ITEM 1. BUSINESS --------
Development and Description of Business - ---------------------------------------
CRI Hotel Income Partners, L.P. (the Partnership) is a limited partnership which was formed under the Delaware Revised Uniform Limited Partnership Act as of September 23, 1986 and will continue until December 31, 2016, unless dissolved earlier in accordance with the Partnership Agreement. The Partnership was formed for the purpose of investing in hotels that were acquired from Days Inns of America, Inc. The Partnership's primary objectives continue to be cash flow growth and capital appreciation. However, the attainment of these objectives is principally dependent on the hotels' operations. The hotels are or had been operated by Bryanston Group, Inc. d/b/a Buckhead Hotel Management Company, Inc., formerly known as Days Inns Management Company, Inc., under the nationally recognized franchise name of Days Inns. The Partnership entered into new management contracts with Oak Hotels, Inc., which will continue to be operated as Days Inns.
The General Partner of the Partnership is CRICO Hotel Associates I, L.P. (CRICO Associates), a Delaware limited partnership, the general partner of which is C.R.I., Inc. (CRI), a Delaware corporation. The General Partner has authority in the overall management and control of the Partnership. The Assignor Limited Partner of the Partnership is CRICO Hotel Fund, Inc. (CRICO Hotel Fund).
The Registration Statement of the Partnership was declared effective by the Securities and Exchange Commission (SEC) on April 17, 1987, and a prospectus of the same date was printed. The Partnership registered a total of 6,000,000 Beneficial Assignee Certificates (BACs), at $25 per BAC, with the SEC. BACs represent beneficial assignments of the limited partner interests held by CRICO Hotel Fund. BACs were to be offered in series, with Series A having a minimum of 196,000 BACs, or $4,900,000, and a maximum of 2,344,000 BACs, or $58,600,000. The Partnership terminated the Series A offering on March 31, 1988 with 868,662 BACs, or gross proceeds of $21,716,550, and does not intend to offer another series.
The number of BACs sold, along with debt instruments issued by the Partnership, generated sufficient proceeds to purchase five hotels and one leasehold interest. As of December 31, 2008, the Partnership remained invested in four hotels and one leasehold interest, as discussed below.
Employees - ---------
The Partnership has no employees. Services are performed by CRI, the General Partner of the General Partner, and agents retained by it. See the notes to the financial statements for additional information concerning these services.
I-1
PART I ------
ITEM 2.
ITEM 2. PROPERTIES ----------
A schedule of the hotels and the leasehold interest owned by the Partnership as of December 31, 2008, follows.
See Item 6, Management's Discussion and Analysis of Financial Condition and Results of Operations - Financing, for information concerning the mortgage financing of the first four hotels listed above.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS -----------------
On September 2, 2008, a complaint was filed against CRI Hotel Income Partners, L.P., in the Circuit Court of the Sixth Judicial Circuit, in and for Pinellas County, Florida. The Plaintiffs claimed damages of $15,000, exclusive of interest and cost as a result of being bitten by bed bugs while staying at the Days Inn Clearwater on or about July 16, 2008. The complaint was submitted to Wausau Insurance Company, Claim #PX415-008254-01. On January 21, 2009, the defense counsel retained by Wausau requested that the plaintiff make a demand for settlement of this lawsuit so as to avoid protracted litigation. A response is expected during the first quarter of 2009 to the request. Any damages will be covered by Wausau under the hotel's insurance policy.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of 2008.
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PART II -------
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S BENEFICIAL ASSIGNEE ----------------------------------------------- CERTIFICATES AND RELATED PARTNERSHIP MATTERS --------------------------------------------
(a) There is no established market for the purchase and sale of BACs, although various informal secondary market services exist. Due to the limited markets, however, investors may be unable to sell or otherwise dispose of their BACs.
On April 2, 2007, MacKenzie Patterson Fuller L.P. and numerous affiliated entities (MacKenzie) initiated a registered tender offer to purchase all of the outstanding BACs at a price of $12.50 per BAC. The offer expired on May 4, 2007. MacKenzie is not affiliated with the Partnership or the General Partner. The price offered was determined solely at the discretion of MacKenzie and does not necessarily represent the fair market value of each BAC. In response to the MacKenzie registered tender offer, on April 11, 2007, the General Partner filed a Schedule 14D-9. In that filing, the General Partner recommended that BAC holders reject the MacKenzie offer because the offer price was far lower than MacKenzie's own estimated liquidation value of the Partnership and it believed that current BAC holders could realize that difference in value themselves by choosing to hold their investments for several more years until the Partnership's assets are liquidated.
A number of investors have sold their BACs to other investors. If more than two percent of the total outstanding BACs are transferred due to sale in any one calendar year (not counting certain exempt transfers), the Partnership could be taxed as a "publicly traded partnership," with potentially severe tax implications for the Partnership and its investors. Section 7704 of the Internal Revenue Code defines the term "publicly traded partnership" as any partnership for federal income tax purposes, the interests of which are readily traded on an established securities market, or readily tradable on a secondary market or the substantial equivalent thereof. If the Partnership is classified as a "publicly traded partnership" or otherwise fails to qualify as a partnership for federal income tax purposes in any taxable year, it would then be subject to federal income tax on any taxable income in that taxable year at regular corporate rates. A BAC holder could not then take into account the BAC holder's distributive share of the Partnership's income and would be subject to tax on the BAC holder's share of the Partnership's income to the extent distributed either as dividends out of current or accumulated earnings and profits or as taxable gain in excess of the tax basis of the investor's BACs. A BAC holder could also have to file amended income tax returns. If the Partnership were taxed as a corporation, the BAC holder's cash flow, return on investment and the value of the investor's BACs would be significantly reduced. Also, the income and losses from the Partnership would no longer be considered a passive activity.
From January 1, 2007 through April 29, 2007, the Partnership received sale transfer requests for approximately 2.0% of the outstanding BAC's. Accordingly, to remain within the two percent safe harbor, effective April 30, 2007, the General Partner halted recognition of any transfers that would exceed the safe harbor limit through December 31, 2007. As a result, transfers of BACs due to sale transactions were not recognized by the Partnership between April 30, 2007 and December 31, 2007. The Partnership's unaffiliated transfer agent, Registrar & Transfer Company, informed the General Partner in late January, 2008 that it had processed sale transfers in excess of four percent of the outstanding BACs in early January, 2008. Accordingly, the General Partner instructed the transfer agent to halt all further sale transfers for the rest of 2008. The Partnership sought an opinion from its tax counsel that it is "more likely than not" that there would be no adverse tax consequences to the Partnership in connection with exceeding the safe harbor limitation in 2008. In supplying information requested in connection with the opinion, the General Partner became
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PART II -------
ITEM 5. MARKET FOR THE REGISTRANT'S BENEFICIAL ASSIGNEE ----------------------------------------------- CERTIFICATES AND RELATED PARTNERSHIP MATTERS - Continued --------------------------------------------
aware that the percentage of trades significantly exceeded the safe harbor in 2006, when Treasury Regulations applicable to the Partnership reduced the safe harbor amount from five percent to two percent, and in 2007, when a re-calculation of the non-exempt transfers reflected a total transfer of 2.21%. However, if transfers in connection with known tender offers are not counted, the percentage of sale transfers is reduced to well under two percent. The Partnership's tax attorneys issued an opinion to the effect that the transfers pursuant to the tender offers were not the type of regular and ongoing trading activities contemplated as constituting public trading and that therefore it was more likely than not that such trading would not result in the Partnership being treated as a publicly traded partnership under Section 7704. However, there can be no assurance that the Internal Revenue Service will agree with the Partnership's position and take no action to treat it as a publicly traded partnership.
