ITEM 1. BUSINESS
Description of the Partnership
Courtyard by Marriott Limited Partnership, a Delaware limited partnership (the "Partnership"), was formed on July 15, 1986 to acquire and own 50 Courtyard by Marriott hotels (the "Hotels") and the respective fee or leasehold interests in the land on which the Hotels are located. The Hotels are located in 16 states and contain a total of 7,223 guest rooms as of December 31, 1998. The Partnership commenced operations on August 20, 1986 and will terminate on December 31, 2086, unless earlier dissolved. Prior to December 24, 1998 the sole general partner of the Partnership, with a 5% interest was CBM One Corporation ("CBM One"), a wholly owned subsidiary of Host Marriott Corporation ("Host Marriott").
The Partnership is engaged solely in the business of owning and operating hotels and therefore is engaged in one industry segment. The principal offices of the Partnership are located at 10400 Fernwood Road, Bethesda, Maryland 20817.
The Hotels are operated as part of the Courtyard by Marriott system, which includes over 343 hotels worldwide in the moderately-priced segment of the U.S. lodging industry. The Hotels are managed by Courtyard Management Corporation (the "Manager"), a wholly-owned subsidiary of Marriott International, Inc. ("MII"). As part of the refinancing in March 1997, the two Operating Agreements were converted into a single management agreement (the "Management Agreement") effective January 4, 1997. The initial term of the Management Agreement expires at the end of 2017. The Manager can extend the Management Agreement for up to four successive periods of ten years. The Hotels have the right to use the Courtyard by Marriott name pursuant to the Management Agreement and, if the Management Agreement is terminated or not renewed, the Partnership would lose that right for all purposes (except as part of the Partnership's name). See Item 13 "Certain Relationships and Related Transactions."
The objective of the Courtyard by Marriott system, including the Hotels, is to provide consistently superior lodging at a fair price with an appealing, friendly and contemporary residential character. Courtyard by Marriott hotels generally have fewer guest rooms than traditional, full-service hotels, in most cases containing approximately 150 guest rooms, including approximately 12 suites, as compared to full-service Marriott hotels which typically contain 350 or more guest rooms.
Each Courtyard by Marriott hotel is designed around a courtyard area containing a swimming pool (indoor pool in northern climates), walkways, landscaped areas and a gazebo. Each Hotel generally contains a small lobby, a restaurant with seating for approximately 50 guests, a lounge, a hydrotherapy pool, a guest laundry, an exercise room and two small meeting rooms. The hotels do not contain as much public space and related facilities as full-service hotels.
Courtyard by Marriott hotels are designed for business and vacation travelers who desire high quality accommodations at moderate prices. Most of the Hotels are located in suburban areas near office parks or other commercial activities. See Item 2
ITEM 2. PROPERTIES
Introduction
The properties consisted of 50 Courtyard by Marriott hotels as of December 31, 1998. The Hotels have been in operation for at least ten years. The Hotels range in age between 11 and 16 years. The Hotels are geographically diversified among 16 states, and no state has more than nine Hotels.
The lodging industry in general, and the moderately-priced segment in particular, is highly competitive, but the degree of competition varies from location to location and over time. On a combined basis, competitive forces affecting the Hotels are not, in the opinion of the General Partner, more adverse than the overall competitive forces affecting the lodging industry generally. See Item 1 "Business--Competition."
The following table sets forth certain information related to the Hotels.
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP HOTELS (50 Courtyard Hotels)
Location Rooms Alabama Montgomery (1) 146
Arizona Phoenix Airport (1) 145
California Buena Park (1) 145 Fremont (1) 146 Pleasanton 145 Sacramento-Rancho Cordova 144 San Francisco Airport (2) 147 Santa Ana (1) 145
Connecticut Windsor (1) 149
Florida Melbourne (1) 146 Miami Airport-West (1) 145 Tallahassee (1) 154
Georgia Atlanta-Delk Road (1) 146 Atlanta-Executive Park (1) 145 Atlanta-Northlake (2) 128 Atlanta-Peachtree Corners 131 Atlanta-Peachtree Dunwoody 128 Atlanta-Windy Hill 127 Augusta 130 Columbus 139 Savannah 144
Illinois Naperville (1) 147
Maryland Hunt Valley (1) 146 Landover 152 Rockville (1) 147
(1) Land is leased from an affiliate of MII. (2) Land is leased from a third party.
Location Rooms Michigan Dearborn (1) 147 Southfield 147 Troy 147 Warren 147
North Carolina Charlotte-Arrowood Road (1) 146 Raleigh-Wake Forest Road 153
New York Tarrytown 139
Ohio Cincinnati-Blue Ash (1) 149 Columbus-Dublin (1) 147 Columbus-Worthington (1) 145
Pennsylvania Valley Forge (1) 150
Tennessee Brentwood (1) 145 Memphis-Park Avenue East (1) 146
Texas Arlington 147 Bedford (1) 145 Dallas-Addison (1) 145 Dallas-Las Colinas 147 Dallas-LBJ Northwest (1) 146 San Antonio Airport (1) 145 San Antonio-Medical Center (1) 146
Virginia Fair Oaks 144 Herndon (1) 146 Hampton (1) 146 Richmond (1) 145 Virginia Beach (1) 146 ---------
Total: 7,223
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Marvin Schick and Jack Hirsch, the plaintiffs in a class action lawsuit styled Marvin Schick, et al. v. Host Marriott Corporation, et al., Civil Action No. 15991, filed their complaint on October 16, 1997 in Delaware Chancery Court against the General Partner, the Manager and certain of their respective affiliates, officers and directors. The plaintiffs' claim that the General Partner agreed to decrease the owner's priority under the terms of the Management Agreement for the benefit of the Manager without obtaining the consent of the limited partners. The lawsuit includes claims against Host Marriott and the General Partner for breach of contract and breach of fiduciary duty, and against Marriott International, Inc. and the Manager for interference with contract and aiding and abetting in the breach of fiduciary duties. The General Partner believes that the change in the Management Agreement did not require limited partner approval, because, among other things, it did not result in an increase in compensation to the Manager. The defendants filed an answer to the plaintiffs' complaint and asserted a number of defenses. The parties to this lawsuit have reached a tentative agreement to settle the matter and are in the process of negotiating the details of the settlement.
On February 11, 1998, four individual limited partners in partnerships sponsored by Host Marriott, filed a class action lawsuit, styled Ruben, et al. v. Host Marriott Corporation, et al., Civil Action No. 16186, in Delaware State Chancery Court against Host Marriott and the general partners of Courtyard by Marriott Limited Partnership, Courtyard by Marriott II Limited Partnership, Marriott Residence Inn Limited Partnership, Marriott Residence Inn II Limited Partnership, and Fairfield Inn by Marriott Limited Partnership (collectively, the "Five Partnerships"). The plaintiffs alleged that the proposed merger of the Five Partnerships (the "Merger") into an umbrella partnership real estate investment trust proposed by CRF Lodging Company, L.P. in a preliminary registration statement filed with the Securities and Exchange Commission, dated December 22, 1997, constituted a breach of the fiduciary duties owed to the limited partners of the Five Partnerships by Host Marriott and the general partners of the Five Partnerships. In addition, the plaintiffs alleged that the Merger breached various agreements relating to the Five Partnerships. The plaintiffs sought, among other things, the following: certification of a class; injunctive relief to block consummation of the Merger or, in the alternative, rescission of the Merger; and damages. The defendants, in light of market conditions, decided to abandon their efforts to complete the initial Merger. As a result of this decision, the plaintiffs voluntarily dismissed the lawsuits.
On March 16, 1998, limited partners in several partnerships sponsored by Host Marriott, filed a lawsuit, styled Robert M. Haas, Sr. and Irwin Randolph Joint Tenants, et al. v. Marriott International, Inc., et al., Case No. 98-CI-04092, in the 57th Judicial District Court of Bexar County, Texas against Marriott International, Inc., Host Marriott, various of their subsidiaries, J.W. Marriott, Jr., Stephen Rushmore, and Hospitality Valuation Services, Inc. (collectively, the "Defendants"). The lawsuit relates to the following limited partnerships: Courtyard by Marriott Limited Partnership, Courtyard by Marriott II Limited Partnership, Marriott Residence Inn Limited Partnership, Marriott Residence Inn II Limited Partnership, Fairfield Inn by Marriott Limited Partnership, Desert Springs Marriott Limited Partnership and Atlanta Marriott Marquis Limited Partnership (collectively, the "Seven Partnerships"). The plaintiffs allege that the Defendants conspired to sell hotels to the Seven Partnerships for inflated prices and that they charged the Seven Partnerships excessive management fees to operate the Seven Partnerships' hotels. The plaintiffs further allege, among other things, that the Defendants committed fraud, breached fiduciary duties, and violated the provisions of various contracts. The plaintiffs are seeking unspecified damages. The Defendants, which do not include the Seven Partnerships, believe that there is no truth to the plaintiffs' allegations and that the lawsuit is totally devoid of merit. The Defendants intend to vigorously defend against the claims asserted in the lawsuit. They have filed an answer to the plaintiffs' petition and asserted a number of defenses. A related case concerning Courtyard by Marriott II Limited Partnership filed by the plaintiff's lawyers in the same court involves similar allegations against the defendants, and has been certified as a class action. Trial in this related case is presently scheduled for May 1999. Due to the prosecution of the related case, there has been no meaningful activity in the Haas case. Although the Seven Partnerships have not been named as Defendants in the lawsuit, the partnership agreements relating to the Seven Partnerships include an indemnity provision which requires the Seven Partnerships, under certain circumstances, to indemnify the general partners against losses, expenses and fees.
