The company has formed wholly owned taxable REIT subsidiaries (TRS) to acquire the leases for $5.25 million cash. The TRS lessees also will become the hotels' franchisees and will be responsible for payments to franchisors.
The TRS lessees are entering into long-term management contracts with Innkeepers Hospitality to operate the hotels.There are several key terms in the management contracts. For example, Innkeepers Hospitality will get base management fees of 3% of gross revenue, a $750 accounting services fee per hotel per month and an incentive management fee. The 2002 proforma gross revenue of the 61 hotels was $182 million, which would have meant base management fees of about $5.5 million. Innkeepers USA Trust will not take on the cost of Innkeepers Hospitality's corporate overhead or functions resulting from the deal.
In addition, Innkeepers Hospitality will get paid an incentive management fee of 50% of hotel available cash flow. The TRS lessees will keep the remaining 50%. Hotel available cash flow generally means hotel gross revenue, less: hotel operating expenses such as franchise fees; Innkeepers Hospitality's base management and accounting services fees; and base and percentage rent, which the TRS lessees pay to the company.
The terms will also state that Innkeepers Hospitality won't get incentive management fees until the company gets from the TRS lessees all prior- and current-year base and percentage rent accruing during the initial 10-year term of the management agreements. TRS is acquiring the existing leases without modification to rent formulas or other economic terms.
And in one last key term, the management contracts' initial term will be 10 years. Each management agreement will allow for two five-year extension options."The company will have greater control over its assets through the terms of the management agreements," says David Bulger, chief financial officer, treasurer and executive vice president of the company.
The hotel lease acquisition and the management contracts are set to take place in phases, as Innkeepers Hospitality gets more hotel management business with third parties. According to the agreement, the first lease acquisitions will include 23 hotels and are expected to close in the third quarter.
The transaction's completion is subject to several conditions, including lender approval and Innkeepers Hospitality's qualification as an eligible independent contractor, as defined in the REIT Modernization Act.
Jeffrey H. Fisher, CEO, president and chairman of Innkeepers USA Trust, controls Innkeepers Hospitality.
Innkeepers USA Trust owns upscale, extended-stay hotel properties across the country.
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