Comfort Inn 2011 Annual Report Download - page 107

Table of Contents
have a material adverse effect on the Company's business, financial position, results of operations or cash flows.
In June 2008, the Company guaranteed $1 million of a bank loan funding a franchisee's construction of a Cambria Suites in Columbus, Ohio. During
the third quarter of 2011, the Company was released from its obligation under the guaranty.
In July 2008, the Company guaranteed $1 million of a bank loan funding a franchisee's construction of a Cambria Suites in Noblesville, Indiana.
During the fourth quarter of 2011, the Company was released from its obligation under the guaranty.
The Company has the following commitments outstanding:
•The Company occasionally provides financing in the form of forgivable promissory notes or cash incentives to franchisees for property
improvements, hotel development efforts and other purposes. At December 31, 2011, the Company had commitments to extend an additional $5.8
million for these purposes provided certain conditions are met by its franchisees, of which $3.2 million is expected to be advanced in the next twelve
months.
•The Company has entered into a commitment to invest no less than $3.0 million for 50% ownership in a joint venture, provided certain
contingencies are met. The Company expects to fund this commitment within the next three years.
•The Company has a $3.1 million loan commitment, provided certain conditions are met by the borrower, related to the construction of a
hotel under one of the Company's brands. This commitment is expected to be funded in the next twelve months.
On July 11, 2011, Choice Hotels International Services Corp., a wholly-owned subsidiary of the Company, as tenant, and F.P. Rockville II Limited
Partnership (the “Landlord”), as landlord, executed an Office Lease (the “Lease”) for office space to which the Company intends to relocate its corporate
headquarters. The obligations of the tenant under the Lease have been
guaranteed by the Company. The relocation is expected to occur upon construction of an office building, completion of other
improvements to the property and building, and satisfaction of other conditions and contingencies set forth in the Lease,
including significant conditions related to the scope and timing of the construction, development and permitting of the office
building.
The target commencement date for the Lease, which is the date on which the Company will take occupancy of its leased premises for purposes of
commencing an interior fit-out of the premises, is December 1, 2012. The target rent commencement date for the Lease, which is the date on which the
Company will begin to make rental payments to the Landlord under the Lease, is June 1, 2013. The Lease runs for an initial term of 10 years from the rent
commencement date. The leased premises will consist of approximately 138,000 square feet of office space in a to-be constructed office building located in
Rockville, Maryland (the “Building”). The Company has an option to extend the Lease beyond the initial term for up to 15 years at then current fair market
rent.
As part of the consideration to the Company for execution of the Lease, the Landlord agreed to provide the Company, during the Lease term, a cash flow
participation and preference in the cash flow of the Landlord (“Cash Flow Participation”). The Cash Flow Participation is equal to the greater of: (1) $1.58
times the total rentable square feet of the initial Leased Premises along with any creditable square footage, each determined one-time only as of the Rent
Commencement Date, per lease year (“Fixed Payment Amount”), or (2) seven percent ( 7%) of the annual distributable cash flow (as defined in the Lease)
including excess proceeds of sale or refinancing, provided, however, in the event the distributable cash flow is less than the Fixed Payment Amount in any
lease year, such shortfall shall accrue and earn interest at six percent ( 6%) compounded annually to be paid out from the next available cash flow. The Cash
Flow Participation shall be payable in arrears not later than July 31 (beginning July 31, 2014) for the preceding Lease year. The Cash Flow Participation shall
continue during the Lease and any extension options unless the Landlord no longer owns the Building, the Company is in default under the Lease or the
Company no longer leases at least four floors of the building for office use.
No rent is due under the Lease until the rent commencement date, which is currently targeted to occur on or about June 1, 2013. Thereafter, the
annual rent is established at a specific minimum amount and is re-set to a new minimum amount each year. Subject to one or more applicable adjustments set
forth in the Lease, the Company's minimum annual rent amount, without setoff, deduction for improvement allowances or abatement of any kind, during the
initial term ranges from approximately $5.5 million during the initial year to approximately $7.6 million during the final year. During the initial 10-year term
of the Lease, the minimum expected rent payments by the Company are expected to be approximately $67.6 million. In addition, beginning on or about the
first anniversary of the rent commencement date, the Company is obligated to pay its proportionate share of increases in the cost of operating, managing and
maintaining the Building.
In the ordinary course of business, the Company enters into numerous agreements that contain standard indemnities whereby the Company indemnifies
another party for breaches of representations and warranties. Such indemnifications are
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