The Partnership and the Hotels are involved in routine litigation and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance and which collectively are not expected to have a material adverse effect on the business, financial condition or results of operations of the Partnership.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5.
ITEM 5. MARKET FOR THE PARTNERSHIP'S LIMITED PARTNERSHIP UNITS AND RELATED SECURITY HOLDER MATTERS
There is currently no established public trading market for the units and it is not anticipated that a public market for the Units will develop. Transfers of Units are limited to the first date of each accounting period and may be made only to accredited investors. All transfers are subject to approval by the General Partner. As of December 31, 1998, there were 1,084 holders (including holders of half-units) of record of the 1,150 Units.
In accordance with Sections 4.07 and 4.10 of the Partnership Agreement, cash available for distribution for any year will be distributed at least annually to the general and limited partners (the "Partners") of record at the end of each accounting period during such year as follows:
(i) first, through and including the end of the accounting period during which the Partners shall have received cumulative distributions of sales or refinancing proceeds ("Capital Receipts") equal to $60,526,500, 5% to the General Partner and 95% to the limited partners;
(ii) next, through and including the end of the accounting period during which the Partners shall have received cumulative distributions of Capital Receipts equal to $121,053,000, 15% to the General Partner and 85% to the limited partners; and
(iii) thereafter, 30% to the General Partner and 70% to the limited partners.
Cash available for distribution means, with respect to any fiscal period, the cash revenues of the Partnership from all sources during the fiscal period, other than Capital Receipts, less (i) all cash expenditures of the Partnership during such fiscal period, including, without limitation, repayment of all Partnership indebtedness to the extent required to be paid, but not including expenditures of Capital Receipts, plus fees for management services and administrative expenses and (ii) such reserves as may be determined by the General Partner, in its sole discretion to be necessary to provide for the foreseeable needs of the Partnership.
As of December 31, 1998, the Partnership has distributed a total of $4,187,271 to the General Partner and $79,553,152 to the limited partners ($69,177 per limited partner unit) since inception. Included in the $69,177 of distributions per limited partner unit was $4,000 per limited partner unit distribution from excess refinancing proceeds that was distributed to the partners in 1988 and the $25,000 per limited partner unit from 1997 excess refinancing proceeds. During 1998, the Partnership distributed $605,000 to the General Partners and $11,495,000 ($2,000 and $8,000 per limited partner unit from 1998 and 1997 operations, respectively) to the limited partners. An additional $2,000 per limited partner unit from 1998 operations will be distributed in April 1999.
In 1997, the Partnership made a partial return of capital distribution of $1,513,158 to the General Partner and $28,750,000 to the limited partners ($25,000 per limited partner unit) from excess refinancing proceeds. In addition, during 1997, the Partnership distributed $484,211 to the General Partner and $9,200,000 to the limited partners ($8,000 per limited partner unit) from 1997 operations. An additional $2,000 per limited partner unit was distributed in 1998.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data presents historical operating information for the Partnership for each of the five years in the period ended December 31, 1998 presented in accordance with generally accepted accounting principles (in thousands, except per unit amounts):
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Form 10-K include forward-looking statements and as such may involve known and unknown risks, uncertainties and other factors which may cause the 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. The cautionary statements set forth in reports filed under the Securities Act of 1934 contained important factors with respect to such forward-looking statements, including: (i) national and local economic and business conditions that will, among other things, affect demand for hotels and other properties, the level or rates and occupancy that can be achieved by such properties and the availability and terms of financing; (ii) the ability to compete effectively; (iii) changes in travel patterns, taxes and government regulations; (iv) governmental approvals, actions and initiatives; and (v) the effects of tax legislative action. Although the Partnership believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be attained or that any deviations will not be material. The Partnership undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect any future events or circumstances.
GENERAL
The following discussion and analysis addresses results of operations for the fiscal years ended December 31, 1998, 1997 and 1996. During the period from 1996 through 1998, the Partnership's total revenues grew from $181.6 million to $201.3 million. Growth in room sales, and thus hotel sales, was driven primarily by growth in room revenue per available room ("REVPAR"). REVPAR is a commonly used indicator of market performance for hotels which represents the combination of daily room rate charged and the average daily occupancy achieved. REVPAR does not include food and beverage or other ancillary revenues generated by the property. During the period from 1997 through 1998, the Hotels' combined average room rate increased by $6 to $87, while the combined average occupancy remained stable at approximately 80%.
The Partnership's operating costs and expenses are, to a great extent, fixed. Therefore, the Partnership derives substantial operating leverage from increases in revenue offset in part by (i) base and Courtyard management fees under the Management Agreement, which are each 3% of gross hotel sales, (ii) incentive management fees equal to 15% of operating profit, and (iii) variable ground lease payments.
RESULTS OF OPERATIONS
Revenues primarily represent the gross sales generated by the Partnership's Hotels. Total hotel sales less hotel property-level costs and expenses equals house profit which reflects the net amounts flowing to the Partnership as the property owner. As discussed below, the Partnership previously recorded only the house profit generated by the Partnership's Hotels as revenue.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on EITF 97-2, "Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements." EITF 97-2 addresses the circumstances in which a management entity may include the revenues and expenses of a managed entity in its financial statements.
The Partnership considered the impact of EITF 97-2 on its financial statements and determined that EITF 97-2 requires the Partnership to include property-level sales and operating expenses of its Hotel in its statements of revenues and expenses for the period during which the Partnership operated the Hotel through a management agreement. The Partnership has given retroactive effect to the adoption of EITF 97-2 in the accompanying statement of revenues and expenses. Application of EITF 97-2 to the financial statements for the fiscal years ended December 31, 1998, 1997 and 1996 increased both revenues and operating expenses by approximately $100.1 million, $94.2 million, and $91.3 million respectively, and had no impact on operating profit or net income.
The following table shows selected combined operating and financial statistics for the Hotels (in thousands, except combined average occupancy, combined average daily room rate, REVPAR and number of rooms.
1998 Compared to 1997:
Revenues. Revenues increased $11.8 million, or 6%, to $201.3 million in 1998 from $189.6 million in 1997 as a result of strong growth in REVPAR of 7%. The increase in REVPAR was primarily a result of a 7% increase in combined average daily room rates. Additionally, food and beverage revenues increased $524,000.
Operating Costs and Expenses. Operating costs and expenses increased $8.1 million, or 5%, to $157.0 million in 1998 from $148.9 million in 1997, primarily reflecting an increase in base, Courtyard and incentive management fees associated with increased revenues and operating profit as well as an increase in property-level costs and expenses. As a percentage of hotel revenues, operating costs and expenses represented 78% of revenues for 1998 and 79% in 1997.
Total Hotel Property-Level Costs and Expenses. The 1998 total hotel property-level costs and expenses increased $5.8 million, or 6%. The increase is due to increases in both rooms costs and selling, administrative and other expenses.
Operating Profit. As a result of the changes in revenues and operating costs and expenses discussed above, operating profit increased $3.6 million to $44.3 million, or 22% of total revenues, in 1998 from $40.7 million, or 21% of revenues, in 1997.
Interest Expense. Interest expense increased $0.3 million to $26.3 million in 1998 from $26.0 million in 1997 from the increase in principal as a result of the 1997 refinancing.
Income Before Extraordinary Items. Income before extraordinary items increased $3.5 million to $18.9 million, or 9% of revenues, in 1998, from $15.3 million, or 8% of revenues, in 1997.
Extraordinary Items. The Partnership recognized an extraordinary gain in 1997 of $14.9 million representing the forgiveness of deferred management fees by the Manager. This extraordinary gain was combined with a loss on extinguishment of debt of $2.4 million resulting in a net extraordinary gain of $12.5 million. No extraordinary gain was recognized in 1998.
Net Income. Net income decreased $8.9 million to $18.9 million, or 9% of total revenues, in 1998 from $27.8 million, or 15% of total revenues, in 1997 due to the impact of the net extraordinary gain in the prior year, discussed above.
1997 Compared to 1996:
Revenues. Revenues increased $8.0 million, or 4%, to $189.6 million in 1997 from $181.6 million in 1996 as a result of strong growth in REVPAR of 7%. The increase in REVPAR was primarily a result of a 6% increase in combined average daily room rates and a one percentage point increase in combined average occupancy.
Operating Costs and Expenses. Operating costs and expenses increased $3.2 million, or 2%, to $148.9 million in 1997 from $145.7 million in 1996, primarily reflecting an increase in base and Courtyard management fees associated with increased revenues and operating profit. As a percentage of hotel revenues, operating costs and expenses represented 79% of revenues for 1997 and 80% in 1996.
Total Hotel Property-Level Costs and Expenses. The 1998 total hotel property-level costs and expenses increased $2.9 million, or 3%. The increase is due to increases in both rooms costs and selling, administrative and other expenses.
Property Taxes. Property taxes decreased by 12% during 1997 to $5.3 million when compared to 1996.
Insurance and Other. Insurance and other increased by 29% to $2.0 million when compared to 1996. The increase is primarily due to an increase in equipment rent and Partnership administrative expenses.