(b) As of March 24, 2009, there were 867 registered holders of BACs in the Partnership.
(c) Cash available for distribution, as defined in the Partnership Agreement, is intended to be distributed on a quarterly basis within sixty days after the end of each calendar quarter. A distribution in the amount of $221,597 ($0.25 per BAC) was declared and paid to BAC holders of record and to the General Partner for the first quarter of 2007 in the amounts of $217,165 and $4,432, respectively. A distribution in the amount of $221,598 ($0.25 per BAC) was declared and paid to BAC holders of record, to the General Partner and to the state of Minnesota for withholding for the second quarter of 2007 in the amounts of $212,021, $4,432 and $5,145, respectively. A distribution in the amount of $221,597 ($0.25 per BAC) was declared and paid to BAC holders of record and to the General Partner and to the state of Minnesota for withholding for the third quarter of 2007 in the amounts of $212,020, $4,432 and $5,145, respectively. The Partnership did not declare a distribution for the fourth quarter of 2007. The Partnership did not declare a distribution in 2008. See Part II, Item 6, Management's Discussion and Analysis of Financial Condition and Results of Operations, for additional information concerning the distributions during these years, and for a discussion of factors which may affect future distribution levels.
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PART II -------
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS -----------------------------------
CRI Hotel Income Partners, L.P.'s (the Partnership) Management's Discussion and Analysis of Financial Condition and Results of Operations section is based on the financial statements, and contains information that may be considered forward looking, including statements regarding the effect of governmental regulations. Actual results may differ materially from those described in the forward looking statements and will be affected by a variety of factors including seasonality with respect to the hotel industry, national and local economic conditions, the general level of interest rates, governmental regulations affecting the Partnership and interpretations of those regulations, the competitive environment in which the Partnership operates, and the availability of working capital.
Critical Accounting Policies ----------------------------
The Partnership has disclosed its selection and application of significant accounting policies in Note 1 of notes to financial statements included in this annual report on Form 10-K at December 31, 2008. Property and equipment are depreciated or amortized over their useful lives or remaining lease terms, ranging from one to thirty years using the straight-line method. The calculation requires three amounts for each asset; (1) the purchase price, (2) the estimated useful life, (3) the estimated residual value at the end of the asset's useful life. Of these three amounts, two are estimates that require significant management judgment. In order to determine the appropriate allocation, management periodically reviews the particular asset's historical or current replacement cost, useful economic life, and residual value, and updates this information as necessary. Depreciation and amortization expense is a significant expense of the Partnership and a change in the estimate of useful life or residual value of its assets could significantly impact the statement of operations.
Travel and the Economy ----------------------
The hotel industry in the fourth quarter 2008 is continuing to feel the effects of a sagging economy with decreased demand and lower occupancies, which had a negative impact at all of the five hotels owned by the Partnership. The Partnership's ability to pay operating expenses and current liabilities, and to pay distributions to BAC holders, is primarily dependent upon the performance of the underlying hotels. The General Partner is currently unable to estimate the impact the future state of the economy could have on the Partnership's operations, liquidity, or capital resources.
Distributions -------------
A distribution in the amount of $221,597 ($0.25 per BAC) was declared and paid to BAC holders of record and to the General Partner for the first quarter of 2007 in the amounts of $217,165 and $4,432, respectively. A distribution in the amount of $221,598 ($0.25 per BAC) was declared and paid to BAC holders of record, to the General Partner and to the state of Minnesota for withholding for the second quarter of 2007 in the amounts of $212,021, $4,432 and $5,145, respectively. A distribution in the amount of $221,597 ($0.25 per BAC) was declared and paid to BAC holders of record and to the General Partner and to the state of Minnesota for withholding for the third quarter of 2007 in the amounts of $212,020, $4,432 and $5,145, respectively. The Partnership did not declare a distribution for the fourth quarter of 2007. The General Partner did not declare a distribution in 2008. The General Partner closely monitors the Partnership's liquidity and cash flow in an effort to ensure that sufficient cash is available for operating requirements, and for possible distributions to BAC holders.
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PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
Financial Condition/Liquidity -----------------------------
The General Partner expects that the hotels in the aggregate will generate sufficient cash flow to achieve a positive cash flow after operating expenses. In addition to the periodic replacement of fixed assets, the General Partner determined several years ago that certain capital improvements were needed to enhance the marketability of the hotels. Since 1997, the Partnership funded a total of approximately $2.5 million from the working capital reserve to the hotels for such capital improvements.
The Partnership's liquidity and future results of operations are primarily dependent upon the performance of the underlying hotels. Hotel operations may be materially affected by changing market conditions and by seasonality caused by variables such as vacations, holidays and climate. The General Partner continues to work closely with the hotels' manager to institute an aggressive marketing campaign and stricter cost-cutting and cost-control measures in an effort to maintain liquidity at the hotels.
For the years ended December 31, 2008 and 2007, net cash provided by the hotels' operating activities and existing cash resources was adequate to support investing and financing activities. The Partnership anticipates that existing cash resources along with future cash flows from the hotels' operations, in the aggregate, will be sufficient to pay operating expenses, accounts payable and accrued expenses, and hotel trade payables. Accounts payable and accrued expenses and hotel trade payables at December 31, 2008 totaled $798,608, which represents a $128,303 decrease from the corresponding amounts in 2007. Accounts payable and accrued expenses decreased primarily due to lower land lease payable, lower incentive management fee payable and lower accrued audit costs payable, partially offset by higher professional fees payable. Hotel trade payables increased compared to December 31, 2007, primarily due to a decrease in available cash.
Financing ---------
On December 19, 1997, the Partnership refinanced with Citicorp Real Estate, Inc. (Citicorp) the Zero Coupon Notes which were originally issued in connection with the Partnership's acquisition of the hotels. The loan matured January 1, 2008. On that date, a balloon payment in the amount of $7,273,441 became due. The General Partner was unable to refinance the Partnership's mortgage debt prior to its maturity. Although the loan was in default, the special servicer agreed to a forbearance agreement for a period of 180 days for payment of a fee in the amount of $72,734, plus continued monthly payments of principal, interest (at the pre-default rate) and tax and capital improvements escrows.
On May 6, 2008, the Partnership closed three loans from General Electric Credit Corporation ("GE") in the aggregate amount of $5,000,000 to refinance the Plymouth and Roseville hotels in Minnesota and the Clearwater hotel in Florida. The three loans are cross-collateralized by the three hotels. The Partnership used the loan proceeds together with the proceeds, of a loan from Remediation Capital Funding, LLC in the amount of $2,900,000, of which $500,000 is held by the Lender pending resolution of the environmental matter further discussed below, secured by the University hotel in Minnesota, to pay off the existing debt in full.
