10-Q

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 June 30, 2006

OR

¨ 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 001-32379

MHI HOSPITALITY CORPORATION

(Exact name of registrant as specified in its charter)

MARYLAND	20-1531029
(State or Other Jurisdiction of corporation or Organization)	(I.R.S. Employer Identification No.)

814 Capitol Landing Road, Williamsburg, Virginia 23185

Telephone Number (757) 229-5648

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  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

Large Accelerated Filer  ¨    Accelerated Filer  ¨    Non-accelerated Filer  x

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

As of August 8, 2006, there were 6,712,000 shares of the registrant’s common stock issued and outstanding.

MHI HOSPITALITY CORPORATION

INDEX

		Page
	PART I
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	24
	PART II
Item 1.	Legal Proceedings	25
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults Upon Senior Securities	25
Item 4.	Submission of Matters to a Vote of Security Holders	25
Item 5.	Other Information	25
Item 6.	Exhibits	26

2

PART I

Item 1. Financial Statements

MHI HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS

	June 30, 2006			December 31, 2005
	(unaudited)
ASSETS
Investment in hotel properties, net	$	102,395,115		$	101,583,250
Cash and cash equivalents		2,420,555			501,810
Restricted cash		3,464,106			4,330,981
Accounts receivable		2,634,505			2,095,193
Accounts receivable-affiliate		4,463			242,362
Prepaid expenses, inventory and other assets		2,419,960			1,917,038
Assets held for sale		4,506,364			4,451,912
Shell Island lease purchase, net		2,832,279			3,088,235
Deferred financing costs, net		683,717			175,142
TOTAL ASSETS	$	121,361,064		$	118,385,923
LIABILITIES
Line of credit	$	7,678,232		$	3,500,000
Mortgage loans		42,157,632			42,686,943
Accounts payable and accrued expenses		5,520,253			5,106,882
Dividends and distributions payable		1,801,661			1,803,973
Advance deposits		648,177			266,657
TOTAL LIABILITIES		57,805,955			53,364,455
Minority interest in operating partnership		21,217,912			21,805,572
Commitments and contingencies (see Note 7)
SHAREHOLDERS’ EQUITY
Preferred stock, par value $0.01, 1,000,000 shares authorized, 0 shares issued and outstanding		—			—
Common stock, par value $0.01, 49,000,000 shares authorized, 6,712,000 shares issued and outstanding at June 30, 2006 and December 31, 2005		67,120			67,040
Additional paid in capital		47,890,267			47,760,347
Accumulated deficit		(5,620,190	)		(4,611,491	)
TOTAL SHAREHOLDERS’ EQUITY		42,337,197			43,215,896
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	121,361,064		$	118,385,923

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

3

MHI HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended June 30, 2006			Three months ended June 30, 2005			Six months ended June 30, 2006			Six months ended June 30, 2005
REVENUE
Rooms department	$	12,379,692		$	9,472,674		$	22,804,541		$	16,856,963
Food and beverage department		5,353,338			4,224,297			9,585,311			7,427,867
Other operating departments		868,059			610,782			1,738,809			1,108,110
Total revenue		18,601,089			14,307,753			34,128,661			25,392,940
EXPENSES
Hotel operating expenses
Rooms department		3,381,090			2,403,631			6,275,188			4,566,744
Food and beverage department		3,485,574			2,689,409			6,574,175			5,035,024
Other operating departments		223,168			180,385			435,759			325,764
Indirect		6,530,643			4,851,936			12,611,506			9,363,692
Total hotel operating expenses		13,620,475			10,125,361			25,896,628			19,291,224
Depreciation and amortization		1,221,820			1,057,876			2,388,255			1,840,912
Corporate general and administrative		663,970			497,017			1,454,415			965,167
Total operating expenses		15,506,265			11,680,254			29,739,298			22,097,303
NET OPERATING INCOME		3,094,824			2,627,499			4,389,363			3,295,637
Other income (expense)
Interest expense		(1,095,832	)		(422,213	)		(2,069,946	)		(1,035,610	)
Interest income		21,464			53,346			43,411			101,658
Net income before minority interest in operating partnership and income taxes		2,020,456			2,258,632			2,362,828			2,361,685
Minority interest in operating partnership		(642,125	)		(784,055	)		(779,204	)		(809,101	)
Income tax provision		(276,483	)		(148,064	)		(246,603	)		(148,064	)
Income from continuing operations		1,101,848			1,326,513			1,337,021			1,404,520
Income (loss) from discontinued operations, net		25,945			62,554			(65,680	)		(43,916	)
NET INCOME	$	1,127,793		$	1,389,067		$	1,271,341		$	1,360,604
Continued operations per share
Basic	$	0.16		$	0.20		$	0.20		$	0.21
Diluted	$	0.16		$	0.20		$	0.20		$	0.21
Discontinued operations per share
Basic	$	0.00		$	0.01		$	(0.01	)	$	(0.00	)
Diluted	$	0.00		$	0.01		$	(0.01	)	$	(0.00	)
Net income (loss) per share
Basic	$	0.16		$	0.21		$	0.19		$	0.21
Diluted	$	0.16		$	0.21		$	0.19		$	0.21
Weighted average number of shares outstanding
Basic		6,705,978			6,704,000			6,704,994			6,630,519
Diluted		6,774,978			6,704,000			6,770,464			6,630,519

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

4

MHI HOSPITALITY CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)

	Common Stock			Additional Paid-In Capital		Accumulated Deficit			Total
	Shares	Par Value
Balances at December 31, 2005	6,704,000	$	67,040	$	47,760,347	$	(4,611,491	)	$	43,215,896
Issuance of restricted common stock awards	8,000		80		72,920		—			73,000
Amortization of deferred stock grants					57,000		—			57,000
Net income					—		1,271,341			1,271,341
Dividends declared					—		(2,280,040	)		(2,280,040	)
Balances at June 30, 2006	6,712,000	$	67,120	$	47,890,267	$	(5,620,190	)	$	42,337,197

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

5

MHI HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six months Ended June 30, 2006			Six months ended June 30, 2005
Cash Flows from Operating Activities:
Net income	$	1,271,341		$	1,360,604
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2,523,096			1,951,906
Amortization of deferred financing costs		114,178			38,788
Charges related to equity-based compensation		130,000			—
Minority interest in operating partnership		740,926			783,818
Changes in assets and liabilities:
Restricted cash		(347,454	)		(425,458	)
Accounts receivable		(539,313	)		(1,106,831	)
Inventory, prepaid expenses and other assets		(473,167	)		(982,036	)
Accounts payable and accrued expenses		413,369			(1,077,052	)
Advance deposits		381,520			151,023
Due from affiliates		237,899			257,465
Net cash provided by operating activities		4,452,395			952,227
Cash flows from investing activities:
Improvements and additions to hotel properties		(3,163,212	)		(3,477,517	)
Proceeds of restricted capital improvement reserve		1,214,330			—
Net cash used in investing activities		(1,948,882	)		(3,477,517	)
Cash flows from financing activities:
Proceeds from sale of common stock		—			7,000,000
Payment of issuance costs related to sale of common stock		—			(490,000	)
Dividends and distributions paid		(3,610,938	)		(1,786,905	)
Proceeds from line of credit		4,178,232			—
Payments on related party note		—			(2,000,000	)
Payment of deferred financing costs		(622,751	)		(54,565	)
Payment of loans		(529,311	)		(557,337	)
Net cash provided by (used in) financing activities		(584,768	)		2,111,193
Net increase (decrease) in cash and cash equivalents		1,918,745			(414,097	)
Cash and cash equivalents at the beginning of the period		501,810			8,314,353
Cash and cash equivalents at the end of the period	$	2,420,555		$	7,900,256
Supplemental disclosures:
Cash paid during the period for interest	$	1,983,700		$	1,000,143

The accompanying notes are an integral part of these financial statements

6

MHI HOSPITALITY CORPORATION

NOTES TO FINANCIAL STATEMENTS

(unaudited)

1. Organization and Description of Business

MHI Hospitality Corporation (the “Company”) is a self-advised real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004 to own full-service upscale and mid-scale hotels located in primary and secondary markets in the mid-Atlantic and Southeastern regions of the United States. The hotels operate under well-known national hotel brands such as Hilton and Intercontinental Hotels Group brands. The Company commenced operations on December 21, 2004 when it completed its initial public offering (“IPO”) and thereafter consummated the acquisition of six hotel properties (“initial properties”). The Company utilized part of its net proceeds to repay approximately $25.0 million of mortgage indebtedness secured by the initial properties and paid an additional $16.9 million in cash related to the acquisition of the properties. Accordingly, the Company had approximately $12.9 million available in cash immediately following its formation.

