10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 333-186090

 

 

BRE SELECT HOTELS CORP

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   35-2464254

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

c/o Blackstone Real Estate Partners VII L.P.

345 Park Avenue

New York, New York

  10154
(Address of principal executive offices)   (Zip Code)

(212) 583-5000

(Registrant’s telephone number, including area code)

Not Applicable

(Former Name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒

(Note: As a voluntary filer, the registrant has not been subject to the filing requirements of Section 13 or 15(d) of the Exchange Act for the past 90 days. The registrant has filed all reports required under Section 13 or 15(d) of the Exchange Act during the preceding 12 months.)

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer   ☒  (Do not check if a smaller reporting company)    Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

 

Common Stock, $0.01 par value per share

     

100

(Class)     Outstanding at August 14, 2017

 

 

 


Table of Contents

BRE SELECT HOTELS CORP

FORM 10-Q

INDEX

 

             Page  

PART I. FINANCIAL INFORMATION

  
  Item 1.   Financial Statements (Unaudited):   
    Condensed Consolidated Balance Sheets – June 30, 2017 and December 31, 2016      3  
    Condensed Consolidated Statements of Operations – Three and Six Months Ended June 30, 2017 and 2016      4  
    Condensed Consolidated Statements of Cash Flows – Six Months Ended June 30, 2017 and 2016      5  
    Notes to Condensed Consolidated Financial Statements      6  
  Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      17  
  Item 3.   Quantitative and Qualitative Disclosures about Market Risk      26  
  Item 4.   Controls and Procedures      26  

PART II. OTHER INFORMATION

  
  Item 1.   Legal Proceedings      27  
  Item 1A.   Risk Factors      27  
  Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      27  
  Item 3.   Defaults Upon Senior Securities      27  
  Item 4.   Mine Safety Disclosures      27  
  Item 5.   Other Information      27  
  Item 6.   Exhibits      28  
  Signatures      29  

This Form 10-Q includes references to certain trademarks or service marks. The SpringHill Suites® by Marriott, TownePlace Suites® by Marriott, Fairfield Inn® by Marriott, Courtyard® by Marriott, Residence Inn® by Marriott and Marriott Suites® trademarks are the property of Marriott International, Inc. or one of its affiliates. The Homewood Suites® by Hilton, Hilton Garden Inn®, Hampton Inn® and Hampton Inn & Suites® trademarks are the property of Hilton Worldwide Holdings Inc. or one or more of its affiliates. For convenience, the applicable trademark or service mark symbol has been omitted for uses other than in this paragraph but will be deemed to be included wherever the above referenced terms are used.


Table of Contents

BRE SELECT HOTELS CORP

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands, except share data)

 

     June 30,
2017
     December 31,
2016
 

ASSETS

 

  

Investment in real estate, net of accumulated depreciation of $106,714 and $93,423, respectively

   $ 840,102      $ 857,918  

Hotels held for sale

     4,794        43,096  

Cash

     19,737        25,170  

Restricted cash

     11,195        5,996  

Due from third-party managers, net

     5,730        4,518  

Insurance receivable

     5,067        5,067  

Prepaid expenses and other assets

     4,364        2,798  

Goodwill

     109,064        116,470  

Deferred tax assets

     5,440        6,051  
  

 

 

    

 

 

 

TOTAL ASSETS

   $ 1,005,493      $ 1,067,084  
  

 

 

    

 

 

 

LIABILITIES

     

Accounts payable and accrued expenses

     8,742        12,729  

Due to third-party managers, net

     755        1,113  

Mortgages payable

     745,356        757,245  

Mortgages payable related to assets of hotels held for sale

     3,615        35,871  

Other liabilities

     —          145  
  

 

 

    

 

 

 

TOTAL LIABILITIES

     758,468        807,103  

Commitments and contingencies (Note 8)

     

7% Series A Cumulative Redeemable Preferred Stock, $1.90 initial liquidation preference, 120,000,000 shares authorized; 72,382,848 issued and outstanding at June 30, 2017 and December 31, 2016

     137,160        137,160  

STOCKHOLDER’S EQUITY

     

Preferred stock, $0.0001 par value, 30,000,000 shares authorized; none issued and outstanding at June 30, 2017 and December 31, 2016

     —          —    

Common stock, $0.01 par value, 100,000 shares authorized; 100 shares issued and outstanding at June 30, 2017 and December 31, 2016

     —          —    

Additional paid-in capital

     109,865        122,821  
  

 

 

    

 

 

 

TOTAL STOCKHOLDER’S EQUITY

     109,865        122,821  
  

 

 

    

 

 

 

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY

   $ 1,005,493      $ 1,067,084  
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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BRE SELECT HOTELS CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands, except share data)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2017     2016     2017     2016  

REVENUE

        

Room revenue

   $ 65,966     $ 74,125     $ 122,384     $ 136,312  

Other revenue

     3,957       5,255       8,859       9,594  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     69,923       79,380       131,243       145,906  

EXPENSES

        

Operating expense

     15,489       17,018       29,990       32,856  

Hotel administrative expense

     5,951       6,863       11,681       13,319  

Sales and marketing

     5,669       5,998       10,655       11,373  

Utilities

     2,006       2,158       4,096       4,335  

Repair and maintenance

     2,328       2,819       4,718       5,517  

Franchise fees

     3,229       3,663       5,992       6,754  

Management fees

     2,220       2,763       4,071       4,993  

Taxes, insurance and other

     3,655       3,907       7,447       7,519  

General and administrative

     1,730       1,375       3,557       2,550  

Depreciation expense

     9,250       9,743       18,173       20,349  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     51,527       56,307       100,380       109,565  
  

 

 

   

 

 

   

 

 

   

 

 

 

Impairment of investment in real estate

     (2,988     (2,994     (2,988     (8,507

Gain on sale of hotel properties

     —         —         3,628       —    

Operating income

     15,408       20,079       31,503       27,834  

Interest expense, net

     (7,198     (8,178     (14,121     (16,294
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax expense

     8,210       11,901       17,382       11,540  

Income tax expense

     (1,305     (1,679     (1,267     (72
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     6,905       10,222       16,115       11,468  

Series A Preferred Stock dividends declared

     (2,411     (2,411     (4,821     (4,821
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available for common stockholder

   $ 4,494     $ 7,811     $ 11,294     $ 6,647  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted net income per common share

        

Total basic and diluted net income per common share available to common stockholder

   $ 44,940.00     $ 78,110.00     $ 112,940.00     $ 66,470.00  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 142,500.00     $ 100,000.00     $ 242,500.00     $ 190,000.00  

Weighted average common shares outstanding—basic and diluted

     100       100       100       100  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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BRE SELECT HOTELS CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)

 

     Six Months Ended  
     June 30,  
     2017     2016  

Cash flows from operating activities:

    

Net income

   $ 16,115     $ 11,468  

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation

     18,173       20,349  

Impairment of investment in real estate

     2,988       8,507  

Gain on sale of hotel properties

     (3,628     —    

Amortization of deferred financing costs

     —         2,520  

Deferred income taxes

     611       (1,965

Other non-cash expenses, net

     —         (15

Changes in operating assets and liabilities:

    

Increase in due to/from third-party managers, net

     (1,570     (1,248

Decrease in insurance receivable

     —         1,165  

Increase in prepaid expenses and other assets

     (1,566     (1,108

Decrease in accounts payable and accrued expenses

     (652     (1,055

(Decrease) increase in other liabilities

     (145     580  
  

 

 

   

 

 

 

Net cash provided by operating activities

     30,326       39,198  

Cash flows from investing activities:

    

Capital improvements

     (17,508     (21,528

Proceeds from sale of assets

     59,437       —    

Property insurance proceeds

     727       307  
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     42,656       (21,221

Cash flows from financing activities:

    

Payments of mortgage debt

     (44,145     (218

Dividends paid to Series A Preferred stockholders

     (4,821     (4,821

Dividends paid to common stockholder

     (24,250     (19,000
  

 

 

   

 

 

 

Net cash used in financing activities

     (73,216     (24,039

Net decrease in cash and restricted cash

     (234     (6,062

Cash and restricted cash, beginning of period

     31,166       35,308  
  

 

 

   

 

 

 

Cash and restricted cash, end of period

   $ 30,932     $ 29,246  
  

 

 

   

 

 

 

Supplemental Cash Flow Information, including Non-Cash Activities:

    

Interest paid

   $ 14,335     $ 13,986  

Taxes paid

   $ 1,857     $ 1,410  

Accrued capital improvements

   $ 1,916     $ 1,890  

Accrued 7% Series A Preferred Stock dividends

   $ 2,411     $ 2,411  

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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BRE SELECT HOTELS CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization

BRE Select Hotels Corp, together with its wholly-owned subsidiaries (the “Company”), is a Delaware corporation that made an election, through the filing of Form 1120-REIT for 2012, to qualify as a real estate investment trust, or REIT, for federal income tax purposes. The Company was formed on November 28, 2012 to invest in income-producing real estate in the United States through the acquisition of Apple REIT Six, Inc. (“Apple Six”) on behalf of BRE Select Hotels Holdings LP (“BRE Holdings”), a Delaware limited partnership and an affiliate of the Company. All of the common stock of the Company is owned by BRE Holdings, which is an affiliate of Blackstone Real Estate Partners VII L.P. (the “Sponsor”). The acquisition of Apple Six (the “Merger”) was completed on May 14, 2013 (the “Acquisition Date”). As of June 30, 2017, the Company owned 53 hotels located in 17 states with an aggregate of 6,365 rooms.

2. Summary of Significant Accounting Policies

Principles of Consolidation – The unaudited condensed consolidated financial statements include all of the accounts of the Company and its subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.

Basis of Presentation – The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with standards for the preparation of interim financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation have been included in these condensed consolidated financial statements. Operating results for the interim periods herein are not necessarily indicative of the results that may be expected for the twelve month period ending December 31, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Use of Estimates – The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents – Cash and cash equivalents primarily consist of cash in banks. The Company has deposits in excess of $250,000 within single financial institutions that are not insured by the Federal Deposit Insurance Corporation. The Company believes it mitigates this risk by depositing with major financial institutions.

Restricted Cash – Restricted cash consists of deposits held in escrow for the payment of certain required repairs, capital improvements and property taxes pursuant to the terms of the Company’s mortgages payable, as well as a repairs and improvements reserve required by the Marriott International Inc. or its affiliates (“Marriott”) management agreements.

The following table provides detail regarding cash and restricted cash that sums to the total of such amounts presented in the accompanying condensed consolidated statements of cash flows (in thousands).    

 

     June 30,      December 31,      June 30,      December 31,  
     2017      2016      2016      2015  

Cash

   $ 19,737      $ 25,170      $ 18,945      $ 29,137  

Restricted cash

     11,195        5,996        10,301        6,171  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total cash and restricted cash

   $ 30,932      $ 31,166      $ 29,246      $ 35,308  
  

 

 

    

 

 

    

 

 

    

 

 

 

Due from Third-Party Managers, net – Due from third-party managers, net, represents the net working capital advanced to and held by the hotel management companies for operation of the hotels.

Due to Third-Party Managers, net – Due to third-party managers, net, represents management fees due in excess of the net working capital advanced to and held by the hotel management companies for operation of the hotels.

 

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Investment in Real Estate and Related Depreciation – Real estate is stated at cost, net of accumulated depreciation. Repair and maintenance costs are expensed as incurred while significant improvements, renovations, and replacements that extend the useful life of the real estate asset are capitalized and depreciated over the estimated useful life of the real estate asset. Depreciation is computed using the straight-line method over the average estimated useful lives of the assets, which are 39 years for buildings, 10 to 15 years for land and building improvements, and three to seven years for furniture and equipment.

Impairment of Investment in Real Estate – The Company periodically assesses whether there are any indicators that the value of real estate assets may be impaired. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate the carrying value of an asset may not be recoverable. Indicators of impairment include: (1) a property with current or potential losses from operations, (2) when it becomes more likely than not that a property will be sold before the end of its previously estimated useful life, or (3) when events, trends, contingencies or changes in circumstances indicate that a triggering event has occurred and an asset’s carrying value may not be recoverable. The Company monitors its properties on an ongoing basis by reviewing financial performance and considers each property individually for purposes of reviewing for indicators of impairment. As many indicators of impairment are subjective, such as general economic and market declines, the Company also prepares a quarterly quantitative analysis for each of its properties to assist with its evaluation of impairment indicators. The analysis compares each property’s current period actual and forecasted occupancy and revenue per available room (“RevPAR”) compared to the prior period.

If events or circumstances change, such as the operating performance of a property declines substantially for an extended period of time, the Company’s carrying value for a particular property may not be recoverable and in such instances an impairment loss may be recorded. Recoverability of assets to be held and used is determined by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the asset. If the carrying value of such assets exceeds such cash flows, the assets are considered impaired. Impairment losses are measured as the difference between the asset’s fair value and its carrying value. Fair value is determined by using management’s best estimate of the discounted net cash flows over the remaining useful life of the asset, or other indicators of fair value.

During the second quarter of 2017, the Company executed a letter of intent to sell the Courtyard – Valdosta, Georgia property. As a result, a test for impairment of the property was performed with fair value determined based on the estimated sales proceeds for the property. The Company estimated the sales proceeds based on the agreement of purchase and sale (subject to certain terms) entered into for the property in May 2017. The test resulted in a non-cash impairment of investment in real estate of $2.6 million for the six months ended June 30, 2017. The Courtyard – Valdosta, Georgia property was subsequently sold in June 2017.

During the second quarter of 2017, the Company executed a letter of intent to sell the Fairfield Inn – Pensacola, Florida property. As a result, a test for impairment of the property was performed with fair value determined based on the estimated sales proceeds for the property. The Company estimated the sales proceeds based on the agreement of purchase and sale (subject to certain terms) entered into for the property in May 2017. The test resulted in a non-cash impairment of investment in real estate of $0.4 million for the six months ended June 30, 2017. The Fairfield Inn – Pensacola, Florida property was subsequently sold in July 2017.    

No other triggering events have occurred to indicate that the asset carrying values are not recoverable as of June 30, 2017.

During the first quarter of 2016, the Company executed a letter of intent to sell the Hilton Garden Inn – Fredericksburg, Virginia property. As a result, a test for impairment of the property was performed during the first quarter of 2016 with fair value determined, in part, based on the estimated sales proceeds for the property. The Company estimated the sales proceeds based on the agreement of purchase and sale (subject to certain terms) entered into for the property. The test resulted in a non-cash impairment of investment in real estate of $5.5 million for the six months ended June 30, 2016. The Hilton Garden Inn – Fredericksburg, Virginia property was subsequently sold in August 2016.

During the second quarter of 2016, the Company executed a letter of intent to sell the Marriott – Boulder, Colorado property. As a result, a test for impairment of the property was performed during the second quarter of 2016 with fair value determined, in part, based on the estimated sales proceeds for the property. The Company estimated the sales proceeds based on the agreement of purchase and sale (subject to certain terms) entered into for the property. The test resulted in a non-cash impairment of investment in real estate of $3.0 million for the six months ended June 30, 2016. The Hilton Garden Inn – Fredericksburg, Virginia property was subsequently sold in August 2016.    

Goodwill – Goodwill represents the excess of purchase price over fair value of assets acquired and liabilities assumed in business combinations, and is characterized by intangible assets that do not qualify for separate recognition. In accordance with accounting guidance related to goodwill and other intangible assets, goodwill is not amortized, but instead reviewed for impairment at least annually. The Company performs its annual testing for impairment of goodwill during the fourth quarter of each year and in certain situations between those annual dates if indicators of impairment are present. The impairment analysis for goodwill is performed at the reporting unit level using a two-step approach. The first step is a comparison of the fair value of the reporting unit, determined using an income approach and validated by a market approach, to its carrying amount. If the carrying amount exceeds the fair value, the second step quantifies any impairment loss by comparing the current implied value of goodwill to the recorded goodwill balance. There was no impairment of goodwill for any of the periods presented.

 

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The following table details the carrying amount of the Company’s goodwill at June 30, 2017 and December 31, 2016 (in thousands). The goodwill allocated to the sale of hotel properties represents the goodwill amounts allocated at the Acquisition Date to the Fairfield Inn – Huntsville, Alabama, TownePlace Suites – Arlington, Texas, Springhill Suites – Clearwater, Florida, TownePlace Suites – Las Colinas, Texas, Courtyard – Albany, Georgia, Springhill Suites – Arlington, Texas and Courtyard – Valdosta, Georgia hotel properties which were sold during the six months ended June 30, 2017, and is included within the determination of gain (loss) on sale of hotel properties presented in the accompanying condensed consolidated statement of operations and condensed consolidated statement of cash flows.

 

Balance as of December 31, 2016

  

Goodwill

   $ 116,470  

Accumulated impairment losses

     —    
  

 

 

 
     116,470  

Allocated to sale of hotel properties

     (7,406
  

 

 

 

Balance as of June 30, 2017

  

Goodwill

     109,064  

Accumulated impairment losses

     —    
  

 

 

 
   $ 109,064  
  

 

 

 

Revenue Recognition – Revenue is recognized as earned, which is generally defined as the date upon which a guest occupies a room or utilizes the hotel’s services. Taxes collected from customers and submitted to taxing authorities are not recorded in revenue.

Sales and Marketing Costs – Sales and marketing costs are expensed when incurred. These costs represent the expense for franchise advertising under the terms of the hotel management and franchise agreements and general and administrative expenses that are directly attributable to advertising and promotion.

Income Taxes – The Company made an election, through the filing of Form 1120-REIT for 2012, to qualify as a REIT under the Internal Revenue Code of 1986, as amended, beginning with the Company’s short taxable year ended December 31, 2012. In order to qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a requirement that it distribute at least 90% of its adjusted taxable income to its stockholders, subject to certain adjustments and excluding any net capital gain. The Company’s taxable REIT income and dividend requirements to maintain REIT status are determined on an annual basis. The Company intends to adhere to these requirements to qualify for REIT status, and assuming it does qualify for taxation as a REIT, it will generally not be subject to federal income taxes to the extent it distributes substantially all of its taxable income to the Company’s stockholder. Dividends paid in excess of REIT taxable income for the year will generally not be taxable to the common stockholder. However, the Company’s taxable REIT subsidiaries (“TRS”) will generally be subject to federal, state, and local income taxes and the consolidated income tax provision includes those taxes.

Valuation of Deferred Tax Assets – A valuation allowance for deferred tax assets is provided when it is “more likely than not” that some portion or all of the deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in performing this assessment.

Income per Common Share – Basic income per common share is computed based upon the weighted average number of shares outstanding during the period, after giving effect to the 7% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) dividends declared during the period. There were no potential dilutive shares during the applicable periods, and as a result, basic and dilutive outstanding shares were the same.

Segment Information – The Company derives revenues and cash flows from its hotel portfolio. Hotel portfolio financial information is analyzed for purposes of assessing performance and allocating resources. Therefore, the Company has one operating segment consisting of its hotel portfolio.

New Accounting Pronouncements In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. The update outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The accounting update will become effective for accounting periods beginning after December 15, 2017 and for interim periods within those fiscal years, with early adoption permitted for periods beginning after December 15, 2016. The Company is in the initial stages of evaluating the effect of the standard on the condensed consolidated financial statements, and expects to adopt this standard on January 1, 2018 using the modified retrospective transition method. Based on the initial and ongoing assessment of ASU 2014-09, the Company does not currently believe there will be a material impact to the condensed consolidated financial statements.

 

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In February 2016, the FASB issued ASU 2016-02, Leases. The new standard introduces a new lessee model which requires that substantially all leases be recorded on the balance sheet. The Company will be required to apply the provisions of ASU 2016-02 for accounting periods beginning after December 15, 2018 and for interim periods within those fiscal years. Earlier application is permitted. The Company is currently assessing the impact this new guidance may have on the Company’s operations and financial results.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 reduces the existing diversity in practice in financial reporting across all industries by clarifying certain existing principles in Accounting Standards Codification (“ASC”) 230, Statement of Cash Flows, including providing additional guidance on how and what an entity should consider in determining the classification of certain cash flows. The Company will be required to apply the provisions of ASU 2016-15 for accounting periods beginning after December 15, 2017 and for interim periods within those fiscal years. Earlier application is permitted. The Company is currently assessing the impact this new guidance may have on the Company’s operations and financial results.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, as opposed to waiting until the asset is sold to an outside party. The Company will be required to apply the provisions of ASU 2016-16 for accounting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years. Earlier application is permitted. The Company is currently assessing the impact this new guidance may have on the Company’s operations and financial results.

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business. The amendments in ASU 2017-01 provide an initial screen to determine if substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, in which case the transaction would be accounted for as an asset acquisition. In addition, ASU 2017-01 clarifies the requirements for a set of activities to be considered a business and narrows the definition of an output. The Company will be required to apply the provisions of ASU 2017-01 prospectively for accounting periods beginning after December 15, 2017, including interim reporting periods within those fiscal years. The Company does not expect the new standard to impact its condensed consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 simplifies the accounting for goodwill impairment by eliminating the process of measuring the implied value of goodwill, known as step two, from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The Company will be required to apply the provisions of ASU 2017-04 for accounting periods beginning after December 15, 2019, including interim reporting periods within those fiscal years. Earlier application is permitted. The Company does not expect the new standard to impact its condensed consolidated financial statements unless an impairment loss is determined to exist in a future period.

3. Investment in Real Estate, net

Investment in real estate, net as of June 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

     June 30,      December 31,  
     2017      2016  

Land and Improvements

   $ 137,804      $ 139,453  

Building and Improvements

     746,900        735,863  

Furniture, Fixtures and Equipment

     60,090        52,706  

Construction in Progress

     2,022        23,319  
  

 

 

    

 

 

 
     946,816        951,341  

Less: Accumulated Depreciation

     (106,714      (93,423
  

 

 

    

 

 

 

Investment in Real Estate, net

   $ 840,102      $ 857,918  
  

 

 

    

 

 

 

 

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4. Sale of Hotel Properties

During the six months ended June 30, 2017, the Company sold seven hotels as summarized below (in thousands):

 

                        Mortgage  
                        Payable  

Hotel

  

Date of Sale

   Proceeds      Gain      Repaid  

Fairfield Inn—Huntsville, Alabama

   January 2017    $ 4,575      $ —        $ 4,444  

TownePlace Suites—Arlington, Texas

   January 2017      8,001        —          3,606  

Springhill Suites—Clearwater, Florida

   January 2017      5,767        —          4,971  

TownePlace Suites—Las Colinas, Texas

   January 2017      16,867        3,072        8,248  

Courtyard—Albany, Georgia

   February 2017      8,628        —          6,242  

Springhill Suites—Arlington, Texas

   March 2017      9,015        556        8,360  

Courtyard—Valdosta, Georgia

   June 2017      6,584        —          5,423  
     

 

 

    

 

 

    

 

 

 

Total

      $ 59,437      $ 3,628      $ 41,294  
     

 

 

    

 

 

    

 

 

 

The Company received proceeds of $59.4 million from the sales of these hotels, which are net of $2.0 million in selling costs. Due to the sale of the hotels, the Company made an additional principal payment of $2.6 million in order to comply with the debt yield as required under the terms of the Company’s mortgage loan agreement.

5. Hotels Held for Sale

During the second quarter of 2017, the Company committed to a plan to sell one hotel, the Fairfield Inn – Pensacola, Florida and accordingly the hotel was classified as hotels held for sale as of June 30, 2017. The $4.8 million for hotels held for sale presented in the June 30, 2017 condensed consolidated balance sheet consisted of the investment in real estate of the hotel, which was measured at June 30, 2017 at the lower of carrying value or fair value, less costs to sell. Mortgages payable related to the assets of hotels held for sale presented in the June 30, 2017 condensed consolidated balance sheet represents the principal of the mortgage payable that the Company was contractually required to repay in connection with the sale of the hotel. There were no other major captions of assets or liabilities related to the hotels held for sale. The Company sold the Fairfield Inn – Pensacola, Florida property in July 2017 and received net proceeds of $5.4 million.                

During the fourth quarter of 2016, the Company committed to a plan to sell six hotels and accordingly the hotels were classified as hotels held for sale as of December 31, 2016. Hotels held for sale presented in the December 31, 2016 condensed consolidated balance sheet consisted of the investment in real estate of each hotel, which was measured at December 31, 2016 at the lower of carrying value or fair value, less costs to sell. Mortgages payable related to assets of hotels held for sale presented in the December 31, 2016 condensed consolidated balance sheet represents the principal of the mortgage payable that the Company was contractually required to repay in connection with the sale of the hotels. There were no other major captions of assets or liabilities related to the hotels held for sale. The following is a summary of hotels held for sale as of December 31, 2016 (in thousands).

 

     Assets of Hotels  

Hotel

   Held for Sale  

Fairfield Inn—Huntsville, Alabama

   $ 3,613  

TownePlace Suites—Arlington, Texas

     7,136  

Springhill Suites—Clearwater, Florida

     4,973  

TownePlace Suites—Las Colinas, Texas

     12,330  

Springhill Suites—Arlington, Texas

     7,195  

Courtyard—Albany, Georgia

     7,849  
  

 

 

 

Total

   $ 43,096  
  

 

 

 

The Company sold all six hotels in the first quarter of 2017 as described in Note 4.

6. Mortgages Payable

Mortgages payable as of June 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

     June 30,      December 31,  
     2017      2016  

Mortgages payable related to assets held and used

   $ 745,356      $ 757,245  

Mortgages payable related to assets of hotels held for sale

     3,615        35,871  
  

 

 

    

 

 

 

Total mortgages payable

   $ 748,971      $ 793,116  
  

 

 

    

 

 

 

 

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On December 3, 2014, certain indirect wholly-owned subsidiaries (the “Borrowers”) of the Company entered into a loan agreement (the “Loan Agreement”) with commercial lenders (collectively, the “Lenders”), pursuant to which the Borrowers obtained an $830 million mortgage loan from the Lenders (the “Loan”). The Loan is secured by first-priority, cross-collateralized mortgage liens on 52 of the 53 properties owned or ground-leased by certain subsidiaries of the Company, all related personal property, reserves, a pledge of all income received by the Borrowers with respect to the properties, a pledge of the ownership interests in the operating lessee and a security interest in a cash management account.

A portion of the proceeds from the Loan were used to repay the mortgage and mezzanine loans obtained on May 14, 2013 by the Borrowers, as well as certain indirect wholly-owned subsidiaries of the Company that own direct and indirect interests in the Borrowers (the “Mezzanine Borrowers”), in the aggregate original principal amount of $775 million and with an aggregate outstanding principal amount of $763.9 million as of the date of repayment. Accordingly, on December 3, 2014, the Borrowers and Mezzanine Borrowers repaid in full, cancelled and terminated their respective mortgage and mezzanine loan agreements outstanding at that date without any penalties incurred.

The interest rate of the Loan is equal to the one-month London interbank offered rate for deposits, or LIBOR, plus a margin rate of 2.80%. The Borrowers entered into an interest rate cap agreement, which caps the base interest rate before applying the applicable margins on the Loan, for an aggregate notional amount of $776.5 million, a termination date of December 9, 2017 and a cap rate of 8.374%.

The Loan contains various representations and warranties, as well as certain financial, operating and other covenants that will among other things, limit the Company’s ability to:

 

    incur additional secured or unsecured indebtedness;

 

    make cash distributions at any time that the debt yield, representing the quotient (expressed as a percentage) calculated by dividing the annualized net operating income of the properties subject to the Loan by the outstanding principal amount of the indebtedness under the Loan, is less than 7.50% during the first four years of the Loan and 7.75% during the fifth year of the Loan or if there is a default continuing under the Loan, until such time as the debt yield is equal to or greater than 7.50% during the first four years of the Loan and 7.75% during the fifth year of the Loan or the Loan default has been cured;

 

    make investments or acquisitions;

 

    use assets as security in other transactions;

 

    sell assets (except that the Borrowers are permitted to sell assets so long as the debt yield is not reduced, subject to payment of applicable prepayment premiums and other property release requirements);

 

    guarantee other indebtedness; and

 

    consolidate, merge or transfer all or substantially all of the Company’s assets.

Defaults under the Loan include, among other things, the failure to pay interest or principal when due, material misrepresentations, transfers of the underlying security for the Loan without any required consent from the Lender, defaults under certain agreements relating to the properties, including franchise and management agreements, bankruptcy of a Borrower or any guarantor of the Loan, failure to maintain required insurance and a failure to observe other covenants under the Loan, in each case subject to any applicable cure rights. The Borrowers may prepay the Loan, in whole or in part, at any time without any prepayment penalty or fee.

In addition, the applicable Borrowers for the Loan and BSHH LLC, a Delaware limited liability company (the “Guarantor”) and an affiliate of BRE Holdings, will have recourse liability under the Loan for certain matters typical of a transaction of this type, including, without limitation, relating to losses arising out of actions by the Borrower, Guarantor, Sponsor or their respective affiliates controlled by the Sponsor which constitute fraud, intentional misrepresentation, misappropriation of funds (including insurance proceeds), removal or disposal of any property after an event of default under the Loan, a material violation of the due on sale/encumbrance covenants set forth in the loan agreements, willful misconduct that results in waste to any property and any material modification or voluntary termination of a ground lease without the Lender’s prior written consent if required under the loan agreements. The Borrowers will also have recourse liability for the Loan in the event any security instrument or loan agreement is deemed a fraudulent conveyance or a preference, and the Borrowers and the Guarantor will have recourse liability for the Loan in the event of a voluntary or collusive involuntary bankruptcy of any Borrower or any operating lessee of the properties or in the event Borrower, Guarantor, Sponsor or their respective affiliates controlled by the Sponsor consents to or joins in the application for the appointment of a custodian, receiver, trustee or examiner of any Borrower or the operating lessee of any of the properties or any property, provided, however, the liability of the Guarantor described in this sentence shall not exceed 15% of the principal amount of the Loan outstanding at the time the event occurred.

Concurrent with the execution of the documents reflecting the Loan, the Company executed an Indemnity Agreement in favor of the Guarantor pursuant to which the Company agrees to indemnify and hold the Guarantor harmless from any losses incurred by the Guarantor pursuant to the terms of the guaranty executed by the Guarantor in favor of the Lenders in connection with the Loan.

 

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As part of the Merger, the Company assumed an existing loan with a commercial lender secured by the Company’s Fort Worth, Texas Residence Inn property. The loan matures on October 6, 2022 and carries a fixed interest rate of 4.73%. The outstanding principal balance was $16.4 million and $16.6 million as of June 30, 2017 and December 31, 2016, respectively, and is included in mortgages payable in the condensed consolidated balance sheets.

Components of interest expense for the three and six months ended June 30, 2017 and 2016 were as follows (in thousands):

 

     For the three months ended June 30,      For the six months ended June 30,  
     2017      2016      2017      2016  

Mortgage debt

   $ 7,307      $ 6,999      $ 14,339      $ 13,952  

Amortization of deferred financing costs

     —          1,260        —          2,520  

Capitalized interest

     (109      (81      (218      (178
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense, net

   $ 7,198      $ 8,178      $ 14,121      $ 16,294  
  

 

 

    

 

 

    

 

 

    

 

 

 

Future scheduled principal payments of debt obligations as of June 30, 2017 (assuming exercise of extension option under the Loan Agreement and the sale of the hotels held for sale as of June 30, 2017 during the fiscal year 2017) are as follows (in thousands):

 

2017 (remaining months)

   $ 3,849  

2018

     729,481  

2019

     510  

2020

     533  

2021

     562  

Thereafter

     14,036  
  

 

 

 

Total

   $ 748,971  
  

 

 

 

On July 7, 2017, the Borrowers and Morgan Stanley Bank, N.A., Bank of America, N.A., Citigroup Global Markets Realty Corp., and JPMorgan Chase Bank, National Association (collectively, the “Commercial Lenders”) entered into a loan agreement, pursuant to which the Borrowers obtained a $800 million mortgage loan from the Commercial Lenders (the “New Loan”). The New Loan is secured by first-priority, cross-collateralized mortgage liens on 51 of the 52 properties owned or ground-leased by certain subsidiaries of the Company as of the date of the New Loan, all related personal property, reserves, a pledge of all income received by the Borrowers with respect to the properties, a pledge of the ownership interests in the operating lessee, BRE Select Hotels Operating LLC, an affiliate of the Company, and a security interest in deposit accounts. The New Loan is scheduled to mature on July 9, 2019, with an option for the Borrowers to extend the initial term for five one-year extension terms, subject to certain conditions. The initial interest rate of the New Loan is equal to the one-month LIBOR plus a margin rate of 2.15%. In connection with the New Loan, the Borrowers entered into an interest rate cap agreement, which caps the base interest rate before applying the applicable margins on the New Loan, for an aggregate notional amount of $800 million, a termination date of July 9, 2019 and a strike rate of 4.25%. The New Loan is not subject to any mandatory principal amortization. A portion of the proceeds from the New Loan was used to repay the $732.6 million principal amount outstanding under the previous Loan, and the Borrowers repaid in full, cancelled and terminated the mortgage loan agreements outstanding relating to the previous Loan without any penalties incurred. The remaining amount of proceeds under the New Loan, net of closing costs, was used to redeem shares of the Company’s Series A Preferred Stock as further described in Note 9.    

7. Fair Value of Financial Instruments

In accordance with the authoritative guidance on fair value measurements and disclosures, the Company measures nonfinancial assets and liabilities subject to nonrecurring measurement and financial assets and liabilities subject to recurring measurement based on a hierarchy that prioritizes inputs to valuation techniques used to measure the fair value. Inputs used in determining fair value should be from the highest level available in the following hierarchy:

Level 1 — Inputs based on quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access.

 

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Level 2 — Inputs based on quoted prices for similar assets or liabilities, quoted market prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3 — Inputs are unobservable for the asset or liability and typically based on an entity’s own assumptions as there is little, if any, related market activity.

 

Determining estimated fair values of the Company’s financial instruments such as mortgages payable requires considerable judgment to interpret market data. The market assumptions and/or estimation methodologies used may have a material effect on estimated fair value amounts. Accordingly, the estimates presented are not necessarily indicative of the amounts by which these instruments could be purchased, sold, or settled.

The table excludes cash and cash equivalents, restricted cash, due from third-party managers, net, insurance receivable, accounts payable and accrued expenses, and due to third-party managers, net, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments. Carrying amounts and estimated fair values of financial instruments, for periods indicated, were as follows (in thousands):

 

     June 30, 2017      December 31, 2016  
     Carrying      Estimated      Carrying      Estimated  
     Value      Fair Value      Value      Fair Value  

Financial liabilities not measured at fair value:

           

Mortgages payable and mortgages payable related to assets of hotels held for sale

   $ 748,971      $ 748,613      $ 793,116      $ 792,699  

Mortgages payable and mortgages payable related to assets of hotels held for sale – For fixed rate mortgage payable, fair value is calculated by discounting the future cash flows of each instrument at estimated market rates of debt obligations with similar maturities and credit profiles or quality. This is considered a Level 3 valuation technique. The estimated fair value of the mortgages payable and mortgages payable related to assets of hotels held for sale in the table above includes the estimated fair value of the mortgage loan secured by the Company’s Fort Worth, Texas Residence Inn property, and the Company’s carrying value of the Loan, including carrying amounts related to assets of hotels held for sale. The fair value of the Loan cannot be reasonably estimated because it is not readily determinable without undue cost.

Impairment of investment in real estate – The impairment determinations during the six months ended June 30, 2017 and 2016 described in Note 2 were based on Level 2 fair value measurements.

8. Commitments and Contingencies

Insurance – The Company carries comprehensive insurance, including general liability, property, rental loss and umbrella liability coverage on all of its hotels. In addition, the Company carries flood coverage on certain hotels when available on commercially reasonable terms for hotels where the Company believes such coverage is warranted or required under the terms of the Loan. On June 5, 2015, the Company evacuated and temporarily closed the Homewood Suites in Fort Worth, Texas due to damage incurred from extensive flooding in the area during late May 2015. Remediation work was started immediately, and the hotel reopened on October 27, 2015. Insurance receivable related to fiscal year 2015 property insurance claims totaled $5.1 million at both June 30, 2017 and December 31, 2016. The estimated insurance recoveries are preliminary, subject to final settlement of the respective claims with the Company’s insurance providers. As of June 30, 2017, the total estimated insurance recoveries are probable, and the collectability of the insurance receivable at June 30, 2017 is reasonably assured.

Litigation – The Company is subject to various legal proceedings, claims and administrative proceedings arising in the ordinary course of business, some of which are expected to be covered by liability insurance. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters using the latest information available. The Company records a liability for litigation if an unfavorable outcome is probable and the amount of loss or range of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, the Company accrues the best estimate within the range. If no amount within the range is a better estimate than any other amount, the Company accrues the minimum amount within the range. If an unfavorable outcome is probable but the amount of the loss cannot be reasonably estimated, the Company discloses the nature of the litigation and indicates that an estimate of the loss or range of loss cannot be made. If an unfavorable outcome is reasonably possible and the estimated loss is material, the Company discloses the nature and estimate of the possible loss of the litigation. The Company does not disclose information with respect to litigation where an unfavorable outcome is considered to be remote or where the estimated loss would not be material. Based on current expectations, such matters, both individually and in the aggregate, are not expected to have a material adverse effect on the liquidity, results of operations, business or financial condition of the Company.

 

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In February 2017, the Company received $1.4 million in proceeds from the Deepwater Horizon Economic and Property Damages Settlement Program arising out of damages suffered by four properties prior to the Merger. The proceeds are included in other revenue in the condensed consolidated statement of operations for the six months ended June 30, 2017.

Franchise Agreements – As of June 30, 2017, the Company’s hotel properties, other than the Courtyard in Myrtle Beach, South Carolina, the SpringHill Suites in Fort Worth, Texas and the Marriott in Redmond, Washington, (the “Marriott Managed Properties”) were operated under franchise agreements between the Company’s TRS and Marriott or Hilton Worldwide Holdings Inc. or its affiliates (“Hilton”). The franchise agreements for these hotels allow the properties to operate under the brand identified in the applicable franchise agreements. The management agreements for each of the Marriott Managed Properties allow the Marriott Managed Properties to operate under the brand identified therein. Pursuant to the franchise agreements, the Company pays a royalty fee, generally between 4.5% and 6.0% of room revenue, which is included in franchise fees in the condensed consolidated statements of operations. Program fees, which include additional fees for marketing, are included in sales and marketing expense, and central reservation system and other franchisor costs are included in operating expense in the condensed consolidated statements of operations.

Management Agreements – As of June 30, 2017, each of the Company’s 53 hotels were operated and managed under separate management agreements, by affiliates of the following companies: Marriott, Texas Western International (“Western”), Larry Blumberg & Associates (“LBA”), White Lodging Services Corporation (“White”), Inn Ventures, Inc. (“Inn Ventures”), Interstate Hotels & Resorts, Inc. (“Interstate”), OTO Development, LLC (“OTO”), or Sage Hospitality (“Sage”). The management agreements require the Company to pay a monthly fee calculated as a percentage of revenues, generally between 2.0% - 7.0%, as well as annual incentive fees, if applicable, and are included in management fees in the condensed consolidated statements of operations. The agreements have remaining terms generally ranging from less than one year to 17 years. The agreements with less than one year remaining in their term generally automatically renew on annual or month-to-month terms unless either party to the agreement gives prior notice of the termination thereof. If the Company terminates a management agreement prior to its expiration, it may be liable for estimated management fees through the remaining term and liquidated damages. Additionally, the Company, from time to time, may enter into management agreements to manage retail premises ancillary to its hotels.

TRS Lease Agreements – The Company’s lease agreements are intercompany agreements between the TRS lessees and the Company’s property-owning subsidiaries. These agreements generally contain terms which are customary for third-party lease agreements, including terms for rent payments and other expenses. All related rental income and expense related to the TRS lease agreements eliminate on a consolidated basis, and therefore have no impact on the condensed consolidated financial statements.

Ground Leases – As of June 30, 2017, three of the Company’s hotel properties had ground leases with remaining terms ranging from three to 17 years, which may be extended at the Company’s election. The ground lease for the Residence Inn in Pittsburgh, Pennsylvania originated at the time of the Merger and has a term of 17 years. Payments under this lease are payable to a subsidiary of the Company and, therefore eliminated in consolidation and excluded from the table below. Ground lease expenses totaled $0.1 million for each of the three and six months ended June 30, 2017 and 2016, respectively, and are included in taxes, insurance and other in the condensed consolidated statements of operations. The aggregate amounts of minimum lease payments under these lease agreements for the five years subsequent to June 30, 2017 and thereafter are as follows (in thousands):

 

2017 (remaining months)

   $ 53  

2018

     107  

2019

     107  

2020

     45  

Thereafter

     —    
  

 

 

 

Total

   $ 312  
  

 

 

 

9. 7% Series A Cumulative Redeemable Preferred Stock

In connection with the Merger, the Company issued 97,032,848 shares of Series A Preferred Stock. The terms of these shares provide the Company with the right to redeem such shares at any time for an amount equal to the liquidation preference, plus any accumulated and unpaid dividends. In addition, the terms of these shares include an option for a holder of such shares to require the Company to redeem all or a portion of such holder’s shares on or after November 14, 2020 for an amount equal to the liquidation preference, plus any accumulated and unpaid dividends. The initial dividend rate on these shares is 7% per annum. The dividend rate will increase to 9% per annum if dividends are not paid in cash for more than six quarters, and to 11% per annum if they are not redeemed after the earlier of certain change of control events and May 14, 2018. Due to the put option provided to the holders of these shares, such shares have been classified outside permanent stockholder’s equity.

The initial liquidation preference of $1.90 per share will be subject to downward adjustment should net costs and payments relating to litigation and regulatory matters for alleged legacy acts exceed $3.5 million from the date of the Merger described in Note 1. The Company recognizes changes in the redemption value immediately as they occur and adjusts the carrying amount of the Series A Preferred Stock to equal the redemption value at the end of each reporting period. As of June 30, 2017, the initial liquidation preference has not been adjusted.

 

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On March 28, 2017, the Board of Directors of the Company declared a dividend on the Series A Preferred Stock of $0.0333 per share, which was paid on April 17, 2017 to stockholders of record on April 1, 2017. On June 23, 2017, the Board of Directors of the Company declared a dividend on the Series A Preferred Stock of $0.0333 per share, which was paid on July 17, 2017 to stockholders of record on July 1, 2017. As of June 30, 2017, the Company accrued $2.4 million for this dividend, which is included in accounts payable and accrued expenses in the condensed consolidated balance sheet.    

In August 2017, the Company used proceeds from the New Loan (see Note 6) to redeem 28,560,947 shares of Series A Preferred Stock, representing approximately 39.458% of the total shares of Series A Preferred Stock outstanding, for an aggregate redemption price of approximately $54.5 million.

As of June 30, 2017, BRE Holdings owned approximately 1.5 million shares of the Series A Preferred Stock. As a result of the August 2017 redemption, BRE Holdings ownership of the Series A Preferred Stock was reduced to approximately 0.9 million shares.

10. Stockholder’s Equity

The Company is authorized to issue 150,100,000 shares of capital stock pursuant to its Amended and Restated Certificate of Incorporation, consisting of (i) 100,000 shares of common stock, par value $0.01 per share, and (ii) 150,000,000 shares of preferred stock, par value $0.0001 per share.

Holders of the Company’s common stock are entitled to one vote for each share of common stock held. At June 30, 2017 and December 31, 2016, there were 100 shares of common stock issued and outstanding.

On February 10, 2017, the Board of Directors of the Company declared a dividend on its common stock of $100,000 per share, which was paid on February 13, 2017. On May 12, 2017, the Board of Directors of the Company declared a dividend on its common stock of $142,500 per share, which was paid on May 15, 2017. On July 13, 2017, the Board of Directors of the Company declared a dividend on its common stock of $64,388 per share, which was paid on July 14, 2017. On August 2, 2017, the Board of Directors of the Company declared a dividend on its common stock of $100,000 per share, which was paid on August 3, 2017.

11. Income Taxes

The Company accounts for TRS income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. The analysis utilized by the Company in determining the deferred tax valuation allowance involves considerable management judgment and assumptions. For the three months ended June 30, 2017 and 2016, the Company recorded $1.3 million and $1.7 million of income tax expense, respectively. For the six months ended June 30, 2017 and 2016, the Company recorded $1.3 million and $0.1 million of income tax expense, respectively. The income tax expense for the three and six months ended June 30, 2017 and 2016 is comprised of federal and state income taxes.

12. Related Party Transactions

The Sponsor and its affiliates are in the business of making investments in companies and real estate assets and currently own, and may, from time to time acquire and hold, in each case, interests in businesses or assets that compete directly or indirectly with the Company. In addition, certain affiliates of the Sponsor have significant influence over Hilton, which indirectly owns the entities that serve as franchisors and receive franchise fees for 26 of the hotels owned by the Company. In accordance with the Company’s certificate of incorporation, the Sponsor has no obligation to present any corporate opportunities to the Company or to conduct its other business and investment affairs in the best interests of the Company, common stockholder, or holders of Series A Preferred Shares. In connection with the Sponsor’s and its affiliates’ business activities, the Sponsor, BRE Holdings or any of their affiliates, including, without limitation, Hilton or its subsidiaries, may from time to time enter into arrangements with the Company or its subsidiaries. These arrangements may be subject to restrictions on affiliate transactions contained in agreements entered into in connection with the Loan. The Company incurred $5.0 million and $4.6 million of franchise fees, marketing fees and other expenses during the three months ended June 30, 2017 and 2016, respectively, under agreements with Hilton or its subsidiaries. The Company incurred $8.8 million and $8.4 million of franchise fees, marketing fees and other expenses during the six months ended June 30, 2017 and 2016, respectively, under agreements with Hilton or its subsidiaries. No amounts were outstanding to Hilton as of June 30, 2017 or December 31, 2016.

 

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A management company provides services to the Company including financial, accounting, administrative and other services that may be requested from time to time pursuant to a corporate services agreement. Affiliates of the Sponsor hold a management interest in this management company. The Company paid $0.6 million and $0.5 million to this management company during the three months ended June 30, 2017 and 2016, respectively, and $1.2 million and $1.0 million during the six months ended June 30, 2017 and 2016, respectively. In addition, the Company owed this management company $0 million and $0.1 million as of June 30, 2017 and December 31, 2016, respectively, which is included in accounts payable and accrued expenses in the condensed consolidated balance sheets.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (“Quarterly Report”) and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

In this Quarterly Report, the terms “the Company,” “we” or “our” refer to BRE Select Hotels Corp, together with its wholly-owned subsidiaries. Except where the context suggests otherwise, as used in this Quarterly Report, “occupancy” represents the total number of hotel rooms sold in a given period divided by the number of hotel rooms available; “Average Daily Rate,” or ADR, represents the average room price at a hotel or group of hotels and is computed by dividing total hotel room revenues by the total number of rooms sold in a given period; and “Revenue Per Available Room,” or RevPAR, is the product of occupancy and ADR.

Forward-Looking Statements

This quarterly report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are typically identified by use of terms such as “may,” “believe,” “expect,” “anticipate,” “intend,” “estimate,” “project,” “target,” “goal,” “plan,” “should,” “will,” “predict,” “potential,” “forecast” and similar expressions that convey the uncertainty of future events or outcomes. Such statements involve known and unknown risks, uncertainties, and other factors which may cause the actual results, performance, or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements.

Such factors include, but are not limited to, risks inherent in the hospitality industry; adverse national and regional economic conditions; industry competition; the Company’s dependence on third-party management companies; segment concentration; limitations in the Company’s operating agreements; the Company’s dependence on other hospitality brands; risks associated with the Company’s indebtedness; financing risks; risks related to litigation, regulatory proceedings or inquiries; changes in or interpretations of laws or regulations that impact the Company; risk related to the Company’s status as a real estate investment trust (“REIT”); and the factors discussed in the sections entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 (the “Form 10-K”) and in this Quarterly Report. Although the Company believes that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate, and therefore there can be no assurance that such statements included in the quarterly report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by the Company or any other person that the results or conditions described in such statements or the objectives and plans of the Company will be achieved. In addition, the Company’s qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code. Readers should carefully review the Company’s financial statements and the notes thereto, as well as the risk factors described in the Company’s filings with the SEC. Any forward-looking statement that the Company makes speaks only as of the date made. The Company undertakes no obligation to publicly update or revise any forward-looking statements or cautionary factors as a result of new information, future events or otherwise, except as required by law.

Overview

We are a REIT focused on the ownership of upscale, extended-stay and select-service hotels. Our hotels operate under the Homewood Suites by Hilton, Hilton Garden Inn, Hampton Inn, Hampton Inn & Suites, Courtyard by Marriott, Fairfield Inn by Marriott, Residence Inn by Marriott, SpringHill Suites by Marriott, TownePlace Suites by Marriott and Marriott brands. Our focus is on the ownership of high-quality real estate that generates attractive returns for our investors. As of June 30, 2017, our portfolio consisted of 53 hotels, containing a total of 6,365 rooms diversified among markets in 17 states.

We were formed to invest in income-producing real estate in the United States through the acquisition of Apple REIT Six, Inc. (“Apple Six”). On May 14, 2013, we completed the acquisition of Apple Six pursuant to the merger agreement, by and between us, BRE Select Hotels Holdings LP (“BRE Holdings”) and Apple Six, pursuant to which Apple Six merged with and into us.

Our strategy is to own primarily premium branded select service hotels, concentrated in markets that offer multiple demand generators and high barriers to entry. We believe that premium branded select service hotels offer attractive returns in their ability to generate high RevPAR levels, combined with an efficient operating model to control costs and generate positive cash flows. All 53 of our hotel properties are Hilton or Marriott branded properties.    

We actively monitor the profitability of our properties and aim to maximize stockholder value by evaluating opportunities to acquire or dispose of properties. As such, the composition and size of our hotel portfolio may change materially over time.    

