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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-K

     [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
               OF THE SECURITIES EXCHANGE ACT OF 1934

                                      OR

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

For the Fiscal Year Ended December 31, 1999         Commission File No. 0-25087

                              HOST MARRIOTT, L.P.

               Delaware                              52-2095412
       (State of Incorporation)            (I.R.S. Employer Identification
                                                       Number)

                              10400 Fernwood Road
                           Bethesda, Maryland 20817
                                (301) 380-9000

          Securities registered pursuant to Section 12(g) of the Act:

                              Title of each class
                        -------------------------------
  Units of limited partnership interest (284,890,708 units outstanding as of
                                March 1, 2000)

   Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (ii) has been subject to such filing
requirements for the past 90 days.  Yes [X] No [_]

                      Document Incorporated by Reference
Notice of 2000 Annual Meeting and Proxy Statement of Host Marriott Corporation

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                          FORWARD-LOOKING STATEMENTS

   This annual report on Form 10-K and the information incorporated by
reference into this annual report include forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. We intend to identify forward-looking
statements in this prospectus and the information incorporated by reference
into this prospectus by using words or phrases such as "anticipate",
"believe", "estimate", "expect", "intend", "may be", "objective", "plan",
"predict", "project" and "will be" and similar words or phrases, or the
negative thereof.

   These forward-looking statements are subject to numerous assumptions, risks
and uncertainties. Factors which may cause our actual results, performance or
achievements to be materially different from any future results, performance
or achievements expressed or implied by us in those statements include, among
others, the following:

  . national and local economic and business conditions that will affect,
    among other things, demand for products and services at our hotels and
    other properties, the level of room rates and occupancy that can be
    achieved by such properties and the availability and terms of financing;

  . our ability to maintain the properties in a first-class manner, including
    meeting capital expenditure requirements;

  . our ability to compete effectively in areas such as access, location,
    quality of accommodations and room rate structures;

  . our ability to acquire or develop additional properties and the risk that
    potential acquisitions or developments may not perform in accordance with
    expectations;

  . our degree of leverage which may affect our ability to obtain financing
    in the future or compliance with current debt covenants;

  . changes in travel patterns, taxes and government regulations which
    influence or determine wages, prices, construction procedures and costs;

  . government approvals, actions and initiatives including the need for
    compliance with environmental and safety requirements, and change in laws
    and regulations or the interpretation thereof;

  . the effects of tax legislative action, including specified provisions of
    the Work Incentives Improvement Act of 1999 as enacted on December 17,
    1999 (we refer to this as the "REIT Modernization Act");

  . our ability to satisfy complex rules in order to qualify as a REIT for
    federal income tax purposes and in order for the operating partnership to
    qualify as a partnership for federal income tax purposes, and our ability
    to operate effectively within the limitations imposed by these rules; and

  . other factors discussed below under the heading "Risk Factors" and in
    other filings with the Securities and Exchange Commission.

   Although we believe the expectations reflected in our forward-looking
statements are based upon reasonable assumptions, we can give no assurance
that we will attain these expectations or that any deviations will not be
material. We disclaim any obligations or undertaking to publicly release any
updates or revisions to any forward-looking statement contained in this annual
report on Form 10-K and the information incorporated by reference herein to
reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.

Items 1 & 2. Business and Properties

   Host Marriott, L.P., or the "Operating Partnership," is a limited
partnership owning full service hotel properties as part of an umbrella
partnership real estate investment trust with Host Marriott Corporation ("Host
REIT") as our sole general partner. We were formed as a Delaware limited
partnership in 1998 as a wholly owned subsidiary of Host Marriott Corporation,
a Delaware corporation, in connection with its efforts to

                                       1
<PAGE>

reorganize its business operations to qualify as a REIT for federal income tax
purposes. As part of this reorganization, which we refer to as the REIT
conversion, and which is described below in more detail, on December 29, 1998,
Host Marriott Corporation and various of its subsidiaries contributed to us
substantially all of their assets and we assumed substantially all of their
liabilities. As a result, we have succeeded to the hotel ownership business
formerly conducted by Host Marriott. Throughout this Form 10-K, activities
prior to December 29, 1998 represent the activities of our predecessor, Host
Marriott Corporation and its subsidiaries.

   We and Host REIT were formed primarily to continue, in an UPREIT structure,
the full service hotel ownership business formerly conducted by Host Marriott
and its subsidiaries. Our primary business objective is to provide superior
total returns to our unitholders through a combination of distributions and
appreciation in unit price. In addition, we endeavor to:

  . achieve long-term sustainable growth in "Funds from Operations" per unit,
    as defined by the National Association of Real Estate Investment Trusts,
    (i.e., net income computed in accordance with generally accepted
    accounting principles, excluding gains or losses from debt restructuring,
    sales of properties and other non-recurring items, plus real estate-
    related depreciation and amortization, and after adjustments for
    unconsolidated partnerships and joint ventures), and cash flow;

  . increase asset values by selectively improving and expanding our hotels;

  . acquire additional existing and newly developed upscale and luxury full
    service hotels in targeted markets, primarily focusing on downtown hotels
    in core business districts in major metropolitan markets and select
    airport and resort/convention locations;

  . develop and construct upscale and luxury full service hotels; and

  . opportunistically pursue other real estate investments.

   As of March 1, 2000, we own 122 hotels, containing approximately 58,000
rooms, located throughout the United States and Canada. The hotels are
generally operated under the Marriott, Ritz-Carlton, Four Seasons, Swissotel
and Hyatt brand names. These brand names are among the most respected and
widely recognized brand names in the lodging industry. The hotels are leased
by us and our subsidiaries to lessees, including Crestline and its
subsidiaries, and are managed on behalf of the lessees by subsidiaries of
Marriott International and other companies.

   Host REIT is our sole general partner and manages all aspects of our
business. This includes decisions with respect to:

  . sales and purchases of hotels;

  . the financing of the hotels;

  . the leasing of the hotels; and

  . capital expenditures for the hotels subject to the terms of the leases
    and the management agreements.

   Host REIT, our sole general partner, is managed by a Board of Directors and
has no employees who are not also our employees.

   Under current federal income tax law, REITs are restricted in their ability
to derive revenues directly from the operations of hotels. Therefore we lease
virtually all of our hotels to the lessees. See "--The Leases" below. The
lessees pay rent to us and our subsidiaries generally equal to a specified
minimum rent plus percentage rent based on specified percentages of different
categories of aggregate sales at the relevant hotels to the extent such
"percentage rent" would exceed the minimum rent. The lessees operate the
hotels pursuant to management agreements with the managers. Each of the
management agreements provides for certain base and incentive management fees,
plus reimbursement of specific costs, as further described below. See "--The
Management Agreements". Such fees and cost reimbursements are the obligation
of the lessees and not ours or our subsidiaries (although the obligation to
pay such fees could adversely affect the ability of the lessees to pay the
required rent to us or our subsidiaries).

                                       2
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   The leases, through the sales percentage rent provisions, are designed to
allow us to participate in any growth above specified levels in room sales at
the hotels, which management expects can be achieved through increases in room
rates and occupancy levels. Although the economic trends affecting the hotel
industry will be the major factor in generating growth in lease revenues, the
abilities of the lessees and the managers will also have a material impact on
future sales growth.

   In addition to external growth generated by new acquisitions, we intend to
carefully and periodically review our portfolio to identify opportunities to
selectively enhance existing assets to improve operating performance through
major capital improvements. Our leases and those of our subsidiaries do
provide us with the right to approve and finance major capital improvements.

   Our primary focus is on the acquisition of upscale and luxury full service
hotel lodging properties. Since the beginning of 1994 through the date hereof,
we have acquired, directly and through our respective subsidiaries, 106 full
service hotels containing more than 48,000 rooms for an aggregate purchase
price of approximately $6.2 billion. Based upon data provided by Smith Travel
Research, we believe that our full service hotels outperform the industry's
average occupancy rate by a significant margin and averaged 77.7% occupancy
for both fiscal years 1999 and 1998 compared to a 69.1% and 69.4% average
occupancy for our competitive set for 1999 and 1998, respectively. "Our
competitive set" refers to hotels in the upscale and luxury full service
segment of the lodging industry, the segment which is most representative of
our full service hotels, and consists of Crowne Plaza; Doubletree; Hyatt;
Hilton; Radisson; Renaissance; Sheraton; Swissotel; Westin and Wyndham.

   The relatively high occupancy rates of our hotels, along with increased
demand for full-service hotel rooms, have allowed the managers of our hotels
to increase average daily room rates by selectively raising room rates and by
minimizing, in specified cases, discounted group business, replacing it with
higher-rate group and transient business. As a result, on a comparable basis,
room revenue per available room ("REVPAR") for our full-service properties
increased approximately 4.1% in 1999.

 Business Strategy

   Our primary business objective is to provide superior total returns to our
unitholders through a combination of distributions and appreciation in unit
price. In order to achieve this objective and, therefore, enhance our equity
value, we employ the following strategies:

  . Acquire existing upscale and luxury full-service hotels as market
    conditions permit, including Marriott and Ritz-Carlton hotels and other
    hotels operated by leading management companies such as Four Seasons and
    Hyatt which satisfy our investment criteria, which acquisitions may be
    completed through various means including by entering into joint ventures
    when we believe our return on investment will be maximized by doing so;

  . Develop selected new upscale and luxury full-service hotels, including
    Marriott and Ritz-Carlton hotels and other hotels operated by leading
    management companies such as Four Seasons and Hyatt which satisfy our
    investment criteria and employ transaction structures which mitigate our
    risk;

  . Participate in the sales growth for each of our hotels through leases
    which provide for the payment of rent based upon the lessees' gross hotel
    sales in excess of specified thresholds; and

  . Enhance existing hotel operations by completing selective capital
    improvements which are designed to increase gross hotel sales or improve
    operations.

   Although competition for acquisitions has remained steady and the
availability of suitable acquisition candidates has been limited recently due
to market conditions, we believe that the upscale and luxury full-service
segments of the market will continue to offer opportunities over time to
acquire assets at attractive multiples of cash flow and at discounts to
replacement value, including underperforming hotels which can be improved by
conversion to the Marriott, Ritz-Carlton, or other high quality brands. Since
the beginning of fiscal year 1994, we have acquired 14 hotels which we have
converted to the Marriott brand. The vast majority of our hotel

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properties are operated under the Marriott and Ritz-Carlton brands. In
general, based upon data provided by Smith Travel Research, we believe that
the Marriott brand has consistently outperformed the industry. Demonstrating
the strength of the Marriott brand name, our comparable properties, consisting
of 84 hotels, owned directly or indirectly by us for the entire 1999 and 1998
fiscal years, respectively, excluding two properties where significant
expansion at the hotels substantially affected operations during the two
fiscal years, generated a 31% and 29% REVPAR premium over our competitive set
for fiscal years 1999 and 1998, respectively. Accordingly, management
anticipates that any additional full service properties acquired in the future
and converted from other brands to the Marriott brand should achieve higher
occupancy rates and average room rates than has previously been the case for
those properties as the properties begin to benefit from Marriott's brand name
recognition, reservation system and group sales organization.

   We have increased our pool of potential acquisition candidates by
considering acquisitions of select non-Marriott and non-Ritz-Carlton hotels
that offer long-term growth potential and are consistent with the overall
quality of our current portfolio. We will focus on upscale and luxury full
service properties in difficult to duplicate locations with high costs to
prospective competitors, such as hotels located in downtown, airport and
resort/convention locations, which are operated by quality managers. For
example, in December 1998, we consummated the Blackstone acquisition for
approximately $1.55 billion in a combination of cash, operating partnership
units, assumed debt and other consideration. The Blackstone acquisition
consisted of two Ritz-Carlton, two Four Seasons, one Grand Hyatt, three Hyatt
Regency and four Swissotel properties. In the future, we may also consider
opportunities to improve property operations by converting certain existing or
acquired hotels to these and other quality national brands. For example, we
are currently converting the resort property in Singer Island, Florida to the
Hilton brand, which is expected to be completed April 1, 2000.

   We believe we are well qualified to pursue our acquisition and development
strategy. Management has extensive experience in acquiring and financing
lodging properties and believes its industry knowledge, relationships and
access to market information provide a competitive advantage with respect to
identifying, evaluating and acquiring hotel assets.

   In September 1999, the board of directors of Host REIT approved the
repurchase, from time to time on the open market and/or in privately
negotiated transactions, of up to 22 million of the outstanding shares of Host
Marriott Corporation common stock, operating partnership units or Convertible
Preferred Securities convertible into a like number of shares of common stock.
Based on current market conditions, the Board of Host REIT believes that the
stock repurchase program reflects the best return on investment for its
shareholders. However, the Board of Host REIT will continue to look at
strategic acquisitions as well as evaluate Host REIT's stock repurchase
program based on changes in market conditions and Host REIT's stock price. The
stock repurchases may be financed through cash from operations, assets sales,
and other financing activities, such as the issuances of the Class A and Class
B Preferred Stock made during 1999. Such repurchases will be made at
management's discretion, subject to market conditions and may be suspended at
any time at our discretion. Through March 8, 2000, we spent, in the aggregate,
approximately $149 million to repurchase 10.5 million shares of common stock,
and 1.5 million shares of the Convertible Preferred Securities and 0.6 million
operating partnership units for a total reduction of 16.0 million equivalent
common shares on a fully diluted basis.

The REIT Conversion

   During 1998, Host Marriott and its subsidiaries and affiliates consummated
a series of transactions intended to enable Host REIT to qualify as a REIT for
federal income tax purposes. As a result of these transactions, the hotels
formerly owned by Host Marriott and its subsidiaries and other affiliates are
now owned by us and our subsidiaries; we and our subsidiaries lease
substantially all of these hotels to Crestline Capital Corporation, and
Marriott International and other hotel operators conduct the day-to-day
management of the hotels pursuant to management agreements with Crestline.
Host REIT has elected to be treated as a REIT for federal income tax purposes
effective January 1, 1999. The important transactions comprising the REIT
conversion are summarized below.


                                       4
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   During 1998, Host Marriott reorganized its hotels and certain other assets
so that they were owned by us and our subsidiaries. Host Marriott and its
subsidiaries received a number of OP Units equal to the number of then
outstanding shares of Host Marriott common stock, and we and our subsidiaries
assumed substantially all of the liabilities of Host Marriott and its
subsidiaries. As a result of this reorganization and the related transactions
described below, Host REIT is our sole general partner and, as of December 31,
1999, held approximately 78% of our outstanding OP Units. We and our
subsidiaries conduct our hotel ownership business. OP Units owned by holders
other than Host REIT are redeemable at the option of the holder, generally
commencing one year after the issuance of their OP Units. Upon redemption of
an OP Unit, the holder would receive from us cash in an amount equal to the
market value of one share of Host REIT common stock. However, in lieu of a
cash redemption by us, Host REIT has the right to acquire any OP Unit offered
for redemption directly from the holder thereof in exchange for either one
share of Host REIT common stock or cash in an amount equal to the market value
of one share of Host REIT common stock.

   In connection with the REIT conversion, two taxable corporations were
formed in which we own approximately 95% of the economic interest but none of
the voting interest. We refer to these two subsidiaries as the non-controlled
subsidiaries. The non-controlled subsidiaries hold various assets and related
liabilities which were originally contributed by Host Marriott and its
subsidiaries to us, but whose direct ownership by Host REIT, us or our other
subsidiaries generally would jeopardize Host REIT's status as a REIT and our
status as a partnership for federal income tax purposes. These assets
primarily consist of interests in partnerships or other interests in three
hotels which are not leased, and specified furniture, fixtures and equipment--
also known as FF&E--used in the hotels. We have no control over the operation
or management of the hotels or other assets owned by the non-controlled
subsidiaries. The Host Marriott Statutory Employee/Charitable Trust acquired
all of the voting common stock of each non-controlled subsidiary,
representing, in each case, the remaining approximately 5% of the total
economic interests in each non-controlled subsidiary. The beneficiaries of the
Employee/Charitable Trust are a trust formed for the benefit of specified
employees of ours and the J. Willard and Alice S. Marriott Foundation.

   Under current federal income tax law, REITs are restricted in their ability
to derive revenues from the operation of hotels. However, they can derive
rental income by leasing hotels. Therefore, we and our subsidiaries lease
virtually all of our hotel properties to subsidiaries of Crestline. The
lessees pay rent to us and our subsidiaries generally equal to the greater of
(1) a specified minimum rent or (2) rent based on specified percentages of
different categories of aggregate sales at the relevant hotels. Generally,
there is a separate lessee for each hotel property or there is a separate
lessee for each group of hotel properties that has separate mortgage financing
or has owners in addition to us and our wholly owned subsidiaries. The lessees
for all but four of our hotels are wholly owned subsidiaries of Crestline,
formed as limited liability companies, each of whose purpose is limited to
acting as lessee under an applicable lease. The limited liability company
agreement for each Crestline lessee provides that Crestline will have full
control over the management of the business of the lessee, except with respect
to certain decisions for which the consent of other members or the hotel
manager will be required. In addition, although the Crestline lessees are
wholly owned subsidiaries of Crestline, Marriott International or its
appropriate subsidiary has a non-economic voting interest on specific matters
pertaining to hotels which are managed by Marriott International or its
subsidiaries.

   The leases, through the sales percentage rent provisions, are designed to
allow us and our subsidiaries to participate in any growth above specified
levels in room sales at the hotels, which management expects can be achieved
through increases in room rates and occupancy levels. Although the economic
trends affecting the hotel industry will be the major factor in generating
growth in lease revenues, the abilities of the lessees and the managers will
also have a material impact on future sales growth. Our leases have remaining
terms ranging from two to ten years, subject to earlier termination upon the
occurrence of contingencies that are specified in the leases. We may elect to
purchase each of the leases either upon a sale of a hotel to a third party or
upon the occurrence of certain changes in tax law such as those changes
included in the REIT Modernization Act (discussed below), for a purchase price
equal to the fair rental value of the lessee's interest in the lease over the
remaining term of such lease. Effective November 15, 1999, we amended
substantially all of our leases with Crestline to give Crestline the right to
renew each of these leases for up to four additional terms of seven years

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each at a fair rental value, to be determined either by agreement between us
and Crestline or through arbitration at the time the renewal option is
exercised. Crestline is under no obligation to exercise these renewal options,
and we have the right to terminate the renewal options during time periods
specified in the amendments. In addition, the amendments provide that the fair
rental value payable by us to Crestline in connection with the purchase of a
lease as described above does not include any amounts relating to any renewal
period. Therefore, the fair rental value of a lease after expiration of the
initial term for such lease would be zero. We have received notices of
termination from Crestline on five leases, with effective dates ranging from
March through June 2000. We are currently negotiating for replacement leases
on those five hotels. We expect to be able to obtain replacement leases for
these leases without material impact to our future operations.

   In December 1999, the REIT Modernization Act was passed, with most
provisions effective for taxable years beginning after December 31, 2000. The
REIT Modernization Act significantly amends the REIT laws applicable to us.
Among the changes, the REIT Modernization Act allows a REIT to own up to 100%
of the voting stock of one or more taxable REIT subsidiaries subject to
limitations on the value of those subsidiaries. The rents received from such
subsidiaries would not be disqualified from being "rents from real property"
by reason of our ownership interest in the subsidiary so long as the property
is operated on behalf of the taxable REIT subsidiary by an "eligible
independent contractor." This would enable us to lease our hotels to wholly
owned taxable subsidiaries if the hotels are operated and managed on behalf of
such subsidiaries by an independent third party. Under the REIT Modernization
Act, taxable REIT subsidiaries will be subject to federal income tax. Under
the law that is currently in effect, a REIT must satisfy three tests relating
to the nature of its assets:

  . First, at least 75% of its total assets must be represented by real
    estate assets.

  . Second, no more than 25% of its total assets may be represented by
    securities other than those in the 75% asset class.

  . Third, within the 25% assets class, the value of any one issuer's
    securities may not exceed 5% of its total assets and a REIT may not own
    more than 10% of any one issuer's outstanding voting securities.

   The third test will be modified in two respects by the REIT Modernization
Act:

  . The 10% voting securities test will be expanded so that we will be
    prohibited from owning more than 10% of the value of the outstanding
    securities of any one issuer.

  . We will be permitted to own securities of a subsidiary that exceed the 5%
    value test and the new 10% vote or value test if the subsidiary elects to
    be a taxable REIT subsidiary.

   Under the REIT Modernization Act, beginning January 1, 2001, we could lease
our hotels to a subsidiary of ours that is a taxable corporation and that
elects to be treated as a "taxable REIT subsidiary". In addition, as a result
of passage of the REIT Modernization Act, we have the right to purchase the
leases from Crestline on or after January 1, 2001, for a price equal to their
fair market value, the amount of which could be significant. We intend to
evaluate our options regarding the Crestline leases and have not yet made a
decision whether or not to purchase those leases. Finally, under the REIT
Modernization Act, beginning January 1, 2001, the aggregate fair market values
of real and personal property will be used for purposes of determining rents
from real property. Currently, the aggregate tax bases of both real and
personal property are used for this purpose.

Recent Acquisitions, Developments and Dispositions

   The pace of acquisitions changed significantly in 1999 from the previous
years. After three years of acquisitions numbering 36, 17, and 24 full service
hotels for 1998, 1997 and 1996, respectively, our 1999 acquisitions were
limited to completing the acquisition of minority interests in two hotels
where we had previously acquired the controlling interests for a total
consideration of approximately $14 million.

   During the year we focused our energies on increasing the value of our
current portfolio with selective investments and expansions and new
developments. We plan to selectively develop new upscale and luxury full-
service hotels in major urban markets and convention/resort locations with
strong growth prospects, unique or difficult to duplicate sites, high costs
for prospective competitors for other new hotels and limited new supply.

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We intend to target only development projects that show promise of providing
financial returns that represent a premium to acquisitions. The largest of
these projects was the construction of a 717-room full service hotel adjacent
to the convention center in downtown Tampa, Florida. The hotel, which was
completed and opened for business on February 19, 2000, includes 45,000 square
feet of meeting space, three restaurants and a 30-slip marina as well as many
other amenities. The total development cost of the property was approximately
$104 million, excluding a $16 million tax subsidy provided by the City of
Tampa.

   In April 1999 we completed a 210-room expansion of the Philadelphia
Marriott, through a renovation of the historic railroad headhouse building
adjacent to the property. The project was completed for approximately $37
million including a $7 million tax financing provided by the City of
Philadelphia.

   Two other development projects, the Orlando World Center Marriott expansion
and the Ritz-Carlton Naples, Florida spa addition are currently under
construction. At the Orlando Marriott, the addition of a 500-room tower and
15,000 square feet of meeting space will make it the single largest hotel in
the Marriott system at 2000 rooms. We also have renovated the golf course,
added a multi-level parking deck, and upgraded and expanded several
restaurants. The Orlando World Center Marriott construction is expected to be
completed by mid-year 2000. Also under development is a 50,000 square-foot
world-class spa at the Ritz-Carlton, Naples. This project is anticipated to be
completed late in 2000. The combined approximate development cost for these
expansions is estimated to be approximately $107 million.

   Two longer-term development projects are currently active with anticipated
completion in 2001. These are the construction of a 295-room Ritz-Carlton,
Naples, Golf Lodge and the 200-room expansion of the Memphis Marriott. The
construction of the Naples Golf Lodge near the 463-room Ritz-Carlton, Naples,
as well as the construction of the new spa facility, will offer travelers an
unmatched resort experience. The Memphis Marriott, which is located adjacent
to a newly-renovated convention center, was converted to the Marriott brand
upon acquisition in 1998 to capitalize on Marriott's brand name recognition.
The combined development costs for these projects is estimated to be
approximately $90 million.

   In addition to investments in partnerships in which we already held
minority interests, we have been successful in adding properties to our
portfolio through partnership arrangements with either the seller of the
property or the incoming managers (typically Marriott International or a
Marriott franchisee). We have the financial flexibility and, due to our
existing private partnership investment portfolio, the administrative
infrastructure in place to accommodate such arrangements. We view this ability
as a competitive advantage and expect to enter into similar arrangements to
acquire additional properties in the future.

   Through subsidiaries we currently own four Canadian properties, containing
1,636 rooms. We intend to continue to evaluate other attractive acquisition
opportunities in Canada. In addition, the overbuilding and economic stress
experienced in some European and Pacific Rim countries may eventually lead to
additional international acquisition opportunities. We will acquire
international properties only when we believe such acquisitions achieve
satisfactory returns after adjustments for currency and country risks.

   We will also consider from time to time selling hotels that do not fit our
long-term strategy, or otherwise meet our ongoing investment criteria,
including for example, hotels in some suburban locations, hotels that require
significant capital improvement and other underperforming assets. The net
proceeds from these sales will be reinvested in upscale and luxury hotels more
consistent with our strategy or otherwise applied in a manner consistent with
our investment strategy (which may include the purchase of securities) at the
time of sale. The following table summarizes our 1999 dispositions (in
millions, except number of rooms):

<TABLE>
<CAPTION>
                                                                      Pre-tax
                                                          Total     Gain (Loss)
Property                           Location     Rooms Consideration on Disposal
--------                           --------     ----- ------------- -----------
<S>                            <C>              <C>   <C>           <C>
Minneapolis/Bloomington
 Marriott....................  Bloomington, MN   479      $ 35          $10
Saddle Brook Marriott........  Saddle Brook, NJ  221        15            3
Marriott's Grand Hotel Resort
 and Golf Club...............  Point Clear, AL   306        28           (2)
The Ritz-Carlton, Boston.....  Boston, MA        275       119           15
El Paso Marriott.............  El Paso, TX       296         1           (2)
</TABLE>


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Hotel Lodging Industry

   The lodging industry posted moderate gains in 1999 as higher average daily
rates drove strong increases in REVPAR, which measures daily room revenues
generated on a per room basis. This does not include food and beverage or
other ancillary revenues generated by the property. REVPAR represents the
product of the average daily room rate charged and the average daily occupancy
achieved. Previously, the lodging industry benefited from a favorable
supply/demand imbalance, driven in part by low construction levels combined
with high gross domestic product, or GDP, growth. However, during 1999 and
1998 supply moderately outpaced demand, causing slight declines in occupancy
rates in the upscale and luxury full-service segments in which we operate.
According to Smith Travel Research, supply in our brands' competitive set
increased 1.6% for the year ended December 31, 1999 while demand in our
competitive set increased 1.1%. At the same time, occupancy declined 0.4% in
our competitive set for the year ended December 31, 1999.

   These declines in occupancy, however, were more than offset by increases in
average daily rates which generated higher REVPAR. According to Smith Travel
Research, for the year ended December 31, 1999, average daily rate and REVPAR
for our competitive set increased 3.0% and 2.5%, respectively, versus the same
period one year ago. The current amount of excess supply in the upper-upscale
and luxury portions of the full-service segment of the lodging industry is
relatively moderate and much less severe than that experienced in the lodging
industry in other occupancy downturns, in part because of the greater
financial discipline and lending practices imposed by financial institutions
and public markets today relative to those during the late 1980's.

   Our hotels have outperformed both the industry as a whole and the upper-
upscale and luxury full service segment. The attractive locations of our
hotels, the limited availability of new building sites for new construction of
competing full service hotels, and the lack of availability of financing for
new full service hotels has allowed us to maintain REVPAR and average daily
rate premiums over our competitors in these service segments. For our
comparable hotels, average daily rates increased 3.8% in 1999. The increase in
average daily rate helped generate a strong increase in comparable hotel
REVPAR of 4.1% for the same period. Furthermore, because our lodging
operations have a high fixed-cost component, increases in REVPAR generally
yield greater percentage increases in our consolidated earnings before
interest expense, income taxes, depreciation, amortization and other non-cash
items or EBITDA. While we do not benefit directly from increases in EBITDA
levels at our properties due to the structure of our leases, we should benefit
from such increases due to expected higher market valuations of our properties
based on such elevated EBITDA levels.

   We believe that the current environment of excess new supply will most
likely continue over the next twelve to twenty-four months. However, the
relative balance between supply and demand growth may be influenced by a
number of factors including growth of the economy, interest rates, unique
local considerations and the relatively long lead time to develop urban,
convention and resort hotels. We believe that growth in room supply in upscale
and luxury full-service sub-markets in which we operate continue to exceed
room demand growth through the year 2001. There can be no assurance that
growth in supply will moderate or that REVPAR and EBITDA will continue to
improve.

Hotel Lodging Properties

   Our lodging portfolio, as of March 1, 2000, consists of 122 upscale and
luxury full service hotels containing approximately 58,000 rooms. Our hotel
lodging properties represent quality upscale and luxury assets in the full
service segment. All but thirteen of our hotel properties are currently
operated under the Marriott or Ritz-Carlton brand names.

   Our hotels average approximately 474 rooms. Thirteen of our hotels have
more than 750 rooms. Hotel facilities typically include meeting and banquet
facilities, a variety of restaurants and lounges, swimming pools, gift shops
and parking facilities. Our hotels primarily serve business and pleasure
travelers and group meetings at locations in downtown, airport, resort
convention and suburban locations throughout the United States. The

                                       8
<PAGE>

properties are generally well situated in locations where there are
significant barriers to entry by competitors including downtown areas of major
metropolitan cities at airports and resort/convention locations where there
are limited or no development sites. The average age of the properties is 16
years, although many of the properties have had more recent substantial
renovations or major additions.

   To maintain the overall quality of our lodging properties, each property
undergoes refurbishments and capital improvements on a regularly scheduled
basis. Typically, refurbishing has been provided at intervals of five years,
based on an annual review of the condition of each property. For fiscal years
1999, 1998 and 1997 we spent $197 million, $165 million and $129 million,
respectively, on capital improvements to existing properties. As a result of
these expenditures, we expect to maintain high quality rooms at our
properties.

   We continue to benefit from our strategic alliance with Marriott
International. Marriott International serves as the manager for 99 of our 122
hotels and all but 13 are part of Marriott International's full-service hotel
system. The Marriott brand name has consistently delivered occupancy and
REVPAR premiums over other brands. Our properties have reported annual
increases in REVPAR since 1993. Based upon data provided by Smith Travel
Research, our comparable properties have more than a 9 percentage point
occupancy premium and an approximate 31% REVPAR premium over the competitive
set for 1999.

   Comparable properties refer to properties that we owned for the same period
of time in each of the periods covered as adjusted to exclude properties where
significant disruptions to operations occurred due to expansions to the
properties.

   The chart below sets forth performance information for our comparable
properties:

<TABLE>
<CAPTION>
                                                                1999     1998
                                                               -------  -------
   <S>                                                         <C>      <C>
   Comparable Full-Service Hotels(1)
   Number of properties.......................................      84       84
   Number of rooms............................................  40,868   40,868
   Average daily rate......................................... $146.74  $141.41
   Occupancy percentage.......................................    78.5%    78.2%
   REVPAR..................................................... $115.13  $110.57
   REVPAR % change............................................     4.1%     --
</TABLE>
--------
(1) Consists of 84 properties owned, directly or indirectly, by us for the
    entire 1999 and 1998 fiscal years, respectively, after giving effect to
    adjustments to remove two properties where significant expansion at the
    hotels affected operations for the 1999 and 1998 fiscal years. These
    properties, for the respective periods, represent the "comparable
    properties."

   The chart below presents some performance information for our hotels:

<TABLE>
<CAPTION>
                                                    1999(1)   1998       1997
                                                    -------  -------    -------
   <S>                                              <C>      <C>        <C>
   Number of properties............................     121      126(2)      95
   Number of rooms.................................  57,086   58,445(2)  45,718
   Average daily rate.............................. $149.51  $140.36    $133.74
   Occupancy percentage............................    77.7%    77.7%      78.4%
   REVPAR.......................................... $116.13  $109.06    $104.84
</TABLE>
--------
(1) The property statistics and operating results include operations for the
    Minneapolis/Bloomington Marriott, the Saddle Brook Marriott, Marriott's
    Grand Hotel Resort and Golf Club, the Ritz-Carlton, Boston, and the El
    Paso Marriott, which were sold at various times throughout 1999, through
    the date of sale.
(2) Number of properties and rooms is as of December 31, 1998 and includes 25
    properties (9,965 rooms) acquired in that month.

                                       9
<PAGE>

   The following table presents full service hotel information by geographic
region for 1999:

<TABLE>
<CAPTION>
                         As of December 31, 1999  Year Ended December 31, 1999(1)
                         ------------------------ --------------------------------------
                          Number   Average Number  Average       Average
Geographic Region        of Hotels of Guest Rooms Occupancy    Daily Rate     REVPAR
-----------------        --------- -------------- -----------  ------------  -----------
<S>                      <C>       <C>            <C>          <C>           <C>
Atlanta.................     11         486             74.7%   $    148.78  $    111.12
Florida.................     12         531             77.1         149.75       115.51
Mid-Atlantic............     17         364             75.8         132.80       100.69
Midwest.................     14         358             76.6         132.19       101.24
New York................     10         716             84.0         203.16       170.70
Northeast...............     11         390             77.4         140.99       109.07
South Central...........     19         497             76.2         123.25        93.89
Western.................     27         491             78.2         154.26       120.60
                            ---
Average--All regions....    121         472             77.7         149.51       116.13
                            ===
</TABLE>
--------
(1) The property statistics and operating results include operations for the
    Minneapolis/Bloomington Marriott, the Saddle Brook Marriott, Marriott's
    Grand Hotel Resort and Golf Club, the Ritz-Carlton, Boston, and the El
    Paso Marriott, all sold at various times throughout 1999, through the date
    of applicaple sale.

   Prior to 1997, we divested virtually all of our limited-service hotel
properties through the sale and leaseback of 53 Courtyard properties and 18
Residence Inn properties. The Courtyard and Residence Inn properties are
subleased to subsidiaries of Crestline under sublease agreements and are
managed by Marriott International under long-term management agreements.
During 1999, limited-service properties represented less than 1% of our EBITDA
from hotel properties. Lease revenues for the 71 properties that we sub-lease
are reflected in our revenues in 1999, while gross property-level sales were
reflected previous to that.

   The following table sets forth as of March 1, 2000, the location and number
of rooms relating to each of our 122 hotels. All of the properties are leased
to a subsidiary of Crestline and operated under Marriott brands by Marriott
International, unless otherwise indicated.

<TABLE>
<CAPTION>
Location                                                                   Rooms
--------                                                                   -----
<S>                                                                        <C>
Arizona
 Mountain Shadows Resort..................................................   337
 Scottsdale Suites........................................................   251
 The Ritz-Carlton, Phoenix................................................   281
California
 Coronado Island Resort(1)(2).............................................   300
 Costa Mesa Suites........................................................   253
 Desert Springs Resort and Spa............................................   884
 Fullerton(2).............................................................   224
 Hyatt Regency, Burlingame(3).............................................   793
 Manhattan Beach(1)(2)(4)(6)..............................................   380
 Marina Beach(1)(2).......................................................   368
 Newport Beach............................................................   570
 Newport Beach Suites.....................................................   250
 Ontario Airport(4)(6)....................................................   299
 Sacramento Airport(2)(3)(7)..............................................    85
 San Diego Marriott Hotel and Marina(2)(6)................................ 1,355
 San Diego Mission Valley(6)(7)...........................................   350
 San Francisco Airport....................................................   684
 San Francisco Fisherman's Wharf(4).......................................   285
 San Francisco Moscone Center(2).......................................... 1,498
 San Ramon(2).............................................................   368
 Santa Clara(2)...........................................................   754
 The Ritz-Carlton, Marina del Rey(2)......................................   306
 The Ritz-Carlton, San Francisco..........................................   336
 Torrance.................................................................   487
</TABLE>
<TABLE>
<CAPTION>
Location                                                                   Rooms
--------                                                                   -----
<S>                                                                        <C>
Colorado
 Denver Southeast(2)......................................................   595
 Denver Tech Center(1)....................................................   625
 Denver West(2)...........................................................   307
 Marriott's Mountain Resort at Vail(1)....................................   349
Connecticut
 Hartford/Farmington......................................................   380
 Hartford/Rocky Hill(2)...................................................   251
Florida
 Fort Lauderdale Marina(2)................................................   580
 Harbor Beach Resort(2)(5)(6).............................................   624
 Jacksonville(2)(4).......................................................   256
 Miami Airport(2).........................................................   782
 Miami Biscayne Bay(2)....................................................   605
 Orlando World Center..................................................... 1,503
 Palm Beach Gardens(4)....................................................   279
 Singer Island Holiday Inn(3).............................................   222
 Tampa Airport(2).........................................................   295
 Tampa Waterside..........................................................   717
 Tampa Westshore(2).......................................................   309
 The Ritz-Carlton, Amelia Island..........................................   449
 The Ritz-Carlton, Naples.................................................   463
Georgia
 Atlanta Marriott Marquis(6).............................................. 1,671
 Atlanta Midtown Suites(2)................................................   254
 Atlanta qNorcross........................................................   222
</TABLE>

                                      10
<PAGE>

<TABLE>
<CAPTION>
Location                                                                   Rooms
--------                                                                   -----
<S>                                                                        <C>
Georgia (continued)
 Atlanta Northwest........................................................   400
 Atlanta Perimeter(2).....................................................   400
 Four Seasons, Atlanta(3).................................................   246
 Grand Hyatt, Atlanta(3)..................................................   439
 JW Marriott Hotel at Lenox(2)............................................   371
 Swissotel, Atlanta(3)....................................................   348
 The Ritz-Carlton, Atlanta(2).............................................   447
 The Ritz-Carlton, Buckhead...............................................   553
Illinois
 Chicago/Deerfield Suites.................................................   248
 Chicago/Downers Grove Suites.............................................   254
 Chicago/Downtown Courtyard...............................................   334
 Chicago O'Hare(2)........................................................   681
 Chicago O'Hare Suites(2).................................................   256
 Swissotel, Chicago(3)....................................................   630
Indiana
 South Bend(2)............................................................   300
Louisiana
 New Orleans.............................................................. 1,290
Maryland
 Bethesda(2)..............................................................   407
 Gaithersburg/Washingtonian Center........................................   284
Massachusetts
 Boston/Newton............................................................   430
 Hyatt Regency, Cambridge(3)..............................................   469
 Swissotel, Boston(3).....................................................   498
Michigan
 The Ritz-Carlton, Dearborn...............................................   308
 Detroit Livonia..........................................................   224
 Detroit Romulus..........................................................   245
 Detroit Southfield.......................................................   226
Minnesota
 Minneapolis City Center(2)...............................................   583
 Minneapolis Southwest(6)(7)..............................................   320
Missouri
 Kansas City Airport(2)...................................................   382
New Hampshire
 Nashua...................................................................   251
New Jersey
 Hanover..................................................................   353
 Newark Airport(2)........................................................   590
 Park Ridge(2)............................................................   289
New Mexico
 Albuquerque(2)...........................................................   411
New York
 Albany(6)(7).............................................................   359
 New York Marriott Financial Center.......................................   504
 New York Marriott Marquis(2)............................................. 1,919
 Marriott World Trade Center (1)(2).......................................   820
 Swissotel, The Drake(3)..................................................   494
</TABLE>
<TABLE>
<CAPTION>
Location                                                                  Rooms
--------                                                                  ------
<S>                                                                       <C>
North Carolina
 Charlotte Executive Park(4).............................................    298
 Greensboro/Highpoint(2).................................................    299
 Raleigh Crabtree Valley.................................................    375
 Research Triangle Park..................................................    224
Ohio
 Dayton..................................................................    399
Oklahoma
 Oklahoma City...........................................................    354
 Oklahoma City Waterford(1)(4)(6)........................................    197
Oregon
 Portland................................................................    503
Pennsylvania
 Four Seasons, Philadelphia(3)...........................................    365
 Philadelphia Convention Center(2)(6)....................................  1,410
 Philadelphia Airport(2).................................................    419
 Pittsburgh City Center(1)(2)(4)(6)......................................    400
Tennessee
 Memphis(1)(2)...........................................................    403
Texas
 Dallas/Fort Worth Airport...............................................    492
 Dallas Quorum(2)........................................................    547
 Houston Airport(2)......................................................    566
 Houston Medical Center(2)...............................................    386
 JW Marriott Houston.....................................................    503
 Plaza San Antonio(1)(2)(4)..............................................    252
 San Antonio Rivercenter(2)..............................................    999
 San Antonio Riverwalk(2)................................................    500
Utah
 Salt Lake City(2).......................................................    510
Virginia
 Dulles Airport(2).......................................................    370
 Fairview Park(2)........................................................    395
 Hyatt Regency, Reston(3)................................................    514
 Key Bridge(2)...........................................................    588
 Norfolk Waterside(2)(4).................................................    404
 Pentagon City Residence Inn.............................................    300
 The Ritz-Carlton, Tysons Corner(2)......................................    397
 Washington Dulles Suites................................................    254
 Westfields(1)...........................................................    335
 Williamsburg(1).........................................................    295
Washington
 Seattle SeaTac Airport..................................................    459
Washington, DC
 Washington Metro Center(1)..............................................    456
Canada
 Calgary(1)..............................................................    380
 Toronto Airport(6)......................................................    423
 Toronto Eaton Center(2).................................................    459
 Toronto Delta Meadowvale(3).............................................    374
                                                                          ------
TOTAL.................................................................... 57,803
                                                                          ======
</TABLE>

(1) This property was converted to the Marriott brand after acquisition.
(2) The land on which this hotel is built is leased under one or more long-term
    lease agreements.
(3) This property is not operated under the Marriott brand and is not managed
    by Marriott International.
(4) This property is operated as a Marriott franchised property.
(5) This property is leased to Marriott International.
(6) This property is not wholly owned by the operating partnership.
(7) This property is not leased to Crestline.

                                       11
<PAGE>

Investments in Affiliated Partnerships

   We and certain of our subsidiaries also manage our partnership investments
and conduct the partnership services business. As previously discussed, in
connection with the REIT conversion, the non-controlled subsidiaries were
formed to hold various assets. The direct ownership of those assets by us or
Host REIT could jeopardize Host REIT's status as a REIT or our treatment as a
partnership for federal income tax purposes. Substantially all our general and
limited partner interests in partnerships owning 209 limited-service hotels
were held by the non-controlled subsidiaries at year end. Additionally, of the
20 full-service hotels in which we had general and limited partner interests
13 were acquired by us, two were sold, four were transferred to the non-
controlled subsidiary and one was retained. We executed a definitive agreement
regarding litigation for seven of these limited partnerships subsequent to
year end. See "--Legal Proceeding" below.

   The managing general partner of the partnership is responsible for the day-
to-day management of the partnership operations, which generally includes
payment of partnership obligations from partnership funds, preparation of
financial reports and tax returns and communications with lenders, limited
partners and regulatory bodies. As the general partner, we are reimbursed for
the cost of providing these services subject to limitations in certain cases.

   The partnership hotels are currently operated under management agreements
with Marriott International or its subsidiaries. As the general partner, we
oversee and monitor Marriott International and its subsidiaries' performance
pursuant to these agreements.

   Cash distributions provided from these partnerships including distributions
related to partnerships sold, transferred or acquired in 1998 are tied to the
overall performance of the underlying properties and the overall level of
debt. All debt of these partnerships is nonrecourse to us and our
subsidiaries, except that we are contingently liable under various guarantees
of debt obligations of certain of the limited-service partnerships.

Marketing

   As of March 1, 2000, 99 of our 122 hotel properties were managed by
subsidiaries of Marriott International as Marriott or Ritz-Carlton brand
hotels. Ten of the 23 remaining hotels are operated as Marriott brand hotels
under franchise agreements with Marriott International. The remaining hotels
are managed primarily by Hyatt, Four Seasons and Swissotel. In addition, we
are currently converting the resort property in Singer Island, Florida to the
Hilton brand, which is expected to be completed April 1, 2000.

   We believe that our properties will continue to enjoy competitive
advantages arising from their participation in the Marriott, Ritz-Carlton,
Hyatt, Four Seasons, Swissotel, and Hilton hotel systems. The national
marketing programs and reservation systems of each of these managers, as well
as the advantages of strong customer preference for these upper-upscale and
luxury brands should also help these properties to maintain or increase their
premium over competitors in both occupancy and room rates. Repeat guest
business is enhanced by guest rewards programs offered by Marriott, Hyatt,
Swissotel, and Hilton. For example, the Marriott Rewards program membership
includes more than 7.5 million members.

   Each of the managers maintains national reservation systems that provide
reservation agents with complete descriptions of the rooms available and up-
to-date rate information from the properties. Marriott's reservation system
also features connectivity to airline reservation systems, providing travel
agents with access to available rooms inventory for all Marriott and Ritz-
Carlton lodging properties. In addition, software at Marriott's centralized
reservations centers enables agents to immediately identify the nearest
Marriott or Ritz-Carlton brand property with available rooms when a caller's
first choice is fully occupied. Our website (www.hostmarriott.com) currently
permits users to connect to the Marriott, Ritz-Carlton, Hyatt, Four Seasons,
and Swissotel reservation systems to reserve rooms in our hotels.

Competition

   Our hotels compete with several other major lodging brands in each segment
in which they operate. Competition in the industry is based primarily on the
level of service, quality of accommodations, convenience

                                      12
<PAGE>

of locations and room rates. Although the competitive position of each of our
hotel properties differs from market to market, we believe that our properties
compare favorably to their competitive set in the markets in which they
operate on the basis of these factors. The following table presents key
participants in segments of the lodging industry in which we compete:

<TABLE>
<CAPTION>
 Segment              Representative Participants
 -------              ---------------------------
 <C>                  <S>
 Luxury Full-Service  Ritz-Carlton; Four Seasons
 Upscale Full-Service Crown Plaza; Doubletree; Hyatt; Hilton; Marriott Hotels,
                      Resort and Suites; Radisson; Renaissance; Sheraton;
                      Swissotel; Westin; Wyndham
</TABLE>

Seasonality

   Our hotel revenues have traditionally experienced significant seasonality.
Additionally, hotel revenues in the fourth quarter reflect sixteen weeks of
results compared to twelve weeks for the first three quarters of the fiscal
year. Average hotel sales by quarter over the three years 1997 through 1999
for our lodging properties are as follows:

<TABLE>
<CAPTION>
       First Quarter      Second Quarter       Third Quarter       Fourth Quarter
       -------------      --------------       -------------       --------------
       <S>                <C>                  <C>                 <C>
            22%                23%                  22%                 33%
</TABLE>

Other Real Estate Investments

   We have lease and sublease activity relating primarily to Host Marriott's
former restaurant operations. Additionally, we have lease activity related to
certain office space that we own in Atlanta, Chicago, and San Francisco which
is included in other revenues in our statements of operations. Prior to the
REIT conversion, we owned 12 undeveloped parcels of vacant land, totaling
approximately 83 acres, originally purchased primarily for the development of
hotels or senior living communities. These parcels are now owned by one of the
non-controlled subsidiaries.

Employees

   Currently, we have approximately 188 management employees, and
approximately 15 other employees which are covered by a collective bargaining
agreement that is subject to review and renewal on a regular basis. We believe
that we and our managers have good relations with labor unions and have not
experienced any material business interruptions as a result of labor disputes.

Environmental and Regulatory Matters

   Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic
substances on, under or in such property. Such laws may impose liability
whether or not the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In addition, certain
environmental laws and common law principles could be used to impose liability
for release of asbestos-containing materials, and third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to released asbestos-containing materials.
Environmental laws also may impose restrictions on the manner in which
property may be used or business may be operated, and these restrictions may
require expenditures. In connection with our current or prior ownership or
operation of hotels, we may be potentially liable for any such costs or
liabilities. Although we are currently not aware of any material environmental
claims pending or threatened against us, we can offer no assurance that a
material environmental claim will not be asserted against us.

The Leases

   In order for Host REIT to qualify as a REIT and for us to be treated as a
partnership for income tax purposes, neither we nor Host REIT may operate the
hotels or related properties. Accordingly, we lease the hotels

                                      13
<PAGE>

to lessees, which are primarily wholly owned indirect subsidiaries of
Crestline. The following is a brief summary of the general terms of the leases
a form of which has been filed with the Commission.