On July 22, 2005, the Company acquired the Crowne Plaza Jacksonville Hotel (formerly, the Hilton Jacksonville Riverfront Hotel) in Jacksonville, Florida from BIT Holdings Seventeen, Inc., an affiliate of the AFL-CIO Building Investment Trust (the “Trust”), for an aggregate price of $22 million. The Trust, for which Mercantile Safe Deposit and Trust Company (“Mercantile”) acts as trustee, financed a portion of the purchase price by extending an $18 million mortgage loan (the “Loan”) to the purchaser. Pursuant to the terms of a Purchase Sale and Contribution Agreement dated May 20, 2005, MHI Hotels, LLC (“MHI Hotels”), an affiliate of MHI Hotels Services LLC (“MHI Hotels Services”), contributed furniture, fixtures and equipment used in the operation of the Hotel and assigned its leasehold interest and other rights relating to the property to the purchaser in exchange for 90,569 units in the operating partnership, MHI Hospitality L.P. (the “Operating Partnership”), valued at approximately $913,000. On April 1, 2006, the Company completed the re-flagging of the hotel to a Crowne Plaza.

On May 9, 2006, the Company closed on a senior secured revolving credit facility for up to $60 million which was syndicated by Branch Banking & Trust Company (“BB&T). The facility replaced an existing $23 million facility with BB&T and will be used to fund acquisitions and working capital.

On June 20, 2006, the Company announced it had entered into a definitive agreement to sell the Holiday Inn Downtown, in Williamsburg, VA for $4.75 million. The Company has agreed to take back three promissory notes that total $4.43 million from the purchaser and will receive the remainder of the purchase price in cash. Promissory notes in the amount of $2.63 million and $1.4 million will mature on December 31, 2006 with interest-only payments due monthly bearing rates of 8.0% and 8.5%, respectively. The notes may be extended an additional seven months to August 31, 2007. The third promissory note in the amount of $0.4 million with interest-only payments due monthly at a rate of 8.0% will mature on August 31, 2007. The Company has committed to substitute the third promissory note for a $0.4 million 20-year promissory note bearing interest at 8.0% with interest-only payments due monthly for the first four years and payments under a 20-year amortization schedule thereafter if the purchaser refinances the first two promissory notes. The promissory notes will be secured by a security interest in the hotel and by personal guarantees of affiliates of the purchaser. The closing is subject to customary terms and conditions.

Substantially all of the Company’s assets are held by, and all of its operations are conducted through, the Operating Partnership. For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which is approximately 63.2% owned by the Company, leases its hotels to a subsidiary of MHI Hospitality TRS Holding Inc., MHI Hospitality TRS, LLC, (collectively, “MHI TRS”), a wholly owned subsidiary of the Operating Partnership. MHI TRS then engages a hotel management company to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

2. Summary of Significant Accounting Policies

Basis of Presentation – The consolidated financial statements of the Company presented herein include all of the accounts of MHI Hospitality Corporation as of and for the three months and six months ended June 30, 2006 and 2005.

Principles of Consolidation – The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries. All inter-company accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents – The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

7

Restricted Cash – Restricted cash includes real estate tax escrows and reserves for replacements of furniture, fixtures and equipment pursuant to certain requirements in the Company’s mortgage agreement with MMA Realty Capital, Inc. (“MMA”, formerly The Mutual of New York Life Insurance Company). MMA holds mortgages on the Hilton Wilmington Riverside and the Hilton Savannah DeSoto. In addition, restricted cash includes the unexpended balance of a capital improvement reserve account for the Crowne Plaza Jacksonville Hotel administered by Mercantile.

Fair Value of Financial Instruments – The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses, and mortgage loans. Due to their short maturities, or in the case of mortgage loans, interest rates in line with current interest rates, these financial instruments are carried at amounts that reasonably approximate fair value.

Investment in Hotel Properties – Investments in hotel properties are recorded at acquisition cost and allocated to land, property and equipment and identifiable intangible assets in accordance with Statement of Financial Accounting Standards No. 141, Business Combinations. Replacements and improvements are capitalized, while repairs and maintenance are expensed as incurred. Upon the sale or retirement of a fixed asset, the cost and related accumulated depreciation are removed from the Company’s accounts and any resulting gain or loss is included in the statements of operations. Expenditures under a renovation project, which constitute additions or improvements that extend the life of the property, are capitalized.

Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally 15 to 39 years for buildings and building improvements and 3 to 10 years for furniture, fixtures and equipment. Leasehold improvements are amortized over the shorter of the lease term or the useful lives of the related assets.

The Company reviews its investments in hotel properties for impairment whenever events or changes in circumstances indicate that the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause a review include, but are not limited to, adverse changes in the demand for lodging at the properties due to declining national or local economic conditions and/or new hotel construction in markets where the hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operations and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying amount to the related hotel property’s estimated fair market value is recorded and an impairment loss recognized.

Assets Held For Sale and Discontinued Operations – The Company records assets as held for sale when management has committed to a plan to sell the assets, actively seeks a buyer for the assets, and the consummation of the sale is considered probably and is expected within one year. The related operations of assets held for sale are reports as discontinued if 1) such operations and cash flows can be clearly distinguished, both operationally and financially, from the ongoing operations of the Company, 2) such operations and cash flows will be eliminated from ongoing operations once the disposal occurs, and 3) the Company will not have any significant continuing involvement subsequent to the disposal.

Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The unamortized franchise fees as of June 30, 2006 and December 31, 2005 were $197,120 and $208,308, respectively. Amortization expense totaled $7,513 and $14,592 for the three months and six months ended June 30, 2006 and $5,625 and $11,250 for the three and six months ended June 30, 2005, respectively.

Minority Interest in Operating Partnership – Certain hotel properties have been acquired, in part, by the Operating Partnership through the issuance of limited partnership units of the Operating Partnership. The minority interest in the Operating Partnership is: (i) increased or decreased by the limited partners’ pro-rata share of the Operating Partnership’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by redemption of partnership units for the Company’s common stock and (iv) adjusted to equal the net equity of the Operating Partnership multiplied by the limited partners’ ownership percentage immediately after each issuance of units of the Operating Partnership and/or the Company’s common stock through an adjustment to additional paid-in capital. Net income or net loss is allocated to the minority interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.

Revenue Recognition – Revenues from operations of the hotels are recognized when the services are provided. Revenues consist of room sales, food and beverage sales, and other hotel department revenues, such as telephone, rooftop leases and gift shop sales and rentals.

Deferred Financing Costs – Deferred financing costs are recorded at cost and consist of loan fees and other costs incurred in issuing debt. Amortization of deferred financing costs is computed using a method that approximates the effective interest method over the term of the related debt and is included in interest expense in the statements of operations.

8

Income Taxes – The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. As a REIT, the Company generally will not be subject to federal income tax on that portion of its net income (loss) that does not relate to MHI Hospitality TRS, LLC, the Company’s wholly owned taxable REIT subsidiary. MHI Hospitality TRS, LLC, which leases the Company’s hotels from the Operating Partnership, is subject to federal and state income taxes.

The Company accounts for income taxes in accordance with the provisions of Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (“SFAS 109”). Under SFAS 109, the Company accounts for income taxes using the asset and liability method under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

Stock-based Compensation – The Company’s 2004 Long Term Incentive Plan (“Plan”) permits the grant of stock options, restricted (non-vested) stock and performance share compensation awards to its employees for up to 350,000 shares of common stock. The Company believes that such awards better align the interest of its employees with those of its shareholders.

Under the Plan, the Company has made restricted stock and deferred stock awards totaling 81,000 shares including 69,000 shares granted under deferred stock awards to its executives, 4,000 restricted shares issued to certain employees, and 8,000 restricted shares issued to its directors. Of the 69,000 shares granted under deferred stock awards, 60,000 shares vest over five years and 9,000 shares vest at the end of this year. Regarding the restricted shares awarded the Company’s directors and certain employees; the shares vest immediately and represent compensation for the previous year of service. All such shares are charged to compensation expense on a straight-line basis over the vesting or service period based on the Company’s stock price on the date of grant or issuance. Under the Plan, the Company may issue a variety of performance-based stock awards, including nonqualified stock options. As of June 30, 2006, no performance-based stock awards have been issued. Consequently, stock-based compensation as determined under the fair-value method would be the same under the intrinsic-value method. Total compensation cost recognized under the Plan was $28,500 and $57,000 for the three months and six months ended June 30, 2006, respectively and $0 for the three months and six months ended June 30, 2005.

Comprehensive Income (Loss) – Comprehensive income (loss), as defined, includes all changes in equity (net assets) during a period from non-owner sources. The Company does not have any items of comprehensive income (loss) other than net income (loss).

Segment Information – Statement of Financial Accounting Standards No 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), requires public entities to report certain information about operating segments. Based on the guidance provided in SFAS 131, the Company has determined that its business is conducted in one reportable segment, hotel ownership.

Use of Estimates – The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America 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.

Reclassifications – Certain reclassifications have been made to the prior period balances to conform to the current period presentation.

3. Acquisition of Hotel Properties

There were no new acquisitions in the six months ended June 30, 2006.