Operating Profit. As a result of the changes in revenues and operating costs and expenses discussed above, operating profit increased $4.7 million to $40.7 million, or 21% of total revenues, in 1997 from $36.0 million, or 20% of revenues, in 1996.
Interest Expense. Interest expense increased $2.5 million to $26.0 million due to the increased level of debt from $280.8 million to $325.0 million as a result of the refinancing in 1997.
Income before Extraordinary Items. Income before extraordinary items increased $1.9 million to $15.3 million, or 8% of revenues, in 1997, from $13.5 million, or 7% of revenues, in 1996.
Extraordinary Items. The Partnership recognized an extraordinary gain in 1997 of $14.9 million representing the forgiveness of deferred management fees by the Manager. This extraordinary gain was combined with a loss on extinguishment of debt of $2.4 million resulting in a net extraordinary gain of $12.5 million. No extraordinary gain was recognized in 1996.
Net Income. Net income increased $14.4 million to $27.8 million, or 15% of total revenues, in 1997 from $13.5 million, or 7% of total revenues, in 1996 due to improved lodging results and the impact of the net extraordinary gain discussed above.
CAPITAL RESOURCES AND LIQUIDITY
Principal Sources and Uses of Cash
The Partnership's principal source of cash is cash from operations. Cash provided by operations was $38.2 million, $31.7 million and $42.7 million for the years ended 1998, 1997 and 1996, respectively. The decrease from 1996 to 1997 was primarily due to $4.2 million of deferred incentive management fees paid in 1997 and no deferral of current incentive management fees in 1997. In accordance with to the new management agreement, unpaid incentive management fees will no longer accrue. The increase in cash from operations from 1997 to 1998 was primarily due to a 6% increase in revenues.
The Partnership's cash investing activities consist primarily of contributions to the property improvement fund and capital expenditures for improvements to existing hotels. Cash used in investing activities was $14.9 million, $16.8 million and $9.6 million for 1998, 1997 and 1996, respectively. As part of the debt refinancing, contributions to the property improvement fund will remain at 5% of gross Hotel sales through 1998 and may be increased by the Manager to 6% in 1999 and 2000 and 7% thereafter if the current contribution of 5% of gross Hotel sales is insufficient to make the replacements, renewals and repairs necessary to maintain the Hotels in accordance with the Manager's standards for Courtyard by Marriott hotels. Capital expenditures for hotel improvements were $11.1 million, $23.6 million and $19.1 million for the years ended December 31, 1998, 1997 and 1996, respectively. During 1996 and 1997 a majority of the Partnership's Hotels underwent room renovations and replacements.
The Partnership's financing activities primarily consist of capital distributions to its partners, repayments of debt and payment of financing costs, as well as the refinancing of the Partnership's mortgage debt. Cash used in financing activities was $19.5 million, $22.2 million and $31.4 million for 1998, 1997 and 1996, respectively. During 1998 and 1997 and 1996 the Partnership paid cash distributions of $12.1 million, $40.1 million and $2.3 million, respectively. Cash distributions in 1998 included $11.5 million to the limited partners ($10,000 per limited partner unit) and $0.6 million to the General Partner as a return on invested capital paid from refinancing proceeds. 1997 cash distributions included a $25,000 per unit return of investment from refinancing proceeds.
In February 1997, the Partnership repaid $8.2 million in principal on the 49 Hotels Loan with cash flow from 1996 operations. On March 21, 1997, the Partnership repaid $280.8 million in principal on the 49 Hotels Loan and the Windsor Loan from the proceeds of the debt refinancing. In addition, from March 22, 1997 through December 31, 1997, the Partnership repaid $4.6 million in principal on the refinanced debt. During 1996, the Partnership repaid $28.8 million in principal on the 49 Hotels Loan and the Windsor Loan. During 1998, the Partnership repaid $7.4 million in principal on the refinanced debt. The Partnership also paid $25.3 million, $24.8 million and $22.1 million of interest on its mortgage debt in 1998, 1997 and 1996, respectively.
Pursuant to the terms of the 50 Hotels Loan, the Partnership is required to establish with the lender a separate escrow account for payments of insurance premiums and real estate taxes for each Hotel if the credit rating of Marriott International, Inc. is downgraded by Standard and Poor's Rating Services. The Manager, Courtyard Management Corporation, is a wholly-owned subsidiary of Marriott International, Inc. In March 1997, MII acquired the Renaissance Hotel Group N.V., adding greater geographic diversity and growth potential to its lodging portfolio. The assumption of additional debt associated with this transaction resulted in a single downgrade of MII's long-term senior unsecured debt effective April 1997. The Partnership transferred $7.9 million into the reserve account during 1998. Out of the balance, approximately $6.9 million of real estate taxes were paid. The escrow reserve is included in restricted cash and the resulting tax and insurance liability is included in accounts payable and accrued liabilities in the accompanying balance sheet, as of December 31, 1998.
In addition, in connection with the 50 Hotels Loan, the Partnership was also required to reserve one month's debt service in a separate escrow account. In 1997, the Partnership transferred $2.8 million into the debt reserve account in order to meet this requirement. The debt service reserve is also included in restricted cash in the accompanying balance sheet.
Refinancing
In March 1997, the General Partner refinanced all of its outstanding mortgage debt. The total amount of debt increased from $280.8 million to $325 million. The $44.2 million of excess financing proceeds were used to make a $7 million contribution to the property improvement fund, a $30.2 million partial return of capital distribution to the partners and to pay $7 million of refinancing costs. The new non-recourse loan matures on April 10, 2012, requires principal amortization on a 20-year term and carries a fixed interest rate of 7.865%.
The land on which 31 of the Hotels are located is leased from affiliates of MII. The ground leases have remaining terms (including all renewal options) expiring between the years 2058 and 2081. The MII ground leases provide for rent based on specific percentages (from 2% to 9.75%) of certain sales categories, subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. The affiliates of MII, as land lessors, agreed to continue to subordinate their ownership interest as well as receipt of ground rent to debt service on the 50 Hotels Loan obtained March 21, 1997.
In connection with the refinancing, MII and affiliates agreed to subordinate their right to receive rental payments under the MII ground leases to the payment of debt service on the 50 Hotels Loan.
Property Improvement Fund
The Management Agreement requires annual contributions to a property improvement fund to ensure that the physical condition and product quality of the Hotels are maintained. Contributions to this fund are based on a percentage of annual total hotel sales, currently equal to 5%. The Partnership believes that the 5% contribution requirement is consistent with industry standards. However, in accordance with the Management Agreement, contributions to the property improvement fund may be increased by the Manager to 6% in 1999 and 2000 and 7% thereafter if the current contribution of 5% of gross Hotel sales is insufficient to make the replacements, renewals and necessary repairs to maintain the Hotels in accordance with the Manager's standards for Courtyard by Marriott hotels. The balance in the fund totaled $5.5 million as of December 31, 1998 and $1.6 million in 1997. Total capital expenditures for 1998, 1997 and 1996 were $11.1 million, $23.6 million and $19.1 million, respectively.
General
The General Partner believes that cash from hotel operations combined with the ability to defer 1% of the Courtyard management fee to the Manager and ground rent payments to affiliates of MII will provide adequate funds in the short term and long term for the operational needs of the Partnership.
Competition
The moderately priced lodging segment continues to be highly competitive. An increase in supply growth continued through 1998 with the introduction of a number of new national brands. It is expected that Courtyard will continue outperforming both national and local competitors. The brand is continuing to carefully monitor the introduction of new mid-priced brands including Wingate Hotels, Hilton Garden Inns, Four Points by Sheraton, Main Stay, Candlewood Hotels and Club Hotels.
Inflation
The rate of inflation has been relatively low in the past four years. The Manager is generally able to pass through increased costs to customers through higher room rates and prices. In 1998, the growth in average rates of Courtyard hotels exceeded inflationary costs.
Seasonality
Demand, and thus room occupancy, is affected by normally recurring seasonal patterns. For most of the Hotels, demand is higher in the spring and summer months (March through October) than during the remainder of the year.
Year 2000 Issues
Year 2000 issues have arisen because many existing computer programs and chip-based embedded technology systems use only the last two digits to refer to a year, and therefore do not properly recognize a year that begins with "20" instead of the familiar "19." If not corrected, many computer applications could fail or create erroneous results. The following disclosure provides information regarding the current status of the Partnership's Year 2000 compliance program.
Host Marriott has adopted the compliance program because it recognizes the importance of minimizing the number and seriousness of any disruptions that may occur as a result of the Year 2000 issue. Host Marriott's compliance program includes an assessment of Host Marriott's hardware and software computer systems and embedded systems, as well as an assessment of the Year 2000 issues relating to third parties with which Host Marriott has a material relationship or whose systems are material to the operations of the Partnership's Hotels. Host Marriott's efforts to ensure that its computer systems are Year 2000 compliant have been segregated into two separate phases: in-house systems and third-party systems.
In-House Systems. Host Marriott has invested in the implementation and maintenance of accounting and reporting systems and equipment that are intended to enable the Partnership to provide adequately for its information and reporting needs and which are also Year 2000 compliant. Substantially all of Host Marriott's in-house systems have already been certified as Year 2000 compliant through testing and other mechanisms, and Host Marriott has not delayed any systems projects due to the Year 2000 issue. Host Marriott is in the process of engaging a third party to review its Year 2000 in-house compliance. Host Marriott believes that future costs associated with Year 2000 issues for its in-house systems will be insignificant and, therefore, not impact the Partnership's business, financial condition and results of operations. Host Marriott has not developed, and does not plan to develop, a separate contingency plan for its in-house systems due to their current Year 2000 compliance.
