FAIRFIELD INN BY MARRIOTT LTD PARTNERSHIP - 10-K Annual Report

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FORM 10K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended Commission File Number
December 31, 2001 0-16728

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)

Delaware 52-1638296
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

P.O. Box 9507, 7 Bulfinch Place - Suite 500, Boston, MA 02114
--------------------------------------------------------------
(Address of principal executive offices)

(617) 570-4600
----------------------------------------------------
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

UNITS OF LIMITED PARTNERSHIP INTEREST

Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
----- -----

There is no public market for the Limited Registrant Units.
Accordingly, information with respect to the aggregate market value of Limited
Registrant Units held by non-affiliates of Registrant has not been supplied.

Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ ]

Documents incorporated by reference
-----------------------------------

None

Exhibit Index page 50

PART I

Certain matters discussed herein are forward-looking statements. We
have based these forward-looking statements on our current expectations and
projections about future events. Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "believes," "expects," "may," "will," "should,"
"estimates," or "anticipates," or the negative thereof or other variations
thereof or comparable terminology. All forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause our actual
transactions, results, performance or achievements to be materially different
from any future transactions, results, performance or achievements expressed or
implied by such forward- looking statements. Although we believe the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, we can give no assurance that our expectations will be
attained or that any deviations will not be material. We disclaim any
obligations or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this annual report on Form 10-K to
reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.

ITEM 1. BUSINESS

General

Fairfield Inn by Marriott Limited Partnership, a Delaware limited
partnership, was formed on August 23, 1989 to acquire, own and operate 50
Fairfield Inn by Marriott properties, which compete in the economy segment of
the lodging industry. Effective August 16, 2001, AP-Fairfield GP LLC, a Delaware
limited liability company, became the general partner of the partnership. See
"Restructuring Plan" below.

The partnership leases the land underlying 32 of its Inns from Marriott
International, Inc. ("Marriott International") and some of its affiliates. The
50 Inns are located in sixteen states. See "Item 2. Properties" below. Effective
November 30, 2001, Sage Management Resources III, LLC ("Sage"), an affiliate of
Sage Hospitality Resources, LLC, began providing management at the properties.
See "Restructuring Plan" below. Prior to such date, the properties were managed
by Fairfield FMC Corporation, a wholly owned subsidiary of Marriott
International, as part of the Fairfield Inn by Marriott system under a long-term
management agreement. Under Sage the Inns will continue to be operated under the
Fairfield Inn by Marriott system. Sage is a leading hotel management company
that, including the partnership's properties, owns, manages and/or operates 95
hotels located in 29 states. Of these hotels, 80 carry a Marriott flag including
69 Fairfield Inns.

Between November 17, 1989 and July 31, 1990, the partnership sold
83,337 units of limited partnership interests in a registered public offering
for $1,000 per unit. The original general partner, Marriott FIBM One
Corporation, contributed $0.8 million for a 1% general partner interest and $1.1
million to assist in establishing our initial working capital reserve at $1.5
million, as required in the partnership agreement. In addition, the general
partner purchased units equal to a 10% limited partner interest at the closing
of the offering. The remaining 90% limited partnership interest was acquired by
unrelated parties.

In light of the partnership's requirements to obtain the funds
necessary to complete certain capital improvements by November 30, 2003, the
decline in operations since 1996 and in an effort to reduce operating costs, the
partnership has placed eight inns on the market for potential sale and is
attempting to sell such inns, with the approval of its mortgage lender. The
eight inns are located in Montgomery, Alabama; Orlando South, Florida; Atlanta
Southlake, Georgia; Chicago Lansing, Illinois; Charlotte Airport, North
Carolina; Charlotte Northeast, North Carolina; Raleigh Northeast, North
Carolina; and Columbus North, Ohio. There can be no assurance that the Inns can
be sold or, if sold, will be sold for an amount sufficient to make the necessary
capital improvements.

2

Restructuring Plan

As a result of the partnership's continued decline in operating results
which are discussed below, the prior general partner, FIBM One LLC, developed a
restructuring plan for the partnership. In connection with this plan, the
consent of limited partners of the partnership was sought for the transfer by
FIBM One LLC of its general partner interest in the partnership to the current
general partner. Effective August 16, 2001, following the receipt of the
necessary consent to the transfer of the general partner interest, FIBM One LLC
transferred its general partner interest in the partnership to AP-Fairfield GP
LLC, which is affiliated with Apollo Real Estate Advisors, L.P. and Winthrop
Financial Associates, a Boston based real estate investment company with
extensive experience in partnership, asset and property management as well as
investor servicing.

On November 30, 2001, the second phase of the Restructuring Plan was
implemented as the partnership (i) replaced Marriott International as the
property manager at the partnership's properties with Sage Management, (ii)
entered into new Franchise Agreements with Marriott International, (iii) entered
into Ground Lease modifications which provide for substantially reduced rent for
the year 2002, and an extension of the term to November 30, 2098, (iv) agreed to
complete the property improvement plans ("PIPs") required by Marriott
International at the properties by no later than November 30, 2003 and (v)
Marriott International waived its right to receive the deferred fees then owing
to it.

Pursuant to the terms of the management agreement with Sage, which
agreement has a term of five years subject to early termination, the partnership
is required to pay Sage a management fee equal to 3% of adjusted gross revenues
at the partnership's properties. In addition, Sage is entitled to an annual
incentive management fee equal to 10% of the excess earnings before interest,
taxes, depreciation and amortization of the partnership in excess of $25 million
during the first three years and thereafter, the greater of (ii) $25 million or
107.5% of the prior year's earnings before interest, taxes, depreciation and
amortization. If the partnership's earnings before interest, taxes, depreciation
and amortization is not at least $25 million for the 2004 calendar year (subject
to certain exceptions), the partnership has the right to terminate Sage. The
prior management agreement required the partnership to pay management fees of 3%
of gross revenues as well as an incentive management fee equal to 15% of
"operating profit," as defined in the management agreement, increasing to 20%
after the Inns achieved total operating profit during any 12 month period equal
to or greater than $33.9 million. See "The Fairfield Inn by Marriott System"
below.

The new Franchise Agreements are substantially similar to the prior
agreements with Marriott International as they relate to the use of the
"Fairfield Inn by Marriott" flag except that it is an event of default under the
Ground Lease if the PIPs are not completed by November 30, 2003. If the
partnership were to default on the Franchise Agreement, it would also constitute
a default under the Ground Lease and the Loan encumbering the partnership's
properties. The Franchise Agreements permit the Inns to be operated as
"Fairfield Inns by Marriott." See "The Fairfield Inn by Marriott System" below.

If prior to November 30, 2003 the partnership provides evidence to
Marriott International that it has received a capital infusion (either by way of
loan or otherwise) of not less than $23,000,000 in order to fund the completion
of the PIPs, that the partnership is diligently pursuing completion of the PIPs,
and certain other conditions are satisfied, the Ground Leases will be further
modified to provide, among other things, for further substantial reductions in
rent through December 31, 2004, for an additional option to purchase the fee
interest in the properties on terms more favorable than those contained in the
existing options, provided certain option payments are made, and for the
shortening of the terms of the Ground Leases to December 31, 2052 with a
partnership right to extend the term for three successive periods of twelve
years each. If the partnership does not provide such evidence, the reduced
ground rent payments will cease and the additional purchase options granted in
connection with the restructuring will be terminated.

Also, as part of the restructuring plan, the partnership filed a Form
S-1 Registration Statement, in which the partnership sought to offer its limited
partners the right to purchase $23 million in subordinated notes due in 2007
(the "Offering"). The proceeds of the Offering, if made, will be utilized for
capital improvements at the Inns. Due to the partnership's current financial
difficulties, and in light of the decline in operations throughout 2001 and in
the aftermath of the September 11 events, it is uncertain when, or if, the
Offering will ultimately be made. It is not presently anticipated that the
Offering will be made until and unless the partnership's properties are able to
generate sufficient cash flow to meet the partnership's operating expenses and
debt service. However, the General Partner will continue to endeavor to
implement the other restructuring elements of the plan and seek alternate means
to maintain partnership viability.

3

Finally, management of the partnership has elected to cease making
distributions given the negative forecast on the hospitality industry since the
events of September 11, 2001 and the partnership's need for the funds required
to complete the capital improvements required by the PIPs.

Declining Operations; Capital Shortfall

The Inns have experienced a substantial decline in operating results
over the past several years. Since 1996, our annual revenues have declined each
year, from $97.4 million in 1996 to $83.9 million in 2001. The operating profit
has declined over the same period from a $17.3 million operating profit in 1996
to a $496,000 operating profit in 2001. The decline in Inn operations is
primarily due to increased competition, over-supply of limited service hotels in
the markets where the partnership's Inns operate, increased pressure on room
rates, the deferral of capital improvements needed to make the Inns more
competitive in their marketplaces because of a lack of funds, and a slowdown in
the economy resulting in a softness in the lodging industry as a whole.
Exacerbating this trend is the impact of the events of September 11, 2001 which
have had a significant detrimental effect on the hospitality business in general
and the Inns in particular as travel nationwide has severely decreased.

In light of the age of the partnership's Inns, which range from 12 to
15 years, major capital expenditures will be required over the next several
years to remain competitive in the markets where the partnership operates and to
satisfy brand standards, required by our management agreement. These capital
expenditures include room refurbishments planned for 22 of our Inns over the
next several years and the replacement of roofs and facades. As indicated above,
if the capital improvements are not completed, the Franchise Agreement could be
terminated and the Inns could not be operated "Fairfield Inn by Marriott". If
this were to occur, the partnership would seek to become part of a comparable,
nationally recognized hotel system in order to continue to comply with the
obligations under our loan documents. If the partnership is unable to retain
another nationally recognized manager, it could significantly impair our
revenues and our cash flow. Further, loss of the ability to operate as a
"Fairfield Inn by Marriott" is a default under our loan agreement and ground
lease which ultimately could result in a foreclosure on the Inns.

For further discussion of our results of operations, shortfall of
capital, and liquidity situation, as well as efforts being undertaken to address
these problems, see "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" below.

Competition

The United States lodging industry is segmented into full service and
limited service properties. The Inns are included within the limited service
segment and directly compete in the sub-segment of mid-scale properties without
food and beverage facilities. This segment is highly competitive and includes
many name brands including Comfort Inn and Suites, Holiday Inn Express, Hampton
Inn and Suites, La Quinta Inn and Suites, Sleep Inn, Country Inn and Suites,
Candlewood Hotels and Wingate Inns. Competition is based primarily on the level
of service, quality of accommodations, convenience of locations and room rates.
Full service hotels generally offer restaurant and lounge facilities and meeting
space, as well as a wide range of services and amenities. Hotels within our
competitive set generally offer basic guest room accommodations with limited or
no services and amenities.

Based on data by Smith Travel Research, supply in this sub-segment
increased significantly in the late 1990's, growing at rates in excess of 11%
annually, which exceeded demand growth for each year during the period from 1995
through 1999 by as much as 300 basis points. Additionally, the supply growth
rate is projected to continue to grow at 5-6% annually for the next three years,
which will increase the competitive pressure on the Inns. These new products
frequently reflect updated designs and features, which increases the need to
make capital expenditures at the Inns in order for them to compete effectively.
In addition to competing brands, customers compare the Inns to other Fairfield
Inn by Marriott properties. The Fairfield by Marriott brand currently consists
of 484 hotels, of which the partnership owns 50, within the United States, and
continues to grow, with 28 hotel openings and construction of an additional 18
inns expected to commence in 2002, according to our manager. The partnership's
Inns, which are 12 to 15 years old, struggle to compete with newer Fairfield Inn
properties, which benefit from design enhancements and a more contemporary feel,
as well as other limited service properties in the marketplaces where the
partnership operates.

4

The inclusion of the Inns within the nationwide Fairfield Inn by
Marriott hotel system provides advantages of name, recognition, and centralized
reservations and advertising, system-wide marketing and promotion, centralized
purchasing and training and support services. As economy hotels, the Inns
compete with limited service hotels in their respective markets by providing
streamlined services and amenities at prices that are significantly lower than
those available at full service hotels.

The Fairfield Inn by Marriott System

As part of the "Fairfield Inn by Marriott" system, the manager is
required to furnish specific chain services to the Inns, which services are
furnished generally on a central or regional basis to all Inns in the Fairfield
Inn by Marriott hotel system that are owned, leased, or managed by Marriott
International and its subsidiaries. Costs and expenses incurred in providing
such services are allocated among all domestic Fairfield Inn by Marriott hotels
managed, owned or leased by Marriott International or its subsidiaries. The
costs and expenses are allocated among all Inns based on the gross revenues of
each Inn.

Beginning in 1997, the partnership's Inns began participating in
Marriott International's Marriott Rewards Program ("MRP"). The cost of this
program is charged to all hotels in the full-service, Residence Inn by Marriott,
Courtyard by Marriott and Fairfield Inn by Marriott systems based upon the MRP
revenues at each hotel or Inn. The total amounts of chain services and MRP costs
allocated to the partnership for the years ended December 31, 2001, 2000 and
1999 were $1.8 million, $1.7 million and $1.8 million, respectively.

In addition, the manager maintains a marketing fund to pay the costs
associated with specified system-wide advertising, marketing, sales, promotional
and public relations materials and programs. Each Inn within the system
contributes approximately 2.4% of gross Inn revenues to the marketing fund. For
the years ended December 31, 2001, 2000 and 1999, the partnership contributed
$1.9 million, $2.5 million and $2.3 million, respectively, to the marketing
fund.