4. Investment in Hotel Properties

Investment in hotel properties as of June 30, 2006 and December 31, 2005 consisted of the following (in thousands):

	MHI Hospitality Corporation June 30, 2006			MHI Hospitality Corporation December 31, 2005
	(unaudited)
Land and land improvements	$	12,530		$	12,513
Buildings and improvements		86,764			86,399
Furniture, fixtures and equipment		22,226			19,629
		121,520			118,541
Less: accumulated depreciation		(19,125	)		(16,958	)
	$	102,395		$	101,583

9

5. Credit Facility

As of June 30, 2006, the Company had a secured, revolving credit facility with a financial institution that enabled the Company to borrow up to $60 million, subject to borrowing base and loan-to-value limitations, with a syndicated bank group comprising of Branch Banking & Trust Company (BB&T), Key Bank National Association, Regions Bank and Manufacturers and Traders Trust Company. The credit facility was refinanced during second quarter of 2006 and replaced a $23 million secured, revolving credit facility with BB&T. The Company had borrowings of $7,678,232 and $3,500,000 at June 30, 2006 and December 31, 2005, respectively.

The facility matures during May 2010 and bears interest at a floating rate of LIBOR plus additional interest ranging from 2.0% to 2.5%. On June 30, 2006, LIBOR was 5.334%. In some circumstances, the revolving line of credit facility may bear interest at BB&T’s prime rate. Any amounts drawn under the revolving line of credit facility mature at the expiration of the facility. The revolving line of credit facility includes an uncommitted accordion facility, pursuant to which the Company may be able to increase the total commitment under the revolving line of credit facility up to $75 million. The Company is required to pay a fee of 0.25% on the unused portion of the credit facility. Under the terms of the agreement, the Company is required to enter into an interest rate swap in order to hedge against interest rate risk.

The facility is secured by the Holiday Inn Brownstone and the Hilton Philadelphia Airport, and a lien on all business assets of those properties including, but not limited to, equipment, accounts receivable, inventory, furniture, fixtures and proceeds thereof. The two properties had a net carrying value of approximately $35.6 million. Under the terms of the BB&T line of credit, the Company must satisfy certain financial and non-financial covenants. As of June 30, 2006 and December 31, 2005, the Company was in compliance with all of the required covenants.

6. Mortgage Debt

Upon its formation, the Company assumed existing mortgage debt with MMA Realty Capital, Inc. that was in place on two of the initial properties.

On September 25, 1998, Savannah Hotel Associates, LLC obtained a mortgage loan in the amount of $12.8 million to refinance the mortgage at the Savannah DeSoto Hilton hotel. The loan is secured by the Savannah DeSoto Hilton hotel and its maturity date is November 1, 2008. Loan principal and interest payments are due monthly, with fixed principal payments plus interest amortized over a twenty (20) year schedule. Interest is based on a fixed rate of 7.49%. Savannah Hotel Associates, LLC recorded deferred financing costs of approximately $0.2 million related to obtaining the mortgage loan. The outstanding balance due on the loan as of June 30, 2006 and December 31, 2005 was $9,935,121 and $10,175,989, respectively.

On February 12, 1998 Capitol Hotel Associates, LP, LLP obtained a mortgage loan in the amount of $13.0 million to refinance the mortgage at the Wilmington Riverside Hilton hotel. On October 19, 1999 Capitol Hotel Associates, LP, LLP obtained a promissory note in the amount of $4.25 million upon completion of construction of renovations. The debt was consolidated into one instrument and is secured by the Wilmington Riverside Hilton hotel and its maturity date is March 1, 2008. Loan principal and interest payments are due monthly, with fixed principal payments and interest payments amortized over a twenty (20) year schedule. Interest is based on a fixed rate of 8.22%. Capitol Hotel Associates, LP, LLP recorded deferred financing costs of approximately $0.2 million related to obtaining the mortgage loan. The outstanding balance due on the loan as of June 30, 2006 and December 31, 2005 was $14,222,512 and $14,510,954, respectively.

On July 22, 2005 the Company purchased the Crowne Plaza Jacksonville Hotel in Jacksonville, Florida from BIT Holdings Seventeen, Inc., an affiliate of the AFL-CIO Building Investment Trust (the “Trust”), for an aggregate price of $22 million. The Trust, for which Mercantile Safe Deposit and Trust Company (“Mercantile”) acts as trustee, financed a portion of the purchase price by extending an $18 million mortgage loan (the “Loan”) to the purchaser. The loan, which is secured by a lien against all the assets, rents and profits of the hotel as well as the real property, bears interest at the rate of 8.0% payable monthly during the term and matures in July 2010. Pre-payment penalties apply toward any principal of the loan repaid before the fifth year of the term.

Total debt maturities as of June 30, 2006 were as follows ($000s):

2006	$	552
2007		1,168
2008		22,439
2009		—
2010		18,000
Total	$	42,158

10

7. Commitments and Contingencies

Ground, Building and Submerged Land Leases – The Company leases 2,086 square feet of commercial space next to the Savannah hotel property for use as an office, retail or conference space, or for any related or ancillary purposes for the hotel and/or atrium space. The space is leased under a six-year operating lease, which expires October 31, 2006. There is a renewal option for up to three five-year periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for this operating lease was $10,795 and $21,590 for the three months and six months ended June 30, 2006, respectively and $9,387 and $18,774 for the three months and six months ended June 30, 2005, respectively.

The Company leases, as landlord, the entire fourteenth floor of the Savannah hotel property to The Chatham Club, Inc. under a ninety-nine year lease expiring July 31, 2086. This lease was assumed upon the purchase of the building under the terms and conditions agreed to by the previous owner of the property. No rental income is recognized under the terms of this lease as the original lump sum rent payment of $990 was received by the previous owner and not prorated over the life of the lease.

The Company leases a parking lot adjacent to the Holiday Inn Brownstone in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expires August 31, 2016. There is a renewal option for up to three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. The Company holds an exclusive and irrevocable option to purchase the leased land at fair market value at the end of the original lease term, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for this operating lease is $76,104 annually, and is expected to remain the same in 2006. For the three months ended June 30, 2006 and 2005, rent expense was $19,026. For the six months ended June 30, 2006 and 2005, rent expense was $38,052.

In conjunction with the sublease arrangement for the property at Shell Island, the Company incurs an annual lease expense for a leasehold interest other than the purchased leasehold interest. Lease expense was $40,238 and $80,213 for the three months and six months ended June 30, 2006 and $42,764 and $84,528 for the three months and six months ended June 30, 2005, respectively.

The Company leases certain submerged land in the Saint Johns River in front of the Crowne Plaza Jacksonville Hotel from the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land is leased under a five-year operating lease, which expires September 18, 2007. Rent expense for the three months and six months ended June 30, 2006 was $1,160 and $2,320, respectively.

Purchase Agreement – On September 13, 2005, the Company entered into an agreement to purchase the commercial space of a property in Hollywood, Florida last operated as the Ambassador Resort for $0.5 million. The developer of the property is completing a condominium conversion after which time the Company will retain MHI Hotels Services to operate the hotel. Closing is contingent on a variety of factors including the Company’s ability to secure a franchise for the hotel.

Management Agreement – Each of the seven hotels that the Company owned at June 30, 2006 operate under a ten-year master management agreement with MHI Hotels Services which expires in December 2014 for the six initial hotels and in July 2015 for the Crowne Plaza Jacksonville Hotel (see Note 9).

Franchise Agreements – As of June 30, 2006, the Company’s seven hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, the Company is required to pay a franchise fee generally between 2.5% and 5.0% of room revenues, plus additional fees that amount to between 2.5% and 6.0% of room revenues from the hotels.

Restricted Cash Reserves – The Company is required to escrow with its lender on the Wilmington Riverside Hilton and the Savannah DeSoto Hilton an amount equal to 1/12 of the annual real estate taxes due for the properties. The Company is also required to establish a property improvement fund for each of these two hotels to cover the cost of replacing capital assets at the properties. Contributions to the property improvement fund are based on a percentage of gross revenues or receipts at each hotel equating to 5%.

Litigation – The Company is not involved in any material litigation nor, to its knowledge, is any material litigation threatened against the Company.

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8. Capital Stock

Common Shares – The Company is authorized to issue up to 49,000,000 shares of common stock, $.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions.

On December 21, 2004, the Company completed its IPO and sold 6,000,000 shares of common stock at a price of $10 per share, resulting in gross proceeds of $60 million and net proceeds (after deducting underwriting discounts and offering expenses) of approximately $54.8 million. On December 21, 2004 the Company issued 4,000 shares of common stock to its independent directors. On January 19, 2005, the Company sold an additional 700,000 shares of common stock at a price of $9.30 per share, net of the underwriting discount, as a result of the exercise of the underwriters’ over-allotment option, resulting in additional net proceeds of approximately $6.5 million. The total net proceeds generated from the IPO and the underwriters’ over-allotment was approximately $61.3 million. In June 2006, the Company issued 8,000 shares of restricted common stock to its independent directors and non-executive employees. As of June 30, 2006, the Company had 6,712,000 shares of common stock outstanding.

