Agreements and Transactions with Related Parties

Agreements with Our Advisor and Affiliates

We have an advisory agreement with our Advisor (the “Advisory Agreement”) to perform certain services for us under a fee arrangement, including managing our overall business, our investments, and certain administrative duties. The agreement that is currently in effect will expire on March 31, 2020, unless renewed or extended pursuant to its terms. Our Advisor also has a subadvisory agreement with the Subadvisor (the “Subadvisory Agreement”) whereby our Advisor pays 25% of its fees that it earns under the Advisory Agreement and Available Cash Distributions (as defined below) and 30% of the subordinated incentive distributions to the Subadvisor in return for certain personnel services.

The following tables present a summary of fees we paid, expenses we reimbursed and distributions we made to our Advisor, the Subadvisor and other affiliates, as described below, in accordance with the terms of those agreements (in thousands):



	Years Ended December 31,
	2019		2018		2017
Amounts Included in the Consolidated Statements of Operations
Asset management fees	$	10,734	$	10,400	$	8,670
Available Cash Distributions	6,262		5,467		5,078
Personnel and overhead reimbursements	4,170		4,069		3,514
Acquisition fees	—		—		4,415
Interest expense	—		—		332
Accretion of interest on annual distribution and shareholder servicing fee ^(a)	—		—		198
	$	21,166	$	19,936	$	22,207

Other Transaction Fees Incurred
Watermark commitment agreement	$	2,850	$	—	$	—
Capitalized loan refinancing fees	225		245		280
Selling commissions and dealer manager fees	—		—		13,199
Annual distribution and shareholder servicing fee ^(a)	—		—		8,439
Capitalized acquisition fees for equity method investment ^(b)	—		—		6,195
Organization and offering costs	—		—		1,453
	$	3,075	$	245	$	29,566

___________


(a)	Starting with the payment of the third quarter 2017 distribution and shareholder servicing fee (which was paid in October 2017), we began making payments directly to selected dealers rather than through Carey Financial, LLC (“Carey Financial”), a subsidiary of WPC and the former dealer manager of our offering; therefore, this activity is no longer considered a related party transaction.


(b)	Our Advisor elected to receive 50% of the acquisition fee related to our investment in the Ritz-Carlton Bacara, Santa Barbara Venture in shares of our Class A common stock and 50% in cash.

The following table presents a summary of amounts included in Due to related parties and affiliates in the consolidated financial statements (in thousands):



	December 31,
	2019		2018
Amounts Due to Related Parties and Affiliates
Reimbursable costs due to our Advisor	$	956	$	1,100
Asset management fees and other due to our Advisor	894		884
Watermark commitment agreement	800		—
Due to other related parties and affiliates	136		—
	$	2,786	$	1,984

Asset Management Fees, Disposition Fees and Loan Refinancing Fees

We pay our Advisor an annual asset management fee equal to 0.55% of the aggregate Average Market Value of our Investments (as defined in the Advisory Agreement). Our Advisor is also entitled to receive disposition fees of up to 1.5% of the contract sales price of a property, as well as a loan refinancing fee of up to 1.0% of the principal amount of a refinanced loan, if certain conditions described in the Advisory Agreement are met. If our Advisor elects to receive all or a portion of its fees in shares of our Class A common stock, the number of shares issued is determined by dividing the dollar amount of fees by our most recently published estimated net asset value per share (“NAV”) for Class A shares. For the years ended December 31, 2019, 2018 and 2017, we settled $10.7 million, $10.4 million and $8.3 million, respectively, of asset management fees in shares of our Class A common stock at our Advisor’s election. At December 31, 2019, our Advisor owned 3,506,798 shares (3.8%) of our total outstanding common stock. Asset management fees are included in Asset management fees to affiliate and other expenses in the consolidated financial statements.

