was particularly relevant to
the operating partnership prior to January 1, 2001. For a REIT, rent from a
tenant does not qualify as "rents from real property" if the REIT and/or one or
more actual or constructive owners of 10% or more of the REIT actually or
constructively own 10% or more of the tenant (subject to an exception for rents
from a tenant that is a taxable REIT subsidiary). Under Section 7704 of the
Internal Revenue Code, rent from a tenant is not qualifying income if a
partnership and/or one or more actual or constructive owners of 5% or more of
the partnership actually or constructively own 10% or more of the tenant.
Prior to January 1, 2001, a substantial majority of the operating
partnership's income came from rent payments by subsidiaries of Crestline.
Accordingly, because the Blackstone Entities, Host Marriott and any owner of
10% or more of Host Marriott would own or would be deemed to own 5% or more of
the operating partnership, if the Blackstone Entities, Host Marriott and/or any
owner of 10% or more of Host Marriott were to have owned or be deemed to own
collectively 10% or more of Crestline, none of the rent from the Crestline
lessees during those time periods would have been qualifying income for
purposes of determining whether the operating partnership should be taxed as a
corporation. In order to avoid this result, the Crestline articles of
incorporation expressly provided that no person (or persons acting as a group),
including the Blackstone Entities, Host Marriott and any owner of 10% or more
of Host Marriott, may own, actually and/or constructively, more than 9.8% by
value of the equity in Crestline and the Crestline articles of incorporation
contain self-executing mechanisms intended to enforce this prohibition. In
addition, the operating partnership's partnership agreement prohibits any
person, or persons acting as a group, or entity, other than an affiliate of the
Blackstone Entities and Host Marriott, from owning, actually and/or
constructively, more than 4.9% of the value of the operating partnership, and
the Host Marriott charter prohibits any person, or persons acting as a group,
or entity, including the Blackstone Entities and the Marriott family and their
affiliated entities as a group, from, subject to certain limited exceptions,
owning, actually and/or constructively, more than 9.8% of the lesser of the
number or value of the total outstanding shares of common stock of Host
Marriott. If these prohibitions (or the terms of any waivers permitted under
the operative documents) were not enforced during the period that Crestline
owned the lessees of Host Marriott's hotels, there is a significant likelihood
that the operating partnership would have been treated as a corporation for
federal income tax purposes if the operating partnership were considered a
publicly traded partnership under the Internal Revenue Code.
As described above, as a result of the passage of the REIT Modernization
Act, for taxable years beginning after December 31, 2000, the operating
partnership is able to lease its hotel properties to a taxable REIT subsidiary
and the rents received from that subsidiary would not be disqualified from
being "rents from real property" under the REIT rules by reason of the
operating partnership's ownership interest in the subsidiary. See "--Federal
Income Taxation of Host Marriott-- Income Tests Applicable to REITs" above.
If the operating partnership were taxable as a corporation, most, if not
all, of the tax consequences described herein would be inapplicable. In
particular, Host Marriott would not qualify as a REIT because the value of Host
Marriott's ownership interest in the operating partnership would exceed 5% of
Host Marriott's assets and Host Marriott would be considered to hold more than
10% of the voting securities (and 10% of the value of the outstanding
securities) of another corporation (see "--Federal Income Taxation of Host
Marriott--Asset Tests Applicable to REITs" above). In this event, the value of
Host Marriott common stock could be adversely affected (see "--Federal Income
Taxation of Host Marriott--Failure of Host Marriott to Qualify as a REIT"
above).
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Allocations of Operating Partnership Income, Gain, Loss and Deduction
The partnership agreement of the operating partnership provides that if the
operating partnership operates at a net loss, net losses shall be allocated,
first to Host Marriott and the limited partners (other than the holders of
preferred OP Units) in proportion to their respective percentage ownership
interests in the operating partnership, second, to those limited partners other
than Host Marriott who hold preferred OP Units, third, to Host Marriott, as
holder of the preferred OP Units issued in connection with the issuance by Host
Marriott of its preferred stock, and, fourth, to Host Marriott, as general
partner, provided that net losses that would have the effect of creating a
deficit balance in a limited partner's capital account as specially adjusted
for such purpose will be reallocated to Host Marriott, as general partner of
the operating partnership. The partnership agreement also provides that, if the
operating partnership operates at a net profit, net income shall be allocated
first to Host Marriott and to the limited partners to the extent, and in the
reverse order in which, net losses were allocated to the partners with respect
to which such partners have not been previously allocated net income. Subject
to the next sentence, any remaining net income shall be allocated in proportion
to the respective percentage ownership interests of Host Marriott and the
limited partners in the common OP Units of the operating partnership. Finally,
the partnership agreement provides that if the operating partnership has
preferred OP Units outstanding, income will first be allocated to such
preferred OP Units to the extent necessary to reflect and preserve the economic
rights associated with such preferred OP Units.
Although a partnership agreement will generally determine the allocation of
income and loss among partners, such allocations will be disregarded for tax
purposes if they do not comply with the provisions of Section 704(b) of the
Internal Revenue Code and the applicable regulations. Generally, Section 704(b)
and the applicable regulations require that partnership allocations respect the
economic arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The allocations of taxable income and loss
provided for in the operating partnership partnership agreement and the
partnership agreements and operating agreements of the non-corporate
subsidiaries are intended to comply with the requirements of Section 704(b) of
the Internal Revenue Code and the regulations promulgated thereunder.
Tax Allocations with Respect to the Hotels
Pursuant to Section 704(c) of the Internal Revenue Code, income, gain, loss
and deduction attributable to appreciated or depreciated property, such as the
hotels, that is contributed to a partnership in exchange for an interest in the
partnership must be allocated in a manner such that the contributing partner is
charged with, or benefits from, respectively, the difference between the
adjusted tax basis and the fair market value of such property at the time of
contribution associated with the property at the time of the contribution. This
difference is known as built-in gain. The operating partnership agreement
requires that such allocations be made in a manner consistent with Section
704(c) of the Internal Revenue Code. In general, the partners of the operating
partnership, including Host Marriott, who contributed depreciated assets having
built-in gain are allocated depreciation deductions for tax purposes that are
lower than such deductions would be if determined on a pro rata basis. Thus,
the carryover basis of the contributed assets in the hands of the operating
partnership may cause Host Marriott to be allocated lower depreciation and
other deductions, and therefore to be effectively allocated more income, which
might adversely affect Host Marriott's ability to comply with the REIT
distribution requirements and/or cause a higher proportion of Host Marriott's
distributions to its shareholders to be taxed as dividends. See "--Federal
Income Taxation of Host Marriott -- Annual Distribution Requirements Applicable
to REITs" above.