Ground Leases

The land on which 32 of our Inns are located is leased from Marriott
International or its affiliates. The leases expire on November 30, 2088 and
provide that, other than 2002, the partnership will pay annual rents equal to
the greater of a specified minimum rent for each property or a percentage rent
based on gross revenues of the Inn operated on the land. The minimum rents are
adjusted every five years based on changes in the Consumer Price Index. The
percentage rent, which also varies from property to property, is fixed at
predetermined percentages of gross revenues that increase over time. On November
30, 2001, the partnership entered into an amendment to the ground lease which
cancelled the partnership's obligation to pay unpaid deferred ground rent for
2000 and 2001 in the amount of $2.2 million, reduces the minimum ground rent
from $2.8 million to $100,000 for 2002, and extends the term of the lease to
November 30, 2098. Further, if by November 30, 2003 the partnership (i) receives
a capital infusion (either by way of loan or otherwise) of not less than
$23,000,000 in order to fund the completion of the PIPs, (ii) is diligently
pursuing completion of the PIPs, and (iii) satisfies certain other conditions,
the ground rent will be reduced through 2004 and the partnership will have an
option to acquire the fee interest in the land for a price equal to $48,322,371.
If the partnership does not meet these conditions, it will be a default under
the Franchise Agreements, which would also constitute a default under the Ground
Leases. Accordingly, not only could the partnership lose the right to operate
its Inns as a "Fairfield Inn by Marriott", but the 32 Inns subject to Land Lease
could be lost to the ground lessor.

In connection with our 1997 refinancing, beginning in 1997 and
continuing until the mortgage debt is repaid, the payment of rental expense
exceeding 3% of gross revenues from the 32 leased Inns in the aggregate will be
deferred in any year that cash flow is less than the regularly scheduled
principal and interest payments on the mortgage debt. The deferred ground rent
payment remains the partnership's obligation and is payable thereafter to the
extent that there is cash available after the payment of debt service and other
obligations as required by agreements with the manager and the lender. At
December 31, 2001, an aggregate of $2.2 million of ground rent was deferred. The
amount of deferred ground rent waived as a result of the ground lease amendment
will be recognized as a reduction in ground rent expense over the remaining life
of the new lease term, since it represents a new operating lease as of November
30, 2001, for accounting purposes.

5

Under the leases, the partnership pays all costs, expenses, taxes and
assessments relating to the leased Inns and the underlying land, including real
estate taxes. Each ground lease provides that the partnership has a first right
of refusal in the event the applicable ground lessor decides to sell the leased
premises. Upon expiration or termination of a land lease, title to the
applicable Inn and all improvements reverts to the ground lessor.

Mortgage Debt

The partnership has $149 million of mortgage debt. The mortgage debt is
non-recourse, bears interest at a fixed rate of 8.40% and requires monthly
payments of principal and interest based upon a 20-year amortization schedule
for a 10-year term expiring January 11, 2007. Thereafter, until the final
maturity date of January 11, 2017, interest is payable at an adjusted rate, as
defined, and all excess cash flow is applied toward principal amortization. The
mortgage debt is secured by first mortgages on all of the Inns, the land on
which they are located, or an assignment of the partnership's interest under the
ground leases, including ownership interest in all improvements thereon,
fixtures and personal property related thereto.

The partnership's mortgage lender, Nomura Asset Capital Corporation,
securitized the loan through the issuance and sale of commercial mortgage backed
securities backed by mortgages on a total of 71 properties. Our Inns represent
50 of the 71 properties and approximately 33% of the principal amount of the
certificates. We previously reported to the limited partners that, as a result
of our decline in operating performance, Fitch IBCA, a major credit rating
agency, downgraded the two lowest classes of the CMBS on September 2, 1999. On
May 23, 2000, Fitch IBCA once again downgraded the two lowest classes of the
CMBS due to our continued decline in operating performance. The downgrade of
these securities has no effect on the current terms of our mortgage debt,
although it would impair our ability to obtain new funding from other sources.

Employees

The partnership has no employees. Services are performed for the
partnership by the general partner and agents retained by the partnership
including Sage.

Litigation Settlement

On March 16, 1998, limited partners in several partnerships sponsored
by Host Marriott Corporation, filed a lawsuit, styled Robert M. Haas, Sr. and
Irwin Randolph Joint Tenants, et al. v. Marriott International, Inc., et al.,
Case No. CI-04092, in the 57th Judicial District Court of Bexar County, Texas
against Marriott International, Inc., Host Marriott, various of their
subsidiaries (including the general partners of the partnerships set forth
below), J.W. Marriott, Jr., Stephen Rushmore, and Hospitality Valuation
Services, Inc. (collectively, the "Defendants"). The lawsuit related to the
following limited partnerships: Courtyard by Marriott Limited Partnership,
Courtyard by Marriott II Limited Partnership, Marriott Residence Inn Limited
Partnership, Marriott Residence Inn II Limited Partnership, Fairfield Inn by
Marriott Limited Partnership, Desert Springs Marriott Limited Partnership, and
Atlanta Marriott Marquis Limited Partnership (collectively, the "Partnerships").
The plaintiffs alleged that the Defendants conspired to sell hotels to the
partnerships for inflated prices and that they charged the partnerships
excessive management fees to operate the partnerships' hotels. The plaintiffs
further alleged that the Defendants committed fraud, breached fiduciary duties,
and violated the provisions of various contracts. The plaintiffs sought
unspecified damages. The Defendants, which did not include the partnerships,
maintained that there was no truth to the plaintiffs' allegations and that the
lawsuit was totally devoid of merit.

In September 2000, the partnership's then general partner, Marriott
International and other defendants settled this lawsuit filed by limited
partners of seven limited partnerships, including our limited partners. The
terms of the settlement required that the defendants make cash payments to our
limited partners of approximately $152 per unit in full satisfaction of the
litigation and a release of all claims. In addition, the manager agreed to
forgive $23.5 million of deferred incentive management fees payable by the
partnership.

6

Seasonality

Demand at the Inns is affected by normally recurring seasonal patterns.
For most of the Inns, demand is higher in the spring and summer months (March
through October) than during the remainder of the year. As a result of the
economic slowdown and events of September 11, fourth quarter 2001 operations
were significantly lower than the same period in 2000.

ITEM 2. PROPERTIES

The partnership's portfolio consists of 50 Fairfield Inn by Marriott
properties as of March 1, 2002. The Inns, which range in age between 12 and 15
years, are geographically diversified among 16 states.

The following table presents the location and number of rooms for each
of the Inns. All of the Inns are managed by Sage. See Item 1. Business. The land
on which the Inns are located is either owned by us or leased under a long-term
agreement.

Location of Inn Number of Rooms
--------------- ---------------

Alabama
Birmingham--Homewood(1) 132
Montgomery 133
California
Los Angeles--Buena Park(1) 135
Los Angeles--Placentia 135
Florida
Gainesville(1) 135
Miami--West(1) 135
Orlando--International Drive(1) 135
Orlando--South(1) 132
Georgia
Atlanta--Airport(1) 132
Atlanta--Gwinnett Mall 135
Atlanta--Northlake(1). 133
Atlanta--Northwest(1). 130
Atlanta--Peachtree Corners 135
Atlanta--Southlake 134
Savannah(1) 135
Iowa
Des Moines--West(1) 135
Illinois
Bloomington--Normal(1) 128
Chicago--Lansing(1) 135
Peoria 135
Rockford 135
Indiana
Indianapolis--Castleton(1) 132
Indianapolis--College Park 132
Kansas
Kansas City--Merriam 135
Kansas City--Overland Park 134

7

Michigan
Detroit--Airport(1) 133
Detroit--Auburn Hills(1) 134
Detroit--Madison Heights(1) 134
Detroit--Warren(1) 132
Detroit--West (Canton)(1) 133
Kalamazoo(1) 133
Missouri
St. Louis--Hazelwood 135
North Carolina
Charlotte--Airport(1) 135
Charlotte--Northeast(1) 133
Durham(1) 135
Fayetteville(1) 135
Greensboro(1) 135
Raleigh--Northeast(1) 132
Wilmington 134
Ohio
Cleveland--Airport 135
Columbus--North(1) 135
Dayton--North(1) 135
Toledo--Holland 134
South Carolina
Florence 135
Greenville 132
Hilton Head(1) 119
Tennessee
Johnson City(1) 132
Virginia
Hampton 134
Virginia Beach(1) 134
Wisconsin
Madison(1) 135
Milwaukee--Brookfield 135

TOTAL 6,675

(1) The land on which the Inn is located is leased by the partnership from
Marriott International under a long-term lease agreement. See "Item 1.
Business-Ground Lease."

8

Schedule of Properties

The following table sets forth as of December 31, 2001, the gross
carrying value, accumulated depreciation and federal tax basis for each of the
Inns. The rate and method of depreciation varies at each property. See, "Item 8.
Financial Statements and Supplementing Data, Notes 2 and 3" for additional
information.

Location of Inn Gross Carrying Value Accumulated Depreciation Federal Tax Basis
- --------------- -------------------- ------------------------ -----------------

Alabama
Birmingham--Homewood $6,097,000 $3,634,000 $2,609,000
Montgomery $3,474,000 $2,669,000 $3,078,000
California
Los Angeles--Buena Park $3,500,000 $2,918,000 $2,445,000
Los Angeles--Placentia $7,572,000 $3,272,000 $4,281,000
Florida
Gainesville $4,870,000 $2,817,000 $2,138,000
Miami--West $5,909,000 $3,010,000 $2,758,000
Orlando--International Drive $5,501,000 $2,946,000 $2,578,000
Orlando--South $3,990,000 $3,326,000 $2,800,000
Georgia
Atlanta--Airport $3,707,000 $3,115,000 $2,563,000
Atlanta--Gwinnett Mall $6,321,000 $2,861,000 $3,492,000
Atlanta--Northlake $5,795,000 $3,282,000 $2,580,000
Atlanta--Northwest $6,023,000 $3,654,000 $2,598,000
Atlanta--Peachtree Corners $4,691,000 $2,666,000 $3,286,000
Atlanta--Southlake $5,283,000 $2,651,000 $2,949,000
Savannah $5,030,000 $2,559,000 $2,486,000
Iowa
Des Moines--West $5,390,000 $3,207,000 $2,203,000
Illinois
Bloomington--Normal $6,213,000 $3,517,000 $2,813,000
Chicago--Lansing $3,842,000 $3,091,000 $2,309,000
Peoria $6,587,000 $3,155,000 $3,662,000
Rockford $5,965,000 $3,167,000 $2,900,000
Indiana
Indianapolis--Castleton $5,622,000 $3,223,000 $2,554,000
Indianapolis--College Park $6,292,000 $3,284,000 $3,126.000
Kansas
Kansas City--Merriam $5,769,000 $2,834,000 $2,924,000
Kansas City--Overland Park $6,547,000 $3,056,000 $3,523,000
Michigan
Detroit--Airport $5,896,000 $3,163,000 $2,793,000
Detroit--Auburn Hills $6,592,000 $3,297,000 $3,450,000
Detroit--Madison Heights $6,363,000 $3,300,000 $3,119,000
Detroit--Warren $5,722,000 $3,335,000 $2,500,000
Detroit--West (Canton) $5,808,000 $3,386,000 $2,588,000
Kalamazoo $5,594,000 $2,810,000 $2,658,000
Missouri
St. Louis--Hazelwood $6,366,000 $3,001,000 $3,382,000

9

North Carolina
Charlotte--Airport $3,187,000 $3,013,000 $2,701,000
Charlotte--Northeast $3,454,000 $3,074,000 $2,458,000
Durham $5,071,000 $2,912,000 $2,181,000
Fayetteville $4,989,000 $2,841,000 $2,249,000
Greensboro $5,224,000 $2,737,000 $2,464,000
Raleigh--Northeast $2,927,000 $2,624,000 $2,429,000
Wilmington $5,695,000 $2,979,000 $2,768,000
Ohio
Cleveland--Airport $7,033,000 $3,238,000 $3,949,000
Columbus--North $2,873,000 $2,873,000 $2,333,000
Dayton--North $5,204,000 $3,035,000 $2,285,000
Toledo--Holland $5,985,000 $3,085,000 $2,996,000
South Carolina
Florence $5,395,000 $2,915,000 $2,479,000
Greenville $4,938,000 $2,959,000 $3,267,000
Hilton Head $6,565,000 $2,761,000 $3,758,000
Tennessee
Johnson City $3,841,000 $2,721,000 $2,569,000
Virginia
Hampton $6,064,000 $2,724,000 $3,471,000
Virginia Beach $5,020,000 $2,825,000 $2,255,000
Wisconsin
Madison $5,392,000 $3,126,000 $2,371,000
Milwaukee--Brookfield $5,390,000 $2,673,000 $2,780,000

TOTAL

Occupancy
- ---------

The following table sets forth the average occupancy rates at the Inns
for the years ended December 31, 2001, 2000 and 1999

Location of Inn 2001 2000 1999
- --------------- ---- ---- ----

Alabama
Birmingham--Homewood 60.8% 65.8% 72.6%
Montgomery 62.8% 70.4% 78.7%
California
Los Angeles--Buena Park 68.3% 73.4% 60.7%
Los Angeles--Placentia 74.9% 75.5% 73.6%
Florida
Gainesville 61.6% 65.1% 70.6%
Miami--West 72.7% 80.0% 82.9%
Orlando--International Drive 63.2% 82.6% 79.8%
Orlando--South 55.6% 70.9% 75.9%

