LASALLE HOTEL PROPERTIES - 10-K Annual Report

As of March 13, 2002, there were 18,680,432 shares of the Registrant’s Common Shares issued and outstanding. The aggregate market value of the Registrant’s Common Shares held by non-affiliates of the Registrant (17,969,387 shares) at March 13, 2002 was approximately $257.9 million. The aggregate market value was calculated by using the closing price of the stock as of that date on the New York Stock Exchange.

The Company was organized as a Maryland real estate investment trust on January 15, 1998 to buy, own and lease upscale and luxury full-service hotels located in convention, resort and major urban business markets. As of December 31, 2001, the Company owned interests in 17 hotels with approximately 5,900 rooms/suites (collectively the “Hotels”) located in eleven states and the District of Columbia. All of the Hotels are managed by independent hotel operators (“Hotel Operators”). The Company is a real estate investment trust (“REIT”) as defined in the Internal Revenue Code of 1986, as amended (the “Code”).

Substantially all of the Company’s assets are held by, and all of its operations are conducted through, LaSalle Hotel Operating Partnership, L.P. (the “Operating Partnership”). The Company is the sole general partner of the Operating Partnership with an approximate 97.6% ownership at December 31, 2001. At December 31, 2001, continuing investors held, in the aggregate, 443,183 limited partnership units (“Units”), or a 2.4% limited partnership interest in the Operating Partnership. The outstanding Units are redeemable at the option of the holder for a like number of common shares of beneficial interest, par value $0.01 per share (“Common Shares”) of the Company, or, at the option of the Company, for the cash equivalent. All of the Hotels are leased under participating leases (“Participating Leases”) which provide for rental payments equal to the greater of base rent (“Base Rent”) or participating rent (“Participating Rent”) which is based on fixed percentages of gross hotel revenues.

The Company seeks to grow through strategic relationships with premier, internationally recognized hotel operating companies including: Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”), Marriott International, Inc. (“Marriott”), Radisson Hotels International, Inc., Interstate Hotels Company, Crestline Hotels & Resorts, Inc., Outrigger Lodging Services (“OLS”), Noble House Hotels & Resorts, Hyatt Hotels Corporation and the Kimpton Hotel & Restaurant Group, L.L.C. The

Effective January 1, 2002, after having cancelled its operating lease with an affiliate of Crestline Hotels & Resorts, Inc. on December 31, 2001, the Company entered into a lease with LaSalle Hotel Lessee, Inc. (“LHL”), its wholly owned taxable REIT subsidiary for the Holiday Inn Beachside Resort in Key West, with an affiliate of Crestline Hotels & Resorts, Inc. (“Crestline”) remaining as manager. Interstate Hotels Company will replace Crestline as manager of the property effective April 1, 2002.

The Company currently expects to engage Starwood to manage and operate Le Meridien New Orleans and Le Meridien Dallas. The Company anticipates that Starwood will operate these hotels under the Westin brand affiliation. In connection with the re-branding of these hotels, the Company anticipates spending approximately $6.0 million to enhance the guest experience at these hotels and may be obligated to pay a fee to the parent company of the current lessees of these hotels; however, the Company does not believe that the amount of any fees which it may be required to pay will have a material adverse effect on its financial condition, taken as a whole. Contemporaneously with the rebranding of the New Orleans and Dallas hotels, the Company expects to lease the New Orleans and Dallas hotels to LHL.

In March 2002, the Company completed an underwritten public offering of 3,991,900 10¼% Series A Cumulative Redeemable Preferred Shares, par value $0.01 per share (Liquidation Preference $25 per share) (the “2002 Equity Offering”). After deducting underwriting discounts and commissions and other offering costs, the Company raised net proceeds of approximately $96.4 million. A portion of the net proceeds was used to repay existing indebtedness under the Company’s senior unsecured credit facility and the remaining proceeds will be used to fund the redevelopment of the D.C. Boutique Collection.

The Company believes that its regular program of capital improvements at the Hotels, including replacement and refurbishment of furniture, fixtures, and equipment (“FF&E”), helps maintain and enhance its competitiveness and maximizes revenue growth under the Participating Leases. During the year ended December 31, 2001, the Company spent approximately $22.7 million on renovations and additional capital improvements at the Hotels. As of December 31, 2001, two of the four hotels in the D.C. Boutique Collection, the Topaz Hotel which opened on October 10, 2001 and the Hotel Rouge which opened on December 14, 2001, were renovated, improved and repositioned as unique high-end, independent boutique hotels.

The Company plans to spend approximately $34.0 million on renovations and additional capital improvements at the Hotels during 2002 including the cost of completing the renovation and repositioning of the remaining two hotels in the D.C. Boutique Collection. The renovation and repositioning of the remaining two hotels in the D.C. Boutique Collection is scheduled to commence during the second quarter of 2002 and is expected to be completed by the fourth quarter of 2002. The two-year redevelopment program for the D.C. Boutique hotels is anticipated to cost an aggregate of approximately $30.0 million once all renovation work on the four hotels has been completed.