In addition, in the event of the disposition of any of the contributed
assets which have built-in gain, all income attributable to the built-in gain
generally will be allocated to the contributing partners, even though the
proceeds of such sale would be allocated proportionately among all the partners
and likely would be retained
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by the operating partnership, rather than distributed. Thus, if the operating
partnership were to sell a hotel with built-in gain that was contributed to the
operating partnership by Host Marriott's predecessors or Host Marriott, Host
Marriott generally would be allocated all of the income attributable to the
built-in gain, which could exceed the economic, or "book," income allocated to
it as a result of such sale. Such an allocation might cause Host Marriott to
recognize taxable income in excess of cash proceeds, which might adversely
affect Host Marriott's ability to comply with the REIT distribution
requirements. In addition, Host Marriott will be subject to a corporate level
tax on such gain to the extent the gain is recognized prior to January 1, 2009.
See "--Federal Income Taxation of Host Marriott--Annual Distribution
Requirements Applicable to REITs" and "--Federal Income Taxation of Host
Marriott--General" above. It should be noted in this regard that as the general
partner of the operating partnership, Host Marriott will determine whether or
not to sell a hotel contributed to the operating partnership by Host Marriott.
The operating partnership and Host Marriott generally use the traditional
method (with a provision for a curative allocation of gain on sale to the
extent prior allocations of depreciation with respect to a specific hotel were
limited by the "ceiling rule" applicable under the traditional method) to
account for built-in gain with respect to the hotels contributed to the
operating partnership in connection with the REIT conversion. This method is
generally a more favorable method for accounting for built-in gain from the
perspective of those partners, including Host Marriott, who received OP Units
in exchange for property with a low basis relative to value at the time of the
REIT conversion and is a less favorable method from the perspective of those
partners who contributed cash or "high basis" assets to the operating
partnership, including Host Marriott to the extent it contributes cash to the
operating partnership.
Any property purchased by the operating partnership subsequent to the REIT
conversion will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Internal Revenue Code will not apply.
Other Tax Consequences for Host Marriott and Its Shareholders
Host Marriott and its shareholders are subject to state or local taxation in
various state or local jurisdictions, including those in which the operating
partnership or Host Marriott's shareholders transact business or reside. The
state and local tax treatment of Host Marriott and its shareholders may not
conform to the federal income tax consequences discussed above. Consequently,
prospective shareholders of Host Marriott should consult their own tax advisors
regarding the effect of state and local tax laws on an investment in Host
Marriott. To the extent that Host Marriott owns assets or conducts operations
in foreign jurisdictions, it may also be subject to certain foreign taxes.
A portion of the cash to be used by Host Marriott to fund distributions
comes from dividends from the taxable REIT subsidiaries and, in some cases,
interest on notes held by the operating partnership. The taxable REIT
subsidiaries, and certain of their subsidiaries, are subject to federal, state
and local income tax at the full applicable corporate rates (and foreign taxes
to the extent that they own assets or have operations in foreign
jurisdictions). To the extent that Host Marriott's taxable REIT subsidiaries or
any of their subsidiaries is required to pay federal, state or local taxes, or
any foreign taxes, Host Marriott will receive less dividend income from the
relevant entity and will have less cash available for distribution to
shareholders.
As described above in "--Federal Income Taxation of Host Marriott--
Qualification of an Entity as a Taxable REIT Subsidiary," each of Host
Marriott's taxable REIT subsidiaries is fully taxable as a corporation and is
subject to certain rules intended to restrict its ability to reduce its tax
liability.
Taxation of Taxable U.S. Shareholders Generally
The term "U.S. shareholder," when used in this discussion, means a holder of
securities who is, for United States federal income tax purposes:
. a citizen or resident of the United States,
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. a corporation, partnership, or other entity treated as a corporation or
partnership for United States federal income tax purposes, created or
organized in or under the laws of the United States or of a state hereof
or in the District of Columbia, unless, in the case of a partnership,
Treasury Regulations provide otherwise,
. an estate the income of which is subject to United States federal income
taxation regardless of its source or
. a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States persons who
have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in Treasury
Regulations, some trusts in existence on August 20, 1996, and treated as United
States persons prior to this date that elect to continue to be treated as
United States persons, shall also be considered U.S. shareholders.
Distributions Generally
Distributions made by Host Marriott out of its current or accumulated E&P,
other than capital gain dividends as discussed below, constitute dividends
taxable to its taxable U.S. shareholders as ordinary income. As long as Host
Marriott qualifies as a REIT, such distributions are not eligible for the
dividends received deduction that is generally afforded to U.S. shareholders
that are corporations. To the extent that Host Marriott makes distributions not
designated as capital gain dividends in excess of its current and accumulated
E&P, such distributions are treated first as a tax-free return of capital to
each U.S. shareholder, reducing the adjusted basis which such U.S. shareholder
has in its common stock for tax purposes by the amount of such distribution,
but not below zero, with distributions in excess of such U.S. shareholder's
adjusted basis taxable as capital gains, provided that the common stock has
been held as a capital asset. For purposes of determining whether distributions
to holders of Host Marriott's preferred stock or common stock are made out of
Host Marriott's current or accumulated earnings and profits for federal income
tax purposes, earnings and profits are allocated first to Host Marriott's
preferred stock on a pro rata basis and then to Host Marriott's common stock.
Host Marriott will notify shareholders after the close of its taxable year as
to the portions of distributions attributable to that year that constitute
ordinary income, return of capital and capital gain.
Dividends declared by Host Marriott in October, November or December of any
year and payable to a shareholder of record on a specified date in any such
month are treated as both paid by Host Marriott and received by the shareholder
on December 31 of such year, provided that the dividend is actually paid by
Host Marriott on or before January 31 of the following year.
For purposes of computing liability for alternative minimum tax, certain of
Host Marriott's alternative minimum tax adjustments will be treated as
alternative minimum tax adjustments of its shareholders in the ratio that Host
Marriott's distributions bear to its taxable income (determined without regard
to the deduction for dividends paid). Amounts treated as alternative minimum
tax adjustments of Host Marriott's shareholders are deemed to be derived by the
shareholders proportionately from each such alternative minimum tax adjustment
of Host Marriott and are taken into account by the shareholders in computing
their alternative minimum taxable income for the taxable year to which the
dividends are attributable.
Capital Gain Distributions; Retained Net Capital Gains
Distributions that Host Marriott properly designates as capital gain
dividends are taxable to taxable U.S. shareholders as gain from the sale or
exchange of a capital asset held for more than one year (without regard to the
period for which such taxable U.S. shareholder has held his common stock) to
the extent that they do not exceed Host Marriott's actual net capital gain for
the taxable year. A U.S. shareholder's share of a capital gain dividend is an
amount which bears the same ratio to the total amount of dividends paid to such
U.S.