10

Georgia
Atlanta--Airport 70.0% 71.7% 75.4%
Atlanta--Gwinnett Mall 59.1% 68.7% 72.2%
Atlanta--Northlake 59.5% 70.7% 75.3%
Atlanta--Northwest 58.3% 67.9% 73.5%
Atlanta--Peachtree Corners 59.6% 71.8% 78.7%
Atlanta--Southlake 60.4% 64.6% 64.8%
Savannah 67.6% 71.9% 78.7%
Iowa
Des Moines--West 63.1% 65.7% 68.5%
Illinois
Bloomington--Normal 68.3% 68.4% 75.5%
Chicago--Lansing 65.0% 63.0% 62.6%
Peoria 64.5% 63.7% 70.4%
Rockford 57.4% 59.5% 64.9%
Indiana
Indianapolis--Castleton 61.1% 66.2% 71.3%
Indianapolis--College Park 58.0% 61.5% 65.9%
Kansas
Kansas City--Merriam 64.5% 66.8% 66.4%
Kansas City--Overland Park 58.3% 65.8% 70.9%
Michigan
Detroit--Airport 79.5% 88.2% 92.0%
Detroit--Auburn Hills 65.2% 77.0% 76.8%
Detroit--Madison Heights 69.6% 78.6% 80.0%
Detroit--Warren 60.1% 72.6% 75.3%
Detroit--West (Canton) 68.1% 76.4% 81.3%
Kalamazoo 63.0% 63.6% 68.0%
Missouri
St. Louis--Hazelwood 63.6% 69.0% 65.5%
North Carolina
Charlotte--Airport 42.2% 52.3% 66.4%
Charlotte--Northeast 38.3% 54.9% 59.6%
Durham 67.1% 71.3% 71.7%
Fayetteville 64.4% 70.7% 74.5%
Greensboro 59.8% 64.4% 66.8%
Raleigh--Northeast 52.5% 54.8% 64.3%
Wilmington 53.3% 62.0% 75.2%
Ohio
Cleveland--Airport 61.0% 67.6% 73.9%
Columbus--North 67.1% 71.2% 69.1%
Dayton--North 65.7% 72.5% 74.0%
Toledo--Holland 65.2% 67.0% 72.8%
South Carolina
Florence 71.1% 66.8% 65.5%
Greenville 57.4% 65.4% 65.7%
Hilton Head 52.5% 65.8% 65.3%
Tennessee
Johnson City 51.6% 53.6% 60.7%
Virginia
Hampton 55.4% 61.2% 70.8%
Virginia Beach 66.8% 68.4% 60.3%

11

Wisconsin
Madison 60.0% 62.6% 59.5%
Milwaukee--Brookfield 62.2% 69.6% 71.2%

Room Rates
- ----------

The following table sets forth the average daily room rates at the Inns
for the years ended December 31, 2001, 2000 and 1999

Location of Inn 2001 2000 1999
- --------------- ---- ---- ----

Alabama
Birmingham--Homewood $50.11 $49.15 $48.65
Montgomery $49.11 $47.43 $44.94
California
Los Angeles--Buena Park $55.19 $49.28 $49.24
Los Angeles--Placentia $56.13 $52.18 $50.17
Florida
Gainesville $49.47 $47.78 $46.62
Miami--West $63.04 $64.94 $63.85
Orlando--International Drive $59.10 $59.94 $55.14
Orlando--South $45.96 $47.44 $44.61
Georgia
Atlanta--Airport $48.99 $48.17 $46.69
Atlanta--Gwinnett Mall $54.51 $47.91 $47.86
Atlanta--Northlake $49.46 $47.30 $43.16
Atlanta--Northwest $52.82 $53.64 $50.75
Atlanta--Peachtree Corners $46.31 $46.14 $43.54
Atlanta--Southlake $46.58 $46.52 $43.51
Savannah $54.18 $54.85 $54.42
Iowa
Des Moines--West $54.81 $54.51 $57.58
Illinois
Bloomington--Normal $58.71 $59.08 $57.51
Chicago--Lansing $50.30 $56.34 $56.93
Peoria $52.62 $49.99 $50.80
Rockford $47.28 $50.76 $50.98
Indiana
Indianapolis--Castleton $52.99 $60.09 $57.90
Indianapolis--College Park $48.27 $52.36 $51.30
Kansas
Kansas City--Merriam $48.56 $53.79 $53.71
Kansas City--Overland Park $55.32 $57.29 $57.17
Michigan
Detroit--Airport $70.06 $71.48 $61.30
Detroit--Auburn Hills $64.86 $73.08 $59.10
Detroit--Madison Heights $62.31 $61.54 $56.99
Detroit--Warren $55.62 $58.63 $53.95
Detroit--West (Canton) $60.96 $63.33 $61.68
Kalamazoo $54.22 $54.12 $51.93

12

Missouri
St. Louis--Hazelwood $50.01 $45.66 $46.32
North Carolina
Charlotte--Airport $49.15 $56.62 $54.07
Charlotte--Northeast $47.68 $47.05 $49.79
Durham $51.57 $51.08 $53.99
Fayetteville $53.55 $48.21 $47.43
Greensboro $57.64 $59.71 $58.49
Raleigh--Northeast $51.20 $54.63 $51.56
Wilmington $56.26 $56.02 $54.10
Ohio
Cleveland--Airport $56.20 $60.03 $59.02
Columbus--North $49.86 $50.29 $51.79
Dayton--North $52.04 $59.56 $55.55
Toledo--Holland $52.52 $54.00 $51.11
South Carolina
Florence $51.53 $52.60 $52.06
Greenville $45.37 $46.84 $47.96
Hilton Head $64.28 $57.08 $56.03
Tennessee
Johnson City $46.00 $44.10 $45.16
Virginia
Hampton $51.50 $49.02 $46.13
Virginia Beach $54.89 $53.34 $53.95
Wisconsin
Madison $48.45 $48.93 $51.28
Milwaukee--Brookfield $52.95 $54.06 $53.12

Real Estate Taxes
- -----------------

Real Estate taxes billed and rates in 2001 for each of the Inns were:

Billing Rate(1)
------- -------
Location of Inn

Alabama
Birmingham--Homewood $38,279 1.50%
Montgomery $38,165 0.69%
California
Los Angeles--Buena Park $46,766 1.02%
Los Angeles--Placentia $46,529 1.10%
Florida
Gainesville $62,969 2.54%
Miami--West $70,418 2.60%
Orlando--International Drive $106,615 2.05%
Orlando--South $62,757 2.04%

13

Georgia
Atlanta--Airport $31,899 2.15%
Atlanta--Gwinnett Mall $48,212 1.29%
Atlanta--Northlake. $76,347 1.49%
Atlanta--Northwest. $47,680 1.08%
Atlanta--Peachtree Corners $43,974 1.26%
Atlanta--Southlake $29,687 0.91%
Savannah $94,072 1.74%
Iowa
Des Moines--West $91,906 2.98%
Illinois
Bloomington--Normal $71,491 2.30%
Chicago--Lansing $355,971 9.45%
Peoria $96,511 2.90%
Rockford $117,072 3.69%
Indiana
Indianapolis--Castleton $23,799 10.55%
Indianapolis--College Park $25,524 9.26%
Kansas
Kansas City--Merriam $59,360 2.36%
Kansas City--Overland Park $54,008 2.04%
Michigan
Detroit--Airport $76,863 2.71%
Detroit--Auburn Hills $80,812 1.25%
Detroit--Madison Heights $109,465 2.02%
Detroit--Warren $61,574 4.91%
Detroit--West (Canton) $56,776 2.40%
Kalamazoo $94,101 3.40%
Missouri
St. Louis--Hazelwood $92,517 2.93%
North Carolina
Charlotte--Airport $30,019 1.20%
Charlotte--Northeast $39,764 1.20%
Durham $34,067 1.62%
Fayetteville $61,917 1.41%
Greensboro $30,725 1.26%
Raleigh--Northeast $38,098 0.95%
Wilmington $33,077 1.08%
Ohio
Cleveland--Airport $94,146 1.93%
Columbus--North $72,594 3.92%
Dayton--North $62,414 1.88%
Toledo--Holland $49,747 2.06%
South Carolina
Florence $28,493 1.02%
Greenville $48,983 1.55%
Hilton Head $51,828 1.31%
Tennessee
Johnson City $18,265 1.76%
Virginia
Hampton $46,200 1.30%
Virginia Beach $53,349 1.25%

14

Wisconsin
Madison $67,158 2.53%
Milwaukee--Brookfield $58,246 1.92%

(1) The real estate tax rates calculated by dividing the 2001 tax liability by
the 2001 assessed value of the property.

ITEM 3. LEGAL PROCEEDINGS

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report through the
solicitation of proxies or otherwise.

15

PART II

ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED SECURITY HOLDER MATTERS

Units of the partnership are not publicly traded. There are certain
restrictions set forth in the partnership's amended limited partnership
agreement (the "Limited Registrant Agreement") that may limit the ability of a
limited partner to transfer Units. Such restrictions could impair the ability of
a limited partner to liquidate its investment in the event of an emergency or
for any other reason.

As of February 1, 2002, there were 2,507 holders of Units of the
partnership, owning an aggregate of 83,337 Units.

The partnership has not made any distributions during the years ended
December 31, 2001 and 2000. The general partner has elected to cease making
distributions given the negative forecast on the hospitality industry since the
events of September 11, 2001 and the partnership's need for the funds required
to complete the capital improvements required by the PIPs. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", for a discussion of additional factors which may affect the
partnership's ability to pay distributions.

Over the past few years, many companies have begun making
"mini-tenders" (offers to purchase an aggregate of less than 5% of the total
outstanding Units) for Units. Pursuant to the rules of the Securities and
Exchange Commission, when a tender offer is commenced for Units, the partnership
is required to provide limited partners with a statement setting forth whether
it believes limited partners should tender or whether it is remaining neutral
with respect to the offer. Unfortunately, the rules of the Securities and
Exchange Commission do not require that the bidders in certain tender offers
provide the partnership with a copy of their offer. As a result, the general
partner often does not become aware of such offers until shortly before they are
scheduled to expire or even after they have expired. Accordingly, the general
partner does not have sufficient time to advise limited partners of its position
on the tender. In this regard, please be advised that pursuant to the
discretionary right granted to the general partner of the partnership in the
Limited Partnership Agreement to reject any transfers of Units, the general
partner will not permit the transfer of any Unit in connection with a tender
offer unless: (i) the partnership is provided with a copy of the bidder's
offering materials, including amendments thereto, simultaneously with their
distribution to the limited partners; (ii) the offer provides for withdrawal
rights at any time prior to the expiration date of the offer and, if payment is
not made by the bidder within 60 days of the date of the offer, after such 60
day period; and (iii) the offer must be open for at least 20 business days and,
if a material change is made to the offer, for at least 10 business days
following such change.

16

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected historical financial data for
each of the five years in the period ended December 31, 2001, which data has
been derived from our audited financial statements for those years. You should
read the following selected financial data together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our audited financial statements included herein.

Selected Financial Data
(in thousands, except per unit amounts and ratio data)

2001 2000 1999 1998 1997
---- ---- ---- ---- ----

Income Statement Data:
Revenues $ 83,865 $ 91,478 $ 93,084 $ 94,370 $ 95,721
Operating profit (loss) 496 (2,848) 3,885 (522) 11,963
Net (loss) income (11,472) 8,709 (8,552) (12,999) (1,411)
Net (loss) income per limited
partner unit (83,337 Units) (136) 103 (102) (154) (17)
Balance Sheet Data:
Total assets $130,212 $147,082 $163,574 $173,064 $185,503
Total liabilities 155,013 160,411 185,612 186,550 185,990
Other Data (unaudited):
Cash distributions per limited -- -- -- -- 10
partner unit (83,337 Units)
Ratio of earnings to fixed charges -- -- -- -- --
Deficiency of earnings to fixed $11,472 $14,774 $ 8,552 $12,999 $ 1,411
charges

17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Certain matters discussed herein are forward-looking statements. We
have based these forward-looking statements on our current expectations and
projections about future events. Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology, such as "believes," "expects," "may," "will," "should,"
"estimates," or "anticipates," or the negative thereof or other variations
thereof or comparable terminology. All forward-looking statements involve known
and unknown risks, uncertainties and other factors which may cause our actual
transactions, results, performance or achievements to be materially different
from any future transactions, results, performance or achievements expressed or
implied by such forward- looking statements. Although we believe the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, we can give no assurance that our expectations will be
attained or that any deviations will not be material. We disclaim any
obligations or undertaking to publicly release any updates or revisions to any
forward-looking statement contained in this report on Form 10-K to reflect any
change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any such statement is based.

GENERAL

The partnership is the owner of 50 limited service Inns, which are
operated as part of the Fairfield Inn by Marriott system, and until November 30,
2001, managed by Fairfield FMC Corporation. Beginning November 30, 2001, Sage
began providing management at the properties. Under Sage the Inns will continue
to be operated under the Fairfield Inn by Marriott system.

During the period from 1999 through 2001, the partnership's revenues
declined from $93.1 million to $83.9 million. The partnership's revenues are
primarily a function of room revenues generated per available room or "RevPAR."
RevPAR represents the combination of the average daily room rate charged and the
average daily occupancy achieved and is a commonly used indicator of hotel
performance. During the period from 1999 through 2001, the partnership's
combined RevPAR decreased approximately 11% from $37.22 to $33.14.

As a result of the decline in the economy, combined with the effect of
the September 11, 2001 terrorist attacks, the hospitality and travel industry
experienced a significant decrease in operations during the second half of 2001.
The partnerships revenues decreased $7.6 million, or 8.3%, to $83.9 million in
2001 from $91.5 million in 2000, primarily as a result of decreases in occupancy
and room rates, which had been flat or decreasing throughout 2001, with
significant declines in the fourth quarter of 2001.

The partnership's operating costs and expenses are, to a great extent,
fixed. Therefore, the partnership derives substantial operating leverage from
increases in revenue. Operating leverage is offset primarily by certain variable
expenses, including base and incentive management fees which are calculated
based on Inn sales.

The table below presents performance information for the Inns for the
indicated periods:

Year ended December 31,
2001 2000 1999
---- ---- ----

Number of properties 50 50 50
Number of rooms 6,675 6,676 6,676
Average daily rate $53.48 $54.06 $52.35
Occupancy 62.0% 68.0% 71.1%
RevPAR $33.14 $36.76 $37.22
% RevPAR change (9.8%) (1.2%) --

18

RESULTS OF OPERATIONS

The following discussion and analysis addresses results of operations
for the three years ended December 31, 2001 and should be read together with the
"Selected Financial Data" and historical financial statements and related notes.

