Exhibit 10.1

 

_____________________________________________

 

THE MEMBERSHIP INTERESTS DESCRIBED IN AND/OR REPRESENTED BY THIS AGREEMENT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR REGISTERED
OR QUALIFIED UNDER ANY STATE SECURITIES LAWS.  SUCH MEMBERSHIP INTERESTS MAY NOT
BE OFFERED FOR SALE, SOLD, DELIVERED AFTER SALE, TRANSFERRED, PLEDGED OR
HYPOTHECATED, UNLESS QUALIFIED OR REGISTERED UNDER APPLICABLE STATE AND FEDERAL
SECURITIES LAWS OR UNLESS,  IN THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY, SUCH QUALIFICATION AND REGISTRATION IS NOT REQUIRED.  ANY TRANSFER
OF THE UNITS IS FURTHER SUBJECT TO OTHER RESTRICTIONS, TERMS, AND CONDITIONS,
WHICH ARE SET FORTH HEREIN.

 

_____________________________________________

 

 

 

 

 

 

 

 

 

LIMITED LIABILITY COMPANY OPERATING AGREEMENT

 

OF

 

CWI-FAIRMONT SONOMA HOTEL, LLC

 

 

TABLE OF CONTENTS

 

 

 

Page

 

 

 

 

 

 

1.

DEFINITIONS

1

 

 

 

2.

FORMATION OF LIMITED LIABILITY COMPANY

12

 

 

 

3.

NAME AND PLACE OF BUSINESS

12

 

 

 

 

3.1

Name

12

 

3.2

Principal Place of Business

12

 

3.3

Members

12

 

 

 

4.

PURPOSE

12

 

 

 

5.

TERM OF COMPANY; RECORDINGS; AGENT FOR SERVICE OF PROCESS

13

 

 

 

 

5.1

Term

13

 

5.2

Filings

13

 

5.3

Agent for Service of Process

13

 

5.4

Considered a Partnership for Tax Purposes

13

 

5.5

Protection of REIT Status

13

 

5.6

Dispute Resolution Regarding REIT Compliance

15

 

5.7

Sarbanes-Oxley Compliance

15

 

 

 

6.

CONTRIBUTIONS AND LOANS

16

 

 

 

 

6.1

Initial Contributions

16

 

6.2

Use of Funds

16

 

6.3

Mandatory Capital Contributions, Discretionary Capital Contributions or Loans

16

 

6.4

Interest on Contributions

18

 

6.5

Return of Contributions

18

 

 

 

7.

CAPITAL ACCOUNTS; ALLOCATION OF PROFITS AND LOSSES

18

 

 

 

 

7.1

Capital Accounts

19

 

7.2

Allocation of Profits and Losses

19

 

7.3

Other Allocation Rules

20

 

7.4

Tax Allocations

20

 

 

 

8.

DISTRIBUTIONS

20

 

 

 

 

8.1

Distribution of Distributable Cash (Other than From Capital Transactions)

21

 

8.2

Distributions of Cash from Capital Transactions

22

 

8.3

Distributions/Legal Requirements/No In-Kind Distributions

23

 

 

 

9.

MANAGEMENT

23

 

 

 

 

9.1

Managing Member

23

 

-i-

 

TABLE OF CONTENTS

(continued)

 

 

 

Page

 

 

 

 

 

 

 

 

9.2

Duties and Responsibilities of Managing Member

24

 

9.3

Actions by Managing Member

26

 

9.4

Approval by Members

27

 

9.5

Hotel Management

30

 

9.6

Remuneration of Members and their Affiliates

30

 

9.7

Member Approval

30

 

9.8

Liquor License

31

 

9.9

Dispute Resolution

31

 

9.10

Execution of Documents

32

 

9.11

Liability/Indemnification

32

 

9.12

TRS SUB Directors

33

 

9.13

Company Guaranty

34

 

 

 

 

10.

RESTRICTIONS ON TRANSFER; NEW MEMBERS

37

 

 

 

 

 

10.1

Limitations on Transfers

37

 

10.2

Permitted Transfers

37

 

10.3

Indirect Transfers to Non-Affiliates

37

 

10.4

Forced Sale and ROFO

37

 

10.5

Buy/Sell

39

 

10.6

Further Assurances

40

 

10.7

Representations and Warranties of the Members

41

 

10.8

No Dissolution

41

 

 

 

11.

DISSOLUTION AND WINDING UP OF THE COMPANY

41

 

 

 

 

11.1

Dissolution of Company

41

 

11.2

Winding Up of the Company

42

 

 

 

12.

BOOKS AND RECORDS; ACCOUNTS AND INSURANCE

42

 

 

 

 

12.1

Books of Account

42

 

12.2

Reports

43

 

12.3

Audited Financial Statements

43

 

12.4

Tax Returns; Tax Elections

44

 

12.5

Bank Accounts

45

 

12.6

Insurance

45

 

12.7

Accountants

45

 

-ii-

 

TABLE OF CONTENTS

(continued)

 

 

 

Page

 

 

 

 

 

 

13.

ADJUSTMENT OF BASIS ELECTION

45

 

 

 

14.

WAIVER OF ACTION FOR PARTITION

45

 

 

 

15.

AMENDMENTS

45

 

 

 

16.

EQUITABLE RELIEF

45

 

 

 

17.

NOTICES

46

 

 

 

18.

LEGAL REPRESENTATION

47

 

 

 

19.

ATTORNEYS’ FEES

48

 

 

 

20.

INDEPENDENT ACTIVITIES OF MEMBERS

48

 

 

 

21.

INVESTMENT REPRESENTATIONS OF THE MEMBERS

49

 

 

 

22.

MISCELLANEOUS

50

 

 

 

 

22.1

Governing Law

50

 

22.2

Severability

50

 

22.3

Further Assurances

50

 

22.4

Successors and Assigns

50

 

22.5

Number and Gender

51

 

22.6

Entire Agreement

51

 

22.7

Waiver

51

 

22.8

Counterparts

51

 

22.9

Interpretation

51

 

22.10

Parties in Interest

51

 

22.11

No Authority

51

 

 

 

EXHIBITS

 

 

 

EXHIBIT A – MEMBER INFORMATION

 

EXHIBIT B – LEGAL DESCRIPTION

 

EXHIBIT C – SPECIAL ALLOCATIONS

 

EXHIBIT D – INITIAL BUDGET

 

EXHIBIT E – INTENTIONALLY OMITTED

 

EXHIBIT F – INSURANCE REQUIREMENTS

 

EXHIBIT G – RESTRICTED TERRITORY

 

EXHIBIT H – BUYOUT PSA TERMS

 

EXHIBIT I – CAPITAL PLAN

 

 

-iii-

 

LIMITED LIABILITY COMPANY OPERATING AGREEMENT

 

 

OF CWI-FAIRMONT SONOMA HOTEL, LLC

 

 

THIS LIMITED LIABILITY COMPANY OPERATING AGREEMENT OF CWI-FAIRMONT SONOMA HOTEL,
LLC (this “Agreement”) is made and entered into as of July 10, 2013 (the
“Effective Date”), by and between CWI SONOMA HOTEL, LLC, a Delaware limited
liability company (“CWI”), and FAIRMONT HOTELS AND RESORTS (MARYLAND) LLC, a
Maryland limited liability company (“FHR”).  CWI and FHR are sometimes referred
to collectively in this Agreement as the “Members” and individually as a
“Member”.

 

RECITALS

 

A.        CWI-Fairmont Sonoma Hotel, LLC, a Delaware limited liability company
(the “Company”), was formed as a limited liability company pursuant to and in
accordance with the Delaware Limited Liability Company Act (6 Del. C. §18-101,
et seq.), as amended from time to time (the “Act”), by causing the filing of the
Certificate of Formation of the Company (the “Certificate”) with the Secretary
of State of the State of Delaware on June 3, 2013.

 

B.        The Company has been formed to acquire that certain hotel currently
known as the Fairmont Sonoma Mission Inn & Spa, located at 100 Boyes Boulevard
in Sonoma, California, pursuant to that certain Purchase and Sale Agreement by
and between Sonoma Resort Holdings II LLC, a Delaware limited liability company
and an affiliate of FHR (“Seller”), and CWI dated as of June 14, 2013 (the
“Purchase Agreement”).

 

C.        Simultaneously with the execution of this Agreement, the Company shall
enter into that certain Operating Lease Agreement, dated as of the date hereof
(the “Operating Lease”), between the Company and TRS SUB, for the Hotel.

 

NOW, THEREFORE, for and in consideration of the mutual covenants and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Members hereby agree as
follows:

 

1.         DEFINITIONS.  When used in this Agreement, the following terms shall
have the meanings set forth below:

 

1.1       Adjusted Capital Account.  “Adjusted Capital Account” means for each
Member, an amount equal to the balance of such Member’s Capital Account as of
the end of the relevant Fiscal Year or as of any other relevant determination
date, after giving effect to the following adjustments:

 

(a)        credit to such Capital Account any amounts, which such Member is
obligated to restore (pursuant to the terms of this Agreement or otherwise) or
is deemed to be obligated to restore, pursuant to the penultimate sentences of
Regulations Section 1.704-2(g)(1) and Regulations Section 1.704-2(i)(5) after
taking into account any net decrease in a Member’s share of Company Minimum Gain
or Member Nonrecourse Debt Minimum Gain that has occurred as of the relevant
determination date; and

 

1

 

(b)        debit to such Capital Account the items described in Regulations
Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6).

 

The foregoing definition of Adjusted Capital Account is intended to comply with
the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be
interpreted consistently therewith.

 

1.2       Affiliates.  “Affiliates” means, with respect to any Person, any other
Person directly or indirectly controlling, controlled by or under common control
with such Person.  For purposes hereof, the term “control” shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of any Person, or the power to veto
major policy decisions of such Person, whether through the ownership of voting
securities, by agreement, or otherwise.

 

1.3       Applicable Law.  “Applicable Law” means, collectively, all Federal,
state and local laws, statutes, codes, acts, ordinances, orders, judgments,
decrees, injunctions, rules, regulations, permits, licenses, authorizations,
directions, and requirements of and agreements with all courts and governmental
authorities, foreseen and unforeseen, ordinary or extraordinary.

 

1.4       Bankruptcy.  “Bankruptcy” means:

 

(a)        The commencement of any voluntary proceedings under Federal or state
bankruptcy laws;

 

(b)        The failure to terminate any involuntary proceeding under Federal or
state bankruptcy laws within ninety (90) days after the commencement thereof;

 

(c)        The appointment of a receiver with respect to any material assets of
any Person;

 

(d)        A general assignment for the benefit of creditors; or

 

(e)        The issuance of a charging order against the interest of any Person
without the removal thereof within ninety (90) days after issuance.

 

1.5       Book Value.  “Book Value” means for any asset the asset’s adjusted
basis for Federal income tax purposes, except as follows:

 

(a)        The initial Book Value of the Property shall be agreed upon by FHR
and CWI, in their sole, but good faith discretion, after the Effective Date
pursuant to Section 3.1 of the Purchase Agreement.  The Book Value of any
additional property contributed by a Member to the Company shall be the gross
fair market value of such asset, as mutually agreed upon in writing by the
Members;

 

(b)        The Book Values of all Company assets shall be adjusted to equal
their respective gross fair market values, as determined by Managing Member, as
of the following times:  (i) the acquisition of an additional Membership
Interest in the Company by any new or existing Member in exchange for more than
a de minimis capital contribution if Managing Member reasonably determines that
such adjustment is necessary or appropriate to reflect the relative economic
interests of the Members in the Company; (ii) the distribution by the Company to
a Member of more than a de minimis amount of Company property as consideration
for a Membership Interest in the Company if Managing Member reasonably
determines that such adjustment is necessary or appropriate to reflect the
relative economic

 

2

 

interests of the Members in the Company; and (iii) the liquidation of the
Company within the meaning of Regulation Section 1.704-1(b)(2)(ii)(g);

 

(c)        The Book Value of any Company asset distributed to any Member shall
be the gross fair market value of such asset on the date of distribution, as
determined by Managing Member;

 

(d)        The Book Values of Company assets shall be increased (or decreased)
to reflect any adjustment to the adjusted basis of such assets pursuant to
Section 734(b) or Section 743(b) of the Code, but only to the extent that such
adjustments are taken into account in determining Capital Accounts pursuant to
Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that Book Values
shall not be adjusted pursuant to this subparagraph to the extent Managing
Member determines that an adjustment pursuant to subparagraph (b) of this
Section is necessary or appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this subparagraph; and

 

(e)        If the Book Value of an asset has been determined or adjusted
pursuant to subparagraphs (a), (b) or (d) of this Section, such Book Value shall
thereafter be adjusted by the Depreciation taken into account with respect to
such asset for purposes of computing Profits and Losses.

 

1.6       Capital Contribution.  “Capital Contribution” means collectively, the
CWI Initial Contribution, the FHR Initial Contribution, all Mandatory Capital
Contributions, all Discretionary Capital Contributions and all other
contributions in cash and the Book Value of other property contributed to the
capital of the Company.

 

1.7       Capital Plan.  “Capital Plan” means that certain approved capital
improvement plan and budget for Fiscal Years 2012 through 2015, a copy of which
is attached hereto as EXHIBIT “I”.

 

1.8       Capital Transaction.  “Capital Transaction” means (a) the refinancing
of the Property; (b) the sale, exchange or other disposition of any material
part of the Property, or all or substantially all of the Property (including the
condemnation of the Property); (c) the dissolution of the Company; or (d) any
transaction not in the ordinary course of business, which results in the
Company’s receipt of cash or other consideration (other than Capital
Contributions), including, without limitation, proceeds of sales, exchanges, or
other dispositions of assets not in the ordinary course of business,
condemnations, recoveries of damage awards, and insurance proceeds.

 

1.9       Capital Transaction Proceeds.  “Capital Transaction Proceeds” means
all proceeds from a Capital Transaction less the sum of (a) any escrow or
reserve required in connection with, or costs and expenses of the Company
attributable to, such Capital Transaction, including, without limitation, any
holdback escrow (or similar closing reserve or escrow, provided that, in each
instance, all such reserves shall be deemed Capital Transaction Proceeds upon
their subsequent release), Taxes, prepayment fees or penalties, brokerage fees,
escrow fees, title costs and expenses, appraisal fees, consultant fees, audit
and tax costs, closing costs and expenses, including attorneys’ fees (but
excluding amounts paid from the Company’s reserves or funds provided by Capital
Contributions and paid during such Fiscal Year (or portion thereof) for such
costs and expenses); and (b) reasonable reserves needed for the Company’s
business for the remainder of such Fiscal Year and future periods based on the
Initial Budget or any subsequent Approved Company Budget or otherwise approved
by the Members.

 

1.10     Code.  “Code” means the Internal Revenue Code of 1986, as amended from
time to time.

 

3

 

1.11     Company Minimum Gain.  “Company Minimum Gain” has the meaning ascribed
to the term “partnership minimum gain,” in the Regulations Section 1.704-2(d).

 

1.12     Control.  “Control”, “Controlled”, “Controlled by” or any variation
thereof, means the power to direct or cause the direction of the management,
operations, business and policies of a Person, directly or indirectly, whether
through the ability to exercise voting power, by contract or otherwise.

 

1.13     CPI.  “CPI” means the Consumer Price Index (All Cities – All Items)
(1982-84 = 100) or if such index is discontinued, the most comparable index of
the prevailing rate of inflation for the jurisdiction in which the Hotel is
situated, as determined by the relevant Governmental Authority responsible for
official economic statistics;

 

1.14     CWI Causation Event.  “CWI Causation Event” shall mean the occurrence
of any event which results in a claim against the Company or Company Guarantor
arising under the Company Guaranties, but only to the extent such event is
caused by the unilateral act (or intentional or knowing omission) of CWI or its
Affiliates in breach of its obligations under this Agreement and/or such Company
Guaranty; provided, however, for the avoidance of any doubt, a CWI Causation
Event shall expressly exclude any Neutral Event.

 

1.15     CWI Parties.  “CWI Parties” means, collectively, CWI and its
Affiliates, and each of their respective members, partners, shareholders, other
principals, directors, or officers.

 

1.16     CWI-OP. “CWI-OP” means CWI-OP, L.P., a Delaware limited partnership.

 

1.17     Depreciation.  “Depreciation” means, with respect to any asset of the
Company, for each Fiscal Year or other period, the amount of depreciation,
amortization or other cost recovery deduction allowable with respect to such
asset for such Fiscal Year or other period, except that (a) if the Book Value of
an asset differs from its adjusted basis for Federal income tax purposes at the
beginning of any such Fiscal Year or other period, Depreciation with respect to
such asset for such Fiscal Year or other period shall be an amount which bears
the same ratio to such beginning Book Value as the Federal income tax
depreciation, amortization or other cost recovery deduction for such Fiscal Year
or period bears to such beginning adjusted tax basis; and (b) if an asset has a
zero adjusted basis for Federal income tax purposes, Depreciation shall be
determined under any reasonable method selected by Managing Member, which is in
accord with Federal income tax accounting principles applicable to assets of
similar character having a positive adjusted basis for Federal income tax
purposes.

 

1.18     Distributable Cash from Operations.  “Distributable Cash from
Operations” shall mean, for any Fiscal Year, or portion thereof, revenues of the
Company derived from the lease of the Property and received in cash during such
Fiscal Year, or portion thereof, and Company reserves set aside out of revenues
during prior periods (including the Reserve as required under the Hotel
Management Agreement) that are no longer needed for the Company’s business,
including, without limitation, all dividends paid by TRS SUB with respect to
Distributable Cash from Subsidiary Operations, less the sum of (a) operating and
administrative expenses of the Company including, without limitation, Taxes,
consultant fees, and/or audit costs (but excluding amounts paid from the
Company’s reserves or funds provided by Capital Contributions and paid during
such Fiscal Year (or portion thereof) for such costs and expenses); (b) debt
service and other administrative expenses incurred by the Company in the
operation thereof (as set forth in the Initial Budget or any subsequent Approved
Company Budget, or otherwise incurred by the Company as expressly permitted
under this Agreement), including all outstanding loans made to the Company
pursuant to Section 6.3(b); and (c) reasonable working capital

 

4

 

reserves needed for the Company’s administrative expenses for the remainder of
such Fiscal Year based on the Initial Budget or any subsequent Approved Company
Budget.

 

1.19     Distributable Cash from Subsidiary Operations.  “Distributable Cash
from Subsidiary Operations” shall mean, for any Fiscal Year, or portion thereof,
revenues of the TRS SUB derived from the operation of the Property and received
in cash during such Fiscal Year, or portion thereof, less reserves set aside out
of revenues during prior periods (including the Reserve as required under the
Hotel Management Agreement) and less the sum of (a) operating and administrative
expenses of the applicable Subsidiary including, without limitation, Taxes,
consultant fees and/or audit costs (but excluding amounts paid from the
Company’s reserves or funds provided by Capital Contributions and paid during
such Fiscal Year (or portion thereof) for such costs and expenses); (b) debt
service and Company costs (as set forth in the Initial Budget or any subsequent
Approved Company Budget), including all outstanding loans made to the Company
pursuant to Section 6.3(b); (c) lease payments to the Company; and
(d) reasonable working capital reserves needed for the Company’s administrative
expenses business for the remainder of such Fiscal Year based on the Initial
Budget or any subsequent Approved Company Budget.

 

1.20     Fairmont Guarantee Reimbursement.  “Fairmont Guarantee Reimbursement”
means an amount sufficient to repay all amounts funded in the form of Fairmont
Guaranteed Payments in excess of Seven Hundred Fifty Thousand Dollars
($750,000), together with interest thereon at five percent (5%) per annum,
compounded annually.

 

1.21     FHR Causation Event.  “FHR Causation Event” shall mean the occurrence
of any event which results in a claim against the Company or Company Guarantor
arising under the Company Guaranties, but only to the extent such event is
caused by the unilateral act (or intentional or knowing omission) of FHR or its
Affiliates in breach of its obligations under this Agreement and/or such Company
Guaranty (but, for the avoidance of any doubt, excluding any acts or omissions
of FHR or any of its Affiliates in its role as “Operator” in connection the
Hotel Management Agreement or the HMA Side Letter (or any other side letters
relating thereto)); provided, however, for the avoidance of any doubt a FHR
Causation Event shall expressly exclude any Neutral Event.

 

1.22     FHR Guarantor.  “FHR Guarantor” means Fairmont Hotels & Resorts (U.S.)
Inc., a Delaware corporation.

 

1.23     FHR Guaranty.  “FHR Guaranty” means that certain Guaranty by and
between FHR Guarantor and the TRS SUB, dated as of the date of this Agreement.

 

1.24     Fiscal Year.  “Fiscal Year” means the calendar year.

 

1.25     Governmental Authority.  “Governmental Authority” means any court,
tribunal, authority, agency, commission, official or other instrumentality of
the United States, or any state, county, city or other political subdivision,
arbitrator or any judicial or quasi-judicial tribunal of competent jurisdiction.

 

1.26     HMA Side Letter.  HMA Side letter means that certain Side Letter
Agreement dated as of the date hereof made by and between TRS SUB and FHR, as
may be amended from time to time.

 

1.27     Hotel.  “Hotel” shall be as defined in the Recitals.

 

5

 

1.28     Hotel Management Agreement.  “Hotel Management Agreement” means that
certain hotel management agreement between TRS SUB and FHR, dated as of the date
hereof, as may be amended from time to time.

 

1.29     Initial Budget.  “Initial Budget” means that certain approved budget
for the Company, a copy of which is attached hereto as EXHIBIT “D”.

 

1.30     Initial Participation Percentage.  “Initial Participation Percentage”
means, with respect to CWI, seventy-five percent (75%), and with respect to FHR,
twenty-five percent (25%).

 

1.31     Intangible Property.  “Intangible Property” shall mean all intangibles
owned or used by the Company or the TRS SUB in the ownership and operation of
the Hotel.

 

1.32     IRR.  “IRR” means the annual percentage rate that when utilized to
calculate the present value of distributions made to a Member causes the present
value of such distributions to equal the present value of the Member’s Capital
Contributions.  With respect to determining IRR, which shall be done using the
XIRR function in Microsoft Office Excel, the following rules will be applied:

 

(a)        The present value of a Member’s Capital Contribution made on the
Effective Date is the nominal amount of such capital;

 

(b)        A Member will be deemed to have received a specified IRR with respect
to any Capital Contributions only when that Member has received both a return of
such Capital Contributions calculated from the date made to the date repaid plus
a return on such Capital Contributions as determined pursuant to Sections 8.1
and 8.2, but expressly excluding distributions pursuant to Sections 8.1(b)(i),
8.1(b)(iii), 8.2(b), 8.2(c) and 8.2(e);

 

(c)        For purposes of IRR calculations used herein, the annual percentage
rate shall mean a per annum rate using monthly discounting (i.e., an annual
stated IRR of, for example, seventeen percent (17%), shall mean seventeen
percent (17%) as an effective annual rate arrived at by monthly discounting);

 

(d)        Solely for purposes of IRR calculations used herein, all items of
contributions or inflows and all items of distributions or outflows used in such
calculations shall be deemed to have been received or distributed on the last
day of the calendar month in which they occur; and

 

(e)        All references to distributions in this Section 1.29 as it relates to
distributions to FHR shall also include the payment of incentive management fees
to FHR under the Hotel Management Agreement or the HMA Side Letter pursuant to
Section 8.2(g).