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shareholder for the year as the aggregate amount designated as a capital gain
dividend bears to the aggregate amount of all dividends paid on all classes of
shares of stock for the year.
In 1997, the IRS issued Notice 97-64, which provides generally that a REIT
may classify portions of its designated capital gain dividend as either a 20%
gain distribution, which would be taxable to non-corporate U.S. shareholders at
a maximum rate of 20%, an unrecaptured Section 1250 gain distribution, which
would be taxable to non-corporate U.S. shareholders at a maximum rate of 25%,
or a 28% rate gain distribution, which would be taxable to non-corporate U.S.
shareholders at a maximum rate of 28%. If no designation is made, the entire
designated capital gain dividend will be treated as a 28% rate gain
distribution. Notice 97-64 provides that a REIT must determine the maximum
amounts that it may designate as 20% and 25% rate capital gain dividends by
performing the computation required by the Internal Revenue Code as if the REIT
were an individual whose ordinary income were subject to a marginal tax rate of
at least 28%. Notice 97-64 further provides that designations made by the REIT
only will be effective to the extent that they comply with Revenue Ruling 89-
81, which requires that distributions made to different classes of shares of
stock be composed proportionately of dividends of a particular type. In 1998,
Congress enacted legislation reducing the holding period requirement for the
application of the 20% and 25% capital gain tax rates to 12 months from 18
months for sales of capital gain assets on or after January 1, 1998, and
thereby eliminating the 28% capital gain rate. Although Notice 97-64 applied to
sales of capital gain assets after July 28, 1997 and before January 1, 1998, it
is expected that the IRS will issue clarifying guidance, most likely applying
the same principles set forth in Notice 97-64, regarding a REIT's designation
of capital gain dividends in light of the holding period requirements enacted
in 1998.
With regard to Host Marriott's taxable corporate U.S. shareholders,
distributions made by Host Marriott that are properly designated by it as
capital gain dividends will be taxable as long-term gain, at a maximum rate of
35%, to the extent that they do not exceed Host Marriott's actual net capital
gain for the taxable year and without regard to the period during which such
corporate U.S. shareholder has held its common stock. Such U.S. shareholders
may, however, be required to treat up to 20% of certain capital gain dividends
as ordinary income.
Host Marriott may designate, by written notice to its shareholders, that it
is treating all or a portion of its retained net capital gain as having been
distributed to its shareholders for tax purposes, even though no actual
distribution of such retained gain has been made. With respect to any such
retained net capital gains, a U.S. shareholder would include its proportionate
share of such gain in income as long-term capital gain and would be treated as
having paid its proportionate share of the tax actually paid by Host Marriott
with respect to the gain. The U.S. shareholder's basis in its common stock
would be increased by its share of such gain and decreased by its share of such
tax. With respect to such long-term capital gain of a U.S. shareholder that is
an individual or an estate or trust, the IRS, as described above in this
section, has authority to issue regulations that could apply the special 25%
tax rate applicable generally to the portion of the long-term capital gains of
an individual or an estate or trust attributable to deductions for depreciation
taken with respect to depreciable real property. IRS Notice 97-64, described
above in this section, did not address the taxation of non-corporate REIT
shareholders with respect to retained net capital gains.
Host Marriott's Losses; Investment Interest Limitation
U.S. shareholders may not include in their income tax returns any net
operating losses or capital losses of Host Marriott. Instead, such losses would
be carried over by Host Marriott for potential offset against future income,
subject to certain limitations. Distributions made by Host Marriott and gain
arising from the sale or exchange by a U.S. shareholder of common stock will
not be treated as passive activity income, and, as a result, U.S. shareholders
generally will not be able to apply any "passive losses" against such income or
gain. In addition, taxable dividend distributions from Host Marriott generally
will be treated as investment income for purposes of the "investment interest
limitation." This limitation provides that a non-corporate U.S. shareholder may
deduct as an itemized deduction in any taxable year only the amount of interest
incurred in connection with property held for investment that does not exceed
the excess of the shareholder's investment
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income over his or her investment expenses for that year. Capital gain
dividends and capital gains from the disposition of shares of stock, including
distributions treated as such, will be treated as investment income only if the
non-corporate U.S. shareholder so elects, in which case such capital gains will
be taxed at ordinary income rates.
Dispositions of Common Stock
Upon any sale or other disposition of common stock, a U.S. shareholder will
recognize gain or loss for federal income tax purposes in an amount equal to
the difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such common stock for tax purposes. Such gain or loss will be
capital gain or loss if the common stock has been held by the U.S. shareholder
as a capital asset. In the case of a U.S. shareholder who is an individual or
an estate or trust, such gain or loss will be long-term capital gain or loss,
if such shares of stock have been held for more than one year, and any such
long-term capital gain will be subject to the maximum capital gain rate of 20%.
U.S. shareholders that acquire or are deemed to acquire the common stock after
December 31, 2000 and who hold the common stock for more than five years and
certain low income taxpayers may be eligible for a reduction in the long-term
capital gains rate. However, a maximum rate of 25% will apply to capital gain
that is treated as "unrecaptured Section 1250 gain" for individuals, trusts and
estates. The IRS has the authority to prescribe, but has not yet prescribed,
regulations on how the capital gain rates will apply to sales of shares of
REITs; accordingly, shareholders are urged to consult with their own tax
advisors with respect to their capital gain liability. In the case of a U.S.
shareholder that is a corporation, gain or loss from the sale of shares of Host
Marriott common stock will be long-term capital gain or loss if such shares of
stock have been held for more than one year, and any such capital gain shall be
subject to the maximum capital gain rate of 35%. In general, any loss
recognized by a U.S. shareholder upon the sale or other disposition of common
stock that has been held for six months or less, after applying certain holding
period rules, will be treated as a long-term capital loss, to the extent of
distributions received by such U.S. shareholder from Host Marriott that were
required to be treated as long-term capital gains.
Backup Withholding for Host Marriott's Distributions
Host Marriott reports to its U.S. shareholders and the IRS the amount of
dividends paid during each calendar year and the amount of tax withheld, if
any. Under the backup withholding rules, a U.S. shareholder may be subject to
backup withholding at the rate of 31% with respect to dividends paid unless
such holder either is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact, or provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. shareholder that does not provide Host Marriott with
a correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding is creditable against
the shareholder's income tax liability. In addition, Host Marriott may be
required to withhold a portion of its capital gain distributions to any U.S.
shareholders who fail to certify their non-foreign status to Host Marriott. See
"--Taxation of Non-U.S. Shareholders" below.
