**Exhibit 99.1**

 

**W2005 Kapalua/Gengate HotelHoldings, LLC**

**Consolidated Financial Statements**

**December 31, 2007**

** **

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** **

**W2005 Kapalua/GengateHotel Holdings, LLC**

**Index**

 
| ** **                                                    | **Page(s)** |
|---------------------------------------------------------------|-------------|
| ** **                                                    | ** **  |
| **Report  of Independent Certified Public Accountants**       | 1           |
|                                                          |        |
| **Consolidated  Financial Statements**                        |        |
|                                                          |        |
| Balance  Sheet                                                | 2           |
|                                                          |        |
| Statement of  Operations and Changes in Members’ Capital | 3           |
|                                                          |        |
| Statement of  Cash Flows                                      | 4           |
|                                                          |        |
| Notes to  Consolidated Financial Statements                   | 5-13        |

 

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**Report of Independent CertifiedPublic Accountants**

 

To the Members of

W2005 Kapalua/Gengate HotelHoldings, LLC

 

In our opinion, theaccompanying consolidated balance sheet and the related consolidated statementsof operations and changes in members’ capital and cash flows present fairly, inall material respects, the financial position of W2005 Kapalua/Gengate HotelHoldings, LLC and its subsidiaries****at December 31,2007, and the results of their operations and their cash flows for the yearthen ended in conformity with accounting principles generally accepted in theUnited States of America.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.  We conducted our audit of these statements inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

 

| /s/ PricewaterhouseCoopers  LLP |   |   |
|---------------------------------|--------|--------|
| PricewaterhouseCoopers LLP      |   |   |
|                            |   |   |
| Fort Lauderdale, Florida        |   |   |
| March 31, 2008             |   |   |

 

1

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**W2005 Kapalua/GengateHotel Holdings, LLC**

**Consolidated BalanceSheet**

**December 31, 2007**

 
| **Assets**                                                               |   |        |        |
|--------------------------------------------------------------------------|--------|-------------|-------------|
| Current  assets                                                          |   |        |        |
| Cash  and cash equivalents                                               |   | $           | 6,692,285   |   |
| Restricted  cash                                                         |   | 3,142,378   |        |
| Accounts  receivable, net of allowance for doubtful accounts of $197,820 |   | 1,105,760   |        |
| Other  receivable                                                        |   | 2,700,000   |        |
| Inventories                                                              |   | 361,009     |        |
| Prepaid  expenses and other current assets                               |   | 147,321     |        |
| Total  current assets                                                    |   | 14,148,753  |        |
| Property  and equipment, net                                             |   | 329,704,395 |        |
| Deferred  financing costs, net                                           |   | 2,569,972   |        |
| Total  assets                                                            |   | $           | 346,423,120 |   |
| **Liabilities and Members’ Capital**                                |   |        |        |
| Current  liabilities                                                     |   |        |        |
| Accounts  payable and accrued expenses                                   |   | $           | 26,361,349  |   |
| Accrued  construction in progress                                        |   | 10,556,038  |        |
| Due  to related parties                                                  |   | 747,775     |        |
| Due  to hotel operator                                                   |   | 406,041     |        |
| Advance  deposits                                                        |   | 7,029,153   |        |
| Interest  on long-term debt                                              |   | 4,086,363   |        |
| Other  liabilities                                                       |   | 2,500,000   |        |
| Total  current liabilities                                               |   | 51,686,719  |        |
| Long-term  liabilities                                                   |   |        |        |
| Long-term  debt                                                          |   | 288,635,963 |        |
|                                                                     |   |        |        |
| Commitments  and contingencies (Note 7)                                  |   |        |        |
|                                                                     |   |        |        |
| Members’  capital                                                   |   | 6,100,438   |        |
| Total  liabilities and members’ capital                             |   | $           | 346,423,120 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

2

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**W2005 Kapalua/Gengate HotelHoldings, LLC**