Under the Participating Leases, the Company established a reserve (the “Reserve Funds”) for capital improvements at the Hotels. The majority of Reserve Funds have not been recorded on the books and records of the Company as such amounts are capitalized as incurred. The amounts obligated under the Reserve Funds range from 4.0% to 5.5% of each individual Hotel’s total revenues. The total amount obligated by the Company under the Reserve Funds was approximately $14.2 million at December 31, 2001, of which $4.2 million was available in restricted cash reserves for future capital expenditures.

The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a result, the Company generally will not be subject to corporate income tax on that portion of its net income that is currently distributed to shareholders. A REIT is subject to a number of highly technical and complex organizational and operational requirements, including requirements with respect to the nature of its gross income and assets and a requirement that it currently distribute at least 90% of its taxable income. The Company may, however, be subject to certain state and local taxes on its income and property.

From its inception through December 31, 2000, an affiliate of Jones Lang LaSalle Incorporated (“JLL”) acted as the Company’s external advisor (the “Advisor”) and provided all management, acquisition, advisory and administration services pursuant to an Advisory Agreement and Employee Lease Agreement (collectively the “Advisory Agreement”). Effective January 1, 2001, the Company terminated the Advisory Agreement and became self-administered and self-managed. As of January 1, 2001, all of the management and staff of the Advisor became employees of the Company. The Company paid the Advisor $0.6 million for 2001 transition services including the waiver of termination notice period, and for providing support and advice through the first quarter of 2001. In addition, the Company purchased, at book value, the assets used to operate the Company.

The Hotels’ operations historically have been seasonal. Twelve of the Company’s hotels maintain higher occupancy rates during the second and third quarters. The Marriott Seaview Resort generates a large portion of its revenue from golf related business and, as a result, its revenues fluctuate according to the season and the weather. Le Montrose Suite Hotel and Le Meridien Dallas typically experience their highest occupancies in the first quarter, while Holiday Inn Beachside Resort and Le Meridien New Orleans typically experience their highest occupancies in the first and second quarters. This seasonality pattern can be expected to cause fluctuations in the Company’s quarterly revenue under the Participating Leases.

Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal or remediation of certain hazardous or toxic substances on, under, or in such property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, the presence of contamination from hazardous or toxic substances,

or the failure to remediate such contaminated property properly, may adversely affect the owner’s ability to borrow using such property as collateral. Furthermore, a person who arranges for the disposal or treatment of a hazardous or toxic substance at a property owned by another, or who transports such substance to or from such property, may be liable for the costs of removal or remediation of such substance released into the environment at the disposal or treatment facility. The costs of remediation or removal of such substances may be substantial, and the presence of such substances may adversely affect the owner’s ability to sell such real estate or to borrow using such real estate as collateral. In connection with the ownership and operation of the Hotels, the Company, the Operating Partnership, or the lessees, as the case may be, may be potentially liable for such costs.

Phase I environmental site assessments (“ESAs”) have been performed on all of the Hotels by a qualified independent environmental engineer. The purpose of the Phase I ESAs is to identify potential sources of contamination for which the Company may be responsible and to assess the status of environmental regulatory compliance. The Phase I ESAs include historical reviews of the hotels, reviews of certain public records, preliminary investigations of the sites and surrounding properties, screenings for the presence of asbestos-containing materials, polychlorinated biphenyls, underground storage tanks, and the preparation and issuance of written reports. The Phase I ESAs do not include invasive procedures, such as soil sampling or groundwater analysis.

The ESAs have not revealed any environmental liability or compliance concerns that the Company believes would have a material adverse effect on the Company’s business, assets, results of operations, or liquidity, nor is the Company aware of any material environmental liability or concerns. Nevertheless, it is possible that the Phase I ESAs did not reveal all environmental liabilities or compliance concerns or that material environmental liabilities or compliance concerns exist of which the Company is currently unaware. Moreover, no assurance can be given that (i) future laws, ordinances or regulations will not impose any material environmental liability or (ii) the current environmental condition of the Hotels will not be affected by the condition of the properties in the vicinity of the Hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to the Operating Partnership or the Company.

The Company believes that its Hotels are in compliance, in all material respects, with all federal, state and local environmental ordinances and regulations regarding hazardous or toxic substances and other environmental matters, the violation of which would have a material adverse effect on the Company. The Company has not been notified by any governmental authority of any material noncompliance, liability or claim relating to hazardous or toxic substances or other environmental matters in connection with any of its present properties.

The Company had 21 employees as of March 15, 2002. Prior to January 1, 2001, the date the Company became self-managed, the Company had no employees, and the Advisor managed the day-to-day operations of the Company. All persons employed in the day-to-day operations of the Hotels are employees of the management companies engaged by the lessees to operate such Hotels.

The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones the Company faces. Additional risks and uncertainties not presently known to the Company or that it currently deems immaterial also may impair its business operations. If any of the following risks occur, the Company’s business, financial condition, operating results and cash flows could be materially adversely affected.

To maintain its status as a REIT, the Company is unable to operate any of its Hotels. As a result, the Company is unable to directly implement strategic business decisions with respect to the operation and marketing of its Hotels, such as decisions with respect to the setting of room rates, repositioning of a hotel, food and beverage prices and certain similar matters. Although it consults with the lessees and Hotel Operators with respect to strategic business plans, the lessees and Hotel Operators are under no obligation to implement any of the Company’s recommendations with respect to such matters.