Acquisition Fees to our Advisor

Pursuant to our Advisory Agreement, our Advisor is entitled to acquisition fees of 2.5% of the total investment cost of the properties acquired, including on our proportionate share of equity method investments and loans originated by us. The total fees to be paid may not exceed 6% of the aggregate contract purchase price of all investments, as measured over a period specified in our Advisory Agreement.

Available Cash Distributions

Carey Watermark Holdings 2’s special general partner interest entitles it to receive distributions of 10% of Available Cash, as defined in the agreement of limited partnership of the Operating Partnership (“Available Cash Distributions”) generated by the Operating Partnership, subject to certain limitations. Available Cash Distributions are included in Income attributable to noncontrolling interests in the consolidated financial statements.

Personnel and Overhead Reimbursements

Under the terms of the Advisory Agreement, our Advisor generally allocates expenses of dedicated and shared resources, including the cost of personnel, rent and related office expenses, between us and our affiliate CWI 1, based on total pro rata hotel revenues on a quarterly basis. Pursuant to the Subadvisory Agreement, after we reimburse our Advisor, it will subsequently reimburse the Subadvisor for personnel costs and other charges, including the services of our Chief Executive Officer, subject to the approval of our board of directors. These reimbursements are included in Corporate general and administrative expenses and Due to related parties and affiliates in the consolidated financial statements and are settled in cash. We have also granted RSUs to employees of the Subadvisor pursuant to our 2015 Equity Incentive Plan.

Selling Commissions and Dealer Manager Fees

Pursuant to our former dealer manager agreement with Carey Financial, Carey Financial received a selling commission for sales of our Class A and Class T common stock. From March 2016 to April 2017, Carey Financial received a selling commission of $0.82 and $0.22 per share sold and a dealer manager fee of $0.35 and $0.30 per share sold for the Class A and Class T common stock, respectively. In connection with the extension of our initial public offering in 2017, we adjusted our offering prices in April 2017 to reflect our NAVs as of December 31, 2016, with a selling commission of $0.84 and $0.23 per share sold and a dealer manager fee of $0.36 and $0.31 per share sold for the Class A and Class T common stock, respectively, which were paid through the termination of our offering on July 31, 2017. The selling commissions were re-allowed and a portion of the dealer manager fees could have been re-allowed to selected dealers. These amounts are recorded in Additional paid-in capital in the consolidated financial statements. During the year ended December 31, 2017, we paid selling commissions and dealer manager fees totaling $13.2 million.

Through June 30, 2017, Carey Financial was entitled to receive an annual distribution and shareholder servicing fee in connection with our Class T common stock, which it may have re-allowed to selected dealers. Beginning with the payment for the third quarter of 2017, which was paid in October 2017, the distribution and shareholder servicing fee was paid by us directly to selected dealers rather than through Carey Financial; therefore, this activity is no longer considered a related party transaction. The amount of the distribution and shareholder servicing fee is 1.0% of the NAV of our Class T common stock. The distribution and shareholder servicing fee accrues daily and is payable quarterly in arrears. We currently expect that we will cease incurring the distribution and shareholder servicing fee during the third quarter of 2020, at which time the total underwriting compensation paid in respect of the offering will reach 10.0% of the gross offering proceeds. During the year ended December 31, 2017, $9.0 million of distribution and shareholder servicing fees were charged to stockholder’s equity and $3.6 million of such fees were paid to Carey Financial, which it may have re-allowed to selected dealers. During the years ended December 31, 2019, 2018 and 2017, we paid $5.6 million, $5.8 million and $1.5 million, respectively, of distribution and shareholder servicing fees to selected dealers.