 

1.33     Lender.  “Lender” means the lender (as may be changed from time to
time) that funds the Loan to the Company.

 

1.34     Loan.  “Loan” means the mortgage and/or mezzanine loan advanced under
the Loan Documents (the amount of which may be adjusted and/or refinanced from
time to time) for the acquisition of the Property (or any subsequent
re-financing of any loan obtained by the Company or the TRS SUB or other
Subsidiary of the Company).

 

1.35     Loan Documents.  “Loan Documents” shall mean and refer to the documents
evidencing the Loan (as they may be revised and/or replaced from time to time).

 

6

 

1.36     Managing Member.  “Managing Member” means CWI or any replacement
managing member appointed pursuant to Section 9.1(a).

 

1.37     Member.  “Member” means any Person admitted to the Company as a member
in accordance with this Agreement, or a Person who has been admitted as a member
pursuant to Applicable Law.  The Members of the Company and their respective
Participation Percentages shall be reflected on EXHIBIT “A” attached hereto, as
it may be amended from time to time.

 

1.38     Member Nonrecourse Debt.  “Member Nonrecourse Debt” has the meaning
ascribed to the term “partner nonrecourse debt” in Regulations
Section 1.704-2(b)(4).

 

1.39     Member Nonrecourse Debt Minimum Gain.  “Member Nonrecourse Debt Minimum
Gain” means an amount, with respect each Member Nonrecourse Debt, equal to the
Company Minimum Gain that would result if such Member Nonrecourse Debt were
treated as a Nonrecourse Liability, determined in accordance with Regulations
Section 1.704-2(i)(3).

 

1.40     Member Nonrecourse Deductions.  “Member Nonrecourse Deductions” means
items of Company loss, deduction or Section 705(a)(2)(B) of the Code
expenditures that are attributable to Member Nonrecourse Debt or to other
liabilities of the Company owed to or guaranteed by a Member to the extent that
no other Member bears the economic risk of loss.

 

1.41     Membership Interest.  “Membership Interest” means the interest of a
Member in the Company.

 

1.42     Neutral Event.  “Neutral Event” shall mean any event which gives rise
to a claim under any one or more of the Company Guaranties and which is caused
by (i) any act by CWI, in its capacity as Managing Member, to the extent such
act (x) complies with the rights, duties and/or obligations of Managing Member
under this Agreement and (y) is not the result of or caused by fraud, gross
negligence, willful misconduct, theft, misappropriation of funds, and/or a
material default in the performance of (or failure to perform) the obligations
of Managing Member under this Agreement as determined by the judgment or final
adjudication (in a procedure described in Section 9.1(b)); or (ii) without
limiting clause (i) above, any act or omission other than a CWI Causation Event
or a FHR Causation Event.

 

1.43     Nonrecourse Deductions.  “Nonrecourse Deductions” means the Company
deductions that are characterized as “nonrecourse deductions” pursuant to
Regulations Section 1.704-2(b)(1).

 

1.44     Nonrecourse Liability.  “Nonrecourse Liability” has the meaning
ascribed to such term pursuant to Regulations Section 1.704-2(b)(3).

 

1.45     Parent Company.  “Parent Company” means, with respect to CWI, Carey
Watermarks Investors Incorporated, and with respect to FHR, Fairmont Hotels &
Resorts (U.S.), Inc., a Delaware corporation.

 

1.46     Participation Percentage.  “Participation Percentage” of a Member shall
mean that percentage set forth opposite such Member’s name on EXHIBIT “A”, as it
may be amended from time to time.

 

7

 

1.47     Permit.  “Permit” means any material license, permit, consent,
authorization, approval, certificate of occupancy, ratification, certification,
registration, exemption, variance, exception and similar consent granted or
issued by any Governmental Authority with respect to the Hotel.

 

1.48     Permitted Transferee.  “Permitted Transferee” of a Membership Interest
means (a) any Member; (b) any Affiliate of a Member; (c) a trust under which the
distribution of the Membership Interest may be made only to beneficiaries who
are Affiliates of such Member; and (d) any Person who receives direct or
indirect interests in any Member of any Affiliate of any Member as a result of
an Initial Public Offering.  In avoidance of doubt, with respect to CWI, any
encumbrance, gift, assignment, pledge, hypothecation, sale or other transfer, by
operation of law or otherwise, of all or any direct or indirect interest in CWI
by the respective direct and/or indirect owner in CWI to any Affiliate of CWI
and with respect to FHR, any encumbrance, gift, assignment, pledge,
hypothecation, sale or other transfer, by operation of law or otherwise, of all
or any direct or indirect interest in FHR by the respective direct and/or
indirect owner in FHR to any Affiliate of FHR, shall not be deemed a Transfer
under this Agreement and shall be permitted without the consent of any Member. 
In furtherance of the foregoing, W.P. Carey, Inc., Carey Watermark Investors
Incorporated and Watermark Capital Partners, LLC or any entity Controlled by
W.P. Carey, Inc., Carey Watermark Investors Incorporated or Watermark Capital
Partners, LLC or any subsidiary of any such entities (and without regard to the
percentage of equity ownership any of them may have in such entity), shall be
deemed “Affiliates” of CWI for all purposes under this definition so long as
such entities are Controlled by or under common Control with the same Person
that such are entities Controlled by, or under common Control with, as of the
Effective Date.

 

1.49     Person.  “Person” means an individual, corporation, firm, partnership,
limited liability company, trust or any other form of association or entity.

 

1.50     Preservation Costs.  “Preservation Costs” means (a) all debt service
payments required under any Loan Documents, taxes, assessments, water, sewer or
other similar rents, utilities, insurance premiums, Permit fees and charges,
(b) all Working Capital Shortfalls, and (c) expenditures necessary on an
emergency basis to avoid imminent material damage to the Hotel or imminent
injury to persons or property, whether or not provided for or within the amounts
provided for in the Initial Budget or any subsequent Approved Company Budget for
the Fiscal Year in question, as may reasonably be required to avoid or mitigate
such damage or injury.

 

1.51     Profits and Losses.  “Profits” and “Losses” means, for each Fiscal Year
of the Company (or other period for which Profit or Loss must be computed), the
Company’s taxable income or loss determined in accordance with Section 703(a) of
the Code (for this purpose, all items of income, gain, loss or deduction
required to be stated separately pursuant to Section 703(a)(1) of the Code shall
be included in taxable income or loss), with the following adjustments:

 

(a)        Any tax-exempt income of the Company, not otherwise taken into
account in computing taxable income or loss, shall be included in computing
Profits or Losses;

 

(b)        Any expenditures of the Company described in Section 705(a)(2)(B) of
the Code (or treated as such pursuant to Regulation
Section 1.704-1(b)(2)(iv)(l)) and not otherwise taken into account in computing
taxable income or loss, shall be subtracted from Profits or Losses;

 

(c)        In the event the Book Value of any Company asset is adjusted pursuant
to Section 1.5(b), Section 1.5(d) or Section 1.5(e), the amount of such
adjustment shall be treated as an item of gain (if the adjustment increases the
Book Value of the asset) or an item of loss (if the adjustment decreases the
Book Value of the asset) from the disposition of such asset and shall be taken
into account for purposes of computing Profits or Losses;

 

8

 

(d)        Gain or loss resulting from any disposition of property with respect
to which gain or loss is recognized for Federal income tax purposes shall be
computed by reference to the Book Value of the property disposed of, in the
event that the adjusted tax basis of such property differs from its Book Value;

 

(e)        In lieu of depreciation, amortization or other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account Depreciation for such Fiscal Year or other period,
computed in accordance with the definition of Depreciation herein;

 

(f)        To the extent an adjustment to the adjusted tax basis of any Company
asset pursuant to Section 734(b) of the Code is required, pursuant to
Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in
determining the Capital Account as a result of a distribution other than in
liquidation of a Membership Interest in the Company, the amount of such
adjustment shall be treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such basis) from the
disposition of such asset and shall be taken into account for purposes of
computing Profits or Losses; and

 

(g)        Any items that are specially allocated pursuant to EXHIBIT “C” shall
not be taken into account in computing Profits or Losses.

 

1.52     Property.  “Property” means the Land, the Hotel, all personal property
owned by the Company or the TRS SUB and/or otherwise presently situated at the
Hotel (other than those owned by any tenant of the Hotel), the Intangible
Property, and all other assets of the Company and the TRS SUB.

 

1.53     Qualified Transferee Requirements.  “Qualified Transferee Requirements”
means a Person who (i) has reasonably sufficient financial resources and
liquidity to fulfill the transferring Member’s obligations under this Agreement;
(ii) is not known in the community as being of bad moral character and has not
been convicted of a felony in any state or Federal court; and (iii) is not an
Affiliate of Persons who have been convicted of a felony in any state or Federal
court.

 

1.54     Regulations.  “Regulations” means the Income Tax Regulations
promulgated under the Code, including Temporary Regulations, as such Regulations
may be amended from time to time, including corresponding provisions of
succeeding Regulations.

 

1.55     Reserves.  “Reserves” means such amounts as may be required pursuant to
the terms of the Hotel Management Agreement.

 

1.56     Restricted Territory.  “Restricted Territory” means that area depicted
on EXHIBIT “G” attached hereto.

 

1.57     Sale Lockout Period.  “Sale Lockout Period” means the period commencing
on the Effective Date and expiring on the Fourth Anniversary of the Effective
Date.

 

1.58     Specially Designated National or Blocked Person.  “Specially Designated
National or Blocked Person” means (a) a person or entity designated by the US
Department of Treasury’s Office of Foreign Assets Control from time to time as
“specially designated national or blocked person” or similar status; (b) a
person or entity described in Section 1 of the US Executive Order 13224, issued
September 23, 2001; or (iii) a person or entity otherwise identified by
governmental authorities as a person or entity of which either Party is
prohibited from transacting business.  As of the Effective Date, a

 

9

 

list of such designations and the text of the Executive Order are published at:
www.ustreas.gov/office/enforecemtns/ofac.

 

1.59     Subsidiary.  “Subsidiary” means any subsidiary of the Company,
including, without limitation, TRS SUB.

 

1.60     Tax(es).  “Tax” or “Taxes” means any income, gross or net receipts,
property, sales, use, capital gain, transfer, excise, license, production,
franchise, employment, social security, occupation, payroll, registration,
occupancy, transient occupancy, governmental pension or insurance, withholding,
royalty, severance, stamp or documentary, value added, or other tax, charge,
assessment, duty, levy, compulsory loan, business or occupation (including any
interest, additions to tax, or civil or criminal penalties thereon) of the
United States or any state or local jurisdiction therein, or of any other nation
or any jurisdiction therein.

 

1.61     Tax Returns.  “Tax Returns” means any report, form, return, statement
or other information (including any amendments) required to be supplied to a
Governmental Authority by a Person with respect to Taxes, including information
returns, any amendments thereof or schedule or attachment thereto and any
documents with respect to or accompanying requests for the extension of time in
which to file any such report, return, document, declaration or other
information.

 

1.62     Total Value.  “Total Value” means, for purposes of Section 10.5, a
hypothetical amount representing the Offering Member’s good faith estimate (at
the time of delivering any Buy-Sell Notice) of the total cash value of the
Company, after liquidation of all assets and (a) payment or reservation for
payment of all liabilities to third parties (including, without limitation, all
mortgage indebtedness or other indebtedness of the Company and its
Subsidiaries); and taking into account; (b) accruals and reserves related to
such indebtedness, a statement of which shall be included in the written
estimate; and (c) plus or minus, as the case may be, net prorations for
revenues, expenses and other items related to the Company and the TRS SUB, which
prorations shall be determined in the manner provided under the Purchase
Agreement, unless otherwise mutually agreed to by the Members.

 

1.63     Transfer.  “Transfer” means any encumbrance, gift, assignment, pledge,
hypothecation, sale or other transfer, by operation of law or otherwise, of all
or any direct or indirect portion of a Membership Interest.

 

1.64     TRS SUB.  “TRS SUB” means Sonoma Hotel Operator Inc., a Delaware
corporation.

 

1.65     Uniform System.  “Uniform System” means the Uniform System of Accounts
for the Lodging Industry that is published by the Hotel Association of New York
City, Inc. and approved by the American Hotel & Motel Association, in effect at
the time in question (currently, the 10th Revised Edition, 2006).

 

1.66     Unreturned Capital Contribution Account.  “Unreturned Capital
Contribution Account” means, with respect to a Member, the Member’s Capital
Contributions less distributions made pursuant to Sections 8.2(a) and
8.2(d) that represent a return of capital (and not a return on capital).

 

1.67     Working Capital Shortfall.  “Working Capital Shortfall” means the
amount of additional working capital required for the sole purpose of funding
operating expenses of the TRS SUB, the Hotel and the Company pursuant to, and to
the extent of such amounts as set forth in, the Initial Budget or any subsequent
Approved Company Budget.

 

10

 

In addition, the following terms are defined in the Sections of this Agreement
that are referenced alongside the terms:

 

Term

 

Section Reference for Definition

ABC

Section 9.8

Act

Recital A

Agreement

Preamble

Applicable Adjustment Percentage

Section 6.3(c)

Applicable Price

Section 10.5(a)

Approved Company Budget

Section 9.2(a)(iv)

Approved Contracts

Section 9.2(a)(vi)

Audited Financial Request

Section 12.3(a)

Base Year Liability

Section 8.1(b)(i)

Business

Section 4

Buy/Sell Deposit

Section 10.5(a)

Buy-Sell Notice

Section 10.5(a)

Buying Member

Section 10.4(b)

Buyout Default

Section 10.4(b)

Buyout Deposit

Section 10.4(b)

Buyout PSA

Section 10.4(b)

Capital Account

Section 7.1(a)

CapEx Cash Notice

Section 6.3(b)

Certificate

Recital A

Closing Date

Section 10.5(a)

Company

Recital A

Company Budget

Section 9.2(a)(iv)

Company Guaranties

Section 9.13

Company Guarantor

Section 9.13

Contributing Members

Section 6.3(c)

CWI

Preamble

CWI Initial Contribution

Section 6.1

CWI Law Firm

Section 18.2

CWI Parties

Section 18.2

CWI Priority Yield

Section 8.1(b)(ii)

CWI Purchase Default

Section 9.1(a)

Deficiency Amount

Section 6.3(c)

Deficit Loan

Section 6.3(d)

Dilution Multiplier

Section 6.3(c)

Effective Date

Preamble

Exchange Act

Section 5.7

Exclusivity Period

Section 20.3

FHR

Preamble

FHR Initial Contribution

Section 6.1

FHR Law Firm

Section 18.3

FHR Parties

Section 18.3

Golf Club Acquisition

Section 20.3

Indemnitee

Section 9.11(b)

Initial Capital Contributions

Section 6.1

Liquor Licenses

Section 9.8

LiquorCo

Section 9.8

 

11

 

Managing Parties

Section 9.11(a)

Mandatory Capital Contribution(s)

Section 6.3(a)

Mandatory Cash Notice

Section 6.3(a)

Member Decisions

Section 9.4(a)

Non-Contributing Member

Section 6.3(c)

Offering Member

Section 10.5(a)

Operating Lease

Recital C

Operator

Section 9.5

Owner

Section 9.5

Purchase Agreement

Recital B

REIT

Section 5.5

Required Amount

Section 6.3(a)

Responding Member

Section 10.5(a)

Responding Member’s Purchase Price

Section 10.5(a)

Response Notice

Section 10.5(a)

ROFO Closing Date

Section 10.4(b)

ROFO Sale Notice

Section 10.4(b)

Sale Member

Section 10.4(b)

Securities Act

Section 5.7

Seller

Recital B

SOX

Section 5.7

Special Allocations

Section 7.1(b)

Tax Matters Partner

Section 12.4(a)

 

2.         FORMATION OF LIMITED LIABILITY COMPANY.  The Company was formed as a
limited liability company pursuant to the provisions of the Act and upon the
filing of the Certificate with the Secretary of State of the State of Delaware. 
The rights and liabilities of all Members shall be as provided under the Act,
the Certificate and this Agreement.

 

3.         NAME AND PLACE OF BUSINESS.

 

3.1       Name.  The name of the Company shall be CWI-FAIRMONT SONOMA HOTEL,
LLC.

 

3.2       Principal Place of Business.  The principal office of the Company
shall be 272 E. Deerpath Road, Suite 320, Lake Forest, Illinois 60045.  Managing
Member may change the Company’s place of business at any time.

 

3.3       Members.  Unless and until substituted Members are admitted pursuant
to the terms of Section 10, CWI and FHR shall be the only Members of the Company
until they cease to be Members in accordance with the provisions of the Act, the
Certificate, or this Agreement.  Except as otherwise expressly provided herein,
no Member may be removed as a Member of the Company without such Member’s prior
written approval.

 

4.         PURPOSE.  The purpose of the Company shall be to (a) own one hundred
percent (100%) of TRS SUB, (b)  own, lease, finance, and renovate the Property,
and (c) engage in any and all general business activities related or incidental
thereto permitted under the Act (collectively, the “Business”).  The Company
shall not engage in any other business or activity without the unanimous consent
of the Members.

 

12

 

5.         TERM OF COMPANY; RECORDINGS; AGENT FOR SERVICE OF PROCESS.

 

5.1       Term.  The Company commenced as of the date that the Certificate was
filed with the Secretary of State of the State of Delaware and shall continue
until terminated as herein provided or by operation of law.

 

5.2       Filings.  Managing Member shall execute, deliver and file any
amendments to and/or restatements of the Certificate as Managing Member deems
necessary and shall file any documents required for the Company to qualify to do
business in California and in any other jurisdiction in which the Company may
wish to conduct business.  The existence of the Company as a separate legal
entity shall continue until cancellation of the Certificate.  Managing Member
shall cause appropriate fictitious business name and like statements to be filed
and published for the Company if and as required for the proper conduct of the
Business.  Any amendments or modification to the Certificate or any state
registrations shall require the prior written approval of all Members, unless
such amendment or modification is purely ministerial (in which instance, it can
be as prepared by the Managing Member).

 

5.3       Agent for Service of Process.  The name and address of the agent for
service of process of the Company designated on the Certificate is Corporation
Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808. 
The agent for service of process of the Company may be changed from time to time
by Managing Member, subject to Applicable Law.

 

5.4       Considered a Partnership for Tax Purposes.  The Members intend that,
pursuant to the provisions of Subchapter K of Chapter 1 of Subtitle A of the
Code and/or any comparable provision of applicable state law, beginning as of
the Effective Date, the Company will be treated as a partnership for Federal,
state and local income tax purposes.  Each Member agrees not to make or attempt
to make an election under Section 761 of the Code or to be excluded from the
application of Subchapter K or from the application of any comparable provisions
of applicable state law.  The Company and the Members shall not elect
classification of the Company for Federal tax purposes as other than a
partnership under Regulations Section 301.7701-3 or for state and/or local tax
purposes under such comparable provisions of applicable state or local law.

 

5.5       Protection of REIT Status.  The Members acknowledge that CWI is an
Affiliate of Carey Watermark Investors Incorporated, which is a real estate
investment trust (“REIT”), and the Members agree that, notwithstanding anything
to the contrary in this Agreement, Managing Member shall (so long as CWI is
Managing Member and, thereafter, CWI may) take or omit to take any action
necessary (as determined by CWI in its sole but good faith discretion) to cause
the Company (and any other entity in which the Company owns an interest) to be
operated in a manner (i) that enables Carey Watermark Investors Incorporated to
qualify as a REIT within the meaning of Section 856 of the Code; and (ii) that
recognizes the income, asset and operating requirements of the Code that are
applicable to a REIT under Sections 856 through 860 of the Code to the extent
possible.  Therefore, the Company shall conduct its operations in accordance
with the following limitations (and any other limitations required by the Code
or other applicable law):

 

(a)        The Business and affairs of the Company will be managed in a manner
that does not cause Carey Watermark Investors Incorporated to be disqualified as
a REIT under the Code or incur any amount of tax pursuant to Section 856, 857 or
4981 of the Code;

 

(b)        The Company and its Subsidiaries shall not render any services to any
lessee, sublessee, or any customer thereof, either directly or through an
“independent contractor” within the meaning of Section 856(d)(3) of the Code, if
the rendering of such services would cause all or any

 

13

 

part of the rents received by the Company or its Subsidiaries to fail to qualify
as “rents from real property” within the meaning of Section 856(d) of the Code;

 

(c)        The Company and its Subsidiaries shall not directly or indirectly own
(taking into account the attribution rules referred to in Section 856(d)(5) of
the Code), in the aggregate ten percent (10%) or more of the total number of
shares of all classes of stock, ten percent (10%) or more of the voting power of
all classes of voting stock or ten percent (10%) or more of the assets or net
profits of any lessee or sublessee of all or any part of any of the Property or
other Company property, other than a lessee Subsidiary that makes an election by
filing IRS Form 8875 to be treated as a “taxable REIT subsidiary” under
Section 856(l)(1) of the Code;

 

(d)        No lease or sublease of any space at the Hotel or any other Company
or Subsidiary property shall provide for any rent based in whole or in part on
the “income or profits” derived by any lessee or sublessee from such property
within the meaning of Section 856(d)(2)(A) of the Code (other than rents based
on gross receipts pursuant to the lease between TRS SUB and the Company);

 

(e)        The Company and its Subsidiaries shall not own more than ten percent
(10%) of the total voting power or more than ten percent (10%) of the total
value of the outstanding securities of any one issuer (as determined for
purposes of Section 856(c)(4)(B) of the Code) other than securities of a
subsidiary, including, without limitation, the TRS SUB that makes an election by
filing IRS Form 8875 to be treated as a “taxable REIT subsidiary” under
Section 856(l)(1) of the Code;

 

(f)        The TRS SUB or any other Subsidiary that is treated as a corporation
under the Code (other than a “real estate investment trust”) shall make an
election by filing IRS Form 8875 to be treated as a “taxable REIT subsidiary”
under Section 856(l)(1) of the Code;

 

(g)        The TRS SUB or any other Subsidiary that has made an election to be
treated as a “taxable REIT subsidiary” under the Code shall not directly or
indirectly operate a “lodging facility” or a “health care facility,” as such
terms are defined in Section 856 of the Code, but rather shall contract with an
“eligible independent contractor” within the meaning of Section 856(d)(9)(A) of
the Code (e.g., without limitation, such contractor must be actively engaged in
the trade or business of operating “qualified lodging facilities” for Persons
other than those that are related to the TRS SUB, the Company or CWI) to operate
such facilities, provided that, in the case of any “lodging facility,” no
gambling activities are conducted on the premises and no gambling revenues are
generated by the facility, and CWI acknowledges as of the date hereof that FHR
is an “eligible independent contractor” based on FHR’s representation in
paragraph 12 of the HMA Side Letter;

 

(h)        Neither the Company nor its Subsidiaries shall take any action (or
fail to take any action permitted under this Agreement) that would otherwise
cause the Company’s gross income to consist of more than one percent (1%) of
income not described in Section 856(c)(2) of the Code or more than ten percent
(10%) of income not described in Section 856(c)(3) of the Code, or cause any
significant part of the Company assets to consist of assets other than “real
estate assets” within the meaning of Section 856(c)(5)(B) of the Code;

 

(i)         The Company shall distribute to the Members during each calendar
year an amount of cash mutually agreed upon by the Members, but in no event in
an amount less than that which is necessary to comply with REIT requirements, to
be made to the Members with respect to such Fiscal Year at the times required to
prevent the imposition of an excise tax under Section 4981 of the Code;
provided, however, that if each such Member’s distributable share of any
Distributable Cash from Operations and/or Capital Transaction Proceeds and its
distributable share of any funds maintained in the Company reserves are
insufficient to meet the aforesaid distribution requirement with respect to such

 

14

 

Member, then the Company shall have satisfied the foregoing distribution
requirement with respect to such Member upon distributing to it such Member’s
distributable share of Distributable Cash from Operations and/or Capital
Transaction Proceeds and funds maintained in the Company reserves (but in no
event the Reserve).  In no event shall the Company be required to borrow funds,
or any Member be required to contribute funds to the Company, in order to permit
the Company to satisfy the foregoing distribution requirement.  The foregoing
provisions of this subsection shall not, however, adversely affect the
allocation of, or any Member’s Participation Percentage in Distributable Cash
from Operations and/or Capital Transaction Proceeds; or

 

(j)         The Company and its Subsidiaries shall not engage in any “prohibited
transactions” within the meaning of Section 857(b)(6)(B)(iii) of the Code.