Effects of Terrorist Attacks of September 11, 2001. The terrorist attacks of September 11, 2001 have caused disruption in the lodging industry and other travel-related businesses. The Company’s business has been adversely affected by the attacks, and its Hotels continue to experience reduced occupancy levels due to the decline in travel. The Company is unable to determine whether this adverse impact is temporary or of a more lasting duration. Military actions against terrorists, new terrorist attacks (actual or threatened), and other political events may cause a lengthy period of uncertainty that could increase customer reluctance to travel and therefore adversely affect the Company’s cash flow.

Unexpected Capital Expenditures Could Adversely Affect the Company’s Cash Flow. Hotels require ongoing renovations and other capital improvements, including periodic replacement or refurbishment of FF&E. Under the terms of its leases, the Company is obligated to pay the cost of certain capital expenditures at the Hotels and to pay for periodic replacement or refurbishment of FF&E. If capital expenditures exceed expectations, there can be no assurance that sufficient sources of financing will be available to fund such expenditures. In addition, the Company may acquire hotels in the future that require significant renovation. Renovation of hotels involves numerous risks, including the possibility of environmental problems, construction cost overruns and delays, impact on current demand, uncertainties as to market demand or deterioration in market demand after commencement of renovation and the emergence of unanticipated competition from other hotels.

Conditions of Franchise Agreements and Brand Licensing Agreements Could Adversely Affect the Company. Two of the Company’s hotels are subject to franchise or brand licensing agreements. In addition, hotels in which the Company invests subsequently may be operated pursuant to franchise or brand agreements. The continuation of a franchise or brand agreement is generally subject to specified operating standards, as well as other terms and conditions. Licensors typically inspect licensed properties periodically to confirm adherence to operating standards. Action or inaction by the Company or by any of the lessees or the Hotel Operators could result in a breach of specified operating standards or other terms or conditions of the franchise or brand licenses which could result in the loss of a franchise or brand license. It is possible that a licensor could condition the continuation of a franchise or brand license on the completion of capital improvements which the Company’s management or Board of Trustees determines are too expensive or otherwise unwarranted in light of general economic conditions or the operating results or prospects of the affected hotel. In that event, management or the Board of Trustees may elect to allow the franchise or brand license to lapse. In any case, if a license is terminated, the Company and the lessee may seek to obtain a suitable replacement license or to operate the hotel independent of a franchise or brand license. The loss of a franchise or brand license could have a material adverse effect upon the operations or the underlying value of the hotel covered by the license because of the loss of associated name recognition, marketing support and centralized reservation systems provided by the licensor, or due to any penalties payable upon early termination of a license.

The Company has obtained a senior unsecured credit facility from a syndicate of banks, which provides for a maximum borrowing amount of up to $210.0 million and matures on December 31, 2003. There can be no assurance that the Company will be able to renew the credit facility upon maturity, or that if renewed, the terms will not be less favorable. The senior unsecured credit facility contains certain financial covenants relating to debt service coverage, market value net

worth and total funded indebtedness. Borrowings under the credit facility bear interest at floating rates equal to the London Inter-Bank Offer Rate (“LIBOR”) plus an applicable margin or at an “Adjusted Base Rate” as set forth in the Company’s credit agreement plus an applicable margin, at the Company’s election. The applicable margin is determined based upon total liabilities compared to earnings before interest, taxes, depreciation and amortization (“EBITDA”) adjusted according to our credit agreement and ranges from 2.00% to 3.25% for LIBOR borrowings and from 0.500% to 1.750% for base rate borrowings. On February 11, 2002, the Company amended the senior unsecured credit facility amending certain debt covenant definitions and limiting total outstanding borrowings to $175.0 million through November 15, 2002. In addition, distributions were limited to $0.01 per Common Share for the first and second quarters of 2002, $0.20 for the third and fourth quarters of 2002 and $0.30 for the first and second quarters of 2003; however, the fourth quarter 2002 distribution may be adjusted in order to meet distribution requirements under the Code in order to maintain its REIT status. The Company intends to maintain its REIT status by meeting annual distribution requirements under the Code.

At December 31, 2001, the Company had outstanding LIBOR borrowings against the senior unsecured credit facility of $175.4 million. The Company did not have any Adjusted Base Rate borrowings outstanding at December 31, 2001. Subsequent to the 2002 Equity Offering the outstanding borrowings were reduced to $87.8 million. For the year ended December 31, 2001, the weighted average interest rate for borrowings under the senior unsecured credit facility was approximately 6.1%. Additionally, the Company is required to pay a variable unused commitment fee determined from a ratings or leverage based pricing matrix, currently set at 50 basis points. The Company incurred an unused commitment fee of approximately $0.1 and $0.2 million for the years ended December 31, 2001 and December 31, 2000, respectively.

The Company relies on borrowings under the credit facility to finance acquisitions, capital improvements, working capital and for general corporate purposes. The Company’s credit facility contains financial covenants that could restrict its ability to incur additional indebtedness or make distributions on the Common Shares. Some of these covenants become more restrictive over time. Availability under the credit facility may be reduced by hotel financing which the Company obtains outside the credit facility. Pursuant to the credit facility, the amount of outside financing is limited to specified levels. If the Company is unable to borrow under the credit facility, it could adversely affect the Company’s financial condition.