Third-Party Systems. The Partnership relies upon operational and accounting systems provided by third parties, primarily the Manager of its Hotels, to provide the appropriate property-specific operating systems (including reservation, phone, elevator, security, HVAC and other systems) and to provide it with financial information. Based on discussions with the third parties that are critical to the Partnership's business, including the Manager of its Hotels, Host Marriott believes that these parties are in the process of studying their systems and the systems of their respective vendors and service providers and, in many cases, have begun to implement changes, to ensure that they are Year 2000 compliant. However, Host Marriott has not received any oral or written assurances that these third parties will be Year 2000 compliant on time. To the extent these changes impact property-level systems, the Partnership may be required to fund capital expenditures for upgraded equipment and software. The Partnership does not expect these charges to be material, but is committed to making these investments as required. To the extent that these changes relate to the Manager's centralized systems (including reservations, accounting, purchasing, inventory, personnel and other systems), the Partnership's Management Agreement generally provides for these costs to be charged to the Partnership's Hotels. Host Marriott expects that the Manager will incur Year 2000 costs for its centralized systems in lieu of costs related to system projects that otherwise would have been pursued and therefore, its overall level of centralized systems charges allocated to the Hotels will not materially increase as a result of the Year 2000 compliance effort. Host Marriott believes that this deferral of certain system projects will not have a material impact on its future results of operations, although it may delay certain productivity enhancements at the Partnership's Hotels. Host Marriott will continue to monitor the efforts of these third parties to become Year 2000 compliant and will take appropriate steps to address any non-compliance issues. The Partnership believes that in the event of material Year 2000 non-compliance caused by a breach of the Manager's duties, the Partnership will have the right to seek recourse against the Manager under its Management Agreement. The Management Agreement generally does not specifically address the Year 2000 compliance issue. Therefore, the amount of any recovery in the event of Year 2000 non-compliance at a property, if any, is not determinable at this time.
Host Marriott will work with the third parties to ensure that appropriate contingency plans will be developed to address the most reasonably likely worst case Year 2000 scenarios, which may not have been identified fully. In particular, Host Marriott has had extensive discussions regarding the Year 2000 problem with MII, the parent of the Manager of the Partnership's Hotels. Due to the significance of MII to the Partnership's business, a detailed description of MII state of readiness follows.
MII has adopted an eight-step process toward Year 2000 readiness, consisting of the following: (i) Awareness: fostering understanding of, and commitment to, the problem and its potential risks; (ii) Inventory: identifying and locating systems and technology components that may be affected; (iii) Assessment: reviewing these components for Year 2000 compliance, and assessing the scope of Year 2000 issues; (iv) Planning: defining the technical solutions and labor and work plans necessary for each particular system; (v) Remediation/Replacement: completing the programming to renovate or replace the problem software or hardware; (vi) Testing and Compliance Validation: conducting testing, followed by independent validation by a separate internal verification team; (vii) Implementation: placing the corrected systems and technology back into the business environment; and (viii) Quality Assurance: utilizing a dedicated audit team to review and test significant projects for adherence to quality standards and program methodology.
MII has grouped its systems and technology into three categories for purposes of Year 2000 compliance: (i) information resource applications and technology (IT Applications) -- enterprise-wide systems supported by MII's centralized information technology organization ("IR"); (ii) Business-initiated Systems ("BIS") - systems that have been initiated by an individual business unit, and that are not supported by MII's IR organization; and (iii) Building Systems - non-IT equipment at properties that use embedded computer chips, such as elevators, automated room key systems and HVAC equipment. MII is prioritizing its efforts based on how severe an effect noncompliance would have on customer service, core business processes or revenues, and whether there are viable, non-automated fallback procedures (System Criticality).
MII measures the completion of each phase based on documented and quantified results, weighted for System Criticality. As of December 31, 1998, the Awareness and Inventory phases were complete for IT Applications and nearly complete for BIS and Building Systems. For IT Applications, the Assessment, Planning and Remediation/Replacement and Testing phases were each over 95 percent complete, and Compliance Validation had been completed for nearly half of key systems, with most of the remaining work in its final stage. BIS and Building Systems, Assessment and Planning are nearly complete. Remediation/Replacement and Testing are 20% complete for BIS, and Marriott International is on track for completion of initial Testing of Building Systems by the end of first quarter 1999. Compliance Validation is in progress for both BIS and Building Systems. Marriott International remains on target for substantial completion of Remediation/Replacement and Testing for System Critical BIS and Building Systems by June 1999 and September 1999, respectively. Quality Assurance is in progress for IT Applications, BIS and Building Systems.
MII has initiated Year 2000 compliance communications with its significant third party suppliers, vendors and business partners, including its franchisees. MII is focusing its efforts on the business interfaces most critical to its customer service and revenues, including those third parties that support the most critical enterprise-wide IT Applications, franchisees generating the most revenues, suppliers of the most widely used Building Systems and BIS, the top 100 suppliers, by dollar volume, of non-IT products, and financial institutions providing the most critical payment processing functions. Responses have been received from a majority of the firms in this group. A majority of the respondents have either given assurances of timely Year 2000 compliance or have identified the necessary actions to be taken to achieve timely Year 2000 compliance.
MII is also establishing a common approach for testing and addressing Year 2000 compliance issues for its managed and franchised properties. This includes a guidance protocol for operated properties, and a Year 2000 "Toolkit" for franchisees containing relevant Year 2000 compliance information. MII is also utilizing a Year 2000 best-practices sharing system.
Risks. There can be no assurance that Year 2000 remediation by the Partnership or third parties will be properly and timely completed, and failure to do so could have a material adverse effect on the Partnership, its business and its financial condition. The Partnership cannot predict the actual effects to it of the Year 2000 issue, which depends on numerous uncertainties such as: (i) whether significant third parties properly and timely address the Year 2000 issue; and (ii) whether broad-based or systemic economic failures may occur. Host Marriott is also unable to predict the severity and duration of any such failures, which could include disruptions in passenger transportation or transportation systems generally, loss of utility and/or telecommunications services, the loss or distortion of hotel reservations made on a centralized reservation system and errors or failures in financial transactions or payment processing systems such as credit cards. Due to the general uncertainty inherent in the Year 2000 issue and the Partnership's dependence on third parties, the Partnership is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Partnership. Host Marriott's Year 2000 compliance program is expected to significantly reduce the level of uncertainty about the Year 2000 issue and Host Marriott believes that the possibility of significant interruptions of normal operations should be reduced.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Index
Courtyard by Marriott Limited Partnership Financial Statements:
Report of Independent Public Accountants............................... 21
Statement of Operations................................................ 22
Balance Sheet.......................................................... 23
Statement of Changes in Partners' Capital (Deficit).................... 24
Statement of Cash Flows................................................ 25
Notes to Financial Statements.......................................... 26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF COURTYARD BY MARRIOTT LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Courtyard by Marriott Limited Partnership (a Delaware limited partnership) as of December 31, 1998 and 1997, and the related statements of operations, changes in partners' capital (deficit) and cash flows for each of the three years in the period ended December 31, 1998. These financial statements and the schedule referred to below are the responsibility of the General Partner's management. Our responsibility is to express an opinion on these financial statements and the schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Courtyard by Marriott Limited Partnership as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, the Partnership has given retroactive effect to the change to include property-level sales and operating expenses of its hotels in the statement of operations.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index at Item 14(a)(2) is presented for the purpose of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements, and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C. March 22, 1999
STATEMENT OF OPERATIONS Courtyard by Marriott Limited Partnership For the Years Ended December 31, 1998, 1997 and 1996 (in thousands, except per Unit amounts)
The accompanying notes are an integral part of these financial statements.
BALANCE SHEET Courtyard by Marriott Limited Partnership December 31, 1998 and 1997 (in thousands)
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) Courtyard by Marriott Limited Partnership For the Years Ended December 31, 1998, 1997 and 1996 (in thousands)
The accompanying notes are an integral part of these financial statements.
STATEMENT OF CASH FLOWS Courtyard by Marriott Limited Partnership For the Years Ended December 31, 1998, 1997 and 1996 (in thousands)
The accompanying notes are an integral part of these financial statements.
NOTES TO FINANCIAL STATEMENTS Courtyard by Marriott Limited Partnership December 31, 1998 and 1997
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Courtyard by Marriott Limited Partnership (the "Partnership"), a Delaware limited partnership, was formed to acquire and own 50 Courtyard by Marriott hotels (the "Hotels") and the land on which certain of the Hotels are located. The Partnership's 50 hotels are located in 16 states in the United States: nine in Georgia; seven in Texas; six in California; five in Virginia; four in Michigan and three or fewer in each of the other 11 states. The Hotels are operated as part of the Courtyard by Marriott hotel system by Courtyard Management Corporation (the "Manager"), a wholly owned subsidiary of Marriott International, Inc. ("MII").
On August 20, 1986 (the "Closing Date"), 1,150 limited partnership interests (the "Units"), representing a 95% interest in the Partnership, were sold pursuant to a private placement offering at $100,000 per Unit. CBM One Corporation, (the "Old General Partner") made capital contributions consisting of $1,211,000 in cash and land on which certain of the Hotels are located valued at $4,842,000 for its 5% general partner interest.