2001 compared to 2000

Rooms Revenues: Rooms revenues decreased $7.8 million, or approximately
8.7%, to $81.5 million in 2001 from $89.3 million in 2000, reflecting a 6.0
percentage point decrease in average occupancy to 62.0% and the $0.58 decrease
in the average daily room rate to $53.48. The decrease in average occupancy was
primarily the result of increased competition in the economy segment and
exacerbated by the September 11, 2001 terrorist attacks, which hurt the
hospitality industry in general. In 2001, total Inn revenues decreased $7.6
million, or 8.3%, to $83.9 million when compared to 2000.

Operating Expense: Operating expenses decreased $11 million, or 11.6%,
to $83.4 million when compared to 2000. The individual components are discussed
below.

Rooms Costs: In 2001, rooms costs decreased $1.5 million, or 5.5%, to
$26.4 million when compared to 2000. The overall decrease in controllable room
costs is a result of the occupancy decreases at the Inns. Room costs in 2001
were also lower due to the implementation of the Guestview reservation system in
2000.

Selling, Administrative and other: Selling, administrative and other
expenses decreased by $0.6 million in 2001 to $27.1 million, or a 2.0% decrease
when compared to 2000. The decrease in expenses was due to a decrease in labor
costs, repairs and maintenance expenses.

Insurance and other: Insurance and other expenses increased $2.9
million in 2001 as compared to 2000. This increase is primarily due to the
payment of a franchise application fee of $500,000 to Marriott International in
connection with the new franchise agreement, legal expenses incurred in
connection with the restructuring, expenses associated with the transition of
the management of the Inns from Marriott International to Sage and payments to
the special servicer on the loan and the rating agencies relating to the loan
modifications.

Termination of Management Agreement: In connection with the termination
of the Management Agreement with Fairfield FMC Corporation, $2,036,000 and
$2,849,130 of incentive fees earned in 2001 and 2000, respectively, were no
longer due under the terms of the Management Agreement. Deferred incentive fees
of $2,849,130 related to 2000, net of a $500,000 payment to the Manager, have
been reflected in the 2001 statement of operations in the line titled
Termination of Management Agreement.

Loss on impairment of long-lived assets: In 2001, the partnership
recorded impairment of long-lived assets of $3.8 million related to our Inns
located in Greenville, South Carolina; Charlotte-Northeast, North Carolina;
Charlotte Airport, North Carolina; Chicago-Lansing, Illinois; Atlanta-Southlake,
Georgia; and Atlanta-Peachtree Corners, Georgia. The partnership recorded an
impairment charge of $8.1 million in 2000 related to the Inns located in Johnson
City, Tennessee; Raleigh and Charlotte Airport, North Carolina; and Columbus
North, Ohio.

Operating Profit (Loss): As a result of the changes in revenues and
operating expenses discussed above, operating loss decreased by $3.3 million,
resulting in operating income of $496,000 for 2001, when compared to an
operating loss of $2.8 million in 2000.

Interest Expense: Interest expense decreased by $0.4 million to $12.8
million in 2001 when compared to 2000. This decrease is due to the payment of
$4.4 million of principal on the mortgage debt.

Loss Before Extraordinary Item: The partnership generated a net loss of
$11.5 million in 2001 compared to a loss before extraordinary item of $14.8
million in 2000. This decreased loss is primarily due to the gain on forgiveness
of incentive management fees and decreases in operating expenses which were
partially offset by the decrease in revenues discussed above.

19

Extraordinary Gain: In connection with the class action litigation
settlement agreement that became effective in 2000, Fairfield FMC Corporation,
the previous manager of all our Inns, waived $23.5 million of deferred incentive
management fees.

Net Income (Loss): Net loss for 2001 was $11.5 million compared to net
income of $8.7 million for 2000. The decrease is primarily due to the $23.5
million of deferred management fees waived in 2000 and lower revenues in 2001,
offset by the gain on termination of the incentive management fees in 2001 and
decreases in operating expenses.

2000 compared to 1999

Rooms Revenues: Rooms revenues decreased $1.3 million, or approximately
1.5%, to $89.3 million in 2000 from $90.7 million in 1999, reflecting a 3.1
percentage point decrease in average occupancy to 68.0% partially offset by the
$1.71 increase in average rate to $54.06. The decrease in average occupancy was
primarily the result of increased competition in the economy segment. In 2000,
total Inn revenues decreased $1.6 million, or 1.7%, to $91.5 million when
compared to 1999.

Operating Expense: Operating expenses increased $5.1 million, or 5.7%,
to $94.3 million when compared to 1999. The individual components are discussed
below.

Rooms Costs: In 2000, rooms costs decreased $0.6 million, or 2.1%, to
$27.9 million when compared to 1999. The overall decrease in controllable room
costs is a result of the occupancy decreases at the Inns. These decreases were
partially offset by an increase in the reservation costs due to the
implementation of the Guestview reservation system in 2000.

Selling, Administrative and other: Selling, administrative and other
expenses increased by $0.8 million in 2000 to $27.7 million, or a 3.0% increase
when compared to 1999. The increase in expenses was due to an increase in labor
costs, repairs and maintenance expenses.

Loss on impairment of long-lived assets: In 2000, the partnership
recorded impairment of long-lived assets of $8.1 million related to its Inns
located in Johnson City, Tennessee, Raleigh and Charlotte Airport, North
Carolina, and Columbus North, Ohio. The partnership recorded an impairment
charge of $2.8 million in 1999 related to its Inns located in Lansing, Illinois
and Charlotte-Northeast, North Carolina.

Operating Profit (Loss): As a result of the changes in revenues and
operating expenses discussed above, operating profit decreased by $6.7 million,
resulting in an operating loss of $2.8 million for 2000, when compared to an
operating profit of $3.9 million in 1999.

Interest Expense: Interest expense decreased by $0.3 million to $13.2
million in 2000 when compared to 1999. This decrease is due to the payment of
$4.3 million of principal on the mortgage debt.

Loss Before Extraordinary Item: The partnership generated a loss before
extraordinary item of $14.8 million in 2000 compared to a net loss of $8.6
million in 1999. This increased loss is primarily due to the decrease in
revenues coupled with the increase in operating expenses discussed above.

Extraordinary Gain: In connection with the class action litigation
settlement agreement that became effective in 2000, Fairfield FMC Corporation,
the manager of all the partnership's Inns, waived $23.5 million of deferred
incentive management fees.

Net Income (Loss): Net income for 2000 was $8.7 million compared to a
net loss of $8.6 million for 1999. The increase is primarily due to the $23.5
million of deferred management fees waived in 2000 offset by slightly lower
revenues and increases in operating expenses.

20

LIQUIDITY AND CAPITAL RESOURCES

Going Concern and Other Important Risk Factors: Adequate liquidity and
capital are critical to the partnership's ability to continue as a going
concern. The partnership's inns have experienced a substantial decline in
operating results over the past several years. Since 1996, the partnership's
annual revenues have declined each year, from $97.4 million in 1996 to $83.9
million in 2001. Further, operating profit has declined over the same periods
from a $17.3 million operating profit in 1996 to a $496,000 operating profit in
2001.

In addition, the partnership has faced increasing needs to make
substantial capital improvements to its inns to enable it to compete more
effectively in the markets and to satisfy standards for the Fairfield Inn brand,
as required by the franchise agreements. The partnership had approximately $1.6
million of unrestricted cash as of December 31, 2001. The general partner is
attempting to address the decline in operating cash flow and need for additional
capital as discussed below.

Further to the slowdown in the hotel industry (due to softness in the
economy), the September 11th terrorist attacks have caused general travel in the
United States to significantly decline, thereby further exacerbating the
partnership's financial difficulties. The Partnership had significant declines
in occupancy levels and RevPAR in the fourth quarter of 2001 as a result. While
the partnership is working with Sage to attempt to offset this trend, the
partnership expects results in 2002 to be below historical levels.

The partnership had $148.9 million of mortgage debt outstanding as of
December 31, 2001. The annual principal and interest debt service requirements
are approximately $17 million. There can be no assurances that there is
sufficient liquidity, including the availability of cash reserves, to fund
operations and meet debt service for 2002. Further, there can be no assurances
that the partnership will be able to reverse the decline in operations, or
obtain the additional financing that may be required to meet operating needs in
the future, and make the necessary PIP's to avoid default under the
partnership's franchise agreements with Marriott International. The above
factors raise substantial doubt about the partnership's ability to continue as a
going concern.

As a result of the partnership's continued decline in operating
results, which are discussed above, the prior general partner, FIBM One LLC,
developed a restructuring plan for the partnership. In connection with this
plan, the consent of limited partners of the partnership was sought for the
transfer of FIBM One LLC's general partner interest in the partnership to the
current general partner. Effective August 16, 2001, following the receipt of the
necessary consent to the transfer of the general partner interest, FIBM One LLC,
transferred its general partner interest in the partnership to AP-Fairfield GP,
LLC.

Also, as part of the restructuring plan, the partnership filed a Form
S-1 Registration Statement, in which the partnership sought to offer its limited
partners the right to purchase $23 million in subordinated notes due in 2007
(the "Offering"). The proceeds of the Offering were to be utilized for capital
improvements at the Inns.

On November 30, 2001, the second phase of the Restructuring Plan was
implemented as the partnership (i) replaced Fairfield FMC Corporation as the
property manager at the partnership's properties with Sage, (ii) entered into
new Franchise Agreements with Marriott International, (iii) entered into Ground
Lease modifications which provide for substantially reduced rent for the year
2002, and an extension of the term to November 30, 2098, and (iv) agreed to
complete the property improvement plans ("PIPs") required by Marriott
International at the properties by no later than November 30, 2003.

Based upon forecasts provided by Sage, the partnership is projecting
improved results for 2002 over 2001. Partnership cash, including $3.1 million
held in lender reserve accounts, totaled $4.7 million at December 31, 2001.
Along with forecasted operating cash flow, partnership cash, and reserves held
by the lender, the partnership expects to be able to meet debt service during
2002. However, this will require improved results, of which there can be no
assurance, and maintaining a debt service reserve at levels below lender
requirements.

Principal Sources and Uses of Cash: The partnership's principal source
of cash has been cash from operations. The partnership's principal uses of cash
are to make debt service payments, fund the property improvement fund and
maintain reserves required pursuant to the terms of the mortgage debt.

21

The partnership's cash and cash equivalents declined to $1,597,000 at
December 31, 2001 as compared to $7,702,000 at December 31, 2000. The decline
from prior year is due to $8,921,000 of cash used in investing activities and
$1,288,000 of cash used in financing activities, which more than offset
$4,104,000 of cash provided by operating activities. Cash used in investing
activities consisted of $9,190,000 of capital improvements and equipment
purchases which was partially offset by the excess of withdrawals from the
property improvement fund over contributions to the property improvement fund.
Cash used in financing activities consisted of principal payments on the
partnership's mortgage loan and changes to the restricted cash reserves as
required under the terms of the mortgage debt.

Shortfall in Funds Available for Capital Expenditures: In light of the
age of the partnership's inns, which range from 12 to 15 years, major capital
expenditures will be required over the next several years in an effort to remain
competitive in the markets where the partnership operates and to satisfy brand
standards required by the franchise agreement. These capital expenditures
include room refurbishments planned for 22 of the Inns over the next several
years and the replacement of roofs, facades, carpets, wall vinyl and furniture.
The capital expenditure needs for the partnership's inns for 2002 and 2003 are
estimated to total approximately $19 million.

The cost of future capital expenditures for the partnership's inns is
estimated to exceed available funds. The partnership's property improvement fund
became insufficient to meet anticipated capital expenditures in 1999 and
continued to be insufficient through 2001. To address this shortfall, the
partnership deposited an additional $2.4 million into the property improvement
fund during 1999 from its partnership cash beyond the required contributions. In
addition, the contribution rate to the property improvement fund was increased
to 7% of gross sales for 1997 and thereafter. The partnership contributed $5.8
million and $6.0 million during 2001 and 2000, respectively, to the property
improvement fund.

Based upon information provided by Sage, the estimated property
improvement fund shortfall is expected to be $1.8 million of projected capital
expenditure requirements by the end of 2003. Until the partnership reaches a
resolution concerning funding of the partnership's operating and capital
expenditure shortfalls, any proposed capital expenditures exceeding the amount
available in the property improvement fund will be deferred.

As indicated above, the partnership is required to provide evidence by
no later than November 30, 2003 that at least $23 million has been set aside to
complete a portion of these capital improvements. If the capital improvements
are not completed, the Franchise Agreement could be terminated and the Inns
could not be operated "Fairfield Inn by Marriott". If this were to occur, the
partnership would seek to become part of a comparable, nationally recognized
hotel system in order to continue to comply with the obligations under its loan
documents. If the partnership is unable to retain another nationally recognized
manager, it could significantly impair its revenues and cash flow, and result in
a default under its loan agreement.

Recently Issued Accounting Standards

The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards "SFAS" No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of SFAS No.
133." The Statement deferred for one year the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
requires companies to recognize all derivatives on the balance sheet as assets
or liabilities, measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for depending on the use
of the derivative and whether they qualify for hedge accounting. This Statement
was effective for fiscal years beginning after June 15, 2000. There was no
effect from this Statement on the partnership's financial statements, as the
partnership has no derivatives.

In July 2001, the FASB issued SFAS No. 141 "Business Combinations".
SFAS No. 141 requires that all business combinations be accounted for under the
purchase method of accounting. SFAS No. 141 also changes the criteria for the
separate recognition of intangible assets acquired in a business combination.
SFAS No. 141 is effective for all business combinations initiated after June 30,
2001. This Statement will not affect the partnership's financial statements.

