AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT

Exhibit 10.42

 

AMENDED AND RESTATED

 

LIMITED PARTNERSHIP AGREEMENT

 

OF

 

SHC KSL PARTNERS, L.P.

 

Among

 

SHC DEL GP, LLC,

 

SHC DEL LP, LLC,

 

DCORO HOLDINGS, LLC,

 

KSL DC NEWCO, LLC

 

and

 

HDC DC CORPORATION

 

Dated: As of January 9, 2006

TABLE OF CONTENTS

 

 

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AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT

 

THIS AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT (this “ Agreement ”) is made and entered into as of January 9, 2006 (the “ Effective Date ”), by and among (i) SHC DEL GP, LLC , a Delaware limited liability company (hereinafter referred to as the “ General Partner ”), (ii) SHC DEL LP, LLC , a Delaware limited liability company (hereinafter referred to as “ SHC LP ”), (iii) DCORO HOLDINGS, LLC , a Delaware limited liability company (hereinafter referred to as “ KKR LP ”), (iv) KSL DC NEWCO, LLC , a Delaware limited liability company (collectively hereinafter referred to as “ KSL LP ”) (v) HDC DC CORPORATION , a Delaware corporation (hereinafter referred to as “ DC Corp ”). SHC LP, KKR LP, KSL LP and DC Corp are hereinafter referred to as the “ Class A Limited Partners ”. The General Partner and the Class A Limited Partners are hereinafter referred to as the “ Class A Partners ”. DC Corp, SHC LP, KSL LP are hereinafter referred to as the “ Class B Limited Partners ”. The Class A Partners and the Class B Limited Partners are hereinafter referred to as the “ Partners ”.

 

RECITALS

 

A. On December 9, 2003, CNL KSL PARTNERS GP, and CNL Hospitality Partners, L.P. formed CNL KSL Partners, LP (the “ Company ”) as a Delaware limited partnership by filing the Certificate and entered into an Agreement of Limited Partnership on the same date; such agreement was amended and restated in its entirety by that certain Limited Partnership Agreement of CNL KSL Partners, LP among the Partners, dated as of December 18, 2003 (the “ Original Agreement ”).

 

B. Pursuant to that certain Purchase and Sale Agreement, dated as of October 31, 2005, by and among Recreation (as defined herein), KSL LP and SHC del Coronado, L.L.C. (the “ Purchase Agreement ”), the parties to this Agreement shall own the Partnership Interests described herein.

 

C. The parties hereto desire to enter into this Agreement for the purpose of revising the Original Agreement to reflect the developments described in Recital B .

 

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

 

ARTICLE 1.

FORMATION AND CONTINUATION

 

Section 1.1 Organization; Continuation . The Company was organized as a Delaware limited partnership pursuant to the Act on the date set forth in Recital A above.

 

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Section 1.2 Agreement; Effect of Inconsistencies with Act . This Agreement amends and restates the Original Agreement in its entirety. This Agreement supersedes the Original Agreement, which shall be of no further force or effect. The Partners agree to the terms and conditions of this Agreement, as it may from time to time be amended, supplemented or restated according to its terms. The Partners intend that this Agreement shall be the sole source of the agreement among the parties with respect to the Property and the Company’s business and purpose. Except to the extent a provision of this Agreement expressly incorporates federal income tax rules by reference to sections of the Code or Regulations or is expressly prohibited or ineffective under the Act, this Agreement shall govern, even when inconsistent with, or different from the provisions of the Act or any other law. To the extent any provision of this Agreement is prohibited or ineffective under the Act, this Agreement shall be considered amended to the smallest degree possible in order to make such provision effective under the Act. If the Act is subsequently amended or interpreted in such a way as to validate a provision of this Agreement that was formerly invalid, such provision shall be considered to be valid from the effective date of such interpretation or amendment. Each Partner shall be entitled to rely on the provisions of this Agreement, and no Partner shall be liable to the Company or to any other Partner for any action or refusal to act taken in good faith reliance on this Agreement. The Partners and the Company agree that the duties and obligations imposed on the Partners as such shall be those set forth in this Agreement, which is intended to govern the relationship among the Company and the Partners, notwithstanding any provision of the Act, fiduciary duties or common law to the contrary.

 

Section 1.3 Name . The name of the Company shall be “SHC KSL Partners, L.P.”, and such name shall be used at all times in connection with the conduct of the Company’s business. The General Partner may, from time to time, change the name of the Company upon notice to the other Partners.

 

Section 1.4 Effective Date . This Agreement shall become effective as of the Effective Date.

 

Section 1.5 Term . The Partnership shall continue until the Company is dissolved and its affairs wound up in accordance with this Agreement and the Act.

 

Section 1.6 Certificate of Limited Partnership . On December 9, 2003, the Certificate was filed with the Secretary of State pursuant to the Act. The General Partner shall take all other actions deemed by it to be necessary or appropriate from time to time to comply with all applicable requirements for the operation and, when appropriate, termination of the Company as a limited partnership under the Act.

 

Section 1.7 Registered Agent and Office . The Company’s registered agent for service of process and registered office in the State of Delaware shall be that Person and location reflected in the Certificate. The General Partner may, from time to time, change the registered agent or office through appropriate filings with the Secretary of State. If the

 

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registered agent ceases to act as such for any reason or the registered office shall change, the General Partner shall promptly designate a replacement registered agent or file a notice of change of address, as the case may be.

 

Section 1.8 Principal Place of Business . The Company’s principal place of business shall be located at the Hotel. The General Partner may change the location of the Company’s principal place of business to anywhere within the United States from time to time. The General Partner shall make those filings and take those other actions required by applicable law in connection with the change and shall give notice to all Partners of the new location of the Company’s principal place of business promptly after the change becomes effective.

 

Section 1.9 Foreign Qualifications . The Company shall qualify to do business as a foreign limited partnership in each jurisdiction in which the nature of its business requires such qualification. The General Partner may select any Person permitted by applicable law to act as registered agent for the Company in each jurisdiction in which it is qualified to do business, and may replace any such Person from time to time.

 

Section 1.10 Partner’s Qualifications . Each Partner shall maintain its respective existence and good standing under the laws of its state of incorporation or formation, and its qualification to do business in such jurisdictions where such qualifications are required.

 

ARTICLE 2.

DEFINITIONS

 

Section 2.1 General Interpretive Principles . For purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires, (i) the terms defined in this Article shall have the meanings assigned to them in this Article and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other genders; (ii) accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP (as defined herein); (iii) references in this Agreement to “Articles,” “Sections,” “subsections,” “paragraphs” and other subdivisions without reference to a document are to designated Articles, Sections, subsections, paragraphs and other subdivisions of this Agreement; (iv) a reference to a subsection without further reference to a Section is a reference to such subsection as contained in the same Section in which the reference appears, and this rule shall also apply to paragraphs and other subdivisions; (v) the words “hereto,” “herein,” “hereof,” “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular provision; (vi) the word “including” means “including, but not limited to”; and (vii) all Schedules and Exhibits to this Agreement are incorporated herein by this reference thereto as if fully set forth herein, and all references herein to this Agreement shall be deemed to include all such incorporated Schedules and Exhibits.

 

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Section 2.2 Defined Terms . As used in this Agreement, the following terms shall have the following respective meanings (unless otherwise expressly provided herein):

 

2006 Loans : As defined in Section 6.4 .

 

Act : The Delaware Revised Uniform Limited Partnership Act in its present form or as amended from time to time.

 

Actual Closing Costs : Actual costs incurred by the Company in connection with the exercise of the Put Rights and the Strategic Partners ROFO/Sale Right, including, without limitation, (i) any make-whole and/or prepayment penalties payable in connection with the refinancing of any indebtedness and the placing of new indebtedness in connection with satisfying the Put Rights and/or the Strategic Partners ROFO/Sale Right and (ii) all transfer, stamp and recording taxes imposed on the Transfer and all other closing costs.