 

In the event that any change is required for compliance with the foregoing
requirements of this Section 5.5 which requires the Company to incur a material
increase in costs or necessitates certain assets and/or activities to be held or
conducted through any subsidiary that is subject to income tax in respect of
such asset (or activity that would not otherwise have been incurred had the
Company held such asset or conducted such activity directly), the Company shall
reimburse FHR for the amount of any such material increase in costs that FHR
bears in connection with complying with this Section 5.5; provided, however,
that the Members agree that the distributions of the Base Year Liability (as
defined below) to FHR as required by and in accordance with
Section 8.1(b)(i) shall satisfy the foregoing reimbursement obligations of the
Company in connection with the current lease of the Hotel to the TRS SUB and all
costs and expense incurred in connection therewith.  In addition, if any of the
requirements to qualify for “real estate investment trust” status are changed,
then upon CWI’s delivery of written notice to FHR (or Managing Member, if CWI
ceases to be Managing Member) describing such changes, such changes shall be
deemed incorporated herein, and this Section 5.5 shall be deemed amended as
necessary to incorporate such changed real estate investment trust requirements;
provided, however, in the event any such changes result in a (1) change in the
state or federal income tax liability of the TRS SUB, the Members shall promptly
adjust the Base Year Liability accordingly in good faith (and without reference
to the terms and conditions of Section 8.1(b)(i) (i.e., the term requiring that
for the three (3) consecutive years FHR’s proportionate share (based on its then
current Participation Percentage) of the TRS SUB’s federal and state tax income
liability is 110% or more of the Base Year Liability) and thereafter for all
purposes under this Agreement, the Base Year Liability shall be such adjusted
amount (subject to further adjustment as provided in this Agreement), or
(2) material adverse economic effect on either of the Members or increase the
obligations of FHR hereunder or under the Hotel Management Agreement which the
Members cannot mitigate after using good faith efforts (which efforts shall
specifically exclude other than de minimis out-of-pocket expenses or payments by
either of such Members) to structure around such effects, either Member shall
have the right to deliver the Buy-Sell Notice as provided in this Agreement
(notwithstanding that such delivery and/or the closing of the transaction may
take place during the Sale Lockout Period).

 

5.6       Dispute Resolution Regarding REIT Compliance.  Notwithstanding
anything to the contrary set forth in Section 9.9 or elsewhere in this
Agreement, any dispute over whether an activity of the Company or the TRS SUB is
in violation of Section 5.5 shall be determined and resolved in the sole and
absolute discretion of CWI (provided that any additional out-of-pocket expenses
to the Company resulting therefrom will be borne solely by CWI).

 

5.7       Sarbanes-Oxley Compliance.  The Company and the TRS SUB shall take all
actions necessary to comply with the requirements of the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder (the
“Securities Act”), the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder (the “Exchange Act”), and the
Sarbanes-Oxley Act of 2002 and the rules and regulations promulgated thereunder
(“SOX”).  Managing

 

15

 

Member and any principal executive officer of the Company and the principal
financial officer of the Company shall make all certifications required by
Rule 13a-14 or 15d-14 under the Exchange Act and Sections 302 and 906 of SOX as
applicable.  For purposes of this Agreement, “principal executive officer” and
“principal financial officer” shall have the meanings given to such terms in
SOX.  Neither the Company nor any of the TRS SUB has outstanding, or has
arranged any outstanding, “extensions of credit” to directors or executive
officers within the meaning of Section 402 of SOX.  The costs and expenses of
any actions taken pursuant to this Section 5.7 shall be borne by the Company or
the TRS SUB, as applicable, so long as such actions are taken for the benefit of
the Company or such TRS SUB and not for the Members or their Affiliates (which
costs and/or expenses shall be the sole obligation of such Member or its
Affiliate).

 

6.         CONTRIBUTIONS AND LOANS.

 

6.1       Initial Contributions.  Immediately after the formation of the Company
and the mutual execution of this Agreement and concurrently with the acquisition
of the Hotel by the Company, (a) CWI will make an initial Capital Contribution
to the Company in the amount of Thirty-Eight Million Four Hundred Eight Thousand
Three Hundred Forty-Four Dollars ($38,408,344) (the “CWI Initial Contribution”)
in exchange for a seventy-five (75%) Participation Percentage and an interest in
the profits and losses of the Company as described herein; and (b) FHR will make
an initial Capital Contribution to the Company in the amount of Twelve Million
Eight Hundred Two Thousand Seven Hundred Eighty-One Dollars ($12,802,781) (the
“FHR Initial Contribution” and together with the CWI Initial Contribution, the
“Initial Capital Contributions”)) in exchange for twenty-five (25%)
Participation Percentage and an interest in the profits and losses of the
Company as described herein.  Each Member’s initial Capital Account balance
shall be reflected on EXHIBIT “A”.

 

6.2       Use of Funds.  The CWI Initial Contribution shall be used by the
Company in strict accordance with the statement of sources and uses attached
hereto as Schedule 1 (i.e., the acquisition of the Property as well as the
completion of the Capital Plan and additional improvements to the Property as
may be agreed upon by CWI and FHR before December 31, 2015).

 

6.3       Mandatory Capital Contributions, Discretionary Capital Contributions
or Loans.

 

(a)        In addition to the Initial Capital Contributions, the Members have
unconditionally and irrevocably committed to fund in accordance with their
respective Initial Participation Percentages the following additional Capital
Contributions (individually, a “Mandatory Capital Contribution” and
collectively, the “Mandatory Capital Contributions”):

 

(i)         all amounts necessary to fulfill the Company’s obligations under
Section 7.1(l) of the Purchase Agreement with respect to the Post-Closing
Statement (as defined in the Purchase Agreement);

 

(ii)        all Preservation Costs as determined by the Managing Member; and

 

(iii)      all other amounts unanimously approved by the Members in writing, in
each Member’s sole and absolute discretion.

 

In the event that a Mandatory Capital Contribution is required under this
Agreement (and, with respect to Preservation Costs under clause (i) above,
subject to FHR having fully funded all amounts required of it under the terms
and conditions of the FHR Guaranty), Managing Member shall deliver written
notice (a “Mandatory Cash Notice”) to each Member setting forth the

 

16

 

amount of such Mandatory Capital Contribution required from such Member (which
shall equal the amount of the relevant Mandatory Capital Contribution multiplied
by each Member’s respective Initial Participation Percentages) and each Member
shall be obligated to fund such amount (each, a “Required Amount”) within ten
(10) Business Days following the date of receipt by a Member of a Mandatory Cash
Notice in which case the Capital Account of any such contributing Member shall
be increased by the amount of the Mandatory Capital Contribution (but no
adjustments shall be made to the Initial Participation Percentages of the
Members).

 

(b)        Except as provided in Section 6.1 and this Section 6.3, the Members
shall not be required to make any additional Capital Contributions or loans to
the Company in addition to the Initial Capital Contributions and the Mandatory
Capital Contributions.  Notwithstanding the foregoing, each Member shall have
the option (but not the obligation) to fund Capital Expenditures necessary to
complete the improvements contemplated in the Capital Plan that were not funded
by the Initial Capital Contribution (each, a “Discretionary Capital
Contribution”) in the event that either Member delivers notice to the other (a
“CapEx Cash Notice”) recommending an additional capital call for and the amount
thereof (as well as a detailed description of the purpose for which the
Discretionary Capital Contribution shall be used), and (y) the Members cannot
unanimously agree to fund such amounts set forth in the CapEx Cash Notice;
provided, however, the requesting Member shall have the right to unilaterally
make a Discretionary Capital Contribution (or make a loan to the Company (as
opposed to the other Member), which shall otherwise be treated in the same
manner as a Deficit Loan in accordance with Section 6.3(c) below; provided,
further, at the option of the Contributing Member, the loan shall be repayable
upon demand or deemed advanced as a Capital Contribution to the Company under
this Section 6.3(b) at any time starting twenty-four (24) months (as opposed to
six (6) months) after the date the amounts hereunder were advanced to the
Company by the Contributing Member) for such amounts, in which case and upon
receipt thereof the Company shall use the Discretionary Capital Contribution (or
loan) amounts for the purpose(s) set forth in the CapEx Cash Notice, and the
Capital Account of any such contributing Member shall be increased by the amount
of the Discretionary Capital Contribution and the Participation Percentages of
the Members shall be adjusted accordingly so that each Member’s Participation
Percentage is reflective of such Member’s share of the total Capital
Contributions made to the Company; provided, however, that any reduction in the
non-funding Member’s Participation Percentage and increase in the funding
Member’s Participation Percentage in accordance with this Section 6.3(b) shall
not affect the Members’ Initial Participation Percentages, and each Member shall
remain obligated to make any additional Capital Contributions in accordance with
their respective Initial Participation Percentages (for avoidance of doubt, if
the Members unanimously agree to fund the amounts referenced under
Section 6.3(b), such amounts shall be deemed Mandatory Capital Contributions
under Section 6.3(a) above); or

 

(c)        If either Member fails to fully fund a Mandatory Capital
Contribution, Managing Member shall deliver written notice to such Member (the
“Non-Contributing Member”) within twenty (20) days after the date a Mandatory
Cash Notice is given pursuant to Section 6.3(a).  If the Non-Contributing Member
shall fail to advance all or any part of its Required Amount upon receipt of
such notice, the other Member (the “Contributing Member”), within ten (10) days
thereafter, may elect, in its sole discretion either (i) to advance directly to
the Company as a loan to the Non-Contributing Member the portion of the Required
Amount not advanced by the Non-Contributing Member (the “Deficiency Amount”), as
provided in Section 6.3(d) below (provided that, at the option of the
Contributing Member and in addition to the repayment provisions thereof, if such
loan is made pursuant to this Section 6.3(c) shall be repayable upon demand or
deemed advanced as a Capital Contribution to the Company under clause (A) and
(B) below at any time starting six (6) months after the date the amounts
thereunder were advanced to the Company by the Contributing Member at the
Contributing Member’s election); or (ii) to advance a Capital Contribution to
the Company equal to the Deficiency Amount, whereupon the

 

17

 

Participation Percentage of the Members shall be recalculated to (A) increase
the Contributing Member’s collective Participation Percentage by the Applicable
Adjustment Percentage (as defined below) and increasing its aggregate Capital
Account by the product of the Deficiency Amount and the Dilution Multiplier (as
defined below), with such increases in Participation Percentage and Capital
Accounts to be allocated to the Contributing Members pro rata based on the
portion of the Deficiency Amount owed to the Contributing Member, and (B) reduce
the Non-Contributing Member’s Participation Percentage by the Applicable
Adjustment Percentage and decrease its Capital Account by the product of the
Deficiency Amount and the Dilution Multiplier.  The “Applicable Adjustment
Percentage” shall mean the fraction, expressed as a percentage, in which the
numerator is an amount equal to the Dilution Multiplier times the Deficiency
Amount, and the denominator is the sum of the Member’s total Capital
Contribution (taking into account the additional Capital Contributions funded by
the Contribution Member).  The “Dilution Multiplier” shall mean 1.5.  Any
reduction in the Non-Contributing Member’s Participation Percentage and increase
in the Contributing Member Participation Percentage in accordance with this
Section 6.3(c) shall not affect the Members’ Initial Participation Percentages,
and the Non-Contributing Member and the Contributing Member shall remain
obligated to make any additional Capital Contributions in accordance with their
respective Initial Participation Percentages.

 

(d)        If the Contributing Members make a loan to the Non-Contributing
Member as provided in Section 6.3(c), the Deficiency Amount shall be delivered
to the Company by the Contributing Members, shall be treated as an additional
Capital Contribution by the Non-Contributing Member of the Deficiency Amount and
shall constitute a loan to the Non-Contributing Member (a “Deficit Loan”).  Each
Deficit Loan shall bear interest at the annual rate of seventeen percent (17%),
compounded monthly, and shall be repaid by payment directly by the Company to
the Contributing Members of any distributions otherwise due the Non-Contributing
Member pursuant to the other Sections of this Agreement; provided, however, that
for Capital Account maintenance purposes, such amount shall be deemed
distributed to the Non-Contributing Member (with a corresponding reduction to
its Capital Account) followed by the repayment by the Non-Contributing Member to
the Contributing Member.  Any payments on a Deficit Loan shall be credited first
to any interest then due on the loan with the balance of such distributions to
be credited against the outstanding principal balance of such loan.  Any Deficit
Loan will be recourse to the Non-Contributing Member’s right to distributions
pursuant to this Agreement and must be repaid directly by the Company on behalf
of the Non-Contributing Member as set forth in this Section 6.3.  For avoidance
of doubt, no Deficit Loan shall be considered a Capital Contribution by the
Contributing Member for purposes of this Agreement or increase such Contributing
Member’s Capital Account, unless otherwise required by applicable laws.

 

(e)        Notwithstanding any of the foregoing, the Members agree that in the
event that CWI makes a Deficit Loan or a loan to the Company in accordance with
Section 6.3(b), the Deficit Loan and/or a loan to the Company in accordance with
Section 6.3(b) may be structured in a manner necessary to permit the REIT to
continue to qualify as a REIT within the meaning of Sections 856-860 of the
Code.

 

6.4       Interest on Contributions.  No interest shall be paid by the Company
on any Capital Contribution made by any Member to the Company.

 

6.5       Return of Contributions.  Except as otherwise provided in this
Agreement, no Member shall have the right to withdraw or reduce such Member’s
Capital Contribution or to receive any distributions, except as a result of
dissolution.  No Member shall have the right to demand or receive property other
than cash in return for such Member’s Capital Contributions.

 

7.         CAPITAL ACCOUNTS; ALLOCATION OF PROFITS AND LOSSES.

 

18

 

7.1       Capital Accounts.

 

(a)        The Company shall maintain a separate capital account (“Capital
Account”) for each Member.

 

(b)        The Capital Account of each Member shall be maintained in accordance
with Sections 1.704-1(b) and 1.704-2 of the Regulations and shall be interpreted
and applied in a manner consistent with such Regulations and the special
allocations set forth in Sections (a) through (i) of EXHIBIT “C” attached hereto
shall apply (the “Special Allocations”).

 

(c)        Each Member’s Capital Account shall be adjusted in accordance with
the following provisions:

 

(i)         To each Member’s Capital Account there shall be credited (A) the
amount of any cash Capital Contributions made, and the Book Value of any
property contributed (net of liabilities secured by such property), by such
Member to the Company, and (B) such Member’s allocable share of Profits and
other items of income and gain allocated to such Member; and

 

(ii)        To each Member’s Capital Account there shall be debited (A) the
amount of cash and the Book Value of any Company property distributed to such
Member pursuant to any provision of this Agreement (net of any liabilities
secured by such property), and (B) such Member’s allocable share of Losses and
other items of income and gain allocated to such Member.

 

(d)        In the event of a Transfer of a Member’s Membership Interest, or any
portion thereof, in accordance with the terms of this Agreement, whether or not
the purchaser, assignee or successor-in-interest is then a Member, the Person so
acquiring such Member’s Membership Interest, or any portion thereof, shall
acquire the Capital Account, or any portion thereof, of the Member formerly
owning such Membership Interest, adjusted for distributions of Distributable
Cash from Operations and/or Capital Transaction Proceeds made pursuant to
Section 8 and allocations of Profits and Losses made pursuant to Section 7.2.

 

7.2       Allocation of Profits and Losses.  After giving effect to the Special
Allocations set forth in EXHIBIT “C” attached hereto, Managing Member shall
cause the Company to allocate Profits and Losses in respect of each Fiscal Year
of the Company (and, in each case, each item of income, gain, loss, deduction
and tax preference, required to be taken into account by the Members separately
under Section 702(a) of the Code, which are included in the computation of such
Profits and Losses for such year) to the Members in a manner such that the
Capital Account of each Member is, as nearly as possible, equal
(proportionately) to the excess of:

 

(a)        the distributions that would be made to that Member pursuant to
Section 11.2(a)(iii) if:

 

(i)         the Company were dissolved, its affairs wound up, and its assets
sold for an amount of cash equal to their Book Values;

 

(ii)        all liabilities of the Company were satisfied (limited with respect
to each non-recourse liability to the Book Value of the assets securing such
liability); and

 

(iii)       the assets of the Company were distributed to the Members in
accordance with Section 11.2(a)(iii) immediately after making such allocation;
over

 

19

 

(b)        the sum of (i) the Member’s respective share of Company Minimum Gain
and Member Nonrecourse Debt Minimum Gain; and (ii) the amount, if any, that such
Member is obligated (or deemed obligated) to contribute, in its capacity as a
Member, to the Company, computed immediately prior to the hypothetical sale of
assets described in Section 7.2(a).

 

7.3       Other Allocation Rules.

 

(a)        For purposes of determining Profits, Losses or any other items
allocable to any period, Profits, Losses and other items shall be determined on
a daily, monthly or other basis, as determined by Managing Member, using any
permissible method under Section 706 of the Code and the Regulations thereunder.

 

(b)        Credits, or income resulting from the recapture of credits, shall be
allocated among the Members in accordance with the Code, Regulations and
Applicable Law.

 

(c)        Whenever items of income or loss of the Company allocable hereunder
consist of items of different character for tax purposes (i.e., ordinary income,
long-term capital gain, depreciation recapture, interest expense, etc.) the
items of income or loss of the Company allocable to each Member shall include,
to the extent possible, its pro rata share of each such item; provided, however,
in making allocations of depreciation recapture under Section 1245 or
Section 1250 of the Code, or unrecaptured Section 1250 gain under
Section 1(h) of the Code, principles consistent with those of Regulations
Section 1.1245-1(e) shall be followed, such that amounts treated as ordinary
income shall be allocated first to the Member that was allocated the related
ordinary deduction.

 

(d)        The Members are aware of the income tax consequences of the
allocations made by this Section 7 and EXHIBIT “C” attached hereto and, except
as otherwise provided in Section 12.4(a), hereby agree to be bound by the
provisions of this Section 7 and EXHIBIT “C” attached hereto in reporting their
shares of Company income and loss for income tax purposes.

 

(e)        If the Book Value of any Company asset is adjusted as provided in the
definition thereof, subsequent allocations of income, gain, loss and deduction
with respect to such asset shall, solely for Federal income tax purposes and
pursuant to Regulations Section 1.704-1(b), take account of any variation
between the adjusted basis of such asset for Federal income tax purposes and its
Book Value in the same manner as under Section 704(c) of the Code and the
Regulations thereunder.

 

7.4       Tax Allocations.

 

(a)        Except as provided in Section 7.4(b), items of Company income, gain,
loss, deduction and credit shall be allocated, for Federal, state and local
income tax purposes, among the Members in accordance with the allocation of such
income, gain, losses, deductions and credits among the Members under
Section 7.2.

 

(b)        In accordance with Section 704(c) of the Code and the Regulations
thereunder, income, gain, loss and deduction with respect to any property
contributed to the capital of the Company shall, solely for tax purposes, be
allocated among the Members so as to take account of any variation between the
adjusted basis of such property to the Company for Federal income tax purposes
and its initial Book Value in accordance with the traditional method as
described in Treasury Regulations 1.704-3.

 

8.         DISTRIBUTIONS.

 

20

 

8.1       Distribution of Distributable Cash (Other than From Capital
Transactions).

 

(a)        The Company shall distribute all available Distributable Cash from
Operations in accordance with this Section 8.1.  Unless otherwise authorized by
the Members, all Distributable Cash from Subsidiary Operations shall be
distributed from the TRS SUB directly to the Company and shall be deemed part of
the Company’s Distributable Cash from Operations.  The Company shall cause, on a
regular, reoccurring basis (but in no event less often than quarterly), the TRS
SUB to distribute all of its Distributable Cash from TRS SUB Operations to the
Company so it in turn can be distributed by the Company to the Members in
accordance with this Agreement.

 

(b)        Subject to Section 6.3(d) and Section 8.3, Distributable Cash from
Operations of the Company shall be distributed from time to time, but no less
frequently than quarterly to the Members as follows:

 

(i)      First, one hundred percent (100%) to FHR, until FHR has received
cumulative distributions pursuant to this Section 8.1(b)(i) as to have earned
cumulative distributions of [One Hundred Fifty Thousand Dollars ($150,000)] (the
“Base Year Liability”) per annum, plus the sum of any accrued and unpaid
distributions under this Section 8.1(b)(i); provided, however, that subject to
the terms of the last paragraph of Section 5.5, if for any three (3) consecutive
Fiscal Years FHR’s proportionate share (based on its then current Participation
Percentage) of the TRS SUB’s federal and state tax income liability is one
hundred ten percent (110%) or more of the Base Year Liability, then the Members
shall in good faith agree on an equitable increase of such distributable amount
to FHR under this Section 8.1(b)(i) on a going forward basis and after any such
adjustment to the Base Year Liability, if for any subsequent three
(3) consecutive Fiscal Years FHR’s proportionate share (based on its then
current Participation Percentage) of the TRS SUB’s federal and state tax income
liability exceeds the then adjusted Base Year Liability by one hundred ten
percent (110%) or more, then the Members shall readjust the then current Base
Year Liability amount to reimburse FHR for such additional liability in excess
of the then applicable Base Year Liability amount on a going forward basis;

 

(ii)     Second, one hundred percent (100%) to CWI, until CWI has received
cumulative distributions pursuant to this Section 8.1(b)(ii) as to have earned
(A) from the Effective Date through December 31, 2015, a cumulative (compounded
quarterly) annual return of eight and one-half percent (8.5%) on the aggregate
amount of Capital Contributions actually made by CWI as of the date such
distribution is made; and (B) commencing on January 1, 2016 and thereafter, a
cumulative (compounded quarterly) annual return of eight and one-half percent
(8.5%) on the aggregate amount of unreturned Capital Contributions actually made
by CWI as of the date such distribution is made (collectively, the “CWI Priority
Yield”);

 

(iii)    Third, one hundred percent (100%) to CWI, until CWI has received
cumulative distributions pursuant to this Section 8.1(b)(iii) as to have earned
cumulative  distributions of One Hundred Thousand Dollars ($100,000) per annum,
plus the sum of any accrued and unpaid distributions under this
Section 8.1(b)(iii); provided, however, commencing on January 1, 2015, the
distributions under this Section 8.1(b)(iii) shall be subordinated (but shall
continue to accrue to the extend unpaid) to payment of any incentive management
fees to FHR under the Hotel Management Agreement or the HMA Side Letter, as
applicable; and

 

(iv)    Thereafter, sixty-five percent (65%) to CWI, and thirty-five percent
(35%) to FHR.