In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets". SFAS No. 142 addresses accounting and reporting for
intangible assets acquired, except for those acquired in a business combination.
SFAS No.

22

142 presumes that goodwill and certain intangible assets have indefinite useful
lives. Accordingly, goodwill and certain intangibles will not be amortized but
rather will be tested at least annually for impairment. SFAS No. 142 also
addresses accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 is effective fiscal years
beginning after December 15, 2001. This Statement will not affect the
partnership's financial statements.

New Accounting Standards

In October 2001, the Financial Accounting Standards Board issued SFAS
No. 144 "Accounting for Impairment or Disposal of Long-Lived Assets" which
replaces SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." This standard provides guidance beyond
that previously specified in Statement 121 to determine when a long-lived asset
should be classified as held for sale, among other things. This Statement is
effective for fiscal years beginning after December 15, 2001. It is not expected
that the implementation of the Statement will have a material effect on the
partnership.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying financial statements and related footnotes. In preparing
these financial statements, management has made its best estimates and judgments
of certain amounts included in the financial statements, giving due
consideration to materiality. The partnership does not believe there is a great
likelihood that materially different amounts would be reported related to the
accounting policies described below. However, application of these accounting
policies involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates.

Impairment of long-lived assets: At December 31, 2001 and December 31,
2000, the partnership had $110.0 million and $122.0 million of property and
equipment (net), and $5.7 million and $0 of properties held for sale, accounting
for approximately 89% and 83%, respectively, of the partnership's total assets.
Property and equipment is carried at the lower of cost or net realizable value.
The fair value of the partnership's property and equipment is dependent on the
performance of the properties.

During the years ended December 31, 2001, 2000, and 1999, the
Partnership recognized $3.8 million, $8.1 million, and $2.8 million,
respectively, of impairment losses related to its property and equipment. An
impairment loss must be recorded for an Inn if estimated undiscounted future
cash flows are less than the book value of the Inn. Impairment losses are
measured based on the estimated fair value of the Inn. In assessing the
recoverability of the partnership's property and equipment the partnership must
consider the forecasted financial performance of its properties. If these
estimates or their related assumptions change in the future, the partnership may
be required to record additional impairment charges. See Item 8. Financial
Statements and Supplementary Data-Note 2 of the accompanying financial
statements for further discussion.

Useful lives of long-lived assets: Property and equipment, and certain
other long-lived assets, are amortized over their useful lives. Useful lives are
based on management's estimates of the period that the assets will generate
revenue.

Deferred ground rent: Ground rent payable to Marriott International and
its affiliates at December 31, 2001 and 2000 was $2,204,000 and $1,082,000,
respectively, and is included in Due to Marriott International, Inc. and
affiliates on the accompanying balance sheet. The partnership's deferred ground
rent that remained payable at November 30, 2001 was waived in accordance with
the amended lease agreement that was entered between the partnership and
Marriott International and its affiliates. The amount of deferred ground rent
waived as a result of the ground lease amendment will be recognized as a
reduction in ground rent expense over the remaining life of the new lease term,
which has been extended to November 30, 2098, since it represents a new
operating lease as of November 30, 2001, for accounting purposes.

23

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.

The partnership is not subject to market risk with respect to interest
rates, foreign currency exchanges or other market rate or price risk, and we do
not hold any financial instruments for trading purposes. As of December 31,
2001, all of the partnership's debt has a fixed interest rate.

24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

Page
----

Report of Independent Public Accountants................................... 26

Balance Sheets as of December 31, 2001 and 2000............................ 27

Statements of Operations for the fiscal years ended
December 31, 2001, 2000 and 1999.......................................... 28

Statements of Changes in Partners' Capital for the fiscal years ended
December 31, 2001, 2000 and 1999.......................................... 29

Statements of Cash Flows for the fiscal years ended
December 31, 2001, 2000 and 1999.......................................... 30

Notes to Financial Statements.............................................. 31

25

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO THE PARTNERS OF FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP:

We have audited the accompanying balance sheets of Fairfield Inn by
Marriott Limited Partnership (a Delaware limited partnership) as of December 31,
2001 and 2000, and the related statements of operations, changes in partners'
capital (deficit) and cash flows for the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
General Partner's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Fairfield Inn by
Marriott Limited Partnership as of December 31, 2001 and 2000, and the results
of its operations and its cash flows for the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.

The accompanying financial statements have been prepared assuming that
the partnership will continue as a going concern. As discussed in Note 1 to the
financial statements, the partnership has suffered recurring operating losses,
has a net capital deficiency, and the partnership may not be able to meet its
2002 debt obligations. These factors raise substantial doubt about the
partnership's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments relating to recoverability of asset carrying
amounts or the amount of liabilities that might result should the partnership be
unable to continue as a going concern.

Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index at Item
14(a)(2) is presented for the purpose of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in our audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.

Arthur Andersen LLP

Vienna, Virginia
March 18, 2002

26

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

BALANCE SHEETS
December 31, 2001 and 2000
(in thousands)

2001 2000
---- ----

ASSETS
Property and equipment, net $ 110,039 $ 122,013
Properties held for sale 5,709 --
Deferred financing costs, net of accumulated amortization 2,451 2,937
Due from manager 1,069 --
Inventory 1,000 --
Due from Marriott International, Inc. and affiliates -- 1,215
Property improvement fund 5,220 5,489
Restricted cash 3,127 7,726
Cash and cash equivalents 1,597 7,702
--------- ---------

Total assets $ 130,212 $ 147,082
========= =========

LIABILITIES AND PARTNERS' DEFICIT LIABILITIES
Mortgage debt $ 148,850 $ 153,569
Due to Marriott International, Inc., affiliates and other 2,503 3,931
Accounts payable and accrued liabilities 3,660 2,911
--------- ---------

Total liabilities 155,013 160,411
--------- ---------

PARTNERS' DEFICIT
General Partner 813 813
Capital contribution (517) (517)
Capital distributions (494) (379)
--------- ---------
Cumulative net losses (198) (83)
--------- ---------

Limited Partners 75,479 75,479
Capital contributions (51,270) (51,270)
Capital distributions (48,812) (37,455)
--------- ---------
Cumulative net losses (24,603) (13,246)
--------- ---------

Total partners' deficit (24,801) (13,329)
--------- ---------

$ 130,212 $ 147,082
========= =========

The accompanying notes are an integral part of these financial statements.

27

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

STATEMENTS OF OPERATIONS
Fiscal years ended December 31, 2001, 2000 and 1999
(in thousands, except Unit and per Unit amounts)

2001 2000 1999
---- ---- ----

REVENUES
Rooms $81,540 $89,308 $90,653
Other 2,325 2,170 2,431
--------- -------- --------

Total revenues 83,865 91,478 93,084
--------- -------- --------

OPERATING EXPENSES
Rooms 26,373 27,894 28,481
Other department costs and expenses 1,844 1,670 1,597
Selling, administrative and other 27,135 27,701 26,907
--------- -------- --------

Total property-level costs and expenses 55,352 57,265 56,985
Depreciation 11,647 13,463 14,413
Property taxes 4,048 3,886 3,749
Fairfield Inn system fee 2,409 2,744 2,792
Incentive management fee -- 2,849 2,775
Ground rent 2,665 2,964 2,742
Base management fee 1,712 1,830 1,862
Insurance and other 4,077 1,198 1,038
Termination of management agreement (Note 7) (2,349) -- --
Loss on impairment of long-lived assets (Note 2) 3,808 8,127 2,843
--------- -------- --------

Total operating expenses 83,369 94,326 89,199
--------- -------- --------

OPERATING PROFIT (LOSS) 496 (2,848) 3,885
Interest expense (12,845) (13,238) (13,528)
Interest income 727 1,312 1,091
Other income 150 -- --
--------- -------- --------

LOSS BEFORE EXTRAORDINARY ITEM (11,472) (14,774) (8,552)
EXTRAORDINARY ITEM
Gain on the forgiveness of incentive management fees -- 23,483 --
--------- -------- --------

NET (LOSS) INCOME $(11,472) $8,709 $(8,552)
========= ======== ========

ALLOCATION OF NET (LOSS) INCOME
General Partner $(115) $87 $(86)
Limited Partners (11,357) 8,622 (8,466)
--------- -------- --------

$(11,472) $8,709 $(8,552)
========= ======== ========

NET (LOSS) INCOME PER LIMITED PARTNER UNIT
(83,337 UNITS) $ (136) $ 103 $ (102)
========= ======== ========

The accompanying notes are an integral part of these financial statements.

28

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT)
Fiscal years ended December 31, 2001, 2000 and 1999
(in thousands)

General Limited
Partner Partners Total

Balance, December 31, 1998 $ (84) $(13,402) $(13,486)
Net loss (86) (8,466) (8,552)
-------------- -------------- --------------

Balance, December 31, 1999 (170) (21,868) (22,038)
Net income 87 8,622 8,709
-------------- -------------- --------------

Balance, December 31, 2000 (83) (13,246) (13,329)
Net loss (115) (11,357) (11,472)
-------------- -------------- --------------

Balance, December 31, 2001 $(198) $(24,603) $(24,801)
============== ============== ==============

The accompanying notes are an integral part of these financial statements.

29

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

STATEMENTS OF CASH FLOWS
Fiscal years ended December 31, 2001, 2000 and 1999
(in thousands)

2001 2000 1999
---- ---- ----

OPERATING ACTIVITIES
Net (loss) income $(11,472) $8,709 $(8,552)
Extraordinary gain on the forgiveness of incentive -- (23,483) --
management fees
Depreciation 11,647 13,463 14,413
Deferral of incentive management fee -- 2,849 2,775
Amortization of deferred financing costs as interest expense 486 487 486
Amortization of mortgage debt premium (350) (350) (350)
Loss on disposition of equipment -- 16 28
Loss on impairment of long-lived assets 3,808 8,127 2,843
Termination of management agreement (2,849) -- --
Changes in operating accounts:
Due to/from Marriott International, Inc. and affiliates 2,636 106 823
Receivables and other current assets (2,069) -- --
Accounts payable and accrued liabilities 749 (335) 776
Change in restricted reserves 1,518 913 3,119
------------- ------------ -----------

Cash provided by operations 4,104 10,502 16,361

INVESTING ACTIVITIES
Additions to property and equipment (9,190) (6,682) (8,973)
Change in property improvement fund 269 (1,603) (3,678)
------------- ------------ -----------

Cash used in investing activities (8,921) (8,285) (12,651)
------------- ------------ -----------

FINANCING ACTIVITIES
Repayment of mortgage debt (4,369) (3,978) (3,689)
Change in restricted cash 3,081 (598) 1,386
------------- ------------ -----------

Cash used in financing activities (1,288) (4,576) (2,303)
------------- ------------ -----------

(DECREASE) INCREASE IN CASH AND (6,105) (2,359) 1,407
CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS at beginning of year 7,702 10,061 8,654
------------- ------------ -----------

CASH AND CASH EQUIVALENTS at end of year $ 1,597 $ 7,702 $ 10,061
============= ============ ===========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest $ 12,730 $ 13,121 $ 13,409
============= ============ ===========

The accompanying notes are an integral part of these financial statements.

30

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

NOTE 1. THE PARTNERSHIP

Description of the partnership

Fairfield Inn by Marriott Limited Partnership, a Delaware limited partnership,
was formed on August 23, 1989, to acquire, own and operate 50 Fairfield Inn by
Marriott properties (the "Inns"), which compete in the economy segment of the
lodging industry. Effective August 16, 2001, AP-Fairfield GP LLC, a Delaware
limited liability company, became the general partner of the partnership. See
"Restructuring Plan" below.

The partnership leases the land underlying 32 of the Inns from Marriott
International, Inc. ("Marriott International") and certain of its affiliates
(the "Land Leases"). Of the partnership's 50 Inns, seven are located in each of
Georgia and North Carolina; six in Michigan; four in each of Florida, Illinois,
and Ohio; and three or less in each of Alabama, California, Iowa, Indiana,
Kansas, Missouri, South Carolina, Tennessee, Virginia and Wisconsin. Effective
November 30, 2001, Sage Management Resources III, LLC ("Sage"), an affiliate of
Sage Hospitality Resources, LLC, began providing management at the properties.
See "Restructuring Plan" below. Prior to such date the Inns were managed by
Fairfield FMC Corporation (the "Manager"), a wholly-owned subsidiary of Marriott
International, as part of the Fairfield Inn by Marriott hotel system under a
long-term management agreement. Under Sage the Inns will continue to be operated
under the Fairfield Inn by Marriott system.

Inn operations commenced on July 31, 1990 (the "Closing Date") after 83,337
limited partnership interests (the "Units") were sold in a public offering for
$1,000 per Unit. Marriott FIBM One Corporation ("FIBM One") contributed $841,788
for a 1% general partnership interest and $1.1 million to establish the initial
working capital reserve of the partnership at $1.5 million. In addition, FIBM
One had a 10% limited partnership interest in the partnership while the
remaining 90% of the limited partnership interest is owned by outside parties.

Restructuring Plan

As a result of the partnership's continued decline in operating results, which
are discussed below, the prior general partner, FIBM One LLC, developed a
restructuring plan for the partnership. In connection with this plan, the
consent of limited partners of the partnership was sought for the transfer of
FIBM One LLC's general partner interest in the partnership to the current
general partner. Effective August 16, 2001, following the receipt of the
necessary consent to the transfer of the general partner interest, FIBM One LLC,
transferred its general partner interest in the partnership to AP-Fairfield GP,
LLC (the "New General Partner"), which is affiliated with Apollo Real Estate
Advisors, L.P. and Winthrop Financial Associates.

Also, as part of the restructuring plan, the partnership filed a Form S-1
Registration Statement, in which the partnership sought to offer its limited
partners the right to purchase $23 million in subordinated notes due in 2007
(the "Offering"). The proceeds of the Offering, if made, will be utilized for
capital improvements at the Inns.