  . Lessees. There generally is a separate lessee for each hotel or group of
    hotels that is owned by us or our subsidiaries. Each lessee is a Delaware
    limited liability company, whose purpose is limited to acting as lessee
    under the applicable lease(s). For those hotels where it is the manager,
    Marriott International or a subsidiary has a noneconomic membership
    interest in the lessee entitling it to certain voting rights but no
    economic rights. The operating agreements for such lessees provide that
    the Crestline member of the lessee has full control over the management
    of the business of the lessee, except with respect to specific decisions
    for which the consent of both members are required. Upon any termination
    of the applicable management agreement, these special voting rights of
    Marriott International or its subsidiary will cease.

  . Lease Terms. Each lease has a fixed term ranging generally from seven to
    ten years (depending upon the lease), subject to earlier termination upon
    the occurrence of specified contingencies described in the lease.
    Effective November 15, 1999, we amended substantially all of our leases
    with Crestline to give Crestline the right to renew each of these leases
    for up to four additional terms of seven years each at a fair rental
    value, to be determined either by agreement between us and Crestline or
    through arbitration at the time the renewal option is exercised.
    Crestline is under no obligation to exercise these renewal options, and
    we have the right to terminate the renewal options during time periods
    specified in the amendments. In addition, the amendments provide that the
    fair rental value payable by us to Crestline in connection with the
    purchase of a lease as described above does not include any amounts
    relating to any renewal period. Therefore, the fair rental value of a
    lease after expiration of the initial term for such lease would be zero.

  . Termination of the Leases upon Changes in Tax Laws. In the event that
    changes in the federal income tax laws such as those included in the REIT
    Modernization Act allow the lessors, or subsidiaries or affiliates of the
    lessors, to directly operate the hotels without jeopardizing Host REIT's
    status as a REIT, the lessors have the right to terminate all, but not
    less than all, of the leases (excluding leases of hotels that must still
    be leased following the tax law change) in return for paying the lessees
    the fair market value of the remaining terms of the leases

  . Minimum Rent; Percentage Rent. Each lease requires the lessee to pay
    minimum rent in a fixed dollar amount specified in each lease per annum
    plus to the extent it exceeds minimum rent, percentage rent based upon
    specified percentages of aggregate sales from the applicable hotel,
    including room sales, food and beverage sales and other income in excess
    of specified thresholds. The amount of minimum rent and the percentage
    rent thresholds are to be adjusted each year. The annual adjustment with
    respect to minimum rent equals a percentage of any increase in the
    Consumer Price Index during the previous twelve months. Neither minimum
    rent nor percentage rent thresholds will be decreased because of the
    annual adjustment.

  . Lessee Expenses. Each lessee is responsible for paying all of the
    expenses of operating the applicable hotel(s), including all personnel
    costs, utility costs and general repair and maintenance of the hotel(s).
    The lessee also is responsible for all fees payable to the applicable
    manager, including base and incentive management fees, chain services
    payments and franchise or system fees, with respect to periods covered by
    the term of the lease. The lessee is not obligated to bear the cost of
    any capital improvements or capital repairs to the hotels or the other
    expenses borne by the lessor, as described below.

  . Lessor Expenses. The lessor is responsible for the following expenses:
    real estate taxes, personal property taxes, casualty insurance on the
    structures, ground lease rent payments, required expenditures for FF&E
    and capital expenditures. The consent of the lessor is required for any
    capital expenditures or a change in the amount of the FF&E reserve
    payment.

  . Crestline Guarantee. Crestline and some of its subsidiaries have entered
    into a limited guarantee of the lease and management agreement
    obligations of each lessee. For each of four identified "pools" of
    hotels, the cumulative limit of the guarantee at any time is 10% of the
    aggregate rents under all leases in such pool paid with respect to the
    preceding thirteen full accounting periods (with an annualized amount

                                      14
<PAGE>

   based upon the minimum rent for those leases that have not been in effect
   for thirteen full accounting periods). In the event of a payment default
   under any lease or failure of Crestline to maintain specified minimum net
   worth or debt service coverage ratios, the obligations under the
   guarantees of leases in each pool are secured by excess cash flow of each
   lessee in such pool. Such excess cash flow will be collected, held in a
   cash collateral account, and disbursed in accordance with agreed cash
   management procedures.

  . Working Capital. Each lessor sold the existing working capital (including
    Inventory and Fixed Asset Supplies (as defined in the Uniform System of
    Accounts for Hotels) and receivables due from the manager, net of
    accounts payable and accrued expenses) to the applicable lessee upon the
    commencement of the lease at a price equal to the fair market value of
    such assets. The purchase price was represented by a note evidencing a
    loan that bears interest at a rate per year equal to the "long-term
    applicable federal rate" in effect on the commencement of the lease.
    Interest owed on the working capital loan is due simultaneously with each
    periodic rent payment and the amount of each payment of interest will be
    credited against such rent payment. The principal amount of the working
    capital loan will be payable upon termination of the lease.

  . Termination of Leases upon Disposition of Full Service Hotels. In the
    event the applicable lessor enters into an agreement to sell or otherwise
    transfer any full-service hotel free and clear of the applicable lease,
    the lessor must pay the lessee a termination fee equal to the fair market
    value of the lessee's leasehold interest in the remaining term of the
    lease. Alternatively, the lessor would be entitled to substitute a
    comparable hotel or hotels for any hotel that is sold or sell the hotel
    subject to the lease subject to the lessee's reasonable approval. In
    addition, the lessors collectively and the lessees collectively each have
    the right to terminate up to twelve leases without being required to pay
    any fee or other compensation as a result of such termination, but the
    lessors are permitted to exercise such right only in connection with
    sales of hotels to an unrelated third party or the transfer of a hotel to
    a joint venture in which the operating partnership does not have a two-
    thirds or greater interest. We have received notices of termination from
    Crestline on five leases, with effective dates ranging from March through
    June 2000, which we are currently negotiating. We expect to be able to
    obtain replacement leases for these leases without material impact to our
    future operations.

  . Assignment of Lease. A lessee is permitted to sublet all or part of the
    hotel or assign its interest under its lease, without the consent of the
    lessor, to any wholly owned and controlled single purpose subsidiary of
    Crestline, provided that Crestline continues to meet the minimum net
    worth test and all other requirements of the lease. Transfers to other
    parties are permitted if approved by the lessor.

  . Subordination to Qualifying Mortgage Debt. The rights of each lessee are
    expressly subordinate to qualifying mortgage debt and any refinancing
    thereof.

  . Personal Property Limitation. If a lessor reasonably anticipates that the
    average tax basis of the items of the lessor's FF&E and other personal
    property that are leased to the applicable lessee will exceed 15% of the
    aggregate average tax basis of the real and personal property subject to
    the applicable lease the lessor would acquire any replacement FF&E that
    would cause the applicable limits to be exceeded, and immediately
    thereafter the lessee would be obligated either to acquire such excess
    FF&E from the lessor or to cause a third party to purchase such FF&E. The
    annual rent under the applicable lease would then be reduced in
    accordance with a formula based on market leasing rates for the excess
    FF&E. Beginning January 1, 2001, the average aggregate fair market values
    of both real and personal property will be used for purposes of
    determining rents from real property as opposed to the aggregate tax
    bases.

  . Change in Manager. A lessee is permitted to change the manager or the
    brand affiliation of a hotel only with the approval of the applicable
    lessor, which approval may not be unreasonably withheld.

The Management Agreements

   All of our hotels are subject to management agreements for the operation of
the properties. The original terms of the management agreements are generally
15 to 20 years in length with multiple optional renewal terms. The following
is a brief summary of the general terms of the management agreements a form of
which has been

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<PAGE>

filed with the Commission. The lessees lease the hotels from us or our
subsidiaries. Upon leasing the hotels, the lessees assumed substantially all
of the obligations of such subsidiaries under the management agreements
between those entities and the subsidiaries of Marriott International and
other companies that currently manage the hotels. As a result of their
assumptions of obligations under the management agreements, the lessees have
substantially all of the rights and obligations of the "owners" of the hotels
under the management agreements for the period during which the leases are in
effect (including the obligation to pay the management and other fees
thereunder) and hold us harmless with respect thereto. Our subsidiaries remain
liable for all obligations under the management agreements.

  . General. Under each management agreement related to a Marriott
    International-managed hotel, the manager provides complete management
    services to the applicable lessees in connection with its management of
    such lessee's hotels.

  . Operational services. The managers have sole responsibility and exclusive
    authority for all activities necessary for the day-to-day operation of
    the hotels, including establishment of all room rates, the processing of
    reservations, procurement of inventories, supplies and services, periodic
    inspection and consultation visits to the hotels by the managers'
    technical and operational experts and promotion and publicity of the
    hotels. The manager receives compensation from the lessee in the form of
    a base management fee and an incentive management fee, which are normally
    calculated as percentages of gross revenues and operating profits,
    respectively.

  . Executive supervision and management services. The managers provide all
    managerial and other employees for the hotels; review the operation and
    maintenance of the hotels; prepare reports, budgets and projections;
    provide other administrative and accounting support services, such as
    planning and policy services, financial planning, divisional financial
    services, risk planning services, product planning and development,
    employee planning, corporate executive management, legislative and
    governmental representation and certain in-house legal services; and
    protect the "Marriott" trademark and other tradenames and service marks.
    The manager also provides a national reservations system.

  . Chain services. The management agreements require the manager to furnish
    chain services that are furnished generally on a central or regional
    basis to hotels in the Marriott hotel system. Such services include: (1)
    the development and operation of computer systems and reservation
    services, (2) regional management and administrative services, regional
    marketing and sales services, regional training services, manpower
    development and relocation costs of regional personnel and (3) such
    additional central or regional services as may from time to time be more
    efficiently performed on a regional or group level. Costs and expenses
    incurred in providing such services are allocated among all hotels in the
    Marriott hotel system managed by the manager or its affiliates and each
    applicable lessee is required to reimburse the manager for its allocable
    share of such costs and expenses.

  . Working capital and fixed asset supplies. The lessee is required to
    maintain working capital for each hotel and fund the cost of fixed asset
    supplies, which principally consist of linen and similar items. The
    applicable lessee also is responsible for providing funds to meet the
    cash needs for the operations of the hotels if at any time the funds
    available from operations are insufficient to meet the financial
    requirements of the hotels.

  . Use of affiliates. The manager employs the services of its affiliates to
    provide certain services under the management agreements. Certain of the
    management agreements provide that the terms of any such employment must
    be no less favorable to the applicable lessee, in the reasonable judgment
    of the manager, than those that would be available from the manager.

   FF&E replacements. The management agreements generally provide that once
each year the manager will prepare a list of FF&E to be acquired and certain
routine repairs that are normally capitalized to be performed in the next year
and an estimate of the funds necessary therefor. Under the terms of the
leases, the lessor is required to provide to the applicable lessee all
necessary FF&E for the operation of the hotels (including funding any required
FF&E replacements). For purposes of funding the FF&E replacements, a specified
percentage (generally

                                      16
<PAGE>

5%) of the gross revenues of the hotel is deposited by the manager into a book
entry account. These amounts are treated under the leases as paid by the
lessees to the lessor and will be credited against their rental obligations.

   Under each lease, the lessor is responsible for the costs of FF&E
replacements and for decisions with respect thereto (subject to its
obligations to the lessee under the lease).

  . Building alterations, improvements and renewals. The management
    agreements require the manager to prepare an annual estimate of the
    expenditures necessary for major repairs, alterations, improvements,
    renewals and replacements to the structural, mechanical, electrical,
    heating, ventilating, air conditioning, plumbing and vertical
    transportation elements of each hotel. Such estimate must be submitted to
    the lessor and the lessee for their approval. In addition to the
    foregoing, the management agreements generally provide that the manager
    may propose such changes, alterations and improvements to the hotel as
    are required, in the manager's reasonable judgment, to keep the hotel in
    a competitive, efficient and economical operating condition or in
    accordance with Marriott standards. The cost of the foregoing is paid
    from the FF&E reserve account; to the extent that there are insufficient
    funds in such account, the operating partnership is required to pay any
    shortfall.

  . Service marks. During the term of the management agreements, the service
    mark, such as "Marriott" and other symbols, logos and service marks
    currently used by the manager and its affiliates, may be used in the
    operation of the hotels. Marriott International (or its applicable
    affiliates), Hyatt, Swissotel, and Four Seasons intend to retain their
    legal ownership of these marks. Any right to use the service marks, logo
    and symbols and related trademarks at a hotel will terminate with respect
    to that hotel upon termination of the management agreement with respect
    to such hotel.

  . Termination fee. Certain of the management agreements provide that if the
    management agreement is terminated prior to its full term due to
    casualty, condemnation or the sale of the hotel, the manager would
    receive a termination fee as specified in the specific management
    agreement. Under the leases, the responsibility for the payment of any
    such termination fee as between the lessee and the lessor depends upon
    the cause for such termination.

  . Termination for failure to perform. Most of the management agreements may
    be terminated based upon a failure to meet certain financial performance
    criteria, subject to the manager's right to prevent such termination by
    making specified payments to the lessee based upon the shortfall in such
    criteria.

   Assignment of management agreements. The management agreements applicable
to each hotel have been assigned to the applicable lessee for the term of the
lease of such hotel. The lessee is obligated to perform all of the obligations
of the lessor under the management agreement during the term of its lease,
other than specified retained obligations including, without limitation,
payment of real property taxes, property casualty insurance and ground rent,
and maintaining a reserve fund for FF&E replacements and capital expenditures,
for which the lessor retains responsibility. Although the lessee has assumed
obligations of the lessor under the management agreement, the lessor is not
released from its obligations and, if the lessee fails to perform any
obligations, the manager will be entitled to seek performance by or damages
from the lessor. If the lease is terminated for any reason, any new or
successor lessee must meet certain requirements for an approved lessee or
otherwise be acceptable to Marriott International.

Non-competition agreements

   Pursuant to a non-competition agreement entered into in connection with the
leases, Crestline has agreed, among other things, that until the earlier of
December 31, 2008 and the date on which it is no longer a lessee for more than
25% of the number of the hotels owned by us on December 29, 1998, it will not
(1) own, operate or otherwise control (as owner or franchisor) any full-
service hotel brand or franchise, or purchase, finance or otherwise invest in
full-service hotels, or act as an agent or consultant with respect to any of
the foregoing activities, or lease or manage full-service hotels (other than
hotels owned by us) if its economic return therefrom would be more similar to
returns derived from ownership interests in such hotels except for
acquisitions of

                                      17
<PAGE>

property used in hotels as to which a subsidiary of Crestline is the lessee,
investments in full-service hotels which represent an immaterial portion of a
merger or similar transaction or a minimal portfolio investment in another
entity, limited investments (whether debt or equity) in full-service hotels as
to which a subsidiary of Crestline is the lessee or activities undertaken with
respect to its business of providing asset management services to hotel
owners, or (2) without our consent, manage any of the hotels owned by us,
other than to provide asset management services.

   We have agreed with Crestline, among other things, that, (1) until December
31, 2003, we will not purchase, finance or otherwise invest in senior living
communities, or act as an agent or consultant with respect to any of the
foregoing activities (except for acquisitions of communities which represent
an immaterial portion of a merger or similar transaction or for minimal
portfolio investments in other entities) and (2) until the earlier of December
31, 2008 and the date on which subsidiaries of Crestline are no longer lessees
for more than 25% of the number of the hotels owned by Host Marriott on
December 29, 1998, we will not lease, as tenant or subtenant, limited- or
full-service hotel properties from any "real estate investment trust" within
the meaning of Sections 856 through 859 of the Internal Revenue Code where it
will not be the operator or manager of the hotel (other than through a
contractual arrangement with a non-affiliated party) and where its rental
payments qualify as "rents from real property" within the meaning of Section
856(d) of the Internal Revenue Code, or purchase, finance or otherwise invest
in persons or entities which engage in any of the foregoing activities, or act
as an agent or consultant with respect to any of the foregoing activities
(except for acquisitions of entities which engage in any of the foregoing
activities where the prohibited activities represent an immaterial portion of
a merger or similar transaction, or minimal portfolio investments in other
entities which engage in any of the foregoing activities, or certain leasing
arrangements existing on December 29, 1998 or entered into in the future
between us and certain other related parties, or by our management of any
hotels in which it has an equity interest). In addition, both Crestline and we
have agreed not to hire or attempt to hire any of the other company's senior
employees at any time prior to December 31, 2000.

   We entered into a noncompetition agreement with Marriott International that
defines our rights and obligations with respect to certain businesses operated
by each of us. Crestline became an additional party to this agreement at the
time its shares were distributed to our stockholders. At that time, we also
entered into an agreement with Crestline under which we agreed with Crestline
about the allocation between us of the rights to engage in certain activities
permitted under the agreement with Marriott International. In general, until
October 8, 2000, we and our subsidiaries are prohibited from entering into or
acquiring any business that competes with the hotel management business (i.e.,
managing, operating or franchising full-service or limited-service hotels) as
conducted by Marriott International. Pursuant to this agreement, we cannot (1)
operate any hotel under a common name with any other hotel we operate or with
any hotel operated by Crestline, (2) have a manager (other than Marriott
International or one of its affiliates) manage any limited-service hotel for
us under a common name with any other limited-service hotel managed by such
manager for use or for Crestline, (3) have a manager (other than Marriott
International or one of its affiliates) manage more than the greater of (a) 10
full-service hotels under a common name which is a brand other than "Delta,"
"Four Seasons," "Holiday Inn," "Hyatt" and "Swissotel" (the "Existing Brands")
or (b) 25% of any system operated by such manager under a common name which is
not an Existing Brand, (4) have a manager (other than Marriott International
or one of its affiliates) manage more than the greater of (a) 5 full-service
hotels under a common name which is an Existing Brand or (b) 12.5% of any
system operated by such manager under a common name which is an Existing
Brand, (5) franchise as franchisor any limited-service hotel under a common
name with any other limited-service hotel for which we or Crestline is a
franchisor or (6) franchise as franchisor more than 10 full-service hotels
under a common name.

Risk Factors

   The following risk factors should be considered by prospective investors
who should carefully consider the material described below.

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<PAGE>

Risks relating to redemption of OP Units

   A holder who redeems OP Units may have adverse tax effects. A holder of OP
Units who redeems OP Units will be treated for tax purposes as having sold the
OP Units. The sale will be taxable and the holder will be treated as realizing
an amount equal to the sum of the value of the common stock or cash the holder
receives plus the amount of operating partnership nonrecourse liabilities
allocable to the redeemed OP Units. It is possible that the amount of gain the
holder recognizes could exceed the value of the common stock the holder
receives. It is even possible that the tax liability resulting from this gain
could exceed the value of the common stock or cash the holder receives.

   If a holder of OP Units redeems OP Units, the original receipt of the OP
Units may be subject to tax. If a holder of OP Units redeems OP Units,
particularly within two years of receiving them, there is a risk that the
original receipt of the OP Units may be treated as a taxable sale under the
"disguised sale" rules of the Internal Revenue Code. Subject to several
exceptions, the tax law generally provides that a partner's contribution of
property to a partnership and a simultaneous or subsequent transfer of money
or other consideration from the partnership to the partner will be presumed to
be a taxable sale. In particular, if money or other consideration is
transferred by a partnership to a partner within two years of the partner's
contribution of property, the transactions are presumed to be a taxable sale
of the contributed property unless the facts and circumstances clearly
establish that the transfers are not a sale. On the other hand, if two years
have passed between the original contribution of property and the transfer of
money or other consideration, the transactions will not be presumed to be a
taxable sale unless the facts and circumstances clearly establish that they
should be.

   Differences between an investment in shares of common stock and OP Units
may affect redeeming holders of OP Units. If a holder of OP Units elects to
redeem OP Units, we will determine whether the holder receives cash or shares
of our common stock in exchange for the OP Units. Although an investment in
shares of our common stock is substantially similar to an investment in OP
Units, there are some differences between ownership of OP Units and ownership
of common stock. These differences include form of organization, management
structure, voting rights, liquidity and federal income taxation, some of which
may be material to investors.

   There are possible differing fiduciary duties of Host REIT, as the general
partner, and the Board of Directors of Host REIT. Host REIT, as our general
partner, and the Board of Directors of Host REIT, respectively, owe fiduciary
duties to their constituent owners. Although some courts have interpreted the
fiduciary duties of the Board of Directors in the same way as the duties of a
general partner in a limited partnership, it is unclear whether, or to what
extent, there are differences in such fiduciary duties. It is possible that
the fiduciary duties of the directors of Host REIT to its shareholders may be
less than those of Host REIT, as our general partner to the holders of OP
Units.

Risks of ownership of Host REIT common stock

   There are limitations on the acquisition of Host REIT common stock and
changes in control. Host REIT's charter and bylaws, our partnership agreement,
Host REIT's shareholder rights plan and the Maryland General Corporation Law
contain a number of provisions that could delay, defer or prevent a
transaction or a change in control of us that might involve a premium price
for our shareholders or otherwise be in their best interests, including the
following:

     Ownership limit. The 9.8% ownership limit described under "--Possible
  adverse consequences of limits on ownership of Host REIT common stock"
  below may have the effect of precluding a change in control of us by a
  third party without the consent of Host REIT's Board of Directors, even if
  such change in control would be in the interest of our unitholders, and
  even if such change in control would not reasonably jeopardize Host REIT's
  status as a REIT.

     Staggered board. Host REIT's charter provides that its Board of
  Directors will consist of eight members and can be increased or decreased
  after that according to Host REIT's bylaws, provided that the

                                      19
<PAGE>

  total number of directors is not less than three nor more than 13. Pursuant
  to Host REIT's bylaws, the number of directors will be fixed by Host REIT's
  Board of Directors within the limits in Host REIT's charter. Host REIT's
  Board of Directors is divided into three classes of directors. Directors
  for each class are chosen for a three-year term when the term of the
  current class expires. The staggered terms for directors may affect
  shareholders' ability to effect a change in control of Host REIT, even if a
  change in control would be in the interest of our unitholders.

     Removal of board of directors. Host REIT's charter provides that, except
  for any directors who may be elected by holders of a class or series of
  shares of capital stock other than Host REIT common stock, directors may be
  removed only for cause and only by the affirmative vote of shareholders
  holding at least two-thirds of Host REIT's outstanding shares entitled to
  be cast for the election of directors. Vacancies on the Board of Directors
  may be filled by the concurring vote of a majority of the remaining
  directors and, in the case of a vacancy resulting from the removal of a
  director by the shareholders, by at least two-thirds of all the votes
  entitled to be cast in the election of directors.

     Preferred shares; classification or reclassification of unissued shares
  of capital stock without shareholder approval. Host REIT's charter provides
  that the total number of shares of stock of all classes which it has
  authority to issue is 800,000,000, initially consisting of 750,000,000
  shares of common stock and 50,000,000 shares of preferred stock, of which
  8,160,000 have been issued. Host REIT's Board of Directors has the
  authority, without a vote of shareholders, to classify or reclassify any
  unissued shares of stock, including common stock into preferred stock or
  vice versa, and to establish the preferences and rights of any preferred or
  other class or series of shares to be issued. The issuance of preferred
  shares or other shares having special preferences or rights could delay or
  prevent a change in control even if a change in control would be in the
  interests of our unitholders. Because Host REIT's Board of Directors has
  the power to establish the preferences and rights of additional classes or
  series of shares without a shareholder vote, its Board of Directors may
  give the holders of any class or series preferences, powers and rights,
  including voting rights, senior to the rights of holders of its common
  stock.

     Consent rights of the limited partners. Under our partnership agreement,
  Host REIT generally will be able to merge or consolidate with another
  entity with the consent of partners holding percentage interests that are
  more than 50% of the aggregate percentage interests of the outstanding
  limited partnership interests entitled to vote on the merger or
  consolidation, including any limited partnership interests held by Host
  REIT, as long as the holders of limited partnership interests either
  receive or have the right to receive the same consideration as Host REIT's
  shareholders. Host REIT, as holder of a majority of the limited partnership
  interests, would be able to control the vote. Under Host REIT's charter,
  holders of at least two-thirds of its outstanding shares of common stock
  generally must approve the merger or consolidation.

     Maryland business combination law. Under the Maryland General
  Corporation Law, specified "business combinations," including specified
  issuances of equity securities, between a Maryland corporation and any
  person who owns 10% or more of the voting power of the corporation's then
  outstanding shares, or an "interested shareholder," or an affiliate of the
  interested shareholder are prohibited for five years after the most recent
  date in which the interested shareholder becomes an interested shareholder.
  Thereafter, any such business combination must be approved by 80% of
  outstanding voting shares, and by two-thirds of voting shares other than
  voting shares held by an interested shareholder unless, among other
  conditions, the corporation's common shareholders receive a minimum price,
  as defined in the Maryland General Corporation Law, for their shares and
  the consideration is received in cash or in the same form as previously
  paid by the Interested Shareholder. Host REIT is subject to the Maryland
  business combination statute.

     Maryland control share acquisition law. Under the Maryland General
  Corporation Law, "control shares" acquired in a "control share acquisition"
  have no voting rights except to the extent approved by a vote of two-thirds
  of the votes entitled to be cast on the matter, excluding shares owned by
  the acquiror and by officers or directors who are employees of the
  corporation. "Control shares" are voting shares which, if aggregated with
  all other such shares previously acquired by the acquiror or in respect of
  which the acquiror is able to exercise or direct the exercise of voting
  power (except solely by virtue of a revocable proxy),

                                      20
<PAGE>

would entitle the acquiror to exercise voting power in electing directors
within one of the following ranges of voting power: (1) one-fifth or more but
less than one-third, (2) one-third or more but less than a majority or (3) a
majority or more of the voting power. Control shares do not include shares the
acquiring person is then entitled to vote as a result of having previously
obtained shareholder approval. A "control share acquisition" means the
acquisition of control shares, subject to specified exceptions. Host REIT is
subject to these control share provisions of Maryland law, subject to an
exemption for Marriott International pursuant to its purchase right. See
"Risks of ownership of Host REIT's Common Stock--Marriott International
purchase right."

   Merger, consolidation, share exchange and transfer of Host REIT's
assets. Pursuant to Host REIT's charter, subject to the terms of any
outstanding class or series of capital stock, we can merge with or into
another entity, consolidate with one or more other entities, participate in a
share exchange or transfer its assets within the meaning of the Maryland
General Corporation Law if approved (1) by Host REIT's Board of Directors in
the manner provided in the Maryland General Corporation Law and (2) by its
shareholders holding two-thirds of all the votes entitled to be cast on the
matter, except that any merger of Host REIT with or into a trust organized for
the purpose of changing its form of organization from a corporation to a trust
requires only the approval of its shareholders holding a majority of all votes
entitled to be cast on the merger. Under the Maryland General Corporation Law,
specific mergers without a vote of shareholders and a share exchange is only
required to be approved by a Maryland successor by its Board of Directors.
Host REIT's voluntary dissolution also would require approval of shareholders
holding two-thirds of all the votes entitled to be cast on the matter.

   Amendments to Host REIT's charter and bylaws. Host REIT's charter contains
provisions relating to restrictions on transferability of Host REIT's common
stock, the classified Board of Directors, fixing the size of Host REIT's Board
of Directors within the range set forth in its charter, removal of directors
and the filling of vacancies, all of which may be amended only by a resolution
adopted by the Board of Directors and approved by Host REIT's shareholders
holding two-thirds of the votes entitled to be cast on the matter. As
permitted under the Maryland General Corporation Law, Host REIT's charter and
bylaws provide that directors have the exclusive right to amend Host REIT's
bylaws. Amendments of this provision of Host REIT's charter also would require
action of Host REIT's Board of Directors and approval by shareholders holding
two-thirds of all the votes entitled to be cast on the matter.

   Marriott International purchase right. As a result of Host Marriott's spin-
off of Marriott International in 1993, Marriott International has the right to
purchase up to 20% of each class of Host REIT's outstanding voting shares at
the then fair market value when specific change of control events involving
Host REIT occurs, subject to specified limitations to protect Host REIT's
status. The Marriott International purchase right may have the effect of
discouraging a takeover of Host REIT, because any person considering acquiring
a substantial or controlling block of Host REIT's common stock will face the
possibility that its ability to obtain or exercise control would be impaired
or made more expensive by the exercise of the Marriott International purchase
right.

   Shareholder rights plan. Host REIT adopted a shareholder rights plan which
provides, among other things, that when specified events occur, our
shareholders will be entitled to purchase from Host REIT a newly created
series of junior preferred shares, subject to Host REIT's ownership limit. The
preferred share purchase rights are triggered by the earlier to occur of (1)
ten days after the date of a public announcement that a person or group acting
in concert has acquired, or obtained the right to acquire, beneficial
ownership of 20% or more of Host REIT's outstanding shares of common stock or
(2) ten business days after the commencement of or announcement of an
intention to make a tender offer or exchange offer, the consummation of which
would result in the acquiring person becoming the beneficial owner of 20% or
more of Host REIT's outstanding common stock. The preferred share purchase
rights would cause substantial dilution to a person or group that attempts to
acquire Host REIT on terms not approved by Host REIT's Board of Directors.

   There are possible adverse consequences of limits on ownership of our
common stock. To maintain Host REIT's qualification as a REIT for federal
income tax purposes, not more than 50% in value of its outstanding shares of
capital stock may be owned, directly or indirectly, by five or fewer
individuals, as defined in the

                                      21
<PAGE>

Internal Revenue Code to include some entities. In addition, a person who
owns, directly or by attribution, 10% or more of an interest in a tenant of
ours, or a tenant of any partnership in which we are a partner, cannot own,
directly or by attribution, 10% or more of Host REIT's shares without
jeopardizing its qualification as a REIT. Primarily to facilitate maintenance
of its qualification as a REIT for federal income tax purposes, the ownership
limit under Host REIT's charter prohibits ownership, directly or by virtue of
the attribution provisions of the Internal Revenue Code, by any person or
persons acting as a group of more than 9.8% of the issued and outstanding
shares of Host REIT's common stock, subject to an exception for shares of its
common stock held prior to the REIT conversion so long as the holder would not
own more than 9.9% in value of its outstanding shares, and prohibits
ownership, directly or by virtue of the attribution provisions of the Internal
Revenue Code, by any person, or persons acting as a group, of more than 9.8%
of the issued and outstanding shares of any class or series of Host Marriott's
preferred shares. Together, these limitations are referred to as the
"ownership limit." The Board of Directors, in its sole and absolute
discretion, may waive or modify the ownership limit with respect to one or
more persons who would not be treated as "individuals" for purposes of the
Internal Revenue Code if it is satisfied, based upon information required to
be provided by the party seeking the waiver and upon an opinion of counsel
satisfactory to the Board of Directors, that ownership in excess of this limit
will not cause a person who is an individual to be treated as owning shares in
excess of the ownership limit, applying the applicable constructive ownership
rules, and will not otherwise jeopardize Host REIT's status as a REIT for
federal income tax purposes for example, by causing any of our tenants or any
of the partnerships, including Crestline and the lessees, to be considered a
"related party tenant" for purposes of the REIT qualification rules. Common
stock acquired or held in violation of the ownership limit will be transferred
automatically to a trust for the benefit of a designated charitable
beneficiary, and the person who acquired such common stock in violation of the
ownership limit will not be entitled to any distributions thereon, to vote
such shares of common stock or to receive any proceeds from the subsequent
sale thereof in excess of the lesser of the price paid therefor or the amount
realized from such sale. A transfer of shares of Host REIT's common stock to a
person who, as a result of the transfer, violates the ownership limit may be
void under certain circumstances, and, in any event, would deny that person
any of the economic benefits of owning shares of our common stock in excess of
the ownership limit. The ownership limit may have the effect of delaying,
deferring or preventing a change in control and, therefore, could adversely
affect the shareholders' ability to realize a premium over the then-prevailing
market price for Host REIT's common stock in connection with such transaction.

   We depend on external sources of capital for future growth. As with other
REITs, but unlike corporations generally, Host REIT's and our ability to
reduce our debt and finance our growth largely must be funded by external
sources of capital because Host REIT generally will have to distribute to its
shareholders 95% of its taxable income in order to qualify as a REIT,
including taxable income which does not generate corresponding cash. This
distribution requirement will be reduced to 90% for taxable years after
December 31, 2000. In order to make its distributions to shareholders, Host
REIT must receive distributions from us. Our access to external capital will
depend upon a number of factors, including general market conditions, the
market's perception of our growth potential, our current and potential future
earnings, cash distributions and the market price of Host REIT's common stock.
Currently, our access to external capital has been limited to the extent that
Host REIT's common stock is trading at what we believe is a significant
discount to its estimated net asset value.

   Shares of Host REIT common stock that are or become available for sale
could affect the price for its shares of common stock. Sales of a substantial
number of Host REIT's shares of common stock, or the perception that sales
could occur, could adversely affect prevailing market prices for its common
stock. In addition, holders of OP Units who redeem their OP Units and receive
Host REIT common stock will be able to sell their shares freely after they are
received, unless the person is our affiliate. There are currently
approximately 64.0 million OP Units outstanding held by someone other than
Host REIT, substantially all of which are currently redeemable. Further, a
substantial number of shares of Host REIT common stock have been and will be
issued or reserved for issuance from time to time under our employee benefit
plans, including shares by Host REIT common stock reserved for options, and
these shares of common stock would be available for sale in the public markets
from time to time pursuant to exemptions from registration or upon
registration. Moreover, the issuance of additional shares of Host REIT of
common stock in the future would be available for sale in the public

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<PAGE>

markets. We can make no prediction about the effect that future sales of Host
REIT common stock would have on the market price of its common stock.

   Our earnings and cash distributions will affect the market price of shares
of Host REIT common stock. We believe that the market value of a REIT's equity
securities is based primarily upon the market's perception of the REIT's
growth potential and its current and potential future cash distributions,
whether from operations, sales, acquisitions, development or refinancings, and
is secondarily based upon the value of the underlying assets. For that reason,
shares of Host REIT common stock may trade at prices that are higher or lower
than the net asset value per share or per OP Unit. To the extent we retain
operating cash flow for investment purposes, working capital reserves or other
purposes rather than distributing such cash flow to our unitholders, including
Host REIT, these retained funds, while increasing the value of our underlying
assets, may not correspondingly increase the market price of Host REIT common
stock. Our failure to meet the market's expectation with regard to future
earnings and cash distributions would likely adversely affect the market price
of Host REIT common stock.

   Market interest rates may affect the price of shares of Host REIT common
stock. One of the factors that investors consider important in deciding
whether to buy or sell shares of a REIT is the distribution rate on such
shares, considered as a percentage of the price of such shares, relative to
market interest rates. If market interest rates increase, prospective
purchasers of REIT shares may expect a higher distribution rate. Thus, higher
market interest rates could cause the market price of Host REIT shares to go
down.

Risks of operation

   We do not control our hotel operations, and we are dependent on the
managers and lessees of our hotels. Because federal income tax laws currently
restrict REITs and "publicly traded" partnerships from deriving revenues
directly from operating a hotel, we operate none of our hotels. Instead, we
lease virtually all of our hotels to subsidiaries of Crestline which, in turn,
retain managers to manage our hotels pursuant to management agreements. Thus,
we are dependent on the lessees but, under the hotel leases, we have little
influence over how the lessees operate our hotels. Similarly, we are dependent
on the managers, principally Marriott International, but we have little
influence over how the managers manage our hotels. We have very limited
recourse if we believe that the hotel managers do not maximize the revenues
from our hotels, which in turn will maximize the rental payments we receive
under the leases. We may seek redress under most leases only if the lessee
violates the terms of the lease and then only to the extent of the remedies
set forth in the lease.

   Each lessee's ability to pay rent accrued under its lease depends to a
large extent on the ability of the hotel manager to operate the hotel
effectively and to generate gross sales in excess of its operating expenses.
Our rental income from the hotels may therefore be adversely affected if the
managers fail to provide quality services and amenities and competitive room
rates at our hotels or fail to maintain the quality of the hotel brand names.
Although the lessees have primary liability under the management agreements
while the leases are in effect, we remain liable under the management
agreements for all obligations that the lessees do not perform. We may
terminate a lease if the lessee defaults under a management agreement, but
terminating the lease could, unless another suitable lessee is found, impair
Host REIT's ability to qualify as a REIT for federal income tax purposes and
our ability to qualify as a partnership for federal income tax purposes if we
are a "publicly traded partnership" unless another suitable lessee is found.
As described below, Host REIT's inability to qualify as a REIT or our
inability to qualify as a partnership for federal income tax purposes would
have a material adverse effect on us.

   We do not control the assets held by the non-controlled subsidiaries. We
own economic interests in several taxable corporations, which we refer to as
"non-controlled subsidiaries," that hold various assets which, under our
credit facility may not exceed, in the aggregate, 15% of the value of our
assets. The assets held by the non-controlled subsidiaries consist primarily
of interests in partnerships that own hotels that are not leased to third
parties, hotels that are not leased to third parties, some FF&E used in our
hotels and some international hotels. If we owned these assets, it could
jeopardize Host REIT's REIT status and/or our status as a partnership for
federal income tax purposes. Although we own approximately 95% of the total
economic interests of the non-controlled subsidiaries, we own none of the
voting stock of the non-controlled subsidiaries. The Host

                                      23
<PAGE>

Marriott Statutory Employee/Charitable Trust, the beneficiaries of which are
(1) a trust formed for the benefit of a number of our employees and (2) the J.
Willard and Alice S. Marriott Foundation, owns all of the voting common stock,
representing approximately 5% of the total economic interests in such the
controlled subsidiaries. The Host Marriott Statutory Employee/Charitable Trust
elects the directors who are responsible for overseeing the operations of the
non-controlled subsidiaries. The directors are currently our employees,
although this is not required. As a result, we have no control over the
operation or management of the hotels or other assets owned by the non-
controlled subsidiaries, even though we depend upon the non-controlled
subsidiaries for a portion of our revenues. Also, the activities of the non-
controlled subsidiaries could cause us to be in default under our principal
credit facilities.

   We are dependent upon the ability of Crestline and the lessees to meet
their rent obligations. The lessees' rent payments are the primary source of
our revenues. Crestline guarantees the obligations of its subsidiaries under
the hotel leases, but Crestline's liability is limited to a relatively small
portion of the aggregate rent obligation of its subsidiaries. The ability of
Crestline and each of its subsidiaries to meet its obligations under the
leases will determine the amount of our revenue and our ability to meet our
obligations. We have no control over Crestline or any of its subsidiaries and
cannot assure you that Crestline or any of its subsidiaries will have
sufficient assets, income and access to financing to enable them to satisfy
their obligations under the leases or to make payments of fees under the
management agreements. Although the lessees have primary liability under the
management agreements while the leases are in effect, we and our subsidiaries
remain liable under the management agreements for all obligations that the
lessees do not perform. Because of our dependence on Crestline, our credit
rating will be affected by its creditworthiness.

Our relationships with Marriott International and Crestline may result in
conflicts of interest.

   Marriott International, a public hotel management company, manages a
significant number of our hotels. In addition, Marriott International manages
hotels that compete with our hotels. As a result, Marriott International may
make decisions regarding competing lodging facilities which it manages that
would not necessarily be in our best interests. J.W. Marriott, Jr. is a member
of Host REIT's Board of Directors and his brother, Richard E. Marriott, is
Host REIT's Chairman of the Board. Both J.W. Marriott, Jr. and Richard E.
Marriott serve as directors, and J.W. Marriott, Jr. also serves as an officer,
of Marriott International. J.W. Marriott, Jr. and Richard E. Marriott also
beneficially own, as determined for securities law purposes, as of January 31,
2000, approximately 10.8% and 10.6%, respectively, of the outstanding shares
of common stock of Marriott International. In addition, J.W. Marriott, Jr. and
Richard E. Marriott own, as of January 31, 2000, approximately 5.1% and 4.8%,
respectively, of the outstanding shares of common stock of Crestline. Neither
J.W. Marriott, Jr. or Richard E. Marriott serves as an officer or director of
Crestline. As a result, J.W. Marriott, Jr. and Richard E. Marriott have
potential conflicts of interest as Host REIT directors when making decisions
regarding Marriott International, including decisions relating to the
management agreements involving the hotels, Marriott International's
management of competing lodging properties and Crestline's leasing and other
businesses.

   Both Host REIT's Board of Directors and the Board of Directors of Marriott
International follow appropriate policies and procedures to limit the
involvement of Messrs. J.W. Marriott, Jr. and Richard E. Marriott in conflict
situations, including requiring them to abstain from voting as directors of
either Host REIT or Marriott International or Host REIT's or their
subsidiaries on matters which present a conflict between the companies. If
appropriate, these policies and procedures will apply to other directors and
officers.

   When the leases expire or terminate, we might not be able to find other
lessees. Our current hotel leases have terms generally ranging from seven to
ten years. We cannot assure you that when our leases expire, our hotels will
be re-leased to the current lessees, or if re-leased, will be re-leased on
terms favorable to us. If our hotels are not re-leased, we will be required to
find other lessees who meet the requirements of the management agreements and
of the federal income tax rules that govern REITs. We have received notices of
termination from Crestline on five leases, with effective dates ranging from
March through June 2000. We are in the process of finding new lessees for
these hotels, and we expect to be able to obtain replacement leases for

                                      24
<PAGE>

these leases without material impact to our future operations. We cannot
assure you that we will be able to find satisfactory lessees or that the terms
of any new leases would be favorable. If we fail to find satisfactory lessees:

  . Host REIT could lose its REIT status;

  . we would be taxed as a "C" corporation if we are a "publicly traded
    partnership," which would require us to pay substantial federal income
    taxes;

  . it could adversely affect Host REIT's and our ability to raise additional
    capital.

   Failure to enter leases on satisfactory terms could also result in reduced
cash available for debt service and distributions to unitholders, including
Host REIT.

   We have substantial indebtedness. Our degree of leverage could affect our
ability to:

  . obtain financing in the future for working capital, capital expenditures,
    acquisitions, development or other general business purposes;

  . undertake financings on terms and conditions acceptable to us;

  . pursue our acquisition strategy; or

  . compete effectively or operate successfully under adverse economic
    conditions.

   We have a policy of incurring debt only if, immediately following the
incurrence, our debt-to-total market capitalization ratio on a pro forma basis
would be 60% or less. Host REIT's debt-to-total market capitalization ratio
was approximately 69% as of December 31, 1999. If Host REIT's total market
capitalization does not change, we would have to waive or change our debt
policy to incur additional indebtedness. Host REIT's debt-to-total market
capitalization ratio has increased primarily because of a general decline in
the market valuation of the stock of lodging companies, including Host REIT's
stock. As a result of this decline, Host REIT's Board of Directors may
reconsider whether our debt incurrence policy should be linked to another
measure of value instead of Host REIT's total market capitalization.

   If our cash flow and working capital is not sufficient to fund our
expenditures or service our indebtedness, we would have to raise additional
funds through:

  . the sale of equity;

  . the refinancing of all or part of our indebtedness;

  . the incurrence of additional permitted indebtedness; or

  . the sale of assets.

   We cannot assure you that any of these sources of funds would be available
in amounts sufficient for us to meet our obligations or fulfill our business
plans. Additionally, our debt contains certain performance related covenants
which, if not achieved, could require immediate repayment of the debt or
significantly increase the rate of interest on the debt.

   There is no limitation on the amount of debt we may incur. There are no
limitations in our or Host REIT's organizational documents that limit the
amount of indebtedness that we may incur. However, our existing debt
instruments contain restrictions on the amount of indebtedness that we may
incur. Accordingly, Host REIT's Board of Directors could alter or eliminate
our 60% policy without shareholder approval to the extent permitted by our
debt agreements. If this policy were changed, we could become more highly
leveraged, which would increase our debt service payments and adversely affect
our cash flow and our ability to service our debt and make distributions to
our shareholders.

   Our leases and management agreements could impair the sale or other
disposition of our hotels. Under each lease with a subsidiary of Crestline, we
generally must purchase a lease if we want to terminate the lease prior to the
expiration of its term. We must purchase the lease even if we are terminating
the lease because of a change in the federal income tax laws that either would
make continuation of the lease jeopardize Host REIT's status as a REIT or
would enable us to operate our hotels directly ourselves. The REIT

                                      25
<PAGE>

Modernization Act will allow us to lease the hotels to a "taxable REIT
subsidiary" after December 31, 2000. See "--REIT Modernization Act changes to
REIT asset tests" below. At the present time, no decision has been made
regarding whether a taxable REIT subsidiary would be formed and, if so,
whether it would purchase any of the leases from a Crestline subsidiary. The
purchase price generally will be equal to the fair market value of the
lessee's leasehold interest in the remaining term of the lease, which could be
a significant amount. In addition, if we decide to sell a hotel, we may be
required to terminate its lease, and the payment of the purchase price under
such circumstances could impair our ability to sell the hotel and would reduce
the net proceeds of any sale.

   Under the terms of the management agreements, we generally may not sell,
lease or otherwise transfer the hotels unless the transferee assumes the
related management agreements and meets specified other conditions. Our
ability to finance, refinance or sell any of the properties managed by
Marriott International or another manager may, depending upon the structure of
such transactions, require the manager's consent. If Marriott International or
any other manager did not consent, we would be prohibited from financing,
refinancing or selling the property without breaching the management
agreement.

   Our rental revenues from hotels are subject to the prior rights of
lenders. The mortgages on some of our hotels require that rent payments under
the leases on the hotels be used first to pay the debt service on the mortgage
loans. Consequently, only the cash flow remaining after debt service on those
mortgage loans will be available to satisfy other obligations, including
property taxes and insurance, FF&E reserves for the hotels and capital
improvements, and to make distributions to our unitholders, including Host
REIT.

   The acquisition contracts relating to some hotels limit our ability to sell
or refinance those hotels. For reasons relating to federal income tax
considerations of the former owners of some of our hotels, we agreed to
restrictions on selling some hotels or repaying or refinancing the mortgage
debt on those hotels for varying periods depending on the hotel. We anticipate
that, in specified circumstances, we may agree to similar restrictions in
connection with future hotel acquisitions. As a result, even if it were in our
best interests to sell or refinance the mortgage debt on these hotels, it may
be difficult or impossible to do so during their respective lock-out periods.

   Our ground lease payments may increase faster than the rent revenues we
receive on the hotels. As of December 31, 1999, we leased 53 of our hotels
pursuant to ground leases. These ground leases generally require increases in
ground rent payments every five years. Our ability to make distributions to
shareholders could be adversely affected to the extent that the rents payable
by the lessees under the leases do not increase at the same or a greater rate
as the increases under the ground leases. In addition, if we were to sell a
hotel encumbered by a ground lease, the buyer would have to assume the ground
lease, which could result in a lower sales price.

   New acquisitions may fail to perform as expected or we may be unable to
make acquisitions on favorable terms. We intend to acquire additional full-
service hotels. Newly acquired properties may fail to perform as expected,
which could adversely affect our financial condition. We may underestimate the
costs necessary to bring an acquired property up to standards established for
its intended market position. We expect to acquire hotels with cash from
secured or unsecured financings and proceeds from offerings of equity or debt,
to the extent available. We may not be in a position or have the opportunity
in the future to make suitable property acquisitions on favorable terms.
Competition for attractive investment opportunities may increase prices for
hotel properties, thereby decreasing the potential return on our investment.
In addition, in order to maintain Host REIT's status as a REIT, we must lease
virtually all of the properties we acquire. We cannot guarantee that the
leases for newly acquired hotels will be as favorable to us as the existing
leases. Under the REIT Modernization Act, however, we would be permitted to
lease any newly acquired hotels to a taxable REIT subsidiary after December
31, 2000.

   The seasonality of the hotel industry may affect the ability of the lessees
to make timely rent payments. The seasonality of the hotel industry may, from
time to time, affect either the amount of rent that accrues under the hotel
leases or the ability of the lessees to make timely rent payments under the
leases. A lessee's inability to make timely rent payments to us could
adversely affect our financial condition and our ability to make distributions
to our shareholders.

                                      26
<PAGE>

   We may be unable to sell properties when appropriate because real estate
investments are illiquid. Real estate investments generally cannot be sold
quickly. We may not be able to vary our portfolio promptly in response to
economic or other conditions. The inability to respond promptly to changes in
the performance of our investments could adversely affect our financial
condition, and ability to service debt and make distributions to shareholders.
In addition, there are limitations under the federal tax laws applicable to
REITs and agreements that we have entered into when we acquired some of our
properties that may limit our ability to recognize the full economic benefit
from a sale of our assets.