Because Real Estate Investments Are Illiquid the Company May Not Be Able to Sell Hotels When Appropriate. Real estate investments generally cannot be sold quickly. The Company may not be able to vary its portfolio promptly in response to economic or other conditions. In addition, provisions of the Code limit a REIT’s ability to sell properties in some situations when it may be economically advantageous to do so.

Liability for Environmental Matters Could Adversely Affect the Company’s Financial Condition. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and clean-up hazardous or toxic substances or petroleum product releases at a property. An owner of real estate is liable for the costs of removal or remediation of certain hazardous or toxic substances on or in the property. These laws often impose such liability without regard to whether the owner knew of or caused the presence of the contaminants. Clean-up costs and the owner’s liability generally are not limited under the enactments and could exceed the value of the property and/or the aggregate assets of the owner. The presence of or the failure to properly remediate the substances may adversely affect the owner’s ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the clean-up costs of the substances at a disposal or treatment facility, whether or not such facility is owned or operated by the person. Even if more than one person was responsible for the contamination, each person covered by the environmental laws may be held responsible for the entire amount of clean-up costs incurred. In addition, third-parties may sue the owner or operator of a site for damages and costs resulting from environmental contamination emanating from that site.

Environmental laws also govern the presence, maintenance and removal of asbestos-containing materials (“ACMs”). These laws impose liability for release of ACMs into the air and third-parties may seek recovery from owners or operators of real properties for personal injury associated with ACMs. In connection with the ownership (direct or indirect), operation, development and redevelopment of real properties, the Company may be considered an owner or operator of properties containing ACMs. Having arranged for the disposal or treatment of contaminants the Company may be potentially liable for removal, remediation and other costs, including governmental fines and injuries to persons and property.

The Costs of Compliance with the Americans with Disabilities Act Could Adversely Affect the Company’s Cash Flow. Under the Americans with Disabilities Act of 1990 (the “ADA”), all public accommodations are required to meet certain federal requirements related to access and use by disabled persons. A determination that the Company is not in compliance with the ADA could result in imposition of fines or an award of damages to private litigants.

Certain Leases and Management Agreements May Constrain the Company from Acting in the Best Interests of Shareholders or Require it to Make Certain Payments. The Harborside Hyatt Conference Center & Hotel, the Le Meridien New Orleans and the San Diego Paradise Point Resort are each subject to a ground lease with a third-party lessor. In order for the Company to sell any of these hotels or to assign its leasehold interest in any of these ground leases, it must first obtain the consent of the relevant third-party lessor. Accordingly, if the Company determines that the sale of any of these hotels or the assignment of its leasehold interest in any of these ground leases is in the best interest of its shareholders, the Company may be prevented from completing such transaction if it is unable to obtain the required consent from the relevant lessor.

In some instances, the Company may be required to obtain the consent of the Hotel Operator prior to selling the hotel. Typically, such consent is only required in connection with certain proposed sales, such as if the proposed purchaser is engaged in the operation of a competing hotel or does not meet certain minimum financial requirements. Hotels where manager approval of certain sales may be required include: Chicago Marriott Downtown and Harborside Hyatt Conference Center & Hotel.

Le Meridien Dallas is a unit of a commercial condominium complex and is subject to a right of first refusal in favor of the owner of the remaining condominium units. In addition, the Company is subject to certain rights of first refusal or similar rights with respect to the following hotels: Hotel Viking, LaGuardia Airport Marriott, Marriott Seaview Resort and Radisson Convention Hotel. Similarly, the Hotel Operator of the D.C. Boutique Collection hotels has a right of first offer and a right of first refusal if any of the hotels are sold other than through a public bidding process.

The Company is subject to the risks associated with debt financing, including the risk that cash provided by operating activities will be insufficient to meet required payments of principal and interest, the risk of rising interest rates on its floating rate debt, the risk that it will not be able to prepay or refinance existing indebtedness on certain hotels (which generally will not have been fully amortized at maturity) or that the terms of such refinancing will not be as favorable as the terms of existing indebtedness. In the event it is unable to secure refinancing of such indebtedness on acceptable terms, it might be forced to dispose of properties on disadvantageous terms.

In addition, Holiday Inn Beachside Resort, Le Meridien Dallas, Le Meridien New Orleans, Le Montrose Suite Hotel and Radisson Convention Hotel are mortgaged to secure payment of indebtedness aggregating approximately $118.6 million as of December 31, 2001. The Harborside Hyatt Conference Center & Hotel is mortgaged to secure payment of principal and interest on bonds with an aggregate par value of approximately $42.5 million. If the Company is unable to meet mortgage payments, the mortgage securing the property could be foreclosed upon by, or the property could be otherwise transferred to, the mortgagee with a consequent loss of income and asset value to the Company. From time to time, the Company may mortgage additional hotels to secure payment of additional indebtedness.

As of December 31, 2001, approximately $199.8 million of aggregate indebtedness (57.4% of the total) was subject to variable interest rates. The aggregate indebtedness balance includes the Company’s $11.9 million pro rata portion of indebtedness relating to the Company’s joint venture investment in the Chicago Marriott Downtown hotel. An increase in interest rates could increase the Company’s interest expense and reduce its cash flow and its ability to service its indebtedness.