On the Closing Date, the Partnership executed a purchase agreement (the "Purchase Agreement") with Host Marriott to acquire the Hotels and the land on which certain of the Hotels are located for a total fixed price of $448,184,000. Of the total purchase price, $374,656,000 was paid in cash from the proceeds of the mortgage financing and the initial installment on the sale of the Units with the remaining $73,528,000 evidenced by a note payable to Host Marriott. Twenty-eight of the Hotels were conveyed to the Partnership in 1986, twenty-one Hotels in 1987 and the final Hotel in January 1988.
On April 17, 1998, Host Marriott, the parent of the Old General Partner of the Partnership, announced that its Board of Directors authorized the company to reorganize its business operations so as to qualify as a real estate investment trust ("REIT") to become effective as of January 1, 1999 (the "REIT Conversion"). On December 29, 1998, Host Marriott announced that it had completed substantially all the steps necessary to complete the REIT Conversion and expected to qualify as a REIT under the applicable Federal income tax laws beginning January 1, 1999. Subsequent to the REIT Conversion, Host Marriott is referred to as Host REIT. In connection with the REIT Conversion, Host Marriott contributed substantially all of its hotel assets to a newly-formed partnership, Host Marriott L.P. ("Host LP").
Prior to December 24, 1998, the sole general partner of the Partnership, with a 5% interest, was CBM One Corporation ("CBM One"), a wholly owned subsidiary of Host Marriott Corporation. In connection with Host Marriott Corporation's conversion to a real estate investment trust, the following steps occurred. Host Marriott formed CBM One LLC, a Delaware single member limited liability company, having three classes of member interests (Class A - 1% economic interest, managing; Class B - 98% economic interest, non-managing; Class C - 1% economic interest, non-managing). CBM One merged into CBM One LLC on December 24, 1998 and CBM One ceased to exist. On December 28, 1998, Host Marriott contributed its entire interest in CBM One LLC to Host Marriott, L.P. ("Host LP"), which is owned 78% by Host Marriott and 22% by outside limited partners. Finally on December 30, 1998, Host LP contributed its 98% Class B and 1% Class C interest in CBM One LLC to Rockledge Hotel Properties, Inc. ("Rockledge"), a Delaware corporation which is owned 95% by Host LP (economic non-voting interest) and 5% by Host Marriott Statutory/Charitable Employee Trust, a Delaware statutory business trust (100% of voting interest). As a result, the sole general partner of the Partnership is CBM One LLC (the "General Partner")which has three classes of member interests; a Class A 1% managing economic interest owned by Host LP and a Class B 98% and Class C 1% non-managing economic interest owned by Rockledge.
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
a. Cash available for distribution will be distributed (i) first, 5% to the General Partner and 95% to the limited partners until the General Partner and the limited partners (collectively, the "Partners") have received cumulative distributions of sale or refinancing proceeds ("Capital Receipts") equal to $60,526,500; (ii) next, 15% to the General Partner and 85% to the limited partners until the Partners have received cumulative distributions of Capital Receipts equal to $121,053,000; and (iii) thereafter, 30% to the General Partner and 70% to the limited partners.
b. Capital Receipts, other than from the sale or other disposition of substantially all of the assets of the Partnership, not retained by the Partnership will be distributed (i) first, 5% to the General Partner and 95% to the limited partners until the Partners have received cumulative distributions of Capital Receipts equal to $121,053,000 and (ii) thereafter, 30% to the General Partner and 70% to the limited partners.
c. Proceeds from the sale of substantially all of the assets of the Partnership or from a related series of Hotel sales leading to the sale of substantially all of the assets of the Partnership will be distributed to the Partners pro-rata in accordance with their capital account balances.
d. Net profits are generally allocated in the same ratio in which cash available for distribution is distributed. Net losses are generally allocated to the General Partner. To the extent the General Partner makes debt service advances to the Partnership and other loans are outlined in the partnership agreement, the General Partner will be allocated net losses equal to the amounts advanced.
e. In general, gain recognized by the Partnership will be allocated, with respect to any year, in the following order of priority: (i) to all Partners whose capital accounts have negative balances until such negative balances are brought to zero; (ii) to all Partners up to the amount necessary to bring their respective capital account balances to an amount equal to their invested capital, as defined; and (iii) thereafter, 30% to the General Partner and 70% to the limited partners.
Gain arising from the sale or other disposition (or from a related series of sales or dispositions) of substantially all of the assets of the Partnership will be allocated (i) to the limited partners in an amount equal to the excess, if any, of (1) the sum of 15% times the weighted average of the limited partners' invested capital each year, over (2) the sum of distributions to the limited partners of Capital Receipts and cash available for distribution each year; (ii) next, to the General Partner until it has been allocated an amount equal to 30/70 times the amount allocated to the limited partners under clause (i); and (iii) thereafter, 30% to the General Partner and 70% to the limited partners.
f. For financial reporting purposes, profits and losses are allocated among the Partners based on their stated interests in cash available for distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting, and its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Working Capital and Supplies
Pursuant to the terms of the Partnership's management agreement discussed in Note 7, the Partnership is required to provide the Manager with working capital and supplies to meet the operating needs of the Hotels. The Manager converts cash advanced by the Partnership into other forms of working capital consisting primarily of operating cash, inventories, and trade receivables and payables which are maintained and controlled by the Manager. Upon the termination of the management agreement, the Manager is required to convert working capital and supplies into cash and return it to the Partnership. As a result of these conditions, the individual components of working capital and supplies controlled by the Manager are not reflected in the accompanying consolidated balance sheet.
Revenues and Expenses
Revenues primarily represent the gross revenues generated by the Partnership's Hotels.
On November 20, 1997, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board reached a consensus on EITF 97-2, "Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements." EITF 97-2 addresses the circumstances in which a management entity may include the revenues and expenses of a managed entity in its financial statements.
The Partnership has considered the impact of EITF 97-2 on its financial statements and determined that EITF 97-2 requires the Partnership to include property-level sales and operating expenses of its Hotels in its statement of operations. The Partnership has given retroactive effect to the adoption of EITF 97-2 in the accompanying statement of operations. Application of EITF 97-2 to the financial statements for the fiscal years ended December 31, 1998, 1997 and 1996 increased both revenues and operating expenses by approximately $100.1 million, $94.2 million and $91.3 million, respectively, and had no impact on operating profit or net income.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:
Building and improvements 40 years Leasehold improvements 40 years Furniture and equipment 4-10 years
All property and equipment is pledged to secure the mortgage debt described in Note 5.
The Partnership assesses impairment of its real estate properties based on whether estimated undiscounted future cash flows from such properties will be less than their net book value. If a property is impaired, its basis is adjusted to fair market value less selling costs. There was no such adjustment required at December 31, 1998 or 1997.
Deferred Financing Costs
Deferred financing costs represent the costs incurred in connection with obtaining the mortgage debt (see Note 5) and are amortized, using the straight-line method which approximates the effective interest rate method, over the term of the loan. In connection with the refinancing, $2,423,000 of unamortized deferred financing fees related to the 49 Hotels and Windsor Loans were written off in 1997 and recorded in the financial statements as an extraordinary loss. Financing costs as of December 31, 1998 and 1997 were $6,644,000 and $6,642,000, respectively. Accumulated amortization of financing costs as of December 31, 1998 and 1997 totaled $790,000 and $347,000, respectively.
Ground Rent
The land leases with affiliates of MII (see Note 6) include scheduled increases in minimum rents per property. These scheduled rent increases, which are included in minimum lease payments, are being recognized by the Partnership on a straight-line basis over the 95 year term of the leases. The adjustment included in ground rent expense to reflect minimum lease payments on a straight-line basis was $(232,000) for 1998, 1997 and ($268,000) for 1996.
Income Taxes
Provision for Federal and state income taxes has not been made in the accompanying financial statements since the Partnership does not pay income taxes, but rather, allocates its profits and losses to the individual Partners. Significant differences exist between the net income for financial reporting purposes and the net income as reported in the Partnership's tax return. These differences are due primarily to the use, for income tax purposes, of accelerated depreciation methods, shorter depreciable lives for the assets, differences in the timing of recognition of certain fees and straight-line rent adjustments. As a result of these differences, the excess of the tax basis in net Partnership liabilities over the net Partnership liabilities reported in the accompanying financial statements is $52,845,000 and $45,080,000 as of December 31, 1998 and 1997, respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three months or less at date of purchase to be cash equivalents.
Reclassifications
Certain reclassifications were made to the 1996 and 1997 financial statements to conform to the 1998 presentation.
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in thousands):
NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments are shown below. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts (in thousands)
The estimated fair value of mortgage debt obligations is based on the expected future debt service payments discounted at estimated market rates. Management fees due to Courtyard Management Corporation and debt service guaranty payable to Host Marriott Corporation including accrued interest are valued based on the expected future payments from operating cash flow discounted at risk adjusted rates.
NOTE 5. DEBT
The 49 Hotels Loan and the Windsor Loan, as discussed below, were refinanced on March 21, 1997 and the lenders were repaid in full.
49 Hotels Loan
On April 18, 1994, the Partnership entered into a restated loan agreement (the "49 Hotels Loan") with a group of banks (the "Lenders") for the 49 Hotels. For the period June 16, 1996 through June 15, 1997 the 49 Hotels Loan bore interest at floating rates at the Partnership's option equal to LIBOR plus 1.75 percentage points or the higher of .75 percentage points plus (a) prime, or (b) .5 percentage points plus (i) the three week average 3-month CD rate or (ii) the federal funds rate.
