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EX-32 - CERTIFICATION REQUIRED UNDER SECTION 906 - CRI HOTEL INCOME PARTNERS L Pexhibit32_093010-chips.htm
EX-31 - CERTIFICATION REQUIRED UNDER SECTION 302 - CRI HOTEL INCOME PARTNERS L Pexhibit31_093010-chips.htm

 

United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2010
or

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

For the transition period from ____________ to ____________


Commission file number 33-11096

CRI HOTEL INCOME PARTNERS, L.P.

 (Exact Name of Issuer as Specified in its Charter)


Delaware
52-1500621
(State of Incorporation)
(I.R.S. Employer Identification No.)
   
11200 Rockville Pike
 
Rockville, MD
20852
(Address of Principal Executive Offices)
(ZIP Code)

(301) 468-9200
(Issuer’s Telephone Number, Including Area Code)
_____________________


Indicate by check mark whether the 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x                                No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer                                                                                                   o           Accelerated filer            o
Non-accelerated filer (Do not check if a smaller reporting company)                   o           Smaller reporting company   x

 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o                                No x


 
 

 


CRI HOTEL INCOME PARTNERS, L.P.

INDEX TO FORM 10-Q

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010


   
Page
     
Part I
FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
 
Balance Sheets
 
 
- September 30, 2010 and December 31, 2009
2
 
Statements of Operations
 
 
- for the three and nine months ended September 30, 2010 and 2009
3
 
Statement of Changes in Partners’ (Deficit) Capital
 
 
- for the nine months ended September 30, 2010 and 2009
4
 
Statements of Cash Flows
 
 
- for the nine months ended September 30, 2010 and 2009
5
 
Notes to Financial Statements
6
     
Item 2.
Management's Discussion and Analysis of Financial Condition
 
 
and Results of Operations
13
     
Item 4.
Controls and Procedures
19
     
     
Part II
OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
19
     
Item 5.
Other Information
19
     
Item 6.
Exhibits
20
     
Signature
 
20



 
1

 

Part I.              FINANCIAL INFORMATION
Item 1.              Financial Statements

CRI HOTEL INCOME PARTNERS, L.P.


BALANCE SHEETS

ASSETS


   
September 30,
   
December 31,
 
   
2010
   
2009
 
   
(Unaudited)
       
             
Property and equipment - at cost:
           
Land
  $ 1,574,490     $ 1,574,490  
Buildings and site improvements
    14,395,423       14,395,423  
Furniture, fixtures and equipment
    4,531,553       4,382,160  
Leasehold improvements
    1,431,234       1,431,234  
                 
      21,932,700       21,783,307  
Less: accumulated depreciation and amortization
    (15,910,004 )     (15,361,284 )
                 
      6,022,696       6,422,023  
                 
Hotel operating cash
    214,383       110,395  
Working capital reserve
    1,343,151       1,649,444  
Receivables and other assets, net of allowance for doubtful accounts
               
of $34,566 and $29,458,respectively
    557,525       467,722  
Acquisition fees, principally paid to related parties,
               
net of accumulated amortization of $799,065 and $774,719, respectively
    221,038       245,384  
Property purchase costs,
               
net of accumulated amortization of $145,327 and $141,099, respectively
    36,940       41,168  
Loan refinancing costs,
               
net of accumulated amortization of $145,131 and $77,949, respectively
    115,022       124,203  
                 
Total assets
  $ 8,510,755     $ 9,060,339  


LIABILITIES AND PARTNERS' CAPITAL

Accounts payable and accrued expenses
  $ 591,598     $ 369,925  
Hotel trade payables
    243,735       270,002  
Mortgages payable
    7,122,743       7,216,472  
                 
Total liabilities
    7,958,076       7,856,399  
                 
Partners' (deficit) capital:
               
General Partner
    (377,731 )     (364,706 )
Beneficial Assignee Certificates (BACs) Series A;
               
868,662 BACs issued and outstanding
    930,410       1,568,646  
                 
Total partners' capital
    552,679       1,203,940  
                 
Total liabilities and partners' capital
  $ 8,510,755     $ 9,060,339  






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

 
2

 

Part I.              FINANCIAL INFORMATION
Item 1.              Financial Statements

CRI HOTEL INCOME PARTNERS, L.P.


STATEMENTS OF OPERATIONS
(Unaudited)

   
For the three months ended
   
For the nine months ended
 
   
September 30,
   
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                         
Revenue:
                       
Rooms
  $ 1,997,883     $ 1,977,044     $ 5,977,535     $ 6,013,359  
Rental and other
    50,666       54,668       146,678       144,795  
Telephone
    5,097       7,139       16,663       18,617  
Food and beverage
    3,868       3,560       24,221       14,837  
                                 
      2,057,514       2,042,411       6,165,097       6,191,608  
                                 
Departmental expenses:
                               
Rooms
    (649,070 )     (636,770 )     (1,839,668 )     (1,838,111 )
Telephone
    (14,327 )     (16,103 )     (43,004 )     (45,432 )
Rental and other
    (8,924 )     (12,008 )     (29,335 )     (34,575 )
Food and beverage
    (3,631 )     (4,342 )     (20,956 )     (13,882 )
                                 
      (675,952 )     (669,223 )     (1,932,963 )     (1,932,000 )
                                 
Gross operating income
    1,381,562       1,373,188       4,232,134       4,259,608  
                                 
Unallocated operating income (expenses):
                               
Interest and other income
    91,421       7,867       120,742       28,317  
General and administrative
    (296,254 )     (301,150 )     (919,265 )     (940,790 )
Depreciation and amortization
    (180,899 )     (226,840 )     (644,475 )     (728,558 )
Marketing
    (191,908 )     (189,092 )     (545,710 )     (564,209 )
Energy
    (179,891 )     (170,835 )     (490,172 )     (513,356 )
Building lease
    (88,615 )     (97,777 )     (382,206 )     (402,018 )
Property operations and maintenance
    (171,326 )     (161,103 )     (466,750 )     (471,442 )
Property taxes
    (138,162 )     (132,777 )     (435,590 )     (417,530 )
Management fees
    (76,357 )     (76,242 )     (234,086 )     (235,807 )
Professional fees
    (17,841 )     (66,050 )     (249,979 )     (177,385 )
Base asset management fee
    (23,438 )     (23,438 )     (70,313 )     (70,313 )
                                 
