**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D. C. 20549**

**FORM 10-K**

* *

**(Mark One)**

**ý****ANNUAL REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIESEXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31, 2003**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THESECURITIESEXCHANGE ACT OF 1934**

 

**For thetransition periodfrom             to             **

 

**Commission file number 0-24097**

 

**CNL HOSPITALITY PROPERTIES, INC.**

(Exactname of registrant as specified in its charter*)*

 

| **Maryland**                                                                       |   | **59-3396369**                        |
|------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                   |   | (I.R.S. Employer  Identification No.) |
|                                                                               |   |                                  |
| **450  South Orange Avenue   Orlando, Florida 32801**                              |
| (Address of principal  executive offices, including zip code)                      |
|                                                                               |
| Registrant’s telephone number,  including area code:  **(407) 650-1000** |
|                                                                               |
| Securities registered  pursuant to Section 12(b) of the Act:                       |

 

| **Title of each class:** |   | **Name of exchange on which  registered:** |
|--------------------------|--------|--------------------------------------------|
| None                     |   | Not Applicable                             |

 

Securities registeredpursuant to Section 12(g) of the Act:

Common Stock, $0.01 parvalue per share

(Titleof class)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or such shorter period that the registrant was required to file suchreports), and (2) has been subject to such filing requirements for the past 90days:  Yes  ý   No  o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theAct). Yes  ý   No  o

 

*Aggregate market value of the votingstock held by nonaffiliates of the registrant:*  No established market exists for theRegistrant’s shares of common stock, so there is no market value for suchshares.  Each share was originally soldat $10 per share.  Based on the $10offering price of the shares, $2,709,175,700 of our common stock was held bynon-affiliates as of February 20, 2004.

 

The number of Sharesof common stock outstanding as of February 20, 2004, was 270,937,570.

 

*DOCUMENTS INCORPORATED BY REFERENCE*

 

Registrantincorporates by reference portions of the CNL Hospitality Properties, Inc.Definitive Proxy Statement for the 2004 Annual Meeting of Stockholders (Items10, 11, 12 and 13 of Part III) to be filed no later than April 30, 2004.

 

 

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CONTENTS

 
| Part I                                                        |      |
|---------------------------------------------------------------|-----------|
|                                                          | Item  1.  | Business |   |
|                                                          | Item  2.  | Properties |   |
|                                                          | Item  3.  | Legal  Proceedings |   |
|                                                          | Item  4.  | Submission  of Matters to a Vote of Security Holders |   |
|                                                          |      |
| Part  II                                                      |      |
|                                                          | Item  5.  | Market  for Registrant’s Common Equity and Related Stockholder Matters |   |
|                                                          | Item  6.  | Selected  Financial Data |   |
|                                                          | Item  7.  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |
|                                                          | Item  7A. | Quantitative  and Qualitative Disclosures About Market Risk |   |
|                                                          | Item  8.  | Financial  Statements and Supplementary Data |   |
|                                                          | Item  9.  | Changes  in and Disagreements with Accountants on Accounting and Financial Disclosure |   |
|                                                          | Item 9A.  | Controls and  Procedures |   |
|                                                          |      |
| Part  III.                                                    |      |
|                                                          | Item  10. | Directors  and Executive Officers of the Registrant |   |
|                                                          | Item  11. | Executive  Compensation |   |
|                                                          | Item  12. | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |   |
|                                                          | Item  13. | Certain  Relationships and Related Transactions |   |
|                                                          | Item  14. | Principal  Accountant Fees and Services |   |
|                                                          |      |
| Part  IV.                                                     |      |
|                                                          | Item  15. | Exhibits,  Financial Statement Schedules and Reports on Form 8-K |   |
|                                                          |      |
| Signatures                                                    |      |
|                                                          |      |
| Certifications                                                |      |
|                                                          |      |
| Schedule  II – Valuation and Qualifying Accounts         |      |
|                                                          |      |
| Schedule  III – Real Estate and Accumulated Depreciation |      |
|                                                          |      |
| Exhibits                                                      |      |

 

1

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**PART I**

 

**Item 1****.  Business**

 

CNL HospitalityProperties, Inc. is a corporation which was organized pursuant to the laws ofthe State of Maryland on June 12, 1996 and operates for federal income taxpurposes as a real estate investment trust (a “REIT”). The terms “Company” or“Registrant” include, unless the context otherwise requires, CNL HospitalityProperties, Inc., CNL Hospitality Partners, LP, CNL Hospitality GP Corp., CNLHospitality LP Corp., each of their subsidiaries and several consolidatedpartnerships and joint ventures (see Exhibit 21 for a listing of oursubsidiaries).  Various other whollyowned subsidiaries are expected to be formed in the future, primarily forpurposes of acquiring or developing hotel and resort properties.

 

We are engagedprimarily in the acquisition, development and ownership of interests in hoteland resort properties including limited service hotels, extended stay hotels,and full service hotels and resorts, which we refer to as “Properties.”  We have retained CNL Hospitality Corp. asour advisor to provide management, acquisition, development, advisory andcertain administrative services.  As ofDecember 31, 2003, we owned interests in 130 Properties, located primarilyacross the United States with one Property, located in Montreal, Canada.  We generally lease our Properties to whollyowned taxable REIT subsidiary entities (“TRS”) and contracts with third-partymanagers to operate the Properties under affiliations with national hotel andresort brands.  Hotel and resortoperating revenues and expenses for these Properties are included in ourconsolidated results of operations.  OtherProperties are leased on a triple-net basis to unrelated third-party tenantswho operate the Properties or contract with hotel and resort managers to runtheir hotel and resort operations.  Weinclude rental income from operating leases in our consolidated results ofoperations for these Properties.  Forsome Properties, we have received various credit enhancement guarantees fromthird-party managers who, subject to limitations, have guaranteed performancelevels for Properties they manage up to varying maximum amounts.

 

We may alsoprovide mortgage loans to operators of national and regional hotel and resortbrands, however, we have not done so as of December 31, 2003.  In addition, we may invest up to a maximumof 5% of total assets in equity interests in businesses that provide servicesto or are otherwise ancillary to the lodging industry.  As of December 31, 2003, investments inthese ancillary businesses represented less than one percent of our totalassets.

 

We were formed inJune 1996, at which time we received an initial capital contribution of $0.2million from CNL Hospitality Corp. for 20,000 shares of common stock.  Since that time, through December 31, 2003,we have sold approximately 243.7 million shares of our common stock, raisingapproximately $2.4 billion of capital through five best-efforts public stockofferings.  On July 23, 2003, we filed aregistration statement on Form S-11 under the Securities Act of 1933, asamended, whereby we may offer upto an additional 400 million shares of commonstock (representing $4 billion of capital) to the public on a best-effortsbasis, which we refer to as the “2004 Offering”, including up to 50 millionshares ($500 million) which may be available to stockholders purchasing sharesthrough our reinvestment plan. If commenced, the 2004 Offering is expected tostart sometime after the completion of our current stock offering of 175million shares representing $1.75 billion of capital, which commenced onFebruary 4, 2003 which we refer to as the “2003 Offering”.  CNL Securities Corp., an affiliate of CNLHospitality Corp., is the managing dealer for our equity offerings.

 

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Since our inception our primary investment objectiveshave been to preserve, protect, and enhance our assets while (i) makingquarterly distributions; (ii) obtaining fixed income through the receipt ofbase rent, or payments on mortgage loans we have provided to other hotel andresort operators, and increasing our income (and distributions) and providingprotection against inflation through, in the case of triple-net leases, thereceipt of percentage rent and/or automatic increases in base rent; (iii)continuing to qualify as a REIT for federal income tax purposes; and (iv)providing our stockholders with liquidity of their investment within fouryears, either in whole or in part, through (a) the listing of our shares on anational securities exchange or over-the-counter market or (b) if we are unableto list our shares on a national securities exchange or over-the-counter marketwithin four years, the commencement of orderly sales of our Properties anddistribution of the proceeds thereof (outside the ordinary course of businessand consistent with our objectives of qualifying as a REIT).  As a result of the REIT Modernization Act of1999 (the “RMA”), we have expanded our activities to meet our objectiveswhereby we seek to provide increases in income (and distributions) by takingadvantage of the TRS structure allowed by the RMA.  To meet our objectives, we seek to purchase establishedProperties with stabilized cash flows or to obtain credit enhancements thatsupplement cash flow in advance of stabilization and obtain prioritypartnership positions or operating guarantees. We may not meet these investment objectives.  During the first quarter of 2004, we began to actively considervarious alternatives including a public underwritten offering of common stock,the possible the merger of us and our advisor, CNL Hospitality Corp., thelisting of our shares on a national securities exchange or over-the-countermarket, recapitalization of our current debt structure, possible mergers oracquisitions, and continuing to raise capital under the 2004 Offering.  We expect that the 2003 Offering will becompleted in March 2004.

 

For the next fouryears or until our shares are listed on a national securities exchange orover-the-counter market, we intend, to the extent consistent with our objectiveof qualifying as a REIT, to invest in additional Properties or entities owningProperties or provide mortgage loans to other hotel and resort operators ormake other permitted investments, using any proceeds from the sale of aProperty or mortgage loans provided to other hotel and resort operators or frompermitted investments that are not required to be distributed to stockholdersin order to preserve our REIT status for federal income tax purposes.  We will not sell any assets if such salewould not be consistent with our objective of qualifying as a REIT.  If the listing of our shares on a nationalsecurities exchange or over-the-counter market occurs, we intend to use any netsales proceeds not required to be distributed to stockholders in order topreserve our status as a REIT to invest in additional Properties or entitiesowning Properties, to provide mortgage loans and other permitted investments.

 

From time to timewe may sell some Properties. In deciding the precise timing and terms ofProperty sales, our advisor, CNL Hospitality Corp., will consider factors suchas national and local market conditions, potential capital appreciation, cashflows, and federal income tax considerations. In connection with sales of our Properties, we may take purchase moneyobligations as partial payment of the sales price.  The terms of payment will be affected by custom in the area inwhich the Property is located and prevailing economic conditions.  When a purchase money obligation is acceptedin lieu of cash upon the sale of a Property, we will continue to have amortgage on the Property and the proceeds of the sale will be realized over aperiod of years rather than at closing of the sale.

 

On July 10, 2003,we acquired all of the outstanding stock of RFS Hotel Investors, Inc. forapproximately $383 million and assumed approximately $409 million inliabilities (including transaction and severance costs, which totaledapproximately $55 million).  Inconnection with this transaction, we obtained 57 additional Properties.

 

In February 2004,we entered into an agreement to acquire all of the outstanding capital stock ofKSL Recreation Corporation and their subsidiaries (“KSL”) for approximately$1.4 billion plus the assumption of debt (see “Item 7. Management’s Discussionand Analysis of Financial Condition and Results of Operations – PendingInvestments, Completed Developments and other Events Subsequent to December 31,2003”).  Upon consummation of thistransaction, six of the resorts currently owned by KSL will be held by ourwholly owned subsidiaries.  Inconnection with the execution of this agreement, we have paid a deposit of $75million.

 

3

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During the yearended December 31, 2003, we adopted the provisions of FIN 46R (“Consolidationof Variable Interest Entities”).  As aresult, we consolidate investments in variable interest entities for which weare the primary beneficiary.  Prior toFIN 46R, a company generally consolidated another entity in its consolidatedfinancial statements only if it controlled the entity through voting interests.  The adoption of FIN 46R resulted in theconsolidation of several of our previously unconsolidated subsidiaries.  FIN 46R does not require but does permitrestatement of previously issued financial statements.  We have restated prior years’ accompanyingconsolidated financial statements to reflect the consolidation of previouslyunconsolidated subsidiaries in order to maintain comparability between thecurrent and prior periods presented herein. These restatements had no effect on stockholders’ equity or netearnings.

 

*Leases*

 

As of December 31,2003, we owned interests in 130 Properties, including 57 Properties acquired asa result of the acquisition of RFS Hotel Investors, Inc., generally consistingof land, buildings and equipment, including two under development.  Of the Properties in which we own interests,we currently lease, or will lease in the case of Properties under development,113 Properties to TRS entities, with management performed by third-partyoperators, and lease 17 Properties on a triple-net basis to third-partyoperators.  For Properties leased to TRSentities, the lease rental income and expenses have been eliminated inconsolidation and the hotel and resort operating revenues and expenses havebeen included in our consolidated results of operations.  Leases to unrelated third parties areoperating leases and resulted in rental income from operating leases beingincluded in our results of operations.

 

*CertainManagement Services*

 

Pursuant to anAdvisory Agreement, CNL Hospitality Corp. provides management services relatingto our business, the Properties and the mortgage loans we may provide to otherhotel and resort operators.  Under thisagreement, CNL Hospitality Corp. is responsible for assisting us in negotiatingleases, permanent financing, mortgage loans to other hotel and resort operatorsand our revolving line of credit; collecting rents and payments on any mortgagefinancing we provide; inspecting the Properties and the tenants’ or managers’books and records; and responding to tenants’ or managers’ inquiries andnotices.  In exchange for theseservices, CNL Hospitality Corp. is entitled to receive fees.  For its services, CNL Hospitality Corp.receives an asset management fee, which is calculated monthly in an amount equalto one-twelfth of 0.60% of the total amount invested in the Properties,exclusive of acquisition fees and acquisition expenses, plus one-twelfth of0.60% of the outstanding principal amount of any mortgage loans, as of the endof the preceding month.  For identifyingthe Properties, structuring the terms of the acquisition and leases of theProperties and structuring the terms of the mortgage loans, CNL HospitalityCorp. receives an acquisition fee equal to 4.5% of gross proceeds from theofferings, loan proceeds from permanent financing and a portion of ourrevolving line of credit that is used to acquire Properties.

 

In late 2003, CNLHospitality Corp. allowed us to defer the payment of the asset management feesindefinitely.  The reason for the deferralwas to provide us with additional liquidity as we evaluate the timing ofeconomic and industry recovery.  We didnot pay asset management fees after August 2003 and in January 2004, CNLHospitality Corp. refunded to us all of the asset management fees which hadpreviously been paid during 2003.  Outof the total $11.6 million due to related parties as of December 31, 2003, $5.3million relates to asset management fees. These fees are due upon demand. We will continue to accrue and will remain obligated to pay assetmanagement fees to CNL Hospitality Corp., however, it is uncertain as to whensuch fees will be paid.

 

The AdvisoryAgreement continues until March 31, 2004, and thereafter may be extendedannually upon mutual consent of CNL Hospitality Corp. and our Board ofDirectors unless terminated at an earlier date upon 60 days prior writtennotice by each party.

 

4

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*Competition*

 

The hotel andresort industry is generally characterized as being intensely competitive.  Our hotels and resorts compete withindependently owned hotels, hotels which are part of local or regional chains,and hotels in other well-known national chains, including those offeringdifferent types of accommodations.  Theprincipal competitive factors affecting our hotels and resorts include but arenot limited to brand recognition, location, range of services and guestamenities offered, the quality of the hotel and services provided, and price.

 

We compete withother persons and entities to locate suitable Properties to acquire interestsin and to locate purchasers for our Properties.  We also will compete with other financing sources such as banks,mortgage lenders, and sale/leaseback companies for suitable Properties, tenantsand mortgage financing borrowers.

 

*Concentration of Risk*

 

During the yearended December 31, 2003, a significant portion of our rental income and hoteland resort revenues was earned from 68 Properties operating as various MarriottInternational, Inc. brands (including Marriott Hotels, Resorts, and Suites, JWMarriott, Residence Inn by Marriott, TownePlace Suites by Marriott, Courtyardby Marriott, Fairfield Inn, and Spring Hill Suites by Marriott) and 36Properties operating as various Hilton Hotels Corporation brands (includingDoubletree, Embassy Suites, Hilton Hotels and Suites, Homewood Suites byHilton, and Hampton Inn).

 

Although we intendto acquire additional Properties and we carefully screen our managers andtenants and we have obtained interests in non-Marriott and non-Hilton brandedProperties, failure of the Marriott and Hilton brands would significantlyimpact our results of operations.  Webelieve that the risk of such a default will be reduced through future acquisitionswhich enhance brand diversification.

 

*Available Information*

 

We make available free of charge on or through our Internet website(http://www.cnlonline.com) our Annual Report on Form 10-K, Quarterly Reports onForm 10-Q, Current Reports on Form 8-K, and, if applicable, amendments to thosereports filed or furnished pursuant to Section 13(a) or 15(d) of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonablypracticable after we electronically file such material with, or furnish it to,the Securities and Exchange Commission (the “Commission”).

 

*Employees*

 

We have noemployees other than our officers who are not compensated by us.  Information with respect to our officers isincorporated by reference to our Definitive Proxy Statement to be filed withthe Commission no later than April 30, 2004. We have retained CNL Hospitality Corp. as our advisor to providemanagement, acquisition, development, advisory and some administrative servicesand have retained other affiliates to provide additional administrativeservices.

 

*Seasonality*

 

Demand in the lodging industry is affected byrecurring seasonal patterns and some Properties in certain locations areaffected more than others.  Seasonalvariations in revenue at our Properties can be expected to cause quarterlyfluctuations in revenues and earnings. As a result, we may need to enter into short-term borrowings in someperiods in order to offset these fluctuations in revenues and to makedistributions to stockholders.  Hoteland resort operations also may be adversely affected by events beyond ourcontrol, such as extreme weather conditions, poor economic factors and/orcycles, geopolitical risks and other factors affecting business and/or pleasuretravel.

 

5

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*Risk Factors*

 

*Company-RelatedRisks*.

 

*Dependencyon our Advisor*. Subject to approval by our Board of Directors, CNL Hospitality Corp. asour advisor, is responsible for our investments and daily management, includingall acquisitions, dispositions and financings. We cannot be sure that our advisor will achieve our objectives or thatour Board of Directors will be able to act quickly to remove CNL HospitalityCorp. if it deems removal necessary.  Asa result, it is possible that we would be managed for some period by a companythat was not acting in our best interests or not capable of helping us achieveour objectives.

 

C*onflicts of interest*.  We will be subject to conflicts of interestarising out of our relationships with CNL Hospitality Corp., our advisor, andwith our other affiliates, including the following:

 

•                  Some of theofficers and directors of CNL Hospitality Corp. and our officers and directorscurrently are engaged, and in the future are expected to engage, in themanagement of other business entities and properties and in other businessactivities associated with our affiliates. Additionally, some of the officers and directors are majority owners ofCNL Hospitality Corporation.  Theseofficers and directors may experience conflicts of interest in allocatingmanagement time, services, and functions among us and the various entities inwhich any of them are or may become involved and could take actions that aremore favorable to the other entities than to us.

 

•                  CNL HospitalityCorp. has been engaged to perform various services for us and will receive feesand compensation for these services. None of the agreements for these services were the result ofarm’s-length negotiations.  The timingand nature of fees and compensation to CNL Hospitality Corp. could create aconflict between its interests and those of our stockholders.

 

•                  A conflict couldarise because affiliates may compete with us to acquire hotel properties orinvest in mortgage loans of a type suitable for acquisition by us and may bebetter positioned to make such acquisitions or investments as a result ofrelationships that may develop with various operators of hotel and resortbrands and their franchisees.

 

•                  A conflict alsocould arise in connection with CNL Hospitality Corp.’s determination as towhether or not to purchase or sell a Property, since the interests of CNLHospitality Corp. and our stockholders may differ as a result of their distinctfinancial and tax positions and the compensation to which CNL Hospitality Corp.or its affiliates may be entitled upon the purchase or sale of a Property.

 

•                  A conflict couldarise in connection with the determination of whether or not to list our sharesof common stock on a national securities exchange since CNL Hospitality Corp.and other affiliates may receive different amounts of compensation and otherbenefits if our shares are listed, and that compensation could be paid earlierif the listing of our shares occurs. The Board of Directors must approve the listing of our shares on anational securities exchange or over-the-counter market.

 

•                  We have in thepast and may in the future invest in joint ventures with other programssponsored by CNL Hospitality Corp. or its affiliates.  Potential situations may arise in which the interests of the co-ventureror co-venturers may conflict with our interests.

 

*Failureto qualify as a REIT*. A REIT generally is not taxed at the federal corporate level on incomeprovided it distributes at least 90% of its annual taxable income to itsstockholders and meets certain other requirements under sections 856 through860 of the Internal Revenue Code of 1986. If we fail to qualify as a REIT, we would be subject to federal incometax at regular corporate rates and the funds available for distribution tostockholders would be reduced by the amount of federal taxes owed.

 

6

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*Risksrelated to borrowing*. We may borrow money to acquire assets, to preserve our status as a REITor for any other authorized corporate purposes.  We may mortgage or put a lien on one or more of our assets inconnection with any borrowing.  Weanticipate that our permanent financing generally will not exceed 50% of ourtotal assets and we may not borrow more than 300% of our net assets, without showingour independent directors that a higher level of borrowing is appropriate.  Additional borrowing may present risks ifthe cash flow from our real estate and other investments is insufficient tomeet our debt obligations.  In addition,our lenders may seek to impose restrictions on future borrowings, distributionsand operating policies.  If we mortgageor pledge assets as collateral and thereafter cannot meet our debt obligations,the lender could take the collateral, and we would lose both the asset and theincome we are deriving from it.

 

*Borrowingto make distributions*. We have and may in the future borrow money as necessary or advisable tomake distributions, including, but not limited to, distributions for thepurpose of the maintenance of our qualification as a REIT for federal incometax purposes.  During 2003, we usedborrowings on our revolving line of credit to fund distributions.  We anticipate that, at least for the nearterm, we will continue to borrow on our revolving line of credit to fund aportion of our distributions.  Were weto discontinue this practice at the current time, distributions would beadversely affected.

 

*We maynot have adequate insurance.* An uninsured loss or a loss in excess of insured limits could have amaterial adverse impact on our operating results and cash flows and returns tothe stockholders could be reduced.  TheCompany or its third-party tenants or management companies maintaincomprehensive insurance on each of the Company’s properties, includingliability, fire and extended coverage, of the type and amount the Companybelieves is customarily obtained for or by hotel owners.  Some of the Company’s hotels in Californiaand the Company’s hotel in Hawaii are located in areas that are subject toearthquake activity.  These hotels arelocated in areas of high seismic risk and some were constructed under buildingcodes that were less stringent with regard to earthquake relatedrequirements.  An earthquake couldrender significant uninsured damage to the hotels. Additionally, areas inFlorida and Louisiana, where certain of the Company’s hotels are located, mayexperience hurricane or high-wind activity. The Company has earthquake insurance policies on its hotels located in seismicareas of California and in Hawaii, and has wind insurance policies on certainof its hotels located in Florida and Louisiana. However, various types ofcatastrophic losses, like earthquakes and floods may not be fully insurable ormay not be commercially practical to insure. Additionally, deductibles on earthquake and wind insurance policies maybe higher than general property insurance policies.  With respect to some of the hotels in California, in addition tothe applicable deductibles under the earthquake insurance policies, the Companyis self-insured for the first $7.5 million per earthquake.

 

*Uninsurablelosses*.  Some types oflosses, such as from terrorist attacks, may be either uninsurable, toodifficult to obtain or too expensive to justify insuring against.  Furthermore, an insurance provider couldelect to deny or limit coverage under a claim. Should an uninsured loss or a loss in excess of insured limits occur, wecould lose all or a portion of the capital we have invested in a Property, aswell as the anticipated future revenue from the Property.  Therefore, if we, as landlord, incur anyliability which is not fully covered by insurance, we would be liable for theuninsured amounts, cash available for distributions to stockholders may bereduced and the value of our assets may decrease significantly.  In addition, in such an event, we mightnevertheless remain obligated for any mortgage debt or other financialobligations related to the Property.

 

*Unavailabilityand termination of credit enhancements*.  Although historically we have had creditenhancements, some of the credit enhancements have started to expire and we maynot obtain credit enhancements, such as guarantees, net worth requirements orliquidity facility agreements, from a third-party tenant or manager inconnection with future leases and/or hotel management agreements.  Even if provided to us, these enhancementsgenerally terminate at either a specific time during the lease term or at suchtime that the funding limits have been reached.  After the termination of a credit enhancement, or in the eventthat the maximum limit of a credit enhancement is reached, we may only look tothe operations of the hotel.  If thisoccurs, our results of operations or cash available for distribution may beadversely impacted.

 

*Possiblelack of control of our joint ventures*.  Our independent directors must approve alljoint venture or general partnership arrangements in which we enter.  Subject to that approval, we may enter intoa joint venture with an unaffiliated party to purchase a Property, and thejoint venture or general partnership agreement relating to that joint ventureor partnership may provide that we will share management control of the jointventure with the unaffiliated party.  Inthe event the joint venture or general partnership agreement provides that wewill have sole management control of the joint venture, the agreement may beineffective as to a third party who has no notice of the agreement, and wetherefore may be unable to control fully the activities of the joint venture.  In any joint venture with another programsponsored by an affiliate, we do not anticipate that we will have solemanagement control of the joint venture. In addition, when we invest in properties indirectly through theacquisition of interests in entities that own hotel properties or intereststherein, we may not control the management of such assets.

 

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*RealEstate and Other Investment Risks*.

 

*Possiblelack of diversification increases investment risk*.  Our profitability and ability to diversifyinvestments is limited by the amount of future funds we receive through ourpublic offerings and borrowings.  We maynot be able to achieve diversification by property type or geographiclocation.  There is no limit on thenumber of properties of a particular brand or facility type which we mayacquire.  Under investment guidelinesestablished by the Board of Directors, no single hotel brand may represent morethan 50% of the total portfolio unless approved by the Board of Directors,including a majority of the independent directors.  Even at these levels of concentration, any adverse developmentwith respect to a specific brand could have adverse consequences for us.  Our board of directors, including a majorityof the independent directors, will review our Properties and potentialinvestments in terms of geographic and hotel brand diversification.  As of February 20, 2004, a significantportion of our Properties were Marriott-branded and Hilton-branded hotels.  Because of this concentration, there is arisk that any adverse developments affecting Marriott or Hilton generally couldmaterially adversely affect our revenues (thereby affecting our ability to makedistributions to stockholders).* *In addition, although our Properties arelocated in 37 states, 12.3% of the Properties are located in California and19.2% of the Properties are located in Florida.  Our profitability and our ability todiversify our investments, both geographically and by type of propertiespurchased, will be limited by the amount of funds at our disposal.  To the extent our assets are geographicallyconcentrated, an economic downturn in one or more of the markets in which wehave invested could have an adverse effect on our financial condition and ourability to make distributions.

 

*Useof the**TRS structureincreases dependence on the operating results of the hotels*.  For Properties leased to our subsidiaries,our operations are dependent on the profitable operations of Properties which, inpart, may be subsidized by credit enhancements.  In addition, many of our Properties are newly constructed andhave not achieved their Ultimate Market Share. We are subject to the risks of increased hotel and resort operatingexpenses for the hotels now in our TRS lessee structure, including but notlimited to: (i) wage and benefit costs; (ii) repair and maintenance expenses;(iii) energy costs; (iv) property taxes, (v) the costs of liability insurance;and (vi) other operating expenses. Increases in these operating expenses can have a significant adverseimpact on our earnings and cash flow. Poor performance by the Properties leased to subsidiaries will affectour results of operations to a much greater extent than would performance byProperties leased to third parties.  Wedo, however, have the right under the agreements with the third party managersof these hotels to terminate the manager and engage a new manager in the eventthat the poor performance is attributable to the manager.

 

*Dependencyon ability of third-parties to operate our Properties*.  We do not control the third-party tenants ormanagers who are responsible for maintenance and other day-to-day management ofthe Properties.  Our financial conditionis dependent on the ability of these third-party managers or tenants that we donot control to operate our Properties successfully.  We have and in the future intend to continue to enter into onlymanagement agreements with managers or leasing agreements with third-partytenants having substantial prior hotel and resort experience.  If our tenants or managers are unable tooperate our Properties successfully, the tenants may not be able to pay theirrent and they may not generate significant percentage rent, which couldadversely affect our financial condition.

 

*Environmental liabilities. *We obtain detailedenvironmental studies for each Property prior to acquisition, however, we mayacquire Properties where environmental issues exist.  In accordance with our policy, when an environmental issue existsfor a Property to be acquired which cannot be resolved prior to the acquisitionof the Property, we generally seek to obtain indemnification from the seller ornegotiate other comparable arrangements such as a reduction in the purchaseprice of the Property to be acquired. Another alternative is for us to establish an escrow fund in an amountequal to or greater than the estimated remediation costs in order to fund thecost of such remediations.  We haveobtained indemnifications in writing from sellers on several of our Propertiesto cover potential remediation costs. In addition, we cannot be sure that all environmental liabilities havebeen identified or that no prior owner, operator or current occupant hascreated an environmental condition not known to us.  Environmental liabilities that we incur could have an adverseeffect on our financial condition or results of operations.

 

*Competition*.  We compete with other companies for theacquisition of properties.  In addition,the hotel industry in which we invest is highly competitive, and we anticipatethat any Property we acquire will compete with other businesses in thevicinity.  The operating results of ourProperties depend in part on the ability of the tenants and managers to competesuccessfully with other businesses in the vicinity.  In addition, we compete with other financing sources for suitabletenants, managers and properties.  Ifwe, our tenants and our managers are unable to continue to competesuccessfully, our results of operations will be adversely affected.

 

8

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*Industry-RelatedRisks*.

 

*Risksof hotel and resort operations*.  The risks common to the hotel industry could adversely affecthotel occupancy and the rates that can be charged for hotel rooms as well ashotel and resort operating expenses, and generally include: (i) increases insupply of hotel rooms that exceed increases in demand; (ii) increases in energycosts and other travel expenses that reduce business and leisure travel; (iii)reduced business and leisure travel due to continued geo-political uncertainty,including terrorism; (iv) adverse effects of declines in general and localeconomic activity; (v) adverse effects of a downturn in the hotel and resortindustry; and (vi) risks generally associated with the ownership of hotels andreal estate.

 

*Adversetrends in the hotel industry may impact our Properties*.  The success of our Properties dependslargely on the Property operators’ ability to adapt to dominant trends in thehotel industry, as well as greater competitive pressures, increasedconsolidation, industry overbuilding, dependence on consumer spending patternsand changing demographics, the introduction of new concepts and products,availability of labor, price levels and general economic conditions.  The success of a particular hotel brand, theability of a hotel brand to fulfill any obligations to operators of itsbusiness, and trends in the hotel industry may affect our income and the fundswe have available to distribute to stockholders.

 

*Adverseeffect of the economic downturn, military activity in the Middle East andconcern about terrorist activities*.  As a result of the effects of the economic downturn, the lodgingindustry has experienced a significant decline in business relating to areduction in travel for both business and pleasure.  Consistent with other competitors in the lodging industry, someof our hotels have experienced declines in occupancy and average daily ratesdue to the decline in travel.*** ***Althoughaggressive cost containment and a significant slowdown in the construction ofnew hotels has occurred over the past two years, positioning the industry for arecovery, we do not expect to benefit from a significant recovery until atleast the second half of 2004.  Inaddition, any continued military conflict in the Middle East or possibleterrorist activity could have additional adverse effects on the economy,including the travel and lodging industry. It is possible that these factors could have a material adverse effecton the value of our assets and/or our result of operations.

 

*Possiblelack of control over market and business conditions*.  Changes in general or local economic ormarket conditions, increased costs of energy, increased costs of insurance,increased costs of products, increased costs and shortages of labor,competitive factors, fuel shortages, quality of management, the ability of ahotel chain to fulfill any obligations to operators of its hotel business,limited alternative uses for the building, changing consumer habits,condemnation or uninsured losses, changing demographics, changing trafficpatterns, inability to remodel outmoded buildings as required by the franchiseor lease agreement, voluntary termination by a tenant of its obligations undera lease, bankruptcy of a tenant or borrower, and other factors beyond ourcontrol may reduce the value of Properties that we currently own or those thatwe acquire in the future, the ability of tenants to pay rent on a timely basis,the amount of the rent and the ability of borrowers to make mortgage loanpayments on time.  If tenants are unableto make lease payments or borrowers are unable to make mortgage loan paymentsas a result of any of these factors, cash available to make distributions toour stockholders may be reduced.

* *

*Seasonalityof the hotel industry*. The hotel industry is seasonal in nature.  As a result of the seasonality of the hotel industry, there maybe quarterly fluctuations in results of operations of Properties leased tosubsidiaries.  In addition, there may bequarterly fluctuations in the amount of percentage rent, if any, we willreceive from our third-party leases.  Asa result, we may need to enter into short-term borrowing in certain periods inorder to offset these fluctuations in revenues and to make distributions to ourstockholders.

 

9

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**Item 2****.  Properties**

 

As of December 31,2003, we had acquired interests, directly or indirectly through ourpartnerships, in 130 Properties, located in 37 states, the District of Columbiaand Canada, generally consisting of land, buildings and equipment, including 24Properties through interests in 12 partnerships with various thirdparties.  As of December 31, 2003, twoof our hotels were under development. Of the Properties in which we own interests, we currently lease 113 toTRS entities, with management performed by third-party operators, and 17 tothird-party operators on a triple-net basis.

 

We are committedto fund improvements at our Properties in order to, in part, maintain theircompetitiveness.  Major renovations andother capital improvements are typically funded with proceeds from our cashreserves, stock offerings, permanent financings, or borrowings under ourrevolving line of credit.

 

Generally,Properties acquired consist of land, building and equipment and in certaininstances intangible assets; although in some cases, we may acquire the landunderlying the building with the building owned by the tenant or a third party,or may acquire the building only with the land owned by a third party.  The 130 Properties we own directly orindirectly as of December 31, 2003, generally conform to the followingspecifications of size, cost, and type of land and buildings.

 

*Hotel and Resort Properties*.  Hotel lot sizes generally range up to 10acres depending on product, market and design considerations, and are availableat a broad range of pricing.  The sitesare generally in primary or secondary urban, suburban, airport, highway orresort markets which have been evaluated for past and future anticipatedlodging demand trends.  Resorts aregenerally located on larger lots which allows for additional recreationalamenities.

 

The buildingsgenerally are mid-rise construction. The Properties consist of limited service hotels, extended stay hotels,and full service hotels or resorts. Limited service hotels generally minimize non-guest room space and offerlimited food service such as complimentary continental breakfasts and do not haverestaurant or lounge facilities on-site. Extended stay hotels generally containguest suites with a kitchen area and living area separate from the bedroom.Extended stay hotels vary with respect to providing on-site restaurantfacilities.  Full service hotelsgenerally have conference or meeting facilities and on-site food and beveragefacilities.  Resorts generally haveexpanded food and beverage facilities and often have additional recreationalamenities such as golf courses, tennis courts and/or spa facilities.  The Properties include equipment and mostconform to national hotel and resort brand approved design concepts.

 

As of December 31,2003, 104 of the Properties directly owned, including the two Properties beingdeveloped, were pledged as collateral under our financing arrangements.  For more detailed information relating tothese arrangements, see “Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Debt Financing”.

 

10

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The followingtable lists the number of Properties we own, directly or indirectly throughpartnerships, as of December 31, 2003, by state, or country including theProperties under development.

 

| **State/  Country**   |   | **Number of  Properties** |   |
|-----------------------|--------|---------------------------|--------|
|                  |   |                      |   |
| Alabama               |   | 1                         |   |
| Arizona               |   | 7                         |   |
| California*           |   | 25                        |   |
| Canada                |   | 1                         |   |
| Colorado              |   | 3                         |   |
| Connecticut           |   | 2                         |   |
| Delaware              |   | 1                         |   |
| District of  Columbia |   | 1                         |   |
| Florida*              |   | 16                        |   |
| Georgia               |   | 5                         |   |
| Hawaii                |   | 1                         |   |
| Illinois              |   | 3                         |   |
| Indiana               |   | 1                         |   |
| Kansas                |   | 1                         |   |
| Kentucky              |   | 1                         |   |
| Louisiana             |   | 2                         |   |
| Maine                 |   | 1                         |   |
| Massachusetts         |   | 2                         |   |
| Maryland              |   | 2                         |   |
| Michigan              |   | 5                         |   |
| Minnesota             |   | 3                         |   |
| Missouri              |   | 2                         |   |
| Mississippi           |   | 1                         |   |
| North Carolina        |   | 3                         |   |
| Nebraska              |   | 2                         |   |
| New Jersey            |   | 4                         |   |
| Nevada                |   | 1                         |   |
| New York              |   | 3                         |   |
| Oklahoma              |   | 2                         |   |
| Oregon                |   | 1                         |   |
| Pennsylvania          |   | 2                         |   |
| Rhode Island          |   | 1                         |   |
| South Carolina        |   | 1                         |   |
| Tennessee             |   | 1                         |   |
| Texas                 |   | 12                        |   |
| Utah                  |   | 1                         |   |
| Virginia              |   | 6                         |   |
| Washington            |   | 2                         |   |
| Wisconsin             |   | 1                         |   |
| Total                 |   | 130                       |   |

 

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*                 Includes oneproperty under development as of December 31, 2003.

 

11

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**Item 3****.  Legal Proceedings**

 

On May 13, 2003, A. Bruce Chasen, as classrepresentative, filed a putative class action lawsuit in the Circuit Court ofShelby County, Tennessee, 30th Judicial District against RFS, RFS’sdirectors and us (the “Chasen Complaint”). On June 6, 2003, the Chasen Complaint was amended.  The amended Chasen Complaint alleges, amongother things, that (i) the merger consideration to be received by RFS’sshareholders is significantly less than the intrinsic value of RFS, (ii) theRFS directors breached their fiduciary duties to shareholders on a variety ofgrounds including failing to ascertain the true value of RFS, failing todetermine whether there were any other bidders for RFS, and failing to avoidcertain alleged conflicts of interest shared by members of the RFS Board andits financial advisor, (iii) we aided and abetted the RFS Board in connectionwith their breach of fiduciary duties, (iv) the RFS Board violated portions ofthe Tennessee Investor Protection Act, and (v) the RFS proxy statement is falseand misleading.  Among other things, theamended Chasen Complaint seeks certification of the class action, an injunctionenjoining RFS and us from completing the merger, monetary damages in anunspecified amount, the payment of attorney’s fees, and rescissorydamages.  On July 1, 2003, we filed ananswer to the amended Chasen Complaint setting forth an affirmative defense andgeneral denials of the allegations set forth therein.  The plaintiff’s motion for a temporary restraining order for purposesof enjoining the transaction, was denied by the Circuit Court of Shelby County,Tennessee, 30th Judicial District on July 8, 2003.  Based upon the information currentlyavailable to us, we believe the allegations contained in the amended ChasenComplaint are without merit and intend to vigorously defend the action, andtherefore, a liability was not accrued. We are planning to file a motion to dismiss the allegations in theamended Chasen Complaint.  If the motionis not successful, it is expected that the case will proceed to trial.

 

On August 26, 2002, CarmelValley, LLC filed a lawsuit against RFS and some of its subsidiaries in theSuperior Court of the State of California, for the County of San Diego (the“Carmel Valley Complaint”).  In connectionwith the acquisition of RFS Hotel Investors, Inc., we have become a party tothe Carmel Valley Complaint which claims damages relating to a dispute over aparcel of land located adjacent to one of the RFS Properties.  We have unsuccessfully attempted to mediatethis case.  At this time, we believethat the damages claimed lack sufficient factual support and will continue tovigorously defend the action, and therefore, a liability was notaccrued.  However, it is possible that we could incur losses if the plaintiffultimately prevails.  The plaintiff isseeking monetary damages of up to $0.7 million.  We have recently filed certain motions to dismiss which are beingconsidered by the Court.  If the motionsare not successful, it is expected that the case will proceed to trial.

 

From time to time we may be exposed to otherlitigation arising from an unrecognized preacquisition contingency or from theoperations of our business.  At thistime, we do not believe that resolution of these matters, included those discussedabove, will have a material adverse effect on our financial condition orresults of operations.

 

12

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**Item 4****.  Submission of Matters to a Vote of SecurityHolders**

 

None.

 

13

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**PART II**

 

**Item 5****.  Market for Registrant’s Common Equity andRelated Stockholder Matters**

 

As of February 20,2004, there were approximately 93,569 stockholders of record of commonstock.  There is no public tradingmarket for the shares, and even though we intend to list our shares on anational securities exchange or over-the-counter market within four years ifmarket conditions are satisfactory, a public market for the shares may notdevelop even if the shares are listed. Prior to such time, if any, as the listing of our shares on a nationalsecurities exchange or over-the-counter market occurs, any stockholder (otherthan CNL Hospitality Corp.) may present all or any portion equal to at least25% of such stockholder’s shares to us for redemption at any time, inaccordance with the procedures outlined in our prospectus for our 2003Offering.  At such time, we may, at oursole option, redeem such shares presented for redemption for cash, at aredemption price equal to the then current offering price, less a discount of8%.  The 2003 offering price is $10.00per share; thereby the net redemption price while the 2003 offering is ongoingis $9.20 per share.  During periods whenwe are not engaged in a public offering, the redemption price will bedetermined by our Board of Directors based a variety of Factors.  At no time during a 12-month period may thenumber of shares redeemed by us exceed 5% of the number of shares of ouroutstanding common stock at the beginning of the 12-month period.  The full amount of the proceeds from thesale of shares under the reinvestment plan for the 2003 Offering attributableto any calendar quarter will be used to redeem shares presented for redemptionduring such quarter.  In addition, wemay, at our discretion, use up to $100,000 per calendar quarter of the proceedsof any public offering of our common stock for redemptions.  Any amount of offering proceeds which isavailable for redemptions, but which is unused, may be carried over to the nextsucceeding calendar quarter for use for redemptions.  There may not be sufficient funds available for redemptions and,accordingly, a stockholder’s shares may not be redeemed. Our Board ofDirectors, in its discretion, may amend or suspend the redemption plan at anytime they determine that such amendment or suspension is in our bestinterest.  For the years ended December31, 2003 and 2002, approximately 716,000 and 260,000 shares, respectively, wereredeemed at $9.20 per share and retired from shares outstanding of commonstock.  The price to be paid for anyshare transferred other than pursuant to the redemption plan is subject tonegotiation by the purchaser and the selling stockholder.

 

For the yearsended December 31, 2003 and 2002, total shares of 901,363 and 565 weretransferred between owners, respectively, other than pursuant to the redemptionplan. We are not aware of any other trades of our shares, other than purchasesmade in our public offerings and redemptions of shares by us.  The following table reflects, for eachcalendar quarter, the high, the low and the average sales prices for transfersof units during 2003 and 2002, net of commissions.

 
|           |   | **2003** |   |
|----------------|--------|----------|--------|
|           |   | **High** |   | **Low** |   | **Average** |   |
| First Quarter  |   | $        | 8.64   |   | $ | 6.97 |   | $ | 7.92 |   |
| Second Quarter |   | 9.20     |   | 9.20 |   | 9.20 |   |
| Third Quarter  |   | 9.00     |   | 7.01 |   | 7.68 |   |
| Fourth Quarter |   | 10.00    |   | 7.39 |   | 8.74 |   |
|           |   |     |   |   |   |   |   |
|           |   | **2002** |   |
|           |   | **High** |   | **Low** |   | **Average** |   |
| First Quarter  |   | $        | 7.05   |   | $ | 7.05 |   | $ | 7.05 |   |
| Second Quarter |   | 10.00    |   | 10.00 |   | 10.00 |   |
| Third Quarter  |   | 9.20     |   | 9.00 |   | 9.10 |   |
| Fourth Quarter |   | (1)      |   | (1) |   | (1) |   |

 

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(1) We are not aware of anytrades during this period.

 

As of December 31,2003, the offering price per share of common stock was $10.00.  The offering price per share was determinedby us, in our sole discretion, based upon the price we believed investors wouldpay for the shares and on certain other considerations.  Our shares are not publicly traded and thereis no public market for the shares on which to base market value.  We did not take into account the value ofthe underlying assets in determining the price per share.  Investors are cautioned that common stocknot publicly traded is generally considered illiquid and the estimated valueper share may not be realized when an investor seeks to liquidate his or hercommon stock.

 

14

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We expect to makedistributions to the stockholders pursuant to the provisions of the Articles ofIncorporation.  For the years endedDecember 31, 2003 and 2002, we declared cash distributions of approximately$130.0 million and $74.2 million respectively, to the stockholders.  For the years ended December 31, 2003 and2002, approximately 39% and 51%, respectively, of the distributions paid tostockholders were considered ordinary income and approximately 61% and 49%,respectively, were considered a return of capital to stockholders for federalincome tax purposes.  No amountsdistributed to stockholders for the years ended December 31, 2003 and 2002,were required to be or have been treated by us as a return of capital forpurposes of calculating the stockholders’ return on their investedcapital.  Some future fees payable toCNL Hospitality Corp. are subordinate to the achievement of an 8% return onstockholders’ invested capital.

 

The following table presents total distributions and distributions pershare (in thousands except per share data):

 
|                          |   | **First** |   | **Second** |   | **Third** |   | **Fourth** |   | **Year** |   |
|-------------------------------|--------|-----------|--------|------------|--------|-----------|--------|------------|--------|----------|--------|
| 2003 Quarter                  |   |      |   |       |   |      |   |       |   |     |   |
|                          |   |      |   |       |   |      |   |       |   |     |   |
| Total  distributions declared |   | $         | 25,396 |       | $      | 29,010    |   | $          | 34,177 |     | $      | 41,378 |   | $ | 129,961 |   |
| Distributions  per share      |   | 0.194     |   | 0.194      |   | 0.194     |   | 0.194      |   | 0.776    |   |
|                          |   |      |   |       |   |      |   |       |   |     |   |
| 2002 Quarter                  |   |      |   |       |   |      |   |       |   |     |   |
|                          |   |      |   |       |   |      |   |       |   |     |   |
| Total  distributions declared |   | $         | 15,432 |       | $      | 17,058    |   | $          | 19,322 |     | $      | 22,405 |   | $ | 74,217 |   |
| Distributions  per share      |   | 0.194     |   | 0.194      |   | 0.194     |   | 0.194      |   | 0.776    |   |

 

On January 1, 2004and February 1, 2004, we declared distributions totaling approximately $15.7million and $16.7 million, respectively, or $0.064583 per share of commonstock, payable by March 31, 2004, to stockholders of record on January 1, 2004and February 1, 2004, respectively.

 

We intend tocontinue to declare distributions of cash to stockholders on a monthly basiswhile we are engaged in a public offering of our common stock, and quarterlythereafter to the extent that cash is available for distribution.  We may not continue to be able to paydistributions, except to maintain REIT status in accordance with the InternalRevenue Code of 1986, as amended. We are required to distribute annually atleast 90% of our taxable income to maintain our objective of qualifying as aREIT.  Distributions will be made at thediscretion of the Board of Directors, depending generally on various factorsincluding cash flows from operations and our financial condition, subject to theobligation of the Board of Directors to ensure we remain qualified as a REITfor federal income tax purposes.

 

15

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**Item 6****.  Selected Financial Data**

 

The followingselected financial data should be read in conjunction with the consolidatedfinancial statements and related notes in Item 8 hereof (in thousands exceptper share data).  Data for fiscal years2002 and earlier has been restated to reflect the adoption of FIN 46R.

 
|                                            |   | **2003**  |      | **2002**  |   | **2001**  |   | **2000** |      | **1999** |   |
|-------------------------------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|----------|-----------|----------|--------|
| Year Ended  December 31:                        |   |      |      |      |   |      |   |     |      |     |   |
| Revenues                                        |   | $         | 557,140   |      | $      | 225,526   |   | $        | 89,017    |     | $      | 36,099 |   | $ | 10,678 |   |
| Income from  continuing operations              |   | 4,771     |      | 15,810    |   | 19,328    |   | 20,670   |      | 7,516    |   |
| Income from  discontinued operations            |   | 1,222     |      | —    |   | —    |   | —   |      | —   |   |
| Net earnings (1)                                |   | 5,993     |      | 15,810    |   | 19,328    |   | 20,670   |      | 7,516    |   |
| Cash flows from  operating activities           |   | 112,887   |      | 76,660    |   | 58,408    |   | 43,651   |      | 12,890   |   |
| Cash flows used  in investing activities        |   | 1,894,612 |      | 551,987   |   | 433,026   |   | 334,237  |      | (130,231 | )      |
| Cash flows from  financing activities           |   | 1,876,478 |      | 479,269   |   | 273,419   |   | 238,811  |      | 206,085  |   |
| Cash  distributions declared (2)                |   | 129,961   |      | 74,217    |   | 48,409    |   | 28,082   |      | 10,766   |   |
| Funds from  operations (3)                      |   | 90,594    |      | 59,475    |   | 41,871    |   | 30,053   |      | 10,478   |   |
| Income from  continued operations per share:    |   |      |      |      |   |      |   |     |      |     |   |
| Basic                                           |   | 0.02      |      | 0.16      |   | 0.30      |   | 0.53     |      | 0.47     |   |
| Diluted                                         |   | 0.02      |      | 0.16      |   | 0.30      |   | 0.53     |      | 0.45     |   |
| Income from  discontinued operations per share: |   |      |      |      |   |      |   |     |      |     |   |
| Basic                                           |   | 0.01      |      | —    |   | —    |   | —   |      | —   |   |
| Diluted                                         |   | 0.01      |      | —    |   | —    |   | —   |      | —   |   |
| Earnings per share:                             |   |      |      |      |   |      |   |     |      |     |   |
| Basic                                           |   | 0.03      |      | 0.16      |   | 0.30      |   | 0.53     |      | 0.47     |   |
| Diluted                                         |   | 0.03      |      | 0.16      |   | 0.30      |   | 0.53     |      | 0.45     |   |
|                                            |   |      |      |      |   |      |   |     |      |     |   |
| Cash  distributions declared per share          |   | 0.78      |      | 0.78      |   | 0.77      |   | 0.74     |      | 0.72     |   |
| Weighted average  number of shares outstanding: |   |      |      |      |   |      |   |     |      |     |   |
| Basic                                           |   | 172,449   |      | 97,874    |   | 64,458    |   | 38,698   |      | 15,890   |   |
| Diluted                                         |   | 172,449   |      | 97,874    |   | 64,458    |   | 45,886   |      | 21,438   |   |
|                                            |   |      |      |      |   |      |   |     |      |     |   |
| At December 31:                                 |   |      |      |      |   |      |   |     |      |     |   |
| Total assets                                    |   | $         | 3,876,978 |      | $      | 1,565,432 |   | $        | 1,147,676 |     | $      | 653,962 |   | $ | 266,968 |   |
| Mortgages  payable                              |   | 1,499,989 |      | 401,765   |   | 275,567   |   | 170,055  |      | —   |   |
| Other notes  payable and line of credit         |   | 174,361   |      | 53,818    |   | 65,072    |   | 19,582   |      | —   |   |
| Total  stockholders’ equity                |   | 1,940,741 |      | 1,014,323 |   | 637,876   |   | 419,289  |      | 253,055  |   |

 

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(1)                                  Tothe extent that operating expenses payable or reimbursable by us in any fourconsecutive fiscal quarters (the “Expense Year”) exceed the greater of 2% ofaverage invested assets or 25% of net income (the “Expense Cap”), CNLHospitality Corp. shall reimburse us within 60 days after the end of theExpense Year the amount by which the total operating expenses paid or incurredby us exceed the Expense Cap.  Duringthe five years ended December 31, 2003, operating expenses did not exceed theExpense Cap.

 

(2)                                  Cashdistributions are declared by the Board of Directors and generally are based onvarious factors, including cash flow from operations.  Approximately 95%, 79%, 60%, 26%, and 30% of cash distributionsfor the years ended December 31, 2003, 2002, 2001, 2000, and 1999, respectively,represent a return of capital in accordance with generally accepted accountingprinciples (“GAAP”).  Cash distributionstreated as a return of capital on a GAAP basis represent the amount of cashdistributions in excess of accumulated net earnings on a GAAP basis, includingdeductions for depreciation expense.  Wehave not treated such amounts as a return of capital for purposes ofcalculating the stockholders’ return on their invested capital as a GAAP basiscalculation would not be appropriate for this purpose.