 

Additional Capital Contributions : The additional Capital Contributions required to be made by the Partners pursuant to Section 4.3 , including, as applicable, any Capital Contribution made by a Contributing Partner for a Non-Contributing Partner pursuant to Section 10.2 .

 

Additional Contributions : As defined in Section 4.3(c) .

 

Adjusted Basis : The basis for determining gain or loss for federal income tax purposes from the sale or other disposition of property, as defined in Section 1011 of the Code.

 

Adjusted Capital Account Balance : As defined in Section 5.7(a) .

 

Adjusted EBITDA : Earnings of the Company, Subsidiaries, Subsidiary Affiliates and Tenant on a consolidated basis (except as duplicated) before interest, taxes, depreciation and amortization on the same consolidated basis. For the avoidance of doubt, Adjusted EBITDA shall be calculated after the payment of all management fees (including fees payable under the Hotel Management Agreement but not the Asset Management Agreement) but before capital expenditures, termination fess payable under the Hotel Management Agreement, if any, and FF&E reserves in accordance with the hypothetical calculation reflected in Exhibit D . Adjusted EBITDA includes Net Membership Cash Flow (as defined in the Hotel Management Agreement).

 

Affiliate : and all derivations thereof, shall mean (a) as to any Person which is not an individual, any other Person controlling, controlled by or under common control with such Person, including, without limitation, any partner, member, shareholder, officer or director of such Person, as the case may be, and (b) with respect to any Person who is an individual, such individual’s parents, spouse, direct lineal or adoptive descendants, siblings, nieces, nephews and/or first cousins and/or one or more trusts created solely for

 

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the benefit of such individual or any such family members. For the purposes of this definition, the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of a Person, whether through ownership of voting securities or a partnership or membership interest, by contract or otherwise.

 

Agreement : This limited partnership agreement in its present form or as amended, supplemented or restated from time to time.

 

Annual Budget : The annual budget as approved in accordance with the terms of the Hotel Management Agreement.

 

Approved or Approved by the Class A Partners : Approved in writing (including e-mail) by the Class A Partners holding at least 60% of the Class A Percentage Interests, unless a lesser percentage is herein specified.

 

Asset Management Agreement : The asset management agreement, dated as of the Effective Date, between the Company and SHC DTRS, Inc.

 

Asset Manager : SHC DTRS, Inc., a Delaware corporation (and an Affiliate of the Strategic Partners), or any other Asset Manager Approved by the Class A Partners pursuant to this Agreement.

 

Assignee : A Person to whom a Partnership Interest is Transferred and who is not admitted as a Partner.

 

Bank Accounts : As defined in Section 7.5 .

 

Business Day : Any day other than a Saturday, a Sunday, a day on which national banks in California or Illinois are not open for business or are authorized by law to close.

 

Capital Account : The capital account of a Partner maintained in accordance with Section 4.4 .

 

Capital Call Notice : As defined in Section 4.3(b) .

 

Capital Contribution : Any money or property from time to time contributed by a Partner to the Company, including the Initial Capital Contribution and Additional Capital Contributions.

 

Capital Transaction : A transaction in which the Company (i) borrows money, (ii) sells, exchanges or otherwise disposes of all or any part of its Property, including a sale or other disposition pursuant to a condemnation, or (iii) receives the proceeds of property damage insurance, or any other transaction that, in accordance with GAAP, is considered capital in nature.

 

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Carrying Value : Carrying Value means, with respect to any asset, the Adjusted Basis of the asset, except as follows:

 

(i) the initial Carrying Value of an asset contributed by a Partner to the Company after the Effective Date shall be the gross fair market value of the asset, as agreed to by the Partners at the time the asset is contributed;

 

(ii) the Carrying Values of the Company’s assets shall be adjusted to equal their respective gross fair market values, as reasonably determined by the Partners, as of the following times: (a) the acquisition of an additional interest in the Company by any new or existing Assignee or Partner in exchange for more than a de minimis Capital Contribution; (b) the distribution by the Company to a Partner or an Assignee of more than a de minimis amount of property as consideration for all or part of a Partnership Interest or an Assignee’s Economic Interest; and (c) the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); but adjustments pursuant to clauses (a) and (b) above shall be made only if the Partners reasonably determine that such adjustments are necessary or appropriate to reflect the relative economic interests of the Partners in the Company;

 

(iii) the Carrying Value of an asset of the Company distributed to a Partner shall be adjusted to equal the gross fair market value of the asset on the date of distribution as reasonably determined by the Partners; and

 

(iv) the Carrying Values of the Company’s assets shall be increased (or decreased) to reflect any adjustments to the Adjusted Basis of those assets pursuant to Sections 734(b) or 743(b) of the Code, but only to the extent that those adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section 4.4 ; but the Carrying Values shall not be adjusted pursuant to this clause (iv) to the extent the Partners reasonably determine that an adjustment pursuant to clause (ii) above is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this clause (iv).

 

If the Carrying Value of an asset is determined or adjusted pursuant to clauses (i), (ii) or (iv), such Carrying Value shall thereafter be adjusted by the Depreciation taken into account with respect to the asset for purposes of computing Profit and Loss.

 

Certificate : The Certificate of Limited Partnership of the Company filed with the Secretary of State, as amended from time to time in accordance with the Act.

 

Class A Limited Partner or Class A Limited Partners : As defined in the Preamble.

 

Class A Partners : As defined in the Preamble.

 

Class A Partnership Interests : The Partnership Interests of the Class A Partners.

 

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Class A Percentage Interests : The Percentage Interests of the Class A Partners.

 

Class B Limited Partners : As defined in the Preamble.

 

Class B Partnership Interests : The Partnership Interests of the Class B Limited Partners.

 

Class B Percentage Interests : The Percentage Interests of the Class B Limited Partners.

 

Code : The Internal Revenue Code of 1986, as in effect and hereafter amended.

 

Common Capital : A Class A Partner’s initial Common Capital is reflected in Section 4.1(b).

 

Common Capital Balance : A Class A Partner’s Common Capital Balance, as of any day, shall equal the excess of: (x) the dollar value of the Common Capital assigned to such Class A Partner under Section 4.1(b) , over (y) the amount of cash distributed to such Class A Partner pursuant to Sections 5.1(b)(iii) and 5.1(c)(iii) hereof. Such Common Capital Balance shall be decreased based on the date of any actual distribution. In the event a Class A Partner transfers all or any portion of its Class A Partnership Interest in accordance with the terms of this Agreement, its transferee shall succeed to the Common Capital Balance to the extent it relates to the transferred Class A Partnership Interest.

 

Company : The limited partnership continued pursuant to this Agreement, and any successor limited partnership that continues the business of the Company, and is a reformation or reconstitution of the Company.

 

Contract : As defined in Section 8.8(c) .

 

Contributing Partner : Any Class A Partner other than a Non-Contributing Partner.

 

Contribution Event : As defined in Section 10.1 .

 

Corporate Transaction Transfer : With respect to any Partner, a direct or indirect Transfer of all or substantially all of such Partner’s Partnership Interest in connection with a sale, merger, acquisition or initial public offering involving all or substantially all of the assets and interests of such Partner and its Affiliates, and as a result of which the Partnership Interest of such Partner continues to be held by a Person who, directly or through Affiliates, owns substantially all of the business and assets that were (immediately prior to such transaction) held by the transferring Partner and its Affiliates.

 

DC Corp Shares : As defined in Section 8.5(b) .

 

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Deadlock Response Period : As defined in Section 4.3(c) .

 

Defaulting Partner : A Partner or Partners with respect to which an Event of Default has occurred and is continuing.

 

Depreciation : For each Fiscal Year, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such Fiscal Year, except that if the Carrying Value of an asset differs from its Adjusted Basis on the Effective Date or at the beginning of a subsequent Fiscal Year, Depreciation shall be determined in a manner permitted by the Regulations promulgated under Section 704(c). To the extent consistent with such Regulations, Depreciation shall be an amount which bears the same ratio to the beginning Carrying Value as the federal income tax depreciation, amortization or other cost recovery deduction for the Fiscal Year (or part thereof) bears to such beginning Adjusted Basis.