      (1,273,270 )     (1,437,437 )     (4,317,804 )     (4,493,091 )
                                 
Operating income (loss)
    108,292       (64,249 )     (85,670 )     (233,483 )
                                 
Interest expense
    (191,393 )     (188,254 )     (565,591 )     (561,144 )
                                 
Net loss
  $ (83,101 )   $ (252,503 )   $ (651,261 )   $ (794,627 )
                                 
                                 
Net loss allocated to
                               
General Partner (2%)
  $ (1,662 )   $ (5,050 )   $ (13,025 )   $ (15,893 )
                                 
                                 
Net loss allocated to
                               
BAC Holders (98%)
  $ (81,439 )   $ (247,453 )   $ (638,236 )   $ (778,734 )
                                 
                                 
Net loss per BAC, based
                               
on 868,662 BACs outstanding
  $ (.09 )   $ (.28 )   $ (.73 )   $ (.90 )
                                 





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

 
3

 

Part I.              FINANCIAL INFORMATION
Item 1.              Financial Statements

CRI HOTEL INCOME PARTNERS, L.P.


STATEMENT OF CHANGES IN PARTNERS’ (DEFICIT) CAPITAL
(Unaudited)

         
Beneficial
       
         
Assignee
       
   
General
   
Certificate
       
   
Partner
   
Holders
   
Total
 
                   
Partners' (deficit) capital, January 1, 2010
  $ (364,706 )   $ 1,568,646     $ 1,203,940  
                         
Net loss
    (13,025 )     (638,236 )     (651,261 )
                         
Partners' (deficit) capital, September 30, 2010
  $ (377,731 )   $ 930,410     $ 552,679  


































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

 
4

 

Part I.              FINANCIAL INFORMATION
Item 1.              Financial Statements

CRI HOTEL INCOME PARTNERS, L.P.


STATEMENTS OF CASH FLOWS
(Unaudited)

   
For the nine months ended
 
   
September 30,
 
   
2010
   
2009
 
             
             
Cash flows from operating activities:
           
Net loss
  $ (651,261 )   $ (794,627 )
                 
Adjustments to reconcile net loss to net cash
               
provided by operating activities:
               
Depreciation and amortization
    644,475       728,559  
                 
Changes in assets and liabilities:
               
Decrease in working capital reserve
    156,900       388,281  
(Increase) decrease in receivables and other assets, net
    (89,803 )     16,007  
Increase in accounts payable and accrued expenses
    221,673       66,366  
Decrease in hotel trade payables
    (26,267 )     (24,112 )
                 
Net cash provided by operating activities
    262,503       446,542  
                 
                 
Cash flows from investing activities:
               
Additions to property and equipment
    (149,393 )     (153,921 )
Change in working capital reserve
    149,393       153,921  
                 
Net cash used in investing activities
    --       --  
                 
                 
Cash flows from financing activities:
               
Payment of principal on mortgage payable
    (93,729 )     (92,537 )
Loan refinancing cost
    (58,000 )     (14,500 )
                 
Net cash used in financing activities
    (151,729 )     (107,037 )
                 
                 
Net increase in hotel operating cash and cash and cash equivalents
    103,988       273,437  
                 
Hotel operating cash and cash and cash equivalents, beginning of period
    110,395       156,805  
                 
Hotel operating cash and cash and cash equivalents, end of period
  $ 214,383     $ 430,242  
                 
                 
                 
Supplemental disclosure of cash flow information:
               
Cash paid during the period for interest
  $ 565,591     $ 561,144  












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

 
5

 

CRI HOTEL INCOME PARTNERS, L.P.

NOTES TO FINANCIAL STATEMENTS
September 30, 2010 and 2009
(Unaudited)


1.           BASIS OF PRESENTATION

In the opinion of CRICO Hotel Associates I, L.P. (the “General Partner”), the accompanying unaudited financial statements reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position of CRI Hotel Income Partners, L.P. (the “Partnership”) as of September 30, 2010, and the results of its operations and its cash flows for the three and nine month periods ended September 30, 2010 and 2009.  The results of operations for the interim period ended September 30, 2010, are not necessarily indicative of the results to be expected for the full year.

The accompanying unaudited financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (US GAAP) and with the instructions to Form 10-Q.  Certain information and accounting policies and footnote disclosures normally included in financial statements prepared in conformity with US GAAP have been condensed or omitted pursuant to such instructions.  These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Partnership's annual report on Form 10-K and the amended annual report on Form 10-K/A at December 31, 2009.

The Partnership and the chief operating decision maker consider the hotels’ operations as a single homogeneous business activity as it relates to achieving their objectives of cash flow growth and capital appreciation.  The chief operating decision maker reviews cash flow and operating results in the aggregate in order to determine the appropriate level of cash available, if any, for distribution to the investors in the Partnership.  Accordingly, the Partnership considers itself to operate in a single reportable segment.

2.           LONG-LIVED ASSETS

The Partnership reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable.  Recoverability is measured by a comparison of the carrying amount of an asset to the estimated future undiscounted net cash flows expected to be generated by the asset.  If an asset were determined to be impaired, its basis would be adjusted to fair value through the recognition of an impairment loss.

3.           WORKING CAPITAL RESERVE

The working capital reserve of $1,343,151 and $1,649,444 as of September 30, 2010 and December 31, 2009, respectively, represents cash and cash equivalents reserved for working capital for the Partnership.  The working capital reserve is available to support the operations of the Partnership and its hotel properties, including capital improvements of the hotel properties, as well as operating and financing obligations of the Partnership.  During the nine month period ending September 30, 2010, $156,900 of working capital reserves were used to meet operating obligations and $149,393 was used to fund additions to property and equipment of the Partnership.