 

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Our hotel portfolio experienced a decline in room revenue for the three and six months ended June 30, 2017 compared to the prior year primarily due to the sale of two properties in August 2016 and seven properties during the six months ended June 30, 2017. Excluding the properties sold, for the three and six months ended June 30, 2017 occupancy increased slightly, while ADR declined slightly compared to the 2016 comparable periods. Operating income declined for the three months ended June 30, 2017 compared to the 2016 comparable period due to the sale of nine properties since August 2016. However, operating income improved for the six months ended June 30, 2017 compared to the 2016 comparable period primarily due to the gain on sale of hotel properties of $3.6 million in 2017 and the decline of impairments of investment in real estate in 2017 compared to the 2016 comparable period. Although our hotel performance can be influenced by many factors including local competition, local and general economic conditions in the United States and the performance of individual managers assigned to each hotel, the performance of our hotels as compared to other hotels within their respective local markets, in general, continues to meet our expectations.

We remain cautiously optimistic that both the hotel industry and our portfolio will achieve moderate growth in the upcoming quarters, due to forecasted growth in the U.S. economy along with continued expected increased demand versus available supply. In addition, since 2014 we have renovated over 80% of our hotel portfolio. The resulting property improvements are expected to further improve our financial results through increased room rates at our properties.

We have elected to be taxed as a REIT for federal income tax purposes. In order to qualify as a REIT, we must meet a number of organizational and operational requirements, including a requirement that we distribute at least 90% of our adjusted taxable income to our stockholders, subject to certain adjustments and excluding any net capital gain. In addition, as a REIT we are not permitted to operate or manage our hotels. Accordingly, all of our hotels are leased to our property-owning subsidiaries and are operated pursuant to hotel management agreements between our taxable REIT subsidiaries lessees and unaffiliated third-party hotel management companies as follows:

 

Management Company

   Number of
Hotels
     Number of
Rooms
 

Inn Ventures, Inc.

     10        1,493  

Interstate Hotels & Resorts, Inc.

     9        1,055  

White Lodging Services Corporation

     8        1,002  

Larry Blumberg & Associates

     11        859  

Texas Western Hospitality

     5        615  

Marriott International, Inc.

     3        542  

OTO Development, LLC

     5        496  

Sage Hospitality

     2        303  
  

 

 

    

 

 

 

Total

     53        6,365  
  

 

 

    

 

 

 

We currently intend to adhere to these requirements to qualify for REIT status. There can be no assurance that we will qualify as a REIT for any particular year, however. If we fail to qualify as a REIT for any taxable year, we would be subject to federal income tax at corporate rates and distributions to our stockholders would not qualify for the dividends paid deduction. This tax liability would reduce net earnings available for distribution to our stockholders. In addition, we would generally be disqualified from treatment as a REIT for the year in which we lose our REIT status and for the four taxable years following such year.    

Recent Events

In January 2017, we sold the Fairfield Inn – Huntsville, Alabama, TownePlace Suites – Arlington, Texas, Springhill Suites – Clearwater, Florida and TownePlace Suites – Las Colinas, Texas. In February 2017, we sold the Courtyard – Albany, Georgia. In March 2017, we sold the Springhill Sites – Arlington, Texas. In June 2017, we sold the Courtyard – Valdosta, Georgia. In August 2016, we sold the Marriott – Boulder, Colorado and the Hilton Garden Inn – Fredericksburg, Virginia properties. The nine hotels sold in 2016 and the first six months of 2017 are collectively referred to as the “Sold Properties.”    

During the second quarter of 2017, we committed to a plan to sell the Fairfield Inn – Pensacola, Florida and, accordingly, the hotel was classified as hotels held for sale as of June 30, 2017. We subsequently sold the hotel in July 2017.

In July 2017, we obtained a $800 million mortgage loan from commercial lenders. A portion of the proceeds from the new loan was used to repay the $732.6 million principal amount outstanding under the previous mortgage loan. The remaining amount of proceeds, net of closing costs, was used to redeem 28,560,947 shares of our Series A Preferred Stock (representing approximately 39.458% of the total shares of Series A Preferred Stock outstanding) for an aggregate redemption price of approximately $54.5 million.

 

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In February 2017, we received $1.4 million in proceeds from the Deepwater Horizon Economic and Property Damages Settlement Program arising out of damages suffered by four properties prior to the merger. The proceeds are included in other revenue for the six months ended June 30, 2017.

On June 5, 2015, we evacuated and temporarily closed the Homewood Suites in Fort Worth, Texas due to damage incurred from extensive flooding in the area during late May 2015. Remediation work was started immediately, and the hotel reopened on October 27, 2015. For the year ended December 31, 2015, we recorded a total estimated loss due to property damage of $1.7 million, net of estimated property insurance recoveries of $8.6 million for this hotel and three other properties in Texas also impacted by the May 2015 flooding but which did not result in the temporary closures of these properties. Insurance receivable related to fiscal year 2015 property insurance claims totaled $5.1 million at both June 30, 2017 and December 31, 2016. The estimated insurance recoveries are preliminary, subject to final settlement of the respective claims with our insurance providers.

Our Hotel Portfolio

As of June 30, 2017, we owned 53 hotels with an aggregate of 6,365 rooms located in 17 states. The following tables summarize the hotels and rooms by brand and by state:    

 

Number of Hotels and Guest Rooms by Brand

 

Brand Affiliation

   Number of
Hotels
     Number of
Rooms
 

Marriott

     

Residence Inn

     10        1,247  

Courtyard

     8        822  

TownePlace Suites

     3        416  

SpringHill Suites

     3        379  

Marriott

     1        262  

Fairfield Inn

     2        125  
  

 

 

    

 

 

 

Subtotal

     27        3,251  

Hilton

     

Hilton Garden Inn

     13        1,645  

Hampton Inn / Hampton Inn & Suites

     7        757  

Homewood Suites

     6        712  
  

 

 

    

 

 

 

Subtotal

     26        3,114  
  

 

 

    

 

 

 

Total

     53        6,365  
  

 

 

    

 

 

 

 

Number of Hotels and Guest Rooms by State

 

State

   Number of
Hotels
     Number of
Rooms
 

California

     9        1,078  

Texas

     7        897  

Washington

     4        692  

Oregon

     4        671  

Florida

     7        581  

Alabama

     5        382  

Alaska

     3        348  

Connecticut

     3        319  

Colorado

     2        303  

New Jersey

     2        246  

Pennsylvania

     1        156  

North Carolina

     1        147  

South Carolina

     1        135  

Tennessee

     1        121  

New York

     1        112  

Arizona

     1        99  

Georgia

     1        78  
  

 

 

    

 

 

 

Total

     53        6,365  

 

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Key Indicators of Operating Performance

We use a variety of operating information and metrics to evaluate the operating performance of our hotels. These key indicators include financial information that is prepared in accordance with U.S. GAAP, along with other non-U.S. GAAP financial measures. In addition, we use industry standard statistical information and comparative data, some of which may not be financial in nature. In evaluating financial condition and operating performance, the most important indicators that we focus on are:

 

    Occupancy – Occupancy represents the total number of hotel rooms sold in a given period divided by the total number of hotel rooms available, and is a key measure of the utilization of our hotels’ available capacity. Occupancy is a major driver of room revenue, as well as other revenue categories including food and beverage revenues. We use occupancy as a primary measure of demand at each of our hotels during a given period of time. Occupancy also guides us in determining achievable levels of ADR. Fluctuations in occupancy are accompanied by fluctuations in most categories of variable operating costs, such as utility cost and certain labor costs such as housekeeping, resulting in varying levels of hotel profitability.

 

    Average Daily Rate (ADR) – ADR represents the average room price at a hotel or group of hotels and is computed by dividing total hotel room revenues by the total number of rooms sold in a given period. ADR trends provide information concerning the customer base and pricing environment at our hotels. Increases in ADR typically result in higher operating margins and overall profitability, since variable hotel expenses do not increase correspondingly. As a result, ADR trends are carefully monitored to manage pricing levels.

 

    Revenue per Available Room (RevPAR) – RevPAR is the product of occupancy and ADR. It does not include non-room revenues such as food and beverage revenue or other ancillary revenues for guest services provided by the hotel. We use RevPAR to identify trend information for comparable properties and regions.

RevPAR Index is another commonly used metric in the lodging industry, and measures each hotel’s market share in relation to its competitive set with 100 being the average (the index excludes hotels under renovation) and is provided by Smith Travel Research, Inc.®, an independent company that tracks historical hotel performance in most markets throughout the world. The RevPAR Index for a particular hotel is calculated as the quotient of (1) the subject hotel’s RevPAR divided by (2) the average RevPAR of the hotels in the subject’s competitive set, multiplied by 100.

One critical component of this calculation is the determination of a hotel’s competitive set, which consists of a small group of hotels within its relevant market. We work with each hotel’s management company to assess and agree on each hotel’s competitive set. Many factors are involved in determining each hotel’s competitive set, including geographic location, brand affiliation, and comparable service levels provided.

Results of Operations

Results of Operations for the Three and Six Months Ended June 30, 2017 and 2016 (in thousands):

 

     Three Months            Three Months         
     Ended      Percent of     Ended      Percent of  
     June 30, 2017      Revenue     June 30, 2016      Revenue  

Total hotel revenue

     69,923        100   $ 79,380        100

Hotel operating expenses

     36,892        53     41,282        52

Taxes, insurance and other expense

     3,655        5     3,907        5

General and administrative expense

     1,730        2     1,375        2

Depreciation

     9,250          9,743     

Impairment of investment in real estate

     2,988          2,994     

Interest expense, net

     7,198          8,178     

Income tax expense

     1,305          1,679     

 

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     Six Months            Six Months         
     Ended      Percent of     Ended      Percent of  
     June 30, 2017      Revenue     June 30, 2016      Revenue  

Total hotel revenue

   $ 131,243        100   $ 145,906        100

Hotel operating expenses

     71,203        54     79,147        54

Taxes, insurance and other expense

     7,447        6     7,519        5

General and administrative expense

     3,557        3     2,550        2

Depreciation

     18,173          20,349     

Impairment of investment in real estate

     2,988          8,507     

Gain on sale of hotel properties

     (3,628        —       

Interest expense, net

     14,121          16,294     

Income tax expense

     1,267          72     

Comparable Operating Metrics

The follow table reflects key operating metrics for our 53 hotels owned as of June 30, 2017 (“Comparable Properties”). We define Comparable Properties as the results generated by the 53 hotels owned as of the end of the reporting period.

 

     For the three months ended June 30,     For the six months ended June 30,  

Statistical Data

   2017     2016     2017     2016  

Occupancy

     79.9     79.4     75.8     75.2

ADR

   $ 141.21     $ 141.94     $ 137.24     $ 137.47  

RevPAR

   $ 112.83     $ 112.77     $ 103.97     $ 103.42  

RevPAR Index

     116       117       118       118  

Revenues

Our principal source of revenue is hotel revenue, consisting of room and other related revenue. For the three months ended June 30, 2017 and 2016, we had total hotel revenue of $69.9 million and $79.4 million, respectively. For the six months ended June 30, 2017 and 2016, we had total hotel revenue of $131.2 million and $145.9 million, respectively. The decline was largely due to $9.1 million and $15.5 million in revenue attributable to the Sold Properties in the three and six months ended June 30, 2016 respectively, but not earned in 2017 due to the disposition of the Sold Properties. The year-to-date decline in total hotel revenue attributable to the Sold Properties was partly offset by $1.4 million in proceeds received from the Deepwater Horizon Economic and Property Damages Settlement Program arising out of damages suffered by four properties prior to the Merger.

Expenses

Hotel operating expenses consist of direct room expense, hotel administrative expense, sales and marketing expense, utilities expense, repair and maintenance expense, franchise fees and management fees. For the three months ended June 30, 2017 and 2016, hotel operating expenses totaled $36.9 million and $41.3 million, respectively, representing, 53% and 52%, respectively, of total hotel revenue. For the six months ended June 30, 2017 and 2016, hotel operating expenses totaled $71.2 million and $79.1 million, respectively, representing, 54% and 54%, respectively, of total hotel revenue. The decline was largely due to $5.1 million and $8.8 million in expenses attributable to the Sold Properties that were incurred during the three months and six months ended June 30, 2016, respectively, but not incurred in 2017 due to the disposition of the Sold Properties.

Excluding the impact of the Sold Properties, our results for the three and six months ended June 30, 2017 compared to the three and six months ended June 30, 2016 reflect the impact of increases in revenues at our Comparable Properties and our efforts to control costs. Certain operating costs, such as management costs, certain utility costs and minimum supply and maintenance costs, are relatively fixed in nature. Although operating expenses generally increase as occupancy and revenue increase, we have and expect to continue to work with our management companies to reduce costs as a percentage of revenue where possible while maintaining quality service levels at each property.    

Taxes, insurance, and other expenses for the three months ended June 30, 2017 and 2016 were $3.7 million and $3.9 million, or 5% and 5% of total hotel revenue, respectively. Taxes, insurance, and other expenses for the six months ended June 30, 2017 and 2016 were $7.4 million and $7.5 million, or 6% and 5% of total hotel revenue, respectively. Excluding the impact of the Sold Properties, we continued to experience increases in property taxes in 2017 as the economy has continued to improve, and localities reassessed property values accordingly.

 

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General and administrative expense for the three months ended June 30, 2017 and 2016 was $1.7 million and $1.4 million, or 2% and 2% of total hotel revenue, respectively. General and administrative expense for the six months ended June 30, 2017 and 2016 was $3.6 million and $2.6 million, or 3% and 2% of total hotel revenue, respectively. The principal components of general and administrative expense are advisory fees and expenses, legal fees, accounting fees and reporting expenses. The increase in 2017 compared to 2016 was due to higher advisory and legal fees due to the sale of seven hotels during the six months ended June 30, 2017 compared to no sales of hotels during the six months ended June 30, 2016.

Depreciation expense for the three months ended June 30, 2017 and 2016 was $9.3 million and $9.7 million, respectively. Depreciation expense for the six months ended June 30, 2017 and 2016 was $18.2 million and $20.3 million, respectively. The decrease in 2017 compared to 2016 was largely due to $1.2 million and $2.6 million in depreciation expense attributable to the Sold Properties that was incurred during the three and six months ended June 30, 2016, respectively, but not incurred in 2017 due to the disposition of the Sold Properties, offset by increases in 2017 depreciation expense related to fixed assets placed in service at the Comparable Properties since June 30, 2016.    

In the second quarter of 2017, we recorded a non-cash impairment of investment in real estate of $2.6 million for the Courtyard – Valdosta, Georgia property and $0.4 million for the Fairfield Inn – Pensacola, Florida property. In the first quarter of 2016, we recorded a non-cash impairment of investment in real estate of $5.5 million for the Hilton Garden Inn – Fredericksburg, Virginia property. In the second quarter of 2016, we recorded a non-cash impairment of investment in real estate of $3.0 million for the Marriott – Boulder, Colorado property. We tested the properties for impairment and subsequently recorded the 2017 and 2016 impairment charges as a result of changes in the expected useful lives for these investments in real estate due to our execution of letters of intent to sell the properties during the respective periods.

Gain on sale of hotel properties for the six months ended June 30, 2017 and 2016 was $3.6 million and $0, respectively. We sold six hotels during the first quarter of 2017 and one hotel during the second quarter of 2017, compared to no sales of hotels during the three and six months ended June 30, 2016.    

Interest expense, net for the three months ended June 30, 2017 and 2016 was $7.2 million and $8.2 million, respectively. Interest expense, net for the six months ended June 30, 2017 and 2016 was $14.1 million and $16.3 million, respectively. The decrease was due primarily to the elimination of $1.3 million and $2.5 million of amortization of deferred financing costs for the three and six months ended June 30, 2017, respectively, compared to the same periods in 2016 as all deferred financing costs were fully amortized in 2016. We capitalized interest of $0.1 million in both the three months ended June 30, 2017 and 2016, respectively, and $0.2 million for both the six months ended June 30, 2017 and 2016, respectively, related to capital improvement projects at several of our hotels.                

Income tax expense for the three months ended June 30, 2017 and 2016 was $1.3 million and $1.7 million, respectively. Income tax expense for the six months ended June 30, 2017 and 2016 was $1.3 million and $0.1 million, respectively. The decline in income tax expense for the three months ended June 30, 2017 as compared to the 2016 comparable period is primarily due to taxable income earned by the Sold Properties in 2016, but not earned in 2017 due to the disposition of the Sold Properties. The increase in income tax expense for the six months ended June 30, 2017 as compared to the 2016 comparable period is primarily due to the taxable gain on sale of certain hotel properties during 2017, partially offset by the decline in taxable income attributable to the Sold Properties as described above. Excluding the sale of hotels, our effective tax rate was consistent period over period.    

Non-U.S. GAAP Financial Measures

The two key non-U.S. GAAP financial measures that we use to evaluate our performance are EBITDA and Adjusted EBITDA.

EBITDA – EBITDA is defined as net income or loss excluding interest, income taxes, and depreciation and amortization. We believe EBITDA is a useful measure to evaluate operating performance between periods, as it removes the impact of our capital structure (interest expense) and asset base (depreciation and amortization) from our operating results.

Adjusted EBITDA – We further adjust EBITDA for certain additional items, including impairment of investment in real estate, extinguishment of mortgages payable and mezzanine loans, gain or loss on sale of hotel properties, loss on disposals of investments in real estate, derivatives and merger transaction costs.

We believe that EBITDA and Adjusted EBITDA provide additional useful supplemental information about our ongoing operating performance. Specifically, these measures are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions, and these measures are frequently used by investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry. Additionally, these measures exclude certain items that can vary widely across different industries and among competitors within our industry.

 

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EBITDA and Adjusted EBITDA are not recognized terms under GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives, either in isolation or as a substitute, for net income (loss), cash flow or other methods of analyzing our results as reported under GAAP.

The following table is a reconciliation of our GAAP net income to EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2017 and 2016 (in thousands):

 

     For the three months ended June 30,      For the six months ended June 30,  
     2017      2016      2017      2016  

Net income

   $ 6,904      $ 10,222      $ 16,115      $ 11,468  

Depreciation and amortization

     9,250        9,743        18,173        20,349  

Interest expense, net

     7,198        8,178        14,121        16,294  

Income tax expense

     1,305        1,679        1,267        72  
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

     24,657        29,822        49,676        48,183  

Impairment of investment in real estate

     2,988        2,994        2,988        8,507  

Gain on sale of hotel properties

     —          —          (3,628      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 27,645      $ 32,816      $ 49,036      $ 56,690  
  

 

 

    

 

 

    

 

 

    

 

 

 

Liquidity and Capital Resources

Operating cash flow from our hotel properties is our principal source of liquidity. We anticipate that our cash flows from operations will provide adequate capital for the next 12 months for all anticipated uses, including all scheduled principal and interest payments on our outstanding indebtedness, ongoing capital commitments to fund capital improvements, dividends on the Series A Preferred Stock, distributions necessary to maintain our qualification as a REIT and other capital obligations associated with conducting our business.

Net cash flows provided by operating activities for the six months ended June 30, 2017 declined by $8.9 million compared to the six months ended June 30, 2016, primarily due to the impact of nine fewer hotels for the full six-month period in 2017 compared to 2016 due to the sale of the Sold Properties. Net cash flows provided by (used in) investing activities for the six months ended June 30, 2017 increased by $63.9 million compared to the six months ended June 30, 2016, due primarily to the $59.4 million in proceeds from the sale of hotel properties in 2017 and $4.0 million less in capital improvements consistent with our capital improvement plans. Net cash used in financing activities for the six months ended June 30, 2017 increased by $49.2 million compared to the six months ended June 30, 2016, due to repayment of $43.9 million of mortgage debt related to the Sold Properties during the six months ended June 30, 2017 compared to the six months ended June 30, 2016, and a $5.3 million increase in cash dividends paid on our common stock.    

Mortgage Loans

On December 3, 2014, certain of our indirect wholly owned subsidiaries (the “Borrowers”) with commercial lenders (collectively, the “Lenders”) entered into a loan agreement, pursuant to which the Borrowers obtained an $830 million mortgage loan from the Lenders (the “Loan”). The Loan is secured by first-priority, cross-collateralized mortgage liens on 52 of the 53 properties owned or ground-leased by certain of our subsidiaries, all related personal property, reserves, a pledge of all income received by the Borrowers with respect to the properties, a pledge of the ownership interests in the operating lessee and a security interest in a cash management account.

As of June 30, 2017, we had $749.0 million in mortgages payable, comprised of $732.6 million under the Loan, and $16.4 million secured by the Fort Worth, Texas Residence Inn property. In connection with the sales of the Fairfield Inn – Huntsville, Alabama, TownePlace Suites – Arlington, Texas, Springhill Suites – Clearwater, Florida, TownePlace Suites – Las Colinas, Texas, Courtyard – Albany, Georgia, Springhill Sites – Arlington, Texas and Courtyard – Valdosta, Georgia we repaid $43.9 million of the Loan.

On July 7, 2017, the Borrowers and Morgan Stanley Bank, N.A., Bank of America, N.A., Citigroup Global Markets Realty Corp., and JPMorgan Chase Bank, National Association (collectively, the “Commercial Lenders”) entered into a loan agreement, pursuant to which the Borrowers obtained a $800 million mortgage loan from the Commercial Lenders (the “New Loan”). The New Loan is secured by first-priority, cross-collateralized mortgage liens on 51 of the 52 properties owned or ground-leased by

 

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certain subsidiaries of the Company as of the date of the New Loan, all related personal property, reserves, a pledge of all income received by the Borrowers with respect to the properties, a pledge of the ownership interests in the operating lessee, BRE Select Hotels Operating LLC, an affiliate of the Company, and a security interest in deposit accounts. The New Loan is scheduled to mature on July 9, 2019, with an option for the Borrowers to extend the initial term for five one-year extension terms, subject to certain conditions. The initial interest rate of the New Loan is equal to the one-month London interbank offered rate for deposits, or LIBOR, plus a margin rate of 2.15%. In connection with the New Loan, the Borrowers entered into an interest rate cap agreement, which caps the base interest rate before applying the applicable margins on the New Loan, for an aggregate notional amount of $800 million, a termination date of July 9, 2019 and a strike rate of 4.25%. The New Loan is not subject to any mandatory principal amortization. A portion of the proceeds from the New Loan was used to repay the $732.6 million principal amount outstanding under the previous Loan, and the Borrowers repaid in full, cancelled and terminated the mortgage loan agreements outstanding relating to the previous Loan without any penalties incurred. The remaining amount of proceeds under the New Loan, net of closing costs, was used to redeem shares of the Company’s Series A Preferred Stock.

Capital Expenditures

We have ongoing capital commitments to fund capital improvements. We are required, under all of the hotel franchise agreements and under our loan agreements, to make a percentage of the gross revenues from each hotel available for the repair, replacement and refurbishing of furniture, fixtures, and equipment at such hotel, provided that under the loan agreements such amounts may be used for certain capital expenditures with respect to the hotels. Pursuant to the Loan, we must deposit monthly in a lender escrow an amount equal to the sum of 4-5% of total revenue, excluding revenue from the Marriott managed hotels, per the terms of our franchise and management agreements. These funds can then be used for capital enhancements to the properties. We spent $17.5 million in capital improvements in the first six months of this year, and expect to spend an additional $7.5 million on capital improvements during the remainder of this year.

Distributions

To qualify as a REIT, we are required to distribute at least 90% of our ordinary income to our stockholders. We intend to adhere to these distribution and the other requirements to qualify for REIT status.

BRE Holdings owns 100% of our issued and outstanding common stock. In 2016, dividends on our common stock were paid in February, May, August, September and November. On February 13, 2017, we paid a dividend on our common stock of $100,000 per share. On May 15, 2017, we paid a dividend on our common stock of $142,500 per share. On July 14, 2017, we paid a dividend on our common stock of $64,388 per share. On August 3, 2017, we paid a dividend on our common stock of $100,000 per share. Any decision to declare and pay dividends on our common stock in the future will be made at the sole discretion of our Board of Directors and will depend on, among other things, our results of operations, cash requirements, financial condition, contractual restrictions and other factors that our Board of Directors may deem relevant.

In 2016, dividends on the Series A Preferred Stock were paid in January, April, July, and October. On January 17, 2017, we paid a dividend on our Series A Preferred Stock of $0.0333 per share to stockholders of record on January 1, 2017. On March 28, 2017, our Board of Directors declared a dividend on the Series A Preferred Stock of $0.0333 per share, which was paid on April 17, 2017 to stockholders of record on April 1, 2017. On June 23, 2017, our Board of Directors of the Company declared a dividend on the Series A Preferred Stock of $0.0333 per share, which was paid on July 17, 2017 to stockholders of record on July 1, 2017. Dividends for the Series A Preferred Stock are anticipated to be paid quarterly in January, April, July and October each year.

Repurchases

We and our affiliates and/or our stockholder and its respective affiliates, may from time to time repurchase our outstanding Series A Preferred Stock or debt through open market purchases, privately negotiated transactions or otherwise. Purchases or retirement of our Series A Preferred Stock or debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions, and other factors. The amounts involved may be material.

In August 2017, we used proceeds from the New Loan to redeem 28,560,947 shares of Series A Preferred Stock, representing approximately 39.458% of the total Series A Preferred Stock outstanding, with an aggregate redemption price of approximately $54.5 million.

Contractual Obligations

Our contractual obligations have not changed significantly from those disclosed in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

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Table of Contents

Impact of Inflation

Operators of hotels, in general, possess the ability to adjust room rates daily to reflect the effects of inflation. Competitive pressures may, however, limit the operators’ ability to raise room rates. Currently the Company is not experiencing any material impact from inflation.

Insurance

We carry comprehensive insurance, including general liability, property, rental loss and umbrella liability coverage on all of our hotels. In addition, we carry flood coverage on certain hotels when available on commercially reasonable terms for hotels where we believe such coverage is warranted or required under the terms of our debt agreements. We have selected policy specifications and insured limits which we believe to be appropriate given the relative risk of loss, the cost of the coverage and industry practice, and as such believe our hotels are adequately insured.

Seasonality

Demand in the lodging industry is impacted by recurring seasonal patterns. For properties located in non-resort markets, demand is generally lower in the winter months due to decreased travel and higher in the spring and summer months during peak travel season. Accordingly, we expect that we will have lower revenue, operating income and cash flow in the first and fourth quarters, and higher revenue, operating income and cash flow in the second and third quarters. To the extent that cash flow from operations is insufficient during any quarter, due to temporary or seasonal fluctuations in revenue, we expect to utilize cash on hand or, if necessary, any available other financing sources to make distributions to stockholders.

Critical Accounting Policies

There have been no significant changes in our critical accounting policies or estimates from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

For the Company’s disclosures about market risk, please see “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016. There have been no material changes to the Company’s disclosures about market risk in Part II, Item 7A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Item  4. Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this Form 10-Q. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that, as of June 30, 2017, the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The Company, as the successor to Apple Six, is subject to claims for alleged acts of Apple Six that occurred prior to the Merger. On February 24, 2017, a putative class action, captioned Wilchfort v. Knight, et al., Civil Action No. 17-cv-01046 (E.D.N.Y.), was filed in the United States District Court for the Eastern District of New York against BRE Select Hotels Corp, as successor-in-interest to Apple REIT Six, Inc., Apple Hospitality REIT, Inc., Apple REIT Seven, Inc., Apple REIT Eight, Inc. (together with Apple REIT Six, Inc. and Apple REIT Seven, Inc., the “Apple REITs”), certain of the Apple REITs’ directors, officers and advisors, and Apple Fund Management, LLC. Plaintiff seeks to represent a class of all persons and entities who elected to participate in Apple REITs’ Dividend Reinvestment Plans (“DRIPs”) between July 17, 2007 and the later of the termination and/or suspension of the respective DRIPs or February 12, 2014. The complaint alleges, among other things, that the prices at which Plaintiff and the purported class members purchased additional shares through the DRIPs were artificially inflated and not indicative of the true value of units in the Apple REITs. Plaintiff asserts claims for breach of contract, tortious interference with contract and tortious interference with business expectancy and breach of implied duty of good faith and fair dealing and seeks, among other things, damages and other costs and expenses. The plaintiff filed a response in opposition to the Company’s motion to dismiss on July 18, 2017. The response, among other things, voluntarily dismisses the tortious interference with contract and tortious interference with business expectancy claims and no longer names the Apple REITs’ directors, officers and advisors, and Apple Fund Management, LLC, as defendants. The Company believes that any claims against it are without merit, and it intends to defend against them vigorously. At this time, the Company cannot reasonably predict the outcome of this proceeding or provide a reasonable estimate of the possible loss or range of loss due to this proceeding.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which could materially adversely affect the Company’s business, financial condition, results of operations (including revenues and profitability), operating cash flow and value. The risks described in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that it currently deems to be immaterial also could materially adversely affect its business, financial condition, results of operations (including revenues and profitability), operating cash flow and value. There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item  4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Exhibit

Number

  

Description of Documents

10.1    Loan Agreement dated as of July 7, 2017 by and among BRE Select Hotels Properties LLC, BRE Select Hotels Tuscaloosa LLC, BRE Select Hotels Redmond LLC, BRE Select Hotels AZ LLC, BRE Select Hotels TX L.P., BRE Select Hotels NC L.P., BRE Select Hotels Properties II LLC and BRE Select Hotels Properties II Sub LLC, collectively, as Borrower, and BRE Select Hotels Operating LLC, as Operating Lessee, and Morgan Stanley Bank, N.A., Bank of America, N.A., Citigroup Global Markets Realty Corp., and JPMorgan Chase Bank, National Association, collectively, as Lender.
10.2    Form of Fee and Leasehold Mortgage, Assignment of Leases and Rents and Security Agreement by Borrower and Operating Lessee, collectively, as Mortgagor, to Morgan Stanley Bank, N.A., Bank of America, N.A., Citigroup Global Markets Realty Corp., and JPMorgan Chase Bank, National Association, collectively, as Mortgagee.
10.3    Guaranty Agreement executed as of July 7, 2017 by BSHH LLC in favor of Morgan Stanley Bank, N.A., Bank of America, N.A., Citigroup Global Markets Realty Corp., and JPMorgan Chase Bank, National Association, collectively, as Lender.
31.1    Certification of the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of the Company’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of the Company’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101    The following materials from BRE Select Hotels Corp’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows, and (iv) related notes to these financial statements, tagged as blocks of text and in detail.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations or warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of the affairs as of the date they were made or at any other time.    

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    BRE SELECT HOTELS CORP
Date: August 14, 2017     By:   /s/ WILLIAM J. STEIN
      William J. Stein
     

Chief Executive Officer and Senior Managing Director

(Principal Executive Officer)

   
Date: August 14, 2017     By:   /s/ BRIAN KIM
      Brian Kim
     

Chief Financial Officer, Vice President

and Managing Director

(Principal Financial Officer and Principal Accounting Officer)

 

29

EX-10.1

Exhibit 10.1

 

 

 

LOAN AGREEMENT

Dated as of July 7, 2017

By and Among

THE ENTITIES SET FORTH ON SCHEDULE I ATTACHED HERETO,

collectively, as Borrower

and

BRE SELECT HOTELS OPERATING LLC,

as Operating Lessee

and

MORGAN STANLEY BANK, N.A., BANK OF AMERICA, N.A., CITIGROUP

GLOBAL MARKETS REALTY CORP., and JPMORGAN CHASE BANK, NATIONAL

ASSOCIATION,

collectively, as Lender

 

 

 


TABLE OF CONTENTS

 

         Page  

Article I. Definitions; Principles of Construction

     1  

Section 1.1.

  Definitions      1  

Section 1.2.

  Principles of Construction      56  

Article II. General Terms

     57  

Section 2.1.

  Loan Commitment; Disbursement to Borrower      57  

Section 2.2.

  Interest Rate      58  

Section 2.3.

  Loan Payment      63  

Section 2.4.

  Prepayments      64  

Section 2.5.

  Release of Property      68  

Section 2.6.

  Cash Management      74  

Section 2.7.

  Withholding Taxes      78  

Section 2.8.

  Extension of the Initial Maturity Date      82  

Article III. Conditions Precedent

     82  

Section 3.1.

  Conditions Precedent to Closing      82  

Article IV. Representations and Warranties

     83  

Section 4.1.

  Borrower Representations      83  

Section 4.2.

  Survival of Representations      99  

Article V. Covenants

     100  

Section 5.1.

  Affirmative Covenants      100  

Section 5.2.

  Negative Covenants      122  

Article VI. Insurance; Casualty; Condemnation

     136  

Section 6.1.

  Insurance      136  

Section 6.2.

  Casualty      142  

Section 6.3.

  Condemnation      142  

Section 6.4.

  Restoration      143  

Article VII. Reserve Funds

     149  

Section 7.1.

  Required Repairs      149  

Section 7.2.

  Tax and Insurance Escrow Fund      149  

Section 7.3.

  Replacements and Replacement Reserve      151  

Section 7.4.

  Intentionally Omitted      156  

 

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TABLE OF CONTENTS

(continued)

 

         Page  

Section 7.5.

  Ground Lease Reserve Fund      156  

Section 7.6.

  Excess Cash Flow Reserve Fund      157  

Section 7.7.

  Reserve Funds, Generally      158  

Article VIII. Defaults

     159  

Section 8.1.

  Event of Default      159  

Section 8.2.

  Remedies      164  

Section 8.3.

  Remedies Cumulative; Waivers      165  

Article IX. Special Provisions

     166  

Section 9.1.

  Sales and Securitization      166  

Section 9.2.

  Securitization Indemnification      171  

Section 9.3.

  Exculpation      176  

Section 9.4.

  Matters Concerning Manager      179  

Section 9.5.

  Servicer      179  

Section 9.6.

  Matters Concerning Franchisor      180  

Section 9.7.

  Register      180  

Article X. Miscellaneous

     181  

Section 10.1.

  Survival      181  

Section 10.2.

  Lender’s Discretion      181  

Section 10.3.

  Governing Law      181  

Section 10.4.

  Modification, Waiver in Writing      183  

Section 10.5.

  Delay Not a Waiver      183  

Section 10.6.

  Notices      183  

Section 10.7.

  Trial by Jury      185  

Section 10.8.

  Headings      186  

Section 10.9.

  Severability      186  

Section 10.10.

  Preferences      186  

Section 10.11.

  Waiver of Notice      186  

Section 10.12.

  Remedies of Borrower, Operating Lessee and the Other Loan Parties      186  

Section 10.13.

  Expenses; Indemnity      186  

 

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TABLE OF CONTENTS

(continued)

 

         Page  

Section 10.14.

  Incorporated      188  

Section 10.15.

  Offsets, Counterclaims and Defenses      188  

Section 10.16.

  No Joint Venture or Partnership; No Third Party Beneficiaries      188  

Section 10.17.

  Publicity      189  

Section 10.18.

  Cross Default; Cross Collateralization; Waiver of Marshalling of Assets      189  

Section 10.19.

  Waiver of Counterclaim      190  

Section 10.20.

  Conflict; Construction of Documents; Reliance      190  

Section 10.21.

  Brokers and Financial Advisors      190  

Section 10.22.

  Prior Agreements      190  

Section 10.23.

  Joint and Several Liability      190  

Section 10.24.

  Approvals and Consents      191  

Section 10.25.

  Certain Additional Rights of Lender (VCOC)      194  

Section 10.26.

  Discounted Payoff      194  

Section 10.27.

  Use of Borrower Provided Information      195  

Section 10.28.

  Borrower Affiliate Lender      195  

Section 10.29.

  Marriott Franchise Agreements      196  

Section 10.30.

  Additional Mezzanine Loan      196  

Section 10.31.

  EU Bail-In Rule      198  

 

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SCHEDULES

 

Schedule I

  

  

Borrower

Schedule II

  

  

Individual Property

Schedule III

  

  

Ground Leases

Schedule IV

  

  

Reserved

Schedule V

  

  

Reserved

Schedule VI

  

  

Reserved

Schedule VII

  

  

REAs

Schedule VIII

  

  

Reserved

Schedule IX

  

  

Previously-Owned Property

Schedule X

  

  

Franchise Agreement Guarantees

Schedule XI

  

  

Reserved

Schedule 1.1

  

  

Release Amounts

Schedule 1.2

  

  

Franchise Agreements

Schedule 1.3

  

  

Management Agreements

Schedule 1.4

  

  

Qualified Managers

Schedule 1.5

  

  

Qualified Franchisors

Schedule 1.8

  

  

Assignment of Management Agreements

Schedule 2.6.1

  

  

Clearing Accounts

Schedule 4.1.1

  

  

Organizational Chart of Borrower and Operating Lessee

Schedule 4.1.4

  

  

Litigation

Schedule 4.1.6

  

  

Liens

Schedule 4.1.12

  

  

Condemnation

Schedule 4.1.16

  

  

Separate Tax Lots Exceptions

Schedule 4.1.17

  

  

Pending Assessments

 

-iv-


Schedule 4.1.20

  

  

Pending Insurance Claims

Schedule 4.1.22

  

  

Certificates of Occupancy and Licenses Exceptions

Schedule 4.1.23

  

  

Flood Zones

Schedule 4.1.26

  

  

Rent Roll

Schedule 4.1.30

  

  

Special Purpose Entity Exceptions

Schedule 4.1.36

  

  

Borrower and Operating Lessee Organizational Identification Numbers

Schedule 4.1.39

  

  

Ground Lease Exceptions

Schedule 4.1.41

  

  

Defaults under Franchise Agreements

Schedule 4.1.43

  

  

Labor

Schedule 4.1.44

  

  

Project Improvement Plans

Schedule 5.1.11(d)

  

  

2017 Annual Budget

Schedule 5.1.22

  

  

Pre-Approved Alterations

Schedule 5.2.10

  

  

REIT Election

Schedule 7.1

  

  

Required Repairs

 

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EXHIBITS

 

Exhibit A

  

  

Reserved

Exhibit B

  

  

Ratable Share

Exhibit C

  

  

Tax Compliance Certificates

Exhibit D

  

  

Sample Debt Yield (Mortgage Only) Calculation

 

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LOAN AGREEMENT

This LOAN AGREEMENT, dated as of July 7, 2017 (as amended, restated, replaced, supplemented or otherwise modified from time to time, this “Agreement”), between MORGAN STANLEY BANK, N.A., a national banking association, having an address at 1585 Broadway, New York, New York 10036 (“MSB”), BANK OF AMERICA, N.A., a national banking association, having an office at c/o Capital Markets Servicing Group, 900 West Trade Street, Suite 650, Mail Code: NC1-026-06-01, Charlotte, North Carolina 28255 (“BOA”), CITIGROUP GLOBAL MARKETS REALTY CORP., a New York corporation, having an address at 390 Greenwich Street, 7th Floor, New York, New York 10013 (“CGMRC”), and JPMORGAN CHASE BANK, NATIONAL ASSOCIATION, having an address at 383 Madison Avenue, New York, New York 10179 (“JPM”, and together with MSB, BOA, CGMRC and their respective successors and/or assigns, each a “Co-Lender” and, collectively, “Lender”), BRE SELECT HOTELS OPERATING LLC, a Delaware limited liability company, having its principal place of business at c/o Blackstone Real Estate Advisors L.P., 345 Park Avenue, New York, New York 10154 (“Operating Lessee”) and THE ENTITIES SET FORTH ON SCHEDULE I ATTACHED HERETO, each having its principal place of business at c/o Blackstone Real Estate Advisors L.P., 345 Park Avenue, New York, New York 10154 (each, an “Individual Borrower” and, collectively, “Borrower”).

W I T N E S S  E T H:

WHEREAS, Borrower desires to obtain the Loan (as hereinafter defined) from Lender; and

WHEREAS, Lender is willing to make the Loan to Borrower, subject to and in accordance with the terms of this Agreement and the other Loan Documents (as hereinafter defined).

NOW THEREFORE, in consideration of the making of the Loan by Lender and the covenants, agreements, representations and warranties set forth in this Agreement, the parties hereto hereby covenant, agree, represent and warrant as follows:

ARTICLE I.

DEFINITIONS; PRINCIPLES OF CONSTRUCTION

Section 1.1. Definitions. For all purposes of this Agreement, except as otherwise expressly required or unless the context clearly indicates a contrary intent:

Acceptable Counterparty” shall mean a counterparty to the Interest Rate Cap Agreement (or the guarantor of such counterparty’s obligations) that (a) has and shall maintain, until the expiration of the applicable Interest Rate Cap Agreement (i) a long-term unsecured debt rating of not less than “A+” by S&P, (ii) if any of the Securities or any class thereof in any Securitization is rated by Moody’s, a long-term senior unsecured debt rating of at least “A1” from Moody’s and (iii) if any of the Securities or any class thereof in any Securitization is rated


by Fitch and Fitch rates such counterparty, a long-term unsecured debt rating of at least “A” (and not on “Rating Watch Negative”) by Fitch and a short-term unsecured debt rating of at least “F-1” (and not on “Rating Watch Negative”) by Fitch or (b) is otherwise acceptable to the Rating Agencies, as evidenced by a Rating Agency Confirmation to the effect that such counterparty shall not cause a downgrade, withdrawal or qualification of the ratings assigned, or to be assigned, to the Securities or any class thereof in any Securitization. Notwithstanding anything to the contrary, SMBC Capital Markets, Inc. shall qualify as an Acceptable Counterparty subject to providing a guaranty reasonably acceptable to Lender from an affiliate satisfying the foregoing credit ratings requirements.

Additional Insolvency Opinion” shall mean a non-consolidation opinion letter delivered in connection with the Loan subsequent to the Closing Date reasonably satisfactory in form and substance to Lender and, following a Securitization, satisfactory in form and substance to the Approved Rating Agencies, and from counsel acceptable to Lender and, following a Securitization, the Approved Rating Agencies.

Additional Interest” shall have the meaning set forth in Section 2.4.1(a) hereof.

Additional Mezzanine Borrower” shall have the meaning set forth in Section 10.30 hereof.

Additional Mezzanine Lender” shall have the meaning set forth in Section 10.30 hereof.

Additional Mezzanine Loan” shall have the meaning set forth in Section 10.30 hereof.

Additional Mezzanine Loan Agreement” shall mean those certain loan agreements entered into by Additional Mezzanine Lender and any Additional Mezzanine Borrower, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Additional Mezzanine Loan Documents” shall have the meaning set forth in Section 10.30 hereof.

Adjusted Release Amount” shall mean, (i) for any Individual Property to be released, the sum of (a) the Amortized Release Amount for such Individual Property and (b) the applicable Release Price Premium for such Individual Property.

Administrative Agent” means MSMCH or any successor thereof in accordance with Section 10.24(d) of this Agreement.

Administrative Agent Decisions” shall have the meaning set forth in Section 10.24(a) hereof.

Affected Property” shall have the meaning set forth in Section 9.1.3 hereof.

 

-2-


Affiliate” shall mean, as to any Person, any other Person that, directly or indirectly, is in Control of, is Controlled by or is under common Control with such Person or is a director or officer of such Person or of an Affiliate of such Person.

Affiliated Manager” shall mean any Manager which Borrower, Operating Lessee, Principal, BREP or Guarantor Controls or has, directly or indirectly, fifty-one percent (51%) or more of the legal, beneficial or economic interest therein.

Agent” shall mean any Eligible Institution acting as Agent under the Cash Management Agreement.

Agreement” shall mean this Loan Agreement, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

ALTA” shall mean American Land Title Association, or any successor thereto.

Alterations Deposit” shall have the meaning set forth in Section 5.1.22 hereof.

Amortized Release Amount” shall mean, for any Individual Property, the original Release Amount for such Individual Property, as such amount may be reduced by (a) prepayments that are made in connection with a Default Release, a Ground Lease Default Release, a Sale/Franchise/Brand Management Default Release or a release in connection with a Casualty/Condemnation Prepayment in excess of such Individual Property’s Amortized Release Amount, in each case, the principal amount of the Loan repaid in excess of such Individual Property’s Amortized Release Amount shall be deemed to reduce the Amortized Release Amounts of the Properties subject to the Lien of the Mortgages at the time of such payment or prepayment pro rata and (b) any voluntary repayment or prepayment made other than in connection with an Individual Property release, in which case the principal amount of the Loan repaid in connection with such repayment or prepayment shall be deemed to reduce the Amortized Release Amounts of the Properties subject to the Lien of the Mortgages at the time of such prepayment pro rata.

Annual Budget” shall mean the operating budget, including all planned Capital Expenditures, for the Properties prepared by or on behalf of Borrower in accordance with Section 5.1.11(d) hereof for the applicable Fiscal Year or other period.

Applicable Similar Law” shall have the meaning set forth in Section 5.2.9 hereof.

Approved Annual Budget” shall have the meaning set forth in Section 5.1.11 hereof.

Approved Alterations” shall have the meaning specified in Section 5.1.22 hereof.

Approved Bank” shall mean a bank or other financial institution satisfying the requirements of clause (i) of the definition of Eligible Institution.

 

-3-


Approved Rating Agencies” shall mean each of S&P, Moody’s, Fitch, and Morningstar or any other nationally recognized statistical rating agency in each case, which has been approved by Lender and designated by Lender to assign a rating to the Securities and which has assigned a rating to the Securities.

Assignment of Agreements” shall mean that certain Assignment of Agreements Affecting Real Estate, by and among Borrower, Lender and Operating Lessee, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Assignment of Interest Rate Cap Agreement” shall have the meaning set forth in Section 2.2.7(a) hereof.

Assignment of Management Agreement” shall mean, individually and/or collectively, as the context may require, those certain assignments of management agreement and subordination of management fees, dated as of the Closing Date, among Lender, the applicable Borrower, the applicable Manager and Operating Lessee as set forth on Schedule 1.8, attached hereto, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Award” shall mean any compensation paid by any Governmental Authority to Borrower, Operating Lessee or any of their respective Affiliates (which, for the purposes of this definition, shall not include Hilton Manager or any subsidiary of Hilton Worldwide, Inc.) in connection with a Condemnation in respect of all or any part of any Individual Property.

Bankruptcy Action” shall mean with respect to any Person (a) such Person filing a voluntary petition under the Bankruptcy Code; (b) the filing of an involuntary petition against such Person under the Bankruptcy Code or soliciting or causing to be solicited petitioning creditors for any involuntary petition against such Person under the Bankruptcy Code; (c) such Person filing an answer consenting to or otherwise acquiescing in or joining in any involuntary petition filed against it, by any other Person under the Bankruptcy Code; (d) such Person consenting to or acquiescing in or joining in an application for the appointment of a custodian, receiver, trustee, or examiner for such Person or any portion of any Individual Property; or (e) such Person making an assignment for the benefit of creditors.

Bankruptcy Code” shall mean Title 11 of the United States Code, 11 U.S.C. § 101, et seq., as the same may be amended from time to time, and any successor statute or statutes and all rules and regulations from time to time promulgated thereunder, and any comparable foreign laws relating to bankruptcy, insolvency or creditors’ rights or any other Federal, state, local or foreign bankruptcy or insolvency law.

Basic Carrying Costs” shall mean, with respect to each Individual Property, for any period, the sum of the following costs associated with such Individual Property: (a) Taxes, (b) Other Charges and (c) Insurance Premiums.

BOA” shall have the meaning set forth in the introductory paragraph hereto.

Borrower” shall have the meaning set forth in the introductory paragraph hereto, together with its successors and permitted assigns.

 

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Borrower Brand Management Default” shall have the meaning set forth in Section 2.5.2.

Borrower Franchise Default” shall have the meaning set forth in Section 2.5.2.

Brand Managed Property” shall mean, individually and/or collectively, as the context requires, the Hilton Managed Properties, the Marriott Managed Properties and the Hyatt Managed Properties.

Brand Management Agreement” shall mean, a Management Agreement with a Brand Manager.

Brand Management Default Election Notice shall have the meaning set forth in Section 8.1(a) hereof.

Brand Manager” shall mean each of Hilton Manager, Hyatt Manager and Marriott Manager.

BRE Select Hotels Properties Borrower” shall mean BRE Select Hotels Properties LLC, a Delaware limited liability company, together with its successors and permitted assigns.

BRE Select Hotels Properties II Borrower” shall mean BRE Select Hotels Properties II LLC, a Delaware limited liability company, together with its successors and permitted assigns.

BRE Select Hotels Properties II Sub” shall mean BRE Select Hotels Properties II Sub LLC, a Delaware limited liability company, together with its successors and permitted assigns.

Breakage Costs” shall have the meaning set forth in Section 2.2.3 hereof.

BREP” shall mean, individually and/or collectively (as the context may require), Blackstone Real Estate Partners VII-NQ L.P., Blackstone Real Estate Partners VII.TE.1-NQ L.P., Blackstone Real Estate Partners VII.TE.2-NQ L.P., Blackstone Real Estate Partners VII.TE.3-NQ L.P., Blackstone Real Estate Partners VII.TE.4-NQ L.P., Blackstone Real Estate Partners VII.TE.5-NQ L.P., Blackstone Real Estate Partners VII.TE.6-NQ L.P., Blackstone Real Estate Partners VII.TE.7-NQ L.P., Blackstone Real Estate Partners VII.TE.8-NQ L.P., Blackstone Real Estate Partners VII.F-NQ (AV) L.P., Blackstone Real Estate Holdings VII-NQ-ESC L.P., Blackstone Family Real Estate Partnership VII – SMD L.P., Blackstone Real Estate Partners VII L.P., Blackstone Real Estate Partners VII.TE.1 L.P., Blackstone Real Estate Partners VII.TE.2 L.P., Blackstone Real Estate Partners VII.TE.3 L.P., Blackstone Real Estate Partners VII.TE.4 L.P., Blackstone Real Estate Partners VII.TE.5 L.P., Blackstone Real Estate Partners VII.TE.6 L.P., Blackstone Real Estate Partners VII.TE.7 L.P., Blackstone Real Estate Partners VII.TE.8 L.P., Blackstone Real Estate Partners VII.F L.P., Blackstone Real Estate Holdings VII-ESC L.P., Blackstone Real Estate Associates VII L.P., and any other parallel partnerships and alternative investment vehicles comprising the real estate fund commonly known as Blackstone Real Estate Partners VII.

 

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Business Day” shall mean any day other than a Saturday, Sunday or any other day on which any of (a) national banks in New York, New York, or (b) the place of business of the trustee under a Securitization (or, if no Securitization has occurred, Lender), or (c) the place of business of any Servicer or the financial institution that maintains any collection account for or on behalf of any Servicer or any Reserve Funds or (d) the New York Stock Exchange or the Federal Reserve Bank of New York is not open for business.