Taxation of Tax-Exempt Shareholders
Provided that a tax-exempt shareholder has not held its common stock as
"debt financed property" within the meaning of the Internal Revenue Code and
such shares of common stock are not otherwise used in a trade or business, the
dividend income from Host Marriott will not be unrelated business taxable
income ("UBTI") to a tax-exempt shareholder. Similarly, income from the sale of
common stock will not constitute UBTI unless such tax-exempt shareholder has
held such common stock as "debt financed property" within the meaning of the
Internal Revenue Code or has used the common stock in a trade or business.
However, for a tax-exempt shareholder that is a social club, voluntary
employee benefit association, supplemental unemployment benefit trust or
qualified group legal services plan exempt from federal income
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taxation under Internal Revenue Code Sections 501 (c)(7), (c)(9), (c)(17) and
(c)(20), respectively, income from an investment in Host Marriott will
constitute UBTI unless the organization is properly able to deduct amounts set
aside or placed in reserve for certain purposes so as to offset the income
generated by its investment in Host Marriott. Such a prospective shareholder
should consult its own tax advisors concerning these "set aside" and reserve
requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any trust which is described
in Section 401(a) of the Internal Revenue Code, is tax-exempt under Section
501(a) of the Internal Revenue Code and holds more than 10%, by value, of the
interests in the REIT. Tax-exempt pension funds that are described in Section
401(a) of the Internal Revenue Code are referred to below as "qualified
trusts." A REIT is a "pension held REIT" if it meets the following two tests:
. The REIT would not have qualified as a REIT but for the fact that Section
856(h)(3) of the Internal Revenue Code provides that stock owned by
qualified trusts shall be treated, for purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust rather than by
the trust itself.
. Either at least one such qualified trust holds more than 25%, by value,
of the interests in the REIT, or one or more such qualified trusts, each
of which owns more than 10%, by value, of the interests in the REIT, hold
in the aggregate more than 50%, by value, of the interests in the REIT.
The percentage of any REIT dividend treated as UBTI is equal to the ratio of
the UBTI earned by the REIT, treating the REIT as if it were a qualified trust
and therefore subject to tax on UBTI, to the total gross income of the REIT. A
de minimis exception applies where the percentage is less than 5% for any year.
As discussed above, the provisions requiring qualified trusts to treat a
portion of REIT distributions as UBTI will not apply if the REIT is able to
satisfy the "not closely held" requirement without relying upon the "look-
through" exception with respect to qualified trusts. Based on the current
estimated ownership of Host Marriott common stock and as a result of certain
limitations on transfer and ownership of common stock contained in the Host
Marriott's charter, Host Marriott should not be classified as a "pension held
REIT."
Taxation of Non-U.S. Shareholders
The rules governing federal income taxation of the ownership and disposition
of common stock by non-U.S. shareholders (that is, shareholders who are not
"U.S. shareholders" as defined above) are complex and no attempt is made herein
to provide more than a brief summary of such rules. Accordingly, the discussion
does not address all aspects of federal income tax and does not address any
state, local or foreign tax consequences that may be relevant to a non-U.S.
shareholder in light of its particular circumstances. In addition, this
discussion is based on current law, which is subject to change, and assumes
that Host Marriott qualifies for taxation as a REIT. Prospective non-U.S.
shareholders should consult with their own tax advisers to determine the impact
of federal, state, local and foreign income tax laws with regard to an
investment in common stock, including any reporting requirements.
Distributions Generally
Distributions by Host Marriott to a non-U.S. shareholder that are neither
attributable to gain from sales or exchanges by Host Marriott of United States
real property interests nor designated by Host Marriott as capital gain
dividends will be treated as dividends of ordinary income to the extent that
they are made out of current or accumulated E&P of Host Marriott. Such
distributions ordinarily will be subject to withholding of United States
federal income tax on a gross basis (that is, without allowance of deductions)
at a 30% rate or such lower rate as may be specified by an applicable income
tax treaty, unless the dividends are treated as effectively connected with the
conduct by the non-U.S. shareholder of a United States trade or business. Under
certain treaties, however, lower withholding rates generally applicable to
dividends do not apply to dividends from a REIT, such as Host Marriott. Certain
certification and disclosure requirements must be satisfied to be exempt from
withholding under the effectively connected income exemption. Dividends that
are effectively connected with such a trade or business will be subject to tax
on a net basis (that is, after allowance of deductions) at
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graduated rates, in the same manner as U.S. shareholders are taxed with respect
to such dividends, and are generally not subject to withholding. Any such
dividends received by a non-U.S. shareholder that is a corporation may also be
subject to an additional branch profits tax at a 30% rate or such lower rate as
may be specified by an applicable income tax treaty. Host Marriott expects to
withhold United States income tax at the rate of 30% on any distribution made
to a non-U.S. shareholder unless (i) a lower treaty rate applies and any
required form or certification evidencing eligibility for that lower rate is
filed with Host Marriott or (ii) a non-U.S. shareholder files an IRS Form W-8
ECI with Host Marriott claiming that the distribution is effectively connected
income.
Distributions in excess of the current or accumulated E&P of Host Marriott
will not be taxable to a non-U.S. shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's common stock, but rather will
reduce the adjusted basis of such common stock. Such distributions, however,
will be subject to U.S. withholding tax as described below. To the extent that
such distributions exceed the adjusted basis of a non-U.S. shareholder's common
stock, they will give rise to gain from the sale or exchange of its common
stock, the tax treatment of which is described below.
Host Marriott is required to withhold 10% of any distribution in excess of
its current and accumulated E&P, even if a lower treaty rate applies and the
non-U.S. shareholder is not liable for tax on receipt of that distribution.
Consequently, although Host Marriott currently intends that its transfer agent
will withhold at a rate of 30%, or a lower applicable treaty rate, on the
entire amount of any distribution, to the extent that this is not done, any
portion of a distribution not subject to withholding at a rate of 30%, or lower
applicable treaty rate, would be subject to withholding at a rate of 10%.
However, a non-U.S. shareholder may seek a refund of such amounts from the IRS
if it subsequently determines that such distribution was, in fact, in excess of
current or accumulated E&P of Host Marriott, and the amount withheld exceeded
the non-U.S. shareholder's United States tax liability, if any, with respect to
the distribution.
Capital Gain Distributions
Distributions to a non-U.S. shareholder that are designated by Host Marriott
at the time of distribution as capital gain dividends, other than those arising
from the disposition of a United States real property interest, generally
should not be subject to United States federal income taxation, unless:
(i) the investment in the common stock is effectively connected with the
non-U.S. shareholder's United States 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, except that a shareholder that is a
foreign corporation may also be subject to the 30% branch profits tax, as
discussed above, or
(ii) the non-U.S. shareholder is a nonresident alien individual who is
present in the United States for 183 days or more during the taxable year
and has a "tax home" in the United States, in which case the nonresident
alien individual will be subject to a 30% tax on the individual's capital
gains.