Warrants – The Company has granted no warrants representing the right to purchase common stock.

Preferred Shares – The Company is authorized to issue 1,000,000 shares of preferred stock, $.01 par value per share. As of June 30, 2006, there were no shares of preferred stock outstanding.

Operating Partnership Units – Holders of Operating Partnership units have certain redemption rights, which enable them to cause the Operating Partnership to redeem their units in exchange for shares of the Company’s common stock on a one-for-one basis or, at the option of the Company, cash per unit equal to the market price of the Company’s common stock at the time of redemption. The number of shares issuable upon exercise of the redemption rights will be adjusted upon the occurrence of stock splits, mergers, consolidations or similar pro-rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or the stockholders of the Company. As of June 30, 2006, the total number of Operating Partnership units outstanding was 3,907,607.

9. Related Party Transactions

The following is a summary of the transactions between the Company and MHI Hotels Services:

Accounts Receivable – At June 30, 2006 and December 31, 2005, the Company was due $4,463 and $242,362, respectively, from MHI Hotels Services.

Shell Island Sublease – The Company has a sublease arrangement with MHI Hotels Services on its leasehold interests in the property at Shell Island. For the three months ended June 30, 2006 and 2005, the Company earned $160,000 in leasehold revenue. For the six months ended June 30, 2006 and 2005, the Company earned $320,000 in leasehold revenue.

Sublease of Office Space – The Company subleases office space in Greenbelt, MD from MHI Hotels Services. Rent expense was $9,270 and $18,540 for the three months and six months ended June 30, 2006, respectively and $11,930 and $6,375 for the three months and six months ended June 30, 2005, respectively.

Strategic Alliance Agreement – On December 21, 2004, the Company entered into a ten-year strategic alliance agreement with MHI Hotels Services that provides in part for the referral of acquisition opportunities to the Company and the management of its hotels by MHI Hotels Services.

Management Agreements – Each of the seven hotels that the Company owned at June 30, 2006 are operated by MHI Hotels Services under a master management agreement which expires in December 2014 for the six initial hotels and in July 2015 for the Crowne Plaza Jacksonville Hotel. MHI Hotels Services receives a base management fee, and if the hotels meet and exceed certain thresholds, an additional incentive management fee. The base management fee for the initial portfolio of six hotels was 2.0% in 2005, rising to 2.5% in 2006 and 3.0% thereafter of total gross revenues from the hotels. The base management fee for the Crowne Plaza Jacksonville Hotel is 2.0% through 2006, rising to 2.5% in 2007 and 3.0% thereafter. The incentive management fee, if any, will be due annually in arrears within 90 days of the end of the fiscal year and will be equal to 10% of the amount by which the gross operating profit of the hotels, on an aggregate basis, for a given year exceeds the gross operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive management fee may not exceed 0.25% of gross revenues of all of the hotels included in the incentive fee calculation. Due to the uncertainty related to the calculation of the incentive management fees, the Company has not accrued any related expense related to these fees as of June 30, 2006.

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The Company paid MHI Hotels Services approximately $0.469 million and $0.844 million for the three months and six months ended June 30, 2006, respectively, and approximately $0.227 million and $0.527 million for the three months and six months ended June 30, 2005, respectively, in management fees.

Employee Medical Benefits – The Company purchases employee medical benefits through Maryland Hospitality, Inc. (d/b/a MHI Health), an affiliate of MHI Hotels Services. The Company paid $18,708 and $36,093 for the three months and six months ended June 30, 2006, respectively and $7,125 and $14,250 for the three months and six months ended June 30, 2005, respectively for benefits.

Reimbursement of Real Estate and Personal Property Taxes – In January 2006, the Company received reimbursement of real estate and personal property taxes totaling $173,632 related to the acquisition of the Crowne Plaza Jacksonville. The reimbursement for accrued taxes due at settlement was deferred until receipt and payment of the annual tax invoices.

Construction Management Services – The Company engaged MHI Hotels Services to manage the renovation of the Crowne Plaza Jacksonville. For the three months and six months ended June 30, 2006, the company paid $112,000 in construction management fees.

10. Income Taxes

The components of the income tax provision (benefit) for the three months and six months ended June 30, 2006 and 2005 are as follows (in thousands):

	Three Months Ended June 30, 2006			Three Months Ended June 30, 2005			Six Months Ended June 30, 2006			Six Months Ended June 30, 2005
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Current:
Federal	$	—		$	—		$	—		$	—
State		28			51			286			51
		28			51			286			51
Deferred:
Federal		250			55			(104	)		55
State		(1	)		(53	)		(29	)		(53	)
		249			2			(133	)		2
	$	277		$	53		$	153		$	53

A reconciliation of the statutory federal income tax expense to the Company’s income tax provision is as follows (in thousands):

	Three Months Ended June 30, 2006			Three Months Ended June 30, 2005			Six Months Ended June 30, 2006			Six Months Ended June 30, 2005
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Statutory federal income tax expense	$	687		$	769		$	803		$	747
Effect of non-taxable REIT income		(437	)		(714	)		(907	)		(692	)
State income tax expense		27			(2	)		257			(2	)
	$	277		$	53		$	153		$	53

As of June 30, 2006, the Company had a net deferred tax asset of approximately $0.84 million, primarily due to past years’ net operating loss. These loss carryforwards will begin to expire in 2024 if not utilized by then. The Company believes that is more likely than not that the deferred tax asset will be realized and that no valuation allowance is required.

11. Discontinued Operations

The provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, require that hotels sold or held for sale be treated as discontinued operations.

On June 20, 2006, the Company announced it had entered into a definitive agreement to sell the Holiday Inn Downtown, in Williamsburg, VA. The results of operations of the property for the three months and six months ended June 30, 2006 and 2005 have been classified or reclassified as discontinued operations. After transaction costs, the Company does not expect to recognize any material gain or loss on sale of the property.

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The results of operations for the property for the three months and six months ended June 30, 2006 and 2005 were as follows:

	Three months ended June 30, 2006			Three months ended June 30, 2005			Six months ended June 30, 2006			Six months ended June 30, 2005
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue
Rooms department	$	664,717		$	666,837		$	869,020		$	938,131
Food and beverage department		241,084			252,655			359,683			371,820
Other operating departments		13,481			15,744			18,111			22,944
Total revenue		919,282			935,236			1,246,814			1,332,895
Expenses
Hotel operating expenses
Rooms department		249,564			205,932			362,653			316,129
Food and beverage department		211,557			223,043			348,657			350,299
Other operating departments		12,126			10,468			19,188			21,942
Indirect		334,190			432,199			579,255			698,077
Total hotel operating expenses		807,437			871,642			1,309,753			1,386,447
Depreciation and amortization		69,939			59,685			134,841			110,994
Total operating expenses		877,376			931,327			1,444,594			1,497,441
Net operating income		41,906			3,909			(197,780	)		(164,546	)
Minority interest in operating partnership		(15,129	)		(36,705	)		38,278			25,281
Income tax (provision) benefit		(832	)		95,349			93,822			95,349
Net income from discontinued operations	$	25,945		$	62,553		$	(65,680	)	$	(43,916	)

12. Earnings per Share

	Three months ended June 30, 2006		Three months ended June 30, 2005		Six months ended June 30, 2006		Six months ended June 30, 2005
	(unaudited)		(unaudited)		(unaudited)		(unaudited)
Net income	$	1,127,793	$	1,389,067	$	1,271,341	$	1,360,604
Basic:
Weighted average number of common shares outstanding		6,705,978		6,704,000		6,704,994		6,630,519
Net income per share - basic	$	0.16	$	0.20	$	0.19	$	0.21
Diluted:
Dilutive awards		69,000		—		65,470		—
Diluted weighted average number common shares outstanding		6,774,978		6,704,000		6,770,464		6,630,519
Net income per share - diluted	$	0.16	$	0.20	$	0.19	$	0.21

Diluted net income per share takes into consideration the pro forma dilution of certain unvested stock awards.

13. Subsequent Events

On July 6, 2006, the Company announced that it entered into a definitive agreement to purchase the 186-room Louisville Ramada Riverfront Inn, located in Jeffersonville, Indiana for $7.6 million. The hotel is located directly on the Ohio River, with unimpeded views of the Louisville skyline, and easy access to the center of downtown Louisville. The Company intends to extensively renovate and re-brand the hotel, as is consistent with the company’s repositioning strategy. To facilitate the closing of the acquisition, which is expected in the late third quarter subject to customary closing conditions, the Company may access funds from either its line of credit or the proceeds of the sale of the Holiday Inn Downtown Williamsburg, VA, or a combination of the two.

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On July 11, 2006, the Company paid the dividend for the second quarter of 2006 that was authorized on April 24, 2006 to those stockholders and unit holders of MHI Hospitality, L.P. of record on June 15, 2006. The dividend was $0.17 per share (unit).