 

Disabling Conduct : As defined in Section 6.3(a) .

 

Distribution or Distributions : A distribution of cash by the Company to a Partner or an Assignee on account of a Partnership Interest pursuant to Section 5.1 or Section 14.3 .

 

Document : As defined in Section 6.6 .

 

Drag Along Notice : As defined in Section 8.5(c) .

 

Drag Along Partners : As defined in Section 8.5(c) .

 

Drag Along Right : As defined in Section 8.5(b) .

 

Due Date : As defined in Section 4.3(b) .

 

Economic Interest : With respect to an Assignee, the Assignee’s rights to receive allocations of Profits and Losses and Distributions.

 

Effective Date : As defined in the Preamble.

 

Emergency Costs : Costs and expenses required to (a) correct a condition that if not corrected would endanger imminently the preservation or safety of the Property or the safety of tenants, guests or other persons lawfully on or using the Property, (b) avoid the imminent suspension of any necessary service in or to the Property, or (c) prevent any of the Partners from being subjected imminently to criminal or substantial civil penalties or damages.

 

Event of Default : As defined in Section 10.1 .

 

FF&E : Furniture, fixtures and equipment.

 

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Financing Proceeds : means the net proceeds from any financing, refinancing or borrowing by the Company or the net proceeds from any financing, refinancing or borrowing by its Subsidiaries that is received by the Company from its Subsidiaries, including in each instance the proceeds of a sale and leaseback on which no taxable gain is recognized for Federal income tax purposes, and any amount withdrawn from reserves, to the extent determined by the General Partner, in its commercially reasonable discretion, as properly allocable to a financing, refinancing or similar event, after deducting (i) any expenses incurred in connection therewith, and (ii) any amounts applied towards the payment of any indebtedness (including Partner loans), other obligation or expense of the Company or its Subsidiaries or the creation of any reserves commercially and reasonably deemed necessary by the General Partner or required by a Lender.

 

Fiscal Quarter : Each calendar quarter in each Fiscal Year.

 

Fiscal Year : The Fiscal Year means (i) the calendar year, or (ii) any portion of the period described in clause (ii) for which the Company is required to allocate Profits, Losses or other items of Company income, gain, loss or deduction pursuant to Article 5 of the Agreement.

 

Full KSL LP Put Price : As defined in Section 8.6(a) .

 

GAAP : United States generally accepted accounting principles consistently applied from accounting period to accounting period and within each such accounting period.

 

General Partner : As defined in the Preamble.

 

Hotel : That certain 679-room luxury hotel located in Coronado, California, and known as the Hotel del Coronado, including all land, improvements, fixtures, and appurtenances (as described in detail on Exhibit A ) owned by the Company (or one or more Subsidiary Affiliates).

 

Hotel Management Agreement : That certain management agreement, dated as of the Effective Date, by and between Tenant and Hotel Manager, providing for Hotel Manager’s management of the Property, as the same may be modified or amended from time to time, together with any replacement or renewal thereof, together with that certain Owner Agreement as attached thereto, if applicable.

 

Hotel Management Business . The management or operation of two or more hotels, resorts or other hospitality properties, whether through management contracts or leases.

 

Hotel Manager : KSL HdC Management Co., LLC, a Delaware limited liability company (and an Affiliate of KSL LP), or any other Hotel Manager Approved by the Class A Partners pursuant to this Agreement.

 

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Hotel Manager Termination Event : The termination of the Hotel Management Agreement pursuant to Sections 3.7 or 8.3 of the Hotel Management Agreement.

 

Initial Capital Contributions : The Capital Contributions made by the Partners pursuant to Section 4.2 .

 

KKR Interests : As defined in Section 8.7 .

 

KKR LP 180-Day Period : As defined in Section 8.7 .

 

KKR LP Put Notice : As defined in Section 8.7 .

 

KKR LP Sale Notice : As defined in Section 8.7(b) .

 

KKR Partners : As defined in Section 8.7 .

 

KKR Partners Put Price : As defined in Section 8.7 .

 

KKR Partners Put Right : As defined in Section 8.7 .

 

KSL LP 180-Day Period : As defined in Section 8.6 .

 

KSL LP Mini Put Right : a KSL LP Put Right with an aggregate value of no greater than $5,000,000.

 

KSL LP Put Notice : As defined in Section 8.6 .

 

KSL LP Put Price : As defined in Section 8.6 .

 

KSL LP Put Right : As defined in Section 8.6 .

 

KSL LP Sale Notice : As defined in Section 8.6(b) .

 

Lender : Any lender under a Loan.

 

Limited Partner or Limited Partners : The Class A Limited Partners and the Class B Limited Partners.

 

Liquidity Event : A transaction in which a Partner sells some or all of its Partnership Interest and/or DC Corp Shares, as applicable.

 

Loan or Loans : Any obligation for borrowed money, and any bonds, debentures, notes or other evidences of indebtedness that constitute an obligation and indebtedness of the Company or its Subsidiary Affiliates, including, without limitation, any line of credit or other credit facility for the Company’s (or its Subsidiary Affiliates’) working capital needs.

 

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Loan Documents : Collectively, the security agreements, financing statements and all other related loan documents entered into in connection with a Loan.

 

Losses : As defined in Section 5.2 .

 

Management Rights : The rights, if any, of a Partner to participate in the management of the Company, including the rights to receive information, to inspect and audit the books and records, and to vote on, consent to, or approve the action of the Company.

 

Maturity : With respect to any Loan, the maturity date of such Loan as set forth in the Loan Documents, including for this purpose the maturity date or accelerated maturity date, if applicable, that results by virtue of an acceleration of the maturity date of a Loan pursuant to the terms of the Loan Documents.

 

Minimum Gain on Nonrecourse Liability : As defined in Section 5.7(b) .

 

Minimum Gain on Partner Nonrecourse Debt : As defined in Regulations Section 1.704-2(i).

 

Mortgage : Any mortgage, deed of trust, or similar security document securing a Loan.

 

Multiple Property Transfer Transaction : With respect to any Partner, a direct or indirect Transfer of all or substantially all of such Partner’s Partnership Interest in connection with a sale, merger, acquisition or initial public offering involving the Property and at least one additional property of such Partner or its Affiliates, and as a result of which the Partnership Interest of such Partner continues to be held by a Person who, directly or through Affiliates, owns the Property and the additional property(ies) that were (immediately prior to such transaction) held directly or indirectly by the transferring Partner and its Affiliates.

 

Necessary Expenditures : (a) all Emergency Costs, (b) all fees and reimbursements owed by the Company under the Asset Management Agreement and (c) all other expenditures whether or not of a recurring nature that are necessary for the Company to preserve, operate, maintain, improve or protect the Property or operate the business of the Company, including payment of any amounts due under the Hotel Management Agreement, funding of a KSL LP Mini Put Right, insurance payments, real estate tax payments, interest payments on any Loans, utility costs, repair and maintenance costs, costs of compliance with federal, state and local laws, codes, rules or regulations, and any other operating expenses or capital expenses set forth in the Annual Budget or otherwise Approved by the Class A Partners and including payment of the principal balance of a Loan upon its Maturity, but excluding payment of the principal balance of a Loan prior to

 

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its Maturity, unless such payment is required pursuant to the terms of the Loan Documents or has otherwise been Approved by the Class A Partners.

 

Net Cash Flow : For any specified period, an amount equal to the sum of (i) all cash revenues received by the Company (directly or through distributions from its Subsidiaries) during such period from any source (other than Financing Proceeds, Sales Proceeds or Capital Contributions), including Net Membership Cash Flow (as defined in the Hotel Management Agreement)and (ii) amounts set aside as reserves during earlier periods where, and to the extent, such reserves are determined by the General Partner to be no longer reasonably necessary in the efficient conduct of the Company’s business (including its business conducted through its Subsidiaries) or otherwise required by the Hotel Management Agreement reduced by the sum of (w) cash expenditures by the Company or its Subsidiaries during such period for real estate taxes, management fees and other costs and expenses in connection with the normal conduct of the Company’s business, (x) all payments by the Company or its Subsidiaries during such period for all costs and expenses (including legal fees) of obtaining a Loan and of principal of and interest on all Loans and other obligations of the Company for borrowed money to the extent approved pursuant to the terms of this Agreement, (y) all cash expenditures by the Company or its Subsidiaries during such period for capital improvements and/or replacements in excess of amounts available therefor in the Property’s FF&E reserve, and (z) such reserves as commercially reasonably established by the General Partner, but only to the extent the payments and expenditures described in clauses (w), (x) and (y) are not made from funds received as Capital Contributions or Financing Proceeds or from cash reserves of the Company which were established during any earlier period.