Calculation Date” shall mean the last day of each calendar quarter during the Term and any day on which there is a prepayment of any portion of the outstanding principal amount of the Loan pursuant to Section 2.4.1 hereof.

Capital Expenditures” shall mean, for any period, the amount expended for items capitalized under GAAP and the Uniform System of Accounts (including expenditures for building improvements or major repairs and replacements).

Cash Management Account” shall have the meaning set forth in Section 2.6.2 hereof.

Cash Management Agreement” shall mean that certain Cash Management Agreement, dated as of the date hereof, by and among Borrower, Operating Lessee, Lender and any Agent which may become a party to such agreement, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Cash Trap Event” shall mean the occurrence of any one or more of the following events: (a) an Event of Default, (b) a Mezzanine Loan Default; or (c) a Debt Yield Trigger Event.

Cash Trap Event Cure” shall mean (a) no Event of Default shall be continuing, and in the event that the related Cash Trap Event occurred solely as a result of an Event of Default, Lender (in its sole and absolute discretion) shall have accepted a cure by Borrower of such Event of Default, (b) no Mezzanine Loan Default shall be continuing, and in the event that the related Cash Trap Event occurred solely as a result of a Mezzanine Loan Default, the applicable Mezzanine Lender shall have accepted a cure by the applicable Mezzanine Borrowers of such Mezzanine Loan Default or otherwise waived such Mezzanine Loan Default and shall not have otherwise accelerated such Mezzanine Loan, moved for a receiver or commenced foreclosure proceedings and (c) in the event that the related Cash Trap Event occurred as a result of a Debt Yield Trigger Event, the achievement of a Debt Yield Cure.

Cash Trap Period” shall mean the period commencing on the occurrence of a Cash Trap Event and terminating on the date of a Cash Trap Event Cure.

Cash Trap Sweep Instructions” shall have the meaning set forth in Section 2.6.1(e) hereof.

Casualty” shall have the meaning set forth in Section 6.2 hereof.

Casualty/Condemnation Prepayment” shall have the meaning set forth in Section 6.4 hereof.

 

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Casualty/Condemnation Threshold Amount” shall mean the greater of (i) One Million and No/100 Dollars ($1,000,000.00) and (ii) five percent (5.00%) of the original Total Release Amount for the applicable Individual Property.

Casualty Consultant” shall have the meaning set forth in Section 6.4 hereof.

Casualty Retainage” shall have the meaning set forth in Section 6.4 hereof.

Cause” shall mean, with respect to an Independent Director, (a) acts or omissions by such Independent Director that constitute systematic and persistent or willful disregard of such Independent Director’s duties, (b) such Independent Director has been indicted or convicted for any crime or crimes of moral turpitude or dishonesty or for any violation of any Legal Requirements, (c) such Independent Director no longer satisfies the requirements set forth in the definition of “Independent Director”, (d) the fees charged for the services of such Independent Director are materially in excess of the fees charged by the other providers of Independent Directors listed in the definition of “Independent Director”, (e) the death or incapacity of such Independent Director or (f) any other reason for which the prior written consent of Lender shall have been obtained.

CGMRC” shall have the meaning set forth in the introductory paragraph hereto.

Certificate of Designation” shall mean that certain Certificate of Designation of 7% Series A Cumulative Redeemable Preferred Shares of BRE Select Hotels Corp, dated May 13, 2013, with shares being issued pursuant thereto on May 14, 2013.

Clearing Account” shall have the meaning set forth in Section 2.6.1 hereof.

Clearing Account Agreement” shall mean, individually and/or collectively (as the context requires), those certain clearing account control agreements, dated as of the date hereof, described on Schedule 2.6.1 hereto, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time, relating to funds deposited in any Clearing Account.

Clearing Bank” shall mean those clearing banks which establish, maintain and hold each Clearing Account, each of which shall be an Eligible Institution.

Closing Date” shall mean the date of the funding of the Loan.

Closing Date Debt Yield (Aggregate)” shall mean (x) following the creation of any New Mezzanine Loan, an amount equal to the Initial Closing Date Debt Yield (Mortgage Only) and (y) following the creation of the Additional Mezzanine Loan, an amount reasonably determined by Lender at the time of the origination of the Additional Mezzanine in accordance with the methodology set forth in Exhibit D equal to what the Closing Date Debt Yield (Aggregate) would have been had such Additional Mezzanine Loan(s) been made on the Closing Date. For the avoidance of doubt and notwithstanding anything to the contrary contained in the Loan Documents, the term Closing Date Debt Yield (Aggregate) and the corresponding provisions shall not be applicable unless and until a Mezzanine Loan is created or originated.

 

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Closing Date Debt Yield (Mortgage Only)” shall mean 11.2%; provided however if at any time a New Mezzanine Loan created in accordance with Section 9.1.2(d), the Closing Date Debt Yield (Mortgage Only) shall be recalculated by Lender in its reasonable discretion in accordance with the methodology set forth in Exhibit D to be the Closing Date Debt Yield (Mortgage Only) that would have been in effect on the Closing Date if the Loan Amount on the Closing Date was in an amount equal to the Loan Amount immediately after giving effect to the creation of the New Mezzanine Loan.

Code” shall mean the Internal Revenue Code of 1986, as amended.

Co-Lender” shall have the meaning set forth in the introductory paragraph hereto, together with its successors and/or assigns.

Component” shall mean, individually, any one of Component A, Component B, Component C, Component D, Component E and Component F, and “Components” shall mean, collectively, Component A, Component B, Component C, Component D, Component E and Component F.

Component A” shall mean the component of the Loan designated as “A” in Section 2.1.5 hereof.

Component B” shall mean the component of the Loan designated as “B” in Section 2.1.5 hereof.

Component C” shall mean the component of the Loan designated as “C” in Section 2.1.5 hereof.

Component D” shall mean the component of the Loan designated as “D” in Section 2.1.5 hereof.

Component E” shall mean the component of the Loan designated as “E” in Section 2.1.5 hereof.

Component F” shall mean the component of the Loan designated as “F” in Section 2.1.5 hereof.

Concentration Account” shall have the meaning set forth in Section 2.6.1 hereof.

Concentration Account Agreement” shall mean, individually and/or collectively (as the context requires), those certain clearing account control agreements, dated as of the date hereof, described on Schedule 2.6.1 hereto, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time, relating to funds deposited in the applicable Concentration Account.

Concentration Bank” shall mean each clearing bank which establishes, maintains and holds the Concentration Account, which shall be an Eligible Institution.

 

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Condemnation” shall mean a temporary or permanent taking by any Governmental Authority as the result or in lieu or in anticipation of the exercise of the right of condemnation or eminent domain, of all or any part of any Individual Property, or any interest therein or right accruing thereto, including any right of access thereto or any change of grade affecting such Individual Property or any part thereof.

Condemnation Proceeds” shall have the meaning set forth in Section 6.4 hereof.

Connection Income Taxes” shall mean Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Section 2.7 Taxes or branch profits Section 2.7 Taxes.

Consent Request Date” shall have the meaning set forth in Section 10.24(d) hereof.

Consumer Price Index” shall mean the Consumer Price Index as published by the United States Department of Labor, Bureau of Labor Statistics or any substitute index hereafter adopted by the Department of Labor.

Contribution Agreement” shall mean that certain Contribution Agreement among the Individual Borrowers dated as of the date hereof, as the same may be amended, restated, replaced or otherwise modified from time to time.

Control” or “control” shall mean the possession, directly or indirectly, of the power to direct or cause the direction of management, policies or activities of a Person, whether through ownership of voting securities, by contract or otherwise. “Controlled” and “Controlling” shall have correlative meanings.

Covered Disclosure Information” shall have the meaning set forth in Section 9.2(b) hereof.

Covered Rating Agency Information” shall have the meaning set forth in Section 9.2(e) hereof.

Custodial Funds” shall mean the following funds collected by Borrower or Operating Lessee on a third party’s behalf that must be paid or remitted to a third party and so are not properly considered “revenue” of Borrower or Operating Lessee: (i) tips, gratuities or service charges with respect to food, beverage, banquet or other guest services paid in cash or check or received via credit card and owed to employees working at the Properties; (ii) payments or fees received from or on behalf of hotel guests and patrons and paid or reimbursed to tenants or other vendors or service providers of the hotels and (iii) amounts paid out to hotel guests or patrons for checks cashed or per diem expense allowances paid.

Dallas Parking Lease” shall mean that certain Parking Lease, dated as of April 17, 2007, by and between North Dallas Tower, Ltd. and Apple Six Services II, L.P., as assigned pursuant to that certain Assignment and Assumption of Parking Lease, dated as of May 14, 2013, from Apple Six Services II, L.P. to BRE Select Hotels TX L.P.

 

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Debt” shall mean the outstanding principal amount set forth in, and evidenced by, this Agreement and the Note together with all interest accrued and unpaid thereon and all other sums (including, but not limited to, any Spread Maintenance Payment or Breakage Costs) due to Lender in respect of the Loan under the Note, this Agreement, the Mortgages or any other Loan Document.

Debt Service” shall mean, with respect to any particular period of time, the scheduled interest payments due under this Agreement and the Note.

Debt Service Coverage Ratio” shall mean a ratio for the applicable period in which:

(a) the numerator is the Net Operating Income (excluding interest on credit accounts and using annualized operating expenses for any recurring expenses not paid monthly (e.g., Taxes and Insurance Premiums)) for the immediately preceding twelve (12) full calendar month period for those Individual Properties subject to the Lien of a Mortgage as of the date of determination as set forth in the statements required hereunder, without deduction for (i) actual management fees and franchise fees incurred in connection with the operation of the Property, or (ii) amounts paid to the Reserve Funds, less (A) management fees and franchise fees equal to the greater of (1) assumed management and franchise fees of four percent (4%) of Gross Income from Operations and (2) the actual management fees and franchise fees incurred, and (B) Replacement Reserve Fund contributions equal to four percent (4.00%) of Gross Income from Operations; and

(b) the denominator is the aggregate amount of Debt Service for each of the Components of the Loan and any Mezzanine Debt Service for such period.

Debt Yield (Aggregate)” shall mean, for any date of determination, the percentage obtained by dividing:

(a) the Net Operating Income (excluding interest on credit accounts and using annualized operating expenses for any recurring expenses not paid monthly (e.g., Taxes and Insurance Premiums)) for the immediately preceding twelve (12) full calendar month period for those Individual Properties subject to the Lien of a Mortgage as of the date of determination as set forth in the financial statements required hereunder, including, for purposes of calculating the Operating Expense component of Net Operating Income, (i) Replacement Reserve Fund contributions equal to the greater of (A) four percent (4.00%) of Gross Income from Operations and (B) the amount required under the Management Agreements with each Brand Manager and Franchise Agreements, as applicable, and (ii) for management fees and franchise fees in an amount equal to the greater of (A) the amount required under the Management Agreements and the Franchise Agreements and (B) four percent (4.00%) of Gross Income from Operations; by

(b) the sum of the outstanding principal balances of (i) all Components of the Loan and (ii) the Mezzanine Loans on the date of determination.

 

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Any calculation of the Debt Yield (Aggregate) shall be made in accordance with the methodology set forth on Exhibit D to this Agreement. For the avoidance of doubt and notwithstanding anything to the contrary contained in the Loan Documents, the term Debt Yield (Aggregate) and the provisions of this Agreement to the extent they reference Debt Yield (Aggregate), including, without limitation, any Debt Yield (Aggregate) tests contained in Section 10.30 hereof shall not be applicable until after a Mezzanine Loan is created or originated.

Debt Yield (Mortgage Only)” shall mean, for any date of determination, the percentage obtained by dividing:

(a) the Net Operating Income (excluding interest on credit accounts and using annualized operating expenses for any recurring expenses not paid monthly (e.g., Taxes and Insurance Premiums)) for the immediately preceding twelve (12) full calendar month period for those Individual Properties subject to the Lien of a Mortgage as of the date of determination as set forth in the financial statements required hereunder, including, for purposes of calculating the Operating Expense component of Net Operating Income, (i) Replacement Reserve Fund contributions equal to the greater of (A) four percent (4.00%) of Gross Income from Operations and (B) the amount required under the Management Agreements with each Brand Manager and Franchise Agreements, as applicable, and (ii) for management fees and franchise fees in an amount equal to the greater of (A) the amount required under the Management Agreements and the Franchise Agreements and (B) four percent (4.00%) of Gross Income from Operations; by

(b) the sum of the outstanding principal balances of all Components of the Loan.

For reference purposes, a sample calculation of Debt Yield (Mortgage Only) is attached as Exhibit D to this Agreement.

Debt Yield Cure” shall mean (a) no Event of Default or Mezzanine Loan Default shall be continuing and (b) the achievement of a Debt Yield (Mortgage Only) and Debt Yield (Aggregate) equal to or exceeding Required Debt Yield for the two (2) consecutive calendar quarters immediately preceding the Calculation Date based upon the trailing twelve (12) month period immediately preceding such Calculation Date (which Required Debt Yield may be achieved, at Borrower’s sole discretion, by making voluntary prepayments in accordance with the terms of this Agreement in amounts necessary to achieve a Debt Yield (Mortgage Only) and Debt Yield (Aggregate) equal to or exceeding the Required Debt Yield; provided that in the event the Required Debt Yield is achieved by such a prepayment, the Debt Yield Trigger Period shall terminate upon such prepayment).

Debt Yield Trigger Event” shall mean a Debt Yield (Mortgage Only) and Debt Yield (Aggregate), as determined by Lender, of less than the Required Debt Yield on any Calculation Date for the two consecutive calendar quarters immediately preceding the Calculation Date, based upon the trailing twelve (12) month period immediately preceding such Calculation Date.

Debt Yield Trigger Period” shall mean the period commencing on the occurrence of a Debt Yield Trigger Event and continuing until the occurrence of a Debt Yield Cure.

 

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Deemed Approval Requirements” means, with respect to a request by Borrower for Lender’s approval or consent, that:

(i) if the first correspondence from Borrower to Lender requesting such approval or consent contains a bold-faced, conspicuous legend at the top of the first page thereof stating “FIRST NOTICE: THIS IS A REQUEST FOR CONSENT UNDER THE 2017 BX SELECT/APPLE LOAN. FAILURE TO RESPOND TO THIS REQUEST WITHIN 10 BUSINESS DAYS MAY RESULT IN THE REQUEST BEING DEEMED GRANTED,” and is accompanied by such information and documents as is reasonably required for Lender to adequately evaluate such request and as reasonably requested by Lender in writing prior to the expiration of such ten (10) Business Day period, and

(ii) if Lender fails to grant or withhold its approval to such request within such ten (10) Business Day period, a second notice requesting approval is delivered to Lender from Borrower containing a bold-faced, conspicuous legend at the top of the first page thereof stating that “SECOND AND FINAL NOTICE: THIS IS A REQUEST FOR CONSENT UNDER THE 2017 BX SELECT/APPLE LOAN. FAILURE TO RESPOND TO THIS REQUEST IN WRITING WITHIN 5 BUSINESS DAYS WILL RESULT IN YOUR APPROVAL BEING DEEMED GRANTED,” and is accompanied by such information and documents as is reasonably required for Lender to adequately evaluate such request and as reasonably requested by Lender in writing prior to the expiration of such five (5) Business Day period, and if Lender fails to grant or withhold its approval to such request (or denies such request without stating the grounds for such denial in reasonable detail) prior to the expiration of such five (5) Business Day period.

Default” shall mean the occurrence of any event hereunder or under any other Loan Document which, but for the giving of notice or passage of time, or both, would be an Event of Default.

Default Rate” shall mean, with respect to the Loan, a rate per annum equal to the lesser of (a) the Maximum Legal Rate or (b) three percent (3%) above the Interest Rate otherwise applicable to each Component.

Default Release” shall have the meaning set forth in Section 2.5.2(n) hereof.

Determination Date” shall mean, with respect to each Interest Period, the date that is two (2) London Business Days prior to the first day of such Interest Period.

Disclosure Document” shall mean a prospectus, prospectus supplement (including any amendment or supplement to either thereof), private placement memorandum, or similar offering memorandum, offering circular, structural and collateral term sheet or other similar offering documents provided to prospective investors, in each case in preliminary or final form and including all exhibits and annexes thereto, used in connection with a Securitization and designated as a “Disclosure Document” by Lender in its reasonable discretion.

Discounted Payoff” shall have the meaning set forth in Section 10.26 hereof.

EEA Bail-In Action” means the exercise of any EEA Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.

 

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EEA Bail-In Legislation” means, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EEA Bail-In Legislation Schedule.

EEA Bail-In Legislation Schedule” means the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor person), as in effect from time to time.

EEA Financial Institution” means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.

EEA Member Country” means any of the member states of the European Union, Iceland, Liechtenstein, and Norway.

EEA Resolution Authority” means any public administrative authority or any person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.

EEA Write-Down and Conversion Powers” means, with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the EEA Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EEA Bail-In Legislation Schedule.

Eligible Account” shall mean either a separate and identifiable account from all other funds held by the holding institution that is either (a) an account or accounts maintained with a federal or state-chartered depository institution or trust company which complies with the definition of Eligible Institution or (b) a segregated trust account or accounts maintained with a federal or state chartered depository institution or trust company acting in its fiduciary capacity and which, in the case of a state chartered depository institution or trust company, is subject to regulations substantially similar to 12 C.F.R. § 9.10(b), having in either case a combined capital and surplus of at least $50,000,000.00 and subject to supervision or examination by federal and state authority. An Eligible Account will not be evidenced by a certificate of deposit, passbook or other instrument.

Eligible Assignee” shall mean (A) during the continuance of an Event of Default, any Person and (B) so long as no Event of Default has occurred and is continuing, any Person (other than a natural person) that is any of the following, provided that any such Person shall at the time it acquires its interest in the Loan satisfy the Eligibility Requirements: (a) a commercial bank, insurance company, REIT, sovereign wealth fund, mutual fund, annuity fund or similar structure arranged by an insurance company, business development company, trust company, pension fund or pension advisory firm, or other financial institution, in each case,

 

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organized under the laws of the United States, or any state thereof, which regularly invests in or makes commercial real estate loans; (b) intentionally omitted; (c) a Person that is engaged in the business of commercial real estate banking; (d) a fund (other than a mutual fund), family office or an investment company, money management firm or “qualified institutional buyer” within the meaning of Rule 144A under the Securities Act of 1933, as amended, or an institutional “accredited investor” within the meaning of Regulation D under the Securities Act of 1933 which regularly invests in or makes commercial real estate loans or whose investment guidelines expressly permit doing the same; (e) any Mezzanine Lender then holding a portion of a Mezzanine Loan; or (f) a single purpose entity in which 50% or more of the investors therein meet the criteria set forth in (a) through (e) above. Notwithstanding the foregoing, (i) following the occurrence of a Securitization of the Loan (or any portion thereof) or Mezzanine Loan (or any portion thereof), in no event shall any restriction set forth herein prevent Lender from selling or distributing certificates (or similar interests) in connection with such Securitization and (ii) unless approved by Borrower in writing in Borrower’s reasonable discretion, “Eligible Assignee” shall not include any direct competitor of BREP or any Affiliate thereof that primarily engaged in the business of owning or operating commercial real estate in the ordinary course but not including any Affiliates of such competitors that are in the business of commercial real estate lending including Affiliates whose investment guidelines permit investments in both debt, equity and securities.

Eligible Institution” shall mean (i) a depository institution or trust company insured by the Federal Deposit Insurance Corporation, the short-term unsecured debt obligations or commercial paper of which are rated at least “A-1+” by S&P, “P-1” by Moody’s and “F-1+” by Fitch in the case of accounts in which funds are held for thirty (30) days or less (or, in the case of Letters of Credit and accounts in which funds are held for more than thirty (30) days, the long-term unsecured debt obligations of which are rated at least “A+” by S&P, “Aa3” by Moody’s and “A+” by Fitch) and (ii) Capital One, National Association and PNC Bank, National Association; provided that, with respect to clause (ii) above, the ratings by each of the Approved Rating Agencies for the short term unsecured debt obligations or commercial paper and long term unsecured debt obligations of such institution is at least equal to the ratings in effect as of the date hereof.

Eligibility Requirements” means, with respect to any Person, that such Person together with its Affiliates (i) is regularly engaged in the business of making, originating or owning commercial mortgage or mezzanine real estate loans or interests in such commercial mortgage and/or mezzanine real estate loans and has capital/statutory surplus or shareholder equity (including committed capital) of at least $250,000,000 or holds at least $250,000,000 of commercial real estate loans (except with respect to a pension advisory firm, asset manager or similar fiduciary, provided, such Person’s account manager satisfies the requirements of this clause (i)), (ii) has not been and is not an Embargoed Person and has never been convicted of, or pled guilty or no contest to, any unlawful activity, including money laundering, terrorism or terrorism activities, (iii) has not been a debtor in any bankruptcy proceedings, voluntary or involuntary, made an assignment for the benefit of creditors or taken advantage of any insolvency act, or any act for the benefit of debtors or the subject of any material governmental or regulatory investigation which resulted in a final, non-appealable conviction for criminal activity involving moral turpitude or a civil proceeding in which such Person has been found liable in a final non-appealable judgment for attempting to hinder, delay or defraud creditors, each within seven (7) years prior to the date of determination and (iv) if such Person is not a bank or an insurance company, has no material then outstanding and unpaid judgments against such Person.

 

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Embargoed Person” shall have the meaning set forth in Section 4.1.35 hereof.

Environmental Indemnity” shall mean that certain Environmental Indemnity Agreement, dated as of the date hereof, executed by Borrower and Operating Lessee in connection with the Loan for the benefit of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Equipment” shall mean, with respect to each Individual Property, any equipment now owned or hereafter acquired by Borrower or Operating Lessee, which is used at or in connection with the Improvements or such Individual Property or is located thereon or therein, including (without limitation) all machinery, equipment, furnishings, and electronic data-processing and other office equipment now owned or hereafter acquired by Borrower or Operating Lessee and any and all additions, substitutions and replacements of any of the foregoing), together with all attachments, components, parts, equipment and accessories installed thereon or affixed thereto.

ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated thereunder.

ERISA Affiliate” shall mean any Person that for purposes of Title IV of ERISA is a member of the Borrower’s, Operating Lessee’s or Guarantor’s controlled group, or under common control with the Borrower, Operating Lessee or Guarantor within the meaning of Section 414(b) or (c) of the Code.

Event of Default” shall have the meaning set forth in Section 8.1 hereof.

Excess Cash Flow” shall mean all remaining amounts on deposit in the Cash Management Account (other than any required minimum balance) after the payment or disbursement of all escrows, reserves, approved Operating Expenses, Debt Service, Mezzanine Debt Service, management fees and other amounts permitted to be paid in accordance with the Loan Documents and the Mezzanine Loan Documents.

Excess Cash Flow Reserve Account” shall have the meaning set forth in Section 7.6.1 hereof.

Excess Cash Flow Reserve Fund” shall have the meaning set forth in Section 7.6.1 hereof.

Excess Net Proceeds” shall have the meaning set forth in Section 6.4 hereof.

Exchange Act” shall have the meaning set forth in Section 9.1.1 hereof.

Exchange Act Filing” shall mean a filing pursuant to the Exchange Act in connection with or relating to a securitization.

 

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Excluded Entity” shall mean (i) BREP, (ii) any Public Vehicle, (iii) Prospect Hotel Advisors, L.L.C.; provided, that with respect to clause (iii), it owns a direct or indirect interest equity in Guarantor and such interest is less than three percent (3%) of the direct or indirect equity interests in Guarantor and Borrower, (iv) any direct or indirect legal or beneficial owner of BREP, a Public Vehicle or Prospect Hotel Advisors, L.L.C. (to the extent clause (iii) is satisfied), including, without limitation, any shareholder, partner, member and/or non-member manager of the foregoing, and (v) BRE Select Hotels Corp with respect to the Preferred Shares only and any direct or indirect legal or beneficial owner of any Preferred Shares.

Excluded Taxes” shall mean any of the following Section 2.7 Taxes imposed on or with respect to a Lender or Agent or required to be withheld or deducted from a payment to a Lender or Agent: (a) Section 2.7 Taxes imposed on (or measured by) net income (however denominated), franchise Section 2.7 Taxes, and branch profits Section 2.7 Taxes, in each case, (i) imposed as a result of such Lender or Agent being organized under the laws of, or having its principal office or, in the case of any Lender, applicable lending office located in, the jurisdiction imposing such Section 2.7 Tax, or (ii) that are Other Connection Taxes, (b) in the case of a Lender, U.S. federal withholding Section 2.7 Taxes resulting from any law in effect on the date such Lender acquires an interest in a Loan or commitment pursuant to this Agreement or designates a new lending office, except to the extent that such Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from Borrower with respect to such Section 2.7 Taxes pursuant to Section 2.7, (c) any Section 2.7 Taxes attributable to such Lender’s failure to comply with Section 2.7(e), and (d) any Section 2.7 Taxes imposed under FATCA.

Extended Maturity Date” shall have the meaning set forth in Section 2.8 hereof.

Extension Option” shall have the meaning set forth in Section 2.8 hereof.

Extension Term” shall have the meaning set forth in Section 2.8 hereof.

Face Amount” shall mean the actual principal amount of the related Mezzanine Loans that is retired pursuant to a Discounted Payoff.

FATCA” shall mean Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantially comparable and not materially more onerous to comply with), any current or future regulations issued thereunder or official interpretations thereof, any agreements entered into pursuant to Section 1471(b)(1) of the Code, and any law, regulation, rule, promulgation, guidance notes, practices or official agreement implementing an official government agreement with respect to the foregoing.

FF&E” shall mean, with respect to each Individual Property, collectively, furnishings, Fixtures and Equipment located in the guest rooms, hallways, lobbies, restaurants, lounges, meeting and banquet rooms, parking facilities, public areas or otherwise in any portion of the Properties, including (without limitation) all beds, chairs, bookcases, tables, carpeting, drapes, couches, luggage carts, luggage racks, bars, bar fixtures, radios, television sets, intercom and paging equipment, electric and electronic equipment, heating, lighting and plumbing

 

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fixtures, fire prevention and extinguishing apparatus, cooling and air-conditioning systems, elevators, escalators, stoves, ranges, refrigerators, laundry machines, tools, machinery, boilers, incinerators, switchboards, conduits, compressors, vacuum cleaning systems, floor cleaning, waxing and polishing equipment, cabinets, lockers, shelving, dishwashers, garbage disposals, washer and dryers, and all other customary hotel and resort equipment and other tangible property owned by Borrower or Operating Lessee, or in which Borrower or Operating Lessee has or shall have an interest, now or hereafter located at each Individual Property and useable in connection with the present or future operation and occupancy of each Individual Property; provided, however, that FF&E shall not include (a) fixed asset supplies, including, but not limited to, linen, china, glassware, tableware, uniforms, other hotel inventory and similar items, whether used in connection with public space or guest rooms, or (b) items owned by tenants, guests or by third party operators.

FF&E Manager Reserve Account” shall have the meaning set forth in Section 2.6.1(j) hereof.

FF&E Reserve Account Control Agreements” shall mean those certain control account agreements (or other similarly named agreements) that may be entered into among one or more Borrowers, Operating Lessee, Lender, the applicable Brand Manager and the bank or other financial institution holding the related FF&E reserve fund under a Management Agreement for a Brand Managed Property, pursuant to which, among other things, the parties thereto acknowledge and agree to Lender’s security interest in the applicable fund and/or account.

Fiscal Year” shall mean each twelve (12) month period commencing on January 1 and ending on December 31 during each year of the term of the Loan.

Fitch” shall mean Fitch, Inc.

Fixtures” shall mean, with respect to each Individual Property, all Equipment now owned, or the ownership of which is hereafter acquired, by Borrower or Operating Lessee which is so related to the Land and the Improvements forming part of the Individual Property in question that it is deemed fixtures or real property under applicable Legal Requirements, including, without limitation, all building or construction materials intended for construction, reconstruction, alteration, decoration or repair of or installation on the applicable Individual Property, construction equipment, appliances, machinery, plant equipment, fittings, apparatuses, fixtures and other items now or hereafter attached to, installed in or used in connection with (temporarily or permanently) any of the Improvements or the Land, including, but not limited to, engines, devices for the operation of pumps, pipes, plumbing, call and sprinkler systems, fire extinguishing apparatuses and equipment, heating, ventilating, incinerating, electrical, air conditioning and air cooling equipment and systems, gas and electric machinery, appurtenances and equipment, pollution control equipment, security systems, disposals, dishwashers, refrigerators and ranges, recreational equipment and facilities of all kinds, and water, electrical, storm and sanitary sewer facilities, utility lines and equipment (whether owned individually or jointly with others, and, if owned jointly, to the extent of Borrower’s and/or Operating Lessee’s interest therein) and all other utilities whether or not situated in easements, all water tanks, water supply, water power sites, fuel stations, fuel tanks, fuel supply, and all other structures, together with all accessions, appurtenances, additions, replacements, betterments and substitutions or any of the foregoing and the proceeds thereof.

 

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Floating Interest Rate” shall mean a fluctuating rate per annum equal to LIBOR plus the Spread for each Component; provided, however, in no event shall LIBOR be deemed to be less than zero percent.

Floating Interest Rate Loan” shall mean the Loan at such time as the interest thereon accrues at a rate of interest based on the Floating Interest Rate.

Foreclosure” shall have the meaning set forth in Section 9.3 hereof.

Foreign Lender” means a Lender that is not a U.S. Person.

Franchise Agreement” shall mean, with respect to each Individual Property, the applicable franchise agreement more particularly described on Schedule 1.2 attached hereto, between Operating Lessee and Franchisor, as the same may be amended or modified from time to time in accordance with the terms and provisions of this Agreement, or, if the context requires, the Replacement Franchise Agreement executed in accordance with the terms and provisions of this Agreement.

Franchise Agreement Guarantees” shall mean those agreements set forth on Schedule X attached hereto.

Franchise Default Election Notice” shall have the meaning set forth in Section 8.1(a) hereof.

Franchise Owner Agreement” shall mean those certain Owner Agreements executed by Borrower for the benefit of the applicable Franchisor in connection with a Franchise Agreement or any Replacement Franchise Agreement.

Franchisor” shall mean, with respect to each Individual Property, the applicable franchisor identified on Schedule 1.2 attached hereto, or, if the context requires, a Qualified Franchisor.

Free Prepayment Amount” shall have the meaning set forth in Section 2.4.1 hereof.

Full Replacement Cost” shall have the meaning set forth in Section 6.1(a) hereof.

GAAP” shall mean generally accepted accounting principles in the United States of America as of the date of the applicable financial report.

Governmental Authority” shall mean any court, board, agency, commission, office or other authority of any nature whatsoever for any governmental unit (foreign, federal, state, county, district, municipal, city or otherwise) whether now or hereafter in existence having jurisdiction over the Properties (and any operations conducted thereat), Borrower or Operating Lessee.

 

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Grantor Trust” shall mean a grantor trust as defined in subpart E, part I of subchapter J of the Code.

Gross Income from Operations” shall mean, without duplication, all income and proceeds (whether in cash or on credit, and computed on an accrual basis) received by Borrower, Operating Lessee or Manager on behalf of Borrower or Operating Lessee for the use, occupancy or enjoyment of the Properties, or any part thereof, or received by Borrower, Operating Lessee or Manager on behalf of Borrower or Operating Lessee for the sale of any goods, services or other items sold on or provided from the Properties in the ordinary course of the Properties’ operation, including without limitation: (a) all income and proceeds received from rental of rooms, Leases and commercial space, meeting, conference and/or banquet space within the Properties including parking revenue; (b) all income and proceeds received from food and beverage operations and from catering services conducted from the Properties even though rendered outside of the Properties; (c) all income and proceeds from business interruption, rental interruption and use and occupancy insurance with respect to the operation of the Properties (after deducting therefrom all necessary costs and expenses incurred in the adjustment or collection thereof) applicable to the period in question; (d) all Awards for temporary use (after deducting therefrom all costs incurred in the adjustment or collection thereof and in Restoration of the Properties); (e) all income and proceeds from judgments, settlements and other resolutions of disputes with respect to matters which would be includable in this definition of “Gross Income from Operations” if received in the ordinary course of the operation of the Properties (after deducting therefrom all necessary costs and expenses incurred in the adjustment or collection thereof); (f) intentionally omitted; (g) intentionally omitted; (h) all income from the operation of any spa or conference center at any Individual Property; and (i) all other income from operation of the Properties (including laundry and vending income), but excluding, (1) gross receipts received by lessees, licensees or concessionaires of the Properties; (2) consideration received at the Properties for hotel accommodations, goods and services to be provided at other hotels (which are not one of the Individual Properties), although arranged by, for or on behalf of Borrower, Operating Lessee or Manager; (3) income and proceeds from the sale or other disposition of goods, capital assets and other items not in the ordinary course of the operation of the Properties; (4) Hotel Taxes; (5) Awards (except to the extent provided in clause (d) above); (6) refunds of amounts not included in Operating Expenses at any time and uncollectible accounts; (7) gratuities collected by the Properties employees; (8) the proceeds of any permitted financing; (9) other income or proceeds resulting other than from the use or occupancy of the Properties, or any part thereof, or other than from the sale of goods, services or other items sold on or provided from the Properties in the ordinary course of business; (10) any credits or refunds made to customers, guests or patrons in the form of allowances or adjustments to previously recorded revenues; (11) payments made to Borrower and any Mezzanine Borrowers pursuant to the Interest Rate Cap Agreement or any similar interest rate cap agreement with respect to any Mezzanine Loan; (12) interest on credit accounts, rent concessions or credits, and other required pass-throughs and interest on Reserve Funds and (13) without duplication of the items referenced in (1)-(12) above, Custodial Funds.

 

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Ground Lease” shall mean each of the ground leases described on Schedule III hereto.

Ground Lease Default Release” shall have the meaning set forth in Section 2.5.2(l) hereof.

Ground Leased Property” shall mean those certain Individual Properties demised by each of the Ground Leases.

Ground Lease Reserve Account” shall have the meaning set forth in Section 7.5.1 hereof.

Ground Lease Reserve Fund” shall have the meaning set forth in Section 7.5.1 hereof.

Ground Lessor” shall mean each lessor under a Ground Lease, as described on Schedule III hereto.

Ground Rent” shall have the meaning set forth in Section 7.5.1 hereof.

Guarantor” shall mean BSHH LLC, a Delaware limited liability company, together with its successors and permitted assigns, and any Replacement Guarantor pursuant to the terms hereof and the Guaranty.

Guarantor Bankruptcy Event” shall mean if Guarantor or any guarantor or indemnitor under any guaranty or indemnity issued in connection with the Loan shall make an assignment for the benefit of creditors or if a receiver, liquidator or trustee shall be appointed for Guarantor or any guarantor or indemnitor under any guaranty or indemnity issued in connection with the Loan or if Guarantor or such other guarantor or indemnitor shall be adjudicated a bankrupt or insolvent, or if any petition for bankruptcy, reorganization or arrangement pursuant to federal bankruptcy law, or any similar federal or state law, shall be filed by or against, consented to, or acquiesced in by, Guarantor or such other guarantor or indemnitor, or if any proceeding for the dissolution or liquidation of Guarantor or such other guarantor or indemnitor shall be instituted; provided, however, if such appointment, adjudication, petition or proceeding was involuntary and not consented to by Guarantor or such other guarantor or indemnitor, upon the same not being discharged, stayed or dismissed within ninety (90) days.

Guarantor Financial Covenants” shall mean those covenants set forth in Section 5.2 of the Guaranty.

Guaranty” shall mean that certain Guaranty Agreement, dated as of the date hereof, executed and delivered by Guarantor in connection with the Loan to and for the benefit of Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Hilton Managed Properties” shall mean, individually and/or collectively as the context may require, any Individual Property managed by Hilton Manager.

 

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Hilton Manager” shall mean, individually and/or collectively as the context may require, with respect to any Individual Property, any subsidiary of Hilton Worldwide Inc.

Hotel Taxes” shall mean all sales and occupancy taxes collected by Borrower or Operating Lessee that are required to be paid to a state or local taxing authority or similar taxing authority (including, without limitation, sales taxes, use taxes, occupancy taxes, business license taxes and special assessments by any municipality or government).

Hyatt Managed Properties” shall mean, individually and/or collectively as the context may require, any Individual Property managed by Hyatt Manager.

Hyatt Manager” shall mean, individually and/or collectively as the context may require, with respect to any Individual Property, any subsidiary of Hyatt Corporation.

Improvements” shall have the meaning set forth in the granting clause of the related Mortgage with respect to each Individual Property.

Indebtedness” of a Person, at a particular date, shall mean the sum (without duplication) at such date of (a) all indebtedness or liability of such Person (including, without limitation, amounts for borrowed money and indebtedness in the form of mezzanine debt or preferred equity); (b) obligations evidenced by bonds, debentures, notes, or other similar instruments; (c) obligations for the deferred purchase price of property or services (including trade obligations); (d) obligations under letters of credit; (e) obligations under acceptance facilities; (f) all guaranties, endorsements (other than for collection or deposit in the ordinary course of business) and other contingent obligations to purchase, to provide funds for payment, to supply funds, to invest in any Person or entity, or otherwise to assure a creditor against loss; and (g) obligations secured by any Liens, whether or not the obligations have been assumed (other than the Permitted Encumbrances).

Indemnified Liabilities” shall have the meaning set forth in Section 10.13 hereof.

Indemnified Person” shall mean Lender, any Affiliate of Lender and its designee (whether or not it is the Lender) that has filed any registration statement relating to the Securitization or has acted as the sponsor or depositor in connection with the Securitization, any Affiliate of Lender that acts as an underwriter, placement agent or initial purchaser of Securities issued in the Securitization, any other co-underwriters, co-placement agents or co-initial purchasers of Securities issued in the Securitization, and each of their respective officers, directors, partners, employees, representatives, agents and Affiliates and each Person or entity who Controls any such Person within the meaning of Section 15 of the Securities Act of 1933, as amended, or Section 20 of the Securities Exchange Act of 1934, as amended, any Person who is or will have been involved in the origination of the Loan on behalf of Lender, any Person who is or will have been involved in the servicing of the Loan on behalf of Lender secured hereby, any Person in whose name the encumbrance created by the Mortgages is or will have been recorded, any Person who may hold or acquire or will have held a full or partial interest in the Loan secured hereby (including, but not limited to, investors or prospective investors in the Securities, as well as custodians, trustees and other fiduciaries who hold or have held a full or partial interest

 

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in the Loan secured hereby for the benefit of third parties) as well as the respective directors, officers, shareholders, partners, employees, agents, servants, representatives, contractors, subcontractors, affiliates, subsidiaries, participants, successors and assigns of any and all of the foregoing (including, but not limited to, any other Person who holds or acquires or will have held a participation or other full or partial interest in the Loan, whether during the term of the Loan or as a part of or following a foreclosure of the Loan and including, but not limited to any successors by merger, consolidation or acquisition of all or a substantial portion of Lender’s assets and business).

Indemnified Taxes” shall mean (a) Section 2.7 Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by any Borrower under any Loan Document and (b) to the extent not otherwise described in clause (a) above, Other Taxes.

Indemnifying Person” shall mean Borrower.

Independent Director” or “Independent Manager” shall mean an individual who has prior experience as an independent director, independent manager or independent member with at least three years of employment experience and who is provided by CT Corporation, Corporation Service Company, National Registered Agents, Inc., Wilmington Trust Company, Stewart Management Company, Lord Securities Corporation or, if none of those companies is then providing professional Independent Directors, another nationally recognized company reasonably approved by Lender, in each case that is not an Affiliate of Borrower, Operating Lessee or Principal, and that provides professional Independent Directors and other corporate services in the ordinary course of its business, and which individual is duly appointed as an Independent Director or Independent Manager and is not, and has never been, and will not while serving as Independent Director or Independent Manager be, any of the following:

(a) a member, partner, equityholder, manager, director, officer or employee of Borrower, Principal or Operating Lessee or any of their respective equityholders or Affiliates (other than serving as an Independent Director and/or Independent Manager of Borrower, Principal or Operating Lessee or an Affiliate of Borrower, Principal or Operating Lessee that is not in the direct chain of ownership of Borrower, Principal or Operating Lessee (provided that Independent Directors and/or Independent Managers of a Principal shall be permitted to serve as a springing limited partner of its direct subsidiary) and that is required by a creditor to be a single purpose bankruptcy remote entity, provided that such Independent Director or Independent Manager is employed by a company that routinely provides professional Independent Directors or Independent Managers in the ordinary course of its business);

(b) a creditor, supplier or service provider (including provider of professional services) to Borrower, Principal or Operating Lessee or any of their respective equityholders or Affiliates (other than a nationally-recognized company that routinely provides professional Independent Directors or Independent Managers and other corporate services to Borrower, Principal or Operating Lessee or any of their respective Affiliates in the ordinary course of its business);

(c) a family member of any such member, partner, equityholder, manager, director, officer, employee, creditor, supplier or service provider; or

 

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(d) a Person that controls (whether directly, indirectly or otherwise) any of (a), (b) or (c) above.

A natural person who otherwise satisfies the foregoing definition and satisfies subparagraph (a) by reason of being the Independent Director or Independent Manager of a “special purpose entity” affiliated with Borrower, Principal or Operating Lessee shall be qualified to serve as an Independent Director of the Borrower, Principal or Operating Lessee, provided that the fees that such individual earns from serving as an Independent Director of Affiliates of Borrower, Principal or Operating Lessee in any given year constitute in the aggregate less than five percent (5%) of such individual’s annual income for that year and provided, further, that no individual may serve as an Independent Director or Independent Manager of Borrower, Principal or Operating Lessee if such individual is also an Independent Director or Independent Manager of any Mezzanine Borrower or Principal (as defined in the applicable Mezzanine Loan Documents). For purposes of this paragraph, a “special purpose entity” is an entity, whose organizational documents contain restrictions on its activities and impose requirements intended to preserve such entity’s separateness that are substantially similar to those contained in the definition of “Special Purpose Entity” in this Agreement.

Individual Borrower” shall have the meaning set forth in the introductory paragraph hereto, together with its successors and permitted assigns.

Individual Property” shall mean (i) each parcel of real property, the Improvements thereon and all personal property owned by an Individual Borrower (or leased pursuant to a Ground Lease) and encumbered by a Mortgage, together with all rights pertaining to such property and Improvements, as set forth on Schedule II attached hereto and as more particularly described in the granting clauses of each Mortgage and referred to therein as the “Property”, together with the Operating Lessee’s leasehold interests in the applicable Individual Property pursuant to the Operating Lease, and (ii) any property that is or becomes subject to the Lien of a Mortgage.

Individual Tuscaloosa Property” shall have the meaning set forth in Section 2.5.2 hereof.

Initial Maturity Date” shall mean the Payment Date occurring in July, 2019.

Insolvency Opinion” shall mean that certain non-consolidation opinion letter dated the date hereof delivered by Richards, Layton & Finger, P.A. in connection with the Loan.

Insurance Premiums” shall have the meaning set forth in Section 6.1 hereof.

Insurance Proceeds” shall have the meaning set forth in Section 6.4 hereof.

Interest Period” shall mean, with respect to any Component, (a) the period commencing on (and including) the Closing Date and ending on (and including) July 14, 2017 and (b) thereafter, the period commencing on (and including) the fifteenth (15th) day of each calendar month and ending on (and including) the fourteenth (14th) day of the following calendar month. Each Interest Period set forth in clause (b) above shall be a full month and shall not be shortened by reason of any payment of the Loan prior to the expiration of such Interest Period.

 

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Interest Rate” shall mean the rate at which the outstanding principal amount of the Loan bears interest from time to time in accordance with Section 2.2.3 hereof.

Interest Rate Cap Agreement” shall mean, collectively, one or more interest rate protection agreements (together with the confirmation and schedules relating thereto) between an Acceptable Counterparty and Borrower obtained by Borrower as and when required pursuant to Section 2.2.7 and Section 2.8 hereof. After delivery of a Replacement Interest Rate Cap Agreement to Lender, the term “Interest Rate Cap Agreement” shall be deemed to mean such Replacement Interest Rate Cap Agreement and such Replacement Interest Rate Cap Agreement shall be subject to all requirements applicable to the Interest Rate Cap Agreement.

Interest Shortfall” shall mean, with respect to any repayment or prepayment of the Loan (including a repayment on the Maturity Date) made on a date that is after the Payment Date and prior to, but not including, the Determination Date, after a Securitization, the interest that would have accrued on the Loan (absent such repayment or prepayment) from and including the date on which such repayment or prepayment occurs through and including the last day of the Interest Period relating to the Payment Date following the date of such prepayment.

IRS” shall mean the United States Internal Revenue Service.

JPM” shall have the meaning set forth in the introductory paragraph hereto.

Lease” shall mean any lease, sublease or subsublease, letting, license, concession or other agreement (whether written or oral and whether now or hereafter in effect), pursuant to which any Person is granted a possessory interest in, or right to use or occupy all or any portion of any space in any Individual Property by or on behalf of any Individual Borrower or Operating Lessee (other than ordinary course (i) short-term occupancy rights of hotel guests which are not the subject of a written agreement, (ii) occupancy agreements for groups of hotel guests for transitory periods of time, (iii) agreements for catering, business and similar special events or functions at any of the Properties, (iv) any lease agreement or concession agreement between Borrower or Operating Lessee, as applicable, and Manager or its Affiliates with respect to sale of liquor and (v) space license agreements for telecommunications equipment and antennas), and every modification, amendment or other agreement relating to such lease, sublease, subsublease, or other agreement entered into in connection with such lease, sublease, subsublease, or other agreement and every guarantee of the performance and observance of the covenants, conditions and agreements to be performed and observed by the other party thereto; provided that in no event shall the Operating Lease or any Ground Lease constitute a Lease and excluding any Permitted Equipment and Vehicle Leases.

Legal Requirements” shall mean, with respect to each Individual Property, all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions of Governmental Authorities affecting Borrower, Operating Lessee, such Individual Property or any part thereof, or the construction, use, alteration or operation thereof, or any part thereof, whether now or hereafter enacted and in

 

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force, and all permits, licenses and authorizations and regulations relating thereto, and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Borrower and/or Operating Lessee, at any time in force affecting Borrower and/or Operating Lessee, such Individual Property or any part thereof, including, without limitation, any which may (a) require repairs, modifications or alterations in or to such Individual Property or any part thereof, or (b) in any way limit the use and enjoyment thereof.

Lender” shall have the meaning set forth in the introductory paragraph hereto, together with its successors and assigns.

Lender’s Allocation” shall mean a fraction, expressed as a percentage as of the date of determination, the numerator of which is the outstanding principal balance of the Loan and the denominator of which is the aggregate principal balance of the Loan and the Mezzanine Loans.

Lender Documents” shall mean any agreement among Lender, Mezzanine Lenders and/or any participant or any fractional owner of a beneficial interest in the Loan or the Mezzanine Loans relating to the administration of the Loan, the Mezzanine Loans, the Loan Documents or the Mezzanine Loan Documents, including without limitation any intercreditor agreements, co-lender agreements and participation agreements.

Letter of Credit” shall mean an irrevocable, unconditional, transferable, clean sight draft letter of credit in favor of Lender and entitling Lender to draw thereon based solely on a statement executed by an officer of Lender stating that it has the right to draw thereon under this Agreement, and issued by a domestic Approved Bank or the U.S. agency or branch of a foreign Approved Bank, and upon which letter of credit Lender shall have the right to draw in full: (a) if Lender has not received at least thirty (30) days prior to the date on which the then outstanding letter of credit is scheduled to expire, a notice from the issuing financial institution that it has renewed the applicable letter of credit; (b) thirty (30) days prior to the date of termination following receipt of notice from the issuing financial institution that the applicable letter of credit will be terminated; and (c) thirty (30) days after Lender has given notice to Borrower that the financial institution issuing the applicable letter of credit ceases to be an Approved Bank.

Liabilities” shall have the meaning set forth in Section 9.2(b) hereof.

LIBOR” shall mean with respect to each Interest Period, the rate (expressed as a percentage per annum and rounded up to the next nearest 1/1000 of 1%) for deposits in U.S. dollars, for a one-month period, that appears on Reuters Screen LIBOR01 Page (or the successor thereto) as of 11:00 a.m., London time, on the related Determination Date. If such rate does not appear on Reuters Screen LIBOR01 Page as of 11:00 a.m., London time, on such Determination Date, LIBOR shall be the arithmetic mean of the offered rates (expressed as a percentage per annum) for deposits in U.S. dollars for a one-month period that appear on the Reuters Screen Libor Page as of 11:00 a.m., London time, on such Determination Date, if at least two such offered rates so appear. If fewer than two such offered rates appear on the Reuters Screen Libor Page as of 11:00 a.m., London time, on such Determination Date, Lender (or Servicer, on Lender’s behalf) shall request the principal London office of any four major reference banks in

 

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the London interbank market selected by Lender to provide such bank’s offered quotation (expressed as a percentage per annum) to prime banks in the London interbank market for deposits in U.S. dollars for a one-month period as of 11:00 a.m., London time, on such Determination Date for the amounts of not less than U.S. $1,000,000. If at least two such offered quotations are so provided, LIBOR shall be the arithmetic mean of such quotations. If fewer than two such quotations are so provided, Lender (or Servicer, on Lender’s behalf) shall request any three major banks in New York City selected by Lender to provide such bank’s rate (expressed as a percentage per annum) for loans in U.S. dollars to leading European banks for a one-month period as of approximately 11:00 a.m., New York City time on the applicable Determination Date for amounts of not less than U.S. $1,000,000. If at least two such rates are so provided, LIBOR shall be the arithmetic mean of such rates. LIBOR shall be determined conclusively (absent manifest error) by Lender or its agent. Notwithstanding the foregoing, in no event shall LIBOR be less than zero percent.

Licenses” shall have the meaning set forth in Section 4.1.22 hereof.