On July 17, 2006, the Company authorized the payment of a quarterly dividend of $0.17 per share (unit) to the stockholders and unit holders of record as of September 15, 2006. The dividend is to be paid October 11, 2006.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a self-advised REIT incorporated in Maryland in August 2004 to pursue current and future opportunities in the full-service, upper upscale, upscale and mid-scale segments of the hotel industry. We commenced operations in December 2004 when we completed our initial public offering.

Concurrent with the completion of the IPO, we acquired six hotel properties. Our hotel portfolio currently consists of seven full-service, upper upscale and mid-scale hotels. The seventh hotel, the Crowne Plaza Jacksonville Hotel (formerly, the Hilton Jacksonville Riverfront Hotel), was acquired on July 22, 2005. We own a 100% interest in all of our hotels. We also have a leasehold interest in a resort condominium facility. As of June 30, 2006, we owned the following hotel properties:

Property	Number of Rooms	Location	Date of Acquisition
Hilton Philadelphia Airport	331	Philadelphia, PA	December 21, 2004
Holiday Inn Laurel West	207	Laurel, MD	December 21, 2004
Holiday Inn Downtown Williamsburg	136	Williamsburg, VA	December 21, 2004
Holiday Inn Brownstone	187	Raleigh, NC	December 21, 2004
Hilton Wilmington Riverside	274	Wilmington, NC	December 21, 2004
Hilton Savannah DeSoto	246	Savannah, GA	December 21, 2004
Crowne Plaza Jacksonville	292	Jacksonville, FL	July 22, 2005
Total	1,673

On June 15, 2006, we entered into a definitive agreement to sell the Holiday Inn Downtown, in Williamsburg, VA for $4.75 million. We agreed to take back three promissory notes totaling $4.43 million from the purchaser and will receive the remainder of the purchase price in cash. Promissory notes in the amount of $2.63 million and $1.4 million will mature on December 31, 2006 with interest-only payments due monthly bearing rates of 8.0% and 8.5%, respectively. The notes may be extended an additional seven months to August 31, 2007. The third note in the amount of $0.4 million with interest-only payments due monthly at a rate of 8.0% will mature on August 31, 2007. We have committed to substitute the third promissory note for a $0.4 million 20-year promissory note bearing interest at 8.0% with interest-only payments due monthly for the first four years and payments under a 20-year amortization schedule thereafter if the purchaser refinances the first two promissory notes. The promissory notes will be secured by a security interest in the hotel and by personal guarantees of affiliates of the purchaser. The closing is subject to customary terms and conditions.We conduct substantially all our business through our operating partnership, MHI Hospitality, L.P. We are the sole general partner of our operating partnership and we own an approximate 63.2% interest in our operating partnership, with the remaining interest being held by the contributors of our initial properties as limited partners.

To qualify as a REIT, we cannot operate hotels. Therefore, our operating partnership leases our hotel properties to MHI Hospitality TRS, LLC, our TRS Lessee. Our TRS Lessee has engaged MHI Hotels Services, LLC (“MHI Hotels Services”) to manage our hotels. Our TRS Lessee, and its parent, MHI Hospitality TRS Holding, Inc., are consolidated into our financial statements for accounting purposes. The earnings of MHI Hospitality TRS Holding, Inc. are subject to taxation similar to other C corporations.

Key Operating Metrics

In the hotel industry, most categories of operating costs, with the exception of franchise, management, credit card fees and the costs of the food and beverage served, do not vary directly with revenues. This aspect of our operating costs creates operating leverage, whereby changes in sales volume disproportionately impact operating results. Room revenue is the most important category of revenue and drives other revenue categories such as food, beverage and telephone. There are three key performance indicators used in the hotel industry to measure room revenues:

• Occupancy, or the number of rooms sold, usually expressed as a percentage of total rooms available;

• Average daily rate or ADR, which is total room revenue divided by the number of rooms sold; and

• Revenue per available room or RevPAR, which is the room revenue, divided by the total number of available rooms.

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Results of Operations

The following table illustrates the key operating metrics for the three months and six months ended June 30, 2006 and 2005 for the properties owned by the Company during the respective reporting periods. Accordingly, the operations of the Crowne Plaza Jacksonville Hotel are not reflected for the three months and six months ended June 30, 2005.

	Three months ended June 30, 2006			Three months ended June 30, 2005			Six months ended June 30, 2006			Six months ended June 30, 2005
Occupancy %		76.3	%		75.7	%		70.6	%		71.3	%
ADR	$	112.32		$	106.52		$	110.69		$	99.85
RevPAR	$	85.68		$	80.68		$	78.18		$	71.19
Available Room Nights		152,243			125,671			302,813			249,961

In addition, the table below illustrates the same metrics as they pertain to all seven properties in our current portfolio for both periods. The 2005 figures reflect the performance of the Crowne Plaza Jacksonville under previous ownership. That hotel was managed by MHI Hotels Services throughout 2005.

	Three months ended June 30, 2006			Three months ended June 30, 2005			Six months ended June 30, 2006			Six months ended June 30, 2005
Occupancy %		76.3	%		75.6	%		70.6	%		72.2	%
ADR	$	112.32		$	106.26		$	110.69		$	102.64
RevPAR	$	85.68		$	80.32		$	78.18		$	74.07
Available Room Nights		152,243			152,243			302,813			302,813

Comparison of Three Months Ended June 30, 2006 to Three Months Ended June 30, 2005

Revenue. Total revenue for the three months ended June 30, 2006 was approximately $18.6 million, an increase of approximately $4.3 million or 30.0% from the three months ended June 30, 2005. Approximately $2.8 million of the increase was attributable to the acquisition of the Crowne Plaza Jacksonville Hotel, which was acquired in July 2005. Room revenues at our other properties (with the exception of the Holiday Inn Downtown in Williamsburg, Virginia which is not included in the presentation of continuing operations) increased approximately $1.2 million as a result of increases in occupancy and ADR.

Room revenues for the three months ended June 30, 2006 rose to approximately $12.4 million, an increase of approximately $2.9 million or 30.7% compared to room revenues for the three months ended June 30, 2005. Approximately $1.7 million of the increase was attributable to the acquisition of the Crowne Plaza Jacksonville Hotel. Room revenues at our other properties (with the exception of the Holiday Inn Downtown in Williamsburg, Virginia which is not included in the presentation of continuing operations) increased approximately $1.2 million or 12.2%. A new mix of business, a strong market, and the completion of room renovations caused a significant increase in ADR at our Philadelphia property. Our efforts to re-position our property in Laurel, Maryland coupled with the completion of renovations also contributed to the significant increase in ADR at that property.

Overall, our seven properties were able to achieve a 6.7% increase in room revenue through a combined 0.9% increase in occupancy and a 5.7% increase in ADR over the same period last year.

Food and beverage revenues for the three months ended June 30, 2006 increased approximately $1.1 million or 26.7% to approximately $5.4 million compared to food and beverage revenues for the three months ended June 30, 2005. Approximately $0.9 million of the increase was attributable to the acquisition of the Crowne Plaza Jacksonville Hotel.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, and management fees were approximately $13.6 million, an increase of approximately $3.5 million or 34.5% for the three months ended June 30, 2006 compared to approximately $10.1 million for the three months ended June 30, 2005, of which approximately $2.4 million of the increase was attributable to the acquisition of the Crowne Plaza Jacksonville Hotel, which was acquired in July 2005.

Rooms expense for the three months ended June 30, 2006 increased approximately $1.0 million or 40.7% to approximately $3.4 million compared to rooms expense of approximately $2.4 million for the three months ended June 30,

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2005. Approximately $0.6 million of the increase was attributable to the acquisition of the Crowne Plaza Jacksonville Hotel. Much of the remaining increase relates to increased expenses at our Hilton brand properties for replacing room amenities as well as the increased cost of implementing the Hilton bedding program.

Food and beverage expenses for the three months ended June 30, 2006 increased approximately $0.8 million or 29.6% to approximately $3.5 million compared to food and beverage expense for the three months ended June 30, 2005. The higher food and beverage costs are attributable to the higher volume of food and beverage sales. Indirect expenses at our properties for the three months ended June 30, 2006 increased approximately $1.7 million or 34.6% to approximately $6.5 million compared to the three months ended June 30, 2005, of which approximately $1.2 million was attributable to the acquisition of the Crowne Plaza Jacksonville Hotel. Some of the indirect expenses vary directly with increases in revenue. Accordingly, we saw significant increases in sales and marketing expenses, hotel franchising fees and management fees.

Depreciation and amortization. Depreciation and amortization expense for the three months ended June 30, 2006 was approximately $1.2 million, an increase of approximately $0.2 million or 15.5% compared to approximately $1.0 million for the three months ended June 30, 2005. The increase in depreciation and amortization was attributable to the acquisition of the Crowne Plaza Jacksonville Hotel.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended June 30, 2006 increased approximately $0.2 million or 33.6% compared to approximately $0.7 million for the three months ended June 30, 2005. Increased staffing levels including the hiring of our Chief Operating Officer in January 2006 and our Chief Accounting Officer in May 2005 contributed to the increase.