**Consolidated Statement ofOperations and Changes in Members’ Capital**

**For the Year Ended December 31,2007**

 
| Revenues                                                 |   |        |        |
|----------------------------------------------------------|--------|-------------|-------------|
| Rooms                                                    |   | $           | 23,245,341  |   |
| Food  and beverage                                       |   | 16,003,567  |        |
| Other  hotel                                             |   | 5,563,248   |        |
| Total  revenues                                          |   | 44,812,156  |        |
|                                                     |   |        |        |
| Operating  expenses                                      |   |        |        |
| Hotel  operations                                        |   | 26,483,735  |        |
| General  and administrative                              |   | 15,327,218  |        |
| Sales  and marketing                                     |   | 6,683,766   |        |
| Property  operation and maintenance                      |   | 3,189,458   |        |
| Property  taxes                                          |   | 518,956     |        |
| Management  fees                                         |   | 1,792,486   |        |
| Ground  lease                                            |   | 542,381     |        |
| Building  fire and casualty insurance                    |   | 1,184,647   |        |
| Depreciation                                             |   | 3,051,077   |        |
| Loss  on disposal of fixed assets                        |   | 3,832,473   |        |
| Total  operating expenses                                |   | 62,606,197  |        |
| Loss  from operations                                    |   | (17,794,041 | )           |
| Interest  expense, net                                   |   | 7,714,974   |        |
| Change  in fair value of derivative financial instrument |   | 198,618     |        |
| Other  expense                                           |   | 56,764      |        |
| Net  loss                                                |   | $           | (25,764,397 | ) |
|                                                     |   |        |        |
| Members’  deficit, beginning of year                |   | $           | (1,883,767  | ) |
| Members’  contribution                              |   | 33,748,602  |        |
| Net  Loss                                                |   | (25,764,397 | )           |
| Members’  capital, end of year                      |   | $           | 6,100,438   |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

3

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**W2005 Kapalua/GengateHotel Holdings, LLC**

**Consolidated Statementof Cash Flows**

**For the Year EndedDecember 31, 2007**

 
| **Cash flows from operating activities**                                         |   |         |        |
|----------------------------------------------------------------------------------|--------|--------------|-------------|
| Net  loss                                                                        |   | $            | (25,764,397 | ) |
| Adjustments  to reconcile net loss to net cash provided by operating activities: |   |         |        |
| Depreciation                                                                     |   | 3,051,077    |        |
| Amortization  of deferred financing cost                                         |   | 1,415,189    |        |
| Loss  on disposal of fixed assets                                                |   | 3,832,473    |        |
| Change  in fair value of derivative financial instrument                         |   | 198,618      |        |
| Changes  in assets and liabilities                                               |   |         |        |
| Accounts  receivable, net                                                        |   | 6,399,552    |        |
| Inventories                                                                      |   | 561,033      |        |
| Prepaid  and other current assets                                                |   | (105,258     | )           |
| Accounts  payable and accrued expenses                                           |   | 15,445,780   |        |
| Due  to related parties                                                          |   | 66,629       |        |
| Due  to hotel operator                                                           |   | (3,728,266   | )           |
| Advance  deposits                                                                |   | 3,094,765    |        |
| Interest  payable                                                                |   | 2,156,028    |        |
| Other  liabilities                                                               |   | 2,500,000    |        |
| Net  cash provided by operating activities                                       |   | 9,123,223    |        |
|                                                                             |   |         |        |
| **Cash flows from investing activities**                                         |   |         |        |
| Additions  to property and equipment                                             |   | (141,216,279 | )           |
| Proceeds  from the disposal of fixed assets                                      |   | 586,365      |        |
| Use  of restricted cash to purchase property and equipment                       |   | 2,060,254    |        |
| Net  cash used in investing activities                                           |   | (138,569,660 | )           |
|                                                                             |   |         |        |
| **Cash flows from financing activities**                                         |   |         |        |
| Cash  contributions from members                                                 |   | 26,248,602   |        |
| Payment  of financing costs                                                      |   | (4,280,793   | )           |
| Payment  to acquire interest rate cap                                            |   | (75,900      | )           |
| Payment  on capital leases                                                       |   | (193,774     | )           |
| Payment  of long-term debt                                                       |   | (160,500,000 | )           |
| Proceeds  from borrowings under long-term debt                                   |   | 268,635,963  |        |
| Net  cash provided by financing activities                                       |   | 129,834,098  |        |
| Net  increase in cash and cash equivalents                                       |   | 387,661      |        |
| Cash  and cash equivalents, beginning of year                                    |   | 6,304,624    |        |
| Cash  and cash equivalents, end of year                                          |   | $            | 6,692,285   |   |
|                                                                             |   |         |        |
| **Supplemental disclosure of cash flow information**                             |   |         |        |
| Cash  paid for interest                                                          |   | $            | 14,367,831  |   |
|                                                                             |   |         |        |
| **Non-cash financing and investing activities**                                  |   |         |        |
| Increase  in retainage payable used for funding construction activities          |   | $            | 3,616,939   |   |
| Increase  in accounts payable used for funding construction activities           |   | $            | 7,067,983   |   |
| Land  contributed by member                                                      |   | $            | 7,500,000   |   |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