Organization and Offering Costs

Pursuant to the Advisory Agreement, we were liable for certain expenses related to our public offering, which were deducted from the gross proceeds of the offering. We reimbursed Carey Financial and selected dealers for reasonable bona fide due diligence expenses incurred that were supported by a detailed and itemized invoice. Our Advisor was reimbursed for all organization expenses and offering costs incurred in connection with our offering (excluding selling commissions and the dealer manager fees), which terminated on July 31, 2017. Through the life of our initial public offering, our Advisor incurred organization and offering costs on our behalf of approximately $9.1 million, all of which has been paid. During the offering period, costs incurred in connection with raising of capital are recorded as deferred offering costs. Upon receipt of offering proceeds, we charged the deferred offering costs to stockholders’ equity. During the year ended December 31, 2017, $2.8 million of deferred offering costs were charged to stockholders’ equity.

Other Transactions with Affiliates

Proposed Merger

In connection with the Proposed Merger, we have entered into an internalization agreement with WPC and Watermark, as well as separate transition services agreements with each. Immediately following the closing of the Proposed Merger:


(i)	the advisory agreements with WPC for both us and CWI 1 will terminate;

(ii)

the operating partnerships of both us and CWI 1 will redeem the special general partnership interests that WPC and Watermark currently hold, for which they will receive, in the aggregate, approximately $97.4 million in consideration, comprised of $65.0 million in shares of our preferred stock and 2,840,549 shares in our Class A common stock valued at approximately $32.4 million. Watermark will receive 2,417,996 limited partnership units in our Operating Partnership with an aggregate value of $27.6 million;


(iii)	the combined company will internalize the management services currently provided by WPC;


(iv)	WPC will provide certain transition services at cost to us for periods generally up to 12 months from the closing of the Proposed Merger; and


(v)	Watermark will provide certain transition services at cost to us and we will provide certain transaction services at cost to them for periods generally up to six months from the closing of the Proposed Merger.

Commitment Agreement

On October 1, 2019, we, CWI 1, Watermark and Mr. Medzigian, the chief executive officer of both us and CWI 1 entered into a commitment agreement pursuant to which we and CWI 1 agreed to pay Watermark a total of $6.95 million in consideration of the commitments of Watermark and Mr. Medzigian to wind down and ultimately liquidate a private fund that was formed to raise capital to invest in lodging properties, and to devote their business activities exclusively to the affairs of us and CWI 1 and certain other activities set forth in the commitment agreement, with the exception of the wind-down of the private fund and performing asset management services for two hotels owned by WPC (one of which was subsequently sold). Of the total $6.95 million, $5.0 million was paid on October 25, 2019, of which $2.0 million was allocated to and paid by us, and was included in Other assets in the consolidated balance sheet at December 31, 2019 as a deferred cost. The remaining balance of $1.95 million was paid on January 15, 2020, of which $0.8 million was allocated to and paid by us, and was included as a payable in Due to other related parties and affiliates and a deferred cost in Other assets in the consolidated balance sheet at December 31, 2019.

Working Capital Facility

In October 19, 2017, our Operating Partnership entered into a $25.0 million secured credit facility with WPC to fund our working capital needs (the “Working Capital Facility”). The Working Capital Facility was scheduled to mature on December 31, 2019 and was extended to the later of March 31, 2020 or the closing date of the Proposed Merger, which is currently expected to occur during the first quarter of 2020. The interest rate for any borrowing made under the Working Capital Facility during this extension would increase to the London Interbank Offered Rate (“LIBOR”) plus 3.0% from the current interest rate of LIBOR plus 1.0%. If the Advisory Agreement expires or is terminated, the Working Capital Facility would mature at that time. We serve as guarantor of the Working Capital Facility and have pledged our unencumbered equity interest in certain properties as collateral, as further described in the related pledge and security agreement. At both December 31, 2019 and 2018, no amounts were outstanding under the Working Capital Facility.

Jointly-Owned Investments

At December 31, 2019, we owned interests in three ventures with CWI 1: the Marriott Sawgrass Golf Resort & Spa, a Consolidated Hotel, and the Ritz-Carlton Key Biscayne and the Ritz-Carlton Bacara, Santa Barbara, both Unconsolidated Hotels. A third-party also owns an interest in the Ritz-Carlton Key Biscayne.