Interest Expense. Interest expense for the three months ended June 30, 2006 increased approximately $0.7 million or 159.5% to approximately $1.1 million compared to interest expense for the thee months ended June 30, 2005, primarily due to the mortgage on the Crowne Plaza Jacksonville Hotel acquired in July 2005 and borrowings on the line of credit.

Income Tax Provision. The net income tax provision for the three months ended June 30, 2006 increased to approximately $0.3 million. The income tax provision is primarily derived from the taxable income of our TRS lessee. The taxable income of our TRS lessee attributable to continuing operations for the three months ended June 30, 2006 was greater than the taxable income attributable to continuing operations for the three months ended June 30, 2005.

Net income. The net income for the three months ended June 30, 2006 decreased approximately $0.3 million compared to the three months ended June 30, 2005 as a result of the operating results discussed above.

Comparison of Six Months Ended June 30, 2006 to Six Months Ended June 30, 2005

Revenue. Total revenue for the six months ended June 30, 2006 was approximately $34.1 million, an increase of approximately $8.7 million or 34.4% from the six months ended June 30, 2005. The increase was primarily due to approximately $6.4 million in incremental revenues attributable to the acquisition of the Crowne Plaza Jacksonville Hotel. Revenues increased due to increases in both room revenue and food and beverage revenues. Room revenues at our other properties (with the exception of the Holiday Inn Downtown in Williamsburg, Virginia which is not included in the presentation of continuing operations) increased approximately $1.8 million as a result of an increase in ADR.

Room revenues for the six months ended June 30, 2006 rose to approximately $22.8 million, an increase of approximately $6.0 million or 35.3% compared to room revenues for the six months ended June 30, 2005. Approximately $4.2 million of the increase was attributable to the acquisition of the Crowne Plaza Jacksonville Hotel. Room revenues at our other properties (with the exception of the Holiday Inn Downtown in Williamsburg, Virginia which is not included in the presentation of continuing operations) increase approximately $1.8 million or 10.6%. A new mix of business, a strong market, and the completion of room renovations caused a significant increase in ADR at our Philadelphia property. Our efforts to re-position our property in Laurel, Maryland coupled with the completion of renovations also contributed to the significant increase in ADR at that property.

Overall, our seven properties were able to achieve a 5.6% increase in revenue despite a 2.1% decline in occupancy by achieving a 7.9% increase in ADR over the same period.

Food and beverage revenues for the six months ended June 30, 2006 increased approximately $2.2 million or 29.0% to approximately $9.6 million compared to food and beverage revenues for the six months ended June 30, 2005. Approximately $1.7 million of the increase was attributable to the acquisition of the Crowne Plaza Jacksonville Hotel.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, and management fees were approximately $25.9 million, an increase of approximately $6.6 million or

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34.6% for the six months ended June 30, 2006 compared to approximately $19.3 million for the six months ended June 30, 2005, primarily due to approximately $5.2 million in incremental expense attributable to the acquisition of the Crowne Plaza Jacksonville Hotel in July 2005.

Rooms expense for the six months ended June 30, 2006 increased approximately $1.7 million or 37.4% to approximately $6.3 million compared to rooms expense of approximately $4.6 million for the six months ended June 30, 2005 primarily due to the acquisition of the Crowne Plaza Jacksonville Hotel. Much of the remaining increase relates to increased expenses at our Hilton brand properties for replacing room amenities as well as the increased cost of implementing the Hilton bedding program.

Food and beverage expenses for the six months ended June 30, 2006 increased approximately $1.5 million or 30.6% to approximately $6.6 million compared to food and beverage expense for the six months ended June 30, 2005. The higher food and beverage costs are attributable to the higher volume of food and beverage sales. Indirect expenses at our properties for the six months ended June 30, 2006 increased approximately $3.2 million or 34.7% to approximately $12.6 million compared to the six months ended June 30, 2005, primarily due to the acquisition of the Crowne Plaza Jacksonville Hotel. We saw significant increases in sales and marketing expenses, hotel franchise fees and management fees as these expenses vary directly with increases in revenue.

Depreciation and amortization. Depreciation and amortization expense for the six months ended June 30, 2006 was approximately $2.4 million, an increase of approximately $0.5 million or 29.7% compared to approximately $1.8 million for the six months ended June 30, 2005. The increase in depreciation and amortization was attributable to the acquisition of the Crowne Plaza Jacksonville Hotel as well as the renovation activities at our Philadelphia, Williamsburg and Laurel properties.

Corporate General and Administrative. Corporate general and administrative expenses for the six months ended June 30, 2006 increased approximately $0.5 million or 50.7% compared to the six months ended June 30, 2005 to approximately $1.5 million. Increased staffing levels, including the hiring of our Chief Operating Officer in January 2006 and our Chief Accounting Officer in May 2005, as well as an accelerated timetable for the preparation of the Company’s tax returns contributed to the increase.

Interest Expense. Interest expense for the six months ended June 30, 2006 increased approximately $1.0 million or 99.9% to approximately $2.1 million compared to interest expense for the same period ended June 30, 2005, primarily due to the mortgage on the Crowne Plaza Jacksonville Hotel acquired in July 2005 and borrowings on the line of credit.

Income Tax Provision. The net income tax provision for the six months ended June 30, 2006 increased to approximately $0.2 million. The income tax provison is primarily derived from the taxable income of our TRS lessee. The taxable income of our TRS lessee attributable to continuing operations for the six months ended June 30, 2006 was greater than the taxable income attributable to continuing operations for the six months ended June 30, 2005.

Net income. The net income for the six months ended June 30, 2006 decreased approximately $0.1 million compared to the six months ended June 30, 2005 as a result of the operating results discussed above.

Funds From Operations

Funds from Operations, FFO, is used by industry analysts and investors as a supplemental operating performance measure of an equity REIT. FFO is calculated in accordance with the definition that was adopted by the Board of Governors of the National Association of Real Estate Investment Trusts, NAREIT. FFO, as defined by NAREIT, represents net income or loss determined in accordance with GAAP, excluding extraordinary items as defined under GAAP and gains or losses from sales of previously depreciated operating real estate assets, plus certain non-cash items such as real estate asset depreciation and amortization, and after adjustment for any minority interest from unconsolidated partnerships and joint ventures. Historical cost accounting for real estate assets in accordance with GAAP implicitly assumes that the value of real estate assets diminishes predictably over time. Since real estate values instead have historically risen or fallen with market conditions, many investors and analysts have considered the presentation of operating results for real estate companies that use historical cost accounting to be insufficient by itself. Thus, NAREIT created FFO as a supplemental measure of REIT operating performance that excludes historical cost depreciation, among other items, from GAAP net income.

Management believes that the use of FFO, combined with the required GAAP presentations, has improved the understanding of the operating results of REITs among the investing public and made comparisons of REIT operating results more meaningful. Management considers FFO to be a useful measure of adjusted net income for reviewing comparative operating and financial performance because we believe FFO is most directly comparable to net income (loss), which remains the primary measure of performance, because by excluding gains or losses related to sales of previously depreciated operating real estate assets and excluding real estate asset depreciation and amortization, FFO assists in comparing the

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operating performance of a company’s real estate between periods or as compared to different companies. Although FFO is intended to be a REIT industry standard, other companies may not calculate FFO in the same manner as we do, and investors should not assume that FFO as reported by us is comparable to FFO as reported by other REITs.

The following table reconciles net income to FFO for the three months and six months ended June 30, 2006 and 2005 (unaudited):

	Three months ended June 30, 2006		Three months ended June 30, 2005		Six months ended June 30, 2006		Six months ended June 30, 2005
Net income (loss)	$	1,127,793	$	1,389,067	$	1,271,341	$	1,360,604
Add minority interest		657,254		820,759		740,926		783,818
Add depreciation and amortization		1,291,758		999,802		2,523,095		1,951,906
FFO	$	3,076,805	$	3,209,629	$	4,535,363	$	4,096,329
Weighted average shares outstanding		6,705,978		6,704,000		6,704,994		6,630,519
Weighted average units outstanding		3,907,607		3,817,036		3,907,607		3,817,036
Weighted average shares and units		10,613,585		10,521,036		10,612,601		10,447,555
FFO per share and unit	$	0.29	$	0.31	$	0.43	$	0.39

Liquidity and Capital Resources

As of June 30, 2006, we had cash and cash equivalents of approximately $5.9 million, of which $3.5 million was in restricted reserve accounts and real estate tax escrows. Coincident with the purchase of the Crowne Plaza Jacksonville Hotel, we placed $3.0 million into a capital improvement reserve with Mercantile Safe Deposit and Trust Company, the mortgagor’s trustee. During the six months ended June 30, 2006, approximately $1.2 million had been expended from the reserve. On May 9, 2006, we replaced our existing $23.0 million secured line of credit with a revolving credit facility for up to $60.0 million that will provide financing for future acquisitions as well as working capital. For a discussion of the new line of credit, please see Note 5, Credit Facility, to the Company’s consolidated financial statements provided in this report.

