1997 Annual Report - Four Seasons Hotels and Resorts

ANNUAL INFORMATION FORM(continued)M ANAGEMENT’ S D ISCUSSION AND A NALYSISThe Four Seasons Hotel Berlin opened in September 1996; however, the effective date of the handover is subjectto a dispute arising from certain construction deficiencies alleged by the Corporation. Until the dispute is resolved,the Corporation will accrue for the losses, if any, of the hotel from January 1, 1998 even though the lease may not beeffective until a later date.Four Seasons has entered into an agreement with one of its equity partners in the project pursuant to which thepartner will be responsible for funding up to one-half of any annual operating loss incurred in the first 10 years ofthe Four Seasons Hotel Berlin’s operation, up to a maximum of DM2 million (approximately $1.6 million) per year andDM15 million (approximately $12 million) in the aggregate. A portion of Four Seasons’ interest in the net proceeds, ifany, from the sale of the multi-use project, after repayment of debt, has been pledged to that partner to secure repaymentto that partner of any amounts it has funded in connection with the hotel’s operations. This obligation is recourse only tothe Corporation’s interest in the net sale proceeds.Four Seasons’ share of the hotel’s budgeted operating loss (after funding by its partner and payment of managementfees) is currently estimated to be approximately DM5 million (approximately $4 million) in 1998. The Corporationexpects its fee revenues from this hotel to offset approximately one-half of the operating losses that are accrued in 1998.The long-term outlook for the hotel is expected to be favourable once construction is completed in the vicinity of the hoteland the Berlin hotel market stabilizes to higher occupancy levels after the expected relocation of federal government andcorporate offices to Berlin.Four Seasons Hotel LondonThe Corporation has an aggregate of £27.5 million (approximately $65 million) loans receivable outstanding in connectionwith the Four Seasons Hotel London. This amount represents two loans which were advanced to corporations indirectlycontrolled by His Royal Highness Prince Alwaleed Bin Talal Bin Abdulaziz Al Saud (“Kingdom”) in two separate transactionsthrough which Kingdom acquired an aggregate 87.5% interest in the hotel.The first loan, which has a balance of £11.2 million (approximately $26 million), represents part of the considerationreceived by the Corporation when it sold its 50% interest in the hotel to Kingdom in 1995. The loan is a cash flow bondsecured by the transferred interest in the hotel and bears interest at 10%.The second loan, which has an outstanding balance of £16.3 million (approximately $39 million), was advanced whenthe other 50% owner of the hotel sold its interest to Kingdom and the Corporation in the first quarter of 1998. This loanbears interest at 10% per annum payable out of hotel cash flow, and is secured by the transferred interest in the hotel.Concurrent with this transaction, the Corporation’s management arrangements for the hotel were reorganized and improved.32Four Seasons Hotels Inc.