Host Marriott will be required to withhold and to remit to the IRS 35% of
any distribution to non-U.S. shareholders that is designated as a capital gain
dividend or, if greater, 35% of a distribution to non-U.S. shareholders that
could have been designated by Host Marriott as a capital gain dividend. The
amount withheld is creditable against the non-U.S. shareholder's United States
federal income tax liability.
Pursuant to the Foreign Investment in Real Property Tax Act, which is
referred to as "FIRPTA," distributions to a non-U.S. shareholder that are
attributable to gain from sales or exchanges by Host Marriott of United States
real property interests, whether or not designated as capital gain dividends,
will cause the non-U.S. shareholder to be treated as recognizing such gain as
income effectively connected with a United States trade or business. Non-U.S.
shareholders would thus generally be taxed at the same rates applicable to U.S.
shareholders, subject to a special alternative minimum tax in the case of
nonresident alien individuals. Also, such gain may be subject to a 30% branch
profits tax in the hands of a non-U.S. shareholder that is a
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corporation, as discussed above. Host Marriott is required to withhold 35% of
any such distribution. That amount is creditable against the non-U.S.
shareholder's federal income tax liability.
Although the law is not clear on the matter, it appears that amounts
designated by Host Marriott as undistributed capital gains in respect of the
common stock held by U.S. shareholders (see "--Annual Distribution Requirements
Applicable to REITs" above) generally should be treated with respect to non-
U.S. shareholders in the same manner as actual distributions by Host Marriott
of capital gain dividends. Under that approach, the non-U.S. shareholders would
be able to offset as a credit against their United States federal income tax
liability resulting therefrom their proportionate share of the tax paid by Host
Marriott on such undistributed capital gains and to receive from the IRS a
refund to the extent their proportionate share of such tax paid by Host
Marriott were to exceed their actual United States federal income tax
liability.
Dispositions of Common Stock
Gain recognized by a non-U.S. shareholder upon the sale or exchange of
common stock generally will not be subject to United States taxation unless
such shares of stock constitute a "United States real property interest" within
the meaning of FIRPTA. The common stock will not constitute a "United States
real property interest" so long as Host Marriott is a "domestically controlled
REIT." A "domestically controlled REIT" is a REIT in which at all times during
a specified testing period less than 50% in value of its stock is held directly
or indirectly by non-U.S. shareholders. Host Marriott believes, but cannot
guarantee, that it is a "domestically controlled REIT." Moreover, even if Host
Marriott is a "domestically controlled REIT," because the common stock is
publicly traded, no assurance can be given that Host Marriott will continue to
be a "domestically controlled REIT." Notwithstanding the foregoing, gain from
the sale or exchange of common stock not otherwise subject to FIRPTA will be
taxable to a non-U.S. shareholder if either (a) the investment in Host Marriott
common stock is effectively connected with the non-U.S. shareholder's U.S.
trade or business, in which case the non-U.S. shareholder will be subject to
the same treatment as domestic shareholders with respect to any gain or (b) the
non-U.S. shareholder is a nonresident alien individual who is present in the
United States for 183 days or more during the taxable year and has a "tax home"
in the United States, in which case the nonresident alien individual will be
subject to a 30% United States withholding tax on the amount of such
individual's gain.
Even if Host Marriott does not qualify as or ceases to be a "domestically
controlled REIT," gain arising from the sale or exchange by a non-U.S.
shareholder of common stock would not be subject to United States taxation
under FIRPTA as a sale of a "United States real property interest" if:
(i) the common stock is "regularly traded," as defined by applicable
regulations, on an established securities market such as the NYSE; and
(ii) such non-U.S. shareholder owned, actually or constructively, 5% or
less of the common stock throughout the five-year period ending on the date
of the sale or exchange.
If gain on the sale or exchange of common stock were subject to taxation
under FIRPTA, the non-U.S. shareholder would be subject to regular United
States income tax with respect to such gain in the same manner as a taxable
U.S. shareholder (subject to any applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien individuals)
and the purchaser of the common stock would be required to withhold and remit
to the IRS 10% of the purchase price.
Backup Withholding Tax and Information Reporting.
Backup withholding tax generally is a withholding tax imposed at the rate of
31% on certain payments to persons that fail to furnish certain information
under the United States information reporting requirements. Backup withholding
and information reporting will generally not apply to distributions paid to
non-U.S. shareholders outside the United States that are treated as dividends
subject to the 30% (or lower treaty rate) withholding tax discussed above,
capital gain dividends or distributions attributable to gain from the sale or
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exchange by Host Marriott of United States real property interests. As a
general matter, backup withholding and information reporting will not apply to
a payment of the proceeds of a sale of common stock by or through a foreign
office of a foreign broker. Generally, information reporting (but not backup
withholding) will apply, however, to a payment of the proceeds of a sale of
common stock by a foreign office of a broker that:
(a) is a United States person;
(b) derives 50% or more of its gross income for certain periods from
the conduct of a trade or business in the United States;
(c) is a "controlled foreign corporation," which is, generally, a
foreign corporation controlled by United States shareholders; or
(d) is a foreign partnership, if at any time during its tax year, one
or more of its partners are United States persons (as defined in Treasury
regulations) who in the aggregate hold more than 50% of the income or
capital interest in the partnership or if, at any time during its tax year,
such foreign partnership is engaged in a United States trade or business.
If, however, the broker has documentary evidence in its records that the
holder is a non-U.S. shareholder and certain other conditions are met or the
shareholder otherwise establishes an exemption, information reporting will not
apply. Payment to or through a United States office of a broker of the proceeds
of a sale of common stock is subject to both backup withholding and information
reporting unless the shareholder certifies under penalty of perjury that the
shareholder is a non-U.S. shareholder, or otherwise establishes an exemption. A
non-U.S. shareholder may obtain a refund of any amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
IRS.
The IRS has issued final regulations regarding the withholding and
information reporting rules discussed above. In general, these regulations do
not alter the substantive withholding and information reporting requirements
but unify certification procedures and forms and clarify and modify reliance
standards. These regulations generally are effective for payments made after
December 31, 2000, subject to certain transition rules. A non-U.S. shareholder
should consult its own advisor regarding the effect of the new regulations.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated as of the date of this prospectus supplement, Salomon Smith Barney Inc.,
as the underwriter, has agreed to purchase, and the selling shareholders have
agreed to sell to the underwriter, 18,200,000 shares of our common stock.
The underwriting agreement provides that the obligation of the underwriter
to purchase the shares included in this offering are subject to approval of
legal matters by counsel and to other conditions. The underwriter is obligated
to purchase all the shares if it purchases any of the shares.