4

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** **

**W2005 Kapalua/GengateHotel Holdings, LLC**

**Notesto Consolidated Financial Statements**

** **

**1.**                            Organizationand Business

** **

W2005 Kapalua/Gengate HotelHoldings, LLC, a Delaware limited liability company (the “Company”), wasformed on February 9, 2006 by and between Whitehall Street Global RealEstate Limited Partnership 2005; 51.4% (“Whitehall Street”), Whitehall StreetGlobal Employee Fund 2005, LP; 13.6% (“Whitehall Employee Fund”), GengateKapalua Holdings GP, LLC; 0% (“GHGP”) and Gengate Kapalua Holdings, LLC; 35% (“GKH”).

 

The Company was formed toacquire and own The Ritz-Carlton Kapalua, (the “Hotel”) located on the Islandof Maui, Hawaii.  The Hotel is managedthrough an operating agreement (the “Management Agreement”) with theRitz-Carlton Hotel Company, LLC (the “Hotel Operator”).

 

OnMarch 27, 2007, MLP RCK LLC, a wholly owned subsidiary of Maui Land &Pineapple Company, Inc. (“MLPC”) acquired a 21.4286% interest in theCompany.  As a consequence initialmembers’ interest became the following: Whitehall Street; 40.4234%, Whitehall Employee Fund; 10.648%, GKH;27.5%, and GHGP; 0%.  Whitehall Street,Whitehall Employee Fund and GKH are designated as the Managing Members of theCompany (together with MLPC and GHGP, the “Members”).  Major decisions, as defined in the SecondAmended and Restated Limited Liability Company Agreement (the “CompanyAgreement”), require the consent of either Whitehall Street or WhitehallEmployee Fund, and either GKH or MLPC.

 

OnJuly 1, 2007, the Hotel was closed for a major renovation and conversionof 250 hotel rooms into 107 condominium units. The Hotel was issued a temporary certificate of occupancy on December 28,2007.

 

**Allocationof Net Profit and Loss**

 

Profits and losses areallocated pro rata among all Members in proportion to their percentageinterests.

 

**Distributionsto Members**

 

Distributions to Members aremade pro rata in accordance with their relative percentage interests in theCompany.  No distributions have been madeto the Members since inception of the Company.

 

**2.**                            Liquidity

** **

The Hotel was closed on July 1,2007 for an extensive renovation and residence conversion construction andreopened on December 28, 2007.  Forthe year ended December 31, 2007, the Company incurred a net loss of $25,764,397and had net cash inflows from operating activities of $9,123,223.  At December 31, 2007, the Company had adeficit of $37,537,966 in working capital. Management believes that it will be able to continue to fund theoperating needs with cash currently on hand, operations, sale of condominiumunits and additional debt or equity.  Asof March 28, 2008, Whitehall Street, Whitehall Employee Fund and GHGP haveconfirmed to the Company that they have the ability and intent to fund, ifrequired, through at least March 31, 2009, an amount necessary to meet theCompany’s obligations as they come due.  Theamount of cash to be funded is dependent upon the profitability of the hoteland management’s ability to close on condominium sales.  MLPC has not confirmed its intent to fund theCompany.

 

5

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**W2005 Kapalua/GengateHotel Holdings, LLC**

**Notes to Consolidated Financial Statements**

** **

**3.**                            Summaryof Significant Accounting Policies

** **

**Basis of Presentation**

** **

The accompanyingconsolidated financial statements include the accounts of W2005 Kapalua/GengateHotel Holdings, LLC and its wholly owned subsidiaries, W2005 Kapalua/GengateHotel Mezzanine, LLC (“W2005 Mezzanine”), and W2005 Kapalua/Gengate HotelRealty, LLC, each a Delaware limited liability company. All significantintercompany transactions have been eliminated.