Operating Requirements. The Company finances its operations from operating cash flow, which is principally derived from the operations of its hotels. Cash flow provided by operating activities for the six months ended June 30, 2006 was approximately $4.5 million. We expect that the net cash provided by operations will be adequate to fund the Company’s operating requirements, debt service and the payment of dividends in accordance with federal income tax laws which require us make annual distributions to our stockholders of at least 90% of our REIT taxable income, excluding net capital gain. We declared dividends of $0.17 per share (unit) paid on July 11, 2006, which we funded out of working capital.

Capital Expenditures. We substantially completed renovations at three of our six initial hotels last year and have commenced renovations at the Crowne Plaza Jacksonville Hotel. During the six months ended June 30, 2006, approximately $3.2 million was spent on renovations and capital improvements. Of that amount, approximately $1.2 million was funded from the capital improvement reserve. These activities represent our net cash flow used in investing activities for the six months ended June 30, 2006 of approximately $1.9 million.

Recurring capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment, as well as debt service, are our most significant short-term liquidity requirements. During the next 12 months, we expect capital expenditures will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements required by our franchisors or capital expenditures relating to hotels we acquire in the future. With respect to two of our hotels, the reserve accounts are escrowed with funds deposited monthly (5% of gross sales), and reserved for capital projects. The Hilton Savannah DeSoto and Hilton Wilmington Riverside have these reserve accounts. Our intent for the capital reserve accounts at other hotels is to maintain overall capital expenditures at 4% of gross revenue.

On September 13, 2005, we entered into an agreement to purchase an interest in a condominium hotel property in Hollywood, Florida last operated as the Ambassador Resort. The seller will renovate the hotel and complete a condominium conversion. We will retain MHI Hotels Services to manage the hotel on its behalf. Purchase of the interest in the property and costs related to pre-opening expenses are expected to be incurred later this year and total approximately $3.0 million. Such costs will be funded by additional borrowings on the line of credit.

On June 20, 2006, the Company announced an agreement to sell the Holiday Inn Downtown Williamsburg. The Company intends to structure the disposition of the property as a “like-kind exchange” for tax purposes whereby the Company can defer recognizing gain on the sale of the property if it follows certain procedures and meets certain conditions.

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In the event we are unable to follow these procedures and meet the conditions to effect the transaction as a “like-kind exchange,” the property may be sold for cash in which case there may be expense associated with the tax indemnification agreement between the Company and the contributors of the property.

On July 6, 2006, we announced it had entered into an agreement to purchase the 186-room Louisville Ramada Riverfront Hotel in Jeffersonville, Indiana for $7.6 million. We intend to combine the proceeds of the sale of the Holiday Inn Downtown in Williamsburg, Virginia with additional borrowings on its line of credit to complete the purchase and subsequent renovations to the property. However, we may fund the purchase of the property and subsequent renovations solely from the line of credit. Renovation of the property is estimated at $7.0 million, which will be funded through borrowings on the line of credit and are expected to be complete by the end of 2007.

The Hilton licenses at our Wilmington and Savannah properties expire in 2008. As a part of the license renewal, we anticipate that significant renovations will take place at each property. Renovations at our Wilmington property will occur in 2007 and will be followed by renovations at our Savannah property. We do not expect the renovations at our Savannah property to be complete until 2008. Estimates of the cost of the renovations are not currently determinable, as the terms of the license renewals have not been fully negotiated. The renovations will be funded by our line of credit.

Debt service requirements on our borrowings will reduce our cash flows. The initial public offering and the related repayment of indebtedness on certain of our initial properties, the restructuring of management agreements and our execution of a new management agreement with lower management fees have reduced our debt service and management fee payments and, consequently, improved cash flow and liquidity in periods subsequent to the initial public offering versus periods prior to the offering.

Our long-term liquidity needs will generally include the funding of future acquisitions, development and investment activity, the retirement of mortgage debt and amounts outstanding under our secured line of credit, and obligations under our tax indemnity agreements, if any. We remain committed to maintaining a flexible capital structure. Accordingly, in addition to the sources described above with respect to our short-term liquidity, we expect to meet our long-term liquidity needs through a combination of some or all of the following:

• The issuance by the Company, the operating partnership of the Company, and/or their subsidiary entities of secured and unsecured debt securities;

• The incurrence by the subsidiaries of the operating partnership of mortgage indebtedness in connection with the acquisition or refinancing of hotel properties;

• The issuance of additional shares of our common stock or preferred stock;

• The issuance of additional units in the operating partnership;

• The selective disposition of non-core assets; and

• The sale or contribution of some of our wholly owned properties, development projects and development land to strategic joint ventures to be formed with unrelated investors, which would have the net effect of generating additional capital through such sale or contributions.

In connection with the acquisition of our six initial hotel properties, we entered into tax indemnity agreements that require us to indemnify the contributors of our initial properties against tax liabilities in the event we sell those properties in a taxable transaction during a 10-year period. Such indemnification obligations could result in aggregate payments of approximately $46.0 million. Our obligations under the tax indemnity agreements may effectively preclude us from selling or disposing of certain of the initial hotels in taxable transactions or reducing our consolidated indebtedness below approximately $11.0 million.

We anticipate that our available cash and cash equivalents and cash flows from operating activities, with cash available from borrowings and other sources, will be adequate to meet our capital and liquidity needs in both the short and long term. However, if these sources of funds are insufficient or unavailable, our ability to satisfy cash payment obligations and make stockholder distributions may be adversely affected.

Inflation

We generate revenues primarily from lease payments from our TRS Lessee and net income from the operations of our TRS Lessee. Therefore, we rely primarily on the performance of the individual properties and the ability of our management company to increase revenues and to keep pace with inflation.

Operators of hotels, in general, possess the ability to adjust room rates daily to keep pace with inflation. However, competitive pressures at some or all of our hotels may limit the ability of our management company to raise room rates.

Seasonality

The operations of the properties have historically been seasonal. The periods from mid-November through mid-February are traditionally slow with the exception of the Crowne Plaza Jacksonville Hotel. The months of March and April are traditionally strong, as is October. The remaining months are generally good, but are subject to the weather and can vary significantly.

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Geographic Concentration

Our hotels are located in Florida, Georgia, North Carolina, Virginia, Maryland and Pennsylvania.

Critical Accounting Policies

The critical accounting policies are described below. We consider these policies critical because they involve difficult management judgments and assumptions, are subject to material change from external factors or are pervasive, and are significant to fully understand and evaluate our reported financial results.

Investment in Hotel Properties. Hotel properties are stated at cost, net of any impairment charges, and are depreciated using the straight-line method over an estimated useful life of 7-39 years for buildings and 3-10 years for furniture and equipment. In accordance with generally accepted accounting principles, the majority interests in hotels comprising our accounting predecessor, MHI Hotels Services Group, and minority interests held by the controlling holders of our accounting predecessor in hotels acquired from third parties are recorded at historical cost basis. Minority interests in those entities that comprise our accounting predecessor and the interests in hotels, other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value at time of acquisition.

We review our hotel properties for impairment whenever events or changes in circumstances indicate the carrying value of the hotel properties may not be recoverable. Events or circumstances that may cause us to perform our review include, but are not limited to adverse changes in the demand for lodging at our properties due to declining national or local economic conditions and/or new hotel construction in markets where our hotels are located. When such conditions exist, management performs an analysis to determine if the estimated undiscounted future cash flows from operating activities and the proceeds from the ultimate disposition of a hotel property exceed its carrying value. If the estimated undiscounted future cash flows are less than the carrying amount of the asset, an adjustment to reduce the carrying value to the related hotel property’s estimated fair market value is recorded and an impairment loss is recognized.

There were no charges for impairment recorded for the three months or six months ended June 30, 2006 or 2005.

We estimate the fair market values of our properties through cash flow analysis taking into account each property’s expected cash flow generated from operations, holding period and expected proceeds from ultimate disposition. These cash flow analyses are based upon significant management judgments and assumptions including revenues and operating costs, growth rates and economic conditions at the time of ultimate disposition. In projecting the expected cash flows from operations of the asset, we base our estimates on future projected net operating income before depreciation and eliminating non-recurring operating expenses, which is a non-GAAP operational measure, and deduct expected capital expenditure requirements. We then apply growth assumptions based on estimated changes in room rates and expenses and the demand for lodging at our properties, as impacted by local and national economic conditions and estimated or known future new hotel supply. The estimated proceeds from disposition are determined as a matter of management’s business judgment based on a combination of anticipated cash flow in the year of disposition, terminal capitalization rate, ratio of selling price to gross hotel revenues and selling price per room.

If actual conditions differ from those in our assumptions, the actual results of each asset’s operations and fair market value could be significantly different from the estimated results and value used in our analysis.