The Phase I environmental study of the University hotel required by GE revealed excess levels of three chemicals deemed hazardous in the groundwater on the property. The contamination is not due to acts or omissions of the hotel. Simultaneously with its refinancing efforts, the Partnership engaged a consultant to enroll the University property in the Minnesota Pollution Control Agency's ("MCPA") Voluntary Investigation and Cleanup ("VIC") Program and deal with the contamination at the site. The Partnership's goal is to obtain a No
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PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
Action Letter with a Covenant Not to Sue, at which point it should be able to obtain financing on the property again. NOVA, the Partnership's consultant has prepared and submitted an additional Phase I study in accordance with the guidelines established by the MPCA-VIC Program along with the application and proposed scope of work for the required Phase II study. On July 16, 2008, the MPCA approved the work plan for the Phase II study with samples of soil and ground water scheduled to begin collection for analysis August 11, 2008. On January 28, 2009, NOVA completed the Phase II study. Based on the results of the solvent, petroleum, and RCRA metal impacts above action or guidance levels that were detected in the soil, soil vapor and groundwater samples collected at the site, with the exception of the petroleum impacts, the compounds detected at the site appear to be associated with regional up gradient off-site areas of contamination located to the northeast and possibly to the north of the site. It does not appear that the historical uses of the site are the source of the solvent, soil vapor and groundwater impacts detected at the site. NOVA has submitted these results and requests that the MPCA issue an Off-Site Determination letter and No Further Action letter for the site. The Partnership has been advised that the VIC Program process will likely take from nine months to eighteen months.
The three new GE loans bear interest at the rate of 6.79% per annum and mature on January 1, 2016 with balloon payments due as set forth below:
Plymouth $887,269 Roseville $2,083,122 Clearwater $887,269
The new loan with Remediation Capital bears interest at the rate of 14% per annum and matures on May 6, 2009, although the Partnership has two options, at its sole discretion, to extend the loan for six months each time. It is contemplated that this loan will be refinanced after the environmental issues at the University hotel have been resolved.
The Partnership made installments of principal and interest aggregating $802,042 and $804,589 for the years ended December 31, 2008 and 2007. The Partnership's aggregate balance on the current loans was $7,341,231 as of December 31, 2008. The Partnership's balance on the former loan was $7,273,441 as of December 31, 2007.
Capital Improvements, Real Estate Tax Reserves Held by Servicer --------------------------------------------------------------- and Intercompany Transactions -----------------------------
In addition to the monthly loan installments under its former mortgage loan, as discussed above, the Partnership also made monthly payments which were escrowed for capital improvements and estimated annual real estate taxes. During the years ended December 31, 2008 and 2007, the Partnership made escrow deposits aggregating $77,458 and $232,374, respectively, for capital improvements, and $130,622 and $389,142, respectively, for estimated annual real estate taxes. As of December 31, 2008 and December 31, 2007, the servicer held reserves of $0 and $197,736, respectively, for capital improvements, and $0 and $117,849, respectively, for real estate taxes. This loan was refinanced on May 6, 2008. The Partnership was reimbursed by the former servicer in June 2008 for the remaining balances in the escrowed capital improvement and real estate tax accounts. Under the new mortgage, the Partnership will pay directly for real estate taxes and capital improvements.
In 2008, the Partnership contributed $83,640 to the Clearwater hotel for capital improvements. In 2007, the Partnership contributed $31,835, $56,880, $39,636 and $145,725 to the Clearwater hotel, Plymouth hotel, Roseville hotel and Minneapolis hotel, respectively, for capital improvements.
II-5
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
Working Capital Reserve -----------------------
The working capital reserve of $2,333,266 and $1,582,408 as of December 31, 2008 and 2007, respectively, represents all cash and cash equivalents, as defined in Note 1.d. of the accompanying financial statements, maintained as working capital for the Partnership. The working capital reserve may be increased or reduced by the General Partner as it deems appropriate.
Distributions to BAC holders ----------------------------
A distribution in the amount of $221,597 ($0.25 per BAC) was declared and paid to BAC holders of record and to the General Partner for the first quarter of 2007 in the amounts of $217,165 and $4,432, respectively. A distribution in the amount of $221,598 ($0.25 per BAC) was declared and paid to BAC holders of record, to the General Partner and to the state of Minnesota for withholding for the second quarter of 2007 in the amounts of $212,021, $4,432 and $5,145, respectively. A distribution in the amount of $221,597 ($0.25 per BAC) was declared and paid to BAC holders of record and to the General Partner and to the state of Minnesota for withholding for the third quarter of 2007 in the amounts of $212,020, $4,432 and $5,145, respectively. The Partnership did not declare a distribution for the fourth quarter of 2007. The Partnership did not declare a distribution in 2008.
Results of Operations - Partnership -----------------------------------
2008 versus 2007 - ----------------
The Partnership's net income for the year ended December 31, 2008, decreased compared to December 31, 2007, primarily due to decreases in gross operating income, interest and other income and increased interest expense, partially offset by a decrease in unallocated operating expenses. Gross operating income decreased primarily due to lower rooms revenue as a result of lower occupancy. Interest and other income decreased as the restaurant on the Minneapolis hotel property is not leased; and lower interest rates in 2008. Interest expense increased as the mortgage loans were refinanced. Unallocated operating expenses decreased due to lower depreciation and amortization expenses, marketing expense, building lease expense, management fees and professional fees, partially offset by higher general and administrative expenses and property operations and maintenance expenses. General and administrative expenses increased primarily due to higher reimbursed payroll costs and the forbearance agreement fee. Building lease expense decreased due to lower revenues at Scottsdale Days Inn. Marketing expense decreased due to lower payroll and lower frequent guest program expense. Management fees decreased due to lower revenues.
Results of Operations - Hotels ------------------------------
Analysis of each hotel's operating results for the year 2008 versus the year 2007 follows.
Operating statistics - --------------------
The hotels' results of operations are affected by changing market conditions and by seasonality caused by variables such as vacations, holidays and climate. Based on the hotels' operating budgets and historical trends, the following months should provide the highest net cash flow to the Partnership from each of the hotels.
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PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
Hotel Location Peak Months -------------- -------------------
Clearwater, FL January through April Minneapolis, MN March through November Plymouth, MN April through October Roseville, MN April through October Scottsdale, AZ January through April; and October and November
The hotels' results of operations set forth below may not be consistent with longer-term historical trends.
The Partnership's statements of operations include operating results for each of the hotels as summarized below. Gross Operating Income represents total revenue from rooms, rental and other, telephone, and food and beverage, less the related departmental expenses. Operating Income represents Gross Operating Income less unallocated operating income and expenses. The results of operations and average occupancy for the hotels for the years ended December 31, 2008 and 2007, follow.
Gross Operating Income ---------------------------------- Hotel Location 2008 2007 -------------- ----------- -----------
Clearwater, FL $ 706,887 $ 878,090 Minneapolis, MN 2,157,018 2,067,131 Plymouth, MN 845,549 770,239 Roseville, MN 1,084,843 1,081,000 Scottsdale, AZ 2,376,799 2,708,112 ----------- -----------
Total $ 7,171,096 $ 7,504,572 =========== ===========
Operating (Loss) Income ---------------------------------- Hotel Location 2008 2007 -------------- ----------- -----------
Clearwater, FL $ (28,330) $ 60,197 Minneapolis, MN 1,193,772 1,130,057 Plymouth, MN 281,841 218,879 Roseville, MN 454,559 446,553 Scottsdale, AZ 360,443 509,800 Depreciation and net Partnership operating expenses (1,570,437) (1,301,366) ----------- -----------
Total $ 691,848 $ 1,064,120 =========== ===========
Average Occupancy ---------------------------------- Hotel Location 2008 2007 -------------- ----------- -----------
Clearwater, FL 49% 56% Minneapolis, MN 79% 84% Plymouth, MN 66% 66% Roseville, MN 68% 72% Scottsdale, AZ 72% 83%
2008 versus 2007 - ----------------
Clearwater, Florida: Gross operating income and operating income for the year ended December 31, 2008, decreased compared to 2007 primarily due to decreases in rooms revenue, telephone revenue and rental and other revenue and increased property tax expense, partially offset by decreases in rooms expense, telephone expense, rental and other expense, general and administrative expenses, marketing expense, energy expense, repair and maintenance expenses, management
II-7
PART II -------
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS - Continued -----------------------------------
fees and insurance expense. Occupancy decreased due to higher fuel prices and a decrease in the housing and construction markets. These factors combined with a highly active hurricane season, lead to the overall reduction in occupancy.
