Marriott Corp. has created an unprecedented plan to finance expansion of its hotel business by selling tax shelters to the public.
Investors will be able to put as little as $5,000 into the Marriott venture and potentially earn five times that much in tax deductions, according to a preliminary offering statement made public yesterday.
The plan takes advantage of fast real estate tax write-offs created by the new federal tax bill, but would have offered investors even bigger deductions if Congress had not cut the maximum federal income tax rate from 70 percent to 50 percent.
The giant Bethesda food and lodging chain has formed a new enterprise called Potomac Hotel Limited Partnership to operate the tax shelter plan.
Potomac Limited Partnership plans to raise $18 million from the public and use that money as what amounts to a down payment on 11 hotels costing $365 million.
Four big banks have agreed to provide the equivalent of 100 percent financing for the hotels and under certain circumstances to lend the partnership up to 25 percent more than the value of the properties.
But to get that extraordinary financing, the partnership will pay an unlimited floating interest rate.
Tax shelter sales are a common method of raising money for real estate ventures, but the Marriott deal is believed to be the first time a major corporation has combined a public tax shelter offering with a private bank loan to get financing.
Marriott officials yesterday said they were prohibited by Securities and Exchange Commission rules from commenting on the offering.
Marriott apparently developed the unique financing scheme because of the difficulty in raising funds from other sources to finance the rapid expansion of its hotel business. Marriott opened 20 new hotels last year and plans to build about 10,000 new hotel rooms a year.
Until now, Marriott has borrowed from insurance companies and other institutional investors to finance some of its hotels, but those sources are running short of funds and demanding very high interest rates.
The tax shelter plan will provide funds for 11 hotel properties--four already in operation, four under construction and three in the planning stage. With 4,271 rooms, the 11 hotels represent about half a year's growth for Marriott.
The offering statement filed with the SEC stresses that investing in the Marriott hotel plan is only for taxpayers in the top income brackets. The tax deductions will be of little benefit to persons who pay less than 42 percent of their income in taxes and are best for those paying the maximum rate of 50 percent.
An investor in the 50 percent tax bracket who puts $1,000 into the Marriott deal will earn only $375 in cash profits over the next 15 years, but will get an estimated $5,018 in tax deductions, based on projected earnings of the hotels and the present tax law, the offering states.
The total return in cash and tax benefits on a $1,000 investment would amount to an estimated $5,493 for someone in the 50 percent bracket and $4,696 for a taxpayer in the 42 percent bracket.
The minimum investment in the plan is five units at $1,000 each, a total of $5,000. Anyone purchasing more than five units will have to sign a statement showing they have a net worth of more than $75,000.
A total of 18,000 units in the Marriott tax shelter plan will be offered to the public by Warburg Paribas Becker Inc., the New York investment bankers.
Financing for the project will be provided by Bankers Trust Co. and Manufacturers Hanover Trust Co. of New York, First National Bank of Chicago and Security Pacific National Bank of Los Angeles. The partnership will pay the banks interest ranging from 2 to 3.75 percentage points above the 90-day certificate of deposit rate reported by the New York Federal Reserve Bank, currently 13.75 percent.
If interest rates on the project go above specified levels, the banks will lend the partnership additional money--up to $91.25 million--to pay the excess interest.