 

(c)        The Members intend that the Initial Budget and any subsequent
Approved Company Budget shall include, as an expense item, such reasonable and
customary Company

 

21

 

or TRS SUB working capital requirements, which are to be mutually agreed upon by
the Members from time to time, and the Members agree that distributions to the
Members according to this Agreement will not be made if such distributions have
the effect of materially impairing the working capital of the Company and/or TRS
SUB; provided, however, the amount of the Reserve as well as the amount of
working capital required for the operation of the Hotel are such amounts set
forth in the Hotel Management Agreement.  The amount of any Company (as opposed
to Hotel) working capital for each Fiscal Year shall be suggested by Managing
Member at the time that it presents any draft Company Budget (in accordance with
Section 9.2(a)(iv)) each year to the Members.

 

(d)        Notwithstanding any other provision to the contrary, the Company may
withhold from any amount otherwise distributable to the Members any taxes
payable by the Company with respect to amounts allocable or distributable to any
Member.  Any amounts so withheld shall be paid by the Company to the appropriate
taxing authority and shall be treated as amounts distributed to the Member.

 

8.2       Distributions of Cash from Capital Transactions.  Subject to
Section 6.3(d) and Section 8.3, Capital Transaction Proceeds shall be
distributed following a Capital Transaction, as follows:

 

(a)        First, one hundred percent (100%) to CWI, until CWI has received
cumulative distributions pursuant to this Section 8.2(a) as to have reduced its
Unreturned Capital Contribution Account to zero;

 

(b)        Second, one hundred percent (100%) to FHR, until FHR, has received
cumulative distributions pursuant to Section 8.1(b)(i) and this
Section 8.2(b) as to have received cumulative distributions equal to the Base
Year Liability per annum (as such amount may be adjusted pursuant to
Section 8.1(b)(i)), plus the sum of any accrued and unpaid distributions under
Section 8.1(b)(i);

 

(c)        Third, one hundred percent (100%) to FHR, until FHR has received
cumulative distributions pursuant to this Section 8.2(c) as to receive an amount
equal to the outstanding balance of the Fairmont Guarantee Reimbursement;

 

(d)        Fourth, one hundred percent (100%) to FHR, until FHR has received
cumulative distributions pursuant to this Section 8.2(d) as to have reduced its
Unreturned Capital Contribution Account to zero;

 

(e)        Fifth, one hundred percent (100%) to CWI, until CWI has received
cumulative distributions pursuant to Section 8.1(b)(iii) and this
Section 8.2(e) as to have received cumulative distributions of One Hundred
Thousand Dollars ($100,000) per annum, plus the sum of any accrued and unpaid
distributions under Section 8.1(b)(iii);

 

(f)        Sixth, one hundred percent (100%) to CWI, until CWI has received
cumulative distributions pursuant to Sections 8.1(b)(ii), 8.1(b)(iv), 8.2(a) and
this Section 8.2(f) as to have earned a seventeen percent (17%) IRR;

 

(g)        Seventh, one hundred percent (100%) to FHR, until FHR has received
(i) cumulative distributions pursuant to Sections 8.1(b)(iv), 8.2(d) and this
Section 8.2(g); and (ii) the payment of any incentive management fees to FHR
under the Hotel Management Agreement or HMA Side Letter, as to have earned a
seventeen percent (17%) IRR; and

 

22

 

(h)        Thereafter, forty percent (40%) to FHR and sixty percent (60%) to the
Members pro rata in proportion to their respective Participation Percentages.

 

8.3       Distributions/Legal Requirements/No In-Kind Distributions. 
Notwithstanding any provision to the contrary contained in this Agreement, the
Company shall not make a distribution to a Member on account of its interest in
the Company if such distribution would violate the Act or any other applicable
law.  Notwithstanding anything to the contrary contained in this Agreement,
there shall be no in-kind distributions of any assets, unless approved by the
Members in accordance with Section 9.4.

 

9.         MANAGEMENT.

 

9.1       Managing Member.

 

(a)        Managing Member shall, subject to the limitations set forth in
Section 9.3 and 9.4, establish the Initial Budget or any subsequent Approved
Company Budget for the Company (as opposed to the operating budget for the
Property, which is to be prepared by Operator in accordance with the Hotel
Management Agreement), operate the business affairs of the Company, be empowered
to set policy for and to make all decisions in respect of the Company and to
make all decisions regarding those matters, and to perform any and all other
acts or activities incident thereto, in each instance in accordance with the
terms of this Agreement and the then current Approved Company Budget.  Managing
Member will devote such time, effort and skill to the Business of the Company as
Managing Member reasonably deems necessary.  CWI shall serve as Managing Member
until its removal, which shall only be permitted upon the earlier of (i) the
resignation or voluntary disassociation of Managing Member from the Company;
(ii) the judgment or final adjudication (in a procedure described in
Section 9.1(b)) of Managing Member as having committed fraud, gross negligence,
willful misconduct, theft, misappropriation of funds, and/or a material default
in the performance of (or failure to perform) the obligations of Managing Member
under this Agreement that causes material harm to the Company; or (iii) the
filing by Managing Member of a voluntary petition in Bankruptcy or the failure
by Managing Member to cause an involuntary filing of Bankruptcy against Managing
Member to be dismissed within ninety (90) days after the filing thereof;
(iv) the closing of any purchase of one hundred percent (100%) of CWI’s
Membership Interest by FHR pursuant to and in accordance with Section 10.5; or
(v) following the delivery of a Response Notice by CWI pursuant to and in
accordance with Section 10.5 whereupon CWI elects to purchase one hundred
percent (100%) of FHR’s Membership Interest, CWI fails to complete the purchase
on or before the Closing Date (other than as a result of FHR’s default)(a “CWI
Purchase Default”).  Managing Member’s service may not be terminated in any
other way.  In the event of fraud, gross negligence, willful misconduct, theft,
or misappropriation of funds by Managing Member, FHR shall also have the right
to pursue all other rights and remedies with respect to actual losses (but not
consequential or speculative losses) suffered or incurred by the Company or FHR
as a result thereof.  Upon the removal of CWI as Managing Member pursuant to any
of clauses (i), (ii), (iii), (iv) or (v) of this Section 9.1, FHR shall become
Managing Member.

 

(b)        If FHR believes that Managing Member has committed fraud, gross
negligence, willful misconduct, theft, misappropriation of funds or a material
default in the performance of (or failure to perform) the obligations of
Managing Member under this Agreement that causes material harm to the Company,
FHR may deliver written notice to Managing Member setting forth in reasonable
detail the basis for that determination and, if CWI does not resign as Managing
Member, submit the same to arbitration pursuant to Section 9.9.  Following a
decision or judgment of the arbitrator(s) that Managing Member committed fraud,
willful misconduct, theft, misappropriation of funds or a material default in
the performance of (or failure to perform) the obligations of Managing Member
under this Agreement that causes material harm to the Company, such Managing
Member shall be automatically removed as Managing Member.  During the period
from the delivery of written notice to Managing

 

23

 

Member that Managing Member has committed fraud, gross negligence, willful
misconduct, theft, misappropriation of funds or a material default in the
performance of (or failure to perform) the obligations of Managing Member under
this Agreement that causes material harm to the Company, until the final
determination of the arbitrator, the authority of Managing Member shall be
suspended, and the unanimous approval of the Members shall be required for any
payments or other actions to be taken by Managing Member hereunder.

 

9.2       Duties and Responsibilities of Managing Member.

 

(a)        Except as set forth in Sections 9.3 and 9.4, or as otherwise
expressly delegated by Managing Member or TRS SUB to the Operator pursuant to
the terms of the Hotel Management Agreement, Managing Member shall be
responsible for, and is hereby authorized to perform the following acts to the
extent necessary to carry out the business affairs of the Company under this
Agreement:

 

(i)         Protect and preserve the titles and interests of the Company with
respect to any assets owned directly or indirectly by the Company including,
without limitation, the Hotel;

 

(ii)        Pay all property taxes and assessments, ground rents, rents and
other impositions applicable to the Hotel and/or such other assets owned by the
Company;

 

(iii)       Execute and/or modify the Approved Contracts on behalf of the
Company;

 

(iv)       Each Fiscal Year, commencing with the Fiscal Year beginning on
January 1, 2014, prepare an annual business plan and budget for the Company
setting forth a summary of expenses for the operation and administration of the
Company and the TRS SUB (the “Company Budget”).  Each draft budget shall be
delivered to FHR (or the Members, in the event that CWI is removed as Managing
Member) not later than November 1 of each Fiscal Year and shall be subject to
the objection by the Members to the extent of any portion thereof would be an
unreasonable expenditure of the Company; provided, however, that FHR shall have
no right to object to any portion of the Company Budget, which represents an
expenditure or expenditures necessary in the sole, but good faith discretion of
CWI to maintain or operate the Company or TRS SUB, subject to the terms of
Sections 5.5 and 5.6, in accordance with Applicable Law.  Subject to the
immediately preceding proviso, if the Members shall object to any portion of the
proposed Company Budget, the Members shall specify with the reasons for its
disapproval within five (5) Business Days following the Member’s receipt of the
proposed Company Budget and Managing Member shall, after consultation with the
Members, submit to the Members a new proposed Company Budget or appropriate
portion thereof within ten (10) days after the date of the Members disapproval
of the same.  The same procedure shall be followed until the Members no longer
have any objection to the Company Budget as provided above, except that the
Members shall have three (3) Business Days to respond with particularity to
Managing Member’s resubmittal.  Until such time as the Members have no
objections to the new proposed Company Budget as aforesaid, the portion approved
shall become immediately effective, and the Approved Company Budget for the
previous Fiscal Year shall remain in effect with respect to the portion of the
Company Budget subject to objection.  Once the Company Budget is approved by
FHR, it shall be the “Approved Company Budget” for the Company for the Fiscal
Year in question;

 

(v)     Make payments approved under the Initial Budget or any subsequent
Approved Company Budget (each bank or other institution with which any account
of the Company is maintained shall specifically recognize the right of Managing
Member to add or delete the

 

24

 

signature rights of any of the Members; provided, however, the foregoing shall
not apply to any and all bank accounts maintained with respect to the operation
of the Hotel, which shall be subject to the terms of the Hotel Management
Agreement);

 

(vi)    Supervise the performance of and under the Loan Documents and any
agreements or contracts approved as part of the Initial Budget and each
subsequent Approved Company Budget (the “Approved Contracts”); provided,
however, if CWI is removed as Managing Member pursuant to the provisions hereof,
then a successor Managing Member shall take no action and shall have no rights
to act on behalf of Owner under the Hotel Management Agreement to the extent
such rights are expressly reserved by CWI pursuant to Section 9.5;

 

(vii)   Obtain and maintain any and all requisite permits, licenses or
entitlements necessary for the operation of the Company;

 

(viii)  On behalf of the Company, maintain complete and accurate books of the
Company and the TRS SUB, showing all receipts and expenditures, assets and
liabilities, Profits and Losses and all other records necessary for recording
the Company’s and the TRS SUB’s business and affairs (the books of the Company
and the TRS SUB shall be kept on the accrual basis in accordance with the
Uniform System for companies of similar size, type, quality and business
operations as the Company or the TRS SUB, as applicable, and shall be open to
inspection and examination by each Member at all reasonable times);

 

(ix)    Prepare financial statements of the Company and the TRS SUB and/or, if
requested by any Member, cause audited financial statements of the Company and
the TRS SUB to be prepared (the cost of which shall be paid by the Company),
including, without limitation, financial statements in compliance with the
requirements, procedures and terms applicable to the Company pursuant to and in
accordance with Section 12.3 (but applied to the Company and the TRS SUB); and

 

(x)     Maintain insurance for the Company and the TRS SUB in accordance with
Section 12.6 and the terms of the Hotel Management Agreement.  Managing Member
shall obtain quotes for the insurance coverages appropriate for the activities
being conducted at the Hotel from time to time, and prior to the expiration or
renewal of any coverages then in effect, with the intention that the insurance
obtained and maintained shall be the most favorable to the Company and the TRS
SUB, as reasonably determined by Managing Member.

 

(b)        Necessary Time.  Managing Member and its senior management will
devote such time, effort and skill to the business of the Company and the TRS
SUB (or to the business of the Company and the TRS SUB owning the Hotel) as is
reasonably necessary to discharge its duties under this Agreement.

 

(c)        Asset Management.  CWI Lodging Advisors, LLC shall, from time to
time, at no additional cost or expense to the Company or any of the Members,
provide customary asset management services to the Company related to the Hotel
to the extent CWI Lodging Advisors, LLC believes necessary in its sole
discretion.

 

(d)        Affiliate Transactions.  In performing its obligations under this
Agreement, Managing Member from time to time may use the services of one or more
Affiliates, provided that Managing Member shall fully disclose such affiliation
to or interest in such transaction to the Members and neither Managing Member
nor any such Affiliates shall be entitled to any additional fee, charge or other
amount payable other than such amount set forth in Section 8.1(b)(ii).  In the
event

 

25

 

Managing Member has entered into any agreement with an Affiliate, Managing
Member shall promptly notify the Members of any change in the direct or indirect
ownership of such Affiliate; provided, however, that in the event that such
transfer results in the applicable Person no longer qualifying as an Affiliate,
the respective agreement with the Affiliate will immediately terminate (without
penalty) as of the date of such transfer.

 

9.3       Actions by Managing Member.

 

(a)        In addition to the duties and responsibilities of Managing Member
described in Section 9.2, Managing Member may, without the prior consent of the
Members, but nevertheless subject to Section 9.4 and the limitations of this
Section 9.3 and the Hotel Management Agreement, take any and all actions
necessary to carry out the business affairs of the Company under this Agreement,
and operate the Company and the TRS SUB as determined by Managing Member in its
sole, but good faith discretion including, but not limited to, the following:

 

(i)         In accordance with the Initial Budget and any subsequent Approved
Company Budget, take any action to approve or consent to any binding agreements
or contracts (whether written or oral) including, without limitation, any
acquisitions, development plans, budgets, or capital improvements;

 

(ii)        In accordance with the Initial Budget and any subsequent Approved
Company Budget or as otherwise permitted under this Agreement, retain or employ,
and coordinate the services of, any employees, supervisors, architects,
engineers, general contractor, property manager, attorneys, and other persons
(but expressly excluding accountants) to carry out the business of the Company
and the TRS SUB;

 

(iii)       In accordance with the Initial Budget or any subsequent Approved
Company Budget, enter into any contract in the name of or for the benefit of the
Company and/or the TRS SUB;

 

(iv)       Acquire any real or personal property for the Company or the TRS SUB,
to the extent expressly authorized pursuant to the Initial Budget or any
subsequent Approved Company Budget or as otherwise permitted under this
Agreement, and sell or dispose any personal property in the ordinary course;

 

(v)        In accordance with the Initial Budget and any subsequent Approved
Company Budget (or as may be permitted under Section 9.4(a)(ii)), incur any
indebtedness of the Company or the TRS SUB or become liable as an endorser,
guarantor, surety, or otherwise for any debt obligation or undertaking of any
other Person, so long as such indebtedness is: (A) unsecured indebtedness of any
kind other than trade debt incurred under the following clause (B); (B) trade
debt incurred in the ordinary course of business not to exceed the amounts set
forth in the Initial Budget or any subsequent Approved Company Budget or, if not
included therein, Fifty Thousand Dollars ($50,000) with respect to any
individual expense or related group of expenses or Two Hundred Thousand Dollars
($200,000) in the aggregate of all such expenses in any Fiscal Year; and
(C) endorsements for deposit or collection of checks, drafts and similar
instruments received by the Company in the ordinary course of business;

 

(vi)       Subject to the terms of Section 10.4 and the terms of the Hotel
Management Agreement, sell, transfer, or otherwise dispose of any of the assets
of the Company at any time, (A) so long as expressly authorized pursuant to the
Initial Budget or any subsequent Approved Company Budget; or (B) so long as the
sale or disposal of personal property is in the ordinary course (i.e.,

 

26

 

at the end of such asset’s useful life or as required to be replaced under the
Hotel Management Agreement);

 

(vii)      Retain legal counsel for the Company, the Hotel in connection with
any matter involving an uninsured claim involving a dispute of Two Hundred
Thousand Dollars ($200,000) or less;

 

(viii)     Initiate any litigation of Two Hundred Thousand Dollars ($200,000) or
less on behalf of the Company or undertake any course of defense in connection
with any litigation brought against the Company, or settle any litigation
concerning the Company;

 

(ix)       Settle any insurance claim on behalf of the Company in an amount of
Two Hundred Thousand Dollars ($200,000) or less;

 

(x)        In accordance with the Initial Budget or any subsequent Approved
Company Budget or as otherwise permitted under this Agreement, engage the
services of any Person, so long as such engagement has a term no longer than
thirty (30) days, or a right to terminate (without penalty) upon not more than
thirty (30) days’ notice;

 

(xi)       Amend, modify or otherwise change leasing parameters (subject to the
terms of the Hotel Management Agreement);

 

(xii)      Approve any changes to the FF&E reserve contributions (subject to the
terms of the Hotel Management Agreement) and any other reserves;

 

(xiii)     Subject to the terms of the Hotel Management Agreement, approve or
effectuate any program of insurance for the Company or the TRS SUB, the Hotel or
any of the foregoing; and

 

(xiv)     Make investments in the name of the Company or the TRS SUB in the
ordinary course of business as permitted hereunder.

 

The Members have the right to reasonably request from time to time information
and details regarding any actions taken by Managing Member that are permitted
without the consent of the Members (including, but not limited to, FHR) in
accordance with this Section 9.3, provided that such information is within the
reasonable control or possession of Managing Member (provided that Managing
Member shall not be obligated to provide written reports with respect thereto).

 

9.4       Approval by Members.

 

(a)        Notwithstanding anything to the contrary set forth herein, subject to
Section 5.5, neither Managing Member nor any of the other Members may take any
of the following actions (the “Member Decisions”) without the prior unanimous
written approval of each of the Members:

 

(i)         Acquire any real or personal property for the Company or the TRS
SUB, except as expressly authorized to acquire pursuant to the Initial Budget or
any subsequent Approved Company Budget or this Agreement;

 

(ii)        Incur any secured indebtedness of the Company or the TRS SUB or
become liable as an endorser, guarantor, surety or otherwise for any secured
debt obligation or

 

27

 

undertaking of any other Person; provided, however, upon the expiration of the
FHR Guaranty, FHR’s approval shall not be required if the Lender is a third
party institutional lender and the amount of the Loan (including any mezzanine
debt, provided, that no such mezzanine debt may be structured as preferred
equity or as participating equity mezzanine loan) is no more than 85% (or, if
CWI or its Affiliate, is not then the Managing Member, eighty percent (80%)) of
the fair market value of the Property (with such fair market value as determined
by the Lender) at the time of financing; provided, further, the foregoing
percentage of fair market value limitation shall not prevent the Company’s
ability to refinance any pre-existing Loan and pay the cost and expense thereof
(subject to the other conditions set forth herein); provided, finally, in all
instances, the terms and conditions of the Loan Documents shall permit the
exercise of the Member’s rights set forth in Sections 10.3, 10.4 and 10.5;

 

(iii)       Issue guaranties on behalf of the Company or the TRS SUB in
connection with any indebtedness;

 

(iv)       Commence or take any action in the name of, for or on behalf of
either TRS SUB relating in any way to a Bankruptcy;

 

(v)        Dissolve or liquidate the TRS SUB;

 

(vi)       Admit an additional shareholder to the TRS SUB;

 

(vii)      Cause the formation of any corporation or other subsidiary entity
owned or controlled by the Company or the TRS SUB;

 

(viii)     Take any action or otherwise exercise any right of the Company in the
Company’s capacity as a shareholder of the TRS SUB, except to the extent that
Managing Member is expressly authorized pursuant to Section 9.3 to take any such
action without the approval of all of the Members of the Company; provided,
however, any voting rights of the Company in its capacity as shareholder of the
TRS SUB shall require the unanimous written approval of the Members;

 

(ix)       Take any action or omit to take an action that requires the unanimous
consent of all of the board of directors of the TRS SUB in accordance with
governing documents or bylaws of the TRS SUB;

 

(x)        Make investments in the name of the Company or the TRS SUB or with
any Company and/or TRS SUB funds;

 

(xi)       Commence or take any action in the name of, for or on behalf of the
Company relating in any way to a Bankruptcy;

 

(xii)      Dissolve or liquidate the Company or the TRS SUB except as expressly
required or permitted pursuant to Section 11;

 

(xiii)     Admit an additional Member to the Company except as otherwise
permitted pursuant to Section 10;

 

(xiv)     Amend, modify, or otherwise change the Business of the Company or the
TRS SUB;

 

(xv)      Amend the Certificate or this Agreement;

 

28

 

(xvi)                  Amend, modify or otherwise change the bylaws or other
organizational documents or the business of the TRS SUB;

 

(xvii)              Knowingly, willfully, affirmatively or in bad faith take any
action or omit to take any action that would cause the Company and/or any of its
Members to incur any material liability under any recourse guaranty or any other
guaranty or indemnity or that would violate any material affirmative or negative
covenant or other material provision of any document evidencing or securing the
Loan or other material agreement binding on the Company or the Property;

 

(xviii)          acquire any real or personal property or interest therein or on
behalf of the Company other than non-material personal property in the ordinary
course of business and as otherwise consistent with the Initial Budget or any
subsequent Approved Company Budget or this Agreement;

 

(xix)                  Voluntarily agree or enter into any conditions or
restrictions in connection with the zoning or entitlements applicable to the
Property;

 

(xx)                      Except as permitted by Section 9.2(d), enter into any
contract, lease, agreement or other arrangement with any Affiliate of CWI;

 

(xxi)                  Make a distribution of any Distributable Cash from
Operations or Capital Transaction Proceeds in contravention of this Agreement;

 

(xxii)              Establish a condominium, cooperative or other comparable
ownership regime with respect to the Property or any portion thereof or enter
into any of the documents or agreements in connection therewith;

 

(xxiii)          Effect a merger, conversion, consolidation or other
reorganization of the Company;

 

(xxiv)          Enter into a settlement agreement or a material mediation
relating to environmental matters;

 

(xxv)              File any voluntary petition under Title 11 of the United
States Code, the Bankruptcy Act, or seek the protection of any other Federal or
State bankruptcy or insolvency law or debtor relief statute or consenting to the
institution or continuation of any involuntary bankruptcy proceeding or the
admission in writing of the inability to pay debts generally as they become due;
or the making of a general assignment for the benefit of creditors;

 

(xxvi)          Grant any general power of attorney or other unlimited authority
to act on behalf or in the name of the Company; or

 

(xxvii)      Appoint any officers or authorized agents of the Company or TRS SUB
(other than those acting as officers or authorized agents of Managing Member).