If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Moreover, unless entitled to relief under certain statutory provisions, the Company also will be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. This treatment would cause the Company to incur additional tax liabilities and would significantly impair the Company’s ability to service indebtedness, and reduce the amount of cash available to make new investments or to make distributions on its Common Shares and preferred shares.

Partnership or joint venture investments may involve risks not otherwise present for investments made solely by the Company, including the possibility that its co-investors might become bankrupt, that its co-investors might at any time have different interests or goals than the Company does, and that its co-investors may take action contrary to its instructions, requests, policies or objectives, including its policy with respect to maintaining its qualification as a REIT. Other risks of joint venture investments include an impasse on decisions, such as a sale, because neither the Company’s co-investors nor the Company would have full control over the partnership or joint venture. There is no limitation under the Company’s organizational documents as to the amount of funds that may be invested in partnerships or joint ventures.

Holders of Units in the Operating Partnership or co-investors in properties not owned entirely by the Company may suffer different and more adverse tax consequences than the Company upon the sale or refinancing of properties. The Company may have different objectives from these co-investors and unitholders regarding the appropriate pricing and timing of any sale or refinancing of these properties. While the Company, as the sole general partner of the Operating Partnership, has the exclusive authority as to whether and on what terms to sell or refinance each property owned solely by the Operating Partnership, some of its trustees who have interests in Units may seek to influence the Company not to sell or refinance the properties, even though such a sale might otherwise be financially advantageous to it, or may seek to influence the Company to refinance a property with a higher level of debt.

The Company carries comprehensive liability, fire, flood, earthquake, extended coverage and business interruption policies that insure it against losses with policy specifications and insurance limits that the Company believes are reasonable. There are certain types of losses that management may decide not to insure against since the cost of insuring is not economical. The Company may suffer losses that exceed its insurance coverage. Further, market conditions, changes in building codes and ordinances or other factors such as environmental laws may make it too expensive to repair or replace a property that has been damaged or destroyed, even if covered by insurance.

As a result of the terrorist attacks of September 11, 2001, insurance companies are limiting coverage for losses arising out of acts of terrorism in their renewed “all-risk” policies. The Company believes it is covered for terrorist act losses in its current policy, which expires on March 31, 2002. When the Company renews its policy on April 1, 2002, it is expected that this coverage will no longer automatically be included in the “all-risk” basic policy. The Company may, in the future, be compelled to pay additional undeterminable costs to remain in compliance with existing debt agreements and to insure the Company’s investment properties from losses from this type of act.

Property		Number of Rooms/ Suites	Location
1.	Radisson Convention Hotel	565	Bloomington, MN
2.	Le Meridien New Orleans	494	New Orleans, LA
3.	Le Meridien Dallas	407	Dallas, TX
4.	Marriott Seaview Resort	297	Galloway, NJ (Atlantic City)
5.	Holiday Inn Beachside Resort	222	Key West, FL
6.	Omaha Marriott Hotel	299	Omaha, NE
7.	Le Montrose Suite Hotel	132	West Hollywood, CA
8.	San Diego Paradise Point Resort	457	San Diego, CA
9.	Harborside Hyatt Conference Center & Hotel	270	Boston, MA
10.	LaGuardia Airport Marriott	438	New York, NY
11.	Hotel Viking	234	Newport, RI
12.	Chicago Marriott Downtown	1,192	Chicago, IL
13.	Topaz Hotel	99	Washington, D.C.
14.	Hotel Rouge	137	Washington, D.C.
15.	Clarion Hampshire House Hotel	82	Washington, D.C.
16.	Howard Johnson Plaza Hotel & Suites	184	Washington, D.C.
17.	Holiday Inn on the Hill	343	Washington, D.C.

	Total Number of Rooms/Suites	5,852

Radisson Convention Hotel. Radisson Convention Hotel is an upscale full-service convention hotel located at the intersection of Interstate 494 and Highway 100, approximately 15 minutes from the Minneapolis/St. Paul International Airport, and five miles from the Mall of America. On January 25, 2002, the Company terminated the operating lease with affiliates of the Radisson Group, Inc. and entered into a lease with LHL. Affiliates of the Radisson Group, Inc. continue to operate the hotel.

Le Meridien New Orleans. Le Meridien New Orleans is a luxury full-service convention oriented hotel located in downtown New Orleans, a major convention city. The hotel is centrally located across the street from the French Quarter and near the central business district, the Ernest N. Morial Convention Center and the New Orleans Superdome. The hotel has received the AAA Four Diamond award for 16 consecutive years. The hotel is subject to a 99-year ground lease with the city of New Orleans, which expires in May 2081. The hotel is currently leased to and operated by affiliates of Le Meridien Hotels & Resorts (“Meridien”).

Le Meridien Dallas. Le Meridien Dallas is an upscale full-service convention oriented hotel located in downtown Dallas, approximately 25 minutes from the Dallas/Fort Worth International Airport, in the heart of the city’s arts and financial districts. The hotel is conveniently located near the City Convention Center, four stops away on the Dallas light rail system, with a DART station adjacent to the hotel. The hotel is currently leased to and operated by Meridien.

branding of these hotels, the Company anticipates spending approximately $6.0 million to enhance the guest experience at these hotels and may be obligated to pay a fee to the parent company of Meridien; however, the Company does not believe that the amount of any fees which it may be required to pay will have a material adverse effect on its financial condition, taken as a whole. Contemporaneously with the rebranding of the New Orleans and Dallas hotels, the Company expects to lease the New Orleans and Dallas hotels to LHL.