4.           CAPITAL IMPROVEMENTS

In 2009, the Partnership contributed $105,000 to the Clearwater hotel for capital improvements and operating expenses.


 
6

 

CRI HOTEL INCOME PARTNERS, L.P.

NOTES TO FINANCIAL STATEMENTS
September 30, 2010 and 2009
(Unaudited)


5.           MORTGAGES PAYABLE

On December 19, 1997, the Partnership refinanced with Citicorp Real Estate, Inc. (Citicorp) the Zero Coupon Notes which were originally issued in connection with the Partnership's acquisition of the hotels.  The loan matured January 1, 2008.  On that date, a balloon payment in the amount of $7,273,441 became due.  The General Partner was unable to refinance the Partnership’s mortgage debt prior to its maturity.  Although the loan was in default, the special servicer agreed to a forbearance agreement for a period of 180 days for payment of a fee in the amount of $72,734, plus continued monthly payments of principal, interest (at the pre-default rate) and tax and capital improvements escrows.

On May 6, 2008, the Partnership closed three loans from General Electric Credit Corporation (“GE”) in the aggregate amount of $5,000,000 to refinance the Plymouth and Roseville hotels in Minnesota and the Clearwater hotel in Florida.  The three loans are cross-collateralized by the three hotels.  The Partnership used the loan proceeds together with the proceeds of a loan from Remediation Capital Funding, LLC in the amount of $2,900,000, of which $500,000 was held by the lender pending resolution of the environmental matter further discussed below, secured by the University hotel in Minnesota, to pay off the existing debt in full.

The three new GE loans bear interest at the rate of 6.79% per annum and mature on January 1, 2016 with balloon payments due as set forth below:

 
Plymouth
 
$887,269
 
Roseville
 
$2,083,122
 
Clearwater
 
$887,269

The Phase I environmental study of the University hotel required by GE revealed excess levels of three chemicals deemed hazardous in the groundwater on the property.  The contamination is not due to acts or omissions of the hotel. Simultaneously with its refinancing efforts, the Partnership engaged a consultant to enroll the University property in the Minnesota Pollution Control Agency's (“MCPA”) Voluntary Investigation and Cleanup ("VIC") Program and deal with the contamination at the site.  The Partnership's goal is to obtain a No Action Letter with a Covenant Not to Sue.  NOVA, the Partnership’s consultant, has prepared and submitted an additional Phase I study in accordance with the guidelines established by the MPCA-VIC Program along with the application and proposed scope of work for the required Phase II study.  On July 16, 2008, the MPCA approved the work plan for the Phase II study with samples of soil and ground water scheduled to begin collection for analysis August 11, 2008.  On January 28, 2009, NOVA completed the Phase II study.  Based on the results of the solvent, petroleum, and RCRA metal impacts above action or guidance levels that were detected in the soil, soil vapor and groundwater samples collected at the site, with the exception of the petroleum impacts, the compounds detected at the site appear to be associated with regional up gradient off-site areas of contamination located to the northeast and possibly to the north of the site.  It does not appear that the historical uses of the site are the source of the solvent, soil vapor and groundwater impacts detected at the site.  In March 2009, NOVA submitted these results and requests that the MPCA issue an Off-Site Determination letter and No Further Action letter for the site. In December 2009, after reviewing NOVA’s report the MPCA requested additional investigations to further evaluate the source of the chlorinated solvent contamination and the corresponding risk of the vapor intrusion into the site buildings.  The objective of these additional investigations and continued groundwater monitoring was to further evaluate the soils and groundwater at the site for the presence of impacts associated with both on-site and off-site environmental conditions.


 
7

 

CRI HOTEL INCOME PARTNERS, L.P.

NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
(Unaudited)


5.           MORTGAGES PAYABLE - Continued

It was also the objective of the additional investigations to show that the concentrations detected in the groundwater samples collected from the monitoring wells are a result of the former Kempf Paper facility located to the northeast of the site at an up-gradient location.  In addition a vapor intrusion assessment was also completed at the site.  The investigation was conducted from April through June 2010 and in accordance with the Work Plan reviewed and approved by the MPCA. NOVA completed the scope of work and submitted a Supplemental Investigation and Groundwater Monitoring Report to the MPCA on June 28, 2010.  Based on all of the results, NOVA in its professional opinion requested that the MPCA issue an Off-site Source Determination letter and No Further Action letter for the site.  We are awaiting a reply from MCPA.

The loan with Remediation Capital bears interest at the rate of 14% per annum and originally matured on May 5, 2010.  The Partnership negotiated a short term note extension with the current lender.  On May 21, 2010, the Partnership paid a non-refundable extension fee of $29,000, one percent of the outstanding principal balance to extend the maturity date to September 5, 2010.  The note matured on September 5, 2010 with an option to extend an additional two months, making the new maturity date November 5, 2010.  The Partnership exercised the option to extend the maturity date to November 5, 2010 and paid an additional non-refundable extension fee of $29,000.  On November 5, 2010, the Partnership and the lender further extended the maturity date of the note to December 31, 2010.  For the extension, the Partnership paid an extension fee of $29,000.