 

Nominal Capital Contributions : As set forth on Exhibit E .

 

Non-Contributing Partner : A Partner or Partners with respect to which a Contribution Event has occurred and is continuing.

 

Nondefaulting Partner : Any Partner other than a Defaulting Partner.

 

Nonrecourse Deductions : As defined in Regulations Section 1.704-2(b)(1).

 

North Beach Development Project : That certain limited term occupancy condominium project and related improvements currently under construction on a portion of the Property and the related public improvements.

 

Offered Interest : As defined in Section 8.3(a) .

 

Offeree : As defined in Section 8.3(a) .

 

Offering Notice : As defined in Section 8.3(a) .

 

Offeror : As defined in Section 8.3(a) .

 

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One-Third Transfer : As defined in Section 8.1(a) .

 

Original Agreement : As defined in the Recitals.

 

Parallel Entity : The Company and a Person formed on behalf of the Company by the General Partner, in its commercially reasonable judgment, to undertake business opportunities with respect to Property in which all the Partners (or their Affiliates) shall be equity owners in the same proportion as in the Company and with the same rights and obligations. The Partners acknowledge that HdC North Beach Development, LLLP is a Parallel Entity.

 

Partners : The Class A Partners and the Class B Limited Partners.

 

Partnership Interest : With respect to a Partner, the Partner’s entire ownership interest in the Company and its Subsidiary Affiliates, including all of the Partner’s rights and obligations hereunder including, without limitation, its Economic Interest, Management Rights, voting rights and the obligation to comply with the terms and provisions of this Agreement.

 

Percentage Interest : The percentage interest from time to time of each Partner in the Company, as set forth in Section 4.1 , as such percentage interest is adjusted from time pursuant to any provision of this Agreement that provides for such adjustment.

 

Permitted Transferee : An Affiliate of a Partner.

 

Person : An individual, corporation, trust, association, unincorporated association, estate, partnership, joint venture, limited partnership, limited liability company or other legal entity, including a governmental entity.

 

Preferred Capital : A Class B Limited Partner’s initial Preferred Capital is reflected in Section 4.1(c).

 

Preferred Capital Balance : A Class B Limited Partner’s Preferred Capital Balance, as of any day, shall equal the excess of: (x) the dollar value of the Preferred Capital assigned to such Class B Limited Partner under Section 4.1(c) , over (y) the amount of cash distributed to such Class B Limited Partner pursuant to Sections 5.1(b)(ii), and 5.1(c)(ii) hereof. Such Preferred Capital Balance shall be decreased based on the date of any actual distribution. In the event a Class B Limited Partner transfers all or any portion of its Class B Partnership Interest in accordance with the terms of this Agreement, its transferee shall succeed to the Preferred Capital Balance to the extent it relates to the transferred Class B Partnership Interest.

 

Preferred Return : means twelve and one-half percent (12.5%) per annum of the average daily balance of each Class B Partner’s Preferred Capital Balance from the Effective Date and thereafter. The Preferred Return shall be determined on the basis of a

 

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year of 365 or 366 days, as the case may be, for the actual number of days in the period for which the Preferred Return is being determined, on a cumulative basis. The Partners agree that the Preferred Return is a market rate as of the Effective Time; provided , however , any Partner can require the Company to retain an independent reputable appraisal firm to determine the market rate for the Preferred Return as of the Effective Date.

 

Profit : As defined in Section 5.2 .

 

Prohibited Result : As defined in Section 15.19 .

 

Property : shall mean all tangible and intangible property, real, personal, or mixed owned by the Company or in which the Company has a beneficial interest, including the Hotel.

 

Purchase Agreement : As defined in Recital B .

 

Put Black-Out Period : As defined in Section 8.9 .

 

Put Price Formula : 10.25 multiplied by the Company’s Adjusted EBITDA with respect to the twelve (12) month-period prior to the date of determination, less (x) the outstanding amount of indebtedness for borrowed money of the Company (excluding the undrawn face amount of letters of credit) plus (y) cash and cash equivalents (as reduced by reasonable reserves, as determined in the reasonable discretion of the General Partner, for Necessary Expenditures and unpaid debt service and taxes for any prior years), which in the case of each of clauses (x) and (y) shall be calculated as of the date of delivery of the KSL LP Put Notice or the KKR LP Put Notice, as applicable, less (z) Actual Closing Costs incurred in connection with closing of the applicable Put Right.

 

Put Rights : Collectively or individually, as the context indicates, the KSL LP Put Right and the KKR Partners Put Right.

 

Rating Agency: As defined in the Loan Agreement.

 

Rating Agency Condition : with respect to any action, that each Rating Agency shall have been given ten days’ prior notice thereof and that each of the Rating Agencies shall have notified the Company in writing that such action will not result in a reduction, withdrawal or qualification of the then current rating by such Rating Agency of the Loan or any pool of loans of which the Loan forms a part. If no Rating Agency has rated securities backed in whole or in part by the Loan, the “Rating Agency Condition” shall mean, with respect to any action, that the Lender shall have notified the Company in writing that it consents to such action.

 

Recreation : HdC Recreation Holdings I, LLC.

 

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Regulations : The permanent and temporary regulations, and all amendments, modifications and supplements thereof, from time to time promulgated by the Secretary of the Treasury under the Code.

 

ROFR : As defined in Section 8.8(c) .

 

ROFR Notice : As defined in Section 8.8(c) .

 

Sale : As defined in Section 8.5(b) .

 

Sales Proceeds : Any net proceeds received by the Company (directly or through distributions from its Subsidiaries) from (i) the exchange, condemnation, eminent domain taking, casualty, sale or other disposition of all or substantially all of the Property, or (ii) the liquidation of the Property in connection with a dissolution of the Company, and any amount withdrawn from reserves, to the extent determined by the General Partner, in its commercially reasonable discretion, as properly allocable to amounts described in (i) or (ii) above, after deducting (A) any expenses incurred in connection therewith, and (B) any amounts applied towards the payment of any indebtedness (including Partner loans), other obligation or expense of the Company or the creation of any reserves reasonably deemed necessary by the General Partner.

 

Secretary of State : The Secretary of State of the State of Delaware.

 

South Beach Development : As defined in Section 6.4 .

 

Specially Designated National or Blocked Person : (i) Persons designated by the U.S. Department of Treasury’s Office of Foreign Assets Control, or other governmental entity, from time to time as a “specially designated national or blocked person” or similar status, (ii) a Person described in Section 1 of U.S. Executive Order 13224 issued on September 23, 2001, or (iii) a Person otherwise identified by government or legal authority as a Person with whom the Partners are prohibited from transacting business.

 

Strategic 180-Day Period : As defined in Section 8.8 .

 

Strategic Interests : As defined in Section 8.8 .

 

Strategic Partners : Collectively, SHC del GP, LLC and SHC del LP, LLC.

 

Strategic Partners ROFO/Sale Right : As defined in Section 8.8 .

 

Strategic REIT : means Strategic Hotel Capital, Inc.

 

Strategic ROFO/Sale Notice : As defined in Section 8.8 .

 

Strategic ROFO/Sale Price : As defined in Section 8.8 .