   Our revenues and the value of our properties are subject to conditions
affecting the lodging industry. If our assets do not generate income
sufficient to pay our expenses, service our debt and maintain our properties,
we will be unable to make distributions to our shareholders. Our revenues and
the value of our properties are subject to conditions affecting the lodging
industry. These include:

  . changes in the national, regional and local economic climate;

  . local conditions such as an oversupply of hotel properties or a reduction
    in demand for hotel rooms;

  . the attractiveness of our hotels to consumers and competition from
    comparable hotels;

  . the quality, philosophy and performance of the managers of our hotels,
    primarily Marriott International;

  . the ability of any hotel lessee to maximize rental payments;

  . changes in room rates and increases in operating costs due to inflation
    and other factors; and

  . the need to periodically repair and renovate our hotels.

   Adverse changes in these conditions could adversely affect our financial
performance.

   Our expenses may remain constant even if our revenue drops. The expenses of
owning property are not necessarily reduced when circumstances like market
factors and competition cause a reduction in income from the property. If a
property is mortgaged and we are unable to meet the mortgage payments, the
lender could foreclose and take the property. Our financial condition could be
adversely affected by:

  . interest rate levels;

  . the availability of financing;

  . the cost of compliance with government regulation, including zoning and
    tax laws; and

  . changes in governmental regulations, including those governing usage,
    zoning and taxes.

   We depend on our key personnel. We depend on the efforts of our executive
officers and other key personnel. While we believe that we could find
replacements for these key personnel, the loss of their services could have a
significant adverse effect on our operations. On November 3, 1999, Terence C.
Golden, President and Chief Executive Officer of Host REIT, announced his
resignation effective in May 2000. Mr. Golden will remain on Host REIT's Board
of Directors. Host REIT's Board of Directors has appointed Christopher J.
Nassetta, currently Executive Vice President and Chief Operating Officer of
Host REIT, as our President and Chief Executive Officer, upon the
effectiveness of Mr. Golden's resignation. Mr. Nassetta also became a member
of Host REIT's Board of Directors at the time of the announcement of Mr.
Golden's resignation. We do not intend to obtain key-man life insurance with
respect to any of our personnel.

   Partnership and other litigation judgments or settlements could have a
material adverse effect on our financial condition. We and Host REIT are
parties to various lawsuits relating to previous partnership transactions,
including the REIT conversion. While we and the other defendants to such
lawsuits believe all of the lawsuits in which we are a defendant are without
merit and we are vigorously defending against such claims, we can give no
assurance as to the outcome of any of the lawsuits. In connection with the
REIT conversion, we have assumed all liability arising under legal proceedings
filed against Host REIT and will indemnify them as to all such matters. If any
of the lawsuits were to be determined adversely to us or settlement involving
a payment of a material sum of money were to occur, there could be a material
adverse effect on our financial condition.

                                      27
<PAGE>

Host REIT announced that Marriott International and Host REIT have executed a
definitive settlement agreement to resolve specific pending litigation
involving seven limited partnerships. The proposed settlement would involve an
acquisition of the limited partner interests in two partnerships by a joint
venture between our non-controlled subsidiary and Marriott International and a
resolution of claims against all defendants in all seven partnerships for
approximately $372 million. Our share of the payment, including for the
acquisition, is expected to be approximately $113 million, not including our
existing interests in the partnerships. The proposed settlement is subject to
numerous conditions, including definitive documentation, court approval and
various consents, and we cannot assure you that the settlement will occur. As
a result of the proposed settlement, we have recorded a one-time, non-
recurring, pre-tax charge of $40 million to our 1999 earnings.

   We may acquire hotel properties through joint venture with third parties
that could result in conflicts. Instead of purchasing hotel properties
directly, we may invest as a co-venturer. Joint venturers often share control
over the operation of the joint venture assets. Actions by a co-venturer could
subject the assets to additional risk, including:

  . our co-venturer in an investment might have economic or business
    interests or goals that are inconsistent with our interests or goals,

  . our co-venturers may be in a position to take action contrary to our
    instructions or requests or contrary to our policies or objectives, or

  . a joint venture partner could go bankrupt, leaving us liable for its
    share of joint venture liabilities.

   Although we generally will seek to maintain sufficient control of any joint
venture to permit our objectives to be achieved, we might not be able to take
action without the approval of our joint venture partners. Also, our joint
venture partners could take actions binding on the joint venture without our
consent.

   Environmental problems are possible and can be costly. We believe that our
properties are in compliance in all material respects with applicable
environmental laws. Unidentified environmental liabilities could arise,
however, and could have a material adverse effect on our financial condition
and performance. Federal, state and local laws and regulations relating to the
protection of the environment may require a current or previous owner or
operator of real estate to investigate and clean up hazardous or toxic
substances or petroleum product releases at the property. The owner or
operator may have to pay a governmental entity or third parties for property
damage and for investigation and clean-up costs incurred by the parties in
connection with the contamination. These laws typically impose clean-up
responsibility and liability without regard to whether the owner or operator
knew of or caused the presence of the contaminants. Even if more than one
person may have been responsible for the contamination, each person covered by
the environmental laws may be held responsible for all of the clean-up costs
incurred. In addition, third parties may sue the owner or operator of a site
for damages and costs resulting from environmental contamination emanating
from that site. Environmental laws also govern the presence, maintenance and
removal of asbestos. These laws require that owners or operators of buildings
containing asbestos properly manage and maintain the asbestos, they notify and
train those who may come into contact with asbestos and they undertake special
precautions, including removal or other abatement, if asbestos would be
disturbed during renovation or demolition of a building. These laws may impose
fines and penalties on building owners or operators who fail to comply with
these requirements and may allow third parties to seek recovery from owners or
operators for personal injury associated with exposure to asbestos fibers.

   Compliance with other government regulations can also be costly. Our hotels
are subject to various forms of regulation, including Title III of the
Americans with Disabilities Act, building codes and regulations pertaining to
fire safety. Compliance with those laws and regulations could require
substantial capital expenditures. These regulations may be changed from time
to time, or new regulations adopted, resulting in additional or unexpected
costs of compliance. Any increased costs could reduce the cash available for
servicing debt and making distributions to our shareholders.

   Some potential losses are not covered by insurance. We carry comprehensive
liability, fire, flood, extended coverage and rental loss, for rental losses
extending up to 12 months, insurance with respect to all of

                                      28
<PAGE>

our hotels. We believe the policy specifications and insured limits of these
policies are of the type customarily carried for similar hotels. Some types of
losses, such as from earthquakes and environmental hazards, however, may be
either uninsurable or too expensive to justify insuring against. Should an
uninsured loss or a loss in excess of insured limits occur, we could lose all
or a portion of the capital we have invested in a hotel, as well as the
anticipated future revenue from the hotel. In that event, we might
nevertheless remain obligated for any mortgage debt or other financial
obligations related to the property.

Federal income tax risks.

   General. We believe that Host REIT has been organized and has operated in
such a manner so as to qualify as a REIT under the Internal Revenue Code,
commencing with its taxable year beginning January 1, 1999. A REIT generally
is not taxed at the corporate level on income it currently distributes to its
shareholders as long as it distributes currently at least 95% of its taxable
income, excluding net capital gain. This distribution requirement will be
reduced to 90% in years beginning after December 31, 2000. No assurance can be
provided, however, that Host REIT will qualify as a REIT or that new
legislation, Treasury Regulations, administrative interpretations or court
decisions will not significantly change the tax laws with respect to its
qualification as a REIT or the federal income tax consequences of such
qualification.

   Required distributions and payments. In order to continue to qualify as a
REIT, Host REIT currently is required each year to distribute to its
shareholders at least 95% of its taxable income, excluding net capital gain,
and will be required to distribute 90% of this amount for years beginning
after December 31, 2000. Due to some transactions entered into in years prior
to the REIT conversion, Host REIT expects to recognize substantial amounts of
"phantom" income, which is taxable income that is not matched by cash flow or
EBITDA to us. In addition, Host REIT will be subject to a 4% nondeductible
excise tax on the amount, if any, by which certain distributions made by Host
REIT with respect to the calendar year are less than the sum of 85% of Host
REIT's ordinary income, 95% of Host REIT's capital gain net income for that
year, and any undistributed taxable income from prior periods. Host REIT
intends to make distributions to its shareholders to comply with the 95%
distribution requirement and to avoid the nondeductible excise tax and will
rely for this purpose on distributions from us. However, differences in timing
between taxable income and cash available for distribution due to, among other
things, the seasonality of the lodging industry and the fact that some taxable
income will be "phantom" income could require us to borrow funds or to issue
additional equity to enable Host REIT to meet the 95% distribution requirement
and, therefore, to maintain Host REIT's REIT status, and to avoid the
nondeductible excise tax. We are required to pay, or reimburse Host REIT, as
our general partner, for, some taxes and other liabilities and expenses that
it incurs, including all taxes and liabilities attributable to periods and
events prior to the REIT conversion. In addition, because the REIT
distribution requirements prevent Host REIT from retaining earnings, we will
generally be required to refinance debt that matures with additional debt or
equity. We cannot assure you that any of these sources of funds, if available
at all, would be sufficient to meet our distribution and tax obligations.

   Adverse consequences of Host REIT's failure to qualify as a REIT. If Host
REIT fails to qualify as a REIT, it will be subject to federal income tax,
including any applicable alternative minimum tax, on its taxable income at
regular corporate rates. In addition, unless entitled to statutory relief,
Host REIT will not qualify as a REIT for the four taxable years following the
year during which REIT qualification is lost. The additional tax burden would
significantly reduce the cash available for distribution by Host REIT to its
shareholders and Host REIT would no longer be required to make any
distributions to its shareholders. Host REIT's failure to qualify as a REIT
could reduce materially the value of its common stock and the OP Units and
would cause any distributions by Host REIT to its shareholders to be taxable
as ordinary income to the extent of Host REIT's current and accumulated E&P.
However, subject to limitations under the Internal Revenue Code, corporate
distributees may be eligible for the dividends received deduction with respect
to these distributions. Host REIT's failure to qualify as a REIT also would
result in a default under the senior notes and the credit facility.

   Host REIT's earnings and profits attributable to its non-REIT taxable
years. In order to qualify as a REIT, Host REIT cannot have at the end of any
taxable year any undistributed E&P that is attributable to one

                                      29
<PAGE>

of its non-REIT taxable years. A REIT has until the close of its first taxable
year as a REIT in which it has non-REIT E&P to distribute such accumulated
E&P. Host REIT was required to have distributed this E&P prior to the end of
1999, the first taxable year for which its REIT election was effective. If
Host REIT failed to do this, it will be disqualified as a REIT at least for
taxable year 1999. We believe that distributions of non-REIT E&P that Host
REIT made were sufficient to distribute all of the non-REIT E&P as of December
31, 1999, but there could be uncertainties relating to the estimate of Host
REIT's non-REIT E&P and the value of the Crestline stock that Host REIT
distributed to its shareholders. Therefore, we cannot guarantee that Host REIT
met this requirement.

   Treatment of leases. To qualify as a REIT, Host REIT must satisfy two gross
income tests, under which specified percentages of its gross income must be
passive income, like rent. For the rent paid pursuant to the leases, which
constitutes substantially all of our gross income, to qualify for purposes of
the gross income tests, the leases must be respected as true leases for
federal income tax purposes and not be treated as service contracts, joint
ventures or some other type of arrangement. In addition, the lessees must not
be regarded as "related party tenants," as defined in the Internal Revenue
Code. We believe, taking into account both the terms of the leases and the
expectations that we and the lessees have with respect to the leases, that the
leases will be respected as true leases for federal income tax purposes. There
can be no assurance, however, that the IRS will agree with this view. If the
leases were not respected as true leases for federal income tax purposes or if
the lessees were regarded as "related party tenants," Host REIT would not be
able to satisfy either of the two gross income tests applicable to REITs and
Host REIT would lose its REIT status. See "--Adverse Consequences of Host
REIT's failure to qualify as a REIT," above.

   Other tax liabilities; our substantial deferred and contingent tax
liabilities. Notwithstanding Host REIT's status as a REIT, we are subject to
certain federal, state and local taxes on our income and property. In
addition, Host REIT will be required to pay tax at the regular corporate rate,
currently 35%, upon its share of any "built-in gain" recognized as a result of
any sale before January 1, 2009, by us of assets, including the hotels, in
which interests were acquired by us from Host REIT's predecessor and its
subsidiaries as part of the REIT conversion. Built-in gain is the amount by
which an asset's fair market value exceeded Host REIT's adjusted basis in the
asset on January 1, 1999, the first day of Host REIT's first taxable year as a
REIT. Host REIT or a non-controlled subsidiary likely will recognize
substantial built-in gain and deferred tax liabilities in the next ten years
without any corresponding receipt of cash by Host REIT from us. Host REIT
recognized a substantial amount of built-in gains and deferred tax liabilities
in 1999. Accordingly, our potential tax exposure on these gains and deferred
liabilities for the future is significantly less than it was at the time of
our REIT conversion. We are obligated under our partnership agreement to pay
all such taxes incurred by Host REIT, as well as any liabilities that the IRS
may assert against Host REIT for corporate income taxes for taxable years
prior to the time it qualified as a REIT. The non-controlled subsidiaries are
fully taxable corporations and will pay federal and state income tax on their
net income at the applicable corporate rates.

   Our failure to qualify as a partnership. We believe that we qualify to be
treated as a partnership for federal income tax purposes. No assurance can be
provided, however, that the IRS will not challenge our status as a partnership
for federal income tax purposes, or that a court would not sustain such a
challenge. If the IRS were successful in treating us as a corporation for tax
purposes, Host REIT would fail to meet two of the asset tests applicable to
REITs and, accordingly, cease to qualify as a REIT. See "--Adverse
consequences of Host REIT's failure to qualify as a REIT," above. Also, the
imposition of a corporate tax on us would reduce significantly the amount of
cash available for distribution to our unitholders, including Host REIT.
Finally, the classification of us as a corporation would cause Host REIT to
recognize gain at least equal to its "negative capital accounts," and possibly
more, depending upon the circumstances.

   REIT Modernization Act changes to the REIT asset tests. Currently, a REIT
may not own securities in any one issuer if the value of those securities
exceeds 5% of the value of the REIT's total assets or the securities owned by
the REIT represent more than 10% of the issuer's outstanding voting
securities. As a result of the REIT Modernization Act, after December 31,
2000, the 5% value test and the 10% voting security test will be modified in
two respects. First, the 10% voting securities test will be expanded so that
REITs also will be prohibited from owning more than 10% of the value of the
outstanding securities of any one issuer. Second, an

                                      30
<PAGE>

exception to these tests will allow a REIT to own securities of a subsidiary
that exceed the 5% value test and the new 10% vote or value test if the
subsidiary elects to be a "taxable REIT subsidiary," which would be a fully
taxable corporation. The expanded 10% vote or value test, however, will not
apply to an existing subsidiary unless it engages in a substantial new line of
business or acquires any substantial asset or the Company acquires any
securities in that subsidiary after July 12, 1999. Under a new asset test, for
taxable years beginning after December 31, 2000, the Company will not be able
to own securities of taxable REIT subsidiaries that represent in the aggregate
more than 20% of the value of the Company's total assets. At the present time,
no decision has been made as to whether any of the non-controlled subsidiaries
will elect to be treated as taxable REIT subsidiaries.

   Several provisions of the new law will ensure that a taxable REIT
subsidiary will be subject to an appropriate level of federal income taxation.
For example, a taxable REIT subsidiary will be limited in its ability to
deduct interest payments made to an affiliated REIT. In addition, the REIT
will have to pay a 100% penalty tax on some payments that it receives if the
economic arrangements between the REIT, the REIT's tenants, and the taxable
REIT subsidiary are not comparable to similar arrangements between unrelated
parties.

Item 3. Legal Proceedings

   Texas Multi-Partnership Lawsuit. On March 16, 1998, limited partners in
several limited partnerships sponsored by Host Marriott or its subsidiaries
filed a lawsuit, Robert M. Haas, Sr. and Irwin Randolph Joint Tenants, et al.
v. Marriott International, Inc., et al., Case No. 98-CI-04092, in the 57th
Judicial District Court of Bexar County Texas, alleging that the defendants
conspired to sell hotels to the partnerships for inflated prices and that they
charged the partnerships excessive management fees to operate the
partnerships' hotels. A Marriott International subsidiary manages each of the
hotels involved and, as to some properties, Marriott International, or one of
its subsidiaries, is the ground lessor and collects rent. The Company,
Marriott International, several of their subsidiaries, and J.W. Marriott, Jr.
are among the various named defendants. The Haas lawsuit originally involved
the following partnerships:

    1.) Courtyard by Marriott Limited Partnership ("CBMI");

    2.) Courtyard by Marriott II Limited Partnership ("CBMII");

    3.) Marriott Residence Inn Limited Partnership ("Res I");

    4.) Marriott Residence Inn II Limited Partnership ("Res II");

    5.) Fairfield Inn by Marriott Limited Partnership (Fairfield");

    6.) Desert Springs Marriott Limited Partnership ("Desert Springs"); and

    7.) Atlanta Marriott Marquis Limited Partnership ("AMMLP").

   Those allegations concerning CBM II have been transferred to the CBM II
lawsuit described below.

   Courtyard by Marriott II Limited Partnership (CBM II). A group of partners
in CBM II filed a lawsuit, Whitey Ford, et al v. Host Marriott Corporation, et
al., Case No. 96-CI-08327, on June 7, 1996, in the 285th Judicial District
Court of Bexar County, Texas against the Company, Marriott International, and
others alleging breach of fiduciary duty, breach of contract, fraud, negligent
misrepresentation, tortious interference, violation of the Texas Free
Enterprise and Antitrust Act of 1983 and conspiracy in connection with the
formation, operation and management of CBM II and its hotels. The plaintiffs
are seeking unspecified damages. On January 29, 1998, two other limited
partners, A.R. Milkes and D.R. Burklew, filed a petition in intervention
seeking to convert the lawsuit into a class action.

   Courtyard by Marriott Limited Partnership (CBM I). Two members of an ad hoc
committee of CBM I limited partners, Marvin Schick and Jack Hirsch, filed a
putative class action lawsuit, Marvin Schick, et al. v. Host Marriott
Corporation, et al., Civil Action No. 15991, in Delaware Chancery Court
against the Company, Marriott International, and others on October 16, 1997,
regarding the 1995 refinancing of CBMI's mortgage debt.

                                      31
<PAGE>

The complaint contains allegations of breach of fiduciary duty, breach of
contract, tortious interference, and aiding and abetting liability in
connection with the refinancing.

   Atlanta Marquis. Certain limited partners of AMMLP filed a putative class
action lawsuit, Hiram and Ruth Sturm v. Marriott Marquis Corporation, et al.,
Case No. 97-CV-3706, in the U.S. District Court for the Northern District of
Georgia, on December 12, 1997 against AMMLP's general partner, its directors
and the Company, regarding the merger of AMMLP into a new partnership as part
of the refinancing of AMMLP's debt. The plaintiffs allege that the defendants
misled the limited partners in order to induce them to approve the AMMLP
merger, violated securities regulations and federal roll-up regulations, and
breached their fiduciary duties to the partners. Another limited partner of
AMMLP sought similar relief and filed a separate lawsuit, styled Poorvu v.
Marriott Marquis Corporation, et al., Civil Action No. 16095-NC, on December
19, 1997, in Delaware State Chancery Court.

   Partnership Litigation Settlement. On March 9, 2000, we and Marriott
International entered into a settlement agreement that would resolve the Texas
Multi-Partnership, the CBM II (Whitey Ford and Milkes), the CBMI (Schick), and
the Atlanta Marquis (Sturm and Poorvu) litigation. The settlement, which is
still subject to numerous conditions, including participation in the class
action settlement by holders of at least 90% of the units in each partnership,
court approval, and various consents, was reached with lead counsel to the
plaintiffs in litigation pending in Texas, Delaware and Georgia. There are two
principal features of the proposed settlement. First, one of our non-
controlled subsidiaries and Marriott International would form a joint venture
to acquire the equity interests of the limited partners in two partnerships,
CBM I and CBM II, and to obtain a full release of all claims for approximately
$372 million. These partnerships own 120 Courtyard hotels. The settlement of
litigation concerning these two partnerships, including the acquisitions and
full releases of all claims, would be financed with approximately $185 million
of mezzanine debt loaned to the joint venture by Marriott International, and
equity contributed in equal shares by our non-controlled subsidiary and
Marriott International. Marriott International will continue to manage these
120 hotels under long-term agreements. Second, Marriott International and we
would each pay approximately $31 million to the limited partners in Res I and
Res II, Fairfield, Desert Springs, and Atlanta in exchange for settlement of
the litigation and full releases of claims.

   MHP II. Limited partners of Marriott Hotel Properties II Limited
Partnership ("MHP II") are asserting putative class claims in lawsuits filed
in Palm Beach County Circuit Court on May 10, 1996, Leonard Rosenblum, as
Trustee of the Sylvia Bernice Rosenblum Trust, et al. v. Marriott MHP Two
Corporation, et al., Case No. CL-96-4087-AD, and, in Delaware State Chancery
Court on April 24, 1996, Cary W. Salter, Jr., et al. v. MHP II Acquisition
Corp., et al., respectively, against the Company and certain of its affiliates
alleging that the defendants violated their fiduciary duties and engaged in
fraud and coercion in connection with the tender offer for MHP II units.

   The defendants removed the Florida action to the United States District
Court for the Southern District of Florida and, after hearings on various
procedural motions, the District Court remanded the case to state court on
July 25, 1998. The defendants then filed motions to dismiss Rosenblum's fifth
amended complaint or, in the alternative, to deny class certification in the
state court case. The state court held a hearing on these motions on October
27, 1998 but did not issue a ruling at that time. Thereafter, and prior to any
ruling on the defendants' motions, Rosenblum filed a motion seeking leave to
file a sixth amended complaint adding allegations relating to the partnership
merger of MHP II and adding additional plaintiffs. On February 2, 1999, the
court granted Rosenblum's motion to file an amended complaint and denied as
moot the defendants' motion to dismiss the earlier complaint.

   On June 12, 1996, the Delaware Chancery Court entered an order denying the
Delaware plaintiffs' application to enjoin the tender offer for MHP II units.
The Delaware plaintiffs subsequently moved to voluntarily dismiss the Delaware
action. The Chancery Court granted this motion, but with the proviso that the
plaintiffs could only refile in the Florida federal action. After the District
Court's remand of the Rosenblum case to Florida state court, two of the three
original Delaware plaintiffs asked the Chancery Court to reconsider its order
granting their voluntary dismissal. The Chancery Court refused to allow the
plaintiffs to join the

                                      32
<PAGE>

Rosenblum action in Florida and, instead, reinstated the Delaware case, now
styled In Re Marriott Hotel Properties II Limited Partnership Unitholders
Litigation, Consolidated Civil Action No. 14961. On January 29, 1999, Cary W.
Salter alone filed an Amended Consolidated Class Action Complaint in the
Delaware action, adding allegations relating to the partnership merger of MHP
II. On January 24, 2000, the Delaware Chancery Court issued a memorandum
opinion in which the court dismissed all but one of the plaintiff's claims.

   In light of the Chancery Court's decision, the defendants in the Florida
action filed a supplemental memorandum in support of their motions to dismiss,
and attached a copy of the Delaware opinion to the memorandum. The Florida
court has not yet ruled on the motions.

   Potomac Hotel Limited Partnership. On July 15, 1998, one limited partner in
Potomac Hotel Limited Partnership, or PHLP, filed a class action lawsuit
styled Michael C. deBerardinis v. Host Marriott Corporation, Civil Action No.
WMN 98-2263, in the United States District Court for the District of Maryland.
The plaintiff alleged that Host Marriott misled PHLP's limited partners in
order to induce them into approving the sale of one of PHLP's hotels, violated
the securities regulations by issuing a false and misleading consent
solicitation and breached fiduciary duties and the partnership agreement. The
complaint sought unspecified damages. On February 16, 1999, the District Court
dismissed the federal securities claims with prejudice and the state law
claims without prejudice. On March 9, 1999, the plaintiff filed a class action
complaint in Montgomery County, Maryland Circuit Court in a case styled
Michael C. deBerardinis v. Host Marriott Corporation, Civil No. 197694-V, to
further pursue the state law claims for breach of fiduciary duty and breach of
contract. In support of these claims, the plaintiff asserted that Host
Marriott manipulated certain financial transactions, that PHLP's 1982
management agreement with Marriott International, Inc. and the 1995
refinancing of PHLP's debt were unfair, and that Host Marriott committed
misdeeds relating to a loan default and decisions regarding whether or not to
repurchase certain hotels. The state court complaint again sought unspecified
damages. On July 12, 1999, the state court denied Host Marriott's motion to
dismiss. Discovery is currently pending in the case and currently is scheduled
to close on June 30, 2000. All dispositive motions are currently due no later
than July 17, 2000.

   Marriott Suites Limited Partnership (MSLP). On December 10, 1999, KSK
Hawaii Co., Ltd. ("KSK"), a limited partner in MSLP, filed a lawsuit, KSK
Hawaii Co., Ltd. v. Marriott SBM One Corporation, et al., Civil Action No.
17657-NC, in Delaware State Chancery Court. KSK alleges in its complaint that
it suffered damages due to fraud, breaches of fiduciary duty, breaches of
MSLP's partnership agreement and aiding and abetting in connection with MSLP's
1996 recapitalization and the partnership merger of MSLP in 1998. KSK claims
that it was coerced into selling 19 of its 20 partnership units in the 1996
recapitalization. KSK also maintains that the 1998 merger was a "freeze-out'
merger that was designed solely to eliminate KSK's interest in MSLP. KSK
maintains that it lost slighly more than $15 million as a result of its
investment in MSLP.

   Richmond Marriott Partnership. On January 28, 2000, June Schallman and
David Ingall, limited partners in Mutual Benefit/Marriott Hotel Associates-I
Limited Partnership (the "Richmond Partnership"), filed a putative class
action lawsuit, Schallman, et al. v. Host Marriott Corporation and M.B.
Investment Properties, Inc., Civil Action No. 2047 169, in a Montgomery
County, Maryland State Circuit Court. Host Marriott and MB Investment
Properties, Inc. "(MBIP"), who are not affiliated, were the original general
partners of the Richmond Partnership, which was formed in 1985 to own the
Richmond, Virginia Marriott Hotel. The plaintiffs allege that the defendants
breached the partnership agreement and their fiduciary duties thereunder by,
among other things, loaning money to the Richmond Partnership at commercially
unreasonable interest rates, and entering into a management agreement with a
subsidiary of Marriott International which imposes commercially unreasonable
fees, does not disclose profits made from supplying goods and services, and
fails to share rebates provided by suppliers and vendors. The Plaintiffs also
allege that the defendants fraudulently concealed this alleged self-dealing.
On March 9, 2000, Host Marriott filed a motion to dismiss for failure to state
a claim on which relief can be granted.

Item 4. Submission of matters to a vote of security holders

   None

                                      33
<PAGE>

                                    PART II

Item 5. Market for our OP Units and related unitholder matters

   There is no established public trading market for our OP Units and
transfers of OP Units are restricted by the terms of our partnership
agreement. During 1999, a quarterly cash distribution of $0.21 per OP Unit was
declared on each of March 15, June 15, September 23, and December 20, 1999.
The quarterly distributions were subsequently paid on April 14, July 14,
October 15, 1999, and January 17, 2000.

   The number of holders of record of our OP Units on March 1, 2000 was 2,857.
The number of outstanding OP Units was 284,890,708 as of March 1, 2000, of
which 221,193,529 were owned by Host REIT.

   As a result of the REIT conversion, Host REIT is required to use available
funds to pay dividends to the extent of 95% of taxable income in order to
maintain our REIT qualification. Host REIT has indicated an intent to pay
dividends equal to 100% of taxable income for each year. Payment of these
dividends is expected to be funded by distributions from us. To the extent
that our cash flow is not sufficient to make distributions to holders of OP
Units in an amount sufficient so that Host REIT can pay such dividends, we may
be required to borrow money to pay such distributions.

Issuances of Unregistered Securities.

   Unless stated otherwise, we acquired interests in partnerships owning hotel
properties in connection with each of the following issuances of unregistered
securities.

   On December 30, 1998, we issued 25.7 million OP Units to various limited
partners in the eight public partnership mergers and the four private
partnerships in exchange for their existing partnership interests, which were
valued at approximately $333 million. The issuance of OP Units was made in
reliance on an exemption from the registration requirements of the Securities
Act pursuant to Section 4(2). The OP Units issued are redeemable for the cash
equivalent of a share of Host REIT's common stock or, at Host REIT's option,
shares of its common stock, beginning on December 30, 1999.

   Also on December 30, 1998, we issued approximately 43.9 million OP Units to
the Blackstone Entities in part in exchange for the acquisition of, or
controlling interests in, twelve hotels and one mortgage loan secured by an
additional hotel. The actual number of OP Units will fluctuate based upon
certain adjustments to be determined on March 31, 1999. Based upon current
stock prices, we will be required to issue approximately 3.7 million
additional OP Units on March 31, 1999 to the Blackstone Entities. The issuance
of OP Units was made in reliance on an exemption from the registration
requirements of the Securities Act pursuant to Section 4(2) thereunder. The OP
Units are redeemable for the cash equivalent of a share of Host REIT's common
stock or, at Host REIT's option, shares of its common stock.

   In December 1998, we issued approximately 205.3 million OP Units to Host
Marriott and its subsidiaries in exchange for substantially all of Host
Marriott's and its subsidiaries' assets (excluding the senior living business
transferred to Crestline) and the assumption of substantially all of their
liabilities. The number of OP Units issued to Host Marriott and its
subsidiaries equalled the number of outstanding shares of Host Marriott's
common stock. The issuance of OP Units was made in reliance on an exemption
from the registration requirements for the Securities Act pursuant to Section
4(2).

   In June 1999, we issued approximately 586,000 cumulative redeemable
preferred OP Units to limited partners of Timewell Group, Ltd. and Timeport,
Ltd for the acquisition of their limited partnership interests in Times Square
Marquis Hotel, L.P., which owns the New York Marriott Marquis Hotel. The
issuance of the preferred OP Units was made in reliance on an exemption from
the registration requirements of the Securities Act pursuant to Section 4(2).
The preferred OP Units are redeemable for OP Units one year from the date of
acquisition and are then immediately redeemable for cash, or at Host REIT's
option, shares of common stock of Host REIT. Also, two years from the date of
acquisition, Host REIT may require the holder to convert the preferred OP
Units to OP Units.

                                      34
<PAGE>

   In August 1999, Host REIT issued 4,160,000 shares of 10% Class A redeemable
cumulative preferred stock the proceeds of which were used to purchase
4,160,000 units of 10% Class A redeemable cumulative preferred OP units.
Dividends on the preferred OP Units are payable quarterly in arrears at the
rate of 10% per year. The issuance of the preferred OP Units was made in
reliance on an exemption from the registration requirements for the Securities
Act pursuant to Section 4(2).

   In November 1999, Host REIT issued 4,000,000 shares of 10% Class B
redeemable cumulative preferred stock the proceeds of which were used to
purchase 4,000,000 units of 10% Class B redeemable cumulative preferred OP
units. Dividends on the preferred OP Units are payable quarterly in arrears at
the rate of 10% per year. The issuance of the preferred OP Units was made in
reliance on an exemption from the registration requirements for the Securities
Act pursuant to Section 4(2).

   In December 1999, we issued approximately 26,000 cumulative redeemable
preferred OP Units to limited partners of Hopewell Group, Ltd. for the
acquisition of their limited partnership interests in Ivy Street Hotel Limited
Partnership, which indirectly owns the Atlanta Marriott Marquis Hotel. The
issuance of the preferred OP Units was made in reliance on an exemption from
the registration requirements of the Securities Act pursuant to Section 4(2).
The preferred OP Units are redeemable for OP Units one year from the date of
acquisition and are then immediately redeemable for cash, or at Host REIT's
option, shares of common stock of Host REIT. Also, two years from the date of
acquisition, Host REIT may require the holder to convert the preferred OP
Units to OP Units.

                                      35
<PAGE>

Item 6. Selected Financial Data

   The following table presents certain selected historical financial data of
Host Marriott, the predecessor to Host REIT and the operating partnership.
This information has been derived from Host Marriott's and our audited
consolidated financial statements for the five most recent fiscal years ended
December 31, 1999. As Host Marriott is our predecessor, we consider the
historical financial information of Host Marriott for periods prior to the
REIT conversion to be our historical financial information. The earnings per
unit information included below is based on the outstanding common stock of
Host Marriott for periods prior to 1999. The 1998 and 1997 financial
information reflects the discontinued operations related to the spin-off of
Crestline in conjunction with the REIT conversion.

<TABLE>
<CAPTION>
                                              Fiscal Year(1)(2)
                                -----------------------------------------------
                                 1999  1998(3)(4) 1997(3)(4)  1996   1995(3)(4)
                                ------ ---------- ---------- ------  ----------
                                     (in millions, except per unit data)
<S>                             <C>    <C>        <C>        <C>     <C>
Income Statement Data:
  Revenues(5).................. $1,376   $3,564     $2,875   $2,005    $1,389
  Income (loss) from continuing
   operations..................    256      194         47      (13)      (62)
  Income (loss) before
   extraordinary item..........    256      195         47      (13)     (123)
  Net income (loss)............    285       47         50      (13)     (143)
  Net income (loss) available
   to common unitholders.......    279       47         50      (13)     (143)
  Basic earnings (loss) per
   common unit:(8)
    Income (loss) from
     continuing operations.....    .86      .90        .22     (.06)     (.36)
    Income (loss) before
     extraordinary items.......    .86      .91        .22     (.06)     (.72)
    Net income (loss)..........    .96      .22        .23     (.06)     (.84)
  Diluted earnings (loss) per
   common unit:(8)
    Income (loss) from
     continuing operations.....    .83      .84        .22     (.06)     (.36)
    Income (loss) before
     extraordinary items.......    .83      .85        .22     (.06)     (.72)
    Net income (loss)..........    .93      .27        .23     (.06)     (.84)
  Cash distributions declared
   per common unit(9)..........    .84     1.00        --       --        --

Balance Sheet Data:
  Total assets(7).............. $8,196   $8,262     $6,141   $5,152    $3,557
  Debt(10).....................  5,583    5,698      3,466    2,647     2,178
  Convertible Preferred
   Securities..................    --       --         550      550       --

Other Data:
  Ratio of earnings to combined
   fixed charges and preferred
   OP unit dividends(6)........   1.5x     1.5x       1.3x     1.0x       --
  Deficiency of earnings to
   combined fixed charges and
   preferred unit
   dividends(6)................    --       --         --       --         70
</TABLE>
--------
 (1) The Internal Revenue Code requires REITs to file their income tax return
     on a calendar year basis. Accordingly, in 1998 we changed our fiscal year
     end to December 31 for both financial and tax reporting requirements.
     Previously, our fiscal year ended on the Friday nearest to December 31.
     As a result of this change, the results of operations for 15 hotels not
     managed by Marriott International were adjusted in 1998 to include 13
     months of operations (December 1997 through December 1998) and therefore
     are not comparable to fiscal years 1997 and 1996, each of which included
     12 months of operations. The additional month of operations in 1998
     increased our revenues by $44 million.
 (2) Fiscal year 1996 includes 53 weeks. Fiscal years 1995, 1997 and 1998
     include 52 weeks.
 (3) The historical financial data for fiscal years 1998 and 1997 reflect as
     discontinued operations our senior living business that we formerly
     conducted but disposed of in the spin-off of Crestline as part of the
     REIT conversion. We recorded income from the discontinued operations, net
     of taxes, of $6 million in fiscal year 1998. We recorded a loss from
     discontinued operations, net of taxes, of $61 million in 1995, as a
     result of the spin-off of Host Marriott Services Corporation. The 1995
     loss from discontinued operations includes a pre-tax charge of $47
     million for the adoption of SFAS No. 121, "Accounting For the Impairment
     of Long-Lived Assets and Long-Lived Assets to be Disposed Of," a pretax
     $15 million restructuring charge and an extraordinary loss of $10
     million, net of taxes, on the extinguishment of debt.
 (4) In 1998, we recognized a $148 million extraordinary loss, net of taxes,
     on the early extinguishment of debt. In 1997, we recognized a $3 million
     extraordinary gain, net of taxes, on the early extinguishment of debt.
     Also in 1998, we recognized REIT conversion

                                      36
<PAGE>

     expenses of $64 million and recorded a tax benefit of $106 million
     related to tax liabilities that we will not recognize as a result of our
     conversion to a REIT. The loss from continuing operations for 1995
     includes a $10 million pre-tax charge to write down the carrying value of
     five limited service properties to their net realizable value and a $60
     million pre-tax charge to write down an undeveloped land parcel to its
     estimated sales value. In 1995, we recognized a $20 million extraordinary
     loss, net of taxes, on the extinguishment of debt.
 (5) Historical revenue for 1999 primarily represents lease income generated
     by our leases with Crestline. Periods prior to 1999 represent gross hotel
     sales as our leases were not in effect until January 1, 1999. Revenues
     for fiscal years 1998, 1997, 1996 and 1995 have also been adjusted to
     reclassify interest income as revenue (previously classified as other
     income from operations) in order to be consistent with our 1999 statement
     of operations presentation.
 (6) The ratio/deficiency of earnings to combined fixed charges and preferred
     stock dividends is computed by dividing income from continuing operations
     before income taxes, fixed charges and preferred stock dividends by total
     fixed charges and preferred stock dividends. Fixed charges represent
     interest expense (including capitalized interest), amortization of debt
     issuance costs and the portion of rent expense that is deemed to
     represent interest. The deficiency of $70 million in 1995 is primarily as
     a result of depreciation expense.
 (7) Total assets for fiscal year 1997 include $236 million related to net
     investment in discontinued operations.
 (8) Basic earnings (loss) per common unit is computed by dividing net income
     (loss) by the weighted average number of units of common OP Units
     outstanding. Diluted earnings (loss) per common unit is computed by
     dividing net income (loss) by the weighted average number of units of
     common OP Units outstanding plus other dilutive securities. Diluted
     earnings (loss) per unit has not been adjusted for the impact of the
     Convertible Preferred Securities for 1999, 1997 and 1996 and for the
     comprehensive stock plan for 1995 through 1996, as they are anti-
     dilutive.
 (9) 1999 cash dividends per common unit reflect a quarterly cash distribution
     of $0.21 per common unit declared on March 15, June 15, September 23, and
     December 20 of 1999. 1998 cash distributions per common unit reflect the
     cash portion of a special dividend declared on December 18, 1998. This
     special dividend entitled shareholders of record on December 28, 1998 to
     elect to receive either $1.00 in cash or .087 of a share of common stock
     for each outstanding share of our common stock owned by such shareholder
     on the record date. Cash totaling approximately $73 million and
     approximately 11.5 million shares were subsequently issued during 1999.
(10) Long-term obligations consist of long term debt (which includes senior
     notes, secured senior notes, mortgage debt, a revolving bank credit
     facility, convertible debt obligation to Host Marriott Corporation, and
     other notes) and capital lease obligations.

                                      37
<PAGE>

Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition

Overview

   Host Marriott, L.P., a Delaware limited partnership, operates through an
umbrella partnership structure and is the owner of hotel properties. Host REIT
operates as a self-managed and self-administered REIT with its operations
conducted solely through us and our subsidiaries. Since REITs are not
currently permitted to derive revenues directly from the operations of hotels,
we lease substantially all of the hotels to subsidiaries of Crestline Capital
Corporation, "Crestline" or the "lessee," and other lessees.

   As of December 31, 1999, we owned, or had controlling interests in, 121
upscale and luxury, full-service hotel lodging properties generally located
throughout the United States and operated primarily under the Marriott, Ritz-
Carlton, Four Seasons, Swissotel and Hyatt brand names. Most of these
properties are managed by Marriott International, Inc., "Marriott
International."

   During 1999, our basic earnings per unit before extraordinary items
decreased 6% to $0.86. Our results benefited from increased hotel sales,
offset by the loss on litigation settlement. We refinanced almost $1.2 billion
of debt with long term fixed rate notes. We issued 8.16 million of preferred
OP units. Host REIT implemented a stock repurchase program which resulted in
the retirement of a like number of OP Units held by Host REIT being
repurchased. As of December 31, 1999, the refinancing of our debt has resulted
in an average interest rate of approximately 8.1% with 96% of the debt at a
fixed rate and an average maturity of approximately eight years with only 4%
of our debt maturing in the next two years. During the third and fourth
quarter we received net proceeds of $196 million as a result of the issuance
of perpetual preferred stock and a substantially similar preferred OP Unit
security, of which Host REIT is the sole holder.

   We are focused on carefully using our capital to improve returns to
unitholders. Currently our primary use of free cash flow and asset sales
proceeds is to fund Host REIT's stock buyback plan, which was announced during
the third quarter of 1999. Based on current market conditions, we believe that
the stock repurchase program reflects the best return on investment for our
unitholders. However, we will continue to look at strategic acquisitions as
well as evaluate the stock repurchase program based on changes in market
conditions and the stock price. Through March 8, 2000, the stock repurchase
program has resulted in the retirement of 10.5 million shares of common stock,
1.5 million shares of our Convertible Preferred Securities and 600,000
operating partnership units, for a total reduction of 16.0 million equivalent
units on a fully diluted basis for $149 million.

   On November 3, 1999, Host REIT's board of directors announced that Terence
C. Golden, its President and Chief Executive Officer, will retire effective
May 18, 2000, the date of Host REIT's next annual shareholders meeting. The
board also announced that it has named Christopher J. Nassetta, currently Host
REIT's Executive Vice President and Chief Operating Officer to assume the
positions of President and Chief Executive Officer effective on that date. Mr.
Golden will remain a member of the board of directors and Mr. Nassetta was
elected to the board of directors on November 2, 1999.

   In December 1999, the REIT Modernization Act was passed, effective for
taxable years beginning after December 31, 2000, which significantly amends
the REIT laws applicable to us. Under the REIT Modernization Act, beginning
January 1, 2001, we will be able to lease our hotels to a subsidiary that is a
taxable corporation and that elects to be treated as a "taxable REIT
subsidiary". In addition, as a result of passage of the REIT Modernization
Act, we have the right to purchase the leases from Crestline on or after
January 1, 2001, for a price equal to the fair rental value of the lessee's
interest in the leases over their remaining terms, excluding any option
periods, the amount of which could be significant.

   Effective November 15, 1999, we amended substantially all of our leases
with Crestline to give Crestline the right to renew each of these leases for
up to four additional terms of seven years each at a fair rental value, to be
determined either by agreement between us and Crestline or through arbitration
at the time the renewal option is exercised. Crestline is under no obligation
to exercise these renewal options, and we have the right to

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terminate the renewal options during time periods specified in the amendments.
In addition, the amendments provide that the fair rental value payable by us
to Crestline in connection with the purchase of a lease as described above
does not include any amounts relating to any renewal period. Therefore, the
fair rental value of a lease after expiration of the initial term for such
lease would be zero. We intend to evaluate our options regarding the Crestline
leases and have not yet made a decision whether or not to purchase those
leases.

   Host REIT and Marriott International have executed a definitive settlement
agreement to resolve specific pending litigation involving seven limited
partnerships. The proposed settlement would involve an acquisition of the
limited partner interests in two partnerships by a joint venture between one
of our affiliates and Marriott International, and cash payments to partners in
the other five partnerships, in exchange for resolution of claims against all
defendants in all seven partnerships. Our share of the payment, including the
acquisition of two of the partnerships, is expected to be approximately $113
million, excluding related expenses. The proposed settlement is subject to
numerous conditions, including definitive documentation, court approval and
various consents, and no assurance can be given that the settlement will
occur. As a result of the proposed settlement, we have recorded a one-time
non-recurring, pre-tax charge of $40 million in the fourth quarter of 1999.

Results of Operations

   Our historical revenues have primarily represented gross property-level
sales from hotels, net gains on property transactions, interest income and
equity in earnings of affiliates. Our historical operating costs and expenses
have principally consisted of property-level operating costs, depreciation,
management fees, real and personal property taxes, ground, building and
equipment rent, property insurance and other costs. As of January 1, 1999, we
lease substantially all of our hotels to subsidiaries of Crestline due to the
REIT conversion. As a result of these leases, we no longer record property-
level revenues and operating expenses, rather we recognize rental income on
the leases and specified owner expenses, including real estate and property
taxes, property insurance, and ground and equipment related to the properties.
The comparison of the 1999 results with 1998 and 1997 is also affected by a
change in the reporting period for our hotels not managed by Marriott
International. Thus, 1999 revenues and expenses are not comparable with prior
years.

1999 Compared to 1998

   Revenues. Revenues decreased $2.2 billion, or 61%, to $1.4 billion for
1999. As discussed above, our revenues and operating profit are not comparable
to prior years, primarily due to the leasing of our hotels as a result of the
REIT conversion. However, gross hotel sales, which is used in the
determination of rental income for 1999, increased $836 million or 24% over
1998 amounts as is shown in the following table.

   The table below represents gross hotel sales generated by the properties
for 1999 and 1998. Rental income for 1999 is computed based on gross hotel
sales.

<TABLE>
<CAPTION>
                                                              Year Ended
                                                       -------------------------
                                                       December 31, December 31,
                                                           1999         1998
                                                       ------------ ------------
                                                             (in millions)
   <S>                                                 <C>          <C>
   Hotel Sales(1)
     Rooms............................................    $2,725       $2,220
     Food and beverage................................     1,258          984
     Other............................................       295          238
                                                          ------       ------
       Total sales....................................    $4,278       $3,442
                                                          ======       ======
</TABLE>
--------
(1) 1999 gross hotel sales do not represent our reported revenues for 1999.
    Rather, rental income, which is computed based on gross hotel sales,
    represents our reported revenues for 1999.

   Lodging results for 1999 were primarily driven by the addition of 36
properties in 1998. The increase in hotel sales also reflects the growth in
room revenues generated per available room or REVPAR. For comparable

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properties, REVPAR increased 4.1%, to $115.13 for 1999. On a comparable basis,
average room rates increased approximately 3.8% for the year, while average
occupancy increased less than one percentage point for the year.

   Interest income decreased $12 million or 24% as a result of a lower level
of cash and marketable securities held during 1999 compared to 1998.

   The net gain on property transactions for 1999 primarily represents the $24
million recognized on the sale of five properties, including the sale of the
Ritz-Carlton Boston and the El Paso Marriott during the fourth quarter of
1999.

   Expenses. As discussed above, hotel revenues and hotel operating costs are
not comparable with the prior year. The lessee pays specified direct property-
level costs including management fees and we receive a rent payment, which is
generally calculated as a percentage of revenue, subject to a minimum level,
net of certain property-level owner costs. All of these costs were our
expenses in 1998. Property-level owner costs which are comparable, including
depreciation, property taxes, property insurance, ground and equipment rent,
increased 8% to $553 million for 1999 versus 1998, primarily reflecting the
depreciation from 36 properties acquired during 1998.

   Minority Interest. Minority interest expense decreased $31 million to $21
million in 1999, primarily reflecting the impact of the consolidation of
partnerships which occurred as part of the REIT conversion.

   Interest Expense. Interest expense increased 40% to $469 million in 1999,
primarily due to the issuance of senior notes, establishment of a new credit
facility and additional mortgage debt on properties acquired in 1998. In
addition, in 1999, we recognized $38 million in interest expense related to
the convertible debt obligation to Host Marriott Corporation, which supports
the dividends paid by Host REIT to holders of the Convertible Preferred
Securities. In 1998, these dividends, totaling $37 million, were a separate
component of expense.

   Corporate Expenses. Corporate expenses decreased $13 million to $37 million
in 1999, resulting primarily from lower staffing levels after the Crestline
spin-off, lower costs associated with reduced acquisition activity and lower
costs related to various stock compensation plans.