 

**Use of Estimates**

** **

**The preparation of financialstatements in conformity with accounting principles generally accepted in theUnited States of America requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities, the disclosure ofcontingent assets and liabilities at the balance sheet date and the reported amountsof revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.**

** **

**Revenue Recognition**

** **

Hotel operating revenues arefrom room rentals, food and beverage sales, spa sales and retail merchandisesales.  Revenues are recorded as servicesare rendered or goods are provided.  Additionally,the Company collects sales, use, occupancy and similar taxes which are presentedon a net basis (excluded from revenues) in the accompanying consolidatedstatement of operations.  Amountsreceived in advance of guest stays are reflected as advance deposits in theaccompanying balance sheet.  Theseadvance deposits are recognized as revenue when the service is provided.  Interest expense is net of $474,337 ofinterest income.

 

**Fair Value of Financial Instruments**

** **

Financial instrumentsinclude cash and cash equivalents, restricted cash, accounts receivable,accounts payable and accrued expenses, advance deposits and long-termobligations.  The carrying amounts offinancial instruments other than long-term obligations approximate fair valuedue to their short term nature.  TheCompany’s mortgage loan obligations at fair value is advantageous (LIBOR plus220 basis points) when compared with the February 2008 recapitalization,as described in Note 6, where variable rate debt increased to LIBOR plus 300basis points. Such obligations approximate fair value. Other long term debtapproximates market value, based upon rates currently available for similarinstruments. The Company has an interest rate cap that is carried at fairvalue.

 

**Cash and Cash Equivalents**

** **

The Company considers allhighly liquid investments purchased with an original maturity of three monthsor less to be cash equivalents.

 

**Restricted Cash**

** **

Restricted cash representsamounts reserved for payment of real estate taxes, repairs, insurance and fundingof furniture, fixture and equipment purchases. These restrictions are required under the Mortgage Loan and by the ManagementAgreement.  In addition, and as part ofthe restricted cash balance, the Company has on deposit, $2,895,700 to supportan irrevocable standby letter of credit expiring on July 26, 2008, whichwas used to obtain a building permit application.

 

**Accounts Receivable**

** **

The Company records tradeaccounts receivable in the normal course of business related to the sale ofproducts and services.  The Company doesnot charge interest on past due accounts receivable.  The allowance for doubtful accounts is basedon review of specific accounts that have been identified as at risk fornon-collection and prior collection history. Write-offs are evaluated on a case-by-case basis.

 

6

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**W2005 Kapalua/GengateHotel Holdings, LLC**

**Notes to Consolidated Financial Statements**

 

**Concentration of Credit Risk**

** **

A significant portion of theCompany’s cash and cash equivalents are maintained at various financialinstitutions in amounts that exceed federally insured limits.  The Company has not experienced any lossesand believes it is not exposed to significant credit risk in this area.

 

**Inventories**

** **

Inventories consistprimarily of food, beverages and merchandise held for resale and operating supplies.  Amounts are valued on a first in first outbasis.

 

**Derivative Financial Instruments**

** **

**As of December 31, 2007, theCompany had an interest rate cap which is a derivative financialinstrument.  This derivative is $4,400and is recorded on the consolidated balance sheet at fair value.  The interest rate cap was not designated as ahedging instrument; therefore changes in the fair value of this instrument arerecognized in the results of operations in the period that the change occurs.**

** **

**Property and Equipment**

** **

Property and equipment arecarried at cost, net of accumulated depreciation.  Routine repairs and maintenance are expensedas incurred.  Expenditures that improvethe functionality of the related equipment or extend its useful life arecapitalized.  When property and equipmentare retired or otherwise disposed, the related gain or loss is included in thedetermination of income.  Depreciation iscalculated on the straight-line method based on the following useful lives:

 
| Land  improvements                 |   | 20 years  |   |
|------------------------------------|--------|-----------|--------|
| Buildings and  improvements        |   | 39 years  |   |
| Furniture,  fixtures and equipment |   | 3-7 years |   |

 

**Deferred Financing Costs**

** **

Costs incurred inconjunction with obtaining the debt instruments are included as deferredfinancing costs.  Deferred financingcosts are amortized over the respective lives of the applicable debt issues ona straight-line basis, which approximates the effective interest method as acomponent of interest expense.