 

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Strategic ROFO/Sale Price Formula : An amount equal to the price set forth in the Strategic ROFO/Sale Notice (with respect to Section 8.8(a) ) or Contract (with respect to Section 8.8(c) ), as applicable less (x) the outstanding amount of indebtedness for borrowed money of the Company (excluding the undrawn face amount of letters of credit) plus (y) cash and cash equivalents (as reduced by reasonable reserves, as determined in the reasonable discretion of the General Partner, for Necessary Expenditures and unpaid debt service and taxes for any prior years) which in the case of each of clauses (x) and (y) shall be calculated as of the date of delivery of the Strategic ROFO/Sale Notice or the ROFO Notice, as applicable, less (z) Actual Closing Costs incurred in connection with closing of the Strategic Partners ROFO/Sale Right.

 

Subsidiaries, or each a Subsidiary : SHC Hotel Del Junior Mezz Partners, LP, a Delaware limited partnership, SHC Hotel Del Intermediate Mezz Partners, LP, a Delaware limited partnership, SHC Hotel Del Senior Mezz Partners, LP, a Delaware limited partnership, SHC Hotel Del Partners, LP, a Delaware limited partnership, and such other Persons formed by the General Partner as Subsidiaries or Subsidiary Affiliates of the Company in connection with the business of the Company.

 

Subsidiary Affiliates : As defined in Section 15.1 .

 

Tag Along Partner : As defined in Section 8.5(a) .

 

Tenant: Hotel Del Coronado, LP, a Delaware limited partnership.

 

Transfer and Transferred : A sale, assignment, transfer or other disposition (voluntarily or by operation of law) of, or the granting or creating of a lien, encumbrance or security interest in, a Partnership Interest.

 

Unfulfilled Additional Contributions : As defined in Section 4.3(c) .

 

ARTICLE 3.

BUSINESS, PURPOSES AND POWERS

 

Section 3.1 Business and Purpose . (a) The sole business and purpose of the Company shall be:

 

(i) to acquire, own, hold, develop, construct, lease, operate, manage, maintain, mortgage, improve, repair, encumber, finance, refinance, sell, redevelop, rehabilitate, improve and otherwise deal with and dispose of, directly or indirectly, through Subsidiaries and Subsidiary Affiliates, the Property; and

 

(ii) to conduct all activities reasonably necessary or desirable to accomplish the foregoing purposes and to do anything necessary or incidental to any of the foregoing, which in each case, is not a breach of this Agreement;

 

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(b) The Company may not engage in any other business or activity without the approval of all of the Class A Partners.

 

Section 3.2 Powers . Except as otherwise provided in this Section 3.2 , the Company shall have all powers of a limited partnership under the Act and the power to do all things necessary or convenient to operate its business and accomplish its purposes as described in Section 3.1 , including the following:

 

(a) to hold, operate, manage and exercise rights with respect to all Property;

 

(b) to sell, transfer, assign, convey, lease, encumber or otherwise dispose of or deal with all or any part of the Property and any and all rights or interests therein;

 

(c) to incur expenses and to enter into and carry out contracts, agreements and guaranties necessary to accomplish the business and purposes of the Company;

 

(d) to raise and provide such funds as may be necessary to further the business and purposes of the Company and to borrow money, incur liabilities and issue promissory notes and other evidences of indebtedness, and to secure the same by security interest or other lien on all or any part of the Property;

 

(e) to employ or retain, on behalf of the Company, such Persons as, the General Partner deems advisable in the operation and management of the business of the Company, including such accountants, attorneys and consultants as the General Partner deems appropriate, on such commercially reasonable terms and at such commercially reasonable compensation as the General Partner shall determine;

 

(f) to collect, receive and deposit all sums due or to become due to the Company;

 

(g) to hire and appoint agents and employees of the Company, to define their duties and to establish their compensation;

 

(h) to pay any and all taxes, charges and assessments that may be levied, assessed or imposed upon any Property;

 

(i) to demand, sue for, collect, recover and receive all goods, claims, debts, moneys, interest and demands whatsoever now due or that may hereafter become due or belong to the Company, including the right to institute any action, suit, or other legal proceedings for the recovery of any property, or any part or parts thereof, to the possession of which the Company may be entitled, and to make, execute and deliver receipts, releases and other discharges therefore under seal or otherwise;

 

(j) to make, execute, endorse, accept, collect and deliver any and all bills of exchange, checks, drafts and notes of the Company;

 

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(k) to defend, settle, adjust, compound, submit to arbitration and compromise all actions, suits, accounts, reckonings, claims and demands whatsoever that now are or hereafter shall be pending between the Company and any Person (other than disputes between or among Partners), at law or in equity;

 

(1) to form, organize, and operate the Subsidiaries and the Subsidiary Affiliates, in accordance with their respective organizational documents and resolutions as in effect on the Effective Date or, if later, their respective dates of formation or organization;

 

(m) to secure and maintain insurance against liability and property damage with respect to the activities of the Company; and

 

(n) to do and perform all acts and things necessary, appropriate, proper, advisable, incidental to, or convenient for, the furtherance and accomplishment of the business and purposes of the Company set forth in Section 3.1 .

 

Section 3.3 Limitations on Scope of Business . Except for the authority expressly granted to the General Partner in this Agreement, no Partner, attorney-in-fact, employee or other agent of the Company shall have any authority to bind or act for the Company or any other Partner in the carrying on of their respective businesses or activities.

 

ARTICLE 4.

PARTNERS, CAPITAL CONTRIBUTIONS AND FINANCING

 

Section 4.1 Identity of Partners and Percentage Interests .

 

(a) Partners . The Partners of the Company shall be the Class A Partners and the Class B Limited Partners.

 

(b) Class A Percentage Interests . The Class A Percentage Interests for the Class A Partners are as follows:

 

1	Estimates—TBD at closing.

 

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(c) Class B Percentage Interests . The initial Class B Percentage Interests and Preferred Capital of the respective Class B Limited Partners are as follows:

 

 

Section 4.2 Capital Accounts . Upon the execution and delivery of this Agreement each Partner will have the Capital Account set forth on Exhibit B .

 

Section 4.3 Additional Capital Contributions . The Class A Partners shall be required to make Additional Capital Contributions to the Company, for the purposes and in accordance with the procedures set forth below in this Section 4.3 :

 

(a) Necessary Expenditures and Other Costs . If at any time and from time to time after the Effective Date, the General Partner determines that the amount of the Company’s Necessary Expenditures exceeds the amount of funds then available to the Company from prior Capital Contributions, Property revenues, Loans and any reserves previously established by the Company, the Class A Partners shall make Additional Capital Contributions to fund such Necessary Expenditures. All such Additional Capital Contributions shall be made by the Class A Partners in cash or current funds, pro rata, in proportion to their respective Percentage Interests.

2	Estimates—TBD at closing.

 

3	Estimates—TBD at closing.

 

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(b) Procedure For Additional Capital Contributions Not Due to Deadlock . (i) If, as and when Additional Capital Contributions are (i) required as determined pursuant to Section 4.3(a) or (ii) Approved by the Class A Partners pursuant to Section 6.4 hereof, the General Partner shall deliver to each Class A Partner a written notice requesting such Additional Capital Contributions (a “ Capital Call Notice ”). Any Capital Call Notice shall specify the date (the “ Due Date ”) on or before which such funds are required by the Company, which shall be at least twenty-five (25) days after delivery of the Capital Call Notice except for Additional Capital Contributions for Emergency Costs, which shall be payable within ten (10) days after delivery of the Capital Call Notice. The Capital Call Notice shall specify the use of the proceeds of the contributions to be made. Each Class A Partner shall, on or before the Due Date, pay to the Company in cash or current funds such Class A Partner’s proportionate share of the amount specified in the Capital Call Notice in accordance with its Percentage Interest. For purposes of Section 10.1(a) , it shall be a Contribution Event as to a Class A Partner if the Class A Partner does not make the payment required by any Capital Call Notice by the applicable Due Date.