The underwriter proposes to offer the shares directly to the public at the
public offering price set forth on the cover page of this prospectus
supplement. If all of the shares are not sold at the initial offering price,
the underwriter may change the public offering price and the other selling
terms.
We, the selling shareholders and certain persons and entities affiliated
with the selling shareholders have agreed that, for a period of 30 days from
the date of this prospectus supplement, we and they will not, without the prior
written consent of the underwriter, dispose of or hedge any shares of our
common stock or any securities convertible into or exchangeable for our common
stock, subject to various exceptions contained in this prospectus supplement
and in the underwriting agreement. The underwriter in its sole discretion may
release any of the securities subject to these lock-up agreements at any time
without notice.
Our common stock is listed on the New York Stock Exchange under the symbol
"HMT."
The following table shows the underwriting discounts and commissions that
the selling shareholders are to pay to the underwriter in connection with this
offering.
Paid by
Selling
Shareholders
------------
Per share....................................................... $ 0.10
Total........................................................... $1,820,000
In addition to the underwriting discount, the underwriter will receive a
commission from all investors in the amount of $.05 for each share of common
stock sold to those investors in this offering.
In connection with the offering, the underwriter may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, covering transactions and stabilizing transactions. Short sales involve
sales of common stock in excess of the number of shares to be purchased by the
underwriter in the offering, which creates a short position. The underwriter
must close out any short position by purchasing shares of common stock in the
open market. A short position is more likely to be created if the underwriter
is concerned that there may be downward pressure on the price of the shares in
the open market after pricing that could adversely affect investors who
purchase in the offering. Stabilizing transactions consist of bids for or
purchases of shares in the open market while the offering is in progress.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the common stock. They may also cause the price
of the common stock to be higher than the price that would otherwise exist in
the open market in the absence of these transactions. The underwriter may
conduct these transactions on the New York Stock Exchange or in the over-the-
counter market, or otherwise. If the underwriter commences any of these
transactions, it may discontinue them at any time.
We and the selling shareholders estimate that our respective portions of the
total expenses of this offering will be $150,000 and $50,000.
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The underwriters have performed investment banking and advisory services for
us and the selling shareholders from time to time for which they have received
customary fees and expenses. The underwriter may, from time to time, engage in
transactions with and perform services for us and the selling shareholders in
the ordinary course of their business.
We and the selling shareholders have agreed to indemnify the underwriter
against certain liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriter may be required to make
because of any of those liabilities.
EXPERTS
The audited financial statements and schedules incorporated by reference in
the prospectus accompanying this prospectus supplement and elsewhere in the
registration statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
incorporated by reference herein in reliance upon the authority of said firm as
experts in giving said reports.
LEGAL MATTERS
Specified legal matters in connection with this offering will be passed upon
for Host Marriott by Hogan & Hartson L.L.P., and David E. Reichmann, Esq.,
Assistant General Counsel of Host Marriott. Specified legal matters in
connection with this offering will be passed upon for the underwriter by Sidley
Austin Brown & Wood LLP.
S-54
PROSPECTUS
47,713,875 Shares
HOST MARRIOTT CORPORATION
Common Stock
The persons or entities listed herein, who may become shareholders of Host
Marriott Corporation, may offer and sell from time to time up to 47,713,875
shares of our common stock under this prospectus. We refer to such persons or
entities as the selling shareholders. We may issue the offered shares to the
selling shareholders if and to the extent that such selling shareholders redeem
their units of limited partnership interest in Host Marriott, L.P. and we
choose to issue to them our common stock in exchange for their partnership
units. We are registering the offered shares as required under the terms of a
registration rights agreement between the selling shareholders and us. Fifty
percent of the offered shares (23,856,938 shares) become eligible for sale
commencing on or after July 1, 1999; twenty five percent (11,928,469 shares)
become eligible for sale commencing on or after October 1, 1999; and the
remaining twenty five percent (11,928,468 shares) become eligible for sale
commencing on or after January 1, 2000. Our registration of the offered shares
does not mean that any of the selling shareholders will offer or sell any of
the offered shares. We will receive no proceeds of any sales of the offered
shares by the selling shareholders, but we will incur expenses in connection
with the offering.
The selling shareholders may sell the offered shares in public or private
transactions, on or off the New York Stock Exchange, at prevailing market
prices or at privately negotiated prices. The selling shareholders may sell the
offered shares directly or through agents or broker-dealers acting as principal
or agent, or in a distribution by underwriters.
Our common stock is listed on the New York Stock Exchange under the symbol
"HMT."
Neither the Securities and Exchange Commission nor any state securities
commission has approved of these offered shares, or determined if this
prospectus is truthful or complete. It is illegal for any person to tell you
otherwise.
The date of this prospectus is July 2, 1999.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement on Form S-3 that we
filed with the Commission under the Securities Act of 1933. This prospectus
and any accompanying prospectus supplement do not contain all of the
information included in the registration statement. For further information,
we refer you to the registration statement, including its exhibits. Statements
contained in this prospectus and any accompanying prospectus supplement about
the provisions or contents of any agreement or other document are not
necessarily complete. If the Commission's rules and regulations require that
such agreement or document be filed as an exhibit to the registration
statement, please see such agreement or document for a complete description of
these matters. You should not assume that the information in this prospectus
or any prospectus supplement is accurate as of any date other than the date on
the front of each document.
This prospectus provides you with a general description of the offered
shares. Each time a selling shareholder sells any of the offered shares, the
selling shareholder will provide you with this prospectus and a prospectus
supplement, if applicable, that will contain specific information about the
terms of that offering. The prospectus supplement may also add, update or
change any information contained in this prospectus. You should read both this
prospectus and any prospectus supplement together with additional information
described under the heading "Where You Can Find More Information."
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Commission. You may read and copy materials that we have
filed with the Commission, including the registration statement, at the
following Commission public reference rooms:
450 Fifth Street, N.W. 7 World Trade Center 500 West Madison Street
Room 1024 Suite 1300 Suite 1400
Washington, D.C. 20549 New York, New York 10048 Chicago, Illinois 60661
Please call the Commission at 1-800-SEC-0330 for further information on the
public reference rooms.
Our Commission filings can also be read at the following address:
New York Stock Exchange
20 Broad Street
New York, New York 10005
Our Commission filings are also available to the public on the Commission's
Web Site at http://www.sec.gov.
The Commission allows us to "incorporate by reference" the information we
file with them, which means that we can disclose important information to you
by referring you to those documents. The information incorporated by reference
is an important part of this prospectus, and information that we file later
with the Commission will automatically update and supersede this information.
We incorporate by reference the documents listed below and any future filings
made with the Commission under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 until all of the offered securities to which
this prospectus relates have been sold or the offering is otherwise
terminated.
1. Annual Report on Form 10-K for the fiscal year ended December 31,
1998 (filed on March 26, 1999).