The 49 Hotels Loan required minimum annual principal payments of $7,000,000. Additionally, while the loan balance was above $300,000,000, 100% of Available Cash Flow (equal to operating profit, as defined, less the sum of (1) interest expense, (2) the $7,000,000 annual principal payment, (3) partnership administrative expenses of up to $250,000, as adjusted annually for the consumer price index, and (4) ground rent payments to MII) was used to pay additional principal on the 49 Hotels Loan. While the loan balance was between $250,000,000 and $299,999,999, 80% of Available Cash Flow was used to pay additional principal on the 49 Hotels Loan and once the loan balance was less than $250,000,000, 75% of Available Cash Flow would have been used to pay additional principal on the loan.
For the period January 1, 1997 to March 21, 1997, the weighted average interest rate on the 49 Hotels Loan was 7.2% and was 7.08% in 1996. The 49 Hotels Loan would have matured on June 15, 1997; however, the term could have been extended for two one-year periods if certain operating profit levels, as defined, were met.
As security for the 49 Hotels Loan, the Lenders had a mortgage on the Partnership's fee or leasehold interest in each of the Hotels, except the Windsor, Connecticut Hotel (the "Windsor Hotel"). In addition, all of the Lenders had a security interest in certain personal property associated with each Hotel and granted a security interest in the Partnership's rights under the operating agreement (see Note 7) and Purchase Agreement. Thirty of the 49 hotels covered by the 49 Hotels Loan lease land (see Note 6) from affiliates of MII. These affiliates agreed to subject their ownership interests as well as subordinate their receipt of ground rent to the payment of debt service on the 49 Hotels Loan.
Windsor Hotel Loan
On February 9, 1988, the Partnership entered into a loan agreement to provide non-recourse mortgage debt of $8,274,000 (the "Windsor Loan") to pay approximately 80% of the purchase price of the Windsor Hotel. The Windsor Loan bore interest at a floating rate equal to the adjusted CD rate or LIBOR plus 2.0 percentage points. The Windsor Loan matured on August 15, 1996 with the remaining principal balance of $6,289,000 plus accrued interest due at that time. In exchange for Host Marriott providing a guaranty of repayment of the loan at maturity, the lender agreed to extend the Windsor Loan maturity to March 31, 1997. The Partnership agreed to continue to pay interest on the Windsor Loan at LIBOR plus 200 basis points until the earlier of repayment or March 31, 1997. No principal amortization on the Windsor Loan was required until maturity. For the period January 1, 1997 to March 21, 1997, the weighted average interest rate on the Windsor Loan was 7.65% and was 7.46% for 1996.
As security for the Windsor Loan, the bank had a mortgage on the Partnership's leasehold interest in the Windsor Hotel. Additionally, the bank had a security interest in the Partnership's interest in the personal property associated with the Windsor Hotel and a security interest in the Partnership's rights under the operating agreement and Purchase Agreement.
The Windsor Hotel land is also leased from an affiliate of MII, which agreed to subject their ownership interest as well as their receipt of ground rent to the payment of debt service on the Windsor Loan.
49 Hotels Loan Guaranties
Host Marriott provided additional security to the Lenders in the form of a debt guaranty (the "Debt Service Guaranty") of aggregate interest and principal of up to $40 million. Host Marriott's performance under the Debt Service Guaranty was backed by a $40 million guaranty of aggregate principal and interest from MII (the "Backup Guaranty"). Payments by Host Marriott under the Debt Service Guaranty or MII under the Backup Guaranty would have been treated as advances to the Partnership and bore interest at the base rate announced by The First National Bank of Chicago. The Debt Service Guaranty replaced the original guaranty of $37.3 million under the Original 49 Hotels Loan. No amounts were advanced under the Debt Service Guaranty or the Backup Guaranty covering the 49 Hotels Loan. As of December 31, 1998, $7,341,000 had been advanced by the General Partner under the Original 49 Hotels Debt Service Guaranty. The weighted average interest rate on the Original 49 Hotel Loan guaranty advances was 8.4% for 1998 and 1997. The interest rate was 7.75% at December 31, 1998. Accrued interest on the guaranty advance as of December 31, 1998 and 1997, was $6,867,000 and $6,253,000, respectively.
MII provided two additional guaranties to the Lenders: the debt and tenant change guaranty (the "Debt and Tenant Change Guaranty") and the Marriott International Guaranty (the "MII Guaranty").
The Debt and Tenant Change Guaranty provided that in the event of nonpayment of principal and interest when due or upon loan maturity, MII would have advanced amounts, as defined, in addition to amounts advanced under the Backup Guaranty for principal and interest. No amounts were advanced pursuant to the Debt and Tenant Change Guaranty.
Upon the refinancing of the Partnership's debt, Host Marriott and MII were released from these guaranties.
Windsor Loan Guaranty
Host Marriott directly or through the General Partner provided additional security to the Windsor Loan lenders in the form of a debt service guaranty of aggregate interest and principal on the Windsor Loan of up to $706,000. Payments by Host Marriott or the General Partner under the debt service guaranty were treated as advances to the Partnership and bore interest at the base rate announced by The First National Bank of Chicago. No amounts were advanced under the Windsor Loan guaranty. However, in exchange for Host Marriott providing a guaranty of repayment of the loan at maturity, the lender agreed to extend the Windsor Loan maturity to March 31, 1997.
Upon the refinancing of the Partnership's debt, Host Marriott and MII were released from this guaranty.
50 Hotels Loan
On March 21, 1997 (the "Refinancing Date") both the 49 Hotels Loan and the Windsor Loan were refinanced with a new loan covering all 50 Hotels (the "50 Hotels Loan"). The total amount of the debt was increased from $280.8 million to $325.0 million. The $44.2 million of excess refinancing proceeds were used to: (i) make a $7 million contribution to the property improvement fund to cover anticipated shortfalls; (ii) pay approximately $7 million of refinancing costs; and (iii) make a $30.2 million partial return of capital distribution to the partners. The new loan continues to be non-recourse and requires monthly payments of interest at a fixed rate of 7.865% and principal based on a 20 year amortization schedule. The loan has a scheduled maturity on April 10, 2012; however, the loan maturity can be extended for an additional five years. During the extended loan term, the loan bears interest at an adjusted rate, as defined, and all cash flow from Partnership operations is used to amortize the principal balance of the loan.
Debt maturities as of December 31, 1998 under the refinanced loan are as follows (in thousands):
1999 $ 7,955 2000 8,604 2001 9,306 2002 10,065 2003 10,886 Thereafter 266,235 -------------- $ 313,051
The refinanced mortgage loan is secured by first mortgages on all of the Hotels, related personal property, and the land on which they are located or an assignment of the Partnership's interest under the land leases. No new debt guaranties have been provided by Host Marriott or MII.
Pursuant to the terms of the 50 Hotels Loan, the Partnership is required to establish with the lender a separate escrow account for payments of insurance premiums and real estate taxes for each Hotel if the credit rating of Marriott International, Inc. is downgraded by Standard and Poor's Rating Services. The Manager, Courtyard Management Corporation, is a wholly-owned subsidiary of MII. In March 1997, MII acquired the Renaissance Hotel Group N.V., adding greater geographic diversity and growth potential to its lodging portfolio. The assumption of additional debt associated with this transaction resulted in a single downgrade of MII's long-term senior unsecured debt effective April 1997. The escrow reserve is included in restricted cash and the resulting tax and insurance liability is included in accounts payable and accrued liabilities in the accompanying balance sheet.
In addition, in connection with the 50 Hotels Loan, the Partnership was also required to reserve one month's debt service in a separate account. The balance of the debt service reserve as of December 31, 1998 and 1997 was $2.8 million and $2.7 million, respectively. The debt reserve is also included in restricted cash in the accompanying balance sheet.
Restricted cash consists of the following:
1998 1997
Debt Service Reserve $ 2,788 $ 2,718 Real Estate and Insurance Escrow 1,764 766 Restricted Cash Collateral 4,763 4,480 ----------- --------- $ 9,315 $ 7,964
NOTE 6. LAND LEASES
The land on which 31 of the Hotels are located is leased from affiliates of MII. In addition, two of the Hotels are located on land leased from third parties. The ground leases have remaining terms (including all renewal options) expiring between the years 2058 and 2081. The MII ground leases and one of the third party ground leases provide for rent based on specific percentages (from 2% to 9.75%) of certain sales categories, subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. The affiliates of MII, as land lessors, agreed to continue to subordinate their ownership interest as well as receipt of ground rent to debt service on the 50 Hotels Loan obtained March 21, 1997 (see Note 5).
Minimum future rental payments during the term of the ground leases as of December 31, 1998 are as follows (in thousands):
Lease Ground Year Leases ----------- -------- 1999 $ 7,068 2000 7,140 2001 7,140 2002 7,140 2003 7,140 Thereafter 532,423 $ 568,051
Total ground rent expense was $8,021,000 in 1998, $7,648,000 in 1997 and $7,246,000 in 1996.
NOTE 7. MANAGEMENT AGREEMENT
Prior to the refinancing of the mortgage debt, the two operating agreements were converted into a single management agreement effective January 4, 1997. The initial term of the management agreement (the "Management Agreement") expires at the end of 2017. The Manager can extend the Management Agreement for up to four successive periods of ten years.