Holiday Inn Beachside Resort. Holiday Inn Beachside Resort is a full-service resort comprised of several one, two and three-story buildings, located on approximately 7.8 acres, on the beach facing the Gulf of Mexico. The resort is located on the island of Key West, considered to have the most consistent weather in Florida, and benefits from the island’s reputation as a popular tourist destination. On December 31, 2001, the Company terminated the operating lease with Beachside Hospitality, Inc., an affiliate of Crestline, and on January 1, 2002 entered into a lease with LHL on essentially the same terms. Interstate Hotels Company will replace Crestline as manager of the property effective April 1, 2002.

Omaha Marriott Hotel. Omaha Marriott Hotel is an upscale full-service major business hotel located in the western suburbs of Omaha at one of the city’s busiest intersections (I-680 and West Dodge Road). The hotel is located in the Regency Office Park, a mixed-use development containing over 865,000 square feet of office and retail space, and directly across West Dodge Road from Westroads Shopping Center, one of the largest shopping malls in Omaha. The hotel is leased to LHL and operated by Marriott pursuant to a long-term incentive-based operating agreement.

Le Montrose Suite Hotel. Le Montrose Suite Hotel is a five-story, luxury full-service hotel located in West Hollywood, California, two blocks east of Beverly Hills and one block south of the “Sunset Strip.” The hotel is within walking distance of many of the area’s finest restaurants, retail shops and night clubs. The hotel attracts short and long-term guests and small groups primarily from the recording, film and design industries. The hotel is leased to and operated by Outrigger Lodging Services, Inc. (“OLS”).

San Diego Paradise Point Resort. San Diego Paradise Point Resort is a luxury resort that lies on 44 acres and has nearly one mile of beachfront. The hotel is located in the heart of Mission Bay on Vacation Island, a 4,600-acre aquatic park in southwest San Diego County. The resort is 15 minutes away from the San Diego International Airport and convenient to many major San Diego tourist attractions including Sea World, Old Town, downtown San Diego, the San Diego Convention Center, Qualcomm Stadium and the San Diego Zoo. The hotel is subject to a 50-year ground lease, which expires in June 2049. The hotel is leased to and operated by WestGroup San Diego Associates, Ltd., an affiliate of Noble House Hotels & Resorts.

Harborside Hyatt Conference Center & Hotel. Harborside Hyatt Conference Center & Hotel is a full-service luxury conference and airport hotel located adjacent to Boston’s Logan International Airport along the Boston waterfront. The property features 19,000 square feet of meeting space and is directly across the Boston Harbor from Boston’s central business district. The hotel is located next to the Ted Williams tunnel, providing convenient access to downtown Boston. The property is subject to a long-term ground lease from the Massachusetts Port Authority (“Massport”), Logan International Airport’s owner and operating authority. The hotel is leased to LHL and operated by Hyatt Corporation (“Hyatt”).

LaGuardia Airport Marriott. LaGuardia Airport Marriott is an upscale full-service urban/major business hotel located directly across from New York’s LaGuardia Airport. The hotel is five minutes from Shea Stadium and the USTA National Tennis Center and 20 minutes from Manhattan. The hotel is leased to LHL and operated by Marriott pursuant to a long-term incentive-based operating agreement.

Hotel Viking. Hotel Viking is a full-service upscale resort located on Bellevue Avenue in Newport, Rhode Island, a resort area that is rapidly becoming a year-round hotel market. The hotel offers 29,000 square feet of meeting space, a restaurant, a lounge and a rooftop bar. The property also includes the Trinity Parish House and the fully restored Kay Chapel, both adjacent to the hotel. The hotel was leased and operated by Viking Hotel Corporation, an affiliate of Bellevue Properties Inc. On February 26, 2001, the Company terminated the operating lease with Bellevue Properties, Inc. and entered into a lease with LHL on essentially the same terms. Noble House Hotel and Resorts replaced Bellevue Properties, Inc. as operator of the property.

Chicago Marriott Downtown. Chicago Marriott Downtown is a full-service, upscale convention hotel located at the intersection of North Michigan Avenue and Ohio Street on downtown Chicago’s world-famous “Magnificent Mile.” The property has over 60,000 square feet of meeting space, five food and beverage outlets, a health club and sports center, a business center and a gift shop. The Chicago Marriott Downtown has superb visibility and allows guests convenient access to a variety of attractions. A world-renowned shopping destination, the “Magnificent Mile” is home to such retailers as Neiman Marcus, Saks Fifth Avenue, Marshall Fields, and Niketown. The Company, through the Operating Partnership, owns a 9.9% equity interest in the Chicago Marriott Downtown. The hotel is leased to Chicago 540 Lessee, Inc. in which the Company also owns a 9.9% equity interest. The hotel is operated and managed by Marriott pursuant to a long-term incentive-based operating agreement.

