Contract analysis

I. Executive Summary and Purpose The purpose of this memorandum is to analyze the material federal and state income tax implications of Pellegrino Capital Group LLC's ("Pellegrino" or "PCG") proposed $25,000,000 co-investment in Ridgeline-Clarion Co-Invest, L.P. (the "Co-Invest Vehicle" or "Co-Invest LP"), a Delaware limited partnership, alongside Ridgeline Equity Partners Fund IV, L.P. ("Fund IV"), in connection wit

1. Partnership Classification. The Co-Invest Vehicle will be treated as a partnership for federal income tax purposes under IRC § 761(a) and the applicable Treasury Regulations. No entity-level federal income tax will be imposed on the Co-Invest Vehicle. All items of income, gain, loss, deduction, and credit will pass through to the partners, including Pellegrino, in accordance with the terms of the limited partnersh

2. UBTI. The unrelated business taxable income rules under IRC §§ 511–514 are not a concern for Pellegrino because Pellegrino is a private, for-profit family office and is not a tax-exempt organization under any subsection of IRC § 501. Accordingly, the UBTI rules have no application to Pellegrino's investment in the Co-Invest Vehicle.

3. FIRPTA. FIRPTA risk is limited given that Clarion's primary business is hotel management services and proprietary revenue management technology, rather than direct ownership of U.S. real property interests ("USRPIs"). Preliminary analysis suggests that AcquisitionCo is unlikely to be classified as a U.S. real property holding corporation ("USRPHC"), although certain assets of Clarion and its subsidiaries require f

4. Section 704(b) and 704(c) Allocations. The allocation provisions of the Co-Invest Vehicle's limited partnership agreement ("LPA") appear, based on our review of the current draft, to satisfy the substantial economic effect safe harbor under Treasury Regulation § 1.704-1(b)(2)(ii). Because all partners are contributing cash (rather than appreciated or depreciated property) to the Co-Invest Vehicle, Section 704(c) c

5. Carried Interest — Section 1061. The 10% carried interest payable to the general partner of the Co-Invest Vehicle constitutes an "applicable partnership interest" under IRC § 1061 and is subject to the three-year holding period requirement for long-term capital gain treatment. This provision does not apply to Pellegrino's limited partnership interest, which was acquired in exchange for a capital contribution and n

6. State and Local Taxes. Multi-state tax filing obligations may arise for Pellegrino in Delaware, Florida, Tennessee, and New York, as well as potentially in other states where Clarion-managed hotel properties are located. A preliminary analysis of each relevant jurisdiction is set forth in Section VIII below. We recommend obtaining a state-by-state breakdown of Clarion's managed properties and revenue sources to co

II. Transaction Overview A. The Target — Clarion Hospitality Holdings, Inc. Clarion Hospitality Holdings, Inc. is a Delaware corporation headquartered at 200 International Drive, Suite 1500, Nashville, Tennessee 37214. Clarion is an integrated hospitality asset management platform that manages approximately 14,200 hotel rooms across 62 properties, with a primary focus on select-service and extended-stay hotel segment

III. Entity Classification and Check-the-box Analysis A threshold question in any partnership investment structure is the federal income tax classification of each entity in the chain. The following analysis addresses the classification of the Co-Invest Vehicle, its general partner, AcquisitionCo, and Pellegrino under the entity classification rules of the Code and Treasury Regulations. A. Co-Invest Vehicle — Ridgeli

IV. UBTI Analysis A. Applicability to Pellegrino The unrelated business taxable income rules, codified in IRC §§ 511 through 514, impose a tax on the unrelated business taxable income of organizations that are otherwise exempt from federal income tax under IRC § 501(a). The UBTI regime applies to entities described in, among other provisions, IRC § 501(c)(3) (charitable organizations), § 401(a) (qualified pension, pr

V. FIRPTA Analysis A. Overview of FIRPTA The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), codified principally in IRC § 897, imposes a federal income tax on foreign persons' gains from the disposition of U.S. real property interests ("USRPIs"). Section 897(a) provides that any gain or loss of a nonresident alien individual or foreign corporation from the disposition of a USRPI is treated as income

Section 1445 of the Code imposes a withholding obligation on the transferee of a USRPI acquired from a foreign person. The transferee must withhold 15% (or, in certain cases, 10%) of the amount realized on the disposition and remit the withheld amount to the IRS. Failure to withhold gives rise to penalties and potential liability for the tax that should have been withheld. B. Applicability to Pellegrino Pellegrino Ca

VI. Allocation Methodology — IRC Sections 704(b) and 704(c) A. Section 704(b) — Economic Effect Under IRC § 704(a), a partner's distributive share of income, gain, loss, deduction, or credit is determined by the partnership agreement. However, under IRC § 704(b), if the allocation under the partnership agreement does not have "substantial economic effect," the partner's distributive share is determined in accordance

VII. Carried Interest — IRC Section 1061 A. Overview IRC § 1061, enacted as part of the Tax Cuts and Jobs Act of 2017 (P.L. 115-97) and effective for taxable years beginning after December 31, 2017, modifies the treatment of certain long-term capital gains recognized by taxpayers holding "applicable partnership interests" ("APIs"). An API is defined under § 1061(c)(1) as any interest in a partnership that, directly o

Section 1061 applies only to "applicable partnership interests" — that is, partnership interests received in connection with the performance of substantial services in an applicable trade or business. Pellegrino's limited partnership interest in the Co-Invest Vehicle was acquired in exchange for Pellegrino's $25,000,000 capital contribution. Pellegrino is not performing any services in connection with the management,

VIII. State and Local Tax Considerations The following discussion addresses the principal state and local tax considerations arising from Pellegrino's investment in the Co-Invest Vehicle. This analysis is preliminary and should be supplemented with a comprehensive multi-state review once a state-by-state breakdown of Clarion's managed properties and revenue sources has been obtained. A. Delaware Co-Invest Vehicle (Li