 

16

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(3)                                  Managementconsiders funds from operations (“FFO”) to be an indicative measure ofoperating performance due to the significant effect of depreciation of realestate assets on net earnings.  FFO,based on the revised definition adopted by the Board of Governors of theNational Association of Real Estate Investment Trusts (“NAREIT”) in October1999 and as used herein, means net earnings determined in accordance withgenerally accepted accounting principles (“GAAP”), excluding gains or lossesfrom debt restructuring and sales of property, plus depreciation andamortization of real estate assets and after adjustments for unconsolidatedpartnerships.  (Net earnings determinedin accordance with GAAP includes the noncash effect of scheduled rent increasesthroughout the lease terms.  This is aGAAP convention requiring real estate companies to report rental revenue basedon the average rent per year over the life of the leases).  During the years ended December 31, 2003,2002, 2001, 2000, and 1999, we did not have significant adjustments related tostraight-lining of leases.  Managementbelieves that by excluding the effect of depreciation, amortization and gainsor losses from sales of real estate, all of which are based on historical costsand which may be of limited relevance in evaluating current performance, FFOcan facilitate comparisons of operating performance between periods and betweenother equity REITs.  FFO was developedby NAREIT as a relative measure of performance and liquidity of an equity REITin order to recognize that income-producing real estate historically has notdepreciated on the basis determined under GAAP.  However, FFO (i) does not represent cash generated from operatingactivities determined in accordance with GAAP (which, unlike FFO, generallyreflects all cash effects of transactions and other events that enter into thedetermination of net earnings), (ii) is not necessarily indicative of cash flowavailable to fund cash needs and (iii) should not be considered as analternative to net earnings determined in accordance with GAAP as an indicationof our operating performance, or to cash flow from operating activitiesdetermined in accordance with GAAP as a measure of either liquidity or ourability to make distributions.  FFO, aspresented, may not be comparable to similarly titled measures reported by othercompanies.  Accordingly, we believe thatin order to facilitate a clear understanding of the consolidated historicaloperating results of the Company, FFO should be considered in conjunction withour net earnings and cash flows as reported in the accompanying consolidatedfinancial statements and notes thereto.

 

The following is areconciliation of net earnings to FFO for the years ended December 31, 2003,2002, 2001, 2000, and 1999 (in thousands):

 

 
|                                   |   | **Year Ended  December 31,** |   |
|----------------------------------------|--------|------------------------------|--------|
|                                   |   | **2003**                     |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
|                                   |   |                         |   |   |   |   |   |   |   |   |   |
| Net earnings                           |   | $                            | 5,993  |   | $ | 15,810 |   | $ | 19,328 |   | $ | 20,670 |   | $ | 7,516 |   |
| Adjustments:                           |   |                         |   |   |   |   |   |   |   |   |   |
| Effect of  unconsolidated subsidiaries |   | 14,117                       |   | 6,496 |   | 1,499 |   | 1,825 |   | 1,710 |   |
| Effect of  minority interest           |   | (6,230                       | )      | (2,624 | ) | (774 | ) | (272 | ) | (16 | ) |
| Amortization of  real estate assets    |   | 1,765                        |   | 1,353 |   | 353 |   | 131 |   | 49 |   |
| Depreciation of  real estate assets    |   | 74,949                       |   | 34,864 |   | 21,465 |   | 7,699 |   | 1,219 |   |
| Effect of  assumption of liabilities   |   | —                       |   | 3,576 |   | — |   | — |   | — |   |
| Funds from  operations                 |   | $                            | 90,594 |   | $ | 59,475 |   | $ | 41,871 |   | $ | 30,053 |   | $ | 10,478 |   |
|                                   |   |                         |   |   |   |   |   |   |   |   |   |
| Weighted average  shares:              |   |                         |   |   |   |   |   |   |   |   |   |
| Basic                                  |   | 172,449                      |   | 97,874 |   | 64,458 |   | 38,698 |   | 15,890 |   |
| Diluted                                |   | 172,449                      |   | 97,874 |   | 64,458 |   | 45,886 |   | 21,438 |   |

 

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**Item 7****.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

The followinginformation contains forward-looking statements within the meaning of Section27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. These statements generally are characterized by the use of terms such as“believe,” “expect” and “may.”  Althoughwe believe that the expectations reflected in such forward-looking statementsare based upon reasonable assumptions, our actual results could differmaterially from those set forth in the forward-looking statements.  Some factors that might cause such adifference include the following: changes in general economic conditions,changes in local and national real estate conditions, terrorism, extended U.S.military combat operations, availability of capital from borrowings under ourline of credit and security agreement, continued availability of proceeds fromour offerings, our ability to obtain additional permanent financing onsatisfactory terms, our ability to continue to identify suitable investments,our ability to continue to locate suitable managers and tenants for ourProperties and borrowers for mortgage loans, and the ability of such tenantsand borrowers to make payments under their respective leases or mortgage loans.  Given these uncertainties, we caution younot to place undue reliance on such statements.  We undertake no obligation to publicly release the results of anyrevisions to these forward-looking statements that may be made to reflectfuture events or circumstances or to reflect the occurrence of unanticipatedevents.  All prior period amountscontained herein have been restated to reflect the impact of the adoption ofFIN 46R.

 

**Overview**

 

Since our firstpublic offering of securities in 1997, we have grown into one of the largesthospitality REITs in the United States base on total asset value.  Our primary focus during 2003 was theinvestment of proceeds from our public offerings in the acquisition ofProperties.  During the year endedDecember 31, 2003, we received net offering proceeds of approximately $1.2billion, proceeds from the issuance of permanent financing of approximately$0.9 billion and invested approximately $1.7 billion in 73 hotel and resortproperties (including the acquisition of RFS Hotel Investors, Inc.).  As of December 31, 2003, we held interestsin real estate assets with a value of approximately $3.9 billion that consistedof 130 Properties, which includes two Properties under development.  These Properties, generally consisting ofland, buildings and equipment, are located in 37 states, the District ofColumbia and Canada.  We own 24 of ourhotel and resort properties through interests in 12 partnerships with variousthird-parties.  Of the 128 Propertiescurrently operating, we currently lease 111 to TRS entities (including TRSentities owned through joint ventures), with management performed bythird-party operators, and 17 Properties to unaffiliated third-party operatorson a triple-net basis.  As of February 20,2004, the Company had commitments to purchase an additional sixProperties.  During the first quarter of2004, we began to actively consider various alternatives including anunderwritten public offering of common stock, the merger of us and our Advisor,CNL Hospitality Corp., the listing of our shares on a national securitiesexchange or over-the-counter market, recapitalization of our current debtstructure, possible mergers, additional acquisitions or continuing to raisemoney and operate as we currently do.

 

Our results ofoperations are highly dependent upon the operations of our hotel and resortproperties.  To evaluate the financialcondition and operating performance of our Properties, management regularlyreviews operating statistics such as revenue per available room, average dailyroom rate and occupancy statistics. These statistics are compared with historical and budgeted statistics aswells as those for our industry and peer groups.

 

**CriticalAccounting Policies**

 

Our consolidatedfinancial statements include our accounts and all consolidated subsidiaries.The discussion and analysis of the financial condition and results ofoperations is based upon our consolidated financial statements, which have beenprepared in accordance with generally accepted accounting principles (“GAAP”).  The preparation of financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the reported amount of assets, liabilities, revenues and expenses, andrelated disclosures.  The estimates arebased on judgment and historical experience, and are believed to be reasonablebased on current circumstances.  Weevaluate these estimates and assumptions on an on-going basis.

 

While we do notbelieve that the reported amounts would be materially different, application ofthese policies involves the exercise of judgment and the use of assumptions asto future uncertainties and, as a result, actual results could differ fromthese estimates under different assumptions or conditions.  The following represent certain criticalaccounting policies that require the use of business judgment or significantestimates to be made:

 

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•                  *Allocation of Purchase Prices to Properties.*  We generally obtain third-party Propertyappraisals as a part of our normal pre-acquisition due diligenceprocedures.  These appraisals are usedby us to evaluate the fairness of the purchase price and to assist in theallocation of the purchase price between land, building, equipment, intangibleassets and goodwill.  In circumstanceswhere a specific Property or business acquired is expected to have significantvalues assigned to intangible assets or goodwill, we obtain third-partypurchase price allocation studies to assist in the allocation of purchase pricesto these assets.  Management believesthat these appraisals and purchase price allocation studies are carried out bycompetent third-party experts and that they result in fair allocations,however, a change in the allocations could result in an increase or decrease indepreciation expense and amortization expense and could result in differentbalance sheet classifications between assets.

 

•                  *Determinationof Fair Value of Long-lived Assets. *Managementreviews our Properties and investments in unconsolidated subsidiariesperiodically (no less than once per year) for impairment or whenever events orchanges in circumstances indicate that the carrying amount of the assets maynot be recoverable through operations. Management determines whether impairment in value has occurred bycomparing the estimated future undiscounted cash flows, including the residualvalue of the Property, with the carrying cost of the individual Property.  Although to date, no impairment has occurred,such an impairment would result in a reduction in the carrying value of theimpaired Property and an expense to us for the amount of the impairmentwrite-down.

 

In estimating future undiscounted cash flows, we usehistorical cash flows, the expected growth rate of revenues and expenses, theeffect of capital expenditures, remaining useful life of the Property, holdingperiods, and future market and economic conditions.  Variability of these and other assumptions could result in adifference in the estimated undiscounted future cash flows.

 

•                  *Depreciation and Amortization Expense*.   Depreciationand amortization expense are based on the estimated useful lives of our assetsand on the method used to calculate depreciation.  The life of the assets are based on a number of assumptions,including cost and timing of capital expenditures to maintain and refurbish theassets, and estimated holding periods. We believe our estimates are reasonable;however, a change in the estimated lives of the assets or the method ofdepreciation could affect depreciation and amortization expense and net incomeor the gain or loss on the sale of any of the assets

 

•                  *Consolidationpolicy. *In accordance withFIN 46R (defined below under “Recent Accounting Pronouncements”), weconsolidate investments in variable interest entities for which we are theprimary beneficiary.  The primarybeneficiary of a variable interest entity is the party that absorbs a majorityof a joint venture’s expected losses, receives a majority of its expectedresidual returns, or both, as a result of holding variable interests, which arethe ownership, contractual, or other pecuniary interests in an entity thatchange with changes in the fair value of the entity’s net assets excludingvariable interests.  To make thisdetermination, we must make certain estimates and assumptions about thevariable interest entities’ (“VIEs”) future operating performance. Variabilityin these estimates may result in a different conclusion regarding whether ornot to consolidate certain VIEs.

 

•                  *Valuation ofdeferred tax assets. *We account for federal and stateincome taxes with respect to our TRS subsidiaries using the asset and liabilitymethod.  Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the consolidated financial statements carrying amounts ofexisting assets and liabilities and respective tax bases and operating lossesand tax-credit carry forwards.  Deferredtax assets and liabilities are measured using enacted tax rates expected to applyto taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period that includes the enactment date.  In the event that these assumptions changethe deferred taxes may change.

 

Valuation allowances are established when necessary toreduce deferred tax assets to the amount expected to be realized.  The valuation allowance is based on ourestimates of future taxable income and ongoing prudent and feasible taxplanning strategies. Should we determine it would not be likely to realize infull the deferred tax asset in the future, we would record a valuationallowance to reduce the deferred tax asset to an amount that is more likelythan not to be realized. An adjustment to the deferred tax asset would decreaseincome in the period the determination was made.

 

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In estimating future taxable income, we must estimatefuture income using historical data, the expected growth rate of revenues andexpenses, the effect of capital expenditures, and future market and economicconditions.  Variability of these andother assumptions could result in an inability to recover the carrying value ofthe deferred tax assets.

 

**Impact of Recent Accounting Pronouncements**

 

In April 2003, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities” (“FAS 149”). FAS 149 amends and clarifiesfinancial accounting and reporting for derivative instruments, includingcertain derivative instruments embedded in other contracts (collectivelyreferred to as derivatives) and for hedging activities under FASB Statement No.133, “Accounting for Derivative Instruments and Hedging Activities.”  We adopted FAS 149 in the year endedDecember 31, 2003, and it did not have a material impact on our results ofoperations.  

 

In May 2003, theFASB issued FASB Statement No.150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity” (“FAS150”).  FAS 150 establishes standardsfor how an issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  FAS 150 requires issuers to classify certain financialinstruments as liabilities (or assets in some circumstances) that previouslywere classified as equity.  FAS 150requires that minority interests for majority owned finite lived entities beclassified as a liability and recorded at fair market value.  Effective October 29, 2003, the FASBdeferred implementation of FAS 150, as it applies to minority interests offinite lived Partnerships.  We adoptedFAS 150 in the year ended December 31, 2003, except as it applies to minorityinterest, and it did not have a material impact on our results of operations.

 

In December 2003,the FASB issued FIN 46R, “Consolidation of Variable Interest Entities”.  This Interpretation requires existingunconsolidated variable interest entities to be consolidated by their primarybeneficiaries.  The primary beneficiaryof a variable interest entity is the party that absorbs a majority of theentity’s expected losses, receives a majority of its expected residual returns,or both, as a result of holding variable interests, which are the ownership,contractual, or other pecuniary interests in an entity that change with changesin the fair value of the entity’s net assets excluding variable interests.  Prior to FIN 46R, a company generallyincluded another entity in its consolidated financial statements only if itcontrolled the entity through voting interests.  Application of FIN 46R is required in financial statements of publicentities that have interests in variable interest entities for periods endingafter March 15, 2004.  We have adoptedFIN 46R as of December 31, 2003, which resulted in the consolidation of severalof our previously unconsolidated subsidiaries. FIN 46R does not require, but does permit restatement of previouslyissued financial statements; we have restated prior years’ consolidatedfinancial statements to maintain comparability between the periods presented inthe consolidated financial statements and the accompanying notes.  These restatements had no effect onstockholders’ equity or net earnings.

 

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**Resultsof Operations**

 

**Hotel and Resort Operating Statistics**

 

The followingtable presents information related to our 128 operating Properties as ofDecember 31, 2003:

 
| **Brand Affiliation**             |   | **Hotel Properties** |   | **Rooms** |   |
|-----------------------------------|--------|----------------------|--------|-----------|--------|
| Full Service  Hotels and Resorts: |   |                 |   |      |   |
| Doubletree                        |   | 2                    |   | 852       |   |
| Embassy Suites                    |   | 4                    |   | 974       |   |
| Hilton Hotels                     |   | 10                   |   | 3,961     |   |
| Holiday Inn                       |   | 5                    |   | 954       |   |
| Hyatt                             |   | 3                    |   | 1,621     |   |
| Independent*                      |   | 3                    |   | 1,019     |   |
| Marriott                          |   | 6                    |   | 2,995     |   |
| JW Marriott                       |   | 2                    |   | 1,444     |   |
| Sheraton                          |   | 3                    |   | 659       |   |
| Four Points                       |   | 2                    |   | 412       |   |
| Wyndham                           |   | 2                    |   | 390       |   |
|                              |   | 42                   |   | 15,281    |   |
| Extended Stay  Hotels:            |   |                 |   |      |   |
| Homewood Suites                   |   | 1                    |   | 83        |   |
| Residence Inn                     |   | 26                   |   | 3,915     |   |
| TownePlace  Suites                |   | 8                    |   | 841       |   |
|                              |   | 35                   |   | 4,839     |   |
| Limited Service  Hotels:          |   |                 |   |      |   |
| Comfort Inn                       |   | 1                    |   | 184       |   |
| Courtyard                         |   | 17                   |   | 3,627     |   |
| Fairfield Inn                     |   | 1                    |   | 388       |   |
| Hampton Inn                       |   | 19                   |   | 2,431     |   |
| Holiday Inn  Express              |   | 5                    |   | 637       |   |
| SpringHill  Suites                |   | 8                    |   | 1,455     |   |
|                              |   | 51                   |   | 8,722     |   |
|                              |   |                 |   |      |   |
| Total                             |   | 128                  |   | 28,842    |   |

 

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*  Includes the 688 room Hotel Del Coronado

 

During the yearended December 31, 2003, a significant portion of our rental income and hoteland resort revenues was earned from 68 Properties operating as various Marriottbrands (including Marriott Hotels, Resorts, and Suites, JW Marriott, ResidenceInn by Marriott, TownePlace Suites by Marriott, Courtyard by Marriott,Fairfield Inn, and Spring Hill Suites by Marriott) and 36 Properties operatingas various Hilton brands (including Doubletree, Embassy Suites, Hilton Hotelsand Suites, Homewood Suites by Hilton, and Hampton Inn).  We carefully screen our managers and tenantsand we have obtained interests in non-Marriott and non-Hilton brandedProperties, however, failure of the Marriott and Hilton brands wouldsignificantly impact our results of operations.  Management believes that the risk of such a default will bereduced through future acquisitions and diversification.

 

Managementregularly reviews operating statistics such as revenue per available room(“RevPAR”), average daily rate (“ADR”) and occupancy at our Properties in orderto gauge performance as compared to the industry and past results.

 

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The following tablespresent information related to our comparable Properties by hotel and resortbrand for the years ended December 31, 2003 and 2002.  Comparable hotels are defined as Properties owned by us duringthe entirety of both periods being compared. Unaudited hotel occupancy, ADR and RevPAR are presented for hotel andresort brands for which we owned three or more hotels within each respectivebrand category.  The data available tomake comparisons is limited due to the amount, timing and extent of recent acquisitionswe have made.

 

**UNAUDITEDCOMPARABLE CNL HOTEL OPERATING STATISTICS BY BRAND**

**For theYear Ended December 31, 2003 (A)**

** **
|                              |   |       |   |      |   | **Occupancy** |   | **ADR**                |   | **RevPAR** |   |
|-----------------------------------|--------|------------|--------|-----------|--------|---------------|--------|------------------------|--------|------------|--------|
|                              |   | **Hotels** |   | **Rooms** |   | **2003**      |   | **Variance  vs. 2002** |   | **2003**   |   | **Variance   vs. 2002** |   | **2003** |   | **Variance   vs. 2002** |   |
| Full Service  Hotels and Resorts: |   |       |   |      |   |          |   |                   |   |       |   |   |   |   |   |   |   |
| Hilton                            |   | 3          |   | 1,210     |   | 74.4          | %      | 4.4 ppt                |   | $          | 95.68  |   | (4.7 | )% | $ | 71.22 |   | 1.3 | % |
|                              |   |       |   |      |   |          |   |                   |   |       |   |   |   |   |   |   |   |
| Extended Stay  Hotels:            |   |       |   |      |   |          |   |                   |   |       |   |   |   |   |   |   |   |
| Residence Inn                     |   | 10         |   | 1,543     |   | 74.5          | %      | (0.7) ppt              |   | $          | 94.40  |   | (0.7 | )% | $ | 70.29 |   | (1.6 | )% |
| TownePlace  Suites                |   | 4          |   | 412       |   | 67.5          | %      | (9.4) ppt              |   | $          | 63.12  |   | 0.8 | % | $ | 42.63 |   | (11.5 | )% |
|                              |   |       |   |      |   |          |   |                   |   |       |   |   |   |   |   |   |   |
| Limited Service  Hotels:          |   |       |   |      |   |          |   |                   |   |       |   |   |   |   |   |   |   |
| Courtyard by  Marriott            |   | 10         |   | 2,112     |   | 68.4          | %      | 1.4 ppt                |   | $          | 95.81  |   | (3.8 | )% | $ | 65.55 |   | (1.9 | )% |
| SpringHill  Suites by Marriott    |   | 6          |   | 1,090     |   | 66.1          | %      | 2.8 ppt                |   | $          | 75.38  |   | (0.6 | )% | $ | 49.81 |   | 3.7 | % |

 

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(A) Includes brands in which we owned three or more Properties duringthe entirety of both periods being presented.

 

**UNAUDITEDCOMPARABLE CNL HOTEL OPERATING STATISTICS BY PROPERTY TYPE**

**For theYear Ended December 31, 2003**

 
|                             |   |       |   |      |   | **Occupancy** |   | **ADR**                |   | **RevPAR** |   |
|----------------------------------|--------|------------|--------|-----------|--------|---------------|--------|------------------------|--------|------------|--------|
|                             |   | **Hotels** |   | **Rooms** |   | **2003**      |   | **Variance  vs. 2002** |   | **2003**   |   | **Variance   vs. 2002** |   | **2003** |   | **Variance   vs. 2002** |   |
| Full Service  Hotels and Resorts |   | 8          |   | 3,452     |   | 70.5          | %      | 4.8 ppt                |   | $          | 108.03 |   | (0.2 | )% | $ | 76.15 |   | 7.1 | % |
| Extended Stay  Hotels            |   | 14         |   | 1,955     |   | 73.0          | %      | (2.5) ppt              |   | $          | 88.30  |   | 0.2 | % | $ | 64.46 |   | (3.1 | )% |
| Limited Service  Hotels          |   | 17         |   | 3,590     |   | 66.8          | %      | 1.6 ppt                |   | $          | 85.90  |   | (3.5 | )% | $ | 57.37 |   | (1.0 | )% |
| Total Comparable  Hotels         |   | 39         |   | 8,997     |   | 69.6          | %      | 2.0 ppt                |   | $          | 95.07  |   | (0.9 | )% | $ | 66.13 |   | 2.0 | % |

 

For the year endedDecember 31, 2003, RevPAR for all comparable Properties was $66.13,representing an increase of 2.0% compared to the same period in 2002.  The RevPAR increase resulted from a 2.0percentage point increase in occupancy to 69.6% and an decrease of 0.9% in ADRto $95.07, as compared to the same period in 2002.

 

The majority ofthis growth came from the comparable Full Service Hotels and Resorts categorywith a 7.1% RevPAR increase as compared to same period of 2002.  This increase was primarily due to improvedoperating performance of the Waikiki Beach Marriott Resort, which underwentsignificant renovations in 2001 and 2002, and Hilton Costa Mesa which underwentsignificant renovations in 2002 and 2003. RevPAR for the comparable Extended Stay Hotels and Limited ServiceHotels categories decreased by 3.1% and 1.0%, respectively, as compared to thesame period in 2002.

 

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**Comparison of year ended December 31,2003 to year ended December 31, 2002**

 
|                                 |   | **Year Ended December 31,** |    |
|--------------------------------------|--------|-----------------------------|---------|
| **(amounts in thousands)**           |   | **2003**                    |    | **2002** |   | **Change** |   | **% Change** |   |
|                                 |   |                        |    |   |   |   |   |   |   |
| Hotel revenues                       |   | $                           | 490,148 |   | $ | 170,122 |   | $ | 320,026 |   | 188 | % |
| Hotel expenses                       |   | (369,693                    | )       | (118,130 | ) | (251,563 | ) | 213 | % |
| Gross margin                         |   | $                           | 120,455 |   | $ | 51,992 |   | $ | 68,463 |   | 132 | % |
| Gross margin percentage              |   | 25                          | %       | 31 | % |   |   |   |   |
|                                 |   |                        |    |   |   |   |   |   |   |
| Other Revenues                       |   |                        |    |   |   |   |   |   |   |
| Rental income from operating leases  |   | $                           | 35,263  |   | $ | 37,341 |   | $ | (2,078 | ) | (6 | )% |
| Credit enhancement funding           |   | 24,763                      |    | 10,279 |   | 14,484 |   | 141 | % |
| Interest and other income            |   | 6,966                       |    | 7,784 |   | (818 | ) | (11 | )% |
|                                 |   |                        |    |   |   |   |   |   |   |
| Other Expenses                       |   |                        |    |   |   |   |   |   |   |
| Interest and loan cost amortization  |   | 61,202                      |    | 24,718 |   | 36,484 |   | 148 | % |
| General operating and administrative |   | 10,107                      |    | 6,060 |   | 4,047 |   | 67 | % |
| Asset mgmt. fees to related party    |   | 12,782                      |    | 6,696 |   | 6,086 |   | 91 | % |
| Depreciation and amortization        |   | 76,714                      |    | 36,217 |   | 40,497 |   | 112 | % |

 

As of December 31, 2003and 2002, we owned interests in 128 and 55 operating hotel and resortProperties, respectively.  Out of thetotal increase in hotel and resort revenues during the year ended December 31,2003, $248.2 million or 78% of the increase, resulted from the acquisition ofadditional Properties during 2002 and in 2003 (including the 57 Propertiesacquired through the RFS Acquisition (defined below).  Hotel and resort revenues also increased as a result of ourtaking assignment of leases on 11 existing Properties and engaging third-partymanagers to operate these Properties. For these Properties, rental income from operating leases that wasrecorded during the first half of 2002 was replaced by hotel and resortoperating revenues and expenses for the remainder of 2002 and all for of2003.  The remaining increase of $71.8 millionor 22%, was due to improved year over year performance of our 27 comparableProperties and from the 11 Properties for which we took assignment of theleasing which were operated under the TRS structure for the entirety of bothperiods being presented.

 

The decrease in rental income for the year endedDecember 31, 2003 was due to our taking assignment of 11 existing leases, asdiscussed above, partially offset by an increase in rental income from fiveProperties acquired in July 2003, as a result of the RFS Acquisition which wereleased to third-party tenants.

 

During the yearended December 31, 2003 and 2002, we received approximately $24.8 million and$10.3 million revenues from credit enhancements (4.4% and 4.6% of totalrevenues for the years ended December 31, 2003 and 2002, respectively).  Theincrease in credit enhancement revenues during the year ended December 31,2003, as compared to the same period in 2002, was due to the increase in theamount of credit enhancements available to and utilized by us.  These guarantees are provided to us bythird-party hotel and resort managers in order to guarantee a minimum returnfor some of our Properties.  As a resultof the downturn in the overall economy and other factors, and the resultingadverse effect on our operations, we have been relying on credit enhancementsto substantially enhance our net earnings and cash flows, and to partially funddistributions.  During 2003, some of ourcredit enhancements were fully utilized or expired and for certain propertieswe obtained additional enhancements.  Tothe extent that current credit enhancements outstanding are fully utilized, orexpire, and we are not able to obtain additional enhancements, our results ofoperations and our ability to make distributions to stockholders may beadversely affected.  As of December 31,2003, we had $22.1 million available for funding under our remaining creditenhancements.  There is no assurance thatwe will continue to be able to obtain additional credit enhancements in the future.

 

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Of the totalincrease in hotel and resort operating expenses during the year ended December31, 2003, as compared to the same period in 2002, $81.3 million resulted fromthe acquisition of additional Properties acquired during 2002 and in 2003(including the 57 Properties acquired through the RFS Acquisition).  Hotel and resort operating expenses alsoincreased as a result of our taking assignment of leases on 11 existingProperties and engaging third-party managers to operate these Properties.  The remaining increase of $170.3 million wasdue to increased year over year expenses of our 27 comparable Properties andfrom the 11 Properties for which we took assignment of the leases during 2002which were operated under the TRS structure for the entirety of both periodsbeing presented.

 

Hotel and resortoperating expenses increased at a faster rate than hotel and resort revenuesresulting in decreased margins as a result of the continued economic slowdownin the lodging industry, reduced revenues from telecommunication services atthe Properties, higher hotel and resort related insurance premiums andincreased wage pressure for employees hired by hotel and resort managers at theProperties.  In addition, the shift inour Property portfolio toward a higher proportion of full service hotel andresort properties, has resulted in an increase in our food and beveragerevenues, which generally have lower profit margins than other hoteldepartments.

 

Interest expenseincreased due to increased borrowings under our permanent financingarrangements which were used for the acquisition of Properties.  Both, depreciation and amortization , aswell as, management fees increased as a result of the additional Properties weacquired.

 
|                              |   | **Year Ended December 31,** |    |
|-----------------------------------|--------|-----------------------------|---------|
| **(amounts in thousands)**        |   | **2003**                    |    | **2003% of  Hotel and  Resort  Revenue** |   | **2002** |   | **2002% of  Hotel and  Resort  Revenue** |   |
| Hotel Operating Expenses:         |   |                        |    |   |   |   |   |   |   |
| Room                              |   | $                           | 87,114  |   | 18% |   | $ | 32,574 |   | 19% |   |
| Food and beverage                 |   | 75,457                      |    | 15% |   | 20,126 |   | 12% |   |
| Other hotel operating departments |   | 17,616                      |    | 4% |   | 4,431 |   | 3% |   |
| Property operations               |   | 110,857                     |    | 23% |   | 36,454 |   | 21% |   |
| Repairs and maintenance           |   | 25,314                      |    | 5% |   | 6,842 |   | 4% |   |
| Hotel management fees             |   | 16,644                      |    | 3% |   | 5,898 |   | 3% |   |
| Sales and marketing               |   | 36,691                      |    | 7% |   | 11,805 |   | 7% |   |
| Total hotel operating expenses    |   | $                           | 369,693 |   | 75% |   | $ | 118,130 |   | 69% |   |

 

Total hotel andresort operating expenses increased as a percentage of total hotel and resortrevenues during the year ended December 31, 2003, as compared to the sameperiod in 2002.  The increase isprimarily due to an increase in food and beverage expense due to an increase inthe number of full service hotels and resorts in our portfolio of Properties,as discussed above.  Property operationsincreased from 21% of hotel revenue in 2002 to 23% of hotel revenue in 2003 asa result of increased property taxes and insurance during 2003.  The increases were due to the significantgrowth in the number of Properties we own. All other expenses incurred in 2003 remained at levels similar to thesame period in 2002, showing increases or decreases of approximately onepercent in each of the other categories.

 

During the year ended December 31, 2003, generaloperating and administrative expenses increased from approximately $6.1 millionto approximately $10.1 million, primarily due to an increase in state taxes ofapproximately $1.8 million and an increase of administrative expenses of $2.2million.  However, general operating andadministrative expenses, as a percentage of total revenues decreased from 2.7%to 1.8% for the years ended December 31, 2002 and 2003, respectively, as aresult of increases due to economies of scale created as we acquired additionalProperties in 2003.

 

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*Losses from UnconsolidatedSubsidiaries*

 

Losses fromunconsolidated subsidiaries increased $6.7 million to approximately $24.0million from approximately $17.3 million for the years ended December 31, 2003and 2002, respectively.  The followingis a summary of our equity in earnings/(losses) from unconsolidatedsubsidiaries (in thousands):

 
| **Subsidiary**                      |   | **2003** |    | **2002** |   | **(Increase)/Decrease** |   |
|-------------------------------------|--------|----------|---------|----------|--------|-------------------------|--------|
| Desert Ridge  Resorts Partners, LLC |   | $        | (9,625  | )        | $      | (6,547                  | )      | $ | (3,078 | ) |
| WB Resort  Partners, LP             |   | (10,305  | )       | (9,006   | )      | (1,299                  | )      |
| CY-SF Hotel  Parent, LP             |   | (2,125   | )       | (673     | )      | (1,452                  | )      |
| CTM Partners,  LLC                  |   | (1,926   | )       | (1,036   | )      | (890                    | )      |
| CNL Plaza, Ltd.                     |   | 11       |    | 6        |   | 5                       |   |
| Total                               |   | $        | (23,970 | )        | $      | (17,256                 | )      | $ | (6,714 | ) |

 

Losses wereprimarily due to net losses incurred by Desert Ridge Resorts Partners, LLC andCY-SF Hotel Parent, the unconsolidated subsidiaries that own the JW MarriottDesert Ridge Resort and Spa Property and the Courtyard San Francisco Property,respectively.  The JW Marriott DesertRidge Resort and Spa Property opened in November 2002 and is expected tocontinue to generate losses until it gains market share.  The Courtyard in San Francisco Property wasacquired during the middle of 2002 and, therefore, only generated losses for aportion of 2002 as compared with the entire year of 2003.  In addition, we have continued to incurlosses at CTM Partners, LLC, which owns a majority interest in a joint venturethat owns the rights to the Mobil Travel Guide.  We expect these losses to continue until this company begins togenerate sufficient revenues to offset its initial startup costs.  The Courtyard San Francisco Property and theWaikiki Beach Marriott Resort Property (owned by WB Resort Partners, LP) havecontinued to be negatively impacted by current economic conditions and adecline in tourism from Asian markets. Losses at these three Properties may increase if the economy and lodgingindustry do not recover.

 

*Discontinued Operations*

 

We account for some revenues and expenses asoriginating from discontinued operations pursuant to FASB Statement No.144,“Accounting for the Impairment or Disposal of Long-Lived Assets”  (“FASB 144”).  FASB 144 requires that sales of real estate, or theidentification of a real estate asset as held for sale, be treated asdiscontinued operations.  Any gain orloss from such disposition, and any income or expenses associated with realestate assets held for sale, are included in the consolidated statements ofearnings as discontinued operations.  Inconnection with the RFS Acquisition, we decided to sell six non-strategic hotelProperties from the former RFS portfolio (see Item 8. Financial Statements andSupplementary Data - Note 4, “RFS Acquisition” to the Consolidated FinancialStatements), and therefore, these Properties were classified as real estate heldfor sale as of December 31, 2003.

 

The post-merger results of operations for these hotelProperties are reflected as discontinued operations in the accompanyingconsolidated statement of operations. The operating results of discontinuedoperations are as follows for the period ended December 31, 2003 (inthousands):

 

| Hotel and resort  revenues           |   | $      | 5,700 |   |
|--------------------------------------|--------|--------|-------|--------|
| Hotel and resort  expenses           |   | (4,478 | )     |
| Income from  discontinued operations |   | $      | 1,222 |   |

 

25

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**Comparisonof year ended December 31, 2002 to year ended December 31, 2001**

 
|                                 |   | **Year Ended December 31,** |    |
|--------------------------------------|--------|-----------------------------|---------|
| **(amounts in thousands)**           |   | **2002**                    |    | **2001** |   | **Change** |   | **% Change** |   |
| Revenues                             |   |                        |    |   |   |   |   |   |   |
| Hotel revenues                       |   | $                           | 170,122 |   | $ | 18,697 |   | $ | 151,425 |   | 810 | % |
| Hotel expenses                       |   | (118,130                    | )       | (15,584 | ) | (102,546 | ) | 658 | % |
| Gross margin                         |   | $                           | 51,992  |   | $ | 3,113 |   | $ | 48,879 |   | 1570 | % |
| Gross margin percentage              |   | 31                          | %       | 17 | % |   |   |   |   |
|                                 |   |                        |    |   |   |   |   |   |   |
| Other Revenues                       |   |                        |    |   |   |   |   |   |   |
| Rental income from operating leases  |   | $                           | 37,341  |   | $ | 61,031 |   | $ | (23,690 | ) | (39 | )% |
| Credit enhancement funding           |   | 10,279                      |    | — |   | 10,279 |   | n/a |   |
| Interest and other income            |   | 7,784                       |    | 9,289 |   | (1,505 | ) | (16 | )% |
|                                 |   |                        |    |   |   |   |   |   |   |
| Other Expenses                       |   |                        |    |   |   |   |   |   |   |
| Interest and loan cost amortization  |   | 24,718                      |    | 16,098 |   | 8,620 |   | 54 | % |
| General operating and administrative |   | 6,060                       |    | 3,603 |   | 2,457 |   | 68 | % |
| Asset mgmt. fees to related party    |   | 6,696                       |    | 3,327 |   | 3,369 |   | 101 | % |
| Depreciation and amortization        |   | 36,217                      |    | 21,818 |   | 14,399 |   | 66 | % |

 

As of December 31, 2002, and 2001 we owned interestsin 55 and 39 Properties, respectively.  Theincrease in hotel and resort revenue and the decrease in rental income was dueto our investment in new Properties and leasing to TRS entities, as well astaking assignment of leases on 18 existing Properties and engaging third-partymanagers to operate these Properties during the year ended December 31, 2002.For these Properties, rental income from operating leases that was recordedprior to the assignment of the leases was replaced with hotel and resortoperating revenues and expenses. Two Properties that were acquired at the endof 2001 and all of the new Properties acquired in 2002 are leased to our TRSentities or the TRS entities of our partnerships and operated using third-partymanagers.

 

During the yearsended December 31, 2002 and 2001, we earned approximately $10.3 million and $0million in credit enhancement funding.  The increase during the year ended December31, 2002, as compared to the same period in 2001, was primarily due toMarriott’s forgiveness of the amounts previously funded under certain creditenhancements, resulting in income being recorded during the fourth quarter of2002.  Additionally, we leased asignificant number of our Properties to third-party tenants under triple-netleasing arrangements prior to 2002, therefore, we did not have as many TRSleases with credit enhancements.  Underthese triple — net leasing arrangements, the third-party tenants were requiredto pay minimum rental payments to us, which were not dependent on hotel andresort operating performance.

 

26

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The increase inhotel and resort operating expenses during the year ended December 31, 2002, ascompared to the same period in 2001, was primarily due to the increase in thenumber of Properties leased to TRS entities, as described above.  Similarly, interest expense increased due toadditional proceeds from permanent financing used for acquisitions.  Depreciation and amortization increased as aresult of the additional Properties owned by us and asset management feesincreased due to additional fees earned on the new Properties acquired andowned by us.

 
|                              |   | **Year Ended December 31,** |    |
|-----------------------------------|--------|-----------------------------|---------|
| **(amounts in thousands)**        |   | **2002**                    |    | **2002% of  Hotel  Revenue** |   | **2001** |   | **2001%  of Hotel  Revenue** |   |
| Hotel Operating Expenses:         |   |                        |    |   |   |   |   |   |   |
| Room                              |   | $                           | 32,574  |   | 19% |   | $ | 4,357 |   | 23% |   |
| Food and beverage                 |   | 20,126                      |    | 12% |   | 3,800 |   | 20% |   |
| Other hotel operating departments |   | 4,431                       |    | 3% |   | 628 |   | 3% |   |
| Property operations               |   | 36,454                      |    | 21% |   | 3,799 |   | 20% |   |
| Repairs and maintenance           |   | 6,842                       |    | 4% |   | 697 |   | 4% |   |
| Hotel management fees             |   | 5,898                       |    | 3% |   | 494 |   | 3% |   |
| Sales and marketing               |   | 11,805                      |    | 7% |   | 1,809 |   | 10% |   |
| Total hotel operating expenses    |   | $                           | 118,130 |   | 69% |   | $ | 15,584 |   | 83% |   |

 

Total hotel andresort operating expenses decreased as a percentage of total hotel and resortrevenues during the year ended December 31, 2002, as compared to the sameperiod in 2001.  The decrease isprimarily due to a decrease in room and food and beverage expenses due to adecrease in demand as a result of the downturn in the economy.  Several expense categories remained in 2002at similar levels, as compared to the same period in 2001, since they had nochange as a percentage of total hotel and resort revenues.

 

General operatingand administrative expenses, as a percentage of total revenues, decreased from4.0% in 2001 to 2.7% in 2002.  Thisdecrease, as a percentage of total revenues, was primarily due to theefficiencies of scale created as we acquired additional Properties in 2002.

 

*Lossesfrom Unconsolidated Subsidiaries*

 

Equity in lossesfrom unconsolidated subsidiaries increased $9.3 million to approximately $17.3million from approximately $8.0 million for the years ended December 31, 2002and 2001, respectively.  The followingis a summary of our equity in earnings/(losses) from unconsolidatedsubsidiaries (in thousands):

 
| **Subsidiary**                     |   | **2002** |    | **2001** |   | **(Increase)/Decrease** |   |
|------------------------------------|--------|----------|---------|----------|--------|-------------------------|--------|
| Desert Ridge Resorts Partners, LLC |   | $        | (6,547  | )        | $      | (3,396                  | )      | $ | (3,151 | ) |
| WB Resort Partners, LP             |   | (9,006   | )       | (4,572   | )      | (4,434                  | )      |
| CY-SF Hotel Parent, LP             |   | (673     | )       | —   |   | (673                    | )      |
| CTM Partners, LLC                  |   | (1,036   | )       | —   |   | (1,036                  | )      |
| CNL Plaza, Ltd.                    |   | 6        |    | —   |   | 6                       |   |
| Total                              |   | $        | (17,256 | )        | $      | (7,968                  | )      | $ | (9,288 | ) |

 

These losses wereprimarily due to pre-opening and marketing expenses incurred during theconstruction of the JW Marriott Desert Ridge Resort and losses at the WaikikiBeach Marriott which was open but undergoing significant renovations.  In 2002, we also incurred losses from theCourtyard San Francisco Property and CTM Partners, LLC.  The Courtyard San Francisco Property wasrecently built and was beginning to gain market share.  The San Francisco market was significantlyeffected by the events of September 11, 2001 and the recent economicdownturn.  CTM Partners, LLC was in theinitial stages of redeveloping the Mobil Travel Guide brand and did not startto generate sufficient revenues to offset startup expenses.

 

27

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**Certain Trends Which May AffectResults of Operations**

 

*Lodging Industry Environment*

 

The lodgingindustry’s RevPAR performance improved slightly in 2003.  Based on data provided by Smith TravelResearch, full-year 2003 RevPAR growth increased by 0.3% over 2002 which was atdepressed levels.  For 2004, lodgingfundamentals are anticipated to improve due to low supply levels and theanticipated recovery in demand. However, the lodging industry is susceptible tonegative deviations from forecasted results due to the unpredictable impact ofvarious factors, such as:

 

#### **(i)**                                                             Geopolitical stability: Thecontinued military activity in the Middle East, associated terrorism concernsand, consequent increase in domestic security alerts (such as, the frequenttravel warnings issued in 2003 by the Department of Homeland Security) have hada significant negative impact on lodging demand for hotel rooms.

 

#### **(ii)**                                                          Economic recovery:  The general slowdown of the economy and itseffect on corporate travel demand has lessened the industry’s profitabilityconsiderably in the last several years.

 

#### **(iii)**                                                       Pricing control:  The pervasiveness of the Internet anddiscount-travel sites has impacted hotel room rates.  Although operators have begun to seek to exercise greater controlover their distribution channels, re-establishing rate integrity is expected tobe a slow process.

 

#### **(iv)**                                                      Profitability contraction:  Given recent cost cutting measures undertakenby operators to counteract decreased demand, it is anticipated that operatorsmay have to hire additional staff and increase spending levels to meet anypotential increase in demand.

 

As a result ofthese conditions, we expect the overall lodging industry to continue to lagbehind pre-September 2001 levels, and therefore, our performance could beadversely affected in 2004.  Thesefactors could affect us by decreasing hotel and resort revenues and operating margins.

 

*Credit Enhancements*

 

We benefit fromvarious types of credit enhancements that have been provided by the managers ofsome of our Properties.  These creditenhancements may be provided to us directly or indirectly throughunconsolidated subsidiaries and guarantee us some minimum returns on ourProperties.  We recognize funding underthese guarantees either as other income, as reductions in base management feesor as liabilities, depending upon the nature of each credit enhancementagreement and whether the funded amounts are required to be repaid by us in thefuture.  All of the credit enhancementsare subject to expiration or “burn-off” provisions over time or at such timethat the funding limit has been reached. There is no assurance that market conditions will allow us to continueto obtain credit enhancements on Properties acquired in the future.  As a result of the downturn in the overalleconomy and the threat of terrorism and their adverse effect on our operations,we have been relying on credit enhancements to substantially enhance our netearnings, cash flows and our distributions. To the extent that this trend continues and current credit enhancementsare fully utilized or expire, our results of operations and our ability to payDistributions to stockholders will be affected.

 

For backgroundinformation relating to our credit enhancements, reference is made to Note 20,“Credit Enhancements” to the Consolidated Financial Statements included in Item8. “Financial Statements and Supplementary Data.”

 

As of December 31,2003, we had approximately $10.5 million, in outstanding liabilities from ourcredit enhancement guarantees.  Inaddition**,** as of December 31, 2003,we had approximately $22.1 million which remained available for funding underthese types of guarantees.  As ofDecember 31, 2003, our unconsolidated subsidiaries had liabilities ofapproximately $71.2 million relating to the potential repayment of creditenhancements and had approximately $34.3 million which remained available forfunding.

 

Liabilities fromcredit enhancements are required to be repaid by us, or our unconsolidatedsubsidiaries, at such time that the net operating income of Properties coveredby the enhancements are in excess of predefined minimum returns to us or ourunconsolidated subsidiaries.  Theserepayments will limit our ability to increase future distributions tostockholders.

 

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-Intentionally LeftBlank-

 

29

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**Liquidity and Capital Resources**

 

We use capitalprimarily to acquire or develop Properties and invest in joint ventures, whichacquire and own Properties.  Othersmaller investments may be made in businesses which are ancillary to thelodging industry.  Less than one percentof our total assets reflect investments in ancillary businesses as of December31, 2003 and 2002.  We may also providemortgage loans to operators of hotel and resort brands, but have not done so asof December 31, 2003.  We are requiredto distribute at least 90% of our taxable income to stockholders.  We generally raise funds through the salesof common stock, the acquisition of permanent financing, through our operatingactivities and through draws on our revolving line of credit.

 

**Sourcesof Liquidity and Capital Resources**

 

*EquitySales*

 

We rely on salesof our common stock to finance a significant portion of our Propertyacquisitions and other investments. During the years ended December 31, 2003, 2002 and 2001, we raisedapproximately $1.2 billion, $0.5 billion and $0.3 billion (representing 117.0million, 48.9 million and 28.6 million shares, respectively) from our commonstock offerings.

 

As of December 31,2003, net proceeds to us from our five public offerings, loan proceeds andcapital contributions from CNL Hospitality Corp. (our “Advisor”), afterdeduction of selling commissions, marketing support fees, due diligence expensereimbursements and organizational and offering expenses, totaled approximately$2.2 billion.  We have used net offeringproceeds, proceeds from permanent financing and advances from our revolvingline of credit to invest in 130 Properties located in 37 states, the Districtof Columbia, and Canada and for the other uses set forth in the table below.

 

The followingtable summarizes our proceeds, investment activity and cash available forinvestment, as of December 31, 2003 (dollars in thousands):

 
| Sources of  equity and debt proceeds:                                                    |   |      |      |
|------------------------------------------------------------------------------------------|--------|-----------|-----------|
| Net proceeds  from offerings                                                             |   | $         | 2,182,024 |   |
| Initial capital  contribution from our Advisor                                           |   | 200       |      |
| Proceeds from  permanent financings and advances on line of credit                       |   | 1,842,711 |      |
|                                                                                     |   | 4,024,935 |      |
|                                                                                     |   |      |      |
| Uses of equity  and debt proceeds:                                                       |   |      |      |
| Investment in  130 Properties (including joint ventures) and other ancillary investments |   | 3,927,843 |      |
| Repayments on  line of credit and other debt                                             |   | 466,132   |      |
| Stock  redemptions (approximately 1,516 shares)                                          |   | 13,954    |      |
| Distribution  shortfall funded by revolving line of credit                               |   | 17,074    |      |
|                                                                                     |   | 3,006,526 |      |
|                                                                                     |   |      |      |
| Cash available  for investment                                                           |   | $         | 97,093    |   |

 

The remaining cashavailable for investment is less than total cash and cash equivalents on theconsolidated balance sheet as of December 31, 2003 because the total cash andcash equivalents includes operating cash. The above table only includes cash available for investing activities.

 

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During the periodJanuary 1, 2004 through February 20, 2004, we received additional net offeringproceeds of approximately $270.0 million (representing the issuance ofapproximately 27.0 million shares of our common stock) from the 2003 Offering,used approximately $75.0 million for a non-refundable deposit in connectionwith the KSL Acquisition (see “Pending Investments, Completed Developments andother Events Subsequent to December 31, 2003” below for a description of thistransaction, although no assurance can be made that this transaction willclose). As of February 20, 2004, we had approximately $339.2 million availablefor investment in Properties, mortgage loans and other permitted investments.  We expect to use the uninvested net proceedsfrom the 2003 Offering plus any additional net offering proceeds from the saleof the remaining shares in the 2003 Offering, to complete the KSLAcquisition.  During the first quarterof 2004, we began to consider various alternatives including an underwrittenpublic offering of Common Stock, the merger of the Company and our advisor CNLHospitality Corp., the listing of our shares on a national securities exchangeor over-the-counter market, recapitalization of our current debt structure,possible mergers and/or acquisitions, or commencing the 2004 Offering.  We expect that the 2003 Offering will becompleted in March 2004, at which time no additional equity proceeds will beraised until these various alternatives are evaluated or the Company commencesthe 2004 Offering.

 

*DebtFinancing*

 

As of December 31, 2003, our total consolidated debtwas approximately $1.7 billion. We have approximately $18.8 million inprincipal amortization and debt maturities due during 2004 and approximately$1.2 billion in principal amortization and debt maturities due over thesucceeding four years. As of December 31, 2003, the weighted average interestrate on mortgages and other notes payable was approximately 6.25%.Approximately, 46% of our total debt has a variable rate of interest as ofDecember 31, 2003. 

 

We intend to borrow money in connection with the KSLAcquisition and to acquire interests in additional Properties, to invest inmortgage loans and to pay some related fees. We intend to encumber assets in connection with such borrowings.  We currently have a revolving line of creditpursuant to which we may receive cash advances of up to $96.7 million untilSeptember 2006.  A total ofapproximately $72.6 million was available under our revolving line of credit asof December 31, 2003.  The maximumamount we may borrow, absent our demonstrating that a higher level of borrowingis appropriate as approved by a majority of the independent directors, is 300%of our net assets.

 

Our objectives and strategies with respect tolong-term debt are to (i) minimize the amount of interest incurred on permanentfinancing while limiting the risk related to interest rate fluctuations throughhedging activities and (ii) maintain the ability to refinance existingdebt.  For of our mortgage notes thatbear interest at fixed rates, changes in market interest rates during the termof such debt will not affect our operating results.  The majority of our fixed rate debt arrangements allow forrepayment earlier than the stated maturity date.  These prepayment rights may afford us the opportunity to mitigatethe risk of refinancing at maturity at higher rates by refinancing prior tomaturity.

 

All of ourmortgage debt is recourse solely to specific assets except for fraud,misapplication of funds and other customary recourse provisions. Most of ourProperties serve as collateral for mortgage debt.

 

As of December 31,2003 and 2002, our fixed and variable rate debt instruments, excluding debt ofunconsolidated partnerships, were as follows (in thousands):

 
|                                       |   | **2003**  |      | **2002** |   |
|--------------------------------------------|--------|-----------|-----------|----------|--------|
|                                       |   |      |      |     |   |
| Mortgages  payable and accrued interest    |   | $         | 1,499,988 |     | $      | 401,765 |   |
| Construction  loan facilities              |   | 60,517    |      | 21,281   |   |
| Tax incremental  financing note            |   | 8,098     |      | 8,458    |   |
| Revolving line  of credit                  |   | 24,073    |      | 24,079   |   |
| Indebtedness  collateralized by Properties |   | 1,592,676 |      | 455,583  |   |
|                                       |   |      |      |     |   |
| Unsecured notes                            |   | 81,674    |      | —   |   |
|                                       |   |      |      |     |   |
|                                       |   | $         | 1,674,350 |     | $      | 455,583 |   |

 

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**Uses ofLiquidity and Capital Resources**

 

*RFS Acquisition*

 

On July 10, 2003, we completed the acquisition of RFSHotel Investors, Inc. and RFS Partnership, LP (collectively, “RFS”) forapproximately $383 million in cash ($12.35 per share or limited partnershipunit) and the assumption of approximately $409 million in liabilities includingtransaction and severance costs, which totaled approximately $55 million (the“RFS Acquisition’’).  In connection withthis transaction, we obtained interests in 57 Properties.

