– Yes to both. K
Monday, June 04, 2012 3:44 PM
Verne, B. Michael
Followingup my phone message to you from earlier today, I am hoping for your guidance onthe following set of facts, which is a new situation for me:
Myclient, company A (its own UPE), owns and operates a chain of hotels. At theend of this year, Company A plans to convert to a REIT, after which it willcontinue to own the hotels but will no longer directly operate them. A part ofthe conversion process, Company A will enter into the following transactioninvolving with Company B, a third party with no existing relationship toCompany A:
1) After filing HSR, but prior to closing, Company A willform a new, indirect wholly-owned LLC subsidiary, "Transfer Sub".
2) Company A will cause Transfer Sub to enter intomanagement agreements with various other subsidiaries of Company A, pursuant towhich Transfer Sub will have the right to manage all of Company A's hotels.
3) Prior to closing, Company A will also transfer toTransfer Sub certain assets associated with operating the hotels, primarilyconsisting of employee contracts.
4) At closing, Company B will acquire from Company A (a)100% of the membership interests of Transfer Sub and (b) certain IP assets(service marks, etc.) associated with operating the hotels. Company A'spurchase of the membership interests of Transfer Sub will allow Company A to assumeTransfer Sub's management agreements and employee contracts. The totalconsideration for the transaction is in excess of $200 million.
CompanyB will NOT acquire any real property in this transaction.
1) My understanding is that, because no real property isbeing acquired, this transaction is not eligible for the hotel real propertyexemption under 802.2(e), even though all assets held by Transfer Sub and theIP assets being acquired are all assets incidental to the operation of a hotel.Company A & Company B meet the size of person tests, and sizeof-transaction test is met, so this transaction is reportable. Please confirmwhether this is correct.
2) Assuming the transaction is reportable, how shouldCompany A report NAICS revenues in Item 5? Transfer Sub has no 2011 revenuesbecause it was not in existence in 2011, and its only means of generatingrevenue, the management agreements, did not exist in 2011. Similarly, the IPinterests being acquired by Company B are not revenue-generating assets, butare simply used in branding and operating the hotels that will be managed byCompany B. Should Company A report zero 2011 revenues associated with TransferSub and the IP assets?