Business Context and Reporting Period
This Form 8-K is filed by Apple REIT Nine, Inc. on April 26, 2012, reporting events occurring on April 26 and April 27, 2012. The filing details the modification and subsequent completion of a sale agreement for 110 parcels of land located in the Ft. Worth, Texas area, which are leased to a third party.
Key Financial Metrics and Transaction Details
- Total Purchase Price: $198.4 million.
- Cash Proceeds: $138.4 million (received upon closing).
- Financing Note: $60.0 million.
- Note Interest Rate: 10.5% annually.
- Note Terms: Monthly interest payments for the first three years; interest accrues thereafter until the Purchaser's Senior Lender is repaid. The term shall not extend beyond April 15, 2049.
- Security: The Note carries a subordinate security interest in the Land.
Material Changes and Transaction Structure
The transaction represents a material change from the original sale contract entered into on August 3, 2011. The original agreement required the full purchase price to be funded in cash. The modified agreement, executed on April 26, 2012, and closed on April 27, 2012, introduced a seller-financed note for $60.0 million of the consideration.
Management Commentary, Risks, and Related Parties
Use of Proceeds: The Company intends to use the $138.4 million in cash proceeds for operating purposes and is evaluating the best use for any excess cash.
Related Party Disclosure: While the Company states it has no material relationship with the Purchaser (111 Realty Investors, LP), a partner of the Purchaser serves on the board of directors of Apple REIT Ten, Inc., a related party of the Company.
Risks and Contingencies: The repayment of the $60.0 million note is contingent upon the Purchaser's ability to repay its Senior Lender. Until that occurs, interest accrues, and the Company relies on lease proceeds from the Land to service the debt.
Investor Verification Checklist
- Verify the creditworthiness of 111 Realty Investors, LP and their ability to service the $60.0 million note.
- Confirm the status and repayment timeline of the Purchaser's Senior Lender, as this dictates the cash flow from the note.
- Review the lease agreement for the Ft. Worth land to ensure lease proceeds are sufficient to cover accrued interest if the Senior Lender is not repaid within three years.
- Examine the relationship between the Purchaser's partner and Apple REIT Ten, Inc. for potential conflicts of interest.