   Loss on Litigation. In connection with a proposed settlement for litigation
related to seven limited service partnerships discussed above we have recorded
a one-time, non-recurring charge of $40 million.

   Income from Discontinued Operations. Income from discontinued operations
represents the senior living communities business' results of operations for
1998.

   Extraordinary Gain (Loss). In connection with the refinancing of the
mortgage and renegotiation of the management agreement on the New York
Marriott Marquis Hotel, we recognized an extraordinary gain of $14 million on
the forgiveness of debt in the form of accrued incentive management fees.

   An extraordinary loss of $3 million representing the write-off of deferred
financing fees occurred in July 1999 when the mortgage debt for eight
properties was refinanced, including the New York Marriott Marquis Hotel. In
connection with this refinancing, the interest rate swap agreements associated
with some of the original debt were terminated and an extraordinary gain of $8
million was recognized.

   An extraordinary loss of $2 million representing the write-off of deferred
financing fees occurred during the fourth quarter of 1999 when prepayments
totaling $225 million were made to permanently reduce the outstanding balance
of the term loan portion of the Bank Credit Facility to $125 million.

   During the fourth quarter of 1999, we extinguished approximately $53
million of the convertible debt obligation to Host REIT through the purchase
of 1.1 million shares of Host REIT's Convertible Preferred Securities on the
open market. We recorded an extraordinary gain of $14 million on this
transaction, based on

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the discount at which we purchased the Convertible Preferred Securites. We
also recorded an extraordinary loss of $2 million representing the write-off
of deferred financing fees in connection with the early extinguishment.

   In connection with the purchase of the old senior notes, we recognized an
extraordinary loss of $148 million in the third quarter of 1998, which
represents the bond premium and consent payments totaling approximately $175
million and the write-off of deferred financing fees of approximately $52
million related to the old senior notes, net of taxes.

   Net Income. Our net income in 1999 was $285 million, compared to $47
million in 1998. Basic and diluted earnings per common unit were $.96 and $.93
for 1999, compared to $.22 and $.27 in 1998.

   Net Income Available to Common Unitholders. Our net income available to
common unitholders in 1999 was $279 million, compared to $47 million in 1998,
reflecting dividends of $6 million in 1999 on the Class A and Class B
Preferred Units which were issued during 1999.

1998 Compared to 1997

   Revenues. Revenues increased $0.7 billion, or 24%, to $3.6 billion for 1998
from $2.9 billion for 1997. Our revenue and operating profit were impacted by
improved results for comparable full-service hotel properties, the addition of
18 full-service hotel properties during 1997 and 36 full-service hotel
properties during 1998 and the gain on the sale of two hotel properties in
1998.

   Hotel sales, which are gross hotel sales, including room sales, food and
beverage sales, and other ancillary sales such as telephone sales, increased
$0.6 billion, or 23%, to over $3.4 billion in 1998, reflecting the REVPAR
increases for comparable units and the addition of full-service hotels in 1997
and 1998. Improved results for our full-service hotels were driven by strong
increases in REVPAR for our 78 comparable units of 7.3% to $112.39 for 1998.
Results were further enhanced by approximately one percentage point increase
in the house profit margin for comparable full-service properties. Average
room rates increased nearly 6.9% for our comparable full-service hotels.

   As discussed in Note 2 to the financial statements, we spun off our senior
living communities. We have accounted for these revenues and expenses as
discontinued operations and has shown the amount, net of taxes, below income
from continuing operations. Revenues generated from our 31 senior living
communities totaled $241 million for 1998 compared to $111 million for 1997,
as the assets were purchased in the third quarter of 1997.

   Revenues were also impacted by the gains on the sales of two hotels. The
New York East Side Marriott was sold for $191 million resulting in a pre-tax
gain of approximately $40 million. The Napa Valley Marriott was sold for $21
million resulting in a pre-tax gain of approximately $10 million.

   Operating Costs and Expenses. Operating costs and expenses principally
consisted of property-level operating costs, depreciation, management fees,
real and personal property taxes, ground, building and equipment rent,
insurance and certain other costs. Operating costs and expenses increased $0.5
billion to $2.9 billion, primarily representing increased hotel operating
costs. Hotel operating costs increased $0.5 billion to $2.8 billion for 1998,
primarily due to the addition of 54 full-service hotel properties during 1997
and 1998 and increased management fees and rentals tied to improved property
results. As a percentage of hotel revenues, hotel operating costs and expenses
decreased slightly to 82% for 1998 from 84% of revenues for 1997, due to the
significant increases in REVPAR discussed above, offset by increases in
management fees and property-level operating costs, including higher labor
costs in certain markets.

   Minority Interest. Minority interest expense increased $21 million to $52
million for 1998, primarily reflecting the impact of the consolidation of
affiliated partnerships and the acquisition of controlling interests in newly-
formed partnerships during 1997 and 1998.

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   Corporate Expenses. Corporate expenses increased $5 million to $50 million
for 1998. As a percentage of revenues, corporate expenses decreased to 1.4% of
revenues for 1998 from 1.6% in 1997, reflecting our efforts to control
corporate expenses in spite of the substantial growth in revenues.

   REIT Conversion Expenses. REIT conversion expenses reflect the professional
fees, consent fees, and other expenses associated with our conversion to a
REIT and totaled $64 million for 1998. There were no REIT conversion expenses
prior to 1998.

   Interest Expense. Interest expense increased 16% to $335 million in 1998,
primarily due to additional debt assumed in connection with the 1997 and 1998
full-service hotel additions as well as the issuance of the senior notes and
establishment of a new credit facility in 1998.

   Dividends on Convertible Preferred Securities. The dividends on the
Convertible Preferred Securities reflect the dividends on the $550 million in
6.75% Convertible Preferred Securities issued by a subsidiary trust of Host
Marriott in December 1996.

   Interest Income. Interest income decreased $1 million to $51 million for
1998, primarily reflecting the lower level of cash and marketable securities
held in 1998 compared to 1997.

   Discontinued Operations. Income from discontinued operations of $6 million
for 1998 represents the senior living communities' business results of
operations for the entire year. The provision for loss on disposal of $5
million for 1998 includes organizational and formation costs related to
Crestline Capital Corporation.

   Income before Extraordinary Item. Income before extraordinary item for 1998
was $195 million, compared to $47 million for 1997.

   Extraordinary Gain (Loss). In connection with the purchase in August 1998
of our old senior notes, we recognized an extraordinary loss of $148 million,
which represents the bond premium and consent payments totaling approximately
$175 million and the write-off of deferred financing fees of approximately $52
million related to the old senior notes, net of taxes. In March 1997, we
purchased 100% of the outstanding bonds secured by a first mortgage on the San
Francisco Marriott Hotel. We purchased the bonds for $219 million, which was
an $11 million discount to the face value of $230 million. In connection with
the redemption and defeasance of the bonds, we recognized an extraordinary
gain of $5 million, which represents the $11 million discount and the write-
off of deferred financing fees, net of taxes. In December 1997, we refinanced
the mortgage debt secured by Marriott's Orlando World Center. In connection
with the refinancing, we recognized an extraordinary loss of $2 million, which
represents payment of a prepayment penalty and the write-off of unamortized
deferred financing fees, net of taxes.

   Net Income. Net income for 1998 was $47 million compared to net income of
$50 million for 1997. Basic earnings per common share was $.22 and $.23 for
1998 and 1997, respectively. Diluted earnings (loss) per common share was $.27
and $.23 for 1998 and 1997, respectively.

Liquidity and Capital Resources

   Cash and cash equivalents were $277 million and $436 million at December
31, 1999 and December 31, 1998, respectively. The decrease in cash is
primarily a result of cash flows used for investing and financing activities,
offset by cash provided by operating activities.

   Cash provided by continuing operations increased $48 million to $360
million during 1999. During 1998, cash from discontinued operations was $29
million; however, there was no cash activity related to discontinued
operations in 1999.

   Cash used in investing activities from continuing operations was $176
million and $655 million in 1999 and 1998, respectively. Cash used in
investing activities includes capital expenditures of $361 million and $252

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million and acquisitions of $29 million and $988 million in 1999 and 1998,
respectively. Significant investing activities during 1999 include:

  . Costs associated with the newly constructed 717 room Tampa Waterside
    Marriott which opened in February 2000 with over 45,000 square feet of
    meeting space. The total cost of the project was over $104 million, of
    which $57 million was expended during 1999.

  . During 1999 we acquired the remaining minority interests in the two
    hotels whose operations we previously consolidated. The acquisition costs
    included the issuance of approximately 600,000 preferred OP Units valued
    at $8 million and payments of partnership indebtedness of approximately
    $6 million.

  . In May 1999, we completed a 210-room expansion of the Philadelphia
    Marriott for a total cost of approximately $37 million. The project
    consisted of a renovation and conversion of the historic railway terminal
    directly adjacent to the property.

  . Property and equipment balances include $243 million and $78 million for
    construction in progress as of December 31, 1999 and December 31, 1998,
    respectively. The balance as of December 31, 1999 primarily relates to
    the Tampa Waterside Marriott, which was placed in service in February
    2000, as well as properties in Orlando, Memphis, Naples, and various
    other expansion and development projects.

   The cash used for investing activities was partially offset by cash
provided from the net sale of assets of $195 million in 1999, compared to $227
million in 1998. 1999 property dispositions consisted of the five hotels
previously discussed.

   Cash used in investing activities from discontinued operations was $50
million in 1998; however, there was no cash investing activity related to
discontinued operations in 1999.

   Cash (used in) provided by financing activities from continuing operations
was ($343) million and $265 million in 1999 and 1998, respectively.

   We expect that in 2000 we will make cash payments for certain tax and
litigation contingencies and development projects. Cash payments will be
required for the settlement of litigation related to seven limited
partnerships, the recognition of certain deferred tax items and the settlement
of certain audits of prior years' tax returns with the Internal Revenue
Service and also to fund specific development projects, all of which are
discussed in this report on Form 10-K. The source of future cash outflows are
dependent on cash from operations and the amount of additional debt, if any,
necessary for payment upon the final resolution of these terms.

   As of December 31, 1999, our total consolidated debt was approximately $5.6
billion. Our debt is comprised of $2.5 billion in unsecured senior notes, $2.3
billion in non-recourse mortgage debt and $125 million outstanding under the
term loan portion of the $1.025 billion bank credit facility and $514 million
of convertible debt obligation to Host Marriott. Based on our total
capitalization of approximately $7.7 billion as of December 31, 1999
consisting of long term debt, minority interests and shareholder's equity,
consolidated debt represents 73% of Host REIT's total capitalization, compared
to 59% as of December 31, 1998.

   Since August 1998, we have issued or refinanced more than $3.4 billion of
debt, as is described below, in order to reduce the risk and volatility in our
capital structure. The net effect of these transactions has been to virtually
eliminate all of our near term maturities, as less than 4% of our debt matures
over the next two years, reduce our average interest rate by approximately 80
basis points, and extend our average maturity by almost one year. As a result,
our average rate is now approximately 8%, and our average maturity is
approximately 8 years, with 96% of our debt having fixed interest rates.
Significant debt transactions include:

  . Currently, $125 million is outstanding under the term loan portion of the
    bank credit facility, while the available capacity under the revolving
    credit portion of the bank credit facility remains at $900 million. The
    bank credit facility was originally negotiated in August 1998 for $1.25
    billion, and $225 million was subsequently repaid on the term loan during
    1999 to permanently reduce the total bank credit facility to $1.025
    billion. The credit facility has an initial three-year term with two one-
    year extension options.

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   Borrowings under the credit facility generally bear interest at the
   Eurodollar rate plus 1.65% (7.57% at December 31, 1999), and the interest
   rate and commitment fee on the unused portion of the facility fluctuate
   based on specified financial ratios.

  . We issued $300 million of 8 3/8% Series D Senior notes due 2006 in
    February 1999 and used the proceeds to refinance, or purchase, debt which
    had been assumed through the merger of some partnerships or the purchase
    of hotel properties in connection with the REIT conversion in December
    1998. We repaid a $40 million variable rate mortgage with a portion of
    the proceeds, and terminated the associated swap agreement, incurring a
    termination fee of approximately $1 million. In August 1999, the Series D
    Senior notes were exchanged on a one-for-one basis for Series E Senior
    notes, which are freely transferable by the holders.

  . In April 1999, a subsidiary of ours completed the refinancing of the $245
    million mortgage on the New York Marriott Marquis Hotel, maturing in June
    2000. In connection with the refinancing, we renegotiated the hotel's
    management agreement and recognized an extraordinary gain of $14 million
    on the forgiveness of accrued incentive management fees by the manager.
    This mortgage was subsequently refinanced as part of the $665 million
    financing agreement discussed below.

  . In June 1999, we refinanced the debt on the San Diego Marriott Hotel and
    Marina. The mortgage is for $195 million and a term of 10 years at a rate
    of 8.45%. In addition, we entered into a mortgage for the Philadelphia
    Marriott expansion in July 1999 for $23 million at an interest rate of
    approximately 8.6%, maturing in 2009.

  . In July 1999, we entered into a financing agreement pursuant to which we
    borrowed $665 million due 2009 at a fixed rate of 7.47%. Eight of our
    hotels serve as collateral for the agreement. In connection with this
    refinancing, an extraordinary loss of $3 million was recognized,
    representing the write-off of deferred financing fees. The proceeds from
    this financing were used to refinance existing mortgage indebtedness
    maturing at various times through 2000, including approximately $590
    million of outstanding variable rate mortgage debt, and to terminate the
    related interest rate swap agreements, recognizing an extraordinary gain
    of approximately $8 million. As a result of the refinancing we no longer
    have any interest rate swap agreements outstanding.

  . In August 1999, we made a prepayment of $19 million to pay down in full
    the mezzanine mortgage on the Marriott Desert Springs Resort and Spa. In
    September 1999, we made a prepayment of $45 million to pay down in full
    the mortgage note on the Philadelphia Four Seasons Hotel.

  . In August 1998, we purchased substantially all of our then outstanding
    senior debt including: (i) $600 million of 9 1/2% senior notes due 2005,
    (ii) $350 million of 9% senior notes due 2007 and (iii) $600 million of 8
    7/8% senior notes due 2007. We simultaneously issued an aggregate of $1.7
    billion in new senior notes in two series: $500 million of 7 7/8% Series
    A notes due in 2005 and $1.2 billion of 7 7/8% Series B notes due in
    2008. In December 1998, we issued $500 million of 8.45% Series C senior
    notes due in 2008 under the same indenture and with the same covenants as
    the Series A and Series B senior notes.

  . In addition to the capital resources provided by our debt financings, in
    December 1996, a wholly-owned subsidiary of Host Marriott issued 11
    million shares of 6 3/4% Convertible Quarterly Income Preferred
    Securities, with a liquidation preference of $50 per share for a total
    liquidation amount of $550 million. The Convertible Preferred Securities
    represent an undivided beneficial interest in the assets of the trust
    and, pursuant to various agreements entered into in connection with the
    transaction, are fully, irrevocably and unconditionally guaranteed by us.
    Proceeds from the issuance of the convertible preferred securities were
    invested in $567 million 6 3/4% Convertible Subordinated Debentures due
    December 2, 2026 issued by us, which are the trust's sole assets. Each of
    the convertible preferred securities is convertible at the option of the
    holder into shares of Host REIT common stock at the rate of 3.2537 shares
    per convertible preferred security equivalent to a conversion price of
    $15.367 per share of Host REIT common stock. This conversion ratio
    includes adjustments to reflect distributions made to Host REIT's common
    stockholders in connection with the REIT conversion. During 1999, 1998
    and 1997, no shares were converted into common stock. Holders of the
    convertible preferred securities are entitled to receive preferential

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   cumulative cash distributions at an annual rate of 6 3/4% accruing from
   the original issue date, commencing March 1, 1997, and payable quarterly
   in arrears thereafter. The distribution rate and the distribution and
   other payment dates for the Convertible Preferred Securities correspond to
   the interest rate and interest and other payment dates on the Convertible
   Subordinated Debentures. We may defer interest payments on the Convertible
   Subordinated Debentures for a period not to exceed 20 consecutive
   quarters. If interest payments on the Convertible Subordinated Debentures
   are deferred, so too are payments on the Convertible Preferred Securities.
   Under this circumstance, Host REIT would not be permitted to declare or
   pay any cash distributions with respect to Host REIT capital stock or debt
   securities that rank equal in right of payment with or junior to the
   Convertible Subordinated Debentures. Subject to certain restrictions, the
   Convertible Preferred Securities are redeemable at Host REIT's option upon
   any redemption of the Convertible Subordinated Debentures after December
   2, 1999. Upon repayment at maturity or as a result of the acceleration of
   the Convertible Subordinated Debentures upon the occurrence of a default,
   the Convertible Preferred Securities are subject to mandatory redemption.
   During 1999, Host REIT repurchased 1.1 million shares of the Convertible
   Preferred Securities as part of the stock repurchase plan discussed below
   which resulted in the retirement of $53 million of the Convertible
   Subordinated Debentures.

   Significant equity financings include:

  . In September 1999, Host REIT announced its intention to repurchase, from
    time to time, up to 22 million shares of its common stock, our operating
    partnership units or an amount of the Convertible Preferred Securities
    which are convertible into a like number of shares of its common stock
    based upon the specified conversion ratio. As of December 31, 1999, we or
    Host REIT had purchased approximately 5.8 million shares of common stock,
    1.1 million shares of the Convertible Preferred Securities and 0.3
    million OP Units for an aggregate consideration of approximately $89
    million. Any repurchases of common stock, operating partnership units, or
    Convertible Preferred Securities may be effected through open market or
    privately negotiated purchases, through a tender offer, or through one or
    more combinations of such methods. The repurchase program is on-going,
    and through March 8, 2000, approximately 16.0 million equivalent common
    shares were repurchased for $149 million.

  . Distributions reflect the $73 million in payments for a special dividend
    declared in December 1998 as well as the $0.63 distribution per OP Unit
    paid as of December 31, 1999. In addition, on December 20, 1999, Host
    REIT's Board of Directors declared a regular cash distribution of $0.21
    per OP Unit paid on January 17, 2000.

  . In August 1999, Host REIT sold 4.16 million shares of 10% Class A
    preferred stock, and we issued an equivalent security, the Class A
    Preferred Limited Partner Units. Holders of the Class A preferred units
    are entitled to receive cumulative cash dividends at a rate of 10% per
    year of the $25.00 per unit liquidation preference. Dividends and
    corresponding distributions are payable quarterly in arrears beginning
    October 15, 1999. After August 3, 2004 Host REIT has the option to redeem
    the Class A preferred stock for $25.00 per share, plus accrued and unpaid
    dividends to the date of redemption. The Class A preferred units rank to
    our common OP Units, and on a parity with our Class B preferred units.
    The Class A preferred unitholders generally have no voting rights. We
    declared a distribution of $.625 per unit on December 20, 1999, which was
    paid on January 17, 2000.

  . In November 1999, Host REIT sold 4.0 million shares of 10% Class B
    preferred stock, and we issued an equivalent security, the Class B
    Preferred Limited Partner Units. Holders of the Class B preferred units
    are entitled to receive cumulative cash dividends at a rate of 10% per
    year of the $25.00 per unit liquidation preference. Dividends and
    corresponding distributions are payable quarterly in arrears beginning
    January 15, 2000. After April 29, 2005 Host REIT has the option to redeem
    the Class B preferred stock for $25.00 per share, plus accrued and unpaid
    dividends to the date of redemption. The Class B preferred units rank
    senior to our OP Units, and on a parity with our Class A preferred units.
    The Class B preferred unitholders generally have no voting rights. We
    declared a distribution of $.325 per unit on December 20, 1999, which was
    paid on January 17, 2000.

                                      45
<PAGE>

  . In December 1998, we completed the acquisition of, or controlling
    interests in, twelve world-class luxury hotels and certain other assets,
    including a mortgage note on a thirteenth hotel property from affiliates
    of the Blackstone Group. The operating partnership paid approximately
    $920 million in cash and assumed debt and issued approximately 47.7
    million OP Units, along with other consideration for a total value of
    approximately $1.55 billion.

  . In December 1998, subsidiaries of ours merged with eight public
    partnerships and acquired limited partnership interests in four private
    partnerships, which collectively own or control 28 properties 15 of which
    were controlled by us and consolidated on our financial statements prior
    to December 1998. We issued approximately 25.8 million OP Units, 8.5
    million of which were subsequently converted to Host REIT common stock,
    for interests in these partnerships valued at approximately $333 million.
    As a result of these transactions, we increased our ownership of most of
    the 28 properties to 100% while consolidating 13 additional hotels
    containing 4,445 rooms.

  . In connection with our conversion to a REIT, we formed two non-controlled
    subsidiaries, which own approximately $325 million in assets as of
    December 31, 1999. The ownership of most of these assets by us and Host
    REIT would have jeopardized its status as a REIT and our status as a
    partnership for federal income tax purposes. These assets primarily
    consist of partnership or other interests in hotels which are not leased,
    some furniture, fixtures and equipment used in the hotels. In exchange
    for our contribution of these assets to the non-controlled subsidiaries,
    we received nonvoting common stock representing 95% of the total economic
    interests of the non-controlled subsidiaries. The Host Marriott Statutory
    Employee/Charitable Trust, the beneficiaries of which are 1) a trust
    formed for the benefit of some of our employees and 2) the J. Willard
    Marriott Foundation, acquired all of the voting common stock representing
    the remaining 5% of the total economic interests, and reflecting 100% of
    the control of each non-controlled subsidiary. As a result, as of
    December 31, 1998, we did not control the non-controlled subsidiaries.

 FFO and EBITDA

   We consider Funds from Operations (FFO), which represents FFO as defined by
the National Association of Real Estate Investment Trusts, and our EBITDA to
be indicative measures of our operating performance due to the significance of
our long-lived assets. FFO and EBITDA are also useful in measuring our ability
to service debt, fund capital expenditures and expand our business.
Furthermore, management believes that FFO and EBITDA are meaningful
disclosures that will help unitholders and the investment community to better
understand our financial performance, including comparing our performance to
other REITs. However, FFO and EBITDA as presented may not be comparable to
amounts calculated by other companies. This information should not be
considered as an alternative to net income, operating profit, cash from
operations, or any other operating or liquidity performance measure prescribed
by generally accepted accounting principles. Cash expenditures for various
long-term assets, interest expense (for EBITDA purposes only) and income taxes
have been, and will be incurred which are not reflected in the EBITDA and FFO
presentation.

                                      46
<PAGE>

   FFO increased $149 million, or 37%, to $551 million in 1999 over 1998.
Amounts for 1998 and prior represent comparative FFO, which equals FFO as
defined by NAREIT plus deferred tax expense. The following is a reconciliation
of income from continuing operations to FFO (in millions):

<TABLE>
<CAPTION>
                                                        Year Ended
                                           ------------------------------------
                                           December 31, December 31, January 2,
                                               1999         1998        1998
                                           ------------ ------------ ----------
   <S>                                     <C>          <C>          <C>
   Funds from Operations
   Income from continuing operations.....      $256         $194        $ 47
   Depreciation and amortization.........       291          243         230
   Other real estate activities..........       (28)         (57)          5
   Partnership adjustments...............        19          (11)        (12)
   REIT conversion expenses..............       --            64         --
   Loss on litigation settlement.........        40          --          --
   Tax adjustments.......................       (21)         (59)         15
                                               ----         ----        ----
   Funds from continuing operations......       557          374         285
   Discontinued operations...............       --            28          10
                                               ----         ----        ----
   Funds from operations before preferred
    unit distributions...................       557          402         295
   Distributions on preferred units......        (6)         --          --
                                               ----         ----        ----
   Funds from operations.................      $551         $402        $295
                                               ====         ====        ====
</TABLE>

   EBITDA increased $179 million, or 22%, to $1,007 million in 1999 from $828
million in 1998. Hotel EBITDA increased $162 million, or 19%, to $1,032
million in 1999 from $870 million in 1998, reflecting comparable hotel EBITDA
growth, as well as incremental EBITDA from 1998 acquisitions offset by amounts
representing hotel sales which are retained by Crestline.

   The following schedule presents our EBITDA as well as a reconciliation of
EBITDA to income from continuing operations (in millions):

<TABLE>
<CAPTION>
                                                        Year Ended
                                           ------------------------------------
                                           December 31, December 31, January 2,
                                               1999         1998        1998
                                           ------------ ------------ ----------
<S>                                        <C>          <C>          <C>
EBITDA
  Hotels..................................    $1,032       $ 870       $ 690
  Office buildings........................         3           1         --
  Interest income.........................        39          53          55
  Corporate and other expenses............       (67)        (96)        (63)
                                              ------       -----       -----
EBITDA....................................    $1,007       $ 828       $ 682
                                              ======       =====       =====
EBITDA....................................    $1,007       $ 828       $ 682
  Interest expense........................      (469)       (335)       (288)
  Dividends on Convertible Preferred Secu-
   rities.................................       --          (37)        (37)
  Depreciation and amortization...........      (293)       (243)       (231)
  Minority interest expense...............       (21)        (52)        (31)
  Income taxes............................        16          20         (36)
  REIT Conversion expense.................       --          (64)        --
  Loss on litigation settlement...........       (40)        --          --
  Other non-cash changes, net.............        56          77         (12)
                                              ------       -----       -----
    Income from continuing operations.....    $  256       $ 194       $  47
                                              ======       =====       =====
</TABLE>

   Our interest coverage, defined as EBITDA divided by cash interest expense,
was 2.4 times, 2.7 times, and 2.5 times for 1999, 1998, and 1997,
respectively. The ratio of earnings to fixed charges was 1.5 to 1.0, 1.5 to
1.0, and 1.3 to 1.0 in 1999, 1998, and 1997, respectively.

                                      47
<PAGE>

   Partnership Activities. Prior to the REIT conversion, we had general and
limited partner interests in numerous limited partnerships which owned 240
hotels including 20 full-service hotels, managed by Marriott International. As
a result of the REIT conversion, the majority of our interests in the 220
limited-service hotels were transferred to the non-controlled subsidiaries.
Additionally, as part of the REIT conversion, we acquired 13 of the 20 full-
service hotels, two were sold, four were transferred to one of the non-
controlled subsidiaries and one was retained by Host REIT.

   Leases. In addition to our full-service hotels, we also lease some property
and equipment under noncancelable operating leases, including the long-term
ground leases for some of our hotels, generally with multiple renewal options.
The leases related to the 53 Courtyard properties and 18 Residence Inn
properties sold during 1995 and 1996, are nonrecourse to us and contain
provisions for the payment of contingent rentals based on a percentage of
sales in excess of stipulated amounts. We remain contingently liable on
certain leases related to divested non-lodging properties. Such contingent
liabilities aggregated $80 million at December 31, 1999. However, management
considers the likelihood of any substantial funding related to these divested
properties' leases to be remote.

   Inflation. Our hotel lodging properties have been impacted by inflation
through its effect on increasing costs and on the managers' ability to
increase room rates. Unlike other real estate, hotels have the ability to
change room rates on a daily basis, so the impact of higher inflation
generally can be passed on to customers. Our exposure to inflation is less now
that substantially all of our hotels are leased to others.

   Almost all of our debt bears interest at fixed rates. This debt structure
largely mitigates the impact of changes in the rate of inflation on future
interest costs. We have some financial instruments that are sensitive to
changes in interest rates. The interest recognized on the debt obligations is
based on various LIBOR terms, which ranged from 5.6% to 5.9% and 5.1% to 5.8%
at December 31, 1999 and December 31, 1998, respectively.

   We repaid a $40 million variable rate mortgage with proceeds from the $300
million senior notes offering discussed in Note 5 to the financial statements
during the first quarter of 1999. We terminated the associated swap agreement
incurring a termination fee of approximately $1 million.

   In July 1999, we completed the refinancing of approximately $790 million of
outstanding variable rate mortgage debt and terminated the related interest
rate swap agreements. As a result of the refinancing we no longer have any
interest rate swap agreements outstanding. As of December 31, 1999, our
remaining variable debt consists of the credit facility and the mortgage debt
on the Ritz-Carlton Amelia Island property which total $340 million, $50
million of which has been repaid subsequent to year end.

   Accounting Standards. As discussed in note 1 to the financial statements,
in December 1999, we changed our method of accounting for contingent rental
revenues to conform to the Commission's Staff Accounting Bulletin (SAB) No.
101. As a result, contingent rental revenue will be deferred on the balance
sheet until certain revenue thresholds are realized. We have adopted SAB No.
101 with retroactive effect beginning January 1, 1999 to conform to the new
presentation. SAB No. 101 has no impact on full-year 1999 revenues, net
income, or earnings per unit because all rental revenues considered contingent
under SAB No. 101 were earned as of December 31, 1999. The change in
accounting principle has no effect on prior years because percentage rent
relates to rental income on our leases, which began in 1999.

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including specified derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The Statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the income statement and requires that a company must formally
document, designate and assess the effectiveness of transactions that receive
hedge accounting. SFAS No. 133 is effective for fiscal years beginning after
June 15, 2000. We have not determined the full impact of SFAS No. 133.

                                      48
<PAGE>

Item 7.a Quantitative and Qualitative Disclosures about Market Risk

   The table below provides information about our financial instruments that
are sensitive to changes in interest rates. For debt obligations, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates.

<TABLE>
<CAPTION>
                                      Expected Maturity Date
                                -----------------------------------
                                                                          Fair
                                2000 2001 2002 2003 2004 Thereafter Total Value
                                ---- ---- ---- ---- ---- ---------- ----- -----
                                                ($ in millions)
<S>                             <C>  <C>  <C>  <C>  <C>  <C>        <C>   <C>
Liabilities
Long-term Debt--variable:
  The Ritz-Carlton, Amelia Is-
   land........................ --   --   --    90  --      --        90    79
  Credit Facility.............. --   125  --   --   --      --       125   125
  Average Interest Rate(1)..... 7.6  7.6  7.6  --   --      --       --    --
</TABLE>
--------
(1) Interest rates are based on various LIBOR terms plus certain basis points
    which range from 165 to 200 basis points. The one-month LIBOR rate at
    December 31, 1999 was 5.6%. We have assumed for purposes of this
    presentation that the LIBOR rate remains unchanged. A 100 basis point
    increase would increase our interest rate expense by approximately $2
    million per year.

                                      49
<PAGE>

Item 8. Financial Statements and Supplementary Data

   The following financial information is included on the pages indicated:

Host Marriott, L.P.

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Public Accountants.................................   51
Consolidated Balance Sheets as of December 31, 1999 and 1998.............   52
Consolidated Statements of Operations for the Fiscal Years Ended December
 31, 1999 and 1998, and January 2, 1998..................................   53
Consolidated Statements of Shareholders' Equity and Comprehensive Income
 for the Fiscal Years Ended December 31, 1998 and January 2, 1998........   54
Consolidated Statements of Partners' Capital and Comprehensive Income for
 the Fiscal Years Ended December 31, 1999 and 1998.......................   55
Consolidated Statements of Cash Flows for the Fiscal Years Ended December
 31, 1999 and 1998 and January 2, 1998...................................   56
Notes to Consolidated Financial Statements...............................   58

Lease Pool Financial Statements

 CCHP I Corporation:
<CAPTION>
                                                                           Page
                                                                           ----
<S>                                                                        <C>
Report of Independent Public Accountants.................................   93
Consolidated Balance Sheet as of December 31, 1999.......................   94
Consolidated Statement of Operations for the Fiscal Year Ended December
 31, 1999................................................................   95
Consolidated Statement of Shareholders' Equity for the Fiscal Year Ended
 December 31, 1999.......................................................   96
Consolidated Statement of Cash Flows for the Fiscal Year Ended December
 31, 1999................................................................   97
Notes to Consolidated Financial Statements...............................   98

 CCHP II Corporation:

Report of Independent Public Accountants.................................  105
Consolidated Balance Sheet as of December 31, 1999.......................  106
Consolidated Statement of Operations for the Fiscal Year Ended December
 31, 1999................................................................  107
Consolidated Statement of Shareholders' Equity for the Fiscal Year Ended
 December 31, 1999.......................................................  108
Consolidated Statement of Cash Flows for the Fiscal Year Ended December
 31, 1999................................................................  109
Notes to Consolidated Financial Statements...............................  110

 CCHP III Corporation:

Report of Independent Public Accountants.................................  117
Consolidated Balance Sheet as of December 31, 1999.......................  118
Consolidated Statement of Operations for the Fiscal Year Ended December
 31, 1999................................................................  119
Consolidated Statement of Shareholders' Equity for the Fiscal Year Ended
 December 31, 1999.......................................................  120
Consolidated Statement of Cash Flows for the Fiscal Year Ended December
 31, 1999................................................................  121
Notes to Consolidated Financial Statements...............................  122

 CCHP IV Corporation:

Report of Independent Public Accountants.................................  129
Consolidated Balance Sheet as of December 31, 1999.......................  130
Consolidated Statement of Operations for the Fiscal Year Ended December
 31, 1999................................................................  131
Consolidated Statement of Shareholders' Equity for the Fiscal Year Ended
 December 31, 1999.......................................................  132
Consolidated Statement of Cash Flows for the Fiscal Year Ended December
 31, 1999................................................................  133
Notes to Consolidated Financial Statements...............................  134
</TABLE>

                                       50
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Host Marriott Corporation as general partner to Host Marriott, L.P.:

   We have audited the accompanying consolidated balance sheets of Host
Marriott, L.P. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, partner's capital and
comprehensive income and cash flows of Host Marriott, L.P. for the fiscal year
ended December 31, 1999 and the consolidated statements of operations,
shareholders' equity and comprehensive income and cash flows of Host Marriott
Corporation (as predecessor to Host Marriott L.P. -- See Note 1) for the
fiscal years ended December 31, 1998 and January 2, 1998. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

   We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Host
Marriott, L.P. and subsidiaries as of December 31, 1999, and the results of
operations and cash flows of Host Marriott, L.P. for the fiscal year ended
December 31, 1999 and of Host Marriott Corporation for the fiscal years ended
December 31, 1998 and January 2, 1998, in conformity with accounting
principles generally accepted in the United States.

   Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at
Item 14(a)(2) is presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic financial
statements. This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.

                                          Arthur Andersen LLP

Vienna, Virginia
March 8, 2000

                                      51
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                                   1999   1998
                                                                  ------ ------
                                                                  (in millions)
<S>                                                               <C>    <C>
                             ASSETS
Property and equipment, net.....................................  $7,108 $7,201
Notes and other receivables, net (including amounts due from
 affiliates of $127 million and $134 million, respectively).....     175    203
Rent receivable.................................................      72    --
Due from managers...............................................     --      19
Investments in affiliates.......................................      49     33
Other assets....................................................     515    370
Cash and cash equivalents.......................................     277    436
                                                                  ------ ------
                                                                  $8,196 $8,262
                                                                  ====== ======
               LIABILITIES AND PARTNERS' CAPITAL
Debt
  Senior notes..................................................  $2,539 $2,246
  Mortgage debt.................................................   2,309  2,438
  Convertible debt obligation to Host Marriott Corporation......     514    567
  Other.........................................................     221    447
                                                                  ------ ------
                                                                   5,583  5,698
Accounts payable and accrued expenses...........................     148    204
Deferred income taxes...........................................      49     97
Other liabilities...............................................     426    460
                                                                  ------ ------
    Total liabilities...........................................   6,206  6,459
                                                                  ------ ------
Minority interest...............................................     136    147
Cumulative redeemable preferred limited partnership interests of
 third parties at redemption value ("Preferred OP Units")
 (representing 0.6 million units and 0 units at December 31,
 1999 and 1998, respectively)...................................       5    --
Limited partnership interests of third parties at redemption
 value (representing 64.0 million units and 64.6 million units
 at December 31, 1999 and 1998, respectively)...................     528    892
Partners' capital
  General partner...............................................       1      1
  Cumulative redeemable preferred limited partner...............     196    --
  Limited partner...............................................   1,122    767
  Accumulated other comprehensive income (loss).................       2     (4)
                                                                  ------ ------
    Total partners' capital.....................................   1,321    764
                                                                  ------ ------
                                                                  $8,196 $8,262
                                                                  ====== ======
</TABLE>

                See Notes to Consolidated Financial Statements.


                                       52
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

       Fiscal years ended December 31, 1999 and 1998, and January 2, 1998
                 (in millions, except per common share amounts)

<TABLE>
<CAPTION>
                                                         1999    1998    1997
                                                        ------  ------  ------
<S>                                                     <C>     <C>     <C>
REVENUES
 Rental income (Note 1)...............................  $1,295  $  --   $  --
 Hotel sales
 Rooms................................................     --    2,220   1,850
 Food and beverage....................................     --      984     776
 Other................................................     --      238     180
                                                        ------  ------  ------
  Total hotel revenues................................     --    3,442   2,806
 Interest income......................................      39      51      52
 Net gains (losses) on property transactions..........      28      57     (11)
 Equity in earnings of affiliates and other...........      14      14      28
                                                        ------  ------  ------
  Total revenues......................................   1,376   3,564   2,875
                                                        ------  ------  ------
EXPENSES
 Depreciation and amortization........................     289     242     231
 Property-level expenses..............................     264     271     247
 Hotel operating expenses
 Rooms................................................     --      524     428
 Food and beverage....................................     --      731     592
 Other department costs and deductions................     --      843     693
 Management fees and other (including Marriott
  International management fees of $196 million in
  1998 and $162 million in 1997)......................     --      213     171
 Minority interest....................................      21      52      31
 Corporate expenses...................................      37      50      45
 REIT conversion expenses.............................     --       64     --
 Loss on litigation settlement........................      40     --      --
 Interest expense.....................................     469     335     288
 Dividends on Host Marriott-obligated mandatorily
  redeemable convertible preferred securities of a
  subsidiary trust whose sole assets are the
  convertible subordinated debentures due 2026
  ("Convertible Preferred Securities")................     --       37      37
 Other................................................      16      28      29
                                                        ------  ------  ------
  Total expenses......................................   1,136   3,390   2,792
                                                        ------  ------  ------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
 TAXES................................................     240     174      83
 Benefit (provision) for income taxes.................      16     (86)    (36)
 Benefit from change in tax status....................     --      106     --
                                                        ------  ------  ------
INCOME FROM CONTINUING OPERATIONS.....................     256     194      47
DISCONTINUED OPERATIONS
 Income from discontinued operations (net of income
  tax expense of $4 million in 1998)..................     --        6     --
 Provision for loss on disposal (net of income tax
  benefit of $3 million in 1998)......................     --       (5)    --
                                                        ------  ------  ------
INCOME BEFORE EXTRAORDINARY ITEMS.....................     256     195      47
 Extraordinary gain (loss), net of income tax expense
  (benefit) of $4 million, ($80) million and $1
  million in 1999, 1998 and 1997, respectively........      29    (148)      3
                                                        ------  ------  ------
NET INCOME............................................  $  285  $   47  $   50
                                                        ======  ======  ======
 Less: Distributions on preferred limited partner
  units to Host Marriott, net of income tax expense of
  $4 million..........................................      (6)    --      --
                                                        ------  ------  ------
NET INCOME AVAILABLE TO COMMON UNITHOLDERS............  $  279  $   47  $   50
                                                        ======  ======  ======
BASIC EARNINGS (LOSS) PER COMMON UNIT:
 Continuing operations................................  $  .86  $  .90  $  .22
 Discontinued operations (net of income taxes)........     --      .01     --
 Extraordinary gain (loss)............................     .10    (.69)    .01
                                                        ------  ------  ------
BASIC EARNINGS PER COMMON UNIT........................  $  .96  $  .22  $  .23
                                                        ======  ======  ======
DILUTED EARNINGS (LOSS) PER COMMON UNIT:
 Continuing operations................................  $  .83  $  .84  $  .22
 Discontinued operations (net of income taxes)........     --      .01     --
 Extraordinary gain (loss)............................     .10    (.58)    .01
                                                        ------  ------  ------
DILUTED EARNINGS PER COMMON UNIT......................  $  .93  $  .27  $  .23
                                                        ======  ======  ======
</TABLE>
                See Notes to Consolidated Financial Statements.

                                       53
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
             AND COMPREHENSIVE INCOME OF HOST MARRIOTT CORPORATION

            Fiscal years ended December 31, 1998 and January 2, 1998
                                 (in millions)
<TABLE>
<CAPTION>
 Shares Outstanding
 ----------------------
                                                                                           Accumulated
                                                                     Additional Retained      Other
                                                    Preferred Common  Paid-in   Earnings  Comprehensive Comprehensive
 Preferred   Common                                   Stock   Stock   Capital   (Deficit) Income (Loss) Income (Loss)
 ---------   ----------                             --------- ------ ---------- --------- ------------- -------------
 <C>         <C>         <S>                        <C>       <C>    <C>        <C>       <C>           <C>
          --      202.0  Balance, January 3,
                         1997....................      $--     $202    $  921     $  (1)       $ 5           $--
          --         --  Net income available to
                         common shareholders.....       --       --        --        50         --            50
          --         --  Other comprehensive
                         income:
          --         --  Unrealized gain on HM
                         Services common stock...       --       --        --        --          7             7
                                                                                                             ---
          --         --  Comprehensive income
                         available to common
                         shareholders............                                                            $57
                                                                                                             ===
          --        1.8  Common stock issued for
                         the comprehensive stock
                         and employee stock
                         purchase plans..........       --        2        14        --         --
---------------------------------------------------------------------------------------------------------------------
          --      203.8  Balance, January 2,
                         1998....................       --      204       935        49         12            --
          --         --  Net income available to
                         common shareholders.....       --       --        --        47         --            47
          --         --  Other comprehensive
                         income (loss):
          --             Unrealized loss on HM
                         Services common stock...       --       --        --        --         (5)           (5)
          --             Foreign currency
                         translation adjustment..       --       --        --        --         (9)           (9)
          --             Reclassification of gain
                         realized on HM Services
                         common stock--net
                         income..................       --       --        --        --         (2)           (2)
                                                                                                             ---
          --         --  Comprehensive income
                         available to common
                         shareholders............                                                            $31
                                                                                                             ===
          --        1.4  Common stock issued for
                         the comprehensive stock
                         and employee stock
                         purchase plans..........       --       --         8        --         --
          --         --  Adjustment of stock par
                         value from $1 to $.01
                         per share...............       --     (202)      202        --         --
          --       11.9  Common stock issued for
                         Special Dividend........       --       --       143      (143)        --
          --         --  Distribution of stock of
                         Crestline Capital
                         Corporation.............       --       --        --      (438)        --
          --         --  Cash portion of Special
                         Dividend................       --       --        --       (69)        --
---------------------------------------------------------------------------------------------------------------------
          --      217.1  Balance, Before
                         contribution to Host
                         Marriott, L.P. .........      $--     $  2    $1,288     $(554)       $(4)
                         Net assets retained by
                         Host Marriott...........                         (23)
                                                                       ------
                         Balance contributed to
                         Host Marriott, L.P. ....                      $  709
                                                                       ======
</TABLE>


                See Notes to Consolidated Financial Statements.


                                       54
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

                  CONSOLIDATED STATEMENT OF PARTNER'S CAPITAL
                AND COMPREHENSIVE INCOME OF HOST MARRIOTT, L.P.

                 Fiscal years ended December 31, 1999 and 1998
                                 (in millions)

<TABLE>
<CAPTION>
 Class A and                                                                    Accumulated
 B Preferred   Common                               Preferred                      Other
    Units     OP Units                               Limited  General Limited  Comprehensive Comprehensive
 Outstanding Outstanding                             Partner  Partner Partner  Income (Loss) Income (Loss)
 ----------- -----------                            --------- ------- -------  ------------- -------------
 <C>         <C>         <S>                        <C>       <C>     <C>      <C>           <C>
      --        217.1    Contribution by Host
                         Marriott................     $ --      $ 1   $  712        $(4)         $ --
      --          8.5    Issuance of OP Units to
                         Host Marriott in
                         connection with the
                         Partnership Mergers.....       --       --      113         --
      --           --    Market Adjustment to
                         record OP Units of third
                         parties at redemption
                         value...................       --       --      (58)        --
----------------------------------------------------------------------------------------------------------
      --        225.6    Balance, December 31,
                         1998....................       --        1      767         (4)           --
      --           --    Net income..............       --       --      285         --           285
      --           --    Other comprehensive
                         income (loss):
                         Unrealized gain on HM
                         Services common stock...       --       --       --          4             4
                         Foreign currency
                         translation adjustment..       --       --       --          3             3
                         Reclassification of gain
                         realized on HM Services
                         common stock--net
                         income..................       --       --       --         (1)           (1)
                                                                                                 ----
      --           --    Comprehensive income....       --       --       --         --          $291
                                                                                                 ====
      --          3.6    Units issued to Host
                         Marriott for the
                         comprehensive stock and
                         employee stock purchase
                         plans...................       --       --        8         --
      --          0.5    Redemptions of limited
                         partnership interests of
                         third parties for cash..       --       --       (3)        --
      --           --    Other comprehensive
                         income attributed to OP
                         Units of third parties..       --       --        2         --
      --           --    Distributions on OP
                         Units...................       --       --     (245)        --
      --           --    Distributions on
                         Preferred Limited
                         Units...................       --       --       (6)        --
      --         (0.4)   Adjustment to Special
                         Dividend................       --       --       (4)        --
      --         (5.8)   Repurchases of OP
                         Units...................       --       --      (50)        --
      --           --    Market adjustment to
                         record Preferred OP
                         Units and OP Units of
                         third parties at
                         redemption value........       --       --      368         --
     8.2           --    Issuance of Preferred OP
                         Units...................      196       --       --         --
----------------------------------------------------------------------------------------------------------
     8.2        223.5    Balance, December 31,
                         1999....................     $196      $ 1   $1,122        $ 2
</TABLE>
--------------------------------------------------------------------------------


                See Notes to Consolidated Financial Statements.


                                       55
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
       Fiscal years ended December 31, 1999 and 1998, and January 2, 1998

<TABLE>
<CAPTION>
                                                      1999     1998     1997
                                                     -------  -------  -------
                                                          (in millions)
<S>                                                  <C>      <C>      <C>
OPERATING ACTIVITIES
Income from continuing operations................... $   256  $   194  $    47
Adjustments to reconcile to cash from operations:
 Depreciation and amortization......................     293      243      231
 Income taxes.......................................     (66)    (103)     (20)
 Amortization of deferred income....................      (4)      (4)      (4)
 Net (gains) losses on property transactions........     (24)     (50)      19
 Equity in earnings of affiliates...................      (6)      (1)      (4)
 Other..............................................      26       39       62
 Changes in operating accounts:
  Other assets......................................     (55)     (56)      57
  Other liabilities.................................     (60)      50       44
                                                     -------  -------  -------
 Cash from continuing operations....................     360      312      432
 Cash from discontinued operations..................     --        29       32
                                                     -------  -------  -------
 Cash from operations...............................     360      341      464
                                                     -------  -------  -------
INVESTING ACTIVITIES
Proceeds from sales of assets.......................     195      227       51
Acquisitions........................................     (29)    (988)    (359)
Capital expenditures:
 Capital expenditures for renewals and
  replacements......................................    (197)    (165)    (129)
 New investment capital expenditures................    (150)     (87)     (29)
 Other Investments..................................     (14)     --       --
Purchases of short-term marketable securities.......     --      (134)    (354)
Sales of short-term marketable securities...........     --       488      --
Notes receivable collections (advances), net........      19        4        6
Affiliate notes receivable issuances and
 collections, net...................................     --       (13)      (6)
Other...............................................     --        13       13
                                                     -------  -------  -------
 Cash used in investing activities from continuing
  operations........................................    (176)    (655)    (807)
 Cash used in investing activities from discontinued
  operations........................................     --       (50)    (239)
                                                     -------  -------  -------
 Cash used in investing activities..................    (176)    (705)  (1,046)
                                                     -------  -------  -------
FINANCING ACTIVITIES
Issuances of debt, net..............................   1,345    2,496      857
Debt prepayments....................................  (1,397)  (1,898)    (403)
Cash contributed to Crestline at inception..........     --       (52)     --
Cash contributed to Non-Controlled Subsidiary.......     --       (30)     --
Cost of extinguishment of debt......................      (2)    (175)     --
Scheduled principal repayments......................     (34)     (51)     (90)
Issuances of OP Units...............................       5        1        6
Issuances of preferred limited partner units........     196      --       --
Distributions on common OP Units....................    (258)     --       --
Distributions on preferred limited partner units....      (2)     --       --
Redemption or repurchase of OP Units for cash.......     (54)     --       --
Repurchases of Convertible Preferred Securities.....     (36)     --       --
Other...............................................    (106)     (26)      22
                                                     -------  -------  -------
 Cash from (used in) financing activities from
  continuing operations.............................    (343)     265      392
 Cash from (used in) financing activities from
  discontinued operations...........................     --        24       (3)
                                                     -------  -------  -------
 Cash from (used in) financing activities...........    (343)     289      389
                                                     -------  -------  -------
DECREASE IN CASH AND CASH EQUIVALENTS...............    (159)     (75)    (193)
CASH AND CASH EQUIVALENTS, beginning of year........     436      511      704
                                                     -------  -------  -------
CASH AND CASH EQUIVALENTS, end of year.............. $   277  $   436  $   511
                                                     =======  =======  =======
</TABLE>

                See Notes to Consolidated Financial Statements.


