Starwood 2004 Annual Report Download - page 54

management services in 2003 and 2002, and $42,000 in 2004. We believe that the terms of the management
agreement were at or better than market terms. The management agreement terminated on September 30,
2003 and the management company has since managed the health club and spa on a month-to-month
agreement. We and the management company continued this arrangement until we closed the health club and
spa in June 2004 for conversion to a Bliss spa.
An entity in which Mr. Sternlicht has an indirect interest held 259 limited partnership units in Westin
Hotels Limited Partnership (the owner of the Westin Michigan Avenue Hotel.) The units were acquired in
1995 and 1996, prior to our acquisition of Westin. The entity tendered all of its units to us in connection with
our tender oÅer. We purchased all shares tendered to us and the entity received approximately $190,000 for its
units.
Other Management-Related Investments. Innisbrook. Mr. Sternlicht has a 38% indirect interest in an
entity (the ""Innisbrook Entity'') that owned the common area facilities and certain undeveloped land (but not
the hotel) at the Innisbrook Resort. In May 1997, the Innisbrook Entity entered into a management
agreement for the Innisbrook Resort with Westin, which was then a privately held company partly owned by
Starwood Capital and Goldman, Sachs & Co. When we acquired Westin in January 1998, we acquired
Westin's rights and obligations under the management and other related agreements. Under these agreements,
the hotel manager was obligated to loan up to $12.5 million to the owner in the event certain performance
levels were not achieved. Management fees earned under these agreements were $636,000, $512,000 and
$584,000 in 2004, 2003 and 2002, respectively. The operations of the Innisbrook Entity did not and continue
not to generate suÇcient cash Öow to service its outstanding debt and current obligations for much of the past
several years.
We reached an agreement in 2004 with the Innisbrook Entity and its primary lender regarding certain
outstanding obligations of the Innisbrook Entity, including approximately $11 million (consisting principally
of loans made by us as hotel manager under the $12.5 million obligation) payable to us upon certain events.
Pursuant to the agreement, the Innisbrook Entity conveyed the Innisbrook Resort to the lender (in lieu of
foreclosure) and we were paid approximately $465,000 for outstanding receivables. Under the terms of the
agreement, we entered into a new management agreement for the Innisbrook Resort with the lender providing
for (i) an increased base management fee percentage, (ii) management of the Innisbrook Resort's golf
facilities (which we subcontracted to Troon, the manager of the facilities prior to the new agreement) (iii) the
right to receive a termination fee of up to $5.9 million (declining to $5.5 million over three years) upon certain
events and (iv) the right to be repaid certain capital expenditures made by us if the management agreement is
terminated prior to January 1, 2006. As part of the agreement, each of the parties released substantially all of
their claims against the others (including our right to receive payment of approximately $10.26 million loaned
by us to the Innisbrook Entity upon the occurrence of certain events). Under the new agreement, aÇliates of
the Innisbrook Entity also loaned the lender $2 million to provide working capital for the Innisbrook Resort.
The resolution of the matter did not have a material impact on our Ñnancial position, results of operations or
cash Öows and was approved by the Governance Committee based on the recommendation of management
and outside legal advisors.
Savannah. In July 2002, we acquired a 49% interest in the Westin Savannah Harbor Resort and Spa in
connection with the restructuring of the indebtedness of that property. An unrelated party holds an additional
49% interest in the property. The remaining 2% is held by Troon. Troon invested in the project on a pari-passu
basis and manages the golf course at the Westin Savannah. The unrelated third party negotiated the terms of
the golf management agreement with Troon, and approved the terms of its equity interest, and therefore, we
believe the arrangements are on an arms-length basis.
Aircraft Lease. In February 1998, we leased a Gulfstream III Aircraft (""GIII'') from Star Flight LLC,
an aÇliate of Starwood Capital. The term of the lease was one year and automatically renews for one-year
terms until either party terminates the lease upon 90 days' written notice. The rent for the aircraft, which was
set at approximately 90% of fair market value at the time (based on two estimates from unrelated third
parties), is (i) a monthly payment of 1.25% of the lessor's total costs relating to the aircraft (approximately
$123,000 at the beginning of the lease with this amount increasing as additional costs are incurred by the
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