 

*Property Acquisitions*

 

In addition to theinterests in the Properties acquired as a result of the RFS Acquisition, weacquired the following Properties during the years ended December 31, 2002 and2003:

 
| **Brand  Affiliation**         |   | **Property  Location** |   | **Date of  Acquisition** |   | **Purchase  Price (in  thousands)** |   |
|--------------------------------|--------|------------------------|--------|--------------------------|--------|-------------------------------------|--------|
|                           |   |                   |   |                     |   |                                |   |
| SpringHill  Suites by Marriott |   | Manhattan Beach, CA    |   | January 18, 2002         |   | $                                   | 20,000 |   |
| TownePlace  Suites by Marriott |   | Manhattan Beach, CA    |   | January 18, 2002         |   | 15,000                              |   |
| SpringHill  Suites by Marriott |   | Plymouth Meeting, PA   |   | January 18, 2002         |   | 27,000                              |   |
| Courtyard by  Marriott         |   | Basking Ridge, NJ      |   | March 1, 2002            |   | 35,750                              |   |
| Marriott Hotel                 |   | Bridgewater, NJ        |   | June 14, 2002            |   | 61,500                              |   |
| Courtyard by  Marriott         |   | Newark, CA             |   | October 25, 2002         |   | 25,500                              |   |
| Residence Inn by  Marriott     |   | Newark, CA             |   | November 15, 2002        |   | 27,300                              |   |
| Doubletree  Crystal City       |   | Arlington, VA          |   | December 19, 2002        |   | 71,000                              |   |
| Hyatt Regency                  |   | Miami, FL              |   | February 20, 2003        |   | 35,800                              |   |
| JW Marriott                    |   | New Orleans, LA        |   | April 21, 2003           |   | 92,500                              |   |
| Marriott Hotel*                |   | Seattle, WA            |   | May 23, 2003             |   | 88,900                              |   |
| Marriott Hotel                 |   | Plano, TX              |   | August 15, 2003          |   | 55,550                              |   |
| Marriott Hotel                 |   | Baltimore, MD          |   | August 29, 2003          |   | 69,000                              |   |
| Courtyard by  Marriott         |   | Arlington, VA          |   | August 29, 2003          |   | 35,000                              |   |
| Hyatt                          |   | Montreal, Canada       |   | December 15, 2003        |   | 51,498                              |   |
|                                |        |                        |        |                          |        |                                     |        |  |

 

----

*                 Newly constructed

 

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In 2002 and 2003, we also acquired interests in thefollowing Properties through various joint ventures, all of which have beenconsolidated in the accompanying consolidated financial statements inaccordance with FIN 46R:

 
| **Brand  Affiliation** |   | **Property  Location** |   | **Ownership  Interest** |   | **Date of  Acquisition** |   | **Purchase  Price (in thousands)** |   |
|------------------------|--------|------------------------|--------|-------------------------|--------|--------------------------|--------|------------------------------------|--------|
|                   |   |                   |   |                    |   |                     |   |                               |   |
| Hampton Inn            |   | Houston, TX            |   | 85.0                    | %      | September 4, 2002        |   | $                                  | 14,300 |   |
| Hilton Hotel           |   | Dallas, TX             |   | 75.0                    | %      | December 24, 2002        |   | 52,000                             |   |
| Hilton Hotel           |   | Tucson, AZ             |   | 75.0                    | %      | December 24, 2002        |   | 69,000                             |   |
| Hilton Hotel           |   | Rye, NY                |   | 75.0                    | %      | February 20, 2003        |   | 75,000                             |   |
| Embassy Suites         |   | Orlando, FL            |   | 75.0                    | %      | February 20, 2003        |   | 12,500                             |   |
| Embassy Suites         |   | Arlington, VA          |   | 75.0                    | %      | February 20, 2003        |   | 45,500                             |   |
| Embassy Suites         |   | Santa Clara, CA        |   | 75.0                    | %      | February 20, 2003        |   | 46,500                             |   |
| Hyatt Regency          |   | Dearborn, MI           |   | 85.0                    | %      | August 28, 2003          |   | 65,000                             |   |
| Hampton Inn            |   | Manhattan, NY          |   | 66.7                    | %      | August 29, 2003          |   | 28,000                             |   |
| Hilton Hotel           |   | La Jolla, CA           |   | 75.0                    | %      | December 17, 2003        |   | 110,000                            |   |
| Hilton Hotel           |   | Washington, D.C.       |   | 75.0                    | %      | December 17, 2003        |   | 102,000                            |   |
| Del Coronado  Hotel    |   | Del Coronado, CA       |   | 70.0                    | %      | December 18, 2003        |   | 406,900                            |   |
|                        |        |                        |        |                         |        |                          |        |                                    |        |  |

 

The Company alsocompleted construction and opened the following three wholly owned Propertiesduring 2002:

 

| **Brand  Affiliation**     |   | **Property  Location** |   | **Opening  Date** |   |
|----------------------------|--------|------------------------|--------|-------------------|--------|
| Residence Inn by  Marriott |   | Orlando, FL            |   | February 14, 2002 |   |
| Courtyard by  Marriott     |   | Weston, FL             |   | February 14, 2002 |   |
| Courtyard by  Marriott     |   | Edison, NJ             |   | November 4, 2002  |   |

 

We are currentlydeveloping one Property in Florida, which is expected to be completed in June2004.  We also developed and opened, onFebruary 18, 2004, a Courtyard by Marriott in Foothill Ranch, California.  The total estimated final cost of thisProperty, including land, is approximately $18.3 million. We also currentlyhave six Properties held for sale.

 

*Investments*

 

On April 21, 2003and May 21, 2003, through a wholly owned subsidiary CNL Hospitality Partners,LP (“Hospitality Partners”), we invested $10 million and $5 million,respectively, in convertible preferred partnership units of Hersha HospitalityLimited Partnership (“HLP”).  Inaddition, in connection with the acquisition of an interest in the Hampton InnChelsea-Manhattan Property, on August 29, 2003, our subsidiary investedapproximately $4 million in additional convertible preferred partnership unitsof HLP.  The $19 million that oursubsidiary invested in HLP’s Series A convertible preferred partnership unitsrepresent 190,266 Series A preferred partnership units which are convertible atany time for (among other securities) approximately 2,816,460 common shares ofbeneficial interest of Hersha Hospitality Trust, HLP’s parent entity, subjectto some adjustments.  The investment inHLP is structured to provide us with a 10.5% cumulative preferred distribution,paid quarterly, and each of the current and any proposed investments in jointventures with HLP is structured to provide us with a 10.5% cumulative preferreddistribution on our unreturned capital contributions.  Distributions or returns may not be paid in the future.  HLP declares dividends quarterly in arrears.  During 2003, we received approximately $1.2million in distributions from the convertible preferred partnership units ofHLP.

 

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Subsequent toDecember 31, 2003, we exercised our registration rights under that certainRegistration Rights Agreement with HLP dated April 21, 2003 (“RegistrationRights Agreement”). Accordingly, on March 2, 2004, Hersha Hospitality Trustfiled a registration statement on Form S-3 with the Commission registering the2,816,460 common shares of beneficial interest of Hersha Hospitality Trustunderlying our 190,266 Series A preferred partnership units in HLP.  Although we invoked our registration rightsunder the Registration Rights Agreement, at this time we do not know withcertainty that we will exchange our preferred partnership units into commonshares of beneficial interest, or if we do exercise our rights to convert thepreferred partnership units into common shares of beneficial interest, that wewill sell the shares.

 

*Investments in UnconsolidatedSubsidiaries*

 

During 2003 and2002, we invested a total of approximately $0.7 million and $42.7 million,respectively, in unconsolidated subsidiaries. As of December 31, 2003, we had the following investments inunconsolidated subsidiaries:

 
| **Name**                           |   | **Total  Amount  Invested** |         | **Ownership  Interest** |   | **Description** |                                                                                                                |
|------------------------------------|--------|-----------------------------|--------------|-------------------------|--------|-----------------|---------------------------------------------------------------------------------------------------------------------|
| WB Resort  Partners, L.P.          |   | $                           | 41.6 million |                    | 49.00  | %               | A partnership which owns a resort in Hawaii                                                                         |   |
| Desert Ridge  Resort Partners, LLC |   | $                           | 25.1 million |                    | 44.00  | %               | A joint venture which owns a resort in Arizona                                                                      |   |
| CY-SF Hotel  Partnership, L.P.     |   | $                           | 13.0 million |                    | 48.15  | %               | A partnership which owns one hotel in California                                                                    |   |
| CTM Partners,  LLC                 |   | $                           | 5.2 million  |                    | 31.25  | %               | A joint venture that holds a majority interest in an  LLC that owns the licensing rights to the Mobil Travel Guide. |   |
| CNL Plaza, Ltd.                    |   | $                           | 0.3 million  |                    | 9.9    | %               | A partnership which owns an office building in  Florida where our advisor leases office space.                      |   |

 

We may be required to fund our share of shortfalls forthese subsidiaries if they occur.

 

*Distributions*

 

During the yearsended December 31, 2003, 2002 and 2001, we generated cash from operations ofapproximately $112.9 million, $76.7 million and $58.4 million,respectively.  In the years endedDecember 31, 2003, 2002, and 2001, we declared and paid distributions to ourstockholders of approximately $130.0 million, $74.2 million and $48.4 million,respectively.  In addition, on January1, 2004 and February 1, 2004, we declared distributions to stockholders ofrecord on January 1, 2004 and February 1, 2004, totaling approximately $15.7million and $16.7 million, respectively, or $0.064583 per share, payable byMarch 31, 2004.  The increase indistributions during the year ended December 31, 2003 was due to the increasein the average outstanding common shares during 2003 and an increase in cashflows resulting from the additional Properties acquired during the year.

 

Our distribution policy is based on a balancedanalysis of both current and long-term stabilized cash flows of our Propertiesand value creation, and our objective of continuing to qualify as a REIT forfederal income tax purposes.  During theyear ended December 31, 2003 distributions paid to stockholders were greaterthan cash flows generated from operations. This occurred predominantly because our acquisition strategy has focusedon opportunistically investing in larger portfolios, which allows us to obtainincreased efficiencies as we invest the proceeds received from the sale ofshares of common stock.  As a result,larger cash outlays are required at the time of purchase which causes equityproceeds to accumulate for longer periods of time in cash and short-terminvestments prior to making these purchases. In addition, many of the larger Properties that we are currentlyoperating through joint ventures are undergoing renovations or have recentlybeen renovated and as a result the cash distributions that we received fromthese joint ventures were less than what is ultimately expected to be receivedonce these Properties stabilize and obtain their projected market share.  Management expects this trend to continue in2004 as additional capital improvements are made and the renovated Propertiesstabilize.  In addition**,** the operations of our Properties havebeen adversely affected by the recent economic downturn and consequently cashdistributions from joint ventures may be delayed if economic recovery isfurther delayed.  During the year endedDecember 31, 2003 $41.5 million in cash flows from operating activities wassupported by credit enhancements and we used borrowings on our revolving lineof credit to fund a portion of our distributions.  Please see "Current and Future Cash needs" forinformation about the ability to maintain the current level of distributions tostockholders.

 

34

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During the yearended December 31, 2003, we also utilized funding under our credit enhancementsto fund a portion of distributions to stockholders.  Some credit enhancements expired during the second half of 2003and others are expected to expire in 2004. These expirations may result in a reduction in the amount of cashavailable for distribution in the future.

 

For the years ended December 31, 2003, 2002 and 2001,approximately 39%, 51%, and 52%, respectively, of the distributions received bystockholders were considered to be ordinary income and approximately 61%, 49%,and 48%, respectively, were considered a return of capital for federal incometax purposes.  No amounts distributed tothe stockholders for the years ended December 31, 2003, 2002 and 2001 wererequired to be or have been treated by us as a return of capital for purposesof calculating the stockholders’ return on their invested capital.

 

*Redemptions*

 

In October 1998,the Board of Directors elected to implement our redemption plan (see “Item 5.Market for Registrant’s Common Equity and Related Stockholder Matters” foradditional information related to the redemption plan).  During the years ended December 31, 2003,2002 and 2001, approximately 716,000 shares, 260,000 shares, and 251,000shares, respectively, were redeemed at approximately $6.6 million, $2.4million, and $2.3 million, respectively, and retired from shares outstanding ofcommon stock.  Shares were redeemed for$9.20 per share.

 

*Commitmentsand Contingencies*

 

From time to timewe may be exposed to litigation arising from an unrecognized preacquisitioncontingency on and from the operation of our business.  At this time, we do not believe thatresolution of these matters will have a material adverse effect on ourfinancial condition or results of operations. See “Item 3. Legal Proceedings” for additional information related tosignificant litigation.

 

Our Properties areoperated under various management agreements with third party managers thatcall for base management fees, which generally range from 3% to 5% of hotel andresort revenues and have an incentive management fee provision related to thehotel’s profitability.  The managementagreements generally require us to set aside 3% to 5% of hotel and resortrevenues in FF&E Reserve accounts to be used for the replacement of furniture,fixtures and equipment.  The managementagreements have terms from 10 to 20 years and generally have renewal options.

 

*Off-Balance Sheet Arrangements andContractual Cash Obligations*

 

The followingtable represents our contractual cash obligations and the future potentialcommitments, and the related payment periods and estimated payment periods asof December 31, 2003 (in thousands):

 
| **Contractual  Cash Obligations**                                                                  |   | **Less than  1  Year** |       | **2-3 Years** |       | **4-5 Years** |       | **Thereafter** |       | **Total** |       |
|----------------------------------------------------------------------------------------------------|--------|------------------------|------------|---------------|------------|---------------|------------|----------------|------------|-----------|------------|
|                                                                                               |   |                   | ** ** |          | ** ** |          | ** ** |           | ** ** |      | ** ** |
| Mortgages and  other notes payable (including the revolving line of credit and other  liabilities) |   | $                      | 18,777     |          | $          | 653,551       |       | $              | 539,335    |      | $          | 462,687 |   | $ | 1,674,350 |   |
|                                                                                                    |        |                        |            |               |            |               |            |                |            |           |            |  |  |  |  |  |

 

In addition to ourcommitments to lenders under our loan agreements and obligations to fundProperty acquisitions and development, we are a party to some contracts whichmay result in future obligations to third parties.  The future potential commitments, contingencies, and guarantees,which consist of commitments made to third parties, and are not accrued asliabilities, but we have agreed to pay in the event of some circumstances. Weconsider the likelihood of any material payments under these commitments,contingencies, and guarantees to be remote and not significant individually andin the aggregate and does not exceed approximately $15 million.  In addition, we do not have any significantoff-balance sheet arrangements.

 

35

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*PendingInvestments, Completed Developments, and Other Events Subsequent to December31, 2003*

 

On February 12,2004, through a wholly owned subsidiary, we entered into a stock purchaseagreement with KKR Partners II, L.P., a Delaware limited partnership, KKR 1996Fund, L.P., a Delaware limited partnership, Resort Associates, L.P., a Delawarelimited partnership, Golf Associates, L.P., a Delaware limited partnership andKSL Recreation Corporation, a Delaware corporation (collectively referred to as“KSL”), whereby we have agreed to acquire all of the outstanding capital stockof KSL and its subsidiaries, for approximately $1.4 billion in cash andestimated closing costs of approximately $25 million (the “KSLAcquisition”).  In connection with theKSL Acquisition, we paid a non-refundable deposit of $75 million in February2004. Upon consummation of the KSL Acquisition, the six resorts currently ownedby KSL will be acquired by our wholly owned subsidiaries and we will be subjectto the outstanding debt of KSL and its subsidiaries (approximately $794 millionas of February 2, 2004) (“Existing KSL Debt”) and any other outstandingliabilities.  The closing of the KSLAcquisition is subject to the fulfillment of certain conditions, such ascustomary approvals and other closing conditions.  If the  conditions are notsatisfied, or if satisfied, the KSL Acquisition may not occur.  We have received a commitment from a lenderto finance the KSL Acquisition with a bridge loan of up to $1.86 billion (“KSLBridge Loan”).  We may use the proceedsof the KSL Bridge Loan to repay the Existing KSL Debt simultaneously with theconsummation of the KSL Acquisition or we may only draw approximately $1.1billion on the KSL Bridge Loan and later refinance the Existing KSL Debt. Weare in the process of obtaining a commitment to refinance the Existing KSL Debt(if such debt is not repaid simultaneously with the consummation of the KSLAcquisition) and/or a portion of the KSL Bridge Loan with the proceeds ofpermanent financing to be obtained within nine months of consummating the KSLAcquisition. The KSL Bridge Loan is expected to be repaid from a combination ofpermanent debt, or out of the proceeds that we may receive from the sale of ourcommon stock through the 2004 offering.

 

In March 2004, the third-party tenants affiliated withMarriott for ten of our Properties with combined net operating income ofapproximately $13.0 million and base rental obligations of $26.7 millioninformed us that the annual net operating income projected for these Propertieswould be insufficient to fund the full amount of scheduled base rent for 2004and potentially subsequent years. As a result, we have begun discussions withthose tenants on possible alternatives that would address the currentcircumstances including our possible acquisition of the leasehold interests inthese Properties and the execution of management agreements with Marriott orits affiliates to operate the Properties under long-term contracts. Under thisalternative arrangement, these Properties would be leased to one or more of ourTRS subsidiaries and managed by an affiliate of Marriott.  This possible alternative may includeadditional guarantees, provided by Marriott, of minimum returns which may notprovide the same income stream as the base rents. The Properties are encumberedby debt and consequently any alternative solution will be subject to approvalby the lender providing the related financing. As these discussions continue itis possible that Marriott, on behalf of the tenants, will continue to pay therent due under the current lease structure until such time that these leasesare assigned or modified.  We may berequired to return the security deposits received in connection with thecurrent agreements.  Should we take assignmentof the leasehold interests, the operations of these hotels will be included inour consolidated statement of earnings in lieu of the rental income which iscurrently being recognized. The scheduled base rent payments on theseProperties and the debt service payments on the related loans are current.

 

Subsequent toDecember 31, 2003, we developed and completed a Courtyard by Marriott inFoothill Ranch, California. The Property opened on February 18, 2004.

 

36

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**Currentand Future Cash Needs**

 

Historically, hotel operating revenue and rentalincome under operating leases has been the principal source of funds to meetour short-term liquidity requirements, which primarily consist of operatingexpenses, debt service, stockholder distributions, property taxes, insuranceand asset management fees.  During thelast two years, rental income has become much less significant and we have hadto rely on credit enhancements and funding from our revolving line of credit tofund a portion of our distributions to stockholders.   Recently, credit enhancements have begun to be fully utilized orhave expired.  We expect this trend tocontinue into 2004 and there is no guarantee that we will be able to obtainadditional new credit enhancements.  Inaddition, we anticipate that our 2003 Offering will be completed in March2004.  As these events occur, we will berequired to rely more heavily on hotel operating revenues and cash flows fromoperations to fund our short-term liquidity requirements.  This may put pressure on our ability tomaintain the current level of distributions to stockholders.  To the extent that cash flows fromoperations are not sufficient to fund these expenditures, we intend to rely oncredit enhancements advances from our revolving line of credit to fund suchshortfalls (approximately $72 million available for drawing on the revolvingline of credit as of December 31, 2003). During periods that the revolving line of credit does not havesufficient capacity to fund such shortfalls, we may be required to reduce theamount of distributions paid to stockholders.

 

Our long-termliquidity needs generally include the funding of existing and futuredevelopment activity, selective asset acquisitions and the retirement ofmortgage debt of amounts outstanding under the revolving line of credit and oflong-term unsecured debt. We remain committed to maintaining a flexible capitalstructure.  Accordingly, we expect tomeet our long-term liquidity needs through a combination of (1) the issuance ofadditional equity securities, (2) the selective disposition of non-core assetsor other assets, which, upon sale will generate positive returns, (3) the saleor contribution of some of our wholly-owned Properties, development projectsand development land to strategic joint ventures to be formed with unrelatedinvestors, which will have the net effect of generating additional capitalthrough such sale or contributions and (4) the sources described above withrespect to our short-term liquidity.  Wedo not intend to reserve funds to retire existing secured or unsecuredindebtedness upon maturity.

 

Other Information

 

**Related Parties**

 

Some of ourdirectors and officers hold similar positions with our advisor, CNL HospitalityCorp., and its affiliates, including the managing dealer, CNL SecuritiesCorp.  These affiliates are by contractentitled to receive fees and compensation for services provided in connectionwith common stock offerings, and the acquisition, development, management andsale of our assets.  Amounts incurredrelating to these transactions were $202.2 million and $77.5 million for theyears ended December 31, 2003 and 2002, respectively.  Of these amounts, approximately $10.1 million and $1.9 millionare included in due to related parties in the accompanying consolidated balancesheets as of December 31, 2003 and 2002, respectively.

 

CNL HospitalityCorp. and its affiliates provide various administrative services to us,including services related to accounting; financial, tax and regulatorycompliance reporting; stockholder distributions and reporting; due diligenceand marketing; and investor relations (including administrative services inconnection with the offerings), on a day-to-day basis.  The expenses incurred for these serviceswere $6.6 million and $4.3 million for the years ended December 31, 2003 and2002, respectively.

 

We maintain bankaccounts in a bank in which some of our officers and directors serve asdirectors, and in which an affiliate of our advisor, CNL Hospitality Corp., isa stockholder.  The amount depositedwith this bank was approximately $29.0 million and $14.9 million at December31, 2003 and 2002, respectively.

 

37

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**Cash andCash Equivalents**

 

Until Propertiesare acquired, or Mortgage Loans are entered into, net offering proceeds areheld in short-term (defined as investments with a maturity of three months orless), highly liquid investments, such as demand deposit accounts at commercialbanks, certificates of deposit and money market accounts which managementbelieves to have appropriate safety of principal.  This investment strategy provides high liquidity in order tofacilitate our use of these funds to acquire Properties and to fund MortgageLoans or other permitted investments. At December 31, 2003, the Company had approximately $147.7 millioninvested in such short-term investments as compared to $52.9 million atDecember 31, 2002.  A portion of thisrepresented operating cash held at the Company’s hotels.  The increase in the amount invested inshort-term investments was primarily attributable to cash received from thesale of common stock offset by the acquisition of Properties during 2003.

 

**Item 7A****.  Quantitative and Qualitative DisclosuresAbout Market Risk.**

 

The following is aschedule of our fixed and variable rate debt maturities and principal payments,including our revolving line of credit, for each of the next five years, andthereafter (in thousands):

 

 

|       |   | **Fixed Rate  Mortgages  Payable and  Accrued Interest** |    | **Variable  Rate  Other Notes  Payable** |   | **Total  Mortgages  and Other Notes  Payable** |   |
|------------|--------|----------------------------------------------------------|---------|------------------------------------------|--------|------------------------------------------------|--------|
| 2004       |   | $                                                        | 16,432  |                                     | $      | 2,345                                          |   | $ | 18,777 |   |
| 2005       |   | 8,390                                                    |    | 46,302                                   |   | 54,692                                         |   |
| 2006       |   | 9,025                                                    |    | 589,834                                  |   | 598,859                                        |   |
| 2007       |   | 274,131                                                  |    | —                                   |   | 274,131                                        |   |
| 2008       |   | 138,004                                                  |    | 127,200                                  |   | 265,204                                        |   |
| Thereafter |   | 457,185                                                  |    | 5,502                                    |   | 462,687                                        |   |
|       |   | $                                                        | 903,167 |                                     | $      | 771,183                                        |   | $ | 1,674,350 |   |

 

We are subject tointerest rate risk through outstanding balances on our variable rate debt, asdescribed in the “Borrowings” section above. We may mitigate this risk by paying down additional outstanding balanceson our variable rate loans from offering proceeds, refinancing with fixed ratepermanent debt or obtaining cash flow hedges.

 

Managementestimates that a one-percentage point increase in interest rates for the yearended December 31, 2003, would have resulted in additional interest costs ofapproximately $7.7 million.  Thissensitivity analysis contains certain simplifying assumptions (for example, itdoes not consider the impact of changes in prepayment risk or credit spreadrisk).  Therefore, although it gives anindication of our exposure to interest rate change, it is not intended topredict future results and our actual results will likely vary.

 

In addition, wehave issued fixed interest rate mortgages payable and notes payable to lendersunder permanent financing arrangements. We believe that the estimated fairvalue of the amounts outstanding on our fixed rate mortgages payable and notespayable under permanent financing arrangements at December 31, 2003,approximated the outstanding principal amount of $822.3 million at December 31,2003.  Fair value was determined basedon market prices as of December 31, 2003.

 

38

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**Item8.   Financial Statements andSupplementary Data**

 

CNL HOSPITALITYPROPERTIES, INC.

AND SUBSIDIARIES

 

CONTENTS

 
| Report  of Independent Certified Public Accountants                            |   |
|--------------------------------------------------------------------------------|--------|
|                                                                           |   |
| Financial Statements:                                                          |   |
|                                                                           |   |
| Consolidated Balance Sheets                                                    |   |
|                                                                           |   |
| Consolidated  Statements of Earnings                                           |   |
|                                                                           |   |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Income |   |
|                                                                           |   |
| Consolidated  Statements of Cash Flows                                         |   |
|                                                                           |   |
| Notes to  Consolidated Financial Statements                                    |   |

 

39

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Report of IndependentCertified Public Accountants

 

To the Board of Directors and Stockholders

CNL Hospitality Properties, Inc.

 

 

In our opinion, the accompanying consolidated balance sheets and therelated consolidated statements of earnings, of stockholders’ equity andcomprehensive income and of cash flows present fairly, in all materialrespects, the financial position of CNL Hospitality Properties, Inc. and itssubsidiaries at December 31, 2003 and 2002, and the results of their operationsand their cash flows for each of the three years in the period ended December31, 2003 in conformity with accounting principles generally accepted in theUnited States of America.  In addition,in our opinion, the financial statement schedules listed in the index appearingunder Item 15(a)(2) presents fairly, in all material respects, the informationset forth therein when read in conjunction with the related consolidatedfinancial statements.  These financialstatements and the financial statement schedules are the responsibility of theCompany’s management; our responsibility is to express an opinion on thesefinancial statements and the financial statement schedules based on ouraudits.  We conducted our audits ofthese statements in accordance with auditing standards generally accepted inthe United States of America, which require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

As discussed in Note 2 to the consolidated financial statements, theCompany adopted Statement of Financial Accounting Standards Interpretation No.46R, “Consolidation of Variable Interest Entities”, in 2003.

 

 
| /s/ PRICEWATERHOUSECOOPERS, LLP |   |
|---------------------------------|--------|
|                            |
| Orlando, Florida                |
| March 12, 2004                  |

 

40

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CNL HOSPITALITYPROPERTIES, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands except pershare data)

 
|                                                                                                                                                                        |   | **December  31,** |      |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------|-----------|
|                                                                                                                                                                        |   | **2003**          |      | **2002** |   |
| ASSETS                                                                                                                                                                      |   |              |      |   |   |
| Hotel and resort  properties, net                                                                                                                                           |   | $                 | 3,357,376 |   | $ | 1,379,588 |   |
| Investments in  unconsolidated subsidiaries                                                                                                                                 |   | 30,714            |      | 59,369 |   |
| Real estate held  for sale                                                                                                                                                  |   | 29,550            |      | — |   |
| Cash and cash  equivalents                                                                                                                                                  |   | 147,694           |      | 52,941 |   |
| Restricted cash                                                                                                                                                             |   | 60,105            |      | 21,795 |   |
| Receivables, net                                                                                                                                                            |   | 55,410            |      | 16,670 |   |
| Goodwill and  other intangible assets, net                                                                                                                                  |   | 82,997            |      | — |   |
| Prepaid expenses  and other assets                                                                                                                                          |   | 68,388            |      | 28,283 |   |
| Loan costs, less  accumulated amortization of $5,881 and $2,719, respectively                                                                                               |   | 18,918            |      | 6,786 |   |
| Deferred income  taxes, less valuation allowance of $10,098 and $4,314, respectively                                                                                        |   | 25,826            |      | — |   |
|                                                                                                                                                                        |   | $                 | 3,876,978 |   | $ | 1,565,432 |   |
|                                                                                                                                                                        |   |              |      |   |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                   |   |              |      |   |   |
| Mortgages  payable and accrued interest                                                                                                                                     |   | $                 | 1,499,988 |   | $ | 401,765 |   |
| Other notes  payable                                                                                                                                                        |   | 150,289           |      | 29,739 |   |
| Line of credit                                                                                                                                                              |   | 24,073            |      | 24,079 |   |
| Accounts payable  and accrued expenses                                                                                                                                      |   | 68,909            |      | 24,107 |   |
| Other  liabilities                                                                                                                                                          |   | 11,847            |      | 6,569 |   |
| Due to related  parties                                                                                                                                                     |   | 11,570            |      | 2,505 |   |
| Security  deposits and unearned revenues                                                                                                                                    |   | 12,443            |      | 12,883 |   |
| Total  liabilities                                                                                                                                                          |   | 1,779,119         |      | 501,647 |   |
|                                                                                                                                                                        |   |              |      |   |   |
| Commitments and  contingencies                                                                                                                                              |   |              |      |   |   |
|                                                                                                                                                                        |   |              |      |   |   |
| Minority  interests                                                                                                                                                         |   | 157,118           |      | 49,462 |   |
|                                                                                                                                                                        |   |              |      |   |   |
| Stockholders’  equity:                                                                                                                                                 |   |              |      |   |   |
| Preferred stock,  without par value.  Authorized and unissued 3,000 shares                                                                                                  |   | —            |      | — |   |
| Excess shares,  $.01 par value per share.  Authorized and unissued 63,000 shares                                                                                            |   | —            |      | — |   |
| Common stock,  $.01 par value per share.  Authorized 450,000 shares; issued 243,752 and 126,802 shares, respectively;  outstanding 242,243 and 126,009 shares, respectively |   | 2,424             |      | 1,260 |   |
| Capital in  excess of par value                                                                                                                                             |   | 2,164,275         |      | 1,115,745 |   |
| Accumulated  distributions in excess of net earnings                                                                                                                        |   | (222,334          | )         | (98,366 | ) |
| Accumulated  other comprehensive loss                                                                                                                                       |   | (3,624            | )         | (4,316 | ) |
|                                                                                                                                                                        |   |              |      |   |   |
| Total  stockholders’ equity                                                                                                                                            |   | 1,940,741         |      | 1,014,323 |   |
|                                                                                                                                                                        |   | $                 | 3,876,978 |   | $ | 1,565,432 |   |

 

See accompanying notes toconsolidated financial statements.

 

41

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CNL HOSPITALITYPROPERTIES, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS

(in thousands except pershare data)

 
|                                                                                                                                  |   | **Year Ended  December 31,** |    |
|---------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|---------|
|                                                                                                                                  |   | **2003**                     |    | **2002** |   | **2001** |   |
| Revenues:                                                                                                                             |   |                         |    |   |   |   |   |
| Room                                                                                                                                  |   | $                            | 364,181 |   | $ | 134,646 |   | $ | 11,864 |   |
| Food and beverage                                                                                                                     |   | 98,198                       |    | 26,225 |   | 5,390 |   |
| Other hotel and  resort operating departments                                                                                         |   | 27,769                       |    | 9,251 |   | 1,443 |   |
| Rental income  from operating leases                                                                                                  |   | 35,263                       |    | 37,341 |   | 61,031 |   |
| Credit  enhancement funding                                                                                                           |   | 24,763                       |    | 10,279 |   | — |   |
| Interest and  other income                                                                                                            |   | 6,966                        |    | 7,784 |   | 9,289 |   |
|                                                                                                                                  |   | 557,140                      |    | 225,526 |   | 89,017 |   |
|                                                                                                                                  |   |                         |    |   |   |   |   |
| Expenses:                                                                                                                             |   |                         |    |   |   |   |   |
| Room                                                                                                                                  |   | 87,114                       |    | 32,574 |   | 4,357 |   |
| Food and  beverage                                                                                                                    |   | 75,457                       |    | 20,126 |   | 3,800 |   |
| Other hotel and  resort operating departments                                                                                         |   | 17,616                       |    | 4,431 |   | 628 |   |
| Property  operations                                                                                                                  |   | 110,857                      |    | 36,454 |   | 3,799 |   |
| Repairs and  maintenance                                                                                                              |   | 25,314                       |    | 6,842 |   | 697 |   |
| Hotel and resort  management fees                                                                                                     |   | 16,644                       |    | 5,898 |   | 494 |   |
| Sales and  marketing                                                                                                                  |   | 36,691                       |    | 11,805 |   | 1,809 |   |
| Interest and  loan cost amortization                                                                                                  |   | 61,202                       |    | 24,718 |   | 16,098 |   |
| General operating  and administrative                                                                                                 |   | 10,107                       |    | 6,060 |   | 3,603 |   |
| Asset management  fees to related party                                                                                               |   | 12,782                       |    | 6,696 |   | 3,327 |   |
| Depreciation and  amortization                                                                                                        |   | 76,714                       |    | 36,217 |   | 21,818 |   |
|                                                                                                                                  |   | 530,498                      |    | 191,821 |   | 60,430 |   |
| Income from  continuing operations before equity in losses of unconsolidated subsidiaries  and minority interests’ (income) loss |   | 26,642                       |    | 33,705 |   | 28,587 |   |
|                                                                                                                                  |   |                         |    |   |   |   |   |
| Equity in losses  of unconsolidated subsidiaries                                                                                      |   | (23,970                      | )       | (17,256 | ) | (7,968 | ) |
| Minority  interests’ (income) loss                                                                                               |   | 778                          |    | (639 | ) | (1,291 | ) |
|                                                                                                                                  |   |                         |    |   |   |   |   |
| Income from  continuing operations before benefit from income taxes                                                                   |   | 3,450                        |    | 15,810 |   | 19,328 |   |
|                                                                                                                                  |   |                         |    |   |   |   |   |
| Benefit from  income taxes                                                                                                            |   | 1,321                        |    | — |   | — |   |
|                                                                                                                                  |   |                         |    |   |   |   |   |
| Income from  continuing operations                                                                                                    |   | 4,771                        |    | 15,810 |   | 19,328 |   |
|                                                                                                                                  |   |                         |    |   |   |   |   |
| Income from  discontinued operations                                                                                                  |   | 1,222                        |    | — |   | — |   |
|                                                                                                                                  |   |                         |    |   |   |   |   |
| Net earnings                                                                                                                          |   | $                            | 5,993   |   | $ | 15,810 |   | $ | 19,328 |   |
| Earnings per  share of common stock  (basic and diluted):                                                                             |   |                         |    |   |   |   |   |
| Continuing  operations                                                                                                                |   | $                            | 0.02    |   | $ | 0.16 |   | $ | 0.30 |   |
| Discontinued  operations                                                                                                              |   | $                            | 0.01    |   | $ | — |   | $ | — |   |
|                                                                                                                                  |   | $                            | 0.03    |   | $ | 0.16 |   | $ | 0.30 |   |
| Weighted average  number of shares of common stock outstanding:                                                                       |   |                         |    |   |   |   |   |
| Basic and  diluted                                                                                                                    |   | 172,449                      |    | 97,874 |   | 64,458 |   |

 

See accompanying notes toconsolidated financial statements.

 

42

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CNL HOSPITALITYPROPERTIES, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTSOF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

Years Ended December 31,2003, 2002 and 2001 (in thousands, except per share data)

 
|                                                                                                  |                  | **Common Stock** |           | **Capital in  excess of  par value** |   | **Accumulated  distributions  in  excess of  net earnings** |   | **Accumulated  other  comprehensive  loss** |   | **Total** |    | **Comprehensive****income** |   |
|-------------------------------------------------------------------------------------------------------|-----------------------|------------------|----------------|--------------------------------------|--------|-------------------------------------------------------------|--------|---------------------------------------------|--------|-----------|---------|-----------------------------|--------|
|                                                                                                  |                  |             |           |                                 |   |                                                        |
|                                                                                                  |                  |             |           |                                 |   |                                                        |
|                                                                                                  |                  |             |           |                                 |   |                                                        |
|                                                                                                  | **Number of  shares** |             | **Par  value** |                                 |   |                                                        |   |                                        |   |
|                                                                                                  |                  |             |           |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Balance at  December 31, 2000                                                                         |                  | 49,002           |           | $                                    | 490    |                                                        | $      | 432,403                                     |   | $         | (10,878 | )                           | $      | — |   | $ | 422,015 |   |   |   |
|                                                                                                  |                  |             |           |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Subscriptions  received for common stock through public offerings and distribution  reinvestment plan |                  | 28,607           |           | 286                                  |   | 285,783                                                     |   | —                                      |   | —    |    | 286,069                     |   | $ | — |   |
|                                                                                                  |                  |             |           |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Retirement of  common stock                                                                           |                  | (251             | )              | (3                                   | )      | (2,310                                                      | )      | —                                      |   | —    |    | (2,313                      | )      | — |   |
|                                                                                                  |                  |             |           |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Stock issuance  costs                                                                                 |                  | —           |           | —                               |   | (34,724                                                     | )      | —                                      |   | —    |    | (34,724                     | )      | — |   |
|                                                                                                  |                  |             |           |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Net earnings                                                                                          |                  | —           |           | —                               |   | —                                                      |   | 19,328                                      |   | —    |    | 19,328                      |   | 19,328 |   |
|                                                                                                  |                  |             |           |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Current period  adjustments to recognize value of cash flow hedges                                    |                  | —           |           | —                               |   | —                                                      |   | —                                      |   | (1,190    | )       | (1,190                      | )      | (1,190 | ) |
|                                                                                                  |                  |             |           |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Total  comprehensive income                                                                           |                  | —           |           | —                               |   | —                                                      |   | —                                      |   | —    |    | —                      |   | $ | 18,138 |   |
|                                                                                                  |                  |             |           |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Distributions  declared and paid  ($.77 per share)                                                    |                  | —           |           | —                               |   | —                                                      |   | (48,409                                     | )      | —    |    | (48,409                     | )      |   |   |
|                                                                                                  |                  |             |           |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Balance at  December 31, 2001                                                                         |                  | 77,358           |           | $                                    | 773    |                                                        | $      | 681,152                                     |   | $         | (39,959 | )                           | $      | (1,190 | ) | $ | 640,776 |   |   |   |

 

See accompanying notes toconsolidated financial statements.

 

43

----

 
|                                                                                                  |                  | **Common Stock** |          | **Capital in  excess of  par value** |   | **Accumulated  distributions  in  excess of  net earnings** |   | **Accumulated  other  comprehensive  loss** |   | **Total** |    | **Comprehensive****income** |   |
|-------------------------------------------------------------------------------------------------------|-----------------------|------------------|---------------|--------------------------------------|--------|-------------------------------------------------------------|--------|---------------------------------------------|--------|-----------|---------|-----------------------------|--------|
|                                                                                                  |                  |             |          |                                 |   |                                                        |
|                                                                                                  |                  |             |          |                                 |   |                                                        |
|                                                                                                  |                  |             |          |                                 |   |                                                        |
|                                                                                                  | **Number of  shares** |             | **Par value** |                                 |   |                                                        |   |                                        |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Balance at  December 31, 2001                                                                         |                  | 77,358           |          | $                                    | 773    |                                                        | $      | 681,152                                     |   | $         | (39,959 | )                           | $      | (1,190 | ) | $ | 640,776 |   |   |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Subscriptions  received for common stock through public offerings and distribution  reinvestment plan |                  | 48,911           |          | 489                                  |   | 488,622                                                     |   | —                                      |   | —    |    | 489,111                     |   | $ | — |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Retirement of  common stock                                                                           |                  | (260             | )             | (2                                   | )      | (2,389                                                      | )      | —                                      |   | —    |    | (2,391                      | )      | — |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Stock issuance  costs                                                                                 |                  | —           |          | —                               |   | (51,640                                                     | )      | —                                      |   | —    |    | (51,640                     | )      | — |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Net earnings                                                                                          |                  | —           |          | —                               |   | —                                                      |   | 15,810                                      |   | —    |    | 15,810                      |   | 15,810 |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Current period  adjustments to recognize value of cash flow hedges                                    |                  | —           |          | —                               |   | —                                                      |   | —                                      |   | (3,126    | )       | (3,126                      | )      | (3,126 | ) |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Total  comprehensive income                                                                           |                  | —           |          | —                               |   | —                                                      |   | —                                      |   | —    |    | —                      |   | $ | 12,684 |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Distributions  declared and paid ($.78 per share)                                                     |                  | —           |          | —                               |   | —                                                      |   | (74,217                                     | )      | —    |    | (74,217                     | )      |   |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |    |                        |   |   |   |
| Balance at  December 31, 2002                                                                         |                  | 126,009          |          | $                                    | 1,260  |                                                        | $      | 1,115,745                                   |   | $         | (98,366 | )                           | $      | (4,316 | ) | $ | 1,014,323 |   |   |   |

 

See accompanying notes toconsolidated financial statements.

 

44

----

 
|                                                                                                  |                  | **Common Stock** |          | **Capital in  excess of  par value** |   | **Accumulated  distributions  in  excess of  net earnings** |   | **Accumulated  other  comprehensive  loss** |   | **Total** |     | **Comprehensive  I****ncome** |   |
|-------------------------------------------------------------------------------------------------------|-----------------------|------------------|---------------|--------------------------------------|--------|-------------------------------------------------------------|--------|---------------------------------------------|--------|-----------|----------|-------------------------------|--------|
|                                                                                                  |                  |             |          |                                 |   |                                                        |
|                                                                                                  |                  |             |          |                                 |   |                                                        |
|                                                                                                  |                  |             |          |                                 |   |                                                        |
|                                                                                                  | **Number of  shares** |             | **Par value** |                                 |   |                                                        |   |                                        |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |     |                          |   |   |   |
| Balance at  December 31, 2002                                                                         |                  | 126,009          |          | $                                    | 1,260  |                                                        | $      | 1,115,745                                   |   | $         | (98,366  | )                             | $      | (4,316 | ) | $ | 1,014,323 |   |   |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |     |                          |   |   |   |
| Subscriptions  received for common stock through public offerings and distribution  reinvestment plan |                  | 116,950          |          | 1,171                                |   | 1,168,325                                                   |   | —                                      |   | —    |     | 1,169,496                     |   | $ | — |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |     |                          |   |   |   |
| Retirement of  common stock                                                                           |                  | (716             | )             | (7                                   | )      | (6,584                                                      | )      | —                                      |   | —    |     | (6,591                        | )      | — |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |     |                          |   |   |   |
| Stock issuance  costs                                                                                 |                  | —           |          | —                               |   | (113,211                                                    | )      | —                                      |   | —    |     | (113,211                      | )      | — |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |     |                          |   |   |   |
| Net earnings                                                                                          |                  | —           |          | —                               |   | —                                                      |   | 5,993                                       |   | —    |     | 5,993                         |   | 5,993 |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |     |                          |   |   |   |
| Current period  adjustment to recognize change in value of cash flow hedges                           |                  | —           |          | —                               |   | —                                                      |   | —                                      |   | 554       |     | 554                           |   | 554 |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |     |                          |   |   |   |
| Current period  adjustment to recognize change in value of foreign operations investment  hedge       |                  | —           |          | —                               |   | —                                                      |   | —                                      |   | (791      | )        | (791                          | )      | (791 | ) |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |     |                          |   |   |   |
| Translation  adjustment from foreign operations                                                       |                  | —           |          | —                               |   | —                                                      |   | —                                      |   | 929       |     | 929                           |   | 929 |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |     |                          |   |   |   |
| Total  comprehensive income                                                                           |                  | —           |          | —                               |   | —                                                      |   | —                                      |   | —    |     | —                        |   | $ | 6,685 |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |     |                          |   |   |   |
| Distributions  declared and paid ($.78 per share)                                                     |                  | —           |          | —                               |   | —                                                      |   | (129,961                                    | )      | —    |     | (129,961                      | )      |   |   |
|                                                                                                  |                  |             |          |                                 |   |                                                        |   |                                        |   |      |     |                          |   |   |   |
| Balance at  December 31, 2003                                                                         |                  | 242,243          |          | $                                    | 2,424  |                                                        | $      | 2,164,275                                   |   | $         | (222,334 | )                             | $      | (3,624 | ) | $ | 1,940,741 |   |   |   |

 

See accompanying notes toconsolidated financial statements.

 

45

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CNL HOSPITALITYPROPERTIES, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
|                                                                                             |   | **Years  Ended December 31,** |   |
|--------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|
|                                                                                             |   | **2003**                      |   | **2002** |   | **2001** |   |
|                                                                                             |   |                          |   |   |   |   |   |
| Cash flows from  operating activities:                                                           |   |                          |   |   |   |   |   |
| Net earnings                                                                                     |   | $                             | 5,993  |   | $ | 15,810 |   | $ | 19,328 |   |
| Adjustments to  reconcile net earnings to net cash provided by operating activities:             |   |                          |   |   |   |   |   |
| Depreciation                                                                                     |   | 76,714                        |   | 36,217 |   | 21,818 |   |
| Amortization                                                                                     |   | 3,337                         |   | 1,593 |   | 1,277 |   |
| Distributions  from investment in unconsolidated subsidiaries, net of equity in  earnings/losses |   | 33,070                        |   | 27,586 |   | 9,817 |   |
| Minority  interest                                                                               |   | (778                          | )      | 639 |   | 1,291 |   |
| Utilization of  deferred tax asset                                                               |   | (1,321                        | )      | — |   | — |   |
| Changes in  operating assets and liabilities net of effects of business acquisitions:            |   |                          |   |   |   |   |   |
| Receivables                                                                                      |   | (33,298                       | )      | (13,344 | ) | (1,265 | ) |
| Due from related  parties                                                                        |   | —                        |   | (1,158 | ) | — |   |
| Prepaid expenses  and other assets                                                               |   | (1,122                        | )      | (2,417 | ) | 270 |   |
| Accrued rental  income                                                                           |   | (421                          | )      | 306 |   | (8 | ) |
| Accounts payable  and accrued expenses                                                           |   | 17,182                        |   | 11,626 |   | 3,713 |   |
| Due to related  parties                                                                          |   | 9,065                         |   | 1,460 |   | (333 | ) |
| Credit  enhancements                                                                             |   | 4,906                         |   | 2,056 |   | — |   |
| Security  deposits                                                                               |   | (993                          | )      | (2,978 | ) | 4,036 |   |
| Rents paid in  advance                                                                           |   | 553                           |   | (736 | ) | (1,536 | ) |
|                                                                                             |   |                          |   |   |   |   |   |
| Net cash  provided by operating activities                                                       |   | 112,887                       |   | 76,660 |   | 58,408 |   |
|                                                                                             |   |                          |   |   |   |   |   |
| Cash flows from  investing activities:                                                           |   |                          |   |   |   |   |   |
| Additions to  hotel Properties                                                                   |   | (1,224,313                    | )      | (446,520 | ) | (351,621 | ) |
| RFS Acquisition                                                                                  |   | (450,350                      | )      | — |   | — |   |
| Investment in  unconsolidated subsidiaries                                                       |   | (727                          | )      | (53,099 | ) | (30,804 | ) |
| Additions to  goodwill and other intangible assets                                               |   | (83,000                       | )      | — |   | — |   |
| Acquisition of  additional interest in Hotel Investors, net of Hotel Investors’ cash        |   | —                        |   | — |   | (32,884 | ) |
| Deposit on  Property and other investments                                                       |   | (24,985                       | )      | (10,300 | ) | — |   |
| Increase in  restricted cash                                                                     |   | (29,241                       | )      | (12,425 | ) | (6,106 | ) |
| Increase  (decrease) in other assets                                                             |   | (81,996                       | )      | (29,643 | ) | (11,611 | ) |
|                                                                                             |   |                          |   |   |   |   |   |
| Net cash used in  investing activities                                                           |   | (1,894,612                    | )      | (551,987 | ) | (433,026 | ) |
|                                                                                                  |        |                               |        |  |  |  |  |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

46

----

 
| Cash flows from  financing activities:                         |   |      |    |    |   |    |   |
|----------------------------------------------------------------|--------|-----------|---------|---------|--------|---------|--------|
| Net (repayments)  / proceeds from borrowings on line of credit |   | (6        | )       | 16,579  |   | 7,500   |   |
| Payment of loan  costs                                         |   | (9,751    | )       | (2,395  | )      | (4,932  | )      |
| Proceeds from  mortgage loans and other notes payable          |   | 866,912   |    | 118,720 |   | 137,990 |   |
| Principal  payments on mortgage loans                          |   | (4,730    | )       | (1,931  | )      | (1,184  | )      |
| Payments on  other notes, net of borrowings                    |   | (2,533    | )       | (26,607 | )      | —  |   |
| Net  contributions from minority interests                     |   | 107,233   |    | 14,570  |   | 37,729  |   |
| Subscriptions  received from stockholders                      |   | 1,169,496 |    | 489,111 |   | 286,069 |   |
| Distributions to  stockholders                                 |   | (129,961  | )       | (74,217 | )      | (48,409 | )      |
| Due from related  parties – offering expenses             |   | —    |    | —  |   | (1,411  | )      |
| Distributions to  minority interest                            |   | (380      | )       | (530    | )      | (2,896  | )      |
| Retirement of  common stock                                    |   | (6,591    | )       | (2,391  | )      | (2,313  | )      |
| Payment of stock  issuance costs                               |   | (113,211  | )       | (51,640 | )      | (34,724 | )      |
|                                                           |   |      |    |    |   |    |   |
| Net cash  provided by financing activities                     |   | 1,876,478 |    | 479,269 |   | 373,419 |   |
|                                                           |   |      |    |    |   |    |   |
| Net increase  (decrease) in cash and cash equivalents          |   | 94,753    |    | 3,942   |   | (1,199  | )      |
|                                                           |   |      |    |    |   |    |   |
| Cash and cash  equivalents at beginning of year                |   | 52,941    |    | 48,999  |   | 50,198  |   |
|                                                           |   |      |    |    |   |    |   |
| Cash and cash  equivalents at end of year                      |   | $         | 147,694 |    | $      | 52,941  |   | $ | 48,999 |   |
|                                                                |        |           |         |         |        |         |        |  |  |  |

 

See accompanying notes toconsolidated financial statements.

 

47

----

 
| Supplemental  disclosures of cash flow information:                                                                                              |   |    |    |   |   |   |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------|---------|--------|--------|--------|--------|
| Cash paid during  the year for interest                                                                                                          |   | $       | 54,315  |   | $      | 22,274 |   | $ | 16,597 |   |
| Supplemental  schedule of non-cash investing activities:                                                                                         |   |    |    |   |   |   |   |
| RFS Acquisition                                                                                                                                  |   |    |    |   |   |   |   |
| Purchase  accounting:                                                                                                                            |   |    |    |   |   |   |   |
| Assets acquired:                                                                                                                                 |   |    |    |   |   |   |   |
| Cash and cash  equivalents                                                                                                                       |   | $       | 5,612   |   | $      | — |   | $ | — |   |
| Restricted cash                                                                                                                                  |   | 9,069   |    | — |   | — |   |
| Accounts  receivable                                                                                                                             |   | 5,442   |    | — |   | — |   |
| Loan costs                                                                                                                                       |   | 5,543   |    | — |   | — |   |
| Prepaid expenses  and other assets                                                                                                               |   | 8,595   |    | — |   | — |   |
| Deferred tax  asset                                                                                                                              |   | 24,505  |    | — |   | — |   |
| Hotel properties                                                                                                                                 |   | 711,809 |    | — |   | — |   |
| Total                                                                                                                                            |   | $       | 770,575 |   | $      | — |   | $ | — |   |
| Liabilities  assumed:                                                                                                                            |   |    |    |   |   |   |   |
| Accounts payable  and accrued expenses                                                                                                           |   | $       | 23,207  |   | $      | — |   | $ | — |   |
| Mortgages  payable                                                                                                                               |   | 160,731 |    | — |   | — |   |
| Other notes  payable                                                                                                                             |   | 124,021 |    | — |   | — |   |
| Total                                                                                                                                            |   | $       | 307,959 |   | $      | — |   | $ | — |   |
| Net assets  acquired                                                                                                                             |   | $       | 462,616 |   | $      | — |   | $ | — |   |
|                                                                                                                                             |   |    |    |   |   |   |   |
| Net of cash                                                                                                                                      |   | $       | 457,004 |   | $      | — |   | $ | — |   |
|                                                                                                                                             |   |    |    |   |   |   |   |
| Hotel Properties  acquired as a result of the RFS Acquisition classified as Real Estate Held  for Sale                                           |   | $       | 29,550  |   | $      | — |   | $ | — |   |
|                                                                                                                                             |   |    |    |   |   |   |   |
| Amounts incurred  but not paid for construction in progress                                                                                      |   | $       | 6,827   |   | $      | 4,175  |   | $ | 6,601 |   |
|                                                                                                                                             |   |    |    |   |   |   |   |
| Allocation of  acquisition fees included in other assets to investment in hotel Properties  and unconsolidated subsidiaries and operating leases |   | $       | 77,014  |   | $      | 21,879 |   | $ | 10,657 |   |
| Supplemental  schedule of non-cash financing activities:                                                                                         |   |    |    |   |   |   |   |
| Non-cash  reduction in TIF Note                                                                                                                  |   | $       | 360     |   | $      | 1,227  |   | $ | — |   |
| Assumption of  other liabilities with Crestline lease assumption                                                                                 |   | $       | —  |   | $      | 3,576  |   | $ | — |   |
| Distributions  declared not paid to minority interest at year end                                                                                |   | $       | —  |   | $      | 106    |   | $ | 88 |   |
| Loans assumed as  a result of the acquisition of Properties                                                                                      |   | $       | 75,571  |   | $      | 9,327  |   | $ | 6,736 |   |
| (Decrease)  increase in assets related to value of cash flow hedge                                                                               |   | $       | —  |   | $      | (792   | )      | $ | 258 |   |
| Obligations  under capital leases acquired during the period                                                                                     |   | $       | —  |   | $      | 115    |   | $ | 125 |   |

 

See accompanying notes toconsolidated financial statements.