                                       56
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

              CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
      Fiscal years ended December 31, 1999 and 1998, and January 2, 1998

Supplemental schedule of noncash investing and financing activities:

   In 1999, approximately 612,000 cumulative redeemable preferred limited
partnership units valued at $7.6 million were issued in connection with the
acquisition of minority interests in two hotels.

   The Company assumed mortgage debt of $1,215 million and $733 million in
1998 and 1997, respectively, for the acquisition of, or purchase of
controlling interest in, certain hotel properties and senior living
communities.

   In 1998, the Company distributed $438 million of net assets in connection
with the discontinued operations and contributed $12 million of net assets to
the Non-Controlled Subsidiaries in connection with the REIT Conversion.





                See Notes to Consolidated Financial Statements.


                                      57
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

 Description of Business

   Host Marriott Corporation, a Maryland corporation formerly named HMC Merger
Corporation ("Host REIT"), operating through an umbrella partnership
structure, is a self-managed and self-administered real estate investment
trust ("REIT") with its operations conducted solely through an operating
partnership, Host Marriott, L.P. (the "Operating Partnership") and its
subsidiaries. As REITs are not currently permitted to derive revenues directly
from the operations of hotels, Host REIT leases all of the hotels to
subsidiaries of Crestline Capital Corporation or other lessees (collectively
the "Lessee") as further discussed at Note 9.

   As of December 31, 1999, the Operating Partnership owned, or had
controlling interests in, 121 upscale and luxury, full-service hotel lodging
properties generally located throughout the United States and operated
primarily under the Marriott, Ritz-Carlton, Four Seasons, Hyatt and Swissotel
brand names. 108 of these properties are managed or franchised by Marriott
International, Inc. ("Marriott International"). Host REIT also has economic,
non-voting interests in certain Non-Controlled Subsidiaries, whose hotels are
also managed by Marriott International (see Note 4).

 Basis of Presentation

   On December 15, 1998, shareholders of Host Marriott Corporation, ("Host
Marriott"), a Delaware corporation and the predecessor to Host REIT, approved
a plan to reorganize Host Marriott's business operations through the spin-off
of Host Marriott's senior living business as part of Crestline and the
contribution of Host Marriott's hotels and certain other assets and
liabilities to a newly formed Delaware limited partnership, Host Marriott,
L.P. Host Marriott merged into HMC Merger Corporation (the "Merger"), a newly
formed Maryland corporation (renamed Host Marriott Corporation) which intends
to qualify, effective January 1, 1999, as a REIT and is the sole general
partner of the Operating Partnership. Host Marriott and its subsidiaries'
contribution of its hotels and certain assets and liabilities to the Operating
Partnership and its subsidiaries (the "Contribution") in exchange for units of
partnership interest in the Operating Partnership ("OP Units") was accounted
for at Host Marriott's historical basis. As of December 31, 1999, Host REIT
owned approximately 78% of the Operating Partnership.

   In these consolidated financial statements, the "Company" or "Host
Marriott" refers to Host Marriott Corporation before, and Host Marriott, L.P.
after Host Marriott Corporation's conversion to a REIT (the "REIT
Conversion"). Host Marriott Corporation is presented as the predecessor to the
Operating Partnership since the Operating Partnership and its subsidiaries
received substantially all of the continuing operations, assets and
liabilities of Host Marriott Corporation and its subsidiaries.

   On December 29, 1998, the Company completed the previously discussed spin-
off of Crestline (see Note 2), through a taxable stock dividend to its
shareholders. Each Host Marriott shareholder of record on December 28, 1998
received one share of Crestline for every ten shares of Host Marriott common
stock owned (the "Distribution").

   As a result of the Distribution, the Company's financial statements have
been restated to present the senior living communities business results of
operations and cash flows as discontinued operations. See Note 2 for further
discussion of the Distribution. All historical financial statements presented
have been restated to conform to this presentation.

                                      58
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Principles of Consolidation

   The consolidated financial statements include the accounts of the Company
and its subsidiaries and controlled affiliates. Investments in affiliates over
which the Company has the ability to exercise significant influence, but does
not control, are accounted for using the equity method. All material
intercompany transactions and balances have been eliminated.

 Fiscal Year End Change

   The U.S. Internal Revenue Code of 1986, as amended, requires REITs to file
their U.S. income tax return on a calendar year basis. Accordingly in 1998,
the Company changed its fiscal year-end to December 31 for both financial and
tax reporting requirements. Previously, the Company's fiscal year ended on the
Friday nearest to December 31.

 Revenues

   The Company's 1999 revenue primarily represents the rental income from its
leased hotels and is not comparable to 1998 hotel revenues which reflect gross
sales generated by the properties. The rent due under each lease is the
greater of base rent or percentage rent, as defined. Percentage rent
applicable to room, food and beverage and other types of hotel revenue varies
by lease and is calculated by multiplying fixed percentages by the total
amounts of such revenues over specified threshold amounts. Both the minimum
rent and the revenue thresholds used in computing percentage rents are subject
to annual adjustments based on increases in the United States Consumer Price
Index and the Labor Index, as defined. As of year end all annual thresholds
have been achieved.

   The comparison of the 1999 results with 1998 and 1997 is also affected by a
change in the reporting period for the Company's hotels not managed by
Marriott International. In prior years, operations for certain of the
Company's hotels were recorded from the beginning of December of the prior
year to November of the current year due to a one-month delay in receiving
results from those hotel properties. Upon conversion to a REIT, operations are
required to be reported on a calendar year basis in accordance with Federal
income tax regulations. As a result, the Company recorded one additional
period of operations in fiscal year 1998 for these properties. The effect on
revenues and net income was to increase revenues by $44 million and net income
by $6 million and diluted earning per share by $0.02 in 1998.

 Earnings (Loss) Per Unit

   Basic earnings per unit is computed by dividing net income available to
common unitholders by the weighted average number of units outstanding.
Diluted earnings per unit is computed by dividing net income available to
common unitholders as adjusted for potentially dilutive securities, by the
weighted average number of units outstanding plus other potentially dilutive
securities. Dilutive securities may include units distributed to Host Marriott
Corporation for Host Marriott Corporation common shares granted under
comprehensive stock plans, warrants and the Convertible Preferred Securities
(see Note 6). Dilutive securities also include those common and preferred OP
Units issuable or outstanding that are held by minority partners which are
assumed to be converted. Diluted earnings per unit was not adjusted for the
impact of the Convertible Preferred Securities for 1999 and 1997 as they were
anti-dilutive. In December 1998, the Company declared the Special Dividend
(Note 2) and, in February 1999, Host REIT distributed 11.5 million shares to
existing shareholders in conjunction with the Special Dividend. The weighted
average number of units outstanding and the basic and diluted earnings per
unit computations have been restated to reflect these shares as outstanding
for all periods presented.

   In February 1999, the Company distributed 8.5 million units to Host
Marriott Corporation for 8.5 million shares of Host Marriott Corporation
common stock issued in exchange for 8.5 million OP Units issued to certain
limited partners in connection with the Partnership Mergers (see Note 12)
which are deemed outstanding at December 31, 1998.

                                      59
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A reconciliation of the number of units utilized for the calculation of
diluted earnings per unit follows:

<TABLE>
<CAPTION>
                                                                  Year Ended
                      --------------------------------------------------------------------------------------------------
                                    1999                             1998                             1997
                      -------------------------------- -------------------------------- --------------------------------
                                                 Per                              Per                              Per
                        Income        Units      Unit    Income        Units      Unit    Income        Units      Unit
                      (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
                      ----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
<S>                   <C>         <C>           <C>    <C>         <C>           <C>    <C>         <C>           <C>
Net income..........     $285         291.6      $.98      $47         216.3      $.22      $50         215.0      $.23
 Distributions on
  preferred limited
  partner units and
  preferred OP
  Units.............       (6)          --       (.02)     --            --        --       --            --        --
                         ----         -----      ----      ---         -----      ----      ---         -----      ----
Basic earnings
 available to common
 unitholders
 per unit...........     $279         291.6      $.96      $47         216.3      $.22      $50         215.0      $.23
 Assuming
  distribution of
  units to Host
  Marriott
  Corporation for
  Host Marriott
  Corporation common
  shares granted
  under the
  comprehensive
  stock plan, less
  shares assumed
  purchased at
  average market
  price.............      --            5.3      (.02)     --            4.0      (.01)     --            4.8       --
 Assuming conversion
  of Preferred
  OP Units..........      --            0.3       --       --            --        --       --            --        --
 Assuming issuance
  of minority OP
  Units issuable
  under certain
  purchase
  agreements........        7          10.9      (.01)     --            0.3       --       --            --        --
 Assuming conversion
  of Convertible
  Preferred
  Securities........      --            --        --        22          35.8       .06      --            --        --
 Assuming conversion
  of warrants.......      --            --        --       --            --        --       --            0.3       --
                         ----         -----      ----      ---         -----      ----      ---         -----      ----
Diluted Earnings per
 Unit...............     $286         308.1      $.93      $69         256.4      $.27      $50         220.1      $.23
                         ====         =====      ====      ===         =====      ====      ===         =====      ====
</TABLE>

 International Operations

   The consolidated statements of operations include the following amounts
related to non-U.S. subsidiaries and affiliates: revenues of $24 million, $121
million and $105 million, and income (loss) before income taxes of $8 million,
$7 million and ($9 million) in 1999, 1998 and 1997, respectively.

 Minority Interest

   Minority interest consists of limited partnership interests in consolidated
investments of $136 million and $147 million as of December 31, 1999 and 1998,
respectively.

 Property and Equipment

   Property and equipment is recorded at cost. For newly developed properties,
cost includes interest, ground rent and real estate taxes incurred during
development and construction. Replacements and improvements are capitalized.

   Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, generally 40 years for buildings and three to ten
years for furniture and equipment. Leasehold improvements are amortized over
the shorter of the lease term or the useful lives of the related assets.

   Gains on sales of properties are recognized at the time of sale or deferred
to the extent required by generally accepted accounting principles. Deferred
gains are recognized as income in subsequent periods as conditions requiring
deferral are satisfied or expire without further cost to the Company.

   In cases where management is holding for sale particular hotel properties,
the Company assesses impairment based on whether the estimated sales price
less costs of disposal of each individual property to be sold is less than the
net book value. A property is considered to be held for sale when the Company
has made the decision to dispose of the property. Otherwise, the Company
assesses impairment of its real estate properties based on whether it is
probable that undiscounted future cash flows from each individual property
will be less than its net book value. If a property is impaired, its basis is
adjusted to its fair market value.

                                      60
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Deferred Charges

   Financing costs related to long-term debt are deferred and amortized over
the remaining life of the debt.

 Cash, Cash Equivalents and Short-term Marketable Securities

   The Company considers all highly liquid investments with a maturity of 90
days or less at the date of purchase to be cash equivalents. Cash and cash
equivalents includes approximately $5 million and $22 million at December 31,
1999 and 1998, respectively, of cash related to certain consolidated
partnerships, the use of which is restricted generally for partnership
purposes to the extent it is not distributed to the partners. Short-term
marketable securities include investments with a maturity of 91 days to one
year at the date of purchase. The Company's short-term marketable securities
represent investments in U.S. government agency notes and high quality
commercial paper. The short-term marketable securities are categorized as
available for sale and, as a result, are stated at fair market value.
Unrealized holding gains and losses are included as a separate component of
partners' capital until realized.

 Concentrations of Credit Risk

   Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents
and short-term marketable securities. The Company maintains cash and cash
equivalents and short-term marketable securities with various high credit-
quality financial institutions. The Company performs periodic evaluations of
the relative credit standing of these financial institutions and limits the
amount of credit exposure with any institution.

   In addition, on January 1, 1999, subsidiaries of Crestline became the
lessees of virtually all the hotels and, as such, their rent payments are the
primary source of the Company's revenues. The full-service hotel leases are
grouped into four lease pools, with Crestline's guarantee limited to the
greater of 10% of the aggregate rent payable for the preceding year or 10% of
the aggregate rent payable under all leases in the respective pool.
Additionally, the lessee's obligation under each lease agreement is guaranteed
by all other lessees in the respective lease pool. As a result, the Company
believes that the operating results of each full-service lease pool may be
material to the Company's financial statements. However, management believes
that due to Crestline's substantial assets, net worth and ability to operate
as a separate publicly traded company, Crestline will have the financial
stability and access to capital necessary to meet the substantial obligations
as lessee under the leases. The separate financial statements of each full-
service lease pool are included in this filing. For a more detailed discussion
of the guarantee, see Note 9.

 Use of Estimates in the Preparation of Financial Statements

   The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

 REIT Conversion Expenses

   The Company incurred certain costs related to the REIT Conversion. These
costs consist of professional fees, printing and filing costs, consent fees
and certain other related fees and are classified as REIT conversion expenses
on the consolidated statement of operations. The Company recognized REIT
conversion expense of $64 million in 1998.


                                      61
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 Interest Rate Swap Agreements

   In the past, the Company entered into a limited number of interest rate
swap agreements for non-trading purposes. The Company used such agreements to
fix certain of its variable rate debt to a fixed rate basis. The interest rate
differential to be paid or received on interest rate swap agreements is
recognized as an adjustment to interest expense.

 Other Comprehensive Income

   As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" (SFAS 130) which establishes new rules for the reporting
and display of comprehensive income and its components. SFAS 130 requires
unrealized gains or losses on the Company's right to receive Host Marriott
Services stock (see Note 10) and foreign currency translation adjustments, to
be included in other comprehensive income. Prior year financial statements
have been reclassified to conform to the requirements of SFAS 130.

   The components of total accumulated other comprehensive income in the
balance sheet are as follows (in millions):

<TABLE>
<CAPTION>
                                                                     1999  1998
                                                                     ----  ----
   <S>                                                               <C>   <C>
   Net unrealized gains............................................. $ 8   $ 5
   Foreign currency translation adjustment..........................  (6)   (9)
                                                                     ---   ---
   Total accumulated other comprehensive income (loss).............. $ 2   $(4)
                                                                     ===   ===
</TABLE>

 Application of New Accounting Standards

   On December 3, 1999 the Securities and Exchange Commission staff issued
Staff Accounting Bulletin (SAB) No. 101, which codified the staff's position
on revenue recognition. The Company retroactively changed its method of
accounting for contingent rental revenues to conform to SAB No. 101. As a
result, base rent is recognized as it is earned according to the applicable
lease provisions. Percentage rent is recorded as deferred revenue on the
balance sheet until the applicable hotel revenues exceed the threshold
amounts. The Company has adopted SAB No. 101 with retroactive effect beginning
January 1, 1999.

   In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Statement
establishes accounting and reporting standards requiring that derivative
instruments (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statement is effective for fiscal years
beginning after June 15, 2000. The Company has not determined the impact of
SFAS No. 133, but management does not believe it will be material.

2. Distribution and Special Dividend

   In December 1998, the Company distributed to its shareholders through a
taxable distribution the outstanding shares of common stock of Crestline (the
"Distribution"), formerly a wholly owned subsidiary of the Company, which, as
of the date of the Distribution, owned and operated the Company's senior
living communities, owned certain other assets and held leasehold interests in
substantially all of the Company's hotels. The Distribution provided Company
shareholders with one share of Crestline common stock for every ten shares of
Company common stock held by such shareholders on the record date of December
28, 1998. As a result of the Distribution, the Company's financial statements
have been restated to present the senior living communities' business results
of operations and cash flows as discontinued operations. Revenues for the
Company's discontinued operations totaled $241 million and $111 million in
1998 and 1997, respectively. The provision for loss on disposal includes
organizational and formation costs related to Crestline.

                                      62
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   For purposes of governing certain of the ongoing relationships between the
Company and Crestline after the Distribution and to provide for an orderly
transition, the Company and Crestline entered into various agreements,
including a Distribution Agreement, an Employee Benefits Allocation Agreement
and a Tax Sharing Agreement. Effective as of December 29, 1998, these
agreements provide, among other things, for the division between the Company
and Crestline of certain assets and liabilities.

   On December 18, 1998, the Board of Directors declared a special dividend
which entitled shareholders of record on December 28, 1998 to elect to receive
either $1.00 in cash or .087 of a share of common stock of the Company for
each outstanding share of the Company's common stock owned by such shareholder
on the record date (the "Special Dividend"). Cash totaling $73 million and
11.5 million shares of common stock that were elected in the Special Dividend
were paid and/or issued in 1999.

3. Property and Equipment

   Property and equipment consists of the following:

<TABLE>
<CAPTION>
                                                                 1999     1998
                                                                -------  ------
                                                                (in millions)
   <S>                                                          <C>      <C>
   Land and land improvements.................................. $   687  $  740
   Buildings and leasehold improvements........................   6,687   6,613
   Furniture and equipment.....................................     712     740
   Construction in progress....................................     243      78
                                                                -------  ------
                                                                  8,329   8,171
   Less accumulated depreciation and amortization..............  (1,221)   (970)
                                                                -------  ------
                                                                $ 7,108  $7,201
                                                                =======  ======
</TABLE>

   Interest cost capitalized in connection with the Company's development and
construction activities totaled $7 million in 1999, $4 million in 1998, and $1
million in 1997.

4. Investments in and Receivables from Affiliates

   Investments in and receivables from affiliates consist of the following:

<TABLE>
<CAPTION>
                                                            Ownership
                                                            Interests 1999 1998
                                                            --------- ---- ----
                                                               (in millions)
   <S>                                                      <C>       <C>  <C>
   Equity investments
     Rockledge Hotel Properties, Inc. .....................     95%   $ 47 $ 31
     Fernwood Hotel Assets, Inc. ..........................     95%      2    2
   Notes and other receivables from affiliates, net........    --      127  134
                                                                      ---- ----
                                                                      $176 $167
                                                                      ==== ====
</TABLE>

   In connection with the REIT Conversion, Rockledge Hotel Properties, Inc.
and Fernwood Hotel Assets, Inc. (together, the "Non-Controlled Subsidiaries")
were formed to own various assets of approximately $264 million contributed by
Host Marriott Corporation to the Operating Partnership, the direct ownership
of which by Host REIT or the Operating Partnership could jeopardize Host
REIT's status as a REIT. These assets primarily consist of partnership or
other interests in hotels which are not leased and certain furniture, fixtures
and equipment ("FF&E") used in the hotels. In exchange for the contribution of
these assets to the Non-Controlled Subsidiaries, the Operating Partnership
received only non-voting common stock of the Non-Controlled Subsidiaries,
representing 95% of the total economic interests therein. The Host Marriott
Statutory Employee/Charitable Trust, the beneficiaries of which are certain
employees of the Company and the J.W. Marriott Foundation concurrently
acquired all of the voting common stock representing the remaining 5% of the
total economic interest. The Non-

                                      63
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Controlled Subsidiaries own three full-service hotels and interests in
partnerships that own an additional two full-service hotels and 209 limited-
service hotels.

   In connection with the REIT Conversion, the Company completed the
Partnership Mergers and, as a result, investments in affiliates in prior years
include earnings and assets, which are now consolidated. (See Note 12 for
discussion.)

   Receivables from affiliates are reported net of reserves of $7 million at
December 31, 1999 and 1998. Net amounts funded by the Company totaled $10
million in 1997, and repayments were $2 million in 1999, $14 million in 1998
and $2 million in 1997. There were no fundings in 1999 and 1998.

   The Company's pre-tax income from affiliates includes the following:

<TABLE>
<CAPTION>
                                                                 1999 1998 1997
                                                                 ---- ---- ----
                                                                 (in millions)
   <S>                                                           <C>  <C>  <C>
   Interest income.............................................. $11  $ 1  $11
   Equity in net income.........................................   6    1    5
                                                                 ---  ---  ---
                                                                 $17  $ 2  $16
                                                                 ===  ===  ===
</TABLE>

   Combined summarized balance sheet information for the Company's affiliates
follows:

<TABLE>
<CAPTION>
                                                                   1999   1998
                                                                  ------ ------
                                                                  (in millions)
   <S>                                                            <C>    <C>
   Property and equipment, net................................... $1,556 $1,656
   Other assets..................................................    344    258
                                                                  ------ ------
     Total assets................................................ $1,900 $1,914
                                                                  ====== ======
   Debt, principally mortgages................................... $1,533 $1,622
   Other liabilities.............................................    310    300
   Equity (deficit)..............................................     57     (8)
                                                                  ------ ------
     Total liabilities and equity................................ $1,900 $1,914
                                                                  ====== ======
</TABLE>

   Combined summarized operating results for the Company's affiliates follow:

<TABLE>
<CAPTION>
                                                         1999    1998    1997
                                                         -----  ------  -------
                                                            (in millions)
   <S>                                                   <C>    <C>     <C>
   Hotel revenues....................................... $ 911  $1,123  $ 1,393
   Operating expenses:
     Cash charges (including interest)..................  (710)   (930)  (1,166)
     Depreciation and other non-cash charges............  (153)   (151)    (190)
                                                         -----  ------  -------
   Income before extraordinary items....................    48      42       37
   Extraordinary items--forgiveness of debt.............   --        4       40
                                                         -----  ------  -------
     Net income......................................... $  48  $   46  $    77
                                                         =====  ======  =======
</TABLE>

                                      64
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


5. Debt

   Debt consists of the following:

<TABLE>
<CAPTION>
                                                                    1999   1998
                                                                   ------ ------
                                                                   (in millions)
<S>                                                                <C>    <C>
Series A senior notes, with a rate of 7 7/8% due August 2005.....  $  500 $  500
Series B senior notes, with a rate of 7 7/8% due August 2008.....   1,193  1,192
Series C senior notes, with a rate of 8.45% due December 2008....     498    498
Series E senior notes, with a rate of 8 3/8% due February 2006...     300    --
Senior secured notes, with a rate of 9 1/2% due May 2005.........      13     21
Senior notes, with an average rate of 9 3/4% at December 31,
 1999, maturing through 2012.....................................      35     35
                                                                   ------ ------
  Total senior notes.............................................   2,539  2,246
                                                                   ------ ------
Mortgage debt (non-recourse) secured by $3.5 billion of real es-
 tate assets, with an average rate of 7.95% at December 31, 1999,
 maturing through April 2037.....................................   2,309  2,438
Line of credit, with a variable rate of Eurodollar plus 1.65%
 (7.57% at December 31, 1999)....................................     125    350
Other notes, with an average rate of 7.36% at December 31, 1999,
 maturing through December 2017..................................      90     90
Capital lease obligations........................................       6      7
                                                                   ------ ------
  Total other....................................................     221    447
                                                                   ------ ------
                                                                   $5,069 $5,131
                                                                   ====== ======
</TABLE>

   Public Debt. In February 1999, the Company issued $300 million of 8 3/8%
Series D notes due in 2006 under the same indenture and with the same
covenants as the New Senior Notes (described below). The debt was used to
refinance, or purchase, approximately $299 million of debt acquired in the
Partnership Mergers, including a $40 million variable rate mortgage and
terminate the associated swap agreement, incurring a termination fee of $1
million. The notes were exchanged in August 1999 for Series E Senior notes on
a one-for-one basis, which are freely transferable by the holders.

   In December 1998, the Operating Partnership issued $500 million of 8.45%
Series C notes due in 2008 under the same indenture and with the same
covenants as the New Senior Notes (described below).

   On August 5, 1998, the Company issued an aggregate of $1.7 billion in new
senior notes (the "New Senior Notes"). The New Senior Notes were issued in two
series, $500 million of 7 7/8% Series A notes due in 2005 and $1.2 billion of
7 7/8% Series B notes due in 2008. The indenture under which the New Senior
Notes were issued contains covenants restricting the ability of the Company
and certain of its subsidiaries to incur indebtedness, grant liens on their
assets, acquire or sell assets or make investments in other entities, and make
certain distributions to equity holders of the Company and the Operating
Partnership. The Company utilized the proceeds from the New Senior Notes to
purchase substantially all of its (i) $600 million in 9 1/2% senior notes due
2005; (ii) $350 million in 9% senior notes due 2007; and (iii) $600 million in
8 7/8% senior notes due 2007 (collectively, the "Old Senior Notes").
Approximately $13 million of the Old Senior Notes remain outstanding. In
connection with the purchase of substantially all of the Old Senior Notes, the
Company recorded a charge of approximately $148 million (net of income tax
benefit of $80 million) as an extraordinary item representing the amount paid
for bond premiums and consent fees, as well as the write-off of deferred
financing fees on the Old Senior Notes.

   Concurrently with each offer to purchase, the Company successfully
solicited consents (the "1998 Consent Solicitations") from registered holders
of the Old Senior Notes to certain amendments to eliminate or modify

                                      65
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

substantially all of the restrictive covenants and certain other provisions
contained in the indentures pursuant to which the Old Senior Notes were
issued.

   Bank Credit Facility. In August 1998, the Company entered into a $1.25
billion credit facility (the "Bank Credit Facility") with a group of
commercial banks. The Bank Credit Facility has an initial three-year term with
two one-year extension options. At origination, the facility consisted of a
$350 million term loan and a $900 million revolver. Borrowings under the Bank
Credit Facility bear interest currently at the Eurodollar rate plus 1.65%
(7.57% at December 31, 1999). The interest rate and commitment fee on the
unused portion of the Bank Credit Facility fluctuate based on certain
financial ratios. The New Senior Notes and the Bank Credit Facility were
assumed by the Operating Partnership in connection with the REIT Conversion.

   During 1999, the Company repaid $225 million of the outstanding balance on
the $350 million term loan portion of the Bank Credit Facility, permanently
reducing the term loan portion to $125 million. In connection with these
prepayments, an extraordinary loss of $2 million representing the write-off of
deferred financing costs was recognized. As a result of these repayments, the
available capacity under the revolver remains $900 million while the total
Bank Credit Facility has been permanently reduced to $1.025 billion.

   The Bank Credit Facility contains covenants restricting the ability of the
Company and certain of its subsidiaries to incur indebtedness, grant liens on
their assets, acquire or sell assets or make investments in other entities,
and make certain distributions to equity holders of Host REIT and the
Operating Partnership. The Bank Credit Facility also contains certain
financial covenants relating to, among other things, maintaining certain
levels of tangible net worth and certain ratios of EBITDA to interest and
fixed charges, total debt to EBITDA, unencumbered assets to unsecured debt,
and secured debt to total debt.

   Mortgage Debt. In August 1999, the Company made a prepayment of $19 million
to pay down in full the mezzanine mortgage on the Marriott Desert Springs
Resort and Spa. In September 1999, the Company made a prepayment of $45
million to pay down in full the mortgage note on the Philadelphia Four Seasons
Hotel.

   In July 1999, the Company entered into a financing agreement pursuant to
which it borrowed $665 million due 2009 at a fixed rate of 7.47% with eight
hotels serving as collateral. In connection with this refinancing, an
extraordinary loss of $3 million was recognized, representing the write-off of
deferred financing fees. The proceeds from this financing were used to
refinance existing mortgage indebtedness maturing at various times through
2000, including approximately $590 million of outstanding variable rate
mortgage debt.

   In June 1999, the Company refinanced the debt on the San Diego Marriott
Hotel and Marina. The mortgage is $195 million with a term of 10 years at a
rate of 8.45%. In addition, the Company entered into a mortgage for the
Philadelphia Marriott expansion in July 1999 for $23 million at an interest
rate of approximately 8.6%, maturing in 2009.

   In April 1999, a subsidiary of the Company completed the refinancing of the
$245 million mortgage on the New York Marriott Marquis, maturing June 2000. In
connection with the refinancing, the Company renegotiated the management
agreement and recognized an extraordinary gain of $14 million on the
forgiveness of accrued incentive management fees by the manager. This mortgage
was subsequently refinanced as part of the $665 million financing agreement
discussed above.

   In connection with the refinancing of certain mortgage debt for
approximately $152 million in December 1997, the Company recognized an
extraordinary loss of $2 million which represents payment of a prepayment
penalty and the write-off of unamortized deferred financing fees, net of
taxes.

   In 1997, the Company purchased 100% of the outstanding bonds secured by a
first mortgage on the San Francisco Marriott for $219 million, an $11 million
discount to the face value of $230 million. An extraordinary

                                      66
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

gain of $5 million was recognized, which represents the $11 million discount
less the write-off of unamortized deferred financing fees, net of taxes.

   Interest Rate Swap Agreements. During 1999, the Company terminated its
outstanding interest rate swap agreements recognizing an extraordinary gain of
approximately $8 million. The Company was party to an interest rate swap
agreement with a financial institution with an aggregate notional amount of
$100 million which expired in December 1998. In 1997, the Company was party to
two additional interest rate swap agreements with an aggregate notional amount
of $400 million which expired in May 1997. The Company realized a net
reduction of interest expense of $338,000 and $1 million in 1999 and 1997,
respectively, related to interest rate swap agreements.

   The Company's debt balance at December 31, 1999, includes $87 million of
debt that is recourse to the parent company. Aggregate debt maturities at
December 31, 1999 are (in millions):

<TABLE>
   <S>                                                                   <C>
   2000................................................................. $  180
   2001.................................................................    169
   2002.................................................................    157
   2003.................................................................    132
   2004.................................................................     47
   Thereafter...........................................................  4,900
                                                                         ------
                                                                          5,585
   Discount on senior notes.............................................     (9)
   Capital lease obligation.............................................      7
                                                                         ------
                                                                         $5,583
                                                                         ======
</TABLE>

   Cash paid for interest for continuing operations, net of amounts
capitalized, was $413 million in 1999, $325 million in 1998, and $278 million
in 1997. Deferred financing costs, which are included in other assets,
amounted to $111 million and $98 million, net of accumulated amortization, as
of December 31, 1999 and 1998, respectively. Amortization of deferred
financing costs totaled $17 million, $10 million, and $7 million in 1999,
1998, and 1997, respectively.

6. Convertible Debt Obligation to Host Marriott Corporation

   The obligation for the $514 million and $567 million of 6 3/4% Convertible
Subordinated Debentures (the "Debentures") as of December 31, 1999 and 1998,
respectively, has been included in these financial statements as debt of the
Company because upon the REIT Conversion the Operating Partnership assumed
primary liability for repayment of the Debentures of Host Marriott underlying
the Convertible Preferred Securities (defined below) of the Host Marriott
Financial Trust (the "Issuer"), a wholly-owned subsidiary trust of Host
Marriott. The common securities of the Issuer were not contributed to the
Operating Partnership and therefore the Issuer is not consolidated by the
Operating Partnership. Upon conversion by a Convertible Preferred Securities
holder, Host Marriott will issue shares of its common stock which will be
delivered to such holder. Upon the issuance of such shares by Host Marriott,
the Operating Partnership will issue to Host Marriott the number of OP Units
equal to the number of shares of Host Marriott common stock issued in exchange
for the Debentures.

   In December 1996, the Issuer issued 11 million shares of 6 3/4% convertible
quarterly income preferred securities (the "Convertible Preferred
Securities"), with a liquidation preference of $50 per share (for a total
liquidation amount of $550 million). The Convertible Preferred Securities
represent an undivided beneficial interest in the assets of the Issuer. The
payment of distributions out of moneys held by the Issuer and payments on
liquidation of the Issuer or the redemption of the Convertible Preferred
Securities are guaranteed by the

                                      67
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company to the extent the Issuer has funds available therefor. This guarantee,
when taken together with the Company's obligations under the indenture
pursuant to which the Debentures (defined below) were issued, the Debentures,
the Company's obligations under the Trust Agreement and its obligations under
the indenture to pay costs, expenses, debts and liabilities of the Issuer
(other than with respect to the Convertible Preferred Securities) provides a
full and unconditional guarantee of amounts due on the Convertible Preferred
Securities. Proceeds from the issuance of the Convertible Preferred Securities
were invested in 6 3/4% Convertible Subordinated Debentures (the "Debentures")
due December 2, 2026 issued by the Company. The Issuer exists solely to issue
the Convertible Preferred Securities and its own common securities (the
"Common Securities") and invest the proceeds therefrom in the Debentures. The
note receivable from the Operating Partnership is the Issuer's sole asset.

   Each of the Convertible Preferred Securities and the related debentures are
convertible at the option of the holder into shares of Host Marriott
Corporation common stock at the rate of 3.2537 shares per Convertible
Preferred Security (equivalent to a conversion price of $15.367 per share of
Host Marriott Corporation common stock). The Issuer will only convert
Debentures pursuant to a notice of conversion by a holder of Convertible
Preferred Securities. During 1999, 1998 and 1997, no shares were converted
into common stock. The conversion ratio and price were adjusted to reflect the
impact of the Distribution and the Special Dividend.

   Holders of the Convertible Preferred Securities are entitled to receive
preferential cumulative cash distributions at an annual rate of 6 3/4%
accruing from the original issue date, commencing March 1, 1997, and payable
quarterly in arrears thereafter. The distribution rate and the distribution
and other payment dates for the Convertible Preferred Securities will
correspond to the interest rate and interest and other payment dates on the
Debentures. The Company may defer interest payments on the Debentures for a
period not to exceed 20 consecutive quarters. If interest payments on the
Debentures are deferred, so too are payments on the Convertible Preferred
Securities. Under this circumstance, the Company will not be permitted to
declare or pay any cash distributions with respect to its capital stock or
debt securities that rank pari passu with or junior to the Debentures.

   Subject to certain restrictions, the Convertible Preferred Securities are
redeemable at the Issuer's option upon any redemption by the Company of the
Debentures after December 2, 1999. Upon repayment at maturity or as a result
of the acceleration of the Debentures upon the occurrence of a default, the
Debentures shall be subject to mandatory redemption, from which the proceeds
will be applied to redeem Convertible Preferred Securities and Common
Securities, together with accrued and unpaid distributions.

   As part of the share repurchase program described below in Note 7, the
Company purchased 1.1 million shares of Convertible Preferred Securities in
1999 and has purchased an additional 0.4 million shares through March 8, 2000,
resulting in the retirement of an equivalent amount of Debentures.

7. Equity and Partner's Capital

   223.5 million and 225.6 million OP units were outstanding as of December
31, 1999 and 1998, respectively. 8.16 million preferred limited partner units
were outstanding as of December 31, 1999. No preferred limited partner units
were outstanding as of December 31, 1998.

   A quarterly distribution of $0.21 per unit was paid on April 14, July 14,
and October 15 of 1999. A fourth quarter distribution of $0.21 per unit was
declared on December 20, 1999 and paid on January 17, 2000.

   During 1999, approximately 585,000 Class TS cumulative redeemable preferred
operating partnership units and approximately 26,000 Class AM cumulative
redeemable preferred operating partnership units (together the "Preferred OP
Units") were issued in connection with the acquisition of minority interests
in two hotels. The

                                      68
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Preferred OP Units are convertible into OP Units on a one-for-one basis,
subject to adjustment in specified events, at any time beginning one year
after acquisition, and after conversion to OP Units are redeemable for cash or
at Host REIT's option, Host REIT common shares. The Company has the right to
convert the Preferred OP Units to OP Units two years from the date of
issuance. Preferred OP Unitholders are entitled to receive a preferential cash
distribution of $0.21 per quarter.

   In September 1999, the Board of Directors of Host REIT approved the
repurchase, from time to time on the open market and/or in privately
negotiated transactions, of up to 22 million of the outstanding shares of Host
REIT common stock, operating partnership units, or a corresponding amount of
the Convertible Preferred Securities, which are convertible into a like number
of shares of common stock, based on the appropriate conversion ratio. Such
repurchases will be made at management's discretion, subject to market
conditions, and may be suspended at any time at the Company's discretion. For
the year ended December 31, 1999, Host REIT repurchased 5.8 million common
shares, 1.1 million shares of the Convertible Preferred Securities and 0.3
million OP Units for a total investment of $89 million. Through March 8, 2000,
Host REIT repurchased an additional 4.7 million common shares, 0.4 million
Convertible Preferred Securities, and 0.3 million operating partnership units
for an additional investment of $60 million.

   In August 1999, Host REIT sold 4.16 million shares of 10% Class A preferred
stock, and in November 1999, Host REIT sold 4.0 million shares of 10% Class B
preferred stock. The Operating Partnership, in turn, issued equivalent
securities, the Class A Preferred Units and Class B Preferred Units ("Class A
and B Preferred Units"), to Host REIT. Holders of the Class A and B Preferred
Units are entitled to receive cumulative cash dividends at a rate of 10% per
annum of the $25.00 per unit liquidation preference, payable quarterly in
arrears commencing October 15, 1999 and January 15, 2000 for the Class A and
Class B preferred stock, respectively. After August 3, 2004 and April 29,
2005, Host REIT has the option to redeem the Class A and Class B Preferred
Stock, respectively, for $25.00 per share, plus accrued and unpaid dividends
to the date of redemption. The Class A and B Preferred Units rank senior to
the OP Units, and on a parity with each other. The preferred unitholders
generally have no voting rights. Accrued distributions at December 31, 1999
were $4 million.

   In conjunction with the Merger, the Blackstone Acquisition and the
Partnership Mergers (Note 12), the Company issued approximately 64.5 million
OP Units which are convertible into cash (or at Host Marriott's option, shares
of Host Marriott common stock).

   Host Marriott Corporation issued 11.5 million shares of common stock as
part of the Special Dividend and 8.5 million shares of common stock in
exchange for 8.5 million OP Units issued to certain limited partners in
connection with the Partnership Mergers (Note 12). Also, as part of the REIT
Conversion, Host Marriott Corporation changed its par value from $1 to $0.01
per share. The change in par value did not affect the number of shares
outstanding.

8. Income Taxes

   The Operating Partnership is not a tax paying entity. However, the
Operating Partnership under the Operating Partnership Agreement is required to
reimburse Host REIT for any tax payments Host REIT is required to make.
Accordingly, the tax information included herein represents disclosures
regarding Host REIT. As a result of the requirement of the Company to
reimburse Host REIT for these liabilities, such liabilities and related
disclosures are included in the Company's financial statements.


                                      69
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   In December 1998, Host Marriott restructured itself to enable Host REIT to
qualify for treatment as a REIT, pursuant to the U.S. Internal Revenue Code of
1986, as amended, effective January 1, 1999. In general, a corporation that
elects REIT status and distributes at least 95% of its taxable income to its
shareholders and complies with certain other requirements (relating primarily
to the nature of its assets and the sources of its revenues) is not subject to
Federal income taxation to the extent it distributes its taxable income. In
1999, Host REIT distributed 100% if its 1999 taxable income which amounted to
$.84 per outstanding common share. Of the total distribution, $.83 per share
was taxable as ordinary income with the remaining $.01 per share taxable as a
capital gain. Management believes that Host REIT was organized to qualify as a
REIT for 1999 and intends for it to qualify in subsequent years (including
distribution of at least 95% of its REIT taxable income to shareholders each
year). Management expects that Host REIT will pay taxes on "built-in gains" on
only certain of its assets. Based on these considerations and the settlement
of certain tax contingencies in 1999, management does not believe that Host
REIT will be liable for income taxes at the federal level or in most of the
states in which it operates in future years, and Host REIT eliminated $26
million and $106 million of its net tax liabilities as of December 31, 1999
and 1998. Host REIT does not expect to provide for any material deferred
income taxes in future periods except in certain states and foreign countries.
In connection with the Distribution and formation of the Non-Controlled
Subsidiaries, Host REIT further reduced deferred income tax liabilities by
$102 million in 1998.

   In order to qualify as a REIT for federal income tax purposes, among other
things, Host REIT was required to distribute all of its accumulated earnings
and profits ("E&P") to its stockholders in one or more taxable dividends prior
to December 31, 1999. To accomplish the requisite distributions of accumulated
E&P, Host Marriott made distributions consisting of approximately 20.4 million
shares of Crestline valued at $297 million, $73 million in cash, and
approximately 11.5 million shares of Host Marriott stock valued at $138
million. Management believes it has distributed all required E&P as of
December 31, 1999. Host REIT's final calculation of E&P and the distribution
thereof is subject to review by the Internal Revenue Service.

   Where required, deferred income taxes are accounted for using the asset and
liability method. Under this method, deferred income taxes are recognized for
temporary differences between the financial reporting bases of assets and
liabilities and their respective tax bases and for operating loss and tax
credit carryforwards based on enacted tax rates expected to be in effect when
such amounts are realized or settled. However, deferred tax assets are
recognized only to the extent that it is more likely than not that they will
be realized based on consideration of available evidence, including tax
planning strategies and other factors.

   Total deferred tax assets and liabilities at December 31, 1999 and December
31, 1998 were as follows:

<TABLE>
<CAPTION>
                                                                1999    1998
                                                               ------  -------
                                                               (in millions)
   <S>                                                         <C>     <C>
   Deferred tax assets........................................ $   10  $    32
   Deferred tax liabilities...................................    (59)    (129)
                                                               ------  -------
     Net deferred income tax liability........................ $  (49) $   (97)
                                                               ======  =======
</TABLE>

   The tax effect of each type of temporary difference and carryforward that
gives rise to a significant portion of deferred tax assets and liabilities as
of December 31, 1999 and December 31, 1998 follows:

<TABLE>
<CAPTION>
                                                                1999    1998
                                                               ------  -------
                                                               (in millions)
   <S>                                                         <C>     <C>
   Safe harbor lease investments.............................. $  (24) $   (24)
   Deferred tax gain..........................................    (35)    (105)
   Alternative minimum tax credit carryforwards...............     10       32
                                                               ------  -------
     Net deferred income tax liability........................ $  (49) $   (97)
                                                               ======  =======
</TABLE>


                                      70
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   The provision (benefit) for income taxes consists of:

<TABLE>
<CAPTION>
                                                                1999  1998  1997
                                                                ----  ----  ----
                                                                (in millions)
   <S>                                                          <C>   <C>   <C>
   Current--Federal...........................................  $ 26  $116  $19
      --State.................................................     3    27    4
      --Foreign...............................................     3     4    3
                                                                ----  ----  ---
                                                                  32   147   26
                                                                ----  ----  ---
   Deferred--Federal..........................................   (37)  (49)   8
      --State.................................................   (11)  (12)   2
                                                                ----  ----  ---
                                                                 (48)  (61)  10
                                                                ----  ----  ---
                                                                $(16) $ 86  $36
                                                                ====  ====  ===
</TABLE>

   At December 31, 1999, Host REIT had approximately $10 million of
alternative minimum tax credit carryforwards available which do not expire.

   As of December 31, 1999, Host REIT had settled with the Internal Revenue
Service substantially all issues for tax years through 1996. Host REIT expects
to resolve any remaining issues with no material impact on the consolidated
financial statements. Host REIT made net payments to the IRS of approximately
$14 million, $27 million, and $10 million in 1999, 1998 and 1997,
respectively, related to these settlements.

   A reconciliation of the statutory Federal tax rate to Host REIT's effective
income tax rate follows (excluding the impact of the change in tax status):

<TABLE>
<CAPTION>
                                                             1999    1998  1997
                                                             -----   ----  ----
   <S>                                                       <C>     <C>   <C>
   Statutory Federal tax rate...............................   --  % 35.0% 35.0%
   Built-in-gains...........................................   2.8    --    --
   State income taxes, net of Federal tax benefit...........   1.2    5.8   4.9
   Tax credits..............................................   --    (1.7) (2.7)
   Tax contingencies........................................ (16.9)   --    --
   Additional tax on foreign source income..................   1.6    4.2   6.0
   Permanent non-deductible REIT Conversion expenses........   --     4.6   --
   Other permanent items....................................   --     1.2    .1
   Other, net...............................................   --     0.3    .1
                                                             -----   ----  ----
     Effective income tax rate.............................. (11.3)% 49.4% 43.4%
                                                             =====   ====  ====
</TABLE>

   Cash paid for income taxes, including IRS settlements, net of refunds
received, was $50 million in 1999, $83 million in 1998 and $56 million in
1997.

9. Leases

   Due to current federal income tax law restrictions on a REIT's ability to
derive revenues directly from the operation of a hotel, the Company leases its
hotels (the "Leases") to one or more lessees (the "Lessees").

   Hotel Leases. There generally is a separate Lessee for each hotel or group
of hotels that is owned by a separate subsidiary of the Company. The operating
agreements for such Lessees provide that the Crestline member of the Lessee
has full control over the management of the business of the Lessee, subject to
blocking rights by Marriott International, where it is the manager, over
certain decisions by virtue of its non-economic, limited voting interest in
the lessee subsidiaries. Each full-service hotel Lease has a fixed term
generally ranging

                                      71
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

from seven to ten years, subject to earlier termination upon the occurrence of
certain contingencies as defined in the Leases. Each Lease requires the Lessee
to pay 1) minimum rent in a fixed dollar amount per annum plus 2) to the
extent it exceeds minimum rent, percentage rent based upon specified
percentages of aggregate sales from the applicable hotel, including room
sales, food and beverage sales, and other income in excess of specified
thresholds. The amount of minimum rent and the percentage rent thresholds will
be adjusted each year based upon any increases in the Consumer Price Index and
the Employment Cost Index during the previous 10 months, as well as for
certain capital expenditures and casualty occurrences. The Company has
received notices of termination from Crestline on five leases, with effective
dates ranging from March through June 2000, which we are currently
negotiating. We expect to be able to obtain replacement leases for these
leases without material impact to our future operations.

   Effective November 15, 1999, we amended substantially all of our leases
with Crestline to give Crestline the right to renew each of these leases for
up to four additional terms of seven years each at a fair rental value, to be
determined either by agreement between us and Crestline or through arbitration
at the time the renewal option is exercised. Crestline is under no obligation
to exercise these renewal options, and the Company has the right to terminate
the renewal options during certain time periods specified in the amendments.
In addition, the amendments provide that the fair rental value payable by the
Company to Crestline in connection with the purchase of a lease as described
above does not include any amounts relating to any renewal period. Therefore,
the fair rental value of a lease after expiration of the initial term for such
lease would be zero. The Company intends to evaluate our options regarding the
Crestline leases and have not yet made a decision whether or not to purchase
those leases.

   If the Company anticipates that the average tax basis of the Company's FF&E
and other personal property that are leased by any individual lessor entity
will exceed 15% of the aggregate average tax basis of the fixed assets in that
entity, then the Lessee would be obligated either to acquire such excess FF&E
from the Company or to cause a third party to purchase such FF&E. The Lessee
has agreed to give a right of first opportunity to a Non-Controlled Subsidiary
to acquire the excess FF&E and to lease the excess FF&E to the Lessee.

   Each Lessee is responsible for paying all of the expenses of operating the
applicable hotel(s), including all personnel costs, utility costs and general
repair and maintenance of the hotel(s). The Lessee also is responsible for all
fees payable to the applicable manager, including base and incentive
management fees, chain services payments and franchise or system fees, with
respect to periods covered by the term of the Lease. The Company also remains
liable under each management agreement.

   The Company is responsible for paying real estate taxes, personal property
taxes (to the extent the Company owns the personal property), casualty
insurance on the structures, ground lease rent payments, required expenditures
for FF&E (including maintaining the FF&E reserve, to the extent such is
required by the applicable management agreement) and other capital
expenditures.