 

**Long-lived Assets**

** **

The Company evaluatespotential impairment of long-lived assets in accordance with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-Lived Assets*, which requires the Company to (a) recognizean impairment loss if the carrying amount of a long-lived asset is more thanthe value of its undiscounted projected cash flows and (b) measure animpairment loss as the difference between the carrying amount and fair value ofthe asset.  No impairments of long-livedassets occurred during the year ended December 31, 2007.

 

**Income Taxes**

** **

The Company has elected tobe a limited liability company for federal tax purposes.  Limited liability companies are not taxableentities under provisions of the Internal Revenue Code and, accordingly, theaccompanying consolidated financial statements do not reflect a provision for 

 

7

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**W2005 Kapalua/GengateHotel Holdings, LLC**

**Notes to Consolidated Financial Statements**

 

federal or state incometaxes.  The tax effects of the Company’stransactions are the responsibility of the Members.

 

**4.**                            Propertyand Equipment

 

**Property and equipment consist of the following at December 31,2007:**

 

 
| Land                               |   | $           | 33,444,471  |   |
|------------------------------------|--------|-------------|-------------|--------|
| Building and  improvements         |   | 164,971,293 |        |
| Furniture,  fixtures and equipment |   | 2,130,635   |        |
|                               |   | 200,546,399 |        |
| Less accumulated  depreciation     |   | (6,742,631  | )           |
|                               |   | 193,803,768 |        |
| Construction in  progress          |   | 135,900,627 |        |
| Net property and  equipment        |   | $           | 329,704,395 |   |

 

On March 27, 2007, theCompany purchased 49 acres of land (“Hotel land”) underlying the Hotelcondominium and amenities from MLPC for $32.5 million plus closing costs.  The acquisition was financed through a debtfacility provided by Lehman Brothers Holdings, Inc. The Company was, priorto acquisition, the lessee under a long-term ground lease with MLPC.

 

During2007, the Company began construction of 107 condominium units by renovating 250hotel rooms in four low-rise clusters adjacent to the Hotel.  All condominiums will be offered for sale in2008.  Construction in progress includescapitalized interest costs of $10,521,768 and taxes of $518,956 for the yearended December 31, 2007.

 

Includedin furnitures, fixtures and equipment is approximately $152,000 of equipmentunder capital leases where payments are due through 2009.

 

Depreciation expense for theyear ended December 31, 2007 was $3,051,077.

 

8

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**W2005 Kapalua/GengateHotel Holdings, LLC**

**Notes to Consolidated Financial Statements**

 

**5.**                            AccountsPayable and Accrued Expenses

** **

Accountspayable and accrued expenses consist of the following at December 31, 2007:

 
| Accounts payable                                 |   | $         | 19,459,590 |   |
|--------------------------------------------------|--------|-----------|------------|--------|
| Accrued payroll,  payroll taxes and benefits     |   | 2,894,453 |       |
| Accrued real  estate and personal property taxes |   | 114,407   |       |
| Accrued sales  taxes                             |   | 13,805    |       |
| Accrued other -  Hotel                           |   | 3,463,739 |       |
| Other                                            |   | 415,354   |       |
| Total                                            |   | $         | 26,361,349 |   |

 

**6.**                            Long-TermDebt

** **

Long-term debt at December 31,2007 is as follows:

 
| Luxury loan (a)          |   | $           | 20,000,000  |   |
|--------------------------|--------|-------------|-------------|--------|
| Mortgage loan  (b)       |   | 268,635,963 |        |
|                     |   | 288,635,963 |        |
| Less current  maturities |   | —      |        |
|                     |   | $           | 288,635,963 |   |

 

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(a)               On March 13, 2006, the Company entered into a$20,000,000 term loan agreement (the “Luxury Loan”) maturing April 13,2011 with Luxury Finance LLC.  The LuxuryLoan bears interest at an annual rate equal to prime rate plus 350 basis points(8.53% at December 31, 2007).

 

(b)              On March 13, 2006, the Company entered into a $180,500,000term loan agreement (the “Lehman Loan”) initially maturing April 1, 2008with Lehman Brothers Holdings Inc. (“Lehman”). The Lehman Loan provided for two (2) extensions of one (1) yeareach, at the Company’s option. Monthly payments of interest commenced on May 9,2006.  The loan was collateralized by thefirst deed of trust on the Hotel.  On March 27,2007, this loan was repaid.