 

48

----

 

CNL HOSPITALITYPROPERTIES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS

Years Ended December 31,2003, 2002 and 2001

 

1.                                       Organization:

 

CNL Hospitality Properties, Inc. is a corporationwhich was organized pursuant to the laws of the State of Maryland on June 12,1996 and operates for federal income tax purposes as a real estate investmenttrust (a “REIT”). The terms “Company” or “Registrant” include, unless thecontext otherwise requires, CNL Hospitality Properties, Inc., CNL HospitalityPartners, LP, CNL Hospitality GP Corp., CNL Hospitality LP Corp., each of theirsubsidiaries and several consolidated partnerships and joint ventures (seeExhibit 21 for a listing of the Company’s subsidiaries).  Various other wholly or majority ownedsubsidiaries are expected to be formed in the future, primarily for purposes ofacquiring or developing hotel and resort properties (“Properties”).

 

As of December 31, 2003 the Company owned 106Properties directly and 24 Properties through equity investment interests.  The Company leases most of its Properties totaxable REIT subsidiary (“TRS”) entities and contracts with third-party hoteland resort management companies to operate these Properties.  Hotel and resort operating revenues andexpenses for these Properties are included in the consolidated results ofoperations.  Other Properties are leasedon a triple-net basis to unrelated third-party tenants who operate theProperties or contract with hotel and resort managers to operate their hoteland resort Property. Rental income from operating leases is included in theconsolidated results of operations for these Properties.

 

2.                                       Summaryof Significant Accounting Policies:

 

Principles ofConsolidation – The accompanying consolidated financialstatements include the accounts of CNL Hospitality Properties, Inc., and eachof its wholly or majority owned subsidiaries. In accordance with the provisions of Statement of Financial AccountingStandards Interpretation No. 46 (“FIN 46R”), “Consolidation of VariableInterest Entities”, the Company also consolidates joint ventures for which theCompany is the primary beneficiary.  Theprimary beneficiary of a variable interest entity is the party that absorbs amajority of the entity’s expected losses, receives a majority of its expectedresidual returns, or both, as a result of holding variable interests, which arethe ownership, contractual, or other pecuniary interests in an entity thatchange with changes in the fair value of the entity’s net assets excludingvariable interests.  All significantintercompany balances and transactions have been eliminated inconsolidation.  Interests of thirdparties are reflected as minority interests for these variable interestentities.  FIN 46R does not requirerestatement of previously issued financial statements, however, the Company hasrestated prior years’ consolidated financial statements to reflect theconsolidation of previously unconsolidated subsidiaries in order to maintaincomparability between the periods presented in the consolidated financialstatements and the accompanying notes. These restatements had no effect on stockholders’ equity, net earningsor related per share amounts for all periods presented.

 

49

----

 

The following is a summary of this restatement of thepreviously filed consolidated financials statements:

 
| **Financial  Statements** |   | **Effect of FIN 46R**                                                                                                                                                                                                                                |
|---------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Balance Sheet             |   | Increase in hotel and resort Properties offset by a  reduction in investments in unconsolidated subsidiaries.                                                                                                                                        |
| Balance Sheet             |   | Increase in mortgages and other notes payable for  loans which were previously not consolidated.                                                                                                                                                     |
| Balance Sheet             |   | Adjustments to hotel and resort operating assets and  liabilities.                                                                                                                                                                                   |
| Balance Sheet             |   | Increase in minority interest to reflect the  interests of the minority partners in the newly consolidated subsidiaries.                                                                                                                             |
| Stmt. of Earnings         |   | Increase in hotel and resort revenues from  previously unconsolidated Properties.                                                                                                                                                                    |
| Stmt. of Earnings         |   | Increase in hotel and resort expenses from  previously unconsolidated Properties.                                                                                                                                                                    |
| Stmt. of Earnings         |   | Increase in depreciation expense from previously  unconsolidated Properties.                                                                                                                                                                         |
| Stmt. of Earnings         |   | Increase in interest expense from loans held by  previously unconsolidated subsidiaries.                                                                                                                                                             |
| Stmt. of Earnings         |   | Increase in general and administrative and other  expenses which were previously not consolidated.                                                                                                                                                   |
| Stmt. of Earnings         |   | Adjustment to minority interest representing the  interest in income or losses that is allocated to minority partners of the  newly consolidated subsidiaries.                                                                                       |
| Stmt. of Earnings         |   | Adjustment to equity in losses of unconsolidated  subsidiaries for the removal of income of losses from subsidiaries that are  now consolidated.                                                                                                     |
| Stmt. of Cash Flows       |   | Adjustments to changes in operating assets and  liabilities of the newly consolidated subsidiaries.                                                                                                                                                  |
| Stmt. of Cash Flows       |   | Increase in depreciation expense as a result of the  newly consolidated Properties.                                                                                                                                                                  |
| Stmt. of Cash Flows       |   | Reduction in distributions from investment in  unconsolidated subsidiaries, net of equity in earnings/losses.  These distributions are no longer  separately reflected since their operations are consolidated in the accounts  of the Company. |
| Stmt. of Cash Flows       |   | Increase in additions to hotel and resort Properties  and a decrease in investments in unconsolidated subsidiaries as a result of  the consolidation of these subsidiaries.                                                                          |

 

Revenue Recognition- Revenues are recognized when rooms are occupied and the services have beenperformed.  Cash received from customersfor events occurring after the end of each respective year have been recordedas deposits and is included in accounts payable and accrued expenses in theaccompanying consolidated financial statements.

 

Lease Accounting- Certain Properties are leased to, and operated by, unrelated third-partytenants on a “triple-net” basis, whereby the tenant is generally responsiblefor all Property operating expenses, including property taxes, insurance, andmaintenance and repairs.  Thesethird-party Property leases are accounted for as operating leases.  When minimum lease payments vary during thelease term, income is recognized on a straight-line basis so as to produce aconstant periodic rent over the lease term. Accrued rental income, included inother assets, represents the aggregate amount of income recognized on astraight-line basis in excess of scheduled payments to date.

 

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2.                                       Summaryof Significant Accounting Policies - Continued:

 

Foreign CurrencyTranslation - The results of operations for foreign locationsare maintained in the local currency and translated using the average exchangerates during the period.  Assets andliabilities are translated to U.S. dollars using the exchange rate in effect atthe balance sheet date. The resulting translation adjustments are reflected instockholders’ equity as a cumulative foreign currency translation adjustment, acomponent of accumulated other comprehensive income (loss).  Gains and losses from foreign currencytransactions are included in the accompanying consolidated statement ofearnings.

 

Hotel and ResortProperties – Hotel and resort properties are generally comprisedof land, buildings, and equipment and are recorded at historical cost.  The cost of improvements and betterments andany interest incurred during the construction or renovation periods arecapitalized.  Costs of repairs andmaintenance are expensed as incurred.

 

Buildings and equipment are generally depreciated onthe straight-line method over their estimated useful lives of 40 and sevenyears, respectively.  When theProperties or equipment are sold, the related cost and accumulated depreciationwill be removed from the accounts and any gain or loss from sale will bereflected as income.

 

Impairment of Long-LivedAssets – Long-lived assets are tested for recoverability atleast annually or whenever events or changes in circumstances indicate that itscarrying amount may not be recoverable. The carrying amount of a long-livedasset is not recoverable if it exceeds the sum of the undiscounted cash flowsexpected to result from the use and eventual disposition of the asset. Theassessment is based on the carrying amount of the asset at the date it istested for recoverability.  Animpairment loss is recognized when the carrying amount of a long-lived assetexceeds its fair value.  If impairmentis recognized, the adjusted carrying amount of a long-lived asset is its newcost basis.

 

Investment inUnconsolidated Subsidiaries – Investments in unconsolidatedsubsidiaries are accounted for under the equity method of accounting when theCompany owns a 50% interest or less in the costs and benefits of the subsidiary.  The difference between the Company’scarrying amount of its investments in unconsolidated subsidiaries and theunderlying equity in the net assets of the subsidiaries is due to acquisitionfees and expenses which have been allocated to the Company’s investment.  These amounts are amortized over 36 years,which is the estimated life of the building and equipment commencing when thehotel and resort begins operations.

 

Cash and Cash Equivalents– The Company considers all highly liquid investments with an original maturityof three months or less to be cash equivalents.  Cash and cash equivalents consist of demand deposits atcommercial banks and money market funds. Cash accounts maintained on behalf ofthe Company in demand deposits at commercial banks and money market funds mayexceed federally insured levels; however, the Company has not experienced anylosses in such accounts.  Managementbelieves the Company is not exposed to any significant credit risk on cash andcash equivalents.

 

Certain amounts of cash are restricted for maintenanceand replacement of furniture, fixtures, and equipment at the Company’s variousProperties.  Other amounts have been setaside for capital improvements at various Properties.  These amounts have been separately classified as restricted cashin the accompanying consolidated balance sheets.

 

Credit Enhancements– The Company benefits from various types of credit enhancements that have beenprovided by the managers of many of its Properties.  All of the credit enhancements are subject to expiration, or“burn-off” provisions over time.  Thefollowing summary describes the various types of credit enhancements that theCompany benefits from:

 

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Limited Rent Guarantees – Limited rent guarantees(“LRG”) are provided by third-party hotel and resort managers to unrelatedthird-party tenants for certain Properties which the Company leases on atriple-net basis.  These creditenhancements guarantee the full, complete and timely payment of rental paymentsto the Company relating to these Properties. The credit enhancement results in rental revenue being recorded by theCompany which otherwise may not have been recorded.  The Company is not obligated to repay amounts funded under LRG’s.

 

Threshold Guarantees – Threshold guarantees (“TG”) areprovided by third-party hotel and resort managers to the Company in order toguarantee a certain minimum return for each of the Properties covered by theTG.   Generally, each TG is availablefor a specific Property or pool of Properties. Funding under these guarantees is either recognized as other income, asa reduction in base management fees or, as liabilities by the Company,depending upon the nature of each agreement and whether the funded amounts arerequired to be repaid by the Company.

 

Liquidity Facility Loans – Liquidity Facility Loans(“LFL”) are provided by third-party hotel and resort managers to the Company orits unconsolidated subsidiaries in order to guarantee a minimum distributionfor each of the Properties covered by the LFL. Funding under an LFL is recognized as a liability when the amountsfunded may be required to be repaid.

 

Senior Loan Guarantees – Senior loan guarantees(“SLG”) are provided by third-party hotel and resort managers to the Company orits unconsolidated subsidiaries in order to guarantee the payment of seniordebt service for each of the Properties covered by the SLG.  Funding under SLG is recognized as aliability because the amounts funded may be required to be repaid in thefuture.

 

Loan Costs– Loan costs incurred in connection with securing financing have beencapitalized and are being amortized over the terms of the loans using thestraight-line method, which approximates the effective interest method.

 

Earnings Per Share– Basic earnings per share is calculated based upon the weighted average numberof shares of common stock outstanding during each year, and diluted earningsper share is calculated based upon weighted average number of common sharesoutstanding plus potentially dilutive common shares.

 

Reclassification– Certain items in the prior years’ consolidated financial statements have beenreclassified to conform with the 2003 presentation.  These reclassifications had no effect on stockholders’ equity ornet earnings.

 

Goodwill and OtherIntangible Assets – The Company follows Statement ofFinancial Accounting Standards No. 141, “Business Combinations” (“SFAS 141”)and Statement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets” (“SFAS 142”).  SFAS141 requires business combinations initiated after June 30, 2001 to beaccounted for using the purchase method of accounting.  It also specifies the types of acquiredintangible assets that are required to be recognized and reported separate fromgoodwill.  SFAS 142 requires thatgoodwill and certain intangible assets with indefinite lives no longer beamortized, but instead tested for impairment at least annually.

 

IncomeTaxes - Under theprovisions of the Internal Revenue Code and applicable state laws, each TRSentity of the Company is subject to taxation of income on the profits andlosses from its tenant operations.  TheCompany does not file a consolidated return for its TRS entities.

 

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The Company accounts for federal and state incometaxes with respect to its TRS subsidiaries using the asset and liabilitymethod.  Deferred tax assets andliabilities are recognized for the future tax consequences attributable todifferences between the consolidated financial statements carrying amounts ofexisting assets and liabilities and respective tax bases and operating lossesand tax-credit carry forwards.  Deferredtax assets and liabilities are measured using enacted tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in taxrates is recognized in income in the period that includes the enactment date.Valuation allowances are established when necessary to reduce deferred taxassets to the amount expected to be realized.

 

Segment Information- The Company derives all significant revenues from a single line of business,hotel and resort real estate ownership.

 

Recent AccountingPronouncements – In April 2003, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards No.149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”(“FAS 149”).  FAS 149 amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under FASBStatement No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  The Company adopted FAS149 in the year ended December 31, 2003, and it did not have a material impacton the Company’s results of operations. 

 

In May 2003, the FASB issued Statement of FinancialAccounting Standards Statement No.150, “Accounting for Certain FinancialInstruments with Characteristics of both Liabilities and Equity” (“FAS150”).  FAS 150 establishes standardsfor how an issuer classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  FAS 150 requires issuers to classify certain financialinstruments as liabilities (or assets in some circumstances) that previously wereclassified as equity.  FAS 150 requiresthat minority interests for majority owned finite lived entities be classifiedas a liability and recorded at fair market value.  Effective October 29, 2003, the FASB deferred implementation ofFAS 150, as it applies to minority interests of finite lived Partnerships.  The Company adopted FAS 150 in the yearended December 31, 2003, except as it applies to minority interest, and it didnot have a material impact on the Company’s results of operations.

 

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In December 2003, the FASB issued Statement ofFinancial Accounting Standards Interpretation No. 46 (revised December 2003)(“FIN 46R”), “Consolidation of Variable Interest Entities”.  This Interpretation requires existingunconsolidated variable interest entities to be consolidated by their primarybeneficiaries.  The primary beneficiaryof a variable interest entity is the party that absorbs a majority of theentity’s expected losses, receives a majority of its expected residual returns,or both, as a result of holding variable interests, which are the ownership,contractual, or other pecuniary interests in an entity that change with changesin the fair value of the entity’s net assets excluding variable interests.  Prior to FIN 46R, a company generally includedanother entity in its consolidated financial statements only if it controlledthe entity through voting interests. Application of FIN 46R is required in financial statements of publicentities that have interests in variable interest entities for periods endingafter March 15, 2004.  The Company hasadopted FIN 46R as of December 31, 2003, which resulted in the consolidation ofseveral previously unconsolidated subsidiaries.  FIN 46R does not require, but does permit restatement ofpreviously issued financial statements. The Company has restated prior years’consolidated financial statements to maintain comparability between the periodspresented in the consolidated financial statements and the accompanyingnotes.  These restatements had no effecton stockholders’ equity or net earnings.

 

Use of Estimates– Company Management has made a number of estimates and assumptions relating tothe reporting of assets and liabilities and the disclosure of contingent assetsand liabilities to prepare these consolidated financial statements inconformity with generally accepted accounting principles. Actual results coulddiffer from those estimates.

 

Fair Value of FinancialInstruments - The estimated fair value of cash and cashequivalents, accounts receivable, accounts payable, accrued expenses, andvariable rate approximates carrying value because of short maturities.  The fair value of fixed rate long-term debtis determined based on market prices.

 

Derivative Instrumentsand Hedging Activities - The Company utilizes derivativeinstruments to partially offset the effect of fluctuating interest rates andforeign currency exchange rates on the cash flows associated with itsvariable-rate debt and its net investment in a foreign subsidiary. The Companyminimizes these risks by following established risk management policies andprocedures including the use of derivatives. The Company does not enter into orholds derivatives for trading or speculative purposes.  The Company records all derivativeinstruments on the balance sheet at fair value.  On the date the Company enters into a derivative contract, thederivative is designated a hedge of the exposure to variable cash flows of aforecasted transaction, referred to as a cash flow hedge, when the Companyhedges variability of cash flows related to a variable-rate asset or liabilityor its net investment in a foreign subsidiary. The effective portion of thederivative’s gain or loss is initially reported as a component of othercomprehensive income (outside earnings) and subsequently recognized inoperations in the periods in which earnings are impacted by the variability ofthe cash flows of the hedged item.  Theineffective portion of the gain or loss is reflected in earnings.

 

Advertising andPromotional Costs - The costs of advertising, promotional andmarketing programs are charged to operations in the year incurred and areincluded in hotel and resort expense in the accompanying consolidated statementof operations.  Advertising, promotionaland marketing costs totaled $36.7 million, $11.8 million and $1.8 million forthe years ended December 31, 2003, 2002 and 2001.

 

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3.                                       Assumptionof Third-Party Leases:

 

*WesternInternational Leases*

Effective January 1, 2002, the Company took assignmentof its leases with WI Hotel Leasing, LLC for seven Properties and paidapproximately $0.07 million for this assignment.  These Properties are currently being leased by a TRS of theCompany and are managed by affiliates of Marriott International, Inc.(“Marriott”).  The operations of theseProperties have been reflected in the Company’s results of operations for theyears ended December 31, 2003 and 2002.

 

*CrestlineMI-3 Leases*

Effective June 28, 2002, the Company took assignmentof its leases from CCCL Leasing, LLC, an affiliate of Crestline CapitalCorporation, for nine Properties.  TheseProperties are currently being leased by a TRS of the Company and are managedby an affiliate of Marriott.  Theoperations of these Properties are reflected in the Company’s consolidatedresults of operations for the Company effective June 28, 2002.  In connection with this transaction, CCCLLeasing, LLC gave up its claim to security deposits totaling approximately $4.0million.  In addition, the Companyassumed a liquidity facility loan of approximately $3.6 million and paidapproximately $0.03 million in legal fees and other expenses.  These transactions resulted in net otherincome of approximately $0.4 million being recognized during the year endedDecember 31, 2002.

 

*CrestlineAtlanta Leases*

Effective June 30, 2002, the Company took assignmentof its leases from CC GB Leasing, LLC, an affiliate of Crestline CapitalCorporation, for two Properties.  TheseProperties are currently leased by a TRS of the Company and are managed by anaffiliate of Interstate Hotels and Resorts under the Residence Inn by Marriottbrand.  The operations of the Propertiesare reflected in the Company’s consolidated results of operations effectiveJune 30, 2002.  In connection with thistransaction, CC GB Leasing, LLC forfeited security deposits totaling $1.4million, and the Company assumed net assets of approximately $0.1 million,resulting in other income of approximately $1.5 million being recognized by theCompany during the year ended December 31, 2002.

 

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4.                                       RFSAcquisition:

 

On July 10, 2003, the Company, through itssubsidiaries, acquired RFS Hotel Investors, Inc., a Tennessee REIT (“RFS”) andRFS Partnership, L.P. (“RFS OP”), for approximately $383 million in cash($12.35 per share or limited partnership unit) and the assumption ofapproximately $409 million in liabilities (including transaction and severancecosts, which totaled approximately $55 million).  Upon consummation of this transaction, RFS was merged with andinto a subsidiary of the Company and RFS ceased to exist as a separatecorporate entity.  Further, uponconsummation of this transaction, a subsidiary of the Company was merged withand into RFS OP, and RFS OP continues to exist as a separate entity.  Prior to the closing of this transaction,RFS was publicly traded on the New York Stock Exchange under the symbol“RFS.”  Previously, on May 9, 2003, in aseparate transaction, the Company purchased from RFS one million newly issuedshares of RFS’s common stock at a price per share of $12.35.  The former assets of RFS are now held bysubsidiaries of the Company.  Uponclosing of the transaction, in July 2003, the Company and its subsidiaries(which now include RFS OP) became responsible for the former debts andobligations of RFS and its subsidiaries (approximately $318 million).

 

The Company initially financed this transaction byusing approximately $158 million from sales of common stock in its current offering,borrowing approximately $43 million under its line of credit (amount wassubsequently repaid in November 2003), obtaining $50 million in permanentfinancing related to one of its Properties, obtaining an additional $81 millionin permanent debt funding from an existing loan and obtaining a bridge loan of$101 million (the “RFS Bridge Loan”). On August 27, 2003, the Company borrowed temporarily an additional $88million on the RFS Bridge Loan, which was repaid on September 30, 2003.  Of the $88 million borrowed, approximately$44 million was used to refinance former RFS debts, and the remaining $44million was used by the Company to acquire additional Properties.  On December 4, 2003, the Company obtained aloan totaling $130 million of which approximately $101 million was used torepay the RFS Bridge Loan.  The Companypooled 26 Properties as collateral for this loan.  On December 24, 2003, the Company obtained an additional loancollateralized by the same 26 Properties in the amount of $35 million.  The remaining proceeds from these loans willbe used to acquire interests in additional Properties.

 

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The following summarizes the estimated fair values ofthe assets acquired and liabilities assumed at the date of acquisition (inthousands):

 

|                                   |   | **July 10,  2003** |    |
|----------------------------------------|--------|-------------------------|---------|
| ASSETS                                 |   |                    |    |
| Investment in  Properties              |   | $                       | 682,259 |   |
| Real estate held  for sale             |   | 29,550                  |    |
| Cash and cash  equivalents             |   | 5,612                   |    |
| Restricted cash                        |   | 9,069                   |    |
| Accounts  receivable                   |   | 5,442                   |    |
| Prepaid expenses  and other assets     |   | 8,595                   |    |
| Loan Costs                             |   | 5,543                   |    |
| Deferred income  taxes                 |   | 24,505                  |    |
| Total assets  acquired                 |   | 770,575                 |    |
|                                   |   |                    |    |
| LIABILITIES                            |   |                    |    |
| Mortgage notes  payable                |   | 160,731                 |    |
| Other notes  payable                   |   | 124,021                 |    |
| Accounts payable  and accrued expenses |   | 23,207                  |    |
| Total  liabilities assumed             |   | 307,959                 |    |
|                                   |   |                    |    |
| Net assets  acquired                   |   | $                       | 462,616 |   |

 

In connection with the RFS Acquisition, the Companyacquired 57 hotels with approximately 8,300 rooms located in 24 states.  One of the Properties is owned through apartnership in which the Company owns a 75% interest (“Wharf Associates”).  Brands under which these hotels are operatedinclude Sheraton, Residence Inn by Marriott, Hilton, DoubleTree, Holiday Inn,Hampton Inn, and Homewood Suites by Hilton. This transaction has provided further brand and geographicdiversification to the Company’s portfolio of hotels.

 

Flagstone Hospitality Management LLC (“Flagstone”)previously managed 50 of the 57 Properties. In October 2003, the Company began terminating both existing managementlicense agreements with Flagstone and franchise licenses for many of theseProperties and entering into new management and franchise agreements withinternationally recognized hotel and resort managers. Management contracts forall 50 Properties were completely transitioned to new internationallyrecognized hotel and resort managers and franchisors by January 31, 2004.

 

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5.                                       Other Property Acquisitions:

 

In addition to the interests in the Properties acquiredthrough the RFS Acquisition the following Properties were acquired during theyears ended December 31, 2002 and 2003:

 
| **Brand  Affiliation**         |   | **Property  Location** |   | **Date of  Acquisition** |   | **Purchase  Price  (in thousands)** |   |
|--------------------------------|--------|------------------------|--------|--------------------------|--------|-------------------------------------|--------|
|                           |   |                   |   |                     |   |                                |   |
| SpringHill  Suites by Marriott |   | Manhattan Beach, CA    |   | January 18, 2002         |   | $                                   | 20,000 |   |
| TownePlace  Suites by Marriott |   | Manhattan Beach, CA    |   | January 18, 2002         |   | 15,000                              |   |
| SpringHill  Suites by Marriott |   | Plymouth Meeting, PA   |   | January 18, 2002         |   | 27,000                              |   |
| Courtyard by  Marriott         |   | Basking Ridge, NJ      |   | March 1, 2002            |   | 35,750                              |   |
| Marriott Hotel                 |   | Bridgewater, NJ        |   | June 14, 2002            |   | 61,500                              |   |
| Courtyard by  Marriott         |   | Newark, CA             |   | October 25, 2002         |   | 25,500                              |   |
| Residence Inn by  Marriott     |   | Newark, CA             |   | November 15, 2002        |   | 27,300                              |   |
| Doubletree  Crystal City       |   | Arlington, VA          |   | December 19, 2002        |   | 71,000                              |   |
| Hyatt Regency                  |   | Miami, FL              |   | February 20, 2003        |   | 35,800                              |   |
| JW Marriott                    |   | New Orleans, LA        |   | April 21, 2003           |   | 92,500                              |   |
| Marriott Hotel*                |   | Seattle, WA            |   | May 23, 2003             |   | 88,900                              |   |
| Marriott Hotel                 |   | Plano, TX              |   | August 15, 2003          |   | 55,550                              |   |
| Marriott Hotel                 |   | Baltimore, MD          |   | August 29, 2003          |   | 69,000                              |   |
| Courtyard by  Marriott         |   | Arlington, VA          |   | August 29, 2003          |   | 35,000                              |   |
| Hyatt                          |   | Montreal, Canada       |   | December 15, 2003        |   | 51,800                              |   |
|                                |        |                        |        |                          |        |                                     |        |  |

 

----

*              Newlyconstructed

 

In 2002 and 2003, the Company also acquired interestsin the following Properties through various joint ventures, all of which havebeen consolidated in the accompanying consolidated financial statements:

 
| **Brand  Affiliation** |   | **Property  Location** |   | **Ownership  Interest** |   | **Date of  Acquisition** |   | **Purchase Price  (in thousands)** |   |
|------------------------|--------|------------------------|--------|-------------------------|--------|--------------------------|--------|------------------------------------|--------|
|                   |   |                   |   |                    |   |                     |   |                               |   |
| Hampton Inn            |   | Houston, TX            |   | 85.0                    | %      | September 4, 2002        |   | $                                  | 14,300 |   |
| Hilton Hotel           |   | Dallas, TX             |   | 75.0                    | %      | December 24, 2002        |   | 52,000                             |   |
| Hilton Hotel           |   | Tucson, AZ             |   | 75.0                    | %      | December 24, 2002        |   | 69,000                             |   |
| Hilton Hotel           |   | Rye, NY                |   | 75.0                    | %      | February 20, 2003        |   | 75,000                             |   |
| Embassy Suites         |   | Orlando, FL            |   | 75.0                    | %      | February 20, 2003        |   | 12,500                             |   |
| Embassy Suites         |   | Arlington, VA          |   | 75.0                    | %      | February 20, 2003        |   | 45,500                             |   |
| Embassy Suites         |   | Santa Clara, CA        |   | 75.0                    | %      | February 20, 2003        |   | 46,500                             |   |
| Hyatt Regency          |   | Dearborn, MI           |   | 85.0                    | %      | August 28, 2003          |   | 65,000                             |   |
| Hampton Inn            |   | Manhattan, NY          |   | 66.7                    | %      | August 29, 2003          |   | 28,000                             |   |
| Hilton Hotel           |   | La Jolla, CA           |   | 75.0                    | %      | December 17, 2003        |   | 110,000                            |   |
| Hilton Hotel           |   | Washington, D.C.       |   | 75.0                    | %      | December 17, 2003        |   | 102,000                            |   |
| Del Coronado  Hotel    |   | Del Coronado, CA       |   | 70.0                    | %      | December 18, 2003        |   | 406,900                            |   |
|                        |        |                        |        |                         |        |                          |        |                                    |        |  |

 

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These partnerships typically have one or moresubsidiary borrowers, which are legally separate entities, having separateassets and liabilities from the Company and, therefore, the assets and creditof the respective entities may not be available to satisfy the debts and otherobligations of the Company.  Likewise,the assets and credit of the Company may not be available to satisfy the debtsand other obligations of the borrowers on the loans of these other entities.

 

The Company completed construction and opened thefollowing three wholly owned Properties during 2002:

 

| **Brand  Affiliation**     |   | **Property  Location** |   | **Opening  Date** |   |
|----------------------------|--------|------------------------|--------|-------------------|--------|
| Residence Inn by  Marriott |   | Orlando, FL            |   | February 14, 2002 |   |
| Courtyard by  Marriott     |   | Weston, FL             |   | February 14, 2002 |   |
| Courtyard by  Marriott     |   | Edison, NJ             |   | November 4, 2002  |   |

 

All of the Properties acquired or constructed in 2003and 2002 are leased to TRS entities of the Company and are operated bythird-party managers.  The Propertieswere recorded at cost, which was allocated between land, building, andequipment based on replacement cost using independent appraisal data.  Hotel and resort operating assets, liabilities,and any related intangible assets are also recorded based on their fairvalues.  The results of operations ofthe Properties since the date of acquisition are included in the consolidatedresults of operations.

 

The following presents unaudited pro forma results ofoperations of the Company as if the Properties were owned during the entireperiod for the years ended December 31, 2003 and 2002 including the effect ofthe RFS Acquisition (see Note 4) (in thousands, except share and per sharedata):

 

|                                                                           |   | **2003** |    | **2002** |   |
|--------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                                           |   |     |    |     |   |
| Revenues                                                                       |   | $        | 934,394 |     | $      | 910,400 |   |
| Net earnings                                                                   |   | 9,108    |    | 12,316   |   |
| Basic and diluted earnings per share                                           |   | 0.04     |    | 0.07     |   |
| Weighted average number of common shares outstanding – basic and  diluted |   | 242,321  |    | 174,184  |   |
|                                                                                |        |          |         |          |        |  |  |

 

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6.             Hotel and Resort Properties:

 

As of December 31, 2003, 17 Properties with a net bookvalue of approximately $331.9 million are leased to third-party tenants on atriple-net basis, whereby the tenant is generally responsible for all operatingexpenses relating to the Property, including property taxes, insurance, andmaintenance and repairs.  During theyears ended December 31, 2003, 2002 and 2001, these third-party tenants paidapproximately $4.6 million, $4.1 million, and $7.4 million, respectively, inproperty taxes for Properties which the Company leases on a triple-netbasis.  The Company has 104 Propertiesencumbered by debt.  Properties consistof the following at December 31 (in thousands):

 

|                           |   | **2003**  |      | **2002**  |   |
|--------------------------------|--------|-----------|-----------|-----------|--------|
|                           |   |      |      |      |   |
| Land                           |   | $         | 465,176   |      | $      | 191,515 |   |
| Buildings                      |   | 2,661,928 |      | 1,120,149 |   |
| Equipment                      |   | 337,602   |      | 121,777   |   |
|                           |   | 3,464,706 |      | 1,433,441 |   |
| Less accumulated  depreciation |   | (142,197  | )         | (67,248   | )      |
| Construction in  progress      |   | 34,867    |      | 13,395    |   |
|                           |   |      |      |      |   |
|                           |   | $         | 3,357,376 |      | $      | 1,379,588 |   |

 

The Company is currently developing one hotel Propertyin Florida, which is expected to be completed in June 2004.  This Property is expected to be leased to aTRS entity of the Company and managed by a subsidiary of Marriott.  The Company also developed and opened, onFebruary 18, 2004, a Courtyard by Marriott in Foothill Ranch, California.    The total estimated cost of this Propertyincluding land is expected to be $18.3 million.  Construction in progress of approximately $34.9 million and $13.4million respectively, for these Properties is included in hotel and resortproperties in the accompanying consolidated balance sheets as of December 31,2003 and 2002, respectively.  TheCompany has six Properties held for sale with a total book value ofapproximately $30.0 million.

 

The following is a schedule offuture minimum lease payments to be received on the noncancellable operatingleases with third-parties at December 31, 2003 (in thousands):

 

| 2004                 |   | $       | 33,605  |   |
|----------------------|--------|---------|---------|--------|
| 2005                 |   | 33,605  |    |
| 2006                 |   | 33,605  |    |
| 2007                 |   | 33,485  |    |
| 2008                 |   | 32,352  |    |
| 2009 and  thereafter |   | 208,961 |    |
|                 |   | $       | 375,613 |   |

 

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7.                                       Investmentsin Unconsolidated Subsidiaries 

 

During 2003 and 2002, the Company invested a total ofapproximately $0.7 million and $42.7 million, respectively, in unconsolidatedsubsidiaries.  As of December 31, 2003,the Company had the following investments in unconsolidated subsidiaries:

 
| **Name**                           |   | **Total  Amount  Invested** |         | **Ownership  Interest** |   | **Description** |                                                                                                                                                            |
|------------------------------------|--------|-----------------------------|--------------|-------------------------|--------|-----------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| WB Resort  Partners, L.P.          |   | $                           | 41.6 million |                    | 49.00  | %               | A partnership which owns a resort in Hawaii                                                                                                                     |   |
| Desert Ridge  Resort Partners, LLC |   | $                           | 25.1 million |                    | 44.00  | %               | A joint venture which owns a resort in Arizona                                                                                                                  |   |
| CY-SF Hotel  Partnership, L.P.     |   | $                           | 13.0 million |                    | 48.15  | %               | A partnership which owns one hotel in California                                                                                                                |   |
| CTM Partners,  LLC                 |   | $                           | 5.2 million  |                    | 31.25  | %               | A joint venture that holds a majority interest in an  LLC that owns the licensing rights to the Mobil Travel Guide.                                             |   |
| CNL Plaza, Ltd.                    |   | $                           | 0.3 million  |                    | 9.90   | %               | A partnership which owns an office building in  Florida where the Company’s advisor, CNL Hospitality Corp. (the “Advisor”)  leases office space. |   |

 

*DesertRidge Partnership*

During 2002, the Company contributed an additional$16.2 million into Desert Ridge Resort Partners, LLC (the “Desert RidgePartnership”).  The Desert RidgePartnership owns a resort which was under construction in 2001 and the majorityof 2002.  The resort opened for businesson November 30, 2002.  Limited golfcourse operations were included in the consolidated results of operations ofthe Company until the resort opened in late 2002.  The final costs of construction were paid in early 2003 and thetotal cost of the resort was approximately $301.7 million.

 

*WaikikiPartnership*

During 2002, the Company contributed an additional$8.7 million into WB Resort Partners, LP (the “Waikiki Partnership”).  The Waikiki Partnership owns the WaikikiBeach Marriott in Honolulu, Hawaii, which was undergoing significantrenovations for the majority of 2002, and was substantially complete as ofDecember 31, 2002.  The total cost ofthe resort including renovations was approximately $ 208.2 million.

 

*MobilTravel Guide*

In January 2002, the Company acquired a 25% interestin a partnership, CTM Partners, LLC, with Publications International, Ltd.(“PIL”), Hilton Hotels Corporation (“Hilton”), and Marriott that owns a 77.5%interest in a partnership with Exxon Mobil Corporation and PIL (“EMTG”).  EMTG owns the licensing rights to the Mobil TravelGuide.  The licensing rights entitleEMTG to assemble, edit, publish and sell the Mobil Travel Guide to generateadditional products using the Mobil Travel Guide brand.  The Company’s capital contribution in CTMPartners, LLC was approximately $3.6 million. EMTG has engaged Dustin/Massagli LLC, a company in which one of theCompany’s directors is president, and a director and principal stockholder, tomanage its business.  In December 2002,the Company contributed an additional $894,000 to CTM Partners, LLC, therebyincreasing the Company’s ownership in the partnership from 25% to 31.25%.  In 2003, the Company contributed anadditional $0.7 million approximately to the partnership and the other partnersalso made contributions in amounts that maintained the existing ownershipinterests of each partner.

 

61

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*OfficeBuilding*

In May 2002, the Company acquired a 9.9% interest inCNL Plaza, Ltd., a limited partnership that owns an office building located inOrlando, Florida, in which the Advisor and its affiliates lease office space,for $300,000.  The remaining interest inthe limited partnership is owned by several affiliates of the Advisor.  In connection with this acquisition, theCompany has severally guaranteed a 16.67% share, or approximately $2.6 million,of a $15.5 million unsecured promissory note of the limited partnership.

 

*SanFrancisco Partnership*

In June 2002, the Company acquired a 50% interest inCY-SF Hotel Parent, LP (the “San Francisco Partnership”), a partnership with anaffiliate of Marriott.  The SanFrancisco Partnership purchased a Courtyard by Marriott in downtown SanFrancisco for approximately $82.0 million (the “San Francisco DowntownProperty”).  The purchase was financedwith equity investments of $13.0 million each from the Company and Marriott, aswell as $56.0 million in borrowings consisting of two loans from a third-partylender.  One of the loans was in theamount of $41.0 million and requires interest payments equal to the greater ofone-month LIBOR plus 3.25 percent, or 6.25 percent.  The other loan was in the amount of $15.0 million and requiresinterest payments equal to a base rate plus 7 percent.  The base rate equals the greater of (a) thelesser of (i) one-month LIBOR or (ii) 9 percent, or (b) 3 percent.  Both loans mature in August 2007 and requiremonthly payments of interest only through July 1, 2004, at which time monthlypayments of principal and interest are due with the remaining principalbalances and any unpaid interest due at maturity.  The lessee of the San Francisco Downtown Property is a whollyowned subsidiary of the San Francisco Partnership and the Property is managedby a subsidiary of Marriott.  InSeptember 2003, Marriott contributed an additional $1.0 million to thepartnership, thereby increasing its ownership in the partnership from 50percent to 51.9 percent.

 

The following presents unaudited condensed balancesheets for these investments as of December 31, 2003 (in thousands):

 
|                                                                                                 |   | **Desert  Ridge  Resort Partners, LLC** |    | **WB  Resort  Partners,  LP** |   | **CY-SF  Hotel  Parent, LP** |   | **CTM  Partners,  LLC** |   | **CNL Plaza,  Ltd.** |   | **Total** |   |
|------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|---------|-------------------------------|--------|------------------------------|--------|-------------------------|--------|----------------------|--------|-----------|--------|
|                                                                                                 |   |                                    |    |                          |   |                         |   |                    |   |                 |   |      |   |
| Hotel and resort properties                                                                          |   | $                                       | 262,757 |                          | $      | 190,955                      |   | $                       | 77,794 |                 | $      | —    |   | $ | — |   | $ | 531,506 |   |
| Other assets                                                                                         |   | 18,077                                  |    | 21,392                        |   | 7,081                        |   | 21,327                  |   | 61,557               |   | 129,434   |   |
| Mortgages and other notes payable                                                                    |   | 268,730                                 |    | 174,080                       |   | 56,350                       |   | 5,797                   |   | 62,978               |   | 567,935   |   |
| Other liabilities                                                                                    |   | 20,362                                  |    | 22,474                        |   | 11,231                       |   | 11,457                  |   | 696                  |   | 66,220    |   |
| Partners’ capital (deficit)                                                                     |   | (8,258                                  | )       | 15,793                        |   | 17,294                       |   | 4,073                   |   | (2,117               | )      | 26,785    |   |
| Difference between carrying amount of investment and Company’s share of  partners’ capital |   | 4,380                                   |    | 4,590                         |   | 1,728                        |   | —                  |   | —               |   | 10,698    |   |
| Company’s ownership interest at end of period                                                   |   | 44.00                                   | %       | 49.00                         | %      | 48.15                        | %      | 31.25                   | %      | 9.90                 | %      |      |   |
|                                                                                                      |        |                                         |         |                               |        |                              |        |                         |        |                      |        |           |        |  |  |  |  |  |  |

 

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The following presents unaudited condensed balancesheets for these investments as of December 31, 2002 (in thousands):

 
|                                                                                                  |   | **Desert  Ridge  Resort  Partners, LLC** |    | **WB Resort  Partners, LP** |   | **CY-SF  Hotel  Parent, LP** |   | **CTM  Partners,  LLC** |   | **CNL Plaza,  Ltd.** |   | **Total** |   |
|-------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|-----------------------------|--------|------------------------------|--------|-------------------------|--------|----------------------|--------|-----------|--------|
|                                                                                                  |   |                                     |    |                        |   |                         |   |                    |   |                 |   |      |   |
| Hotel and resort  properties                                                                          |   | $                                        | 269,925 |                        | $      | 198,140                      |   | $                       | 80,374 |                 | $      | —    |   | $ | — |   | $ | 548,439 |   |
| Other assets                                                                                          |   | 21,187                                   |    | 22,091                      |   | 3,733                        |   | 12,623                  |   | 63,735               |   | 123,369   |   |
| Mortgages and  other notes Payable                                                                    |   | 230,176                                  |    | 157,798                     |   | 57,160                       |   | 2,247                   |   | 64,061               |   | 511,442   |   |
| Other  liabilities                                                                                    |   | 42,694                                   |    | 15,834                      |   | 3,725                        |   | 220                     |   | 398                  |   | 62,871    |   |
| Partners’  capital (deficit)                                                                     |   | 18,242                                   |    | 46,599                      |   | 23,222                       |   | 10,156                  |   | (724                 | )      | 97,495    |   |
| Difference  between carrying amount of investment and Company’s share of partners’  capital |   | 3,642                                    |    | 3,503                       |   | 1,831                        |   | —                  |   | —               |   | 8,976     |   |
| Company’s  ownership interest at end of period                                                   |   | 44.00                                    | %       | 49.00                       | %      | 50.00                        | %      | 31.25                   | %      | 9.90                 | %      |      |   |
|                                                                                                       |        |                                          |         |                             |        |                              |        |                         |        |                      |        |           |        |  |  |  |  |  |  |

 

The following presents unaudited condensed statementsof operations for these investments for the year ended December 31, 2003 (inthousands):

 
|                                                |   | **Desert  Ridge  Resort  Partners,  LLC** |    | **WB Resort  Partners,  LP** |   | **CY-SF  Hotel  Parent, LP** |   | **CTM  Partners,  LLC** |   | **CNL Plaza,  Ltd.** |   | **Total** |   |
|-----------------------------------------------------|--------|-------------------------------------------|---------|------------------------------|--------|------------------------------|--------|-------------------------|--------|----------------------|--------|-----------|--------|
| Revenues                                            |   | $                                         | 90,270  |                         | $      | 55,766                       |   | $                       | 15,542 |                 | $      | 2,515     |   | $ | 10,445 |   | $ | 174,538 |   |
| Cost of sales                                       |   | (43,471                                   | )       | (22,301                      | )      | (5,512                       | )      | (7,464                  | )      | (3,325               | )      | (82,073   | )      |
| Expenses                                            |   | (68,673                                   | )       | (54,496                      | )      | (14,328                      | )      | (3,043                  | )      | (7,009               | )      | (147,549  | )      |
| Minority interest in loss                           |   | —                                    |    | —                       |   | —                       |   | 1,828                   |   | —               |   | 1,828     |   |
| Net income (loss)                                   |   | $                                         | (21,874 | )                            | $      | (21,031                      | )      | $                       | (4,298 | )                    | $      | (6,164    | )      | $ | 111 |   | $ | (53,256 | ) |
|                                                |   |                                      |    |                         |   |                         |   |                    |   |                 |   |      |   |
| Income (loss) allocable to the Company              |   | $                                         | (9,625  | )                            | $      | (10,305                      | )      | $                       | (2,125 | )                    | $      | (1,926    | )      | $ | 11 |   | $ | (23,970 | ) |
| Other comprehensive income allocable to the Company |   | $                                         | 856     |                         | $      | —                       |   | $                       | — |                 | $      | —    |   | $ | — |   | $ | 856 |   |
| Company’s ownership interest at end ofperiod   |   | 44.00                                     | %       | 49.00                        | %      | 48.15                        | %      | 31.25                   | %      | 9.90                 | %      |      |   |

 

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The following presents unaudited condensed statementsof operations for these investments for the year ended December 31, 2002 (inthousands):

 
|                                                        |   | **Desert  Ridge  Resort  Partners, LLC** |    | **WB Resort  Partners, LP** |   | **CY-SF  Hotel  Parent, LP** |   | **CTM  Partners,  LLC** |   | **CNL Plaza,  Ltd.** |   | **Total** |   |
|-------------------------------------------------------------|--------|------------------------------------------|---------|-----------------------------|--------|------------------------------|--------|-------------------------|--------|----------------------|--------|-----------|--------|
| Revenues                                                    |   | $                                        | 7,344   |                        | $      | 46,657                       |   | $                       | 8,564  |                 | $      | 1,400     |   | $ | 6,088 |   | $ | 70,063 |   |
| Cost of sales                                               |   | (7,016                                   | )       | (20,407                     | )      | (2,899                       | )      | (3,941                  | )      | (1,946               | )      | (36,209   | )      |
| Expenses                                                    |   | (15,680                                  | )       | (44,657                     | )      | (7,011                       | )      | (1,604                  | )      | (4,086               | )      | (73,038   | )      |
| (Net income)  loss                                          |   | $                                        | (15,352 | )                           | $      | (18,397                      | )      | $                       | (1,346 | )                    | $      | (4,145    | )      | $ | 56 |   | $ | (39,184 | ) |
|                                                        |   |                                     |    |                        |   |                         |   |                    |   |                 |   |      |   |
| Income (loss)  allocable to the Company                     |   | $                                        | (6,547  | )                           | $      | (9,006                       | )      | $                       | (673   | )                    | $      | (1,036    | )      | $ | 6 |   | $ | (17,256 | ) |
| Other  comprehensive income (loss) allocable to the Company |   | $                                        | (2,572  | )                           | $      | —                       |   | $                       | — |                 | $      | —    |   | $ | — |   | $ | (2,572 | ) |
| Company’s  ownership interest at end of period         |   | 44.00                                    | %       | 49.00                       | %      | 50.00                        | %      | 31.25                   | %      | 9.90                 | %      |      |   |

 

The following presents unaudited condensed statementsof operations for these investments for the year ended December 31, 2001(inthousands):

 
|                                                        |   | **Desert  Ridge  Resort  Partners, LLC** |   | **WB Resort  Partners, LP** |   | **CY-SF  Hotel  Parent, LP*** |   | **CTM  Partners,  LLC*** |   | **CNL Plaza,  Ltd.*** |   | **Total** |   |
|-------------------------------------------------------------|--------|------------------------------------------|--------|-----------------------------|--------|-------------------------------|--------|--------------------------|--------|-----------------------|--------|-----------|--------|
| Revenues                                                    |   | $                                        | 8,154  |                        | $      | 10,167                        |   | $                        | — |                  | $      | —    |   | $ | — |   | $ | 18,231 |   |
| Cost of sales                                               |   | (2,235                                   | )      | (5,508                      | )      |                          | — |                     |   | —                |   |      | — |   | (7,743 | ) |
| Expenses                                                    |   | (13,830                                  | )      | (13,989                     | )      | —                        |   | —                   |   | —                |   | (27,819   | )      |
| Net loss                                                    |   | $                                        | (7,911 | )                           | $      | (9,330                        | )      | $                        | — |                  | $      | —    |   | $ | — |   | $ | (17,241 | ) |
|                                                        |   |                                     |   |                        |   |                          |   |                     |   |                  |   |      |   |
| Loss allocable  to the Company                              |   | $                                        | (3,396 | )                           | $      | (4,572                        | )      | $                        | — |                  | $      | —    |   | $ | — |   | $ | (7,968 | ) |
| Other  comprehensive Income (loss) allocable to the Company |   | $                                        | (1,370 | )                           | $      | —                        |   | $                        | — |                  | $      | —    |   | $ | — |   | $ | (1,370 | ) |
| Company’s  ownership interest at end of period         |   | 42.33                                    | %      | 49.00                       | %      | —                        |   | —                   |   | —                |   |      |   |

 

----

*                                       Theseentities were not formed until 2002, and therefore are not presented for theyear ended December 31, 2001.

 

The difference between the carrying amount of theinvestments in the above entities and the Company’s share of partners’ capitalresults from various acquisition costs and fees which are not shared by theco-venturers.  These amounts areamortized over 36 years.

 

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The Company is generally entitled to receive cashdistributions in proportion to its ownership interest in each partnership.  During the years ended December 31, 2003 and2002, the Company received the following distributions, which reduce thecarrying value of the investment (in thousands):

 

|                              |   | **December 31,** |   |
|-----------------------------------|--------|------------------|--------|
|                              |   | **2003**         |   | **2002** |   |
|                              |   |             |   |   |   |
| Desert Ridge Resort Partners, LLC |   | $                | 2,891  |   | $ | 1,432 |   |
| WB Resort Partners, LP            |   | 4,790            |   | 4,136 |   |
| CY-SF Hotel Parent, LP            |   | 1,300            |   | 716 |   |
| CNL Plaza, Ltd.                   |   | 119              |   | 164 |   |
|                              |   | $                | 9,100  |   | $ | 6,448 |   |

 

During the second half of 2003 the Company has notreceived the distributions it is entitled to from WB Resort Partners, LP due tocash operating shortfalls of this partnership. The Company does not anticipate receiving cash distributions from thispartnership during 2004.

 

8.                                       DiscontinuedOperations:

 

The Company accounts for certain revenues and expensesas originating from discontinued operations pursuant to FASB Statement No.144,“Accounting for the Impairment or Disposal of Long-Lived Assets”  (“FASB 144”).  FASB 144 requires that sales of real estate, or theidentification of a real estate asset as held for sale, be treated asdiscontinued operations.  Any gain orloss from the disposition, and any income or expenses associated with realestate assets held for sale, are included in the accompanying consolidatedstatement of earnings as discontinued operations.    In connection with the RFS Acquisition in July 2003, theCompany decided to sell six non-strategic Properties from the former RFSportfolio (see Note 4, “RFS Acquisition”), and therefore, these Properties wereclassified as real estate held for sale as of December 31, 2003.

 

The financial results for these Properties arereflected as discontinued operations in the accompanying consolidated financialstatements. The operating results of discontinued operations were as followsfor the year ended December 31 (in thousands):

 

|                                 |   | **2003** |   |
|--------------------------------------|--------|----------|--------|
| Hotel revenues                       |   | $        | 5,700  |   |
| Hotel expenses                       |   | (4,478   | )      |
| Income from  discontinued operations |   | $        | 1,222  |   |

 

In accordance with FASB 144, the Company has ceaseddepreciation on these six Properties. The forgone depreciation was approximately $0.9 million for the yearended December 31, 2003.

 

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9.                                       PrepaidExpenses and Other Assets:

 

Prepaid expenses and other assets as of December 31,2003 and 2002 were approximately $68.4 million and $28.3 million, respectively,and consist primarily of deposits and acquisition fees and expenses relating toProperties the Company intends to acquire, and investments the Company intendsto make.

 

10.                                 Investments:

 

On April 21, 2003 and May 21, 2003, the Company,through a wholly owned subsidiary, invested $10 million and $5 million,respectively, in convertible preferred partnership units of Hersha HospitalityLimited Partnership (“HLP”).  Inaddition, in connection with the acquisition of an interest in the Hampton InnChelsea-Manhattan Property, on August 29, 2003, the Company’s subsidiaryinvested approximately $4 million in additional convertible preferredpartnership units of HLP.  Thisinvestment is accounted for under the cost basis method of accounting andincluded in prepaid expenses and other assets on the accompanying consolidatedbalance sheet.  The investment in HLP isstructured to provide the Company with a 10.5% cumulative preferred distribution,paid quarterly, and each of the current and any proposed investments in jointventures with HLP is structured to provide the Company with a 10.5% cumulativepreferred distribution on its unreturned capital contributions.  There is no assurance, however, that futuredistributions or returns will be paid. HLP declares dividends quarterly in arrears.   During 2003, the Company recognized approximately $1.2 millionin distributions from its investment in the convertible preferred partnershipunits of HLP.

 

11.                                 Goodwilland Other Intangible Assets:

 

In June 2001, the FASB issued SFAS 141 and SFAS142.  SFAS 141 requires that allbusiness combinations be accounting for using the purchase method and providesnew criteria for recording intangible assets separately from goodwill.  SFAS 142 addresses the financial accountingand reporting for acquired goodwill and other intangible assets.  Goodwill and other intangible assets thathave indefinite useful lives are not amortized into results of operations but, instead,will be tested at least annually for impairment and written down whenimpaired.  The Company recorded goodwillof approximately $33.6 million and other intangible assets of approximately$49.4 million in connection with the acquisition of the Hotel del CoronadoProperty in December 2003.  Prior to theHotel del Coronado purchase, the Company had not recorded any goodwill or otherintangible assets.