   Crestline Guarantees. Crestline and certain of its subsidiaries entered
into limited guarantees of the Lease obligations of each Lessee. The full-
service hotel leases are grouped into four lease pools (determined on the
basis of the term of the particular Lease with all leases having generally the
same lease term placed in the same "pool"). For each of the four identified
pools, the cumulative limit of Crestline's guaranty obligation is the greater
of 10% of the aggregate rent payable for the immediately preceding fiscal year
under all Leases in the pool or 10% of the aggregate rent payable under all
Leases in the pool. For each pool, the subsidiary of Crestline that is the
parent of the Lessees in the pool (a "Pool Parent") also is a party to the
guaranty of the Lease obligations for that pool.

   The obligations of the Pool Parent under each guaranty is secured by all
funds received by the applicable Pool Parent from the hotels in the pool, and
the hotels in the pool are required to distribute their excess cash flow to
the Pool Parent for each accounting period, under certain conditions as
described by the guaranty.

                                      72
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   As a result of the limited guarantees of the lease obligations of the
lessees, the Company believes that the operating results of each full-service
lease pool may be material to the Company's financial statements. Separate
financial statements for the year ended December 31, 1999 for each of the four
lease pools in which the Company's hotels are organized are presented in Item
8 of this Annual Report on Form 10-K. Financial information of certain pools
related to the sublease agreements for limited service properties are not
presented, as the Company believes they are not material to the Company's
financial statements. Financial information of Crestline may be found in its
quarterly and annual filings with the Securities and Exchange Commission.

   In the event that Crestline's obligation under a guaranty is reduced to
zero, the applicable Pool Parent can elect to terminate its guaranty and the
pooling agreement for that pool by giving notice to the Operating Partnership.
In that event, subject to certain conditions, the Pool Parent's guaranty will
terminate six months after the effective date of such notice, subject to
reinstatement in certain limited circumstances.

   The Company sold the existing working capital to the applicable Lessee upon
the commencement of the Lease at a price equal to the fair market value of
such assets. The purchase price is represented by a note evidencing a loan
that bears interest at a rate of 5.12%. Interest accrued on the working
capital loan is due simultaneously with each periodic rent payment, and the
amount of each payment of interest is credited against such rent payment. The
principal amount of the working capital loan is payable upon termination of
the Lease. The Lessee can return the working capital in satisfaction of the
note. As of December 31, 1999, the note receivable from Crestline for working
capital was $90 million.

   In the event the Company enters into an agreement to sell or otherwise
transfer any full-service hotel free and clear of the applicable Lease, the
Lessor must pay the Lessee a termination fee equal to the fair market value of
the Lessee's leasehold interest in the remaining term of the Lease using a
discount rate of 12%. Alternatively, the Lessor will be entitled to (i)
substitute a comparable hotel or hotels for any hotel that is sold or (ii)
sell the hotel subject to the Lease and certain conditions without being
required to pay a termination fee.

   REIT Modernization Act. Under the REIT Modernization Act, beginning January
1, 2001, the Company could lease its hotels to one of its subsidiaries that is
a taxable corporation and that elects to be treated as a "taxable REIT
subsidiary". In addition, as a result of passage of the REIT Modernization
Act, the Company has the right to purchase the leases from Crestline on or
after January 1, 2001, for a price equal to the fair rental value of the
lessee's interest in the leases over their remaining terms (which could be
significant).

   Hospitality Properties Trust Relationship. The Company sold and leased back
37 of its Courtyard properties in 1995 and an additional 16 Courtyard
properties in 1996 to Hospitality Properties Trust ("HPT"). Additionally, in
1996, the Company sold and leased back 18 of its Residence Inns to HPT. These
leases, which are accounted for as operating leases and are included in the
table below, have initial terms expiring through 2012 for the Courtyard
properties and 2010 for the Residence Inn properties, and are renewable at the
option of the Company. Minimum rent payments are $51 million annually for the
Courtyard properties and $17 million annually for the Residence Inn
properties, and additional rent based upon sales levels are payable to the
owner under the terms of the leases.

   In connection with the REIT Conversion, the Company sublet the HPT hotels
(the "Subleases") to separate indirect sublessee subsidiaries of Crestline
("Sublessee"), subject to the terms of the applicable HPT Lease. The term of
each Sublease expires simultaneously with the expiration of the initial term
of the HPT lease to which it relates and automatically renews for the
corresponding renewal term under the HPT lease, unless either the HPT lessee
(the "Sublessor") elects not to renew the HPT lease, or the Sublessee elects
not to renew the Sublease at the expiration of the initial term provided,
however, that neither party can elect to terminate fewer than all of the
Subleases in a particular pool of HPT hotels (one for Courtyard by Marriott
hotels and one for Residence Inn

                                      73
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

hotels). Rent under the Sublease consists of the Minimum Rent payable under
the HPT lease and an additional percentage rent payable to the Sublessor. The
percentage rent is sufficient to cover the additional rent due under the HPT
lease, with any excess being retained by the Sublessor. The rent payable under
the Subleases is guaranteed by Crestline, up to a maximum amount of $30
million which amount is allocated between the two pools of HPT hotels.

   Other Lease Information. A number of the Company's leased hotel properties
also include long-term ground leases for certain hotels, generally with
multiple renewal options. Certain leases contain provision for the payment of
contingent rentals based on a percentage of sales in excess of stipulated
amounts. Future minimum annual rental commitments for all non-cancelable
leases for which the Company is the lessee are as follows:

<TABLE>
<CAPTION>
                                                               Capital Operating
                                                               Leases   Leases
                                                               ------- ---------
                                                                 (in millions)
   <S>                                                         <C>     <C>
   2000.......................................................   $ 2    $  109
   2001.......................................................     1       105
   2002.......................................................     1       101
   2003.......................................................     1        97
   2004.......................................................     1       103
   Thereafter.................................................     3     1,236
                                                                 ---    ------
   Total minimum lease payments...............................     9    $1,751
                                                                 ===    ======
   Less amount representing interest..........................    (3)
                                                                 ---
     Present value of minimum lease payments..................   $ 6
                                                                 ===
</TABLE>

   Certain of the lease payments included in the table above relate to
facilities used in the Company's former restaurant business. Most leases
contain one or more renewal options, generally for five or 10-year periods.
Future rentals on leases have not been reduced by aggregate minimum sublease
rentals from restaurants and HPT subleases of $71 million and $851 million,
respectively, payable to the Company under non-cancellable subleases.

   In conjunction with the refinancing of the mortgage of the New York
Marriott Marquis, the Company also renegotiated the terms of the ground lease,
retroactive to 1998. The renegotiated ground lease provides for the payment of
a percentage of the hotel sales (3% in 1998, 4% in 1999 and 5% thereafter)
through 2017, which is to be used to amortize the then existing deferred
ground rent obligation of $116 million. The Company has the right to purchase
the land under certain circumstances. The balance of the deferred ground rent
obligation was $86 million at December 31, 1999.

   The Company remains contingently liable at December 31, 1999 on certain
leases relating to divested non-lodging properties. Such contingent
liabilities aggregated $80 million at December 31, 1999. However, management
considers the likelihood of any substantial funding related to these leases to
be remote.

   Rent expense consists of:

<TABLE>
<CAPTION>
                                                                 1999 1998 1997
                                                                 ---- ---- ----
                                                                 (in millions)
   <S>                                                           <C>  <C>  <C>
   Minimum rentals on operating leases.......................... $106 $104 $ 98
   Additional rentals based on sales............................   29   26   20
                                                                 ---- ---- ----
                                                                 $135 $130 $118
                                                                 ==== ==== ====
</TABLE>


                                      74
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

10. Employee Stock Plans

   In connection with the REIT conversion, the Company assumed the employee
obligations of Host REIT. Upon the exercise of stock options in Host REIT
common stock, Host REIT will issue shares of its common stock in return for
the issuance of an equal number of OP Units of the Company. Accordingly, those
liabilities and related disclosures are included in the Company's financial
statements.

   At December 31, 1999, Host REIT maintained two stock-based compensation
plans, including the comprehensive stock plan (the "Comprehensive Plan"),
whereby Host REIT may award to participating employees (i) options to purchase
Host REIT's common stock, (ii) deferred shares of Host REIT's common stock and
(iii) restricted shares of Host REIT's common stock and the employee stock
purchase plan (the "Employee Stock Purchase Plan"). Total shares of common
stock reserved and available for issuance under the Comprehensive Plan at
December 31, 1999 was 39.6 million.

   Employee stock options may be granted to officers and key employees with an
exercise price not less than the fair market value of the common stock on the
date of grant. Non-qualified options generally expire up to 15 years after the
date of grant. Most options vest ratably over each of the first four years
following the date of the grant.

   In connection with the Host Marriott Services ("HM Services") spin-off in
1995, outstanding options held by current and former employees of Host
Marriott were redenominated in both Host Marriott and Host Marriott Services
stock and the exercise prices of the options were adjusted based on the
relative trading prices of shares of the common stock of the two companies.
Pursuant to the distribution agreement between the Company and HM Services,
the Company originally had the right to receive up to 1.4 million shares of HM
Services' common stock or an equivalent cash value subsequent to exercise of
the options held by certain former and current employees of Marriott
International. On August 27, 1999, Autogrill Acquisition Co., a wholly-owned
subsidiary of Autogrill SpA of Italy, acquired Host Marriott Services
Corporation. Since Host Marriott Services is no longer publicly traded, all
future payments to the Company will be made in cash as Host Marriott Services
Corporation has indicated that the receivable will not be settled in Autogrill
SpA stock. As of December 31, 1999, the receivable balance is approximately
$11.9 million, which is included in other assets.

   Effective December 29, 1998, the Company adjusted the number of outstanding
stock options and the related exercise prices to maintain the intrinsic value
of the options to account for the Special Dividend and the Distribution. The
vesting provisions and option period of the original grant was retained. No
compensation expense was recorded by the Company as a result of these
adjustments. Employee optionholders that remained with the Company received
options only in Host REIT's stock and those employee optionholders that became
Crestline employees received Crestline options in exchange for the Company's
options.

   The Company continues to account for expense under its plans according to
the provisions of Accounting Principle Board Opinion 25 and related
interpretations as permitted under SFAS No. 123. Consequently, no compensation
cost has been recognized for its fixed stock options under the Comprehensive
Plan and its Employee Stock Purchase Plan.

   For purposes of the following disclosures required by SFAS No. 123, the
fair value of each option granted has been estimated on the date of grant
using an option-pricing model with the following weighted average assumptions
used for grants in 1999 and 1997, respectively: risk-free interest rate of
6.4% and 6.2%, volatility of 32% and 35%, expected lives of 12 years and 12
years, and dividend yield of $0.84 per share and no dividend yield. The
weighted average fair value per option granted during the year was $1.15 in
1999 and $13.13 in 1997. No options were granted in 1998. Pro forma
compensation cost for 1999, 1998 and 1997 would have reduced net income by
approximately $919,000, $524,000 and $330,000. Basic and diluted earnings per
share on a pro forma basis were not impacted by the pro forma compensation
cost in 1999, 1998 and 1997.

                                      75
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The effects of the implementation of SFAS No. 123 are not representative of
the effects on reported net income in future years because only the effects of
stock option awards granted in 1997 and subsequent have been considered.

   A summary of the status of the Company's stock option plan for 1999, 1998
and 1997 follows:

<TABLE>
<CAPTION>
                                   1999                   1998                   1997
                          ---------------------- ---------------------- ----------------------
                                        Weighted               Weighted               Weighted
                                        Average                Average                Average
                             Shares     Exercise    Shares     Exercise    Shares     Exercise
                          (in millions)  Price   (in millions)  Price   (in millions)  Price
                          ------------- -------- ------------- -------- ------------- --------
<S>                       <C>           <C>      <C>           <C>      <C>           <C>
Balance, at beginning of
 year...................       5.6        $  3        6.8        $ 4         8.3        $ 4
Granted.................       0.6          10        --         --           .1         20
Exercised...............      (1.3)          3       (1.3)         5        (1.6)         4
Forfeited/Expired.......       --          --        (0.6)         4         --         --
Adjustment for Distribu-
 tion and Special
 Dividend...............       --          --         0.7          3         --         --
                              ----                   ----                   ----
Balance, at end of
 year...................       4.9           4        5.6          3         6.8          4
                              ====                   ====                   ====
Options exercisable at
 year-end...............       4.2                    5.5                    6.4
                              ====                   ====                   ====
</TABLE>

   The following table summarizes information about stock options at December
31, 1999:

<TABLE>
<CAPTION>
                                     Options Outstanding          Options Exercisable
                              ---------------------------------- ----------------------
                                             Weighted
                                              Average   Weighted               Weighted
                                             Remaining  Average                Average
                                 Shares     Contractual Exercise    Shares     Exercise
   Range of Exercise Prices   (in millions)    Life      Price   (in millions)  Price
   ------------------------   ------------- ----------- -------- ------------- --------
   <S>                        <C>           <C>         <C>      <C>           <C>
           $  1 - 3                3.4            7       $ 2         3.4        $ 2
              4 - 6                0.4            9         6         0.4          6
              7 - 9                0.9           13         9         0.4          8
            10 - 12                0.2           14        12         --          12
            13 - 15                --            13        15         --          15
            16 - 19                --            13        18         --          18
                                   ---                                ---
                                   4.9                                4.2
                                   ===                                ===
</TABLE>

   Deferred stock incentive plan shares granted to officers and key employees
after 1990 generally vest over 10 years in annual installments commencing one
year after the date of grant. Certain employees may elect to defer payments
until termination or retirement. The Company accrues compensation expense for
the fair market value of the shares on the date of grant, less estimated
forfeitures. In 1999, 1998 and 1997, 11,000, 12,000 and 14,000 shares were
granted, respectively, under this plan. The compensation cost that has been
charged against income for deferred stock was not material in 1999, 1998 and
1997. The weighted average fair value per share granted during each year was
$14.31 in 1999, $19.21 in 1998 and $15.81 in 1997.

   The Company from time to time awards restricted Host REIT stock plan shares
under the Comprehensive Plan to officers and key executives to be distributed
over the next three to 10 years in annual installments based on continued
employment and the attainment of certain performance criteria. The Company
recognizes compensation expense over the restriction period equal to the fair
market value of the shares on the date of issuance adjusted for forfeitures,
and where appropriate, the level of attainment of performance criteria and
fluctuations in the fair market value of Host REIT's common stock. In 1999,
1998 and 1997, 3,203,000, 2,900

                                      76
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

and 198,000 shares of additional restricted stock plan shares were granted to
certain key employees under these terms and conditions. Approximately 5,000
and 17,000 shares were forfeited in 1999 and 1998, respectively. There were no
shares forfeited in 1997. The Company recorded compensation expense of $7.7
million, $11 million and $13 million in 1999, 1998 and 1997, respectively,
related to these awards. The weighted average fair value per share granted
during each year was $12.83 in 1999, $18.13 in 1998 and $16.88 in 1997. Under
these awards 3,203,000 shares were outstanding at December 31, 1999.

   In 1998, 568,408 stock appreciation rights ("SARs") were issued under the
Comprehensive Plan to certain directors of the Company as a replacement for
previously issued options that were cancelled during the year. The conversion
to SARs was completed in order to comply with ownership limits applicable to
Host REIT upon conversion to a REIT. The SARs are fully vested and the grant
prices range from $1.20 to $5.13. In 1999 and 1998, the Company recognized
compensation (income) expense of $(2.7) million and $4.8 million,
respectively, related to this grant. Additionally, in future periods, the
Company will recognize compensation expense for outstanding SARs as a result
of fluctuations in the market price of Host REIT's common stock.

   Under the terms of the Employee Stock Purchase Plan, eligible employees may
purchase common stock through payroll deductions at 90% of the lower of market
value at the beginning or market value at the end of the plan year.

11. Profit Sharing and Postemployment Benefit Plans

   The Company contributes to profit sharing and other defined contribution
plans for the benefit of employees meeting certain eligibility requirements
and electing participation in the plans. The amount to be matched by the
Company is determined annually by Host REIT's Board of Directors. The Company
provides medical benefits to a limited number of retired employees meeting
restrictive eligibility requirements. Amounts for these items were not
material in 1997 through 1999.

12. Acquisitions and Dispositions

   The Company completed a 210-room expansion of the Philadelphia Marriott in
April 1999 at a cost of approximately $37 million. Additionally, we acquired
the remaining unaffiliated partnership interests in two full-service hotels by
issuing approximately 612,000 cumulative preferred OP Units and paid cash of
approximately $6.8 million.

   The Company acquired or gained controlling interest in 36 hotels with
15,166 rooms in 1998 and 18 hotels with 9,128 rooms in 1997. Twenty-five of
the 1998 acquisitions, consisting of the Blackstone Acquisition and the
Partnership Mergers, were completed on December 30, 1998 in conjunction with
the REIT Conversion. Additionally, three full-service properties were
contributed to one of the Non-Controlled Subsidiaries (Note 4). These
acquisitions are summarized below.

   In December 1998, the Company completed the acquisition of, or controlling
interests in, twelve hotels and one mortgage loan secured by an additional
hotel (the "Blackstone Acquisition") from the Blackstone Group, a Delaware
limited partnership, and a series of funds controlled by affiliates of
Blackstone Real Estate Partners (together, the "Blackstone Entities"). In
addition, the Company acquired a 25% interest in Swissotel Management (USA)
L.L.C., which operates five Swissotel hotels in the United States, which the
Company transferred to Crestline in connection with the Distribution. The
Operating Partnership issued approximately 47.7 million OP Units, which are
redeemable for the Company's common stock (or cash equivalent at Host
Marriott's option) assumed debt and made cash payments totaling approximately
$920 million and distributed 1.4 million of the shares of Crestline common
stock to the Blackstone Entities. During 1999, approximately 467,000 OP Units
were redeemed for common stock and an additional 233,000 OP Units were
redeemed for $2 million in cash. As of December 31, 1999, the Blackstone
Entities own approximately 16% of the outstanding OP Units of the Operating
Partnership.

                                      77
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   In December 1998, the Company announced the completion of the Partnership
Mergers which was the roll-up of eight public partnerships and four private
partnerships which own or control 28 properties, 13 of which were already
consolidated (the "Partnership Mergers"). The Operating Partnership issued
approximately 25.8 million OP Units to partners for their interests valued at
approximately $333 million. As of December 31, 1999, approximately 16.8
million OP Units remain outstanding.

   As a result of these transactions, the Company increased its ownership of
most of the 28 properties to 100% while consolidating 15 additional hotels
(4,445 rooms).

   During 1998, the Company acquired an additional interest in the Atlanta
Marriott Marquis II Limited Partnership, which owns an interest in the 1,671-
room Atlanta Marriott Marquis for approximately $239 million. The Company also
acquired a controlling interest in two partnerships that own four hotels for
approximately $74 million. In addition, the Company acquired four Ritz-Carlton
hotels and two additional hotels totaling over 2,200 rooms for approximately
$465 million.

   In 1997, the Company acquired eight full-service hotels totaling 3,600
rooms for approximately $145 million. In addition, the Company acquired
controlling interests in nine full-service hotels totaling 5,024 rooms for
approximately $621 million, including the assumption of approximately $418
million of debt. The Company also completed the acquisition of the 504-room
New York Marriott Financial Center, after acquiring the mortgage on the hotel
for $101 million in late 1996.

   Also in 1997, the Company acquired the outstanding common stock of the
Forum Group from Marriott Senior Living Services. The Company purchased the
Forum Group portfolio of 29 senior living communities for approximately $460
million, including approximately $270 million in debt. The Company also
acquired 49% of the remaining 50% interest in the partnership which owned the
418-unit Leisure Park retirement community for approximately $23 million,
including the assumption of approximately $15 million of debt. The Company
contributed these assets in conjunction with the Distribution of Crestline.

   The following table summarizes property dispositions for 1999 and 1998:

<TABLE>
<CAPTION>
                                                                      Pre-tax
                                                         Total      Gain/(Loss)
                                                     Consideration  on Disposal
Property                     Location     Year Rooms (in millions) (in millions)
--------                 ---------------- ---- ----- ------------- -------------
<S>                      <C>              <C>  <C>   <C>           <C>
Minneapolis/Bloomington
 Marriott............... Bloomington, MN  1999  479      $ 35           $10
Saddle Brook Marriott... Saddle Brook, NJ 1999  221        15             3
Marriott's Grand Hotel
 Resort and Golf Club... Point Clear, AL  1999  306        28            (2)
The Ritz-Carlton,
 Boston................. Boston, MA       1999  275       119            15
El Paso Marriott........ El Paso, TX      1999  296         1            (2)
New York Marriott East
 Side................... New York, NY     1998  662       191            40
Napa Valley Marriott.... Napa, CA         1998  191        21            10
</TABLE>

                                      78
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


13. Fair Value of Financial Instruments

   The fair values of certain financial assets and liabilities and other
financial instruments are shown below:

<TABLE>
<CAPTION>
                                                      1999           1998
                                                 -------------- --------------
                                                 Carrying Fair  Carrying Fair
                                                  Amount  Value  Amount  Value
                                                 -------- ----- -------- -----
                                                         (in millions)
   <S>                                           <C>      <C>   <C>      <C>
   Financial assets
     Receivables from affiliates................  $ 127   $ 133  $ 134   $ 141
     Notes receivable...........................     48      48     69      69
     Other......................................     12      12      9       9
   Financial liabilities
     Debt, net of capital leases................  5,063   4,790  5,110   5,125
     Other financial instruments
     Convertible Debt Obligation to Host
      Marriott..................................    514     357    567     466
</TABLE>

   Short-term marketable securities and Convertible Preferred Securities are
valued based on quoted market prices. Receivables from affiliates, notes and
other financial assets are valued based on the expected future cash flows
discounted at risk-adjusted rates. Valuations for secured debt are determined
based on the expected future payments discounted at risk-adjusted rates. The
fair values of the Bank Credit Facility and other notes are estimated to be
equal to their carrying value. Senior notes are valued based on quoted market
prices.

   The fair value of the liability related to the interest rate swap agreements
assumed in the Blackstone Acquisition was $14 million. The fair value is based
on the estimated amount the Company would pay or receive to terminate the swap
agreements. The aggregate notional amount of the agreements was $365 million at
December 31, 1998 and $100 million at January 2, 1998. The Company terminated
all the swap agreements in 1999.

14. Marriott International Distribution and Relationship with Marriott
International

   The Company and Marriott International (formerly a wholly owned subsidiary,
the common stock of which was distributed to the Company's shareholders on
October 8, 1993) have entered into various agreements in connection with the
Marriott International Distribution and thereafter which provide, among other
things, that (i) the majority of the Company's hotel lodging properties are
managed by Marriott International (see Note 15); (ii) 13 of the Company's full-
service properties are operated under franchise agreements with Marriott
International with terms of 15 to 30 years; (iii) Marriott International
provided the Company with $92 million of financing at an average rate of 9% in
1997 related to the Company's discontinued senior living operations; (iv) the
Company acquired 49% of Marriott International's 50% interest in the Leisure
Park retirement community in 1997 for $23 million, including approximately $15
million of assumed debt; (v) Marriott International guarantees the Company's
performance in connection with certain obligations ($24 million at December 31,
1999); (vi) the Company borrowed and repaid $109 million of first mortgage
financing for construction of the Philadelphia Marriott (see Note 5); (vii)
Marriott International and the Company formed a joint venture and Marriott
International provided the Company with $29 million in debt financing at an
average interest rate of 12.7% and $28 million in preferred equity in 1996 for
the acquisition of two full-service properties in Mexico City, Mexico; and
(viii) Marriott International provides certain limited administrative services.

   In 1998 and 1997, the Company paid to Marriott International $196 million
and $162 million, respectively, in hotel management fees and $9 million and $4
million, respectively, in franchise fees. Beginning in 1999, these fees,
totaling $218 million in 1999, were paid by the lessees (see Note 9). In 1999,
1998 and 1997, the Company paid to Marriott International $0.3 million, $4
million and $13 million, respectively, in interest and commitment fees under
the debt financing and line of credit provided by Marriott International, and
$3 million for each of

                                       79
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

those years for limited administrative services. In connection with the
discontinued senior living communities' business, the Company paid Marriott
International $13 million and $6 million in management fees during 1998 and
1997, respectively.

   Additionally, Marriott International has the right to purchase up to 20% of
the voting stock of the Company if certain events involving a change in
control of the Company occur.

15. Hotel Management Agreements

   Most of the Company's hotels are subject to management agreements (the
"Agreements") under which Marriott International manages the Company's hotels,
generally for an initial term of 15 to 20 years with renewal terms at the
option of Marriott International of up to an additional 16 to 30 years. The
Agreements generally provide for payment of base management fees equal to one
to four percent of sales and incentive management fees generally equal to 20%
to 50% of Operating Profit (as defined in the Agreements) over a priority
return (as defined) to the Company, with total incentive management fees not
to exceed 20% of cumulative Operating Profit, or 20% of current year Operating
Profit. In the event of early termination of the Agreements, Marriott
International will receive additional fees based on the unexpired term and
expected future base and incentive management fees. The Company has the option
to terminate certain management agreements if specified performance thresholds
are not satisfied. No agreement with respect to a single lodging facility is
cross-collateralized or cross-defaulted to any other agreement and a single
agreement may be canceled under certain conditions, although such cancellation
will not trigger the cancellation of any other agreement.

   As a result of the REIT Conversion, all fees payable under the Agreements
for subsequent periods are the primary obligations of the Lessees. The
obligations of the Lessees are guaranteed to a limited extent by Crestline.
The Company remains obligated to the managers in case the Lessee fails to pay
these fees (but it would be entitled to reimbursement from the Lessee under
the terms of the Leases).

   Pursuant to the terms of the Agreements, Marriott International is required
to furnish the hotels with certain services ("Chain Services") which are
generally provided on a central or regional basis to all hotels in the
Marriott International hotel system. Chain Services include central training,
advertising and promotion, a national reservation system, computerized payroll
and accounting services, and such additional services as needed which may be
more efficiently performed on a centralized basis. Costs and expenses incurred
in providing such services are allocated among all domestic hotels managed,
owned or leased by Marriott International or its subsidiaries. In addition,
the Company's hotels also participate in the Marriott Rewards program. The
cost of this program is charged to all hotels in the Marriott hotel system.

   Crestline, as the Company's Lessee, is obligated to provide the manager
with sufficient funds to cover the cost of (a) certain non-routine repairs and
maintenance to the hotels which are normally capitalized; and (b) replacements
and renewals to the hotels' property and improvements. Under certain
circumstances, Crestline will be required to establish escrow accounts for
such purposes under terms outlined in the Agreements.

   Crestline assumed franchise agreements with Marriott International for 10
hotels. Pursuant to these franchise agreements, Crestline generally pays a
franchise fee based on a percentage of room sales and food and beverage sales
as well as certain other fees for advertising and reservations. Franchise fees
for room sales vary from four to six percent of sales, while fees for food and
beverage sales vary from two to three percent of sales. The terms of the
franchise agreements are from 15 to 30 years.

   Crestline assumed management agreements with The Ritz-Carlton Hotel
Company, LLC ("Ritz-Carlton"), an affiliate of Marriott International, to
manage ten of the Company's hotels. These agreements have an initial term of
15 to 25 years with renewal terms at the option of Ritz-Carlton of up to an
additional 10 to 40 years.

                                      80
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Base management fees vary from two to five percent of sales and incentive
management fees are generally equal to 20% of available cash flow or operating
profit, as defined in the agreements.

   Crestline also assumed management agreements with hotel management
companies other than Marriott International and Ritz-Carlton for 23 of the
Company's hotels (10 of which are franchised under the Marriott brand). These
agreements generally provide for an initial term of 10 to 20 years with
renewal terms at the option of either party or, in some cases, the hotel
management company of up to an additional one to 15 years. The agreements
generally provide for payment of base management fees equal to one to four
percent of sales. Seventeen of the 23 agreements also provide for incentive
management fees generally equal to 10 to 25 percent of available cash flow,
operating profit, or net operating income, as defined in the agreements.

16. Relationship with Crestline Capital Corporation

   The Company and Crestline have entered into various agreements in
connection with the Distribution as discussed in Note 2 and further outlined
below.

 Distribution Agreement

   Crestline and the Company entered into a distribution agreement (the
"Distribution Agreement"), which provided for, among other things, (i) the
distribution of shares of Crestline in connection with the Distribution; (ii)
the division between Crestline and the Company of certain assets and
liabilities; (iii) the transfer to Crestline of the 25% interest in the
Swissotel management company acquired in the Blackstone Acquisition and (iv)
certain other agreements governing the relationship between Crestline and the
Company following the Distribution. Crestline also granted the Company a
contingent right to purchase Crestline's interest in Swissotel Management
(USA) L.L.C. at fair market value in the event the tax laws are changed so
that the Company could own such interest without jeopardizing its status as a
REIT.

   Subject to certain exceptions, the Distribution Agreement provides for,
among other things, assumptions of liabilities and cross-indemnities designed
to allocate to Crestline, effective as of the date of the Distribution,
financial responsibilities for liabilities arising out of, or in connection
with, the business of the senior living communities.

 Asset Management Agreement

   The Company and the Non-Controlled Subsidiaries entered into asset
management agreements (the "Asset Management Agreements") with Crestline
whereby Crestline agrees to provide advice on the operation of the hotels and
review financial results, projections, loan documents and hotel management
agreements. Crestline also agrees to consult on market conditions and
competition, as well as monitor and negotiate with governmental agencies,
insurance companies and contractors. Crestline will be paid a fee not to
exceed $4.5 million for each calendar year for its consulting services under
the Asset Management Agreements, which includes $0.25 million related to the
Non-Controlled Subsidiaries. The Asset Management Agreements each have terms
of two years with an automatic one year renewal, unless earlier terminated by
either party in accordance with the terms thereof.

 Non-Competition Agreement

   Crestline and the Company entered into a non-competition agreement that
limits the respective parties' future business opportunities. Pursuant to this
non-competition agreement, Crestline agrees, among other things, that until
the earlier of December 31, 2008, or the date on which it is no longer a
Lessee of more than 25% of the number of hotels owned by the Company at the
time of the Distribution, it will not own any full service hotel, manage any
limited service or full service hotel owned by the Company, or own or operate
a full service hotel franchise system operating under a common name brand,
subject to certain exceptions. In addition, the

                                      81
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Company agrees not to participate in the business of leasing, operating or
franchising limited service or full service properties, subject to certain
exceptions.

 1998 Employee Benefits and Other Employment Matters Allocation Agreement

   As part of the REIT Conversion, the Company, the Operating Partnership and
Crestline entered into the 1998 Employee Benefits Allocation Agreement
relating to various compensation, benefits and labor matters. Under the
agreement, the Operating Partnership and Crestline each assumed certain
liabilities related to covered benefits and labor matters arising prior to the
effective date of the Distribution and relating to employees of each
organization, respectively, after the Distribution. The agreements also govern
the treatment of awards under the Comprehensive Plan and requires the adoption
of such a plan by Crestline and the Operating Partnership.

17. Litigation

   In connection with the REIT Conversion, the Company assumed all liability
arising under legal proceedings filed against Host REIT and will indemnify
Host REIT as to all such matters. We believe all of the lawsuits in which we
are a defendant, including the following lawsuits, are without merit and we
intend to defend vigorously against such claims; however, no assurance can be
given as to the outcome of any of the lawsuits.

   On March 16, 1998, limited partners in several limited partnerships filed a
lawsuit, the Texas Multi-Partnership Lawsuit, naming the Company, Marriott
International and others as defendants and claiming that they conspired to
sell hotels to the partnerships for inflated prices, that they charged the
partnerships excessive management fees to operate the partnerships' hotels and
otherwise breached their fiduciary duties. The lawsuit involved the following
partnerships: Courtyard by Marriott Limited Partnership, Courtyard by Marriott
II Limited Partnership, Marriott Residence Inn Limited Partnership, Marriott
Residence Inn II Limited Partnership, Fairfield Inn by Marriott Limited
Partnership, Desert Springs Marriott Limited Partnership and Atlanta Marriott
Marquis Limited Partnership. Three other lawsuits, collectively, the
Partnership Lawsuits, involving limited partners of some of the aforementioned
partnerships had also been filed, at various dates beginning in June 1996 and
include similar actions naming the Company, Marriott International and others
as defendants.

   Host REIT and Marriott International announced they had executed a
definitive settlement agreement to resolve the Texas Multi-Partnership Lawsuit
and the Partnership Lawsuits. The understanding, which is still subject to
numerous conditions, including court approval and various consents, has two
principal features. First, the Company and Marriott International expect,
through a joint venture to be formed between their affiliates, to acquire the
equity interest of the limited partners in the two Courtyard partnerships for
approximately $372 million. The Company's share of the acquisition costs of
the Courtyard partnerships is expected to be $82 million. Second, the Company
and Marriott International will each pay approximately $31 million to the
limited partners of the remaining five partnerships in exchange for settlement
of the litigation and a full release of claims. As a result of the proposed
settlement, the Company has recorded a non-recurring, pre-tax charge of $40
million in 1999.

   The Company has also been named a defendant in other lawsuits involving
various hotel partnerships. The lawsuits are ongoing, and although the
ultimate resolution of lawsuits is not determinable, the Company does not
believe the outcome will be material to the financial position, statement of
operations or cash flows of the Company.

18. Geographic and Business Segment Information

   The Company operates one business segment, hotel ownership. The Company's
hotels are primarily operated under the Marriott or Ritz-Carlton brands,
contain an average of approximately 474 rooms as of March 1, 2000, as well as
supply other amenities such as meeting space and banquet facilities; a variety
of restaurants and lounges; gift shops and swimming pools. They are typically
located in downtown, airport, suburban and

                                      82
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

resort areas throughout the United States. During most of 1998, the Company's
foreign operations consisted of six full-service hotel properties located in
Mexico and Canada. As of December 31, 1999, the Company's foreign operations
had decreased to four Canadian hotel properties, as the hotels in Mexico were
contributed to Rockledge Hotel Properties, Inc. at year end 1998. There were
no intercompany sales between the properties and the Company. The following
table presents revenues and long-lived assets for each of the geographical
areas in which the Company operates (in millions):

<TABLE>
<CAPTION>
                                      1999            1998            1997
                                 --------------- --------------- ---------------
                                          Long-           Long-           Long-
                                          lived           lived           lived
                                 Revenues Assets Revenues Assets Revenues Assets
                                 -------- ------ -------- ------ -------- ------
<S>                              <C>      <C>    <C>      <C>    <C>      <C>
United States...................  $1,352  $6,987  $3,443  $7,112  $2,770  $4,412
International...................      24     121     121      89     105     222
                                  ------  ------  ------  ------  ------  ------
  Total.........................  $1,376  $7,108  $3,564  $7,201  $2,875  $4,634
                                  ======  ======  ======  ======  ======  ======
</TABLE>

   The long-lived assets for 1997 exclude $583 million of assets related to
the discontinued senior living business.

19. Supplemental Guarantor and Non-Guarantor Subsidiary Information

   All subsidiaries of the Company guarantee the Senior Notes except those
among the twenty one full service hotels listed below and HMH HPT Residence
Inn, LLC and HMH HPT Courtyard, LLC, the leasees of the Residence Inn and
Courtyard properties, respectively. The separate financial statements of each
guaranteeing subsidiary (each, a "Guarantor Subsidiary") are not presented
because the Company's management has concluded that such financial statements
are not material to investors. The guarantee of each Guarantor Subsidiary is
full and unconditional and joint and several and each Guarantor Subsidiary is
a wholly owned subsidiary of the Company. The non-guarantor subsidiaries (the
"Non-Guarantor Subsidiaries") own the following full-service hotels: the
Albany Marriott, Atlanta Marriott Marquis, Grand Hyatt, Atlanta, Harbor Beach
Resort, Hartford Marriott, Hyatt Regency, Cambridge, Hyatt Regency, Reston,
Manhattan Beach Marriott, Minneapolis Southwest Marriott, New York Marriott
Marquis, Ontario Airport Marriott, Pittsburgh City Center Marriott, The Ritz-
Carlton, Amelia Island, San Diego Marriott Hotel and Marina, San Diego Mission
Valley, Swissotel Atlanta, Swissotel Boston, Swissotel Chicago, The Drake
(Swissotel) New York and the Oklahoma City Waterford Marriott.

   The following condensed combined consolidating financial information sets
forth the financial position as of December 31, 1999 and 1998 and results of
operations and cash flows for the three fiscal years in the period ended
December 31, 1999 of the parent, Guarantor Subsidiaries and the Non-Guarantor
Subsidiaries:


                                      83
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

          Supplemental Condensed Combined Consolidating Balance Sheets
                                 (in millions)

                               December 31, 1999

<TABLE>
<CAPTION>
                                  Guarantor   Non-Guarantor
                          Parent Subsidiaries Subsidiaries  Eliminations Consolidated
                          ------ ------------ ------------- ------------ ------------
<S>                       <C>    <C>          <C>           <C>          <C>
Property and equipment,
 net....................  $1,227    $3,642       $2,239       $   --        $7,108
Investments in
 affiliates.............   1,593       --           --         (1,544)          49
Notes and other
 receivables............     685        51           24          (585)         175
Rent receivable.........      11        23           38           --            72
Other assets............     175       214          175           (49)         515
Cash, cash equivalents
 and marketable
 securities.............     199        58           20           --           277
                          ------    ------       ------       -------       ------
  Total assets..........  $3,890    $3,988       $2,496       $(2,178)      $8,196
                          ======    ======       ======       =======       ======
Debt....................  $1,189    $3,062       $1,168       $  (350)      $5,069
Convertible debt
 obligation to Host
 Marriott...............     514       --           --            --           514
Deferred income taxes...      10        32            7           --            49
Other liabilities.......     314       346          198          (284)         574
                          ------    ------       ------       -------       ------
  Total liabilities.....   2,027     3,440        1,373          (634)       6,206
Minority interests......       9        54           73           --           136
Limited partner interest
 of third parties at
 redemption value.......     533       --           --            --           533
Owner's capital.........   1,321       494        1,050        (1,544)       1,321
                          ------    ------       ------       -------       ------
  Total liabilities and
   owner's capital......  $3,890    $3,988       $2,496       $(2,178)      $8,196
                          ======    ======       ======       =======       ======
</TABLE>

                               December 31, 1998

<TABLE>
<CAPTION>
                                  Guarantor   Non-Guarantor
                          Parent Subsidiaries Subsidiaries  Eliminations Consolidated
                          ------ ------------ ------------- ------------ ------------
<S>                       <C>    <C>          <C>           <C>          <C>
Property and equipment,
 net....................  $1,172    $3,796       $2,233       $    --       $7,201
Investments in
 affiliates.............   1,475       --           --         (1,442)          33
Notes and other
 receivables............     782        52           19          (650)         203
Other assets............     259       145          141          (156)         389
Cash and cash
 equivalents............     330        91           15           --           436
                          ------    ------       ------       -------       ------
  Total assets..........  $4,018    $4,084       $2,408       $(2,248)      $8,262
                          ======    ======       ======       =======       ======
Debt....................  $1,438    $2,837       $1,183       $  (327)      $5,131
Convertible debt
 obligation to Host
 Marriott...............     567       --           --            --           567
Deferred income taxes...      51        39            7           --            97
Other liabilities.......     291       600          252          (479)         664
                          ------    ------       ------       -------       ------
  Total liabilities.....   2,347     3,476        1,442          (806)       6,459
Minority interests......      15        56           76           --           147
Limited partner interest
 of third parties at
 redemption value.......     892       --           --            --           892
Owner's capital.........     764       552          890        (1,442)         764
                          ------    ------       ------       -------       ------
  Total liabilities and
   owner's capital......  $4,018    $4,084       $2,408       $(2,248)      $8,262
                          ======    ======       ======       =======       ======
</TABLE>


                                       84
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Supplemental Condensed Combined Consolidating Statements of Operations
                                 (in millions)

                      Fiscal Year Ended December 31, 1999

<TABLE>
<CAPTION>
                                   Guarantor   Non-Guarantor
                          Parent  Subsidiaries Subsidiaries  Eliminations Consolidated
                          ------  ------------ ------------- ------------ ------------
<S>                       <C>     <C>          <C>           <C>          <C>
REVENUES................  $  584    $   660       $  425        $(293)      $ 1,376
Depreciation............     (65)      (143)         (81)         --           (289)
Property-level
 expenses...............     (51)       (93)        (120)         --           (264)
Hotel operating
 expenses...............     --         --           --           --            --
Minority interest.......      (5)        (7)          (9)         --            (21)
Corporate expenses......      (6)       (20)         (11)         --            (37)
Interest expense........    (157)      (263)        (100)          51          (469)
Other expenses..........     (44)       (11)          (1)         --            (56)
                          ------    -------       ------        -----       -------
Income from continuing
 operations before
 taxes..................     256        123          103         (242)          240
Benefit (provision) for
 income taxes...........      20         (2)          (2)         --             16
                          ------    -------       ------        -----       -------
INCOME BEFORE
 EXTRAORDINARY ITEM.....     276        121          101         (242)          256
Extraordinary item--gain
 on extinguishment of
 debt (net of income
 taxes).................       9          1           19          --             29
                          ------    -------       ------        -----       -------
NET INCOME..............  $  285    $   122       $  120        $(242)      $   285
                          ======    =======       ======        =====       =======

                      Fiscal Year Ended December 31, 1998

<CAPTION>
                                   Guarantor   Non-Guarantor
                          Parent  Subsidiaries Subsidiaries  Eliminations Consolidated
                          ------  ------------ ------------- ------------ ------------
<S>                       <C>     <C>          <C>           <C>          <C>
REVENUES................  $1,012    $ 1,680       $1,023        $(151)      $ 3,564
Depreciation............     (69)      (124)         (49)         --           (242)
Property-level
 expenses...............     (63)      (128)         (80)         --           (271)
Hotel operating
 expenses...............    (535)    (1,094)        (682)         --         (2,311)
Minority interest.......     (30)       (11)         (11)         --            (52)
Corporate expenses......      (8)       (27)         (15)         --            (50)
REIT conversion
 expenses...............     (64)       --           --           --            (64)
Interest expense........     (93)      (208)         (67)          33          (335)
Dividends on convertible
 preferred securities...     (37)       --           --           --            (37)
Other expenses..........     (25)        (2)          (1)         --            (28)
                          ------    -------       ------        -----       -------
Income from continuing
 operations before
 taxes..................      88         86          118         (118)          174
Benefit (provision) for
 income taxes...........     101        (34)         (47)         --             20
                          ------    -------       ------        -----       -------
Income from continuing
 operations.............     189         52           71         (118)          194
Income from discontinued
 operations.............       1        --           --           --              1
                          ------    -------       ------        -----       -------
INCOME BEFORE
 EXTRAORDINARY ITEM.....     190         52           71         (118)          195
Extraordinary item--loss
 on extinguishment of
 debt (net of income
 taxes).................    (143)        (5)         --           --           (148)
                          ------    -------       ------        -----       -------
NET INCOME..............  $   47    $    47       $   71        $(118)      $    47
                          ======    =======       ======        =====       =======
</TABLE>


                                       85
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    Supplemental Condensed Combined Consolidating Statements of Operations--
                                  (Continued)
                                 (in millions)

                       Fiscal Year Ended January 2, 1998

<TABLE>
<CAPTION>
                                   Guarantor   Non-Guarantor
                          Parent  Subsidiaries Subsidiaries  Eliminations Consolidated
                          ------  ------------ ------------- ------------ ------------
<S>                       <C>     <C>          <C>           <C>          <C>
REVENUES................  $ 915      $1,195        $ 808         $(43)      $ 2,875
Depreciation............    (98)        (94)         (39)         --           (231)
Property-level
 expenses...............    (72)       (105)         (70)         --           (247)
Hotel operating
 expenses...............   (552)       (800)        (532)         --         (1,884)
Minority interest.......     (5)        (60)          (5)          39           (31)
Corporate expenses......    (11)        (25)          (9)         --            (45)
REIT conversion
 expenses...............    --          --           --           --            --
Interest expense........    (27)       (189)         (72)         --           (288)
Dividends on convertible
 preferred securities...    (37)        --           --           --            (37)
Other expenses..........    (29)        --           --           --            (29)
                          -----      ------        -----         ----       -------
Income from operations
 before taxes...........     84         (78)          81           (4)           83
Benefit (provision) for
 income taxes...........    (35)         31          (32)         --            (36)
                          -----      ------        -----         ----       -------
INCOME (LOSS) BEFORE
 EXTRAORDINARY ITEM.....     49         (47)          49           (4)           47
Extraordinary item--gain
 on extinguishment of
 debt (net of income
 taxes).................    --            3          --           --              3
                          -----      ------        -----         ----       -------
NET INCOME..............  $  49      $  (44)       $  49         $ (4)      $    50
                          =====      ======        =====         ====       =======
</TABLE>

                                       86
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

     Supplemental Condensed Combined Consolidating Statements of Cash Flows
                                 (in millions)

                      Fiscal Year Ended December 31, 1999

<TABLE>
<CAPTION>
                                         Guarantor   Non-Guarantor
                                Parent  Subsidiaries Subsidiaries  Consolidated
                                ------  ------------ ------------- ------------
<S>                             <C>     <C>          <C>           <C>
OPERATING ACTIVITIES
Cash from operations..........  $  84      $ 117         $ 159       $   360
                                -----      -----         -----       -------
INVESTING ACTIVITIES
Net cash received from sales
 of assets....................      3        192           --            195
Capital expenditures..........   (132)      (179)          (50)         (361)
Acquisitions..................     (1)        (8)          (20)          (29)
Other.........................     19        --            --             19
                                -----      -----         -----       -------
Cash used in investing
 activities...................   (111)         5           (70)         (176)
                                -----      -----         -----       -------
FINANCING ACTIVITIES
Repayment of debt.............   (230)      (392)         (809)       (1,431)
Issuance of debt..............    290         99           956         1,345
Issuance of OP Units..........      5        --            --              5
Issuance of preferred limited
 partner units................    196        --            --            196
Distributions on common and
 preferred limited partner
 units........................   (260)       --            --           (260)
Redemption or repurchase of OP
 Units for cash...............    (54)       --            --            (54)
Repurchase of Convertible
 Preferred Securities.........    (36)       --            --            (36)
Cost of extinguishment of
 debt.........................    --         --             (2)           (2)
Transfer to/from Parent.......    (15)       138          (123)          --
Other.........................    --         --           (106)         (106)
                                -----      -----         -----       -------
Cash from financing
 activities...................   (104)      (155)          (84)         (343)
                                -----      -----         -----       -------
INCREASE IN CASH AND CASH
 EQUIVALENTS..................   (131)       (33)            5          (159)
CASH AND CASH EQUIVALENTS,
 beginning of year............    330         91            15           436
                                -----      -----         -----       -------
CASH AND CASH EQUIVALENTS, end
 of year......................  $ 199      $  58         $  20       $   277
                                =====      =====         =====       =======
</TABLE>

                                       87
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    Supplemental Condensed Combined Consolidating Statements of Cash Flows--
                                  (Continued)
                                 (in millions)

                      Fiscal Year Ended December 31, 1998

<TABLE>
<CAPTION>
                                         Guarantor   Non-Guarantor
                               Parent   Subsidiaries Subsidiaries  Consolidated
                               -------  ------------ ------------- ------------
<S>                            <C>      <C>          <C>           <C>
OPERATING ACTIVITIES
Cash from continuing
 operations..................  $   145     $ 124         $  43       $   312
Cash from discontinued
 operations..................       29       --            --             29
                               -------     -----         -----       -------
Cash from operations.........      174       124            43           341
                               -------     -----         -----       -------
INVESTING ACTIVITIES
Cash received from sales of
 assets......................      227       --            --            227
Capital expenditures.........      (61)     (147)          (44)         (252)
Acquisitions.................     (336)     (325)         (327)         (988)
Sales of short-term
 marketable securities.......      354       --            --            354
Other........................        4       --            --              4
                               -------     -----         -----       -------
Cash from (used in) investing
 activities from continuing
 operations..................      188      (472)         (371)         (655)
Cash from (used in) investing
 activities from discontinued
 operations..................      (50)      --            --            (50)
                               -------     -----         -----       -------
Cash used in investing
 activities..................      138      (472)         (371)         (705)
                               -------     -----         -----       -------
FINANCING ACTIVITIES
Repayment of debt............   (1,902)      (51)         (171)       (2,124)
Issuances of debt............    2,483         6             7         2,496
Transfers to/from Parent.....     (875)      385           490           --
Cash contributed to Crestline
 at inception................      (52)      --            --            (52)
Cash contributed to Non-
 Contributed Subsidiary......      (30)      --            --            (30)
Other........................      (25)      --            --            (25)
                               -------     -----         -----       -------
Cash from (used in) financing
 activities from continuing
 operations..................     (401)      340           326           265
Cash from (used in) financing
 activities from discontinued
 operations..................       24       --            --             24
                               -------     -----         -----       -------
Cash from (used in) financing
 activities..................     (377)      340           326           289
                               -------     -----         -----       -------
DECREASE IN CASH AND CASH
 EQUIVALENTS.................      (65)       (8)           (2)          (75)
CASH AND CASH EQUIVALENTS,
 beginning of year...........      395        99            17           511
                               -------     -----         -----       -------
CASH AND CASH EQUIVALENTS,
 end of year.................  $   330     $  91         $  15       $   436
                               =======     =====         =====       =======
</TABLE>


                                       88
<PAGE>

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

    Supplemental Condensed Combined Consolidating Statements of Cash Flows--
                                  (Continued)
                                 (in millions)

                       Fiscal Year Ended January 2, 1998

<TABLE>
<CAPTION>
                                         Guarantor   Non-Guarantor
                                Parent  Subsidiaries Subsidiaries  Consolidated
                                ------  ------------ ------------- ------------
<S>                             <C>     <C>          <C>           <C>
OPERATING ACTIVITIES
Cash from continuing
 operations...................  $ 203      $  98         $ 131       $   432
Cash from discontinued
 operations...................     32        --            --             32
                                -----      -----         -----       -------
Cash from operations..........    235         98           131           464
                                -----      -----         -----       -------
INVESTING ACTIVITIES
Cash received from sales of
 assets.......................     51        --            --             51
Capital expenditures..........    (52)       (77)          (29)         (158)
Acquisitions..................    (56)      (190)         (113)         (359)
Purchase of short-term
 marketable securities........   (354)       --            --           (354)
Other.........................    --         --             13            13
                                -----      -----         -----       -------
Cash used in investing
 activities from continuing
 operations...................   (411)      (267)         (129)         (807)
Cash used in investing
 activities from discontinued
 operations...................   (239)       --            --           (239)
                                -----      -----         -----       -------
Cash used in investing
 activities...................   (650)      (267)         (129)       (1,046)
                                -----      -----         -----       -------
FINANCING ACTIVITIES
Repayment of debt.............     (5)      (447)          (41)         (493)
Issuances of debt.............    586        270             1           857
Transfers to/from Parent......   (417)       392            25           --
Other.........................      5        --             23            28
                                -----      -----         -----       -------
Cash from financing activities
 from continuing operations...    169        215             8           392
Cash used in financing
 activities from discontinued
 operations...................     (3)       --            --             (3)
                                -----      -----         -----       -------
Cash from financing
 activities...................    166        215             8           389
                                -----      -----         -----       -------
INCREASE (DECREASE) IN CASH
 AND CASH EQUIVALENTS.........   (249)        46            10          (193)
CASH AND CASH EQUIVALENTS,
 beginning of year............    644         53             7           704
                                -----      -----         -----       -------
CASH AND CASH EQUIVALENTS, end
 of year......................  $ 395      $  99         $  17       $   511
                                =====      =====         =====       =======
</TABLE>


                                       89
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

20. Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>
                                                1999
                          ----------------------------------------------------------
                            First      Second       Third      Fourth      Fiscal
                           Quarter     Quarter     Quarter     Quarter      Year
                          ---------   ---------   ---------   ----------  ----------
                           (in millions, except per common share amounts)
<S>                       <C>         <C>         <C>         <C>         <C>
Revenues................   $    192    $    203    $    203   $      778  $    1,376
Income from continuing
 operations before in-
 come taxes.............        (56)        (55)        (44)         395         240
Income from continuing
 operations.............        (56)        (55)        (44)         411         256
Income before extraordi-
 nary item..............        (56)        (55)        (44)         411         256
Net income (loss).......        (56)        (42)        (40)         423         285
Net income (loss) avail-
 able to unitholders....        (56)        (42)        (41)         418         279
Basic earnings (loss)
 per unit:
  Income from continuing
   operations...........       (.19)       (.19)       (.16)        1.40         .86
  Income before extraor-
   dinary items.........       (.19)       (.19)       (.16)        1.40         .86
  Net income (loss).....       (.19)       (.15)       (.14)        1.44         .96
Diluted earnings (loss)
 per unit:
  Income from continuing
   operations...........       (.19)       (.19)       (.16)        1.23         .83
  Income before extraor-
   dinary items.........       (.19)       (.19)       (.16)        1.23         .83
  Net income (loss).....       (.19)       (.15)       (.14)        1.27         .93

<CAPTION>
                                                1998
                          ----------------------------------------------------------
                            First      Second       Third      Fourth      Fiscal
                           Quarter     Quarter     Quarter     Quarter      Year
                          ---------   ---------   ---------   ----------  ----------
                           (in millions, except per common share amounts)
<S>                       <C>         <C>         <C>         <C>         <C>
Revenues................   $    805    $    849    $    756   $    1,154  $    3,564
Income from continuing
 operations before in-
 come taxes.............         48         105           8           13         174
Income from continuing
 operations.............         28          62           2          102         194
Income before extraordi-
 nary items.............         30          66           4           95         195
Net income (loss).......         30          66        (144)          95          47
Net income (loss) avail-
 able to unitholders....         30          66        (144)          95          47
Basic earnings per unit:
  Income from continuing
   operations...........        .13         .29         .01          .47         .90
  Income before extraor-
   dinary items.........        .14         .31         .02          .44         .91
  Net income (loss).....        .14         .31        (.67)         .44         .22
Diluted earnings per
 unit:
  Income from continuing
   operations...........        .13         .26         .01          .43         .84
  Income before extraor-
   dinary items.........        .14         .28         .02          .40         .85
  Net income (loss).....        .14         .28        (.65)         .40         .27
</TABLE>

   The quarterly data in the table above has been restated to reflect the
Company's senior living business as a discontinued operation and the impact of
the 1998 stock portion of the Special Dividend on earnings per share.