D.C. Boutique Collection. On March 8, 2001, LaSalle Hotel Properties acquired four full-service hotels located in Washington, D.C. with a total of 502 guestrooms. Each of the four hotels was originally constructed as an apartment building and as a result, features large guestrooms or suites. The Company leases each of the hotels to wholly owned subsidiaries of LHL. The Company anticipates investing an aggregate of approximately $30.0 million to renovate and reposition the hotels as full-service, upscale, unique, independent boutique hotels. The renovation and repositioning of two of the properties has been completed at an approximate cost of $14.0 million. The remaining two hotels are expected to be completely renovated by the fourth quarter of 2002 at an approximate cost of $16.0 million. The San Francisco, California-based Kimpton Hotel & Restaurant Group, L.L.C., operates all four of these hotels.

Topaz Hotel. Topaz Hotel was the first of the D.C. Boutique Collection to be completely renovated and repositioned. Formerly the Canterbury Hotel, it reopened on October 10, 2001 with an exotic “East-meets-West” theme. The Hotel is conveniently located on Embassy Row in downtown Washington, D.C. It is within walking distance of the Central Business District, minutes from the monuments and museums, and less than two blocks from Dupont Circle and the Metro. The hotel features a Bar/Restaurant.

Hotel Rouge. Hotel Rouge was the second of the D.C. Boutique Collection to open after its renovation and repositioning. Formerly the Quality Hotel & Suites Downtown, it reopened on December 14, 2001 with an “indulgent pleasure” theme. Located on Scott Circle in Washington, D.C., the hotel is five blocks from the White House and just minutes from the business district. The hotel also features a Bar/Restaurant.

Clarion Hampshire House Hotel. Clarion Hampshire House Hotel will be the third of the D.C. Boutique Collection to be renovated and repositioned. It is scheduled to close in the second quarter of 2002 and reopen in the fourth quarter of 2002. The Hotel is located on the Eastern edge of the Georgetown section of Washington, D.C., and near many of the areas attractions.

Howard Johnson Plaza Hotel & Suites. Howard Johnson Plaza Hotel & Suites will be the fourth of the D.C. Boutique Collection to be renovated and repositioned. It is scheduled to close in the second quarter of 2002 and reopen in the fourth quarter of 2002. The Hotel is located just a few blocks from the new D.C. Convention Center which is currently under construction and is expected to open in the Spring of 2003. The hotel is located in close proximity to most of the major downtown tourist attractions.

Holiday Inn on the Hill. Holiday Inn on the Hill is a full-service hotel strategically located on Capitol Hill in Washington, D.C. The property is the closest hotel to the United States Capitol. The Hotel offers a first class amenity package, including 10,000 square feet of newly renovated meeting space, a full-service restaurant and bar and a rooftop swimming pool. The Hotel is minutes away from the site of the new 2.3 million square-foot D.C. Convention Center, which is expected to open in the Spring of 2003. The Hotel is leased by a wholly owned subsidiary of LHL, and Crestline has been the operator of the property since 1997.

In order for the Company to qualify as a REIT, neither the Company nor the Operating Partnership may operate hotels or related properties. The Operating Partnership leases the Hotels to lessees (“Lessees”) for terms of between six and 11 years (from commencement) pursuant to separate Participating Leases that provide for rent equal to the greater of Base Rent or Participating Rent and which set forth the Lessee’s required capitalization and certain other matters. Twelve of the participating leases are with LHL. Unless otherwise noted, each Participating Lease contains the provisions described below.

Participating Lease Terms. The Participating Leases have an average term of approximately 10 years from the effective date, with expiration dates staggered between the years 2007 and 2011, subject to earlier termination upon the occurrence of certain contingencies described in the Participating Leases (including, particularly, the provisions summarized below under the captions “Damage to Hotels,” “Condemnation of Hotels,” “Termination of Participating Leases”). The variation of the lease

Base Rent; Participating Rent; Additional Charges. Each Participating Lease requires the applicable lessee to pay (x) the greater of (i) Base Rent in a fixed amount or (ii) Participating Rent based on certain percentages of room revenue, food and beverage revenue and telephone and other revenue at the applicable hotel, and (y) certain other amounts, including utility charges, certain impositions and insurance premiums, and interest accrued on any late payments or charges (“Additional Charges”). Each lease year, the Base Rent and Participating Rent thresholds are increased to reflect any increase in the applicable Consumer Price Index published by the Bureau of Labor Statistics of the United States of America Department of Labor, U.S. City Average, Urban Wage Earners and Clerical Workers (“CPI”) except for San Diego Paradise Point Resort which has set rent increases defined in the lease. Lessees are required to pay Base Rent monthly in arrears by the first day of each calendar month, and pay Participating Rent quarterly in arrears by the twentieth day of each fiscal quarter, except for the hotels operated by Marriott, whose rents are due in accordance with the terms of their respective leases. Participating Rent is calculated based on the year-to-date departmental receipts as of the end of the preceding fiscal quarter, plus the prorated amount of each of the applicable departmental thresholds for the fiscal quarter, or portion thereof, minus the cumulative Participating Rent previously paid for such fiscal year and the cumulative Base Rent paid for such fiscal year as of the end of the preceding fiscal quarter.