On November 9, 2010, CRI Hotel Income of Minnesota, LLC (“CRI Hotel of Minnesota”), was formed for the purpose of creating a single purpose entity for refinancing the University Days Inn hotel.  CRI Hotel of Minnesota is a wholly-owned subsidiary of CRI Hotel Income Partners, L.P.  (the "Partnership").  The Partnership contributed the University Days Inn Hotel to CRI Hotel of Minnesota in connection with its submission of a mortgage loan application to Franklin National Bank of Minneapolis to refinance the existing mortgage loan on the University Days Inn Hotel (the “Refinancing”).  On December 17, 2010, CRI Hotel of Minnesota entered into a Loan Agreement with Franklin National Bank of Minneapolis for the purpose of refinancing the prior loan with Remediation Capital, which was paid off on December 17, 2010.  Pursuant to the Loan Agreement, Franklin National Bank of Minneapolis issued a loan to CRI Hotel of Minnesota in the principal amount of $3,500,000 for a term of three (3) years (the “Loan”).  The Loan is secured by the University Days Inn Hotel property.  The interest rate for the Loan is seven percent (7%) per year. Principal and interest payments are based upon a 20 year amortization schedule.  A $350,000 environmental escrow reserve account will be established, which will be released when and if the Minnesota Pollution Control Agency issues a No Further Action letter, as previously described in the Partnership's annual and quarterly filings.  The prior mortgage loan with Remediation Capital was paid off on December 17, 2010 and the $500,000 environmental escrow held by Remediation Capital was returned to the Partnership on December 17, 2010.  More information regarding the Loan will be filed in a separate Form 8-K which will also contain certain of the documents evidencing the Loan.

The Partnership made installments of principal and interest aggregating $659,320 and $653,681 for the nine month periods ended September 30, 2010 and 2009, respectively.  The Partnership's balance on the loan was $7,122,743 and $7,216,472 as of September 30, 2010 and December 31, 2009, respectively.


 
8

 

CRI HOTEL INCOME PARTNERS, L.P.

NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
(Unaudited)


5.           MORTGAGES PAYABLE - Continued

Considerable judgment is necessary to estimate the fair value of financial instruments.  Due to current limitations on credit availability and market conditions, the estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments.  We estimate the fair value of our mortgages payable using discounted cash flow analysis, unobservable inputs, and other internally developed estimates that incorporate market-based assumptions to range from $3,500,000 to $4,000,000 for the Plymouth hotel, Roseville hotel and Clearwater hotel; and approximately $2,400,000 for the University hotel loan based on unobservable inputs.

6.           DISTRIBUTIONS TO BAC HOLDERS

The Partnership did not make a distribution in 2009 or in the first three quarters of 2010.

7.           COMMITMENTS

a.           Hotel Management Agreements

The hotels had been operated by Bryanston Group, Inc. d/b/a Buckhead Hotel Management Company, Inc. (Buckhead), formerly known as Days Inns Management Company, Inc., under the nationally recognized franchise name of Days Inns.  The Partnership entered into new management contracts with Oak Hotels, Inc., which will continue to be operated as Days Inns. The management contracts expire December 31, 2016, with the exception of Scottsdale which is coterminous with the land lease on which the hotel is located. The agreements provide for a base management fee of 3.5% of gross revenues from operations with the exception of Scottsdale which provides for a base management fee of 4.5% of gross revenues from operations. The Partnership previously stated that as of February 1, 2010 the management of the hotels had been assigned to Capitol Hotel Group, Inc. (CHG), however, due to an administrative error, the management of the hotels was not assigned and remains with Oak Hotels, Inc. The previously disclosed management fees payable to Oak Hotels, Inc. remain unchanged.

b.           Lease Agreements

The Partnership assumed an existing lease agreement from Days Inns of America, Inc. in connection with the acquisition of the leasehold interest in the Scottsdale Days Inn. The assumption transfers the rights to operate the property on the lease's existing terms over the remaining life of the lease.  In October 2002, the lease was extended to expire on December 31, 2008.  The Partnership has negotiated and executed a third short term extension through December 31, 2011.  Annual lease payments are equal to the sum of (i) 22% of gross room revenue up to $3,300,000 and 30% of gross room revenue in excess of $3,300,000, plus (ii) 2.5% of restaurant sales, with a minimum annual lease payment of $480,000.  For the three month periods ended September 30, 2010 and 2009, lease payments were $88,615 and $97,777, respectively.  For the nine month periods ended September 30, 2010 and 2009, lease payments were $382,206 and $402,018, respectively.


 
9

 

CRI HOTEL INCOME PARTNERS, L.P.

NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
(Unaudited)

7.           COMMITMENTS - Continued

c.           License Agreements

The five License Agreements pursuant to which the hotels are operated as Days Inns were assigned from the current licensee (and former management agent), Buckhead to the Partnership as Licensee. The business terms remained identical.

8.           GROUND LEASE AGREEMENTS

The Partnership had leased a portion of the Minneapolis Days Inn property to Vicorp Restaurants, Inc. (Vicorp), which operated a Baker's Square restaurant on the property.  As of March 2008, Vicorp failed to pay the monthly rent due.  On April 3, 2008, Vicorp declared bankruptcy.  It rejected the lease as an executory contract as of that date. The Partnership has filed a proof of claim for its permitted damages in Vicorp’s bankruptcy case.

On June 22, 2009, the Partnership executed a ten year lease with Asian Mill, Inc., doing business as the Tea House Restaurant, to replace the Vicorp lease.  The lease has two options to renew for five years each.  The base rent for years one through five is $100,700.  Rent commenced on April 19, 2010 upon the opening of the premises for business to the general public. Gross base rental income pursuant to the lease agreement with Tea House, which is included in interest and other income in the accompanying statements of operations, was $24,462 and $73,385 for the three and nine month periods ended September 30, 2010, respectively, and $24,462 for both the three and nine month periods ended September 30, 2009.

The Partnership leases an adjacent building on the Roseville Days Inn property to India Palace, Inc., which operates a restaurant on the property. The lease originally was scheduled to expire on September 30, 2010 and the tenant exercised its option to extend for an additional five years to expire on September 30, 2015. Gross base rental income pursuant to the lease agreement with India Palace, which is included in interest and other income in the accompanying statements of operations, was $7,500 and $22,500 for each of the three and nine month periods ended September 30, 2010 and 2009, respectively.

 
10

 

CRI HOTEL INCOME PARTNERS, L.P.

NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
(Unaudited)


9.           RELATED PARTY TRANSACTIONS

C.R.I., Inc., the general partner of the General Partner, has contracted with Capitol Hotel Group, Inc. (CHG), to perform certain asset management services related to the oversight of the operations and management of the hotels.  The Chairman and the President of C.R.I., Inc. are the Chairman and President, respectively, of, and holders of 100% of the equity interest in, CHG.  CHG was formed in 1986 to address the needs, interest and financial objectives of hotel operations from an owner’s perspective.  CHG has been both an asset manager and a hotel operator of diverse properties in widely varied markets with many major hotel brands and a number of well-known independent destination resorts.

The Partnership previously stated that as of February 1, 2010, management of the hotels was assigned to CHG; however, due to an administrative error, the management of the hotels was not assigned and remains with Oak Hotels, Inc.

In accordance with the terms of the Partnership Agreement, the Partnership is obligated to reimburse the General Partner or its affiliates for their direct expenses in connection with managing the Partnership.  The Partnership paid $32,163 and $132,097 for the three and nine month periods ended September 30, 2010, respectively and $46,167 and $145,218 for the three and nine month periods ended September 30, 2009, respectively. Such reimbursed expenses are included in general and administrative expenses in the accompanying statements of operations.

In accordance with the terms of the Partnership Agreement, the Partnership is obligated to pay the General Partner or its affiliates an annual base asset management fee (Management Fee), equal to 0.50% of the weighted average balance of the adjusted partnership investment during  the period, as defined in the Partnership Agreement.  The Partnership paid a Management Fee of $23,438 and $70,313 for each of the three and nine month periods ended September 30, 2010 and 2009.

10.           DEPRECIATION AND AMORTIZATION

Depreciation is based on the estimated useful lives of depreciable assets using the straight-line method.  Salvage value has been incorporated relating to the Scottsdale hotel.  The estimated lives used in determining depreciation follow.

Type of asset
Estimated life
Building and site improvements
10-30 years
Furniture, fixtures and equipment
7 years
Leasehold improvements
Shorter of estimated life  (usually 7 years) or
 
remaining lease term


 
11

 

CRI HOTEL INCOME PARTNERS, L.P.

NOTES TO FINANCIAL STATEMENTS
September 30, 2009 and 2008
(Unaudited)


10.           DEPRECIATION AND AMORTIZATION - Continued

Property purchase cost and acquisition fees are being amortized over a thirty-year period using the straight-line method, except for the Scottsdale hotel which is being amortized over the remaining lease term.  Loan refinancing costs are being amortized over the life of the loans using the straight-line method, which approximates the effective interest method.

11.           CASH CONCENTRATION RISK

Financial instruments that potentially subject the Partnership to concentrations of risk consist primarily of cash. The Partnership maintains twelve cash accounts.  As of September 30, 2010, the uninsured portion of the cash balance was $0.

12.           SUBSEQUENT EVENTS

On November 9, 2010, CRI Hotel Income of Minnesota, LLC (“CRI Hotel of Minnesota”), was formed for the purpose of creating a single purpose entity for refinancing the University Days Inn hotel.  CRI Hotel of Minnesota is a wholly-owned subsidiary of CRI Hotel Income Partners, L.P.  (the "Partnership").  The Partnership contributed the University Days Inn Hotel to CRI Hotel of Minnesota in connection with its submission of a mortgage loan application to Franklin National Bank of Minneapolis to refinance the existing mortgage loan on the University Days Inn Hotel (the “Refinancing”).  On December 17, 2010, CRI Hotel of Minnesota entered into a Loan Agreement with Franklin National Bank of Minneapolis for the purpose of refinancing the prior loan with Remediation Capital, which was paid off on December 17, 2010.  Pursuant to the Loan Agreement, Franklin National Bank of Minneapolis issued a loan to CRI Hotel of Minnesota in the principal amount of $3,500,000 for a term of three (3) years (the “Loan”).  The Loan is secured by the University Days Inn Hotel property.  The interest rate for the Loan is seven percent (7%) per year. Principal and interest payments are based upon a 20 year amortization schedule.  A $350,000 environmental escrow reserve account will be established, which will be released when and if the Minnesota Pollution Control Agency issues a No Further Action letter, as previously described in the Partnership's annual and quarterly filings.  The prior mortgage loan with Remediation Capital was paid off on December 17, 2010 and the $500,000 environmental escrow held by Remediation Capital was returned to the Partnership on December 17, 2010.  More information regarding the Loan will be filed in a separate Form 8-K which will also contain certain of the documents evidencing the Loan.

# # #

 
12

 

Part I.    FINANCIAL INFORMATION
Item 2.    Management's Discussion and Analysis
       of Financial Condition and Results of Operations


Management's Discussion and Analysis of Financial Condition and Results of Operations section is based on the financial statements, and contains information that may be considered forward looking, including statements regarding the effect of governmental regulations.  Actual results may differ materially from those described in the forward looking statements and will be affected by a variety of factors including seasonality with respect to the hotel industry, national and local economic conditions, the general level of interest rates, governmental regulations affecting the Partnership and interpretations of those regulations, the competitive environment in which the Partnership operates, and the availability of working capital.

 
National Economic Condition
 

 
The economic recession and the slow pace of recovery continue to influence consumers’ confidence and discretionary spending. We believe the weak demand, increased competition and volatility of the economy have had a significant negative impact on the hotel industry, and, as a result, our operating performance during 2010 and 2009. In response to the difficult economic environment, our management has implemented cost savings measures and will continue to look for opportunities to further reduce expenses and maximize cash flows. We believe the current economic recession will continue to negatively affect our operating results in the future, however, we are uncertain as to the duration and magnitude of the recession’s impact.

Financial Condition/Liquidity

The Partnership's liquidity and future results of operations are primarily dependent upon the performance of the underlying hotels.

For the nine month period ended September 30, 2010, existing cash resources were adequate to support operating and financing requirements.  The Partnership anticipates that cash flows from the hotels’ operations and existing cash resources, in the aggregate, will be sufficient to pay operating and financing obligations of the Partnership for the foreseeable future.  Existing cash resources of the Partnership are comprised of hotel operating cash and working capital reserves. At September 30, 2010 the Partnership held $214,383 and $1,343,151 in hotel operating cash and working capital reserves respectively.  During the nine months ending September 30, 2010, Hotel Operating Cash increased by $103,988 while cash held in the working capital reserve decreased by $306,293.