 

The gross carrying amounts and accumulatedamortization of the Company’s amortizable intangible assets are as follows asof December 31, 2003:

 

| **Intangible  Asset (Amortization Period)**       |   | **Gross  Carrying Amount** |   | **Accumulated  Amortization** |   | **Net  Book Value** |   |
|---------------------------------------------------|--------|----------------------------|--------|-------------------------------|--------|---------------------|--------|
| Goodwill  (indefinite life)                       |   | $                          | 33,600 |                          | N/A    |                | $      | 33,600 |   |
| Trade mark  (indefinite lives)                    |   | 49,000                     |   | N/A                           |   | 49,000              |   |
| Customer  relationships/advanced booking(5 years) |   | 400                        |   | (3                            | )      | 397                 |   |
|                                              |   |                       |   |                          |   | $                   | 82,997 |   |
|                                                   |        |                            |        |                               |        |                     |        |  |  |

 

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11.                                 Goodwilland Other Intangible Assets:

 

The estimated amortization expense for the Company’sother intangible assets for each of the five succeeding fiscal years is asfollows:

 

| 2004  |   | $  | 80     |   |
|-------|--------|----|--------|--------|
| 2005  |   | 80 |   |
| 2006  |   | 80 |   |
| 2007  |   | 80 |   |
| 2008  |   | 77 |   |
| Total |   | $  | 397    |   |

 

12.                                 IncomeTaxes:

 

Prior to the RFS Acquisition (see Note 4), the typesof temporary differences between the tax basis of assets and liabilities andtheir GAAP financial statement reporting amounts were principally attributableto net operating losses of the Company’s TRS entities.  The Company has not recorded this futurepotential benefit because its TRS subsidiaries do not have sufficienthistorical earnings on which to base a potential future benefit.  In connection with the RFS Acquisition, theCompany acquired approximately $24.5 million, net of Section 382 limitations,of deferred tax assets arising from, principally, amortization of certain leasetermination costs with the remainder due to net operating losses at RFS’s TRSentities.  The deferred tax assets ofthe RFS TRS entities are not available to offset taxable income for theCompany’s existing TRS subsidiaries and, likewise, the deferred tax assets ofthe existing TRS entities are not available to offset taxable income of the RFSTRS entities.

 

The income taxbenefit consists of the following component for each of the years endedDecember 31:

 

|                      |   | **(In  thousands)** |   |
|---------------------------|--------|---------------------|--------|
|                      |   | **2003**            |   | **2002** |   | **2001** |   |
|                      |   |                |   |   |   |   |   |
| Current:                  |   |                |   |   |   |   |   |
| Federal                   |   | $                   | — |   | $ | — |   | $ | — |   |
| State                     |   | —              |   | — |   | — |   |
|                      |   | —              |   | — |   | — |   |
| Deferred:                 |   |                |   |   |   |   |   |
| Federal                   |   | (1,321              | )      | — |   | — |   |
| State                     |   | —              |   | — |   | — |   |
|                      |   | (1,321              | )      | — |   | — |   |
| Total income tax  benefit |   | $                   | (1,321 | ) | $ | - |   | $ | - |   |

 

The income taxbenefit has been allocated as follows:

 

|                      |   | **(In  thousands)** |   |
|---------------------------|--------|---------------------|--------|
|                      |   | **2003**            |   | **2002** |   | **2001** |   |
|                      |   |                |   |   |   |   |   |
| Continuing  operations    |   | $                   | (1,231 | ) | $ | — |   | $ | — |   |
| Discontinued  operations  |   | —              |   | — |   | — |   |
|                      |   |                |   |   |   |   |   |
| Total income tax  benefit |   | $                   | (1,321 | ) | $ | — |   | $ | — |   |

 

The components of the deferred taxes recognized in theaccompanying consolidated balance sheets at December 31 are as follows (inthousands):

 

|                  |   | **2003** |   | **2002** |   |
|-----------------------|--------|----------|--------|----------|--------|
|                  |   |     |   |     |   |
| Deferred tax  assets: |   |     |   |     |   |
| Net operating  loss   |   | $        | 20,401 |     | $      | 4,314 |   |
| Lease termination     |   | 15,192   |   | —   |   |
| Other                 |   | 331      |   | —   |   |
| Valuation  allowance  |   | (10,098  | )      | (4,314   | )      |
|                  |   |     |   |     |   |
|                  |   | $        | 25,826 |     | $      | — |   |

 

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13.                                 Indebtedness:

 

Indebtedness consisted ofthe following at December 31 (in thousands):

 
|                                       |   | **2003**  |      | **2002** |   |
|--------------------------------------------|--------|-----------|-----------|----------|--------|
|                                       |   |      |      |     |   |
| Mortgages  payable and accrued interest    |   | $         | 1,499,988 |     | $      | 401,765 |   |
| Construction  loan facilities              |   | 60,517    |      | 21,281   |   |
| Tax incremental  financing note            |   | 8,098     |      | 8,458    |   |
| Line of credit                             |   | 24,073    |      | 24,079   |   |
| Indebtedness  collateralized by Properties |   | 1,592,676 |      | 455,583  |   |
|                                       |   |      |      |     |   |
| Unsecured notes                            |   | 81,674    |      | —   |   |
|                                       |   |      |      |     |   |
|                                       |   | $         | 1,674,350 |     | $      | 455,583 |   |

 

The Company has a revolving line of credit (the“Revolving LOC”) to fund acquisition and development of Properties andinvestments in Mortgage Loans and other permitted investments.  Under the terms of the Revolving LOC, theCompany is entitled to receive cash advances of up to approximately $96.7million until September 2006.  Interestpayments are due monthly with principal payments of $1,000 due at the end ofeach loan year.  Other loan terms arelisted in the table below.

 

Some debt arrangements allow for repayments earlierthan the stated maturity date. The weighted average effective interest rate onmortgages and other notes payable was approximately 6.25% as of December 31,2003.  The fair value of the Company’sfixed rate long-term debt was $826.1 million at December 31, 2003.  Fair value was determined based on marketprices as of December 31, 2003.

 

Certain loan agreements contain net worth or debtservice coverage ratio requirements.  Violation of thesecovenants could potentially trigger penalties, including cashmanagement arrangements whereby the lenders or their designated loan servicerscapture operating cash from certain Properties and administer the payment ofproperty taxes, insurance, debt service and expenditures for otherobligations.  Other covenants restrict the Company’s ability to borrowmoney, pay dividends on or repurchase capital stock, make investments and sellassets or enter into mergers or acquisitions.  The Company was incompliance with these covenants as of December 31, 2003.

 

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Indebtedness consisted of the following as of December31 (in thousands): 

 
|                            |   |      |   | **Interest Rate**       |   |   |   |           |   | **2003** |      | **2002** |   |
|---------------------------------|--------|-----------|--------|-------------------------|--------|--------|--------|----------------|--------|----------|-----------|----------|--------|
| Floating Rate  Debt:            |   |      |   |                    |   |   |   |           |   |     |      |     |   |
| CMBS loan                       |   | 26 hotels |   | LIBOR + 189 bps         |   | (1)    |   | December 2006  |   | $        | 130,198   |     | $      | — |   |
| CMBS loan                       |   | 26 hotels |   | LIBOR + 465 bps         |   | (1)(2) |   | December 2006  |   | 35,039   |      | —   |   |
| Mortgage Debt                   |   | 2 hotels  |   | 5-yr Treasury + 200 bps |   | (3)    |   | December 2008  |   | 127,200  |      | —   |   |
| Mortgage Debt                   |   | 4 hotels  |   | LIBOR + 230 bps         |   | (4)    |   | October 2006   |   | 98,891   |      | 100,000  |   |
| Mortgage Debt                   |   | 1 hotel   |   | LIBOR + 285 bps         |   | (5)    |   | December 2008  |   | 290,000  |      | —   |   |
| Construction loan               |   | 3 hotels  |   | LIBOR + 275 bps         |   | (6)    |   | December 2005  |   | 44,939   |      | 21,281   |   |
| Construction loan               |   | 1 hotel   |   | LIBOR + 350 bps         |   |   |   | August 2006    |   | 15,578   |      | —   |   |
| Line of credit                  |   | 15 hotels |   | LIBOR + 225 bps         |   | (7)    |   | September 2006 |   | 24,073   |      | 24,079   |   |
| Line of credit                  |   | 1 hotel   |   | LIBOR + 575 bps         |   | (10)   |   | December 2006  |   | 5,502    |      | —   |   |
| Total floating  rate debt       |   |      |   |                    |   |   |   |           |   | 771,420  |      | 145,360  |   |
|                            |   |      |   |                    |   |   |   |           |   |     |      |     |   |
| Fixed Rate Debt:                |   |      |   |                    |   |   |   |           |   |     |      |     |   |
| Publicly-traded  term notes     |   | n/a       |   | 9.75                    | %      |   |   | March 2012     |   | 81,674   |      | —   |   |
| Mortgage Debt                   |   | 8 hotels  |   | 6.53                    | %      |   |   | November 2007  |   | 91,194   |      | 9,070    |   |
| Mortgage Debt                   |   | 1 hotel   |   | 8.22                    | %      |   |   | November 2007  |   | 18,060   |      | —   |   |
| Mortgage Debt                   |   | 3 hotels  |   | 8.34                    | %      |   |   | December 2007  |   | 50,348   |      | 50,348   |   |
| Mortgage Debt                   |   | 1 hotel   |   | 8.29                    | %      |   |   | December 2025  |   | 31,663   |      | 32,069   |   |
| Mortgage Debt                   |   | 1 hotel   |   | 5.84                    | %      |   |   | December 2007  |   | 31,151   |      | 31,082   |   |
| Mortgage Debt                   |   | 1 hotel   |   | 7.78                    | %      |   |   | January 2023   |   | 9,085    |      | 9,268    |   |
| Mortgage Debt                   |   | 2 hotels  |   | 5.67                    | %      |   |   | December 2007  |   | 79,022   |      | 78,650   |   |
| Mortgage Debt                   |   | 1 hotel   |   | 4.93                    | %      |   |   | July 2008      |   | 50,205   |      | —   |   |
| Mortgage Debt                   |   | 10 hotels |   | 7.83                    | %      |   |   | December 2008  |   | 91,166   |      | —   |   |
| Mortgage Debt                   |   | 7 hotels  |   | 7.67                    | %      | (8)    |   | July 2009      |   | 83,003   |      | 84,638   |   |
| Mortgage Debt                   |   | 5 hotels  |   | 5.95                    | %      |   |   | March 2010     |   | 145,000  |      | —   |   |
| Mortgage Debt                   |   | 8 hotels  |   | 8.00                    | %      |   |   | August 2010    |   | 51,197   |      | —   |   |
| Mortgage Debt                   |   | 1 hotel   |   | 8.32                    | %      |   |   | January 2011   |   | 6,549    |      | 6,640    |   |
| Mortgage Debt                   |   | 1 hotel   |   | 8.11                    | %      |   |   | February 2011  |   | 28,883   |      | —   |   |
| Mortgage Debt                   |   | 1 hotel   |   | 8.08                    | %      |   |   | August 2010    |   | 46,632   |      | —   |   |
| Tax Incremental  Financing Note |   | 1 hotel   |   | 12.85                   | %      | (9)    |   | June 2018      |   | 8,098    |      | 8,458    |   |
| Total fixed rate  debt          |   |      |   |                    |   |   |   |           |   | 902,930  |      | 310,223  |   |
| Total debt                      |   |      |   |                    |   |   |   |           |   | $        | 1,674,350 |     | $      | 455,583 |   |

 

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(1)                                  The26 Properties were collateralized for both Commercial Mortgage Backed Security(“CMBS”) loans listed.

(2)                                  CMBSloan has an interest rate floor of 6.65%.

(3)                                  Mortgagedebt has an interest rate floor of 5.50%.

(4)                                  Interestrate floor of 4.96%.

(5)                                  Blendedinterest rate.

(6)                                  TheConstruction Line of Credit has an interest rate floor of 6.75%.

(7)                                  RevolvingLine of Credit.

(8)                                  Averageinterest rate as the loans bear interest ranging from 7.50% to 7.75%.

(9)                                  TaxIncremental Financing which is paid down with incremental real estate taxesresulting in an interest rate of 12.85%.

(10)                            RevolvingLine of Credit for Hotel del Coronado.

 

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The following is a schedule ofmaturities for all long-term borrowings at December 31, 2003 (in thousands):

 

| 2004                 |   | $       | 18,777    |   |
|----------------------|--------|---------|-----------|--------|
| 2005                 |   | 54,692  |      |
| 2006                 |   | 598,859 |      |
| 2007                 |   | 274,131 |      |
| 2008                 |   | 265,204 |      |
| 2009 and  thereafter |   | 462,687 |      |
|                 |   |    |      |
| Total                |   | $       | 1,674,350 |   |

 

14.                                 DerivativeInstruments:

 

The Company has a subsidiary in Montreal, Canada.  The functional currency of this Property,which was acquired in December 2003, is Canadian dollars.  In December 2003, the Company entered into acurrency forward contract to buy U.S. dollars at a fixed price. This forwardcontract hedges the foreign currency exposure of the Company’s net investmentin this subsidiary.  During 2003, theCompany recognized a net holding loss of $0.8 million in other comprehensiveincome.

 

The Company also purchased interest rate caps whichcapped the floating interest rates of seven loans at rates between 4.0% and6.0% based on a total notional amount of $555.0 million.  During 2003, 2002 and 2001, the Companyrecognized net holding losses of approximately $1.1 million and $0.6 millionand a gain of $0.2 million, respectively, in other comprehensive income fromthese cash flow hedges.

 

An unconsolidated subsidiary of the Company also holdsan interest rate swap which fixed the floating interest rate of a loan atapproximately 6.0% based on a notional amount of $70 million.  During 2003, 2002 and 2001, the Companyrecognized, through its equity investee, a net holding gain of $0.9 million andnet holding losses of approximately $2.6 million and $1.4 million, respectivelyfrom this cash flow hedge.

 

15.                                 Distributions:

 

For the years ended December 31, 2003, 2002 and 2001,approximately 39%, 51%, and 52%, respectively, of the distributions paid tostockholders were considered ordinary income and approximately 61%, 49%, and48%, respectively, were considered a return of capital to stockholders forfederal income tax purposes.  No amountsdistributed to the stockholders for the years ended December 31, 2003, 2002 and2001 are required to be or have been treated by the Company as a return ofcapital for purposes of calculating the stockholders’ return on their investedcapital.

 

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16.                                 RelatedParty Transactions:

 

Certain directors and officers of the Company holdsimilar positions with the Advisor and its affiliates, including the managingdealer, CNL Securities Corp.  Theseaffiliates are by contract entitled to receive fees and compensation forservices provided in connection with common stock offerings, and theacquisition, development, management and sale of the Company’s assets.

 

Amounts incurred relating to these transactions withaffiliates were as follows for the years ended December 31 (in thousands):

 
|                                                             |   | **2003** |    | **2002** |   |
|------------------------------------------------------------------|--------|----------|---------|----------|--------|
| CNL Securities  Corp.:                                           |   |     |    |     |   |
| Selling  commissions *                                           |   | $        | 86,460  |     | $      | 37,003 |   |
| Marketing  support fee and due diligence expense reimbursements* |   | 5,848    |    | 2,448    |   |
|                                                             |   |     |    |     |   |
|                                                             |   | 92,308   |    | 39,451   |   |
| Advisor and its  affiliates:                                     |   |     |    |     |   |
| Acquisition fees                                                 |   | 94,531   |    | 29,464   |   |
| Development fees                                                 |   | 2,612    |    | 1,896    |   |
| Asset management  fees                                           |   | 12,782   |    | 6,696    |   |
|                                                             |   | 109,925  |    | 38,056   |   |
|                                                             |   | $        | 202,233 |     | $      | 77,507 |   |

 

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*  The majorityof these fees and reimbursements were paid to unaffiliated broker-dealer firms.

 

Of these amounts, approximately $10.1 and $1.9 millionis included in due to related parties in the accompanying consolidated balancesheets as of December 31, 2003 and 2002, respectively.  In late 2003 the Company’s Advisor allowedthe Company to defer the payment of the asset management fee indefinitely toprovide liquidity until our results benefit from an economic and industryrecovery.  Asset management fees werenot paid by the Company after August 2003 and in January 2004, the Advisorrefunded to the Company all of the asset management fees which had previouslybeen paid during 2003.  Out of the totalamount due to the Advisor as of December 31, 2003, $5.3 million relates toasset management fees.  The Company willcontinue to accrue and will remain obligated to pay asset management fees upondemand by the Advisor, however, it is uncertain as to when such fees will bepaid.

 

The Advisor and its affiliates provide variousadministrative services to the Company, including services related toaccounting; financial, tax and regulatory compliance reporting; stockholderdistributions and reporting; due diligence and marketing; and investorrelations (including administrative services in connection with the offerings),on a day-to-day basis.

 

The expenses incurred for these services wereclassified as follows for the years ended December 31 (in thousands):

 

|                                           |   | **2003** |   | **2002** |   |
|------------------------------------------------|--------|----------|--------|----------|--------|
|                                           |   |     |   |     |   |
| Stock issuance  costs                          |   | $        | 4,292  |     | $      | 3,128 |   |
| General  operating and administrative expenses |   | 2,279    |   | 1,128    |   |
|                                           |   |     |   |     |   |
|                                           |   | $        | 6,571  |     | $      | 4,256 |   |

 

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The Company maintains bank accounts in a bank in whichcertain officers and directors of the Company serve as directors, and in whichan affiliate of the Advisor is a stockholder. The amount deposited with this bank was approximately $29.0 million and$14.9 million at December 31, 2003 and 2002, respectively.

 

CTM Partners, LLC, a partnership in which the Companyhas a 31.25% interest which owns EMTG, LLC, has engaged Dustin/Massagli LLC, acompany in which one of the Company’s directors is president, a director and aprincipal stockholder, to manage its business.

 

The Company owns a 9.9% interest in CNL Plaza, Ltd., alimited partnership that owns an office building located in Orlando, Florida,in which the Advisor and its affiliates lease office space.  The remaining interest in the limitedpartnership is owned by several affiliates of the Advisor.  In connection with this acquisition, theCompany has severally guaranteed a 16.67% share, or approximately $2.6 million,of a $15.5 million unsecured promissory note of the limited partnership.

 

17.           Concentration ofRisk:

 

During the year ended December 31, 2003, a significantportion of the Company’s rental income and hotel and resort revenues was earnedfrom 68 Properties operating as various Marriott brands (including MarriottHotels, Resorts, and Suites, JW Marriott, Residence Inn by Marriott, TownePlaceSuites by Marriott, Courtyard by Marriott, Fairfield Inn, and Spring HillSuites by Marriott) and 36 Properties operating as various Hilton HotelsCorporation (“Hilton”) brands (including Doubletree, Embassy Suites, HiltonHotels and Suites, Homewood Suites by Hilton, and Hampton Inn).

 

Although the Company intends to acquire additionalProperties, the Company carefully screens its managers and tenants and theCompany has obtained interests in non-Marriott and non-Hilton brandedProperties, failure of the Marriott and Hilton brands would significantlyimpact the results of operations of the Company.  Management believes that the risk of such a default will bereduced through future acquisitions which enhance brand diversification.

 

18.           Stockholders’Equity:

 

On August 13, 2002, the Company filed a registrationstatement on Form S-11 with the Securities and Exchange Commission (the“Commission”) in connection with the proposed sale by the Company of up to 175million shares of common stock at $10 per share ($1.75 billion) (the “2003Offering”).  The 2003 Offering commencedimmediately following the completion of the Company’s fourth public offering onFebruary 4, 2003.  Of the 175 millionshares of common stock offered pursuant to the 2003 Offering, up to 25 millionshares are available to stockholders purchasing shares through the Company’sreinvestment plan.  On July 23, 2003,the Company filed a registration statement on Form S-11 with the Commission inconnection with the proposed sale of up to 400 million shares of common stockat $10 per share ($4 billion) (the “2004 Offering”).  Of the 400 million shares of common stock which may be offered,up to 50 million may be available to stockholders purchasing shares through thereinvestment plan.  The Board ofDirectors expects to submit, for a vote of the stockholders at the next annualmeeting of stockholders, a proposal to increase the number of authorized sharesof common stock of the Company from 450 million to one billion.  Until such time, if any, as the stockholdersapprove an increase in the number of authorized shares of common stock of thecompany, the 2004 Offering would be limited to up to 142 million Shares.  The 2004 Offering, if it occurs, is expectedto commence in mid-2004, sometime after the completion of the Company’s 2003Offering.  CNL Securities Corp., anaffiliate of the Advisor, is the managing dealer for the Company’s equity offerings.

 

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Under the redemption plan, the Company may elect, atits discretion, to redeem shares, subject to certain conditions andlimitations.  During the years endedDecember 31, 2003, 2002 and 2001, approximately 716,000 shares, 269,000 shares,and 251,000 shares, respectively, were redeemed at approximately $6.6 million,$2.4 million, and $2.3 million, respectively, and retired from sharesoutstanding of common stock.  Shareswere redeemed for $9.20 per share.

 

19.                                 Commitmentsand Contingencies:

 

On May 13, 2003, A. Bruce Chasen, as classrepresentative, filed a putative class action lawsuit in the Circuit Court ofShelby County, Tennessee, 30th Judicial District against RFS, RFS’sdirectors and the Company.  On June 6,2003, the complaint was amended.  Theamended putative class action complaint alleges, among other things, that (i)the merger consideration to be received by RFS’s shareholders is significantlyless than the intrinsic value of RFS, (ii) the RFS directors breached theirfiduciary duties to shareholders on a variety of grounds including failing toascertain the true value of RFS, failing to determine whether there were anyother bidders for RFS, and failing to avoid certain alleged conflicts ofinterest shared by members of the RFS Board and its financial advisor, (iii)the Company aided and abetted the RFS Board in connection with their breach offiduciary duties, (iv) the RFS Board violated portions of the TennesseeInvestor Protection Act, and (v) the RFS proxy statement is false andmisleading.  Among other things, theamended complaint seeks certification of the class action, an injunctionenjoining RFS and the Company from completing the merger, monetary damages inan unspecified amount, the payment of attorney’s fees, and rescissorydamages.  On July 1, 2003 the Companyfiled an answer to the amended complaint setting forth an affirmative defenseand its general denials of the allegations set forth therein.  The plaintiff’s motion for a temporaryrestraining order for purposes of enjoining the transaction, was denied on July8, 2003, by the Circuit Court of Shelby County, Tennessee, 30thJudicial District.   The Company isplanning to file a motion to dismiss the allegations in the complaint. If themotion is not successful, it is expected that the case will proceed totrial.  Based upon the informationcurrently available to the Company, the Company believes the allegationscontained in the amended complaint are without merit and intends to vigorouslydefend the action, and therefore, a liability was not accrued.

 

On August 26, 2002, Carmel Valley, LLC filed a lawsuitagainst RFS and certain of its subsidiaries in the Superior Court of the Stateof California, for the County of San Diego. In connection with the RFS Acquisition, the Company has become a partyto a lawsuit claiming damages relating to a dispute over a parcel of landlocated adjacent to one of its Properties. The Company has unsuccessfully attempted to mediate this case.  At this time, the Company believes that thedamages claimed against the Company lack sufficient factual support and willcontinue to vigorously defend the action, and therefore, a liability was notaccrued.  However, it is possible thatlosses could be incurred by the Company if the plaintiff ultimatelyprevails.  The plaintiff is seekingmonetary damages of up to $0.7 million. The Company has recently filed certain motions to dismiss which arebeing considered by the Court.  If themotions are not successful, it is expected that the case will proceed to trial.

 

From time to time the Company may be exposed tolitigation arising from an unrecognized preacquisition contingency and from theoperations of its business.  At thistime, the Company does not believe that resolution of these matters will have amaterial adverse effect on the Company’s financial condition or results ofoperations.

 

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As of December 31, 2003, the Company also hadcommitments to (i) complete construction on two Properties, with an estimatedaggregate cost of approximately $64 million, and (ii) to fund furniture,fixture and equipment replacements and capital improvements as needed at theCompany’s Properties.  The Company alsohas committed to fund its pro rata share of working capital shortfalls andconstruction commitments for its partnerships, if shortfalls arise, and hasguaranteed the debt service for several of its subsidiaries andpartnerships.  In order to enter intothese and other transactions, the Company must obtain additional funds throughthe receipt of additional offering proceeds and/or advances on its RevolvingLOC and permanent financing.

 

Our Properties are operated under various managementagreements with third party managers that call for base management fees, whichgenerally range from 3% to 5% of hotel and resort revenues and have anincentive management fee provision related to the hotel’s profitability.  The****managementagreements generally require us to set aside generally 3% to 5% of hotel andresort revenues in FF&E Reserve accounts to be used for the replacement offurniture, fixtures and equipment.  Themanagement agreements have terms from 10 to 20 years and generally have renewaloptions.

 

20.           Credit Enhancements:

 

The Company benefits from various types of creditenhancements that have been provided by the managers of some of itsProperties.  These credit enhancementsmay be provided to the Company directly or indirectly through unconsolidatedsubsidiaries and guarantee the Company certain minimum returns on itsProperties.  Funding under theseguarantees is either recognized as other income, as reductions in basemanagement fees or as liabilities by the Company, depending upon the nature ofeach credit enhancement agreement and whether the funded amounts are requiredto be repaid by the Company in the future. The repayment of these liabilities is expected to occur at such timethat the net operating income of these Properties are in excess of the minimumreturns to the Company or its unconsolidated subsidiaries. All of the creditenhancements are subject to expiration or “burn-off” provisions over time or atsuch time that the funding limit has been reached.  There is no assurance that market conditions will allow theCompany to continue to obtain credit enhancements on Properties acquired in thefuture.  As a result of the downturn inthe overall economy and the threat of terrorism and their adverse effect on theCompany’s operations, the Company has been relying on credit enhancements tosubstantially enhance its net earnings and cash flows.  To the extent that this trend continues andcurrent credit enhancements are fully utilized or expire, the Company’s resultsof operations and its ability to pay distributions to stockholders will beaffected.

 

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The following table represents the Company’s amountsand utilization of credit enhancements for the years ended December 31, 2003,and 2002:

 

|                                      |   | **Limited  Rent  Guarantees** |   | **Threshold  Guarantees** |   | **Liquidity  Facility  Loans** |   | **Senior  Loan  Guarantees** |   |
|-------------------------------------------|--------|-------------------------------|--------|---------------------------|--------|--------------------------------|--------|------------------------------|--------|
| Amount available  as of January 1, 2002   |   | $                             | 5,911  |                      | $      | 44,850                         |   | $                            | 5,150  |   | $ | — |   |
|                                      |   |                          |   |                      |   |                           |   |                         |   |
| New credit  enhancements obtained         |   | —                        |   | 6,150                     |   | 6,594                          |   | —                       |   |
| Utilization of  credit enhancements       |   | (4,584                        | )      | (18,279                   | )      | (1,727                         | )      | —                       |   |
| Amount available  as of December 31, 2002 |   | 1,327                         |   | 32,721                    |   | 10,017                         |   | —                       |   |
|                                      |   |                          |   |                      |   |                           |   |                         |   |
| New credit  enhancements obtained         |   | —                        |   | 24,709                    |   | —                         |   | —                       |   |
| Utilization of  credit enhancements       |   | (205                          | )      | (37,087                   | )      | (4,292                         | )      | —                       |   |
| Expiration of  credit enhancements        |   | (1,122                        | )      | —                    |   | —                         |   | —                       |   |
| Amount available  as of December 31, 2003 |   | $                             | — |                      | $      | 20,343                         |   | $                            | 5,725  |   | $ | — |   |

 

The following table represents the Company’sunconsolidated subsidiaries amounts and utilization of credit enhancements forthe years ended December 31, 2003, and 2002:

 

|                                      |   | **Limited  Rent  Guarantees** |   | **Threshold  Guarantees** |   | **Liquidity  Facility  Loans** |   | **Senior  Loan  Guarantees** |   |
|-------------------------------------------|--------|-------------------------------|--------|---------------------------|--------|--------------------------------|--------|------------------------------|--------|
| Amount available  as of January 1, 2002   |   | $                             | — |                      | $      | —                         |   | $                            | 46,951 |   | $ | 30,509 |   |
|                                      |   |                          |   |                      |   |                           |   |                         |   |
| New credit  enhancements obtained         |   | —                        |   | —                    |   | 12,000                         |   | —                       |   |
| Utilization of  credit enhancements       |   | —                        |   | —                    |   | (12,833                        | )      | (9,411                       | )      |
| Amount available  as of December 31, 2002 |   | —                        |   | —                    |   | 46,118                         |   | 21,098                       |   |
|                                      |   |                          |   |                      |   |                           |   |                         |   |
| Utilization of  credit enhancements       |   | —                        |   | —                    |   | (26,862                        | )      | (6,098                       | )      |
| Amount available  as of December 31, 2003 |   | $                             | — |                      | $      | —                         |   | $                            | 19,256 |   | $ | 15,000 |   |

 

During the years ended December 31, 2003 and 2002, and2001 the Company recognized approximately $24.8 million, $10.3 million, and $0,respectively, in other income and approximately $2.4 million, $0, and $0respectively, as a reduction in base management fees as a result of creditenhancements amounts that were utilized. Of the total remaining amounts available to the Company under the creditenhancements, approximately $4.7 million is subject to repayment provisions ifutilized. Of the total remaining amounts available to unconsolidatedsubsidiaries of the Company, approximately $33 million is subject to repaymentprovisions if utilized.

 

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For ten of the Company’s Properties leased toaffiliates of Marriott, the credit enhancements funding was sent directly tothe Company’s third-party tenant lessees, which in turn allows them to makeperiodic rental payments to the Company. The credit enhancement applicable to these Properties was fully utilizedand expired in the third quarter of 2003. Rent payments for these Properties total $26.7 million for a calendaryear.  Out of the total amount of rentalincome from operating leases earned from these Properties approximately $7.3million, $4.6 million, and $0 was funded from credit enhancements during theyears ended December 31, 2003, 2002, and 2001, respectively.  There is no guarantee that the Company willcontinue to receive scheduled rental payments for these Properties.  In November 2003, the Company entered intoan agreement whereby the credit enhancements available for three of itsProperties acquired in 2003 will be available to fund short falls in rentalpayments on these 10 Properties.

 

In connection with the lease assumptions on nineProperties as discussed in Note 3, “Assignment of Third-Party Leases,” theCompany assumed a liquidity facility loan in the amount of approximately $3.6million and a total of approximately $10.2 million was available under thefacility.  The facility was provided bythe manager of the Properties to fund Property operating shortfalls for theaggregate rent due on a pooled basis for the nine portfolio Properties.  The facility is available until the earlierof (i) expiration of the agreement on December 31, 2004, (ii) the minimum rentcoverage of the pooled Properties equals or exceeds a predefined threshold for13 consecutive accounting periods or (iii) total liquidity facility fundingequals or exceeds 10% of the total purchase price for all nine Properties atthe end of any fiscal year.  As ofDecember 31, 2003, $1.2 million was available for future draws under theliquidity facility loan.

 

The following table represents the amounts that theCompany had recorded as other liabilities in the accompanying consolidatedbalance sheet as of December 31, (in thousands):

 

|                     |   | **2003** |   | **2002** |   |
|--------------------------|--------|----------|--------|----------|--------|
| Limited rent  guarantees |   | $        | — |     | $      | — |   |
| Threshold  guarantees    |   | 500      |   | —   |   |
| Liquidity  facility loan |   | 10,038   |   | 5,631    |   |
| Senior loan guarantees   |   | —   |   | —   |   |
|                     |   | $        | 10,538 |     | $      | 5,631 |   |

 

The following table represents the amounts that theCompany’s unconsolidated subsidiaries’ had recorded as liabilities related tocredit enhancements as of December 31, (in thousands):

 

|                     |   | **2003** |   | **2002** |   |
|--------------------------|--------|----------|--------|----------|--------|
| Limited rent guarantees  |   | $        | — |     | $      | — |   |
| Threshold  guarantees    |   | —   |   | —   |   |
| Liquidity  facility loan |   | 48,600   |   | 19,575   |   |
| Senior loan  guarantees  |   | 22,574   |   | 14,829   |   |
|                     |   | $        | 71,174 |     | $      | 34,404 |   |

 

The Senior loan guarantee and liquidity facility loanfor the Waikiki Beach Marriott Property, in which the Company owns a 49% jointventure interest, expired in the third quarter of 2003 and the first quarter of2004, respectively.  As result, theCompany and its co-venturers may no longer receive cash distributions from thisjoint venture and may be required to make capital contributions to fund hoteland resort operating shortfalls until the time that the operating performanceof this Property improves.  This mayreduce cash flows available for distribution to the stockholders of the Company.

 

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As of December 31, 2003 and 2002, the Company hadapproximately $26.1 million and $44.1 million, respectively, available forfunding under the various forms of credit enhancement.  The Company’s unconsolidated subsidiarieshad approximately $34.3 million and $67.1 million, respectively, as of December31, 2003 and 2002, available for funding.

 

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21.           SelectedQuarterly Financial Data:

 

The following table presents selected unauditedquarterly financial data for each full quarter during the years ended December31, 2003 and 2002 (in thousands, except per share data).  Revenue amounts reported for 2002 and thefirst three quarters of 2003 have been restated for the effects of theimplementation of FIN 46R (see Note 2 to the consolidated financialstatements):

 
| **2003  Quarter**                                                                |   | **First** |   | **Second** |   | **Third** |   | **Fourth** |    | **Year** |   |
|----------------------------------------------------------------------------------|--------|-----------|--------|------------|--------|-----------|--------|------------|---------|----------|--------|
| Continuing  Operations:                                                          |   |      |   |       |   |      |   |       |    |     |   |
| Revenues                                                                         |   | $         | 95,637 |       | $      | 107,520   |   | $          | 158,387 |     | $      | 195,596 |   | $ | 557,140 |   |
| Income (loss)  from continuing operations                                        |   | 6,437     |   | 983        |   | (6,062    | )      | 3,413      |    | 4,771    |   |
|                                                                             |   |      |   |       |   |      |   |       |    |     |   |
| Discontinued  Operations:                                                        |   |      |   |       |   |      |   |       |    |     |   |
| Revenues                                                                         |   | —    |   | —     |   | 3,001     |   | 2,699      |    | 5,700    |   |
| Income from  discontinued operations                                             |   | —    |   | —     |   | 774       |   | 448        |    | 1,222    |   |
|                                                                             |   |      |   |       |   |      |   |       |    |     |   |
| Net Earnings  (Loss)                                                             |   | 6,437     |   | 983        |   | (5,288    | )      | 3,861      |    | 5,993    |   |
|                                                                             |   |      |   |       |   |      |   |       |    |     |   |
| Earnings (Loss)  per Share, basic and diluted:                                   |   |      |   |       |   |      |   |       |    |     |   |
| Continuing  operations                                                           |   | 0.05      |   | 0.01       |   | (0.03     | )      | 0.02       |    | 0.02     |   |
| Discontinued  operations                                                         |   | —    |   | —     |   | —    |   | —     |    | 0.01     |   |
| Net earnings                                                                     |   | 0.05      |   | 0.01       |   | (0.03     | )      | 0.02       |    | 0.03     |   |
|                                                                             |   |      |   |       |   |      |   |       |    |     |   |
| Weighted average  number of shares of common stock outstanding basic and diluted |   | 133,837   |   | 153,668    |   | 181,941   |   | 220,092    |    | 172,449  |   |
|                                                                                  |        |           |        |            |        |           |        |            |         |          |        |  |  |  |  |  |

 
| **2002  Quarter**                                                                |   | **First** |   | **Second** |   | **Third** |   | **Fourth** |   | **Year** |   |
|----------------------------------------------------------------------------------|--------|-----------|--------|------------|--------|-----------|--------|------------|--------|----------|--------|
| Continuing  Operations:                                                          |   |      |   |       |   |      |   |       |   |     |   |
| Revenues                                                                         |   | $         | 45,038 |       | $      | 49,499    |   | $          | 63,539 |     | $      | 67,450 |   | $ | 225,526 |   |
| Income from  continuing operations                                               |   | 3,651     |   | 4,757      |   | 2,343     |   | 5,059      |   | 15,810   |   |
| Net Earnings                                                                     |   | 3,651     |   | 4,757      |   | 2,343     |   | 5,059      |   | 15,810   |   |
|                                                                             |   |      |   |       |   |      |   |       |   |     |   |
| Earnings per  Share, basic and diluted:                                          |   |      |   |       |   |      |   |       |   |     |   |
| Continuing  operations                                                           |   | 0.05      |   | 0.05       |   | 0.02      |   | 0.04       |   | 0.16     |   |
| Net earnings                                                                     |   | 0.05      |   | 0.05       |   | 0.02      |   | 0.04       |   | 0.16     |   |
|                                                                             |   |      |   |       |   |      |   |       |   |     |   |
| Weighted average  number of shares of common stock outstanding basic and diluted |   | 80,748    |   | 89,490     |   | 100,749   |   | 117,523    |   | 97,874   |   |
|                                                                                  |        |           |        |            |        |           |        |            |        |          |        |  |  |  |  |  |

 

78

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22.           SubsequentEvents:

 

During the period January 1, 2004 through February 20,2004, the Company received subscription proceeds from its 2003 Offering ofapproximately $270.0 million representing the issuance of approximately 27.0million shares of common stock.

 

On January 1, 2004 and February 1, 2004, the Companydeclared distributions totaling approximately $15.7 million and $16.7 million,respectively, or $0.064583 per share of common stock, payable by March 31,2004, to stockholders of record on January 1, 2004 and February 1, 2004,respectively.

 

On February 12, 2004, through a wholly ownedsubsidiary, the Company entered into a stock purchase agreement with KKRPartners II, L.P., a Delaware limited partnership, KKR 1996 Fund, L.P., aDelaware limited partnership, Resort Associates, L.P., a Delaware limitedpartnership, Golf Associates, L.P., a Delaware limited partnership and KSLRecreation Corporation, a Delaware corporation (referred to as “KSL”), wherebythe Company has agreed to acquire all of the outstanding capital stock of KSLand its subsidiaries, for approximately $1.4 billion in cash and estimatedclosing costs of approximately $25 million (the “KSL Acquisition”).  In connection with the KSL Acquisition, theCompany paid a non-refundable deposit of $75 million in February 2004. Uponconsummation of the six resorts currently owned by KSL will be acquired by theCompany’s wholly owned subsidiaries and it will be subject to the outstandingdebt of KSL and its subsidiaries (approximately $794 million as of February 2,2004) (“Existing KSL Debt”) and any other outstanding liabilities.  The closing of the KSL Acquisition issubject to the fulfillment of certain conditions, such as customary approvalsand other closing conditions.  If theconditions or not be satisfied, the KSL Acquisition may not occur.  The Company has received a commitment from alender to finance the KSL Acquisition with a bridge loan of up to $1.86 billion(“KSL Bridge Loan”).  The Company mayuse the proceeds of the KSL Bridge Loan to repay the Existing KSL Debtsimultaneously with the consummation of the KSL Acquisition or it may only drawapproximately $1.1 billion on the KSL Bridge Loan and later refinance theExisting KSL Debt. The Company is in the process of obtaining a commitment torefinance the Existing KSL Debt (if such debt is not repaid simultaneously withthe consummation of the KSL Acquisition) and/or a portion of the KSL BridgeLoan with the proceeds of permanent financing to be obtained within nine monthsof consummating the KSL Acquisition. The KSL Bridge Loan is expected to berepaid from a combination of permanent debt, or out of the proceeds that theCompany, may receives from the sale of our common stock through the 2004Offering.

 

In March 2004, the third-party tenants affiliated withMarriott for ten of the Company’s Properties with combined net operating incomeof approximately $13.0 million and base rental obligations of $26.7 millioninformed us that the annual net operating income projected for these Propertieswould be insufficient to fund the full amount of scheduled base rent for 2004and potentially subsequent years. As a result, the Company has begundiscussions with those tenants on possible alternatives that would address thecurrent circumstances including its possible acquisition of the leaseholdinterests in these Properties and the execution of management agreements with Marriottor its affiliates to operate the Properties under long-term contracts. Underthis alternative arrangement, these Properties would be leased to one or moreof the Company’s TRS subsidiaries and managed by an affiliate of Marriott.  This possible alternative may includeadditional guarantees, provided by Marriott, of minimum returns which may notprovide the same income stream as the base rents. The Properties are encumberedby debt and consequently any alternative solution will be subject to approvalby the lender providing the related financing. As these discussions continue itis possible that Marriott, on behalf of the tenants, will continue to pay therent due under the current lease structure until such time that these leasesare assigned or modified.  The Companymay be required to return the security deposits received in connection with thecurrent agreements.  Should theCompany  take assignment of theleasehold interests, the operations of these hotels will be included in ourconsolidated statement of earnings in lieu of the rental income which iscurrently being recognized.

 

79

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The Company developed and completed a Courtyard byMarriott in Foothill Ranch, California. The Property opened on February 18,2004.

 

As indicated under Note 10, “Investments”, CNLHospitality Partners, LP, a wholly owned subsidiary of the Company(“Hospitality Partners”), has invested approximately $19 million in HLP’sSeries A convertible preferred partnership units (representing 190,266 Series Apreferred partnership units which are convertible at any time for (among othersecurities) approximately 2,816,460 common shares of beneficial interest ofHersha Hospitality Trust (“HT”), HLP’s parent entity, subject to certainadjustments).  Hospitality Partners hasexercised its registration rights under that certain Registration RightsAgreement with HLP dated April 21, 2003 (the “Registration Rights Agreement”).Accordingly, on March 2, 2004, HT filed a registration statement on Form S-3with the Commission registering the 2,816,460 common shares of beneficialinterest of HT underlying the Company’s 190,266 Series A preferred partnershipunits in HLP.  Although the Companyinvoked its registration rights under the Registration Rights Agreement, atthis time the Company does not know with certainty that it will exchange itspreferred partnership units into common shares of beneficial interest, or if itdoes exercise its rights to convert the preferred partnership units into commonshares of beneficial interest, that it will sell such shares.

 

During the first quarter of 2004, the Company began toactively consider various alternatives including Listing, recapitalization ofits current debt structure, possible mergers, additional acquisitions orcontinuing to raise money and operate as it currently does.

 

The Company currently is seeking additional Propertiesor other permitted real estate related investment opportunities, such asinvestments into other real estate companies or partnerships.

 

80

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**Item 9. Changed in and Disagreementswith Accountants on Accounting and Financial Disclosure**

 

None.

 

**Item 9A. Controls and Procedures**

 

QuarterlyEvaluation.  Management carried out anevaluation as of December 31, 2003 of the effectiveness of the design andoperation of the Company’s “disclosure controls and procedures,” whichmanagement refers to as the Company’s disclosure controls.  This evaluation was done under thesupervision and with the participation of management, including the Company’sPrincipal Executive Officer and Principal Financial Officer.  Rules adopted by the Commission require thatmanagement present the conclusions of the Principal Executive Officer andPrincipal Financial Officer about the effectiveness of the Company’s disclosurecontrols as of the end of the period covered by this annual report.

 

Principal Executive Officer and Principal Financial OfficerCertifications.  Included as Exhibits31.1 and 31.2 to this Annual Report on Form 10-K are forms of “Certification”of the Company’s Principal Executive Officer and Principal FinancialOfficer.  The forms of Certification arerequired in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. Thissection of the Annual Report on Form 10-K which you are currently reading isthe information concerning the evaluation referred to in the Section 302certifications.  This information shouldbe read in conjunction with the Section 302 certifications for a more completeunderstanding of the topics presented.

 

DisclosureControls and Procedures and Internal Control over Financial Reporting.  Disclosure controls and procedures aredesigned with the objective of ensuring that information required to bedisclosed in the Company’s reports filed or submitted under the Exchange Act,such as this Annual Report on Form 10-K, is recorded, processed, summarized andreported within the time periods specified in the Commission’s rules andforms.  Disclosure controls andprocedures are also designed with the objective of ensuring that suchinformation is accumulated and communicated to the Company’s management,including the Company’s Principal Executive Officer and Principal FinancialOfficer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

Internal controlover financial reporting is a process designed by, or under the supervision of,the Company’s Principal Executive Officer and Principal Financial Officer, andeffected by the Company’s Board of Directors, management and other personnel,to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles and includes those policiesand procedures that:

 

•      pertain to the maintenance of records thatin reasonable detail accurately and fairly reflect the transactions anddispositions of our assets;

 

•      provide reasonable assurance thattransactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat the Company’s receipts and expenditures are being made only in accordancewith authorizations of management or the Company’s Board; and

 

•      provide reasonable assurance regardingprevention or timely detection of unauthorized acquisition, use or dispositionof the Company’s assets that could have a material adverse effect on theCompany’s financial statements.

 

Limitations on theEffectiveness of Controls.  Management,including the Company’s Principal Executive Officer and Principal FinancialOfficer, do not expect that the Company’s disclosure controls and procedures orthe Company’s internal control over financial reporting will prevent all errorsand all fraud.  A control system, nomatter how well conceived and operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met.  Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs.  Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the company have been detected.  These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdownscan occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts ofsome persons, by collusion of two or more people, or by management’s overrideof the control.  The design of anysystem of controls also is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions;over time, controls may become inadequate because of changes in conditions, orthe degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

 

Conclusions.  Based upon the evaluation, the Company’sPrincipal Executive Officer and Principal Financial Officer have concludedthat, as of December 31, 2003 and subject to the limitations noted above, theCompany’s disclosure controls and procedures were effective at the reasonableassurance level to ensure that material information relating to the Company andthe Company’s consolidated subsidiaries is made known to management, includingthe Company’s Principal Executive Officer and Principal Financial Officer.

 

During the three months ended December 31, 2003, there were nosignificant changes in the Company’s internal control over financial reportingthat has materially affected, or are reasonably likely to materially affect,the Company’s internal control for financial reporting.

 

81

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**PART III**

 

**Item 10****.  Directors and Executive Officers of theRegistrant**

 

(a) Audit Committee Financial Expert

Pursuant to 18 U.S.C.Section 1350 as adopted pursuant to Section 407 of the Sarbanes-Oxley Act of2002, the Company’s Board of Directors has determined that Robert E. Parsons isan independent director and a financial expert.

 

(b) Code of Ethics

Pursuant to 18 U.S.C. Section 1350 as adopted pursuantto Section 406 of the Sarbanes-Oxley Act of 2002, the Company has adopted acode of ethics that applies to the Company’s Principal Executive Officer,Principal Financial Officer and Principal Accounting Officer, or personsperforming similar functions.  TheCompany’s Code of Business Conduct is available at its Internet websitehttp://www.cnlonline.com.

 

(c) Section 16 (a)Beneficial Ownership Reporting Compliance

 

On February 14, 2003, an Annual Statement ofBeneficial Ownership of Securities on Form 5 was not filed by Matthew W. Kaplan(at that time a director of the Company) on behalf of an LLC (of which he hasbeen appointed a manager) with respect to a single transaction relating toshares as to which he disclaimed beneficial ownership.  Such Form wasrequired to be filed by Section 16(a) of the Exchange Act and the rulesand regulations adopted thereunder, and was subsequently filed.

 

Messrs. Bloom and Williams were appointed as executiveofficers of the Company on October 29, 2003. Neither of these individuals filed a timely Initial Statement ofBeneficial Ownership of Securities on Form 3. Such Forms were required to be filed by Section 16(a) of the ExchangeAct and the rules and regulations adopted thereunder, and were subsequentlyfiled.  Neither individual owns sharesin the Company.

 

Other information required by this Item isincorporated by reference to the Company’s Definitive Proxy Statement to befiled with the Commission no later than April 30, 2004.

 

**Item 11****.  Executive Compensation**

 

The information required by this Item is incorporatedby reference to the Company’s Definitive Proxy Statement to be filed with theCommission no later than April 30, 2004.

 

**Item 12****.  Security Ownership of Certain BeneficialOwners and Management**

 

The information required by this Item is incorporatedby reference to the Company’s Definitive Proxy Statement to be filed with theCommission no later than April 30, 2004.

 

**Item 13****.  Certain Relationships and RelatedTransactions**

 

The information required by this Item is incorporatedby reference to the Company’s Definitive Proxy Statement to be filed with theCommission no later than April 30, 2004.

 

###### **Item 14**.   Principal Accountant Fees andServices

 

The information required by this Item is incorporatedby reference to the Company’s Definitive Proxy Statement to be filed with theCommission no later than April 30, 2004.

 

82

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**PART IV**

 

**Item 15****.  Exhibits, Financial Statement Schedules andReports on Form 8-K**

 

 

(a)                                  Thefollowing documents are filed as part of this report.

 
| 1.     | Consolidated  Financial Statements                                                                          |   |
|--------|-------------------------------------------------------------------------------------------------------------|--------|
|   |                                                                                                        |   |
|   | Report  of Independent Certified Public Accountants                                                         |   |
|   |                                                                                                        |   |
|   | Consolidated Balance Sheets  at December 31, 2003 and 2002                                                  |   |
|   |                                                                                                        |   |
|   | Consolidated  Statements of Earnings for the years ended December 31, 2003, 2002 and 2001                   |   |
|   |                                                                                                        |   |
|   | Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2003, 2002  and 2001 |   |
|   |                                                                                                        |   |
|   | Consolidated  Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001                 |   |
|   |                                                                                                        |   |
|   | Notes to  Consolidated Financial Statements                                                                 |   |
|   |                                                                                                        |   |
| 2.     | Financial Statement Schedules                                                                               |   |
|   |                                                                                                        |   |
|   | Schedule  II - Valuation and Qualifying Accounts                                                            |   |
|   |                                                                                                        |   |
|   | Schedule  III - Real Estate and Accumulated Depreciation at December 31, 2003                               |   |
|   |                                                                                                        |   |
|   | Notes to Schedule III -  Real Estate and Accumulated Depreciation at December 31, 2003                      |   |

 
|   | All other Schedules are  omitted as the required information is inapplicable or is presented in the  financial statements or notes thereto. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------|

 

(b)                                 TheCompany filed the following reports during the quarter ended December 31, 2003,on Form 8-K:

 

On October 16, 2003, the Company filed a CurrentReport on Form 8-K under Items 5 and 7 to attach a press release, dated October16, 2003, announcing the election of Robert E. Parsons, Jr. to its Board ofDirectors.

 

On October 20, 2003, the Company filed a CurrentReport on Form 8- K under Items 5 and 7 to attach a press release, dated October17, 2003, announcing its intention to acquire a Property.

 

On December 16, 2003, the Company filed a CurrentReport on Form 8- K under Items 5 and 7 to attach a press release, datedDecember 15, 2003, announcing the acquisition of another Property.

 

On December 22, 2003, the Company filed a CurrentReport on Form 8- K under Items 5 and 7 to attach two press releases.  The press release dated December 17, 2003,announced the formation of a joint venture that acquired two Properties.  The press release dated December 18, 2003,announced the acquisition of an additional Property through a separate jointventure.

 

On December 31, 2003, the Company filed a CurrentReport on Form 8- K under Items 2 and 7 to disclose the acquisition of threeadditional Properties.

