American Hotel

Overview

The Issuer, an Ontario LP, will hold 32 hotel properties, with an appraised value of $159.6M, in 19 states in the U.S. through American Hotel Income Properties REIT Inc. (the "U.S. REIT") and its subsidiaries. For FAPI purposes, this business is expected to be a services business rather than a property income business on general principles. It is issuing 10M units for $100M (assuming exercise of over-allotment option).

Structure

The Issuer will hold 100% of the common shares of the U.S. REIT. In order that the U.S. REIT will qualify as a REIT for Code purposes, on or before January 30, 2014 the U.S. REIT will issue Class B shares to at least 100 accredited investors. The Class B shares are non-voting, have a redemption and liquidation amount of $1,000 per share and have a yield of around 12.5%. The U.S. REIT may also issue a single ROC share to the Issuer.

The U.S. REIT will have two LLC subsidiaries. "Lodging Enterprises" is intended to be a taxable REIT subsidiary under the Code U.S. REIT rules. It will lease the properties of the second subsidiary ("Lodging Properties"), which will not be a TRS.

The shareholders of the GP of the Issuer will enter into a voting agreement so that their voting rights with respect to the GP will be voted in favour of the election of directors approved by the unitholders.

The underwriters will use their commercially reasonable efforts to distribute the Issuer units to not less than 3,000 unitholders.

Debt

At closing, the Issuer's consolidated indebtedness of approx. $71.5M will represent approx. 48.9% of gross book value.

Management

The Issuer will be internally managed and the lodging activities of the Issuer's U.S. subsidiaries will be managed by indirect wholly-owned U.S. subsidiaries of O'Neill Hotels & Resorts Ltd. ("OHR") who founded CHIP REIT. The Issuer CEO was co-founder of CHIP REIT. Management fees are 3.5% of gross hotel revenues plus incentive fees of up to 50% of such fees. There also is a per-property administrative charge, initially of $15,000 per property escalating to $25,000.

The Issuer also will enter into a development agreement with an affiliate of OHR.

Distributions

The Issuer intends to pay monthly cash distributions, estimated to be $0.075 per unit, to initially provide a yield of 9% (representing perhaps 90% of AFFO). The GP of the Issuer will receive 0.01% of cash distributions to a maximum of $100 per annum.

Canadian tax consequences

SIFT tax. The Issuer is not expected to hold any non-portfolio property, so that no SIFT tax is anticipated.

Consent dividends

Any consent dividend deemed to be received by the Issuer from the U.S. REIT as a result of an election under Code s. 565 would not be income to the Issuer. The Issuer would include in its income as a shareholder benefit any U.S. tax remitted by the U.S. REIT with respect to consent dividend elections, and the amount of any such U.S. tax attributable to a particular Issuer unitholder would be treated as non-business income tax from a U.S. source for foreign tax credit purposes.

FAPI

The U.S. REIT will not satisfy the more-than-five full-time employee test because, due to U.S. tax requirements, hotel managers will be employed by the OHR subsidiaries rather than by the U.S. REIT and its subsidiaries. However, it is considered that the hotel business of the U.S. REIT (i.e., Lodging Enterprises) will qualify as a business of providing services rather than of renting real property, so that the income of the U.S. REIT (including presumably rental income of Lodging Properties recharacterized under s. 95(2)(a)(ii)(B)(I)) will not be foreign accrual property income.

U.S. tax consequences

Issuer as Partnership. The Issuer (whose units will trade on the OTC QX - viewed as an "established securities market," and will derive 90% or more of its income from interest, dividends and other qualifying income) intends to make an election to be treated as a partnership for Code purposes, and should not generally be subject to U.S. income tax.

FIRPTA

A U.S. tax reporting requirement will not arise to a non-U.S. unitholders as a result of their disposition of Issuer units provided that they owned 5% or fewer of the units that were listed for trading at the time of disposition and at all times during the immediately preceding five-year period the Issuer met the regularly traded requirement for that quarter. Management expects the regularly traded test to be met.

Although distributions made by the U.S. REIT to the Issuer that are attributable to the sale or exchange of U.S. real property interests by the U.S. REIT, and distributions made by the U.S. REIT in excess of both its earnings and profits and the Issuer's adjusted basis in U.S. REIT shares may be subject to Code s. 1445 withholding, dispositions of property by the U.S. REIT will, to the extent practicable, be made by way of non-recognition transactions, and management has no intention for the U.S. REIT to make distributions as described above.

Distributions

Ordinary REIT dividends received by the Issuer from the U.S. REIT will, to the extent of the distributive share of an Issuer unitholder who holds 5% or fewer of the units, be eligible for a Treaty-reduced rate of withholding - generally 0% for RRSPs, and 15% for individuals including TFSAs. Corporate unitholders should consult their tax advisors.

REIT status

The U.S. REIT intends to make and maintain an election as a real estate investment trust under the Code in its first taxation year, and management anticipates that the U.S. REIT will qualify as a REIT under the Code. An election will be filed for Lodging Enterprises to be a TRS of the U.S. REIT. The OHR manager is intended to qualify as an "eligible independent contractor." No assurance is given that the IRS will not challenge the leases from Lodging Properties to the TRS (Lodging Enterprises) as not having arm's length terms.