Accounts payable and accrued expenses increased during the nine months ending September 30, 2010 largely due to the accrual of interest payments, which are now made monthly, in arrears, real estate tax payments and sales, and occupancy use tax payments which are only made on a periodic basis and the increased accrual of payroll costs due to the timing of payroll. Hotel trade payables decreased primarily due to lower occupancy compared to fourth quarter 2009.

Lease Agreement

The Partnership assumed an existing lease agreement from Days Inns of America, Inc. in connection with the acquisition of the leasehold interest in the Scottsdale Days Inn. The assumption transfers the rights to operate the property on the lease's existing terms over the remaining life of the lease.  In November 2002, the lease was extended to expire on December 31, 2008. The Partnership has negotiated and executed a third short term extension through December 31, 2011.  There is no assurance that the lease will be renewed. Operating income for the Scottsdale hotel was $90,213 for the nine month period ended September 30, 2010.



 
13

 

Part I.    FINANCIAL INFORMATION
Item 2.    Management's Discussion and Analysis
       of Financial Condition and Results of Operations - Continued


Financing

On December 19, 1997, the Partnership refinanced with Citicorp Real Estate, Inc. (Citicorp) the Zero Coupon Notes which were originally issued in connection with the Partnership's acquisition of the hotels.  The loan matured January 1, 2008.  On that date, a balloon payment in the amount of $7,273,441 became due.  The General Partner was unable to refinance the Partnership’s mortgage debt prior to its maturity.  Although the loan was in default, the special servicer agreed to a forbearance agreement for a period of 180 days for payment of a fee in the amount of $72,734, plus continued monthly payments of principal, interest (at the pre-default rate) and tax and capital improvements escrows.

On May 6, 2008, the Partnership closed three loans from General Electric Credit Corporation (“GE”) in the aggregate amount of $5,000,000 to refinance the Plymouth and Roseville hotels in Minnesota and the Clearwater hotel in Florida.  The three loans are cross-collateralized by the three hotels.  The Partnership used the loan proceeds together with the proceeds of a loan from Remediation Capital Funding, LLC in the amount of $2,900,000, of which $500,000 was held by the lender pending resolution of the environmental matter further discussed below, secured by the University hotel in Minnesota, to pay off the existing debt in full.

The three new GE loans bear interest at the rate of 6.79% per annum and mature on January 1, 2016 with balloon payments due as set forth below:

 
Plymouth
 
$887,269
 
Roseville
 
$2,083,122
 
Clearwater
 
$887,269

The Phase I environmental study of the University hotel required by GE revealed excess levels of three chemicals deemed hazardous in the groundwater on the property.  The contamination is not due to acts or omissions of the hotel. Simultaneously with its refinancing efforts, the Partnership engaged a consultant to enroll the University property in the Minnesota Pollution Control Agency's (“MCPA”) Voluntary Investigation and Cleanup ("VIC") Program and deal with the contamination at the site.  The Partnership's goal is to obtain a No Action Letter with a Covenant Not to Sue.  NOVA, the Partnership’s consultant, has prepared and submitted an additional Phase I study in accordance with the guidelines established by the MPCA-VIC Program along with the application and proposed scope of work for the required Phase II study.  On July 16, 2008, the MPCA approved the work plan for the Phase II study with samples of soil and ground water scheduled to begin collection for analysis August 11, 2008.  On January 28, 2009, NOVA completed the Phase II study.  Based on the results of the solvent, petroleum, and RCRA metal impacts above action or guidance levels that were detected in the soil, soil vapor and groundwater samples collected at the site, with the exception of the petroleum impacts, the compounds detected at the site appear to be associated with regional up gradient off-site areas of contamination located to the northeast and possibly to the north of the site.  It does not appear that the historical uses of the site are the source of the solvent, soil vapor and groundwater impacts detected at the site.  In March 2009, NOVA submitted these results and requests that the MPCA issue an Off-Site Determination letter and No Further Action letter for the site. In December 2009, after reviewing NOVA’s report the MPCA requested additional investigations to further evaluate the source of the chlorinated solvent contamination and the corresponding risk of the vapor intrusion into the site buildings. The objective of these additional investigations and continued groundwater monitoring was to further evaluate the soils and groundwater at the site for the presence of impacts associated with both on-site and off-site environmental conditions.

 
14

 

Part I.    FINANCIAL INFORMATION
Item 2.    Management's Discussion and Analysis
       of Financial Condition and Results of Operations - Continued


It was also the objective of the additional investigations to show that the concentrations detected in the groundwater samples collected from the monitoring wells are a result of the former Kempf Paper facility located to the northeast of the site at an up-gradient location.  In addition, a vapor intrusion assessment was also completed at the site.  The investigation was conducted from April through June 2010 and in accordance with the Work Plan reviewed and approved by the MPCA. NOVA completed the scope of work and submitted a Supplemental Investigation and Groundwater Monitoring Report to the MPCA on June 28, 2010.  Based on all of the results, NOVA in its professional opinion requested that the MPCA issue an Off-Site Source Determination letter and No Further Action letter for the site.  We are awaiting a reply from MCPA.

The loan with Remediation Capital bears interest at the rate of 14% per annum and originally matured on May 5, 2010.  The Partnership negotiated a short term note extension with the current lender.  On May 21, 2010, the Partnership paid a non-refundable extension fee of $29,000, one percent of the outstanding principal balance to extend the maturity date to September 5, 2010.  The note matured on September 5, 2010 with an option to extend an additional two months, making the new maturity date November 5, 2010.  The Partnership exercised the option to extend the maturity date to November 5, 2010 and paid an additional non-refundable extension fee of $29,000.  On November 5, 2010, the Partnership and the lender further extended the maturity date of the note to December 31, 2010.  For the extension, the Partnership paid an extension fee of $29,000.