Minneapolis, Minnesota: Gross operating income and operating income for the year ended December 31, 2008, increased compared to 2007 primarily due to increased rooms revenue, as a result of higher room rates, and decreases in rental and other expense, marketing expense and property tax expense, partially offset by decreases in telephone revenue and rental and other revenue and increases in rooms expense, telephone expense, general and administrative expenses, energy expense, repair and maintenance expenses, management fees and insurance expense. Occupancy decreased due to lack of market demand mostly in the fourth quarter. The entire Twin Cities market was affected.
Plymouth, Minnesota: Gross operating income and operating income for the year ended December 31, 2008, increased compared to 2007 primarily due to increased rooms revenue, as a result of higher room rates, and decreases in rooms expense, telephone expense, rental and other expense, general and administrative expenses and marketing expense, partially offset by decreases in telephone revenue and rental and other revenue and increases in energy expenses, repair and maintenance expenses, management fees, insurance expense and property tax expense. Occupancy was flat to last year.
Roseville, Minnesota: Gross operating income and operating income for the year ended December 31, 2008, increased compared to 2007 primarily due to increased rooms revenue, as a result of higher room rates, and decreases in telephone expense, rental and other expense, general and administrative expenses and marketing expense, partially offset by decreases in telephone revenue and rental and other revenue and increases in rooms expense, energy expense, repair and maintenance expenses, management fees, insurance expense and property tax expense. Occupancy decreased in all market segments with a sharp decline in walk-in business, as a direct result of the sluggish economy.
Scottsdale, Arizona: Gross operating income and operating income for the year ended December 31, 2008, decreased compared to 2007 primarily due to decreases in rooms revenue, food and beverage revenue, telephone revenue and rental and other revenue and increases in telephone expense, rental and other expense, marketing expense, energy expense and insurance expense, partially offset by decreases in rooms expense, food and beverage expense, general and administrative expenses, repair and maintenance expenses, management fees, property tax expense and land lease expense. Occupancy decreased in all market segments, mostly impacted by the economy, with the exception of tour and travel. The increase in the tour and travel market was a direct result of additional international travel due to the current exchange rates.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS --------------------
The information required by this item is contained in Part IV.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS --------------------------------------------- ON ACCOUNTING AND FINANCIAL DISCLOSURE --------------------------------------
None.
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PART II -------
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES -----------------------
In January 2009, representatives of the Managing General Partner of the Partnership carried out an evaluation of the effectiveness of the design and operation of the Partnership's disclosure controls and procedures, pursuant to Exchange Act Rules 13a-15 and 15d-15. The Managing General Partner does not expect that the Partnership's disclosure controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Based on such evaluation, our principal executive officer and principal financial officer have concluded that as of December 31, 2008, our disclosure controls and procedures were effective to ensure that (i) the information required to be disclosed by us in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended, was recorded, processed, summarized or reported within the time periods specified in the SEC's rules and forms and (ii) such information was accumulated and communicated to management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. In addition, there have been no significant changes in the Partnership's internal controls over financial reporting that occurred during the Partnership's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Partnership's internal controls over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION -----------------
There has not been any information required to be disclosed in a report on Form 8-K during the quarter ended December 31, 2008, but not reported, whether or not otherwise required by this Form 10-K at December 31, 2008.
Certain states may assert claims against the Partnership for failure to withhold and remit state income tax on operating profit or where the sale(s) of property in which the Partnership was invested failed to produce sufficient cash proceeds with which to pay the state tax and/or to pay statutory partnership filing fees. The Partnership is unable to quantify the amount of such potential claims at this time. The Partnership has consistently advised its Partners that they should consult with their tax advisors as to the necessity of filing non-resident returns in such states with respect to their proportional taxes due.
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PART III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT --------------------------------------------------
(a) and (b)
The Partnership has no directors, executive officers or significant employees of its own.
(a) and (b)
The names, ages and business experience of the directors and executive officers of C.R.I., Inc. (CRI), the General Partner of the Partnership, follow.
William B. Dockser, 72, has been the Chairman of the Board and a Director of CRI since 1974. Prior to forming CRI, he served as President of Kaufman and Broad Asset Management, Inc., an affiliate of Kaufman and Broad, Inc., which managed publicly held limited partnerships created to invest in low and moderate income multifamily apartment properties. Prior to joining Kaufman and Broad, he served in various positions at HUD, culminating in the post of Deputy FHA Commissioner and Deputy Assistant Secretary for Housing Production and Mortgage Credit, where he was responsible for all federally insured housing production programs. Before coming to the Washington, D. C. area, Mr. Dockser was a practicing attorney in Boston and served as a special Assistant Attorney General for the Commonwealth of Massachusetts. He holds a Bachelor of Laws degree from Yale University Law School and a Bachelor of Arts degree, cum laude, from Harvard University.
H. William Willoughby, 62 has been President, Secretary and a Director of CRI since January 1990 and was Senior Executive Vice President, Secretary and a Director of CRI from 1974 to 1989. Effective May 7, 2005, he assumed the duties of Principal Financial Officer and Principal Accounting Officer of CRI. He is principally responsible for the financial management of CRI and its associated partnerships. Prior to joining CRI in 1974, he was Vice President of Shelter Corporation of America and a number of its subsidiaries dealing principally with real estate development and equity financing. Before joining Shelter Corporation, he was a senior tax accountant with Arthur Andersen & Co. He holds a Juris Doctor degree, a Master of Business Administration degree and a Bachelor of Science degree in Business Administration from the University of South Dakota.
(c) There is no family relationship between any of the foregoing directors and executive officers.
(d) Involvement in certain legal proceedings.
None.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ----------------------
(a), (b), (c), (d), (e), (f), (g), and (h)
The Partnership has no officers or directors. However, in accordance with the Partnership Agreement, and as disclosed in the public offering, various types of compensation and fees were paid or are payable to the General Partner and its affiliates. Additional information required by Item 10 is incorporated herein by reference to Note 9 of the notes to financial statements contained in Part III.
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PART III --------
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ----------------------------------------------- AND MANAGEMENT --------------
(a) Security ownership of certain beneficial owners.
The following table sets forth certain information concerning any person (including any "group") who is known to the Partnership to be the beneficial owner of more than five percent of the issued and outstanding BACs at March 24, 2009.
(b) Security ownership of management.
The following table sets forth certain information concerning all BACs beneficially owned, as of March 24, 2009, by each director and by all directors and officers as a group of the managing general partner of the Partnership's General Partner.
(c) Changes in control.
There exists no arrangement known to the Partnership, the operation of which may, at a subsequent date, result in a change in control of the Partnership. There is a provision in the Partnership Agreement which allows, under certain circumstances, the ability to change control.