 

(b)                              Except as otherwise expressly set forth in this
Agreement, any approval, consent, agreement, or exercise of judgment or other
determination to be made by Members with respect to a Member Decision may be
withheld in such Member’s sole, but good faith discretion; provided, however,
the Members further agree that during the period commencing on the Effective
Date through the expiration of the Sale Lockout Period, no Member shall have the
right or authority to initiate in any manner, enter into any agreement or
otherwise commit on behalf of the Company to sell or otherwise

 

29

 

dispose of any direct or indirect interest in the Hotel or the Company
(including, without limitation, assigning, transferring or selling the Operating
Lease to any Person other than a Subsidiary of the Company).

 

9.5                            Hotel Management.  The Members hereby acknowledge
and agree that, notwithstanding the terms and conditions of this Agreement to
the contrary (including, but not limited to, the Sections 9.1 – 9.4), (a) so
long as the manager of the Hotel (“Operator”) is an Affiliate of FHR, FHR shall
have no right to make decisions and/or exercise the rights and/or take any
action or omit to take any action, and/or negotiate any amendments on behalf of
any counterparty under the Hotel Management Agreement (subject to all
limitations and obligations on the part of “Owner”); (b) the TRS SUB (at the
direction of CWI) shall have all of the foregoing rights as well as the right to
enforce and/or terminate the Hotel Management Agreement pursuant to the
respective terms thereof (including, without limitation, the unilateral right to
extend the term of or terminate the Hotel Management Agreement and/or any major
decisions triggered by terms and conditions of the Hotel Management Agreement);
and (c) FHR shall have no right directly or indirectly to vote on or influence
any such matters (in avoidance of doubt, in no event shall FHR, in its capacity
as a Member of the Company, have the right to prevent or interfere with the
exercise of Managing Member’s rights under Section 9.2 and Section 9.3 to the
extent “Owner” had the right to do so under the Hotel Management Agreement
unless Managing Member is expressly prohibited from doing so under the
limitations of Section 9.4 of this Agreement (e.g., if “Owner” under the Hotel
Management Agreement had the right to undertake ROI Capital Improvements (as
defined in the Hotel Management Agreement) with the consent of Manager under the
Hotel Management Agreement, FHR shall not have the right to prevent or otherwise
interfere with or approve or consent to the undertaking of such ROI Capital
Improvements under Section 9.2 or Section 9.3 or otherwise under this Agreement
unless prohibited under Section 9.4 of this Agreement, provided that in no event
shall FHR have any obligation to contribute any additional Capital Contribution
in connection therewith)).  Upon any termination of FHR or any Affiliate of FHR
as Operator, FHR shall have the right to vote on decisions on behalf of the
Company or the TRS SUB as “Owner” under the Hotel Management Agreement, and TRS
SUB shall promptly select a bona fide third party as a replacement Operator
(provided that FHR shall not be entitled to vote or influence such selection
which shall be made by TRS SUB in its sole but reasonable discretion).

 

9.6                            Remuneration of Members and their Affiliates. 
Except as expressly permitted under this Agreement, including, without
limitation, such reasonable and customary out-of-pocket costs as may be incurred
by an Affiliate of either Member, as applicable, in connection with performing
accounting functions or otherwise maintaining the books and records of the
Company pursuant to Section 12 the TRS SUB provided that such costs are set
forth in the Initial Budget or any subsequent Approved Company Budget, no Member
(or their Affiliate) shall be entitled to any fees, commissions, payments or
other remuneration for any services rendered to or for the Company or be
reimbursed for any overhead expenses (including, without limitation, rent,
utilities, property taxes, insurance premiums, general administrative expenses,
salaries or other compensation to employees, etc.) of any Affiliate of such
Member; provided, however, other than Operator’s legal expenses related to
negotiation of the Hotel Management Agreement (which shall be at the sole cost
and expense of Operator without being reimbursable hereunder or otherwise),
Managing Member, a Member, or an Affiliate of a Member may be reimbursed for
third-party out-of-pocket costs and expenses, at cost, without mark-up or
profit, reasonably incurred in connection with performing its duties under this
Agreement (which third-party cost shall include, but shall not be limited to,
reasonable travel expenses to be governed by a travel policy to be agreed upon
between the Members) provided that such costs are set forth in the Initial
Budget or any subsequent Approved Company Budget.

 

9.7                            Member Approval.  No annual or regular meetings
of the Members are required to be held; provided, however, any Member shall have
the right to call a meeting, on not less than ten (10) days’ prior notice, which
meeting may be in person or by teleconference.  In any instance in which the
approval of the Members is required under this Agreement, such approval may be
obtained in any manner

 

30

 

permitted by the Act.  Unless otherwise provided in this Agreement, approval of
the Members shall mean the unanimous written approval of the Members.

 

9.8                            Liquor License.  Members acknowledge that an
Affiliate of FHR is the current holder of the licenses, consents or other
approvals required by the California Department of Alcoholic Beverage Control
(the “ABC”) or required by the City of Sonoma or otherwise that may be necessary
for the Company or the TRS SUB to obtain a liquor license at the Hotel (the
“Liquor Licenses”).  The determination to transfer or obtain new Liquor Licenses
shall be a Member Decision; provided, however, CWI may elect at any time to
cause the Company or TRS SUB to apply for the Liquor Licenses by taking any and
all actions and filing all necessary applications and/or disclosure forms or
other information required by the ABC or the City of Sonoma in connection with
obtaining the Liquor Licenses; provided, further, if (a) the application and/or
disclosure process is impossible or creates an unreasonable and/or impractical
burden on the Members or their respective constituent members, partners,
shareholders or other direct and indirect owners thereof (including, without
limitation, requiring disclosures or applications from any Person having a
direct interest in the REIT and/or any executives or board members of CWI); or
(b) the Company or TRS SUB is unable to obtain or subsequently loses any Liquor
Licenses, which in any case arises because of a Member’s or its Affiliate’s
inability to obtain qualification or the necessary licenses, consents or other
approvals required by the ABC, then in either event and in the sole but good
faith discretion of Managing Member, the Company shall form a wholly owned
subsidiary or other affiliated ownership structure controlled by one or more of
the Members or their respective Affiliates (“LiquorCo”) that will apply for and
hold the Liquor License(s) in lieu of the Company and the Company will enter
into an agreement with LiquorCo that will permit the sale of liquor at the
Hotel, to the extent legally permissible and on reasonable terms and conditions.

 

9.9                            Dispute Resolution.

 

(a)                               In the event that the Members are unable to
mutually agree on any dispute which expressly provides for resolution under this
Section 9.9, such dispute shall be settled as follows:

 

 (i)                              The Members shall work together in good faith
and a spirit of mutual cooperation to attempt to resolve the applicable
arbitrable dispute for a period of ten (10) business days after notice from one
Member to the other referencing this Section 9.9(a)(i) (the “Discussion
Period”); and

 

(ii)                              If within the Discussion Period the Members
fail to resolve the applicable arbitrable dispute, then either Member may
promptly thereafter file an arbitration administered by the American Arbitration
Association in accordance with its Commercial Arbitration Rules, and upon the
issuance of a judgment on the award rendered by the arbitrator(s) thereunder,
such judgment may be entered in any court having jurisdiction thereof.  All
arbitration proceedings and hearings shall occur in New York, New York.

 

For avoidance of doubt, any failure by either Member to approve a Member
Decision shall not constitute a dispute for which arbitration under this
Section 9.9 is available.

 

(b)                              Within ten (10) days after the commencement of
arbitration, the parties shall attempt to mutually agree upon a single person to
act as arbitrator.  If the parties cannot agree on a single arbitrator within
such ten (10) day period, then, within twenty (20) days after the commencement
of arbitration, each party shall select one person to act as arbitrator and the
two selected shall select a third arbitrator within five (5) days of their
respective appointment.  If the arbitrators selected by the parties are unable
or fail to agree upon the third arbitrator, the third arbitrator shall be
selected by the American

 

31

 

Arbitration Association.  Should this selection procedure fail for any reason,
the arbitrators shall be appointed as provided in the Commercial Arbitration
Rules of the American Arbitration Association.  The arbitrator(s) selected
should be competently knowledgeable in the subject matter of the dispute, and in
all instances experienced in disputes relating to the ownership of luxury
hotels.

 

(c)                               The arbitrator(s) may award reasonable
attorneys’ fees and expenses to the prevailing party, if a prevailing party, if
any, can be reasonably identified.  The arbitrator(s) shall make its/their
determination in accordance with the laws of Delaware.  The arbitrator(s) shall
make specific, written findings of fact and conclusions of law.

 

(d)                              A party may apply to the arbitrator(s) seeking
injunctive relief until the arbitration award is rendered or the controversy is
otherwise resolved.  A party also may, without waiving any remedy under this
Agreement, seek from any court having jurisdiction any interim or provisional
relief that is necessary to protect the rights or property of that party,
pending the establishment of the arbitration tribunal (or pending the
arbitration tribunal’s determination of the merits of the controversy).

 

(e)                               Each party to this Agreement agrees that it
may be joined as an additional party to an arbitration involving other parties
to this Agreement.  If more than one arbitration is begun under this Agreement
and any party contends that two or more arbitrations are substantially related
and that the issues should be heard in one proceeding, the
arbitrator(s) selected in the first-filed of such proceedings shall determine
whether, in the interests of justice and efficiency, the proceedings should be
consolidated before those arbitrator(s).

 

(f)                                The filing of an arbitration proceeding by
any Member shall not at any time (i) prohibit, limit or otherwise adversely
affect the rights of either Member to deliver a Buy-Sell Notice and exercise its
rights under Section 10.5 or (ii) prohibit or otherwise adversely affect the
rights of any Member to initiate and close a Transfer, right of first offer,
buy-sell, or any other rights under Section 10.

 

9.10                    Execution of Documents.  Except as otherwise expressly
set forth in this Agreement (including, but not limited to, Sections 9.3 and
9.4), each check, contract, deed or act of sale or similar conveyance document,
lease, promissory note, mortgage, escrow instruction, bond, release or any other
documents of any nature whatsoever, in any way pertaining to the Company or the
TRS SUB shall be signed by Managing Member or the person or persons designated
from time to time by Managing Member; provided, however, the Members agree and
acknowledge that CWI shall have the sole authority to have signing authority and
execute all documents on behalf of “Owner” with respect to all matters under the
Hotel Management Agreement.

 

9.11                    Liability/Indemnification.

 

(a)                               Except as expressly provided otherwise in this
Agreement, Managing Member, and its respective Affiliates, and their respective
partners, members, shareholders, other principals, directors, officers,
employees, agents and other representatives (collectively, the “Managing
Parties”) shall not be liable, responsible or accountable, in damages or
otherwise, to any Member or to the Company for any act performed by them within
the scope of the authority conferred upon them by this Agreement, except for
fraud, willful misconduct or gross negligence.  The Company shall, out of
Company assets (but not the assets of any Members), indemnify and hold the
Managing Parties harmless for any act performed by them which the Managing
Parties believed in good faith to be within the scope of the authority conferred
upon them, except for fraud, willful misconduct and/or gross negligence.  Except
to the extent that any Member incurs loss or damage caused by fraud, willful
misconduct or gross negligence, the Company shall, out of Company assets (but
not the assets of any Members and without

 

32

 

any obligation to make any Capital Contribution to the Company), indemnify and
hold the Managing Parties, the FHR Parties and the CWI Parties harmless from and
against any personal loss or damage incurred by them arising from any act
performed by them for and on behalf of the Company or the TRS SUB or arising out
of any business of the Company or the TRS SUB.

 

(b)                              An indemnitee (an “Indemnitee”) who desires to
make a claim against the Company under this Section 9.11 shall notify the
Company of the claim, demand, action or right of action which is the basis of
such claim within twenty (20) calendar days of discovering such claim, and shall
give the Company a reasonable opportunity to participate in the defense
thereof.  Failure to give such notice shall not affect the Company’s obligations
hereunder, except to the extent of any actual prejudice resulting therefrom.

 

9.12                    TRS SUB Directors.

 

(a)                               The Members acknowledge that the initial
directors of the TRS SUB are, on behalf of CWI, Michael Medzigian, Gil Murillo
and Patrick Vyncke, and on behalf of FHR, Michele Wimpling.  Notwithstanding any
other provision of this Agreement, for so long as (a) CWI maintains an indirect
ownership interest in the TRS SUB of at least sixty percent (60%) or greater,
CWI shall have the right to appoint three-quarters (3/4) of the number of
directors of the TRS SUB at every meeting of the stockholders of the TRS SUB,
and on every action or approval by written consent of the stockholders of the
TRS SUB, CWI shall have the right to cause the Company to nominate
three-quarters (3/4) of the number of directors of the TRS SUB; and (b) FHR
maintains an indirect ownership interest in the TRS SUB, FHR shall have the
right to appoint one-quarter (1/4) of the number of directors of the TRS SUB at
every meeting of the stockholders of the TRS SUB, and on every action or
approval by written consent of the stockholders of the TRS SUB, and the Company
shall so nominate and vote (or cause to be voted) or provide consent (or cause
consent to be provided) with respect to its shares of stock in the TRS SUB for
the nominees designated in this Section 9.12; provided, however if CWI is
removed as Managing Member pursuant to Section 9.1, then FHR (as the new
Managing Member) shall have the right to appoint three-quarters (3/4) of the
number of directors of the TRS SUB and CWI shall have the right to appoint only
one quarter (1/4) of the number of directors of the TRS SUB.  If at any time a
Member’s Participation Percentage is less than sixty percent (60%) and greater
than forty percent (40%), such Member shall have the right to appoint only
one-half (1/2) of the numbers of directors of the TRS SUB (and for avoidance of
doubt, if FHR holds greater than 60%, FHR shall have the right to appoint
three-quarters (3/4) of the number of directors of the TRS SUB and CWI shall
have the right to appoint only one quarter (1/4) of the number of directors of
the TRS SUB).  CWI and FHR shall have the right to cause the Company to vote to
replace any of their respective representatives, in their sole and absolute
discretion, at any time by delivering written notice to the Managing Member
setting forth the identity of such replacement director, provided that each
director of the TRS SUB shall hold office until a successor is elected and
qualified or until such appointed director resigns or is removed.  The Members
and the Company shall not enter into any agreement, arrangement or understanding
inconsistent with the foregoing.

 

(b)                              Subject to Section 5.5, the Company shall vote
or cause to be voted all of its shares of stock in the TRS SUB or take any other
action necessary for the removal of any member of the board of directors of the
TRS SUB upon the request of the Member then entitled to nominate such member to
the board of directors as set forth in Section 9.12(a) above, and for the
election to the board of directors of an individual designated by such Member in
accordance with the provisions hereof.  The Company shall vote all of its shares
of stock in the TRS SUB in such manner or take any other action as shall be
necessary or appropriate to ensure that any vacancy on the board of directors
occurring for any reason shall be filled only in accordance with the provisions
of this Section 9.12(b).

 

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9.13                    Company Guaranty.  The Members acknowledge and agree
that in connection with any financing or refinancing of the Hotel, Lender may
require one or more Members or their Affiliates (as applicable, “Company
Guarantor”) to provide certain guaranties in connection with obtaining the Loan
including, without limitation, a completion guaranty, an environmental indemnity
and a non-recourse carve-out guaranty or such other guaranty(ies) required by
such Lender (collectively, the “Company Guaranties”).  The Members acknowledge
that Carey Watermark Investors Incorporated, a Maryland corporation, is the
initial Company Guarantor in connection with Loan.  In connection with any other
Company Guaranties required by Lender a creditworthy Affiliate of the then
Managing Member shall provide such Company Guaranties and for so long as CWI is
the Managing Member then in no event shall FHR or any Affiliate of FHR have any
obligation to provide or enter into any such Company Guaranties.   If demand is
made on the Company or any Company Guarantor providing a Company Guaranty for
payment or performance under any Company Guaranty, then the Person receiving
such demand shall immediately forward copies of such demand to each Member and
the other guarantors of the same or a related obligation, if any.  If a claim
arises under any of the Company Guaranties that results from a Neutral Event,
each Member shall be liable to Company Guarantor for their pro rata share of the
total liability incurred thereunder (based on each Member’s respective
Participation Percentage at the time of such loss) and each Member hereby
indemnifies and agrees to hold Company Guarantor harmless from and against any
claim that Company Guarantor may sustain or incur as a result of such claim.  If
a FHR Causation Event should occur, then FHR shall be solely liable for any and
all claims made by Lender as a result of such FHR Causation Event and FHR shall
indemnify and agrees to hold Company Guarantor, the Company and CWI (and its
Affiliates) harmless from and against any claim that such indemnified party may
sustain or incur as a result of such claim made by Lender as a result of such
FHR Causation Event.  If a CWI Causation Event should occur, then CWI shall be
solely liable for any and all claims made by Lender as a result of such CWI
Causation Event and CWI shall indemnify and agrees to hold Company Guarantor,
the Company and FHR (and its Affiliates) harmless from and against any claim
that such indemnified party may sustain or incur as a result of such claim made
by Lender as a result of such CWI Causation Event.  For avoidance of doubt, in
the event that either Member funds any amount in connection with a Neutral
Event, then at such Member’s election, such contribution shall either by funded
as a Deficit Loan pursuant to Section 6.3(d) or an Additional Capital
Contribution to the Company equal to the amount so paid which shall be treated
in the same manner as a Capital Contribution made pursuant to
Section 6.3(c) (and such Member’s capital account and Participation Percentage
shall be adjusted accordingly, provided, however, there shall be no punitive
dilution of the other Member’s Participation Percentage) ; provided, however, if
either FHR or CWI, as applicable, funds any amount as the result of a FHR
Causation Event or CWI Causation Event, respectively, such Member shall not
receive any credit for any Capital Contribution made in connection therewith. 
In the event that either Member fails to fund any amounts as required under this
Section 9.13, then, in additional to all other rights and remedies that Company
Guarantor or the applicable Member may have on account thereof (under this
Agreement or otherwise at law or in equity), if the other Member funds all or
any portion of the non-funding Member’s obligations under this Section 9.13,
then the funding Member shall be deemed to have made a Deficit Loan pursuant to
Section 6.3(d), in which event the funding Member shall be deemed the
“Contributing Member” and the Member who failed to fund shall be deemed to be
the “Non-Contributing Member”.

 

9.14                    Special Purpose Entity.  This Section 9.14 is being
adopted to comply with certain provisions necessary to qualify the Company as a
“special purpose” entity and in connection therewith, notwithstanding anything
to the contrary in this Agreement or in any other document governing the
formation, management or operation of the Company, until such time as the
outstanding principal balance of the Loan has been paid in full, the Members
covenant and agree that the Company has not, and shall not:

 

34

 

(a)                               engage in any business or activity other than
(i) the acquisition, development, ownership, leasing and maintenance of the
Hotel, and entering into financing for any of the foregoing, and activities
incidental thereto and (ii) to own the TRS SUB including all activities
incidental thereto;

 

(b)                              acquire or own any material assets other than
the Hotel and its interest in TRS SUB;

 

(c)                               merge into or consolidate with any person or
entity or dissolve, terminate or liquidate in whole or in part, transfer or
otherwise dispose of all or substantially all of its assets or change its legal
structure;

 

(d)                              (i) fail to observe its organizational
formalities or preserve its existence as an entity duly formed, validly existing
and in good standing (if applicable) under the laws of the jurisdiction of its
formation, and qualification to do business in the State of California, or
(ii) without the prior written consent of its lender, amend, modify, terminate
or fail to comply with this Section 9.14;

 

(e)                               own any subsidiary other than TRS SUB or make
any investment in, any Person other than TRS SUB without the prior written
consent of Lender;

 

(f)                                commingle its assets with the assets of any
of its members, general partners, Affiliates, principals or of any other Person
or entity, participate in a cash management system (other than pursuant to the
Hotel Management Agreement) with any other entity or Person or fail to use its
own separate stationery, invoices and checks;

 

(g)                               incur any indebtedness, other than the
indebtedness permitted by its then applicable lender;

 

(h)                              (i) fail to maintain its records (including
financial statements), books of account and bank accounts separate and apart
from those of the members, general partners, principals and Affiliates, as the
case may be, the Affiliates of a member, general partner or principal of the
Company, as the case may be, and any other Person, (ii) permit its assets or
liabilities to be listed as assets or liabilities on the financial statement of
any other Person or (iii) include the assets or liabilities of any other Person
on its financial statements; except for consolidated financial statements which
contain a note indicating that the Company’s separate assets and liabilities are
neither available to pay the debts of the consolidated entity nor constitute
obligations of the consolidated entity;

 

(i)                                  enter into any contract or agreement with
any member, general partner, principal or Affiliate of the Company, as the case
may be, or any member, general partner, principal or Affiliate thereof other
than the Hotel Management Agreement, the Operating Lease, those certain side
letters each dated as of the date hereof between FHR and TRS SUB (and excluding
any other business management services agreement with an Affiliate, provided
that (i) the manager, or equivalent thereof, under such agreement holds itself
out as an agent of the Company, and (ii) the agreement meets the standards set
forth in the respective loan agreement or other security document of a lender
following this parenthetical), except upon terms and conditions that are
commercially reasonable, intrinsically fair and substantially similar to those
that would be available on an arms-length basis with third parties other than
any member, general partner, principal or Affiliate of the Company, or any
member, general partner, principal or Affiliate thereof;

 

(j)                                  seek the dissolution or winding up in
whole, or in part, of  the Company;

 

35

 

(k)                              fail to correct any known misunderstandings
regarding the separate identity of the Company, or any member, general partner,
principal or Affiliate thereof or any other Person;

 

(l)                                  guarantee or become obligated for the debts
of any other Person or hold itself out to be responsible for the debts of
another Person, other than with respect to the obligations set forth in any loan
agreement or other security document of a lender or any guaranty of the Hotel
Management Agreement;

 

(m)                          make any loans or advances to any third party,
including any member, general partner, principal or Affiliate of the Company, or
any member, general partner, principal or Affiliate thereof, and shall not
acquire obligations or securities of any member, general partner, principal or
Affiliate (other than TRS SUB);

 

(n)                              fail to file its own tax returns or be included
on the tax returns of any other Person except as required by law;

 

(o)                              fail either to hold itself out to the public as
a legal entity separate and distinct from any other Person or to conduct its
business solely in its own name or a name franchised or licensed to it by a
hotel manager or hotel franchisor, and not as a division or part of any other
entity in order not (i) to knowingly and intentionally mislead others as to the
identity with which such other party is transacting business, or (ii) to suggest
that the Company is responsible for the debts of any third party (including any
member, general partner, principal or Affiliate of the Company or any member,
general partner, principal or Affiliate thereof) other than TRS SUB;

 

(p)                              fail to 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 when there is
sufficient cash flow from the leasing of the Hotel to do so;

 

(q)                              hold itself out as or be considered as a
department or division of (i) any general partner, principal, member or
Affiliate of the Company, (ii) any Affiliate of a general partner, principal or
member of the Company, or (iii) any other Person;

 

(r)                                 fail to allocate fairly and reasonably any
overhead expenses that are shared with an Affiliate, including paying for office
space and services performed by any employee of an Affiliate;

 

(s)                                pledge its assets for the benefit of any
other Person other than with respect to the obligations under any loan agreement
or other security document of any lender;

 

(t)                                  fail to maintain a sufficient number of
employees in light of its contemplated business operations;

 

(u)                              file or consent to the filing of any petition,
either voluntary or involuntary, to take advantage of any applicable insolvency,
bankruptcy, liquidation or reorganization statute, or make an assignment for the
benefit of creditors without the affirmative vote of the independent director
and of all other managing members;

 

(v)                              fail to hold its assets in its own name; and

 

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(w)                           have any of its obligations guaranteed by an
Affiliate, other than with respect to the obligations under any loan agreement
or other security document of any lender.