On November 30, 2001, the second phase of the Restructuring Plan was implemented
as the partnership (i) replaced Fairfield FMC Corporation as the property
manager at the partnership's properties with Sage, (ii) entered into new
Franchise Agreements with Marriott International, (iii) entered into Ground
Lease modifications which provide for substantially reduced rent for the year
2002, and an extension of the term to November 30, 2098, and (iv) agreed to
complete the property improvement plans ("PIPs") required by Marriott
International at the properties by no later than November 30, 2003.

31

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

Partnership Allocations and Distributions

Partnership allocations and distributions are generally made as follows:

a. Cash available for distribution for each fiscal year will be
distributed quarterly as follows: (i) 99% to the limited partners and 1% to the
General Partner (collectively, the "Partners") until the Partners have received,
with respect to such fiscal year, an amount equal to the Partners' Preferred
Distribution (10% of the excess of original cash contributions over cumulative
distributions of net refinancing and sales proceeds ("Capital Receipts") on an
annualized basis); and (ii) remaining cash available for distribution will be
distributed as follows, depending on the amount of Capital Receipts previously
distributed:

(1) 99% to the limited partners and 1% to the General Partner,
if the Partners have received aggregate cumulative distributions of
Capital Receipts of less than 50% of their original capital
contributions; or

(2) 90% to the limited partners and 10% to the General
Partner, if the Partners have received aggregate cumulative
distributions of Capital Receipts equal to or greater than 50% but less
than 100% of their original capital contributions; or

(3) 80% to the limited partners and 20% to the General
Partner, if the Partners have received aggregate cumulative
distributions of Capital Receipts equal to 100% or more of their
original capital contributions.

b. Refinancing proceeds and sale proceeds from the sale or other
disposition of less than substantially all of the assets of the partnership will
be distributed (i) 99% to the limited partners and 1% to the General Partner
until the Partners have received the then outstanding Partners' 12% Preferred
Distribution, as defined, and cumulative distributions of Capital Receipts equal
to 100% of their original capital contributions; and (ii) thereafter, 80% to the
limited partners and 20% to the General Partner.

c. Sale proceeds from the sale of substantially all of the assets of
the partnership will be distributed to the Partners pro-rata in accordance with
their capital account balances as adjusted to take into account gain or loss
resulting from such sale.

d. Net profits for each fiscal year generally will be allocated in the
same manner in which cash available for distribution is distributed. Net losses
for each fiscal year generally will be allocated 99% to the limited partners and
1% to the General Partner.

e. Gains recognized by the partnership generally will be allocated in
the following order of priority: (i) to those Partners whose capital accounts
have negative balances until such negative balances are brought to zero; (ii) to
all Partners up to the amount necessary to bring the Partners' capital account
balances to an amount equal to their pro-rata share of the Partners' 12%
Preferred Distribution, as defined, plus their Net Invested Capital, as defined;
and (iii) thereafter, 80% to the limited partners and 20% to the General
Partner.

f. For financial reporting purposes, profits and losses are allocated
among the Partners based on their stated interests in cash available for
distribution.

32

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

Going Concern Uncertainty, Liquidity and Financing Requirements

Adequate liquidity and capital are critical to the ability of the partnership to
continue as a going concern. The partnership has experienced declining
operations during the last five years. This decline was exacerbated by the
September 11, 2001 terrorist attacks, which have hurt the hospitality industry
in general. If operating results do not significantly improve in 2002, it is
unlikely the partnership will have sufficient cash flow from current operations
to make the required debt service payments for 2002. These factors and those
discussed below raise substantial doubt about the partnership's ability to
continue as a going concern.

Due to the partnership's current financial difficulties, and in light of the
decline in operations throughout 2001 and in the aftermath of the September 11
events, it is uncertain when, or if, the Offering will ultimately be made. It is
not presently anticipated that the Offering will be made until and unless the
partnership's properties are able to generate sufficient cash flow to meet the
partnership's operating expenses and debt service. However, the General Partner
will continue to endeavor to implement the other restructuring elements of the
plan and seek alternate means to maintain Partnership viability.

Based upon forecasts provided by Sage, the partnership is projecting improved
results for 2002 over 2001. Partnership cash, including $3.1 million held in
lender reserve accounts, totaled over $4.7 million at December 31, 2001. Along
with forecasted operating cash flow, partnership cash, and reserves held by the
lender, the partnership expects to be able to meet debt service during 2002.
However, this will require both improved results, of which there can be no
assurance, and maintaining a debt service reserve at levels below lender
requirements.

The lack of available funds from operations over the past several years has also
delayed room refurbishments at the Inns. Based upon information provided by
Sage, the capital expenditure needs for the next two years for the Inns are
estimated to total approximately $19 million. As indicated above, the
partnership is required to provide evidence by no later than November 30, 2003
that at least $23 million has been set aside to complete a portion of these
capital improvements. If the capital improvements are not completed, the
Franchise Agreement could be terminated and the Inns could be prohibited from
operating as "Fairfield Inn by Marriott". If this were to occur, the partnership
would seek to become part of a comparable, nationally recognized hotel system in
order to continue to comply with the obligations under its loan documents. If
the partnership is unable to retain another nationally recognized brand, it
could significantly impair its revenues and cash flow, and result in a default
under its loan agreement.

Based upon information provided by Sage, the estimated capital expenditure
shortfall in available funds by the end of 2003 will be approximately $1.8
million.

For the years ended December 31, 2001, 2000 and 1999, the partnership
contributed $5,828,000, $5,987,000, $6,516,000, respectively, to the property
improvement fund. However, the partnership's property improvement fund became
insufficient beginning in 1999. Therefore, in 2001, 2000 and 1999 the
partnership deposited $2.5 million, $2.4 million, and $2.4 million, respectively
to the property improvement fund to cover the capital expenditure shortfall. The
shortfall is primarily due to room refurbishments, which are planned for a
majority of the partnership's Inns in the next several years. However, cash from
2002 operations will be reserved to cover the shortfall. Therefore, no cash is
expected to be available for distribution to the partners in 2002.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Accounting

The partnership records are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.

33

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

Property and Equipment

Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the assets, which is
generally 30 years for building, leasehold and land improvements, and 4 to 10
years for furniture and equipment. All property and equipment is pledged as
security for the mortgage debt.

The partnership assesses impairment of its real estate properties based on
whether estimated undiscounted future cash flows from such properties will be
less than their net book value. If a property is impaired, its basis is adjusted
to its estimated fair value. In 1999 and 2000, the Inns located in Lansing,
Illinois; Charlotte-Northeast, North Carolina; Johnson City, Tennessee; Raleigh
and Charlotte Airport, North Carolina, and Columbus North, Ohio experienced
declining cash flows, primarily due to additional competition in their local
markets. In 2001, inns located in Greenville, South Carolina; Atlanta-Southlake,
Georgia; and Atlanta - Peachtree Corners, Georgia also experienced declining
cash flows due to additional competition in their local markets. An additional
impairment charge was also taken in 2001 on the inns located in
Charlotte-Northeast and Charlotte Airport, North Carolina; and in Lansing,
Illinois. As a result, during 2001, 2000 and 1999, the partnership concluded
that these Inns were impaired and adjusted their basis to their estimated fair
market value. The partnership recorded an impairment charge of $3,808,000 in
2001, $8,127,000 in 2000, and $2,843,000 in 1999.

Deferred Financing Costs

Deferred financing costs represent the costs incurred in connection with the
mortgage debt refinancing and are amortized over the term of the Mortgage Debt.
The partnership incurred $4,864,000 of financing costs in connection with the
Mortgage Debt. The financing costs are being amortized using the straight-line
method, which approximates the effective interest method, over the ten year term
of the Mortgage Debt. At December 31, 2001 and 2000, accumulated amortization of
deferred financing costs totaled $2,413,000 and $1,927,000, respectively.

Restricted Cash

The partnership was required to establish certain reserves pursuant to the terms
of the mortgage debt. These are fully discussed in Footnote 5.

Cash and Cash Equivalents

The partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.

Inventory

Inventory consists primarily of linen, which is stated at the lower of cost or
market.

34

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

Ground Rent

The Land Leases include scheduled increases in minimum rents per property. These
scheduled rent increases, which were included in minimum lease payments, were
recognized by the partnership on a straight-line basis over the first ten years
of the leases. The adjustment included in ground rent expense and Due to
Marriott International, Inc. and affiliates to reflect minimum lease payments on
a straight-line basis was a decrease of $12,000 for the year ended December 31,
2000 and $218,000 for each of the years ended December 31, 1999 and 1998.
Deferred straight-line ground rent as of December 31, 1999 was $12,000. At year
end 2000, all deferred straight-line ground rent had been recognized. For the
remaining life of the leases, the minimum rentals are adjusted every five years
based on changes in the Consumer Price Index, and are expensed as incurred.

In addition, ground rent of $1,114,000 and $1,082,000 was deferred at December
31, 2001 and 2000, respectively. For a full discussion see Note 6.

Income Taxes

Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the partnership does not pay income
taxes, but rather, allocates profits and losses to the individual Partners.
Significant differences exist between the net loss for financial reporting
purposes and the net loss as reported in the partnership's tax return.

Recently Issued Accounting Standards

On January 1, 2001, the partnership was required to adopt Statement of Financial
Accounting Standards "SFAS" No. 133." The Statement deferred for one year the
effective date of SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". The Statement requires companies to recognize all
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether they
qualify for hedge accounting. The partnership has no derivatives, therefore
there was no effect from this Statement on the partnership's financial
statements.

In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141 "Business Combinations". SFAS No. 141 requires that all business
combinations be accounted for under the purchase method of accounting. SFAS No.
141 also changes the criteria for the separate recognition of intangible assets
acquired in a business combination. SFAS No. 141 is effective for all business
combinations initiated after June 30, 2001. This statement will not affect the
partnership's financial statements.

In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets". SFAS No. 142 addresses accounting and reporting for intangible assets
acquired, except for those acquired in a business combination. SFAS No. 142
presumes that goodwill and certain intangible assets have indefinite useful
lives. Accordingly, goodwill and certain intangibles will not be amortized but
rather will be tested at least annually for impairment. SFAS No. 142 also
addresses accounting and reporting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 is effective fiscal years
beginning after December 15, 2001. This statement will not affect the
partnership's financial statements.

New Accounting Standards

In October 2001, the Financial Accounting Standards Board issued SFAS No. 144.
"Accounting for Impairment or Disposal of Long-Lived Assets" which replaces SFAS
No. 121. "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." The standard provides guidance beyond that previously
specified in Statement 121 to determine when a long-lived asset should be
classified as held for sale, among other things. This Statement is effective for
fiscal years beginning after December 15, 2001. It is not expected that the
implementation of the statement will have a material effect on the partnership.

35

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

NOTE 3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following as of December 31 (in
thousands):

2001 2000
---- ----

Land and improvements $13,425 $14,873
Building and leasehold improvements 157,931 169,454
Furniture and equipment 66,192 74,374
Construction in progress 491 3,077
--------- ---------
238,039 261,778

Less accumulated depreciation and amortization (128,000) (139,765)
--------- ---------

$ 110,039 $ 122,013
========= =========

In December 2001, the partnership committed to a plan to place eight Inns on the
market for potential sale and is attempting to sell such Inns, with the approval
of its mortgage lender. The eight Inns are located in Montgomery, Alabama;
Orlando South, Florida; Atlanta Southlake, Georgia; Chicago Lansing, Illinois;
Charlotte Airport, North Carolina; Charlotte Northeast, North Carolina; Raleigh
Northeast, North Carolina; and Columbus North, Ohio. Each of these Inns is
carried at the lower of cost or fair value less cost to sell. No depreciation
expense has been taken on these Inns since they were committed to be sold.

The partnership's mortgage debt permits sales of inns only if U.S. government
securities in specified amounts are substituted as collateral for the benefit of
the mortgage lender. The partnership is currently seeking an amendment to the
loan agreement to obtain a waiver of this provision in order to allow proceeds,
if any, from the sale of certain inns to be applied to reduce the outstanding
balance on the mortgage loans, which will reduce debt service commensurately.
However, the proceeds of sales may not be sufficient to satisfy required
prepayment minimums.

In connection with the new franchise agreements, Marriott International will
allow the partnership to sell up to five of eight inns without paying a
termination fee, if the sales occur within 18 months of the date of the new
franchise agreements. The net book value of the eight inns at December 31, 2001
of $5.7 million has been classified as "Properties Held for Sale" in the
accompanying balance sheet.

NOTE 4. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair values of financial instruments not included in this table are
estimated to be equal to their carrying amounts (in thousands):

As of December 31, 2001 As of December 31, 2000
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----

Mortgage debt $148,850 $123,511 $153,569 $135,033
Incentive management fee due to $ -- $ -- $ 2,849 $ 194
Fairfield FMC Corporation

The estimated fair value of the mortgage debt obligation is based on the
expected future debt service payments discounted at estimated market rates.
Incentive management fees due to the Manager were valued based on the expected
future payments from operating cash flow discounted at estimated risk adjusted
rates. In connection with the litigation

36

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

settlement agreement, the Manager forgave $23.5 million of deferred incentive
management fees payable as of December 31, 2000, which is included as an
extraordinary gain on the statement of operations for 2000. As a result of the
termination of the partnership's management agreement with Fairfield FMC
Corporation, the remaining incentive management fees owed of $4.9 million were
not due in accordance with the management agreement with Fairfield FMC
Corporation.