Lien” shall mean, with respect to each Individual Property, any mortgage, deed of trust, deed to secure debt, indemnity deed of trust, lien, pledge, hypothecation, assignment, security interest, or any other encumbrance or charge on or affecting any Individual Borrower, Operating Lessee, any Individual Property, any portion thereof or any interest therein, including, without limitation, any conditional sale or other title retention agreement, any financing lease having substantially the same economic effect as any of the foregoing, the filing of any financing statement, and mechanic’s, materialmen’s and other similar liens and encumbrances.

Loan” shall mean the loan made by Lender to Borrower pursuant to this Agreement.

Loan Documents” shall mean, collectively, this Agreement, the Note, the Mortgages, the Environmental Indemnity, the Assignment of Agreements, the Assignment of Management Agreement, the Guaranty, the Cash Management Agreement, the Clearing Account Agreement, the Concentration Account Agreement, the Interest Rate Cap Agreement, the Assignment of Interest Rate Cap Agreement, the Contribution Agreement, the Operating Lessee Pledge Agreement, and all other documents executed in connection with the Loan.

Loan Party” shall mean, collectively, each Borrower, Operating Lessee and Principal.

Loan-to-Value Ratio” shall mean, as of the date of its calculation, the ratio of (a) the sum of (x) the then current outstanding principal balance of the Loan as of the date of such calculation to (b) the fair market value of the Properties (for purposes of the REMIC provisions, counting only real property and excluding any personal property or going concern value) as proposed by Borrower and determined by Lender in its reasonable discretion using any commercially reasonable method permitted to a REMIC Trust (which may include an existing or updated appraisal, a broker’s price opinion or other written determination of value using a commercially reasonable valuation method, in each case satisfactory to Lender). For the avoidance of doubt, the outstanding principal balance of the Mezzanine Loans will not be included in the calculation of Loan-to-Value Ratio for purposes of the REMIC provisions.

 

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London Business Day” shall mean any day other than (a) a Saturday, (b) a Sunday, or (c) any other day on which commercial banks in London, England are not open for business.

Low Debt Yield Release shall have the meaning set forth in Section 2.5.3 hereof.

Majority Equity Transfer” shall have the meaning given thereto in Section 5.2.10(e).

Management Agreement” shall mean, with respect to each Individual Property, the applicable management agreement more particularly described on Schedule 1.3 attached hereto, between the applicable Operating Lessee and the applicable Manager, as the same may be amended or modified from time to time in accordance with the terms and provisions of this Agreement, or, if the context requires, any Replacement Management Agreement executed in accordance with the terms and provisions of this Agreement.

Manager” shall mean, with respect to each Individual Property, the applicable manager identified on Schedule 1.3 attached hereto, or, if the context requires, a Qualified Manager who is managing the Properties or any Individual Property in accordance with the terms and provisions of this Agreement pursuant to a Replacement Management Agreement.

Manager Account” shall mean, with respect to the Brand Managed Properties, the bank accounts maintained by a Brand Manager in the name of the applicable Individual Borrower or Operating Lessee, as applicable, in accordance with the terms of the applicable Management Agreement.

Marriott Managed Properties” shall mean, individually and/or collectively as the context may require, (a) the Individual Property known as Marriott Redmond Town Center, Redmond, Washington, (b) the Individual Property known as Courtyard by Marriott, Myrtle Beach, South Carolina, (c) the Individual Property known as Spring Hill Suites Fort Worth University, Fort Worth, Texas, and (d) any other Individual Property managed by Marriott Manager.

Marriott Manager” shall mean, individually and/or collectively as the context may require, (a) with respect to the Individual Property known as Marriott Redmond Town Center, Redmond, Washington, Marriott International Inc., (b) with respect to the Individual Property known as Courtyard by Marriott, Myrtle Beach, South Carolina, Courtyard Management Corporation, (c) with respect to the Individual Property known as Spring Hill Suites Fort Worth University, Fort Worth, Texas, Springhill SMC Corporation or, in each case, their applicable successors and assigns as permitted under the Management Agreements with the Marriott Manager, and (d) with respect to any other Individual Property, any subsidiary of Marriott International Inc.

Material Lease” shall mean any Lease (other than the Ground Lease, Operating Lease or any lease agreement, concession agreement or license agreement between Borrower or Operating Lessee, as applicable, and Manager or its Affiliates with respect to the sale of liquor, provided, such agreement is on commercially reasonable, third party, arm’s-length terms) which either individually or when taken together with any other Lease at the same Individual Property with the same Tenant or an Affiliate of such Tenant covers more than 25,000 rentable square feet.

 

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Maturity Date” shall mean the Initial Maturity Date, or, following an exercise by Borrower of one (1) or more of the Extension Options described in Section 2.8 hereof, the Extended Maturity Date, or such other date on which the outstanding principal balance of the Loan becomes due and payable as therein or herein provided, whether at such stated maturity date, by declaration of acceleration, or otherwise.

Maximum Legal Rate” shall mean the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received on the indebtedness evidenced by the Note and as provided for herein or the other Loan Documents, under the laws of such state or states whose laws are held by any court of competent jurisdiction to govern the interest rate provisions of the Loan.

Mezzanine Adjusted Release Amount” shall mean the “Adjusted Release Amount” as defined in each Mezzanine Loan Agreement.

Mezzanine Borrowers” shall mean, collectively, each Additional Mezzanine Borrower and each New Mezzanine Borrower.

Mezzanine Debt Service” shall mean, with respect to any particular period of time, interest payments then due under the Mezzanine Loans.

Mezzanine Deposit Accounts” shall mean collectively, (i) the “Deposit Account” as defined in the Additional Mezzanine Loan Agreement and (ii) the “Deposit Account” as defined in the New Mezzanine Loan Agreement.

Mezzanine Intercreditor Agreement” shall have the meaning set forth in Section 10.30 hereof.

Mezzanine Lenders” shall mean, collectively, the Additional Mezzanine Lender and the New Mezzanine Lender, together with their respective successors and assigns.

Mezzanine Loan Agreements” shall mean, collectively, the Additional Mezzanine Loan Agreement and the New Mezzanine Loan Agreement.

Mezzanine Loan Default” shall mean an “Event of Default” under the Additional Mezzanine Loan and/or the New Mezzanine Loan.

Mezzanine Loan Documents” shall mean, collectively, the Additional Mezzanine Loan Documents and the New Mezzanine Loan Documents, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Mezzanine Loans” shall mean, collectively, the Additional Mezzanine Loan and the New Mezzanine Loan.

 

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Mezzanine Mandatory Prepayment Amount” shall mean, individually and/or collectively (as the context requires), (i) the “Mezzanine Mandatory Prepayment Amount” as defined in the Additional Mezzanine Loan Agreement and (ii) the “Mezzanine Mandatory Prepayment Amount” as defined in the New Mezzanine Loan Agreement.

Mezzanine Modifications” shall have the meaning set forth in Section 9.1.2 hereof.

Mezzanine Notice” shall have the meaning set forth in Section 10.30 hereof.

Mezzanine Prepayment Event” shall mean (i) a prepayment of any Mezzanine Loan pursuant to Section 2.4.1 of the applicable Mezzanine Loan Agreement, provided any voluntary prepayment of any Mezzanine Loan shall be applied pro rata among any tranches or components of such Mezzanine Loan or (ii) a prepayment of any Mezzanine Loan pursuant to Section 2.4.2 of the applicable Mezzanine Loan Agreement.

Monthly Debt Service Payment Amount” shall mean, on each Payment Date, the amount equal to interest which accrues on each Component of the Loan for the Interest Period in which the Payment Date occurs.

Moody’s” shall mean Moody’s Investors Service, Inc.

Morningstar” shall mean Morningstar Credit Ratings, LLC, or any of its successors in interest, assigns, and/or changed entity name or designation resulting from any acquisition by Morningstar, Inc. or other similar entity of Morningstar Credit Ratings, LLC.

Mortgage” shall mean with respect to each Individual Property, that certain first priority fee or leasehold Mortgage (or Deed of Trust or Deed to Secure Debt), Assignment of Leases and Rents and Security Agreement, or similar agreement, dated as of the date hereof, executed and delivered by the related Individual Borrower and Operating Lessee, if applicable, to Lender as security for the Loan and encumbering such Individual Property, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Mortgage Mandatory Prepayment Amount” shall have the meaning set forth in Section 2.4.2 hereof.

MSB” shall have the meaning set forth in the introductory paragraph hereto.

MSMCH” shall mean Morgan Stanley Mortgage Capital Holdings LLC.

Net Operating Income” shall mean, for any period, the amount obtained by subtracting Operating Expenses for such period from Gross Income from Operations for such period.

Net Proceeds” shall have the meaning set forth in Section 6.4 hereof.

Net Proceeds Deficiency” shall have the meaning set forth in Section 6.4 hereof.

 

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Net Proceeds Prepayment” shall have the meaning set forth in Section 6.4(c) hereof.

Net Worth” shall mean an entity’s equity as its total assets minus its total liabilities (in each case exclusive of such entity’s interests in and liabilities related to the Properties), in each case in accordance with GAAP.

New Dallas Parking Lease” shall mean a parking lease to be used in connection with the Individual Property known as the Spring Hill Suites, Dallas, Texas, reserving at least 69 parking spaces to be available for use by Operating Lessee.

New Mezzanine Borrowers” shall have the meaning set forth in Section 9.1.2 hereof.

New Mezzanine Lender” shall mean, individually and/or collectively, as the context requires, Morgan Stanley Mortgage Capital Holdings LLC, Bank of America, N.A., Citigroup Global Markets Realty Corp., and JPMorgan Chase Bank, National Association, together with their respective successors and assigns.

New Mezzanine Loan” shall have the meaning set forth in Section 9.1.2 hereof.

New Mezzanine Loan Agreement” shall mean those certain loan agreements entered into by New Mezzanine Lender and any New Mezzanine Borrower, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

New Mezzanine Loan Documents” shall mean, collectively, those documents evidencing the New Mezzanine Loan, as each of the same may be amended, restated, replaced, supplemented or otherwise modified from time to time in accordance with the terms and conditions of this Agreement and the intercreditor agreement.

New Note” shall have the meaning set forth in Section 9.1.3 hereof.

New TRS Borrower” shall have the meaning set forth in Section 5.2.10(j) hereof.

Non-Consenting Lender” shall have the meaning set forth in Section 10.24(d) hereof.

Note” shall mean, collectively, Note A-1, Note A-2, Note A-3 and Note A-4, as each of the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Note A-1” shall mean that certain Replacement, Amended and Restated Promissory Note A-1, dated the date hereof, in the principal amount of THREE HUNDRED AND TWENTY MILLION AND NO/100 DOLLARS ($320,000,000) by Borrower in favor of Morgan Stanley Bank, N.A.

 

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Note A-2” shall mean that certain Replacement, Amended and Restated Promissory Note A-2, dated the date hereof, in the principal amount of ONE HUNDRED AND SIXTY MILLION AND NO/100 DOLLARS ($160,000,000) by Borrower in favor of Bank of America, N.A.

Note A-3” shall mean that certain Replacement, Amended and Restated Promissory Note A-3, dated the date hereof, in the principal amount of ONE HUNDRED AND SIXTY MILLION AND NO/100 DOLLARS ($160,000,000) by Borrower in favor of Citigroup Global Markets Realty Corp.

Note A-4” shall mean that certain Replacement, Amended and Restated Promissory Note A-4, dated the date hereof, in the principal amount of ONE HUNDRED AND SIXTY MILLION AND NO/100 DOLLARS ($160,000,000) by Borrower in favor of JPMorgan Chase Bank, National Association.

Notice of Redemption” shall mean that certain Notice of Partial Redemption dated as of July 7, 2017, relating to BRE Select Hotels Corp’s election to redeem 28,560,947 Preferred Shares on August 6, 2017.

Officer’s Certificate” shall mean a certificate delivered to Lender by Borrower or Operating Lessee, as applicable, which is signed by an authorized officer of Borrower or Operating Lessee, as applicable, or the general partner, managing member or sole member of Borrower or Operating Lessee, as applicable.

Operating Expenses” shall mean, without duplication, the sum of all ordinary costs and expenses of operating, maintaining, directing, managing and supervising the Properties (excluding, (i) depreciation and amortization, (ii) any Debt Service in connection with the Loan and the Mezzanine Loans, (iii) any Capital Expenditures in connection with the Properties, (iv) any deposits made to the Reserve Funds, (v) leasing commissions, (vi) non-recurring items, (vii) intentionally omitted and (viii) the costs of any other things specified to be done or provided at Borrower’s, Operating Lessee’s or Manager’s sole expense), incurred by Borrower, Operating Lessee or Manager pursuant to the Management Agreement, or as otherwise specifically provided therein, which are properly attributable to the period under consideration under Borrower’s or Operating Lessee’s system of accounting, including without limitation: (a) the cost of all food and beverages sold or consumed and of all necessary chinaware, glassware, linens, flatware, uniforms, utensils and other items of a similar nature, including such items bearing the name or identifying characteristics of the hotels as Borrower, Operating Lessee and/or Manager shall reasonably consider appropriate (“Operating Equipment”) and paper supplies, cleaning materials and similar consumable items (“Operating Supplies”) placed in use (other than reserve stocks thereof in storerooms). Operating Equipment and Operating Supplies shall be considered to have been placed in use when they are transferred from the storerooms of the Properties to the appropriate operating departments; (b) salaries and wages of personnel of the Properties, including costs of payroll taxes and employee benefits (which benefits may include, without limitation, a pension plan, medical insurance, life insurance, travel accident insurance and an executive bonus program), and all other expenses not otherwise specifically referred to in this definition which are referred to as “Administrative and General Expenses” in the Uniform System of Accounts, (c) the cost of all other goods and services obtained by

 

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Borrower, Operating Lessee or Manager in connection with its operation of the Properties including, without limitation, heat and utilities, office supplies and all services performed by third parties, including leasing expenses in connection with telephone and data processing equipment, and all existing and any future installations necessary for the operation of the Improvements for hotel purposes (including, without limitation, heating, lighting, sanitary equipment, air conditioning, laundry, refrigerating, built-in kitchen equipment, telephone equipment, communications systems, computer equipment and elevators), Operating Equipment and existing and any future furniture, furnishings, wall coverings, fixtures and hotel equipment necessary for the operation of the building for hotel purposes which shall include all equipment required for the operation of kitchens, bars, laundries, (if any) and dry cleaning facilities (if any), office equipment, cleaning and engineering equipment and vehicles; (d) the cost of repairs to and maintenance of the Properties (other than of a capital nature); (e) insurance premiums for general liability insurance, workers’ compensation insurance or insurance required by similar employee benefits acts and such business interruption or other insurance as may be provided for protection against claims, liabilities and losses arising from the operation of the Properties (as distinguished from any property damage insurance on the Properties building or its contents) and losses incurred on any self-insured risks of the foregoing types, provided that Borrower and/or Operating Lessee has specifically approved in advance such self-insurance or insurance is unavailable to cover such risks (premiums on policies for more than one year will be pro-rated over the period of insurance and premiums under blanket policies will be allocated among properties covered); (f) all Taxes and Other Charges (other than federal, state or local income taxes and franchise taxes or the equivalent) payable by or assessed against Borrower and/or Operating Lessee with respect to the operation of the Properties; (g) legal fees and fees of any firm of independent certified public accounts designated from time to time by Borrower and/or Operating Lessee (the “Independent CPA”) for services directly related to the operation of the Properties, reasonably acceptable to Lender; (h) the costs and expenses of technical consultants and specialized operational experts for specialized services in connection with non-recurring work on operational, legal, functional, decorating, design or construction problems and activities, including the reasonable fees of Guarantor or any subsidiary of Guarantor in connection therewith, provided that such employment of Guarantor or any such subsidiary of Guarantor is reasonably approved in advance by Lender; provided, further, however, that if such costs and expenses have not been included in an approved budget, then if such costs exceed $5,000 in any one instance the same shall be subject to the reasonable approval by Lender; (i) all expenses for advertising for the Properties and all expenses of sales promotion and public relations activities; (j) all out-of-pocket expenses and disbursements determined by the Independent CPA to have been reasonably, properly and specifically incurred by Borrower, Operating Lessee, Manager, Guarantor or any of their Affiliates pursuant to, in the course of and directly related to, the management and operation of the Properties under the Management Agreement (without limiting the generality of the foregoing, such charges may include all reasonable travel, telephone, telegram, radiogram, cablegram, air express and other incidental expenses, but, shall exclude costs relating to the offices maintained by Borrower, Operating Lessee, Manager, Guarantor or any of their Affiliates other than the offices maintained at the Individual Property for the management of such Individual Property and excluding transportation costs of Borrower, Operating Lessee, any Affiliated Manager, Guarantor or any of their Affiliates related to meetings between Borrower, Operating Lessee, Manager, Guarantor or any of their Affiliates with respect to administration of the Management Agreement or of the Properties involving

 

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travel away from such party’s principal executive offices); (k) the cost of any reservations system, any accounting services or other group benefits, programs or services from time to time made available to properties in the Borrower’s or Operating Lessee’s system, including, without limitation, any provided by any Manager or Franchisor; (l) the cost associated with any retail Leases; (m) any management fees, basic and incentive fees or other fees and reimbursables paid or payable to Manager under the Management Agreement; (n) any franchise fees or other fees and reimbursables paid or payable to Franchisor under the Franchise Agreement; (o) Ground Rent payable under the Ground Lease; and (p) all costs and expenses of owning, maintaining, conducting and supervising the operation of the Property to the extent such costs and expenses are not included above.

Operating Lease” shall mean that certain Lease Agreement, dated as of May 14, 2013, by and among BRE Select Hotels Properties LLC, BRE Select Hotels Properties II LLC, BRE Select Hotels Tuscaloosa LLC, BRE Select Hotels Redmond LLC, BRE Select Hotels AZ LLC, BRE Select Hotels TX L.P., and BRE Select Hotels NC L.P., collectively, as landlord, and Operating Lessee, as tenant, as the same may be amended, assigned, restated, replaced, supplemented or modified from time to time in accordance with the terms and conditions of hereof and the other Loan Documents.

Operating Lessee” shall mean BRE Select Hotels Operating LLC, a Delaware limited liability company, together with its successors and permitted assigns.

Operating Lessee Pledge Agreement” shall mean that certain Pledge and Security Agreement, dated as of the date hereof, from BRE Select Hotels Properties Borrower to Lender, as the same may be amended, restated, replaced, supplemented or otherwise modified from time to time.

Organizational Documents” means as to any Person, the certificate of incorporation and by-laws with respect to a corporation; the certificate of organization and operating agreement with respect to a limited liability company; the certificate of limited partnership and partnership agreement with respect to a limited partnership, or any other organizational or governing documents of such Person.

Other Charges” shall mean all ground rents (other than Ground Rent), maintenance charges, impositions other than Taxes, and any other charges, including, without limitation, vault charges and license fees for the use of vaults, chutes and similar areas adjoining any Individual Property, now or hereafter levied or assessed or imposed against such Individual Property or any part thereof.

Other Connection Taxes” shall mean, with respect to any Lender or Agent, Section 2.7 Taxes imposed as a result of a present or former connection between such Lender or Agent and the jurisdiction imposing such Section 2.7 Tax (other than connections arising from such Lender or Agent having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document).

 

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Other Obligations” shall have the meaning as set forth in the Mortgages.

Other Taxes” shall mean any present or future stamp, court, documentary, intangible, recording, filing or similar excise, or property Section 2.7 Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, or from the registration, receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document, except (i) any such Section 2.7 Taxes that are Other Connection Taxes imposed with respect to an assignment and (ii) any “prohibited transaction” excise tax arising from any Lender’s use of “plan assets” of any “benefit plan investor” within the meaning of the Plan Asset Regulations.

PACE Debt” means any amounts owed in respect of energy retrofit lending programs, commonly known as “PACE Loans”. For avoidance of doubt, PACE Debt is not Permitted Debt and Liens securing PACE Debt are not Permitted Encumbrances.

Parking Lease” shall mean, individually and/or collectively, as the context may require, (a) the Dallas Parking Lease, (b) the Portland Parking Lease, (c) the Redmond Parking Lease and (d) any New Dallas Parking Lease.

Participant Register” shall have the meaning set forth in Section 9.7 hereof.

Payment Date” shall mean, with respect to any Component, the ninth (9th) day of each calendar month during the term of the Loan, or if such date is not a Business Day, the immediately preceding Business Day and the first Payment Date for purposes of this Agreement shall be August 9, 2017.

Permitted Assumption” shall have the meaning given thereto in Section 5.2.10(e).

Permitted Encumbrances” shall mean, with respect to an Individual Property, collectively, (a) the Liens and security interests created by the Loan Documents, (b) all Liens, encumbrances and other matters disclosed in the Title Insurance Policies relating to such Individual Property or any part thereof (including liens disclosed in the title commitments for which Lender has either received affirmative coverage or for which the title insurance company has received adequate protections to remove such items as exceptions from the Title Insurance Policy and such items were so removed), (c) Liens, if any, for Section 2.7 Taxes, Taxes and Other Charges imposed by any Governmental Authority not yet due or delinquent or which are contested in good faith by appropriate proceedings and for which Borrower has set aside adequate reserves on its books, (d) such other title and survey exceptions as Lender has approved or may approve in writing in Lender’s sole discretion, (e) all easements, rights-of-way, restrictions and other similar non-monetary encumbrances recorded against and affecting such Individual Property and that do not materially and adversely affect (i) the ability of Borrower to pay any of its obligations to any Person as and when due, (ii) the marketability of title to such Individual Property, (iii) the fair market value of such Individual Property, or (iv) the use or operation of such Individual Property, (f) rights of Tenants as Tenants only, (g) mechanics’, materialmen’s or similar Liens, in each case only if such liens are discharged or bonded over within sixty (60) days of their filing and do not materially and adversely affect the value or use

 

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of such Individual Property or Borrower’s ability to repay the Loan, and (h) Liens relating to Permitted Equipment and Vehicle Leases and customary purchase money security interests of sellers of goods that satisfy the conditions set forth in the definition of “Permitted Indebtedness”.

Permitted Equipment and Vehicle Leases” means equipment or personal property financing or vehicle financing (a) that is entered into on arm’s-length terms and conditions in the ordinary course of Borrower’s or Operating Lessee’s business, (b) that relate to Personal Property or vehicles which will be (i) used in connection with the operation and maintenance of the Property in the ordinary course of Borrower’s or Operating Lessee’s business and (ii) readily replaceable without material interference or interruption to the operation of the applicable Individual Property and (c) which is secured only by the financed equipment or Personal Property or vehicle.

Permitted Equipment Transfer” shall mean the Transfer of FF&E and/or Personal Property that is either being replaced or that is no longer necessary in connection with the operation of an Individual Property, provided (x) no Event of Default is continuing and (y) such Transfer will not materially and adversely affect the value, use or operation of such Individual Property.

Permitted Indebtedness” shall mean, collectively (a) the Note and the Other Obligations, indebtedness and liabilities specifically provided for in any Loan Document and secured by the Mortgages and the other Loan Documents, (b) key money provided to Borrower or Operating Lessee by a Franchisor or Manager as provided for in the applicable Franchise Agreement or Management Agreement, (c) Permitted Equipment and Vehicle Leases, (d) trade payables incurred in the ordinary course of Borrower’s or Operating Lessee’s business, not secured by Liens on any one or more Individual Properties (other than Liens being properly contested in accordance with the provisions of this Agreement) and customary purchase money security interests of sellers of goods, provided that such trade payables and other amounts in clauses (b) through (d) of this definition (excluding Capital Expenditures and Basic Carrying Costs) (i) do not exceed at any one time in the aggregate four percent (4.00%) of the original principal amount of the Loan and the Mezzanine Loans, (ii) are normal and reasonable under the circumstances, (iii) are payable by or on behalf of Borrower or Operating Lessee for or in respect of the operation of such Individual Property in the ordinary course of the operation of Borrower’s or Operating Lessee’s business or the routine administration of such Borrower’s or Operating Lessee’s business, (iv) are paid within sixty (60) days following the later of (A) the date on which such amount is incurred or (B) the date invoiced, and (v) are not evidenced by a note, (e) obligations pursuant to the Ground Leases and the Operating Leases, (f) obligations pursuant to the Previously-Owned Property Owned Sale Agreements, (g) Taxes, insurance premiums and Other Charges, (h) Capital Expenditures incurred in accordance with the Loan Documents, and (i) customary and ordinary course indemnification of Manager and any liquor license holders in connection with the operation of the Properties. Nothing contained herein shall be deemed to require Borrower or Operating Lessee to pay any trade payable, so long as Borrower or Operating Lessee is in good faith at its own expense, and by proper legal proceedings, diligently contesting the validity, amount or application thereof, provided that in each case, at the time of the commencement of any such action or proceeding, and during the pendency of such action or proceeding (w) no Event of Default shall exist and be continuing hereunder, (x) no Individual Property nor any part thereof or interest therein will be in material

 

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danger of being sold or forfeited, (y) with respect to any amounts of Permitted Indebtedness then being contested by Borrower or Operating Lessee, Borrower or Operating Lessee shall furnish such security as may be required in the proceeding, or as may be reasonably requested by Lender, to insure the payment of any amounts contested, together with all interest and penalties thereon to the extent that the aggregate amount at issue exceeds $2,000,000, and (z) such contest operates to suspend collection or enforcement, as the case may be, of the contested amount.

Permitted Investments” shall mean any one or more of the following obligations or securities acquired at a purchase price of not greater than par, including those issued by Servicer, or any trustee under any Securitization or any of their respective Affiliates, payable on demand or having a maturity date not later than the Business Day immediately prior to the first Payment Date following the date of acquiring such investment and meeting one of the appropriate standards set forth below:

(a) the following obligations of, or the following obligations directly and unconditionally guaranteed as to principal and interest by, the U.S. government or any agency or instrumentality thereof, when such obligations are backed by the full faith and credit of the United States of America and have maturities not in excess of one year:

(i) U.S Treasury obligations (all direct or fully guaranteed obligations);

(ii) U.S. Department of Housing and Urban Development public housing agency bonds (previously referred to as local authority bonds);

(iii) Federal Housing Administration debentures;

(iv) Government National Mortgage Association (GNMA) guaranteed mortgage-bank securities or participation certificates;

(v) RefCorp debt obligations;

(vi) SBA-guaranteed participation certificates and guaranteed pool certificates;

(b) federal funds, unsecured certificates of deposit, time deposits, banker’s acceptances, and repurchase agreements having maturities of not more than 90 days of any commercial bank organized under the laws of the United States of America or any state thereof or the District of Columbia, the short-term debt obligations of which are rated (a) “A-1+” (or the equivalent) by S&P and, if it has a term in excess of three months, the long-term debt obligations of which are rated “AAA” (or the equivalent) by S&P, and that (1) is at least “adequately capitalized” (as defined in the regulations of its primary Federal banking regulator) and (2) has Tier 1 capital (as defined in such regulations) of not less than $1,000,000,000, (b) in one of the following Moody’s rating categories: (1) for maturities less than one month, a long-term rating of “A2” or a short-term rating of “P-1”, (2) for maturities between one and three months, a long-term rating of “A1” and a short-term rating of “P-1”, (3) for maturities between three months to six months, a long-term rating of “Aa3” and a short-term rating of “P-1” and (4) for maturities over six months, a long-term rating of “Aaa” and a short-term rating of “P-1”, or such other ratings as confirmed in a Rating Agency Confirmation and (c) in one of the following Fitch rating categories: (1) for maturities less than three months, a long term rating of “A” and a short term rating of “F-1” and (2) for maturities greater than three months, a long-term rating of “AA-” and a short term rating of “F-1+”;

 

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(c) deposits that are fully insured by the Federal Deposit Insurance Corp.;

(d) commercial paper rated (a) “A-1+” (or the equivalent) by S&P and having a maturity of not more than 90 days, (b) in one of the following Moody’s rating categories: (i) for maturities less than one month, a long-term rating of “A2” or a short-term rating of “P-1”, (ii) for maturities between one and three months, a long-term rating of “A1” and a short-term rating of “P-1”, (iii) for maturities between three months to six months, a long-term rating of “Aa3” and a short-term rating of “P-1” and (iv) for maturities over six months, a long-term rating of “Aaa” and a short-term rating of “P-1” and (c) in one of the following Fitch rating categories: (1) for maturities less than three months, a long term rating of “A” and a short term rating of “F-1” and (2) for maturities greater than three months, a long-term rating of “AA-” and a short term rating of “F-1+”; and

(e) such other investments as to which each Approved Rating Agency shall have delivered a Rating Agency Confirmation.

Notwithstanding the foregoing, “Permitted Investments” (i) shall exclude any security with the S&P’s “r” symbol (or any other Approved Rating Agency’s corresponding symbol) attached to the rating (indicating high volatility or dramatic fluctuations in their expected returns because of market risk), as well as any mortgage-backed securities and any security of the type commonly known as “strips”; (ii) shall be limited to those instruments that have a predetermined fixed dollar of principal due at maturity that cannot vary or change; (iii) shall only include instruments that qualify as “cash flow investments” (within the meaning of Section 860G(a)(6) of the Code); and (iv) shall exclude any investment where the right to receive principal and interest derived from the underlying investment provides a yield to maturity in excess of 120% of the yield to maturity at par of such underlying investment. Interest may either be fixed or variable, and any variable interest must be tied to a single interest rate index plus a single fixed spread (if any), and move proportionately with that index. No investment shall be made which requires a payment above par for an obligation if the obligation may be prepaid at the option of the issuer thereof prior to its maturity. All investments shall mature or be redeemable upon the option of the holder thereof on or prior to the earlier of (x) three months from the date of their purchase and (y) the Business Day preceding the day before the date such amounts are required to be applied hereunder.

Permitted Transfer” shall mean any of the following: (a) any transfer, directly as a result of the death of a natural person, of stock, membership interests, partnership interests or other ownership interests previously held by the decedent in question to the Person or Persons lawfully entitled thereto, (b) any transfer, directly as a result of the legal incapacity of a natural person, of stock, membership interests, partnership interests or other ownership interests previously held by such natural person to the Person or Persons lawfully entitled thereto, (c) any Transfer permitted without the consent of Lender pursuant to the provisions of Section 5.2.2, Section 5.2.10(d) or Section 5.2.10(e) hereof, (d) any Lease of space in any of the Improvements to Tenants in accordance with the provisions of Section 5.1.21, (e) Permitted Encumbrances,

 

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(f) Permitted Equipment Transfers, (g) the release of any Property or portion thereof (or an Unencumbered Borrower) in connection with a release in accordance with Section 2.4.2, Section 2.5 or Section 6.4 hereof, (h) any Sale or Pledge of an Excluded Entity, (i) any Transfer of any interest in an Affiliated Manager, if such Transfer does not otherwise result in a Transfer of an interest in Borrower or Operating Lessee that is not permitted hereunder, (j) any Sale or Pledge of the direct interests in Guarantor so long as after giving effect to such Sale or Pledge, BREP or a Public Vehicle or Qualified Transferee continues to control and own at least 51% of the indirect interests in Borrower, Operating Lessee and Guarantor, (k) any direct or indirect pledge (or any Transfer occurring upon the foreclosure of, or other remedial action with respect to, the same or delivery of an assignment in lieu of foreclosure in respect of the same) by Mezzanine Borrowers of the direct ownership interests in Borrower, Operating Lessee, Principal and/or Mezzanine Borrowers and other collateral pursuant to the Mezzanine Loan Agreements and (l) any Transfer of Publicly Traded Shares in a Public Vehicle or of any direct or indirect equity interest of any Person whose only equity interest in Borrower consists of Publicly Traded Shares in a Public Vehicle.

Person” shall mean any individual, corporation, partnership, joint venture, limited liability company, estate, trust, unincorporated association, any federal, state, county or municipal government or any bureau, department or agency thereof and any fiduciary acting in such capacity on behalf of any of the foregoing.

Personal Property” shall have the meaning set forth in the granting clause of the Mortgage with respect to each Individual Property.

PIP Work” shall have the meaning set forth in Section 5.1.24.

Plan Asset Regulations” shall have the meaning set forth in Section 4.1.9 hereof.

Pledge Agreement” shall mean, individually or collectively, as the context requires, (i) the “Pledge Agreement” as defined in the Additional Mezzanine Loan Agreement and (ii) the “Pledge Agreement” as defined in the New Mezzanine Loan Agreement.

PLL Policy” shall have the meaning set forth in Section 6.1(a) hereof.

Policies” shall have the meaning set forth in Section 6.1(b) hereof.

Policy” shall have the meaning set forth in Section 6.1(b) hereof.

POP Environmental Policy” shall have the meaning set forth in Section 6.1(a) hereof.

Portland Parking Lease” shall mean that certain Lease, dated September 13, 2002, between the State of Oregon, by and through its Department of Transportation and Portland Riverplace LLC, as amended by that certain Letter, dated August 27, 2007, from the State of Oregon, by and through its Department of Transportation to Portland Riverplace LLC, as assigned pursuant to that certain Assignment of Lease and Consent to Assignment dated as of May 2, 2013, by and among Portland Riverplace LLC, as assignor, BRE Select Hotels Properties

 

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LLC, as assignee, and the State of Oregon, by and through its Department of Transportation as further amended by that certain First Extension and Modification of Lease, dated as of April 7, 2017, by and between BRE Select Hotels Properties LLC and the State of Oregon, by and through its Department of Transportation.

Pre-Approved Alterations” shall have the meaning specified in Section 5.1.22 hereof.

Preferred Shares” shall mean the 7% Series A Cumulative Redeemable Preferred Stock of BRE Select Hotels Corp, a Delaware corporation.

Prepayment Notice” shall have the meaning specified in Section 2.4.1(a) hereof.

Previously-Owned Property” shall mean those properties set forth on Schedule IX hereto.

Previously-Owned Property Sale Agreements” shall mean those certain purchase and sale agreements relating to the Previously-Owned Properties as set forth in that certain certificate delivered by Borrower to Lender on the date hereof.

Prime Rate” shall mean the annual rate of interest published in The Wall Street Journal from time to time as the “Prime Rate.” If more than one “Prime Rate” is published in The Wall Street Journal for a day, the average of such “Prime Rates” shall be used, and such average shall be rounded up to the nearest 1/1000th of one percent (0.001%). If The Wall Street Journal ceases to publish the “Prime Rate,” Lender shall select an equivalent publication that publishes such “Prime Rate,” and if such “Prime Rates” are no longer generally published or are limited, regulated or administered by a governmental or quasi-governmental body, then Lender shall select a comparable interest rate index. Notwithstanding the foregoing, in no event shall the Prime Rate be less than zero percent.

Prime Rate Loan” shall mean the Loan at such time as interest thereon accrues at a rate of interest based upon the Prime Rate plus the Prime Rate Spread.

Prime Rate Spread” shall mean, with respect to any Component, the difference (expressed as the number of basis points) between (a) LIBOR plus the Spread for such Component on the date LIBOR was last applicable to the Loan and (b) the Prime Rate on the date that LIBOR was last applicable to the Loan; provided, however, in no event shall such difference be a negative number.

Principal” shall mean the Special Purpose Entity that is the general partner of an Individual Borrower, if such Individual Borrower is a limited partnership, or managing member of an Individual Borrower, if such Individual Borrower is a limited liability company other than a single-member Delaware limited liability company.

Priority Payment Cessation Event” shall mean (a) the initiation of (x) judicial or non-judicial foreclosure proceedings, (y) proceedings for appointment of a receiver or (z) similar remedies permitted by this Agreement or the other Loan Documents relating to all or

 

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a material portion of the applicable Individual Property, and/or (b) the imposition of a stay, an injunction or a similar judicially imposed device that has the effect of preventing Lender from exercising its remedies under this Agreement or the other Loan Documents.

Priority Waterfall Payments” shall mean the payments described in Section 3.4(a) through (c) of the Cash Management Agreement of Taxes, Other Charges, Insurance Premiums, Ground Rent, Hotel Taxes and Custodial Funds; provided, that such amounts have not previously been paid or reserved for by any Brand Manager with respect to the Brand Managed Properties in accordance with the applicable Management Agreement.

Project Improvement Plan” shall mean, collectively, any “property improvement plan” or similar plan for alterations, repairs and maintenance of the Property with which Borrower or Operating Lessee is required to comply under any Management Agreement or Franchise Agreement.

Property” or “Properties” shall mean, collectively, each and every Individual Property which is subject to the terms of this Agreement.

Property Document shall mean, individually or collectively (as the context may require), the following: (i) the REAs and (ii) the Parking Lease.

Protective Advances” means all sums advanced for the purpose of payment of Taxes (including special assessments or payments in lieu of real estate taxes), Other Charges, maintenance costs, Insurance Premiums, Ground Rent, or other items (including capital expenses and leasing costs) reasonably necessary to protect the Lien of any Mortgage on any of the Properties or any portion thereof including, but not limited to, all reasonable attorneys’ fees, costs relating to the entry upon the Properties or any portion thereof or any real property relating to the Properties, to make repairs or to pay, purchase, contest or compromise any Lien which is or may reasonably be expected to be prior or superior to the Loan Documents, from forfeiture, casualty, loss or waste, the payment of any amounts to prevent the breach of any management, franchise or other agreement relating to the Properties which may reasonably be expected to result in a termination of such agreement, or to protect, preserve or defend the Lien of the Loan Documents.

Provided Information” shall mean any and all financial and other information provided to Lender at any time prepared by, or on behalf of, Borrower, Operating Lessee, Principal, any Affiliated Manager (which, for the purposes of this definition, shall not include Hilton Manager or any subsidiary of Hilton Worldwide Inc.), Mezzanine Borrowers, BREP and/or Guarantor.

Public Sale” shall mean (a) the Sale or Pledge in one or a series of transactions of all or any portion of the direct or indirect legal or beneficial interests in Borrower and Mezzanine Borrowers to a Public Vehicle or (b) an event through which, in one or a series of transactions, any direct or indirect owner of a legal or beneficial interest in Borrower and/or Mezzanine Borrowers becomes, or is merged with or into, a Public Vehicle.

 

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Public Vehicle” shall mean a Person with a market capitalization equal to or in excess of $400,000,000 (exclusive of its interests in and any liabilities relating to the collateral securing the Loan) whose securities are listed and traded on (i) the New York Stock Exchange, AMEX, NASDAQ, or another nationally recognized securities exchange or (ii) the Frankfurt Stock Exchange, the London Stock Exchange, Euronext, the Luxembourg Stock Exchange, the Hong Kong Stock Exchange, the Shanghai Stock Exchange, the Tokyo Stock Exchange or the Korea Exchange (KRX), and shall include a majority owned subsidiary of any such Person or any operating partnership through which such Person conducts all or substantially all of its business.

Publicly Traded Shares” means securities that are listed and traded on the New York Stock Exchange, AMEX, NASDAQ, the Frankfurt Stock Exchange, the London Stock Exchange, Euronext or the Luxembourg Stock Exchange.

Qualified Franchisor” shall mean either (a) Franchisor; (b) any hotel franchisor that is in the family of brands of any of the entities listed on Schedule 1.5 hereto; provided that, either (I) with respect to any Individual Property, such franchisor is in the same or better category of hotels as the applicable franchisor as on the Closing Date, based on the annual chain scale published by Smith Travel Reports, (II) with respect to any Individual Property, such franchisor may be in one or two categories lower than the applicable franchisor as of the Closing Date, based on the annual chain scale published by Smith Travel Reports (“Downgrade Franchisor”), so long as (x) such Downgrade Franchisor is within the family of brands of any of the entities listed on Schedule 1.5 hereto and (y) the Properties that are subject to a franchise agreement with a Downgrade Franchisor, (I) in the aggregate, would not, at such time of the execution of the franchise agreement with the applicable Downgrade Franchisor, constitute more than twenty percent (20%) of the Individual Properties (in the aggregate) based on the Amortized Release Amounts and (II) with respect to Properties that are subject to a franchise agreement with a Downgrade Franchisor that is two levels lower than the applicable Downgrade Franchisor on the Closing Date, in the aggregate, would not, at such time of the execution of the franchise agreement with the Downgraded Franchisor constitute more than five percent (5%) of the Individual Properties (in the aggregate) based on the Amortized Release Amounts, or (c) a reputable and experienced franchisor (which may be an Affiliate of Borrower) possessing experience in flagging hotel properties similar in size, scope, use and value as the Properties that is reasonably acceptable to Lender, provided, that (i) with respect to subclause (c) above, if required by Lender following a Securitization, Borrower shall have obtained a Rating Agency Confirmation with respect to the licensing of the Properties by such Person, (ii) in the case of subclauses (b) or (c) above, if such Person is an Affiliate of Borrower (which for purposes of this definition shall not include Hilton Manager or any subsidiary of Hilton Worldwide Inc.), if required by Lender, Borrower shall have obtained an Additional Insolvency Opinion and (iii) in all cases is not subject to a Bankruptcy Action at the time of execution of the franchise agreement.

Qualified Manager” shall mean either (a) Manager; (b) any of the entities set forth on Schedule 1.4 hereto; (c) any management company Controlled by or under common Control with any management company set forth on Schedule 1.4 hereto; or (d) a reputable and experienced management organization (which may be an Affiliate of Borrower) possessing experience in managing properties similar in size, scope, use and value as the Properties that is reasonably acceptable to Lender, provided, that (i) that, in the case of subclause (d) above if required by Lender following a Securitization, Borrower shall have obtained a Rating Agency

 

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Confirmation from the Approved Rating Agencies with respect to such Manager and its management of the Properties, (ii) in the case of subclauses (b), (c) and (d) above, if such Person is an Affiliate of Borrower (which for purposes of this definition shall not include any Hilton Manager or subsidiary of Hilton Worldwide Inc.), if required by Lender, Borrower shall have obtained an Additional Insolvency Opinion and (iii) in all cases, such Person is not subject to a Bankruptcy Action at the time of execution of the management agreement.

Qualified Transferee” shall mean a Person (a) (1) with a Net Worth equal to or in excess of $400,000,000 or (2) reasonably approved by Lender and the holder of the most junior New Mezzanine Loan that is not an affiliate of any Loan Party, (b) that is not subject to a Bankruptcy Action or a material governmental or regulatory investigation which resulted in a final, non-appealable conviction for criminal activity involving moral turpitude or a civil proceeding in which such Person has been found liable in a final non-appealable judgment to have attempted to hinder, delay or defraud creditors, in each case for the past seven (7) years and (c) is able to remake Borrower’s representations set forth in Section 4.1.35 hereof and is able to comply with Borrower’s covenants set forth in Section 5.1.25 hereof.

Ratable Share” shall mean, with respect to any Co-Lender, its share of the Loan based on the proportion of the outstanding principal of the Loan advanced by such Co-Lender to the total outstanding principal amount of the Loan. The Ratable Share of each Co-Lender on the date of this Agreement after giving effect to the funding of the Loan on the Closing Date is set forth on Exhibit B attached hereto and made a part hereof.

Rating Agencies” shall mean each of S&P, Moody’s, Fitch and Morningstar or any other nationally recognized statistical rating agency, which has assigned a rating to the Securities.

Rating Agency Confirmation” shall mean, collectively, in connection with or following a rated Securitization, a written affirmation from each of the Approved Rating Agencies that the credit rating of the Securities given by such Approved Rating Agency of such Securities immediately prior to the occurrence of the event with respect to which such Rating Agency Confirmation is sought will not be qualified, downgraded or withdrawn as a result of the occurrence of such event, which affirmation may be granted or withheld in such Approved Rating Agency’s sole and absolute discretion. In the event that, at any given time, any Approved Rating Agency elects not to consider whether to grant or withhold such an affirmation, then (i) with respect to Section 5.2.10(d)(ii) and Section 5.2.10(e)(vi) hereof, the Rating Agency Confirmation shall be deemed to not apply and (ii) in all other cases, the term Rating Agency Confirmation by such Rating Agency shall be deemed instead to require the written reasonable approval of Lender.

REA” shall mean, collectively, those certain reciprocal easement agreements set forth on Schedule VII attached hereto.

Redmond Parking Lease” shall mean that certain License Agreement, dated as of June 12, 2004, by and between PPR Redmond Retail LLC, as licensor and managing agent for Redmond Town Center, and Redmond Marriott Town Center, as licensee.

 

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Register” shall have the meaning set forth in Section 9.7 hereof.

Related Entities” shall have the meaning set forth in Section 5.2.10(e)(v) hereof.

Release Amount” shall mean, for any Individual Property, the amount set forth on Schedule 1.1, as the same may be reduced in accordance with the definition of Amortized Release Amount.

Release Debt Yield” shall have the meaning set forth in Section 2.5.2 hereof.

Release Price Premium” shall mean for each Individual Property, an amount equal to (a) five percent (5%) of the Amortized Release Amount for such Individual Property until fifteen percent (15%) of the original principal balance of the Loan shall have been prepaid in accordance with Section 2.5.2 hereof and (b) thereafter, ten percent (10%) of the Amortized Release Amount for such Individual Property. For the avoidance of doubt, with respect to the release of any Individual Property, Borrower acknowledges that if a portion of the Adjusted Release Amount (when aggregated with all other Adjusted Release Amounts previously paid) does not exceed fifteen percent (15%) of the original principal balance of the Loan, but the remaining portion of such Adjusted Release Amount (when aggregated with all other amounts previously paid in connection with a release) is in excess of fifteen percent (15%) of the original principal balance of the Loan, the Release Price Premium for such Individual Property being released shall be a blended percentage determined as follows: (i) for the portion of the Adjusted Release Amount that does not exceed fifteen percent (15%) of the original principal balance of the Loan (when aggregated with all other amounts previously paid in connection with a release), five percent (5%) of the Amortized Release Amount, and (ii) for the portion of the Adjusted Release Amount in excess of fifteen percent (15%) of the original principal balance of the Loan (when aggregated with all other Adjusted Release Amounts previously paid), ten percent (10%) of the Amortized Release Amount.

REMIC Trust” shall mean a “real estate mortgage investment conduit” within the meaning of Section 860D of the Code that holds the Note or a portion thereof.

Rents” shall mean, with respect to each Individual Property, all rents, rent equivalents, moneys payable as damages or in lieu of rent or rent equivalents, royalties (including, without limitation, all oil and gas or other mineral royalties and bonuses), income, receivables, receipts, revenues, deposits (including, without limitation, security, utility and other deposits), accounts, cash, issues, profits, charges for services rendered, all other amounts payable as rent under any Lease or other agreement relating to such Individual Property and other consideration of whatever form or nature received by or paid to or for the account of or benefit of Borrower, Operating Lessee or any of their respective agents or employees from any and all sources arising from or attributable to the Individual Property, and proceeds, if any, from business interruption or other loss of income insurance, including, without limitation, all hotel receipts, revenues and credit card receipts collected from guest rooms, restaurants, bars, meeting rooms, banquet rooms and recreational facilities, all receivables, customer obligations, installment payment obligations and other obligations now existing or hereafter arising or created out of the sale, lease, sublease, license, concession or other grant of the right of the use and

 

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occupancy of property or rendering of services by Borrower, Operating Lessee or any operator or manager of the hotel or the commercial space located in the Improvements or acquired from others (including, without limitation, from the rental of any office space, retail space, guest rooms or other space, halls, stores, and offices, and deposits securing reservations of such space), license, lease, sublease and concession fees and rentals, health club membership fees, food and beverage wholesale and retail sales, service charges, vending machine sales and proceeds, if any, from business interruption or other loss of income insurance.

Replacement Franchise Agreement” shall mean (i) either (a) a franchise, trademark and license agreement with a Qualified Franchisor substantially in the same form and substance as any Franchise Agreement, (b) a franchise, trademark and license agreement with a Qualified Franchisor, which franchise, license and trademark agreement shall have been entered into by Borrower or Operating Lessee and such Qualified Franchisor on an arm’s-length basis and otherwise on commercially reasonable terms, with economic terms and franchise fees comparable to existing local market rates or (c) a franchise, trademark and license agreement with a Qualified Franchisor, which franchise, trademark and license agreement shall be reasonably acceptable to Lender in form and substance, provided, with respect to this subclause (c), following a Securitization, Lender at its option, may require that Borrower shall have obtained a Rating Agency Confirmation with respect to such franchise, trademark and license agreement; and (ii) a replacement comfort letter or new comfort letter substantially in the form of the applicable comfort letter delivered to Lender on the Closing Date (or such other form and substance reasonably acceptable to Lender), executed and delivered to Lender by Borrower and such Qualified Franchisor at Borrower’s expense.

Replacement Guarantor” shall have the meaning set forth in Section 5.2.10(e).

Replacement Interest Rate Cap Agreement” shall mean, collectively, one or more interest rate protection agreements, reasonably acceptable to Lender, from an Acceptable Counterparty with terms substantially similar to the Interest Rate Cap Agreement except that the same shall be effective as of the date required in Section 2.2.7(c); provided that to the extent any such interest rate protection agreements do not meet the foregoing requirements, a “Replacement Interest Rate Cap Agreement” shall be such interest rate protection agreements approved in writing by the Approved Rating Agencies with respect thereto.

Replacement Management Agreement” shall mean, collectively, (a) either (i) a management agreement with a Qualified Manager substantially in the same form and substance as any Management Agreement, provided, that only a Brand Manager shall be permitted to enter into a management agreement in substantially the same form and substance as a Management Agreement for a Brand Managed Property, (ii) a management agreement with a Qualified Manager, which management agreement shall (A) have been entered into by Borrower or Operating Lessee (if applicable) and such Qualified Manager on an arm’s-length basis and otherwise on commercially reasonable terms and (B) with economic terms and management fees comparable to existing local market rates, or (iii) a management agreement with a Qualified Manager, which management agreement shall be reasonably acceptable to Lender in form and substance, provided, with respect to this subclause (iii), following a Securitization, Lender, at its option, may require that Borrower shall have obtained a Rating Agency Confirmation from the Approved Rating Agencies with respect to such management agreement and (b) an assignment

 

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of management agreement and subordination of management fees substantially in the form as the applicable Assignment of Management Agreement (or of such other form and substance reasonably acceptable to Lender), executed and delivered to Lender by Borrower or Operating Lessee (if applicable) and such Qualified Manager at Borrower’s expense, provided, that in the event such Qualified Manager is an Affiliated Manager (other than a Brand Manager or any other manager that is affiliated with a nationally recognized brand), any replacement assignment of management agreement shall include a subordination of management fees in form and substance reasonably acceptable to Lender.