 

10.                            RESTRICTIONS ON TRANSFER; NEW MEMBERS.

 

10.1                    Limitations on Transfers.  Except as set forth in
Sections 10.2, 10.3, 10.4 and 10.5, no Member shall for any reason, whether
voluntarily, involuntarily or by operation of law, Transfer all or any of such
Member’s Membership Interest, without the prior unanimous written consent of the
Members.  To the fullest extent permitted by law, any Transfer not expressly
permitted in this Agreement shall be null and void and of no legal effect.  A
transferee of a Membership Interest shall have the right to become a substitute
Member only if (i) unanimous written consent of the Members is given; (ii) such
Person executes an instrument satisfactory to Managing Member accepting,
assuming and adopting the terms and provisions of this Agreement; and (iii) such
Person pays any reasonable expenses in connection with such Person’s admission
as a substitute Member.  The admission of a substitute Member shall not release
the Member who assigned the Membership Interest from any liability that such
Member may have to the Company unless expressly unanimously agreed to by the
Members.

 

10.2                    Permitted Transfers.  Notwithstanding anything to the
contrary set forth in Section 10.1, the Members hereby consent to any Transfer
to a Permitted Transferee without being subject to Sections 10.3, 10.4 and 10.5.

 

10.3                    Indirect Transfers to Non-Affiliates.    Subject to the
rights of the Members under Sections 10.4 and 10.5, Transfers of any direct or
indirect ownership interests in any Member to a Person that is not a Permitted
Transferee (i.e. which would not be permitted under Section 10.2) shall be
permitted under this Section 10.3 if and only if (i) there is no change in
Control of such Member following such Transfer and the transferee meets the
Qualified Transferee Requirements or (ii) the transferee acquires all or
substantially all of the assets of such Member’s Parent Company in connection
with such Transfer and such transferee meets the Qualified Transferee
Requirements.  For avoidance of doubt, no transfer of shares in Carey Watermark
Investors Incorporated shall be restricted or otherwise require the consent of
or notice to FHR provided that the Carey Watermark Investors Incorporated is
publicly traded on a nationally recognized exchange or publicly registered with
the Securities and Exchange Commission.

 

10.4                       Forced Sale and ROFO.

 

(a)                               At any time after the Sale Lockout Period and
subject to the terms and conditions of Section 10.4(b) below and provided that
neither Member has exercised its rights under Section 10.5 and/or the effect of
such exercise is still pending, either Member shall have the right to
unilaterally elect to sell the Property on behalf of the Company.

 

(b)                              If a Member wishes to cause the Company or the
TRS SUB to sell the Property after the Sale Lockout Period, it shall first give
a notice to the other Member of its desire to sell the Property and of the price
and terms on which it is willing to sell the Property (the “ROFO Sale Notice”). 
If the Member not proposing the sale (the “Buying Member”) opposes the sale and
wishes to purchase the Property for the price and on the terms proposed by the
other Member (the “Sale Member”) in the ROFO Sale Notice, it shall so notify the
Sale Member in writing within sixty (60) days after receiving the ROFO Sale
Notice of such election.  If the Buying Member delivers a written notice to the
Selling Member of its election to purchase the Property in accordance with the
terms set forth in the ROFO Sale Notice, then the parties shall proceed with the
sale of the Property pursuant to a purchase and sale agreement in substantially
the same form as the Purchase Agreement with such changes as noted on
Exhibit “H” attached hereto, together with the terms and conditions set forth in
this Section 10.4, which

 

37

 

terms, for the avoidance of any doubt, shall govern and control in the event of
any inconsistency with the Purchase Agreement (the “Buyout PSA”).  The Buyout
PSA shall include and address the following items:  (a) an acknowledgement that
neither the Company nor the Sale Member shall be required to make any
representation with respect to the Property; (b) the obligation of the Buying
Member to obtain the absolute release of the Company and the Sale Member (and
all Affiliates of the Sale Member) from any post-closing obligations or
liabilities under any Guarantees to which the Sale Member or its Affiliates is a
party or to which the Sale Member or its Affiliates may be bound, provided that
if the Loan Documents do not permit the release of the Sale Member or its
Affiliate under any guaranty, then a creditworthy affiliate of the Buying Member
may, at either the Sale Member’s or its Affiliate’s option, enter into an
indemnity agreement in favor of the Sale Member or any applicable Affiliate of
the Sale Member with respect to any obligations or liabilities first accruing
from and after the closing; (c) an undertaking by the Buying Member to release
the Company and the Sale Member from any obligations or liabilities in any way
relating to the Property accruing from and after the closing with respect to the
Property, and an indemnity from a creditworthy Affiliate of the Buying Member,
reasonably acceptable to the Sale Member, pursuant to which the Company and the
Sale Member are indemnified and held harmless from and against any such
post-closing obligations or liabilities; (d) an undertaking by the Buying Member
to release the Sale Member from any post-closing obligations or liabilities
under any cross-indemnity agreements to which either Member are parties; (e) an
undertaking by the Buying Member to make a deposit in an amount equal to five
percent (5%) of the sale price, no later than ten (10) Business Days following
the Buying Member’s written election acquire the Property in accordance with the
ROFO Sale Notice (the “Buyout Deposit”); and (f) a closing date not later than
ninety (90) days after the date of the Buying Member’s receipt of the ROFO Sale
Notice (the “ROFO Closing Date”).  The Buyout PSA shall also provide that
(A) time is of the essence with respect to the closing of the sale contemplated
herein on or before the ROFO Closing Date; (B) one hundred percent (100%) of the
purchase price for the Property shall be payable at the ROFO Closing Date by
wire transfer in immediately available funds; (C) notwithstanding any other
provisions hereof to the contrary, the Buying Member shall not be required to
close on the purchase of the Property in accordance with this Section 10.4 and
the Buyout PSA unless the representations and warranties of the Sale Member as
set forth in Section 10.7 shall be true and correct as of the ROFO Closing Date,
and the Sale Member shall deliver a certificate to such effect to the purchasing
party dated as of the ROFO Closing Date; provided, however, that it shall be
made clear that as to the condition or prospects for the Company, the Sale
Member is selling the Property on an “as-is, where-is” basis; (D) the closing
shall be conducted through an escrow agreement established by the Members with a
title insurer, and shall take place in California; (E) each Member shall pay
one-half of the cost of escrow, together with all of its attorneys’ fees
incurred in connection with such buy-sell transaction; (F) the Sale Member shall
pay all city, county and state transfer taxes (or other similar taxes) in
connection with sale of the Property; and (G) the Buying Member shall pay all
sales taxes (if any) due and payable in connection with the sale of the personal
property located at or within the Property sold to the Buying Member pursuant to
the Buyout PSA and the premium for title insurance and the cost of any title
endorsements. The Buying Member may assign its rights under the this
Section 10.4, in the whole or in part, to any Affiliate of such Member, provided
that no assignment shall relieve the Buying Member from any liability or
obligation with respect to such purchase. If the Buying Member defaults under
the Buyout PSA in its obligation to close on the Closing Date (other than as a
result of the Sale Member’s default or a failure of a condition precedent set
forth in the Buyout PSA) (a “Buyout Default”), then (i) the Buyout Deposit shall
be forfeited by the Buying Member and shall be paid over to the Sale Member by
the institution holding such Buyout Deposit pursuant to the terms of the Buyout
PSA; (ii) the Sale Member shall have the right to proceed with the sale of the
Property as more particularly described in paragraph (c) below and (iii) the
Buying Member shall forfeit its right to any future right of first offer
pursuant to this Section 10.4 as a result of such Buyout Default if the Sale
Member does not elect to or is unable to sale the Property in accordance with
terms of paragraph (c) below to an unaffiliated third party.

 

38

 

(c)                               If for any reason (i) the Buying Member
notifies the Sale Member it does not wish to purchase the Property; (ii) the
Buying Member fails to timely notify the Sale Member that it wishes to purchase
the Property at the price and on the terms required above; or (iii) the Buying
Member timely notifies the Sale Member but the purchase and sale of the Property
does not close within ninety (90) days after Buying Member’s election to
purchase the Property in response to the ROFO Sale Notice for any reason (other
than a default by the Sale Member which is not caused by the Buying Member),
then the Sale Member shall have the right to cause the Company to enter into a
binding agreement for the sale of the Property and/or to cause the Company to
sell the Property on the same or better terms as set forth in the ROFO Sale
Notice to an unaffiliated third party (i.e. a party that is not an Affiliate)
for a purchase price of at least ninety-five percent (95%) of the purchase price
set forth in the ROFO Sale Notice pursuant to this Section 10.4; provided,
however, if the Sale Member does not cause the Company to enter into a binding
agreement to sell the Property to an unaffiliated third party within six
(6) months after the Sale Member is permitted by the terms of this Section 10.4
in accordance with terms and requirements set forth above, then the Sale Member
shall be required to again comply with the provisions of this Section 10.4 prior
to causing the sale of Property pursuant to this Section 10.4.  The Buying
Member may structure any purchase by it under this Section 10.4 of all or
substantially all of the assets of the Company as a purchase of the Sale
Member’s Participation Percentage Interest by paying the Sale Member on the
closing date the same amount that it would have otherwise received upon the sale
of the Property under the purchase contract and the liquidation of the Company. 
Any sale of the Property to an unaffiliated third party pursuant to
Section 10.4(c) must be on commercially reasonable terms and conditions (as
determined by the Sale Member in its good faith discretion) and must result in
(x) the payment in full of all amounts due and owing under the Loan Documents,
(y) the release of all liability to any Affiliates of the Company who guaranteed
any obligation or liabilities under the Loan Documents of any kind, provided
that if the Loan Documents do not permit the release of the Sale Member or its
Affiliate under any guaranty, then a creditworthy affiliate of the Buying Member
may, at either the Sale Member’s or its Affiliate’s option, enter into an
indemnity agreement in favor of the Sale Member or any applicable Affiliate of
the Sale Member with respect to any obligations or liabilities first accruing
from and after the closing, and (z) the full and unconditional release of the
Company and the TRS SUB under the terms and conditions of the Hotel Management
Agreement and any and all other agreements therefore executed by the Company for
matters first arising and accruing from after the Closing of such sale.

 

10.5                       Buy/Sell.

 

(a)                               From and after the expiration of the Sale
Lockout Period, and provided that neither member has exercised its rights under
Section 10.4 and/or the effect of such exercise is still pending, either Member
(the “Offering Member”) may, in its sole and absolute discretion, deliver
written notice (the “Buy-Sell Notice”) to the other Member (the “Responding
Member”), proposing a Total Value which would be the basis for calculating the
applicable price (“Applicable Price”) at which the Offering Member is willing to
either (i) sell to the other Member all of the Offering Member’s Membership
Interest; or (ii) purchase from the other Member all of the other Member’s
Membership Interest.  The Buy-Sell Notice shall be accompanied by a letter or
other statement signed by a bank or trust company confirming that the Offering
Member has deposited with such bank or trust company an amount equal to five
percent (5%) of Total Value (the “Buy/Sell Deposit”).  The Responding Member
shall have a period of thirty (30) days after receipt of the Buy-Sell Notice in
which to elect, by written notice to the Offering Member (the “Response
Notice”), to either (A) purchase all of the Membership Interest of the Offering
Member at the Applicable Price; or (B) sell all of the Responding Member’s
Membership Interest to the Offering Member at the purchase price that would be
payable by the Offering Member if the Responding Member elects to sell all of
the Responding Member’s Membership Interest to the Offering Member (the
“Responding Member’s Purchase Price”) based on the amount the Responding Member
would receive if the assets of the Company were sold for an amount equal to the
Total Value, all third party liabilities were repaid and the balance was paid
and/or distributed pursuant to Section 8.2.  A Response Notice electing to

 

39

 

purchase the Offering Member’s Membership Interest shall include a letter or
other statement signed by a bank or trust company confirming that the Responding
Member has deposited with such bank or trust company an amount equal to five
percent (5%) of Total Value; thereupon, the Buy/Sell Deposit previously made by
the Offering Member shall be returned to the Offering Member by the bank or
trust company with which the Offering Member shall have deposited the Buy/Sell
Deposit.  The sale of the Membership Interests pursuant to this Section 10.5
shall be completed pursuant to a purchase and sale agreement in substantially
the same form as the Buyout PSA (and otherwise in accordance with the terms set
forth in Section 10.4(b) above, and this Section 10.5. The failure of the
Responding Member to timely give a Response Notice shall constitute its election
to sell all of its Membership Interest to the Offering Member at the Applicable
Price.   Unless otherwise approved in writing by the Members, such purchase and
sale shall be consummated within ninety (90) days after the date Responding
Member (1) delivers a Response Notice, or (2) if the Responding Member fails to
give the Offering Member a Response Notice in accordance with this Section 10.5,
is deemed to have elected to sell all of its Membership Interest to the Offering
Member (the “Closing Date”).  Time is of the essence with respect to the closing
of the sale contemplated herein on or before expiration of such ninety (90) day
period.  One hundred percent (100%) of the purchase price for the Membership
Interest being sold or purchased shall be payable at the Closing Date by wire
transfer in immediately available funds.

 

(b)                              Notwithstanding any other provisions hereof to
the contrary, any purchasing Member shall not be required to close on the
purchase of any Membership Interest in accordance with this Section 10.5 unless
the representations and warranties of the selling Member as set forth in
Section 10.7 shall be true and correct as of the Closing Date, and the selling
Member shall deliver a certificate to such effect to the purchasing party dated
as of the Closing Date; provided, however, that it shall be made clear that as
to the condition or prospects for the Company, the selling Member is selling its
Membership Interest on an “as-is, where-is” basis.  If the purchasing Member
defaults under the Buyout PSA entered into pursuant to this Section 10.5 in its
obligation to close on the Closing Date (other than as a result of the selling
Member’s default or a failure of a condition precedent set forth in the Buyout
PSA), then (i) the Buy/Sell Deposit deposited by the purchasing Member shall be
forfeited by the purchasing Member and shall be paid over to the selling Member
by the institution holding such Buy/Sell Deposit; (ii) the selling Member shall
have one hundred twenty (120) days to elect to become the purchasing Member and
purchase the other Member’s Membership Interest at ninety five percent (95%) of
the Applicable Price or the Responding Member’s Purchase Price (as applicable);
and (iii) the purchasing Member shall not have a right to give a “buy-sell
notice” under this Section 10.5 after its failure to complete the purchase.  All
closings shall be conducted through an escrow agreement established by the
Members with a title insurer, and shall take place in California.  Each Member
shall pay one-half of the cost of escrow, together with all of its attorneys’
fees incurred in connection with such buy-sell transaction.  Either Member
purchasing an interest under this Section 10.5 may assign its rights, in the
whole or in part, to any Affiliate of such Member, provided that no assignment
shall relieve the purchasing party from any liability or obligation with respect
to such purchase.

 

10.6                    Further Assurances.  It is the intent of the Members
that, in the event of any closing of a purchase of Membership Interest under
this Section 10, the selling or transferring Member shall fully convey, transfer
and assign all of its Membership Interest and any rights associated therewith. 
Each selling Member agrees that, at any such closing and any time thereafter,
upon request of the purchasing Member, the selling Member shall execute,
acknowledge and deliver to the purchasing Member and the Company such
assignments, conveyances, transfers and other instruments and documents, and
perform such other acts, as may be reasonably necessary to fully effect the
Transfer of the Membership Interest sold or otherwise being Transferred to such
Member.  Any Member acquiring the Membership Interest of the other Member under
this Section 10 may designate its Affiliate to take the assignment of the
Membership Interest to be Transferred to such Member.

 

40

 

10.7                    Representations and Warranties of the Members.  As of
the date of exercise of any rights, and as of the date of closing of any sale of
any Member’s Membership Interest pursuant to this Article 10, each of the
Members represents and warrants to the Company and the other Members with
respect to itself as follows:

 

(a)                               Such Member is the lawful owner of and has the
full right, power and authority to sell, Transfer and deliver such Member’s
Membership Interest, which it purports to own, and the sale, Transfer and
delivery of such Membership Interest in accordance therewith will Transfer good
and marketable title thereto free and clear of all liens, encumbrances, claims
or right of the third parties of every kind and nature whatsoever, subject only
to the provisions of this Agreement;

 

(b)                              The Membership Interest owned by such Member
has been duly authorized.  There are no existing options, warrants, calls or
commitments on the part of any Member or other Person relating to such
Membership Interest.  No voting agreements or restrictions of any kind other
than those set forth in this Agreement affect the rights of any such Membership
Interest or such Member;

 

(c)                               Such Member has the right and power to enter
into this Agreement and this Agreement has been fully executed and delivered and
constitutes the valid and binding obligation of such Member.  No consent of any
Person not a party to this Agreement and no consent of any Governmental
Authority is required to be obtained on the part of such Member in connection
with or resulting from the execution or performance of this Agreement; and

 

(d)                              Any Member selling its Membership Interest
under this Section 10 will deliver to the other Member a certificate dated as of
the closing date of the applicable sale making the foregoing representations and
warranties to such other Member as of the applicable closing date.

 

10.8                    No Dissolution.  If a Member completes a Transfer of all
or any part of its Membership Interest in the Company without complying with the
provisions of this Agreement, such action shall not in and of itself cause or
constitute a dissolution of the Company.

 

11.                               DISSOLUTION AND WINDING UP OF THE COMPANY.

 

11.1                    Dissolution of Company.  The Company shall be dissolved
and its affairs wound up upon the happening of any of the following events:

 

(a)                               The written agreement of all of the Members to
dissolve the Company;

 

(b)                              The occurrence of any event that makes it
unlawful, impossible or impractical to carry on the Business for a period of
more than six (6) consecutive months;

 

(c)                               Entry of a judicial decree of dissolution
pursuant to Section 18-802 of the Act;

 

(d)                              The sale of all or substantially all of the
Company’s assets unless such sale involves any deferred payment of the
consideration for the sale, in which case the Company shall not dissolve until
the last day of the calendar year during which the Company receives the balance
of the deferred payment; or

 

(e)                               At the time there are no Members unless the
Company is continued without dissolution in accordance with the Act.

 

41

 

11.2                    Winding Up of the Company.

 

(a)                               Upon dissolution of the Company for any of the
events described in subparagraphs (a) through (d) of Section 11.1, the Members
shall wind up the affairs and liquidate the assets of the Company, in a manner
approved by the Members, as promptly as is consistent with obtaining the fair
value thereof, and the proceeds therefrom, to the extent sufficient therefor,
when and as received by the Company shall be utilized, paid or distributed in
the following order:

 

  (i)                          First, to creditors, including Members and
managers who are creditors, to the extent otherwise permitted by law, in
satisfaction of liabilities of the Company (whether by payment or the making of
reasonable provision for payment thereof) other than liabilities for which
reasonable provision for payment has been made and liabilities for distribution
to Members under the Act;

 

 (ii)                          Second, to establish Company (or TRS SUB)
reserves for known and unknown liabilities, provided that any remainder of such
withheld amounts shall be distributed to the Members as soon as practicable; and

 

(iii)                          Thereafter, the balance, if any, to the Members
in accordance with Section 8.2.

 

It is intended that the distributions set forth in this Section 11.2(a) comply
with the requirement of Regulations Section 1.704-1(b)(2)(ii)(b)(2) that
liquidating distributions be made in accordance with positive Capital Accounts. 
However, if the balances in the Capital Accounts do not result in such
requirement being satisfied, no change in the amounts of distributions pursuant
to this Section 11.2 shall be made, but rather, items of income, gain, loss,
deduction and credit will be reallocated among the Members so as to cause the
balances in the Capital Accounts to be in the amounts necessary so that, to the
extent possible, such result is achieved.

 

(b)                              If any Member has a deficit balance in its
Capital Account (after giving effect to all contributions, distributions and
allocations for all taxable years, including the year during which such
liquidation occurs), such Member shall have no obligation to make any
contribution to the capital of the Company with respect to such deficit, and
such deficit shall not be considered a debt owed to the Company or to any other
Person for any purpose whatsoever.

 

(c)                               Upon the approval of the Members, a pro rata
portion of the distributions that would otherwise be made to the Members
pursuant to this Section 11.2 may be distributed to a trust established for the
benefit of the Members for the purpose of liquidating Company assets, collecting
amounts owed to the Company and paying any contingent or unforeseen liabilities
or obligations of the Company arising out of or in connection with the Company. 
The assets of any such trust shall be distributed to the Members from time to
time, in the reasonable discretion of Managing Member, in the same proportions
as the amount distributed to such trust by the Company would otherwise have been
distributed to the Members pursuant to this Agreement.

 

12.                            BOOKS AND RECORDS; ACCOUNTS AND INSURANCE.

 

12.1                    Books of Account.  The Members hereby designate CWI to
perform, or cause to be performed (at the Company’s cost, but at no compensation
to CWI other than as specified in this Agreement), all general and
administrative services on behalf of the Company and in pursuance thereof shall
maintain complete and accurate books of the Company, showing the Membership
Interest of the Members, all receipts and expenditures, assets and liabilities,
Profits and Losses and all other records necessary for recording the Company’s
business and affairs, including the maintenance of a Capital

 

42

 

Account for each Member.  The books of the Company shall be kept on the accrual
basis in accordance with the Uniform System and generally accepting accounting
principles, in each instance, for companies of similar size, type, quality and
business operations as the Company, and shall be open to inspection and
examination by each Member at all reasonable times.  CWI shall, if required by
any instruments to which the Company is a party, cause audited financial
statements of the Company’s financial condition as required by the applicable
instruments.

 

12.2                       Reports.  CWI  Member shall provide to FHR:

 

(a)                               as promptly as practicable and in any event
within ninety (90) days after the end of each Fiscal Year, a balance sheet of
the Company as of the end of such year showing its net worth and containing a
statement of each Member’s Capital Account, Capital Contributions and statements
of Profit and Loss, Distributable Cash from Operations, Capital Transaction
Proceeds and the sources and applications of funds of the Company for such year;

 

(b)                              promptly upon receipt thereof, one copy of each
other report submitted to the Company by the Company’s accountants in connection
with any annual, interim or special audit made by them of the books or records
of the Company;

 

(c)                               as promptly as possible following the end of
each Fiscal Year (but no later than March 15 of such Fiscal Year), a copy of the
Company’s Federal, state and local (if any) returns of income for said Fiscal
Year, with Schedule K-1 attached to the Federal return, prepared by the
Company’s accountants, together with a statement of such accountants showing the
amount of Profits, Losses, capital gain and other items allocable to each Member
for Federal, state and local income tax purposes;

 

(d)                              from time to time and with reasonable
promptness, such further information in respect of the business, affairs and
financial condition of the Company as any of the Members may reasonably request;
and

 

(e)                               within twenty (20) days following the end of
each calendar quarter (a) a statement of the actual expenses incurred, to date
for said calendar year by the Company and (b) a summary of projected
distributions to the Members in accordance with Section 8 of this Agreement
during the then current calendar quarter.