On November 9, 2010, CRI Hotel Income of Minnesota, LLC (“CRI Hotel of Minnesota”), was formed for the purpose of creating a single purpose entity for refinancing the University Days Inn hotel.  CRI Hotel of Minnesota is a wholly-owned subsidiary of CRI Hotel Income Partners, L.P.  (the "Partnership").  The Partnership contributed the University Days Inn Hotel to CRI Hotel of Minnesota in connection with its submission of a mortgage loan application to Franklin National Bank of Minneapolis to refinance the existing mortgage loan on the University Days Inn Hotel (the “Refinancing”).  On December 17, 2010, CRI Hotel of Minnesota entered into a Loan Agreement with Franklin National Bank of Minneapolis for the purpose of refinancing the prior loan with Remediation Capital, which was paid off on December 17, 2010.  Pursuant to the Loan Agreement, Franklin National Bank of Minneapolis issued a loan to CRI Hotel of Minnesota in the principal amount of $3,500,000 for a term of three (3) years (the “Loan”).  The Loan is secured by the University Days Inn Hotel property.  The interest rate for the Loan is seven percent (7%) per year. Principal and interest payments are based upon a 20 year amortization schedule.  A $350,000 environmental escrow reserve account will be established, which will be released when and if the Minnesota Pollution Control Agency issues a No Further Action letter, as previously described in the Partnership's annual and quarterly filings.  The prior mortgage loan with Remediation Capital was paid off on December 17, 2010 and the $500,000 environmental escrow held by Remediation Capital was returned to the Partnership on December 17, 2010.  More information regarding the Loan will be filed in a separate Form 8-K which will also contain certain of the documents evidencing the Loan.

The Partnership made installments of principal and interest aggregating $659,320 and $653,681 for the nine month periods ended September 30, 2010 and 2009, respectively.  The Partnership's balance on the loan was $7,122,743 and $7,216,472 as of September 30, 2010 and December 31, 2009, respectively.


 
15

 

Part I.    FINANCIAL INFORMATION
Item 2.    Management's Discussion and Analysis
       of Financial Condition and Results of Operations - Continued


Results of Operations - Partnership

During the first nine months of 2010 the Partnership recorded a net loss of $651,261, compared to a net loss of $794,627, during the first nine months of 2009.  The decrease in net loss was primarily due to higher interest and other income and lower depreciation and amortization expense as a result of assets becoming fully depreciated during 2010.  Interest and other income increased due to rental income from the new lease with Asian Mill, Inc., doing business as the Tea House Restaurant.  In addition, most categories of operating expenses decreased, except for professional fees and property taxes, compared to the prior year reporting period.

The General Partner is not able to predict the future trend of hotel gross operating income, especially rooms revenue as it is affected by occupancy and average daily rate.  The General Partner continues to work closely with the hotels’ manager to contain any increase in unallocated operating expenses.

An analysis of each hotel's operating results for the three and nine month periods ended September 30, 2010 and 2009, follows.

Results of Operations - Hotels

Operating statistics

The hotels' results of operations are affected by changing market conditions and by seasonality caused by variables such as vacations, holidays and climate.  Based on the hotels' operating budgets and historical trends, the following months should provide the highest net cash flow to the Partnership from each of the hotels.
 
 
Hotel Location
Peak Months
Clearwater, FL
January through April
Minneapolis, MN
March through November
Plymouth, MN
April  through October
Roseville, MN
April through October
Scottsdale, AZ
January through April; and
 
October and November


The hotels’ results of operations set forth below may not be consistent with longer-term historical trends.

 
16

 

Part I.    FINANCIAL INFORMATION
Item 2.    Management's Discussion and Analysis
       of Financial Condition and Results of Operations - Continued


The Partnership's statements of operations include operating results for each of the hotels as summarized below.  Gross Operating Income represents total revenue from rooms, rental and other, telephone, and food and beverage, less the related departmental expenses.  Operating Income represents Gross Operating Income less unallocated operating income and expenses.  The results of operations and average occupancy for the hotels for the three month periods ended September 30, 2010 and 2009, follow.


   
Gross Operating Income
   
Gross Operating Income
 
   
for the three month periods
   
for the nine month periods
 
   
ended September 30,
   
ended September 30,
 
Hotel Location
 
2010
   
2009
   
2010
   
2009
 
                         
Clearwater, FL
  $ 69,814     $ 77,075     $ 366,456     $ 432,542  
Minneapolis, MN
    596,756       568,252       1,477,680       1,438,213  
Plymouth, MN
    183,897       170,318       440,792       419,810  
Roseville, MN
    267,015       254,637       628,282       582,444  
Scottsdale, AZ
    264,080       302,906       1,318,924       1,386,599  
                                 
Total
  $ 1,381,562     $ 1,373,188     $ 4,232,134     $ 4,259,608  


   
Operating (Loss) Income
   
Operating (Loss) Income
 
   
for the three month periods
   
for the nine month periods
 
   
ended September 30
   
ended September 30,
 
Hotel Location
 
2010
   
2009
   
2010
   
2009
 
                         
Clearwater, Fl
  $ (91,229 )   $ (80,084 )   $ (119,531 )   $ (84,905 )
Minneapolis, MN
    338,146       328,354       765,770       752,298  
Plymouth, MN
    42,728       36,390       34,300       32,090  
Roseville, MN
    109,355       109,869       195,914       172,522  
Scottsdale, AZ
    (122,959 )     (93,153 )     90,213       57,113  
Depreciation and partnership
                               
operating expenses
    (167,826 )     (365,625 )     (1,052,336 )     (1,162,601 )
                                 
    $ 108,292     $ (64,249 )   $ (85,670 )   $ (233,483 )


   
Average Occupancy
   
Average Occupancy
 
   
for the three month periods
   
for the nine month periods
 
   
ended September 30,
   
ended September 30,
 
Hotel Location
 
2010
   
2009
   
2010
   
2009
 
                         
Clearwater, Fl
    36 %     35 %     44 %     43 %
Minneapolis, MN
    86 %     79 %     77 %     71 %
Plymouth, MN
    68 %     64 %     58 %     53 %
Roseville, MN
    70 %     65 %     61 %     54 %
Scottsdale, AZ
    63 %     67 %     65 %     65 %


Three Month Periods Ended September 30, 2010

Clearwater, Florida:  Gross operating income decreased and operating loss increased for the three month period ended September 30, 2010 compared to 2009 primarily due to lower room rates despite a small increase in occupancy.  Departmental and operational expenses were only slightly lower and could not compensate for the reduced income.