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PART III --------
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ----------------------------------------------
(a) and (b)
Transactions with management and others.
The Partnership has no directors or officers. In addition, the Partnership has had no transactions with individual officers or directors of the managing general partner of the General Partner of the Partnership other than any indirect interest such officers and directors may have in the amounts paid to the General Partner or its affiliates by virtue of either their interest in the General Partner or their stock ownership in CRI. Item 10 of this report, which contains a discussion of the fees and other compensation paid or accrued by the Partnership to the General Partner or its affiliates, is incorporated herein by reference. Note 9 of the notes to financial statements, which contains disclosure of related party transactions, is also incorporated herein by reference.
(c) Certain business relationships.
The Partnership's response to Item 12(a) is incorporated herein by reference. In addition, the Partnership has no business relationship with entities of which the managing general partner of the General Partner of the Partnership is an officer, director or equity owner other than as set forth in the Partnership's response to Item 12(a).
(d) Transactions with promoters.
Not applicable.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES --------------------------------------
During the years ended December 31, 2008 and 2007, the Partnership retained Grant Thornton LLP to provide services as follows.
Year Ended December 31, ---------------------------- 2008 2007 -------- --------
Audit fees (1) $185,750 $173,100 Audit-related fees -- -- Tax fees (2) 14,000 16,500 All other fees -- -- -------- --------
Total billed $199,750 $189,600 ======== ========
(1) Includes quarterly reviews of Forms 10-Q and 10-QSB. (2) Preparation of Partnership federal and state tax returns.
The Partnership has no directors or officers. The Board of Directors of the General Partner of the General Partner of the Partnership, serving as the audit committee, has approved in advance 100% of the fees paid to, and services provided by, Grant Thornton LLP. Prior to approving Grant Thornton LLP's providing any non-audit services, the Board of Directors of the General Partner of the General Partner of the Partnership would assess whether the provision of those services would compromise Grant Thornton LLP's independence. No such services were provided by Grant Thornton LLP during the years ended December 31, 2008 and 2007.
III-3
PART IV -------
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS ---------------------------------
1. Financial Statements
a. The following documents are included as part of this report:
(1) Financial Statements
Report of Independent Registered Public Accounting Firm Balance Sheets Statements of Operations Statements of Changes in Partners' (Deficit) Capital Statements of Cash Flows Notes to Financial Statements
(2) Financial Statement Schedules
None.
(3) Exhibits
Index of Exhibits. (Listed according to the number assigned in the table in Item 601 of Regulation S-K.)
Exhibit No. 1 - Underwriting Agreement.
a. Forms of Sales Agency Agreement. (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.) b. Forms of Selected Dealer Agreements. (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.)
Exhibit No. 3 - Articles of Incorporation and Bylaws.
a. Certificate of Limited Partnership dated as of September 23, 1986 of CRI Hotel Income Partners, L.P. (formerly named CRI Hotel Income Fund, L.P.). (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.)
1. Amendment dated as of March 12, 1987. 2. Amendment dated as of April 17, 1987.
Exhibit No. 10 - Material Contracts.
a. Sale/Purchase Agreement, dated as of October 9, 1986, by and between Days Inns of America, Inc. (DIA), Days Inns Corp. (DID), Days Inns Management Company, Inc. (DIM), and CRI Hotel Income Fund, L.P., and six modifications thereto. (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.) b. Form of Management Agreement by and between DIM and CRI Hotel Income Fund, L.P. (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.) c. Form of Beneficial Assignee Certificate. (Incorporated by reference to the Registration Statement on Form S-1 filed on December 24, 1986.)
IV-1
PART IV -------
ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS - Continued ---------------------------------
d. Forms of Amendment to Hotel Management Agreement by and between CRI Hotel Income Partners, L.P. and Buckhead Hotel Management Company, Inc. (Incorporated by reference to the 1994 Annual Report on Form 10-K filed on March 15, 1995.)
Exhibit No. 10.1 - Form of Management Agreement dated March 1, 2008, between Registrant and Oak Hotels, Inc. for the University, Plymouth and Roseville hotels, April 1, 2008 for the Clearwater Hotel and July 1, 2008 for the Scottsdale Hotel.
Exhibit No. 31.1 - Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit No. 31.2 - Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit No. 32 - Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
IV-2
SIGNATURES ----------
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CRI HOTEL INCOME PARTNERS, L.P. ----------------------------------------------------- (Registrant)
by: CRICO Hotel Associates I, L.P. ------------------------------------------------ General Partner
by: C.R.I., Inc. ------------------------------------------- its General Partner
March 24, 2009 by: /s/ William B. Dockser - -------------- -------------------------------------- DATE William B. Dockser, Director, Chairman of the Board, and Treasurer (Principal Executive Officer)
In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
March 24, 2009 by: /s/ H. William Willoughby - -------------- -------------------------------------- DATE H. William Willoughby, Director, President, Secretary, Principal Financial Officer and Principal Accounting Officer
IV-3
CRI HOTEL INCOME PARTNERS, L. P.
Page ----
Financial Statements of CRI Hotel Income Partners, L.P.
Report of Independent Registered Public Accounting Firm................. IV-5 Balance Sheets as of December 31, 2008 and 2007......................... IV-6 Statements of Operations for the Years Ended December 31, 2008, 2007 and 2006..................................... IV-7 Statements of Changes in Partners' (Deficit) Capital for the Years ended December 31, 2008, 2007 and 2006................................ IV-8 Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006..................................... IV-9 Notes to Financial Statements........................................... IV-10
IV-4
Report of Independent Registered Public Accounting Firm
Partners CRI Hotel Income Partners, L.P.
We have audited the accompanying balance sheets of CRI Hotel Income Partners, L.P. (a Delaware limited partnership) (the Partnership) as of December 31, 2008 and 2007, and the related statements of operations, changes in partners' (deficit) capital, and cash flows for each of the three years in the period ended December 31, 2008. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CRI Hotel Income Partners, L.P. as of December 31, 2008 and 2007, and the results of its operations, and its cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
McLean, Virginia March 24, 2009
IV-5
CRI HOTEL INCOME PARTNERS, L.P.
BALANCE SHEETS
ASSETS
The accompanying notes are an integral part of these financial statements.
IV-6
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these financial statements.
IV-7
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF CHANGES IN PARTNERS' (DEFICIT) CAPITAL
The accompanying notes are an integral part of these financial statements.
IV-8
CRI HOTEL INCOME PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
IV-9
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Organization and offering -------------------------
CRI Hotel Income Partners, L.P. (the Partnership) is a limited partnership which was formed under the Delaware Revised Uniform Limited Partnership Act as of September 23, 1986 and will continue until December 31, 2016, unless dissolved earlier in accordance with the Partnership Agreement. The Partnership was formed for the purpose of investing in hotels that were acquired from Days Inns of America, Inc. The Partnership's primary objectives continue to be cash flow growth and capital appreciation. However, the attainment of these objectives is principally dependent on the hotels' operations. The hotels had been operated by Bryanston Group, Inc. d/b/a Buckhead Hotel Management Company, Inc. (Buckhead), formerly known as Days Inns Management Company, Inc., under the nationally recognized franchise name of Days Inns. The Partnership entered into new management contracts with Oak Hotels, Inc., which will continue to be operated as Days Inns.