 

12.3                    Audited Financial Statements.

 

(a)                               If requested by any Member, the Company shall
cause audited financial statements of the Company to be prepared, including,
without limitation, financial statements in compliance with any or all
requirements of (i) Rule 3-05 and Rule 3-09 of Regulation S-X of the Securities
and Exchange Commission; (ii) any other rule issued by the Securities and
Exchange Commission and applicable to CWI or Carey Watermark Investors
Incorporated; and (iii) any registration statement, report or disclosure
statement filed with the Securities and Exchange Commission by, or on behalf of,
a Member, in each instance prepared by an accounting firm selected by CWI,
within sixty (60) days after Managing Member’s receipt of written request
therefor (“Audited Financial Request”).  Such audited statements shall be at the
end of the applicable Fiscal Year, prepared in accordance with the Uniform
System (or as otherwise determined by CWI) and in accordance with all Applicable
Laws of the United States and otherwise in conformance with the Loan Documents
in which the Company is a borrower thereto; provided, that in the event of any
conflict between the terms of this Section 12.3 and the Loan Documents, the Loan
Documents shall control.  Such audited financial statements shall contain a
statement of member equity, a balance sheet as of the end of the Fiscal Year,
statements of Profit and

 

43

 

Loss and cash flow, a statement of changes in the Capital Accounts and a
statement of changes in financial position for the Fiscal Year then ended, and
which shall be accompanied by a management letter from the accountant with
respect to internal controls of the Company.

 

(b)                              The Company shall bear the cost of all
audit(s).

 

(c)                               The Members acknowledge that CWI, on behalf of
the Company and its Members, as applicable, has commenced an initial audit
pursuant to Rule 3-05 of Regulation S-X of the Securities and Exchange
Commission prior to the Effective Date and notwithstanding anything to the
contrary set forth herein, such costs and expenses in connection with such audit
shall be a cost of the Company.

 

(d)                              The Members agree that CWI shall have the
right, in lieu of any Audited Financial Request, to undertake alternative
actions that will satisfy any legal or regulatory requirements of a REIT and the
Company shall bear the actual out of pocket cost thereof without any profit and
in no event in excess of the amount that audited financial statements would have
cost.

 

12.4                    Tax Returns; Tax Elections.

 

(a)                               The Members hereby designate CWI as tax
matters partner (the “Tax Matters Partner”) as defined in Section 6231(a)(7) of
the Code, and the Members will take such actions as may be necessary,
appropriate, or convenient to effect the designation of such Tax Matters
Partner.  The Tax Matters Partner and the other Members shall use their
reasonable best efforts to comply with the responsibilities outlined in this
section and in Section 6231 of the Code (including any Regulations promulgated
thereunder).  The Tax Matters Partner shall promptly furnish the Internal
Revenue Service with information, if any, sufficient to cause FHR to be treated
as a “notice partner” as defined in Section 6231(a)(8) of the Code.  The Tax
Matters Partner shall not bind FHR to a closing agreement or settlement
agreement without FHR’s prior written consent.  The Tax Matters Partner shall
keep FHR reasonably informed as to the status of any audit of the Company’s tax
affairs and as to the status of any other tax proceedings involving the
Company.  The Tax Matters Partner shall use its reasonable best efforts to cause
to be prepared and shall timely file all Company Tax Returns, shall use its
reasonable best efforts to cause the TRS SUB (whether via Managing Member or the
Operator) to prepare and timely file all TRS SUB Tax Returns and shall furnish
copies thereof to the Members promptly after the filing thereof.  CWI shall
cause each of the Company and the TRS SUB to retain a certified public
accountant to prepare such Tax Returns and filings and shall provide drafts of
any tax returns of the Company and any Schedule K-1s (or state equivalent) to
the Members at least ten (10) days before filing for the Member’s review,
comments and approval.  The Tax Matters Partner shall file all certificates,
notices, statements or other instruments required by law on behalf of the
Company and shall cause the TRS SUB to file the same, including all Federal,
state and local Tax Returns; provided, however, that the Members (and their
accounting firms) shall have the right to review and provide reasonable comments
to any such Tax Returns, and the Tax Matters Partner shall consider such
comments in good faith, prior to causing such returns to be filed; provided,
further, that if the Tax Matters Partner does not accept the proposed changes
after good faith discussions, the Members may report inconsistently with the Tax
Returns prepared by The Tax Matters Partner so long as such Member discloses
such inconsistent position with the Tax Matters Partner before filing such
inconsistent Tax Return.

 

(b)                              Tax Reporting of Transactions Contemplated by
Purchase Agreement.  For all tax purposes, the Company and the Members (and
their Affiliates) shall treat the transactions contemplated by the Purchase
Agreement as a fully taxable sale of the Property by Seller to the Company.  The
Company, the Members (and their Affiliates) shall not take any position for tax
purposes (whether on a tax return or report, or in a tax audit or proceeding, or
otherwise) inconsistent with the foregoing.

 

44

 

12.5                    Bank Accounts.

 

(a)                               Each Member shall have fiduciary
responsibility for the safekeeping and use of all funds of the Company in its
immediate possession or control.

 

(b)                              The funds of the Company shall not be
commingled with the funds of any other Person.  In addition, Managing Member
shall not employ, or permit any other Person to employ, such funds in any manner
except for the benefit of the Company.  Managing Member shall not use or permit
any other Person to use an account that contains funds of the Company as any
central disbursal account for other assets.

 

(c)                               The bank accounts of the Company shall be
maintained in such banking institutions as are approved by the Members (which
approval shall not be unreasonably withheld, conditioned or delayed) and
withdrawals shall be made only in the regular course of Company business and as
otherwise authorized in this Agreement on such signature or signatures as the
Members may determine.

 

(d)                              All funds of the Company shall be invested in
accordance with the then applicable Approved Company Budget.

 

12.6                    Insurance.  The Company shall, and shall cause the TRS
SUB to, obtain and maintain in full force and effect throughout the term of this
Agreement insurance (i) of the types, coverages and amounts set forth on
EXHIBIT “F”; (ii) as may be prudent to carry on account of the activities of the
Company and TRS SUB from time to time, and which other owners of comparable
business operations obtain; and (iii) as may be required under any Loan
Documents or other instruments to which the Company and/or the TRS SUB is a
party.  Managing Member shall obtain and maintain all such insurance on behalf,
and at the expense of, the Company and the TRS SUB, as applicable.  Managing
Member shall supply copies of each of the insurance policies obtained under this
Section 12.6 to the Company and the Members forthwith upon receipt of the same
and of each insurance certificate and premium receipt forthwith upon receiving
the same.

 

12.7                    Accountants.  CWI shall select the accountants for the
Company provided that any such accounting firm is a nationally recognized
accounting firm among the 10 largest accounting firms in the United States.

 

13.                            ADJUSTMENT OF BASIS ELECTION.  In the event of a
Transfer of any Membership Interest in the Company, or in the event of a
distribution of the property of the Company to any Member hereto, the Company
shall file an election, in accordance with Section 754 of the Code and
applicable Treasury Regulations at the request of any Member, to cause the basis
of the Company’s property to be adjusted for Federal income tax purposes, as
provided in Sections 734, 743 and 754 of the Code.

 

14.                            WAIVER OF ACTION FOR PARTITION.  Each of the
Members hereby irrevocably waives, during the term of the Company, any right
such Member may have to maintain any action for partition with respect to any
property of the Company.

 

15.                            AMENDMENTS.  Amendments to this Agreement are a
Member Decision and may be made only if approved in writing by the Members.

 

16.                            EQUITABLE RELIEF.  The rights granted to the
parties hereunder are of a special and unique kind and character, and if there
is a breach by any party of any material provision of this Agreement, the other
parties would not have an adequate remedy at law.  Therefore, the rights of the

 

45

 

parties under this Agreement may be enforced by equitable relief as is provided
under the laws of the State of California.

 

17.                            NOTICES.  Any and all notices, approvals,
requests, consents, waivers, demands or other communications permitted or
required to be made under this Agreement shall be in writing, signed by the
party giving such notice, request, consent, waiver or demand and shall be
delivered (i) personally; (ii) by reputable overnight delivery service; (iii) by
registered or certified mail, return receipt requested; or (iv) by facsimile
with time- and date-stamped confirmation of receipt (provided, however, that a
copy of such notice shall be mailed in accordance with the foregoing
clause (ii) promptly after the transmission of such facsimile).  All such
notices, requests, consents, waivers or demands shall be deemed delivered, as
applicable:

 

(a)                               on the first (1st) business day on or after
the date of the personal delivery;

 

(b)                              on the first (1st) business day on or after the
date of the signed receipt for certified or registered mail;

 

(c)                               on the next business day for overnight
delivery service; or

 

(d)                              on the first (1st) business day on or after the
date of receipt for facsimile.

 

Notices directed to a party shall be delivered to the parties at the address or
facsimile number as set forth below, or at such other address or facsimile
number as may be specified by written notice given in conformity with the terms
of this Section 17:

 

If to FHR or the Company, then to:

 

Fairmont Hotels & Resorts (Maryland) LLC

5 Indian Head Avenue

Indian Head, Maryland 200640

Facsimile No.: (416) 874-2853

Attn.: General Counsel

 

with copies to:

 

Fairmont Hotels Inc.

RBC Centre

155 Wellington Street West

Suite 3300

Toronto, Ontario M5V 0C3

Facsimile No.: (416) 874-2853

Attn: General Counsel

 

And an additional copy to:

 

Goodwin Procter LLP

Exchange Place

Boston, MA 02109

 

46

 

Attention: Christopher B. Barker

Facsimile No.: (617) 227-8591

 

If to CWI, then to:

 

c/o Carey Watermark Investors Incorporated

272 E. Deerpath Road, Suite 320,

Lake Forest, IL 60045

Attention: Michael Medzigian

Telephone No.: 847.482.8600

Email: medzigian@watermarkcap.com

 

with a copy to:

 

Paul Hastings LLP

515 S. Flower Street, 25th Floor

Los Angeles, CA 90071

Attention: Rick S. Kirkbride

Telephone No.: 213.683.6261

Email: rickkirkbride@paulhastings.com

 

Any counsel designated above or any replacement counsel which may be designated
by CWI or FHR by written notice to the other Member is hereby authorized to give
notices hereunder on behalf of its client.

 

18.                            LEGAL REPRESENTATION.

 

18.1                    EACH MEMBER REPRESENTS AND WARRANTS THAT SUCH MEMBER HAS
BEEN ADVISED THAT SUCH MEMBER MAY BE REPRESENTED BY COUNSEL OF SUCH MEMBER’S OWN
CHOOSING IN THE PREPARATION AND ANALYSIS OF THIS AGREEMENT AND EACH MEMBER HAS
CONSENTED TO THE JOINT REPRESENTATION BY COUNSEL FOR ALL MEMBERS IN THE
PREPARATION OF THIS AGREEMENT.  EACH MEMBER HAS READ THIS AGREEMENT WITH CARE
AND BELIEVES THAT SUCH MEMBER IS FULLY AWARE OF AND UNDERSTANDS THE CONTENTS
THEREOF AND THEIR LEGAL EFFECT.

 

18.2                    Each Member acknowledges that Paul Hastings LLP (the
“CWI Law Firm”), represented CWI and/or their Affiliates (collectively, the “CWI
Parties”) in the negotiation of this Agreement.  Each Member acknowledges and
agrees that while it may benefit derivatively from the CWI Law Firm’s
representation of the Company at the request thereof or any Member (with respect
to which all parties hereto hereby expressly consent thereto), it is intended
that the CWI Law Firm not be conflicted from representing the CWI Parties in
connection with any dispute that may arise between the CWI Parties or any other
Member (or its Affiliates), and each Member hereby waive any conflict of
interest that such representation presents.  In addition, and each Member, on
behalf of itself and the owner of any direct or indirect interest in such
Member, waives any conflict regarding the CWI Law Firm’s past or future
representation of the CWI Parties, and hereby consents to and acknowledges that
the CWI Law Firm will in the future represent the CWI Parties, including,
without limitation, in connection with any representation which may present a
potential or real conflict of interest with each other Member and/or the
owner(s) of any direct or indirect interest in such other Member(s).  The
foregoing shall not, however,

 

47

 

limit or affect the obligations of the CWI Law Firm to keep all attorney/client
communications confidential or otherwise to limit any other ethical obligations
of the CWI Law Firm to their clients.

 

18.3                    Each Member also acknowledges that Goodwin Procter LLP
(the “FHR Law Firm”), represented FHR and/or their Affiliates (collectively, the
“FHR Parties”) in the negotiation of this Agreement.  Each Member acknowledges
and agrees that while it may benefit derivatively from the FHR Law Firm’s
representation of the Company at the request thereof or any Member (with respect
to which all parties hereto hereby expressly consent thereto), it is intended
that the FHR Law Firm not be conflicted from representing the FHR Parties in
connection with any dispute that may arise between the FHR Parties or any other
Member (or its Affiliates), and each Member hereby waive any conflict of
interest that such representation presents.  In addition, and each Member, on
behalf of itself and the owner of any direct or indirect interest in such
Member, waives any conflict regarding the FHR Law Firm’s past or future
representation of the FHR Parties, and hereby consents to and acknowledges that
the FHR Law Firm will in the future represent the FHR Parties, including,
without limitation, in connection with any representation which may present a
potential or real conflict of interest with each other Member and/or the
owner(s) of any direct or indirect interest in such other Member(s).  The
foregoing shall not, however, limit or affect the obligations of the FHR Law
Firm to keep all attorney/client communications confidential or otherwise to
limit any other ethical obligations of the FHR Law Firm to their clients.

 

19.                            ATTORNEYS’ FEES.  Should any party hereto
institute any action or proceeding at law or in equity to enforce any provision
hereof, including an action for declaratory relief or for damages by reason of
an alleged breach of any provision of this Agreement, or otherwise in connection
with this Agreement, or any provision hereof, the prevailing party shall be
entitled to recover from the losing party or parties reasonable attorneys’ fees
and costs for services rendered to the prevailing party in such action or
proceeding.

 

20.                            INDEPENDENT ACTIVITIES OF MEMBERS.

 

20.1                    The Members and their respective Affiliates may engage
or invest in, independently or with others, any business activity of any type or
description, including, without limitation, those that might be the same as or
similar to the Company’s Business and that might be in direct or indirect
competition with the Company.

 

20.2                    The Members or Managing Member may engage in or possess
an interest in other business ventures of every nature and description,
independently or with others, including, but not limited to, the ownership,
financing, leasing, operation, management, syndication, brokerage and
development of real property or any other investment asset or venture, and
neither the Company nor the other Members shall have, and each of them hereby
expressly waives, relinquishes and renounces any right by virtue of this
Agreement in and to such independent ventures or to the income or profits
derived therefrom.

 

20.3                    Notwithstanding anything to the contrary contained in
this Agreement or this Section 20.3, if a Member or any Affiliate of a Member is
approached by the owner or any representative of the owner of the Sonoma Golf
Club regarding a possible sale of, or otherwise given an opportunity to purchase
all or any interest in, the Sonoma Golf Club (and its related facilities and
businesses) (a “Golf Club Acquisition”), then such Member shall immediately
present such opportunity to the other Members as a corporate opportunity of the
Company.  Notwithstanding any Member (or any of its Affiliates) being presented
with a Golf Club Acquisition opportunity, such opportunity shall be exclusive to
the Company unless such opportunity has been rejected by one of the Members on
behalf of the Company (which either Member shall have the right to do in its
sole and absolute discretion).  Upon such presentation of the Golf Club
Acquisition opportunity to the Company, Members shall use good faith efforts to
discuss and

 

48

 

mutually approve the Golf Club Acquisition and thereafter negotiate a purchase
and sale agreement with the owner of the Sonoma Golf Club and proceed to the
closing thereof.  In the event (a) one of the Members, on behalf of the Company,
rejects the opportunity to purchase the Golf Club Acquisition, (b) the Members,
on behalf of the Company, fail to unanimously approve the Golf Club Acquisition
within thirty (30) days after being presented the opportunity as provided above,
or (c) if the Company fails to successfully negotiate and close the purchase
thereof within three (3) months (any such time period set forth in clauses (a),
(b) or (c) above, to the extent applicable, is referred to herein as the
“Exclusivity Period”) after being presented the opportunity as provided above,
then in the event of clause (a) above, the Member in favor of the Golf Club
Acquisition shall have the right to acquire the Sonoma Golf Club independent
from and outside of such Member’s interest in the Company (and, for avoidance of
doubt, a Member who rejected the Golf Club Acquisition may not independently
acquire the Sonoma Golf Club) or in the event of clause (b) above, the Member
who approved the Golf Club Acquisition shall have the right to acquire the
Sonoma Golf Club independent from and outside of such Member’s interest in the
Company (and, for avoidance of doubt, a Member who failed to approve the Golf
Club Acquisition may not independently acquire the Sonoma Golf Club), or in the
event of clause (c) above, all Members who approved the Golf Club Acquisition
shall have the right to acquire the Sonoma Golf Club independent from and
outside of such Member’s interest in the Company (and, for the avoidance of
doubt, a Member who did not approve the Golf Club Acquisition may not
independently acquire the Sonoma Golf Club (subject to the terms proviso
immediately following this clause); provided, however, that if the Member
pursuing the Golf Club Acquisition pursuant to this sentence has not entered
into a binding purchase and sale agreement to acquire the Sonoma Golf Club prior
to the first anniversary of the expiration of the Exclusivity Period, then such
Member shall have no right to further pursue any such Golf Club Acquisition
without first bringing the opportunity to the Company for consideration in
accordance with the terms of this Section 20.3.

 

21.                            INVESTMENT REPRESENTATIONS OF THE MEMBERS.  Each
Member, by executing this Agreement, hereby acknowledges, covenants, represents
and warrants to the Company and the other Members, and each of them, as follows:

 

(a)                               That such Member is over the age of
twenty-one (21) years, experienced in business affairs, and capable of
evaluating the merits and risks of this investment;

 

(b)                              Each Member realizes that such Member’s
investment in the Company involves an element of substantial uncertainty as to
the potential for profitability of the business of the Company; and

 

(c)                               Each Member understands that the Membership
Interest in the Company have not been registered with the Securities and
Exchange Commission or qualified with the Delaware Division of Corporations or
any other state securities agency, in reliance upon exemptions therefrom which
are predicated, in part, upon the information previously provided by each of the
Members and the following representations:

 

(i)                        Each Member understands that in addition to the
restrictions imposed by applicable Federal and state securities laws, the right
to Transfer any Membership Interest is restricted by the terms of this
Agreement.  No Transfer will be permitted if, in the opinion of counsel for the
Company, such Transfer will violate applicable Federal or state securities
laws.  The burden and expense will be borne by a Member to satisfy the Company
that all of the conditions of transfer have been satisfied.  In addition, even
if a Member meets all of these requirements, there is no present market for any
Membership Interest and none is anticipated to develop;

 

49

 

(ii)                    Each Member represents that such Member is acquiring
such Member’s Membership Interest in the Company for investment purposes and for
such Member’s own account, with no present intention of dividing the same with
others, or reselling or otherwise distributing such Membership Interest, and
such Member will not sell or otherwise dispose of such Membership Interest in
violation of the Securities Act of 1933, as amended, the Delaware General
Corporation Law, or regulations promulgated thereunder;

 

(iii)                Each Member represents that such Member is capable of
bearing the economic risk of such Member’s investment in the Company (meaning
such Member can afford either a complete loss of the investment or hold it
indefinitely without materially adversely affecting such Member’s standard of
living, causing financial difficulties, or impairing such Member’s ability to
meet current needs and possible personal contingencies);

 

(iv)                Each Member represents that such Member either has a
preexisting personal or business relationship with the other Member, or by
reason of such Member’s business or financial experience or the business or
financial experience of such Member’s professional advisors who are unaffiliated
with and not compensated by the other Member, or any Affiliate or any selling
agent of the other Member, has the capacity to protect such Member’s Membership
Interest in the Company;

 

(v)                    That prior to the execution hereof, each of the Members
had knowledge that the Persons listed upon EXHIBIT “A” would become members of
the Company upon their execution hereof, and each desires and consents to the
association of each of them as Members of this Company; and

 

(vi)                Each Member recognizes that the Company is an existing
entity and therefore has a financial and operating history.  For this reason and
others, purchase of a Membership Interest as an investment involves special
risks.

 

22.                            MISCELLANEOUS.

 

22.1                    Governing Law.  This Agreement shall, in all respects,
be governed by the laws of the State of Delaware applicable to agreements
executed and to be wholly performed within the State of Delaware.

 

22.2                    Severability.  Nothing contained herein shall be
construed so as to require the commission of any act contrary to law, and
wherever there is any conflict between any provisions contained herein and any
present or future statute, law, ordinance or regulation contrary to which the
parties have no legal right to contract, the latter shall prevail; but the
provision of this Agreement which is affected shall be curtailed and limited
only to the extent necessary to bring it within the requirements of the law.

 

22.3                    Further Assurances.  Each of the parties hereto shall
execute and deliver any and all additional papers, documents and other
assurances, and shall do any and all acts and things reasonably necessary in
connection with the performance of their obligations hereunder to carry out the
intent of the parties hereto.

 

22.4                    Successors and Assigns.  All of the terms and provisions
contained herein shall inure to the benefit of and shall be binding upon the
parties hereto and their respective heirs, legal representatives, successors and
assigns.

 

50

 

22.5                    Number and Gender.  In this Agreement, the masculine,
feminine or neuter gender, and the singular or plural number, shall each be
deemed to include the others whenever the context so requires.

 

22.6                    Entire Agreement.  This Agreement constitutes the entire
understanding and agreement of the parties with respect to its subject matter
and any and all prior agreements, understandings or representations with respect
to its subject matter are hereby terminated and canceled in their entirety and
are of no further force or effect.

 

22.7                    Waiver.  A waiver of any provision of this Agreement
shall be valid only if it is in writing and signed by the party making the
waiver.  No waiver by any party hereto of any breach of this Agreement or any
provision hereof shall be deemed to be a waiver of any preceding or succeeding
breach of the same or any other provision hereof.

 

22.8                    Counterparts.  This Agreement may be executed in one or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

 

22.9                  Interpretation.  The captions appearing at the
commencement of the sections hereof are descriptive only and for convenience in
reference.

 

22.10            Parties in Interest.  Nothing in this Agreement, whether
express or implied, is intended to confer any rights or remedies under or by
reason of this Agreement on any Persons other than the Members and their
respective successors and assigns, nor is anything in this Agreement intended to
relieve or discharge the obligation or liability of any third persons to any
party to this Agreement, nor shall any provision give any third Person any right
of subrogation or action over or against any party to this Agreement.

 

22.11            No Authority.  No Member shall have the duty to inquire into
the authority of another Member to act.  All of the Members shall be presumed to
have the authority to execute this Agreement and to carry out any acts
contemplated hereby.

 

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

 

51

 

IN WITNESS WHEREOF, the parties have executed this Limited Liability Company
Operating Agreement on the date first hereinabove mentioned.