 

(c) Procedure For Additional Contributions In the Event of a Deadlock . In the event the General Partner is not able to obtain the Approval of the Class A Partners for an Additional Capital Contribution and the General Partner determines that the failure to obtain Additional Capital Contributions would have a material and adverse effect on the Company, the General Partner may give written notice (a “ Subscription Notice ”) thereof to the Class A Partners to such effect, setting forth in the Subscription Notice the amount or amounts which it believes to be required by the Company (the “ Additional Contributions ”), and the terms and conditions on which it proposes to obtain the Additional Contributions. The terms and conditions of such Subscription Notice may include preferential rights on distributions and liquidation and class voting. The Subscription Notice shall include a term sheet detailing the terms of the Additional Contributions (the “ Term Sheet ”). The Class A Partners shall have the right, for a period of thirty (30) days after the date of the Subscription Notice (the “ Deadlock Response Period ”), to subscribe for their pro rata share (in accordance with their respective Class A Percentage Interests) of the Additional Contributions. During the Deadlock Response Period, the Class A Partners may commit to subscribe for some or all of any Additional Contributions not taken up within the Deadlock Response Period (the “ Unfulfilled Additional Contributions ”). Any Unfulfilled Additional Contributions shall be either (i) sold to the Class A Partners pursuant to their commitments to purchase such Unfulfilled Additional Contributions or (ii) re-offered to the other Class A Partners who have subscribed to make Additional Contributions as nearly as practicable in accordance with their Percentage Interests. If the Class A Partners do not subscribe for all the requested Additional Contributions, the General Partner may offer to third parties all or some of the Additional Contributions in accordance with the terms and conditions offered to the Partners. If, as a condition to subscribing for such Additional Contributions, a third party conditions its purchase on the acquisition of a minimum amount of Additional Contributions, the General Partner may, in its sole discretion, reduce on a pro rata basis

 

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the amounts which the subscribing Class A Partners may acquire. If the General Partner is unable to obtain subscriptions for all of the amount of Additional Contributions (whether from existing Class A Partners or other persons) within ninety (90) days, the General Partner may issue a revised Subscription Notice in accordance with this Section 4.3(c) . Once Additional Contributions are fully subscribed, the General Partner shall prepare an amendment to this Agreement reflecting any terms or any provisions included in the Term Sheet which require such an amendment, if any, and such amendment shall be deemed in full force and effect and the rights of all Partners shall be modified in accordance therewith.

 

(d) Class A Partners’ Obligations Several And Not Joint . The obligations of the Class A Partners to make Additional Capital Contributions pursuant to this Section 4.3 are several and not joint. If no Class A Partner makes an Additional Capital Contribution as required pursuant to clauses (a) and (b) of this Section 4.3 , the General Partner shall attempt to raise such Additional Capital Contributions pursuant to Section 4.3(c).

 

Section 4.4 Capital Accounts . (a) The Company shall establish and maintain a Capital Account for each Partner in accordance with the provisions of Section 704(b) of the Code and the Regulations thereunder.

 

(b) Each Partner’s Capital Account shall be maintained in accordance with the following provisions:

 

(i) Each Partner’s Capital Account shall be credited (increased) with the amounts of such Partner’s Capital Contributions (taking into account the amount of cash contributed to the Company by such Partner and the Carrying Value of any property contributed to the Company by such Partner (net of any liabilities secured by such contributed property that the Company is considered to assume or take subject to under Section 752 of the Code)), such Partner’s distributive share of Profits and any items in the nature of income or gain which are specially allocated to the Partner pursuant to Article 5 , and the amount of recourse liabilities of the Company assumed by such Partner as described in Section 1.704-1(b)(2)(iv)(c) of the Regulations or which are secured by any property distributed by the Company to such Partner;

 

(ii) Each Partner’s Capital Account shall be debited (decreased) with the amounts of cash and the Carrying Value of any property distributed by the Company to such Partner pursuant to any provision of this Agreement (net of any liabilities secured by such contributed property that the Company is considered to assume or take subject to under Section 752 of the Code), such Partner’s distributive share of Losses and any items in the nature of expenses or losses which are specially allocated to the Partner pursuant to Article 5 , and the amount of any liabilities of the Partner assumed by the Company as described in Section 1.704-1(b)(2)(iv)(c) of the Regulations;

 

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(iii) If all or a portion of a Partner’s Partnership Interest is Transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the Transferred Partnership Interest; and

 

(iv) In determining the amount of any liability for purposes of this Section 4.4(b) , Section 752(c) of the Code and any other applicable provisions of the Code and Regulations shall be taken into account.

 

This Section 4.4(b) and other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. If the General Partner, with the advice of the Company’s independent certified public accountants or legal counsel, reasonably determines that it is prudent to modify the manner in which the Capital Accounts, or any charges or credits thereto (including charges or credits relating to liabilities which are secured by contributions or distributed property or which are assumed by the Company or by Partners), are computed in order to comply with such Regulations, the General Partner may make such modification, but only if it is not likely to have a material effect on the amounts to be distributed to any Partner pursuant to Section 5.1 or pursuant to Section 14.3 upon the dissolution of the Company. The General Partner, with the Approval of the Class A Limited Partners, also shall make any adjustments that may be necessary or appropriate to maintain equality between the Capital Accounts of the Partners and the amount of capital reflected on the Company’s balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(g).

 

Section 4.5 Return of Capital Contributions . No Partner or Assignee shall be entitled to demand the return of the Partner’s or Assignee’s Capital Account or Capital Contribution at any particular time, except upon dissolution of the Company. No Partner or Assignee shall be entitled at any time to demand or receive property other than cash. Unless otherwise provided by law, no Partner or Assignee shall be personally liable for the return or repayment of all or any part of any other Partner’s or Assignee’s Capital Account or Capital Contribution, it being expressly agreed that any such return of capital pursuant to this Agreement shall be made solely from the assets (which shall not include any right of contribution from a Partner or Assignee) of the Company.

 

Section 4.6 No Third Party Beneficiary Rights . The provisions of this Article 4 are not intended to be for the benefit of any creditor or any other Person (other than a Partner in its, his or her capacity as such) to whom any debts, liabilities or obligations are owed by (or who otherwise has any claim against) the Company or any of the Partners; and no such creditor or other Person shall obtain any right under any of such provisions or shall by reason of any of such provisions make any claim in respect of any debt, liability or obligation (or otherwise) against the Company nor any of the Partners.

 

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Nothing in this Section 4.6 shall impair or affect any security or pledge agreement granted by the Company to the holder of a Loan.

 

Section 4.7 Certain Capital Contributions . The Partners intend (i) that the General Partner or SHC LP make 100% of the Capital Contributions required by the Company to fund the Company’s indirect investment, through the Subsidiaries, in SHC Hotel Del Tenant Corp., that any future equity capital required by SHC Hotel Del Tenant Corp. be funded, through the Subsidiaries, directly or indirectly solely by the General Partner or SHC LP (including by use of amounts otherwise allocable to them), and that notwithstanding the acquisition of such investment for the General Partner’s or SHC LP’s account, the allocable portion of the Company’s direct and indirect interests in the Subsidiaries and the Tenant shall become and remain property of the Company and the respective Subsidiaries and be deemed part of the capital contributed by the General Partner; and (ii) that the Class A Limited Partners other than SHC LP, pro rata in accordance with their Class A Percentage Interests, make 100% of the Capital Contributions required by the Company to fund the Company’s indirect investment, through the Subsidiaries, in its interest in the Tenant, that any future equity capital required by the Tenant, to the extent required to be funded directly by SHC Hotel Del Tenant Corp. be funded, through the Subsidiaries, directly or indirectly solely by the Class A Limited Partners other than SHC LP, pro rata in accordance with their Class A Percentage Interests (including by use of amounts otherwise allocable to them), and that notwithstanding the acquisition of such investment for the Class A Limited Partners’ other than SHC LP’s accounts, the allocable portion of the Company’s direct and indirect interests in the Subsidiaries and the Tenant shall become and remain property of the Company and the respective Subsidiaries and be deemed part of the capital contributed by the Class A Limited Partners other than SHC LP, consistent, in all respects, and for all purposes, with Rev. Rul. 55-39, 1955-1 CB 403.

 

ARTICLE 5.