Minneapolis, Minnesota:  Gross operating income and operating income for the three month period ended September 30, 2010 increased from 2009 primarily due to higher room occupancy that can be partially attributable to lower average room rates charged.  A property tax increase reduced the amount of income realized by the hotel.

 
17

 

Part I.    FINANCIAL INFORMATION
Item 2.    Management's Discussion and Analysis
       of Financial Condition and Results of Operations - Continued


Plymouth, Minnesota:  Gross operating income and operating income for the three month period ended September 30, 2010 increased compared to 2009 primarily due to higher room occupancy. Departmental and operational expenses were slightly higher due to increased occupancy.

Roseville, Minnesota: Gross operating income for the three month period ended September 30, 2010 increased compared to 2009 primarily due to higher room occupancy that can be partially attributable to the lower average room rates charged.  Operating income for the three month period ended September 30, 2010 decreased slightly compared to 2009 primarily due to higher departmental and operational expense as a result of the increased occupancy.

Scottsdale, Arizona:  Gross operating income decreased and operating loss increased for the three month period ended September 30, 2010 compared to 2009 primarily due to a decrease in occupancy.  Departmental and operational expenses were only slightly lower and could not compensate for the reduced income.

Nine month Periods Ended September 30, 2010

Clearwater, Florida:  Gross operating income decreased and operating loss increased for the nine month period ended September 30, 2010 compared to 2009 primarily due to lower room rates despite a small increase in occupancy.  Departmental and operational expenses were only slightly lower and could not compensate for the reduced income.

Minneapolis, Minnesota:  Gross operating income and operating income for the nine month period ended September 30, 2010 increased compared to 2009 primarily due to an increase in occupancy, however, a lower average room rate partially offset the gain. Operating expenses remained constant despite a reduction in heat, light and power costs which was offset by a property tax increase.

Plymouth, Minnesota:  Gross operating income and operating income for the nine month period ended September 30, 2010 increased compared to 2009 primarily due to higher occupancy, which was partially offset by higher maintenance costs and an increase in property taxes.

Roseville, Minnesota:  Gross operating income and operating income for the nine month period ended September 30, 2010 increased from 2009 primarily due to higher occupancy, which was partially attributable to lower average room rates.  Operating expenses grew slightly, largely as a result of higher repair and maintenance costs and increased property taxes.

Scottsdale, Arizona:  Gross operating income decreased, however, operating income increased for the nine month period ended September 30, 2010 compared to 2009.  Gross operating income decreased as a result of lower average room rates whereas occupancy remained constant.  A significant decrease in operating expenses in almost all categories offset the lower gross operating income and resulted in a higher operating income.


 
18

 

Part I.    FINANCIAL INFORMATION
Item 4.    Controls and Procedures
 
a)           Disclosure Controls and Procedures.

The Partnership’s management, with the participation of the principal executive officer and principal financial officer of the Managing General Partner, who are the equivalent of the Partnership’s principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of the Partnership’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. A control system, no matter how well conceived and operated, can provide only reasonable assurance that the objectives of the control system are met.  Based on such evaluation, the principal executive officer and principal financial officer of the Managing General Partner, who are the equivalent of the Partnership’s principal executive officer and principal financial officer, respectively, have concluded that, as of the end of such period, the Partnership’s disclosure controls and procedures are effective at a reasonable assurance level.

b)           Changes in Internal Control Over Financial Reporting.

There has been no change in the Partnership’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, the Partnership’s internal control over financial reporting.


Part II.   OTHER INFORMATION
Item 1.    Legal Proceedings

The Partnership is unaware of any pending or outstanding litigation involving it or the underlying investment property of the Local Partnerships in which the Partnership invests that are not of a routine nature arising in the ordinary course of business or that would have a material adverse effect on the business.

Item 5.    Other Information

a.  
There has not been any information required to be disclosed in a report on Form 8-K during the quarter ended September 30, 2010, but not reported, whether or not otherwise required by this Form 10-Q at September 30, 2010.

b.  
There is no established market for the purchase and sale of BACs, although various informal secondary market services may exist.  Due to the limited markets, investors may be unable to sell or otherwise dispose of their BACs.

c.  
In addition, certain transfers of BACs in the Partnership may not exceed two percent of the total interests in the Partnership’s capital or profits during any one taxable year to avoid the Partnership being deemed a publicly traded partnership.

 
19

 

Part II.   OTHER INFORMATION
Item 6.    Exhibits


Exhibit No.
Description

10.1
 
Form of Management Agreement dated March 1, 2008, between Registrant and Oak Hotels, Inc. for the University, Plymouth and Roseville hotels, April 1, 2008 for the Clearwater Hotel and July 1, 2008 for the Scottsdale Hotel.
     
31.1
 
Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2
 
Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32
 
Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

All other items are not applicable.



SIGNATURE


In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

   
CRI HOTEL INCOME PARTNERS, L.P.      
   
(Registrant)
     
   
by:  CRICO Hotel Associates I, L.P.      
   
    General Partner
     
   
    by:  C.R.I., Inc.            
   
       Managing General Partner
     
     
     
December 21, 2010   
 
       by:      /s/ H. William Willoughby   
DATE
 
          H. William Willoughby
   
          Director, President, Secretary,
   
          Principal Financial Officer and
   
           Principal Accounting Officer



20