 

 

CWI:

 

 

 

CWI SONOMA HOTEL, LLC,
a Delaware limited liability company

 

 

 

By:

/s/ Michael Medzigian

 

 

Name: Michael Medzigian

 

 

Title:   CEO and President

 

 

 

 

 

 

FHR:

 

 

 

FAIRMONT HOTELS & RESORTS (MARYLAND),
LLC, a Maryland limited liability company

 

 

 

By:

/s/ Iain Morton

 

 

 

 

Name:

Iain Morton

 

 

 

Title:

Senior Vice President, General Counsel, Americas

 

 

EXHIBIT “A”

 

MEMBER INFORMATION

 

Name and Address of Member

 

Initial Capital
Account Balance

 

Initial
Participation Percentage

 

 

 

 

 

CWI Sonoma Hotel, LLC
c/o Carey Watermark Investors Incorporated
272 E. Deerpath Road, Suite 320,
Lake Forest, IL 60045
Attention: Michael Medzigian

 

$38,408,344

 

75%

 

 

 

 

 

Fairmont Hotels & Resorts (Maryland) LLC
5 Indian Head Avenue
Indian Head, Maryland 20640
Attention: General Counsel

 

$12,802,781

 

25%

 

 

 

 

 

 

 

 

 

TOTAL

 

$51,211,125

 

 100%

 

A-1

 

EXHIBIT “B”

 

LEGAL DESCRIPTION

 

 

LAND

 

Lands of Rahn Sonoma Ltd., a Florida Limited Partnership, as described by deeds
recorded under Document Nos. 85028082, 85028086, 1995 0028016, 1996 0055903,
1996 0082929, Sonoma County Records and Lands of Castner et ux as described by
deed recorded under Document No. 82003769, Sonoma County Records, more
particularly described as follows:

 

PARCEL ONE

 

Beginning at the point of intersection of the Westerly line of that right of way
recorded in Book 76 of Official Records, page 232, Sonoma County Records, with
the Southerly line of the Boyes Springs Hotel Grounds, as shown on a map
recorded in Book 33 of Maps, page 19, Sonoma County Records; thence along the
Westerly line of the right of way South 14º48’27” East 147.95 feet to the
Southeasterly corner of the Lands of Rahn Sonoma Ltd. as described by deed
recorded under Document No. 1995-0028016, Sonoma County Records; thence the
following courses along the boundary lines of last said lands of Rahn
Sonoma, Ltd., South 76º03’15” West 333.70 feet, South 61º02’15” West 97.30 feet,
North 28º59’45” West 30.00 feet, North 61º02’15” East 80.00 feet, North
26º56’45” West 162.32 feet and North 43º38’15” East 54.94 feet to the Southerly
boundary line of said Boyes Springs Hotel Grounds; thence South 86º33’30” West
123.30 feet to the Southeasterly corner of Lot 26 of said Boyes Springs Hotel
Grounds; thence along the Easterly line of said Lot 26, North 3º26’50” West
106.00 feet to the Northeasterly corner of said Lot 26; thence North 87º01’10”
East 36.00 feet to a point on the Easterly line of Greger Street (formerly
Willow Way); thence North 3º52’10” West 740.35 feet along the Easterly line of
Greger Street to a curve to the right with a radius of 20.00 feet; thence along
said curve through a central angle of 115º30’ for a distance of 40.32 feet along
the Southerly right of way from Greger Street to Boyes Boulevard; thence the
following courses along the Southwesterly and Southerly right of way line of
Boyes Boulevard South 68º19’30” East 76.71 feet, South 52º19’00” East 123.44
feet, South 43º08’10” East 189.00 feet, South 23º56’00” East 47.45 feet, South
21º33’50” East 0.73 feet and North 67º18’00” East 153.82 feet to the
Northeasterly corner of Lot 15 of said Boyes Springs Hotel Grounds and the
Westerly right of way line of State Highway 12; thence South 22º28’10” East
464.41 feet, along said Westerly right of way line and the Easterly boundary
line of Lots 6, 7 and Lots 9 to 15 of said Boyes Springs Hotel Grounds, to the
Southeasterly corner of said Lot 6; thence South 67º18’00” West 212.62 feet
along the Southerly line of Lots 6 and 8 of said Boyes Springs Hotel Grounds and
the Westerly projection thereof to the Westerly line of the Northwestern Pacific
Railroad right of way; thence South 14º42’00” East 103.55 feet, along said right
of way to the point of beginning.

 

Basis of Bearings, Record of Survey filed in Book 303 of Maps, page 21, Sonoma
County Records.

 

PARCEL TWO

 

B-1

 

Parcel Two, as shown on Parcel Map No. 7054, filed August 36, 1980 in Book 310
of Maps, page 47, Sonoma County Records, more particularly described as follows:

 

Beginning at the Westerly most corner of said Parcel Two; thence the following
courses along the boundary lines of said Parcel Two North 56º03’00” East 125.20
feet, South 34º04’00” East 131.00 feet, South 55º56’00” West 25.20 feet, South
34º04’00” East 1.52, South 56º03’07” West 63.10 feet, North 55º19’45” West
101.74 feet and North 34º04’00” West 37.83 feet to the point of beginning.

 

Basis of Bearings, Record of Survey filed in Book 303 of Maps, page 21, Sonoma
County Records.

 

PARCEL THREE

 

Lots 1, 2, 3 and 4, Plat of Woodleaf Park, filed September 4, 1909 in Book 23 of
Maps, page 19, Sonoma County Records, more particularly described as follows:

 

Beginning at the Southwesterly corner of said Lot 1, thence North 22º41’45” West
183.00 feet along the Westerly boundary line of said Lots 1, 2, 3 and 4 to the
Northwesterly corner of said Lot 4; thence North 67º33’15” East 130.00 feet to
the Northeasterly corner of said Lot 4; thence South 22º41’45” East 183.00 feet
along the Easterly boundary line of said Lots 1, 2, 3 and 4 to the Southeasterly
corner of said Lot 1; thence South 67º33’15” West 130.00 feet to the point of
beginning.

 

Basis of Bearings, Record of Survey filed in Book 303 of Maps, page 21, Sonoma
County Records.

 

Excepting therefrom all that portion as described in the Deed to the State of
California recorded June 15, 2000 under Instrument No. 2000 59559, Sonoma County
Records.

 

PARCEL FOUR

 

All those certain Easement Rights as set forth in Document entitled “Grant of
Appurtenant Easement and Easement in Gross”, recorded September 3, 2002, as
Instrument No. 2002-132191, Sonoma County Records.

 

EXHIBIT “C”

 

SPECIAL ALLOCATIONS

 

All capitalized terms used in this Exhibit shall have the meanings as set forth
in the Agreement.

 

To conform further the allocation provisions of this Agreement to the
Regulations, the Members agree that the following special allocations
rules shall apply; provided, however, that in respect of any particular
allocation the following rules shall supersede the rules otherwise applicable
under Section 7 of the Agreement and this Exhibit only to the extent necessary
to cause such allocation to be respected under the Regulations and the remaining
portion of such allocation shall not be affected.  In the event of any
inconsistency between the Regulations and the provisions of the following
Sections (a) through (j), the Regulations shall govern.

 

(a)                               Loss Limitation Rule.  If any allocation of
Losses for any Fiscal Year otherwise provided in Section 7 of the Agreement or
this Exhibit would (if made) cause or increase a deficit balance in the Capital
Account of a Member (determined for this purpose by taking into account such
Member’s share of Distributable Cash from Operations and/or Capital Transaction
Proceeds in respect of such Fiscal Year and all other adjustments for such
Fiscal Year otherwise required under this Agreement) that exceeds the amount
such Member is obligated to restore to the Company pursuant to Regulations
Section 1.704-1(b)(2)(ii)(c) or 1.704-1(b)(2)(ii)(d) or is deemed obligated to
restore pursuant to the penultimate sentences of Regulations Sections
1.704-2(g)(1) and 1.704-2(i)(5) less the amount of the items described in
Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) and (6), the amount of Losses
otherwise allocable to such Member shall be reduced by the minimum amount
necessary to eliminate such deficit.  Any amount of an allocation denied to a
Member under the first sentence of this paragraph (a) of this Exhibit shall be
reallocated to the Members whose allocations of Losses for such year (determined
under this Exhibit) are not affected by this paragraph, such reallocation to be
made pro rata in accordance with each Member’s Participation Percentage.

 

(b)                              Minimum Gain Chargeback.  If during any Fiscal
Year there is a net decrease in Company Minimum Gain (as determined under
Regulations Sections 1.704-2(b)(2)), then items of income and gain of the
Company shall be allocated to each Member, for such Fiscal Year (and, if
necessary, subsequent periods) in proportion to, and to the extent of, an amount
equal to each Member’s share of the net decrease in the Company Minimum Gain
during such Fiscal Year in accordance with Regulations Section 1.704-2(g)(2). 
This paragraph (b) is intended to comply with the minimum gain chargeback
requirement in such Regulations Sections and shall be interpreted consistently
therewith.

 

(c)                               Qualified Income Offset.  If a Member
unexpectedly receives an adjustment, allocation or distribution described in
Regulations Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6) (modified, as
appropriate, by Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5)), which
causes or increases a negative balance in such Member’s Capital Account
(determined for this purpose with the adjustments required under Section (a)),
such Member will, to the extent required by Regulations
Section 1.704-1(b)(2)(ii)(d), be specially allocated an amount of gross income
and/or gain (consisting of a pro rata portion of each item of Company income and
gain

 

C-1

 

for such Fiscal Year) sufficient to eliminate such negative balance as quickly
as possible; provided, however, that an allocation pursuant to this paragraph
(c) shall be made if and only to the extent that such Member would have a
deficit in its Capital Account (determined as aforesaid) after all other
allocations provided for in Section 7 of the Agreement and this Exhibit have
been tentatively made as if this paragraph (c) were not in this Agreement.

 

(d)                             Nonrecourse Deductions.  Nonrecourse Deductions
for any Fiscal Year of the Company shall be specially allocated to the Members
in proportion to their respective Participation Percentage and otherwise as
provided in Regulations Section 1.704-2(e).

 

(e)                               Member Nonrecourse Deductions.  The Members
Nonrecourse Deductions for any Fiscal Year of the Company shall be specially
allocated to the Member that bears the economic risk of loss for such deductions
within the meaning of Regulations Sections 1.704-2(i)(1) and 1.752-2 and
otherwise as provided in Regulations Section 1.704-2(i).

 

(f)                                Member Nonrecourse Debt Minimum Gain
Chargeback.  If during any Fiscal Year of the Company there is a net decrease in
Member Nonrecourse Debt Minimum Gain, each Member with a share of such Member
Nonrecourse Debt Minimum Gain shall be allocated items of Company income and
gain for such Fiscal Year (and, if necessary, subsequent periods) in proportion
to, and to the extent of, an amount equal to such Member’s share of the net
decrease in the Member Nonrecourse Debt Minimum Gain determined in a manner
consistent with the provisions of Regulations Section 1.704-2(i)(4).  This
paragraph (f) is intended to comply with the “partner nonrecourse debt minimum
gain” chargeback requirement of such Regulations Sections and shall be
interpreted consistently therewith.

 

(g)                              Excess Nonrecourse Liabilities.  Solely for
purposes of determining a Member’s proportionate share of the “excess
nonrecourse liabilities” of the Company within the meaning of Regulations
Section 1.752-3(a)(3), each Member’s interest in Company profits shall be such
Member’s Participation Percentage.

 

(h)                              Sections 732(d), 734(b) and
743(b) Adjustments.  To the extent that an adjustment to the adjusted tax basis
of any Company asset pursuant to Section 732(d), 734(b) or 743(b) of the Code is
required under Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into
account in adjusting Capital Accounts, the amount of such adjustment to the
Capital Accounts shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment decreases such
basis) and such gain or loss shall be allocated to the Members in a manner that
achieves the adjustments to their respective Capital Accounts that are required
to be made pursuant to such Section of the Regulations.

 

(i)                                  Curative Allocations.  The Special
Allocations are intended to comply with the requirements of the Regulations.  It
is the intent of the Members that, to the extent possible, all Special
Allocations shall be offset with other Special Allocations or with Special
Allocations of other items of Company income, gain, loss or deduction pursuant
to this Section (i).  Therefore, notwithstanding any other provision of
Section 7 of the Agreement and this Exhibit (other than the Special
Allocations), Managing Member, with the Members’ approval, shall make such
offsetting allocations of Company income, gain, loss or deduction in whatever
manner it reasonably determines is appropriate so that, after such offsetting
allocations are made,

 

C-2

 

each Member’s Capital Account balance is, to the extent possible, equal to the
Capital Account balance which such Member would have had if the Special
Allocations were not part of this Agreement and all Company items were allocated
pursuant to Section 7 of the Agreement.  In exercising its discretion under this
paragraph (i), Managing Member shall take into account future Special
Allocations under paragraphs (b) and (f) of this Exhibit that, although not yet
made, are likely to offset other Special Allocations previously made under
paragraph (d) and (e) of this Exhibit.

 

(j)                                  Change in Regulations.  If any of the
specific Regulations upon which the Special Allocations provided for in this
Exhibit are based are hereafter changed or if new Regulations in the opinion of
the reputable tax counsel retained by the Company make it necessary to revise
the foregoing special allocation rules or provide further special allocation
rules in order to avoid a significant risk that a material portion of any
allocation of Profits, Losses or other tax attributes otherwise provided for in
Section 7 of the Agreement would be altered as a result of a challenge thereto
by the IRS, the Members agree to make such reasonable amendments to this
Agreement as, in the opinion of such counsel, are necessary or desirable, taking
into account the interests of the Members as a whole and all other relevant
factors, to avoid or reduce significantly such risk to the extent possible
without materially affecting the amounts distributable to any Member pursuant to
this Agreement.

 

C-3

 

EXHIBIT “D”

 

INITIAL BUDGET

 

 

 

(see attached)

 

D-1

 

EXHIBIT “E”

 

INTENTIONALLY OMITTED

 

E-1

 

EXHIBIT “F”

 

INSURANCE REQUIREMENTS

 

 

1)                                   Commercial General Liability (CGL): 
$1,000,000 per occurrence for property damage and bodily and property damage
with a general aggregate limit not less than $2,000,000. The CGL insurance
policy must include coverage for the following:

 

a)            Coverage for Property Damage and Bodily Injury

 

b)           Personal and advertising injury

 

c)            Employees as Insureds

 

d)           Liquor Liability in an amount no less than $1,000,000 per
occurrence

 

e)         Contractual Liability insuring liability arising out of oral,
written, or incidental agreement, including, but not limited to, hold harmless
agreements and the Indemnity Agreement

 

f)             Premises/Operation insuring liability arising out of work
performed on the premises

 

g)            Products and Completed Operations

 

h)           Pollution liability - For claims arising out of heat, smoke or
fumes from a hostile fire, or smoke, fumes, vapor or soot that is used to heat,
cool or dehumidify the building or equipment that is used to heat or cool.

 

i)               Terrorism is included

 

There shall be an Additional Insured Endorsement on this policy (including
coverage for premises and products/completed operations) naming Carey Watermark
Investors, Incorporated and any other entities as may be deemed appropriate. 
There shall also be a Waiver of Subrogation in favor of Carey Watermark
Investors, Incorporated and other entities as may be deemed appropriate.

 

2)                                   Comprehensive Auto Insurance in an amount
no less than $1,000,000 Combined Single Limit and shall include the following:

 

a)            Coverage Symbol 1 - Any Auto

b)           Garagekeepers’ Liability, if the hotel’s operations include parking
operations, with a limit no less than $1,000,000 to cover the average value of
all automobiles that are in the hotel’s care custody and control at any one
time.

 

3)                                   Umbrella/Excess liability insurance in an
amount not less than $49,000,000 per occurrence.

 

4)                                   Commercial Property Insurance in an amount
equal to the full replacement cost of the real and personal property.  Coverage
shall be written on a Special Causes of Loss form with a deductible less

 

F-1

 

than $50,000 unless a high hazard deductible is applicable, etc. California
Earthquake.  Policy will include the following coverages:

 

a)            Agreed Amount Endorsement, if no endorsement confirmation that no
coinsurance or margin clause will apply.

 

b)           Named Windstorm, Applicable if located in a High Hazard County

 

c)            Earthquake including sprinkler leakage - Applicable if located in
an earthquake zone as required by mortgagee

 

d)           Law & Ordinance Coverage to an amount reasonable for the venue

 

e)            Flood, Applicable if located in a high hazard zone.

 

f)             Business Income for loss of profits and necessary continuing
expenses – 12 Months including a 12 month extended period of indemnity.

 

g)            Boiler and Machinery – Stand-alone policy may apply

 

h)           Builder’s Risk including “soft costs”, replacement cost of work
performed and equipment supplies and materials furnished. – Applicable during
construction or during a substantial alteration (General Contractor’s
Stand-alone policy may apply)

 

i)               Terrorism – Stand-alone policy may apply

 

j)               Mold Clean-up if result of a covered cause of loss

 

 

5)                                   Pollution Legal Liability – Including
coverage for Mold with the following limits:

 

a)  Coverage A:

 

$1,000,000 Each Claim – First Party Cleanup

b)  Coverage B:

 

$1,000,000 Each Claim – Third Party Liability

 

 

$5,000,000 Policy Aggregate

 

6)                                   All Property and Liability Insurers shall
be authorized to do business in the state where the property is located.  The
carriers must have a current AM Best Rating of at least A-VII and/or a claims
paying rating of A- or better as rated by Standard and Poor’s Rating Service.

 

7)                                   Such other insurance as may be customarily
carried by other hotel operators on hotels similar to this, or as deemed
necessary by mandate of loan agreement or other exposures as they may become
apparent.

 

F-2

 

EXHIBIT “F” – MANAGER’S INSURANCE

 

1)                                   Workers’ compensation insurance in
statutory amounts on all employees of the Hotel and employer’s liability limits
of $1,000,000.

 

2)                                   Employment Practices Liability:

 

a)      Per Claim Limit:

 

$1,000,000

 

b)    Annual Aggregate

 

$1,000,000

 

 

Employment Practices Liability shall include third party liability for the
benefit of Carey Watermark Investors, Inc., Owner, and Operator.

 

3)                                 Commercial Crime Insurance coverages and
limits of insurance (per occurrence) with the following limits:

 

a) Employee Dishonesty:

 

$500,000

 

b) Forgery & Alteration:

 

$  50,000

 

c) Money & Securities:

 

$  50,000

 

d) Robbery & Safe Burglary of Property other than money and securities

 

$  50,000

 

e) Computer Fraud

 

$  50,000

 

 

Employee Dishonesty shall include an endorsement for third party liability for
the benefit of Carey Watermark Investors, Inc., Owner, and Operator.

 

4)                                   Innkeepers and Safe Deposit Box Liability
insuring loss or damage to guests’ property (up to statutory requirements). 
This can be satisfied by any combination of CGL or Crime Coverage.

 

F-3

 

 

EXHIBIT “G”

 

RESTRICTED TERRITORY

 

 

 

[Map To Be Attached]

 

G-1

 

EXHIBIT “H”

 

TERMS OF BUYOUT PSA

 

The following provisions from the Purchase Agreement (as defined the Recitals)
shall be deleted in their entirety from the Buyout PSA.  As noted in
Section 10.4 of the Agreement, if there is an inconsistency with the terms of
the Agreement and the Purchase Agreement, the terms of the Agreement prevail and
the Buyout PSA will be modified to reflect the terms of the Agreement.

 

Article/Section

 

 

Action/Comment

1.1

 

 

Definitions to be modified as applicable

3.1

 

 

Purchase Price & Deposit to be modified as appropriate;

Article 4

 

 

Entirety of Article IV to be deleted, other than Section 4.5 regarding
confidentiality; in addition, to the extent required by applicable law,
Section 4.9 will be included in the Buyout PSA

Section 5.1

 

 

Definition of knowledge parties for Seller and Purchaser to be modified to
reflect appropriate persons in each of Seller’s and Purchaser’s employ at the
time of the Buyout PSA

 

All of Seller’s Representations and Warranties to be deleted other than the
representations and warranties set forth in Sections 5.1(a), (b), (j), (l) and
(m)

Section 5.3

 

 

Modify by deleting any cap on the Sale Member’s liability for any breach of
representation or warranty. Modify cap on liability for breach of covenant or
with respect to the Sale Member’s indemnification obligations to an amount equal
to three percent (3%) of the purchase price; and modify “basket” to 0.08% of the
purchase price.

Sections 6.2 and 6.3

 

 

Modify closing deliveries as appropriate to reflect structure of the sale

Section 6.5

 

 

Closing Expenses to be allocated as set forth in the Agreement and as follows:

 

Buying Member:

·                 All of Buying Member’s costs in connection with acquisition,
including, attorney’s fees

 

·                 All lenders’ fees, costs and expenses related to the any
acquisition financing or any other financing to be obtained or assumed by the
Buying Member

 

·                 The cost of any ATLA survey and any updates thereto

 

Sale Member:

·                 Its share (based on its Participation Percentage) of the
Company’s costs in connection with the sale, including, attorney’s fees

 

Section 7.1

 

 

Modify to provide that Buying Member is to purchase, in addition to the purchase
price, all unopened (and not in circulation), consumables, including, individual
bottles of wine and liquor and all retail inventories, calculated in a manner
that the Sale Member receives a credit in an amount equal to the then (at the
time of closing) net current

 

H-1

 

 

 

 

assets of the TRS SUB and the Company less the then (at the time of closing) net
current liabilities of the TRS SUB and the Company

Section 8.1

 

 

Modify Section 8.1(b) by deleting all references to any financing or other
documents

Section 9.1

 

 

Modify Section 9.1(b) by deleting all references to any financing or other
documents

Modify Section 9.1(c) such that if any representation of the Sale Member is no
longer true and correct at closing then the Buying Member shall have the right
to terminate the Buyout PSA, receive a return of its deposit and if applicable
(as a result of a default by Selling) such additional remedies as set forth in
Section 15.2

 

Delete Sections 9.1(d), (f) and (h)

Section 10.1(e)

 

 

Delete this section in its entirety

Section 10.2

 

 

Delete this section in its entirety

Section 11.1

 

 

Modify material threshold dollar amount to 3.5% of the Purchase Price under the
Buyout PSA

Section 13

 

 

Modify as appropriate

Section 14.1(a)

 

 

Delete in its entirety

Section 14.1(g)

 

 

Delete in its entirety

Section 15.1

 

 

Modify to reflect terms of Section 10.4/10.5 of the Agreement and delete all
provisions relating to parties rights and obligations with respect to New
Management Agreement, NewCo Operating Agreement and Acquisition Financing (as
such terms were defined in the Purchase Agreement).

Section 15.2

 

 

Modify to reflect terms of Section 10.4/10.5 of the Agreement and delete all
provisions relating to parties rights and obligations with respect to New
Management Agreement, NewCo Operating Agreement and Acquisition Financing (as
such terms were defined in the Purchase Agreement). Modify reimbursement for out
of pocket costs to an amount equal to 0.30% of the Purchase Price.

Section 17.4

 

 

Delete and replace with an assignment provision consistent with terms of
Section 10.4/10.5 of the Agreement

Joinder

 

 

Modify to incorporate a joinder from a creditworthy affiliate of the Sale Member

 

H-2

 

EXHIBIT “I”

 

2012-2015 CAPITAL PLAN

 

 

(see attached)

 

I-1

 

SCHEDULE 1

 

SOURCES & USES

 

(see attached)

 

Schedule 1-1