 

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(c)                                  Exhibits

 
| 2.1    |   | Agreement by and among CNL Hospitality Properties,  Inc., CNL Rose Acquisition Corp., RFS Hotel Investors, Inc., CNL Rose  Acquisition OP, LP and RFS Partnership, L.P., dated May 8, 2003 *(Previously  filed as Exhibit 2.1 to the Registrant’s Form 8-K filed May 9, 2003 and  incorporated herein by reference.)*                                                            |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.2    |   | Amendment to Merger Agreement dated May 27, 2003  among the Company, CNL Rose Acquisition Corp., RFS Hotel Investors, Inc., CNL  Rose Acquisition OP, LP and RFS Partnership, L.P. *(**Previously filed as Exhibit 2.2 to Post-Effective  Amendment No. Two to the Registrant’s Registration Statement on Form S-11  filed July 14, 2003 and incorporated herein by reference.)* |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.3    |   | RFS Acquisition Agreement, dated as of July 10,  2003, by and among CNL Hospitality Partners, LP, CNL Hotel RI-Orlando, Ltd.,  CNL Hotel CY-Edison, LP, RFS Partnership, L.P. and CNL Rose Acquisition Corp.  *(Previously filed as Exhibit 2.1 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference).*              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.4    |   | Stock Purchase Agreement, dated as of February 12,  2004, by and among KKR Partners II, L.P., KKR 1996 Fund, L.P., Resort  Associates, L.P., Golf Associates, L.P., CNL Resort Acquisition Corp. and KSL  Recreation Corporation *(Previously filed as Exhibit 2.1 to the  Registrant’s Form 8-K filed February 13, 2004 and incorporated herein by  reference.)*                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.1    |   | Articles of Amendment and Restatement of CNL  Hospitality Properties, Inc. dated July 21, 2003 *(Previously filed as Exhibit 3.18 to the Registrant’s Registration  Statement on Form S-11 (Registration No. 333-107279) filed July 23, 2003 and  incorporated herein by reference.)*                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.2    |   | CNL American Realty Fund, Inc. Bylaws *(Previously  filed as Exhibit 3.3 to the Registrant’s Registration Statement on Form S-11  filed August 12, 1996 and incorporated herein by reference.)*                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.3    |   | Amendment No. 1 to the Bylaws of CNL Hospitality  Properties, Inc.  *(Previously filed as Exhibit 3.7 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed October 23, 2000 and incorporated herein by reference.)*                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.4    |   | Amendment No. 2 to the Bylaws of CNL Hospitality  Properties, Inc.  *(Previously filed as Exhibit 3.8 to  Post-Effective Amendment No. Six to the Registrant’s Registration Statement  on Form S-11 filed June 11, 2001 and incorporated herein by reference.)*                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.5    |   | Amendment No. 3 to the Bylaws of CNL Hospitality  Properties, Inc.  *(Previously filed as Exhibit 3.9 to  Post-Effective Amendment No. One to the Registrant’s Registration Statement  on Form S-11 (Registration No. 333-67124) filed June 26, 2002 and  incorporated herein by reference.)*                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.6    |   | Fifth Amended and Restated Agreement of Limited  Partnership of RFS Partnership, L.P. dated January 2, 2001 (*Previously filed as Exhibit 3.3 to  RFS Hotel Investors, Inc.’s (“RFS”) Form 10-K filed March 15, 2001 and  incorporated herein by reference.)*                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| 3.7    |   | Amendment to the Certificate of Limited Partnership  of RFS Partnership, L.P., dated July 10, 2003 *(Previously filed as Exhibit 3.17 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed July 14, 2003 and incorporated herein by reference.)*                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                  |
| 4.1    |   | Form of Reinvestment Plan *(Included as Exhibit 4.10 in  Post-Effective Amendment No. Six to the Registrant’s Registration Statement  on Form S-11(Registration No.  333-98074)  filed January 26,  2004 and incorporated herein by reference.)*                                                                                                                            |

 

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| 4.2    |   | Indenture dated February 26, 2002 among RFS  Partnership, L.P., RFS 2002 Financing, Inc., RFS Leasing VII, Inc., RFS Hotel  Investors, Inc. and U.S. Bank National Association (*Previously filed as Exhibit 4.1 to RFS’s Form S-4 Registration  Statement filed March 15, 2002 and incorporated herein by reference.)*                                                               |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.3    |   | Form of Global Note evidencing the 9.75% Series B  Senior Notes due 2012 of RFS Partnership, L.P. and RFS 2002 Financing, Inc. (*Previously filed as Exhibit A to  Exhibit 4.1 to RFS’s Form S-4 Registration Statement filed March 15, 2002 and  incorporated herein by reference.)*                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.4    |   | Form of Guaranty by RFS Hotel Investors, Inc. and  RFS Leasing VII, Inc. (*Previously  filed as Exhibit A to Exhibit 4.1 to RFS’s Form S-4 Registration Statement  filed March 15, 2002 and incorporated herein by reference.)*                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 4.5    |   | Registration Rights Agreement dated February 26,  2002 among RFS Partnership, L.P., RFS 2002 Financing, Inc., RFS Leasing VII,  Inc., RFS Hotel Investors, Inc., Credit Suisse First Boston Corporation and  Banc of America Securities LLC (*Previously  filed as Exhibit 4.4 to RFS’s Form S-4 Registration Statement filed March 15,  2002 and incorporated herein by reference.)* |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.1   |   | Form of Escrow Agreement between CNL Hospitality  Properties, Inc. and SouthTrust Bank *(Previously filed as Exhibit 10.1 to Pre-Effective  Amendment No. One to the Registrant’s Registration Statement on Form S-11  filed December 23, 2002 and incorporated herein by reference.)*                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.2   |   | Advisory Agreement dated as of April 1, 2003 between  CNL Hospitality Properties, Inc. and CNL Hospitality Corp.  *(**Previously  filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed May 15, 2003 and  incorporated herein by reference.)*                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.3   |   | Form of Joint Venture Agreement *(Previously filed as Exhibit 10.3 to  the Registrant’s Registration Statement on Form S-11 filed November 23, 1998  and incorporated herein by reference.)*                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.4   |   | Form of Indemnification and Put Agreement *(Previously  filed as Exhibit 10.4 to the Registrant’s Registration Statement on Form S-11  filed August 12, 1996 and incorporated herein by reference.)*                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.5   |   | Form of Unconditional Guaranty of Payment and  Performance *(Previously filed as Exhibit 10.5 to the Registrant’s Registration  Statement on Form S-11 filed August 12, 1996 and incorporated herein by  reference.)*                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.6   |   | Form of Purchase Agreement *(Previously filed as Exhibit 10.6 to  the Registrant’s Registration Statement on Form S-11 filed August 12, 1996  and incorporated herein by reference.)*                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.7   |   | Form of Lease Agreement *(Previously filed as Exhibit 10.57 to  the Registrant’s Registration Statement on Form S-11 filed August 9, 2001 and  incorporated herein by reference.)*                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.8   |   | Form of Reinvestment Plan *(Included as Exhibit 4.10 to  Post-Effective Amendment No. six to the Registrant’s Registration Statement  on Form S-11 Filed January 26, 2004 and*                                                                                                                                                                                                        |

 

85

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| 10.9   |   | Indemnification Agreement between CNL Hospitality  Properties, Inc. and Lawrence A. Dustin dated February 24, 1999.  Each of the following directors and/or  officers has signed a substantially similar agreement as follows: James M.  Seneff, Jr., Robert A. Bourne, G. Richard Hostetter, J. Joseph Kruse, Richard  C. Huseman, Charles A. Muller, Jeanne A. Wall and Lynn E. Rose, dated July 9,  1997; C. Brian Strickland dated October 31, 1998; John A. Griswold dated  January 7, 1999; Charles E. Adams and Craig M. McAllaster dated February 10,  1999; Matthew W. Kaplan dated February 24, 1999; Thomas J. Hutchison III  dated May 16, 2000; and Robert E. Parsons, Jr. dated November 3, 2003.  *(Previously filed as Exhibit 10.2 to the  Registrant’s Form 10-Q filed May 17, 1999 and incorporated herein by  reference.)* |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.10  |   | Agreement of Limited Partnership of CNL Hospitality  Partners, LP *(Previously filed as Exhibit 10.10 to Post-Effective Amendment No.  Five to the Registrant’s Registration Statement on Form S-11 filed September  23, 1998 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.11  |   | Hotel Purchase and Sale Contract between CNL Real  Estate Advisors, Inc. and Gwinnett Residence Associates, LLC, relating to the  Residence Inn - Gwinnett Place *(Previously filed as Exhibit 10.11 to  Post-Effective Amendment No. Five to the Registrant’s Registration Statement  on Form S-11 filed September 23, 1998 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.12  |   | Assignment and Assumption Agreement between CNL Real  Estate Advisors, Inc. and CNL Hospitality Partners, LP, relating to the  Residence Inn - Gwinnett Place *(Previously filed as Exhibit 10.12 to  Post-Effective Amendment No. Five to the Registrant’s Registration Statement  on Form S-11 filed September 23, 1998 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.13  |   | Hotel Purchase and Sale Contract between CNL Real  Estate Advisors, Inc. and Buckhead Residence Associates, LLC, relating to the  Residence Inn - Buckhead (Lenox Park)   *(Previously  filed as Exhibit 10.13 to Post-Effective Amendment No. Five to the  Registrant’s Registration Statement on Form S-11 filed September 23, 1998 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.14  |   | Assignment and Assumption Agreement between CNL Real  Estate Advisors, Inc. and CNL Hospitality Partners, LP, relating to the  Residence Inn - Buckhead (Lenox Park)   *(Previously  filed as Exhibit 10.14 to Post-Effective Amendment No. Five to the  Registrant’s Registration Statement on Form S-11 filed September 23, 1998 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.15  |   | Lease Agreement between CNL Hospitality Partners, LP  and STC Leasing Associates, LLC, dated August 1, 1998, relating to the  Residence Inn - Gwinnett Place *(Previously filed as Exhibit 10.15 to  Post-Effective Amendment No. Five to the Registrant’s Registration Statement  on Form S-11 filed September 23, 1998 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.16  |   | Lease Agreement between CNL Hospitality Partners, LP  and STC Leasing Associates, LLC, dated August 1, 1998, relating to the  Residence Inn - Buckhead (Lenox Park)   *(Previously  filed as Exhibit 10.16 to Post-Effective Amendment No. Five to the  Registrant’s Registration Statement on Form S-11 filed September 23, 1998 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.17  |   | Master Revolving Line of Credit Loan Agreement with  CNL Hospitality Properties, Inc., CNL Hospitality Partners, LP and Colonial  Bank, dated July 31, 1998 *(Previously filed as Exhibit 10.17 to  Post-Effective Amendment No. Five to the Registrant’s Registration Statement  on Form S-11 filed September 23, 1998 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.18  |   | Master Loan Agreement by and between CNL Hotel  Investors, Inc. and Jefferson-Pilot Life Insurance Company, dated February  24, 1999 *(Previously  filed as Exhibit 10.18 to Post-Effective Amendment No. Seven to the  Registrant’s Registration Statement on Form S-11 filed March 16, 1999 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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| 10.19  |   | Securities Purchase Agreement between CNL  Hospitality Properties, Inc. and Five Arrows Realty Securities II L.L.C.,  dated February 24, 1999 *(Previously filed as Exhibit 10.19 to  Post-Effective Amendment No. Seven to the Registrant’s Registration Statement  on Form S-11 filed March 16, 1999 and incorporated herein by reference.)*                                                                                                                                                                    |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.20  |   | Subscription and Stockholders’ Agreement among CNL  Hotel Investors, Inc., Five Arrows Realty Securities II L.L.C., CNL  Hospitality Partners, LP and CNL Hospitality Properties, Inc., dated February  24, 1999 *(Previously  filed as Exhibit 10.20 to Post-Effective Amendment No. Seven to the  Registrant’s Registration Statement on Form S-11 filed March 16, 1999 and  incorporated herein by reference.)*                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.21  |   | Registration Rights Agreement by and between CNL  Hospitality Properties, Inc. and Five Arrows Realty Securities II L.L.C.,  dated February 24, 1999 *(Previously filed as Exhibit 10.21 to  Post-Effective Amendment No. Seven to the Registrant’s Registration Statement  on Form S-11 filed March 16, 1999 and incorporated herein by reference.)*                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.22  |   | Lease Agreement between Courtyard Annex, L.L.C. and  City Center Annex Tenant Corporation, dated November 15, 1999, relating to  the Courtyard - Philadelphia *(Previously filed as Exhibit 10.22 to  Post-Effective Amendment No. Four to the Registrant’s Registration Statement  on Form S-11 filed February 17, 2000 and incorporated herein by reference.)*                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.23  |   | First Amended and Restated Limited Liability Company  Agreement of Courtyard Annex, L.L.C., relating to the Courtyard -  Philadelphia *(Previously filed as Exhibit 10.23 to Post-Effective Amendment No.  Four to the Registrant’s Registration Statement on Form S-11 filed February  17, 2000 and incorporated herein by reference.)*                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.24  |   | Purchase and Sale Agreement between Marriott  International, Inc., CBM Annex, Inc., Courtyard Annex, Inc., as Sellers, and  CNL Hospitality Partners, LP, as Purchaser, dated November 15, 1999, relating  to the Courtyard - Philadelphia *(Previously filed as Exhibit 10.24 to  Post-Effective Amendment No. Four to the Registrant’s Registration Statement  on Form S-11 filed February 17, 2000 and incorporated herein by reference.)*                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.25  |   | Lease Agreement between CNL Hospitality Partners,  LP, and RST4 Tenant LLC, dated December 10, 1999, relating to the Residence  Inn - Mira Mesa *(Previously filed as Exhibit 10.25 to Post-Effective Amendment No.  Four to the Registrant’s Registration Statement on Form S-11 filed February  17, 2000 and incorporated herein by reference.)*                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.26  |   | Purchase and Sale Agreement between Marriott  International, Inc., TownePlace Management Corporation and Residence Inn by  Marriott, Inc., as Sellers, and CNL Hospitality Partners, LP, as Purchaser,  dated November 24, 1999, relating to the Residence Inn - Mira Mesa and the  TownePlace Suites - Newark *(Previously filed as Exhibit 10.26 to  Post-Effective Amendment No. Four to the Registrant’s Registration Statement  on Form S-11 filed February 17, 2000 and incorporated herein by reference.)* |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.27  |   | First Amendment to Lease Agreement between CNL  Hospitality Partners, LP and STC Leasing Associates, LLC, dated August 1,  1998, related to the Residence Inn - Gwinnett Place, (amends Exhibit 10.15  above) and the First Amendment to Agreement of Guaranty, dated August 1, 1998  (amends Agreement of Guaranty attached as Exhibit I to 10.15 above)  *(Previously filed as Exhibit 10.15 to the  Registrant’s Form 10-Q filed November 10, 1999 and incorporated herein by  reference.)*               |

 

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| 10.28  |   | First Amendment to Lease Agreement between CNL  Hospitality Partners, LP and STC Leasing Associates, LLC, dated August 1,  1998, related to the Residence Inn - Buckhead (Lenox Park) (amends Exhibit  10.16 above) and the First Amendment to Agreement of Guaranty, dated August  1, 1998 (amends Agreement of Guaranty attached as Exhibit I to 10.16  above)  *(Previously filed as Exhibit 10.16 to  the Registrant’s Form 10-Q filed November 10, 1999 and incorporated herein by  reference.)* |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.29  |   | Lease Agreement between CNL Hospitality Partners, LP  and WYN Orlando Lessee, LLC, dated May 31, 2000, relating to the Wyndham  Denver Tech Center *(Previously filed as Exhibit 10.29 to  Post-Effective Amendment No. Six to the Registrant’s Registration Statement  on Form S-11 filed June 9, 2000 and incorporated herein by reference.)*                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.30  |   | Lease Agreement between CNL Hospitality Partners, LP  and WYN Orlando Lessee, LLC, dated May 31, 2000, relating to the Wyndham  Billerica *(Previously  filed as Exhibit 10.30 to Post-Effective Amendment No. Six to the  Registrant’s Registration Statement on Form S-11 filed June 9, 2000 and  incorporated herein by reference.)*                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.31  |   | Purchase and Sale Agreement between CNL Hospitality  Corp., as Buyer, and WII Denver Tech, LLC and PAH Billerica Realty Company,  LLC, as Sellers, and Wyndham International, Inc., relating to the Wyndham  Denver Tech Center and the Wyndham Billerica *(Previously filed as Exhibit 10.31 to  Post-Effective Amendment No. Six to the Registrant’s Registration Statement  on Form S-11 filed June 9, 2000 and incorporated herein by reference.)*                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.32  |   | Lease Agreement between CNL Hospitality Partners, LP  and RST4 Tenant LLC, dated June 17, 2000, relating to the Courtyard - Palm  Desert and the Residence Inn - Palm Desert *(Previously filed as Exhibit 10.32 to  Post-Effective Amendment No. One to the Registrant’s Registration Statement  on Form S-11 filed August 9, 2000 and incorporated herein by reference.)*                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.33  |   | Purchase and Sale Agreement between PDH Associates  LLC, as Seller, and CNL Hospitality Corp., as Buyer, dated January 19, 2000,  relating to the Courtyard - Palm Desert and the Residence Inn - Palm Desert *(Previously  filed as Exhibit 10.33 to Post-Effective Amendment No. One to the  Registrant’s Registration Statement on Form S-11 filed August 9, 2000 and  incorporated herein by reference.)*                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.34  |   | Amendment to Purchase and Sale Agreement between PDH  Associates LLC and CNL Hospitality Corp., dated January 19, 2000, relating to  the Courtyard - Palm Desert and the Residence Inn - Palm Desert (amends  Exhibit 10.33 above)  *(Previously  filed as Exhibit 10.34 to Post-Effective Amendment No. One to the Registrant’s  Registration Statement on Form S-11 filed August 9, 2000 and incorporated  herein by reference.)*                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.35  |   | Assignment Agreement between CNL Hospitality Corp.  and CNL Hospitality Partners, LP, relating to the Courtyard - Palm Desert and  the Residence Inn - Palm Desert *(Previously filed as Exhibit 10.35 to  Post-Effective Amendment No. One to the Registrant’s Registration Statement  on Form S-11 filed August 9, 2000 and incorporated herein by reference.)*                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.36  |   | Lease Agreement between CNL Hospitality Partners, LP  and RST4 Tenant LLC, dated July 28, 2000, relating to the SpringHill Suites -  Gaithersburg *(Previously filed as Exhibit 10.36 to Post-Effective Amendment No.  One to the Registrant’s Registration Statement on Form S-11 filed August 9,  2000 and incorporated herein by reference.)*                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.37  |   | Purchase and Sale Agreement between SpringHill SMC  Corporation, as Seller, and CNL Hospitality Partners, LP, as Purchaser, and  joined in by Marriott International, Inc., dated June 30, 2000, relating to  the SpringHill Suites - Gaithersburg *(Previously filed as Exhibit 10.37 to  Post-Effective Amendment No. One to the Registrant’s Registration Statement  on Form S-11 filed August 9, 2000 and incorporated herein by reference.)*                                                          |

 

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| 10.38  |   | Lease Agreement between CNL Hospitality Partners, LP  and RST4 Tenant LLC, dated July 28, 2000, relating to the Residence Inn -  Merrifield *(Previously filed as Exhibit 10.38 to Post-Effective Amendment No.  One to the Registrant’s Registration Statement on Form S-11 filed August 9,  2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.39  |   | Purchase and Sale Agreement between TownePlace  Management Corporation and Residence Inn by Marriott, Inc., as Sellers, and  CNL Hospitality Partners, LP, as Purchaser, and joined in by Marriott  International, Inc., dated November 24, 1999, relating to the Residence Inn -**Merrifield  *(Previously  filed as Exhibit 10.39 to Post-Effective Amendment No. One to the  Registrant’s Registration Statement on Form S-11 filed August 9, 2000 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.40  |   | First Amendment to Purchase and Sale Agreement  between TownePlace Management Corporation and Residence Inn by Marriott,  Inc., as Sellers, and CNL Hospitality Partners, LP, as Purchaser, and joined  in by Marriott International, Inc., dated November 24, 1999, relating to the  Residence Inn - Mira Mesa, SpringHill Suites - Gaithersburg, Residence Inn -  Merrifield and TownePlace Suites - Newark (amends Exhibits 10.26, 10.37 and  10.39 above)  *(Previously filed as Exhibit 10.40 to  Post-Effective Amendment No. One to the Registrant’s Registration Statement  on Form S-11 filed August 9, 2000 and incorporated herein by reference.)*                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.41  |   | Lease Agreement between CNL Hospitality Partners, LP  and CCCL Leasing LLC, dated August 18, 2000, relating to the Courtyard -  Alpharetta *(Previously filed as Exhibit 10.41 to Post-Effective Amendment No.  Two to the Registrant’s Registration Statement on Form S-11 filed October 23,  2000 and incorporated herein by reference.*                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.42  |   | Lease Agreement between CNL Hospitality Partners, LP  and CCCL Leasing LLC, dated August 18, 2000, relating to the Residence Inn -  Cottonwood *(Previously filed as Exhibit 10.42 to Post-Effective Amendment No.  Two to the Registrant’s Registration Statement on Form S-11 filed October 23,  2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.43  |   | Lease Agreement between CNL Hospitality Partners, LP  and CCCL Leasing LLC, dated August 18, 2000, relating to the TownePlace  Suites - Mt. Laurel *(Previously filed as Exhibit 10.43 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed October 23, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.44  |   | Lease Agreement between CNL Hospitality Partners, LP  and CCCL Leasing LLC, dated August 18, 2000, relating to the TownePlace  Suites - Scarborough *(Previously filed as Exhibit 10.44 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed October 23, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.45  |   | Lease Agreement between CNL Hospitality Partners, LP  and CCCL Leasing LLC, dated August 18, 2000, relating to the TownePlace  Suites - Tewksbury *(Previously filed as Exhibit 10.45 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed October 23, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.46  |   | Purchase and Sale Agreement between Residence Inn by  Marriott, Inc., Courtyard Management Corporation, SpringHill SMC Corporation  and TownePlace Management Corporation, as Sellers, CNL Hospitality Partners,  LP, as Purchaser, CCCL Leasing LLC, as Tenant, Crestline Capital Corporation,  Marriott International, Inc., and joined in by CNL Hospitality Properties,  Inc., dated August 18, 2000, relating to the Residence Inn - Cottonwood,  Courtyard - Alpharetta and Overland Park, SpringHill Suites - Raleigh, and  TownePlace Suites - Mt. Laurel, Scarborough and Tewksbury *(Previously  filed as Exhibit 10.46 to Post-Effective Amendment No. Two to the  Registrant’s Registration Statement on Form S-11 filed October 23, 2000 and  incorporated herein by reference.)* |

 

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| 10.47  |   | First Amendment to Purchase and Sale Agreement  between Residence Inn by Marriott, Inc., Courtyard Management Corporation,  SpringHill SMC Corporation and TownePlace Management Corporation, as Sellers,  CNL Hospitality Partners, LP, as Purchaser, CCCL Leasing LLC, as tenant,  Crestline Capital Corporation, and Marriott International, Inc., dated August  18, 2000, relating to the Residence Inn - Cottonwood, Courtyard - Alpharetta  and Overland Park, SpringHill Suites - Raleigh, and TownePlace Suites - Mt.  Laurel, Scarborough and Tewksbury *(Previously filed as Exhibit 10.47 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed October 23, 2000 and incorporated herein by reference.)* |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.48  |   | Lease Agreement between CNL Hospitality Partners, LP  and RST4 Tenant LLC, dated November 4, 2000, relating to the TownePlace  Suites - Newark *(Previously filed as Exhibit 10.48 to Post-Effective Amendment No.  Three to the Registrant’s Registration Statement on Form S-11 filed December  12, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.49  |   | Lease Agreement between LLB C-Hotel, L.L.C. and LLB  Tenant Corporation, dated October 12, 2000, relating to the Courtyard -  Little Lake Bryan *(Previously filed as Exhibit 10.49 to  Post-Effective Amendment No. Three to the Registrant’s Registration Statement  on Form S-11 filed December 12, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.50  |   | Lease Agreement between LLB F-Inn, L.L.C. and LLB  Tenant Corporation, dated October 12, 2000, relating to the Fairfield Inn -  Little Lake Bryan *(Previously filed as Exhibit 10.50 to Post-Effective  Amendment No. Three to the Registrant’s Registration Statement on Form S-11  filed December 12, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.51  |   | First Amendment to Lease Agreement between LLB  C-Hotel, L.L.C. and LLB Tenant Corporation, dated November 17, 2000, relating  to the Courtyard - Little Lake Bryan (amends Exhibit 10.49 above)  *(Previously filed as Exhibit 10.51 to  Post-Effective Amendment No. Three to the Registrant’s Registration Statement  on Form S-11 filed December 12, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.52  |   | First Amendment to Lease Agreement between LLB  F-Inn, L.L.C. and LLB Tenant Corporation, dated November 17, 2000, relating  to the Fairfield Inn - Little Lake Bryan (amends Exhibit 10.50 above)  *(Previously filed as Exhibit 10.52 to  Post-Effective Amendment No. Three to the Registrant’s Registration Statement  on Form S-11 filed December 12, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.53  |   | Purchase and Sale Agreement between Marriott  International, Inc., as Seller, and CNL Hospitality Partners, LP, as  Purchaser, dated September 17, 1998, relating to the Courtyard - Little Lake  Bryan, the Fairfield Inn - Little Lake Bryan and the SpringHill Suites -  Little Lake Bryan *(Previously filed as Exhibit 10.53 to Post-Effective  Amendment No. Three to the Registrant’s Registration Statement on Form S-11  filed December 12, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.54  |   | Second Amendment to Lease Agreement between CNL LLB  C-Hotel Management, LP (formerly LLB C-Hotel, L.L.C.) and LLB Tenant  Corporation, dated December 15, 2000, relating to the Courtyard - Little Lake  Bryan (amends Exhibits 10.49 and 10.51 above)  *(Previously filed as Exhibit 10.54 to Post-Effective Amendment No.  Four to the Registrant’s Registration Statement on Form S-11 filed March 12,  2001 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 10.55  |   | Second Amendment to Lease Agreement between CNL LLB  F-Inn Management, LP (formerly LLB F-Inn L.L.C.) and LLB Tenant Corporation,  dated December 15, 2000, relating to the Fairfield Inn - Little Lake Bryan  (amends Exhibits 10.50 and 10.52 above)   *(Previously  filed as Exhibit 10.55 to Post-Effective Amendment No. Four to the  Registrant’s Registration Statement on Form S-11 filed March 12, 2001 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                    |

 

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| 10.56  |   | Indenture Agreement among Desert Ridge Resort, LLC,  as Issuer; Bank One, National Association, as Trustee; and Financial  Structures Limited, as Insurer, dated December 15, 2000, relating to the  Desert Ridge Property *(Previously filed as Exhibit 10.56 to  Post-Effective Amendment No. Four to the Registrant’s Registration Statement  on Form S-11 filed March 12, 2001 and incorporated herein by reference.)*                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.57  |   | $96,725,000 Promissory Note with CNL Hospitality  Partners, LP, as Maker, and Security Life of Denver Insurance Company, as  Payee, dated September 7, 2001 *(Previously filed as Exhibit 10.56 to the  Registrant’s Form 10-Q filed May 15, 2003 and incorporated herein by  reference.)*                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.58  |   | Consolidated Lease Amendment dated as of February  27, 1996 between RFS Partnership, L.P.   and RFS, Inc. *(Previously filed as Exhibit 10.3 to RFS’s Current  Report on Form 8-K filed March 14, 1996 and incorporated herein by  reference.)*                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.59  |   | Form of Future Percentage Lease Agreement *(Previously  filed as Exhibit 10.4 to RFS’s Current Report on Form 8-K filed March 14,  1996 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.60  |   | Schedule of terms of Percentage Leases *(Previously  filed as Exhibit 10.2(a) to RFS’s Form 10-K filed March 31, 1999 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.61  |   | Form of Percentage Lease with TRS Lessees *(Previously  filed as Exhibit 10.1 to RFS’s Current Report on Form 8-K filed January 16,  2001 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.62  |   | Form of Management Agreement with Flagstone *(Previously  filed as Exhibit 10.2 to RFS’s Current Report on Form 8-K filed January 16,  2001 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.63  |   | Master Agreement dated February 1, 1996 among  Doubletree Corporation, Seedling Merger Subsidiary, Inc., RFS, Inc., RFS  Hotel Investors, Inc. and RFS Partnership, L.P. *(Previously filed as Exhibit 10.2 to  RFS’s Current Report on Form 8-K filed March 14, 1996 and incorporated herein  by reference.)*                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.64  |   | First Amendment to Master Agreement dated as of  November 21, 1996 among Doubletree Corporation, RFS, Inc., RFS Hotel  Investors, Inc., RFS Partnership, L.P., RFS Leasing, Inc., RFS Financing  Partnership, L.P., DTR RFS Lessee, Inc. *(Previously filed as Exhibit 10.9(a) to RFS’s Form  10-K filed March 31, 1997 and incorporated herein by reference.)*                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.65  |   | Termination Agreement dated as of January 26, 2000  among RFS, Inc., RFS Leasing, Inc., DTR RFS Lessee, Inc., RFS Partnership,  L.P., RFS Financing Partnership, L.P., Plano Inn, L.P., RFS SPE 1 1998 LLC,  RFS SPE 2 1998 LLC, Ridge Lake General Partner, Inc., RFS Hotel Investors,  Inc., Doubletree Corporation and Hilton Hotels Corporation *(Previously  filed as Exhibit 10.15 to RFS’s****Form  10-K filed March 28, 2000 and incorporated herein by reference.)* |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.66  |   | Loan Agreement dated August 9, 2000 by and between  Bank of America, N.A. (as lender) and RFS SPE 2000 LLC (as borrower), a  wholly-owned subsidiary of RFS *(Previously filed as Exhibit 10.19 to RFS’s Form  10-K filed March 15, 2001 and incorporated herein by reference.)*                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.67  |   | Loan Agreement dated August 9, 2000 by and between  Bank of America, N.A. (as lender) and RFS SPE 2 2000 LLC (as borrower), a  wholly-owned subsidiary of RFS *(Previously filed as Exhibit 10.20 to RFS’s Form  10-K filed March 15, 2001 and incorporated herein by reference.)*                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.68  |   | Credit Agreement dated as  of July 10, 2003 among RFS Partnership, L.P. and RFS Financing Partnership,  L.P. (as borrowers), the Registrant (as parent to the borrowers), Bank of  America, N.A. (as Administrative Agent) and the lenders named therein *(Previously  filed as Exhibit 10.68 to Post-Effective Amendment No. Two to the  Registrant’s Registration Statement on Form S-11 filed July 14, 2003 and  incorporated herein by reference.*                       |

 

91

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| 10.69  |   | $320,000,000 Note between RFS Partnership, L.P. and RFS Financing  Partnership, L.P. (as borrowers), and Banc of America Bridge LLC (as lender),  dated as of July 10, 2003 *(Previously filed as Exhibit 10.69 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed July 14, 2003 and incorporated herein by reference.)* |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.70  |   | Continuing Guaranty Agreement, dated as of July 10,  2003 among CNL Hospitality Properties, Inc., CNL Rose GP Corp., and CNL Rose  Acquisition Corp., in favor of Bank of America, N.A. *(Previously filed as Exhibit 10.3 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.71  |   | Security and Pledge Agreement, dated as of July 10,  2003 between RFS Partnership, L.P. and Bank of America, N.A. (relating to  common stock of RFS TRS Holdings, Inc.) *(Previously  filed as Exhibit 10.4 to RFS Partnership, L.P.’s Current Report on Form 8-K  filed July 25, 2003 and incorporated herein by reference.)*                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.72  |   | Security and Pledge Agreement, dated as of July 10,  2003 between CNL Rose Acquisition Corp. and Bank of America, N.A. (relating  to limited partner interests in RFS Partnership, L.P.) *(Previously filed as Exhibit 10.5 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.73  |   | Security and Pledge Agreement, dated as of July 10,  2003 between CNL Hospitality Properties, Inc. and Bank of America, N.A.  (relating to common stock of CNL Rose Acquisition Corp.) *(Previously filed as Exhibit 10.6 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.74  |   | Security and Pledge Agreement, dated as of July 10,  2003 between CNL Rose GP Corp. and Bank of America, N.A. (relating to general  partner interest in RFS Partnership, L.P.) *(Previously  filed as Exhibit 10.7 to RFS Partnership, L.P.’s Current Report on Form 8-K  filed July 25, 2003 and incorporated herein by reference.)*                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.75  |   | Security and Pledge Agreement, dated as of July 10,  2003 between CNL Hospitality Properties, Inc. and Bank of America, N.A.  (relating to common stock of CNL Rose GP Corp.) *(Previously filed as Exhibit 10.8 to RFS Partnership, L.P.’s Current  Report on Form 8-K filed July 25, 2003 and incorporated herein by reference.)*                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.76  |   | Security and Pledge Agreement, dated as of July 10,  2003 between RFS Partnership, L.P. and Bank of America, N.A. (relating to  limited partner interest in Ridge Lake, L.P.) *(Previously filed as Exhibit 10.9 to RFS Partnership, L.P.’s Current  Report on Form 8-K filed July 25, 2003 and incorporated herein by reference.)*                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.77  |   | Security and Pledge Agreement, dated as of July 10,  2003 between RFS Partnership, L.P. and Bank of America, N.A. (relating to  common stock of RFS 2002 Financing, Inc.) *(Previously  filed as Exhibit 10.10 to RFS Partnership, L.P.’s Current Report on Form 8-K  filed July 25, 2003 and incorporated herein by reference.)*                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.78  |   | Security and Pledge Agreement, dated as of July 10,  2003 between RFS Partnership, L.P. and Bank of America, N.A. (relating to  limited liability company interest in RFS Financing 2002, L.L.C.) *(Previously filed as Exhibit 10.11 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                           |
| 10.79  |   | Security and Pledge Agreement, dated as of July 10,  2003 between RFS Partnership, L.P. and Bank of America, N.A. (relating to  limited partner interest in RFS Financing Partnership, L.P.) *(Previously filed as Exhibit 10.12 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*                      |

 

92

----

 
| 10.80  |   | Security and Pledge Agreement, dated as of July 10,  2003 between RFS Partnership, L.P. and Bank of America, N.A. (relating to  common stock of Ridge Lake General Partner, Inc.) *(Previously filed as Exhibit 10.13 to RFS Partnership, L.P.’s Current  Report on Form 8-K filed July 25, 2003 and incorporated herein by reference.)*                                                                                                                                                     |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.81  |   | Security and Pledge Agreement, dated as of July 10,  2003 between RFS Partnership, L.P. and Bank of America, N.A. (relating to  limited liability company interests in Ridge Lake, L.L.C.) *(Previously filed as Exhibit 10.14 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.82  |   | Agreement of Purchase and  Sale of The Hotel Del Coronado and Joint Escrow Instructions among L-O  Coronado Holding II, Inc., L-O Coronado Hotel, Inc. and L-O Coronado IP, Inc.  (jointly, Seller) and CNL Hospitality Corp. (Buyer), effective as of  September 23, 2003 (*Previously Filed as Exhibit 10.83 to Post-Effective  Amendment No. six to the Registrant’s Registration Statement on Form S-11  filed January 26, 2004 and incorporated herein by reference.*)                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.83  |   | First Amendment to  Agreement for Purchase and Sale of Real Property and Joint Escrow Instructions  by and among L-O Coronado Holding II, Inc., L-O Coronado Hotel, Inc. and L-O  Coronado IP, Inc. (collectively, Seller) and CNL Hospitality Corp. (Buyer)  dated as of October 15, 2003 (*Previously Filed as Exhibit 10.82 to Post-Effective  Amendment No. six to the Registrant’s Registration Statement on Form S-11  filed January 26, 2004 and incorporated herein by reference.*)  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.84  |   | Second Amendment to  Agreement for Purchase and Sale of Real Property and Joint Escrow  Instructions by and among L-O Coronado Holding II, Inc., L-O Coronado Hotel,  Inc. and L-O Coronado IP, Inc. (collectively, Seller) and CNL Hospitality  Corp. (Buyer) dated as of October 31, 2003 (*Previously Filed as Exhibit 10.84 to  Post-Effective Amendment No. six to the Registrant’s Registration Statement  on Form S-11 filed January 26, 2004 and incorporated herein by reference.*) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.85  |   | Assignment and Assumption  of Agreement of Purchase and Sale and Joint Escrow Instructions by and  between CNL Hospitality Corp. (Assignor) and CNL Hotel Del Partners, LP  (Assignee) dated as of December 18, 2003 (*Previously Filed as Exhibit 10.85 to  Post-Effective Amendment No. six to the Registrant’s Registration Statement  on Form S-11 filed January 26, 2004 and incorporated herein by reference.*)                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 21     |   | Subsidiaries of the  Registrant (*Filed herewith*.)                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 31.1   |   | Certification of Chief Executive Officer, Pursuant to Rule 13a–14(a), as Adopted  Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (*Filed herewith*).                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 31.2   |   | Certification of Principal Financial Officer, Pursuant to Rule 13a–14(a), as  Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (*Filed herewith*.)                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 32.1   |   | Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 (*Furnished herewith*.)                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 32.2   |   | Certification of Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 (*Furnished herewith*.)                                                                                                                                                                                                                                                                                                                 |

 

(d)           Other FinancialInformation

 

The Company is required tofile audited consolidated financial statements of Desert Ridge Resort Partners,LLC and WB Resort Partners, LP due to the significance of the results ofoperations for these unconsolidated subsidiaries.

 

93

----

 

The following summarized financial information is filed as part of thisreport as a result of Marriott providing credit enhancements that guaranteeminimum returns and/or guarantee lease payments for several of the Company’stenants. The aggregate carrying value of the properties covered by these creditenhancements and guarantees represents more than 20 percent of the Company’stotal assets for the year ended December 31, 2003.  The summarized financial information presented for Marriott as ofJanuary 2, 2004 and January 3, 2003, and for each of the years ended January 2,2004, January 3, 2003 and December 28, 2001, was obtained from the Form 10-Kfiled by Marriott with the Commission for the year ended January 2, 2004.

 

MarriottInternational, Inc. and Subsidiaries

Selected FinancialData

(in Millions,except per share data)

** **

Consolidated BalanceSheets Data:

** **
|                       |   | **January 2,  2004** |   | **January 3,  2003** |   |
|----------------------------|--------|----------------------|--------|----------------------|--------|
|                       |   |                 |   |                 |   |
| Current  Assets            |   | $                    | 1,235  |                 | $      | 1,773 |   |
| Noncurrent  Assets         |   | 6,942                |   | 6,523                |   |
| Current  Liabilities       |   | 1,770                |   | 2,183                |   |
| Noncurrent  Liabilities    |   | 2,569                |   | 2,540                |   |
| Stockholders’  Equity |   | 3,838                |   | 3,573                |   |
|                            |        |                      |        |                      |        |  |  |

 

** **

Consolidated Statementsof Income Data:

** **
|                                               |   | **Fiscal  Year  Ended,  January 2,  2004** |   | **Fiscal  Year  Ended,  January 3,  2003** |   | **Fiscal  Year  Ended,  December 28,  2001** |   |
|----------------------------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|----------------------------------------------|--------|
|                                               |   |                                       |   |                                       |   |                                         |   |
| Gross  revenues                                    |   | $                                          | 9,014  |                                       | $      | 8,415                                        |   | $ | 7,768 |   |
|                                               |   |                                       |   |                                       |   |                                         |   |
| Costs  and expenses (including income tax expense) |   | 8,512                                      |   | 8,138                                      |   | 7,532                                        |   |
|                                               |   |                                       |   |                                       |   |                                         |   |
| Net  income                                        |   | $                                          | 502    |                                       | $      | 277                                          |   | $ | 236 |   |
|                                               |   |                                       |   |                                       |   |                                         |   |
| Basic  earnings per share                          |   | $                                          | 2.16   |                                       | $      | 1.15                                         |   | $ | 0.97 |   |
|                                               |   |                                       |   |                                       |   |                                         |   |
| Diluted  earnings per share                        |   | $                                          | 2.05   |                                       | $      | 1.10                                         |   | $ | 0.92 |   |

 

94

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**Desert Ridge Resort Partners, LLC**

**and Subsidiaries**

**Consolidated Financial Statements**

**As of and for the years ended December 31, 2003and 2002**

 

95

----

 

**Report of Independent CertifiedPublic Accountants**

 

To the Members of

Desert Ridge Resort Partners, LLC

 

 

In our opinion, the accompanying consolidatedstatements of financial position and the related consolidated statements ofoperations, of changes in members’ capital (deficit) and comprehensive loss andof cash flows present fairly, in all material respects, the financial positionof Desert Ridge Resort Partners, LLC and its subsidiaries (the “Company”) atDecember 31, 2003 and 2002 and the results of their operations and theircash flows for the years then ended in conformity with accounting principlesgenerally accepted in the United States of America.  These financial statements are the responsibility of theCompany’s management; our responsibility is to express an opinion on thesefinancial statements based on our audits. We conducted our audits of these statements in accordance with auditingstandards generally accepted in the United States of America, which requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

 
| /s/ PRICEWATERHOUSECOOPERS, LLP |   |
|---------------------------------|--------|
| Orlando, Florida                |
| March 12, 2004                  |

 

96

----

 

**Desert Ridge Resort Partners, LLC andSubsidiaries**

**Consolidated Balance Sheets**

**As of December 31, 2003 and 2002**

 
|                                                                             |   | **December  31,** |        |
|----------------------------------------------------------------------------------|--------|-------------------|-------------|
|                                                                             |   | **2003**          |        | **2002** |   |
| **Assets**                                                                       |   |              |        |   |   |
|                                                                             |   |              |        |   |   |
| Current assets                                                                   |   |              |        |   |   |
| Cash and cash  equivalents                                                       |   | $                 | 2,191,589   |   | $ | 7,564,395 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $168,642 at 2003 |   | 5,384,822         |        | 2,023,040 |   |
| Due from  affiliate                                                              |   | 2,183,255         |        | 3,320,900 |   |
| Prepaid expenses  and other current assets                                       |   | 1,000,882         |        | 731,964 |   |
|                                                                             |   |              |        |   |   |
| Total current  assets                                                            |   | 10,760,548        |        | 13,640,299 |   |
|                                                                             |   |              |        |   |   |
| Restricted cash                                                                  |   | 916,220           |        | 51,397 |   |
| Property and  equipment, net                                                     |   | 262,757,269       |        | 269,925,397 |   |
| Loan costs, net  of accumulated amortization of $3,678,003 and $2,453,184        |   | 4,844,274         |        | 5,939,243 |   |
| Goodwill                                                                         |   | 1,556,115         |        | 1,556,115 |   |
|                                                                             |   |              |        |   |   |
| Total assets                                                                     |   | $                 | 280,834,426 |   | $ | 291,112,451 |   |
|                                                                             |   |              |        |   |   |
| **Liabilities and Members’ Capital  (Deficit)**                             |   |              |        |   |   |
|                                                                             |   |              |        |   |   |
| Current  liabilities                                                             |   |              |        |   |   |
| Accounts payable  and accrued expenses                                           |   | $                 | 7,626,641   |   | $ | 7,313,811 |   |
| Due to affiliate                                                                 |   | 237,160           |        | 5,159,727 |   |
| Construction  costs payable, including retainage payable of $7,259,224 at 2002   |   | 294,614           |        | 17,172,419 |   |
| Obligation under  cash flow hedge                                                |   | 7,779,323         |        | 9,724,228 |   |
| Current portion  of obligations under capital leases                             |   | 216,613           |        | 41,188 |   |
|                                                                             |   |              |        |   |   |
| Total current  liabilities                                                       |   | 16,154,351        |        | 39,411,373 |   |
|                                                                             |   |              |        |   |   |
| Mortgage note  payable                                                           |   | 179,000,000       |        | 179,000,000 |   |
| Other notes  payable                                                             |   | 89,730,398        |        | 51,175,811 |   |
| Distributions  payable                                                           |   | 1,656,103         |        | 1,604,923 |   |
| Accrued rent  under operating leases                                             |   | 1,985,478         |        | 1,547,026 |   |
| Obligations  under capital leases                                                |   | 565,816           |        | 131,728 |   |
|                                                                             |   |              |        |   |   |
| Total liabilities                                                                |   | 289,092,146       |        | 272,870,861 |   |
|                                                                             |   |              |        |   |   |
| Commitments                                                                      |   |              |        |   |   |
|                                                                             |   |              |        |   |   |
| Members’ capital  (deficit)                                                 |   | (8,257,720        | )           | 18,241,590 |   |
|                                                                             |   |              |        |   |   |
| Total  liabilities and members’ capital (deficit)                           |   | $                 | 280,834,426 |   | $ | 291,112,451 |   |

 

See accompanyingnotes to consolidated financial statements.

 

97

----

 

**Desert Ridge Resort Partners, LLC andSubsidiaries**

**Consolidated Statements of Operations**

**For the years ended December 31, 2003and 2002**

 
|                                        |   | **December 31,** |        |
|---------------------------------------------|--------|------------------|-------------|
|                                        |   | **2003**         |        | **2002** |   |
|                                        |   |             |        |   |   |
| Revenues:                                   |   |             |        |   |   |
| Room                                        |   | $                | 41,027,026  |   | $ | 1,411,216 |   |
| Food and beverage                           |   | 35,661,081       |        | 1,655,655 |   |
| Other operating department                  |   | 13,581,940       |        | 4,277,561 |   |
|                                        |   |             |        |   |   |
| Total revenue                               |   | 90,270,047       |        | 7,344,432 |   |
|                                        |   |             |        |   |   |
| Costs and expenses:                         |   |             |        |   |   |
| Room                                        |   | 10,392,949       |        | 776,563 |   |
| Food and beverage                           |   | 23,293,158       |        | 2,227,158 |   |
| Other operating departments                 |   | 9,785,030        |        | 4,012,032 |   |
| Interest expense and loan cost amortization |   | 24,583,609       |        | 3,655,114 |   |
| Pre-opening expenses                        |   | 663,869          |        | 6,547,778 |   |
| Depreciation                                |   | 14,679,757       |        | 2,337,753 |   |
| Property operations and maintenance         |   | 11,225,343       |        | 1,427,877 |   |
| General and administrative                  |   | 8,578,467        |        | 1,055,077 |   |
| Sales and marketing                         |   | 6,234,005        |        | 446,670 |   |
| Management fees                             |   | 2,707,665        |        | 209,649 |   |
|                                        |   |             |        |   |   |
| Total costs and expenses                    |   | 112,143,852      |        | 22,695,671 |   |
|                                        |   |             |        |   |   |
| Net loss                                    |   | $                | (21,873,805 | ) | $ | (15,351,239 | ) |

 

See accompanying notes toconsolidated financial statements.

 

98

----

 

**Desert Ridge Resort Partners, LLC andSubsidiaries**

**Consolidated Statement of Changes inMembers’ Capital (Deficit) and Comprehensive Loss**

**December 31, 2003 and 2002**

 
|                                                                  |   | **Class A Members** |       | **Class B Members** |   | **Accumulated Other  Comprehensive  Loss** |   | **Total**   |       | **Comprehensive  Loss** |   |
|-----------------------------------------------------------------------|--------|---------------------|------------|---------------------|--------|--------------------------------------------|--------|-------------|------------|-------------------------|--------|
|                                                                  |   |                |       |                |   |                                       |   |        |       |                    |   |
| Balance at December 31, 2001                                          |   | $                   | 12,644,106 |                | $      | (2,064,419                                 | )      | $           | (3,191,238 | )                       | $      | 7,388,449 |   |   |   |
|                                                                  |   |                |       |                |   |                                       |   |        |       |                    |   |
| Capital   contributions                                          |   | 30,642,956          |       | 5,703,991           |   | —                                     |   | 36,346,947  |       | $                       | — |   |
|                                                                  |   |                |       |                |   |                                       |   |        |       |                    |   |
| Distributions                                                         |   | (3,441,402          | )          | (168,175            | )      | —                                     |   | (3,609,577  | )          | —                  |   |
|                                                                  |   |                |       |                |   |                                       |   |        |       |                    |   |
| Net loss                                                              |   | (14,911,887         | )          | (439,352            | )      | —                                     |   | (15,351,239 | )          | (15,351,239             | )      |
|                                                                  |   |                |       |                |   |                                       |   |        |       |                    |   |
| Current period adjustment to recognize fair value of  cash flow hedge |   | —              |       | —              |   | (6,532,990                                 | )      | (6,532,990  | )          | (6,532,990              | )      |
| Balance at December 31, 2002                                          |   | $                   | 24,933,773 |                | $      | 3,032,045                                  |   | $           | (9,724,228 | )                       | $      | 18,241,590 |   | $ | (21,884,229 | ) |
|                                                                  |   |                |       |                |   |                                       |   |        |       |                    |   |
| Capital   contributions                                          |   | —              |       | —              |   | —                                     |   | —      |       |                    |   |
|                                                                  |   |                |       |                |   |                                       |   |        |       |                    |   |
| Distributions                                                         |   | (5,902,951          | )          | (667,459            | )      | —                                     |   | (6,570,410  | )          | $                       | — |   |
|                                                                  |   |                |       |                |   |                                       |   |        |       |                    |   |
| Net loss                                                              |   | (19,651,427         | )          | (2,222,378          | )      | —                                     |   | (21,873,805 | )          | (21,873,805             | )      |
|                                                                  |   |                |       |                |   |                                       |   |        |       |                    |   |
| Current period adjustment to recognize  fair value of cash flow hedge |   | —              |       | —              |   | 1,944,905                                  |   | 1,944,905   |       | 1,944,905               |   |
| Balance at December 31, 2003                                          |   | $                   | (620,605   | )                   | $      | 142,208                                    |   | $           | (7,779,323 | )                       | $      | (8,257,720 | ) | $ | (19,928,900 | ) |

 

See accompanying notes toconsolidated financial statements.

 

99

----

 

**Desert Ridge Resort Partners, LLC andSubsidiaries**

**Consolidated Statements of Cash Flows**

**For the years ended December 31, 2003and 2002**

 
|                                                                       |   | **December 31,** |        |
|----------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                       |   | **2003**         |        | **2002** |   |
|                                                                       |   |             |        |   |   |
| Cash flows from operating activities:                                      |   |             |        |   |   |
| Net loss                                                                   |   | $                | (21,873,805 | ) | $ | (15,351,239 | ) |
| Adjustments to reconcile net income to cash used in  operating activities: |   |             |        |   |   |
| Depreciation                                                               |   | 14,679,757       |        | 2,337,753 |   |
| Amortization of loan costs                                                 |   | 1,224,819        |        | 1,198,872 |   |
| Bad debt expense                                                           |   | 235,793          |        | 747 |   |
| Changes in operating assets and liabilities:                               |   |             |        |   |   |
| Accounts receivable                                                        |   | (3,597,575       | )           | (1,788,211 | ) |
| Due from affiliate                                                         |   | 1,137,645        |        | (3,267,460 | ) |
| Prepaid expenses and other current assets                                  |   | (268,918         | )           | (548,002 | ) |
| Accrued rent under operating leases                                        |   | 438,452          |        | 1,465,925 |   |
| Accounts payable and accrued expenses                                      |   | 312,830          |        | 5,830,369 |   |
| Due to affiliate                                                           |   | (4,922,567       | )           | 4,098,793 |   |
|                                                                       |   |             |        |   |   |
| Net cash used in operating activities                                      |   | (12,633,569      | )           | (6,022,453 | ) |
|                                                                       |   |             |        |   |   |
| Cash flows from investing activities:                                      |   |             |        |   |   |
| Additions to property and equipment                                        |   | (20,886,258      | )           | (143,026,360 | ) |
| Marriott Vacation Club payment of office build out                         |   | (2,690,000       | )           | — |   |
| (Increase) decrease in restricted cash                                     |   | (864,823         | )           | 69,157,535 |   |
|                                                                       |   |             |        |   |   |
| Net cash used in investing activities                                      |   | (24,441,081      | )           | (73,868,825 | ) |
|                                                                       |   |             |        |   |   |
| Cash flows from financing activities:                                      |   |             |        |   |   |
| Borrowings, net of repayments, from other notes  payable                   |   | 38,554,587       |        | 48,886,390 |   |
| Principal payments on capital lease obligations                            |   | (203,663         | )           | (41,188 | ) |
| Capital contributions from members                                         |   | —           |        | 36,346,947 |   |
| Distributions to members                                                   |   | (6,519,230       | )           | (2,004,654 | ) |
| Payment of loan costs                                                      |   | (129,850         | )           | (110,576 | ) |
|                                                                       |   |             |        |   |   |
| Net cash provided by financing activities                                  |   | 31,701,844       |        | 83,076,919 |   |
|                                                                       |   |             |        |   |   |
| Net (decrease) increase in cash and cash equivalents                       |   | (5,372,806       | )           | 3,185,641 |   |
|                                                                       |   |             |        |   |   |
| Cash and cash equivalents, beginning of period                             |   | 7,564,395        |        | 4,378,754 |   |
|                                                                       |   |             |        |   |   |
| Cash and cash equivalents, end of period                                   |   | $                | 2,191,589   |   | $ | 7,564,395 |   |
|                                                                       |   |             |        |   |   |
| Supplemental disclosure of cash flow information:                          |   |             |        |   |   |
| Cash paid during the period for:                                           |   |             |        |   |   |
| Interest, net of $14,979,037 in capitalized interest  in 2002              |   | $                | 24,369,166  |   | $ | 685,653 |   |
|                                                                       |   |             |        |   |   |
| Supplemental disclosure of non-cash  investing/financing activities        |   |             |        |   |   |
| Assets acquired through capital lease obligation                           |   | $                | 813,176     |   | $ | — |   |
| Distributions declared but not paid to Partners                            |   | $                | 1,656,103   |   | $ | 1,604,923 |   |
| Construction costs payable included in construction  in progress           |   | $                | 294,614     |   | $ | 17,172,419 |   |
| Ground rental capitalized to construction cost                             |   | $                | —      |   | $ | 515,246 |   |

 

See accompanying notes toconsolidated financial statements.