 

On March 27, 2007,the Company entered into a $271,700,000 mortgage loan (the “Mortgage Loan”)with Lehman to, among other matters,: (i) refinance the outstandingbalance of the Lehman Loan, (ii) acquire the Hotel land, which was subjectto a long-term ground lease, (iii) finance the Hotel renovation andcondominium conversion, (iv) make deposits into reserve fund accounts forrenovation holdbacks, condominium conversion holdbacks, operating deficitholdbacks, marketing cost holdbacks, interest holdbacks and tax holdbacks; and (v) constructthe condominium units.  The Mortgage Loaninitially matures on February 27, 2009 (the “Maturity Date”).  The term of the Mortgage Loan may be extendedfor 

 

9

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**W2005 Kapalua/GengateHotel Holdings, LLC**

**Notes to Consolidated Financial Statements**

 

three additional periodsof one (1) year each at the Company’s option.  Interest is payable monthly at an annual rateequal to prime plus 220 basis points (7.23% at December 31, 2007).  The Company has assigned to Lehman all of itsrights, title and interest to receive any and all payments under an interestcap of 6% with a notional amount equal to the outstanding principal.  The Company has granted Lehman first prioritysecurity interest in its equity interest in the Company.

 

On February 21,2008, the Company, Whitehall Street, MLPC and Karim Alibhai, Manager-GHGP andGKH, entered into a Consent and First Amendment to the Mortgage Loan, (the “FirstAmendment Agreement”) with Lehman to evidence a $5,000,000loan from Marriott International Corporation to the Company.  In addition, the Company received $6,850,000as a short term loan from Whitehall Street and Whitehall Employee Fund anddeposited these funds in the equity reserve account as required by the FirstAmendment Agreement.  The Company isrequired to deposit $10,000,000 in reserve accounts with Lehman to fundconstruction or deficits in operating the Hotel.  As part of the First Amendment Agreement theinterest rate was increased to LIBOR plus 300 basis points and principal paymentsin addition to monthly interest-only payments are required as follows:

 

An amount equal to the greater of the net sale proceedsper sold condominium unit or the release price of the unit stipulated in theFirst Amendment Agreement is to be used to increase certain loan reserves to$55,000,000, then to reduce the principal balance on the Mortgage Loan to$150,000,000.  Subsequent proceeds ofapproximately $15,000,000 are to be used to repay all or defined amounts ofother indebtedness and then the remainder to the Company.

 

**7.**                            Commitmentsand Contingencies

** **

The Company may, fromtime-to-time, be a party to various lawsuits arising in the ordinary course ofbusiness.  Management believes theCompany has adequate insurance coverage for all such matters and that, althoughthe ultimate outcome of such claims cannot be ascertained, current pending andthreatened claims are not expected to have a material adverse impact on theCompany’s financial position, results of operations or cash flows.

 

**8.**                            Indemnifications and Guarantees

** **

The Company has entered intocertain indemnification agreements under which it could be required to makepayments to third parties upon the occurrence or non-occurrence of certainfuture events.  These indemnitiesprimarily include 1) the indemnification of Members and officers of the Companyfor certain events or occurrences while a Member or officer is, or was serving,at the Company’s request in such capacity and 2) all claims and demands whichmay be asserted against the lenders under the Company’s loans for obligationsto be performed by the Company.  Theduration of these indemnities generally is for the length of thecontracts.  These indemnificationsgenerally do no limit the future payments the Company could be obligated tomake.  The Company has not recorded anyliabilities for these indemnities in the accompanying financial statements,based upon the current facts and circumstances that would trigger a payment.

 

10

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** **

**W2005 Kapalua/GengateHotel Holdings, LLC**

**Notes to Consolidated Financial Statements**

** **

**9.**                            RelatedParty Transactions

** **

The following related partytransactions between the Company and various related entities could have adifferent financial statement impact had they occurred in arms lengthtransactions between unrelated entities.