NOTE 5. DEBT

Mortgage Debt

In 1997, the partnership's mortgage debt was refinanced and increased to $165.4
million. The mortgage debt is non-recourse, bears interest at a fixed rate of
8.40% and requires monthly payments of $1.4 million of principal and interest
based upon a 20-year amortization schedule for a 10-year term expiring January
11, 2007. Thereafter, until the final maturity date of January 11, 2017,
interest is payable at an adjusted rate, and all excess cash flow is applied
toward principal amortization. The lender securitized the loan through the
issuance and sale of commercial mortgage backed securities.

The mortgage premium of $3.5 million is being amortized based on a 20-year
amortization schedule for a 10-year term expiring January 11, 2007. Accumulated
amortization of the mortgage premium at December 31, 2001 and 2000 was
$1,737,000 and $1,387,000, respectively, resulting in an unamortized balance of
$1,763,000 and $2,113,000, respectively.

Principal amortization of the Mortgage Debt at December 31, 2001 is as follows
(in thousands):

2002 $ 4,756
2003 5,177
2004 5,602
2005 6,132
2006 6,675
Thereafter 118,745
----------
147,087
Mortgage premium 3,500
Accumulated amortization of mortgage premium (1,737)
----------

Net premium 1,763
----------
Total mortgage debt $148,850
==========

The mortgage debt is secured by first mortgages on all of the Inns, the land on
which they are located, or an assignment of the partnership's interest under the
Land Leases, including ownership interest in all improvements thereon, fixtures
and personal property related thereto.

Reserves

The partnership was required by the lender to establish various reserves for
capital expenditures, working capital, debt service and insurance needs.

37

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

The balances in those reserves as of December 31 are as follows (in thousands):

2001 2000
---- ----

Debt service reserve $1,792 $4,873
Supplemental debt service reserve -- 1,440
Working capital reserve 677 677
Taxes and insurance reserve 532 300
Ground rent reserve 126 225
Condemnation reserve -- 211
------ ------

Total restricted cash $3,127 $7,726
====== ======

The partnership is required to deposit two months' debt service payments, or
$2,850,000, into a debt service reserve. The partnership was also required to
establish a ground rent reserve, which is adjusted annually to equal one month's
anticipated ground rent. The partnership's loan agreement requires that if a
single downgrade of Marriott International's debt occurs, the partnership is
required to contribute an additional month's debt service payment to the debt
service reserve which was over funded in 2000 by $598,000 due to timing and
under funded in 2001 by $2,483,000. In addition, pursuant to the terms of the
mortgage debt subsequent to a downgrade of Marriott International's debt, the
partnership is required to establish with the lender a separate escrow account
for payments of insurance premiums and real estate taxes (the "Tax and Insurance
Escrow Reserve") for each mortgaged property. During 1998, Orange County in
Florida (the "County") paid the partnership $197,000 for a portion of the land
in front of the Orlando South Fairfield Inn in Orlando, Florida. The funds were
placed in an escrow account and shown as the condemnation reserve. During 2001,
the County made its final resolution on the value of the land. The partnership
received an additional $150,000, which was initially placed into the
condemnation reserve. The entire balance of the condemnation reserve account was
then transferred into the debt reserve account in accordance with the terms of
the Amended Loan Agreement.

In addition, the partnership entered into a Working Capital Maintenance and
Supplemental Debt Service Agreement ("Working Capital Agreement") with the
Manager, effective January 13, 1997. As part of the Working Capital Agreement,
the partnership agreed to furnish the Manager additional working capital to be
deposited into a segregated interest bearing account (the "Working Capital
Reserve"). The Working Capital Reserve is to be funded from Operating Profit, as
defined, retained by or distributed to the partnership as such amounts become
available, until the Working Capital Reserve reaches $670,000. The Working
Capital Agreement also requires the funding of another segregated account for
debt service shortfalls (the "Supplemental Debt Service Reserve"). This reserve
is also to be funded out of Operating Profit, as defined, retained or
distributed to the partnership as such amounts become available, until the
Supplemental Debt Service Reserve reached $1,425,000. Interest earned on these
reserve accounts was transferred to the partnership during first quarter 2001.
The balance of the supplemental Debt Service Reserve was used to fund debt
service during 2001. The Working Capital Agreement was terminated effective
November 30, 2001, along with the termination of the Management Agreement with
Fairfield FMC Corporation.

NOTE 6. LAND LEASES

The land on which 32 of the Inns are located is leased from Marriott
International or its affiliates. The Land Leases expire on November 30, 2088 and
provide that, other than in 2002, the partnership will pay annual rents equal to
the greater of a specified minimum rent for each property or a percentage rent
based on gross revenues of the Inn operated thereon. The minimum rentals are
adjusted at various anniversary dates through 2000, as defined in the
agreements. The minimum rentals are adjusted every five years for the remaining
life of the leases based on changes in the Consumer Price Index. The percentage
rent, which also varies from property to property, is fixed at predetermined
percentages of gross revenues that increase over time.

On November 30, 2001, the partnership executed a ground lease amendment, which
cancels the partnership's obligation to pay unpaid deferred ground rent for 2000
and 2001 in the amount of $2.2 million, reduces the minimum ground rent

38

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

from $2.8 million to $100,000 for 2002, and extends the term of the lease to
November 30, 2098. Further, if by November 30, 2003 the partnership (i) receives
a capital infusion (either by way of loan or otherwise) of not less than
$23,000,000 in order to fund the completion of the PIPs, (ii) is diligently
pursuing completion of the PIPs, and (iii) satisfies certain other conditions,
the ground rent will be reduced through 2004 and the partnership will have an
option to acquire the fee interest in the land for a price equal to $48,322,371.
If the partnership does not meet these conditions, it will be a default under
the Franchise Agreements, which would also constitute a default under the Land
Leases. Accordingly, if the partnership does not meet these conditions, not only
could it lose the right to operate its Inns as a "Fairfield Inn by Marriott",
but the 32 Inns subject to a Land Lease could be lost to the ground lessor.

Minimum future rental payments during the term of the Land Leases as of December
31, 2001 are as follows (in thousands):

Lease Year Minimum Rental
---------- --------------

2002.......................... $100
2003.......................... 2,825
2004.......................... 2,825
2005.......................... 3,048
2006.......................... 3,048
Thereafter.................... 653,620
-------
$665,466

Total rental expense on the Land Leases was $2,665,000 for 2001, $2,965,000 for
2000, and $2,742,000 for 1999.

In connection with the refinancing, beginning in 1997 until the Mortgage Debt is
repaid, the payment of rental expense exceeding 3% of gross revenues from the 32
leased Inns in the aggregate shall be deferred in any fiscal year that cash flow
is less than the regularly scheduled principal and interest payments on the
Mortgage Debt. The deferral shall then be payable in the following year if cash
flow is sufficient to pay the regularly scheduled principal and interest
payments for the Mortgage Debt. Ground rent payable to Marriott International
and its affiliates at December 31, 2001 and 2000 was $2,204,000 and $1,082,000,
respectively, and is included in Due to Marriott International, Inc. and
affiliates on the accompanying balance sheet. The amount of deferred ground rent
waived as a result of the ground lease amendment will be recognized as a
reduction in ground rent expense over the remaining life of the new lease term,
since it represents a new operating lease as of November 30, 2001, for
accounting purposes.

Under the leases, the partnership pays all costs, expenses, taxes and
assessments relating to the Inns and the underlying land, including real estate
taxes. Each Land Lease provides that the partnership has a first right of
refusal in the event the applicable ground lessor decides to sell the leased
premises. Upon expiration or termination of a Land Lease, title to the
applicable Inn and all improvements reverts to the ground lessor.

NOTE 7. MANAGEMENT AGREEMENT

Through November 30, 2001, the partnership was a party to a long-term management
agreement (the "Management Agreement") with the Manager. This agreement was
terminated and Sage Management Resources III, LLC ("Sage"), an affiliate of Sage
Hospitality Resources, LLC, was retained as the New Manager effective November
30, 2001. See discussion of new management agreement below.

In conjunction with the 1997 mortgage refinancing, the initial term of the
Management Agreement was extended ten years to December 31, 2019. The Manager
had the option to renew the Management Agreement as to one or more of the Inns
at its option, for up to four additional 10-year terms plus one five-year term.
The Manager was paid a base management fee equal to 2% of gross Inn revenues and
a Fairfield Inn system fee equal to 3% of gross Inn revenues. In addition, the
Manager was entitled to an incentive management fee equal to 15% of Operating
Profit as defined, increasing to 20% after the Inns had achieved total Operating
Profit during any 12 month period equal to or greater than $33.9 million. As of
December 31, 2001, operating profit did not exceed

39

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

$33.9 million. The incentive management fee with respect to each Inn was payable
out of 50% of cash flow from operations remaining after payment of ground rent,
debt service, partnership administrative expenses and the owner's priority
return, as defined.

In accordance with the Management Agreement, incentive management fees earned
through 1992 were waived by the Manager. Incentive management fees earned after
1992 accrued and were payable as outlined above or from Capital Receipts. Due to
the litigation settlement agreement (see Note 10), $23,483,000 of deferred
incentive management fees were waived by the Manager in 2000. As a result, the
partnership recognized an extraordinary gain for this amount in 2000. During
2001, 2000, and 1999, the Manager deferred $2,036,000, $2,849,130 and $2,775,000
of incentive management fees, respectively. In connection with the termination
of the Management Agreement with Fairfield FMC Corporation, $2,036,000 and
$2,849,130 of incentive fees earned in 2001 and 2000, respectively, were no
longer due under the terms of the Management Agreement. Deferred incentive fees
of $2,849,130 related to 2000, net of a $500,000 payment to the Manager, have
been reflected in the 2001 statement of operations in the line titled
Termination of Management Agreement.

The Manager was required to furnish certain services ("Chain Services") which
are furnished generally on a central or regional basis to all managed or owned
Inns in the Fairfield Inn by Marriott hotel system. Costs and expenses incurred
in providing such services were allocated among all domestic Fairfield Inn by
Marriott hotels managed, owned or leased by Marriott International or its
subsidiaries, based upon one or a combination of the following: (i) percent of
revenues, (ii) total number of hotel rooms, (iii) total number of reservations
booked, and (iv) total number of management employees. The Inns also
participated in Marriott International's Marriott Rewards Program ("MRP"). The
cost of this program was charged to all hotels in the full-service, Residence
Inn by Marriott, Courtyard by Marriott and Fairfield Inn by Marriott systems
based upon the MRP revenues at each hotel. The total amount of chain services
and MRP costs allocated to the partnership for the years ended December 31,
2001, 2000 and 1999 was $1,664,000, $1,691,000, and $1,773,000, respectively. In
addition, the Manager maintains a marketing fund to pay the costs associated
with certain system-wide advertising, marketing, sales, promotional and public
relations materials and programs. Each Inn within the system contributes
approximately 2.4% of gross Inn revenues to the marketing fund. For the years
ended December 31, 2001, 2000 and 1999, the partnership contributed $1,924,000,
$2,526,000, and $2,262,000, respectively, to the marketing fund.

Pursuant to the terms of the Management Agreement, the partnership was required
to provide the Manager with working capital and supplies to meet the operating
needs of the Inns. The Manager converted cash advanced by the partnership into
other forms of working capital consisting primarily of operating cash,
inventories, and trade receivables and payables which were maintained and
controlled by the Manager. This advance earns no interest and remained the
property of the partnership throughout the term of the Management Agreement. The
partnership was required to advance upon request of the Manager any additional
funds necessary to satisfy the needs of the Inns as their operations required
from time to time. Upon termination of the Management Agreement, the Manager
returned to the partnership all unused working capital and supplies. The
individual components of working capital (including inventory) and supplies
controlled by the Manager are not reflected in the partnership's balance sheet.
At the inception of the partnership, $1,000,000 was advanced to the Manager for
working capital and supplies which was included in Due from Marriott
International, Inc. and affiliates in the accompanying balance sheet. Effective
with the termination of the Management Agreement, the working capital was turned
over to the new manager and represents inventory.

The Management Agreement provided for the establishment of a property
improvement fund for the Inns to cover (a) the cost of certain non-routine
repairs and maintenance to the Inns, which are normally capitalized; and (b) the
cost of replacements and renewals to the Inns' property and improvements.
Contributions to the property improvement fund were based on a percentage of
gross revenues of each Inn equal to 7%. During 2000, $416,000 of these
contributions were reallocated to pay for debt service. For the years ended
December 31, 2001, 2000 and 1999, the partnership contributed $5,828,000
$5,987,000, and $6,516,000, respectively, to the property improvement fund.
However, if the Manager determined 7% exceeded the amount needed for making
capital expenditures, then the Manager could adjust the incentive management fee
calculation to exclude as a deduction in calculating incentive management fees
up to one percentage point of contributions to the property improvement fund. No
adjustment was necessary for 2000 and 2001.

40

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

New Management Agreements

Effective November 30, 2001, the partnership retained Sage, an independent hotel
management company, to manage its inns under separate management agreements for
each inn.

The management agreements have a term of five years and provide that the inns
will be operated as part of the Fairfield Inn by Marriott franchise system and
that Sage will be responsible for the day-to-day operation of the inns. The
partnership has the right to terminate a management agreement under certain
circumstances, including a change in control of Sage, the sale of all the Inns
(in which event a termination fee may be payable) or Sage's failure to achieve
certain performance levels during the third year of the agreement, unless such
failure is due to circumstances beyond Sage's control. Sage may terminate a
management agreement under certain circumstances, including the partnership's
failure to provide sufficient working capital for the operation of an inn.

Sage receives a base management fee under the management agreements in the
aggregate equal to 3% of adjusted gross revenue, and an incentive management fee
equal to 10% of the excess of earnings before interest, taxes, depreciation and
amortization of all the inns during the applicable fiscal year ("EBITDA") over
(i) $25,000,000, to be adjusted if an inn is no longer managed by Sage (during
the first three years of the management agreements) and (ii) 107.5% of the
greater of (x) $25,000,000 and (y) the prior year's EBITDA (during the last two
years of the management agreements). The right to continue to manage and operate
the inns shall be subordinate to the mortgage. The incentive management fee
shall be subordinate in payment to the mortgage debt. The total fees and
expenses payable by the partnership under the new franchise agreements and the
new management agreements, exclusive of the incentive management fee payable to
Sage, will not exceed the amount that was paid to Fairfield FMC Corporation
under the previous management agreement.