   The first three quarters consist of 12 weeks each in both 1999 and 1998,
and the fourth quarter includes 16 weeks. The sum of the basic and diluted
earnings (loss) per unit for the four quarters in 1999 and 1998 differs from
the annual earnings per common share due to the required method of computing
the weighted average number of shares in the respective periods.

   In December 1999, the Company changed its method of accounting for
contingent rental revenues to conform to the Securities and Exchange
Commission's Staff Accounting Bulletin (SAB) No. 101. As a result, contingent
rental revenue will be deferred on the balance sheet until certain revenue
thresholds are realized. We

                                      90
<PAGE>

                     HOST MARRIOTT, L.P. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

have adopted SAB No. 101 with retroactive effect beginning January 1, 1999 to
conform to the new presentation. SAB No. 101 has no impact on full-year 1999
revenues, net income, or earnings per share because all rental revenues
considered contingent under SAB No. 101 were earned as of December 31, 1999.
The change in accounting principle has no effect on prior years because
percentage rent relates to rental income on our leases, which began in 1999.

                                      91
<PAGE>




                      CCHP I CORPORATION AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1999

              With Independent Public Accountants' Report Thereon


                                       92
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To CCHP I Corporation:

   We have audited the accompanying consolidated balance sheet of CCHP I
Corporation and its subsidiaries (a Maryland corporation) as of December 31,
1999, and the related consolidated statements of operations, shareholder's
equity and cash flows for the fiscal year ended December 31, 1999. These
consolidated financial statements are the responsibility of CCHP I
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

   We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP I
Corporation and its subsidiaries as of December 31, 1999 and the results of
their operations and their cash flows for the fiscal year then ended in
conformity with accounting principles generally accepted in the United States.

                                          Arthur Andersen LLP

Vienna, Virginia
February 24, 2000

                                      93
<PAGE>

                      CCHP I CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET
                            AS OF DECEMBER 31, 1999

                       (in thousands, except share data)

<TABLE>
<S>                                                                     <C>
                                ASSETS
Current assets
  Cash and cash equivalents............................................ $ 9,467
  Due from hotel managers..............................................   3,890
                                                                        -------
                                                                         13,357
Hotel working capital..................................................  26,011
                                                                        -------
                                                                        $39,368
                                                                        =======

                 LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities
  Lease payable to Host Marriott....................................... $ 5,792
  Other................................................................   3,334
                                                                        -------
                                                                          9,126
Hotel working capital notes payable to Host Marriott...................  26,011
Deferred income taxes..................................................   1,027
                                                                        -------
    Total liabilities..................................................  36,164
                                                                        -------
Shareholder's equity
  Common stock (100 shares issued at $1.00 par value)..................     --
  Retained earnings....................................................   3,204
                                                                        -------
    Total shareholder's equity.........................................   3,204
                                                                        =======
                                                                        $39,368
                                                                        =======
</TABLE>


                See Notes to Consolidated Financial Statements.

                                       94
<PAGE>

                      CCHP I CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

                      Fiscal Year Ended December 31, 1999
                                 (in thousands)

<TABLE>
<S>                                                                    <C>
REVENUES
  Rooms............................................................... $585,381
  Food and beverage...................................................  277,684
  Other...............................................................   65,069
                                                                       --------
    Total revenues....................................................  928,134
                                                                       --------

OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
  Rooms...............................................................  141,898
  Food and beverage...................................................  211,964
  Other...............................................................  241,996
Other operating costs and expenses
  Lease expense to Host Marriott......................................  276,058
  Management fees.....................................................   40,659
                                                                       --------
    Total operating costs and expenses................................  912,575
                                                                       --------

OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST...............   15,559
Corporate expenses....................................................   (1,367)
Interest expense......................................................   (1,585)
                                                                       --------
INCOME BEFORE INCOME TAXES............................................   12,607
Provision for income taxes............................................   (5,169)
                                                                       --------
NET INCOME............................................................ $  7,438
                                                                       ========
</TABLE>


                See Notes to Consolidated Financial Statements.

                                       95
<PAGE>

                      CCHP I CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY

                      Fiscal Year Ended December 31, 1999

                                 (in thousands)

<TABLE>
<CAPTION>
                                                         Common Retained
                                                         Stock  Earnings Total
                                                         ------ -------- ------
<S>                                                      <C>    <C>      <C>
Balance, January 1, 1999................................  $--    $  --   $  --
  Dividend to Crestline Capital.........................   --    (4,234) (4,234)
  Net income............................................   --     7,438   7,438
                                                          ----   ------  ------
Balance, December 31, 1999..............................  $--    $3,204  $3,204
                                                          ====   ======  ======
</TABLE>




                See Notes to Consolidated Financial Statements.

                                       96
<PAGE>

                      CCHP I CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                      Fiscal Year Ended December 31, 1999
                                 (in thousands)

<TABLE>
<S>                                                                     <C>
OPERATING ACTIVITIES
Net income............................................................. $ 7,438
Change in amounts due from hotel managers..............................    (678)
Change in lease payable to Host Marriott...............................   5,792
Changes in other operating accounts....................................   1,149
                                                                        -------
  Cash from operations.................................................  13,701
INVESTING ACTIVITIES...................................................     --
                                                                        -------
FINANCING ACTIVITIES
Dividend to Crestline Capital..........................................  (4,234)
                                                                        -------
Increase in cash and cash equivalents..................................   9,467
Cash and cash equivalents, beginning of year...........................     --
                                                                        -------
Cash and cash equivalents, end of year................................. $ 9,467
                                                                        =======
</TABLE>



                See Notes to Consolidated Financial Statements.

                                       97
<PAGE>

                      CCHP I CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

 Organization

   CCHP I Corporation (the "Company") was incorporated in the state of
Delaware on November 23, 1998 as a wholly owned subsidiary of Crestline
Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a
publicly traded company when Host Marriott Corporation ("Host Marriott")
completed its plan of reorganizing its business operations by spinning-off
Crestline to the shareholders of Host Marriott as part of a series of
transactions pursuant to which Host Marriott converted into a real estate
investment trust ("REIT").

   On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 35 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. During 1999, Host
Marriott sold three of the hotels and terminated the leases on those hotels.
As of December 31, 1999, the Company leased 32 full-service hotels from Host
Marriott.

   The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.

 Principles of Consolidation

   The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.

 Fiscal Year

   The Company's fiscal year ends on the Friday nearest December 31.

 Cash and Cash Equivalents

   The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase as cash equivalents.

 Revenues

   The Company records the gross property-level revenues generated by the
hotels as revenues.

 Use of Estimates in the Preparation of Financial Statements

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

                                      98
<PAGE>

                      CCHP I CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 2. Leases

 Hotel Leases

   The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 35 full-service hotels. Each hotel lease has an initial
term generally ranging from three to seven years. The hotel leases generally
have four seven-year renewal options at the option of the Company, however,
Host Marriott may terminate any unexercised renewal options. The Tenant
Subsidiaries are required to pay the greater of (i) a minimum rent specified
in each hotel lease or (ii) a percentage rent based upon a specified
percentage of aggregate revenues from the hotel, including room revenues, food
and beverage revenues, and other income, in excess of specified thresholds.
The amount of minimum rent is increased each year based upon 50% of the
increase in CPI during the previous twelve months. Percentage rent thresholds
are increased each year based on a blend of the increases in CPI and the
Employment Cost Index during the previous twelve months. The hotel leases
generally provide for a rent adjustment in the event of damage, destruction,
partial taking or certain capital expenditures. The rent during any renewal
periods will be negotiated at fair market value at the time the renewal option
is exercised.

   The Tenant Subsidiaries are responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries are responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott is responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.

   In the event that Host Marriott disposes of a hotel free and clear of the
hotel lease, Host Marriott would generally have to pay a termination fee equal
to the fair market value of the Company's leasehold interest in the remaining
term of the hotel lease using a discount rate of 12%. Alternatively, Host
Marriott would be entitled to (i) substitute a comparable hotel for any hotel
that is sold, with the terms agreed to by the Company, or (ii) sell the hotel
subject to the hotel lease, subject to the Company's approval under certain
circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve of Crestline's leases
without having to pay a termination fee. During 1999, Host Marriott exercised
its right to terminate three hotel leases of the Company and Crestline without
having to pay a termination fee. Conversely, Crestline may terminate up to
twelve full-service hotel leases without penalty upon 180 days notice to Host
Marriott. During 1999, Crestline exercised its right to terminate two of the
Company's hotel leases as well as three additional Crestline hotel leases.
These hotel leases will terminate in 2000, 180 days after each respective
notification date.

   As a result of the recent tax legislation discussed below, Host Marriott
may purchase all, but not less than all, of its hotel leases with Crestline,
beginning January 2, 2001, with the purchase price calculated as discussed
above. The payment of the termination fee will be payable in cash or, subject
to certain conditions, shares of Host Marriott common stock at the election of
Host Marriott.

   For those hotels where Marriott International is the manager, it has a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.

 FF&E Leases

   Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"), the
Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally range from two to three years and rent under the

                                      99
<PAGE>

                      CCHP I CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

FF&E Leases is a fixed amount. The Company will have the option at the
expiration of the FF&E Lease term to either (i) renew the FF&E Leases for
consecutive one-year renewal terms at fair market rental rate, or (ii)
purchase the Excess FF&E for a price equal to its fair market value. If the
Company does not exercise its purchase or renewal option, the Company is
required to pay a termination fee equal to approximately one month's rent.

 Guaranty and Pooling Agreement

   In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provides a full guarantee and Crestline
provides a limited guarantee of all of the hotel lease obligations.

   The cumulative limit of Crestline's guarantee obligation is the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement is
reduced to zero, the Company can terminate the agreement and Host Marriott can
terminate the Company's hotel leases without penalty.

   All of the Company's leases are cross-defaulted and the Company's
obligations under the guaranty are secured by all the funds received from its
Tenant Subsidiaries.

 Recent Tax Legislation

   On December 17, 1999 President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effective January 1, 2001, will allow a REIT to lease hotels to a "taxable
REIT subsidiary" if the hotel is operated and managed on behalf of such
subsidiary by an independent third party. A taxable REIT subsidiary is a
corporation that is owned more than 35 percent by a REIT. This law will enable
Host Marriott, beginning in 2001 to lease its hotels to a taxable REIT
subsidiary. Host Marriott may, at its discretion, elect to terminate the
Company's leases, beginning in 2001, and pay termination fees determined
according to formulas specified in the leases. If Host Marriott elects to
terminate the full-service hotel leases, it would have to terminate all of
Crestline's full-service hotel leases.

   Future minimum annual rental commitments for all non-cancelable leases as
of December 31, 1999 are as follows (in thousands):

<TABLE>
   <S>                                                                 <C>
   2000............................................................... $161,094
   2001...............................................................  158,406
   2002...............................................................  156,630
   2003...............................................................  156,630
   2004...............................................................  141,614
   Thereafter.........................................................  141,614
                                                                       --------
     Total minimum lease payments..................................... $915,988
                                                                       ========
   Lease expense for 1999 consisted of the following (in thousands):
   Base rent.......................................................... $167,996
   Percentage rent....................................................  108,062
                                                                       --------
                                                                       $276,058
                                                                       ========
</TABLE>

                                      100
<PAGE>

                      CCHP I CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 3. Working Capital Notes

   Upon the commencement of the hotel leases, the Company purchased the
working capital of the leased hotels from Host Marriott for $26,832,000 with
the purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
Upon termination of the hotel lease, the Company will sell Host Marriott the
existing working capital at its current value. To the extent the working
capital delivered to Host Marriott is less than the value of the note, the
Company will pay Host Marriott the difference in cash. However, to the extent
the working capital delivered to Host Marriott exceeds the value of the note,
Host Marriott will pay the Company the difference in cash. As of December 31,
1999, the outstanding balance of the working capital notes was $26,011,000.

   Debt maturities at December 31, 1999 are as follows (in thousands):

<TABLE>
   <S>                                                                   <C>
   2000................................................................. $   135
   2001.................................................................   1,205
   2002.................................................................     --
   2003.................................................................   3,005
   2004.................................................................     --
   Thereafter...........................................................  21,666
                                                                         -------
                                                                         $26,011
                                                                         =======
</TABLE>

   Cash paid for interest expense in 1999 totaled $1,463,000.

Note 4. Management Agreements

   All of the Company's hotels are operated by hotel management companies
under long-term hotel management agreements between Host Marriott and hotel
management companies.

 Assignment of Management Agreements

   The existing management agreements were assigned to the Tenant Subsidiaries
upon the execution of the hotel leases for the term of each corresponding
hotel lease. The Tenant Subsidiaries are obligated to perform all of the
obligations of Host Marriott under the hotel management agreements including
payment of fees due under the management agreements other than certain
obligations including payment of property taxes, property casualty insurance
and ground rent, maintaining a reserve fund for FF&E replacements and capital
expenditures for which Host Marriott retains responsibility.

 Marriott International Management Agreements

   Marriott International manages 28 of the 32 hotels under long-term
management agreements assigned to the Tenant Subsidiaries, generally for an
initial term of 15 to 20 years with renewal terms at the option of Marriott
International of up to an additional 16 to 30 years. The management agreements
generally provide for payment of base management fees equal to one to four
percent of revenues and incentive management fees generally equal to 20% to
50% of Operating Profit (as defined in the management agreements) over a
priority return (as defined) to the Tenant Subsidiaries, with total incentive
management fees not to exceed 20% of cumulative Operating Profit, or 20% of
current year Operating Profit.

                                      101
<PAGE>

                      CCHP I CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Pursuant to the terms of the management agreements, Marriott International
is required to furnish the hotels with certain services ("Chain Services")
which are generally provided on a central or regional basis to all hotels in
the Marriott International hotel system. Chain Services include central
training, advertising and promotion, a national reservation system,
computerized payroll and accounting services, and such additional services as
needed which may be more efficiently performed on a centralized basis. Costs
and expenses incurred in providing such services are allocated among all
domestic hotels managed, owned or leased by Marriott International or its
subsidiaries. In addition, the Company's hotels also participate in the
Marriott Rewards program. The cost of this program is charged to all hotels in
the Marriott hotel system.

 Other Hotel Management Agreements

   The Company's remaining four hotels are managed by other hotel management
companies. One of the hotels is managed by Swissotel Management (USA) LLC, one
is managed by Four Seasons Hotel Limited, and the remaining two hotels are
managed by other independent hotel management companies under the "Marriott"
brand pursuant to franchise agreements. The managers of the hotels provide
similar services as Marriott International under its management agreements and
receive base management fees, generally calculated as a percentage of
revenues, and in most cases, incentive management fees, which are generally
calculated as a percentage of operating profits.

   The Company has the option to terminate certain management agreements if
specified performance thresholds are not satisfied, with the consent of Host
Marriott under certain conditions. No agreement with respect to a single
lodging facility is cross-collateralized or cross-defaulted to any other
agreement and a single agreement may be canceled under certain conditions,
although such cancellation will not trigger the cancellation of any other
agreement.

 Franchise Agreements

   Two of the Company's hotels are managed under franchise agreements between
Host Marriott and Marriott International for terms ranging from 15 to 30
years. In connection with the assignment of the corresponding management
agreement, the Tenant Subsidiaries assumed the franchise agreements for these
hotels and will be the franchisee for the term of the corresponding hotel
lease. Pursuant to the franchise agreements, the Tenant Subsidiaries generally
pay a franchise fee based on a percentage of room revenues and food and
beverage revenues as well as certain other fees for advertising and
reservations. Franchise fees for room revenues vary from four to six percent,
while fees for food and beverage revenues vary from two to three percent of
revenues.

Note 5. Income Taxes

   The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This allocation method results in Federal and state tax expense allocated for
the period presented that is substantially equal to the expense that would
have been recognized if the Company had filed separate tax returns.

                                      102
<PAGE>

                      CCHP I CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The provision for income taxes for 1999 consists of the following (in
thousands):
<TABLE>
   <S>                                                                    <C>
   Current--Federal...................................................... $3,536
       --State...........................................................    606
                                                                          ------
                                                                           4,142
                                                                          ------
   Deferred--Federal.....................................................    877
       --State...........................................................    150
                                                                          ------
                                                                           1,027
                                                                          ------
                                                                          $5,169
                                                                          ======
</TABLE>

   A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate for 1999 follows:

<TABLE>
   <S>                                                                     <C>
   Statutory federal tax rate............................................. 35.0%
   State income taxes, net of federal tax benefit.........................  6.0
                                                                           ----
                                                                           41.0%
                                                                           ====
</TABLE>

   As of December 31, 1999, the Company had no deferred tax assets. The tax
effect of the temporary difference that gives rise to the Company's deferred
tax liability is attributable to the hotel working capital.

                                      103
<PAGE>

                      CCHP II CORPORATION AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1999

              With Independent Public Accountants' Report Thereon

                                      104
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To CCHP II Corporation:

   We have audited the accompanying consolidated balance sheet of CCHP II
Corporation and its subsidiaries (a Maryland corporation) as of December 31,
1999, and the related consolidated statements of operations, shareholder's
equity and cash flows for the fiscal year ended December 31, 1999. These
consolidated financial statements are the responsibility of CCHP II
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

   We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP II
Corporation and its subsidiaries as of December 31, 1999 and the results of
their operations and their cash flows for the fiscal year then ended in
conformity with accounting principles generally accepted in the United States.

                                          Arthur Andersen LLP

Vienna, Virginia
February 24, 2000

                                      105
<PAGE>

                      CCHP II CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                            As of December 31, 1999
                       (in thousands, except share data)

<TABLE>
<S>                                                                     <C>
                                ASSETS
Current assets
  Cash and cash equivalents............................................ $ 8,856
  Due from hotel managers..............................................  10,280
                                                                        -------
                                                                         19,136
Hotel working capital..................................................  18,090
                                                                        -------
                                                                        $37,226
                                                                        =======

                 LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities
  Lease payable to Host Marriott....................................... $16,197
  Other................................................................   1,246
                                                                        -------
                                                                         17,443
Hotel working capital notes payable to Host Marriott...................  18,090
Deferred income taxes..................................................     996
                                                                        -------
    Total liabilities..................................................  36,529
Shareholder's equity
Common stock (100 shares issued at $1.00 par value)....................     --
Retained earnings......................................................     697
                                                                        -------
    Total shareholder's equity.........................................     697
                                                                        -------
                                                                        $37,226
                                                                        =======
</TABLE>


                See Notes to Consolidated Financial Statements.

                                      106
<PAGE>

                      CCHP II CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

                      Fiscal Year Ended December 31, 1999
                                 (in thousands)

<TABLE>
<S>                                                                   <C>
REVENUES
  Rooms.............................................................. $ 646,624
  Food and beverage..................................................   306,320
  Other..............................................................    64,876
                                                                      ---------
    Total revenues................................................... 1,017,820
                                                                      ---------
OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
  Rooms..............................................................   158,279
  Food and beverage..................................................   230,001
  Other..............................................................   231,668
Other operating costs and expenses
  Lease expense to Host Marriott.....................................   312,112
  Management fees....................................................    66,672
                                                                      ---------
    Total operating costs and expenses...............................   998,732
                                                                      ---------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST..............    19,088
Corporate expenses...................................................    (1,499)
Interest expense.....................................................      (928)
                                                                      ---------
INCOME BEFORE INCOME TAXES...........................................    16,661
Provision for income taxes...........................................    (6,831)
                                                                      ---------
NET INCOME........................................................... $   9,830
                                                                      =========
</TABLE>



                See Notes to Consolidated Financial Statements.

                                      107
<PAGE>

                      CCHP II CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY

                      Fiscal Year Ended December 31, 1999
                                 (in thousands)

<TABLE>
<CAPTION>
                                                       Common Retained
                                                       Stock  Earnings   Total
                                                       ------ --------  -------
<S>                                                    <C>    <C>       <C>
Balance, January 1, 1999..............................  $--   $   --    $   --
  Dividend to Crestline Capital.......................   --    (9,133)   (9,133)
  Net income..........................................   --     9,830     9,830
                                                        ----  -------   -------
Balance, December 31, 1999............................  $--   $   697   $   697
                                                        ====  =======   =======
</TABLE>






                See Notes to Consolidated Financial Statements.

                                      108
<PAGE>

                      CCHP II CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                      Fiscal Year Ended December 31, 1999
                                 (in thousands)

<TABLE>
<S>                                                                     <C>
OPERATING ACTIVITIES
Net income............................................................. $ 9,830
Change in amounts due from hotel managers..............................  (9,322)
Change in lease payable to Host Marriott...............................  16,197
Changes in other operating accounts....................................   1,284
                                                                        -------
  Cash from operations.................................................  17,989
                                                                        -------
INVESTING ACTIVITIES...................................................     --
                                                                        -------
FINANCING ACTIVITIES
Dividend to Crestline Capital..........................................  (9,133)
                                                                        -------
Increase in cash and cash equivalents..................................   8,856
Cash and cash equivalents, beginning of year...........................     --
                                                                        -------
Cash and cash equivalents, end of year................................. $ 8,856
                                                                        =======
</TABLE>





                See Notes to Consolidated Financial Statements.


                                      109
<PAGE>

                     CCHP II CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

 Organization

   CCHP II Corporation (the "Company") was incorporated in the state of
Delaware on November 23, 1998 as a wholly owned subsidiary of Crestline
Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a
publicly traded company when Host Marriott Corporation ("Host Marriott")
completed its plan of reorganizing its business operations by spinning-off
Crestline to the shareholders of Host Marriott as part of a series of
transactions pursuant to which Host Marriott converted into a real estate
investment trust ("REIT").

   On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 28 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. As of December 31,
1999, the Company leased 28 full-service hotels from Host Marriott.

   The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.

 Principles of Consolidation

   The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.

 Fiscal Year

   The Company's fiscal year ends on the Friday nearest December 31.

 Cash and Cash Equivalents

   The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase as cash equivalents.

 Revenues

   The Company records the gross property-level revenues generated by the
hotels as revenues.

 Use of Estimates in the Preparation of Financial Statements

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

                                      110
<PAGE>

                     CCHP II CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 2. Leases

 Hotel Leases

   The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 28 full-service hotels. Each hotel lease has an initial
term of eight years. The hotel leases generally have four seven-year renewal
options at the option of the Company, however, Host Marriott may terminate any
unexercised renewal options. The Tenant Subsidiaries are required to pay the
greater of (i) a minimum rent specified in each hotel lease or (ii) a
percentage rent based upon a specified percentage of aggregate revenues from
the hotel, including room revenues, food and beverage revenues, and other
income, in excess of specified thresholds. The amount of minimum rent is
increased each year based upon 50% of the increase in CPI during the previous
twelve months. Percentage rent thresholds are increased each year based on a
blend of the increases in CPI and the Employment Cost Index during the
previous twelve months. The hotel leases generally provide for a rent
adjustment in the event of damage, destruction, partial taking or certain
capital expenditures. The rent during any renewal periods will be negotiated
at fair market value at the time the renewal option is exercised.

   The Tenant Subsidiaries are responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries are responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott is responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.

   In the event that Host Marriott disposes of a hotel free and clear of the
hotel lease, Host Marriott would generally have to pay a termination fee equal
to the fair market value of the Company's leasehold interest in the remaining
term of the hotel lease using a discount rate of 12%. Alternatively, Host
Marriott would be entitled to (i) substitute a comparable hotel for any hotel
that is sold, with the terms agreed to by the Company, or (ii) sell the hotel
subject to the hotel lease, subject to the Company's approval under certain
circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve of Crestline's leases
without having to pay a termination fee. During 1999, Host Marriott exercised
its right to terminate three of Crestline's hotel leases, however, none of
these were the Company's hotel leases. Conversely, Crestline may terminate up
to twelve full-service hotel leases without penalty upon 180 days notice to
Host Marriott. During 1999, Crestline exercised its right to terminate five of
its hotel leases, however, none of these were the Company's hotel leases.

   As a result of the recent tax legislation discussed below, Host Marriott
may purchase all, but not less than all, of its hotel leases with Crestline
beginning January 1, 2001, with the purchase price calculated as discussed
above. The payment of the termination fee will be payable in cash or, subject
to certain conditions, shares of Host Marriott common stock at the election of
Host Marriott.

   For those hotels where Marriott International is the manager, it has a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.

 FF&E Leases

   Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"), the
Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally range from two to three years and rent under the FF&E Leases
is a fixed amount. The Company will have the option at the expiration of the
FF&E Lease term to

                                      111
<PAGE>

                     CCHP II CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

either (i) renew the FF&E Leases for consecutive one-year renewal terms at
fair market rental rate, or (ii) purchase the Excess FF&E for a price equal to
its fair market value. If the Company does not exercise its purchase or
renewal option, the Company is required to pay a termination fee equal to
approximately one month's rent.

 Guaranty and Pooling Agreement

   In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provides a full guarantee and Crestline
provides a limited guarantee of all of the hotel lease obligations.

   The cumulative limit of Crestline's guarantee obligation is the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement is
reduced to zero, the Company can terminate the agreement and Host Marriott can
terminate the Company's hotel leases without penalty.

   All of the Company's leases are cross-defaulted and the Company's
obligations under the guaranty are secured by all the funds received from its
Tenant Subsidiaries.

 Recent Tax Legislation

   On December 17, 1999 President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effective January 1, 2001, will allow a REIT to lease hotels to a "taxable
REIT subsidiary" if the hotel is operated and managed on behalf of such
subsidiary by an independent third party. A taxable REIT subsidiary is a
corporation that is owned more than 35 percent by a REIT. This law will enable
Host Marriott, beginning in 2001 to lease its hotels to a taxable REIT
subsidiary. Host Marriott may, at its discretion, elect to terminate the
Company's leases, beginning in 2001, and pay termination fees determined
according to formulas specified in the leases. If Host Marriott elects to
terminate the full-service hotel leases, it would have to terminate all of
Crestline's full-service hotel leases.

   Future minimum annual rental commitments for all non-cancelable leases as
of December 31, 1999 are as follows (in thousands):

<TABLE>
   <S>                                                              <C>
   2000............................................................ $  174,747
   2001............................................................    174,747
   2002............................................................    174,747
   2003............................................................    174,747
   2004............................................................    174,747
   Thereafter......................................................    349,493
                                                                    ----------
     Total minimum lease payments.................................. $1,223,228
                                                                    ==========
   Lease expense for 1999 consisted of the following (in
    thousands):
   Base rent....................................................... $  167,755
   Percentage rent.................................................    144,357
                                                                    ----------
                                                                    $  312,112
                                                                    ==========
</TABLE>

                                      112
<PAGE>

                     CCHP II CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 3. Working Capital Notes

   Upon the commencement of the hotel leases, the Company purchased the
working capital of the leased hotels from Host Marriott for $18,090,000 with
the purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
Upon termination of the hotel lease, the Company will sell Host Marriott the
existing working capital at its current value. To the extent the working
capital delivered to Host Marriott is less than the value of the note, the
Company will pay Host Marriott the difference in cash. However, to the extent
the working capital delivered to Host Marriott exceeds the value of the note,
Host Marriott will pay the Company the difference in cash. As of December 31,
1999, the outstanding balance of the working capital notes was $18,090,000.

   Debt maturities at December 31, 1999 are as follows (in thousands):

<TABLE>
     <S>                                                                 <C>
     2000............................................................... $   --
     2001...............................................................     --
     2002...............................................................     --
     2003...............................................................     --
     2004...............................................................     --
     Thereafter.........................................................  18,090
                                                                         -------
                                                                         $18,090
                                                                         =======
</TABLE>

   Cash paid for interest expense in 1999 totaled $856,000.

Note 4. Management Agreements

   All of the Company's hotels are operated by hotel management companies
under long-term hotel management agreements between Host Marriott and hotel
management companies.

 Assignment of Management Agreements

   The existing management agreements were assigned to the Tenant Subsidiaries
upon the execution of the hotel leases for the term of each corresponding
hotel lease. The Tenant Subsidiaries are obligated to perform all of the
obligations of Host Marriott under the hotel management agreements including
payment of fees due under the management agreements other than certain
obligations including payment of property taxes, property casualty insurance
and ground rent, maintaining a reserve fund for FF&E replacements and capital
expenditures for which Host Marriott retains responsibility.

 Marriott International Management Agreements

   Marriott International manages 20 of the 28 hotels under long-term
management agreements assigned to the Tenant Subsidiaries, generally for an
initial term of 15 to 20 years with renewal terms at the option of Marriott
International of up to an additional 16 to 30 years. The management agreements
generally provide for payment of base management fees equal to one to four
percent of revenues and incentive management fees generally equal to 20% to
50% of Operating Profit (as defined in the management agreements) over a
priority return (as defined) to the Tenant Subsidiaries, with total incentive
management fees not to exceed 20% of cumulative Operating Profit, or 20% of
current year Operating Profit.

   Pursuant to the terms of the management agreements, Marriott International
is required to furnish the hotels with certain services ("Chain Services")
which are generally provided on a central or regional basis to all hotels

                                      113
<PAGE>

                     CCHP II CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

in the Marriott International hotel system. Chain Services include central
training, advertising and promotion, a national reservation system,
computerized payroll and accounting services, and such additional services as
needed which may be more efficiently performed on a centralized basis. Costs
and expenses incurred in providing such services are allocated among all
domestic hotels managed, owned or leased by Marriott International or its
subsidiaries. In addition, the Company's hotels also participate in the
Marriott Rewards program. The cost of this program is charged to all hotels in
the Marriott hotel system.

 Ritz-Carlton Hotel Management Agreements

   The Ritz-Carlton Hotel Company, LLC ("Ritz-Carlton"), an affiliate of
Marriott International, manages three of the leased hotels under long-term
Hotel Management Agreements assigned to the Tenant Subsidiaries. These
agreements have an initial term of 15 to 25 years with renewal terms at the
option of Ritz-Carlton of up to an additional 10 to 40 years. Base management
fees vary from two to four percent of revenues and incentive management fees
are generally equal to 20% of available cash flow or operating profit, up to a
maximum of 2.1% of revenues, as defined in the agreements.

 Other Hotel Management Agreements

   The Company's remaining five hotels are managed by other hotel management
companies. One of the hotels is managed by the Hyatt Corporation and the
remaining four hotels are managed by other independent hotel management
companies under other brands pursuant to franchise agreements. The managers of
the hotels provide similar services as Marriott International under its
management agreements and receive base management fees, generally calculated
as a percentage of revenues, and in most cases, incentive management fees,
which are generally calculated as a percentage of operating profits.

   The Company has the option to terminate certain management agreements if
specified performance thresholds are not satisfied, with the consent of Host
Marriott under certain conditions. No agreement with respect to a single
lodging facility is cross-collateralized or cross-defaulted to any other
agreement and a single agreement may be canceled under certain conditions,
although such cancellation will not trigger the cancellation of any other
agreement.

 Franchise Agreements

   Four of the Company's hotels are managed under franchise agreements between
Host Marriott and other hotel companies for terms ranging from 15 to 30 years.
In connection with the assignment of the corresponding management agreement,
the Tenant Subsidiaries assumed the franchise agreements for these hotels and
will be the franchisee for the term of the corresponding hotel lease. Pursuant
to the franchise agreements, the Tenant Subsidiaries generally pay a franchise
fee based on a percentage of room revenues and food and beverage revenues as
well as certain other fees for advertising and reservations. Franchise fees
for room revenues vary from four to six percent, while fees for food and
beverage revenues vary from two to three percent of revenues.

Note 5. Income Taxes

   The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This allocation method results in Federal and net state tax expense allocated
for the period presented that is substantially equal to the expense that would
have been recognized if the Company had filed separate tax returns.

                                      114
<PAGE>

                     CCHP II CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   The provision for income taxes for 1999 consists of the following (in
thousands):

<TABLE>
   <S>                                                                   <C>
   Current--Federal..................................................... $4,981
       --State..........................................................    854
                                                                         ------
                                                                          5,835
                                                                         ------
   Deferred--Federal....................................................    850
       --State..........................................................    146
                                                                         ------
                                                                            996
                                                                         ------
                                                                         $6,831
                                                                         ======
</TABLE>

   A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate for 1999 follows:

<TABLE>
   <S>                                                                     <C>
   Statutory federal tax rate............................................. 35.0%
   State income taxes, net of federal tax benefit.........................  6.0
                                                                           ----
                                                                           41.0%
                                                                           ====
</TABLE>

   As of December 31, 1999, the Company had no deferred tax assets. The tax
effect of the temporary differences that gives rise to the Company's federal
deferred tax liability is attributable to the hotel working capital.

                                      115
<PAGE>

                     CCHP III CORPORATION AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1999

              With Independent Public Accountants' Report Thereon

                                      116
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To CCHP III Corporation:

   We have audited the accompanying consolidated balance sheet of CCHP III
Corporation and its subsidiaries (a Maryland corporation) as of December 31,
1999, and the related consolidated statements of operations, shareholder's
equity and cash flows for the fiscal year ended December 31, 1999. These
consolidated financial statements are the responsibility of CCHP III
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

   We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP III
Corporation and its subsidiaries as of December 31, 1999 and the results of
their operations and their cash flows for the fiscal year then ended in
conformity with accounting principles generally accepted in the United States.

                                          Arthur Andersen LLP

Vienna, Virginia
February 24, 2000

                                      117
<PAGE>

                     CCHP III CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                            As of December 31, 1999
                       (in thousands, except share data)

<TABLE>
<S>                                                                     <C>
                                ASSETS
Current assets
  Cash and cash equivalents............................................ $ 6,638
  Due from hotel managers..............................................   8,214
  Restricted cash......................................................   4,519
                                                                        -------
                                                                         19,371
Hotel working capital..................................................  21,697
                                                                        -------
                                                                        $41,068
                                                                        =======

                 LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities
  Lease payable to Host Marriott....................................... $13,706
  Other................................................................   4,139
                                                                        -------
                                                                         17,845
Hotel working capital notes payable to Host Marriott...................  21,697
Deferred income taxes..................................................     342
                                                                        -------
    Total liabilities..................................................  39,884
                                                                        -------
Shareholder's equity
  Common stock (100 shares issued at $1.00 par value)..................     --
  Retained earnings....................................................   1,184
                                                                        -------
    Total shareholder's equity.........................................   1,184
                                                                        -------
                                                                        $41,068
                                                                        =======
</TABLE>


                See Notes to Consolidated Financial Statements.

                                      118
<PAGE>

                     CCHP III CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

                      Fiscal Year Ended December 31, 1999
                                 (in thousands)

<TABLE>
<S>                                                                    <C>
REVENUES
  Rooms............................................................... $570,611
  Food and beverage...................................................  274,233
  Other...............................................................   80,149
                                                                       --------
    Total revenues....................................................  924,993
                                                                       --------
OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
  Rooms...............................................................  137,338
  Food and beverage...................................................  202,181
  Other...............................................................  236,721
Other operating costs and expenses
  Lease expense to Host Marriott......................................  295,563
  Management fees.....................................................   41,893
                                                                       --------
    Total operating costs and expenses................................  913,696
                                                                       --------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST...............   11,297
Corporate expenses....................................................   (1,357)
Interest expense......................................................   (1,129)
                                                                       --------
INCOME BEFORE INCOME TAXES............................................    8,811
Provision for income taxes............................................   (3,612)
                                                                       --------
NET INCOME............................................................ $  5,199
                                                                       ========
</TABLE>



                See Notes to Consolidated Financial Statements.

                                      119
<PAGE>

                     CCHP III CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY

                      Fiscal Year Ended December 31, 1999
                                 (in thousands)

<TABLE>
<CAPTION>
                                                       Common Retained
                                                       Stock  Earnings   Total
                                                       ------ --------  -------
<S>                                                    <C>    <C>       <C>
Balance, January 1, 1999..............................  $--   $   --    $   --
  Dividend to Crestline Capital.......................   --    (4,015)   (4,015)
  Net income..........................................   --     5,199     5,199
                                                        ----  -------   -------
Balance, December 31, 1999............................  $--   $ 1,184   $ 1,184
                                                        ====  =======   =======
</TABLE>






                See Notes to Consolidated Financial Statements.

                                      120
<PAGE>

                     CCHP III CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                      Fiscal Year Ended December 31, 1999
                                 (in thousands)

<TABLE>
<S>                                                                      <C>
OPERATING ACTIVITIES
Net income.............................................................. $5,199
Change in amounts due from hotel managers............................... (4,084)
Change in lease payable to Host Marriott................................ 13,706
Changes in other operating accounts..................................... (4,168)
                                                                         ------
  Cash from operations.................................................. 10,653
INVESTING ACTIVITIES....................................................    --
                                                                         ------
FINANCING ACTIVITIES
Dividend to Crestline Capital........................................... (4,015)
                                                                         ------
Increase in cash and cash equivalents...................................  6,638
Cash and cash equivalents, beginning of year............................    --
                                                                         ------
Cash and cash equivalents, end of year.................................. $6,638
                                                                         ======
</TABLE>



                See Notes to Consolidated Financial Statements.

                                      121
<PAGE>

                     CCHP III CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

 Organization

   CCHP III Corporation (the "Company") was incorporated in the state of
Delaware on November 23, 1998 as a wholly owned subsidiary of Crestline
Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a
publicly traded company when Host Marriott Corporation ("Host Marriott")
completed its plan of reorganizing its business operations by spinning-off
Crestline to the shareholders of Host Marriott as part of a series of
transactions pursuant to which Host Marriott converted into a real estate
investment trust ("REIT").

   On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 31 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. During 1999, Host
Marriott sold two of the hotels and terminated the leases on those hotels. As
of December 31, 1999, the Company leased 29 full-service hotels from Host
Marriott.

   The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.

 Principles of Consolidation

   The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.

 Fiscal Year

   The Company's fiscal year ends on the Friday nearest December 31.

 Cash and Cash Equivalents

   The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase as cash equivalents.

 Restricted Cash

   In connection with the lender requirements of one of the leased hotels, the
Company is required to maintain a separate account with the lender on behalf
of the Company for the operating profit and incentive management fees of the
hotel. Following the annual audit, amounts will be distributed to the hotel's
manager and to the Company, in accordance with the loan agreement.

 Revenues

   The Company records the gross property-level revenues generated by the
hotels as revenues.

                                      122
<PAGE>

                     CCHP III CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


 Use of Estimates in the Preparation of Financial Statements

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Note 2. Leases

 Hotel Leases

   The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 31 full-service hotels. Each hotel lease has an initial
term of nine years. The hotel leases generally have four seven-year renewal
options at the option of the Company, however, Host Marriott may terminate any
unexercised renewal options. The Tenant Subsidiaries are required to pay the
greater of (i) a minimum rent specified in each hotel lease or (ii) a
percentage rent based upon a specified percentage of aggregate revenues from
the hotel, including room revenues, food and beverage revenues, and other
income, in excess of specified thresholds. The amount of minimum rent is
increased each year based upon 50% of the increase in CPI during the previous
twelve months. Percentage rent thresholds are increased each year based on a
blend of the increases in CPI and the Employment Cost Index during the
previous twelve months. The hotel leases generally provide for a rent
adjustment in the event of damage, destruction, partial taking or certain
capital expenditures. The rent during any renewal periods will be negotiated
at fair market value at the time the renewal option is exercised.

   The Tenant Subsidiaries are responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries are responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott is responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.

   In the event that Host Marriott disposes of a hotel free and clear of the
hotel lease, Host Marriott would generally have to pay a termination fee equal
to the fair market value of the Company's leasehold interest in the remaining
term of the hotel lease using a discount rate of 12%. Alternatively, Host
Marriott would be entitled to (i) substitute a comparable hotel for any hotel
that is sold, with the terms agreed to by the Company, or (ii) sell the hotel
subject to the hotel lease, subject to the Company's approval under certain
circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve of Crestline's leases
without having to pay a termination fee. During 1999, Host Marriott exercised
its right to terminate three of Crestline's hotel leases, however, none of
these were the Company's hotel leases. Conversely, Crestline may terminate up
to twelve full-service hotel leases without penalty upon 180 days notice to
Host Marriott. During 1999, Crestline exercised its right to terminate three
of the Company's hotel leases, as well as two additional Crestline hotel
leases. These hotel leases will terminate in 2000, 180 days after each
respective notification date. In 1999, Host Marriott terminated two of the
Company's hotel leases with no termination fee as stipulated in those specific
lease agreements.

   As a result of the recent tax legislation discussed below, Host Marriott
may purchase all, but not less than all, of its hotel leases with Crestline
beginning January 1, 2001 with the purchase price calculated as discussed
above. The payment of the termination fee will be payable in cash or, subject
to certain conditions, shares of Host Marriott common stock at the election of
Host Marriott.


                                      123
<PAGE>

                     CCHP III CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

   For those hotels where Marriott International is the manager, it has a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.

 FF&E Leases

   Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"), the
Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally range from two to three years and rent under the FF&E Leases
is a fixed amount. The Company will have the option at the expiration of the
FF&E Lease term to either (i) renew the FF&E Leases for consecutive one-year
renewal terms at fair market rental rate, or (ii) purchase the Excess FF&E for
a price equal to its fair market value. If the Company does not exercise its
purchase or renewal option, the Company is required to pay a termination fee
equal to approximately one month's rent.

 Guaranty and Pooling Agreement

   In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provides a full guarantee and Crestline
provides a limited guarantee of all of the hotel lease obligations.

   The cumulative limit of Crestline's guarantee obligation is the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement is
reduced to zero, the Company can terminate the agreement and Host Marriott can
terminate the Company's hotel leases without penalty.

   All of the Company's leases are cross-defaulted and the Company's
obligations under the guaranty are secured by all the funds received from its
Tenant Subsidiaries.