 

**Services Agreement**

** **

On March 13, 2006, theCompany entered into an Asset Management Agreement (“Services Agreement”) withGencom Asset Management Company, LP, (“Gencom”), an affiliate of GHGP and GKH.  The Company engaged Gencom to performservices related to the asset management and development of the Hotel. Under theterms of the Services Agreement, the Company is charged an asset management feeof one percent (1.00%) of hotel gross revenues payable monthly in arrears,during each fiscal year plus all out of pocket expenses (including reasonabletravel expenses), disbursements and advances incurred by Gencom in connectionwith its duties under the Services Agreement. The Company incurred $448,121 in asset management fees for the year endedDecember 31, 2007 and this amount is included as a component of “Managementfees” in the accompanying consolidated statement of operations.  At December 31, 2007, there were no unpaidasset management fees.

 

Gencom receives aDevelopment Management Fee in an amount equal to four percent (4%) of theaggregate hard and soft costs of renovation, exclusive of land costs.  The Development Management Fee is payablemonthly in arrears on the tenth business day following the month during thetime in which the property is undergoing renovations.  The Company incurred $1,467,371 in DevelopmentManagement Fee for the year ended December 31, 2007 and this amount isincluded in construction in progress as a component of “Property and Equipment,net” in the accompanying consolidated balance sheet.  At December 31, 2007, Development ManagementFees of $896,101 were unpaid and were included as a component of “Due torelated parties” in the accompanying consolidated balance sheet.  In addition, during 2007 Gencom charged theCompany approximately $787,000 for payroll and out of pocket expenses relatedto Gencom employees’ involvement in the Hotel renovation.

 

Gencom is also entitled to aResidential Unit Sales Fee upon the closing of the sale of a residential unitby the Company or one of its subsidiaries to any third party purchaser.  The Residential Unit Sales Fee is equal toone percent (1%) of sales price paid and is payable when there is availablecash flow or available capital event with proceeds sufficient to pay the fee.  As of December 31, 2007 no residentialunit sales have closed and thus the Company has not incurred any Residential UnitSales Fees for the year ended December 31, 2007.

 

In addition, Gencom charged the Company a monthlyaccounting fee of $4,000 per month.  TheCompany incurred $48,000 in accounting fees for the year ended December 31,2007 and this amount is included as a component of “General and Administrative”expenses in the accompanying consolidated statement of operations.  At December 31, 2007, $16,000 inaccounting fees was unpaid and is included as a component of “Due to relatedparties” in the accompanying consolidated balance sheet.

 

**CreditEnhancement and Other Fees**

 

In accordance with the Company Agreement the Company paysa fee in connectionwith a loan guaranty or other recourse obligation provided or incurred by aMember (or an affiliate of a Member) to a lender providing financing to theCompany.  The Member providing orincurring a guaranty or other recourse obligation is paid by the Company a feeequal to two percent (2%) per annum of the $15 million guaranty or otherrecourse obligation. For the year ended December 31, 2007, the Companypaid to Whitehall Street a credit enhancement fee of $300,000 which isreflected as a component of interest expense.

 

In conjunction with theland acquisition and debt modification on March 27, 2007, the Company paid toGencom $686,165 for a transaction fee and paid Whitehall and its parent$1,169,880 as a loan origination fee. These amounts have been capitalized as deferred financing costs.

 

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** **

**W2005 Kapalua/GengateHotel Holdings, LLC**

**Notes to Consolidated Financial Statements**

** **

**OperatingRevenues**

 

At December 31, 2007,$194,869 is included as a component of “accounts receivable, net of allowancefor doubtful accounts” in the accompanying consolidated balance sheet foramounts that are due to the Company for unpaid room rentals as a result ofvarious affiliates of the Company renting hotel rooms throughout the year.

 

**10.**                     **Agreements with Hotel Manager**

 