ALLOCATIONS AND DISTRIBUTIONS

 

Section 5.1 Distributions . Subject to Section 5.1(d), Net Cash Flow, Financing Proceeds, and Sales Proceeds shall be distributed as follows:

 

(a) Net Cash Flow . The General Partner shall distribute Net Cash Flow among the Partners, quarterly within forty-five (45) days after the end of each Fiscal Quarter in the following order of priority:

 

(i) First, to the Class B Limited Partners, in proportion to their respective Class B Percentage Interests, until each Class B Limited Partner has been distributed under this Section 5.1(a)(i) and Sections 5.1(b)(i) and 5.1(c)(i) an amount equal to its aggregate Preferred Return; and

 

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(ii) The balance, to the Class A Partners, in proportion to their respective Class A Percentage Interests.

 

(b) Financing Proceeds . Financing Proceeds shall be applied and distributed in the following order of priority:

 

(i) First, to the Class B Limited Partners, in proportion to their respective Class B Percentage Interests, until each Class B Limited Partner has been distributed under this Section 5.1(b)(i) and Sections 5.1(a)(i) and 5.1(c)(i) , an amount equal to its aggregate Preferred Return;

 

(ii) Second, to the Class B Limited Partners, in proportion to their respective Class B Percentage Interests, until each Class B Limited Partner’s Preferred Capital Balance is reduced to zero;

 

(iii) Third, to the Class A Partners, in proportion to their respective Common Capital balances, until each Class A Partner’s Common Capital Balance is reduced to zero; and

 

(iv) The balance, to the Class A Partners, in proportion to their respective Class A Percentage Interests.

 

(c) Sales Proceeds . Sales Proceeds shall be applied and distributed in the following order of priority:

 

(i) First, to the Class B Limited Partners, in proportion to their respective Class B Percentage Interests, until each Class B Limited Partner has been distributed under this Section 5.1(c)(i) and Sections 5.1(a)(i) and 5.1(b)(i) , an amount equal to its aggregate Preferred Return;

 

(ii) Second, to the Class B Limited Partners, in proportion to their respective Class B Percentage Interests, until each Class B Limited Partner’s Preferred Capital Balance is reduced to zero;

 

(iii) Third, to the Class A Partners, in proportion to their respective Common Capital Balances, until each Class A Partner’s Common Capital Balance is reduced to zero; and

 

(iv) The balance, to the Class A Partners, in proportion to their respective Class A Percentage Interests.

 

(d) Liquidating Distributions . Subject to Section 14.3 , notwithstanding any provision of this Section 5.1 to the contrary, in the event the Company (or a Partner’s

 

28

Partnership Interest therein) is “liquidated” within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g), then a distribution of all cash and property, regardless of source, shall be made pursuant to this Section 5.1(d) to the Partners (or such Partner, as appropriate), in accordance with their positive Capital Account balances, after all contributions, distributions and allocations have been made for all periods pursuant to this Agreement, in compliance with Treasury Regulations Section 1.704-1(b)(2)(ii)(b)(2); provided, that, notwithstanding anything to the contrary, immediately prior to the liquidation of the Company, the stock of SHC Del Tenant Corp. shall be distributed entirely to the General Partner or SHC LP, the Company’s indirect interest in the Tenant held directly by SHC Hotel Del Partners, L.P. shall be distributed solely to the Class A Limited Partners other than SHC LP, and, to the extent any such distribution results in or increases a negative Capital Account balance to any such Partner, after taking into account the allocation provisions of Sections 5.2 , 5.3 and 5.4 , consistent with liquidating in accordance with positive Capital Account balances, any such Partner shall immediately contribute capital to the Company equal to the lesser of (a) the deficit caused or increased by such distribution or (b) the aggregate positive Capital Account balance of the other Partners’ (if any) which would remain after making the distributions required by this Section 5.1(d) .

 

(e) Distributions from Hotel Del Coronado, LP . Notwithstanding any provision of this Section 5.1 to the contrary, any cash or other property distributions made to SHC Hotel Del Tenant Corp. from Hotel Del Coronado, LP in a Fiscal Year shall be deemed included as part of the aggregate cash received by the Company with respect to such Fiscal Year, and shall retain the same character as in the hands of Hotel Del Coronado, L.P. (i.e., Net Cash Flow, Sales Proceeds, or Financing Proceeds) and, for purposes of calculating the amounts distributed under this Section 5.1 with respect to such Fiscal Year, such amounts shall be deemed distributed directly to the General Partner or SHC LP (provided however, such deemed distributions shall not be taken into account for purposes of adjustments to the General Partner’s Capital Account pursuant to the provisions of Section 4.4(b)(ii) or the allocations required by Section 5.4(k) ), and any subsequent dividends paid out of SHC Hotel Del Tenant Corp. shall be solely payable to the General Partner or SHC LP, and any cash or other property distributions made directly to SHC Hotel Del Partners, L.P. from Hotel Del Coronado, LP in a Fiscal Year shall be deemed included as part of the aggregate cash received by the Company with respect to such Fiscal Year, and shall retain the same character as in the hands of Hotel Del Coronado, L.P. (i.e., Net Cash Flow, Sales Proceeds, or Financing Proceeds) and, for purposes of calculating the amounts distributed under this Section 5.1 with respect to such Fiscal Year, such amounts shall be deemed distributed directly to the Class A Limited Partners other than SHC LP ( provided , however , such deemed distributions shall not be taken into account for purposes of adjustments to the Class A Limited Partners’ Capital Accounts pursuant to the provisions of Section 4.4(b)(ii) ), and any subsequent distributions made by SHC Hotel Del Partners, L.P. and properly allocable to such amounts shall be solely payable to the Class A Limited Partners other than SHC LP.

 

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Section 5.2 Determination of Profits and Losses . For purposes of this Agreement, the profit (“ Profit ”) or loss (“ Loss ”) of the Company for each Fiscal Year shall be the net income or net loss of the Company, as the case may be, for such Fiscal Year as determined for Federal income tax purposes, but computed with the following adjustments:

 

(a) without regard to any adjustment to basis pursuant to Section 743 of the Code (except as provided in Section 5.2(g) );

 

(b) by excluding gain or losses with respect to Sales Proceeds;

 

(c) by taking into account items of deduction attributable to any Property of the Company based upon the Carrying Value of the Property;

 

(d) by including as an item of gross income any tax-exempt income received by the Company;

 

(e) by treating as a deductible expense any expenditure of the Company described in Section 705(a)(2)(B) of the Code;

 

(f) in the event the Carrying Value of a Property is adjusted pursuant to clauses (ii) or (iii) of the definition thereof, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such Property, shall be treated as net gain or net loss referred to in paragraph (b) of this Section 5.2(f) and shall be excluded from the computation of Profit and Loss; and

 

(g) to the extent an adjustment to the Adjusted Basis of any asset of the Company pursuant to Sections 734(b) or 743(b) of the Code is required by Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken into account in determining Capital Accounts as a result of a distribution other than in complete liquidation of a Partner’s Partnership Interest, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the Adjusted Basis of the asset) or loss (if the adjustment decreases the Adjusted Basis of the asset) from the disposition of the asset shall be treated as net gain or net loss referred to in paragraph (b) of this Section 5.2(g) and shall be excluded from the computation of Profits and Losses.

 

(h) Notwithstanding any other provisions of this definition, any items which are specially allocated pursuant to Section 5.4 hereof shall not be taken into account in computing Profits or Losses.

 

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Section 5.3 General Allocation Rules .