The General Partner of the Partnership is CRICO Hotel Associates I, L.P. (CRICO Associates), a Delaware limited partnership, the general partner of which is C.R.I., Inc. (CRI), a Delaware corporation. The General Partner has authority in the overall management and control of the Partnership. The Assignor Limited Partner of the Partnership is CRICO Hotel Fund, Inc. (CRICO Hotel Fund).
b. Method of Accounting --------------------
The financial statements of the Partnership have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America (US GAAP).
c. Depreciation and amortization -----------------------------
Depreciation is based on the estimated useful lives of depreciable assets using the straight-line method. Salvage value has been incorporated relating to the Scottsdale hotel. The estimated lives used in determining depreciation follow.
Type of asset Estimated life ------------- --------------
Building and site improvements 10-30 years Furniture, fixtures and equipment 7 years Leasehold improvements Shorter of estimated life (usually 7 years) or remaining lease term
Property purchase costs and acquisition fees are being amortized over a thirty-year period using the straight-line method, except for the Scottsdale hotel which is being amortized over the remaining lease term. Loan refinancing costs are being amortized over the life of the loans using the straight-line method, which approximates the effective interest method.
IV-10
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
d. Hotel operating cash; cash and cash equivalents -----------------------------------------------
Hotel operating cash and cash and cash equivalents consist of demand deposits, repurchase agreements and money market funds with original maturities when purchased of three months or less, which have not been designated as a working capital reserve by the General Partner. Hotel operating cash represents funds maintained at the hotels and by the hotels' unaffiliated manager, while cash and cash equivalents represents funds maintained at the Partnership. The Partnership has determined that the carrying amounts for these items approximate fair value.
e. Working capital reserve -----------------------
The working capital reserve represents all cash and cash equivalents, as defined above, maintained as working capital for the Partnership. The General Partner has determined that all cash and cash equivalents maintained at the Partnership which are not currently distributable to the BAC holders and General Partner of the Partnership shall be deemed as a working capital reserve. The working capital reserve may be increased or reduced by the General Partner as it deems appropriate.
f. Hotel accounts receivable -------------------------
Hotel accounts receivable, which is included in receivables and other assets in the accompanying balance sheets, are reviewed by the Partnership for collectibility. Hotel accounts receivable are reflected net of allowance for doubtful accounts of $37,215 and $34,096 as of December 31, 2008 and 2007, respectively.
g. Revenue recognition -------------------
Revenues are recognized when services are provided. The Partnership's revenues are derived primarily from hotel operations, including rooms rentals, telephone usage and food and beverage sales.
h. Earnings per BAC ----------------
Income per BAC is 98% of net income divided by BACs outstanding. The Partnership has no dilutive instruments.
i. Income taxes ------------
For federal and state income tax purposes, each partner reports on his or her personal income tax return his or her share of the Partnership's income or loss as determined for tax purposes. Accordingly, no provision has been made for income taxes in these financial statements.
j. Use of estimates ----------------
In preparing financial statements in conformity with US GAAP, the Partnership is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
IV-11
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
k. Fair value of financial instruments -----------------------------------
In September 2006, the Financial Accounts Standards Board (FASB) issued SFAS No. 157, Fair Value Measurements ("SFAS No. 157"). SFAS No. 157 establishes a formal framework for measuring fair value under US GAAP. Although SFAS No. 157 applies (amends) the provisions of existing FASB and AICPA pronouncements, it does not require any new fair value measurements, nor does it establish valuation standards. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We adopted the recognition and disclosure provisions of SFAS No. 157 for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are re-measured at least annually effective January 1, 2008. The adoption did not have a material impact on our financial position, results of operations or cash flows. In accordance with FSP SFAS No. 157-2, "Effective Date of FASB Statement No. 157", we are required to adopt the provisions of SFAS No. 157 for all other nonfinancial assets and nonfinancial liabilities effective January 1, 2009 and do not expect the adoption to have a material impact on our financial position, results of operations or cash flows.
SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value as follows:
1. Level 1 Inputs -- quoted prices in active markets for identical assets of liabilities. 2. Level 2 Inputs -- observe inputs other than quoted prices in active markets for identical assets and liabilities. 3. Level 3 Inputs -- unobservable inputs.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement.
Except as disclosed in Note 3, the carrying amount of our financial instruments approximates their fair value.
l. Long-lived assets -----------------
The Partnership reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Recoverability is measured by a comparison of the carrying amount of an asset to the estimated future undiscounted net cash flows expected to be generated by the asset. If an asset were determined to be impaired, its basis would be adjusted to fair value through the recognition of an impairment loss.
m. Single operating segment ------------------------
The Partnership and the chief operating decision maker consider the hotels' operations as a single homogeneous business activity as it relates to achieving their objectives of cash flow growth and capital appreciation. The chief operating decision maker reviews cash flow and operating results in the aggregate in order to determine the appropriate level of cash available for distribution to the investors in the Partnership. Accordingly, the Partnership considers itself to operate in a single reportable segment in accordance with Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information.
IV-12
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
n. Risk and uncertainties ----------------------
The hotel industry in the fourth quarter 2008 is continuing to feel the effects of a declining economy with decreased demand and lower occupancies, which had a negative impact at all of the five hotels owned by the Partnership. The Partnership's ability to pay operating expenses and current liabilities, and to pay distributions to BAC holders, is primarily dependent upon the performance of the underlying hotels. The Partnership is currently unable to estimate the impact the future state of the economy could have on its operations, liquidity, or capital resources.
o. New accounting pronouncement ----------------------------
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115" ("SFAS No. 159"). This standard permits entities to choose to measure many financial instruments and certain other items at fair value and is effective for the first fiscal year beginning after November 15, 2007. We did not make this fair value election when we adopted SFAS No. 159 effective January 1, 2008, and, therefore, it did not have an impact on our financial position, results of operations, or cash flows.
2. HOTELS AND LEASEHOLD INTEREST OWNED BY THE PARTNERSHIP
As of December 31, 2008, the Partnership remained invested in four hotels and one leasehold interest, as follows.
Hotels Date of purchase Amount of purchase ---------------------- ---------------- ------------------
Clearwater Days Inn 04/01/88 $3,750,000 Minneapolis Days Inn 11/01/87 $4,800,000 Plymouth Days Inn 12/30/87 $4,000,000 Roseville Days Inn 03/01/88 $4,200,000
Leasehold interest Date of purchase Amount of purchase ---------------------- ---------------- ------------------
Scottsdale Days Inn (A) 07/01/88 $2,000,000
(A) Included in the purchase of the Scottsdale leasehold interest was $618,000 allocated to furniture, fixtures and equipment.
3. MORTGAGE PAYABLE
On December 19, 1997, the Partnership refinanced with Citicorp Real Estate, Inc. (Citicorp) the Zero Coupon Notes which were originally issued in connection with the Partnership's acquisition of the hotels. The loan matured January 1, 2008. On that date, a balloon payment in the amount of $7,273,441 became due. The General Partner was unable to refinance the Partnership's mortgage debt prior to its maturity. Although the loan was in default, the special servicer agreed to a forbearance agreement for a period of 180 days for payment of a fee in the amount of $72,734.41, plus continued monthly payments of principal, interest (at the pre-default rate) and tax and capital improvements escrows.