2. Quarterly Report on Form 10-Q for the quarter ended March 31, 1999
(filed on May 10, 1999).
3. Current Report on Form 8-K (filed on May 3, 1999).
4. Description of our common stock included in a Registration Statement
on Form 8-A filed on November 18, 1998 (as amended on December 28, 1998).
5. Description of our Rights included in a Registration Statement on
Form 8-A filed on December 11, 1998 (as amended on December 24, 1998).
You may request a copy of these filings, at no cost, by writing us at the
following address or telephoning us at (301) 380-2070 between the hours of 9:00
a.m. and 4:00 p.m., Eastern Time:
Corporate Secretary
Host Marriott Corporation
10400 Fernwood Road
Bethesda, Maryland 20817
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. In addition to historical
information, this prospectus and other materials filed or to be filed by us
with the Commission and incorporated by reference in this prospectus contain or
will contain forward-looking statements within the meaning of the federal
securities laws, including the cautionary statements incorporated by reference
from our Annual Report on Form 10-K for the year ended December 31, 1998 under
the caption "Risk Factors" and other similar statements contained elsewhere in
the Form 10-K. Forward-looking statements include information relating to our
intent, belief or current expectations, primarily, but not exclusively, with
respect to:
. economic outlook;
. capital expenditures;
. cost reductions;
. cash flow;
. operating performance;
. financing activities;
. our tax status; or
. related industry developments, including trends affecting our business,
financial condition and results of operations.
We intend to identify forward-looking statements in this prospectus and
other materials filed or to be filed by us with the Commission and incorporated
by reference in this prospectus by using words or phrases such as "anticipate,"
"believe," "estimate," "expect," "intend," "may be," "objective," "plan,"
"predict," "project" and "will be" and similar words or phrases, or the
negatives thereof or other similar variations thereof or comparable
terminology.
All forward-looking statements involve known and unknown risks,
uncertainties and other factors which may cause our actual transactions,
results, performance or achievements to be materially different from any future
transactions, results, performance or achievements expressed or implied by such
forward-looking statements. These risks and uncertainties include the following
factors that could affect such forward-looking statements:
. national and local economic and business conditions that will, among
other things, affect demand for hotels and other properties, the level of
rates and occupancy that can be achieved by such properties and the
availability and terms of financing;
. the ability to maintain the properties in a first-class manner, including
meeting capital expenditure requirements;
. our ability to compete effectively in areas such as access, location,
quality of accommodations and room rate structures;
. our ability to acquire or develop additional properties and the risk that
potential acquisitions or developments may not perform in accordance with
expectations;
2
. changes in travel patterns, taxes and government regulations which
influence or determine wages, prices, construction procedures and costs;
. governmental approvals, actions and initiatives including the need for
compliance with environmental and safety requirements, and changes in
laws and regulations or the interpretation thereof;
. the effects of tax legislative action, including the possible enactment
of the Real Estate Investment Trust Modernization Act of 1999; and
. our ability to satisfy the complex rules in order to qualify for taxation
as a REIT for federal income tax purposes and to operate effectively
within the limitations imposed by these rules.
Although we believe the expectations reflected in such forward-looking
statements are based upon reasonable assumptions, we can give you no assurance
that such expectations will be attained or that any deviations will not be
material. We undertake no obligation to publicly release the results of any
revisions to these forward-looking statements that may be made to reflect any
future events or circumstances.
As used herein and in any accompanying prospectus supplement, "Host
Marriott," "Company," "our," "us" or "we" refer to Host Marriott Corporation, a
Maryland corporation, and one or more of our subsidiaries, including Host
Marriott, L.P., a Delaware limited partnership, and all the predecessors, or,
as the context may require, Host Marriott Corporation only or Host Marriott,
L.P. only. All references to Host Delaware shall mean our predecessor, Host
Marriott Corporation, a Delaware corporation.
THE COMPANY
Host Marriott was formed to continue and expand the hotel lodging property
ownership business of its predecessors. Host Marriott succeeded to this
business as a result of its merger with Host Marriott Corporation, a Delaware
corporation, and other restructuring transactions consummated in December 1998
which we refer to as the "REIT conversion." Host Marriott is one of the largest
owners of hotels in the world, with ownership of, or controlling interests in,
approximately 124 upscale and luxury full-service hotel lodging properties in
its portfolio as of June 30, 1999. Virtually all of these properties are leased
to subsidiaries of Crestline Capital Corporation, a Maryland corporation and
formerly a wholly owned subsidiary of Host Marriott, and are generally operated
under the Marriott and Ritz-Carlton brand names and managed by Marriott
International, Inc. Host Marriott will make an election to be taxed as a REIT
for federal income tax purposes effective for its taxable year beginning
January 1, 1999. Host Marriott owns substantially all of its assets and
conducts substantially all of its business through Host Marriott, L.P. and its
subsidiaries. Host Marriott is the sole general partner of Host Marriott, L.P.
Our principal executive offices are located at 10400 Fernwood Road,
Bethesda, Maryland 20817-1109, and our telephone number is (301) 380-9000.
NO PROCEEDS TO THE COMPANY
We will not receive any of the proceeds from sales of the offered shares by
the selling shareholders. We will pay all costs and expenses incurred in
connection with the offering of the offered shares, other than any brokerage
fees and commissions, fees and disbursements of legal counsel for the selling
shareholders and share transfer and other taxes attributable to the sale of the
common stock, which will be paid by the selling shareholders.
SELLING SHAREHOLDERS
The selling shareholders hold 47,713,875 units of limited partnership
interest in Host Marriott, L.P. which they acquired on December 30, 1998 in
exchange for properties and assets. We may issue the offered shares to
3
the selling shareholders if and to the extent that they redeem their
partnership units and we elect to issue to them shares of our common stock in
exchange. The following table provides the name of each selling shareholder and
the number of shares of common stock that may be issued to and offered by each
selling shareholder. As of June 30, 1999, none of the selling shareholders owns
any shares of common stock. All the offered shares offered by a selling
shareholder represent shares of common stock that may be issued by us upon the
redemption of the selling shareholder's partnership units. The offered shares,
if issued, will become eligible for sale pursuant to the following schedule:
fifty percent (50%), or 23,856,938 shares, will become eligible for sale
commencing on or after July 1, 1999; twenty five percent (25%), or 11,928,469
shares, will become eligible for sale commencing on or after October 1, 1999;
and the remaining twenty five percent (25%), or 11,928,468 shares, will become
eligible for sale commencing on or after January 1, 2000. Since the selling
shareholders may sell all, some or none of the offered shares, no estimate can
be made of the number of offered shares that will be sold by the selling
shareholders or that will be owned by the selling shareholders upon completion
of the offering. The offered shares represent approximately 21% of the total
shares of common stock outstanding as of June 30, 1999, assuming redemption of
all outstanding partnership units for shares of common stock.
