We issue guarantees to certain lenders and hotel owners, primarily to obtain long-term management contracts. The guarantees generally have a stated maximum amount of funding and a term of four to ten years. The terms of guarantees to lenders generally require us to fund if cash flows from hotel operations are inadequate to cover annual debt service or to repay the loan at the end of the term. The terms of the guarantees to hotel owners generally require us to fund if the hotels do not attain specified levels of operating profit. Guarantee fundings to lenders and hotel owners are generally recoverable as loans repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels. We also enter into project completion guarantees with certain lenders in conjunction with hotels that we or our joint venture partners are building.
We show the maximum potential amount of future fundings for guarantees where we are the primary obligor and the carrying amount of the liability for expected future fundings at year-end 2011 in the following table.
We included our liability for expected future fundings at year-end 2011 in our Balance Sheet as follows: $9 million in the “Other current liabilities” and $50 million in the “Other long-term liabilities.”
Our guarantees listed in the preceding table include $11 million of operating profit guarantees and $16 million of debt service guarantees, all of which will not be in effect until either the underlying properties open and we begin to operate the properties or certain other events occur.
The guarantees in the preceding table do not include the following:
- $171 million of guarantees related to Senior Living Services lease obligations of $132 million (expiring in 2018) and lifecare bonds of $39 million (estimated to expire in 2016), for which we are secondarily liable. Sunrise Senior Living, Inc. (“Sunrise”) is the primary obligor on both the leases and $6 million of the lifecare bonds; Health Care Property Investors, Inc., as successor by merger to CNL Retirement Properties, Inc. (“CNL”), is the primary obligor on $32 million of the lifecare bonds, and Five Star Senior Living is the primary obligor on the remaining $1 million of lifecare bonds. Before we sold the Senior Living Services business in 2003, these were our guarantees of obligations of our then consolidated Senior Living Services subsidiaries. Sunrise and CNL have indemnified us for any fundings we may be called upon to make under these guarantees. While we currently do not expect to fund under the guarantees, Sunrise’s SEC filings suggest that Sunrise’s continued ability to meet these guarantee obligations cannot be assured given Sunrise’s financial position and limited access to liquidity. In 2011 Sunrise provided us $3 million cash collateral to cover potential exposure under the existing lease and bond obligations for 2012 and 2013. In conjunction with our consent of the extension in 2011 of certain lease obligations for an additional five-year term until 2018, Sunrise provided us an additional $1 million cash collateral and an $85 million letter of credit issued by Key Bank to secure our exposure under the lease guarantees for the continuing leases during the extension term and certain other obligations of Sunrise. During the extension term, Sunrise agreed to make an annual payment to us with respect to the cash flow of the continuing lease facilities, subject to a $1 million annual minimum.
- Lease obligations, for which we became secondarily liable when we acquired the Renaissance Hotel Group N.V. in 1997, consisting of annual rent payments of approximately $6 million and total remaining rent payments through the initial term of approximately $45 million. Most of these obligations expire by the end of 2020. CTF Holdings Ltd. (“CTF”) had originally provided €35 million in cash collateral in the event that we are required to fund under such guarantees, approximately $6 million (€5 million) of which remained at year-end 2011. Our exposure for the remaining rent payments through the initial term will decline to the extent that CTF obtains releases from the landlords or these hotels exit the system. Since the time we assumed these guarantees, we have not funded any amounts, and we do not expect to fund any amounts under these guarantees in the future.
- See Footnote No. 17, “Spin-off” for additional information on the spin-off of our timeshare operations and timeshare development business. Prior to the spin-off, we had certain guarantees and commitments outstanding related to this business. In conjunction with the spin-off, we became secondarily liable for any payments that may be required under a project completion guarantee, various letters of credit, and several guarantees with a total exposure of $41 million, for which MVW has executed documents indemnifying us. Most of these obligations expire in 2012 and 2013, except for one guarantee in the amount of $27 million (35 million SGD) that expires in 2021. We have not funded any amounts under these obligations. Our liability associated with these guarantees had a carrying value of $2 million at year-end 2011.
- A project completion guarantee that we provided to another lender for a joint venture project with an estimated aggregate total cost of $498 million (Canadian $508 million). The associated joint venture will satisfy payments for cost overruns for this project through contributions from the partners or from borrowings, and we are liable on a several basis with our partners in an amount equal to our 20 percent pro rata ownership in the joint venture. In 2010, our partners executed documents indemnifying us for any payments that may be required for this guarantee obligation. Our liability associated with this project completion guarantee had a carrying value of $3 million at year-end 2011.
In addition to the guarantees described in the preceding paragraphs, in conjunction with financing obtained for specific projects or properties owned by joint ventures in which we are a party, we may provide industry standard indemnifications to the lender for loss, liability, or damage occurring as a result of the actions of the other joint venture owner or our own actions.
Commitments and Letters of Credit
In addition to the guarantees noted in the preceding paragraphs, as of year-end 2011, we had the following commitments outstanding:
- A commitment to invest up to $7 million of equity for noncontrolling interests in partnerships that plan to purchase North American full-service and limited-service properties, or purchase or develop hotel-anchored mixed-use real estate projects. We expect to fund this commitment within three years.
- A commitment to invest up to $24 million of equity for noncontrolling interests in partnerships that plan to develop limited-service properties. We expect to fund $20 million within three years. We do not expect to fund $4 million of this commitment.
- A commitment, with no expiration date, to invest up to $26 million (€20 million) in a joint venture in which we are a partner. We do not expect to fund under this commitment.
- A commitment, with no expiration date, to invest up to $11 million in a joint venture for development of a new property that we expect to fund within two years, as follows: $7 million in 2012 and $4 million in 2013.
- A commitment, with no expiration date, to invest up to $7 million in a joint venture that we do not expect to fund.
- $5 million of loan commitments that we have extended to owners of lodging properties. We do not expect to fund these commitments of which $4 million will expire within three years and $1 million will expire after five years.
- A $1 million commitment, with no expiration date, to a hotel real estate investment trust in which we have an ownership interest. We do not expect to fund this commitment. The commitment is pledged as collateral for certain trust investments.
- We have a right and under certain circumstances an obligation to acquire our joint venture partner’s remaining 50 percent interest in two joint ventures over the next nine years at a price based on the performance of the ventures. We made a $12 million (€9 million) deposit in conjunction with this contingent obligation in 2011 and expect to make the remaining deposit of €6 million in fiscal year 2012, after certain conditions are met. The deposits are refundable to the extent we do not acquire our joint venture partner’s remaining interests.
- We have a right and under certain circumstances an obligation to acquire the landlord’s interest in the real estate property and attached assets of a hotel that we lease for approximately $58 million (€45 million) during the next three years.
- Various commitments for the purchase of information technology hardware, software, and maintenance services in the normal course of business totaling $95 million. We expect to fund these commitments within three years as follows: $47 million in 2012, $46 million in 2013, and $2 million in 2014.
At year-end 2011, we had $65 million of letters of credit outstanding ($64 million outside the Credit Facility and $1 million under our Credit Facility), the majority of which related to our self-insurance programs. Surety bonds issued as of year-end 2011, totaled $108 million, the majority of which federal, state and local governments requested in connection with our lodging operations and self-insurance programs.
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