Under the Management Agreement, the Manager has agreed to subordinate a portion of the Courtyard management fee equal to 1% of gross Hotel sales to debt service on the 50 Hotels Loan. In addition, the Partnership paid $4.2 million of deferred incentive management fees at closing, and the Manager agreed to forgive approximately $14.9 million of deferred fees. The $14.9 million of forgiven fees is recognized as an extraordinary gain in the 1997 financial statements. Deferred and current year incentive management fees are payable from 50% of available cash after the payment of: (i) debt service; (ii) deferred Courtyard management fees, if any; (iii) deferred MII ground rent, if any; and (iv) a priority return to the Partnership equal to 10% of cumulative capital less sale and refinancing proceeds. In addition, incentive management fees paid are capped at 15% of operating profit and no longer increase to 25% of operating profit once cumulative distributions of refinancing proceeds equal $60.5 million. Deferred management fees are not payable to the Manager from sale or refinancing proceeds. Unpaid incentive management fees will not accrue. For the years ended December 31, 1998, 1997 and 1996 incentive management fees of $9,426,000, $8,906,000 and $9,365,000 were paid to the Manager. Deferred incentive management fees of $823,000 and $4.2 million were paid to the Manager during the years ended December 31, 1998 and 1997, respectively. No deferred incentive management fees were paid during 1996.
The Management Agreement provides for annual payments to the Manager of (i) the base management fee equal to 3% of gross sales from the Hotels, (ii) the Courtyard management fee equal to 3% of gross sales from the Hotels, and (iii) the incentive management fee equal to 15% of operating profit, as defined.
The Manager is required to furnish Chain Services which are furnished generally on a central or regional basis to all managed, owned or leased hotels in the Courtyard by Marriott hotel system. Under the Management Agreement, charges for certain Chain Services cannot exceed 5% of gross Hotel sales. The Manager will be responsible for any Chain Services in excess of the 5% of gross Hotel sales limit from its own funds. In addition, the Hotels participate in MII's Marriott's Rewards Program ("MRP"). The costs of this program are charged to all hotels in the full-service, Residence Inn by Marriott, Courtyard by Marriott and Fairfield Inn by Marriott systems based upon the MRP sales at each hotel. Chain Services and MRP costs charged to the Partnership under the Management Agreement were $8,244,000 and $7,084,000 in 1998 and 1997, respectively. The total amount of Chain Services was $6,540,000 in 1996.
The Partnership is required to provide the Manager with working capital and fixed asset supplies to meet the operating needs of the Hotels. Upon termination of the Management Agreement, the working capital and supplies will be returned to the Partnership. The working capital balance was $1,213,000 as of December 31, 1998 and 1997, respectively.
The Management Agreement provides for a property improvement fund to be maintained to ensure that the physical condition and product quality of the Hotels are maintained. Contributions to the property improvement fund are equal to 5% of gross Hotel sales through 1998 and may be increased, at the option of the Manager, to 6% of gross Hotel sales in 1999 and 2000 and 7% thereafter. For the years ended December 31, 1998 and 1997, the Partnership contributed $10,540,000 and $9,478,000, excluding the $7 million contribution paid in 1997 from refinancing proceeds (Note 5), respectively, to the property improvement fund.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Partnership has no directors or officers. The business and policy making functions of the Partnership are carried out through the directors and executive officers of CBM One LLC, the General Partner, who are listed below: Age at Name Current Position December 31, 1998 - --------------------------------------------------------------------------------
Robert E. Parsons, Jr. President and Manager 43 Christopher G. Townsend Executive Vice President, Secretary and Manager 51 W. Edward Walter Treasurer 43 Earla L. Stowe Vice President and Chief Accounting Officer 37
Business Experience
Robert E. Parsons, Jr. joined Host Marriott Corporation's Corporate Financial Planning staff in 1981 and was made Assistant Treasurer in 1988. In 1993, Mr. Parsons was elected Senior Vice President and Treasurer of Host Marriott Corporation, and in 1995, he was elected Executive Vice President and Chief Financial Officer of Host Marriott Corporation. He also serves as a director, manager and officer of numerous Host Marriott Corporation subsidiaries.
Christopher G. Townsend joined Host Marriott's Law Department in 1982 as a Senior Attorney. In 1984 he was made Assistant Secretary of Host Marriott. In 1986 he was made an Assistant General Counsel. He was made Senior Vice President, Corporate Secretary and Deputy General Counsel of Host Marriott in 1993. In January 1997, he was made General Counsel of Host Marriott. He also serves as a director, manager and an officer of numerous Host Marriott subsidiaries.
W. Edward Walter joined Host Marriott Corporation in 1996 as Senior Vice President -Acquisitions and in 1998 was made Treasurer of Host Marriott. He also serves as a director, manager and officer of numerous Host Marriott Corporation subsidiaries. Prior to joining Host Marriott Corporation, Mr. Walter was a partner at Trammell Crow Residential Company and President of Bailey Capital Corporation, a real estate firm focusing on tax exempt real estate investments.
Earla L. Stowe joined Host Marriott Corporation in 1982 and held various positions in the tax department until 1988. She joined the Partnership Services department as an accountant in 1988 and in 1989 she became an Assistant Manager--Partnership Services. She was promoted to Manager--Partnership Services in 1991 and to Director--Asset Management in 1996. Ms. Stowe was promoted to Senior Director-Corporate Accounting in 1998.
ITEM 11.
ITEM 11. MANAGEMENT REMUNERATION AND TRANSACTIONS
As noted in Item 10 above, the Partnership has no directors or officers nor does it have any employees. Under the Partnership Agreement, however, the General Partner has the exclusive right to conduct the business and affairs of the Partnership subject only to the management agreements described in Items 1 and 13. The General Partner is required to devote to the Partnership such time as may be necessary for the proper performance of its duties, but the officers and directors of the General Partner are not required to devote their full time to the performance of such duties. No officer or manager of the General Partner devotes a significant percentage of time to Partnership matters. To the extent that any officer or manager does devote time to the Partnership, the General Partner is entitled to reimbursement for the cost of providing such services. For the fiscal years ending December 31, 1998, 1997 and 1996, the Partnership reimbursed the General Partner in the amount of $523,000, $260,000 and $154,000, respectively, for the cost of providing all administrative and other services as General Partner. For information regarding all payments made by the Partnership to Host Marriott and subsidiaries, see Item 13 "Certain Relationships and Related Transactions."
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 31, 1998, Palm Investors, LLC, an unrelated third party, owns approximately 5.5% of the total number of limited partnership Units. The General Partner owns a total of 15 Units representing a 1.24% limited partnership interest in the Partnership.
As of December 31, 1998, an officer and manager of the General Partner and Host Marriott and their respective affiliates owned a quarter unit; an officer of Host Marriott owned a quarter unit; and two officers of MII owned one unit each.
The Partnership is not aware of any arrangements which may, at a subsequent date, result in a change in control of the Partnership other than the consolidation described in Item 1.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Management Agreement
In connection with the debt refinancing, the 49 Hotels Operating Agreement and the Windsor Hotel Operating Agreement in effect from January 1, 1994 to January 3, 1997 were terminated. A new Management Agreement was executed as of January 4, 1997 for the management of the 50 Partnership Hotels.
Term
The Management Agreement has an initial term expiring December 31, 2017 and can be renewed for four successive ten year periods as to one or more of the Hotels. The Partnership may terminate the Management Agreement if, during any three consecutive years, the average operating profit, as defined, does not exceed $40,198,000 plus 8% of the sum of owner funded capital expenditures. Management Fees
The Management Agreement provides for annual payments of (i) the base management fee equal to 3% of gross Hotel sales, (ii) the Courtyard management fee equal to 3% of gross Hotel sales, and (iii) the incentive management fee equal to 15% of operating profit, as defined. A portion of the Courtyard management fee equal to 1% of gross Hotel sales is subordinate to debt service on the mortgage loan.
Deferral Provisions
As part of the debt refinancing, the Partnership agreed to pay $4.2 million of deferred incentive management fees and the Manager agreed to approximately $14.9 million of these fees at the new mortgage debt closing on March 21, 1997. This left a remaining balance of $6.5 million of accrued incentive management fees as of March 21, 1997 and December 31, 1997. The Partnership paid $823,000 of deferred, incentive management fees during 1998 leaving a balance of $5.7 million of deferred incentive management fees as of December 31, 1998.
Under the new Management Agreement, base and Courtyard management fees no longer accrue if not paid. Deferred and current year incentive management fees are payable from 50% of available cash after the payment of: (i) debt service; (ii) deferred Courtyard management fees; if any; (iii) deferred MII ground rent, if any; and (iv) a priority return to the Partnership equal to 10% of cumulative capital less sale and refinancing proceeds. Deferred management fees are not payable to the Manager from sale or refinancing proceeds. Unpaid incentive management fees will not accrue.
Chain Services
The Manager is required to furnish certain services ("Chain Services") which are furnished generally on a central or regional basis to all hotels managed, owned or leased in the Courtyard by Marriott hotel system. Under the Management Agreement, charges for certain Chain Services cannot exceed 5% of gross Hotel sales. In addition, the Hotels participate in MII's Marriott's Rewards Program ("MRP"). The total amount of Chain Services and MRP costs allocated to the Partnership was $8,244,000 in 1998, $7,084,000 in 1997 and $6,540,000 in 1996.