Replacement Reserve Account” shall have the meaning set forth in Section 7.3.1 hereof.

Replacement Reserve Fund” shall have the meaning set forth in Section 7.3.1 hereof.

Replacement Reserve Monthly Deposit” shall mean, with respect to each Individual Property, an amount equal to the greater of (a) the deposit for Replacements, if any, required to be deposited with Franchisor or Manager pursuant to the applicable Franchise Agreement or Management Agreement (without duplication) and (b) four percent (4%) of Gross Income from Operations for the calendar month that is two (2) calendar months prior to the calendar month in which the applicable deposit to the Replacement Reserve Fund is to be made.

Replacements” shall mean FF&E, replacements and repairs required to be made to each Individual Property or the Improvements but specifically excluding the PIP Work.

Representative Borrower” shall have the meaning set forth in Section 10.6 hereof.

Required Debt Yield” shall mean (a) a Debt Yield (Mortgage Only), as determined by Lender, equal to (i) with respect to the initial term of the Loan and the first and second Extension Terms, eight percent (8.00%) (the “Initial Required Debt Yield (Mortgage Only)” and (ii) with respect to the third, fourth and fifth Extension Terms, nine percent (9.00%) (the “Secondary Required Debt Yield (Mortgage Only)”); provided that in connection with the creation of a New Mezzanine Loan or the origination of the Additional Mezzanine Loan, the Initial Required Debt Yield (Mortgage Only) and Second Required Debt Yield (Mortgage Only) shall be recalculated at the time of such creation or origination to be an amount equal to (A) with respect to the Initial Required Debt Yield (Mortgage Only), a percentage equal to the quotient resulting from (x) the product of eight percent (8.00%) times the aggregate then outstanding principal balance of the Loan and the Mezzanine Loans (including the newly created or originated Mezzanine Loan) divided by (y) the then outstanding principal balance of the Loan and (B) with respect to the Secondary Required Debt Yield (Mortgage Only), a percentage equal to the quotient resulting from (x) the product of nine percent (9.00%) times the aggregate then outstanding principal balance of the Loan and the Mezzanine Loans (including the newly created or originated Mezzanine Loan) divided by (y) the then outstanding principal balance of the Loan and (b) following the creation of any Mezzanine Loan, a Debt Yield (Aggregate), as determined by Lender, equal to (i) with respect to the initial term of the Loan and the first and second Extension Terms, eight percent (8.00%) and (ii) with respect to the third, fourth and fifth Extension Terms, nine percent (9.00%).

 

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Required Repair Deadline” shall have the meaning set forth in Section 7.1 hereof.

Required Repairs” shall have the meaning set forth in Section 7.1 hereof.

Requisite Lender Decision” shall have the meaning set forth in Section 10.24(b) hereof.

Requisite Lenders” means, as of any date, Lenders (which shall include the Co-Lender then acting as Administrative Agent) having at least 66 2/3% of the sum of the outstanding principal amount of the Loan, provided that at all times when two (2) or more Lenders are party to this Agreement, the term “Requisite Lenders” shall in no event mean fewer than two (2) Lenders.

Reserve Accounts” shall mean, collectively, the Tax and Insurance Reserve Account, the Replacement Reserve Account, the Ground Lease Reserve Account, the Excess Cash Flow Reserve Account and any other escrow account established pursuant to the Loan Documents.

Reserve Funds” shall mean, collectively, the Tax and Insurance Escrow Fund, the Replacement Reserve Fund, the Ground Lease Reserve Fund, the Excess Cash Flow Reserve Fund and any other escrow fund established by the Loan Documents.

Restoration” shall mean the repair and restoration of an Individual Property after a Casualty or Condemnation as nearly as possible to the condition the Individual Property was in immediately prior to such Casualty or Condemnation, with such alterations as may be reasonably approved by Lender.

Restricted Party” shall mean collectively, (a) Borrower, Operating Lessee, Principal or Mezzanine Borrowers and (b) any shareholder, partner, member, non-member manager, any direct or indirect legal or beneficial owner of, Borrower, Operating Lessee, Principal, Mezzanine Borrowers or any non-member manager; provided that an Excluded Entity shall not be a Restricted Party and with respect to clause (b), excluding any shareholders or owners of stock or equity interest that are publicly traded on any nationally or internationally recognized stock exchange that are not Affiliates of Borrower, Principal, Operating Lessee or Mezzanine Borrowers. For the avoidance of doubt, notwithstanding anything to the contrary contained in this Agreement, no notice to, or consent of Lender shall be required in connection with any Sale or Pledge of direct or indirect interests in any Excluded Entity.

Restricted Pledge Party” shall mean, collectively, Borrower, Operating Lessee, Principal, Mezzanine Borrowers, or any other direct or indirect equity holder in Borrower, Operating Lessee, Principal or Mezzanine Borrowers up to, but not including, the first direct or indirect equity holder that has substantial assets other than its direct or indirect interest in the Properties, provided, that an Excluded Entity (and any Person owning a direct or indirect interest in any Excluded Entity) and any holder of the Preferred Shares shall not be a Restricted Pledge Party.

 

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S&P” shall mean S&P Global Ratings, acting through Standard & Poor’s Financial Services LLC.

Sale or Pledge” shall mean a voluntary or involuntary sale, conveyance, assignment, transfer, encumbrance, pledge, grant of option or other transfer or disposal of a legal or beneficial interest, whether direct or indirect.

Sale/Franchise/Brand Management Default Release” shall have the meaning set forth in Section 2.5.2 hereof.

Section 2.7 Taxes” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.

Securities” shall have the meaning set forth in Section 9.1.1 hereof.

Securities Act” shall have the meaning set forth in Section 9.1.1 hereof.

Securitization” shall have the meaning set forth in Section 9.1.1 hereof.

Securitization Vehicle” shall mean each REMIC or Grantor Trust into which all or a portion of the Loan has been transferred.

Servicer” shall have the meaning set forth in Section 9.5 hereof.

Servicing Agreement” shall have the meaning set forth in Section 9.5 hereof.

Severed Loan Documents” shall have the meaning set forth in Section 8.2(c) hereof.

Special Purpose Entity” shall mean a corporation, limited partnership or limited liability company that complies with the following requirements from and after the date hereof unless it has received prior written consent to do otherwise from Lender or a permitted administrative agent thereof, or, while the Loan is securitized, a Rating Agency Confirmation from each of the Approved Rating Agencies, and an Additional Insolvency Opinion, in each case:

(i) is and shall be organized solely for the purpose of (A) in the case of Borrower, acquiring, owning, development, constructing, renovating, improving, selling, leasing, transferring, exchanging, assigning, disposing of, operating, managing, financing, refinancing, holding an ownership interest or otherwise dealing with the Properties and activities incidental thereto, acquiring and owning its limited liability company interest in and managing and acting as the sole member of Operating Lessee (with respect to BRE Select Hotels Properties Borrower), BRE Select Hotels Properties II Sub LLC (with respect to BRE Select Hotels

 

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Properties II LLC), a New TRS Borrower (with respect to any Borrower that is the member of such New TRS Borrower), as applicable, entering into and performing its obligations under the Loan Documents with Lender, refinancing the Properties in connection with a permitted repayment of the Loan, and transacting lawful business that is incident, necessary and appropriate to accomplish the foregoing or (B) in the case of any Principal, acting as a general partner of the limited partnership that owns the related Individual Property or as member of the limited liability company that owns the related Individual Property and transacting lawful business that is incident, necessary and appropriate to accomplish the foregoing or (C) with respect to Operating Lessee, leasing each Individual Property that is subject to the Operating Lease and operating, managing and maintaining each Individual Property subject to the Operating Lease and transacting lawful business that is incident, necessary and appropriate to accomplish the foregoing;

(ii) except with respect to the Previously-Owned Properties, has not engaged and shall not engage in any business unrelated to the activities set forth in clause (i) of this definition of “Special Purpose Entity”;

(iii) except for the Previously-Owned Property, has not owned and shall not own any real property other than the Properties;

(iv) except for the Previously-Owned Property, does not have, shall not have and at no time had any assets other than (A) in the case of each Individual Borrower, the related Individual Properties and personal property and fixtures located therein or used in connection therewith necessary or incidental to its ownership and operation of such Individual Property, (B) in the case of any Principal, owning the limited partnership or limited liability company interests in the related Individual Borrower and personal property necessary or incidental to its ownership of such interests, (C) in the case of BRE Select Hotels Properties Borrower, owning the limited liability company interests in Operating Lessee and personal property necessary or incidental to its ownership of such interests, (D) in the case of BRE Select Hotels Properties II Borrower, owning the limited liability company interests in BRE Select Hotels Properties II Sub and personal property necessary or incidental to its ownership of such interests, (E) in the case of any Borrower that is the sole member of a New TRS Borrower, owning the limited liability company interests or partnership interests in such New TRS Borrower, as applicable, and personal property necessary or incidental to its ownership of such interests, and (F) in the case of Operating Lessee, owning its leasehold interest in the applicable Properties pursuant to the applicable Operating Lease and personal property necessary or incidental to such ownership;

(v) has not engaged in, sought, consented or permitted to and shall not engage in, seek, consent to or permit, to the fullest extent permitted by law, (A) any dissolution, winding up, liquidation, consolidation or merger, (B) any sale or other transfer of all or substantially all of its assets or any sale of assets outside the ordinary course of its business other than in connection with a sale of Property or as otherwise permitted by the Loan Documents or (C) in the case of a Principal, any transfer of its partnership or membership interest, except as permitted by the Loan Documents;

 

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(vi) shall not cause, consent to or permit any amendment of its limited partnership agreement, articles of incorporation, articles of organization, certificate of formation, operating agreement or other formation document or organizational document (as applicable) with respect to the matters set forth in this definition without the prior written consent of Lender except as otherwise permitted by the Loan Documents;

(vii) if such entity is a limited partnership, has and shall have at least one general partner and has and shall have, as its only general partners, Special Purpose Entities each of which (A) is a corporation or single member Delaware limited liability company, (B) except as set forth on Schedule 4.1.30, has two (2) Independent Directors or Independent Managers, and (C) holds a direct interest as general partner in the limited partnership of not less than 0.1%;

(viii) if such entity is a corporation, except as set forth on Schedule 4.1.30, has and shall have at least two (2) Independent Directors, and shall not cause or permit the board of directors of such entity to take any Bankruptcy Action with respect to itself or, if the corporation is a Principal, with respect to the applicable Loan Party unless two (2) Independent Directors or Independent Managers shall have participated in such vote and shall have voted in favor of such action;

(ix) if such entity is a limited liability company (other than a limited liability company meeting all of the requirements applicable to a single member limited liability company set forth in this definition of “Special Purpose Entity”), except as set forth on Schedule 4.1.30, has and shall have at least one (1) member that is a Special Purpose Entity, that is a corporation or a single-member limited liability company, that has at least two (2) Independent Directors and that directly owns at least one half of one percent (0.5%) of the equity of the limited liability company;

(x) if such entity is a single member limited liability company, (A) is and shall be a Delaware limited liability company, (B) except as set forth on Schedule 4.1.30, has and shall have at least two (2) Independent Directors or Independent Managers serving as managers of such company, (C) shall not take any Bankruptcy Action with respect to itself, or any entity for which it is the Principal, as applicable, unless two (2) Independent Directors or Independent Managers then serving as managers of the company shall have consented in writing to such action, and (D) except as set forth on Schedule 4.1.30, has had and shall have two (2) natural persons or one entity that is not a member of the company, that has signed its limited liability company agreement and that, under the terms of such limited liability company agreement becomes a member of the company immediately prior to the withdrawal or dissolution of the last remaining member of the company;

(xi) has not and shall not (and, if such entity is (a) a limited liability company, has and shall have a limited liability agreement or an operating agreement, as applicable, (b) a limited partnership, has a limited partnership agreement, or (c) a corporation, has a certificate of incorporation or articles that, in each case, provide that such entity shall not) (1) dissolve, merge, liquidate, consolidate; (2) sell all or substantially all of its assets except as otherwise permitted by the Loan Documents; (3) except for amendments entered into prior to the date hereof, amend its organizational documents with respect to the matters set forth in this definition without the consent of Lender except as otherwise permitted by the Loan Documents; or (4) without the affirmative vote of two (2) Independent Directors or Independent Managers of itself, or, if the corporation is a Principal, with respect to any Loan Party, take any Bankruptcy Action;

 

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(xii) except with respect to prior financings that have been repaid or otherwise discharged or that will be repaid or discharged as of the closing of the Loan, has at all times been and shall at all times intend to remain solvent and has paid and shall pay its debts and liabilities (including, a fairly allocated portion of any personnel and overhead expenses that it shares with any Affiliate) from its assets as the same shall become due, and has maintained and shall maintain adequate capital for the normal obligations reasonably foreseeable in a business of its size and character and in light of its contemplated business operations (in each case, to the extent there exists sufficient cash flow from the operations of the Property to do so; provided, that the foregoing shall not require any member, partner or shareholder of a Special Purpose Entity to make any additional capital contributions to a Special Purpose Entity;

(xiii) has not failed and shall not fail to correct any known misunderstanding regarding the separate identity of such entity;

(xiv) has maintained and shall maintain its bank accounts (except as contemplated by the Loan Documents with respect to any other Loan Party), books of account, books and records separate from those of any other Person and, to the extent that it is required to file income tax returns under applicable law, has filed and shall file its own income tax returns, except to the extent that it is required by law to file consolidated tax returns and, if it is a corporation, has not filed and shall not file a consolidated income tax return with any other corporation, except to the extent that it is required by law to file consolidated tax returns;

(xv) has maintained and shall maintain its own records and books;

(xvi) except with respect to prior financings that have been repaid or otherwise discharged or that will be repaid or discharged as of the closing of the Loan and except as contemplated by the Loan Documents with respect to each other Loan Party, has not commingled and shall not commingle its funds or assets with those of any other Person and has not participated and shall not participate in any cash management system with any other Person;

(xvii) other than pursuant to Permitted Equipment and Vehicle Leases executed by Manager in its capacity as agent of the applicable Loan Party, has held and shall hold its assets in its own name;

(xviii) except as set forth on Schedule 4.1.30, has conducted and shall conduct its business in its name or in a name franchised or licensed to it by Manager, Franchisor or an entity other than an Affiliate of itself or of Borrower (which, for purposes of this definition, shall not include any subsidiary of Hilton Worldwide Inc.), except for business conducted on behalf of itself by another Person under a business management services agreement that is on commercially reasonable terms, so long as the manager, or equivalent thereof, under such business management services agreement holds itself out as an agent of such Special Purpose Entity;

 

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(xix) (A) has maintained and shall maintain its financial statements, accounting records and other entity documents separate from those of any other Person; (B) has shown and shall show, in its financial statements, its asset and liabilities separate and apart from those of any other Person; and (C) has not permitted and shall not permit its assets to be listed as assets on the financial statement of any of its Affiliates except as required by GAAP or the Uniform System of Accounts; provided, however, that any such consolidated financial statement contains a note indicating that the Special Purpose Entity’s separate assets and credit are not available to pay the debts of such Affiliate and that the Special Purpose Entity’s liabilities do not constitute obligations of the consolidated entity, except as provided herein with respect to each other Loan Party and such assets shall also be listed in such Loan Party’s balance sheet, as applicable;

(xx) except in each case with respect to each other Individual Borrower, as contemplated by the Loan Documents, has paid and shall pay its own liabilities and expenses, including the salaries of its own employees, out of its own funds and assets, provided there is sufficient cash flow to do so, and has maintained and shall maintain a sufficient number of employees, if any, in light of its contemplated business operations;

(xxi) has observed and shall observe all partnership, corporate or limited liability company formalities, as applicable that are necessary to maintain its separate existence;

(xxii) intentionally omitted;

(xxiii) following the Closing Date shall not incur Indebtedness other than (A) in the case of each Borrower, (i) the Loan, (ii) Permitted Indebtedness, (iii) as may be required pursuant to the Ground Lease, and (iv) such other liabilities that such Special Purpose Entity is expressly permitted to incur pursuant to this Agreement or as otherwise imposed by law; provided, however, that this covenant shall not require any shareholder, partner or member of Borrower to make additional capital contributions to any such entity; (B) in the case of each Principal, (i) liabilities of Principal as a general partner of a limited partnership, in the capacity as such and (ii) liabilities incurred in the ordinary course of business relating to the ownership and operation of the Loan Party which it holds an interest in and routine administration of the Loan Party which it holds an interest in, provided that (x) the outstanding liabilities at any time shall not exceed $25,000.00 and (y) such liabilities are normal and reasonable under the circumstances; provided, however, that this covenant shall not require any shareholder, partner or member of Principal to make additional capital contributions to any such entity; and (C) in the case of Operating Lessee, (i) Permitted Indebtedness, (ii) as may be required pursuant to a Ground Lease, (iii) such other liabilities that are permitted pursuant to this Agreement or as otherwise imposed by law and (iv) such other liabilities that are permitted pursuant to the Loan Documents; provided, however, that this covenant shall not require any shareholder, partner or member of Operating Lessee to make additional capital contributions to any such entity;

(xxiv) except as expressly permitted pursuant to the terms of any prior financing, and except for guaranties or obligations, in each case, that have been released or discharged or that will be released or discharged as of the closing of the Loan, has not assumed, guaranteed or become obligated and shall not assume or guarantee or become obligated for the debts of any other Person, has not held out and shall not hold out its credit as being available to satisfy the obligations of any other Person or has not pledged and shall not pledge its assets to secure the obligations of any other Person, in each case except as permitted pursuant to the Loan Documents with respect to each other Loan Party or as otherwise imposed by law;

 

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(xxv) has not acquired and shall not acquire obligations or securities of its partners, members or shareholders or any other owner or Affiliate, except (A) with respect to BRE Select Hotels Properties Borrower, BRE Select Hotels Properties Borrower’s limited liability company interest in Operating Lessee, (B) with respect to BRE Select Hotels Properties II Borrower, BRE Select Hotels Properties II Borrower’s limited liability company interest in BRE Select Hotels Properties II Sub, (C) with respect to a member of a New TRS Borrower, such member’s limited liability company interest or such partner’s partnership interests in such New TRS Borrower, as applicable, and (D) with respect to each Principal, such Principal’s membership or general partnership interest and obligations with respect to the Loan Party in which it owns an interest;

(xxvi) has allocated and shall allocate fairly and reasonably any overhead expenses that are shared with any of its Affiliates, constituents, or owners, or any guarantors of any of their respective obligations, or any Affiliate of any of the foregoing (individually, a “Related Party” and collectively, the “Related Parties”), including, but not limited to, paying for shared office space and for services performed by any employee of an Affiliate;

(xxvii) has maintained and used and shall maintain and use separate stationery, invoices and checks bearing its name and not bearing the name of any other entity unless such entity is clearly designated as being the Special Purpose Entity’s agent;

(xxviii) except with respect to prior financings that have been repaid or otherwise discharged or that will be repaid or discharged as of the closing of the Loan and except as contemplated by the Loan Documents with respect to each other Loan Party, has not pledged and shall not pledge its assets to secure the obligations of any other Person;

(xxix) except as set forth on Schedule 4.1.30, has held itself out and identified itself and shall hold itself out and identify itself as a separate and distinct entity under its own name or in a name franchised or licensed to it by Manager, Franchisor or an entity other than an Affiliate of such Special Purpose Entity (which, for purposes of this definition, shall not include any subsidiary of Hilton Worldwide Inc.) and not as a division or part of any other Person;

(xxx) has maintained and shall maintain its assets in such a manner that it shall not be costly or difficult to segregate, ascertain or identify its individual assets from those of any other Person;

(xxxi) has not made and shall not make loans to any Person and has not held and shall not hold evidence of indebtedness issued by any other Person or entity (other than cash and investment grade securities issued by an entity that is not an Affiliate of or subject to common ownership with such entity), except as is contemplated or provided for in the Loan Documents with respect to each other Loan Party;

(xxxii) has not identified and shall not identify its partners, members or shareholders, or any Affiliate of any of them, as a division or department or part of it, and has not identified itself and shall not identify itself as a division or department of any other Person;

 

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(xxxiii) except in each case with respect to each Individual Borrower, as contemplated by the Loan Documents and other than capital contributions and distributions permitted under the terms of its organizational documents, has not entered into or been a party to, and shall not enter into or be a party to, any transaction with any of its partners, members, shareholders or Affiliates except in the ordinary course of its business and on terms which are commercially reasonable terms comparable to those of an arm’s-length transaction with an unrelated third party;

(xxxiv) has not had and shall not have any obligation to, and has not indemnified and shall not indemnify its partners, officers, directors or members, as the case may be, in each case unless such an obligation or indemnification is fully subordinated to the Debt and, to the fullest extent permitted by law, shall not constitute a claim against it in the event that its cash flow is insufficient to pay the Debt;

(xxxv) if such entity is a corporation, has considered and shall consider the interests of its creditors in connection with all corporate actions;

(xxxvi) except with respect to prior financings that have been repaid or otherwise discharged or that will be repaid or discharged as of the closing of the Loan, has not had shall not have any of its obligations guaranteed by any Affiliate except (A) as provided by the Loan Documents with respect to (I) each other Loan Party and (II) the Guaranty and Environmental Indemnity, or (B) in connection with the Franchise Agreements, including, without limitation, the Franchise Agreement Guarantees;

(xxxvii) has not formed, acquired or held and shall not form, acquire or hold any subsidiary, except (A) BRE Select Hotels Properties Borrower’s limited liability company interest in Operating Lessee, (B) BRE Select Hotels Properties II Borrower’s limited liability company interest in BRE Select Hotels Properties II Sub, (C) any member of a New TRS Borrower’s limited liability company interest in such New TRS Borrower, and (D) with respect to each Principal, such Principal’s membership or general partnership interest and obligations with respect to the Loan Party in which it owns an interest;

(xxxviii) has complied and shall comply with all of the terms and provisions contained in its organizational documents;

(xxxix) has conducted and shall conduct its business so that each of the assumptions made about it and each of the facts stated about it in the Insolvency Opinion, or if applicable, any Additional Insolvency Opinion, are true;

(xl) has not permitted and shall not permit any Affiliate or constituent party independent access to its bank accounts, except as contemplated by the Loan Documents with respect to Manager or Franchisor (each, as agent of the applicable Loan Party) and with respect to each other Loan Party; and

(xli) is, has always been and shall continue to be duly formed, validly existing, and in good standing in the state of its incorporation or formation and in all other jurisdictions where it is qualified to do business.

 

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Spread” shall mean, with respect to each Component the following amounts, as the same may be reallocated pursuant to, and in accordance with the restrictions and limitations contained in Section 9.1.2 and which may be increased in accordance with the provisions of Section 2.8(e):

 

(a)

  

Component A:

   2.15%      

(b)

  

Component B:

   2.15%      

(c)

  

Component C:

   2.15%      

(d)

  

Component D:

   2.15%      

(e)

  

Component E:

   2.15%      

(f)

  

Component F:

   2.15%      

Spread Maintenance End Date” shall mean the Payment Date occurring in July, 2018. With respect to any prepayment made after the Payment Date in June, 2018, but prior to the Spread Maintenance End Date, the amount of the Spread Maintenance Payment shall be zero.

Spread Maintenance Payment” shall mean, with respect to any repayment of the outstanding principal amount of any Component of the Loan prior to the Spread Maintenance End Date for which a Spread Maintenance Payment is due, a payment to Lender in an amount equal to the product of (x) the Spread applicable to such Component, (y) the portion of the Component of the Loan which is being repaid in excess of the Free Prepayment Amount and (z) a fraction, the numerator of which is the number of days following the date through which interest on the prepaid amount has been paid to the end of the full Interest Period associated with the Spread Maintenance End Date and the denominator of which is 360.

State” shall mean, with respect to an Individual Property, the State or Commonwealth in which such Individual Property or any part thereof is located.

Strike Price” shall mean (a) for the period from the Closing Date through and including the Initial Maturity Date, a rate as of the Closing Date not greater than the rate that when added to the Spread, yields a per annum interest rate that would result in the Debt Service Coverage Ratio (for purposes of determining the Debt Service and the Mezzanine Debt Service) being no less than 1.10:1.00 (the “Initial Strike Price”), and (b) as of the commencement date for any Extension Term, a rate not more than the greater of (i) the Initial Strike Price and (ii) the rate that when added to the Spread, yields a per annum interest rate that would result in the Debt Service Coverage Ratio (calculated assuming that for all times, LIBOR is equal to the new Strike Price (rather than the then current Strike Price) for purposes of determining the Debt Service and the Mezzanine Debt Service) being no less than 1.10:1.00.

Substitute Guaranty” shall have the meaning set forth in Section 5.2.10(e) hereof.

 

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Survey” shall mean a survey of the Individual Property in question prepared by a surveyor licensed in the State in which the applicable Individual Property is located and satisfactory to Lender and the company or companies issuing the applicable Title Insurance Policy, and containing a certification of such surveyor satisfactory to Lender.

Sweep Accounts” shall have the meaning set forth in Section 2.6.1(e) hereof.

Sweep Bank” shall have the meaning set forth in Section 2.6.1(e) hereof.

Tax and Insurance Escrow Fund” shall have the meaning set forth in Section 7.2 hereof.

Tax and Insurance Reserve Account” shall have the meaning set forth in Section 7.2 hereof.

Taxes” shall mean all real estate and personal property taxes, assessments, water rates or sewer rents, now or hereafter levied or assessed or imposed against any Individual Property or part thereof.

Tenant” shall mean any Person with a possessory right to all or any part of an Individual Property pursuant to a Lease.

Threshold Amount” shall have the meaning set forth in Section 5.1.22 hereof.

Title Insurance Policies” shall mean, with respect to each Individual Property, an ALTA mortgagee title insurance policy in the form reasonably acceptable to Lender (or, if an Individual Property is in a State which does not permit the issuance of such ALTA policy, such form as shall be permitted in such State and reasonably acceptable to Lender) issued with respect to such Individual Property and insuring the lien of the Mortgage encumbering such Individual Property.

Total Loan-to-Value Ratio” shall mean, as of the date of its calculation, the ratio of (a) the sum of (x) the then current outstanding principal balance of the Loan and any New Mezzanine Loan as of the date of such calculation and (y) the proposed amount of the Additional Mezzanine Loan to (b) the fair market value of the Properties (as proposed by Borrower and determined by Lender in its reasonable discretion using any commercially reasonable method permitted to a REMIC Trust (which may include an existing or updated appraisal, a broker’s price opinion or other written determination of value using a commercially reasonable valuation method, in each case satisfactory to Lender, but shall be based solely on the value of real property and shall exclude personal property and going-concern value)).

Total Release Amount” shall mean the sum of (i) the Release Amount, (ii) the “Release Amount” as defined in the Additional Mezzanine Loan Agreement and (iii) the “Release Amount” as defined in the New Mezzanine Loan Agreement.

Transfer” shall have the meaning set forth in Section 5.2.10(b) hereof.

 

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Transferee Borrower” shall have the meaning set forth in Section 5.2.10(e) hereof.

TRIPRA” shall have the meaning set forth in Section 6.1(a) hereof.

Tuscaloosa Sublease” shall mean the “Tuscaloosa Ground Sublease” as defined on Schedule III attached hereto.

UCC” or “Uniform Commercial Code” shall mean the Uniform Commercial Code as in effect in the applicable State in which an Individual Property is located.

Unanimous Decisions” shall have the meaning set forth in Section 10.24(b) hereof.

Unencumbered Borrower” shall have the meaning specified in Section 2.4.2(b) hereof.

Uniform System of Accounts” shall mean the Eleventh Revised Edition of the Uniform System of Accounts for Hotels as adopted by the American Hotel and Lodging Association.

U.S. Obligations” shall mean non-redeemable securities evidencing an obligation to timely pay principal and/or interest in a full and timely manner that are (a) direct obligations of the United States of America for the payment of which its full faith and credit is pledged, or (b) to the extent acceptable to the Approved Rating Agencies, other “government securities” within the meaning of Section 2(a)(16) of the Investment Company Act of 1940, as amended.

U.S. Person” means any Person that is a “United States Person” as defined in Section 7701(a)(30) of the Code.

U.S. Tax Compliance Certificate” shall have the meaning set forth in Section 2.7(e).

Section 1.2. Principles of Construction. All references to sections and schedules are to sections and schedules in or to this Agreement unless otherwise specified. All uses of the word “including” shall mean “including, without limitation” unless the context shall indicate otherwise. Unless otherwise specified, the words “hereof,” “herein” and “hereunder” and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement. Unless otherwise specified, all meanings attributed to defined terms herein shall be equally applicable to both the singular and plural forms of the terms so defined.

 

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ARTICLE II.

GENERAL TERMS

Section 2.1. Loan Commitment; Disbursement to Borrower.

2.1.1. Agreement to Lend and Borrow. Subject to and upon the terms and conditions set forth herein, Lender hereby agrees to make and Borrower hereby agrees to accept the Loan on the Closing Date.

2.1.2. Single Disbursement to Borrower. Borrower may request and receive only one (1) borrowing hereunder in respect of the Loan and any amount borrowed and repaid hereunder in respect of the Loan may not be reborrowed. Borrower and Lender acknowledge and agree that the Loan shall be fully funded as of the Closing Date.

2.1.3. The Note, Mortgage and Loan Documents. The Loan shall be evidenced by the Note and secured by the Mortgage and the other Loan Documents.

2.1.4. Use of Proceeds. Borrower shall use the proceeds of the Loan to (a) repay or discharge any existing loans relating to the Properties or the Preferred Shares, (b) pay all past due Basic Carrying Costs, if any, with respect to the Properties, (c) make deposits into the Reserve Funds on the Closing Date in the amounts provided herein, (d) pay costs and expenses incurred in connection with the closing of the Loan, as approved by Lender, (e) fund any working capital requirements of the Properties and (f) distribute the balance, if any, to Borrower’s equity holders.

2.1.5. Components of the Loan. For the purpose of computing interest payable from time to time on the principal amount of the Loan and certain other computations set forth herein, the principal balance of the Loan shall be divided into Components A, B, C, D, E and F. The principal amount of the Components shall be as follows:

 

COMPONENT

   PRINCIPAL AMOUNT  

A

   $ 799,999,995.00  

B

   $ 1.00  

C

   $ 1.00  

D

   $ 1.00  

E

   $ 1.00  

F

   $ 1.00  

 

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Section 2.2. Interest Rate.

2.2.1. Interest Rate. Subject to the provisions of this Section 2.2, interest on the outstanding principal balance of each Component of the Loan shall accrue from (and include) the Closing Date through the end of the last Interest Period at the Floating Interest Rate for such Component. The total interest accrued under the Loan shall be the sum of the interest accrued on each Component. Borrower shall pay to Lender on each Payment Date the interest accrued (or to be accrued) on the outstanding principal balance of each Component of the Loan for the related Interest Period.

2.2.2. Interest Calculation. Interest on the outstanding principal balance of each Component of the Loan shall be calculated by multiplying (a) the actual number of days elapsed in the relevant Interest Period for which the calculation is being made by (b) a daily rate based on the rate described in Section 2.2.3 and a three hundred sixty (360) day year by (c) the outstanding principal balance of such Component of the Loan.

2.2.3. Determination of Interest Rate. (a) Subject to the terms and conditions of this Section 2.2.3, each Component of the Loan shall bear interest at the Floating Interest Rate applicable to such Component. The Floating Interest Rate applicable to an Interest Period shall be determined by Lender as set forth herein; provided, however, that LIBOR for the Interest Period commencing on the Closing Date through and including July 14, 2017, shall be 1.2233%.

(b) In the event that Lender shall have reasonably determined that by reason of circumstances affecting the interbank Eurodollar market LIBOR cannot be determined as provided in the definition of LIBOR as set forth herein, then Lender shall forthwith give notice thereof by telephone of such fact, confirmed in writing, to Borrower at least one (1) Business Day prior to the Determination Date. If such notice is given, the Loan shall be converted, from and after the first day of the next succeeding Interest Period, to a Prime Rate Loan bearing interest based on the Prime Rate in effect on the related Determination Date.

(c) If, pursuant to the terms of Section 2.2.3(b) above, the Loan has been converted to a Prime Rate Loan but thereafter LIBOR can again be determined as provided in the definition of LIBOR as set forth herein, Lender shall give notice thereof to Borrower and convert the Prime Rate Loan back to a Floating Interest Rate Loan by delivering to Borrower notice of such conversion no later than 11:00 a.m. (New York City Time), one (1) Business Day prior to the next succeeding Determination Date, and the Loan shall be converted to a Floating Interest Rate Loan from, after and including the first day of the next succeeding Interest Period. Notwithstanding any provision of this Agreement to the contrary, in no event shall Borrower have the right to elect to convert a Floating Interest Rate Loan to a Prime Rate Loan.

(d) Intentionally Omitted.

(e) If the adoption of any requirement of law or any change therein or in the interpretation or application thereof, shall hereafter make it unlawful for Lender to make or maintain a Floating Interest Rate Loan as contemplated hereunder, (i) the obligation of Lender hereunder to make a Floating Interest Rate Loan or to convert a Prime Rate Loan to a Floating Interest Rate Loan shall be canceled forthwith and (ii) any outstanding Floating Interest Rate Loan shall be converted automatically to a Prime Rate Loan on the first day of the next

 

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succeeding Interest Period or within such earlier period as required by law. Borrower hereby agrees promptly to pay Lender, upon demand, any additional amounts necessary to compensate Lender for any costs incurred by Lender in making any conversion in accordance with this Agreement, including, without limitation, any interest or fees payable by Lender to lenders of funds obtained by it in order to make or maintain the Floating Interest Rate Loan hereunder. Lender’s notice of such costs, as certified to Borrower, shall be conclusive absent manifest error.

(f) In the event that any change in any requirement of law or in the interpretation or application thereof, or compliance by Lender with any request or directive (whether or not having the force of law) hereafter issued from any central bank or other Governmental Authority:

(i) shall hereafter impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, or deposits or other liabilities in or for the account of, advances or loans by, or other credit extended by, or any other acquisition of funds by, any office of Lender which is not otherwise included in the determination of LIBOR hereunder;

(ii) shall hereafter have the effect of reducing the rate of return on Lender’s capital as a consequence of its obligations hereunder to a level below that which Lender could have achieved under the Loan Documents but for such adoption, change or compliance (taking into consideration Lender’s policies with respect to capital adequacy) by any amount deemed by Lender to be material;

(iii) shall hereafter subject any Lender to any Section 2.7 Taxes (other than (A) Indemnified Taxes and (B) Excluded Taxes) on its loans, loan principal, letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto; or

(iv) shall hereafter impose on Lender any other condition (other than Section 2.7 Taxes) and the result of any of the foregoing is to increase the cost to Lender of making, renewing or maintaining loans or extensions of credit or to reduce any amount receivable hereunder;

then, in any such case, Borrower shall promptly pay Lender, upon demand, any additional amounts necessary to compensate Lender for such additional cost or reduced amount receivable which Lender deems to be material as determined by Lender in its reasonable discretion. If Lender becomes entitled to claim any additional amounts pursuant to this Section 2.2.3(f), Lender shall provide Borrower with not less than thirty (30) days written notice specifying in reasonable detail the event by reason of which it has become so entitled and the additional amount required to fully compensate Lender for such additional cost or reduced amount. A certificate as to any additional costs or amounts payable pursuant to the foregoing sentence submitted by Lender to Borrower shall be conclusive in the absence of manifest error. Subject to Section 2.2.3(h) hereof, this provision shall survive payment of the Note and the satisfaction of all other obligations of Borrower under this Agreement and the Loan Documents.

 

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(g) Lender shall not be entitled to claim compensation pursuant to this Section 2.2.3 for any increased cost or reduction in amounts received or receivable hereunder, or any reduced rate of return, which was incurred or which accrued prior to the earlier of (i) ninety (90) days before the date Lender notified Borrower of the change in law or other circumstance on which such claim for compensation is based and delivered to Borrower a written statement setting forth in reasonable detail the basis for the calculation of the additional amounts owed to Lender under this Section 2.2.3, which statement shall be conclusive and binding on all parties absent manifest error and (ii) any earlier date provided Lender notified Borrower of such change in law or circumstance and delivered the written statement referenced in clause (i) within ninety (90) days after Lender received written notice of such change in law or circumstance.

(h) Borrower agrees to indemnify Lender and to hold Lender harmless from any loss or expense which Lender sustains or incurs as a consequence of (i) any default by Borrower in payment of the principal of or interest on a Floating Interest Rate Loan, including, without limitation, any such loss or expense arising from interest or fees payable by Lender to third-party lenders of funds obtained by it in order to maintain a Floating Interest Rate Loan hereunder, (ii) any prepayment (whether voluntary or mandatory) of the Floating Interest Rate Loan on a day that (A) is not a Payment Date or (B) is a Payment Date if Borrower did not give the prior written notice of such prepayment required pursuant to the terms of this Agreement, including, without limitation, such loss or expense arising from interest or fees payable by Lender to third-party lenders of funds obtained by it in order to maintain the Floating Interest Rate Loan hereunder and (iii) the conversion pursuant to the terms hereof of the Floating Interest Rate Loan to the Prime Rate Loan on a date other than the Payment Date, including, without limitation, such loss or expenses arising from interest or fees payable by Lender to third-party lenders of funds obtained by it in order to maintain a Floating Interest Rate Loan hereunder (the amounts referred to in clauses (i), (ii) and (iii) are herein referred to collectively as the “Breakage Costs”), in each case, subject to Sections 2.4.1 and 2.4.2; provided, however, Borrower shall not indemnify Lender from any loss or expense arising from Lender’s willful misconduct or gross negligence. This provision shall survive payment of the Note in full and the satisfaction of all other obligations of Borrower under this Agreement and the other Loan Documents.

2.2.4. Additional Costs. Lender will use reasonable efforts (consistent with legal and regulatory restrictions) to maintain the availability of the Floating Interest Rate Loan and to avoid or reduce any increased or additional costs payable by Borrower under Section 2.2.3, including, if requested by Borrower, a transfer or assignment of the Loan to a branch, office or Affiliate of Lender in another jurisdiction, or a redesignation of its lending office with respect to the Loan, in order to maintain the availability of the Floating Interest Rate Loan or to avoid or reduce such increased or additional costs, provided that the transfer or assignment or redesignation (a) would not result in any additional costs, expenses or risk to Lender that are not reimbursed by Borrower and (b) would not be disadvantageous in any other respect to Lender (including the effect on any Securitization) as determined by Lender in its reasonable discretion.

2.2.5. Default Rate. In the event that, and for so long as, any Event of Default shall have occurred and be continuing, the outstanding principal balance of the Loan and, to the extent permitted by law, all accrued and unpaid interest in respect of the Loan and any other amounts due pursuant to the Loan Documents, shall accrue interest at the Default Rate, calculated from the date such payment was due without regard to any grace or cure periods contained herein.

 

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2.2.6. Usury Savings. This Agreement, the Note and the other Loan Documents are subject to the express condition that at no time shall Borrower be obligated or required to pay interest on the principal balance of the Loan at a rate which could subject Lender to either civil or criminal liability as a result of being in excess of the Maximum Legal Rate. If, by the terms of this Agreement or the other Loan Documents, Borrower is at any time required or obligated to pay interest on the principal balance due hereunder at a rate in excess of the Maximum Legal Rate, the Interest Rate or the Default Rate, as the case may be, shall be deemed to be immediately reduced to the Maximum Legal Rate and all previous payments in excess of the Maximum Legal Rate shall be deemed to have been payments in reduction of principal and not on account of the interest due hereunder. All sums paid or agreed to be paid to Lender for the use, forbearance, or detention of the sums due under the Loan, shall, to the extent permitted by applicable law, be amortized, prorated, allocated, and spread throughout the full stated term of the Loan until payment in full so that the rate or amount of interest on account of the Loan does not exceed the Maximum Legal Rate of interest from time to time in effect and applicable to the Loan for so long as the Loan is outstanding.

2.2.7. Interest Rate Cap Agreement. (a) Prior to or contemporaneously with the Closing Date, Borrower shall enter into an Interest Rate Cap Agreement, on behalf of itself and the other Borrowers, with a LIBOR strike price no greater than the Strike Price. The Interest Rate Cap Agreement (i) shall at all times be in a form and substance reasonably acceptable to Lender with respect to such matters not otherwise set forth in this Agreement, (ii) shall at all times be with an Acceptable Counterparty, (iii) shall direct such Acceptable Counterparty to deposit directly into the account specified in the Assignment of Interest Rate Cap Agreement, or from and after an Event of Default as directed by Lender, any amounts due Borrower under such Interest Rate Cap Agreement so long as any portion of the Debt exists, provided that the Debt shall be deemed to exist if the Properties are transferred by judicial or non-judicial foreclosure or deed in lieu thereof, (iv) shall be for a period equal to the then existing term of the Loan and (v) shall at all times have a notional amount equal to or greater than the then outstanding principal balance of the Loan and shall at all times provide for the applicable Strike Price. Borrower shall collaterally assign to Lender, pursuant to the Collateral Assignment of Interest Rate Cap Agreement (the “Assignment of Interest Rate Cap Agreement”), all of its right, title and interest to receive any and all payments under the Interest Rate Cap Agreement, and shall deliver to Lender an executed counterpart of such Assignment of Interest Rate Cap Agreement (which shall, by its terms, authorize the assignment to Lender and require that payments be deposited directly into a Concentration Account) and shall notify the Acceptable Counterparty of such assignment.

 

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(b) Borrower shall comply with all of its obligations under the terms and provisions of the Interest Rate Cap Agreement. All amounts paid by the Acceptable Counterparty under the Interest Rate Cap Agreement to Borrower or Lender shall be directly deposited immediately into a Concentration Account or, during the continuance of an Event of Default, into such account as specified by Lender. Borrower shall take all actions reasonably requested by Lender to enforce Lender’s rights under the Interest Rate Cap Agreement in the event of a default by the Acceptable Counterparty and shall not waive, amend or otherwise modify any of its rights thereunder without Lender’s prior consent.

(c) In the event of any downgrade, withdrawal or qualification of the rating of the Acceptable Counterparty by any Approved Rating Agency such that it is no longer an Acceptable Counterparty, Borrower shall replace or cause the cap provider to replace the Interest Rate Cap Agreement with a Replacement Interest Rate Cap Agreement not later than the period of time provided for in such Interest Rate Cap Agreement following such downgrade, withdrawal or qualification (not to exceed ten (10) Business Days), provided, Borrower shall not be required to replace the Interest Rate Cap Agreement with a Replacement Interest Rate Cap Agreement so long as within ten (10) Business Days of such downgrade, withdrawal or qualification, the Acceptable Counterparty under the Interest Rate Cap Agreement either (x) provides a guarantor of its obligations that is an Acceptable Counterparty pursuant to such terms as are acceptable to the Approved Rating Agencies or (y) delivers collateral to secure Borrower’s exposure under the Interest Rate Cap Agreement in such amount and pursuant to such terms as are acceptable to the Approved Rating Agencies.

(d) In the event that Borrower fails to purchase and deliver to Lender the Interest Rate Cap Agreement or fails to maintain the Interest Rate Cap Agreement in accordance with the terms and provisions of this Agreement, Lender may purchase the Interest Rate Cap Agreement and the cost incurred by Lender in purchasing such Interest Rate Cap Agreement shall be paid by Borrower to Lender with interest thereon at the Default Rate from the date such cost was incurred by Lender until such cost is reimbursed by Borrower to Lender.

(e) In connection with the Interest Rate Cap Agreement, Borrower shall obtain and deliver to Lender within ten (10) Business Days following (x) the date upon which an Interest Rate Cap Agreement is required pursuant to Section 2.2.7(a) or (y) the first day of any applicable Extension Term, as applicable (a) a resolution/consent, as applicable, of the Acceptable Counterparty authorizing the delivery of the Interest Rate Cap Agreement acceptable to Lender, and (b) an opinion from counsel (which counsel may be in house counsel for the Acceptable Counterparty) for the Acceptable Counterparty (upon which Lender and its successors and assigns may rely) which shall provide, in relevant part, that:

(i) the Acceptable Counterparty is duly organized, validly existing, and in good standing under the laws of its jurisdiction of incorporation or formation and has the organizational power and authority to execute and deliver, and to perform its obligations under, the Interest Rate Cap Agreement;

(ii) the execution and delivery of the Interest Rate Cap Agreement by the Acceptable Counterparty, and any other agreement which the Acceptable Counterparty has executed and delivered pursuant thereto, and the performance of its obligations thereunder have been and remain duly authorized by all necessary action and do not contravene any provision of its certificate of incorporation or by laws (or equivalent organizational documents) or any law, regulation or contractual restriction binding on or affecting it or its property;

 

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(iii) all consents, authorizations and approvals required for the execution and delivery by the Acceptable Counterparty of the Interest Rate Cap Agreement, and any other agreement which the Acceptable Counterparty has executed and delivered pursuant thereto, and the performance of its obligations thereunder have been obtained and remain in full force and effect, all conditions thereof have been duly complied with, and no other action by, and no notice to or filing with any governmental authority or regulatory body is required for such execution, delivery or performance; and

(iv) the Interest Rate Cap Agreement, and any other agreement which the Acceptable Counterparty has executed and delivered pursuant thereto, has been duly executed and delivered by the Acceptable Counterparty and constitutes the legal, valid and binding obligation of the Acceptable Counterparty, enforceable against the Acceptable Counterparty in accordance with its terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors’ rights generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

(f) At such time as the Loan is repaid in full, all of Lender’s right, title and interest in and to the Interest Rate Cap Agreement shall terminate and Lender shall execute and deliver such documents as may be required to evidence Lender’s release of the Interest Rate Cap Agreement and to notify the Acceptable Counterparty of such release.

Section 2.3. Loan Payment.

2.3.1. Monthly Debt Service Payments. Borrower shall pay to Lender (a) on the Closing Date, an amount equal to interest only on the outstanding principal balance of the Loan from and including the Closing Date up to and including July 14, 2017, which interest shall be calculated in accordance with the provisions of Section 2.2 hereof and (b) on each Payment Date commencing on the Payment Date occurring in August, 2017 and on each Payment Date thereafter up to and including the Maturity Date, Borrower shall make a payment to Lender equal to the Monthly Debt Service Payment Amount, which payments shall be applied first to interest due for the related Interest Period and then to any other amounts due and unpaid pursuant to this Agreement and the other Loan Documents. The Monthly Debt Service Payment Amount paid pursuant to this Section 2.3.1 shall be applied: (i) first, to the payment of interest due and payable on Component A; (ii) second, to the payment of interest due and payable on Component B; (iii) third, to the payment of interest due and payable on Component C; (iv) fourth, to the payment of interest due and payable on Component D; (v) fifth, to the payment of interest due and payable on Component E; and (vi) sixth, to the payment of interest due and payable on Component F.

 

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2.3.2. Payments Generally. The first Interest Period hereunder shall commence on and include the Closing Date and shall end on and include July 14, 2017. Thereafter during the term of the Loan, each Interest Period shall commence on the fifteenth (15th) day of the calendar month preceding the calendar month in which the related Payment Date occurs and shall end on and include the fourteenth (14th) day of the calendar month in which the related Payment Date occurs. For purposes of making payments hereunder, but not for purposes of calculating Interest Periods, if the day on which such payment is due is not a Business Day, then amounts due on such date shall be due on the immediately preceding Business Day and with respect to payments of principal of the Loan due on the Maturity Date, interest shall be payable at the Interest Rate or the Default Rate, as the case may be, through and including, (x) if such payment occurs prior to a Securitization, the Maturity Date or (y) if such payment occurs following a Securitization, the last day of the related Interest Period. All amounts due under this Agreement and the other Loan Documents shall be payable without setoff, counterclaim, defense or any other deduction whatsoever unless required by applicable law.

2.3.3. Payment on Maturity Date. Borrower shall pay to Lender on the Maturity Date the outstanding principal balance of the Loan, all accrued and unpaid interest and all other amounts due hereunder and under the Note, the Mortgages and the other Loan Documents.

2.3.4. Late Payment Charge. If any principal, interest or any other sums due under the Loan Documents are not paid by Borrower on or prior to the date on which it is due (other than the principal amount due on the Maturity Date), Borrower shall pay to Lender upon demand an amount equal to the lesser of three percent (3%) of such unpaid sum or the Maximum Legal Rate in order to defray the expense incurred by Lender in handling and processing such delinquent payment and to compensate Lender for the loss of the use of such delinquent payment. Any such amount shall be secured by the Mortgages and the other Loan Documents to the extent permitted by applicable law.

2.3.5. Method and Place of Payment. Except as otherwise specifically provided herein, all payments and prepayments under this Agreement and the Note shall be made to Lender not later than (a) 11:00 a.m., New York City time, for all payments other than the payment due on the Maturity Date and (b) 2:00 p.m., New York City time, for the payment due on the Maturity Date, on the date when due and shall be made in lawful money of the United States of America in immediately available funds at Lender’s office or as otherwise directed by Lender, and any funds received by Lender after such time shall, for all purposes hereof, be deemed to have been paid on the next succeeding Business Day.

Section 2.4. Prepayments.