IV-13
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
3. MORTGAGE PAYABLE - Continued
On May 6, 2008, the Partnership closed three loans from General Electric Credit Corporation ("GE") in the aggregate amount of $5,000,000 to refinance the Plymouth and Roseville hotels in Minnesota and the Clearwater hotel in Florida. The three loans are cross-collateralized by the three hotels. The Partnership used the loan proceeds together with the proceeds of a loan from Remediation Capital Funding, LLC in the amount of $2,900,000, of which $500,000 is held by the Lender pending resolution of the environmental matter further discussed below, secured by the University hotel in Minnesota, to pay off the existing debt in full.
The Phase I environmental study of the University hotel required by GE revealed excess levels of three chemicals deemed hazardous in the groundwater on the property. The contamination is not due to acts or omissions of the hotel. Simultaneously with its refinancing efforts, the Partnership engaged a consultant to enroll the University property in the Minnesota Pollution Control Agency's ("MCPA") Voluntary Investigation and Cleanup ("VIC") Program and deal with the contamination at the site. The Partnership's goal is to obtain a No Action Letter with a Covenant Not to Sue, at which point it should be able to obtain financing on the property again. NOVA, the Partnership's consultant, has prepared and submitted an additional Phase I study in accordance with the guidelines established by the MPCA-VIC Program along with the application and proposed scope of work for the required Phase II study. On July 16, 2008, the MPCA approved the work plan for the Phase II study with samples of soil and ground water scheduled to begin collection for analysis August 11, 2008. On January 28, 2009, NOVA completed the Phase II study. Based on the results of the solvent, petroleum, and RCRA metal impacts above action or guidance levels that were detected in the soil, soil vapor and groundwater samples collected at the site, with the exception of the petroleum impacts, the compounds detected at the site appear to be associated with regional up gradient off-site areas of contamination located to the northeast and possibly to the north of the site. It does not appear that the historical uses of the site are the source of the solvent, soil vapor and groundwater impacts detected at the site. NOVA has submitted these results and requests that the MPCA issue an Off-Site Determination letter and No Further Action letter for the site. The Partnership has been advised that the VIC Program process will likely take from nine months to eighteen months.
The three new GE loans bear interest at the rate of 6.79% per annum and mature on January 1, 2016 with balloon payments due as set forth below:
Plymouth $887,269 Roseville $2,083,122 Clearwater $887,269
The new loan with Remediation Capital bears interest at the rate of 14% per annum and matures on May 6, 2009, although the Partnership has two options, at its sole discretion, to extend the loan for six months each time. It is contemplated that this loan will be refinanced after the environmental issues at the University hotel have been resolved.
The Partnership made installments of principal and interest aggregating $802,042 and $804,589 for the years ended December 31, 2008 and 2007. The Partnership's aggregate balance on the current loans was $7,341,231 as of December 31, 2008. The Partnership's balance on the former loan was $7,273,441 as of December 31, 2007.
Considerable judgment is necessary to estimate the fair value of financial instruments. Due to current limitations on credit availability and market conditions, the estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. We estimate the fair value of our mortgages payable using
IV-14
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
3. MORTGAGE PAYABLE - Continued
discounted cash flow analysis, unobservable inputs, and other internally developed estimates that incorporate market-based assumptions to range from $3,000,000 to $3,750,000 for the Plymouth hotel, Roseville hotel and Clearwater hotel; and approximately $2,400,000 for the University hotel loan based on unobservable inputs.
4. CAPITAL IMPROVEMENTS, REAL ESTATE TAX RESERVES HELD BY SERVICER AND INTERCOMPANY TRANSACTIONS
In addition to the monthly loan installments under its former mortgage loan, as discussed above, the Partnership also made monthly payments which were escrowed for capital improvements and estimated annual real estate taxes. During the years ended December 31, 2008 and 2007, the Partnership made escrow deposits aggregating $77,458 and $232,374, respectively, for capital improvements, and $130,622 and $389,142, respectively, for estimated annual real estate taxes. As of December 31, 2008 and December 31, 2007, the servicer held reserves of $0 and $197,736, respectively, for capital improvements, and $0 and $117,849, respectively, for real estate taxes. This loan was refinanced on May 6, 2008. The Partnership was reimbursed by the former servicer in June 2008 for the remaining balances in the escrowed capital improvement and real estate tax accounts. Under the new mortgages, the Partnership will pay directly for real estate taxes and capital improvements.
In 2008, the Partnership contributed $83,640 to the Clearwater hotel for capital improvements. In November 2007, the Partnership contributed $31,835, $56,880, $39,636 and $145,725 to the Clearwater hotel, Plymouth hotel, Roseville hotel and Minneapolis hotel, respectively, for capital improvements.
5. WORKING CAPITAL RESERVE
The working capital reserve of $2,333,266 and $1,582,408 as of December 31, 2008 and 2007, respectively, represents all cash and cash equivalents, as defined in Note 1.d., maintained as working capital for the Partnership. The working capital reserve may be increased or reduced by the General Partner as it deems appropriate.
6. COMMITMENTS
a. Hotel Management Agreements ---------------------------
The Partnership entered into management agreements with Buckhead in connection with operation of the hotels. The management agreements were originally extended during 2001 to expire between November 2007 and July 2008. As the respective contracts expired, the Partnership entered into new management contracts with Oak Hotels, Inc. under business terms substantially similar to the former agreements. The new contracts will expire December 31, 2016, with the exception of Scottsdale, which is coterminous with the land lease on which that hotel is located. The agreements provide for a base management fee of 3.5% of gross revenues from operations for the Plymouth hotel, Rosewater hotel and Clearwater hotel and 4.5% for the Scottsdale hotel.
IV-15
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
6. COMMITMENTS - Continued
b. Lease Agreements ----------------
The Partnership assumed an existing lease agreement from Days Inns of America, Inc. in connection with the acquisition of the leasehold interest in the Scottsdale Days Inn. The assumption transfers the rights to operate the property on the lease's existing terms over the remaining life of the lease. In October 2002, the lease was extended to expire on December 31, 2008. The Partnership negotiated and executed a short term extension through December 31, 2009 until the ground lessor decides to re-develop the property. As of February 1, 2009, annual lease payments are equal to the greater of $480,000 or 22% of total room revenue and 2.5% of food and beverage revenue. Minimum lease payments of $40,000 are payable monthly with a quarterly analysis of the actual amount due. For the years ended December 31, 2008 and 2007, annual lease payments were $666,250 and $755,942, respectively.
c. License Agreements ------------------
The five License Agreements pursuant to which the hotels are operated as Days Inns have recently been assigned from the current licensee (and former management agent), Buckhead to the Partnership as Licensee. The business terms remained identical.
d. Legal Proceedings -----------------
On September 2, 2008, a complaint was filed against CRI Hotel Income Partners, L.P., in the Circuit Court of the Sixth Judicial Circuit, in and for Pinellas County, Florida. The Plaintiffs claimed damages of $15,000, exclusive of interest and cost as a result of being bitten by bed bugs while staying at the Days Inn Clearwater on or about July 16, 2008. The complaint was submitted to Wausau Insurance Company, Claim #PX415-008254-01. On January 21, 2009, the defense counsel retained by Wausau requested that the plaintiff make a demand for settlement of this lawsuit so as to avoid protracted litigation. A response is expected during the first quarter of 2009 to the request. Any damages will be covered by Wausau under the hotel's insurance policy.