Other than real estate taxes, casualty insurance including business interruption insurance, ground lease payments, capital impositions and capital replacements and refurbishments (determined in accordance with generally accepted accounting principles) (“GAAP”) which are obligations of the Company, the Participating Leases require the Lessees to pay rent, condominium dues, certain insurance, all costs and expenses, and all utility and other charges incurred in the operation of the Hotels. The Participating Leases also provide for rent reductions and abatements in the event of damage or destruction or a partial taking of any hotel as described under “Damage to Hotels” and “Condemnation of Hotels.”

The Company has sold certain FF&E to the lessees of Radisson Convention Hotel and Le Meridien Dallas at its book value in exchange for promissory notes receivable (“FF&E Notes”) of approximately $1.0 million and $0.6 million, respectively. The FF&E Notes were adjusted to net realizable value in 2001 resulting in a writedown of $1.2 million based on the Company’s valuation estimate of FF&E which secures the loans. As of December 31, 2001, the balances on the FF&E Notes for the lessees of Radisson Convention Hotel and Le Meridien Dallas were $0.3 million and $0.1 million, respectively. The FF&E Notes bear interest at 6.0% and 5.6% per annum, respectively, and are payable in monthly installments of interest only. These FF&E Notes have an initial term of five years unless extended at the Company’s option. Additionally, the Company provided working capital to each of the Lessees in the aggregate amount of $6.0 million in exchange for notes receivable (“Working Capital Notes”). During 2001, $4.3 million of the Working Capital Notes were paid down resulting in an outstanding balance of $1.7 million at December 31, 2001. The Working Capital Notes bear interest at either 5.6%, 6.0% or 9.0% per annum, and are payable in monthly installments of interest only. The term of each Working Capital Note is identical to the term of the related Participating Lease. Payments made under the FF&E Notes and the Working Capital Notes are used to reduce the related Participating Lease payments by an equal amount. The total of the interest income payments and Participating Lease payments will be equal to the amounts calculated by applying the rent provisions of the Participating Leases to the revenues of the Hotels.

Reserve Funds. The Participating Leases for the Hotels obligate the Company to make funds available for capital improvements at the Hotels (including the periodic replacement or refurbishment of FF&E) in amounts ranging from 4.0% to 5.5% of total annual revenue from the Hotels, with the amount of such reserve with respect to each hotel representing projected capital requirements at each hotel. The Company’s obligation to make funds available for capital improvements has not been recorded on the books and records of the Company as such amounts are capitalized as incurred. Any unexpended amounts will remain the property of the Company upon termination of the Participating Leases. The reserve requirements for the hotels operated by Marriott and Hyatt are contained in certain non-cancelable operating agreements, which require the reserves for the hotels operated by Marriott and Hyatt to be maintained through restricted cash escrows (“FF&E Escrows”). The amounts maintained in the FF&E Escrows have been recorded on the books and records of the Company. Otherwise, the Lessees are required, at their expense, to maintain the Hotels in good order and repair, subject to ordinary wear and tear, and to make all necessary and appropriate nonstructural, foreseen and unforeseen, and ordinary and extraordinary repairs (other than capital repairs) which may be necessary and appropriate to keep the Hotels in good order and repair.

The Lessees are not obligated to bear the cost of any capital improvements or capital repairs to the Hotels. With the consent of the Company, however, the Lessees may utilize funds from the capital expenditure reserves to make capital additions, modifications or improvements to the Hotels. All such alterations, replacements and improvements are subject to all the terms and provisions of the Participating Leases and will become the property of the Company upon termination of the Participating Leases. The Company owns substantially all personal property (other than FF&E which has been sold to the Lessees of Radisson Convention Hotel and Le Meridien Dallas, inventory, linens and other nondepreciable personal property) not affixed

Insurance and Property Taxes. The Company is responsible for paying (i) real estate taxes on the Hotels, (ii) any ground lease payments on the Le Meridien New Orleans, San Diego Paradise Point Resort and the Harborside Hyatt Conference Center & Hotel, (iii) casualty insurance on the Hotels, and (iv) business interruption insurance on the Hotels. The Lessees are required to pay for or reimburse the Company for all liability insurance on the Hotels, with extended coverage, including comprehensive general public liability, workers’ compensation and other insurance appropriate and customary for properties similar to the Hotels and naming the Company as an additional insured, where permitted by law.

Maryland		36-4219376
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

4800 Montgomery Lane, Suite M25, Bethesda, Maryland		20814
(Address of principal executive office)		(Zip Code)

Title of each class		Name of each exchange on which registered
Common Shares of Beneficial Interest		New York Stock Exchange, Inc.
($0.01 par value)
10¼% Series A Cumulative Redeemable Preferred Shares		New York Stock Exchange, Inc.
($0.01 par value)

Item No.		Form 10-K Report Page
PART I
1.	Business	1
2.	Properties	9
3.	Legal Proceedings	14
4.	Submission of Matters to a Vote of Security Holders	14

PART II
5.	Market for Registrant’s Common Shares and Related Shareholder Matters	15
6.	Selected Financial Data	17
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
7A.	Quantitative and Qualitative Disclosures About Market Risk	31
8.	Consolidated Financial Statements and Supplementary Data	32
9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	32

PART III
10.	Trustees and Executive Officers of the Registrant	33
11.	Executive Compensation	33
12.	Security Ownership of Certain Beneficial Owners and Management	33
13.	Certain Relationships and Related Transactions	33

PART IV
14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	33

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