**Hotel Management Agreement**

** **

The Hotel Operator managesthe Hotel’s day to day operations.  TheManagement Agreement with the Hotel Operator extends through December 31,2041 and may be extended for an additional ten years (up to a total of threeadditional ten-year periods). Under the Management Agreement, the Company isrequired to pay the Hotel Operator a base management fee of 3.00% of hotelgross revenues during each fiscal year plus an incentive fee based on theoperating profit of the Hotel, distributed to the Company and the HotelOperator after 1) first, to the Company , until the Company has received anamount equal to the First Owner’s Priority (“FOP”) (FOP shall mean the sum of (i) seventeenmillion dollars ($17,000,000) plus (ii) ten and three-quarters percent(10.75%) of Total Capital Investment (calculated as of the last day of suchfiscal year); 2) second, to the Hotel Operator and Company, on a pari passubasis, as follows: (a) eighty percent (80%) of First Available Cash Flow (“FACF”)(FACF shall mean an amount, with respect to each fiscal year or portion thereofduring the term, equal to the excess, if any, of operating profit (up to anamount equal to Second Owner’s Priority (“SOP”) (SOP shall mean the sum of (i) nineteenmillion dollars ($19,000,000) plus (ii) ten and three-quarters percent(10.75%) of Total Capital Investment (calculated as of the last day of suchfiscal year)) to Company and (b) twenty percent (20%) of FACF to the HotelOperator, until the Company shall have received an amount equal to SOP; and 3)third, to the Hotel Operator and Company, on a pari passu basis, asfollows:   (a) seventy-five percent(75%) of Second Available Cash Flow (“SACF”) (SACF shall mean an amount, withrespect to each fiscal year or portion thereof during the term, equal to the excess,if any, of operating profit over SOP) to Company and (b) twenty-fivepercent (25%) of SACF to the Hotel Operator.

 

The Company incurred$1,344,365 in base management fees for the year ended December 31, 2007,and this amount is included as a component of “Management fees” in theaccompanying consolidated statement of operations.  No incentive fees were incurred during this year.  As of December 31, 2007, base managementfees of $15,941 were unpaid and are included as a component of “Due to hoteloperator” in the accompanying consolidated balance sheet.

 

Under the terms of theManagement Agreement, the Hotel Operator employs and provides all employees forthe Company’s hotel operations. While these employees are employees of theHotel Operator and not legally employees of the Company, the Company pays thepayroll costs and related taxes and benefits for these employees.  The Company records the associated expense asan operating expense in the accompanying consolidated statement of operations.

 

Throughout the term of theManagement Agreement, the Company is to have $22,500,000 in net worthcalculated in accordance with generally accepted accounting principles.  Accordingly, the Hotel Operator has the rightto terminate the Management Agreement by written notice and seek other remediespermitted by law.  To date, the HotelOperator has not provided written or constructive notice to the Company.

 

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**W2005 Kapalua/GengateHotel Holdings, LLC**

**Notes to Consolidated Financial Statements**

 

**Marketing Agreement**

** **

The Company is required topay a group marketing services fee of 1.00% of hotel gross revenues during eachfiscal year.  The Company incurred$448,122 in group marketing services fees for the period ended December 31,2007, and this amount is included as a component of “Sales and marketing” inthe accompanying consolidated statement of operations.  As of December 31, 2007, $5,101 in groupmarketing services fees was unpaid and is included as a component of “Due tohotel operator” in the accompanying consolidated balance sheet.

 

**SharedExpenses**

 

The Hotel Operator hasbilled the Company for its share of certain goods and services acquired ongroup basis with other hotels managed by the Hotel Operator.

 

**11.****                    ****Subsequent Events**

 

On December 15, 2007, the Company made a$12,000,000 capital call request pursuant to the Company Agreement.  Oneof the Members, MLPC, declined to fund its $2,571,432 pro rata share (the “MLPCShare”).

 

In connection with the acquisition of the Hotel in 2006,a dispute arose regarding the amount of the closing date adjustment, betweenthe Company and RCK Hawaii, LLC ( the “Seller”) &  BCM/CHI Kapalua, INC. (the “Option Seller”), (collectively,the “Sellers”). On February 14, 2008, a settlement agreement was reached andas a result, the Sellers paid the Company $2,700,000 on February 19, 2008,in full satisfaction of the closing date adjustment.  This amount is included in “Other receivable”in the accompanying balance sheet.

 

On February 21,2008, the Company entered into a $5,000,000 loan agreement (the “FF&E loan”)maturing on February 21, 2011 with Marriott International Capital Corporation.  The FF&E loan bears interest at LIBORplus 350 basis points.  The FF&E loanis collaterized by: (a) FF&E reserves, (b) all funds, money andother items of payment held or deposited in the FF&E reserves, (c) FF&ERecords, and (d) to the extent not otherwise included above, all proceeds,products and profits of or in respect of any of the foregoing.

 

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