2.4.1. Voluntary Prepayments. (a) Borrower may prepay the Loan in whole or in part at any time and from time to time provided, that (i) no Event of Default is continuing as of the date of the applicable prepayment; (ii) Borrower gives Lender not less than ten (10) days’ prior written notice of the amount of the Loan that Borrower intends to prepay and the intended date of prepayment which notice shall be revocable or subject to modification (including extension of the intended prepayment date) by

 

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Borrower at any time (the “Prepayment Notice”); (iii) if any prepayment is made during the period commencing on the first calendar day immediately following a Payment Date to, but not including, the Determination Date in such calendar month, Borrower shall pay to Lender the Interest Shortfall amount, if any, estimated by Lender to be due in connection with such prepayment, provided, that once the Interest Rate for the next occurring Interest Period can be determined, Lender shall calculate the actual amount of interest required to be paid by Borrower for such prepayment and (x) if the Interest Shortfall paid to Lender is in excess of the amount required to be paid pursuant to this Section 2.4.1(a), Lender shall promptly return to Borrower such excess amount and (y) if the Interest Shortfall is less than the amount required to be paid pursuant to this Section 2.4.1(a), Borrower shall pay to Lender within three (3) Business Days of notice from Lender, the amount of such deficiency; and (iv) Borrower pays Lender, in addition to the outstanding principal amount of the Loan to be prepaid, (A) all interest which would have accrued on the amount of the Loan to be paid through and including (x) if such prepayment occurs prior to a Securitization, the date on which such prepayment is made or (y) if such prepayment occurs following a Securitization, the last day of the Interest Period related to the Payment Date next occurring following the date of such prepayment or, if such prepayment occurs on a Payment Date, interest which would have accrued on the prepayment amount through and including the last day of the Interest Period related to such Payment Date (all such interest payable under this clause (y), the “Additional Interest”); (B) all other sums then due and payable under this Agreement, the Note, and the other Loan Documents, including, but not limited to the actual Breakage Costs (if any and provided that if such prepayment includes the payment of Additional Interest, no Breakage Costs shall be payable to Lender) and all of Lender’s reasonable, actual out-of-pocket costs and expenses (including reasonable attorney’s fees and disbursements) incurred by Lender in connection with such prepayment of the Loan and any actual out-of-pocket costs and expenses incurred in connection with a rescinded or extended Prepayment Notice; and (C) if such prepayment is made prior to the Spread Maintenance End Date and exceeds the Free Prepayment Amount, the Spread Maintenance Payment on the amount in excess of the Free Prepayment Amount.

(b) Notwithstanding the other provisions of this Section 2.4.1, Borrower shall be permitted to prepay the Loan (which amount shall not exceed fifteen percent (15%) of the original principal balance of the Loan, in the aggregate) (the “Free Prepayment Amount”), at any time without any Spread Maintenance Payment or other prepayment penalty, premium or charge, provided (i) there is no Event of Default continuing as of the date of the applicable prepayment, (ii) Borrower provides a Prepayment Notice to Lender in the manner specified in Section 2.4.1(a), (iii) if any prepayment is made during the period commencing on the first calendar day immediately following a Payment Date to, but not including, the Determination Date in such calendar month, Borrower shall pay to Lender the Interest Shortfall amount, if any, estimated by Lender to be due in connection with such prepayment, provided, that once the Interest Rate for the next occurring Interest Period can be determined, Lender shall calculate the actual amount of interest required to be paid by Borrower for such prepayment and (x) if the Interest Shortfall paid to Lender is in excess of the amount required to be paid pursuant to this Section 2.4.1(b), Lender shall promptly return to Borrower such excess amount and (y) if the Interest Shortfall is less than the amount required to be paid pursuant to this Section 2.4.1(b), Borrower shall pay to Lender within three (3) Business Days of notice from Lender, the amount

 

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of such deficiency and (iv) Borrower pays Lender, in addition to the amount to be prepaid, if such prepayment occurs on a day that is not a Payment Date, (x) if such prepayment occurs prior to a rated Securitization, all amounts of interest which would have accrued on the amount to be prepaid through and including the date on which such prepayment is made or (y) if such prepayment occurs following a rated Securitization, the Additional Interest; and all other sums then due and payable under this Agreement, the Note, and the other Loan Documents, including, but not limited to, all of Lender’s third party reasonable costs and expenses (including reasonable attorneys’ fees and disbursements) incurred by Lender in connection with such prepayment, including, without limitation, any actual Breakage Costs (if any and provided that if such prepayment includes the payment of Additional Interest, no additional Breakage Costs shall be payable to Lender) and costs and expenses associated with any revoked or extended Prepayment Notice.

(c) Each Mezzanine Borrower shall be permitted to make voluntary prepayments in respect of its respective Mezzanine Loan. Any voluntary prepayments may be applied by the Mezzanine Borrowers to the related Mezzanine Loans in reverse sequential order (i.e., first, to the most junior Mezzanine Loan then outstanding until such Mezzanine Loan is paid in full and then to the next most junior Mezzanine Loan (or if only one Mezzanine Loan is then outstanding, to such Mezzanine Loan) until such Mezzanine Loan is paid in full) in accordance with the applicable Mezzanine Loan Documents, in each case, without any obligation of Borrower to make a corresponding prepayment of the Loan; provided that the foregoing shall not apply to (i) prepayments made to achieve a Debt Yield Cure, which shall be made concurrently with a pro rata prepayment of the Loan and each Mezzanine Loan, (ii) prepayments made from Excess Cash Flow Reserve Funds, which shall be made concurrently with a pro rata prepayment of the Loan under this Agreement and each Mezzanine Loan under the applicable Mezzanine Loan Agreement and (iii) prepayments in connection with a release of any Property from the Lien of the Mortgage.

2.4.2. Mandatory Prepayments.

(a) In the event Lender actually receives any Net Proceeds relating to an Individual Property, if Lender is not obligated to make such Net Proceeds available to Borrower for the Restoration of any Individual Property or otherwise remit such Net Proceeds to Borrower pursuant to Section 6.4 hereof, on the next occurring Payment Date following the date on which Lender receives such Net Proceeds to be applied in accordance with this Section 2.4.2, Borrower shall prepay or authorize Lender to apply such Net Proceeds Prepayment as a prepayment of all or a portion of the outstanding principal balance of the Loan in an amount equal to the aggregate of (a) the Net Proceeds up to an amount equal to the Adjusted Release Amount for such Individual Property, (b) following a rated Securitization, all Additional Interest and (c) the actual reasonable costs of Lender in connection with such prepayment to the extent such amounts are not paid to Lender in accordance with Article VI hereof, excluding any Breakage Costs (collectively, the “Mortgage Mandatory Prepayment Amount”). Amounts paid to or applied by Lender as a Mortgage Mandatory Prepayment Amount shall first be applied to amounts required to be paid by Borrower to Lender pursuant to clause (c) above and then to the amounts set forth in clauses (a) and (b) simultaneously. Except during the continuance of an Event of Default, any Net Proceeds Prepayment to be applied pursuant to this Section 2.4.2 hereof in excess of the Mortgage Mandatory Prepayment Amount shall be applied as follows: (i) first, in

 

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the event that one Mezzanine Loan is outstanding, to Mezzanine Lender, in an amount equal to the related Mezzanine Mandatory Prepayment Amount, to be applied in accordance with the applicable Mezzanine Loan Documents, (ii) second, in the event that more than one Mezzanine Loan is outstanding, to Mezzanine Lenders in order of priority beginning with the most senior Mezzanine Lender and ending with the most junior Mezzanine Lender, with respect to each Mezzanine Loan in an amount equal to the related Mezzanine Mandatory Prepayment Amount, to be applied in accordance with the applicable Mezzanine Loan Documents, and (iii) lastly, to Borrower. After the occurrence of and during the continuance of an Event of Default, Lender may apply such Net Proceeds Prepayment to the Debt (until paid in full) in any order or priority in its sole discretion. Other than during the continuance of an Event of Default, no Spread Maintenance Payment or other premium, penalty or charge shall be due in connection with any prepayment made pursuant to this Section 2.4.2. The Amortized Release Amount with respect to such Individual Property shall be reduced in accordance with its definition; provided, that nothing herein shall be construed to reduce the aggregate Adjusted Release Amount for any Individual Property required to be paid to Lender prior to obtaining a release of the applicable Individual Property. Lender shall provide to Borrower, upon ten (10) days’ prior notice, (i) a release of the Individual Property (and any related collateral) if (A) at any time the Amortized Release Amount is reduced to zero, together with such additional documents and instruments evidencing or confirming the release as the Borrower shall reasonably request, or (B) Lender is required to deliver such release pursuant to a court order issued in connection with a Condemnation or (ii) a release of the portion of an Individual Property that is subject to a Condemnation. Notwithstanding anything in this Agreement to the contrary, any prepayment made pursuant to this Section 2.4.2(a) shall not count towards the Free Prepayment Amount.

(b) In connection with any release under this Section 2.4.2, in the event that such release would result in the release of all Individual Properties held by an Individual Borrower (each an “Unencumbered Borrower”), such Unencumbered Borrower shall be released by Lender from the obligations of the Loan Documents, except with respect to those obligations that are expressly provided herein to survive repayment of the Loan pursuant to the Loan Documents, and shall no longer be considered an Individual Borrower for purposes of this Agreement and, for so long as any Properties are subject to the Operating Lease, BRE Select Hotels Properties Borrower shall not be released by Lender from the obligations of the Loan Documents. In connection with a release or cancellation of each Unencumbered Borrower, Lender agrees to deliver (i) a UCC-3 Financing Statement termination or amendment releasing Lender’s security interest in the collateral pledged to Lender relating to such Unencumbered Borrower, and (ii) instruments executed by Lender reasonably necessary to evidence the release or cancellation of such Unencumbered Borrower from its obligations under the Loan Documents. All reasonable costs and expenses incurred by Lender in connection with such release shall be paid by Borrower.

(c) As provided in Section 6.4(f) hereof, each Casualty/Condemnation Prepayment tendered by Borrower to Lender in accordance with said Section 6.4(f) shall be in the amount of the Adjusted Release Amount in respect of the applicable Individual Property. No Spread Maintenance Premium or other penalty or premium shall be due in connection with any such Casualty/Condemnation Prepayment.

 

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2.4.3. Prepayments After Default. If, during the continuance of an Event of Default, payment of all or any part of the Debt is tendered by Borrower or otherwise recovered by Lender (including, without limitation, through application of any Reserve Funds), such tender or recovery shall (a) include interest at the Default Rate on the outstanding principal amount of the Loan through the last calendar day of the Interest Period within which such tender or recovery occurs and (b) be deemed a voluntary prepayment by Borrower and shall in all instances include (i) an amount equal to the Spread Maintenance Payment (to the extent the amount prepaid is in excess of the Free Prepayment Amount) if such tender or recovery occurs prior to the Spread Maintenance End Date, and (ii) following a rated Securitization, the Additional Interest. After the occurrence and during the continuance of an Event of Default, Lender may apply such payment to the Debt (until paid in full) in any order or priority in its sole discretion.

2.4.4. Application of Prepayments to Components. Except for any prepayment made prior to a rated Securitization of the Loan and any prepayment of any portion of the Free Prepayment Amount made after a rated Securitization of the Loan, any mandatory prepayment of the principal of the Loan made pursuant to Section 2.4.2 hereof and any other voluntary prepayments of principal of the Loan made pursuant to Section 2.4.1 or otherwise when no Event of Default exists shall be applied by Lender between the Components as follows: (a) first, to the reduction of the outstanding principal balance of Component A, until reduced to zero, (b) second, to the reduction of the outstanding principal balance of Component B until reduced to zero, (c) third, to the reduction of the outstanding principal balance of Component C until reduced to zero, (iv) fourth, to the reduction of the outstanding principal balance of Component D until reduced to zero, (v) fifth, to the reduction of the outstanding principal balance of Component E until reduced to zero, and (vi) sixth, to the reduction of the outstanding principal balance of Component F until reduced to zero. Any prepayment made prior to a rated Securitization of the Loan and any prepayment of any portion of the Free Prepayment Amount made after a rated Securitization of the Loan shall be applied to each Component of the Loan on a pro rata pari passu basis. Notwithstanding the foregoing to the contrary, during the continuance of any Event of Default, any payment of principal from whatever source may be applied by Lender among the Components in Lender’s sole discretion.

Section 2.5. Release of Property. Except as set forth in Section 2.4.2 or this Section 2.5, no repayment or prepayment of all or any portion of the Loan shall cause, give rise to a right to require, or otherwise result in, the release of any Lien of any Mortgage on any Individual Property. For the avoidance of doubt, any prepayment of the Loan in connection with a Condemnation or Casualty shall be governed by and made in accordance with Section 2.4.2, Section 6.3 and Section 6.4 hereof.

2.5.1. Release of all Properties Upon Payment in Full. (a) If Borrower has elected to prepay the entire Loan and the requirements of Section 2.4 have been satisfied or the Loan is repaid in full on the Maturity Date, all of the Properties shall be released from the Liens of their respective Mortgages and the other Loan Documents, except those obligations expressly stated to survive repayment of the Loan. In lieu of a release of the Lien of any Mortgage, at Borrower’s option, it may obtain an assignment thereto to one or more designees in accordance with Section 2.5.4 hereof.

 

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(b) Borrower shall submit to Lender, not less than five (5) Business Days prior to the date on which the prepayment will be made, a release (or assignment) of Lien (and related Loan Documents) for each Individual Property for execution by Lender. Each release (or assignment) shall be in a form appropriate in each jurisdiction in which the Individual Property is located and that would be satisfactory to a prudent lender acting reasonably. In addition, Borrower shall provide all other documentation Lender reasonably requires to be delivered by Borrower in connection with such release (or assignment), together with an Officer’s Certificate certifying that such documentation (i) is in compliance with all Legal Requirements and (ii) will effect such release (or assignment) in accordance with the terms of this Agreement. Borrower shall pay all reasonable third-party costs and expenses incurred by Lender in connection with such release (or assignment) and the then current reasonable and customary fee being assessed by Servicer, if any, to effect such release (or assignment).

2.5.2. Release of Individual Property. If Borrower has elected to prepay a portion of the Loan and the requirements of Section 2.4.1 and this Section 2.5.2 have been satisfied, and provided that no Event of Default has occurred and is continuing, Borrower may, at any time, obtain the release of such Individual Property from the Lien of the Mortgage thereon (or at Borrower’s option, an assignment thereof to one or more designees of Borrower) and related Loan Documents, and the release of Borrower’s and/or Operating Lessee’s obligations under the Loan Documents with respect to such Individual Property (other than those expressly stated in the Loan Documents to survive), upon the satisfaction of all of the following conditions:

(a) The amount of the outstanding principal balance of the Loan to be prepaid shall equal the Adjusted Release Amount for the applicable Individual Property (without duplication to amounts paid pursuant to Section 6.4(f) or Section 8.1(a)(xix) hereunder), and such prepayment shall be deemed a voluntary prepayment for all purposes hereunder including, without limitation, the payment of any applicable Spread Maintenance Payment then required (if any);

(b) Subsequent to such release, each Individual Borrower, Operating Lessee and Principal shall continue to be a Special Purpose Entity pursuant to, and in accordance with, Section 4.1.30 hereof;

(c) Intentionally omitted;

(d) Borrower shall submit to Lender, not less than five (5) Business Days prior to the date on which the prepayment will be made, a release (or assignment) of Lien (and related Loan Documents) for such Individual Property for execution by Lender. Such release (or assignment) shall be in a form appropriate in each jurisdiction in which the Individual Property is located and that would be satisfactory to a prudent lender acting reasonably, including any standard provisions, if any, protecting the rights of the releasing (or assigning) lender. In addition, Borrower shall provide all other documentation Lender reasonably requires to be delivered by Borrower in connection with such release (or assignment), together with an

 

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Officer’s Certificate certifying that such documentation (i) is in compliance with all Legal Requirements, (ii) will effect such release (or assignment) in accordance with the terms of this Agreement, and (iii) will not impair or otherwise adversely affect the Liens and security interests granted under the Loan Documents and not being released (or assigned) (or as to the parties to the Loan Documents and Properties subject to the Loan Documents not being released (or assigned));

(e) After giving effect to any such release occurring on such date, (i) the Debt Yield (Mortgage Only) as determined by Lender for the Properties then remaining subject to the Liens of the Mortgages shall be equal to or greater than the greater of (x) the Closing Date Debt Yield (Mortgage Only) and (y) the lesser of (I) the Debt Yield (Mortgage Only) for all of the Properties subject to the Liens of the Mortgages immediately prior to giving effect to all applicable releases and (II) 11.0% (“Initial Debt Yield (Mortgage) Release Threshold”); provided that in connection with creation of a New Mezzanine Loan or the origination of the Additional Mezzanine Loan, the Initial Debt Yield (Mortgage) Release Threshold shall be recalculated at the time of such creation or origination to be an amount equal to a percentage equal to the quotient resulting from (x) the product of 11.0% times the aggregate the outstanding principal balance of the Loan and the Mezzanine Loans (including the newly created or originated Mezzanine Loan) divided by (y) the then outstanding principal balance of the Mortgage Loan and (ii) following the creation of the creation or origination of a Mezzanine Loan, the Debt Yield (Aggregate) as determined by Lender for the Properties then remaining subject to the Liens of the Mortgages shall be equal to or greater than the greater of (x) the Closing Date Debt Yield (Aggregate) and (y) the lesser of (I) the Debt Yield (Aggregate) for all of the Properties subject to the Liens of the Mortgages immediately prior to giving effect to all applicable releases and (II) 11.0% (clauses (i) and (ii) collectively, the “Release Debt Yield”). For the avoidance of doubt and notwithstanding anything to the contrary contained in the Loan Documents, clause (ii) of the definition of Release Debt Yield shall not be applicable unless and until the creation or origination of a Mezzanine Loan.

(f) Concurrently with the payment of the Adjusted Release Amount, each Mezzanine Borrower (if any) shall make a partial prepayment of the related Mezzanine Loan equal to the applicable Mezzanine Adjusted Release Amount applicable to such Individual Property, together with any related interest, fees, prepayment premiums or other amounts payable as set forth in Section 2.5.2(a) of the applicable Mezzanine Loan Agreement in connection with such prepayment;

(g) Intentionally omitted;

(h) Borrower shall reimburse Lender and Servicer, if any, for any reasonable third party costs and expenses arising from such release (including reasonable attorneys’ fees and expenses) and Borrower shall have paid, in connection with such release to the extent such costs have not already been paid directly by Borrower, (i) all recording charges, filing fees, similar taxes or other expenses payable in connection therewith, (ii) all costs and expenses of the Rating Agencies incurred with respect to such release (to the extent such costs have not already been paid directly by Borrower), and (iii) to any Servicer, the current fee being assessed by such Servicer to effect such release in an amount not to exceed the lesser of (a) $2,000 with respect to the release of any Individual Property and (b) $10,000 with respect to the coordinated release (simultaneously on or about the same date) of five (5) or more Properties;

 

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(i) Notwithstanding anything to the contrary contained herein or in any other Loan Document, if the Loan is included in a REMIC Trust and the Loan-to-Value Ratio exceeds or would exceed 125% immediately after giving effect to the release of the applicable Individual Property, no release will be permitted unless the principal balance of the Loan is prepaid by an amount not less than the greater of (i) the Adjusted Release Amount or (ii) the least of the following amounts: (A) only if the released Individual Property is sold, the net proceeds of an arm’s-length sale of the released Individual Property to an unrelated Person, (B) the fair market value of the released Individual Property as reasonably determined by Lender at the time of the release, or (C) an amount such that the Loan-to-Value Ratio after giving effect to the release of the applicable Individual Property is not greater than the Loan-to-Value Ratio immediately prior to such release, unless Lender receives an opinion of counsel that, if this clause (ii) is applicable but not followed or is no longer applicable at the time of such release, the Securitization will not fail to maintain its status as a REMIC Trust as a result of the release of the applicable Individual Property;

(j) In connection with any release under this Section 2.5, in the event that such release would result in an Unencumbered Borrower, such Unencumbered Borrower shall be released by Lender from the obligations of the Loan Documents, except with respect to those obligations that are expressly provided herein to survive repayment of the Loan. In connection with a release or cancellation of each Unencumbered Borrower, Lender agrees to deliver (i) a UCC-3 Financing Statement termination or amendment releasing Lender’s security interest in the collateral pledged to Lender relating to each Unencumbered Borrower, and (ii) instruments executed by Lender reasonably necessary to evidence the release or cancellation of each Unencumbered Borrower from its obligations under the Loan Documents. All reasonable costs and expenses incurred by Lender in connection with such release shall be paid by Borrower;

(k) Notwithstanding anything to the contrary contained herein, in the event that (i) in connection with a sale of a Property that (A) is terminated prior to closing of the sale for a reason other than a default by Borrower or Operating Lessee thereunder, (B) with respect to such sale Borrower or Operating Lessee had agreed to terminate the applicable Franchise Agreement or Brand Management Agreement, and (C) Borrower or Operating Lessee, as applicable, provides written notice to Lender within five (5) Business Days from such termination electing to release such Individual Property, (ii) the Franchise Agreement or Brand Management Agreement for any Individual Property is terminated by Franchisor or Brand Manager as a result of a default by Borrower or Operating Lessee, as applicable, thereunder and Borrower or Operating Lessee, as applicable, provides written notice to Lender within five (5) Business Days from such termination electing to release such Individual Property or (iii) (A) there is a material default by Borrower or Operating Lessee, as applicable, under any Franchise Agreement or Brand Management Agreement beyond any applicable notice or grace period that permits the Franchisor or Brand Manager thereunder to terminate or cancel the Franchise Agreement or Brand Management Agreement, (B) Lender or any Mezzanine Lender has delivered a Franchise Default Election Notice or a Brand Manager Default Election Notice, as such terms are defined herein or in any Mezzanine Loan Agreement, solely with respect thereto, (C) Borrower elects to release such Individual Property by delivering written notice to Lender

 

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within forty-five (45) days from delivery of such Franchise Default Election Notice or Brand Manager Default Election Notice (in the case of items (i), (ii) and (iii), a “Borrower Franchise Default” or a “Borrower Brand Management Default” as applicable) and (D) Borrower has demonstrated to Lender that it (or Operating Lessee, as applicable) has diligently in good faith pursued a cure of such Borrower Franchise Default or Borrower Brand Management Default (which cure, for the avoidance of doubt, shall not require any capital contribution to Borrower or Operating Lessee to effectuate any cure or any obligation of Borrower or Operating Lessee, as applicable, to use operating income or Rents from any Property other than the Individual Property that is the subject of the Borrower Franchise Default or Borrower Brand Management Default to effectuate such cure), in each case, Borrower shall be permitted to obtain a release of such Individual Property (“Sale/Franchise/Brand Management Default Release”). In connection with any Sale/Franchise/Brand Management Default Release, Borrower shall be required to satisfy the conditions set forth in this Section 2.5.2 (including the payment of the Adjusted Release Amount), except that Borrower shall not be required to satisfy the Release Debt Yield as set forth in Section 2.5.2(e). Any prepayment of the Loan in connection with a Sale/Franchise/Brand Management Default Release shall be deemed a voluntary prepayment, and shall be subject to satisfaction of the conditions set forth in Section 2.4.1 (other than the requirement to provide ten (10) days’ prior written notice); provided, that no Spread Maintenance Payment or other premium, penalty or charge shall be due in connection with any prepayment made in connection with a Sale/Franchise/Brand Management Default Release and such prepayment shall not count towards the Free Prepayment Amount;

(l) Notwithstanding anything to the contrary contained herein, Borrower shall have the right to cause the release of any Ground Leased Property in order to cure an Event of Default in connection with a default under the Ground Lease that was not caused by Borrower or Operating Lessee, as applicable, in bad faith to circumvent the requirements of this Section 2.5.2 (“Ground Lease Default Release”). In connection with any Ground Lease Default Release, Borrower shall be required to satisfy the conditions set forth in Section 2.5.2 (including the payment of the Adjusted Release Amount), except that Borrower shall not be required to satisfy the Release Debt Yield as set forth in Section 2.5.2(e). Any prepayment of the Loan in connection with a Ground Lease Default Release shall be deemed a voluntary prepayment, and shall be subject to satisfaction of the conditions set forth in Section 2.4.1 (other than the requirement to provide ten (10) days’ prior written notice); provided, that no Spread Maintenance Payment or other premium, penalty or charge shall be due in connection with any prepayment made in connection with a Ground Lease Default Release and such prepayment shall not count towards the Free Prepayment Amount;

(m) Notwithstanding anything to the contrary set forth in this Agreement, Borrower shall be permitted to release (i) the Individual Property commonly known as Courtyard by Marriott located at 4115 Courtney Drive, Tuscaloosa, Alabama or (ii) the Individual Property commonly known as Fairfield Inn located at 4101 Courtney Drive, Tuscaloosa, Alabama (each an “Individual Tuscaloosa Property”) in accordance with the terms and conditions set forth in this Section 2.5.2 provided (i) the Tuscaloosa Sublease is severed and (ii) the Individual Tuscaloosa Property not subject to the release is subject to a sublease or the Tuscaloosa Sublease with an amendment, in each case, on the same terms as those relating to such Individual Property in the Tuscaloosa Sublease immediately prior to such release and severance (including, without limitation, any and all leasehold mortgagee and lender protections contained in any document or

 

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agreement modifying or amending the Tuscaloosa Sublease), with such changes in rent and the description of the subleasehold estate required to reflect the severance. Such new sublease (or the Tuscaloosa sublease as amended), together with recordable documents necessary to reflect such severance being subject to Lender’s prior written consent (not to be unreasonably withheld, conditioned or delayed); and

(n) Notwithstanding anything to the contrary contained herein, Borrower shall have the right to cause the release of any Individual Property in order to cure a Default or Event of Default or any Default (as defined in the applicable Mezzanine Loan Agreement) or Event of Default (as defined in the applicable Mezzanine Loan Agreement) under any Mezzanine Loan Agreement related to an Individual Property provided that (i) prior to releasing such Individual Property, Borrower or Operating Lessee, as applicable, uses commercially reasonable efforts to cure such Default or Event of Default, which efforts shall not require any capital contribution to Borrower or Operating Lessee to effectuate any cure or any obligation of Borrower or Operating Lessee, as applicable to use any operating income or Rents from the Property other than the Individual Property subject to such Default or Event of Default to effectuate such cure, and (ii) such Default or Event of Default was not caused by Borrower or Operating Lessee, as applicable, in bad faith to circumvent the requirements of this Section 2.5.2 (“Default Release”). In connection with any Default Release, Borrower shall be required to satisfy the conditions set forth in Section 2.5.2 (including the payment of the Adjusted Release Amount), except that Borrower shall not be required to satisfy the Release Debt Yield as set forth in Section 2.5.2(e). Any prepayment of the Loan in connection with a Default Release shall be deemed a voluntary prepayment, and shall be subject to satisfaction of the conditions set forth in Section 2.4.1 (other than the requirement to provide ten (10) days’ prior notice); provided, that no Spread Maintenance Payment or other premium, penalty or charge shall be due in connection with any prepayment made in connection with a Default Release and such prepayment shall not count towards the Free Prepayment Amount.

2.5.3. Release in Connection with a Sale to Third-Party. Notwithstanding the provisions of Section 2.5.2(e), with respect to a requested release of an Individual Property in conjunction with the sale of such Individual Property in an arm’s-length transaction to a third party purchaser, if after giving effect to the release the Release Debt Yield would not be satisfied, Borrower shall be permitted to obtain a release (or assignment) of the Lien of the Mortgage (a “Low Debt Yield Release”), provided that Borrower shall satisfy all of the conditions set forth in Section 2.5.2 (other than Section 2.5.2(e)) except that (x) in lieu of paying the applicable Adjusted Release Amount in connection with such release pursuant to Section 2.5.2(a), Borrower shall pay to Lender, an amount equal to the greater of (A) the Adjusted Release Amount applicable to such Individual Property and (B) the lesser of (I) Lender’s Allocation of one hundred percent (100%) of the gross cash proceeds actually received by Borrower from such Individual Property (net of any reasonable and customary closing costs associated with the sale of such Individual Property) and (II) the amount of a pro rata prepayment of the Loan and the Mezzanine Loans (if any) that would be necessary to, after giving effect to the requested release of the applicable Individual Property, satisfy the Release Debt Yield and (y) Mezzanine Borrowers (if any) in lieu of paying the applicable Mezzanine Adjusted Release Amount shall pay to the applicable Mezzanine Lender, the amount required in accordance with Section 2.5.3 of the applicable Mezzanine Loan Agreement.

 

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In the case of any payment required to be made pursuant to clause (B) hereof, the portion of such payment equal to the difference between the required payment under this Section 2.5.3 and the Adjusted Release Amount for such Individual Property shall be applied to prepay the Loan in accordance with the provisions of Section 2.4.1 of this Agreement. Any such prepayment pursuant to this Section 2.5.3 shall be deemed a voluntary prepayment for all purposes hereunder, including, without limitation, the payment of any applicable Spread Maintenance Payment.

2.5.4. Assignment of Mortgage. Upon the request of Borrower in connection with the release of any Individual Property pursuant to the provisions of this Agreement, Lender agrees to cooperate, at Borrower’s sole cost and expense (including Lender’s reasonable attorneys’ fees and disbursements), to provide an assignment of the Mortgage and a partial assignment of the portion of the Note equal to the principal amount of the Debt being prepaid in connection with the release, in each case, with respect to such Individual Property without representation, recourse, covenant or warranty of any nature, express or implied, in lieu of the release. Notwithstanding the foregoing, Lender reserves the right to impose different requirements or procedures on such an assignment of the Mortgage to the extent (but only to the extent) necessary to accommodate any Legal Requirements enacted or interpreted in a new manner subsequent to the date hereof at the time of such release if and to the extent a reasonably prudent Lender would impose such requirements or procedures.

Section 2.6. Cash Management.

2.6.1. Clearing Account/Concentration Account. (a) During the term of the Loan, Operating Lessee shall establish and maintain: (i) with respect to each Individual Property that is not a Brand Managed Property, an Eligible Account (each, a “Clearing Account”, and collectively, the “Clearing Accounts”) with Clearing Bank in trust for the benefit of Lender, which Clearing Accounts shall be under the sole dominion and control of Lender and entitled as set forth in the applicable Clearing Account Agreement and (ii) those certain concentration accounts (individually and/or collectively, as the context requires, the “Concentration Account”) with the applicable Concentration Bank in trust for the benefit of Lender, which Concentration Accounts shall be under the sole dominion and control of Lender and entitled as set forth in the applicable Concentration Account Agreement.

(b) For each Individual Property other than a Brand Managed Property, Operating Lessee shall (i) cause the delivery of irrevocable written instructions to each of the credit card companies or credit card clearing banks with which Operating Lessee or Manager has entered into merchant’s agreements to deliver all receipts payable with respect to such Individual Property directly to the Clearing Account and (ii) cause each Manager to deposit all amounts received by Borrower, Operating Lessee or such Manager constituting Rents into the applicable Clearing Account, not less than two (2) times per week during the term of the Loan. For each Brand Managed Property, Borrower and Operating Lessee shall cause each Brand Manager pursuant to the applicable Management Agreement to, and each Brand Manager shall, deliver directly to the applicable Concentration Account all income and proceeds to which Borrower or Operating Lessee is entitled pursuant to the applicable Management Agreement within one (1)

 

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Business Day after the applicable Individual Borrower or Operating Lessee is entitled to distributions pursuant to such Management Agreement. For the avoidance of doubt, capital contributions of the indirect owners of Borrower or Operating Lessee shall not constitute Rents. In the event such amounts are mistakenly delivered directly to the related Individual Borrower or Operating Lessee, such Individual Borrower or Operating Lessee shall deliver such amounts to the applicable Clearing Account or Concentration Account, as applicable, not less than two (2) times per week during the term of the Loan.

(c) Each of Borrower and Operating Lessee hereby grants to Lender a first priority security interest in (i) each Clearing Account and all deposits at any time contained therein and the proceeds thereof and (ii) the Concentration Account and all deposits at any time contained therein and the proceeds thereof, and in each case, will take all actions necessary to maintain in favor of Lender a perfected first priority security interest in each Clearing Account and Concentration Account, including, without limitation, filing UCC-1 Financing Statements and continuations thereof. Such financing statements may describe as the collateral covered thereby “all assets of the debtor, whether now owned or hereafter acquired” or words to that effect. Lender and Servicer shall have the sole right to direct withdrawals from each Clearing Account and the Concentration Account in accordance with and subject to the Clearing Account Agreements and Concentration Account Agreement and all costs and expenses for establishing and maintaining each Clearing Account and the Concentration Account shall be paid by Operating Lessee. All monies now or hereafter deposited into each Clearing Account and the Concentration Account shall be deemed additional security for the Debt.

(d) Operating Lessee has obtained from each Clearing Bank (other than PNC Bank, National Association), its agreement to transfer to the applicable Concentration Account (other than a reasonable peg balance and the reasonable fees of the Clearing Bank as more particularly described in the applicable Clearing Account Agreement), in immediately available funds by federal wire transfer or ACH transfer, all amounts on deposit in each Clearing Account not less than two (2) times per week throughout the term of the Loan.

(e) Operating Lessee has obtained from each Concentration Bank and PNC Bank, National Association, as a clearing bank (each a “Sweep Bank” and the accounts held by such Sweep Bank pursuant to the applicable Concentration Account Agreement or Clearing Account Agreement, the “Sweep Accounts”), its agreement to transfer to the Cash Management Account (other than a reasonable peg balance and the reasonable fees of each Sweep Bank as more particularly described in the applicable Concentration Account Agreement or Clearing Account Agreement), during a Cash Trap Period and upon notice to Sweep Bank of such Cash Trap Period, in immediately available funds by federal wire transfer or ACH transfer, all amounts on deposit in the applicable Sweep Account not less than two (2) times per week (the “Cash Trap Sweep Instructions”). In the event of a Cash Trap Event Cure, Lender shall, within three (3) Business Days of Borrower’s written request, provide notice of such Cash Trap Event Cure to each Sweep Bank under each applicable Concentration Account Agreement or Clearing Account Agreement that the Cash Trap Sweep Instructions are no longer in effect and that all amounts on deposit in each Sweep Account shall be transferred by each Sweep Bank to an account designated by Borrower. In the event a Cash Trap Period is not in effect, all amounts on deposit in each Sweep Account shall be transferred by each Sweep Bank to an account designated by Borrower.

 

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(f) Subject to Priority Waterfall Payments made pursuant to Section 3.5 of the Cash Management Agreement and Section 2.6.2(e) hereof, upon the occurrence and during the continuance of an Event of Default, Lender may, in addition to any and all other rights and remedies available to Lender, apply any sums then present in each Clearing Account, each Concentration Account and the Cash Management Account to the payment of the Debt in any order in its sole discretion, subject to the terms of Section 7.7 of this Agreement.

(g) Each Clearing Account and each Concentration Account shall be an Eligible Account and shall not be commingled with other monies held by Borrower, Operating Lessee, Manager, the applicable Clearing Bank, or the applicable Concentration Bank, as applicable.

(h) Neither Borrower nor Operating Lessee shall further pledge, assign or grant any security interest in any Clearing Account or any Concentration Account or the monies deposited therein or permit any lien or encumbrance to attach thereto, or any levy to be made thereon, or any UCC-1 Financing Statements, except those naming Lender as the secured party, to be filed with respect thereto.

(i) Borrower and Operating Lessee shall indemnify Lender and hold Lender harmless from and against any and all actions, suits, claims, demands, liabilities, losses, damages, obligations and actual and out-of-pocket costs and expenses (including litigation costs and reasonable attorneys’ fees and expenses) arising from or in any way connected with any Clearing Account and/or the Clearing Account Agreements or the Concentration Accounts and/or the Concentration Account Agreements (unless arising from the gross negligence or willful misconduct of Lender) or the performance of the obligations for which the Clearing Accounts or the Concentration Accounts were established.

(j) Each of Borrower and Operating Lessee hereby (i) to the extent a control account agreement (or other similarly named agreement) has been entered into among one or more Borrowers and/or Operating Lessee, as applicable, Lender, the applicable Brand Manager and the bank or other financial institution holding the related FF&E reserve under the applicable Management Agreement, grants to Lender a first priority security interest in each Manager Account maintained by a Brand Manager with respect to FF&E and (ii) to the extent a control account agreement (or other similarly named agreement) has not been entered into among one or more Borrowers and/or Operating Lessee, as applicable, Lender, the applicable Brand Manager and the bank or other financial institution holding the related FF&E reserve under the applicable Management Agreement, pledges to Lender all of its right, title and interest in each Manager Account maintained by a Brand Manager with respect to FF&E (each, a “FF&E Manager Reserve Account”). During the term of the Loan, Borrower and Operating Lessee, as applicable, shall use commercially reasonable efforts to cause each FF&E Manager Reserve Account to be maintained as an Eligible Account.

2.6.2. Cash Management Account. (a) Upon the occurrence of a Cash Trap Period, Borrower shall establish and maintain a segregated Eligible Account (the “Cash Management Account”) to be held by Agent in trust and for the benefit of Lender, which Cash Management Account shall be under the sole dominion and control of Lender. The Cash Management Account shall be entitled as set forth in the Cash

 

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Management Agreement. Borrower hereby grants to Lender a first priority security interest in the Cash Management Account and all deposits at any time contained therein and the proceeds thereof and will take all actions necessary to maintain in favor of Lender a perfected first priority security interest in the Cash Management Account, including, without limitation, filing UCC-1 Financing Statements and continuations thereof. Borrower will not in any way alter or modify the Cash Management Account and will notify Lender of the account number thereof. Lender and Servicer shall have the sole right to make withdrawals from the Cash Management Account and all costs and expenses for establishing and maintaining the Cash Management Account shall be paid by Borrower.

(b) The insufficiency of funds on deposit in the Cash Management Account shall not relieve Borrower from the obligation to make any payments, as and when due pursuant to this Agreement and the other Loan Documents, and such obligations shall be separate and independent, and not conditioned on any event or circumstance whatsoever.

(c) Subject to Section 2.6.2(e) hereof, all funds on deposit in the Cash Management Account following the occurrence and during the continuance of an Event of Default may be applied by Lender pursuant to the terms of any Loan Document in such order and priority as Lender shall determine, subject to the terms of Section 7.7 of this Agreement.

(d) Borrower and Operating Lessee hereby agree that Lender may modify the Cash Management Agreement for the purpose of establishing additional sub accounts in connection with any payments otherwise required under this Agreement and the other Loan Documents and Lender shall provide prior written notice thereof to Borrower no less than five (5) Business Days prior to such modification.

(e) Notwithstanding anything contained herein or in the other Loan Documents to the contrary, Lender agrees that, notwithstanding the existence of an Event of Default, prior to a Priority Payment Cessation Event, Lender shall apply amounts on deposit in the Cash Management Account to payment of the Priority Waterfall Payments or, provided that all Priority Waterfall Payments have been made, for Protective Advances as reasonably determined by Lender. During the continuance of an Event of Default, any amounts remaining in the Cash Management Account after payment of the Priority Waterfall Payments and Protective Advances (to the extent a Priority Payment Cessation Event has not occurred) shall applied by Lender in such order and priority as Lender shall determine, subject to the terms of Section 7.7 of this Agreement.

2.6.3. Payments Received Under the Cash Management Agreement. Notwithstanding anything to the contrary contained in this Agreement or the other Loan Documents, and provided no Event of Default has occurred and is continuing, Borrower’s obligations with respect to the payment of the Monthly Debt Service Payment Amount and amounts required to be deposited into the Reserve Funds, if any, shall be deemed satisfied to the extent sufficient amounts are deposited in the Cash Management Account to satisfy such obligations pursuant to this Agreement and the Cash Management Agreement on the dates each such payment is required, regardless of whether any of such amounts are so applied by Lender.

 

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2.6.4. Distributions to Mezzanine Borrowers (if any). All transfers of funds on deposit in the Cash Management Account to the Mezzanine Deposit Accounts or otherwise to or for the benefit of any Mezzanine Lender, pursuant to this Agreement, the Cash Management Agreement or any of the other Loan Documents or Mezzanine Loan Documents are intended by Borrower, the applicable Mezzanine Borrower (if any) and the applicable Mezzanine Lender (if any) to constitute, and shall constitute, distributions from Borrower to the Mezzanine Borrowers and from one Mezzanine Borrower to another Mezzanine Borrower, as applicable. No provision of the Loan Documents or the Mezzanine Loan Documents shall create a debtor-creditor relationship between Borrower and any Mezzanine Lender.

Section 2.7. Withholding Taxes.

(a) Payments Free of Taxes. Any and all payments by or on account of any obligation of the Borrower under any Loan Document shall be made without deduction or withholding for any Section 2.7 Taxes, except as required by applicable law. If any applicable law (as determined in the good faith discretion of the Borrower) requires the deduction or withholding of any Section 2.7 Tax from any such payment by the Borrower, then the Borrower shall be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with applicable law and, if such Section 2.7 Tax is an Indemnified Tax, then the sum payable by the Borrower shall be increased as necessary so that after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable under this Section 2.7(a)) the Lender receives an amount equal to the sum it would have received had no such deduction or withholding been made. For the purposes of this Section 2.7, the term “Loan Documents” shall not include the Interest Rate Cap Agreement, the Assignment of Interest Rate Cap Agreement or any other document with respect thereto, and the term “applicable law” shall include FATCA.

(b) Payment of Other Taxes by the Borrower. The Borrower shall timely pay to the relevant Governmental Authority in accordance with applicable law any Other Taxes.

(c) Indemnification by the Borrower. The Borrower shall indemnify Lender, within 10 days after demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section 2.7) payable or paid by such Lender or required to be withheld or deducted from a payment to such Lender and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Lender shall be conclusive absent manifest error.

(d) Evidence of Payments. As soon as practicable after any payment of Section 2.7 Taxes by the Borrower to a Governmental Authority pursuant to this Section 2.7, the Borrower shall deliver to the Lender the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Lender.

 

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(e) Status of Lenders. (i) Any Lender that is entitled to an exemption from or reduction of withholding Section 2.7 Tax with respect to payments made under any Loan Document shall deliver to the Borrower, at the time or times reasonably requested by the Borrower, such properly completed and executed documentation reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by the Borrower, shall deliver such other documentation prescribed by applicable law or reasonably requested by the Borrower as will enable the Borrower to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than such documentation set forth in Section 2.7(e)(ii)(A), (ii)(B) and (ii)(D) below) shall not be required if in the Lender’s reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.

(ii) Without limiting the generality of the foregoing,

(A) any Lender that is a U.S. Person shall deliver to the Borrower on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower), executed originals of IRS Form W-9 certifying that such Lender is exempt from U.S. federal backup withholding tax;

(B) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower), whichever of the following is applicable:

(1) in the case of a Foreign Lender claiming the benefits of an income tax treaty to which the United States is a party (x) with respect to payments of interest under any Loan Document, executed originals of IRS Form W-8BEN or W8BEN-E establishing an exemption from, or reduction of, U.S. federal withholding Section 2.7 Tax pursuant to the “interest” article of such tax treaty and (y) with respect to any other applicable payments under any Loan Document, IRS Form W-8BEN or W8BEN-E establishing an exemption from, or reduction of, U.S. federal withholding Section 2.7 Tax pursuant to the “business profits” or “other income” article of such tax treaty;

(2) executed originals of IRS Form W-8ECI;

 

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(3) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (x) a certificate substantially in the form attached hereto as Exhibit C-1 to the effect that such Foreign Lender is not a “bank” within the meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of the Borrower within the meaning of Section 881(c)(3)(B) of the Code, or a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code (a “U.S. Tax Compliance Certificate”) and (y) executed originals of IRS Form W-8BEN or W8BEN-E; or

(4) to the extent a Foreign Lender is a partnership or is not the beneficial owner, executed originals of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN or W8BEN-E, a U.S. Tax Compliance Certificate substantially in the form attached hereto as Exhibit C-2 or Exhibit C-3, IRS Form W-9, and/or other certification documents from each beneficial owner, as applicable; provided that if the Foreign Lender is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate substantially in the form attached hereto as Exhibit C-4 on behalf of each such direct and indirect partner;

(C) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower), executed originals of any other form prescribed by applicable law as a basis for claiming exemption from or a reduction in U.S. federal withholding Section 2.7 Tax, duly completed, together with such supplementary documentation as may be prescribed by applicable law to permit the Borrower to determine the withholding or deduction required to be made; and

(D) if a payment made to a Lender under any Loan Document would be subject to a withholding Section 2.7 Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Borrower at the time or times prescribed by law and at such time or times reasonably requested by the Borrower such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower as may be necessary for the Borrower to comply with its obligations under FATCA and to determine that such Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (D), “FATCA” shall include any amendments made to FATCA after the date of this Agreement.

 

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Each Lender agrees that if any form or certification it previously delivered expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify the Borrower in writing of its legal inability to do so.

(f) Treatment of Certain Refunds. If any party determines, in its sole discretion exercised in good faith, that it has received a refund of any Section 2.7 Taxes as to which it has been indemnified pursuant to this Section 2.7 (including by the payment of additional amounts pursuant to this Section 2.7), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section with respect to the Section 2.7 Taxes giving rise to such refund), net of all out-of-pocket expenses (including Section 2.7 Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the amount paid over pursuant to this paragraph (f) (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this paragraph (f), in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this paragraph (f) the payment of which would place the indemnified party in a less favorable net after-tax position than the indemnified party would have been in if the Section 2.7 Tax subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or additional amounts with respect to such Section 2.7 Tax had never been paid. This paragraph shall not be construed to require any indemnified party to make available its tax returns (or any other information relating to its Section 2.7 Taxes that it deems confidential) to the indemnifying party or any other Person.

(g) Survival. Each party’s obligations under this Section 2.7 shall survive any assignment of rights by, or the replacement of, a Lender and the repayment, satisfaction or discharge of all obligations under any Loan Document. Notwithstanding the foregoing or anything to the contrary set forth in this Section 2.7, Borrower shall not be obligated to pay pursuant to this Section 2.7, and Lender shall not be entitled to claim compensation pursuant to this Section 2.7 for any amounts which were incurred or which accrued more than ninety (90) days before the date Lender notified Borrower of the circumstance on which such claim of compensation is based and delivered to Borrower a written statement setting forth in reasonable detail the basis for calculating the amounts payable by Borrower under this Section 2.7.

(h) Lender hereby agrees that, upon the occurrence of any circumstances entitling Lender to additional amounts pursuant to this Section 2.7, Lender shall use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to designate a different applicable lending office for the receipt of payments with respect to, or the funding or booking of, its Loan hereunder, if, in the reasonable judgment of such Lender, such designation (i) would eliminate or reduce such additional amounts payable pursuant to Section 2.7 in the future, and (ii) would not subject such Lender to any material unreimbursed cost or expense and would not otherwise be materially disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with such designation.

 

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Section 2.8. Extension of the Initial Maturity Date. Borrower shall have the option to extend the Initial Maturity Date of the Loan for five (5) successive terms (each such option, an “Extension Option” and each such successive term, an “Extension Term”) of one (1) year each (the Maturity Date following the exercise of each such option is hereinafter the “Extended Maturity Date”) upon satisfaction of the following terms and conditions:

(a) no Event of Default shall have occurred and be continuing at the commencement of the applicable Extension Term;

(b) Borrower shall provide Lender with written revocable notice of its election to extend the Maturity Date as aforesaid not later than thirty (30) days and not earlier than one hundred twenty (120) days prior to the date the Loan is then scheduled to mature (provided that if Borrower shall subsequently revoke such notice, Borrower shall be responsible for Lender’s reasonable, out-of-pocket costs and expenses incurred in connection with same);

(c) if the Interest Rate Cap Agreement is scheduled to mature prior to the applicable Extended Maturity Date, Borrower shall obtain and deliver to Lender on the first day of each Extension Option, one or more Interest Rate Cap Agreements in form substantially identical to the Interest Rate Cap Agreements delivered to Lender in connection with the closing of the Loan or in a form otherwise reasonably acceptable to Lender from an Acceptable Counterparty in a notional amount equal to the then outstanding principal balance of the Loan, which Interest Rate Cap Agreement shall have a LIBOR strike price that is not greater than the Strike Price and be effective commencing on the first date of such Extension Option and shall have a maturity date not earlier than the applicable Extended Maturity Date after giving effect to the option then being exercised;

(d) if any Mezzanine Loan is then outstanding, Lender shall have received evidence that each such Mezzanine Loan shall have a maturity date not earlier than the Extended Maturity Date or shall have been repaid or extended (or will be contemporaneously extended) through a date not earlier than the applicable Extended Maturity Date; and.

(e) the Spread with respect to each Component shall be increased by 12.5 basis points (0.125%) for the fourth Extension Term and by an additional 12.5 basis points (0.125%) for the fifth Extension Term.

ARTICLE III.

CONDITIONS PRECEDENT

Section 3.1. Conditions Precedent to Closing. The obligation of Lender to make the Loan hereunder is subject to the fulfillment by Borrower or waiver by Lender of all of the conditions precedent to closing set forth in the term sheet for the Loan.

 

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ARTICLE IV.

REPRESENTATIONS AND WARRANTIES

Section 4.1. Borrower Representations. Each Individual Borrower and Operating Lessee represent and warrant as of the Closing Date that:

4.1.1. Organization. Each of Borrower, Principal and Operating Lessee has been duly organized and is validly existing and in good standing with requisite power and authority to own or lease the applicable Individual Property and to transact the businesses in which it is now engaged. Each of Borrower and Operating Lessee is duly qualified to do business and is in good standing in each jurisdiction where it is required to be so qualified in connection with its businesses and operations. Each of Borrower and Operating Lessee possesses all rights, licenses, permits and authorizations, governmental or otherwise, necessary to entitle it to own or lease the applicable Individual Property and to transact the businesses in which it is now engaged, except to the extent the failure to possess such rights, licenses and permits would not reasonably be expected to materially and adversely affect Borrower, Operating Lessee or any Individual Property. Except as otherwise set forth in subsection (i) of the definition of “Special Purpose Entity”, the sole business of Borrower and Operating Lessee is the ownership, leasing, management and operation of the related Properties. The ownership interests in Borrower and Operating Lessee are as set forth on the organizational chart attached hereto as Schedule 4.1.1.

4.1.2. Proceedings. Each of Borrower and Operating Lessee has taken all necessary action to authorize the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party. This Agreement and such other Loan Documents to which it is a party have been duly executed and delivered by or on behalf of Borrower and Operating Lessee, as applicable, and constitute legal, valid and binding obligations of Borrower and Operating Lessee, as applicable, enforceable against Borrower and Operating Lessee, as applicable, in accordance with their respective terms, subject only to applicable bankruptcy, insolvency and similar laws affecting rights of creditors generally, and subject, as to enforceability, to general principles of equity (regardless of whether enforcement is sought in a proceeding in equity or at law).