7. GROUND LEASE AGREEMENTS
The Partnership had leased a portion of the Minneapolis Days Inn property to Vicorp Restaurants, Inc. (Vicorp), which operated a Baker's Square restaurant on the property. Gross rental income pursuant to the lease agreement with Vicorp, which is included in interest and other income in the accompanying statements of operations, was $12,712 and $73,694 for 2008 and 2007, respectively. As of March 2008, Vicorp failed to pay the monthly rent due. On April 3, 2008, Vicorp declared bankruptcy. It rejected the lease as an executory contract as of that date. The Partnership has engaged a broker to locate a new tenant for the space. It has filed a proof of claim for its permitted damages in Vicorp's bankruptcy case.
The Partnership leases an adjacent building on the Roseville Days Inn property to India Palace, Inc., which operates a restaurant on the property. The lease expires on September 30, 2010. The lease provides one option to extend the lease for an additional period of five years. Gross base rental income pursuant to the lease agreement with India Palace, which is included in interest and other income in the accompanying statements of operations, was $30,000 for both December 31, 2008 and 2007.
IV-16
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
8. PARTNERS' CAPITAL
The Partnership's profits and losses and distributions are allocated 98% to the BAC holders and 2% to the General Partner. Upon reaching a non-cumulative, annual preferred cash flow return of 12%, the Partnership's profits and losses and distributions will be allocated 85% to the BAC holders and 15% to the General Partner. To date, the annual preferred cash flow return has not been achieved. Cash available for distribution, as defined in the Partnership Agreement, is intended to be distributed on a quarterly basis within 60 days after the end of each calendar quarter.
A distribution in the amount of $221,597 ($0.25 per BAC) was declared and paid to BAC holders of record and to the General Partner for the first quarter of 2007 in the amounts of $217,165 and $4,432, respectively. A distribution in the amount of $221,598 ($0.25 per BAC) was declared and paid to BAC holders of record, to the General Partner and to the state of Minnesota for withholding for the second quarter of 2007 in the amounts of $212,021, $4,432 and $5,145, respectively. A distribution in the amount of $221,597 ($0.25 per BAC) was declared and paid to BAC holders of record and to the General Partner and to the state of Minnesota for withholding for the third quarter of 2007 in the amounts of $212,020, $4,432 and $5,145, respectively. The Partnership did not declare a distribution for the fourth quarter of 2007. The Partnership did not declare a distribution in 2008.
9. RELATED-PARTY TRANSACTIONS
In accordance with the terms of the Partnership Agreement, the Partnership paid the General Partner a fee for services in connection with the review, selection, evaluation, negotiation and acquisition of the hotels. The Partnership paid $1,142,516 in acquisition fees. The acquisition fees were capitalized and are being amortized over a thirty-year period using the straight-line method.
In accordance with the terms of the Partnership Agreement, the Partnership reimbursed the General Partner or its affiliates for costs incurred on behalf of the Partnership for real estate appraisals and market studies, engineering studies, legal consultation and accounting fees, as well as travel and communication expenses related to the acquisition of the hotels. The Partnership paid $233,474 in such costs. The costs were capitalized and are being amortized over a thirty-year period using the straight-line method.
In accordance with the terms of the Partnership Agreement, the Partnership is obligated to reimburse the General Partner or its affiliates for their direct expenses in connection with managing the Partnership. For the years ended December 31, 2008, 2007 and 2006, the Partnership paid $202,455, $90,942 and $41,138, respectively, to the General Partner or its affiliates as direct reimbursement of expenses incurred on behalf of the Partnership. Such reimbursed expenses are included in the accompanying statements of operations as general and administrative expenses.
In accordance with the terms of the Partnership Agreement, the Partnership is obligated to pay the General Partner or its affiliates an annual base asset management fee (Management Fee), equal to 0.50% of the weighted average balance of the adjusted partnership investment during the period, as defined in the Partnership Agreement. The Partnership paid a Management Fee of $93,750 for each of the years ended December 31, 2008, 2007 and 2006.
C.R.I., Inc., the general partner of the General Partner, has contracted with Capitol Hotel Group, Inc. (CHG), to perform certain asset management services related to the oversight of the operations and management of the hotels. The Chairman and President of C.R.I., Inc., are the Chairman and President, respectively, of, and holders of 100% of the equity interest in, CHG.
IV-17
CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
10. INCOME TAXES
A reconciliation of the Partnership's financial statement net income to taxable income follows.
A number of investors have sold their BACs to other investors. If more than two percent of the total outstanding BACs are transferred due to sale in any one calendar year (not counting certain exempt transfers), the Partnership could be taxed as a "publicly traded partnership," with potentially severe tax implications for the Partnership and its investors. Section 7704 of the Internal Revenue Code defines the term "publicly traded partnership" as any partnership for federal income tax purposes, the interests of which are readily traded on an established securities market, or readily tradable on a secondary market or the substantial equivalent thereof. If the Partnership is classified as a "publicly traded partnership" or otherwise fails to qualify as a partnership for federal income tax purposes in any taxable year, it would then be subject to federal income tax on any taxable income in that taxable year at regular corporate rates. A BAC holder could not then take into account the BAC holder's distributive share of the Partnership's income and would be subject to tax on the BAC holder's share of the Partnership's income to the extent distributed either as dividends out of current or accumulated earnings and profits or as taxable gain in excess of the tax basis of the investor's BACs. A BAC holder could also have to file amended income tax returns. If the Partnership were taxed as a corporation, the BAC holder's cash flow, return on investment and the value of the investor's BACs would be significantly reduced. Also, the income and losses from the Partnership would no longer be considered a passive activity.
From January 1, 2007 through April 29, 2007, the Partnership received sale transfer requests for approximately 2.0% of the outstanding BAC's. Accordingly, to remain within the two percent safe harbor, effective April 30, 2007, the General Partner halted recognition of any transfers that would exceed the safe harbor limit through December 31, 2007. As a result, transfers of BACs due to sale transactions were not recognized by the Partnership between April 30, 2007 and December 31, 2007. The Partnership's unaffiliated transfer agent, Registrar & Transfer Company, informed the General Partner in late January, 2008 that it had processed sale transfers in excess of four percent of the outstanding BACs in early January, 2008. Accordingly, the General Partner instructed the transfer agent to halt all further sale transfers for the rest of 2008. The Partnership sought an opinion from its tax counsel that it is "more likely than not" that there would be no adverse tax consequences to the Partnership in connection with exceeding the safe harbor limitation in 2008. In supplying information requested in connection with the opinion, the General Partner became aware that the percentage of trades significantly exceeded the safe harbor in 2006, when Treasury Regulations applicable to the Partnership reduced the safe harbor amount from five percent to two percent, and in 2007, when a re-calculation of the non-exempt transfers reflected a total transfer of 2.21%. However, if transfers in connection with known tender offers are not counted, the percentage of sale transfers is reduced to well under two percent. The Partnership's tax attorneys issued an opinion to the effect that the transfers pursuant to the tender offers were not the type of regular and ongoing trading activities contemplated as constituting public trading and that therefore it was more likely than not that such trading would not result in the Partnership being
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CRI HOTEL INCOME PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
10. INCOME TAXES - Continued
treated as a publicly traded partnership under Section 7704. However, there can be no assurance that the Internal Revenue Service will agree with the Partnership's position and take no action to treat it as a publicly traded partnership.
11. CASH CONCENTRATION RISK
Financial instruments that potentially subject the Partnership to concentrations of risk consist primarily of cash. The Partnership maintains sixteen cash accounts. As of December 31, 2008, the uninsured portion of the cash balance was $2,304,255.
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