Working Capital
The Partnership is required to provide the Manager with working capital and fixed asset supplies to meet the operating needs of the Hotels. Upon termination of the Management Agreement, the working capital and supplies will be returned to the Partnership. As of December 31, 1998, the Partnership has advanced the Manager $1,213,000 in working capital.
Property Improvement Fund
The Management Agreement provides for the establishment of a repairs and equipment reserve (property improvement fund) for the Hotels. The funding of this reserve is based on a percentage of gross Hotel sales. The contribution to the property improvement fund is at 5% of gross Hotel sales through 1998 and may be increased, at the option of the Manager, to 6% of gross Hotel sales in 1999 and 2000 and 7% thereafter if the current contribution of 5% of gross Hotel sales is insufficient to make the replacements, renewals and repairs to maintain the Hotels in accordance with the Manager's standards for Courtyard by Marriott hotels.
Leases
The land on which 31 of the Hotels are located is leased from affiliates of MII. In addition, two of the Hotels are located on land leased from third parties. The ground leases have remaining terms (including all renewal options) expiring between the years 2058 and 2081. The MII ground leases and one of the third party ground leases provide for rent based on specific percentages (from 2% to 9.75%) of certain sales categories, subject to minimum amounts. The minimum rentals are adjusted at various anniversary dates throughout the lease terms, as defined in the agreements. The affiliates of MII, as land lessors, agreed to continue to subordinate their ownership interest as well as receipt of ground rent to debt service on the 50 Hotels Loan obtained March 21, 1997 (see Note 6).
Payments to MII and Subsidiaries
The following table sets forth the amount paid to MII and affiliates under both the Operating and Management Agreements and the ground lease agreements for the years ended December 31, 1998, 1997 and 1996 (in thousands). The table also sets forth accrued but unpaid incentive management fees:
Payments to Host Marriott and Subsidiaries
The following sets forth amounts paid by the Partnership to Host Marriott and its subsidiaries for the years ended December 31, 1998, 1997 and 1996 (in thousands):
Mortgage Debt Guarantees
Upon the refinancing of the Partnership debt on March 21, 1997, Host Marriott and MII were released from the following guaranties.
49 Hotels Loan Guaranties
Host Marriott provided additional security to the 49 Hotels Loan lenders in the form of a debt guaranty (the "Debt Service Guaranty") of aggregate interest and principal of up to $40 million. Host Marriott's performance under the Debt Service Guaranty was backed by a $40 million guaranty of aggregate principal and interest from MII (the "Backup Guaranty"). Payments by Host Marriott under the Debt Service Guaranty or MII under the Backup Guaranty would have been treated as advances to the Partnership and bore interest at the base rate announced by The First National Bank of Chicago. The Debt Service Guaranty replaced the original guarantee of $37.3 million under the Original 49 Hotels Loan. No amounts were advanced under the Debt Service Guaranty or the Backup Guaranty covering the 49 Hotels Loan. As of December 31, 1998 and 1997, $7,341,000 had been advanced by the General Partner under the Original 49 Hotels Loan guaranty. The weighted average interest rate on the Original 49 Hotel Loan guaranty advances was 8.4% for 1998 and 1997. The interest rate was 7.75% at December 31, 1998. Accrued interest on the guaranty advance as of December 31, 1998 and 1997, was $6,867,000 and $6,253,000, respectively.
MII provided two additional guaranties to the 49 Hotels Loan lenders: the debt and tenant change guaranty (the "Debt and Tenant Change Guaranty") and the Marriott International Guaranty (the "MII Guaranty").
The Debt and Tenant Change Guaranty provided that in the event of nonpayment of principal and interest when due or upon loan maturity, MII would have advanced amounts, as defined, in addition to amounts advanced under the Backup Guaranty for principal and interest. No amounts were advanced pursuant to the MII Guaranty and Debt and Tenant Change Guaranty.
Windsor Loan Guaranty
Host Marriott directly or through the General Partner provided additional security to the Windsor Loan lenders in the form of a debt service guaranty of aggregate interest and principal on the Windsor Loan of up to $706,000. Payments by Host Marriott or the General Partner under the debt service guaranty were treated as advances to the Partnership and bore interest at the base rate announced by The First National Bank of Chicago. No amounts were advanced under the Windsor Loan guaranty. PART IV
ITEM 14.
ITEM 14. EXHIBITS, SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents Filed as Part of This Report
(1) Financial Statements All financial statements of the registrant as set forth under Item 8 of this Report on Form 10-K.
(2) Financial Statement Schedules The following financial information is filed herewith on the pages indicated.
Schedule III - Real Estate and Accumulated Depreciation
All other schedules are omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
(3) Exhibits
* Incorporated by reference to the same numbered exhibit in the Partnership's General Form for Registration of Securities on Form 10 previously filed with the Commission.
** Incorporated by reference to the same numbered exhibit in the Partnership's December 31, 1996 10-K previously filed with the Commission.
(b) Reports on Form 8-K
A Form 8-K was filed with the Securities and Exchange Commission ("SEC") on October 9, 1998. This filing, Item 5 - -Other Events, discloses that the General Partner sent a letter dated October 1, 1998 to inform the limited partners that the proposed Consolidation to form a new REIT focused on limited service hotels is no longer being pursued. In addition, the letter informs the limited partners that, to date, there have been no acceptable offers from third parties to purchase the Partnership's hotels. A copy of the letter was included as an Item 7 - -Exhibit in this Form 8-K filing.
A Form 8-K was filed with the SEC on December 4, 1998. This filing, Item 5 - -Other Events, discloses that the General Partner sent letters to the limited partners that accompanied the quarterly reports on Form 10-Q dated June 24, 1998, September 17, 1998 and November 25, 1998.
SCHEDULE III
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP REAL ESTATE AND ACCUMULATED DEPRECIATION December 31, 1998 (in thousands)
Date of Completion of Date Depreciation Construction Acquired Life
50 Courtyard by 1983 - 1988 1986 - 1988 40 years Marriott Hotels
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this 31st day of March, 1999.
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
By: CBM ONE LLC General Partner
/s/ Earla L. Stowe ------------------ Earla L. Stowe Vice President and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the date indicated above.
Signature Title (CBM ONE LLC)
/s/ Robert E. Parsons, Jr. President and Manager Robert E. Parsons, Jr.
/s/ Christopher G. Townsend Executive Vice President, Christopher G. Townsend Secretary and Manager
/s/ W. Edward Walter Treasurer W. Edward Walter
/s/ Earla L. Stowe Vice President and Chief Earla L. Stowe Accounting Officer
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, on this 31st day of March, 1999.
COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
By: CBM ONE LLC General Partner
Earla L. Stowe Vice President and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and the capacities and on the date indicated above.
Signature Title
(CBM ONE LLC)
President and Manager Robert E. Parsons, Jr.
Executive Vice President, Christopher G. Townsend Secretary and Manager
Treasurer W. Edward Walter
Vice President and Chief Earla L. Stowe Accounting Officer
Exhibit 3.b
FIRST AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF COURTYARD BY MARRIOTT LIMITED PARTNERSHIP
THIS FIRST AMENDMENT TO AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF COURTYARD BY MARRIOTT LIMITED PARTNERSHIP (this "First Amendment"), dated as of December 28, 1998, is entered into by CBM One LLC, a Delaware limited liability company, as general partner (the "General Partner"), of Courtyard By Marriott Limited Partnership (the "Partnership"), for itself and on behalf of the limited partners of the Partnership.
WHEREAS, the Partnership was formed pursuant to a Certificate of Limited Partnership filed with the Office of the Secretary of State of the State of Delaware on July 15, 1986;
WHEREAS, in connection with certain restructuring transactions involving its parent company, CBM One Corporation merged with and into the General Partner, a newly formed Delaware limited liability company; and
WHEREAS, in accordance with Section 11.02 of the Partnership Agreement, the General Partner wishes to amend the Partnership Agreement to reflect its successor name by merger and to make certain clean up changes.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which hereby are acknowledged, the General Partner hereby amends the Partnership Agreement as follows:
1. The introductory paragraph of the Partnership Agreement is hereby amended to replace the phrase "CBM One Corporation, a Delaware corporation" with the phrase "CBM One LLC, a Delaware limited liability company."
2. The definitions of "General Partner" and "Host" in Section 1.01 of the Partnership Agreement are hereby amended and restated in their entirety as follows:
"General Partner" means CBM One LLC, a Delaware limited liability company, in its capacity as general partner of the Partnership, and its successors and assigns.
"Host" means Host Marriott Corporation, a Delaware corporation, and its successors and assigns.
3. Section 3.01 of the Partnership Agreement is hereby amended and restated in its entirety as follows:
Section 3.01. General Partner. The General Partner of the Partnership is and shall be CBM One LLC, a Delaware limited liability company, in its capacity as general partner of the Partnership, and its successors and assigns.
4. All defined terms contained in this First Amendment, unless otherwise defined herein, shall have the meaning contained in the Partnership Agreement. Except as modified herein, all terms and conditions of the Partnership Agreement shall remain in full force and effect, which terms and conditions the General Partner hereby ratifies and affirms.
[Page Break Intentionally Inserted]
IN WITNESS WHEREOF, the undersigned has executed this First Amendment as of the date first set forth above.
CBM ONE LLC, as the successor General Partner of Courtyard By Marriott Limited Partnership and on behalf of existing Limited Partners
By:______________________________ Name: Christopher G. Townsend Title: Executive Vice President