4.1.3. No Conflicts. The execution, delivery and performance of this Agreement and the other Loan Documents by Borrower and Operating Lessee, as applicable, will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance (other than pursuant to the Loan Documents) upon any of the property or assets of Borrower or Operating Lessee pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, partnership agreement, management agreement or other agreement or instrument to which Borrower or Operating Lessee is a party or by which any of Borrower’s or Operating Lessee’s property or assets are subject (unless consents from all applicable parties thereto have been obtained), nor will such action result in any violation of the provisions of any statute or any order, rule or regulation of any Governmental Authority having jurisdiction over Borrower or Operating Lessee or any of Borrower’s or Operating Lessee’s properties or assets, and any consent, approval,

 

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authorization, order, registration or qualification of or with any court or any such Governmental Authority required for the execution, delivery and performance by Borrower or Operating Lessee of this Agreement or any other Loan Documents to which it is a party has been obtained and is in full force and effect.

4.1.4. Litigation. Except as set forth on Schedule 4.1.4 attached hereto, there are no actions, suits or proceedings at law or in equity by or before any Governmental Authority or other agency or any unpaid indemnification obligations for which a claim has been made now pending or to Borrower’s or Operating Lessee’s knowledge, threatened against or affecting Borrower, Principal, Operating Lessee or any Individual Property, which actions, suits, proceedings or any unpaid indemnification obligations, if determined against Borrower, Principal, Operating Lessee or any Individual Property, would reasonably be expected to have a material adverse effect on the condition (financial or otherwise) or business of Borrower, Principal and Operating Lessee, taken as a whole, or the condition or ownership of any Individual Property.

4.1.5. Agreements. Neither Borrower nor Operating Lessee is a party to any agreement or instrument or subject to any restriction which would reasonably be expected to materially and adversely affect Borrower and Operating Lessee, taken as a whole, or any Individual Property, or, taken as a whole, Borrower’s and Operating Lessee’s business, properties or assets, operations or condition, financial or otherwise. Neither Borrower nor Operating Lessee is in default in any material respect in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement or instrument to which it is a party or by which Borrower, Operating Lessee or any of the Properties is bound, except to the extent such default would not reasonably be expected to materially and adversely affect Borrower and Operating Lessee, taken as a whole, or any Individual Property. Neither Borrower nor Operating Lessee has any material financial obligation under any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which Borrower or Operating Lessee is a party or by which Borrower, Operating Lessee or the Properties are otherwise bound, other than (a) obligations incurred in the ordinary course of the operation of the Properties as permitted pursuant to clause (xxiii) of the definition of “Special Purpose Entity” set forth in Section 1.1 hereof and (b) Permitted Indebtedness or obligations under the Loan Documents. Other than with respect to the Ground Leases, the Property Documents, the Operating Leases, the Management Agreements, the Franchise Agreements, the Franchise Guaranties and any documents disclosed in the Title Insurance Policies, all agreements or other instruments to which Borrower and/or Operating Lessee is a party or otherwise relating to the Individual Properties are (x) terminable upon no more than thirty (30) days’ prior written notice without penalty or fee or (y) with respect to such agreement or instrument, require Borrower and/or Operating Lessee, as applicable, to make payments during each calendar year during the term of such agreement or instrument in an aggregate yearly amount with respect to any Individual Property that is less than or equal to $250,000.

 

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4.1.6. Title. Borrower has good, marketable and insurable fee simple title to the real property (or a leasehold estate as it relates to the Ground Leased Properties) comprising part of each Individual Property and good title to the balance of such Individual Property, free and clear of all Liens whatsoever except the Permitted Encumbrances, such other Liens as are permitted pursuant to the Loan Documents and the Liens created by the Loan Documents. Operating Lessee has good, marketable and insurable title to the leasehold estate created by the Operating Lease, free and clear of all Liens whatsoever except the Permitted Encumbrances, such other Liens as are permitted pursuant to the Loan Documents and the Liens created by the Loan Documents. The Permitted Encumbrances in the aggregate do not materially and adversely affect the value, operation or use of any applicable Individual Property (as currently used) or Borrower’s ability to repay the Loan. Each Mortgage, when properly recorded in the appropriate records, together with any Uniform Commercial Code financing statements required to be filed in connection therewith, will create (a) a valid, perfected first priority lien on Borrower’s and Operating Lessee’s interests in the applicable Individual Property, subject only to Permitted Encumbrances and the Liens created by the Loan Documents and (b) perfected security interests in and to, and perfected collateral assignments of, all personalty (including the Leases) to the extent a security interest may be perfected therein by the recording of the Mortgage or the filing of a financing statement under the Uniform Commercial Code, all in accordance with the terms thereof, in each case subject only to any applicable Permitted Encumbrances, such other Liens as are permitted pursuant to the Loan Documents and the Liens created by the Loan Documents. Except as set forth in Schedule 4.1.6 or in the Title Insurance Policies, to Borrower’s and Operating Lessee’s knowledge, there are no claims for payment for work, labor or materials affecting the Properties which are a Lien prior to, or of equal priority with, the Liens created by the Loan Documents and as to which Lender has not otherwise received affirmative insurance in the applicable Title Insurance Policy (in form and substance satisfactory to Lender in all respects).

4.1.7. Solvency. Neither Borrower nor Operating Lessee has entered into this transaction or executed the Note, this Agreement or any other Loan Documents with the actual intent to hinder, delay or defraud any creditor and each of Borrower and Operating Lessee has received reasonably equivalent value in exchange for its obligations under such Loan Documents. After giving effect to the Loan, the fair saleable value of Borrower’s and Operating Lessee’s assets exceeds and will, immediately following the making of the Loan, exceed Borrower’s and Operating Lessee’s total liabilities, including, without limitation, subordinated, unliquidated, disputed and contingent liabilities. The fair saleable value of Borrower’s and Operating Lessee’s assets is and will, immediately following the making of the Loan, be greater than Borrower’s and Operating Lessee’s probable liabilities, including the maximum amount of its contingent liabilities on its debts as such debts become absolute and matured. Borrower’s and Operating Lessee’s assets do not and, immediately following the making of the Loan will not, constitute unreasonably small capital to carry out its business as conducted or as proposed to be conducted. Neither Borrower nor Operating Lessee intends to, or believes that it will, incur debt and liabilities (including contingent liabilities and other commitments) beyond its ability to pay such debt and liabilities as they mature (taking into account the timing and amounts of cash to be received by Borrower or Operating Lessee and the amounts to be payable on or in respect of obligations of Borrower or Operating Lessee). No petition in bankruptcy has been filed against Borrower, Principal, Operating Lessee or any of their respective constituent Persons in the last seven (7) years,

 

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and none of Borrower, Principal, Operating Lessee or any constituent Person in the last seven (7) years has ever made an assignment for the benefit of creditors or taken advantage of any insolvency act for the benefit of debtors. None of Borrower, Operating Lessee or any of their respective constituent Persons are contemplating either the filing of a petition by it under any state or federal bankruptcy or insolvency laws or the liquidation of all or a major portion of Borrower’s, Principal’s or Operating Lessee’s assets or property, and neither Borrower nor Operating Lessee has any knowledge of any Person contemplating the filing of any such petition against it or such constituent Persons.

4.1.8. Full and Accurate Disclosure. No statement of fact made by Borrower or Operating Lessee in this Agreement or in any of the other Loan Documents contains any untrue statement of a material fact or omits to state any material fact necessary to make statements contained herein or therein not misleading. There is no material fact presently known to Borrower or Operating Lessee which has not been disclosed to Lender which adversely affects, nor as far as Borrower or Operating Lessee can reasonably foresee, would be reasonably likely to materially and adversely affect, any Individual Property or the business, operations or condition (financial or otherwise) of Borrower and/or Operating Lessee.

4.1.9. No Plan Assets. As of the date of this Agreement, none of Borrower, Operating Lessee or Guarantor is an “employee benefit plan,” as defined in Section 3(3) of ERISA, whether or not subject to Title I of ERISA, and none of the respective assets of Borrower, Operating Lessee or Guarantor constitute “plan assets” of any benefit plan investor within the meaning of 29 C.F.R. Section 2510.3-101, as modified by Section 3(42) of ERISA (the “Plan Asset Regulations”). Except as could not reasonably be expected, individually or in the aggregate to have a material adverse effect on Borrower, Operating Lessee or any Property, none of Borrower, Operating Lessee, Guarantor or any ERISA Affiliate is obligated to contribute to any employee benefit plan (as so defined) subject to Title IV of ERISA. Assuming compliance by the Lender with paragraph (d) of Section 5.2.9 of this Agreement, transactions contemplated hereunder by or with Borrower, Operating Lessee or Guarantor are not subject to any state or other statute or regulation applicable to Borrower, Operating Lessee or Guarantor with respect to governmental plans within the meaning of Section 3(32) of ERISA which are substantially similar to the prohibited transaction provisions of Section 406 of ERISA or Section 4975 of the Code currently in effect and which prohibit the transactions contemplated by this Agreement, including, but not limited to the exercise by Lender of any of its rights under the Loan Documents.

4.1.10. Compliance. Except as set forth on the zoning reports for each Individual Property delivered to Lender on or before the Closing Date, Borrower, Operating Lessee and the Properties and the use thereof comply in all material respects with all applicable Legal Requirements, including, without limitation, building and zoning ordinances and codes, except to the extent such failure to comply would not reasonably be expected to have a material adverse effect on the Individual Property. Neither Borrower nor Operating Lessee is in default or violation of any order, writ, injunction, decree or demand of any Governmental Authority. There has not been committed by Borrower or Operating Lessee or to the best of Borrower’s or Operating

 

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Lessee’s knowledge, any other Person in occupancy of or involved with the operation or use of the Properties any act or omission affording the federal government or any other Governmental Authority the right of forfeiture as against any Individual Property or any part thereof or any monies paid in performance of Borrower’s or Operating Lessee’s obligations under any of the Loan Documents.

4.1.11. Financial Information. All financial data, including, without limitation, the statements of cash flow and income and operating expense, that have been delivered to Lender in connection with the Loan (i) are true, complete and correct in all material respects (or to the extent that any such financial data was incorrect in any material respect when delivered, the same have been corrected by financial data subsequently delivered to Lender prior to the Closing Date in writing and containing an express reference to any and all such concerns), (ii) accurately represent the financial condition of Borrower, Operating Lessee and the Properties, as applicable, as of the date of such reports, and (iii) to the extent prepared or audited by an independent certified public accounting firm, have been prepared in accordance with GAAP throughout the periods covered, except as disclosed therein. The foregoing representation shall not apply to any such financial data that constitutes projections, provided that each of Borrower and Operating Lessee represents and warrants that such projections were made in good faith and that neither Borrower nor Operating Lessee has any reason to believe that such projections are materially inaccurate. Except for Permitted Encumbrances, neither Borrower nor Operating Lessee has any contingent liabilities, liabilities for taxes, unusual forward or long term commitments or unrealized or anticipated losses from any unfavorable commitments that are known to Borrower or Operating Lessee and are reasonably likely to have a material adverse effect on any Individual Property or the current operation thereof as a hotel, except as referred to or reflected in said financial statements. Since the date of such financial statements, there has been no materially adverse change in the financial condition, operations or business of Borrower or Operating Lessee from that set forth in said financial statements.

4.1.12. Condemnation. Except as set forth on Schedule 4.1.12, no Condemnation or other proceeding has been commenced or, to the best of Borrower’s or Operating Lessee’s knowledge, is threatened or, to Borrower’s or Operating Lessee’s knowledge, contemplated with respect to all or any portion of any Individual Property or for the relocation of roadways providing access to any Individual Property, other than to the extent the same would not reasonably be expected to have a material adverse effect on the Individual Property affected thereby.

4.1.13. Federal Reserve Regulations. No part of the proceeds of the Loan will be used for the purpose of purchasing or acquiring any “margin stock” within the meaning of Regulation U of the Board of Governors of the Federal Reserve System or for any other purpose which would be inconsistent with such Regulation U or any other Regulations of such Board of Governors, or for any purposes prohibited by Legal Requirements or by the terms and conditions of this Agreement or the other Loan Documents.

 

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4.1.14. Utilities and Public Access. Except as set forth in the Title Insurance Policies or the Surveys or except to the extent that there is no material adverse effect on any Individual Property, (i) each Individual Property has rights of access to public ways and is served by water, sewer, sanitary sewer and storm drain facilities adequate to service such Individual Property for its respective intended uses; (ii) all public utilities necessary or convenient to the full use and enjoyment of each Individual Property are located either in the public right of way abutting such Individual Property (which are connected so as to serve such Individual Property without passing over other property) or in recorded easements serving such Individual Property and such easements are set forth in and insured by the Title Insurance Policies; and (iii) all roads necessary for the use of each Individual Property for their current respective purposes have been completed and dedicated to public use and accepted by all Governmental Authorities.

4.1.15. Not a Foreign Person. Neither Borrower nor Operating Lessee (or if any of Borrower or Operating Lessee is a disregarded entity for U.S. federal income tax purposes, such entity’s beneficial owner) is a “foreign person” within the meaning of § 1445(f)(3) of the Code.

4.1.16. Separate Lots. Except as set forth in the Title Insurance Policies or on Schedule 4.1.16, each Individual Property is comprised of one (1) or more parcels which constitute a separate tax lot or lots and does not constitute a portion of any other tax lot not a part of such Individual Property.

4.1.17. Assessments. Except as set forth in the Title Insurance Policies or on Schedule 4.1.17, to Borrower’s or Operating Lessee’s knowledge, there are no pending or, to Borrower’s or Operating Lessee’s knowledge, proposed special or other assessments for public improvements or otherwise affecting any Individual Property, nor are there any contemplated improvements to any Individual Property that may result in such special or other assessments, except to the extent such assessment would not have a material adverse effect on the Individual Property.

4.1.18. Enforceability. The Loan Documents are enforceable by Lender (or any subsequent holder thereof) in accordance with their respective terms, subject to principles of equity and bankruptcy, insolvency and other laws generally applicable to creditors’ rights and the enforcement of debtors’ obligations. The Loan Documents are not subject to any right of rescission, set off, counterclaim or defense by Borrower, Operating Lessee or Guarantor, including the defense of usury, nor would the operation of any of the terms of the Loan Documents, or the exercise of any right thereunder, render the Loan Documents unenforceable (subject to principles of equity and bankruptcy, insolvency and other laws generally affecting creditors’ rights and the enforcement of debtors’ obligations), and none of Borrower, Operating Lessee or Guarantor has asserted any right of rescission, set off, counterclaim or defense with respect thereto.

4.1.19. No Prior Assignment. There are no prior assignments of the Leases or any portion of the Rents due and payable or to become due and payable which are presently outstanding except in accordance with the Loan Documents.

 

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4.1.20. Insurance. Borrower has obtained and has delivered to Lender a certificate of insurance for all Policies (or certified copies of any Policy, to the extent Lender shall have requested the same) reflecting the insurance coverages, amounts and other requirements set forth in this Agreement. No claims have been made or are currently pending (except as set forth on Schedule 4.1.20), outstanding or otherwise remain unsatisfied under any such Policy and would reasonably be expected to have a material adverse effect with respect to any Individual Property, Borrower’s or Operating Lessee’s ability to perform its obligations under the Loan Documents and/or Lender’s security interest in such Individual Property, and none of Borrower, Operating Lessee or, to Borrower’s or Operating Lessee’s knowledge, any other Person, has done, by act or omission, anything which would impair the coverage of any such Policy.

4.1.21. Use of Property. Each Individual Property is used exclusively for hotel purposes and other appurtenant and related uses

4.1.22. Certificate of Occupancy; Licenses. Except as set forth on Schedule 4.1.22 or the zoning reports delivered to Lender in connection with the closing of the Loan, all certifications, permits, licenses and approvals, including without limitation, certificates of completion and occupancy permits and any applicable liquor license required for the legal use, occupancy and operation of each Individual Property as a hotel (collectively, the “Licenses”), have been obtained and are in full force and effect, except for where the failure to obtain such licenses or for such licenses to not be in full force and effect does not have a material adverse effect on Borrower and Operating Lessee, taken as a whole, or any Individual Property. Borrower and Operating Lessee shall (or shall cause Manager or an Affiliate of Manager to) keep and maintain all Licenses necessary for the operation of each Individual Property as a hotel to the extent the failure to have such licenses would reasonably be expected to result in a material adverse effect with respect to the Individual Property to which it relates. The use being made of each Individual Property is in conformity in all material respects with the certificate of occupancy, if any, issued for such Individual Property.

4.1.23. Flood Zone. Except as set forth in the Surveys or the flood determinations obtained by Lender or Schedule 4.1.23 attached hereto, none of the Improvements on any Individual Property are located in an area as identified by the Federal Emergency Management Agency as an area having special flood hazards and, if so located, the flood insurance required pursuant to Section 6.1(a)(i) is in full force and effect with respect to each such Individual Property.

4.1.24. Physical Condition. Except if the same do not, in the aggregate in respect of the Individual Property affected thereby, have a material adverse effect on such Individual Property, and except as disclosed in the property condition reports delivered to Lender in connection with the making of the Loan, to Borrower’s and Operating Lessee’s knowledge, (i) each Individual Property, including, without limitation, all buildings, improvements, parking facilities, sidewalks, storm drainage systems, roofs, plumbing systems, HVAC systems, fire protection systems, electrical systems, equipment, elevators, exterior sidings and doors, landscaping, irrigation systems and all structural components, are in good condition, order and repair in all material respects; and (ii) there

 

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exists no structural or other material defects or damages in any Individual Property, whether latent or otherwise, and neither Borrower nor Operating Lessee has received notice from any insurance company or bonding company of any defects or inadequacies in any Individual Property, or any part thereof, which have not been remedied prior to the Closing Date and would adversely affect the insurability of the same or cause the imposition of extraordinary premiums or charges thereon or of any termination or threatened termination of any policy of insurance or bond.

4.1.25. Boundaries. Except as set forth in the Surveys, all of the improvements which were included in determining the appraised value of each Individual Property lie wholly within the boundaries and building restriction lines of such Individual Property, and, except as disclosed in the Surveys, no improvements on adjoining properties encroach upon any Individual Property, and no easements or other encumbrances upon any Individual Property encroach upon any of the Improvements, so as to materially affect the value or marketability of the applicable Individual Property except those which are insured against by the applicable Title Insurance Policy.

4.1.26. Leases. To Borrower’s and Operating Lessee’s knowledge, the Properties are not subject to any Material Leases other than the Material Leases described in the rent roll attached hereto as Schedule 4.1.26 and made a part hereof, which rent roll, to Borrower’s and Operating Lessee’s knowledge, is true, complete and accurate in all material respects as of the Closing Date. With respect to each Individual Property, Operating Lessee is the owner and lessor of landlord’s interest in the applicable Leases. To Borrower’s and Operating Lessee’s knowledge, (i) with the exception of hotel guests and patrons and certain telecommunication and antenna licenses, no Person has any possessory interest in any Individual Property or right to occupy the same except under and pursuant to the provisions of the Leases, (ii) the current Material Leases are in full force and effect and neither Borrower nor Operating Lessee has received or delivered written notice that either party is in default under a Material Lease except for (A) defaults which have been cured and (B) defaults that do not, in the aggregate for any Individual Property, have a materially adverse effect. No Rent has been paid more than one (1) month in advance of its due date (except with respect to provision of rooms and banquet and meeting space and services in the ordinary course of business). To Borrower’s and Operating Lessee’s knowledge, no Tenant listed on Schedule 4.1.26 has assigned its Lease or sublet all or any portion of the premises demised thereby, no such Tenant holds its leased premises under assignment or sublease, nor does anyone except such Tenant and its employees occupy such leased premises. No Tenant under any Lease has a right or option pursuant to such Lease or otherwise to purchase all or any part of the leased premises or the building of which the leased premises are a part and no tenant under any Lease has any right or option for additional space in the Improvements.

4.1.27. Survey. To Borrower’s and Operating Lessee’s knowledge, except as shown in the Title Insurance Policies, the Survey for each Individual Property delivered to Lender in connection with this Agreement does not fail to reflect any material matter affecting such Individual Property or the title thereto, except to the extent the same would not be reasonably be expected to have a material adverse effect on Borrower and Operating Lessee, taken as a whole, or an Individual Property.

 

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4.1.28. Inventory. Borrower is the owner of or leases (or Manager as agent for Borrower or Operating Lessee, as applicable in accordance with the Management Agreement leases) all of the Equipment, Fixtures and Personal Property (as such terms are defined in the Mortgages) located on or at each Individual Property. All of the Equipment, Fixtures and Personal Property are sufficient to operate the Properties in the manner required hereunder and in the manner in which they are currently operated.

4.1.29. Filing and Recording Taxes. All mortgage, mortgage recording, stamp, intangible or other similar tax required to be paid by any Person under applicable Legal Requirements currently in effect in connection with the execution, delivery, recordation, filing, registration, perfection or enforcement of any of the Loan Documents, including, without limitation, the Mortgages, have been paid (or sufficient funds have been escrowed with the Title Company for such payment), and, under current Legal Requirements, each of the Mortgages are enforceable in accordance with their respective terms by Lender (or any subsequent holder thereof), subject to principles of equity and bankruptcy, insolvency and other laws generally applicable to creditors’ rights and the enforcement of debtors’ obligations.

4.1.30. Special Purpose Entity/Separateness. (a) Except as disclosed on Schedule 4.1.30, each Loan Party has at all times been and is a Special Purpose Entity.

(b) The representations and warranties set forth in Section 4.1.30 shall survive for so long as any amount remains payable to Lender under this Agreement or any other Loan Document.

(c) Any and all of the stated facts and assumptions made in any Insolvency Opinion, including, but not limited to, any exhibits attached thereto, will have been true and correct in all respects, and each Loan Party will have complied with all of the stated facts and assumptions made with respect to it in any Insolvency Opinion, in each case as of the date of such Insolvency Opinion. To Borrower’s and Operating Lessee’s knowledge, each entity other than the Loan Parties with respect to which an assumption is made or a fact stated in any Insolvency Opinion will have complied with all of the assumptions made and facts stated with respect to it in any such Insolvency Opinion, in each case as of the date of such Insolvency Opinion.

(d) Each Loan Party hereby represents with respect to itself and each other Loan Party that any amendment or restatement of any organizational document of any Loan Party has been accomplished in accordance with, and was permitted by, the relevant provisions of such document prior to its amendment or restatement from time to time.

(e) Any amendment or restatement of any Loan Party’s organizational documents was accomplished in accordance with, and was permitted by, the relevant provisions of applicable law and the relevant provisions of said document prior to its amendment or restatement from time to time.

 

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(f) Each Loan Party that is a limited liability company and Principal has at all times had at least one member and each Loan Party that is a limited partnership has at all times had one general partner and one limited partner that were different Persons, as applicable.

(g) Any payments made pursuant to the Loan Documents to or for the benefit of any Borrower or any Mezzanine Borrower shall constitute distributions to or at the discretion of the applicable equity owner of such entity.

(h) The Organizational Documents for each Loan Party that is a Delaware limited liability company shall provide that except for duties to any Loan Party as set forth in the Organizational Documents (including duties to the member and any Loan Party’s creditors solely to the extent of their respective economic interests in such Loan Party, but excluding (i) all other interests of the member, (ii) the interests of other Affiliates of a Loan Party, and (iii) the interests of any group of Affiliates of which a Loan Party is a part), the Independent Directors shall not have any fiduciary duties to the member, any officer or any other Person bound by the applicable Loan Party’s Organizational Documents; provided, however, the foregoing shall not eliminate the implied contractual covenant of good faith and fair dealing. The Organizational Documents for each Loan Party’s that is a Delaware limited liability company shall provide that to the fullest extent permitted by law, including Section 18-1101(e) of the Delaware Limited Liability Company Act, an Independent Director shall not be liable to Borrower, the member or any other Person bound by the applicable Loan Party’s Organizational Documents for breach of contract or breach of duties (including fiduciary duties), unless the Independent Director acted in bad faith or engaged in willful misconduct. The Organizational Documents for each Loan Party that is a Delaware limited liability company shall provide that all right, power and authority of the Independent Directors shall be limited to the extent necessary to exercise those rights and perform those duties specifically set forth in the applicable Loan Party’s Organizational Documents. The Organizational Documents for each Loan Party that is a Delaware limited liability company shall provide that notwithstanding any other provision of the applicable Loan Party’s Organizational Documents to the contrary, each Independent Director, in its capacity as an Independent Director, may only act, vote or otherwise participate in those matters referred to in Section 9(j)(iii) of the applicable Loan Party’s Organizational Documents or as otherwise specifically required by the applicable Organizational Documents, and such Independent Director’s act, vote or other participation shall not be required for the validity of any action taken by the board of directors of such Borrower unless, pursuant to the provisions of Section 9(j)(iii) or as otherwise specifically provided in the applicable Organizational Documents, such action would be invalid in the absence of the affirmative vote or consent of such Independent Director. The Organizational Documents of each Loan Party that is not a Delaware limited liability company shall contain terms and provisions similar to the terms and provisions set forth in this subclause (h) to the extent permitted by applicable law.

(i) Without limiting the foregoing in this Section 4.1.30, each Loan Party and except as set forth on Schedule 4.1.30 (i) has since the date of its formation been duly formed, validly existing and in good standing in the state of its incorporation or formation and in all other jurisdictions where it is qualified to do business, (ii) subject to its right to contest taxes in good faith by appropriate proceedings, is not involved in any dispute with any taxing authority which is reasonably likely to have a material adverse effect on any Individual Property or the Loan Parties (taken as a whole), (iii) is not now and has never been, party to any lawsuit, arbitration,

 

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summons or legal proceeding that resulted in a judgment against it that has not been paid in full, and (iv) has all times since the date of its formation been a single purpose, bankruptcy remote entity and complied with the separateness covenants set forth in its respective Organizational Documents.

(j) Intentionally omitted.

(k) Each Loan Party has no judgments or Liens of any nature against it except for Section 2.7 Tax liens not yet due and the Permitted Encumbrances.

(l) Each Loan Party has provided Lender with complete financial statements that reflect a fair and accurate view of the entity’s financial condition.

(m) Except as set forth in Section 4.1.30(n), each Loan Party has no material contingent or actual obligations not related to the Property, in each case other than in connection with (A) with respect to BRE Select Hotels Properties Borrower, BRE Select Hotels Properties Borrower’s limited liability company interest in Operating Lessee, (B) with respect to BRE Select Hotels Properties II Borrower, BRE Select Hotels Properties II Borrower’s limited liability company interest in BRE Select Hotels Properties II Sub, or (C) with respect to each Principal, such Principal’s general partnership interest and obligations with respect to the Loan Party in which it owns an interest.

(n) Each Loan Party has no material contingent or actual obligations related to any Previously Owned Property except (i) to the extent such obligations are (x) covered by insurance, or (y) subject to reimbursement from a third-party or (ii) obligations pursuant to the Previously-Owned Property Sale Agreements.

4.1.31. Management Agreement. Each Management Agreement is in full force and effect and, to Borrower’s and Operating Lessee’s knowledge, there is no material default thereunder by any party thereto and no event has occurred that, with the passage of time and/or the giving of notice would constitute a material default thereunder. Each Management Agreement was entered into on commercially reasonable terms. The aggregate amount of key money and development money to be paid to any Borrower and/or Operating Lessee under the Management Agreements and Franchise Agreements, as of the date hereof, is $348,751.43.

4.1.32. Illegal Activity. No portion of any Individual Property has been or will be purchased by Borrower or Operating Lessee with proceeds of any illegal activity.

4.1.33. No Change in Facts or Circumstances; Disclosure. To Borrower’s and Operating Lessee’s knowledge, all information submitted by and on behalf of Borrower and Operating Lessee to Lender and in all financial statements, rent rolls (including the rent roll attached hereto as Schedule 4.1.26), reports, certificates and other documents submitted in connection with the Loan or in satisfaction of the terms thereof and all statements of fact made by Borrower or Operating Lessee in this Agreement or in any other Loan Document, are true, complete and correct in all material respects (or to the extent any such data was incorrect in any material respect when delivered, the same has been corrected by information subsequently delivered to Lender on or prior to the

 

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date hereof). The foregoing representation shall not apply to any such financial information that constitutes projections, provided that each of Borrower and Operating Lessee represents and warrants that it has no reason to believe that such projections are materially inaccurate. There has been no material adverse change in any condition, fact, circumstance or event that would make any such information inaccurate, incomplete or otherwise misleading in any material respect or that otherwise materially and adversely affects or might materially and adversely affect the use, operation or value of the Properties or the business operations or the financial condition of Borrower or Operating Lessee, taken as a whole (except to the extent further disclosed in writing to Lender). Each of Borrower and Operating Lessee has disclosed to Lender all material facts known to Borrower and Operating Lessee and has not failed to disclose any material fact known to Borrower or Operating Lessee that could cause any Provided Information or representation or warranty made herein to be materially misleading.

4.1.34. Investment Company Act. Neither Borrower nor Operating Lessee is (a) an “investment company” or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended; (b) a “holding company” or a “subsidiary company” of a “holding company” or an “affiliate” of either a “holding company” or a “subsidiary company” within the meaning of the Public Utility Holding Company Act of 2005, as amended; or (c) subject to any other federal or state law or regulation which purports to restrict or regulate its ability to borrow money.

4.1.35. Embargoed Person. As of the date hereof, (a) none of the funds or other assets of Borrower or any other Loan Party constitute property of, or are beneficially owned, directly or indirectly, by any person, entity or government subject to trade restrictions under U.S. law, including but not limited to, the USA PATRIOT Act (including anti-terrorism provisions thereof), the International Emergency Economic Powers Act, 50 U.S.C. §§ 1701 et seq., The Trading with the Enemy Act, 50 U.S.C. App. 1 et seq., and any Executive Orders or regulations promulgated thereunder with the result that the investment in Borrower or any other Loan Party (whether directly or indirectly), is prohibited by law or the Loan made by the Lender is in violation of law (“Embargoed Person”); (b) none of the funds or other assets of Borrower or any other Loan Party constitute property of, or are beneficially owned, directly or indirectly, by any Embargoed Person; (c) no Embargoed Person has any interest of any nature whatsoever in Borrower with the result that the investment in Borrower or any other Loan Party (whether directly or indirectly), is prohibited by law or the Loan is in violation of law; and (d) none of the funds of Borrower or any other Loan Party have been derived from or are the proceeds of, any unlawful activity with the result that the investment in Borrower or any other Loan Party (whether directly or indirectly), is prohibited by law or the Loan is in violation of law. Notwithstanding the foregoing, the representations contained in this Section 4.1.35, to the extent they relate to the Preferred Shares, or any interest therein or holder thereof, are made to Borrower’s knowledge.

4.1.36. Principal Place of Business; State of Organization. Borrower’s and Operating Lessee’s principal place of business as of the date hereof is the address set forth in the introductory paragraph of this Agreement. The Borrower and Operating Lessee are organized under the laws of the State of Delaware and their organizational identification numbers are listed in Schedule 4.1.36.

 

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4.1.37. Reserved.

4.1.38. Reserved.

4.1.39. Ground Lease. Except as set forth on Schedule 4.1.39:

(a) The Ground Lease or a memorandum of such Ground Lease has been duly recorded. Each Ground Lease permits the interest of Borrower (and Operating Lessee) to be encumbered by a mortgage or the Ground Lessor has approved and consented to the encumbrance of the Ground Leased Property by the applicable Mortgage. There have not been amendments or modifications to the terms of the Ground Lease since recordation of the Ground Lease (or a memorandum thereof), with the exception of written instruments disclosed to Lender in this Agreement;

(b) The Ground Lease may not be terminated, surrendered or amended without the prior written consent of Lender; provided that the Ground Lessor shall not be prevented from exercising its remedies in accordance with the Ground Lease if the obligations of Borrower under the Ground Lease are not performed as provided in the Ground Lease;

(c) Except for the Permitted Encumbrances and other encumbrances of record, Borrower’s interest in the Ground Lease is not subject to any Liens or encumbrances superior to, or of equal priority with, the applicable Mortgage other than the Ground Lessor’s related fee interest;

(d) In the event of a foreclosure or assignment or transfer in lieu of foreclosure, the Lender has a one-time right to assign the Ground Lease without the Ground Lessor’s consent without being subject to the net worth tests set forth in the Ground Lease;

(e) As of the date hereof, the Ground Lease is in full force and effect and no default has occurred on the part of the Borrower under the Ground Lease, nor to Borrower’s knowledge has any default occurred by the Ground Lessor under the Ground Lease (except in each case, any such default that has been previously cured). There is no existing condition which, but for the passage of time or the giving of notice, could result in (i) a default by the Borrower under the terms of the Ground Lease or (ii) to Borrower’s knowledge, a default by Ground Lessor under the terms of the Ground Lease;

(f) Under the terms of the Ground Lease and the Loan Documents, taken together, any related insurance and condemnation proceeds that are paid or awarded to Borrower with respect to the leasehold interest will be applied pursuant to the terms of the Loan Documents;

(g) The Ground Lease requires the Ground Lessor to give notice of any default by Borrower to Lender prior to exercising its remedies thereunder;

 

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(h) Lender is permitted the opportunity to cure any default under the Ground Lease, which is curable after the receipt of notice of the default before the Ground Lessor thereunder may terminate the Ground Lease;

(i) The Ground Lease has a term which extends not less than twenty (20) years beyond the Maturity Date (including any unexercised option periods and automatic renewal periods);

(j) The Ground Lease requires the Ground Lessor to enter into a new lease upon termination (prior to expiration of the term thereof) of the Ground Lease for any reason including rejection or disaffirmation of the Ground Lease in a bankruptcy proceeding; and

(k) The Ground Lease does not impose any restrictions on subleasing that would be reasonably expected to have a material adverse effect on the operation of the Borrower’s business as currently operated, provided the tenant under the Ground Lease remains primarily liable for such tenant’s obligations thereunder.

4.1.40. Cash Management Account.

(a) The Cash Management Agreement, the Concentration Account Agreement, each Clearing Account Agreement and this Agreement create a valid and continuing security interest (as defined in the Uniform Commercial Code of the State of New York) in each Clearing Account, the Concentration Account and the Cash Management Account (to the extent the Cash Management Account is opened as of the date hereof) in favor of Lender, which security interest is prior to all other Liens, other than Permitted Encumbrances, and is enforceable as such against creditors of and purchasers from Borrower and/or Operating Lessee. Other than in connection with prior financings that have been repaid or discharged or that will be repaid or discharged as of the closing of the Loan or in connection with the Loan Documents and except for Permitted Encumbrances, neither Borrower nor Operating Lessee has sold, pledged, transferred or otherwise conveyed any Clearing Accounts, the Concentration Accounts and/or Cash Management Account;

(b) Each Clearing Account, each Concentration Account and the Cash Management Account constitutes a “deposit account” and/or “securities account” within the meaning of the Uniform Commercial Code of the State of New York;

(c) Pursuant and subject to the terms hereof and the other applicable Loan Documents, the Concentration Account Agreements and the Clearing Account Agreements, the Concentration Banks, the Clearing Banks and Agent have agreed to comply with all instructions originated by Lender, without further consent by Borrower and/or Operating Lessee, directing disposition of each Clearing Account, the Concentration Account and Cash Management Account and all sums at any time held, deposited or invested therein, together with any interest or other earnings thereon, and all proceeds thereof (including proceeds of sales and other dispositions), whether accounts, general intangibles, chattel paper, deposit accounts, instruments, documents or securities; and

 

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(d) Each Clearing Account, each Concentration Account and the Cash Management Account are not in the name of any Person other than Borrower or Operating Lessee (as applicable), as pledgor, or Lender, as pledgee. Other than as set forth in the Clearing Account Agreements or the Concentration Account Agreements, neither Borrower nor Operating Lessee has consented to the Clearing Bank, Concentration Bank and/or Agent complying with instructions with respect to the Clearing Account, the Concentration Account and/or the Cash Management Account from any Person other than Lender.

4.1.41. Franchise Agreement. Except as set forth on Schedule 4.1.41, each Franchise Agreement is in full force and effect and there is no default thereunder by Borrower or Operating Lessee and to Borrower’s and Operating Lessee’s knowledge, no default thereunder by any other party thereto. No event has occurred that, with the passage of time and/or giving of notice, would constitute a default under any Franchise Agreement by Borrower or Operating Lessee, as applicable, and to Borrower’s and Operating Lessee’s knowledge, would constitute a default thereunder by any other party thereto. None of the items described on Schedule 4.1.41 would reasonably be expected to have a material adverse effect on the applicable Individual Property; provided nothing in this sentence shall restrict or reduce Borrower’s rights under Section 5.2.1 or to a Default Release or a Sale/Franchise/Brand Management Default Release or any other release permitted hereunder.

4.1.42. Taxes. Other than BRE Select Hotels Properties II LLC and Operating Lessee (which are taxable REIT subsidiaries of BRE Select Hotels Corp.), each Borrower is treated as a partnership or a disregarded entity for U.S. federal income tax purposes. Each of Borrower and Operating Lessee has timely filed or caused to be filed all federal income and other material Section 2.7 Taxes, returns and reports required to have been filed by it and has paid or caused to be paid all federal income and other material Section 2.7 Taxes and related liabilities required to have been paid by it, except Section 2.7 Taxes that are being contested in good faith by appropriate proceedings and for which Borrower or Operating Lessee has set aside on its books adequate reserves. There are no Liens for Section 2.7 Taxes on or with respect to any of Borrower’s or Operating Lessee’s income or assets, other than Liens for Section 2.7 Taxes not yet due or delinquent or which are contested in good faith by appropriate proceedings and for which Borrower and/or Operating Lessee has set aside on its books adequate reserves.

4.1.43. Labor. No work stoppage, labor strike, slowdown or lockout is pending or threatened by employees or other laborers at the Properties. Except as described on Schedule 4.1.43, with respect to the Property none of Borrower, Operating Lessee or, to Borrower’s and Operating Lessee’s knowledge without inquiry, Manager (i) is involved in or, to the best of Borrower’s and Operating Lessee’s knowledge, threatened with any material labor dispute, material grievance or litigation relating to labor matters involving any employees or other laborers at the Properties, including, without limitation, violation of any federal, state or local labor, safety or employment laws (domestic or foreign) and/or charges of unfair labor practices or discrimination complaints, (ii) to the best of Borrower’s and Operating Lessee’s knowledge, has engaged with respect to the Properties, in any unfair labor practices within the meaning of the National Labor Relations Act or the Railway Labor Act, or (iii) is a party to, or bound by, any existing collective bargaining agreement or union contract with respect to employees or other laborers at the Properties. As of the Closing Date, neither Borrower nor Operating Lessee has received any notice that any payments that are required to be paid under any collective bargaining agreement have not been paid.

 

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4.1.44. Project Improvement Plans. There are no Project Improvement Plans applicable to the Properties other than the Project Improvement Plans set forth on Schedule 4.1.44 hereto.

4.1.45. Reserved.

4.1.46. Reserved.

4.1.47. Operating Lease. (a) Each Operating Lease is in full force and effect and Operating Lessee is in possession of the premises demised thereunder; (b) neither Borrower nor Operating Lessee have entered into any other agreements that have modified, supplemented or amended any of the terms and provisions of any Operating Lease; (c) each Operating Lease as amended (if amended) represents the entire agreement between the parties as to the premises demised thereunder; (d) no rent or other amounts due under any Operating Lease has been paid more than thirty (30) days in advance of its due date; (e) Operating Lessee has not filed any claim of offset and, to the best knowledge of Operating Lessee and Borrower, has no charge, lien or claim of offset under any Operating Lease, or otherwise, against the rents or other amounts due or to become due thereunder; (f) Operating Lessee is the owner of the “Tenant’s” or “Lessee’s” interest in each Operating Lease and Borrower is the owner of the “Landlord’s” or “Lessor’s” interest in each Operating Lease, (g) no transfer or assignment of any interest in any Operating Lease currently exists except as provided herein and pursuant to the other Loan Documents, (h) except pursuant to the Leases provided to Lender and Leases of less than twenty-five thousand (25,000) square feet, Operating Lessee has not sublet any of the Premises demised pursuant to any Operating Lease; (i) without limiting the foregoing, except as provided for herein and in the other Loan Documents, each of Operating Lessee’s and Borrower’s interest in each Operating Lease is unencumbered and other than in connection with prior financings that have been repaid or discharged or will be repaid or discharged in connection with the closing of the Loan, neither Borrower nor Operating Lessee has collaterally assigned the Operating Lease or otherwise encumbered its interests thereunder in any way; (j) neither Operating Lessee nor Borrower is in default under any Operating Lease and neither knows of any event which but for the passage of time or the giving of notice or both would constitute an event of default or breach by Operating Lessee or Borrower under the Operating Lease; and (k) a true, correct and complete copy of the Operating Lease, together with any amendment thereto and any ancillary agreement or side letter related thereto, has been delivered to Lender.

4.1.48. Reserved.

4.1.49. Use of Proceeds. The Loan is for commercial purposes only and is not for personal, family, household or agricultural purposes.

4.1.50. Reserved.

 

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4.1.51. Property Documents. Other than to the extent the same would not reasonably be expected to have a material adverse effect on any Individual Property affected thereby, Borrower hereby represents and warrants to Lender the following with respect to the Property Documents:

(a) Borrower or Operating Lessee, as applicable, is a party to each Property Document and each Property Document is, to Borrower’s knowledge, in full force and effect and to Borrower’s and Operating Lessee’s knowledge has not been amended or modified and Borrower’s or Operating Lessee’s, as applicable, interest therein has not been assigned pursuant to any assignment which survives the Closing Date except the assignment to Lender pursuant to the Loan Documents;

(b) to the best of Borrower’s and Operating Lessee’s knowledge, each Property Document is in full compliance with all applicable local, state and federal laws, rules and regulations;

(c) to the best of Borrower’s and Operating Lessee’s knowledge, neither Borrower nor Operating Lessee, is in default under any Property Document;

(d) neither Borrower nor Operating Lessee has any knowledge of any current or outstanding notices of termination or default given to or by Borrower with respect to any Property Document;

(e) except as disclosed in writing to Lender, neither Borrower or Operating Lessee, as applicable, nor, to the best of Borrower’s knowledge, any other party to any Property Document has performed any work pursuant to such Property Document, the cost of which Borrower or Operating Lessee, as applicable, or, to Borrower’s and Operating Lessee’s actual knowledge, such other party is or will be entitled to charge in whole or in part to Borrower or Operating Lessee, as applicable, under the provisions of such Property Document except in the ordinary course of operation in accordance with such Property Document;

(f) to the best of Borrower’s and Operating Lessee’s knowledge, there are no set-offs, claims, counterclaims or defenses being asserted in writing, if any, required under any Property Document or otherwise known by Borrower or Operating Lessee for the enforcement of the obligations under any Property Document;

(g) neither Borrower nor Operating Lessee has requested that a matter be submitted to arbitration under any Property Document; and

(h) to Borrower’s and Operating Lessee’s knowledge, all amounts due from Borrower or Operating Lessee, as applicable, under the Property Document have been paid to the extent they are payable to the date hereof.

Section 4.2. Survival of Representations. Each of Borrower and Operating Lessee agrees that all of the representations and warranties of Borrower and Operating Lessee set forth in Section 4.1 hereof and elsewhere in this Agreement and in the other Loan Documents shall survive for so long as any amount remains owing to Lender under this Agreement or any of the other Loan Documents by Borrower. All representations, warranties, covenants and agreements made in this Agreement or in the other Loan Documents by Borrower and Operating Lessee shall be deemed to have been relied upon by Lender notwithstanding any investigation heretofore or hereafter made by Lender or on its behalf.

 

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ARTICLE V.

COVENANTS

Section 5.1. Affirmative Covenants. From the date hereof and until payment and performance in full of all obligations of Borrower under the Loan Documents or the earlier release or assignment of the Liens of the Mortgages encumbering the Properties (and all related obligations) in accordance with the terms of this Agreement and the other Loan Documents, each of Borrower and Operating Lessee hereby covenants and agrees with Lender to comply with the following covenants, and in connection therewith:

5.1.1. Existence; Compliance with Legal Requirements. Borrower and Operating Lessee shall do or cause to be done all things necessary to preserve, renew and keep in full force and effect its existence, rights, licenses, permits and franchises and comply in all material respects with all Legal Requirements applicable to Borrower, Operating Lessee and the Properties, including, without limitation, building and zoning codes and certificates of occupancy and the procurement of all necessary and required hospitality, liquor or innkeeper’s licenses. There shall never be committed by Borrower and Operating Lessee, and Borrower and Operating Lessee shall not permit any other Person in occupancy of or involved with the operation or use of the Properties to commit any act or omission affording the federal government or any state or local government the right of forfeiture against any Individual Property or any part thereof or any monies paid in performance of Borrower’s or Operating Lessee’s obligations under any of the Loan Documents. Each of Borrower and Operating Lessee hereby covenants and agrees not to commit, permit or suffer to exist any act or omission affording such right of forfeiture. Borrower and Operating Lessee shall at all times maintain, preserve and protect all franchises and trade names and preserve all the remainder of its property used or useful in the conduct of its business and shall keep the Properties in good working order and repair, and from time to time make, or cause to be made, all reasonably necessary repairs, renewals, replacements, betterments and improvements thereto, all as more fully provided in the Loan Documents. Borrower and Operating Lessee shall keep the Properties insured at all times by financially sound and reputable insurers, to such extent and against such risks, and maintain liability and such other insurance, as is more fully provided in this Agreement. After prior written notice to Lender, Borrower or Operating Lessee, at Borrower’s own expense, may contest by appropriate legal proceeding promptly initiated and conducted in good faith and with due diligence, the validity of any Legal Requirement, the applicability of any Legal Requirement to Borrower, Operating Lessee or any Individual Property or any alleged violation of any Legal Requirement, provided that (i) no Event of Default has occurred and remains uncured; (ii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any instrument to which Borrower or Operating Lessee is subject and shall not constitute a default thereunder and such proceeding shall be conducted in accordance with all applicable statutes, laws and ordinances; (iii) no Individual Property nor any part

 

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thereof or interest therein will be in danger of being sold, forfeited, terminated, cancelled or lost; (iv) Borrower and/or Operating Lessee, as applicable, shall promptly upon final determination thereof comply with any such Legal Requirement determined to be valid or applicable or cure any violation of any Legal Requirement; (v) such proceeding shall suspend the enforcement of the contested Legal Requirement against Borrower, Operating Lessee or any Individual Property; and (vi) in the event the amount reasonably determined to be necessary to cause compliance with such Legal Requirements exceeds $2,000,000, Borrower shall furnish such security as may be required in the proceeding, or as may be reasonably requested by Lender, to insure compliance with such Legal Requirement, together with all interest and penalties payable in connection therewith (except with respect to Brand Managed Properties, if Borrower or Operating Lessee shall have provided Lender with evidence reasonably acceptable to Lender that the applicable Brand Manager has reserved sufficient amounts therefor and shall be required to apply such amounts to cause such compliance in accordance with the applicable Management Agreements). Lender may apply any such security, as necessary to cause compliance with such Legal Requirement at any time when, in the reasonable judgment of Lender, the validity, applicability or violation of such Legal Requirement is finally established or any Individual Property (or any part thereof or interest therein) shall be in danger of being sold, forfeited, terminated, cancelled or lost.

5.1.2. Taxes and Other Charges. Except as otherwise provided in this Section 5.1.2, Borrower and/or Operating Lessee shall pay or cause to be paid, all Taxes and Other Charges now or hereafter levied or assessed or imposed against the Properties or any part thereof prior to delinquency; provided, however, Borrower’s obligation to directly pay Taxes and Other Charges shall be suspended for so long as Borrower is making deposits into the Tax and Insurance Reserve Account and complies with the terms and provisions of Section 7.2 hereof. Except as otherwise provided in this Section 5.1.2, Borrower shall not later than five (5) Business Days after receipt of a written request from Lender, deliver to Lender receipts for payment or other evidence satisfactory to Lender that the Taxes and Other Charges have been so paid or are not then delinquent no later than ten (10) days prior to the date on which the Taxes and/or Other Charges would otherwise be delinquent if not paid (provided, however, Borrower shall not be required to furnish such receipts for payment of such Taxes and Other Charges during any period that Taxes and Other Charges have been paid by Lender pursuant to Section 7.2 hereof or by any Manager pursuant to a Management Agreement). Except as otherwise provided in the following sentence, neither Borrower nor Operating Lessee shall suffer and shall promptly cause to be paid and discharged any Lien (other than Permitted Encumbrances) or charge whatsoever which may be or become a Lien or charge against the Properties, and shall promptly pay for all utility services provided to the Properties. Borrower or Operating Lessee, at Borrower’s own expense, may contest by appropriate legal proceeding, promptly initiated and conducted in good faith and with due diligence, the amount or validity or application in whole or in part of any Taxes or Other Charges, provided that (i) no Default or Event of Default has occurred and remains uncured; (ii) such proceeding shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Borrower or Operating Lessee is subject and shall not constitute a default thereunder and such proceeding shall be conducted in accordance with all applicable statutes, laws and ordinances; (iii) no

 

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Individual Property nor any part thereof or interest therein will be in danger of being sold, forfeited, terminated, cancelled or lost; (iv) Borrower or Operating Lessee shall promptly upon final determination thereof pay the amount of any such Taxes or Other Charges, together with all costs, interest and penalties which may be payable in connection therewith; (v) such proceeding shall suspend the collection of such contested Taxes or Other Charges from the applicable Individual Property; (vi) during a Cash Trap Period, in the event the amount of such Taxes or Other Charges shall reasonably be expected to exceed $2,000,000 in the aggregate and after taking into account any amounts held by Lender in the Tax and Insurance Reserve Account or with respect to Brand Managed Properties, if any Brand Manager has reserved sufficient amounts for such Taxes or Other Charges and shall be required to apply such amounts therefor in accordance with the applicable Management Agreements (with reasonable evidence thereof provided to Lender), in each case, which are required to be used for payment of such Taxes or Other Charges, Borrower shall furnish such security as may be required in the proceeding, or as may be reasonably requested by Lender, to insure the payment of any such Taxes or Other Charges, together with all interest and penalties thereon. Lender may pay over any such cash deposit or part thereof held by Lender to the claimant entitled thereto at any time when, in the reasonable judgment of Lender, the entitlement of such claimant is established or any Individual Property (or part thereof or interest therein) shall be in imminent danger of being sold, forfeited, terminated, cancelled or lost or there shall be any danger of the Lien of any Mortgage being primed by any related Lien; and (vii) Borrower shall deliver written notice of such contest to Lender.