Number of Shares of
Common Stock
Name of Selling Shareholder Offered Hereby
--------------------------- -------------------
Blackstone Real Estate Partners I L.P....................... 4,356,783
Blackstone Real Estate Partners Two L.P..................... 285,679
Blackstone Real Estate Partners Three L.P................... 2,771,544
Blackstone Real Estate Partners IV L.P...................... 87,134
Blackstone RE Capital Partners L.P.......................... 454,392
Blackstone RE Capital Partners II L.P....................... 49,873
Blackstone RE Offshore Capital Partners L.P................. 87,732
Blackstone Real Estate Holdings L.P......................... 2,394,697
Blackstone Real Estate Partners II L.P...................... 13,315,506
Blackstone Real Estate Holdings II L.P...................... 3,737,981
Blackstone Real Estate Partners II.TE.1 L.P................. 11,204,854
Blackstone Real Estate Partners II.TE.2 L.P................. 484,448
Blackstone Real Estate Partners II.TE.3 L.P................. 2,303,484
Blackstone Real Estate Partners II.TE.4 L.P................. 468,555
Blackstone Real Estate Partners II.TE.5 L.P................. 985,554
BRE Logan Hotel, Inc........................................ 31,957
RTZ Management Corp......................................... 14
CR/RE L.L.C................................................. 27,078
BRE/Ceriale L.L.C........................................... 468,470
BRE/Cambridge L.L.C......................................... 263,025
HT-Burlingame Limited Partnership........................... 1,414,277
H-OP, LLC................................................... 729,523
HE-HM, LLC.................................................. 578,051
Merrill Lynch, Pierce, Fenner & Smith Incorporated.......... 448,926
Merrill Lynch Mortgage Capital Inc.......................... 484,179
White Oak Land Corp......................................... 247,786
David Rubenstein............................................ 30,057
Duke University............................................. 1,883
Trustees of the University of Pennsylvania.................. 433
----------
Total..................................................... 47,713,875
==========
4
PLAN OF DISTRIBUTION
Any of the selling shareholders may from time to time, in one or more
transactions, sell all or a portion of the offered shares on the New York Stock
Exchange, in the over-the-counter market, on any other national securities
exchange on which the common stock is listed or traded, in negotiated
transactions, in underwritten transactions or otherwise, at prices then
prevailing or related to the then current market price or at negotiated prices.
The offering price of the offered shares from time to time will be determined
by the selling shareholders and, at the time of such determination, may be
higher or lower than the market price of the common stock on the New York Stock
Exchange. In connection with an underwritten offering, underwriters or agents
may receive compensation in the form of discounts, concessions or commissions
from a selling shareholder or from purchasers of the offered shares for whom
they may act as agents, and underwriters may sell the offered shares to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or commissions
from the purchasers for whom they may act as agents. The offered shares may be
sold directly or through broker-dealers acting as principal or agent, or
pursuant to a distribution by one or more underwriters on a firm commitment or
best-efforts basis. The methods by which the offered shares may be sold
include:
. a block trade in which a broker-dealer will attempt to sell the offered
shares as agent but may position and resell a portion of the block as
principal to facilitate the transaction;
. purchases by a broker-dealer as principal and resale by the broker-dealer
for its account pursuant to this prospectus;
. ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
. an exchange distribution in accordance with the rules of the New York
Stock Exchange;
. privately negotiated transactions; and
. underwritten transactions.
The selling shareholders and any underwriters, dealers or agents
participating in the distribution of the offered shares may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit on the
sale of the offered shares by the selling shareholders and any commissions
received by an such broker-dealers may be deemed to be underwriting commissions
under the Securities Act.
When a selling shareholder elects to make a particular offer of the offered
shares, this prospectus and a prospectus supplement, if required, will be
distributed which will identify any underwriters, dealers or agents and any
discounts, commissions and other terms constituting compensation from such
selling shareholder and any other required information.
In order to comply with the securities laws of certain states, if
applicable, the offered shares may be sold only through registered or licensed
brokers or dealers. In addition, in certain states, the offered shares may not
be sold unless they have been registered or qualified for sale in such state or
an exemption from such registration or qualification requirement is available
and is complied with.
We have agreed to pay all costs and expenses incurred in connection with the
registration under the Securities Act of the offered shares, including, without
limitation, all registration and filing fees, printing expenses and fees and
disbursements of our counsel and accountants. The selling shareholders will pay
any brokerage fees and commissions, fees and disbursements of legal counsel for
the selling shareholders and stock transfer and other taxes attributable to the
sale of the offered shares. Under agreements that may be entered into by us,
underwriters, dealers and agents who participate in the distribution of the
offered shares, and their respective directors, trustees, officers, partners,
agents, employees and affiliates, may be entitled to indemnification by us
against specified liabilities, including liabilities, losses, claims, damages
and expenses and any actions or proceedings arising under the securities laws
in connection with this offering, or to contribution with respect to payments
which such underwriters, dealers or agents may be required to make in
5
respect thereof. We also have agreed to indemnify each of the selling
shareholders and each person who controls (within the meaning of the Securities
Act) such selling shareholder, and their respective directors, trustees,
officers, partners, agents, employees and affiliates, against specified losses,
claims, damages, liabilities and expenses and any actions or proceedings
arising under the securities laws in connection with this offering. Each of the
selling shareholders has agreed to indemnify us, each person who controls us
(within the meaning of the Securities Act), underwriters, dealers and agents,
and each of our and their directors, trustees, officers, partners, agents,
employees and affiliates, against specified losses, claims, damages,
liabilities and expenses arising and any actions or proceedings under the
securities laws in connection with this offering with respect to written
information furnished to us by such selling shareholder; provided, however,
that the indemnification obligation is several, not joint, as to each selling
shareholder.
EXPERTS
The consolidated financial statements and schedule appearing in our Annual
Report on Form 10-K for the year ended December 31, 1998, incorporated by
reference in this prospectus and elsewhere in the registration statement, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are incorporated by
reference herein in reliance upon the authority of said firm as experts in
giving said report.
LEGAL MATTERS
The validity of the offered shares will be passed upon for us by Hogan &
Hartson L.L.P., Washington, D.C. If any portion of the offered shares is
distributed in an underwritten offering or through agents, certain legal
matters may be passed upon for any agents or underwriters by counsel for such
agents or underwriters identified in the applicable prospectus supplement.
6
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18,200,000 Shares
Host Marriott Corporation
Common Stock
[LOGO OF HOST MARRIOTT]
--------
PROSPECTUS SUPPLEMENT
May 29, 2001
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Salomon Smith Barney
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