 Recent Tax Legislation

   On December 17, 1999 President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effect January 1, 2001, will allow a REIT to lease hotels to a "taxable REIT
subsidiary" if the hotel is operated and managed on behalf of such subsidiary
by an independent third party. A taxable REIT subsidiary is a corporation that
is owned more than 35 percent by a REIT. This law will enable Host Marriott,
beginning in 2001 to lease its hotels to a taxable REIT subsidiary. Host
Marriott may, at its discretion, elect to terminate the Company's leases,
beginning in 2001, and pay termination fees determined according to formulas
specified in the leases. If Host Marriott elects to terminate the full-service
hotel leases, it would have to terminate all of Crestline's full-service hotel
leases.

                                      124
<PAGE>

                     CCHP III CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   Future minimum annual rental commitments for all non-cancelable leases as
of December 31, 1999 are as follows (in thousands):

<TABLE>
   <S>                                                              <C>
   2000............................................................ $  162,014
   2001............................................................    155,465
   2002............................................................    155,465
   2003............................................................    155,465
   2004............................................................    155,465
   Thereafter......................................................    466,395
                                                                    ----------
     Total minimum lease payments.................................. $1,250,269
                                                                    ==========
   Lease expense for 1999 consisted of the following (in
    thousands):
   Base rent....................................................... $  168,910
   Percentage rent.................................................    126,653
                                                                    ----------
                                                                    $  295,563
                                                                    ==========
</TABLE>

Note 3. Working Capital Notes

   Upon the commencement of the hotel leases, the Company purchased the
working capital of the leased hotels from Host Marriott for $22,046,000 with
the purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
Upon termination of the hotel lease, the Company will sell Host Marriott the
existing working capital at its current value. To the extent the working
capital delivered to Host Marriott is less than the value of the note, the
Company will pay Host Marriott the difference in cash. However, to the extent
the working capital delivered to Host Marriott exceeds the value of the note,
Host Marriott will pay the Company the difference in cash. As of December 31,
1999, the outstanding balance of the working capital notes was $21,697,000.

   Debt maturities at December 31, 1999 are as follows (in thousands):

<TABLE>
   <S>                                                                   <C>
   2000................................................................. $   --
   2001.................................................................     --
   2002.................................................................     --
   2003.................................................................     --
   2004.................................................................     --
   Thereafter...........................................................  21,697
                                                                         -------
                                                                         $21,697
                                                                         =======
</TABLE>

   Cash paid for interest expense in 1999 totaled $1,042,000.

Note 4. Management Agreements

   All of the Company's hotels are operated by hotel management companies
under long-term hotel management agreements between Host Marriott and hotel
management companies.

 Assignment of Management Agreements

   The existing management agreements were assigned to the Tenant Subsidiaries
upon the execution of the hotel leases for the term of each corresponding
hotel lease. The Tenant Subsidiaries are obligated to perform all of the
obligations of Host Marriott under the hotel management agreements including
payment of fees due under the management agreements other than certain
obligations including payment of property taxes, property casualty

                                      125
<PAGE>

                     CCHP III CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

insurance and ground rent, maintaining a reserve fund for FF&E replacements
and capital expenditures for which Host Marriott retains responsibility.

 Marriott International Management Agreements

   Marriott International manages 18 of the 29 hotels under long-term
management agreements assigned to the Tenant Subsidiaries, generally for an
initial term of 15 to 20 years with renewal terms at the option of Marriott
International of up to an additional 16 to 30 years. The management agreements
generally provide for payment of base management fees equal to one to four
percent of revenues and incentive management fees generally equal to 20% to
50% of Operating Profit (as defined in the management agreements) over a
priority return (as defined) to the Tenant Subsidiaries, with total incentive
management fees not to exceed 20% of cumulative Operating Profit, or 20% of
current year Operating Profit.

   Pursuant to the terms of the management agreements, Marriott International
is required to furnish the hotels with certain services ("Chain Services")
which are generally provided on a central or regional basis to all hotels in
the Marriott International hotel system. Chain Services include central
training, advertising and promotion, a national reservation system,
computerized payroll and accounting services, and such additional services as
needed which may be more efficiently performed on a centralized basis. Costs
and expenses incurred in providing such services are allocated among all
domestic hotels managed, owned or leased by Marriott International or its
subsidiaries. In addition, the Company's hotels also participate in the
Marriott Rewards program. The cost of this program is charged to all hotels in
the Marriott hotel system.

 Ritz-Carlton Hotel Management Agreements

   The Ritz-Carlton Hotel Company, LLC ("Ritz-Carlton"), an affiliate of
Marriott International, manages three of the leased hotels under long-term
Hotel Management Agreements assigned to the Company. These agreements have an
initial term of 15 to 25 years with renewal terms at the option of Ritz-
Carlton of up to an additional 10 to 40 years. Base Management fees vary from
two to four percent of revenues and incentive management fees are generally
equal to 20% of available cash flow or operating profit, up to a maximum of
2.1% of revenues, as defined in the agreements.

 Other Hotel Management Agreements

   The Company's remaining eight hotels are managed by other hotel management
companies. Two of the hotels are managed by Swissotel Management (USA) LLC,
one is managed by the Hyatt Corporation, and the remaining five hotels are
managed by other independent hotel management companies under the "Marriott"
brand pursuant to franchise agreements. The managers of the hotels provide
similar services as Marriott International under its management agreements and
receive base management fees, generally calculated as a percentage of
revenues, and in most cases, incentive management fees, which are generally
calculated as a percentage of operating profits.

   The Company has the option to terminate certain management agreements if
specified performance thresholds are not satisfied, with the consent of Host
Marriott under certain conditions. No agreement with respect to a single
lodging facility is cross-collateralized or cross-defaulted to any other
agreement and a single agreement may be canceled under certain conditions,
although such cancellation will not trigger the cancellation of any other
agreement.

 Franchise Agreements

   Five of the Company's hotels are managed under franchise agreements between
Host Marriott and Marriott International for terms ranging from 15 to 30
years. In connection with the assignment of the corresponding

                                      126
<PAGE>

                     CCHP III CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

management agreement, the Tenant Subsidiaries assumed the franchise agreements
for these hotels and will be the franchisee for the term of the corresponding
hotel lease. Pursuant to the franchise agreements, the Tenant Subsidiaries
generally pay a franchise fee based on a percentage of room revenues and food
and beverage revenues as well as certain other fees for advertising and
reservations. Franchise fees for room revenues vary from four to six percent,
while fees for food and beverage revenues vary from two to three percent of
revenues.

Note 5. Income Taxes

   The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This allocation method results in Federal and net state tax expense allocated
for the period presented that is substantially equal to the expense that would
have been recognized if the Company had filed separate tax returns.

   The provision for income taxes for 1999 consists of the following (in
thousands):

<TABLE>
   <S>                                                                   <C>
   Current--Federal..................................................... $2,792
       --State..........................................................    478
                                                                         ------
                                                                          3,270
                                                                         ------
   Deferred--Federal....................................................    292
       --State..........................................................     50
                                                                         ------
                                                                            342
                                                                         ------
                                                                         $3,612
                                                                         ======
</TABLE>

   A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate for 1999 follows:

<TABLE>
   <S>                                                                     <C>
   Statutory federal tax rate............................................. 35.0%
   State income taxes, net of federal tax benefit.........................  6.0
                                                                           ----
                                                                           41.0%
                                                                           ====
</TABLE>

   As of December 31, 1999, the Company had no deferred tax assets. The tax
effect of the temporary differences that gives rise to the Company's deferred
tax liability is attributable to the hotel working capital.

                                      127
<PAGE>

                      CCHP IV CORPORATION AND SUBSIDIARIES

                       CONSOLIDATED FINANCIAL STATEMENTS

                               December 31, 1999

              With Independent Public Accountants' Report Thereon

                                      128
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To CCHP IV Corporation:

   We have audited the accompanying consolidated balance sheet of CCHP IV
Corporation and its subsidiaries (a Maryland corporation) as of December 31,
1999, and the related consolidated statements of operations, shareholder's
equity and cash flows for the fiscal year ended December 31, 1999. These
consolidated financial statements are the responsibility of CCHP IV
Corporation's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.

   We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

   In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of CCHP IV
Corporation and its subsidiaries as of December 31, 1999 and the results of
their operations and their cash flows for the fiscal year then ended in
conformity with accounting principles generally accepted in the United States.

                                          Arthur Andersen LLP

Vienna, Virginia
February 24, 2000

                                      129
<PAGE>

                      CCHP IV CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                            As Of December 31, 1999
                       (in thousands, except share data)

<TABLE>
<S>                                                                     <C>
                                ASSETS
Current assets
  Cash and cash equivalents............................................ $ 3,487
  Due from hotel managers..............................................  14,571
  Due from Crestline Capital...........................................   3,487
                                                                        -------
                                                                         21,545
Hotel working capital..................................................  16,522
                                                                        -------
                                                                        $38,067
                                                                        =======

                 LIABILITIES AND SHAREHOLDER'S EQUITY

Current liabilities
  Lease payable to Host Marriott....................................... $20,348
  Other................................................................     456
                                                                        -------
                                                                         20,804
Hotel working capital notes payable to Host Marriott...................  16,522
Deferred income taxes..................................................     741
                                                                        -------
    Total liabilities..................................................  38,067
                                                                        -------
Shareholder's equity
  Common stock (100 shares issued at $1.00 par value)..................     --
  Retained earnings....................................................     --
    Total shareholder's equity.........................................     --
                                                                        -------
                                                                        $38,067
                                                                        =======
</TABLE>



                See Notes to Consolidated Financial Statements.

                                      130
<PAGE>

                      CCHP IV CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

                      Fiscal Year Ended December 31, 1999
                                 (in thousands)

<TABLE>
<S>                                                                    <C>
REVENUES
  Rooms............................................................... $578,321
  Food and beverage...................................................  333,120
  Other...............................................................   77,368
                                                                       --------
    Total revenues....................................................  988,809
                                                                       --------
OPERATING COSTS AND EXPENSES
Property-level operating costs and expenses
  Rooms...............................................................  129,051
  Food and beverage...................................................  234,310
  Other...............................................................  231,547
Other operating costs and expenses
  Lease expense to Host Marriott......................................  316,654
  Management fees.....................................................   66,514
                                                                       --------
    Total operating costs and expenses................................  978,076
                                                                       --------
OPERATING PROFIT BEFORE CORPORATE EXPENSES AND INTEREST...............   10,733
Corporate expenses....................................................   (1,449)
Interest expense......................................................     (846)
Interest income.......................................................       16
                                                                       --------
INCOME BEFORE INCOME TAXES............................................    8,454
Provision for income taxes............................................   (3,466)
                                                                       --------
NET INCOME............................................................ $  4,988
                                                                       ========
</TABLE>



                See Notes to Consolidated Financial Statements.

                                      131
<PAGE>

                      CCHP IV CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY

                      Fiscal Year Ended December 31, 1999
                                 (in thousands)

<TABLE>
<CAPTION>
                                                         Common Retained
                                                         Stock  Earnings Total
                                                         ------ -------- ------
<S>                                                      <C>    <C>      <C>
Balance, January 1, 1999................................  $--    $  --   $  --
  Dividend to Crestline Capital.........................   --    (4,988) (4,988)
  Net income............................................   --     4,988   4,988
                                                          ----   ------  ------
Balance, December 31, 1999..............................  $--    $  --   $  --
                                                          ====   ======  ======
</TABLE>






                See Notes to Consolidated Financial Statements.

                                      132
<PAGE>

                      CCHP IV CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

                      Fiscal Year Ended December 31, 1999
                                 (in thousands)

<TABLE>
<S>                                                                     <C>
OPERATING ACTIVITIES
Net income............................................................. $ 4,988
Change in amounts due from hotel managers.............................. (14,124)
Change in lease payable to Host Marriott...............................  20,348
Changes in other operating accounts....................................     750
                                                                        -------
  Cash from operations.................................................  11,962
                                                                        -------
INVESTING ACTIVITIES...................................................     --
                                                                        -------
FINANCING ACTIVITIES
Amounts advanced to Crestline Capital..................................  (3,487)
Dividend to Crestline Capital..........................................  (4,988)
                                                                        -------
  Cash used in financing activities....................................  (8,475)
                                                                        -------
Increase in cash and cash equivalents..................................   3,487
Cash and cash equivalents, beginning of year...........................     --
                                                                        -------
Cash and cash equivalents, end of year................................. $ 3,487
                                                                        =======
</TABLE>





                See Notes to Consolidated Financial Statements.

                                      133
<PAGE>

                     CCHP IV CORPORATION AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

 Organization

   CCHP IV Corporation (the "Company") was incorporated in the state of
Delaware on November 23, 1998 as a wholly owned subsidiary of Crestline
Capital Corporation ("Crestline"). On December 29, 1998, Crestline became a
publicly traded company when Host Marriott Corporation ("Host Marriott")
completed its plan of reorganizing its business operations by spinning-off
Crestline to the shareholders of Host Marriott as part of a series of
transactions pursuant to which Host Marriott converted into a real estate
investment trust ("REIT").

   On December 31, 1998, wholly owned subsidiaries of the Company (the "Tenant
Subsidiaries") entered into lease agreements with Host Marriott to lease 27 of
Host Marriott's full-service hotels with the existing management agreements of
the leased hotels assigned to the Tenant Subsidiaries. As of December 31,
1999, the Company leased 27 full-service hotels from Host Marriott.

   The Company operates as a unit of Crestline, utilizing Crestline's
employees, insurance and administrative services since the Company does not
have any employees. Certain direct expenses are paid by Crestline and charged
directly or allocated to the Company. Certain general and administrative costs
of Crestline are allocated to the Company, using a variety of methods,
principally including Crestline's specific identification of individual costs
and otherwise through allocations based upon estimated levels of effort
devoted by general and administrative departments to the Company or relative
measures of the size of the Company based on revenues. In the opinion of
management, the methods for allocating general and administrative expenses and
other direct costs are reasonable.

 Principles of Consolidation

   The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions and balances
between the Company and its subsidiaries have been eliminated.

 Fiscal Year

   The Company's fiscal year ends on the Friday nearest December 31.

 Cash and Cash Equivalents

   The Company considers all highly liquid investments with a maturity of
three months or less at date of purchase as cash equivalents.

 Revenues

   The Company records the gross property-level revenues generated by the
hotels as revenues.

 Use of Estimates in the Preparation of Financial Statements

   The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

                                      134
<PAGE>

                     CCHP IV CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 2. Leases

 Hotel Leases

   The Tenant Subsidiaries entered into leases with Host Marriott effective
January 1, 1999 for 27 full-service hotels. Each hotel lease has an initial
term of ten years. The hotel leases generally have four seven-year renewal
options at the option of the Company, however, Host Marriott may terminate any
unexercised renewal options. The Tenant Subsidiaries are required to pay the
greater of (i) a minimum rent specified in each hotel lease or (ii) a
percentage rent based upon a specified percentage of aggregate revenues from
the hotel, including room revenues, food and beverage revenues, and other
income, in excess of specified thresholds. The amount of minimum rent is
increased each year based upon 50% of the increase in CPI during the previous
twelve months. Percentage rent thresholds are increased each year based on a
blend of the increases in CPI and the Employment Cost Index during the
previous twelve months. The hotel leases generally provide for a rent
adjustment in the event of damage, destruction, partial taking or certain
capital expenditures. The rent during any renewal periods will be negotiated
at fair market value at the time this renewal option is exercised.

   The Tenant Subsidiaries are responsible for paying all of the expenses of
operating the hotels, including all personnel costs, utility costs, and
general repair and maintenance of the hotels. In addition, the Tenant
Subsidiaries are responsible for all fees payable to the hotel manager,
including base and incentive management fees, chain services payments and
franchise or system fees. Host Marriott is responsible for real estate and
personal property taxes, property casualty insurance, equipment rent, ground
lease rent, maintaining a reserve fund for FF&E replacements and capital
expenditures.

   In the event that Host Marriott disposes of a hotel free and clear of the
hotel lease, Host Marriott would generally have to pay a termination fee equal
to the fair market value of the Company's leasehold interest in the remaining
term of the hotel lease using a discount rate of 12%. Alternatively, Host
Marriott would be entitled to (i) substitute a comparable hotel for any hotel
that is sold, with the terms agreed to by the Company, or (ii) sell the hotel
subject to the hotel lease, subject to the Company's approval under certain
circumstances, without having to pay a termination fee. In addition, Host
Marriott also has the right to terminate up to twelve of Crestline's leases
without having to pay a termination fee. During 1999, Host Marriott exercised
its right to terminate three of Crestline's hotel leases, however, none of
these were the Company's hotel leases. Conversely, Crestline may terminate up
to twelve full-service hotel leases without penalty upon 180 days notice to
Host Marriott. During 1999, Crestline exercised its right to terminate five of
its hotel leases, however, none of these were the Company's hotel leases.

   As a result of the recent tax legislation discussed below, Host Marriott
may purchase all, but not less than all, of its hotel leases with Crestline
beginning January 1, 2001 with the purchase price calculated as discussed
above. The payment of the termination fee will be payable in cash or, subject
to certain conditions, shares of Host Marriott common stock at the election of
Host Marriott.

   For those hotels where Marriott International is the manager, it has a
noneconomic membership interest with certain limited voting rights in the
Tenant Subsidiaries.

 FF&E Leases

   Prior to entering into the hotel leases, if the average tax basis of a
hotel's FF&E and other personal property exceeded 15% of the aggregate average
tax basis of the hotel's real and personal property (the "Excess FF&E"), the
Tenant Subsidiaries and affiliates of Host Marriott entered into lease
agreements (the "FF&E Leases") for the Excess FF&E. The terms of the FF&E
Leases generally range from two to three years and rent under the FF&E Leases
is a fixed amount. The Company will have the option at the expiration of the
FF&E Lease term to

                                      135
<PAGE>

                     CCHP IV CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

either (i) renew the FF&E Leases for consecutive one-year renewal terms at
fair market rental rate, or (ii) purchase the Excess FF&E for a price equal to
its fair market value. If the Company does not exercise its purchase or
renewal option, the Company is required to pay a termination fee equal to
approximately one month's rent.

 Guaranty and Pooling Agreement

   In connection with entering into the hotel leases, the Company, Crestline
and Host Marriott, entered into a pool guarantee and a pooling and security
agreement by which the Company provides a full guarantee and Crestline
provides a limited guarantee of all of the hotel lease obligations.

   The cumulative limit of Crestline's guarantee obligation is the greater of
ten percent of the aggregate rent payable for the immediately preceding fiscal
year under all of the Company's hotel leases or ten percent of the aggregate
rent payable under all of the Company's hotel leases for 1999. In the event
that Crestline's obligation under the pooling and guarantee agreement is
reduced to zero, the Company can terminate the agreement and Host Marriott can
terminate the Company's hotel leases without penalty.

   All of the Company's leases are cross-defaulted and the Company's
obligations under the guaranty are secured by all the funds received from its
Tenant Subsidiaries.

 Recent Tax Legislation

   On December 17, 1999 President Clinton signed the Work Incentives
Improvement Act of 1999. Included in this legislation are provisions that,
effect January 1, 2001, will allow a REIT to lease hotels to a "taxable REIT
subsidiary" if the hotel is operated and managed on behalf of such subsidiary
by an independent third party. A taxable REIT subsidiary is a corporation that
is owned more than 35 percent by a REIT. This law will enable Host Marriott,
beginning in 2001 to lease its hotels to a taxable REIT subsidiary. Host
Marriott may, at its discretion, elect to terminate the Company's leases,
beginning in 2001, and pay termination fees determined according to formulas
specified in the leases. If Host Marriott elects to terminate the full-service
hotel leases, it would have to terminate all of Crestline's full-service hotel
leases.

   Future minimum annual rental commitments for all non-cancelable leases as
of December 31, 1999 are as follows (in thousands):

<TABLE>
   <S>                                                              <C>
   2000............................................................ $  186,420
   2001............................................................    186,420
   2002............................................................    186,420
   2003............................................................    186,420
   2004............................................................    186,420
   Thereafter......................................................    745,679
                                                                    ----------
     Total minimum lease payments.................................. $1,677,779
                                                                    ==========
   Lease expense for 1999 consisted of the following (in
    thousands):
   Base rent....................................................... $  183,048
   Percentage rent.................................................    133,606
                                                                    ----------
                                                                    $  316,654
                                                                    ==========
</TABLE>

                                      136
<PAGE>

                     CCHP IV CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


Note 3. Working Capital Notes

   Upon the commencement of the hotel leases, the Company purchased the
working capital of the leased hotels from Host Marriott for $16,522,000 with
the purchase price evidenced by notes that bear interest at 5.12%. Interest on
each note is due simultaneously with the rent payment of each hotel lease. The
principal amount of each note is due upon the termination of each hotel lease.
Upon termination of the hotel lease, the Company will sell Host Marriott the
existing working capital at its current value. To the extent the working
capital delivered to Host Marriott is less than the value of the note, the
Company will pay Host Marriott the difference in cash. However, to the extent
the working capital delivered to Host Marriott exceeds the value of the note,
Host Marriott will pay the Company the difference in cash. As of December 31,
1999, the outstanding balance of the working capital notes was $16,522,000

   Debt maturities at December 31, 1999 are as follows (in thousands):

<TABLE>
   <S>                                                                   <C>
   2000................................................................. $   --
   2001.................................................................     --
   2002.................................................................     --
   2003.................................................................     --
   2004.................................................................     --
   Thereafter...........................................................  16,522
                                                                         -------
                                                                         $16,522
                                                                         =======
</TABLE>

   Cash paid for interest expense in 1999 totaled $781,000.

Note 4. Management Agreements

   All of the Company's hotels are operated by hotel management companies
under long-term hotel management agreements between Host Marriott and hotel
management companies.

 Assignment of Management Agreements

   The existing management agreements were assigned to the Tenant Subsidiaries
upon the execution of the hotel leases for the term of each corresponding
hotel lease. The Tenant Subsidiaries are obligated to perform all of the
obligations of Host Marriott under the hotel management agreements including
payment of fees due under the management agreements other than certain
obligations including payment of property taxes, property casualty insurance
and ground rent, maintaining a reserve fund for FF&E replacements and capital
expenditures for which Host Marriott retains responsibility.

 Marriott International Management Agreements

   Marriott International manages 20 of the 27 hotels under long-term
management agreements assigned to the Tenant Subsidiaries, generally for an
initial term of 15 to 20 years with renewal terms at the option of Marriott
International of up to an additional 16 to 30 years. The management agreements
generally provide for payment of base management fees equal to one to four
percent of revenues and incentive management fees generally equal to 20% to
50% of Operating Profit (as defined in the management agreements) over a
priority return (as defined) to the Tenant Subsidiaries, with total incentive
management fees not to exceed 20% of cumulative Operating Profit, or 20% of
current year Operating Profit.

   Pursuant to the terms of the management agreements, Marriott International
is required to furnish the hotels with certain services ("Chain Services")
which are generally provided on a central or regional basis to all hotels

                                      137
<PAGE>

                     CCHP IV CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

in the Marriott International hotel system. Chain Services include central
training, advertising and promotion, a national reservation system,
computerized payroll and accounting services, and such additional services as
needed which may be more efficiently performed on a centralized basis. Costs
and expenses incurred in providing such services are allocated among all
domestic hotels managed, owned or leased by Marriott International or its
subsidiaries. In addition, the Company's hotels also participate in the
Marriott Rewards program. The cost of this program is charged to all hotels in
the Marriott hotel system.

 Ritz-Carlton Hotel Management Agreements

   The Ritz-Carlton Hotel Company, LLC ("Ritz-Carlton"), an affiliate of
Marriott International, manages three of the leased hotels under long-term
Hotel Management Agreements assigned to the Company. These agreements have an
initial term of 15 to 25 years with renewal terms at the option of Ritz-
Carlton of up to an additional 10 to 40 years. Base Management fees vary from
two to four percent of revenues and incentive management fees are generally
equal to 20% of available cash flow or operating profit, as defined in the
agreements.

 Other Hotel Management Agreements

   The Company's remaining four hotels are managed by other hotel management
companies. Two of the hotels are managed by the Hyatt Corporation, one of the
hotels is managed by Swissotel Management (USA) LLC, and one is managed by
Four Seasons Hotel Limited. The managers of the hotels provide similar
services as Marriott International under its management agreements and receive
base management fees, generally calculated as a percentage of revenues, and in
most cases, incentive management fees, which are generally calculated as a
percentage of operating profits.

   The Company has the option to terminate certain management agreements if
specified performance thresholds are not satisfied, with the consent of Host
Marriott under certain conditions. No agreement with respect to a single
lodging facility is cross-collateralized or cross-defaulted to any other
agreement and a single agreement may be canceled under certain conditions,
although such cancellation will not trigger the cancellation of any other
agreement.

Note 5. Income Taxes

   The Company is included in the consolidated Federal income tax return of
Crestline and its affiliates (the "Group"). Tax expense is allocated to the
Company as a member of the Group based upon the relative contribution to the
Group's consolidated taxable income/loss and changes in temporary differences.
This allocation method results in Federal and net state tax expense allocated
for the period presented that is substantially equal to the expense that would
have been recognized if the Company had filed separate tax returns.

   The provision for income taxes for 1999 consists of the following (in
thousands):

<TABLE>
   <S>                                                                    <C>
   Current--Federal...................................................... $2,326
       --State...........................................................    399
                                                                          ------
                                                                           2,725
                                                                          ------
   Deferred--Federal.....................................................    633
       --State...........................................................    108
                                                                          ------
                                                                             741
                                                                          ------
                                                                          $3,466
                                                                          ======
</TABLE>

                                      138
<PAGE>

                     CCHP IV CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


   A reconciliation of the statutory Federal tax rate to the Company's
effective income tax rate for 1999 follows:

<TABLE>
   <S>                                                                     <C>
   Statutory federal tax rate............................................. 35.0%
   State income taxes, net of federal tax benefit.........................  6.0
                                                                           ----
                                                                           41.0%
                                                                           ====
</TABLE>

   As of December 31, 1999, the Company had no deferred tax assets. The tax
effect of the temporary differences that gives rise to the Company's deferred
tax liability is attributable to the hotel working capital.

                                      139
<PAGE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

   None.

                                   PART III

   The information called for by Items 10-13 is incorporated by reference from
Host Marriott Corporation's 2000 Annual Meeting of Shareholders Notice and
Proxy Statement (to be filed pursuant to Regulation 14A not later than 120
days after the close of fiscal year).

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

                                    PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

 (a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT

    (i) FINANCIAL STATEMENTS

     All financial statements of the registrant as set forth under Item 8 of
  this Report on Form 10-K.

     (ii) FINANCIAL STATEMENT SCHEDULES

     The following financial information is filed herewith on the pages
  indicated.

     Financial Schedules:

<TABLE>
<CAPTION>
                                                                         Page
                                                                      ----------
     <C>  <S>                                                         <C>
     III. Real Estate and Accumulated Depreciation..................  S-1 to S-2
</TABLE>

   All other schedules are omitted because they are not applicable or the
required information is included in the consolidated financial statements or
notes thereto.

      (iii) EXHIBITS

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
   2.1   Agreement and Plan of Merger by and among Host Marriott Corporation,
         HMC Merger Corporation and Host Marriott L.P. (incorporated by
         reference to Host Marriott Corporation Registration Statement No. 333-
         64793).

   3.4   Articles of Amendment and Restatement of Articles of Incorporation of
         Host Marriott, L.P. (incorporated by reference to Host Marriott, L.P.
         Registration Statement No. 333-64793).
</TABLE>

                                      140
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
  4.2    Guarantee Agreement, dated December 2, 1996, between Host Marriott
         Corporation and IBJ Schroeder Bank & Trust Company, as Guarantee
         Trustee (incorporated by reference to Exhibit 4.6 of Host Marriott
         Corporation Registration Statement No. 333-19923).

  4.4    Indenture by and among HMC Acquisition Properties, Inc., as Issuer,
         HMC SFO, Inc., as Subsidiary Guarantors, and Marine Midland Bank, as
         Trustee (incorporated by reference to Host Marriott Corporation
         Registration Statement No. 333-00768).

  4.5    Indenture by and among HMH Properties, Inc., as Issuer, HMH Courtyard
         Properties, Inc., HMC Retirement Properties, Inc., Marriott Financial
         Services, Inc., Marriott SBM Two Corporation, HMH Pentagon Corporation
         and Host Airport Hotels, Inc., as Subsidiary Guarantors, and Marine
         Midland Bank, as Trustee (incorporated by reference to Host Marriott
         Corporation Registration Statement 33-95058).

  4.6    Indenture by and among HMH Properties, Inc., as Issuer, and the
         Subsidiary Guarantors named therein, and Marine Midland Bank, as
         Trustee (incorporated by reference to Host Marriott Corporation
         Current Report on Form 8-K dated August 6, 1998).

  4.7    Indenture for the 6 3/4% Convertible Debentures, dated December 2,
         1996, between Host Marriott Corporation and IBJ Schroeder Bank & Trust
         Company, as Indenture Trustee (incorporated by reference to Exhibit
         4.3 of Host Marriott Corporation Registration Statement No. 333-
         19923).

  4.8    Amended and Restated Trust Agreement, dated December 2, 1996, among
         Host Marriott Corporation, IBJ Schroeder Bank & Trust Company, as
         Property Trustee, Delaware Trust Capital Management, Inc., as Delaware
         Trustee, and Robert E. Parsons, Jr., Bruce D. Wardinski and
         Christopher G. Townsend, as Administrative Trustees (incorporated by
         reference to Exhibit 4.2 of Host Marriott Corporation Registration
         Statement No. 333-19923).

  4.9    Amended and Restated Trust Agreement, dated as of December 29, 1998,
         among HMC Merger Corporation, as Depositor, IBJ Schroder Bank & Trust
         Company, as Property Trustee, Delaware Trust Capital Management, Inc.,
         as Delaware Trustee, and Robert E. Parsons, Jr., Ed Walter and
         Christopher G. Townsend, as Administrative Trustees (incorporated by
         reference to Host Marriott Corporation 1998 Annual Report on Form 10-K
         filed March 26, 1999).

 10.1    Second Amended and Restated Agreement of Limited Partnership of Host
         Marriott, L.P. (incorporated by reference to Exhibit 3.1 of Host
         Marriott, L.P. Registration Statement No. 333-55807).

 10.2    Indenture between Host Marriott L.P., as Issuer, and Marine Midland
         Bank, as Indenture Trustee, and Form of 6.56% Callable Note due
         December 15, 2005 (incorporated by reference to Exhibit 4.1 of Host
         Marriott, L.P. Registration Statement No. 333-55807).

 10.3    Amended and Restated Credit Agreement dated as of June 19, 1997 and
         Amended and Restated as of August 5, 1998 among Host Marriott, L.P.,
         Host Marriott Hospitality, Inc., HMH Properties, Inc., Host Marriott,
         L.P., HMC Capital Resources Corp., Various Banks, Wells Fargo Bank,
         National Association, The Bank of Nova Scotia and Credit Lyonnais New
         York Branch, as Co-Arrangers, and Bankers Trust Company as Arranger
         and Administrative Agent (incorporated by reference to Host Marriott
         Corporation Current Report on Form 8-K dated September 11, 1998).

 10.4    First Amendment and Waiver of Amended and Restated Credit Agreement
         dated as of June 19, 1997 and Amended and Restated as of August 5,
         1998, among Host Marriott, L.P., Host Marriott Hospitality Inc., HMH
         Properties, Inc., Host Marriott Corporation, HMC Capital Resources
         Corp., Various Banks, Wells Fargo Bank, National Association, The Bank
         of Nova Scotia and Credit Lyonnais New York Branch, as Co-Arrangers
         and Bankers Trust Company as Arranger and Administrative Agent dated
         as of November 25, 1998 (incorporated by reference to Host Marriott
         Corporation 1998 Annual Report on Form 10-K filed March 26, 1999).

</TABLE>


                                      141
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 10.5    Second Amendment and Consent to Credit Agreement of Amended and
         Restated Credit Agreement dated as of June 19, 1997 and Amended and
         Restated as of August 5, 1998, among Host Marriott Corporation, Host
         Marriott Hospitality Inc., HMH Properties, Inc., Host Marriott
         Corporation, HMC Capital Resources Corp., Various Banks, Wells Fargo
         Bank, National Association, The Bank of Nova Scotia and Credit
         Lyonnais New York Branch, as Co-Arrangers and Bankers Trust Company as
         Arranger and Administrative Agent dated as of December 17, 1998
         (incorporated by reference to Host Marriott Corporation 1998 Annual
         Report on Form 10K filed March 26, 1999).

 10.6    Third Amendment and Waiver to Credit Agreement Amended and Restated
         Credit Agreement dated as of June 19, 1997 and Amended and Restated as
         of August 5, 1998, among Host Marriott Corporation, Host Marriott
         Hospitality Inc., HMH Properties, Inc., Host Marriott, L.P., HMC
         Capital Resources Corp., Various Banks, Wells Fargo Bank, National
         Association, The Bank of Nova Scotia and Credit Lyonnais New York
         Branch, as Co-Arrangers and Bankers Trust Company as Arranger and
         Administrative Agent dated as of March 15, 1999 (incorporated by
         reference to Host Marriott Corporation 1998 Annual Report on Form 10K
         filed March 26, 1999).

 10.7    Host Marriott Corporation Executive Deferred Compensation Plan
         effective as of December 29, 1998 (formerly the Marriott Corporation
         Executive Deferred Compensation Plan) (incorporated by reference to
         Host Marriott Corporation 1998 Annual Report on Form 10K filed March
         26, 1999).

 10.8    Host Marriott Corporation 1997 and Host Marriott, L.P. Comprehensive
         Incentive Stock Plan (incorporated by reference to Host Marriott
         Corporation Proxy Statement filed April 3, 1997).

 10.9    Distribution Agreement dated as of September 15, 1993 between Marriott
         Corporation and Marriott International, Inc. (incorporated by
         reference from Host Marriott Corporation Current Report on Form 8-K
         dated October 23, 1993).

 10.10   Amendment No. 1 to the Distribution Agreement dated December 29, 1995
         by and among Host Marriott Corporation, Host Marriott Services
         Corporation and Marriott International, Inc. (incorporated by
         reference to Host Marriott Corporation Current Report on Form 8-K
         dated January 16, 1996).

 10.11   Amendment No. 2 to the Distribution Agreement dated June 21, 1997 by
         and among Host Marriott Corporation, Host Marriott Services
         Corporation and Marriott International, Inc. (incorporated by
         reference to Host Marriott Corporation Registration Statement No. 333-
         64793).

 10.12   Amendment No. 3 to the Distribution Agreement dated March 3, 1998 by
         and among Host Marriott Corporation, Host Marriott Services
         Corporation and Marriott International, Inc. (incorporated by
         reference to Host Marriott Corporation Registration Statement No. 333-
         64793).

 10.13   Amendment No. 4 to the Distribution Agreement by and among Host
         Marriott, L.P. and Marriott International Inc. (incorporated by
         reference to Host Marriott Corporation Registration Statement No. 333-
         64793).

 10.14   Amendment No. 5 to the Distribution Agreement dated December 18, 1998
         by and among Host Marriott Corporation, Host Marriott Services
         Corporation and Marriott International Inc. (incorporated by reference
         to Host Marriott Corporation 1998 Annual Report on Form 10K filed
         March 26, 1999).

 10.15   Distribution Agreement dated December 22, 1995 by and between Host
         Marriott Corporation and Host Marriott Services Corporation
         (incorporated by reference to Host Marriott Corporation Current Report
         on Form 8-K dated January 16, 1996).

 10.16   Amendment to Distribution Agreement dated December 22, 1995 by and
         between Host Marriott Corporation and Host Marriott Services
         Corporation (incorporated by reference to Host Marriott Corporation
         1998 Annual Report on Form 10K filed March 26, 1999).

 10.17   Tax Sharing Agreement dated as of October 5, 1993 by and between
         Marriott Corporation and Marriott International, Inc. (incorporated by
         reference to Host Marriott Corporation Current Report on Form 8-K
         dated October 23, 1993).

</TABLE>

                                      142
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
  10.18  License Agreement dated as of December 29, 1998 by and among Host
         Marriott Corporation, Host Marriott, L.P., Marriott International,
         Inc. and Marriott Worldwide Corporation (incorporated by reference to
         Host Marriott Corporation 1998 Annual Report on Form 10K filed March
         26, 1999).

  10.19  Noncompetition Agreement between Host Marriott Corporation, Host
         Marriott, L.P. and Crestline Capital Corporation and other parties
         named therein (incorporated by reference to Host Marriott Corporation
         1998 Annual Report on Form 10K filed March 26, 1999).

  10.20  Tax Administration Agreement dated as of October 8, 1993 by and
         between Marriott Corporation and Marriott International, Inc.
         (incorporated by reference to Host Marriott Corporation Current Report
         on Form 8-K dated October 23, 1993).

  10.21  Restated Noncompetition Agreement by and among Host Marriott
         Corporation, Marriott International, Inc. and Sodexho Marriott
         Services, Inc. (incorporated by reference to Host Marriott Corporation
         Registration Statement No. 333-64793).

  10.22  First Amendment to Restated Noncompetition Agreement by and among Host
         Marriott Corporation, Marriott International, Inc. and Sodexho
         Marriott Services, Inc. (incorporated by reference to Host Marriott
         Corporation Registration Statement No. 333-64793).

  10.23  Host Marriott Lodging Management Agreement--Marriott Hotels, Resorts
         and Hotels dated September 25, 1993 by and between Marriott
         Corporation and Marriott International, Inc. (incorporated by
         reference to Host Marriott Corporation Registration Statement No. 33-
         51707).

  10.24  Employee Benefits and Other Employment Matters Allocation Agreement
         dated as of December 29, 1995 by and between Host Marriott Corporation
         and Host Marriott Services Corporation (incorporated by reference to
         Host Marriott Corporation Current Report on Form 8-K dated January 16,
         1996).

  10.25  Tax Sharing Agreement dated as of December 29, 1995 by and between
         Host Marriott Corporation and Host Marriott Services Corporation
         (incorporated by reference to Host Marriott Corporation Current Report
         on Form 8-K dated January 16, 1996).

  10.26  Host Marriott, L.P. Retirement and Savings Plan and Trust
         (incorporated by reference to Host Marriott Corporation 1998 Annual
         Report on Form 10K filed March 26, 1999).

  10.27  Contribution Agreement dated as of April 16, 1998 among Host Marriott
         Corporation, Host Marriott, L.P. and the contributors named therein,
         together with Exhibit B (incorporated by reference to Exhibit 10.18 of
         Host Marriott, L.P. Registration Statement No. 333-55807).

  10.28  Amendment No. 1 to Contribution Agreement dated May 8, 1998 among Host
         Marriott Corporation, Host Marriott, L.P. and the contributors named
         therein (incorporated by reference to Exhibit 10.19 of Host Marriott
         Registration Statement No. 333-55807).

  10.29  Amendment No. 2 to Contribution Agreement dated May 18, 1998 among
         Host Marriott Corporation, Host Marriott, L.P. and the contributors
         named therein (incorporated by reference to Exhibit 10.20 of Host
         Marriott, L.P. Registration Statement No. 333-55807).

 #10.30  Form of Lease Agreement (incorporated by reference to Host Marriott
         Corporation Registration Statement No. 333-64793).

 #10.31  Form of Management Agreement for Full-Service Hotels (incorporated by
         reference to Host Marriott Corporation Registration Statement No. 33-
         51707).

 #10.32  Form of Owner's Agreement between Host Marriott Corporation, Marriott
         International and Crestline Capital Corporation (incorporated by
         reference to Crestline Capital Corporation Registration Statement
         No. 333-64657).

</TABLE>


                                      143
<PAGE>

<TABLE>
<CAPTION>
 Exhibit
   No.                                 Description
 -------                               -----------
 <C>     <S>
 10.33   Employee Benefits and Other Employment Matters Allocation Agreement
         between Host Marriott Corporation, Host Marriott, L.P. and Crestline
         Capital Corporation (incorporated by reference to Host Marriott
         Corporation Registration Statement No. 333-64793).

 10.34   Amendment to the Employee Benefits and Other Employment Matters
         Allocation Agreement effective as of December 29, 1998 by and between
         Host Marriott Corporation, Marriott International, Sodexho Marriott
         Services, Inc., Crestline Capital Corporation and Host Marriott, L.P.
         (incorporated by reference to Host Marriott Corporation 1998 Annual
         Report on Form 10K filed March 26, 1999).

 10.35   Pool Guarantee Agreement between Host Marriott, L.P., the lessees
         referred to therein and Crestline Capital Corporation (incorporated by
         reference to Host Marriott Corporation Registration Statement
         No. 333-64793).

 10.36   Pooling and Security Agreement by and among Host Marriott Corporation
         and Crestline Capital Corporation (incorporated by reference to Host
         Marriott Corporation Registration Statement No. 333-64793).

 10.37   Amended and Restated Communities Noncompetition Agreement
         (incorporated by reference to Host Marriott Corporation Registration
         Statement No. 333-64793).

 10.38   Asset Management Agreement between Host Marriott Corporation and
         Crestline Capital Corporation (incorporated by reference to Crestline
         Capital Corporation Registration Statement No. 333-64657).

 12.1*   Computation of Ratios of Earnings to Fixed Charges.

  21*    List of Subsidiaries of Host Marriott, L.P.

 27.1*   Financial Data Schedule.
</TABLE>
--------
# Agreement filed is illustrative of numerous other agreements to which we are
   a party.
* Filed herewith.

 (b) REPORTS ON FORM 8-K

   . February 24, 2000--Report that Host Marriott Corporation and Marriott
     International have reached a non-binding understanding to resolve
     litigation involving six hotel partnerships.



                                      144
<PAGE>

                                   SIGNATURES

   Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Bethesda, State of Maryland, on March 8, 2000.

                                          Host Marriott, L.P.

                                                 Host Marriott Corporation
                                          By: _________________________________

                                          Its General Partner

                                                 /s/ Robert E. Parsons, Jr.
                                          By: _________________________________
                                                   Robert E. Parsons, Jr.
                                                Executive Vice President and
                                                  Chief Financial Officer

                               POWER OF ATTORNEY

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
        /s/ Terence C. Golden          President, Chief Executive    March 8, 2000
______________________________________  Officer and Director
          Terence C. Golden             (Principal Executive
                                        Officer)

      /s/ Robert E. Parsons, Jr.       Executive Vice President      March 8, 2000
______________________________________  and Chief Financial
        Robert E. Parsons, Jr.          Officer (Principal
                                        Financial Officer)

        /s/ Donald D. Olinger          Senior Vice President and     March 8, 2000
______________________________________  Corporate Controller
          Donald D. Olinger             (Principal Accounting
                                        Officer)

       /s/ Richard E. Marriott         Chairman of the Board of      March 8, 2000
______________________________________  Directors
         Richard E. Marriott

        /s/ R. Theodore Ammon          Director                      March 8, 2000
______________________________________
          R. Theodore Ammon

         /s/ Robert M. Baylis          Director                      March 8, 2000
______________________________________
           Robert M. Baylis

        /s/ J.W. Marriott, Jr.         Director                      March 8, 2000
______________________________________
          J.W. Marriott, Jr.

       /s/ Ann Dore McLaughlin         Director                      March 8, 2000
______________________________________
         Ann Dore McLaughlin

     /s/ Christopher J. Nassetta       Director                      March 8, 2000
______________________________________
       Christopher J. Nassetta

        /s/ John G. Schreiber          Director                      March 8, 2000
______________________________________
          John G. Schreiber

      /s/ Harry L. Vincent, Jr.        Director                      March 8, 2000
______________________________________
        Harry L. Vincent, Jr.
</TABLE>

                                      145
<PAGE>

                                                                    SCHEDULE III
                                                                     Page 1 of 3

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

                    REAL ESTATE AND ACCUMULATED DEPRECIATION

                               December 31, 1999
                                 (in millions)

<TABLE>
<CAPTION>
                                                            Gross Amount at
                            Initial Costs                  December 31, 1999
                          -----------------             ------------------------
                                            Subsequent                                           Date of
                               Buildings &     Costs         Buildings &         Accumulated  Completion of   Date   Depreciation
   Description      Debt  Land Improvements Capitalized Land Improvements Total  Depreciation Construction  Acquired     Life
-----------------  ------ ---- ------------ ----------- ---- ------------ ------ ------------ ------------- -------- ------------
<S>                <C>    <C>  <C>          <C>         <C>  <C>          <C>    <C>          <C>           <C>      <C>
Full-service
hotels:
 New York
 Marriott Marquis
 Hotel, New York,
 NY..............  $  269 $--     $  552       $ 45     $--     $  597    $  597    $(162)          1986        n/a         40
 Other full-
 service
 properties, each
 less than 5% of
 total...........  $2,040 $749    $5,510       $505     $687    $6,077    $6,764    $(677)       various    various         40
                   ------ ----    ------       ----     ----    ------    ------    -----
 Total full-
 service.........   2,309  749     6,062        550      687     6,674     7,361     (839)
 Other
 properties, each
 less than 5% of
 total...........     --    40        27        (54)     --         13        13      (14)       various        n/a    various
                   ------ ----    ------       ----     ----    ------    ------    -----
 Total...........  $2,309 $789    $6,089       $496     $687    $6,687    $7,374    $(853)
                   ====== ====    ======       ====     ====    ======    ======    =====        -------    -------    -------
</TABLE>

                                      146
<PAGE>

                                                                    SCHEDULE III
                                                                     Page 2 of 3

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

                    REAL ESTATE AND ACCUMULATED DEPRECIATION

                               December 31, 1999
                                 (in millions)

Notes:

(A) The change in total cost of properties for the fiscal years ended December
    31, 1999 and 1998, and January 2, 1998 is as follows:

<TABLE>
   <S>                                                                   <C>
   Balance at January 3, 1997........................................... $3,856
   Additions:
     Acquisitions.......................................................  1,459
     Capital expenditures...............................................    117
     Transfers from construction-in-progress............................     30
   Deductions:
     Dispositions and other.............................................   (145)
                                                                         ------
   Balance at January 2, 1998...........................................  5,317
   Additions:
     Acquisitions.......................................................  2,849
     Capital Expenditures...............................................     46
     Transfers from construction-in-progress............................     14
   Deductions:
     Dispositions and other.............................................    (91)
     Transfers to Non-Controlled Subsidiary.............................   (139)
     Transfers to Spin-Off (Crestline Capital Corporation)..............   (643)
                                                                         ------
   Balance at December 31, 1998.........................................  7,353
   Additions:
     Acquisitions.......................................................    100
     Capital expenditures...............................................     69
     Transfers from construction-in-progress............................      7
     Other..............................................................     40
   Deductions:
     Dispositions and other.............................................   (195)
                                                                         ------
   Balance at December 31, 1999......................................... $7,374
                                                                         ======
</TABLE>

                                      147
<PAGE>

                                                                    SCHEDULE III
                                                                     Page 3 of 3

                      HOST MARRIOTT, L.P. AND SUBSIDIARIES

                    REAL ESTATE AND ACCUMULATED DEPRECIATION

                               December 31, 1999
                                 (in millions)

(B) The change in accumulated depreciation and amortization of real estate
    assets for the fiscal years ended December 31, 1998, January 2, 1998 and
    January 3, 1997 is as follows:

<TABLE>
   <S>                                                                     <C>
   Balance at January 3, 1997............................................. $411
   Depreciation and amortization..........................................  126
   Dispositions and other.................................................  (31)
                                                                           ----
   Balance at January 2, 1998.............................................  506
   Depreciation and amortization..........................................  132
   Dispositions and other.................................................  (13)
   Transfers to Non-Controlled Subsidiary.................................  (29)
   Transfers to Spin-Off (Crestline Capital Corporation)..................  (21)
                                                                           ----
   Balance at December 31, 1998...........................................  575
   Depreciation and amortization..........................................  243
   Dispositions...........................................................   (4)
   Other..................................................................   39
                                                                           ----
   Balance at December 31, 1999........................................... $853
                                                                           ====
</TABLE>

(C) The aggregate cost of properties for Federal income tax purposes is
    approximately $5,221 million at December 31, 1999.

(D) The total cost of properties excludes construction-in-progress properties.

                                      148