 

100

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**Desert Ridge Resort Partners, LLC andSubsidiaries**

**Notes to Consolidated FinancialStatements**

**December 31, 2003 and 2002**

 

**1.****                                      Business**

 

**Organization**

**Desert Ridge Resort Partners, LLC(the “LLC” or the “Company”) was organized pursuant to the laws of the State ofDelaware on December 21, 2000.  DesertRidge Resort, LLC and DRR Tenant Corporation are wholly owned subsidiaries ofthe LLC.  The LLC’s Class A Members’ areCNL DRR Investor, LP and CNL Desert Ridge Resort, Ltd. (collectively, the“Class A Members”) and Marriott International, Inc. is the Class B Member(“Marriott”).  The managing Member isCNL DRR Investor, LP.  Both classes ofMembers share in major decisions and there is substantially no differencebetween the rights and obligations of Class A Members and Class B Members.**

 

**The LLC was formed to own andoperate a 950-room luxury resort located in Phoenix, Arizona (the“Property”).  The Property includes twochampionship golf courses, a 25,500 square foot spa and 78,000 square feet ofmeeting space.  Affiliates of theMembers managed the construction activity under development agreementsthroughout the construction period. Construction was completed on November 30, 2002 (the “Opening Date”), atwhich time the Property opened to the public. The Property’s day-to-day activities are managed by an affiliate ofMarriott, however, all Members must agree on key decisions affecting theProperty.**

 

**The structure of the LLC isdesigned to allow its managing Member’s parent to continue to qualify as a realestate investment trust, which is generally not subject to federal incometaxes.  In keeping with this goal, theLLC operates its Property through a taxable REIT subsidiary (“TRS”), aspermitted by the REIT Modernization Act of 1999.**

 

**The LLC relies on capitalcontributions from the Class A Members and Marriott and borrowings under loansto fund capital expenditures, operating losses and negative cash flows.  For the years ended December 31, 2003 and2002, the LLC incurred losses of approximately $21.9 million and $15.4 million,respectively.  As of December 31, 2003,the LLC had deficit capital of approximately $8.3 million.  In addition, the LLC had negative cash flowsfrom operations for the years ended December 31, 2003 and 2002 of approximately$12.6 million and $6.0 million, respectively. Losses and deficit cash flows at the Property may continue until suchtime as the Property establishes market presence and captures market share andcould increase if the economy fails to recover.  The LLC has a Liquidity Facility Loan and Senior Loan Guarantee(see Note 5) to fund operating shortfalls and deficit debt service ifneeded.  The Members are committed tofund such shortfalls if they arise.**

 

**In accordance with the LLCagreement (the “Agreement”), (i) each Member’s account is credited with capitalcontributions, share of profits and (ii) each Members’ account is charged foramounts distributed to each Member.  TheClass A Members and Class B Members own 89.8% and 10.2%, respectively, in theCompany as a result of approximately $51.3 million and $5.8 million,respectively, in capital contributions since its formation.**

** **

**Allocationsand Distributions**

**Net operating profits areallocated (i) first, to the Members’ who received allocations of losses forearlier fiscal years, pro rata, in proportion to the cumulative amount oflosses previously allocated to them, until those Members have receivedcumulative allocation of profits equal to the cumulative losses; (ii) next, toMembers’, pro rata, in proportion to the cumulative distributions made to them,until those Members have received cumulative allocation of profits equal to thecumulative amount of such distributions; and (iii) thereafter, to the Members,pro rata, in proportion to their respective percentage interests.**

 

101

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**Net operating losses areallocated (i) first, to the Members who received allocations of profits forearlier fiscal years, pro rata, in proportion to the cumulative amount ofprofits previously allocated to them, until those Members have receivedcumulative allocation of losses equal to the cumulative profits; (ii) next, toMembers who have positive capital accounts, pro rata, in proportion to therespective amounts of their positive capital accounts, until the capitalaccounts of those Members is reduced to zero; and (iii) thereafter, to theMembers, pro rata, in proportion to their respective percentage interests.**

 

**In accordance with the LLCAgreement, the Company was required to pay each Member a return, computed atthe rate of 11 percent per annum on the daily average outstanding balance ofthe Members’ unreturned capital prior to the Opening Date, as definedabove.  After the Opening Date of theProperty, the per annum distribution rate to Members increased to 11.5percent.  These cash distributions aremade based on cash available for distribution within thirty days of the end ofeach calendar quarter, as defined in the Agreement.  The Company has and may in the future borrow money as necessaryto make distributions.  As of December31, 2003 and 2002, the Company had distributions payable totaling approximately$1.7 million and $1.6 million, respectively.**

 

**2.****                                      Summaryof Significant Accounting Policies**

 

**A summary of significantaccounting principles and practices used in the preparation of the consolidatedfinancial statements follows:**

 

**Basisof Financial Statement Presentation**

**The LLC prepares its consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America. These principles require management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities at the date offinancial statements and reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.**

 

**Principlesof Consolidation**

**The accompanying consolidatedfinancial statements include the accounts of Desert Ridge Resort Partners, LLCand its wholly owned subsidiaries.  Allsignificant intercompany balances and transactions have been eliminated inconsolidation.**

 

**Cashand Cash Equivalents**

**The LLC considers all amountsheld in highly liquid instruments with original maturities of three months orless to be cash equivalents.  Cash andcash equivalents consist primarily of demand deposit accounts. Managementbelieves the credit risk associated with cash and cash equivalents to be lowdue to the quality of the financial institutions in which these assets areheld.**

 

**Beginning on the Opening Date,certain amounts of cash were restricted for maintenance and replacement offurniture, fixtures, and equipment. These amounts are calculated as a certain percentage of gross revenue inaccordance with the hotel management agreement.  The accompanying consolidated statements of financial position asof December 31, 2003 and 2002 include approximately $0.9 million and $0.1million, respectively, which was restricted for maintenance and replacements.**

 

**Inventory**

**Inventory consists primarily offood and beverage inventory, merchandise and operating supplies and isaccounted for using the first in, first out method and is stated at the lowerof cost or market.  Inventory isrecorded in prepaid expenses and other current assets in the accompanyingconsolidated statements of financial position.**

#### ** **

102

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**Propertyand Equipment**

**Property and equipment is statedat cost and includes building, lease and land improvements and furniture,fixtures and equipment (“FF&E”). Land improvements and FF&E are depreciated on the straight-linemethod over the assets’ estimated useful lives of 15 and 7 years,respectively.  Buildings are depreciatedover 40 years.**

 

**Major renewals and bettermentsare capitalized and depreciated over the related assets’ estimated usefullives.  Expenditures for repairs andmaintenance are expensed when incurred. Interest and real estate taxes incurred relating to the construction ofthe resort and amenities are capitalized to construction in progress during theactive construction period during 2002 prior to the Opening Date.**

** **

**DeferredLoan Costs**

**Deferred loan costs, primarilyloan origination and related fees, are capitalized and are being amortized overthe term of the loan using the straight-line method which approximates theeffective interest method.**

** **

**Leases**

**The Company has entered intocapital and operating leases for equipment used at its Properties.  Equipment leased under capital leases arerecorded as equipment under capital leases along with a liability for the offsettingobligation under capital leases. Equipment under capital leases is depreciated over the lease term andthe obligation is reduced as monthly lease payments are made.  Payments under operating leases are recordedas rent expense each month as lease payments are made.**

** **

**IncomeTaxes**

**Under the provisions of theInternal Revenue Code and applicable state laws, the LLC is only subject totaxation of income on the profits and losses from the taxable REIT subsidiary(“TRS”) tenant operations.  The taxconsequences of other LLC revenues and expenses, unrelated to the operation ofthe Property, will accrue to the Members. Certain of these other revenues and expenses may be treated differentlyin the LLC’s income tax return than in the accompanying consolidated financialstatements.  Therefore, amounts reportedin the consolidated financial statements may not be the same as reported in theMembers’ income tax returns.**

#### ** **

**The LLC accounts for federal andstate income taxes on its TRS tenant using the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe consolidated financial statements carrying amounts of existing assets andliabilities and their respective tax bases and operating losses and tax-creditcarry forwards.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to bereversed or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be realized.**

** **

**RevenueRecognition**

**The Property’s revenues arederived from its operations and include revenues from the rental of rooms, foodand beverage sales, golf course and spa operations, telephone usage and otherservice revenue.  Revenue is recognizedwhen rooms are occupied and services have been performed.  Cash received from customers for eventsoccurring after the end of each respective year have been recorded as depositsand is included in accounts payable and accrued expenses in the accompanyingconsolidated statements of financial position. Advanced deposits of approximately $1.1 million and $1.1 million areincluded accounts payable and accrued expense in the accompanying consolidatedstatements of financial position as of December 31, 2003 and 2002,respectively.**

** **

103

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**Advertisingand Promotion Costs**

**The costs of advertising,promotional and marketing programs are charged to operations in the yearincurred and are included as sales and marketing expenses in the accompanying consolidatedstatement of operations.  Advertising,promotional and marketing costs totaled approximately $1.3 million and $0.1million for the years ended December 31, 2003 and 2002, respectively.  These amounts are included in sales andmarketing expenses in the accompanying consolidated statement of operations.**

** **

**DerivativeFinancial Instruments**

**The LLC follows Statement ofFinancial Accounting Standards No. 133, Accounting for Derivative Instrumentsand Hedging Activities” (“FASB 133”), as amended.  FASB 133 established accounting and reporting standards forderivative instruments and for hedging activities by requiring all derivativesto be measured at fair value and recognized in the consolidated statements offinancial position.  Gains or lossesresulting from changes in fair value of derivatives are recognized in earningsor recorded in other comprehensive income, and recognized in the consolidatedstatement of operations when the hedged item affects earnings, depending on thepurpose of the derivatives and whether they qualify for hedging accountingtreatment (the ineffective portion, if any, of all hedges is recognized incurrent earnings).**

** **

**The LLC records the fair value ofits interest rate swaps designated as a cash flow hedge in non-current liabilitieswith the offset to the other comprehensive income (loss) component of members’capital (deficit).**

** **

**Impairmentof Long-Lived Assets**

**In accordance with Statement ofFinancial Accounting Standards No. 144 “Accounting for the Impairment orDisposal of Long-Lived Assets,” the Company’s long-lived assets are tested forrecoverability annually or whenever events or changes in circumstances indicatethat its carrying amount may not be recoverable.  The carrying amount of a long-lived asset is not recoverable ifit exceeds the sum of the undiscounted cash flows expected to result from theuse and eventual disposition of the asset. The assessment is based on the carrying amount of the asset at the dateit is tested for recoverability. An impairment loss is recognized when thecarrying amount of a long-lived asset exceeds its fair value.  If impairment is recognized, the adjustedcarrying amount of a long-lived asset is its new cost basis.  For the years ended December 31, 2003 and2002, the LLC recorded no impairments.**

** **

**Concentrationof Credit Risk**

**Financial instruments whichpotentially subject the Company to a concentration of credit risk consistprincipally of guest and trade accounts receivable.  Concentration of credit risk with respect to guest and trade accountsreceivable is limited due to the wide variety of customers and industries towhich the Property’s services are sold, as well as the dispersion of customersacross many geographic areas.**

** **

**Reclassification**

**Certain items in the prior year’sconsolidated financial statements have been reclassified to conform with the2002 presentation.  Thesereclassifications had no effect on members’ capital (deficit) or results ofoperations.**

 

104

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**3.****                                      Property  and Equipment**

 

**Property and equipment consist ofthe following at December 31, 2003 and 2002:**

 
|                               |   | **2003**    |        | **2002**    |   |
|------------------------------------|--------|-------------|-------------|-------------|--------|
|                               |   |        |        |        |   |
| Land and land  improvements        |   | $           | 62,578,854  |        | $      | 63,466,377 |   |
| Buildings                          |   | 167,486,390 |        | 162,147,269 |   |
| Furniture,  fixtures and equipment |   | 49,131,422  |        | 46,884,567  |   |
| Equipment under  capital leases    |   | 1,027,280   |        | 214,104     |   |
|                               |   | 280,223,946 |        | 272,712,317 |   |
| Less:  accumulated depreciation    |   | (17,466,677 | )           | (2,786,920  | )      |
|                               |   |        |        |        |   |
|                               |   | $           | 262,757,269 |        | $      | 269,925,397 |   |

** **

**In 2003, the LLC receivedapproximately $2.7 million from Marriott in connection with the build-out of aMarriott Vacation Club office.  Thisamount has been reflected as a reduction in property & equipment in theaccompanying consolidated balance sheet as of December 31, 2003.  Accumulated depreciation for equipment undercapital leases was approximately $0.3 million and $0.1 million for the years ended December 31, 2003 and 2002,respectively.**

** **

**4.**                                      MortgageNote Payable

** **

**In December 2000, the LLC enteredinto a $179.0 million construction loan with an institutional lender to financeconstruction costs.  The constructionloan is collateralized by a first mortgage and lien on the Property and allother LLC assets.  The construction loanhas a seven-year term and is due on December 15, 2007.  Interest only payments are due quarterly oneach March 15, July 15, September 15, and December 15 with the entire principalbalance due at maturity.  The amount ofdebt reported in the accompanying consolidated statements of financial positionapproximates the fair value of such debt as of December 31, 2003 and 2002.**

** **

**A portion of the constructionloan bears interest at an annual rate of 185 basis points above three-monthLondon Interbank Offered Rate (the “LIBOR”). The LLC has entered into a seven-year interest rate swap agreement (the“Swap”) to effectively convert the variable rate portion of this mortgage to afixed interest rate of 6.025% per annum. The LLC designates the Swap a hedge of specific debt instruments andrecognizes interest differentials as adjustments to interest expense as thedifferentials occur.  The counterpartyto this agreement is a major financial institution.  The LLC is exposed to credit loss in the event of non-performanceby the counterparty, however, the LLC does not anticipate non-performance bythe major financial institution.  Forthe years ended December 31, 2003 and 2002, the LLC recorded adjustmentsto the fair value of this cash flow hedge of approximately $1.9 million and aloss of approximately $6.5 million, respectively, in other comprehensive incomeor loss.  The accumulated net loss forthe Swap was approximately $7.8 million and $9.7 million, respectively, as ofDecember 31, 2003 and 2002.   Theblended interest rate on the aggregate principal amount of the $179.0 millionmortgage notes, including interest rate, swap costs, premiums for a debtservice insurance policy, and amortization of loan costs is approximately10.13% per annum.**

** **

105

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**5.**                                      OtherNotes Payable

** **

**The LLC and Marriott entered intoa series of agreements whereby Marriott International Capital Corporation hasagreed to make four loans to the LLC: mezzanine loan A (the “Mezzanine Loan”);mezzanine loan B (the “Liquidity Facility Loan”); mezzanine loan C (the“Project Cost Facility Loan”) and mezzanine loan D (the “Senior Loan GuarantyLoan”).**

** **

**A description of each loan is asfollows:**

 
| **Loan**                    |   | **Purpose of Loan**                                                                          |   | **Maximum****Capacity**                                                                            |   | **Maturity** |   | **Interest Rate**                                                           |   |
|-----------------------------|--------|----------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------|--------|--------------|--------|-----------------------------------------------------------------------------|--------|
|                        |   |                                                                                         |   |                                                                                               |   |         |   |                                                                        |   |
| Mezzanine  Loan             |   | Fund a portion of total development costs                                                    |   | $57,134,000                                                                                        |   | 12/2007      |   | Election  of either a floating rate or a fixed rate (not to exceed 13.5%) * |   |
|                        |   |                                                                                         |   |                                                                                               |   |         |   |                                                                        |   |
| Liquidity  Facility Loan    |   | Fund priority shortfalls from the operations of the  Property                                |   | Lesser  of $32,500,000 and 50% of Class A Members Contributions or cumulative  priority shortfalls |   | 12/2007      |   | Election  of either a floating rate or a fixed rate (not to exceed 13.5%) * |   |
|                        |   |                                                                                         |   |                                                                                               |   |         |   |                                                                        |   |
| Project  Cost Facility Loan |   | Fund renovation costs in excess of project budget                                            |   | $30,000,000                                                                                        |   | 12/2007      |   | 8%  per annum                                                               |   |
|                        |   |                                                                                         |   |                                                                                               |   |         |   |                                                                        |   |
| Senior  Loan Guaranty Loan  |   | Fund any deficiency in the payment of monthly debt  service payments under the Mortgage Loan |   | $45,000,000                                                                                        |   | 12/2007      |   | 8%  per annum                                                               |   |

 

----

* The managing member had the option to elect eitherthe floating or fixed interest rate at the time of the initial advance. The floating rate is equal to one-month LIBORplus 700 basis points and the fixed rate is equal to US Treasury Security, withmaturity closest to the Mezzanine Loan and the Liquidity Facility Loan maturitydate, plus 700 basis points.  Based onthis election, these loans bear interest at an annual rate of 8.876%.

 

** The Senior Loan GuarantyLoan has no limit on the amount that can be borrowed until such time the debtservice coverage ratio achieves 1.125 percent. Once the debt service coverage ratio reaches 1.125 percent, futurefundings under the Senior Loan Guaranty Loan are limited to $30 million.

 

106

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At December 31, 2003 and 2002, approximately $21.5million and $5.4 million, respectively, were outstanding under the LiquidityFacility Loan and approximately $57.5 million and $45.7 million, respectively,were outstanding under the Mezzanine Loan. At December 31, 2003 and 2002, approximately $8.5 million and $0,respectively was outstanding under the Project Cost Facility Loan.  No amount was outstanding under the SeniorLoan Guarantee Loan at December 31, 2003 or 2002.  Collateral for these loans is restricted to assets relating tothe hotel property. Each of the loans are due in December 2007.

 

Marriott International Capital Corporation has agreedto loan up to approximately $2.3 million to the LLC for additional improvementsrelating to the future occupancy of Marriott Vacation Club (see Note 7).  The loan will bear interest at 8% per annum,with the principal due on December 15, 2008. As of December 31, 2003, the Company had borrowed approximately $2.2million under this facility.

 

**6.**                                      Leases

 

The LLC is a lessee of various types of equipment usedin operating the Property.  The LLC’sleases are categorized as operating or capital leases based upon the terms inthe lease agreements.  The LLC alsoleases two parcels of land from the State of Arizona under two separateoperating lease agreements, on which the luxury resort and the two golf coursesare located.  These leases are effectiveuntil July 2092 and require escalating base rents.  Rental payments are due annually.  Total rent expense under all operating leases, including the landleases, for the years ended December 31, 2003 and 2002, were approximately $1.2million and $0.6 million, respectively. These amounts have been included in property operations and maintenancein the accompanying consolidated statements of operations for the years endedDecember 31, 2003 and 2002.  The LLC hasrecorded accrued rent of approximately $2.0 million and $1.5 million as ofDecember 31, 2003 and 2002, respectively, as a result of straight-lining theminimum annual rental payments under the terms of the land leases.

 

Future minimum rental payments required under capitalleases together with the present value of the net minimum lease payments as ofDecember 31, 2003:

 

| 2004                                         |   | $        | 254,128 |   |
|----------------------------------------------|--------|----------|---------|--------|
| 2005                                         |   | 276,528  |    |
| 2006                                         |   | 196,528  |    |
| 2007                                         |   | 173,767  |    |
| Total future  minimum lease payments         |   | 900,951  |    |
| Less: interest                               |   | (118,522 | )       |
| Present value of  net minimum lease payments |   | 782,429  |    |
| Less: current  portion                       |   | (216,613 | )       |
|                                         |   |     |    |
|                                         |   | $        | 565,816 |   |

 

107

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Future minimum lease rental payments required underoperating leases that have initial or remaining non-cancelable lease terms inexcess of one year as of December 31, 2003:

 

| 2004       |   | $          | 694,594    |   |
|------------|--------|------------|------------|--------|
| 2005       |   | 688,056    |       |
| 2006       |   | 626,921    |       |
| 2007       |   | 436,672    |       |
| 2008       |   | 486,003    |       |
| Thereafter |   | 76,839,012 |       |
|       |   |       |       |
| Total      |   | $          | 79,771,258 |   |

 

**7.**                                      Transactions with Related Parties

 

*HotelManagement Agreement*

 

The LLC entered into an agreement with an affiliate ofMarriott International, Inc. (the “Manager”) to manage the Property.  Under terms of the agreement, the Manageroperates the Property in return for a fixed management fee of 3 percent ofgross revenues.  The Manager also earnsan incentive management fee ranging from 20 percent to 50 percent of operatingcash flow.  The LLC incurred managementfees of approximately $2.7 million and $0.2 million during the years endedDecember 31, 2003 and 2002, respectively.

##### ** **

*DevelopmentAgreements*

 

The Company entered into agreements for $9 millionwith affiliates of the managing member and Marriott to manage the constructionof the Property.  Under these agreements,approximately $0.2 million and $3.0 million has been paid during the yearsended December 31, 2003 and 2002, respectively.    These amounts have been capitalized to the cost of property andequipment in the accompanying consolidated statements of financial position.

 

Other

 

In connection with the development of a MarriottVacation Club resort (the “MVC Resort”) within close proximity to the Property,the LLC has committed to lease office and lobby space to the MVC Resort for thepurposes of the establishment of a gallery and the promotion of MarriottVacation Club International.  The termof the lease is eight years from the Opening Date of the Property and willresult in annual rental income of approximately $0.4 million.  During the years ended December 31, 2003 and2002, the Company received approximately $0.4 million and $0.03 million,respectively in income in connection with this lease which has been included inother operating department revenue.

 

108

----

 

The LLC has entered into various other agreements withMarriott, or subsidiaries thereof, to provide services such as marketingsupport, reservation services, and other services customary to the operation ofa national brand hotel concept.  The Companyincurred approximately $5.0 million and $0.2 million, respectively, for theyears ended December 31, 2003 and 2002, which have been included in cost ofsales for rooms, food and beverage, and other operating departments in theaccompanying consolidated statements of operations.  The following table summarizes these expenses by major category:

 

|                 |   | **2003**  |      | **2002** |   |
|----------------------|--------|-----------|-----------|----------|--------|
| Advertising          |   | $         | 1,133,045 |     | $      | 36,610 |   |
| Marriott Rewards     |   | 951,257   |      | 12,407   |   |
| Insurance            |   | 1,006,730 |      | 20,730   |   |
| Reservations         |   | 430,204   |      | 83,806   |   |
| Accounting  Services |   | 1,413,645 |      | 95,101   |   |
| Other                |   | 28,359    |      | —   |   |
|                 |   |      |      |     |   |
| Total                |   | $         | 4,963,240 |     | $      | 248,654 |   |

 

The LLC has bonus plans, based on profitabilityformulas, which provide incentive compensation for key officers and employees. Amounts charged to expense for bonuses to property management totaledapproximately $0.9 million and $0 for the years ended December 31, 2003 and2002, respectively.  These amounts areallocated between various hotel cost of sales for rooms, food and beverage, andother operating departments in the accompanying consolidated statement ofearnings.

 

As of December 31, 2003 and 2002, amounts due toMarriott and affiliates was approximately $0.2 million and $5.2 million,respectively, and is included in due to affiliates in the accompanyingconsolidated statements of financial position.

 

As of December 31, 2003 and 2002, amounts due fromMarriott were approximately $2.2 million and $3.3 million, respectively, forreceivables collected by Marriott on behalf of the LLC.

 

**8.**                                      Income Taxes

 

The components of the deferred taxes recognized in theaccompanying consolidated statements of financial position at December 31, 2003and 2002 are as follows:

 

|                      |   | **2003**   |      | **2002**   |   |
|---------------------------|--------|------------|-----------|------------|--------|
| Deferred tax  asset:      |   |       |      |       |   |
| Net operating  loss       |   | $          | 9,906,000 |       | $      | 2,821,000 |   |
|                      |   |       |      |       |   |
| Deferred tax  liability:  |   |       |      |       |   |
| Accelerated  depreciation |   | (4,281,000 | )         | (514,000   | )      |
|                      |   |       |      |       |   |
| Net deferred tax  asset   |   | 5,625,000  |      | 2,307,000  |   |
| Valuation  allowance      |   | (5,625,000 | )         | (2,307,000 | )      |
|                      |   |       |      |       |   |
|                      |   | $          | —    |       | $      | — |   |

 

109

----

 

The types of temporary differences between the taxbases of assets and liabilities and their financial statement reporting amountsare attributable principally to depreciation and net operating losses.  The TRS tenant has net operating losscarry-forwards for federal and state purposes of approximately $25.7 millionand $6.0 million as of December 31, 2003 and 2002, respectively, which isavailable to offset future taxable income. The estimated net operating loss carry-forward expiration dates are asfollows:

 

| 2020   |   | $          | 481,000    |   |
|--------|--------|------------|------------|--------|
| 2021   |   | 5,491,000  |       |
| 2022   |   | 19,692,000 |       |
|   |   |       |       |
|   |   | $          | 25,664,000 |   |

 

The Company has not recorded this potential futurebenefit because its TRS subsidiary does not have sufficient historical earningson which to base a potential future benefit.

 

**9.**                                      Commitmentsand Contingencies

 

From time to time the Partnership may be exposed tolitigation arising from operations of its business in the ordinary course ofbusiness.  Management does not believethat resolution of these matters will have a material adverse impact on thePartnership’s financial condition or results of operations.

 

* * * **

 

110

----

 

**WBResort Partners, L.P.**

**andSubsidiaries**

**ConsolidatedFinancial Statements**

**As of and for the yearsended December 31, 2003 and 2002**

 

111

----

 

**Report of Independent CertifiedAccountants**

 

 

To the Partners of

WB Resort Partners, L.P.

 

 

In our opinion, the accompanying consolidated balancesheets and the related consolidated statements of operations, of changes inpartners’ capital and of cash flows present fairly, in all material respects,the financial position of WB Resort Partners, L.P. and its subsidiaries (the“Partnership”) at December 31, 2003 and 2002 and the results of theiroperations and their cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States of America.  These financial statements are theresponsibility of the Partnership’s management; our responsibility is toexpress an opinion on these financial statements based on our audit.  We conducted our audits of these statementsin accordance with auditing standards generally accepted in the United Statesof America, which require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, and evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

 
| /s/ PRICEWATERHOUSECOOPERS, LLP |   |
|---------------------------------|--------|
| Orlando, Florida                |
| March 12, 2004                  |

 

112

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**WBResort Partners, L.P. and Subsidiaries**

**ConsolidatedBalance Sheets**

**Asof December 31, 2003 and 2002**

 
|                                                                                 |   | **2003**    |        | **2002**    |   |
|--------------------------------------------------------------------------------------|--------|-------------|-------------|-------------|--------|
| **Assets**                                                                           |   |        |        |        |   |
|                                                                                 |   |        |        |        |   |
| Current assets                                                                       |   |        |        |        |   |
| Cash and cash  equivalents                                                           |   | $           | 5,243,688   |        | $      | 3,309,558 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $106,386 and $72,508 |   | 5,537,842   |        | 3,986,276   |   |
| Prepaid expenses  and other current assets                                           |   | 1,429,438   |        | 861,371     |   |
| Total current  assets                                                                |   | 12,210,968  |        | 8,157,205   |   |
|                                                                                 |   |        |        |        |   |
| Restricted cash                                                                      |   | 7,541,324   |        | 11,662,018  |   |
| Property,  construction in progress and equipment, net                               |   | 190,954,732 |        | 198,140,180 |   |
| Loan costs, less  accumulated amortization of $1,492,860 and $860,569                |   | 1,639,679   |        | 2,271,970   |   |
|                                                                                 |   |        |        |        |   |
| Total assets                                                                         |   | $           | 212,346,703 |        | $      | 220,231,373 |   |
|                                                                                 |   |        |        |        |   |
| **Liabilities and Partners’ Capital**                                           |   |        |        |        |   |
|                                                                                 |   |        |        |        |   |
| Current  liabilities                                                                 |   |        |        |        |   |
| Accounts payable  and accrued expenses                                               |   | $           | 11,236,623  |        | $      | 9,423,012 |   |
| Construction  costs payable, including retainage payable $112,758 at 2002            |   | 636,388     |        | 1,716,283   |   |
| Distribution  payable                                                                |   | 7,364,726   |        | 2,463,838   |   |
| Current portion  of capital lease obligation                                         |   | 763,472     |        | 1,081,799   |   |
|                                                                                 |   |        |        |        |   |
| Total current  liabilities                                                           |   | 20,001,209  |        | 14,684,932  |   |
|                                                                                 |   |        |        |        |   |
| Mortgage note  payable                                                               |   | 130,000,000 |        | 130,000,000 |   |
| Other notes  payable                                                                 |   | 44,079,608  |        | 27,798,189  |   |
| Capital lease  obligation                                                            |   | 26,001      |        | 757,851     |   |
| Accrued  rent from operating leases                                             |   | 2,447,356   |        | 391,072     |   |
| Total  liabilities                                                                   |   | 196,554,174 |        | 173,632,044 |   |
|                                                                                 |   |        |        |        |   |
| Commitments  (Note 9)                                                                |   |        |        |        |   |
|                                                                                 |   |        |        |        |   |
| Partners’  capital                                                              |   | 15,792,529  |        | 46,599,329  |   |
|                                                                                 |   |        |        |        |   |
| Total  liabilities and partners’ capital                                        |   | $           | 212,346,703 |        | $      | 220,231,373 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

113

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**WB Resort Partners, L.P. andSubsidiaries**

**Consolidated Statements of Operations**

**For the Years Ended December 31, 2003and 2002**

 
|                                 |   | **2003**   |        | **2002**   |   |
|--------------------------------------|--------|------------|-------------|------------|--------|
|                                 |   |       |        |       |   |
| Revenues:                            |   |       |        |       |   |
| Rooms                                |   | $          | 42,211,855  |       | $      | 35,776,082 |   |
| Food and  beverage                   |   | 8,851,845  |        | 7,427,279  |   |
| Other operating  departments         |   | 4,702,101  |        | 3,463,235  |   |
|                                 |   |       |        |       |   |
| Total revenue                        |   | 55,765,801 |        | 46,666,596 |   |
|                                 |   |       |        |       |   |
| Cost of sales  and other expenses:   |   |       |        |       |   |
| Rooms                                |   | 12,859,657 |        | 11,741,511 |   |
| Food and beverage                    |   | 8,478,072  |        | 7,665,138  |   |
| Other operating  departments         |   | 962,904    |        | 1,000,286  |   |
| Property  operations and maintenance |   | 15,222,139 |        | 14,527,007 |   |
| Depreciation                         |   | 11,975,475 |        | 9,340,907  |   |
| Interest and  loan cost amortization |   | 15,124,872 |        | 10,381,823 |   |
| General and  administrative          |   | 5,027,709  |        | 3,938,931  |   |
| Sales and  marketing                 |   | 5,486,112  |        | 5,070,257  |   |
| Management fees                      |   | 1,660,663  |        | 1,398,192  |   |
|                                 |   |       |        |       |   |
| Total costs and  expenses            |   | 76,797,603 |        | 65,064,052 |   |
|                                 |   |       |        |       |   |
| Net loss                             |   | $          | (21,031,802 | )          | $      | (18,397,456 | ) |

 

The accompanyingnotes are an integral part of these consolidated financial statements

 

 

114

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**WBResort Partners, L.P. and Subsidiaries**

**ConsolidatedStatements of Partners’ Capital**

**Asof December 31, 2003 and 2002**

 
|                       |   | **General Partner** |   | **Limited Partners** |   | **Total**   |   |
|----------------------------|--------|---------------------|--------|----------------------|--------|-------------|--------|
|                       |   |                |   |                 |   |        |   |
| Balance, December 31, 2001 |   | $                   | 39,529 |                 | $      | 39,488,694  |   | $ | 39,528,223 |   |
|                       |   |                |   |                 |   |        |   |
| Contributions              |   | 33,924              |   | 33,889,576           |   | 33,923,500  |   |
|                       |   |                |   |                 |   |        |   |
| Distributions              |   | (8,455              | )      | (8,446,483           | )      | (8,454,938  | )      |
|                       |   |                |   |                 |   |        |   |
| Net loss                   |   | (18,397             | )      | (18,379,059          | )      | (18,397,456 | )      |
|                       |   |                |   |                 |   |        |   |
| Balance, December 31, 2002 |   | $                   | 46,601 |                 | $      | 46,552,728  |   | $ | 46,599,329 |   |
|                       |   |                |   |                 |   |        |   |
| Contributions              |   | —              |   | —               |   | —      |   |
|                       |   |                |   |                 |   |        |   |
| Distributions              |   | (9,775              | )      | (9,765,223           | )      | (9,774,998  | )      |
|                       |   |                |   |                 |   |        |   |
| Net loss                   |   | (21,032             | )      | (21,010,770          | )      | (21,031,802 | )      |
|                       |   |                |   |                 |   |        |   |
| Balance, December 31, 2003 |   | $                   | 15,794 |                 | $      | 15,776,735  |   | $ | 15,792,529 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements

 

115

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**WBResort Partners, L.P. and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

**Forthe Years Ended December 31, 2003 and 2002**

 
|                                                                      |   | **2003**   |        | **2002**    |   |
|---------------------------------------------------------------------------|--------|------------|-------------|-------------|--------|
|                                                                      |   |       |        |        |   |
| Cash flows from operating activities:                                     |   |       |        |        |   |
| Net loss                                                                  |   | $          | (21,031,802 | )           | $      | (18,397,456 | ) |
| Adjustments to reconcile net loss to cash used in  operating activities:  |   |       |        |        |   |
| Depreciation                                                              |   | 11,975,475 |        | 9,340,907   |   |
| Amortization of loan costs                                                |   | 632,291    |        | 623,910     |   |
| Provision for bad debt expense                                            |   | 107,386    |        | 80,802      |   |
| Changes in operating assets and liabilities:                              |   |       |        |        |   |
| Accounts receivable                                                       |   | (1,658,952 | )           | (2,858,087  | )      |
| Prepaid expenses and other current assets                                 |   | (568,067   | )           | 706,364     |   |
| Accrued rent from operating leases                                        |   | 2,056,284  |        | 391,072     |   |
| Accounts payable and accrued expenses                                     |   | 1,813,611  |        | 3,994,909   |   |
| Net cash used in operating activities                                     |   | (6,673,774 | )           | (6,117,579  | )      |
|                                                                      |   |       |        |        |   |
| Cash flows from investing activities:                                     |   |       |        |        |   |
| Additions to property and equipment                                       |   | (5,869,922 | )           | (27,468,646 | )      |
| Decrease (increase) in restricted cash                                    |   | 4,120,694  |        | (11,585,008 | )      |
|                                                                      |   |       |        |        |   |
| Net cash used in investing activities                                     |   | (1,749,228 | )           | (39,053,654 | )      |
|                                                                      |   |       |        |        |   |
| Cash flows from financing activities:                                     |   |       |        |        |   |
| Proceeds from other notes payable                                         |   | 16,281,419 |        | 20,048,437  |   |
| Principal payments on capital lease obligations                           |   | (1,050,177 | )           | (1,046,303  | )      |
| Capital contributions from partners                                       |   | —     |        | 33,923,500  |   |
| Distributions to partners                                                 |   | (4,874,110 | )           | (7,204,518  | )      |
| Payment of loan costs                                                     |   | —     |        | (106,072    | )      |
|                                                                      |   |       |        |        |   |
| Net cash provided by financing activities                                 |   | 10,357,132 |        | 45,615,044  |   |
|                                                                      |   |       |        |        |   |
| Net increase in cash and cash equivalents                                 |   | 1,934,130  |        | 443,811     |   |
| Cash and cash equivalents, beginning of period                            |   | 3,309,558  |        | 2,865,747   |   |
|                                                                      |   |       |        |        |   |
| Cash and cash equivalents, end of period                                  |   | $          | 5,243,688   |        | $      | 3,309,558 |   |
|                                                                      |   |       |        |        |   |
| Supplementary disclosure of cash flow information:                        |   |       |        |        |   |
| Cash paid during the period for:                                          |   |       |        |        |   |
| Interest, net of capitalized interest of $5,431,858  in 2002              |   | $          | 14,461,778  |        | $      | 8,772,225 |   |
|                                                                      |   |       |        |        |   |
| Supplementary disclosure of non-cash investing and  financing activities: |   |       |        |        |   |
|                                                                      |   |       |        |        |   |
| Distributions declared but not paid to partners                           |   | $          | 7,364,726   |        | $      | 2,463,838 |   |
| Construction costs payable included in construction  in progress          |   | $          | 636,388     |        | $      | 1,716,283 |   |

 

Theaccompanying notes are an integral part of these consolidated financial statements.

 

116

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**WBResort Partners, L.P. and Subsidiaries**

**Notesto Consolidated Financial Statements**

**December31, 2003 and 2002**

** **

**1.**                                      Business

 

**Organization**

WB Resort Partners, L.P. (the “Partnership”) wasorganized pursuant to the laws of the State of Delaware on July 27, 2001.  WBM Resort, L.P., WBR Parent, LLC and WBRTenant Corporation are wholly owned subsidiaries of the Partnership.  The Partnership’s general partner is CNL WBRGP Corp. (the “General Partner”) and the limited partners are CNL WBR Investor,L.P., Marriott International, Inc. (“Marriott”) and Waikiki Beach Resort, Ltd.(collectively, the “Limited Partners”).

 

The Partnership was formed to own and operate a resortlocated in Honolulu, Hawaii (the “Property”). The Partnership negotiated a fixed fee agreement with a contractor for$65 million to renovate the Property. As of December 31, 2003, renovations have been completed.  The Property’s day-to-day activities aremanaged by an affiliate of Marriott, however, all partners must agree to keydecisions affecting the Property.

 

The structure of the Partnership and its subsidiariesis designed to allow the parent of its majority owner to continue to qualify asa real estate investment trust, which is generally not subject to federalincome taxes.  In keeping with thisobjective, the Partnership operates its Property through a taxable REITsubsidiary (“TRS”), as permitted by the REIT Modernization Act of 1999.

 

The General Partner and Limited Partners hold a 0.1%and 99.9% interest, respectively, as a result of capital contributions totalingapproximately $0.1 million and $84.9 million in the Partnership in order toobtain the following percentage interests:

 

| **Partner**                 |   | **Percentage Interest** |   |
|-----------------------------|--------|-------------------------|--------|
| General Partner             |   | 0.1                     | %      |
| CNL WBR  Investor, L.P.     |   | 48.9                    | %      |
| Waikiki Beach  Resort, Ltd. |   | 36.0                    | %      |
| Marriott                    |   | 15.0                    | %      |

 

The Partnership relies on capital contributions fromthe General Partner and Limited Partners and borrowings under loans to fundcapital expenditures, operating losses and negative cash flows.  Since completing significant renovations in2002, the Hawaiian market has continued to be significantly impacted by reducedAsian travel since September 2001 as well as the overall weakness in theeconomy.  For the years ended December31, 2003 and 2002, the Partnership reported net losses of approximately $21.0million and $18.4 million, respectively. In addition, the Partnership had negative cash flows from operations forthe years ended December 31, 2003 and 2002 of approximately $6.7 million and$6.1 million, respectively.  Losses anddeficit cash flows at the Property may continue until economic recovery of theregion occurs.  Cash flow deficits arepossible in the future, which may require additional funding.  The General Partner and Limited Partners arerequired by the limited partnership agreement to make their pro-rata share ofcapital contributions required to fund operating shortfalls of thePartnership.  If any partner fails tomake such required capital contribution, they will be in default.  In accordance with the partnershipagreement, non-defaulting partners may elect to cure such default by making thedefaulting partner’s capital contribution, which will be considered a loan fromthe non-defaulting partner to the defaulting partner.

 

117

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**Allocationsand Distributions**

Net operating profits and net operating losses areallocated to the General and Limited Partners in accordance with theirrespective ownership interests.

 

In addition, the General Partner and Limited Partnersare entitled to a return of 11.5% per annum (the “11.5% PreferredReturn”).  The cumulative 11.5%Preferred Return is to be paid quarterly to each partner based on the capitalaccounts of each partner during the quarter. As of December 31, 2003 and 2002, the Partnership had distributionspayable totaling approximately $7.4 million and $2.5 million,respectively.  As of December 31, 2003and during the second half of 2003, the Partnership did not generate sufficientcash flows from operations to allow for the payment of distributions to theGeneral Partner of the Limited Partners. Although the 11.5% Preferred Return will continue to accrue, there is noguarantee when the Partnership will be able to pay these amounts.

 

**2.****                                      Summaryof Significant Accounting Policies**

 

A summary of significant accounting principles andpractices used in the preparation of the financial statements follows:

 

###### **Basis of Financial Statement Presentation**

The Partnership prepares its financial statements inconformity with accounting principles generally accepted in the United Statesof America.  These principles requiremanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the financial statements and reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

#### ** **

**Principlesof Consolidation**

The accompanying consolidated financial statementsinclude the accounts of WB Resort Partners, L.P. and its wholly ownedsubsidiaries. All significant inter-company balances and transactions have beeneliminated in consolidation.

 

#### **Cash and Cash Equivalents**

The Partnership considers all amounts held in highlyliquid instruments with original maturities of three months or less to be cashequivalents.  Cash and cash equivalentsconsist primarily of demand deposit accounts. Management of the Partnershipbelieves the credit risk associated with cash and cash equivalents to be lowdue to the quality of the financial institutions in which these assets areheld.

 

Certain amounts of cash are restricted for maintenanceand replacement of furniture, fixtures, and equipment at the Partnership’sProperty of which approximately $7.5 million and $11.7 million, respectively,is restricted cash in the accompanying consolidated balance sheet as ofDecember 31, 2003 and 2002.  Theseamounts are calculated as a certain percentage of sales in accordance with thehotel management agreement (see Note 7).

 

#### **Inventory**

Inventory consists primarily of food and beverageinventory and operating supplies and is accounted for using the first in, firstout method and is stated at the lower of cost or market.  Inventory is recorded in prepaid expensesand other current assets in the accompanying consolidated balance sheets.

 

118

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#### **Property, Construction in Progress and Equipment**

Property, construction in progress and equipment isstated at cost and includes building, land improvements and furniture, fixturesand equipment.  Building, landimprovements and furniture, fixtures and equipment are depreciated on thestraight-line method over the assets’ estimated useful lives of 40, 15 and 7years, respectively.

 

Expenditures for major renewals and betterments arecapitalized and depreciated over the related assets’ estimated usefullives.  Expenditures for repairs andmaintenance are expensed when incurred. Interest and real estate taxes incurred relating to renovation of theresort and amenities are capitalized to construction in progress during theactive renovation period.

 

**DeferredLoan Costs**

Loan costs, primarily loan origination and relatedfees, are capitalized and are being amortized over the term of the loan usingthe straight-line method which approximates the effective interest method.

 

## ***Revenue Recognition***

The Property’s revenues are derived from itsoperations and include revenues from the rental of rooms, food and beveragesales, golf course and spa operations, telephone usage and other servicerevenue.  Revenue is recognized whenrooms are occupied and services have been performed.  Cash received from customers for events occurring after each yearend have been recorded as deposits in the accompanying consolidated balancesheets.  Advanced deposits ofapproximately $0.4 million and $0.7 million are included in the accompanyingconsolidated balance sheet as of December 31, 2003 and 2002, respectively.

 

**Advertisingand Promotion Costs**

The costs of advertising,promotional and marketing programs are charged to operations in the yearincurred and are included as sales and marketing expenses in the accompanyingstatement of operations.  Advertising,promotional and marketing costs totaled approximately $3.4 million and $1.4million for the years ended December 31, 2003 and 2002, respectively.

 

**Leases**

The Partnership has entered into capital and operatingleases for land and equipment used at the Property.  Equipment leased under capital leases is recorded as equipment onthe accompanying consolidated balance sheet with a liability for thecorresponding obligation under the lease agreement.  Equipment under capital leases are depreciated over the usefullife of the equipment and the obligation is reduced as monthly lease paymentsare made.  Payments under operatingleases are recorded as rent expense as lease payments are made.

 

#### **Income Taxes**

Under the provisions of the Internal Revenue Code andapplicable state laws, the Partnership is only subject to taxation of income onthe profits and losses from the TRS tenant operations.  The tax consequences of other Partnershiprevenues and expenses, unrelated to the operation of the Property, will accrueto the partners.  Certain of these otherrevenues and expenses may be treated differently in the Partnership’s incometax return than in the accompanying consolidated financial statements.  Therefore, amounts reported in theconsolidated financial statements may not be the same as reported in thePartners’ income tax returns.

 

119

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The Partnership accounts for federal and state incometaxes on its TRS tenant using the asset and liability method.  Deferred tax assets and liabilities arerecognized for the future tax consequences attributable to differences betweenthe consolidated financial statements carrying amounts of existing assets andliabilities and respective tax bases and operating losses and tax-credit carryforwards.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled.  The effect ondeferred tax assets and liabilities of a change in tax rates is recognized inincome in the period that includes the enactment date.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to be realized.

 

**Impairmentof Long-Lived Assets**

In accordance withStatement of Financial Accounting Standards No. 144 “Accounting for theImpairment or Disposal of Long-Lived Assets,” the Partnership’s long-livedassets are tested for recoverability annually or whenever events or changes incircumstances indicate that its carrying amount may not be recoverable.  The carrying amount of a long-lived asset isnot recoverable if it exceeds the sum of the undiscounted cash flows expectedto result from the use and eventual disposition of the asset.  The assessment is based on the carryingamount of the asset at the date it is tested for recoverability. An impairmentloss is recognized when the carrying amount of a long-lived asset exceeds itsfair value.  If impairment isrecognized, the adjusted carrying amount of a long-lived asset is its new costbasis.  For the years ended December 31,2003 and 2002, the Partnership recorded no impairments.

 

**Concentrationof Credit Risk**

Financial instruments which potentially subject thePartnership to a concentration of credit risk consist principally of guest andtrade accounts receivable. Concentration of credit risk with respect to guest and trade accountsreceivable is limited due to the wide variety of customers and industries towhich the Property’s services are sold, as well as the dispersion of customersacross many geographic areas.

 

**3.****                                      Property,Construction in Progress and Equipment, Net**

 

Property, construction in progress and equipmentconsist of the following at December 31, 2003 and 2002:

 
|                               |   | **2003**    |        | **2002**    |   |
|------------------------------------|--------|-------------|-------------|-------------|--------|
|                               |   |        |        |        |   |
| Building                           |   | $           | 121,436,927 |        | $      | 121,329,538 |   |
| Leasehold improvements             |   | 36,487,296  |        | —      |   |
| Land  improvements                 |   | 7,145,528   |        | 2,265,081   |   |
| Furniture,  fixtures and equipment |   | 46,531,674  |        | 23,546,112  |   |
| Equipment under  capital leases    |   | 3,234,183   |        | 3,234,183   |   |
|                               |   | 214,835,608 |        | 150,374,914 |   |
| Less:  accumulated depreciation    |   | (23,880,876 | )           | (11,905,401 | )      |
| Construction in  progress          |   | —      |        | 59,670,667  |   |
|                               |   |        |        |        |   |
|                               |   | $           | 190,954,732 |        | $      | 198,140,180 |   |

 

Accumulated depreciation for equipment under capitalleases was approximately $2.5 million and $1.5 million as of December 31,2003 and 2002, respectively.

 

120

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**4.****                                      MortgageNote Payable**

 

In July 2001, the Partnership entered into a $130.0million mortgage loan with an institutional lender to finance a portion of theProperty acquired and future renovation costs. The mortgage is collateralized by a first mortgage and lien on thebuilding and all other assets.  The loanbears interest at 8.53% per annum and matures on August 15, 2006.  Interest only payments are due monthlythrough maturity.  For the years  ended December 31, 2003 and 2002, thePartnership incurred approximately $11.2 million and $8.0 million, respectivelyin interest expense from this loan net of amounts capitalized in 2002.  The amount of debt reported in theaccompanying consolidated balance sheets approximates the fair value of suchdebt as of December 31, 2003 and 2002.

 

**5.****                                      OtherNotes Payable**

 

On July 27, 2001, the Partnership and Marriott enteredinto a loan agreement whereby Marriott has agreed to provide three loans to thePartnership: a liquidity facility loan (“Mezz Loan A”); a senior loan guaranty(“Mezz Loan B”); and a cost overrun loan (“Mezz Loan C”).

 

A description of each loan is as follows:

 
| **Loan**    |   | **Purpose of Loan**                                                                          |   | **Maximum****Capacity** |       | **Maturity** |    | **Interest Rate** |                                               |
|-------------|--------|----------------------------------------------------------------------------------------------|--------|-------------------------|------------|--------------|---------|-------------------|----------------------------------------------------|
|        |   |                                                                                         |   |                    |       |         |    |              |                                               |
| Mezz Loan A |   | Fund priority shortfalls  from the operations of the Property                                |   | $                       | 20,000,000 |         | 07/2006 |              | LIBOR  plus 700 basis points (not to exceed 13.5%) |   |
|        |   |                                                                                         |   |                    |       |         |    |              |                                               |
| Mezz Loan B |   | Fund any deficiency in the  payment of monthly debt service payments under the Mortgage Loan |   | $                       | 20,000,000 |         | 07/2006 |              | LIBOR  plus 700 basis points (not to exceed 13.5%) |   |
|        |   |                                                                                         |   |                    |       |         |    |              |                                               |
| Mezz Loan C |   | Fund renovation costs in  excess of project budget                                           |   | $                       | 10,000,000 |         | 07/2006 |              | LIBOR  plus 700 basis points (not to exceed 13.5%) |   |

 

At December 31, 2003, approximately $21.5 million,$22.6 million and $0 were outstanding under the Mezz Loan A, Mezz Loan B andMezz Loan C, respectively.  As ofDecember 31, 2002, approximately $13.0 million, $14.8 million and $0 wereoutstanding under the Mezz Loan A, Mezz Loan B and Mezz Loan C,respectively.  The Partnership does notanticipate funding under Mezz Loan C since renovations have been complete.  The interest rate on the Mezz Loan A andMezz Loan B was 8.382 percent and 8.876 percent at December 31, 2003 and 2002,respectively.  The Partnership incurredinterest expense of approximately $3.1 million and $1.6 million, respectively,in interest expense from these loans during the years ended December 31, 2003and 2002, respectively.

 

121

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**6.****                                      Leases**

 

The Partnership is a lessee of various types ofequipment used in operating the Property. Leases are categorized as operating or capital leases based upon theterms in the lease agreements.

 

The following is a schedule by years of future minimumrental payments required under capital lease obligations together with thepresent value of the net minimum lease payments as of December 31, 2003:

 

| 2004                                         |   | 792,334  |   |
|----------------------------------------------|--------|----------|--------|
| 2005                                         |   | 25,247   |   |
| Total future  minimum lease payments         |   | 817,581  |   |
| Less: interest                               |   | (28,108  | )      |
| Present value of  net minimum lease payments |   | 789,473  |   |
| Less: current  portion                       |   | (763,472 | )      |
|                                         |   |     |   |
|                                         |   | $        | 26,001 |   |
|                                              |        |          |        |  |

 

The Partnership leases two parcels of land underground leases, on which the Property is located.  These operating leases are effective until 2080 and 2050,respectively.  One of the land leaseshas escalating base rents from 2001 to 2008. The base rents from 2008 through 2080 and 2050, respectively, will neverbe less than 2008 base rent and will increase every five years by the consumerprice index.  The minimum annual renthas been straight-lined over the life of these leases.  Both leases contain percentage rentcalculations based on percentages of gross revenues, as defined.  Rent expense, including accrued rentalexpense and lease taxes for the years ended December 31, 2003 and 2002, wasapproximately $5.1 million and $4.7 million, respectively.  Percentage rent for the years ended December31, 2003 and 2002 was $0.2 million and $0.1 million, respectively.  These amounts have been included in propertyoperations and maintenance in the accompanying consolidated statements ofoperations for the years ended December 31, 2003 and 2002, respectively.