The partnership is required to provide Sage with working capital sufficient to
meet all disbursements and operating expenses necessary to permit the
uninterrupted and efficient operation of the inns. Sage may request additional
contributions to working capital if any additional funds are necessary to
satisfy the needs of the inns as their operations may require from time to time.
Each year, Sage will provide the partnership with an annual budget with detailed
estimates for each month. Sage will also provide the partnership with monthly
financial statements and reports.

The partnership is also required to establish a reserve account to cover
expenditures for capital improvements and replacement of furniture, fixtures and
equipment for the Inns. Contributions to the account will be made on a monthly
basis in an amount equal to 7% of gross monthly revenues for the Inns. If funds
are insufficient to meet required monthly contributions to the reserve account,
the partnership is required to provide additional funds.

If the partnership's earnings before interest, taxes, depreciation, and
amortization is not at least $25 million for the calendar year 2004 (subject to
certain exceptions), the partnership has the right to terminate Sage.

During 2001, the partnership advanced to Sage amounts totaling $868,000 in order
to fund expenses incurred related to Sage's transition as the new manager. The
partnership and Sage entered into a Promissory Note Agreement ("Note") whereby
these advances would be repaid by Sage on a monthly basis beginning February 1,
2002 in an amount equal to 50% of the previous months management fees until the
Note is paid in full. The advances accrue interest at a rate of 12%. Interest
income on these advances was $23,000 for the year ending December 31, 2001.

41

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

NOTE 8. FRANCHISE AGREEMENTS

Effective November 30, 2001, the partnership entered into franchise agreements
with Marriott International for each inn, which permitted the partnership to
continue to use the Fairfield Inn by Marriott brand.

Under the new franchise agreements, the partnership will pay the following fees
for each inn:

o a $10,000 non-refundable application fee per inn to cover Marriott
International's application processing expenses;

o a royalty fee of 4% of gross room revenue;

o a marketing fund contribution of 2.5% of gross room revenue;

o a reservation system fee equal to 1% of gross room revenue, plus $3.50
for each reservation confirmed and a communications support fee of
$379 per month for each inn;

o a property management system fee of $323 per month for each inn plus
an additional $30 per month for each inn to access the Marriott
intranet site; and

o training and software charges.

In addition, the partnership is required to deposit 7% of each inn's gross
monthly revenues into an escrow account to be applied towards capital
improvements. Each new franchise agreement will include a termination fee to
Marriott International if the franchise for a particular inn is terminated. To
facilitate a potential sale, the partnership will not be required to pay the
termination fee on five of eight specified inns if the inns are sold within 18
months of the date of the franchise agreements. Each franchise agreement has a
10-year term. The partnership has the option to renew each agreement for two
additional five-year periods subject to its successful maintenance of brand
standards and compliance with all of the material terms of the agreement.

Marriott International may terminate the franchise agreements under certain
circumstances, including the partnership's failure to operate an inn under the
Fairfield Inn by Marriott brand, certain transfers of an interest in the
partnership and the partnership's failure to complete required upgrading and
remodeling of the inns.

If the Property Improvement Plans, required by Marriott International, are not
completed by November 30, 2003, it will be considered an event of default under
the new franchise agreements.

As a condition to entering into the franchise agreements, an affiliate of the
partnership's general partner has guaranteed the partnership's obligations to
pay the termination fees that may come due under the agreements up to a maximum
of $25 million, and up to a maximum of $10 million on the partnership's other
obligations under the agreements.

NOTE 9. RELATED PARTY TRANSACTIONS

The partnership pays Winthrop Financial Associates, an affiliate of the general
partner, a monthly fee of $30,000 to cover various administrative services
provided on the partnership's behalf. For the year ended December 31, 2001,
$120,000 was expensed for these services.

42

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

NOTES TO FINANCIAL STATEMENTS
December 31, 2001 and 2000

NOTE 10. LITIGATION

In March 2000, the Defendants entered into a settlement agreement with counsel
for the plaintiffs to resolve litigation in seven partnerships, including the
partnership. Under the terms of the settlement, the Defendants paid $18,809,103
in cash in exchange for dismissal of the litigation and a complete release of
all claims in October 2000. Each limited partner received $152 per Unit. In
addition to the Defendants' cash payments, Fairfield FMC Corporation forgave
$23,483,000 of deferred management fees.

43

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None

44

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE PARTNERSHIP

The partnership has no directors or executive officers. The general
partner of partnership is AP-Fairfield GP LLC, a Delaware limited liability
company. The general partner manages and controls substantially all of the
partnership's affairs and has general responsibility and ultimate authority in
all matters affecting its business. As of March 1, 2001, the names of the
executive officers of manager of the general partner and the position held by
each of them, are as follows:

Position Held with the Has Served as a Director
Name General Partner or Officer Since
- ---- --------------- ----------------

Michael L. Ashner Chief Executive Officer and
Director 8-01

Thomas C. Staples Chief Financial Officer 8-01

Peter Braverman Executive Vice President 8-01

Carolyn Tiffany Chief Operating Officer 8-01

Michael L. Ashner, age 49, has been the Chief Executive Officer of
Winthrop Financial Associates, A Limited Partnership ("WFA"), an affiliate of
the general partner, since January 15, 1996. From June 1994 until January 1996,
Mr. Ashner was a Director, President and Co-chairman of National Property
Investors, Inc., a real estate investment company ("NPI"). Mr. Ashner was also a
Director and executive officer of NPI Property Management Corporation ("NPI
Management") from April 1984 until January 1996. In addition, since 1981 Mr.
Ashner has been President of Exeter Capital Corporation, a firm which has
organized and administered real estate limited partnerships. Mr. Ashner
currently serves as a director of Nexthealth Corp., Great Bay Hotel and Casino
Inc., Burnham Pacific Properties, Inc. and NBTY, Inc.

Thomas C. Staples, age 46, has been the Chief Financial Officer of WFA
since January 1, 1999. From March 1996 through December 1998, Mr. Staples was
Vice President/Corporate Controller of WFA. From May 1994 through February 1996,
Mr. Staples was the Controller of the Residential Division of Winthrop
Management.

Peter Braverman, age 50, has been a Vice President of WFA and the
Managing General Partner since January 1996. From June 1995 until January 1996,
Mr. Braverman was a Vice President of NPI and NPI Management. From June 1991
until March 1994, Mr. Braverman was President of the Braverman Group, a firm
specializing in management consulting for the real estate and construction
industries.

Carolyn Tiffany, age 35, has been employed with WFA since January 1993.
From 1993 to September 1995, Ms. Tiffany was a Senior Analyst and Associate in
WFA's accounting and asset management departments. From October 1995 to present
Ms. Tiffany was a Vice President in the asset management and investor relations
departments of WFA until December 1997, at which time she became the Chief
Operating Officer of WFA.

One or more of the above persons are also directors or officers of a
general partner (or general partner of a general partner) of a number of limited
partnerships which either have a class of securities registered pursuant to
Section 12(g) of the Securities and Exchange Act of 1934, or are subject to the
reporting requirements of Section 15(d) of such Act. In addition, each of the
foregoing officers and directors hold similar positions with Newkirk MLP Corp.,
GFB-AS Manager Corp. and AP-PCC III, L.P., entities that through one or more
subsidiaries manage over 200 limited partnerships that hold title to real
property including, commercial properties, residential properties and assisted
living facilities.

Except as indicated above, neither the partnership nor the general
partner has any significant employees within the meaning of Item 401(c) of
Regulation S-K. There are no family relationships among the officers and
directors of the general partner.

45

Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the partnership under Rule 16a-3(e) during the partnership's most
recent fiscal year and Forms 5 and amendments thereto furnished to the
partnership with respect to its most recent fiscal year, the partnership is not
aware of any director, officer, beneficial owner of more than ten percent of the
units of limited partnership interest in the Registrant that failed to file on a
timely basis, as disclosed in the above Forms, reports required by section 16(a)
of the Exchange Act during the most recent fiscal year or prior fiscal years.

ITEM 11. EXECUTIVE COMPENSATION

The partnership is not required to and did not pay remuneration to the
officers and directors of its general partner. Certain officers and directors of
the general partner receive compensation from the general partner and/or its
affiliates (but not from the partnership) for services performed for various
affiliated entities, which may include services performed for the partnership;
however, the general partner believes that any compensation attributable to
services performed for the partnership are immaterial. See also "Item 13.
Certain Relationships and Related Transactions."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

(a) Security Ownership of Certain Beneficial Owners.

Except as set forth below, no person or group is known by the
partnership to be the beneficial owner of more than 5% of the outstanding Units
at March 1, 2002:

Name of Beneficial Owner Number of Units owned % of Class
------------------------ --------------------- ----------

AP-Fairfield LP, LLC(1) 18,424 22.11%

(1) The principal business address of the listed entity, which is an affiliate
of the general partner, is 7 Bulfinch Place, Suite 500, Boston,
Massachusetts 02114.

(b) Security Ownership of Management.

At March 1, 2002, AP-Fairfield LP, LLC, an affiliate of the general
partner, owned 18,424 Units representing approximately 22.11% of the total
number of Units outstanding. Neither the general partner, nor any officer,
director, manager or member thereof, or any of their affiliates owned any Units.

(c) Changes in Control.

There exists no arrangement known to the partnership the operation of
which may at a subsequent date result in a change in control of the partnership.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The partnership pays Winthrop Financial Associates, an affiliate of the
general partner, a monthly fee of $30,000 to cover various administrative
services provided on the partnership's behalf. For the year ended December 31,
2001, $120,000 was expensed for these services.

46

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) (1) Financial Statements: see Index to Financial Statements in Item 8.

(a) (2) Financial Statement Schedule:

Schedule III - Real Estate and Accumulated Depreciation

(a) (3) Exhibits:

See Exhibit Index

(b) Reports on Form 8-K:

The partnership filed the following reports on Form 8-K during the last
quarter of the fiscal year:

A Current Report on Form 8-K was filed with the Securities and Exchange
Commission on December 18, 2001 with respect to the modifications to
the Franchise Agreement, Ground Leases and the entering into of the
Management Agreements. (Item 1-Other Matters).

47

SCHEDULE III

Fairfield Inn by Marriott Limited Partnership
Real Estate and Accumulated Depreciation
As of December 31, 2001
(in thousands)

Initial Costs
--------------------------------------------------------- Leasehold,
Buildings and Subsequent Properties Held Buildings and Accumulated
Description Encumbrances Land Improvements Costs Capitalized For Sale Land Improvements Total Depreciation

50 Fairfield Inns $148,850 $14,873 $159,615 $13,046 $(16,178) $13,425 $157,931 $171,356 $70,065

Date of
Completion of Date Depreciable
Construction Acquired Life

50 Fairfield Inns 1987-1990 1989-1990 20-30 years

Notes:

(a) Reconciliation of Real Estate:
1999 2000 2001
--------------------------------------------

Balance at beginning of year $ 191,024 $ 188,578 $ 184,327
Capital Expenditures 6,153 3,876 7,015
Dispositions/Reclassifications (5,756) - -
Impairment Loss (2,843) (8,127) (3,808)
Properties Held for Sale - - (16,178)
--------------------------------------------
Balance at end of year $ 188,578 $ 184,327 $ 171,356
============================================

(b) Reconciliation of Accumulated Deprciation

Balance at beginning of year $ 56,029 $ 64,740 $ 73,375
Depreciation 8,711 8,635 8,665
Properties Held for Sale - - (11,975)
--------------------------------------------
Balance at end of year $ 64,740 $ 73,375 $ 70,065
===========================================

c The aggregate cost of land, buildings, improvements and properties held for sale for Federal income tax
purposes is approximately $212.9 million at December 31, 2001.

48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP

By: AP-Fairfield GP LLC
General Partner

By: AP-Fairfield Manager Corp.
Manager

Dated: March 29, 2002 By: /s/ Michael L. Ashner
----------------------
Michael L. Ashner
President and Director
(Principal Executive Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, This
report has been signed below by the following persons on behalf of the
registrant and in their capacities on the dates indicated.

Dated: March 29, 2002 By: /s/ Michael L. Ashner
---------------------
Michael L. Ashner
President and Director
(Principal Executive Officer)

Dated: March 29, 2002 By: /s/ Thomas Staples
------------------
Thomas Staples
Chief Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)

49

EXHIBIT INDEX

No. Exhibit Page
--- ------- ----

2.1 Amended and Restated Agreement of Limited Partnership of Fairfield Inn by Marriott Limited (1)
Partnership by and among Marriott FIBM One Corporation (General Partner), Christopher, G.
Townsend (Organizational Limited Partner), and those persons who become Limited Partners
(Limited Partners) dated July 31, 1990.

2.2 First Amendment to Amended and Restated Agreement of Limited Partnership dated as of December (2)
28, 1998.

10.1 Loan Agreement between Fairfield Inn by Marriott Limited Partnership and Nomura Asset Capital (1)
Corporation dated January 13, 1997.

10.2 Secured Promissory Note made by Fairfield Inn by Marriott Limited Partnership (the "Maker") (1)
to Nomura Asset Capital Corporation (the "Payee") dated January 13, 1997.

10.3 Form of Ground Lease (1)

12. Statements re: Computation of Ratio of Earnings to Fixed Charges 51

99. Confirmation of Receipt of Assurances from Arthur Anderson LLP 52

(1) Incorporated by reference to the Registrant's Form 10 filed on January 29,
1998.

(2) Incorporated by reference to the Registrant's Form 10/A filed on April 11,
2001

50