5.1.3. Litigation. Borrower and Operating Lessee shall give prompt written notice to Lender of any litigation or governmental proceedings pending or threatened in writing against Borrower, Operating Lessee or any Individual Property which might materially adversely affect Borrower’s and Operating Lessee’s condition (financial or otherwise) or business, taken as a whole, or any Individual Property.

5.1.4. Access to Properties. Subject to the rights of Tenants, guests, patrons, and with respect to Brand Managed Properties, each Brand Manager under the applicable Management Agreement, and the rights of the landlord under the Ground Lease, Borrower and Operating Lessee shall permit agents, representatives and employees of Lender to inspect the Properties or any part thereof at reasonable hours upon reasonable advance notice.

5.1.5. Notice of Default. Borrower and/or Operating Lessee shall promptly advise Lender of any material adverse change in Borrower’s, Operating Lessee’s or Guarantor’s condition, financial or otherwise, or of the occurrence of any Default or Event of Default of which Borrower or Operating Lessee has knowledge.

5.1.6. Cooperate in Legal Proceedings. Borrower and Operating Lessee shall cooperate fully with Lender with respect to any proceedings before any court, board or other Governmental Authority which may in any way materially and adversely affect the rights of Lender hereunder or any rights obtained by Lender under any of the other Loan Documents and, in connection therewith, permit Lender, at its election, to participate in any such proceedings.

 

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5.1.7. Perform Loan Documents. Borrower and Operating Lessee shall in a timely manner observe, perform and satisfy all the terms, provisions, covenants and conditions of, and shall pay when due all costs, fees and expenses to the extent required under the Loan Documents executed and delivered by, or applicable to, Borrower or Operating Lessee. Neither Borrower nor Operating Lessee shall enter into or otherwise suffer or permit any amendment, waiver, supplement, termination or other modification of any Loan Document executed and delivered by, or applicable to, Borrower or Operating Lessee without the prior written consent of Lender.

5.1.8. Award and Insurance Benefits. Borrower and Operating Lessee shall cooperate with Lender in obtaining for Lender, in accordance with the relevant provisions of this Agreement the benefits of any Awards or Insurance Proceeds lawfully or equitably payable in connection with any Individual Property, and Lender shall be reimbursed for any reasonable, actual, out-of-pocket expenses incurred in connection therewith (including reasonable attorneys’ fees and disbursements, and the payment by Borrower of the expense of an appraisal on behalf of Lender in case of Casualty or Condemnation affecting any Individual Property or any part thereof) out of such Award or Insurance Proceeds.

5.1.9. Further Assurances. Borrower and Operating Lessee shall, at Borrower’s sole cost and expense:

(a) without limiting any other obligation of Borrower or Operating Lessee hereunder, upon the written request of Lender, furnish to Lender all certificates, appraisals, title and other insurance reports and agreements in Borrower’s or Operating Lessee’s possession, and each and every other document, certificate, agreement and instrument required to be furnished by Borrower or Operating Lessee pursuant to the terms of the Loan Documents or which are reasonably requested by Lender in connection therewith, provided, that, so long as no Event of Default has occurred and is continuing, the foregoing shall not require Borrower or Operating Lessee to obtain updated appraisals after the Closing Date, unless specifically required by the terms of this Agreement;

(b) execute and deliver to Lender such documents, instruments, certificates, assignments and other writings, and do such other acts reasonably necessary, to evidence, preserve and/or protect the collateral at any time securing or intended to secure the obligations of Borrower or Operating Lessee under the Loan Documents, as Lender may reasonably require including, without limitation, the execution and delivery of all writings necessary to transfer any hospitality, liquor and other licenses held by Borrower or Operating Lessee or entities Controlled by Borrower or Operating Lessee required for the continued operation of the Properties into the name of Lender or its designee after the occurrence and during the continuance of an Event of Default to the extent such transfer is permitted by applicable law or, to the extent such transfer is not permitted by applicable law, reasonably cooperate with Lender in obtaining new hospitality, liquor or other licenses required for the continued operation of an Individual Property and terminating existing licenses, in each case solely at the direction of Lender; and

 

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(c) do and execute all and such further lawful and reasonable acts, conveyances and assurances for the better and more effective carrying out of the intents and purposes of this Agreement and the other Loan Documents, as Lender shall reasonably require from time to time including, without limitation, the execution and delivery of all such writings necessary to transfer any liquor licenses, if applicable, held by Borrower or Operating Lessee or entities Controlled by Borrower or Operating Lessee with respect to the Property into the name of Lender or its designee after the occurrence and during the continuance of an Event of Default to the extent such transfer is permitted by applicable law or, to the extent such transfer is not permitted by applicable law, reasonably cooperate with Lender in obtaining new hospitality, liquor or other licenses required for the continued operation of an Individual Property and terminating existing licenses, in each case solely at the direction of Lender.

5.1.10. Principal Place of Business, State of Organization. Neither Borrower nor Operating Lessee shall cause or permit any change to be made in its name, identity (including its trade name or names), place of organization or formation (as set forth in Section 4.1.36 hereof) or, except as permitted pursuant to Section 5.2 hereof, Borrower’s or Operating Lessee’s corporate or partnership or other structure unless Borrower or Operating Lessee, as applicable, shall have first notified Lender in writing of such change at least thirty (30) days prior to the effective date of such change, and shall have first taken all action required by Lender for the purpose of perfecting or protecting the lien and security interests of Lender pursuant to this Agreement and the other Loan Documents and, in the case of a change in Borrower’s or Operating Lessee’s structure, except as permitted pursuant to Section 5.2 hereof, without first obtaining the prior written consent of Lender. Upon Lender’s request, Borrower and Operating Lessee shall, at Borrower’s sole cost and expense, execute and deliver additional financing statements, security agreements and other instruments which may be necessary to effectively evidence or perfect Lender’s security interest in the Properties as a result of such change of principal place of business or place of organization. Borrower’s and Operating Lessee’s principal place of business and chief executive office, and the place where Borrower and Operating Lessee keeps its books and records, including recorded data of any kind or nature, regardless of the medium or recording, including software, writings, plans, specifications and schematics, has been for the preceding four months (or, if less, the entire period of the existence of Borrower) and will continue to be the address of Borrower and Operating Lessee set forth at the introductory paragraph of this Agreement (unless Borrower or Operating Lessee, as applicable, notifies Lender in writing at least thirty (30) days prior to the date of such change). Borrower and Operating Lessee shall promptly notify Lender of any change in their organizational identification number. Upon receipt of a written request from Lender, Borrower and Operating Lessee shall execute a certificate in form satisfactory to Lender listing the trade names under which Borrower and Operating Lessee intends to operate each Individual Property, and representing and warranting that Borrower and Operating Lessee do business under no other trade name with respect to such Properties.

5.1.11. Financial Reporting. (a) Borrower and Operating Lessee will keep and maintain or will cause to be kept and maintained on a Fiscal Year basis, in accordance with the Uniform System of Accounts and reconciled in accordance with GAAP (or such other accounting basis acceptable to Lender), proper and accurate books, records and accounts reflecting all of the financial affairs of Borrower and Operating Lessee and all items of income and expense in connection with the operation on an

 

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individual basis of the Properties. Lender shall have the right from time to time at all times during normal business hours upon reasonable notice (and, in any event, not more than two (2) times in any calendar year unless an Event of Default is continuing, in which case no such restriction shall apply) to examine such books, records and accounts at the office of Borrower, Operating Lessee or any other Person maintaining such books, records and accounts and to make such copies or extracts thereof as Lender shall desire. After the occurrence and during the continuance of an Event of Default, Borrower shall pay any reasonable and actual costs and expenses incurred by Lender to examine Borrower’s and Operating Lessee’s accounting records with respect to the Properties, as Lender shall reasonably determine to be necessary or appropriate in the protection of Lender’s interest.

(b) Borrower will furnish to Lender annually, (i) within one hundred twenty (120) days following the end of each Fiscal Year, a copy of Borrower’s and Operating Lessee’s unaudited annual financial statements and (ii) after the first full calendar year following the date hereof, within one hundred twenty (120) days following the end of each Fiscal Year, a complete copy of Guarantor’s annual financial statements audited by a “Big Four” accounting firm or other independent certified public accountant acceptable to Lender in accordance with the Uniform System of Accounts and reconciled in accordance with GAAP (or such other accounting basis acceptable to Lender) covering the Properties on a combined basis (together with a detailed profit and loss statement/schedule with respect to each Individual Property) for such Fiscal Year and containing statements of profit and loss for Borrower, Operating Lessee and the Properties and a balance sheet for Borrower and Operating Lessee. Such statements shall set forth the financial condition and the results of operations for the Properties (on a combined basis) for such Fiscal Year, and shall include, but not be limited to, amounts representing annual net cash flow, Net Operating Income, Gross Income from Operations and Operating Expenses (not including any contributions to the Replacement Reserve Fund). Borrower’s and Operating Lessee’s annual financial statements shall be accompanied by (i) a comparison of the budgeted income and expenses and the actual income and expenses for the prior Fiscal Year, (ii) an Officer’s Certificate stating that each such annual financial statement presents fairly the financial condition and the results of operations of Borrower, Operating Lessee and the Properties being reported upon as of such date and has been prepared in accordance with the Uniform System of Accounts and reconciled in accordance with GAAP (or such other accounting basis acceptable to Lender), (iii) an unqualified opinion of a “Big Four” accounting firm or other independent certified public accountant reasonably acceptable to Lender, and (iv) occupancy statistics including revenue per available room and average daily rates for the Properties on a combined basis as well as for each Individual Property. Together with Borrower’s and Operating Lessee’s annual financial statements, Borrower shall furnish to Lender an Officer’s Certificate certifying as of the date thereof whether there exists an event or circumstance which constitutes a Default or Event of Default under the Loan Documents executed and delivered by, or applicable to, Borrower or Operating Lessee, and if such Default or Event of Default exists, the nature thereof, the period of time it has existed and the action then being taken to remedy the same. All such financial statements of the Borrower or Operating Lessee under this Section 5.1.11(b) shall also constitute the financial statements of the Mezzanine Borrowers (if any).

 

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(c) Borrower will furnish, or cause to be furnished, to Lender (i) prior to a Securitization on or before thirty-five (35) days after the end of each calendar month and (ii) after a Securitization on or before forty-five (45) days after the end of each calendar quarter after the first full calendar quarter following the date hereof, the following items, accompanied by an Officer’s Certificate stating that such items are true, correct, accurate, and complete and fairly present the financial condition and results of the operations of Borrower, Operating Lessee and the Properties on a combined basis as well as each Individual Property (subject to normal year-end adjustments) as of the relevant date as applicable: (i) an occupancy report for the subject month(s), including an average daily rate and revenue per available room; (ii) monthly or quarterly, as applicable, trailing twelve month and year to date operating statements prepared for each calendar month, noting EBITDA, Gross Income from Operations, and Operating Expenses (not including any contributions to the Replacement Reserve Fund), and other information necessary and sufficient to fairly represent the financial position and results of operation of the Properties during such calendar month or quarter, as applicable, and containing a comparison of budgeted income and expenses and the actual income and expenses, all in form satisfactory to Lender and (iii) during a Cash Trap Period, upon the written request of Lender, a detailed explanation of any variances of ten percent (10%) or more between budgeted and actual amounts for such periods. In addition, such certificate shall also be accompanied by an Officer’s Certificate stating that the representations and warranties of Borrower set forth in subsection (xxiii) of the definition of “Special Purpose Entity” are true and correct as of the date of such certificate. On or before the date monthly or quarterly reports, as applicable, are due under this clause (c), Borrower also will furnish, or cause to be furnished, to Lender the most current Smith Travel Research Reports then available to Borrower or Operating Lessee reflecting market penetration and relevant hotel properties competing with the Properties.

(d) Lender hereby acknowledges receipt of the Annual Budget for the remainder of the Fiscal Year ending on December 31, 2017 and Borrower hereby represents and warrants that a true, correct and complete copy of such Annual Budget is attached hereto as Schedule 5.1.11(d). Borrower shall submit to Lender an Annual Budget not later than thirty (30) days prior to the commencement of each Fiscal Year (which, subject to the immediately succeeding sentence shall be for informational purposes only). If an Event of Default is continuing or a Debt Yield Trigger Period is continuing the Annual Budget currently in place shall be deemed approved; provided, that the next Annual Budget shall be subject to Lender’s and, to the extent one or more Mezzanine Loans are outstanding, the most junior New Mezzanine Lender’s (which is not an affiliate of any Loan Party) reasonable written approval so long as an Event of Default is continuing or a Debt Yield Trigger Period is still in effect at such time, which approval shall not be unreasonably withheld, conditioned or delayed (each such Annual Budget, an “Approved Annual Budget”); provided, however, (i) Lender shall not withhold its consent with respect to expenditures necessary to comply with life, health or safety matters and (ii) with respect to the Brand Managed Properties, (x) Lender shall not withhold its consent to any item contained in the Annual Budget for which Borrower or Operating Lessee shall not have the right to consent or approve pursuant to the applicable Management Agreement and (y) Lender shall respond to any request for consent subject to the standards for consent set forth in the applicable Management Agreement, provided that any request for consent or approval shall either be (A) simultaneously sent to Lender by the Brand Manager or (B) sent to Lender by Borrower or Operating Lessee within two (2) Business Days of Borrower’s or Operating Lessee’s receipt of such request from the applicable Brand Manager. So long as neither a Debt Yield Trigger Period exists nor an Event of Default has occurred and is continuing, any Annual Budget, and any amendments or modifications thereto shall be deemed

 

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an Approved Annual Budget and Lender shall have no approval right with respect thereto. In the event that Borrower is required to submit an Annual Budget for approval pursuant to this Section 5.1.11(d), provided no Event of Default has occurred and is continuing, such Annual Budget shall be deemed approved by Lender if the Deemed Approval Requirements have been satisfied with respect to such Annual Budget. In the event that Lender timely disapproves a proposed Annual Budget in accordance with the foregoing, Borrower shall promptly revise such Annual Budget and resubmit the same to Lender and provided no Event of Default has occurred and is continuing, such resubmitted Annual Budget shall be deemed approved by Lender if the Deemed Approval Requirements have been satisfied with respect to such resubmitted Annual Budget. Borrower shall promptly revise each proposed Annual Budget and resubmit the same to Lender in accordance with the foregoing until Lender approves the proposed Annual Budget or the Deemed Approval Requirements are satisfied. Until such time that Lender approves (or is deemed to approve) a proposed Annual Budget, the most recently Approved Annual Budget shall apply; provided that, each line item of such Approved Annual Budget shall be increased by the amount of the increase, if any, in the Consumer Price Index for the immediately preceding calendar year (other than the line items in respect of Taxes, Insurance Premiums, Ground Rents, union wages, if any, utilities expenses and Other Charges, which line items shall be adjusted to reflect actual increases in such expenses).

(e) Reserved.

(f) During the continuance of a Cash Trap Period, neither Borrower nor Operating Lessee shall approve (to the extent Borrower or Operating Lessee is permitted to approve or reject such operating budget pursuant to the terms of the Management Agreement) any operating budget pursuant to any Management Agreement without the prior written consent of Lender (such consent not to be unreasonably withheld, conditioned or delayed). Lender shall cooperate with Borrower and/or Operating Lessee to follow the procedures for budget approval set forth in the Management Agreement to the extent Borrower notifies Lender thereof.

(g) Any reports, statements or other information required to be delivered under this Agreement may be delivered via email, with report files in electronic form of Microsoft Word, Microsoft Excel or .pdf format, (i) in paper form, (ii) on a diskette, and (iii) if requested by Lender and within the capabilities of Borrower’s or Operating Lessee’s data systems without change or modification thereto, in electronic form and prepared using Microsoft Word for Windows files (which files may be prepared using a spreadsheet program and saved as word processing files). Each of Borrower and Operating Lessee agrees that Lender may disclose information regarding the Properties, Operating Lessee and Borrower that is provided to Lender pursuant to this Section 5.1.11(g) in connection with the Securitization to such parties requesting such information in connection with such Securitization.

5.1.12. Business and Operations. Each of Borrower and Operating Lessee shall continue to engage in the businesses presently conducted by it as and to the extent the same are necessary for the ownership, maintenance, management, leasing and operation of the Properties. Each of Borrower and Operating Lessee shall qualify to do business and will remain in good standing under the laws of each jurisdiction of its formation as and to the extent the same are required for the ownership, maintenance, management, leasing and operation of the Properties. Each of Borrower and Operating

 

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Lessee shall at all times during the term of the Loan, continue to own or lease (or Manager as agent for Borrower or Operating Lessee, as applicable, in accordance with the Management Agreement shall lease) all Equipment, Fixtures and Personal Property which are necessary to operate the Properties in the manner required hereunder and in the manner in which it is currently operated, provided that the foregoing shall not be deemed to prohibit or restrict any Permitted Equipment Transfers.

5.1.13. Title to the Properties. Borrower and Operating Lessee shall warrant and defend (a) the title to each Individual Property and every part thereof, subject only to Liens permitted hereunder (including Permitted Encumbrances) and (b) the validity and priority of the Liens of the Mortgages on the Properties, subject only to Liens permitted hereunder (including Permitted Encumbrances), in each case against the claims of all Persons whomsoever. Borrower shall reimburse Lender for any losses, costs, damages or expenses (including reasonable attorneys’ fees and court costs) incurred by Lender if an interest in any Individual Property, other than as permitted hereunder, is claimed by another Person.

5.1.14. Costs of Enforcement. In the event (a) that any Mortgage encumbering any Individual Property is foreclosed in whole or in part or that any such Mortgage is put into the hands of an attorney for collection, suit, action or foreclosure, (b) of the foreclosure of any mortgage encumbering such Individual Property prior to or subsequent to any Mortgage encumbering any Individual Property in which proceeding Lender is made a party, or (c) of the bankruptcy, insolvency, rehabilitation or other similar proceeding in respect of Borrower, Operating Lessee or any of their respective constituent Persons or an assignment by Borrower, Operating Lessee or any of their respective constituent Persons for the benefit of its creditors, Borrower, Operating Lessee and their respective successors or assigns, shall be chargeable with and agrees to pay all out-of-pocket costs of collection and defense, including reasonable third party attorneys’ fees and expenses, incurred by Lender, Operating Lessee or Borrower in connection therewith, but excluding regular servicing fees and in connection with any appellate proceeding or post judgment action involved therein, together with all required service or use taxes.

5.1.15. Estoppel Statement. (a) After written request by Lender, Borrower shall within ten (10) Business Days furnish Lender with a statement, duly acknowledged and certified, setting forth (i) the original principal amount of the Note, (ii) the unpaid principal amount of the Note, (iii) the Interest Rate of the Note, (iv) the date installments of interest and/or principal were last paid, (v) any offsets or defenses to the payment of the Debt, if any, claimed by Borrower, and (vi) that the Note, this Agreement, the Mortgages and the other Loan Documents are valid, legal and binding obligations and have not been modified or if modified, giving particulars of such modification; provided, however, that so long as no Event of Default has occurred and is continuing, Borrower shall not be required to provide such statement more than one (1) time in any calendar year.

 

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(b) After written request by Lender, Borrower and Operating Lessee shall use commercially reasonable efforts to deliver to Lender upon request, tenant estoppel certificates from each commercial Tenant party to a Material Lease at the Properties in form and substance reasonably satisfactory to Lender; provided, however, that so long as no Event of Default has occurred and is continuing, neither Borrower nor Operating Lessee shall be required to seek such statement more than one (1) time in any calendar year and provided, further, Borrower and Operating Lessee (if applicable) shall use commercially reasonable efforts to provide that any such estoppel shall be addressed to both Lender and each Mezzanine Lender (if any).

5.1.16. Loan Proceeds. Borrower shall use the proceeds of the Loan received by it on the Closing Date only for the purposes set forth in Section 2.1.4 hereof.

5.1.17. Reserved.

5.1.18. Confirmation of Representations. If requested by Lender, Borrower and Operating Lessee shall deliver, in connection with any Securitization, (a) one (1) or more Officer’s Certificates certifying as to the accuracy of all representations in all material respects made by Borrower and Operating Lessee in the Loan Documents as of the date of the closing of such Securitization or, if any such representations require qualification on such date, setting forth such qualifications in reasonable detail, and (b) certificates of the relevant Governmental Authorities in all relevant jurisdictions indicating the good standing and qualification of Borrower, Operating Lessee, Principal and Guarantor as of the date that is within thirty (30) days of the Securitization.

5.1.19. No Joint Assessment. Neither Borrower nor Operating Lessee shall suffer, permit or initiate the joint assessment of any Individual Property (a) with any other real property constituting a tax lot separate from such Individual Property, and (b) which constitutes real property with any portion of such Individual Property which may be deemed to constitute personal property, or any other procedure whereby the lien of any taxes which may be levied against such personal property shall be assessed or levied or charged to such real property portion of the Individual Property.

5.1.20. Reserved.

5.1.21. Leasing Matters.

(a) Subject to subsections (b) and (c) below, each of Borrower and Operating Lessee may enter into any lease or other rental arrangement, exercise all extensions and renewals and enter into any modification, amendments and supplements to any Leases without the prior approval of Lender or Mezzanine Lender (if any), provided that, any new Lease entered into after the date hereof shall (i) have rental rates comparable to existing local market rates in all material respects, (ii) be on commercially reasonable terms and shall not contain any terms which would materially adversely affect Lender’s rights under the Loan Documents and (iii) be subordinate to the Mortgage encumbering the applicable Individual Property and shall provide that the lessee agrees to attorn to Lender or any purchaser at a sale by foreclosure or power of sale.

 

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(b) Any Material Leases with respect to an Individual Property written after the date hereof shall be subject to the prior written approval of Lender, which approval shall not be unreasonably withheld, conditioned or delayed. Upon written request of Lender, Borrower and/or Operating Lessee shall furnish Lender with executed copies of all Leases; provided that so long as no Event of Default has occurred and is continuing, Borrower and Operating Lessee, collectively, shall not be required to deliver copies of all Leases more frequently than two (2) times per calendar year. All renewals of Leases (other than with respect to renewal or extension rights set forth in the Leases in effect as of the Closing Date) and all proposed Leases shall provide for rental rates comparable to existing local market rates in all material respects. Each of Borrower and Operating Lessee (i) shall observe and perform the obligations imposed upon the lessor under the Leases in a commercially reasonable manner; (ii) shall enforce and may amend or terminate the terms, covenants and conditions contained in the Leases upon the part of the lessee thereunder to be observed or performed in a commercially reasonable manner and in a manner not to impair the value of the Individual Property involved except that no termination by Borrower or Operating Lessee or acceptance of surrender by a Tenant of any Material Leases (regardless of when any such Material Lease was entered into) shall be permitted unless (A) by reason of a tenant default and then only in a commercially reasonable manner to preserve and protect the Individual Property; or (B) the exercise by a Tenant of any termination right expressly provided in any existing Material Lease or any Material Lease hereafter entered into in compliance with the conditions set forth in this Section 5.1.21; (iii) shall not collect any of the rents more than one (1) month in advance (other than security deposits, payments of first month’s rent upon signing of the Lease and rent for providing rooms and banquet and meeting space and services in the ordinary course of business); (iv) shall not execute any other assignment of lessor’s interest in the Leases or the Rents (except as contemplated by the Loan Documents); (v) shall not alter, modify or change the terms of the Leases (other than Material Leases) in a manner inconsistent with the provisions of the Loan Documents; (vi) shall not alter, modify or change the terms of any Material Lease (regardless of when any such Material Lease was entered into) without the prior written consent of Lender, which approval shall not be unreasonably withheld, conditioned or delayed, which consent shall be subject to the deemed approval provisions set forth in this Section; and (vii) shall execute and deliver at the request of Lender all such further assurances, confirmations and assignments in connection with the Leases as Lender shall from time to time reasonably require. Notwithstanding anything to the contrary contained herein, except in connection with a REIT Restructuring, neither Borrower nor Operating Lessee shall enter into a lease of all or substantially all of any Individual Property without Lender’s prior written consent. At any time that Lender’s approval is required under this Section 5.1.21, provided no Event of Default is continuing, Lender’s approval shall be deemed granted if the Deemed Approval Requirements have been satisfied with respect thereto.

(c) Notwithstanding the foregoing provisions of Section 5.1.21(a) and (b), with respect to the Brand Managed Properties, (i) neither Borrower nor Operating Lessee shall be required to obtain the consent of Lender or any Mezzanine Lender to any Leases that are entered into by any Brand Manager which do not require or permit the consent of Borrower or Operating Lessee in accordance with the applicable Management Agreement. To the extent the Management Agreement for a Brand Managed Property permits Borrower or Operating Lessee to consent or approve a Lease and Lender’s consent is required hereunder, Lender shall respond to any request for consent subject to the standards for consent set forth in the applicable Management Agreement, provided that any request for consent or approval and the related documents shall either be sent (A) by the Brand Manager simultaneously to Lender or (B) by Borrower or Operating Lessee within two (2) Business Days following Borrower’s or Operating Lessee’s receipt of such request for consent or approval from the applicable Brand Manager.

 

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5.1.22. Alterations. Borrower and Operating Lessee shall obtain Lender’s prior written consent to any alterations to any Improvements, which consent shall not be unreasonably withheld or delayed except with respect to alterations that would be reasonably likely to have a material adverse effect on Borrower’s and Operating Lessee’s financial condition, taken as a whole, the value of the applicable Individual Property or the Net Operating Income. Notwithstanding the foregoing, Lender’s consent shall not be required in connection with any alterations (a) for Required Repairs, (b) that will not have a material adverse effect on Borrower’s or Operating Lessee’s financial condition, taken as a whole, or the value of the applicable Individual Property upon completion of such alterations, and such alterations shall with respect to any Individual Property subject to any alterations being performed at such time, be subject to contracts, the aggregate remaining cost of which is no more than the greater of (x) $500,000 and (y) five percent (5%) of the Total Release Amount for such Individual Property (the “Threshold Amount”), (c) that are specifically provided for in the Approved Annual Budget or otherwise consented to by Lender and shall be funded from the Reserve Funds in accordance with this Agreement or from amounts disbursed to Borrower in accordance with the Loan Documents, (d) that are related to a tenant improvement the cost of which is to be paid by the tenant pursuant to an existing Lease or a Lease entered into in accordance with the terms of this Agreement, (e) that are performed in connection with the Restoration of an Individual Property after the occurrence of a Casualty or Condemnation in accordance with the terms and provisions of this Agreement, (f) for Replacements if there are sufficient reserves on deposit in the Replacement Reserve Fund to pay for such obligations, (g) for PIP work made pursuant to a Project Improvement Plan, (h) that are made by a Brand Manager in accordance with the applicable Management Agreement and which do not require or permit the consent of the applicable Individual Borrower or Operating Lessee, (i) that are for decorative work performed in the ordinary course of business, (j) that are alterations required for life/safety purposes or required by applicable law, or (k) as preapproved and set forth on Schedule 5.1.22 (the “Pre-Approved Alterations” and the alterations described in clauses (a) through (k), the “Approved Alterations”). With respect to any Alteration requested to be made by a Brand Manager that is not a Pre-Approved Alteration, Lender shall respond to such request for consent subject to the standards for consent set forth in the applicable Management Agreement, provided that such request shall either be sent (A) by the Brand Manager simultaneously to Lender or (B) by Borrower or Operating Lessee within two (2) Business Days following Borrower’s or Operating Lessee’s receipt of such request for consent or approval from the applicable Brand Manager and such request delivered by Borrower or Operating Lessee shall include the applicable deadline for providing a response. If the total unpaid amounts due and payable with respect to alterations to the Improvements at any Individual Property (other than (I) such amounts to be paid or reimbursed by tenants under the Leases, (II) the costs incurred in connection with the Restoration of an Individual Property, (III) such amounts for which sufficient reserves are on deposit in the Replacement Reserve Fund or (IV) the Pre-Approved Alterations) shall at any time exceed five percent (5%) of the Total Release Amount for an Individual Property, Borrower and/or Operating Lessee shall promptly deliver to Lender as security

 

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for the payment of such amounts and as additional security for Borrower’s and Operating Lessee’s obligations under the Loan Documents any of the following with respect to such alterations exceeding the Threshold Amount (the “Alterations Deposit”): (A) cash, (B) U.S. Obligations, (C) other securities having a rating reasonably acceptable to Lender and, after a Securitization, that, at Lender’s option, the applicable Approved Rating Agencies have provided a Rating Agency Confirmation with respect to such securities or (D) a Letter of Credit. Each such Alterations Deposit shall (i) be in an amount equal to the excess of the total unpaid amounts with respect to the alterations to the Improvements on the applicable Individual Property (other than such amounts to be paid or reimbursed by tenants under the Leases) over the Threshold Amount and (ii) be disbursed from time to time by Lender to Borrower for completion of the Alterations at the applicable Individual Property upon the satisfaction of the following conditions: (1) Borrower shall submit a request for payment to Lender at least five (5) Business Days prior to the date on which Borrower requests that such payment be made, which request for payment shall specify the Alterations for which payment is requested, (2) on the date such request is received by Lender and on the date such payment is to be made, no Event of Default shall be continuing, and (3) such request shall be accompanied by an Officer’s Certificate (x) stating that the applicable portion of the Alterations at the applicable Individual Property to be funded by the requested disbursement have been completed in good and workmanlike manner and in accordance with all applicable Legal Requirements, such Officer’s Certificate to be accompanied by copies of paid invoices or copies of invoices to be paid, as applicable, in each case, with respect to any invoices in excess of $25,000 and any licenses, permits or other approvals by any Governmental Authority required in connection with the applicable portion of the Alterations, (y) identifying each contractor that supplied materials or labor in connection with the applicable portion of the Alterations to be funded by the requested disbursement and (z) stating that each such contractor has been paid or will have been paid in full upon such disbursement. Each Alterations Deposit shall be held by Lender in an interest-bearing account and, until disbursed in accordance with the provisions of this Section 5.1.22, shall constitute additional security for the Debt and Other Obligations under the Loan Documents. Upon the completion of the Alterations in respect of which any Alteration Deposit is being held, Lender shall promptly return to Borrower any remaining portion of the Alterations Deposit upon the request of Borrower, provided that (1) on the date such request is received by Lender and on the date such disbursement is to be made, no Event of Default shall be continuing and (2) such request shall be accompanied by an Officer’s Certificate stating that the Alterations have been fully completed in good and workmanlike manner and in accordance with all applicable Legal Requirements, such Officer’s Certificate to be accompanied by copies of paid invoices or copies of invoices to be paid, as applicable, in each case, with respect to any invoices in excess of $25,000 and any licenses, permits or other approvals by any Governmental Authority required in connection with Alterations (to the extent not received by Lender in connection with prior disbursement requests) and stating that each contractor providing services in connection with the Alterations has been paid in full or will have been paid in full upon such disbursement. At any time that Lender’s approval is required under this Section 5.1.22, provided no Event of Default is continuing, Lender’s approval shall be deemed granted if the Deemed Approval Requirements have been satisfied with respect thereto.

 

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5.1.23. Operation of Property. (a) Each of Borrower and Operating Lessee, as applicable, shall, and shall cause Manager to cause the Properties to be operated, in all material respects, in accordance with the Management Agreement (or Replacement Management Agreement) as applicable and in accordance with all applicable Legal Requirements. In the event that the Management Agreement expires or is terminated (without limiting any obligation of Borrower or Operating Lessee, as applicable, to obtain Lender’s consent to any termination or modification of the Management Agreement in accordance with the terms and provisions of this Agreement), Borrower or Operating Lessee, as applicable, shall promptly enter into a Replacement Management Agreement with Manager or another Qualified Manager, as applicable. Except as otherwise permitted in Section 5.2.1, in the event that the Franchise Agreement expires or is terminated (without limiting any obligation of Borrower or Operating Lessee, as applicable, to obtain Lender’s consent to any termination or modification of the Franchise Agreement in accordance with the terms and provisions of this Agreement), Borrower or Operating Lessee, as applicable, shall promptly enter into a Replacement Franchise Agreement with Franchisor or another Qualified Franchisor, as applicable, or a Replacement Management Agreement with a Brand Manager.

(b) Each of Borrower and Operating Lessee, as applicable, shall: (i) promptly perform and/or observe, in all material respects, all of the covenants and agreements required to be performed and observed by it under the Management Agreement and the Franchise Agreement and do all things necessary to preserve and to keep unimpaired its material rights thereunder; (ii) promptly after they become aware, notify Lender of any material default under the Management Agreement and the Franchise Agreement; (iii) promptly deliver to Lender a copy of each financial statement, business plan, capital expenditures plan, and written notice received by it under the Management Agreement; and (iv) enforce the performance and observance in all material respects of all of the covenants and agreements required to be performed and/or observed by Manager under the Management Agreement, in a commercially reasonable manner.

(c) Any Replacement Management Agreement for a Brand Managed Property shall (i) be with a Qualified Manager and shall either (A) include franchise and intellectual property rights substantially similar to those set forth in the Management Agreement in effect as of the Closing Date or (B) if a Franchise Agreement shall not be in place for such Individual Property, Borrower or Operating Lessee, as applicable, shall enter into a franchise agreement reasonably acceptable to Lender on third-party market rate terms with a Qualified Franchisor. Except as set forth in the definition of Qualified Franchisor, neither Borrower nor Operating Lessee shall permit Manager to rebrand the Property to a lower category based on the annual chain scale published by Smith Travel Reports without the consent of Lender, which consent shall not be unreasonably withheld, conditioned or delayed. At no time shall any Property be operated as an unbranded hotel for more than thirty (30) days.

5.1.24. Project Improvement Plans. Borrower and Operating Lessee shall promptly perform all of the covenants and agreements required to be performed and observed by it under each Project Improvement Plan (“PIP Work”). Borrower and Operating Lessee, as applicable, shall complete all of the work set forth in each Project Improvement Plan in a good and workmanlike manner subject to and in compliance with the terms of each Project Improvement Plan and the terms of this Agreement, if any.

 

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5.1.25. Embargoed Person. Each of Borrower and any other Loan Party has performed and shall perform reasonable due diligence to insure that at all times throughout the term of the Loan, including after giving effect to any Transfers permitted pursuant to the Loan Documents, (a) none of the funds or other assets of Borrower, any other Loan Party and Guarantor constitute property of, or are beneficially owned, directly or indirectly, by any Embargoed Person; (b) no Embargoed Person has any interest of any nature whatsoever in Borrower, any other Loan Party or Guarantor, as applicable, with the result that the investment in Borrower, any other Loan Party or Guarantor, as applicable (whether directly or indirectly), is prohibited by law or the Loan is in violation of law; and (c) none of the funds of Borrower, any other Loan Party or Guarantor, as applicable, have been derived from, or are the proceeds of, any unlawful activity, including money laundering, terrorism or terrorism activities, with the result that the investment in Borrower, any other Loan Party or Guarantor, as applicable (whether directly or indirectly), is prohibited by law or the Loan is in violation of law, or may cause the Property to be subject to forfeiture or seizure. Notwithstanding the foregoing, the covenants contained in this Section 5.1.25 shall not apply to the extent they relate to the Preferred Shares and the direct or indirect beneficial holders thereof.

5.1.26. Ground Lease. (a) Borrower shall, at Borrower’s sole cost and expense, promptly and timely perform and observe all the material terms, covenants and conditions required to be performed and observed by Borrower as lessee under the Ground Lease (including, but not limited to, the payment of all rent, additional rent, percentage rent and other charges required to be paid under the Ground Lease). Borrower shall not provide any notice of non-renewal of any Ground Lease to the applicable Ground Lessor.

(b) Upon written request from Lender and provided that Borrower shall not have notified Lender or does not notify Lender within five (5) Business Days of receipt of such request of Lender, of its intent to release the Ground Leased Property in accordance with Section 2.5.2(l), if Borrower shall be in default under the Ground Lease, then, subject to the terms of the Ground Lease, Borrower shall grant Lender the right (but not the obligation), to cause the default or defaults under the Ground Lease to be remedied and otherwise exercise any and all rights of Borrower under the Ground Lease, as may be necessary to prevent or cure any default provided such actions are necessary to protect Lender’s interest in the Individual Property under the Loan Documents, and Lender shall, subject to the rights of Tenants, Permitted Encumbrances and hotel guests and patrons, have the right to enter all or any portion of the related Ground Leased Property at such times and in such manner as Lender deems necessary, to prevent or to cure any such default; provided that in each case, such actions are necessary to protect Lender’s interest under the Loan Documents.

(c) The actions or payments of Lender to cure any default by Borrower under the Ground Lease shall not remove or waive, as between Borrower and Lender, the default that occurred under this Agreement by virtue of the default by Borrower under the Ground Lease unless and until the Borrower shall have reimbursed Lender for all sums referenced in the

 

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immediately succeeding sentence and the applicable default shall have been cured. All sums expended by Lender to cure any such default shall be paid by Borrower to Lender, upon demand, with interest on such sum at the rate set forth in this Agreement from the date such sum is expended to and including the date the reimbursement payment is made to Lender. All such indebtedness shall be deemed to be secured by the related Mortgage.

(d) Borrower shall notify Lender promptly in writing of the occurrence of any material default by Ground Lessor under the Ground Lease or following the receipt by Borrower of any written notice from Ground Lessor under the Ground Lease noting or claiming the occurrence of any default by Borrower under the Ground Lease or the occurrence of any event that, with the passage of time or service of notice, or both, would constitute a default by Borrower under the Ground Lease. Borrower shall promptly deliver to Lender a copy of any such written notice of default.

(e) Upon written request from Lender, Borrower shall use commercially reasonable efforts to obtain from Ground Lessor under the Ground Lease and furnish to Lender the estoppel certificate of Ground Lessor stating the date through which rent has been paid and whether or not there are any defaults thereunder and specifying the nature of such claimed defaults, if any, but in no event (so long as no Event of Default has occurred and is continuing) more than one (1) time in any Fiscal Year.

(f) Upon written request from Lender and provided that Borrower shall not have notified Lender or does not notify Lender within five (5) Business Days of receipt of such request of Lender, of its intent to release the Ground Leased Property in accordance with Section 2.5.2(l), Borrower shall promptly execute, acknowledge and deliver to Lender such instruments as may reasonably be required to permit Lender to cure any default under the Ground Lease or permit Lender to take such other action required to enable Lender to cure or remedy the matter in default and preserve the security interest of Lender under the Loan Documents with respect to each Ground Leased Property. Borrower irrevocably appoints Lender as its true and lawful attorney in fact to do, in its name or otherwise, unless Borrower has notified Lender of its intention to release the Ground Leased Property in accordance with Section 2.5.2(l), during the continuance of an Event of Default, any and all acts and to execute any and all documents that are necessary to preserve any rights of Borrower under or with respect to each Ground Lease, including, without limitation, the right to effectuate any extension or renewal of each Ground Lease, or to preserve any rights of Borrower whatsoever in respect of any part of each Ground Lease (and the above powers granted to Lender are coupled with an interest and shall be irrevocable).

(g) Notwithstanding anything to the contrary contained in this Agreement with respect to the Ground Lease:

(i) The lien of the related Mortgage attaches to all of Borrower’s rights and remedies at any time arising under or pursuant to Subsection 365(h) of the Bankruptcy Code, 11 U.S.C. Sections 101 et seq., including, without limitation, all of Borrower’s rights, as debtor, to remain in possession of the related Ground Leased Property.

 

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(ii) Borrower shall not, without Lender’s written consent, elect to treat the Ground Lease as terminated under Subsection 365(h)(l) of the Bankruptcy Code. Any such election made without Lender’s prior written consent shall be void.

(iii) As security for the Debt, Borrower unconditionally assigns, transfers and sets over to Lender all of Borrower’s claims and rights to the payment of damages arising from any rejection by the lessor under the Ground Lease under the Bankruptcy Code. Lender, and Borrower shall proceed jointly or in the name of Borrower in respect of any claim, suit, action or proceeding relating to the rejection of the Ground Lease, including, without limitation, the right to file and prosecute any proofs of claim, complaints, motions, applications, notices and other documents in any case in respect of lessor under the Bankruptcy Code. This assignment constitutes a present, irrevocable and unconditional assignment of the foregoing claims, rights and remedies, and shall continue in effect until all of the Debt shall have been satisfied and discharged in full. Any amounts received by Lender or Borrower as damages arising out of the rejection of the Ground Lease as aforesaid shall be applied to all costs and expenses of Lender (including, without limitation, attorneys’ fees and costs) incurred in connection with the exercise of any of its rights or remedies in accordance with the applicable provisions of this Agreement.

(iv) If, pursuant to Subsection 365(h) of the Bankruptcy Code, Borrower seeks to offset, against the rent reserved in the Ground Lease, the amount of any damages caused by the nonperformance by the lessor of any of its obligations thereunder after the rejection by lessor of the Ground Lease under the Bankruptcy Code, then Borrower shall not affect any offset of such amounts unless it shall have provided written notice to Lender of its intent to do so and Lender shall have consented thereto (provided Lender shall be deemed to have consented thereto if it shall fail to object to the same in written notice to Borrower within ten (10) Business Days after receipt of the aforementioned notice in which case Borrower may proceed to offset the amounts set forth in Borrower’s notice.

(v) If any action, proceeding, motion or notice shall be commenced or filed in respect of any lessor of all or any part of the Ground Leased Property in connection with any case under the Bankruptcy Code, Lender and Borrower shall cooperatively conduct and control any such litigation with counsel agreed upon between Borrower and Lender in connection with such litigation. Borrower shall, upon demand, pay to Lender all reasonable actual out of pocket costs and expenses (including reasonable attorneys’ fees and costs) actually paid or actually incurred by Lender in connection with the cooperative prosecution or conduct of any such proceedings. All such costs and expenses shall be secured by the lien of the related Mortgage.

 

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(vi) Borrower shall promptly, after obtaining knowledge of such filing notify Lender orally of any filing by or against the lessor under the Ground Lease of a petition under the Bankruptcy Code, setting forth any information available to Borrower as to the date of such filing, the court in which such petition was filed, and the relief sought in such filing. Borrower shall promptly deliver to Lender any and all notices, summonses, pleadings, applications and other documents received by Borrower in connection with any such petition and any proceedings relating to such petition.

(h) If Lender, its nominee, designee, successor, or assignee acquires title and/or rights of Borrower under the Ground Lease by reason of foreclosure of the applicable Mortgage, deed in lieu of foreclosure or otherwise, such party shall (x) succeed to all of the rights of and benefits accruing to Borrower under the Ground Lease, and (y) be entitled to exercise all of the rights and benefits accruing to Borrower under the Ground Lease. At such time as Lender shall request, Borrower agrees to execute and deliver and use commercially reasonable efforts to cause any third party to execute and deliver to Lender such documents as Lender and its counsel may reasonably require in order to insure that the provisions of this section will be validly and legally enforceable and effective against Borrower and all parties claiming by, through, under or against Borrower.

5.1.27. Payment of Obligations. Each of Borrower and Operating Lessee will pay its obligations, including tax liabilities, that, if not paid, could result in a material adverse effect on the operation of any Individual Property or Borrower’s ability to pay the Debt as it comes due before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) Borrower or Operating Lessee has set aside on its books adequate reserves with respect thereto in accordance with GAAP, or (c) the failure to make payment pending such contest could not reasonably be expected to result in a material adverse effect on the operation of any Individual Property or Borrower’s ability to pay the Debt as it comes due, and provided that the foregoing shall not require any partners, members, shareholders or other owners of Borrower or Operating Lessee to make additional capital contributions to Borrower or Operating Lessee.

5.1.28. Special Purpose Entity Covenants. (a) None of Borrower, Principal or Operating Lessee shall engage in any business other than as set forth in clause (i) of the definition of “Special Purpose Entity.”

(b) Borrower shall not have any Indebtedness other than (i) the Loan, (ii) Permitted Indebtedness, (iii) as may be required pursuant to the Ground Lease, and (iv) such other liabilities that are permitted pursuant to the terms of the Loan Documents; provided, however, that this covenant shall not require any shareholder, partner or member of Borrower to make additional capital contributions to any such entity. Principal shall not have any Indebtedness, other than (A) liabilities of Principal as a general partner of a limited partnership, in the capacity as such and (B) liabilities incurred in the ordinary course of business relating to the ownership and operation of the Loan Party which it holds an interest in and routine administration of the Loan Party which it holds an interest in, provided that (X) the outstanding liabilities at any time shall not exceed $25,000.00 and (Y) such liabilities are normal and reasonable under the circumstances; provided, however, that this covenant shall not require any shareholder, partner or member of Principal to make additional capital contributions to any such entity. Operating Lessee shall not have any Indebtedness other than (i) Permitted Indebtedness,

 

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(ii) as may be required pursuant to a Ground Lease, (iii) such other liabilities that are permitted pursuant to this Agreement or as otherwise imposed by law and (iv) such other liabilities that are permitted pursuant to the Loan Documents; provided, however, that this covenant shall not require any shareholder, partner or member of Operating Lessee to make additional capital contributions to any such entity.

(c) Other than with respect to another Loan Party, each Loan Party shall not assume or guarantee or become obligated for the debts of any other Person, shall not hold out its credit as being available to satisfy the obligations of any other Person and shall not pledge its assets for the benefit of any other Person, in each case except as expressly permitted pursuant to the Loan Documents.

(d) Until the Debt has been paid in full, each Loan Party shall remain a Special Purpose Entity.

(e) Each Loan Party will comply with all of the stated facts and assumptions made with respect to it in any Insolvency Opinion or any Additional Insolvency Opinion. Each Affiliate of a Loan Party (which for purposes of this Section 5.1.28(e) shall not include Hilton Manager or any subsidiary of Hilton Worldwide, Inc.) with respect to which an assumption is made or a fact stated in any Insolvency Opinion will comply with all of the assumptions made and facts stated with respect to it in any such Insolvency Opinion. Each Loan Party covenants that in connection with any Additional Insolvency Opinion delivered in connection with this Agreement it shall provide an updated certification regarding compliance with the facts and assumptions made therein.

(f) Each Loan Party shall provide Lender with five (5) Business Days’ written notice prior to the removal of an Independent Director of such Loan Party and no Independent Director shall be removed other than for Cause.

5.1.29. Taxes. Borrower will be treated as partnerships or disregarded entities for U.S. federal income tax purposes. Borrower and Operating Lessee will each timely file or cause to be filed all federal income and other material Section 2.7 Tax returns and reports required to be filed by it and will pay or cause to be paid all federal income and other material Section 2.7 Taxes and related liabilities required to be paid by it, except Section 2.7 Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or Operating Lessee sets aside on its books adequate reserves in accordance with GAAP. Neither Borrower nor Operating Lessee will permit any Liens for Section 2.7 Taxes to be imposed on or with respect to any of its income or assets, other than Liens for Section 2.7 Taxes not yet due or delinquent or which are contested in good faith by appropriate proceedings and for which Borrower and/or Operating Lessee sets aside on its books adequate reserves in accordance with GAAP.

 

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5.1.30. Intentionally Omitted.

5.1.31. Supplemental Mortgage Affidavits. If, during the continuance of an Event of Default, Lender reasonably determines, based on applicable law, that Lender is not being afforded the maximum amount of security available from any one or more of the Properties as a direct or indirect result of applicable taxes not having been paid with respect to any Individual Property, Borrower and Operating Lessee agree that Borrower and Operating Lessee will execute, acknowledge and deliver to Lender, immediately upon Lender’s request, supplemental affidavits increasing the amount of the Debt attributable to any such Individual Property (as set forth as the Release Amount on Schedule 1.1 hereto) for which all applicable taxes have been paid to an amount determined by Lender to be equal to the lesser of (a) the greater of the fair market value of the applicable Individual Property (i) as of the date hereof and (ii) as of the date such supplemental affidavits are to be delivered to Lender, and (b) the amount of the Debt attributable to any such Individual Property (as set forth as the Release Amount on Schedule 1.1 hereto), and Borrower and Operating Lessee shall, on demand, pay any additional taxes.

5.1.32. Operating Lease

(a) Each of Borrower and Operating Lessee shall (i) promptly perform and observe all of the material covenants required to be performed and observed by it under each Operating Lease in accordance with the terms thereof and do all things necessary to preserve and to keep unimpaired its material rights thereunder; (ii) promptly notify Lender of any material default under any Operating Lease of which it is aware; (iii) promptly deliver to Lender a copy of any notice of default or other material notice under any Operating Lease delivered to Operating Lessee by Borrower or to Borrower by Operating Lessee; (iv) promptly give notice to Lender of any notice or information that Borrower receives which indicates that Operating Lessee is terminating any Operating Lease or that Operating Lessee is otherwise discontinuing its operation of the Property; and (v) promptly enforce the performance and observance of all of the material covenants required to be performed and observed by Operating Lessee or Borrower, as applicable, under each Operating Lease.

(b) Each of Borrower and Operating Lessee hereby assigns to Lender, as further security for the payment and performance of the Debt and observance of the terms, covenants and conditions of this Agreement and the other Loan Documents, all of the rights, privileges and prerogatives of Borrower, as landlord and Operating Lessee, as tenant, as applicable, under each Operating Lease to surrender the leasehold estates created by such Operating Lease or to terminate, cancel, modify, change, supplement, alter or amend such Operating Lease subject only to the rights granted to Borrower and Operating Lessee pursuant to this Section 5.1.32 or Section 5.2.10 hereof. Subject only to the rights granted to Borrower and Operating Lessee pursuant to this Section 5.1.32 or Section 5.2.10 hereof, each of Borrower and Operating Lessee agrees not to surrender the leasehold estates created by such Operating Lease or to terminate, cancel, modify, change, supplement, alter or amend such Operating Lease, and any such surrender, termination, cancellation, modification, change, supplement, alteration or amendment not permitted pursuant to the foregoing terms of this Section 5.1.32 shall be void and of no force or effect.