 

Future minimum lease rental payments required underoperating leases that have initial or remaining noncancellable lease terms inexcess of one year as of December 31, 2003 are as follows:

 

| 2004       |   | 4,794,000   |        |
|------------|--------|-------------|-------------|
| 2005       |   | 4,794,000   |        |
| 2006       |   | 4,794,000   |        |
| 2007       |   | 4,794,000   |        |
| 2008       |   | 4,794,000   |        |
| Thereafter |   | 337,248,000 |        |
|       |   |        |        |
|       |   | $           | 361,218,000 |   |
|            |        |             |             |  |

 

122

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**7.****                                      Transactionswith Related Parties**

 

*HotelManagement Agreement*

 

The Partnership entered into an agreement with anaffiliate of Marriott International, Inc. (the “Manager”) to manage the Property.  Under terms of the agreement, the Manageroperates the Property in return for a fixed management fee of 3 percent ofgross revenues.  The Manager also earnsan incentive management fee equal up to 50 percent of operating profits inexcess of certain payment thresholds. The Partnership incurred fixed management fees of approximately $1.7million and $1.4 million during the years ended December 31, 2003 and2002, respectively.

##### ** **

Other

 

The Partnership has entered into various otheragreements with Marriott, or subsidiaries thereof, to provide services such asmarketing support, reservation services, and other services customary to theoperation of a national brand hotel concept. The Company incurred approximately $5.7 million and $4.1 million, respectively,for the years ended December 31, 2003 and 2002, which have been included incost of sales for rooms, food and beverage, and other operating departments inthe accompanying consolidated statements of operations.  The following table summarizes theseexpenses by major category:

 

|                 |   | **2003**  |      | **2002**  |   |
|----------------------|--------|-----------|-----------|-----------|--------|
| Advertising          |   | $         | 2,042,291 |      | $      | 1,695,056 |   |
| Marriott Rewards     |   | 608,301   |      | 438,407   |   |
| Insurance            |   | 947,964   |      | 380,344   |   |
| Reservations         |   | 1,794,918 |      | 1,264,760 |   |
| Accounting  Services |   | 210,351   |      | 235,526   |   |
| Other                |   | 117,471   |      | 88,991    |   |
|                 |   |      |      |      |   |
| Total                |   | $         | 5,721,296 |      | $      | 4,103,084 |   |

 

The Partnership receives rental income under anarrangement with Marriott Vacation Club. Revenues recognized from this arrangement in 2003 and 2002 wereapproximately $0.4 million and $0.3 million, respectively.  These amounts are included in otheroperating departments revenue in the accompanying consolidated statements ofoperations.

 

As of December 31, 2003 and 2002, amounts duefrom Marriott and affiliates were approximately $0.1 million and $0,respectively, for miscellaneous receivables collected by Marriott on behalf ofthe Partnership.

 

As of December 31, 2003 and 2002, amounts due toMarriott and affiliates were approximately $4.9 million and $0, respectively,for payroll and other costs paid by Marriott on behalf of the Partnership.

 

123

----

 

**8.****                                      IncomeTaxes**

 

The components of the deferred taxes recognized in theaccompanying consolidated balance sheet at December 31, 2003 and 2002 are asfollows:

 

|                       |   | **2003**   |      | **2002**   |   |
|----------------------------|--------|------------|-----------|------------|--------|
|                       |   |       |      |       |   |
| Deferred tax  assets:      |   |       |      |       |   |
| Net operating  loss        |   | $          | 9,768,000 |       | $      | 6,583,000 |   |
|                       |   |       |      |       |   |
| Accrued rent               |   | 935,000    |      | 562,000    |   |
| Deferred tax  liabilities: |   |       |      |       |   |
| Accelerated  depreciation  |   | (3,283,000 | )         | (1,921,000 | )      |
|                       |   |       |      |       |   |
| Net deferred tax  asset    |   | 7,420,000  |      | 5,224,000  |   |
| Valuation  allowance       |   | (7,420,000 | )         | (5,224,000 | )      |
|                       |   |       |      |       |   |
|                       |   | $          | —    |       | $      | — |   |

 

The types of temporary differences between the taxbases of assets and liabilities and their financial statement reporting amountsare attributable principally to depreciation and net operating losses.  The TRS tenant has net operating losscarry-forwards for federal and state purposes of approximately $25.6 millionand $11.2 million as of December 31, 2003 and 2002, respectively, which isavailable to offset future taxable income. The estimated net operating loss carry-forward expiration dates are asfollows:

 

| 2020   |   | $          | 4,047,000  |   |
|--------|--------|------------|------------|--------|
| 2021   |   | 7,202,000  |       |
| 2022   |   | 14,304,000 |       |
|   |   |       |       |
|   |   | $          | 25,553,000 |   |

 

The Company has not recorded this potential futurebenefit because its TRS subsidiary does not have sufficient historical earningson which to base a potential future benefit.

 

**9.****                                     ****Commitmentsand Contingencies**

 

From time to time the Partnership may be exposed tolitigation arising from operations of its business in the ordinary course ofbusiness.  Management does not believethat resolution of these matters will have a material adverse impact on thePartnership’s financial condition or results of operations.

 

* * * * *

 

124

----

 

SIGNATURES

 

**Pursuant to the requirements of Section 13 or 15(d) of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized, on the 15th day ofMarch, 2004.**

 
|   | CNL HOSPITALITY PROPERTIES, INC. |
|--------|----------------------------------|
|   |                             |   |
|   |                             |   |
|   | **By:**                          | **/s/ Thomas J.  Hutchison, III** |   |
|   |                             | THOMAS J. HUTCHISON, III |
|   |                             | Chief Executive Officer  (Principal Executive Officer) |
|   |                             |   |
|   |                             |   |
|   | By:                              | /s/ C. Brian Strickland |   |
|   |                             | C. BRIAN STRICKLAND |
|   |                             | Executive Vice President  (Principal Financial and Accounting Officer) |
|        |                                  |  |  |  |

 

125

----

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the Registrant and in the capacities and on the datesindicated.

 

 
| **Signature**                |   | **Title**                                 |   | **Date**       |
|------------------------------|--------|-------------------------------------------|--------|----------------|
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
| /s/ James M. Seneff, Jr.     |   | Chairman of the Board                     |   | March 15, 2004 |
| JAMES M. SENEFF, JR.         |   |                                      |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
| /s/ Robert A. Bourne         |   | Vice Chairman of the  Board and Treasurer |   | March 15, 2004 |
| ROBERT A. BOURNE             |   |                                      |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
| /s/ Thomas J. Hutchison, III |   | Chief Executive Officer                   |   | March 15, 2004 |
| THOMAS J. HUTCHISON, III     |   | (Principal Executive  Officer)            |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
| /s/ C. Brian Strickland      |   | Executive Vice President,                 |   | March 15, 2004 |
| C. BRIAN STRICKLAND          |   | (Principal Financial  and                 |   |           |
|                         |   | Accounting Officer)                       |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
| /s/ Charles E. Adams         |   | Independent Director                      |   | March 15, 2004 |
| CHARLES E. ADAMS             |   |                                      |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
| /s/ Lawrence A. Dustin       |   | Independent Director                      |   | March 15, 2004 |
| LAWRENCE A. DUSTIN           |   |                                      |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
| /s/ Craig M. McAllaster      |   | Independent Director                      |   | March 15, 2004 |
| CRAIG M. MCALLASTER          |   |                                      |   |           |
|                         |   |                                      |   |           |
|                         |   |                                      |   |           |
| /s/ Robert E. Parsons        |   | Independent Director                      |   | March 15, 2004 |
| ROBERT E. PARSONS            |   |                                      |   |           |

 

126

----

 

CNL HOSPITALITY PROPERTIES, INC. AND SUBSIDIARIES

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS (inthousands)

Years Ended December 31, 2003, 2002 and 2001

 
|     |   |                                    |   |                                |   | **Additions**                         |   | **Deductions**                   |   |         |   |
|----------|--------|-----------------------------------------|--------|-------------------------------------|--------|---------------------------------------|--------|----------------------------------|--------|--------------|--------|
| **Year** |   | **Description**                         |   | **Balance  at  Beginning  of Year** |   | **Charged  to  Costs  and  Expenses** |   | **Charged  to  Other  Accounts** |   | **Utilized** |   | **Balance  at End  of Year** |   |
|     |   |                                    |   |                                |   |                                  |   |                             |   |         |   |   |   |
| 2001     |   | Deferred tax  asset valuation allowance |   | $                                   | — |                                  | — |                             | — |         | — |   | $ | — |   |
|     |   |                                    |   |                                |   |                                  |   |                             |   |         |   |   |   |
| 2002     |   | Deferred tax  asset valuation allowance |   | $                                   | — |                                  | — |                             | 4,314  |         | — |   | $ | 4,314 |   |
|     |   |                                    |   |                                |   |                                  |   |                             |   |         |   |   |   |
| 2003     |   | Deferred tax  asset valuation allowance |   | $                                   | 4,314  |                                  | — |                             | 5,784  |         | — |   | $ | 10,098 |   |

 

----

 

CNL HOSPITALITY PROPERTIES, INC. ANDSUBSIDIARIES

SCHEDULE III – REAL ESTATEAND ACCUMULATED DEPRECIATION (in thousands)

December 31, 2003

 
|                                                                               |   | **Initial  Costs** |   | **Costs  Capitalized  Subsequent  To Acquisition** |   | **Gross  Amount at Which Carried  at Close of Period** |   |             |    |                |   |     |   |          |   |
|------------------------------------------------------------------------------------|--------|--------------------|--------|----------------------------------------------------|--------|--------------------------------------------------------|--------|------------------|---------|---------------------|--------|----------|--------|---------------|--------|
|                                                                               |   | **Land**           |   | **Buildings**                                      |   | **Equipment**                                          |   | **Improvements** |    | **Carrying  Costs** |   | **Land** |   | **Buildings** |   | **Equipment** |   | **Total** |   | **Accumulated  Depreciation** |   | **Date  of  Construction** |   | **Date  Acquired** |   |
|                                                                               |   |               |   |                                               |   |                                                   |   |             |    |                |   |     |   |          |   |   |   |   |   |   |   |   |   |   |   |
| Del Coronado Hotel Del Coronado, California                                        |   | $                  | 8,549  |                                               | $      | 23,824                                                 |   | $                | 33,024  |                | $      | —   |   | $             | — |   | $ | 68,549 |   | $ | 223,824 |   | $ | 33,024 |   | $ | 325,397 |   | $ | 430 |   | 1888 |   | 12/2003 |   |
|                                                                               |   |               |   |                                               |   |                                                   |   |             |    |                |   |     |   |          |   |   |   |   |   |   |   |   |   |   |   |
| Hotel and Resort Properties, each less than 5% of total Various cities  and states |   | 391,991            |   | 2,439,765                                          |   | 279,599                                                |   | 29,719           |    | —              |   | 396,627  |   | 2,439,869     |   | 304,578 |   | 3,141,074 |   | 143,532 |   | Various |   | Various |   |
|                                                                               |   |               |   |                                               |   |                                                   |   |             |    |                |   |     |   |          |   |   |   |   |   |   |   |   |   |   |   |
|                                                                               |   | $                  | 60,540 |                                               | $      | 2,663,589                                              |   | $                | 312,623 |                | $      | 29,719   |   | $             | — |   | $ | 465,176 |   | $ | 2,663,693 |   | $ | 337,602 |   | $ | 3,466,471 |   | $ | 143,962 |   |   |   |   |   |

 

----

 

(1)           Transactions in real estate andaccumulated depreciation during 2003, 2002 and 2001 are summarized as follows:

 
|                         |   | **Cost  (2)(4)** |      | **Accumulated  Depreciation** |   |
|------------------------------|--------|------------------|-----------|-------------------------------|--------|
| Hotel and Resort  Properties |   |             |      |                          |   |
| Balance,  December 31, 2000  |   | $                | 590,963   |                          | $      | 10,919 |   |
| Acquisitions                 |   | 373,706          |      | —                        |   |
| Depreciation  expense (3)    |   | —           |      | 21,465                        |   |
|                         |   |             |      |                          |   |
| Balance, December  31, 2001  |   | 964,669          |      | 32,384                        |   |
| Acquisitions                 |   | 468,772          |      | —                        |   |
| Depreciation  expense (3)    |   | —           |      | 34,864                        |   |
|                         |   |             |      |                          |   |
| Balance,  December 31, 2002  |   | 1,433,441        |      | 67,248                        |   |
| Acquisitions                 |   | 2,033,030        |      | —                        |   |
| Depreciation  expense (3)    |   | —           |      | 74,949                        |   |
|                         |   |             |      |                          |   |
| Balance, December  31, 2003  |   | $                | 3,466,471 |                          | $      | 142,197 |   |

 

 
| (2)    | As of December 31, 2003, 2002, and 2001, the  aggregate cost of the Properties owned by the Company and its subsidiaries  for federal income tax purposes was $3.5 billion, $1.4 billion, and $1.0  billion, respectively.  All of the  leases are treated as operatingleases for federal income tax purposes. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                |
| (3)    | Depreciation expense is computed for buildings and  equipment based upon estimated lives of 40 and seven years, respectively.                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                |
| (4)    | During the years ended December 31, 2003, 2002, and  2001, the Company incurred acquisition fees totaling  $20.3 million, $16.2 million, and $5.5  million, respectively, paid to the Advisor.   Acquisition fees are included in land and buildings atDecember 31,  2003, 2002, and 2001.                |

 

----

 

**EXHIBIT INDEX**

 
| **Exhibit Number** |
|--------------------|
|               |   |   |
|               | 2.1 | Agreement by and among CNL Hospitality Properties,  Inc., CNL Rose Acquisition Corp., RFS Hotel Investors, Inc., CNL Rose  Acquisition OP, LP and RFS Partnership, L.P., dated May 8, 2003  *(Previously filed as Exhibit 2.1 to the  Registrant’s Form 8-K filed May 9, 2003 and incorporated herein by  reference.)* |
|               |   |   |
|               | 2.2 | Amendment to Merger Agreement dated May 27, 2003  among the Company, CNL Rose Acquisition Corp., RFS Hotel Investors, Inc., CNL  Rose Acquisition OP, LP and RFS Partnership, L.P. *(**Previously filed as Exhibit 2.2 to Post-Effective  Amendment No. Two to the Registrant’s Registration Statement on Form S-11  filed July 14, 2003 and incorporated herein by reference.)* |
|               |   |   |
|               | 2.3 | RFS Acquisition Agreement, dated as of July 10,  2003, by and among CNL Hospitality Partners, LP, CNL Hotel RI-Orlando, Ltd.,  CNL Hotel CY-Edison, LP, RFS Partnership, L.P. and CNL Rose Acquisition Corp.  *(Previously filed as Exhibit 2.1 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference).* |
|               |   |   |
|               | 2.4 | Stock Purchase Agreement, dated as of February 12,  2004, by and among KKR Partners II, L.P., KKR 1996 Fund, L.P., Resort  Associates, L.P., Golf Associates, L.P., CNL Resort Acquisition Corp. and KSL  Recreation Corporation *(Previously filed as Exhibit 2.1 to the  Registrant’s Form 8-K filed February 13, 2004 and incorporated herein by  reference.)* |
|               |   |   |
|               | 3.1 | Articles of Amendment and Restatement of CNL  Hospitality Properties, Inc. dated July 21, 2003 *(Previously filed as Exhibit 3.18 to the Registrant’s Registration  Statement on Form S-11 (Registration No. 333-107279) filed July 23, 2003 and  incorporated herein by reference.)* |
|               |   |   |
|               | 3.2 | CNL American Realty Fund, Inc. Bylaws  *(Previously filed as Exhibit 3.3 to the  Registrant’s Registration Statement on Form S-11 filed August 12, 1996 and  incorporated herein by reference.)* |
|               |   |   |
|               | 3.3 | Amendment No. 1 to the Bylaws of CNL Hospitality  Properties, Inc.  *(Previously filed as Exhibit 3.7 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed October 23, 2000 and incorporated herein by reference.)* |
|               |   |   |
|               | 3.4 | Amendment No. 2 to the Bylaws of CNL Hospitality  Properties, Inc.  *(Previously filed as Exhibit 3.8 to  Post-Effective Amendment No. Six to the Registrant’s Registration Statement  on Form S-11 filed June 11, 2001 and incorporated herein by reference.)* |
|               |   |   |
|               | 3.5 | Amendment No. 3 to the Bylaws of CNL Hospitality  Properties, Inc.  *(Previously filed as Exhibit 3.9 to  Post-Effective Amendment No. One to the Registrant’s Registration Statement  on Form S-11 (Registration No. 333-67124) filed June 26, 2002 and  incorporated herein by reference.)* |
|               |   |   |
|               | 3.6 | Fifth Amended and Restated Agreement of Limited  Partnership of RFS Partnership, L.P. dated January 2, 2001 (*Previously filed as Exhibit 3.3 to  RFS Hotel Investors, Inc.’s (“RFS”) Form 10-K filed March 15, 2001 and  incorporated herein by reference.)* |
|               |   |   |
|               | 3.7 | Amendment to the Certificate of Limited Partnership  of RFS Partnership, L.P., dated July 10, 2003 *(Previously filed as Exhibit 3.17 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed July 14, 2003 and incorporated herein by reference.)* |
|               |   |   |
|               | 4.1 | Form of Reinvestment Plan  *(Included as Exhibit 4.10 in Post-Effective Amendment No. Six to the  Registrant’s Registration Statement on Form S-11(Registration No. 333-98074)  filed January 26, 2004 and incorporated herein by reference.)* |

 

----

 
|   | 4.2    | Indenture dated February 26, 2002 among RFS  Partnership, L.P., RFS 2002 Financing, Inc., RFS Leasing VII, Inc., RFS Hotel  Investors, Inc. and U.S. Bank National Association (*Previously filed as Exhibit 4.1 to RFS’s Form S-4 Registration  Statement filed March 15, 2002 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 4.3    | Form of Global Note evidencing the 9.75% Series B  Senior Notes due 2012 of RFS Partnership, L.P. and RFS 2002 Financing, Inc. (*Previously filed as Exhibit A to  Exhibit 4.1 to RFS’s Form S-4 Registration Statement filed March 15, 2002 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 4.4    | Form of Guaranty by RFS Hotel Investors, Inc. and  RFS Leasing VII, Inc. (*Previously  filed as Exhibit A to Exhibit 4.1 to RFS’s Form S-4 Registration Statement  filed March 15, 2002 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 4.5    | Registration Rights Agreement dated February 26,  2002 among RFS Partnership, L.P., RFS 2002 Financing, Inc., RFS Leasing VII,  Inc., RFS Hotel Investors, Inc., Credit Suisse First Boston Corporation and  Banc of America Securities LLC (*Previously  filed as Exhibit 4.4 to RFS’s Form S-4 Registration Statement filed March 15,  2002 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.1   | Form of Escrow Agreement between CNL Hospitality  Properties, Inc. and SouthTrust Bank *(Previously filed as Exhibit 10.1 to Pre-Effective  Amendment No. One to the Registrant’s Registration Statement on Form S-11  filed December 23, 2002 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.2   | Advisory Agreement dated as of April 1, 2003 between  CNL Hospitality Properties, Inc. and CNL Hospitality Corp.  *(**Previously  filed as Exhibit 10.1 to the Registrant’s Form 10-Q filed May 15, 2003 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.3   | Form of Joint Venture Agreement  *(Previously filed as Exhibit 10.3 to the  Registrant’s Registration Statement on Form S-11 filed November 23, 1998 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.4   | Form of Indemnification and Put Agreement  *(Previously filed as Exhibit 10.4 to the  Registrant’s Registration Statement on Form S-11 filed August 12, 1996 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.5   | Form of Unconditional Guaranty of Payment and  Performance  *(Previously filed as Exhibit 10.5 to  the Registrant’s Registration Statement on Form S-11 filed August 12, 1996  and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.6   | Form of Purchase Agreement  *(Previously filed as Exhibit 10.6 to the Registrant’s Registration  Statement on Form S-11 filed August 12, 1996 and incorporated herein by  reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.7   | Form of Lease Agreement  *(Previously filed as Exhibit 10.57 to the Registrant’s Registration  Statement on Form S-11 filed August 9, 2001 and incorporated herein by  reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.8   | Form of Reinvestment Plan  *(Included as Exhibit 4.10 to Post-Effective Amendment No. six to the  Registrant’s Registration Statement on Form S-11 Filed January 26, 2004 and*                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.9   | Indemnification Agreement between CNL Hospitality  Properties, Inc. and Lawrence A. Dustin dated February 24, 1999.  Each of the following directors and/or  officers has signed a substantially similar agreement as follows: James M.  Seneff, Jr., Robert A. Bourne, G. Richard Hostetter, J. Joseph Kruse, Richard  C. Huseman, Charles A. Muller, Jeanne A. Wall and Lynn E. Rose, dated July 9,  1997; C. Brian Strickland dated October 31, 1998; John A. Griswold dated  January 7, 1999; Charles E. Adams and Craig M. McAllaster dated February 10,  1999; Matthew W. Kaplan dated February 24, 1999; Thomas J. Hutchison III  dated May 16, 2000; and Robert E. Parsons, Jr. dated November 3, 2003.  *(Previously filed as Exhibit 10.2 to the  Registrant’s Form 10-Q filed May 17, 1999 and incorporated herein by  reference.)* |

 

----

 
|   | 10.10  | Agreement of Limited Partnership of CNL Hospitality  Partners, LP  *(Previously filed as Exhibit 10.10 to  Post-Effective Amendment No. Five to the Registrant’s Registration Statement  on Form S-11 filed September 23, 1998 and incorporated herein by reference.)*                                                                                                                                                  |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.11  | Hotel Purchase and Sale Contract between CNL Real  Estate Advisors, Inc. and Gwinnett Residence Associates, LLC, relating to the  Residence Inn - Gwinnett Place  *(Previously  filed as Exhibit 10.11 to Post-Effective Amendment No. Five to the  Registrant’s Registration Statement on Form S-11 filed September 23, 1998 and  incorporated herein by reference.)*                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.12  | Assignment and Assumption Agreement between CNL Real  Estate Advisors, Inc. and CNL Hospitality Partners, LP, relating to the  Residence Inn - Gwinnett Place  *(Previously  filed as Exhibit 10.12 to Post-Effective Amendment No. Five to the  Registrant’s Registration Statement on Form S-11 filed September 23, 1998 and  incorporated herein by reference.)*                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.13  | Hotel Purchase and Sale Contract between CNL Real  Estate Advisors, Inc. and Buckhead Residence Associates, LLC, relating to the  Residence Inn - Buckhead (Lenox Park)   *(Previously  filed as Exhibit 10.13 to Post-Effective Amendment No. Five to the  Registrant’s Registration Statement on Form S-11 filed September 23, 1998 and  incorporated herein by reference.)*                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.14  | Assignment and Assumption Agreement between CNL Real  Estate Advisors, Inc. and CNL Hospitality Partners, LP, relating to the  Residence Inn - Buckhead (Lenox Park)   *(Previously  filed as Exhibit 10.14 to Post-Effective Amendment No. Five to the  Registrant’s Registration Statement on Form S-11 filed September 23, 1998 and  incorporated herein by reference.)*                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.15  | Lease Agreement between CNL Hospitality Partners, LP  and STC Leasing Associates, LLC, dated August 1, 1998, relating to the  Residence Inn - Gwinnett Place  *(Previously  filed as Exhibit 10.15 to Post-Effective Amendment No. Five to the  Registrant’s Registration Statement on Form S-11 filed September 23, 1998 and  incorporated herein by reference.)*                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.16  | Lease Agreement between CNL Hospitality Partners, LP  and STC Leasing Associates, LLC, dated August 1, 1998, relating to the  Residence Inn - Buckhead (Lenox Park)   *(Previously  filed as Exhibit 10.16 to Post-Effective Amendment No. Five to the  Registrant’s Registration Statement on Form S-11 filed September 23, 1998 and  incorporated herein by reference.)*                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.17  | Master Revolving Line of Credit Loan Agreement with  CNL Hospitality Properties, Inc., CNL Hospitality Partners, LP and Colonial  Bank, dated July 31, 1998  *(Previously  filed as Exhibit 10.17 to Post-Effective Amendment No. Five to the Registrant’s  Registration Statement on Form S-11 filed September 23, 1998 and incorporated  herein by reference.)*                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.18  | Master Loan Agreement by and between CNL Hotel  Investors, Inc. and Jefferson-Pilot Life Insurance Company, dated February  24, 1999  *(Previously filed as Exhibit 10.18 to  Post-Effective Amendment No. Seven to the Registrant’s Registration Statement  on Form S-11 filed March 16, 1999 and incorporated herein by reference.)*                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.19  | Securities Purchase Agreement between CNL  Hospitality Properties, Inc. and Five Arrows Realty Securities II L.L.C.,  dated February 24, 1999  *(Previously  filed as Exhibit 10.19 to Post-Effective Amendment No. Seven to the  Registrant’s Registration Statement on Form S-11 filed March 16, 1999 and  incorporated herein by reference.)*                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.20  | Subscription and Stockholders’ Agreement among CNL  Hotel Investors, Inc., Five Arrows Realty Securities II L.L.C., CNL  Hospitality Partners, LP and CNL Hospitality Properties, Inc., dated February  24, 1999  *(Previously filed as Exhibit 10.20 to  Post-Effective Amendment No. Seven to the Registrant’s Registration Statement  on Form S-11 filed March 16, 1999 and incorporated herein by reference.)* |

 

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|   | 10.21  | Registration Rights Agreement by and between CNL  Hospitality Properties, Inc. and Five Arrows Realty Securities II L.L.C.,  dated February 24, 1999  *(Previously  filed as Exhibit 10.21 to Post-Effective Amendment No. Seven to the  Registrant’s Registration Statement on Form S-11 filed March 16, 1999 and  incorporated herein by reference.)*                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10.22  | Lease Agreement between Courtyard Annex, L.L.C. and  City Center Annex Tenant Corporation, dated November 15, 1999, relating to  the Courtyard - Philadelphia  *(Previously  filed as Exhibit 10.22 to Post-Effective Amendment No. Four to the Registrant’s  Registration Statement on Form S-11 filed February 17, 2000 and incorporated  herein by reference.)*                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10.23  | First Amended and Restated Limited Liability Company  Agreement of Courtyard Annex, L.L.C., relating to the Courtyard -  Philadelphia  *(Previously filed as Exhibit 10.23 to  Post-Effective Amendment No. Four to the Registrant’s Registration Statement  on Form S-11 filed February 17, 2000 and incorporated herein by reference.)*                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10.24  | Purchase and Sale Agreement between Marriott  International, Inc., CBM Annex, Inc., Courtyard Annex, Inc., as Sellers, and  CNL Hospitality Partners, LP, as Purchaser, dated November 15, 1999, relating  to the Courtyard - Philadelphia  *(Previously  filed as Exhibit 10.24 to Post-Effective Amendment No. Four to the Registrant’s  Registration Statement on Form S-11 filed February 17, 2000 and incorporated  herein by reference.)*                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10.25  | Lease Agreement between CNL Hospitality Partners,  LP, and RST4 Tenant LLC, dated December 10, 1999, relating to the Residence  Inn - Mira Mesa  *(Previously filed as Exhibit 10.25 to  Post-Effective Amendment No. Four to the Registrant’s Registration Statement  on Form S-11 filed February 17, 2000 and incorporated herein by reference.)*                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10.26  | Purchase and Sale Agreement between Marriott International,  Inc., TownePlace Management Corporation and Residence Inn by Marriott, Inc.,  as Sellers, and CNL Hospitality Partners, LP, as Purchaser, dated November  24, 1999, relating to the Residence Inn - Mira Mesa and the TownePlace Suites  - Newark  *(Previously filed as Exhibit 10.26 to  Post-Effective Amendment No. Four to the Registrant’s Registration Statement  on Form S-11 filed February 17, 2000 and incorporated herein by reference.)* |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10.27  | First Amendment to Lease Agreement between CNL  Hospitality Partners, LP and STC Leasing Associates, LLC, dated August 1,  1998, related to the Residence Inn - Gwinnett Place, (amends Exhibit 10.15  above) and the First Amendment to Agreement of Guaranty, dated August 1, 1998  (amends Agreement of Guaranty attached as Exhibit I to 10.15 above)  *(Previously filed as Exhibit 10.15 to the  Registrant’s Form 10-Q filed November 10, 1999 and incorporated herein by  reference.)*                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10.28  | First Amendment to Lease Agreement between CNL  Hospitality Partners, LP and STC Leasing Associates, LLC, dated August 1,  1998, related to the Residence Inn - Buckhead (Lenox Park) (amends Exhibit  10.16 above) and the First Amendment to Agreement of Guaranty, dated August  1, 1998 (amends Agreement of Guaranty attached as Exhibit I to 10.16  above)  *(Previously filed as Exhibit 10.16 to  the Registrant’s Form 10-Q filed November 10, 1999 and incorporated herein by  reference.)*              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10.29  | Lease Agreement between CNL Hospitality Partners, LP  and WYN Orlando Lessee, LLC, dated May 31, 2000, relating to the Wyndham  Denver Tech Center  *(Previously  filed as Exhibit 10.29 to Post-Effective Amendment No. Six to the  Registrant’s Registration Statement on Form S-11 filed June 9, 2000 and  incorporated herein by reference.)*                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10.30  | Lease Agreement between CNL Hospitality Partners, LP  and WYN Orlando Lessee, LLC, dated May 31, 2000, relating to the Wyndham  Billerica  *(Previously filed as Exhibit 10.30 to  Post-Effective Amendment No. Six to the Registrant’s Registration Statement  on Form S-11 filed June 9, 2000 and incorporated herein by reference.)*                                                                                                                                                                            |

 

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|   | 10.31  | Purchase and Sale Agreement between CNL Hospitality  Corp., as Buyer, and WII Denver Tech, LLC and PAH Billerica Realty Company,  LLC, as Sellers, and Wyndham International, Inc., relating to the Wyndham  Denver Tech Center and the Wyndham Billerica   *(Previously  filed as Exhibit 10.31 to Post-Effective Amendment No. Six to the  Registrant’s Registration Statement on Form S-11 filed June 9, 2000 and  incorporated herein by reference.)*                                                                                                                                                                                                           |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.32  | Lease Agreement between CNL Hospitality Partners, LP  and RST4 Tenant LLC, dated June 17, 2000, relating to the Courtyard - Palm  Desert and the Residence Inn - Palm Desert   *(Previously  filed as Exhibit 10.32 to Post-Effective Amendment No. One to the  Registrant’s Registration Statement on Form S-11 filed August 9, 2000 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.33  | Purchase and Sale Agreement between PDH Associates  LLC, as Seller, and CNL Hospitality Corp., as Buyer, dated January 19, 2000,  relating to the Courtyard - Palm Desert and the Residence Inn - Palm  Desert  *(Previously filed as Exhibit 10.33 to  Post-Effective Amendment No. One to the Registrant’s Registration Statement  on Form S-11 filed August 9, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.34  | Amendment to Purchase and Sale Agreement between PDH  Associates LLC and CNL Hospitality Corp., dated January 19, 2000, relating to  the Courtyard - Palm Desert and the Residence Inn - Palm Desert (amends  Exhibit 10.33 above)  *(Previously  filed as Exhibit 10.34 to Post-Effective Amendment No. One to the  Registrant’s Registration Statement on Form S-11 filed August 9, 2000 and  incorporated herein by reference.)*                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.35  | Assignment Agreement between CNL Hospitality Corp.  and CNL Hospitality Partners, LP, relating to the Courtyard - Palm Desert and  the Residence Inn - Palm Desert  *(Previously  filed as Exhibit 10.35 to Post-Effective Amendment No. One to the  Registrant’s Registration Statement on Form S-11 filed August 9, 2000 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.36  | Lease Agreement between CNL Hospitality Partners, LP  and RST4 Tenant LLC, dated July 28, 2000, relating to the SpringHill Suites -  Gaithersburg  *(Previously filed as Exhibit 10.36 to  Post-Effective Amendment No. One to the Registrant’s Registration Statement  on Form S-11 filed August 9, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.37  | Purchase and Sale Agreement between SpringHill SMC  Corporation, as Seller, and CNL Hospitality Partners, LP, as Purchaser, and  joined in by Marriott International, Inc., dated June 30, 2000, relating to  the SpringHill Suites - Gaithersburg  *(Previously  filed as Exhibit 10.37 to Post-Effective Amendment No. One to the  Registrant’s Registration Statement on Form S-11 filed August 9, 2000 and  incorporated herein by reference.)*                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.38  | Lease Agreement between CNL Hospitality Partners, LP  and RST4 Tenant LLC, dated July 28, 2000, relating to the Residence Inn -  Merrifield  *(Previously filed as Exhibit 10.38 to  Post-Effective Amendment No. One to the Registrant’s Registration Statement  on Form S-11 filed August 9, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.39  | Purchase and Sale Agreement between TownePlace  Management Corporation and Residence Inn by Marriott, Inc., as Sellers, and  CNL Hospitality Partners, LP, as Purchaser, and joined in by Marriott  International, Inc., dated November 24, 1999, relating to the Residence Inn -**Merrifield  *(Previously filed as Exhibit 10.39 to  Post-Effective Amendment No. One to the Registrant’s Registration Statement on  Form S-11 filed August 9, 2000 and incorporated herein by reference.)*                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.40  | First Amendment to Purchase and Sale Agreement  between TownePlace Management Corporation and Residence Inn by Marriott,  Inc., as Sellers, and CNL Hospitality Partners, LP, as Purchaser, and joined  in by Marriott International, Inc., dated November 24, 1999, relating to the  Residence Inn - Mira Mesa, SpringHill Suites - Gaithersburg, Residence Inn -  Merrifield and TownePlace Suites - Newark   (amends Exhibits 10.26, 10.37 and 10.39 above)  *(Previously filed as Exhibit 10.40 to  Post-Effective Amendment No. One to the Registrant’s Registration Statement  on Form S-11 filed August 9, 2000 and incorporated herein by reference.)* |

 

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|   | 10.41  | Lease Agreement between CNL Hospitality Partners, LP  and CCCL Leasing LLC, dated August 18, 2000, relating to the Courtyard -  Alpharetta  *(Previously filed as Exhibit 10.41 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed October 23, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.42  | Lease Agreement between CNL Hospitality Partners, LP  and CCCL Leasing LLC, dated August 18, 2000, relating to the Residence Inn -  Cottonwood  *(Previously filed as Exhibit 10.42 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed October 23, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.43  | Lease Agreement between CNL Hospitality Partners, LP  and CCCL Leasing LLC, dated August 18, 2000, relating to the TownePlace Suites  - Mt. Laurel  *(Previously filed as Exhibit 10.43 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed October 23, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.44  | Lease Agreement between CNL Hospitality Partners, LP  and CCCL Leasing LLC, dated August 18, 2000, relating to the TownePlace  Suites - Scarborough  *(Previously  filed as Exhibit 10.44 to Post-Effective Amendment No. Two to the  Registrant’s Registration Statement on Form S-11 filed October 23, 2000 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.45  | Lease Agreement between CNL Hospitality Partners, LP  and CCCL Leasing LLC, dated August 18, 2000, relating to the TownePlace  Suites - Tewksbury  *(Previously  filed as Exhibit 10.45 to Post-Effective Amendment No. Two to the  Registrant’s Registration Statement on Form S-11 filed October 23, 2000 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.46  | Purchase and Sale Agreement between Residence Inn by  Marriott, Inc., Courtyard Management Corporation, SpringHill SMC Corporation  and TownePlace Management Corporation, as Sellers, CNL Hospitality Partners,  LP, as Purchaser, CCCL Leasing LLC, as Tenant, Crestline Capital Corporation,  Marriott International, Inc., and joined in by CNL Hospitality Properties,  Inc., dated August 18, 2000, relating to the Residence Inn - Cottonwood,  Courtyard - Alpharetta and Overland Park, SpringHill Suites - Raleigh, and  TownePlace Suites - Mt. Laurel, Scarborough and Tewksbury  *(Previously filed as Exhibit 10.46 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed October 23, 2000 and incorporated herein by reference.)* |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.47  | First Amendment to Purchase and Sale Agreement  between Residence Inn by Marriott, Inc., Courtyard Management Corporation,  SpringHill SMC Corporation and TownePlace Management Corporation, as Sellers,  CNL Hospitality Partners, LP, as Purchaser, CCCL Leasing LLC, as tenant,  Crestline Capital Corporation, and Marriott International, Inc., dated August  18, 2000, relating to the Residence Inn - Cottonwood, Courtyard - Alpharetta  and Overland Park, SpringHill Suites - Raleigh, and TownePlace Suites - Mt.  Laurel, Scarborough and Tewksbury  *(Previously  filed as Exhibit 10.47 to Post-Effective Amendment No. Two to the Registrant’s  Registration Statement on Form S-11 filed October 23, 2000 and incorporated  herein by reference.)*                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.48  | Lease Agreement between CNL Hospitality Partners, LP  and RST4 Tenant LLC, dated November 4, 2000, relating to the TownePlace  Suites - Newark  *(Previously filed as Exhibit 10.48 to  Post-Effective Amendment No. Three to the Registrant’s Registration Statement  on Form S-11 filed December 12, 2000 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   | 10.49  | Lease Agreement between LLB C-Hotel, L.L.C. and LLB  Tenant Corporation, dated October 12, 2000, relating to the Courtyard -  Little Lake Bryan  *(Previously  filed as Exhibit 10.49 to Post-Effective Amendment No. Three to the  Registrant’s Registration Statement on Form S-11 filed December 12, 2000 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

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|   | 10.50  | Lease Agreement between LLB F-Inn, L.L.C. and LLB  Tenant Corporation, dated October 12, 2000, relating to the Fairfield Inn -  Little Lake Bryan  *(Previously  filed as Exhibit 10.50 to Post-Effective Amendment No. Three to the  Registrant’s Registration Statement on Form S-11 filed December 12, 2000 and  incorporated herein by reference.)*                                                                                                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.51  | First Amendment to Lease Agreement between LLB  C-Hotel, L.L.C. and LLB Tenant Corporation, dated November 17, 2000, relating  to the Courtyard - Little Lake Bryan (amends Exhibit 10.49 above)  *(Previously filed as Exhibit 10.51 to  Post-Effective Amendment No. Three to the Registrant’s Registration Statement  on Form S-11 filed December 12, 2000 and incorporated herein by reference.)*                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.52  | First Amendment to Lease Agreement between LLB  F-Inn, L.L.C. and LLB Tenant Corporation, dated November 17, 2000, relating  to the Fairfield Inn - Little Lake Bryan (amends Exhibit 10.50 above)  *(Previously filed as Exhibit 10.52 to Post-Effective  Amendment No. Three to the Registrant’s Registration Statement on Form S-11  filed December 12, 2000 and incorporated herein by reference.)*                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.53  | Purchase and Sale Agreement between Marriott  International, Inc., as Seller, and CNL Hospitality Partners, LP, as  Purchaser, dated September 17, 1998, relating to the Courtyard - Little Lake  Bryan, the Fairfield Inn - Little Lake Bryan and the SpringHill Suites -  Little Lake Bryan  *(Previously  filed as Exhibit 10.53 to Post-Effective Amendment No. Three to the  Registrant’s Registration Statement on Form S-11 filed December 12, 2000 and  incorporated herein by reference.)* |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.54  | Second Amendment to Lease Agreement between CNL LLB  C-Hotel Management, LP (formerly LLB C-Hotel, L.L.C.) and LLB Tenant  Corporation, dated December 15, 2000, relating to the Courtyard - Little Lake  Bryan (amends Exhibits 10.49 and 10.51 above)  *(Previously filed as Exhibit 10.54 to Post-Effective Amendment No.  Four to the Registrant’s Registration Statement on Form S-11 filed March 12,  2001 and incorporated herein by reference.)*                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.55  | Second Amendment to Lease Agreement between CNL LLB  F-Inn Management, LP (formerly LLB F-Inn L.L.C.) and LLB Tenant Corporation,  dated December 15, 2000, relating to the Fairfield Inn - Little Lake Bryan  (amends Exhibits 10.50 and 10.52 above)   *(Previously  filed as Exhibit 10.55 to Post-Effective Amendment No. Four to the  Registrant’s Registration Statement on Form S-11 filed March 12, 2001 and  incorporated herein by reference.)*                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.56  | Indenture Agreement among Desert Ridge Resort, LLC,  as Issuer; Bank One, National Association, as Trustee; and Financial  Structures Limited, as Insurer, dated December 15, 2000, relating to the  Desert Ridge Property  *(Previously  filed as Exhibit 10.56 to Post-Effective Amendment No. Four to the  Registrant’s Registration Statement on Form S-11 filed March 12, 2001 and  incorporated herein by reference.)*                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.57  | $96,725,000 Promissory Note with CNL Hospitality  Partners, LP, as Maker, and Security Life of Denver Insurance Company, as  Payee, dated September 7, 2001  *(Previously  filed as Exhibit 10.56 to the Registrant’s Form 10-Q filed May 15, 2003 and  incorporated herein by reference.)*                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.58  | Consolidated Lease Amendment dated as of February  27, 1996 between RFS Partnership, L.P.   and RFS, Inc. *(Previously filed as Exhibit 10.3 to RFS’s Current  Report on Form 8-K filed March 14, 1996 and incorporated herein by  reference.)*                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.59  | Form of Future Percentage Lease Agreement *(Previously  filed as Exhibit 10.4 to RFS’s Current Report on Form 8-K filed March 14,  1996 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.60  | Schedule of terms of Percentage Leases *(Previously  filed as Exhibit 10.2(a) to RFS’s Form 10-K filed March 31, 1999 and  incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   | 10.61  | Form of Percentage Lease with TRS Lessees *(Previously  filed as Exhibit 10.1 to RFS’s Current Report on Form 8-K filed January 16,  2001 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                                                        |

 

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|   | 10.62  | Form of Management Agreement with Flagstone *(Previously  filed as Exhibit 10.2 to RFS’s Current Report on Form 8-K filed January 16,  2001 and incorporated herein by reference.)*                                                                                                                                                                                                                                                                                          |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.63  | Master Agreement dated February 1, 1996 among  Doubletree Corporation, Seedling Merger Subsidiary, Inc., RFS, Inc., RFS  Hotel Investors, Inc. and RFS Partnership, L.P. *(Previously filed as Exhibit 10.2 to  RFS’s Current Report on Form 8-K filed March 14, 1996 and incorporated herein  by reference.)*                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.64  | First Amendment to Master Agreement dated as of  November 21, 1996 among Doubletree Corporation,  RFS, Inc., RFS Hotel Investors, Inc., RFS Partnership, L.P.,  RFS Leasing, Inc., RFS Financing Partnership, L.P., DTR RFS Lessee, Inc. *(Previously  filed as Exhibit 10.9(a) to RFS’s Form 10-K filed March 31, 1997 and incorporated  herein by reference.)*                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.65  | Termination Agreement dated as of January 26, 2000  among RFS, Inc., RFS Leasing, Inc., DTR RFS Lessee, Inc., RFS Partnership,  L.P., RFS Financing Partnership, L.P., Plano Inn, L.P., RFS SPE 1 1998 LLC,  RFS SPE 2 1998 LLC, Ridge Lake General Partner, Inc., RFS Hotel Investors,  Inc., Doubletree Corporation and Hilton Hotels Corporation *(Previously  filed as Exhibit 10.15 to RFS’s****Form  10-K filed March 28, 2000 and incorporated herein by reference.)* |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.66  | Loan Agreement dated August 9, 2000 by and between  Bank of America, N.A. (as lender) and RFS SPE 2000 LLC (as borrower), a  wholly-owned subsidiary of RFS *(Previously filed as Exhibit 10.19 to RFS’s Form  10-K filed March 15, 2001 and incorporated herein by reference.)*                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.67  | Loan Agreement dated August 9, 2000 by and between  Bank of America, N.A. (as lender) and RFS SPE 2 2000 LLC (as borrower), a  wholly-owned subsidiary of RFS *(Previously filed as Exhibit 10.20 to RFS’s Form  10-K filed March 15, 2001 and incorporated herein by reference.)*                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.68  | Credit Agreement dated as  of July 10, 2003 among RFS Partnership, L.P. and RFS Financing Partnership,  L.P. (as borrowers), the Registrant (as parent to the borrowers), Bank of  America, N.A. (as Administrative Agent) and the lenders named therein  *(Previously filed as Exhibit 10.68 to  Post-Effective Amendment No. Two to the Registrant’s Registration Statement  on Form S-11 filed July 14, 2003 and incorporated herein by reference.*                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.69  | $320,000,000 Note between RFS Partnership, L.P. and RFS Financing  Partnership, L.P. (as borrowers), and Banc of America Bridge LLC (as lender),  dated as of July 10, 2003  *(Previously  filed as Exhibit 10.69 to Post-Effective Amendment No. Two to the  Registrant’s Registration Statement on Form S-11 filed July 14, 2003 and  incorporated herein by reference.)*                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.70  | Continuing Guaranty  Agreement, dated as of July 10, 2003 among CNL Hospitality Properties, Inc.,  CNL Rose GP Corp., and CNL Rose Acquisition Corp., in favor of Bank of  America, N.A. *(Previously filed as Exhibit  10.3 to RFS Partnership, L.P.’s Current Report on Form 8-K filed July 25,  2003 and incorporated herein by reference.)*                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.71  | Security and Pledge  Agreement, dated as of July 10, 2003 between RFS Partnership, L.P. and Bank  of America, N.A. (relating to common stock of RFS TRS Holdings, Inc.) *(Previously filed as Exhibit 10.4 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.72  | Security and Pledge Agreement, dated as of July 10,  2003 between CNL Rose Acquisition Corp. and Bank of America, N.A. (relating  to limited partner interests in RFS Partnership, L.P.) *(Previously filed as Exhibit 10.5 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   | 10.73  | Security and Pledge Agreement, dated as of July 10,  2003 between CNL Hospitality Properties, Inc. and Bank of America, N.A.  (relating to common stock of CNL Rose Acquisition Corp.) *(Previously filed as Exhibit 10.6 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*                                                                                                                                |

 

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|   | 10.74  | Security and Pledge Agreement, dated as of July 10,  2003 between CNL Rose GP Corp. and Bank of America, N.A. (relating to general  partner interest in RFS Partnership, L.P.) *(Previously  filed as Exhibit 10.7 to RFS Partnership, L.P.’s Current Report on Form 8-K  filed July 25, 2003 and incorporated herein by reference.)*                                                                                                                                                              |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.75  | Security and Pledge Agreement, dated as of July 10,  2003 between CNL Hospitality Properties, Inc. and Bank of America, N.A.  (relating to common stock of CNL Rose GP Corp.) *(Previously filed as Exhibit 10.8 to RFS Partnership, L.P.’s Current  Report on Form 8-K filed July 25, 2003 and incorporated herein by reference.)*                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.76  | Security and Pledge Agreement, dated as of July 10,  2003 between RFS Partnership, L.P. and Bank of America, N.A. (relating to  limited partner interest in Ridge Lake, L.P.) *(Previously filed as Exhibit 10.9 to RFS Partnership, L.P.’s Current  Report on Form 8-K filed July 25, 2003 and incorporated herein by reference.)*                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.77  | Security and Pledge Agreement, dated as of July 10,  2003 between RFS Partnership, L.P. and Bank of America, N.A. (relating to  common stock of RFS 2002 Financing, Inc.) *(Previously  filed as Exhibit 10.10 to RFS Partnership, L.P.’s Current Report on Form 8-K  filed July 25, 2003 and incorporated herein by reference.)*                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.78  | Security and Pledge Agreement, dated as of July 10,  2003 between RFS Partnership, L.P. and Bank of America, N.A. (relating to  limited liability company interest in RFS Financing 2002, L.L.C.) *(Previously filed as Exhibit 10.11 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.79  | Security and Pledge Agreement, dated as of July 10,  2003 between RFS Partnership, L.P. and Bank of America, N.A. (relating to  limited partner interest in RFS Financing Partnership, L.P.) *(Previously filed as Exhibit 10.12 to RFS  Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.80  | Security and Pledge  Agreement, dated as of July 10, 2003 between RFS Partnership, L.P. and Bank  of America, N.A. (relating to common stock of Ridge Lake General Partner,  Inc.) *(Previously filed as Exhibit 10.13  to RFS Partnership, L.P.’s Current Report on Form 8-K filed July 25, 2003 and  incorporated herein by reference.)*                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.81  | Security and Pledge  Agreement, dated as of July 10, 2003 between RFS Partnership, L.P. and Bank  of America, N.A. (relating to limited liability company interests in Ridge  Lake, L.L.C.) *(Previously filed as Exhibit  10.14 to RFS Partnership, L.P.’s Current Report on Form 8-K filed July 25,  2003 and incorporated herein by reference.)*                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.82  | Agreement of Purchase and  Sale of The Hotel Del Coronado and Joint Escrow Instructions among L-O  Coronado Holding II, Inc., L-O Coronado Hotel, Inc. and L-O Coronado IP, Inc.  (jointly, Seller) and CNL Hospitality Corp. (Buyer), effective as of  September 23, 2003 (*Previously filed as Exhibit 10.83 to Post-Effective  Amendment No. Six to the Registrant's Registration Statement on Form  S-11 filed January 26, 2004 and incorporated herein by reference.*)                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.83  | First Amendment to  Agreement for Purchase and Sale of Real Property and Joint Escrow  Instructions by and among L-O Coronado Holding II, Inc., L-O Coronado Hotel,  Inc. and L-O Coronado IP, Inc. (collectively, Seller) and CNL Hospitality  Corp. (Buyer) dated as of October 15, 2003 (*Previously filed as Exhibit 10.83 to  Post-Effective Amendment No. Six to the Registrant's Registration  Statement on Form S-11 filed January 26, 2004 and incorporated herein by  reference.*)  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.84  | Second Amendment to  Agreement for Purchase and Sale of Real Property and Joint Escrow  Instructions by and among L-O Coronado Holding II, Inc., L-O Coronado Hotel,  Inc. and L-O Coronado IP, Inc. (collectively, Seller) and CNL Hospitality  Corp. (Buyer) dated as of October 31, 2003 (*Previously filed as Exhibit 10.84 to  Post-Effective Amendment No. Six to the Registrant's Registration  Statement on Form S-11 filed January 26, 2004 and incorporated herein by  reference.*) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | 10.85  | Assignment and Assumption  of Agreement of Purchase and Sale and Joint Escrow Instructions by and  between CNL Hospitality Corp. (Assignor) and CNL Hotel Del Partners, LP  (Assignee) dated as of December 18, 2003 (*Previously filed as Exhibit 10.85 to  Post-Effective Amendment No. Six to the Registrant's Registration Statement  on Form S-11 filed January 26, 2004 and incorporated herein by  reference.*)                                                                        |

 

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|   | 21     | Subsidiaries of the  Registrant (*Filed herewith*.)                                                                                                                                             |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                            |
|   | 31.1   | Certification of Chief Executive Officer, Pursuant to Rule 13a—14(a), as Adopted  Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (*Filed herewith*).                          |
|   |   |                                                                                                                                                                                            |
|   | 31.2   | Certification of Principal Financial Officer, Pursuant to Rule 13a—14(a), as  Adopted Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 (*Filed herewith*.)                      |
|   |   |                                                                                                                                                                                            |
|   | 32.1   | Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section 906 of the Sarbanes - Oxley Act of 2002 (*Furnished herewith*.)                   |
|   |   |                                                                                                                                                                                            |
|   | 32.2   | Certification of Principal Financial Officer, Pursuant to 18 U.S.C. Section 1350, as  Adopted Pursuant to Section   906 of  the Sarbanes - Oxley Act of 2002 (*Furnished  herewith*.) |

 

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