 

(a) Profits . Except as otherwise provided in Section 5.4 and subject to Section 5.3(c) , Profits for any Fiscal Year shall be allocated among the Partners as follows:

 

(i) First, to the Class B Limited Partners, in the same ratio and in reverse order of the allocations made to the Class B Limited Partners under Section 5.3(b)(iii) and 5.3(d)(iii) for each Fiscal Year to the extent of the excess of (a) the allocations to each Class B Limited Partner of Losses pursuant to Section 5.3(b)(iii) and losses in respect of Sales Proceeds pursuant to Section 5.3(d)(iii) for all current and all prior Fiscal Years, over (b) allocations to each Class B Limited Partner of Profits pursuant to this Section 5.3(a)(i) and gains in respect of Sales Proceeds pursuant to Section 5.3(c)(i) for the current and all prior Fiscal Years;

 

(ii) Second, to the Class A Partners, in the same ratio and in reverse order of the allocations made to the Class A Partners under Section 5.3(b)(ii) and Section 5.3(d)(ii) for each Fiscal Year to the extent of the excess of (a) the allocations to each Class A Partner of Losses pursuant to Section 5.3(b)(ii) and losses in respect of Sales Proceeds pursuant to Section 5.3(d)(ii) for the current and all prior Fiscal Years, over (b) allocations to each Class A Partner of Profits pursuant to this Section 5.3(a)(ii) and gains in respect of Sales Proceeds pursuant to Section 5.3(c)(ii) for the current and all prior Fiscal Years;

 

(iii) Third, to the Class B Limited Partners, in proportion to their respective Class B Percentage Interests, in an amount equal to the excess (if any) of: (x) the Preferred Return; over (y) any amounts previously allocated under Sections 5.3(a)(iii) and 5.3(c)(iii) ; and

 

(iv) Thereafter, to the Class A Partners, in proportion to their Class A Percentage Interests.

 

(b) Losses . Except as otherwise provided in Section 5.4 , Losses for any Fiscal Year shall be allocated among the Class A Partners as follows:

 

(i) First, to the Class A Partners, in the same ratio and in reverse order of the allocations made to the Class A Partners under Section 5.3(a)(iv) and Section 5.3(c)(iv) for each Fiscal Year to the extent of the excess of (a) the allocations to each Class A Partner of Profits pursuant to Section 5.3(a)(iv) and gains in respect of Sales Proceeds pursuant to Section 5.3(c)(iv) for the current and all prior Fiscal Years, over (b) allocations to such Class A Partner of Losses pursuant to this Section 5.3(b)(i) and losses in respect of Sales Proceeds pursuant to Section 5.3(d)(i) for the current and all prior Fiscal Years;

 

(ii) Second, to the Class A Partners, in proportion to and to the extent of the aggregate of each Class A Partner’s respective Common Capital and any Additional Capital Contributions of such Partner after the Effective Date;

 

(iii) Third, to the Class B Limited Partners in proportion to and to the extent of the amounts necessary to reduce each Class B Limited Partner’s respective Adjusted Capital Account Balance to zero; and

 

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(iv) Thereafter, to the Class A Partners in proportion to their respective Class A Percentage Interests.

 

(c) Gains in Respect of Sales Proceeds . Except as otherwise provided in Section 5.4 , gains in respect of Sales Proceeds (for all purposes of this Agreement, any such gains shall also include gains recharacterized as ordinary income under any provision of the Code) shall be allocated among the Partners as follows:

 

(i) First, to the Class B Limited Partners, in the same ratio and in reverse order of the allocations made to the Class B Limited Partners under Section 5.3(b)(iii) and 5.3(d)(iii) for each Fiscal Year to the extent of the excess of (a) the allocations to each Class B Limited Partner of Losses pursuant to Section 5.3(b)(iii) and losses in respect of Sales Proceeds pursuant to Section 5.3(d)(iii) for all current and all prior Fiscal Years, over (b) allocations to each Class B Limited Partner of Profits pursuant to Section 5.3(a)(i) and gains in respect of Sales Proceeds pursuant to this Section 5.3(c)(i) for the current and all prior Fiscal Years;

 

(ii) Second, to the Class A Partners, in the same ratio and in reverse order of the allocations made to the Class A Partners under Section 5.3(b)(ii) and Section 5.3(d)(ii) for each Fiscal Year to the extent of the excess of (a) the allocations to each Class A Partner of Losses pursuant to Section 5.3(b)(ii) and losses in respect of Sales Proceeds pursuant to Section 5.3(d)(ii) for the current and all prior Fiscal Years, over (b) allocations to each Class A Partner of Profits pursuant to Section 5.3(a)(ii) and gains in respect of Sales Proceeds pursuant to this Section 5.3(c)(ii) for the current and all prior Fiscal Years;

 

(iii) Third, to the Class B Limited Partners, in proportion to their respective Class B Percentage Interests, in an amount equal to the excess (if any) of: (x) the Preferred Return; over (y) any amounts previously allocated under Sections 5.3(a)(ii) and 5.3(c)(ii); and

 

(iv) Thereafter, to the Class A Partners in accordance with their respective Class A Percentage Interests.

 

(d) Losses in Respect of Sales Proceeds . Except as otherwise provided in Section 5.4 , losses in respect of Sales Proceeds shall be allocated among the Partners as follows:

 

(i) First, to the Class A Partners, in the same ratio and in reverse order of the allocations made to the Class A Partners under Section 5.3(a)(iv) and Section 5.3(c)(iv) for each Fiscal Year to the extent of the excess of (a) the allocations to each Class A Partner of Profits pursuant to Section 5.3(a)(iv) and gains in respect of Sales Proceeds pursuant to Section 5.3(c)(iv) for the current and all prior Fiscal Years, over (b) the allocations to such Class A Partner of Losses pursuant to Section 5.3(b)(i) and loss in

 

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respect of Sales Proceeds pursuant to this Section 5.3(d)(i) for the current and all prior Fiscal Years;

 

(ii) Second, to the Class A Partners, in proportion to and to the extent of the aggregate of each Class A Partner’s respective Common Capital and any Additional Capital Contributions of such Partner after the Effective Date;

 

(iii) Third, to the Class B Limited Partners in proportion to and to the extent of the amounts necessary to reduce each Class B Limited Partner’s respective Adjusted Capital Account Balance to zero; and

 

(iv) Thereafter, to the Class A Partners in proportion to their respective Class A Percentage Interests.

 

Section 5.4 Priority Allocations. The following allocations shall be made in the following order of priority:

 

(a) Minimum Gain Chargeback - Nonrecourse Liability . If there is a net decrease in the Minimum Gain on Nonrecourse Liability during any Fiscal Year, the Partners shall be allocated items of income and gain for the Fiscal Year, before any other allocation of Company items described in Code Section 704(b) is made for the Fiscal Year (and, if necessary subsequent Fiscal Years), in the amounts and in the proportions required by Regulations Sections 1.704-2(f) and 1.704-2(j)(2)(i). The allocations referred to in this paragraph shall be interpreted and applied to satisfy the requirements of Regulations Section 1.704-2(f).

 

(b) Minimum Gain Chargeback - Partner Nonrecourse Debt . If there is a decrease in the Minimum Gain on Partner Nonrecourse Debt during a Fiscal Year, then any Partner who has a share of the Minimum Gain on Partner Nonrecourse Debt at the beginning of the Fiscal Year shall be allocated items of income and gain for the Fiscal Year, before any other allocation of Company items described in Code Section 704(b) is made for the Fiscal Year (and, if necessary, subsequent Fiscal Years), in the amounts and in the proportions required by Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii). The allocations referred to in this paragraph shall be interpreted and applied to satisfy the requirements of Regulations Section 1.704-2(i)(4).

 

(c) Qualified Income Offset . In the event a Limited Partner unexpectedly receives an adjustment, allocation or distributions described in Regulations Section 1.704-1(b)(ii)(d)(4), (5), or (6) which causes or increases a negative Adjusted Capital Account Balance as of the end of any Fiscal Year, then items of income and gain for the Fiscal Year (and, if necessary, subsequent Fiscal Years) shall be allocated as quickly as possible among all Limited Partners who have such negative balances in their Adjusted Capital Account Balances, pro rata, in proportion to their respective negative balances to the extent necessary to reduce the negative balance of each Limited Partner’s Adjusted

 

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Capital Account Balance to an amount equal to zero; provided that an allocation pursuant to this Section 5.4(c) shall be made only if and to the extent that such Limited Partner would have such a negative balance in the Partner’s Adjusted Capital Account Balance after all other allocations provided for in this Article 5 have been tentatively made as if this Section 5.4(c) were not a part of this Agreement. The allocations referred to in this paragr