Revenue Recognition. Hotel revenues, including room, food, beverage and other hotel revenues, are recognized as the related services are delivered. We generally consider accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If we determine that amounts are uncollectible, which would generally be the result of a customer’s bankruptcy or other economic downturn, such amounts will be charged against operations when that determination is made.

Income Taxes. We record a valuation allowance to reduce deferred tax assets to an amount that we believe is more likely than not to be realized. Because of expected future taxable income of our TRS lessee, we have not recorded a valuation allowance to reduce our net deferred tax asset as of June 30, 2006. Should our estimate of future taxable income be less than expected, we would record an adjustment to the net deferred tax asset in the period such determination was made.

Forward Looking Statements

Information included and incorporated by reference in this Form 10-Q may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and as

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such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations, are generally identified by our use of words, such as “intend,” “plan,” “may,” “should,” “will,” “project,” “estimate,” “anticipate,” “believe,” “expect,” “continue,” “potential,” “opportunity,” and similar expressions, whether in the negative or affirmative. All statements regarding our expected financial position, business and financing plans are forward-looking statements. Factors, which could have a material adverse effect on our operations and future prospects, include, but are not limited to:

• United States economic conditions generally and the real estate market specifically;

• management and performance of our hotels;

• our plans for renovation of our hotels;

• our financing plans;

• supply and demand for hotel rooms in our current and proposed market areas;

• our ability to acquire additional properties and the risk that potential acquisitions may not perform in accordance with expectations;

• legislative/regulatory changes, including changes to laws governing taxation of real estate investment trusts; and

• our competition.

Additional factors that could cause actual results to vary from our forward-looking statements are set forth under the Section titled “Risk Factors” in our current and periodic reports filed with the SEC.

These risks and uncertainties, together with the information contained in our Form 10-K filed with the Securities and Exchange Commission on March 23, 2006 under “Risk Factors,” should be considered in evaluating any forward-looking statement contained in this report or incorporated by reference herein. All forward-looking statements speak only as of the date of this report or, in the case of any document incorporated by reference, the date of that document. All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are qualified by the cautionary statements in this section. We undertake no obligation to update or publicly release any revisions to forward-looking statements to reflect events, circumstances or changes in expectations after the date of this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The effects of potential changes in interest rates prices are discussed below. Our market risk discussion includes “forward-looking statements” and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates. These disclosures are not precise indicators of expected future losses, but only indicators of reasonably possible losses. As a result, actual future results may differ materially from those presented. The analysis below presents the sensitivity of the market value of our financial instruments to selected changes in market interest rates.

To meet in part our long-term liquidity requirements, we will borrow funds at a combination of fixed and variable rates. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. Our line of credit with BB&T requires us to hedge a portion of the line with an interest-rate swap which we intend to enter into in the third quarter of 2006. From time to time we may enter into other interest rate hedge contracts such as collars and treasury lock agreements in order to mitigate our interest rate risk with respect to various debt instruments. We do not intend to hold or issue these derivative contracts for trading or speculative purposes.

As of June 30, 2006, we had approximately $42.2 million of fixed-rate debt and approximately, $7.7 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 7.95%. A change in market interest rates on the fixed portion of our debt would impact the fair value of the debt, but have no impact on interest incurred or cash flows. Assuming that the amount outstanding under our line of credit remains at approximately $7.7 million, the balance at June 30, 2006, the impact on our annual interest incurred and cash flows of a one percent change in interest rate would be approximately $77,000.

As of December 31, 2005, we had approximately $42.7 million of fixed-rate debt. The weighted average interest rate on the fixed-rate debt was 7.95%.

We currently have no interest rate hedge contracts.

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Item 4. Controls and Procedures

The Chief Executive Officer and Chief Financial Officer of MHI Hospitality Corporation have evaluated the effectiveness of the 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 required by paragraph (b) of Rules 13a-15 and 15d-15 under the Exchange Act, and have concluded that as of the end of the period covered by this report, MHI Hospitality Corporation’s disclosure controls and procedures were effective.

There was no change in MHI Hospitality Corporation’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during MHI Hospitality Corporation’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, MHI Hospitality Corporation’s internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

We are not involved in any material litigation nor, to our knowledge, is any material litigation threatened against us.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

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Item 6. Exhibits

The following exhibits are filed as part of this Form 10-Q:

Exhibit Number	Description of Exhibit
10.22	Purchase Agreement dated June 15, 2006
10.22A	First Amendment to Purchase Agreement dated July 25, 2006
10.22B	Second Amendment to Purchase Agreement dated August 4, 2006
31.1	Certification of President and Chief Executive Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules Rule 13(a)-14 and 15(d)-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURE

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.

	MHI HOSPITALITY CORPORATION
Date: August 8, 2006	By:	/s/ Andrew M. Sims
		Andrew M. Sims
		Chief Executive Officer and Chairman of the Board

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EX-10.22

Exhibit 10.22

PURCHASE AGREEMENT

THIS PURCHASE AGREEMENT is made as of the 15th day of June, 2006 by and between JAY GANESH, INC., a Virginia corporation, or permitted assigns (“Buyer”), HIREN PATEL (“Guarantor”), and CAPITOL HOTEL ASSOCIATES, LP, a Virginia Limited Partnership (“Seller”).

W I T N E S S E T H :

WHEREAS, Buyer desires to purchase and Seller desires to sell the property described herein;

NOW, THEREFORE, in consideration of Ten Dollars ($10.00) paid by Buyer to Seller, and the mutual covenants of Seller and Buyer contained herein, Seller and Buyer hereby agree as follows:

1. Agreement to Purchase and Sell. Seller hereby agrees to sell and convey to Buyer, and Buyer hereby agrees to purchase from Seller:

A. Certain real property consisting of approximately +/-3.0 acres of land located in Williamsburg, Virginia, and the hotel improvements located thereon (“the Property”) consisting of a 137 room hotel trading as the Holiday Inn Downtown (“the Hotel”) as more fully described on the legal description attached hereto as Exhibit “A”;

B. To the extent assignable, all of Seller’s rights, title and interest in the Holiday Inn license agreement dated August 13, 2004; provided, however, that Buyer acknowledges and agrees that Seller has informed Buyer that Seller does not believe that the license agreement is assignable;

C. All of the personal property and equipment owned by Seller and located in or at the Hotel and used in connection therewith, including but not limited to, cleaning

equipment, furniture, fixtures, carpets, rugs, draperies, mechanical and electrical equipment, office equipment, china, glassware, silver, cooking utensils, flatware, linens, and uniforms (collectively, the “Personal Property”), as more particularly described on the Inventory attached hereto as Exhibit “B”; provided, however, that Buyer acknowledges and agrees that the contents of MHI Hospitality Corporation’s home office are excluded.

D. To the extent owned by seller and relating to or located on or in the Hotel and transferable by Seller, the telephone number for the Hotel, Hotel directory listings, surveys, plans and specifications, licenses and permits, contractor and maintenance files, service manuals, notices of compliance with state and federal and all governmental agencies and regulations, estoppel certificates or affidavits, and guaranties and warranties as to Personal Property which pertain to the Hotel or are used in connection therewith;

E. Inventory at Closing, including without limitation merchandise held for sale and reserve stocks of operating supplies on hand at Closing (“the Inventory”);

F. The Personal Property to be conveyed hereunder shall be conveyed free and clear of all liens, claims and encumbrances. If said Personal Property is held by Seller under the terms of a lease, lease purchase agreement or purchase contract, same shall be paid from Seller’s proceeds at settlement and conveyed to Buyer free and clear of all liens, claims and encumbrances. Notwithstanding the previous sentence, Buyer acknowledges and agrees that Buyer will be obligated to accept the assignment of three (3) leases from Seller and to assume the performance of such leases following the sale of the Assets. The three leases to be assumed by Buyer are described on Exhibit “C” attached hereto. A schedule of all Personal Property held under lease or purchase agreement or installment sales contact is attached hereto as Exhibit “C” and a copy of all such leases and/or purchase contracts are appended to said Exhibit “C”.

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G. Except as otherwise provided in this Agreement, all franchise rights, warranties, and all other contracts and agreements held by Seller relating exclusively to the Hotel that are assignable by Seller (the property described in the foregoing subparagraphs A through G is herein collectively call the “Assets”).

2. Purchase Price. The Purchase Price for the Assets is Four Million Seven Hundred Fifty Thousand and 00/100 Dollars ($4,750,000.00) (the “Purchase Price”).

A. At the execution of the Agreement described herein below, the sum of One Hundred Thousand Dollars ($100,000.00) (the “Deposit”) will be paid by Buyer to Seller as a good faith deposit, which Deposit shall be applied to the Purchase Price at Closing.

B. The sum of Four Million Two Hundred Fifty Thousand Dollars ($4,250,000.00) shall be paid by Buyer to Seller at Closing in cash or by wire transfer of funds immediately available to Seller.

C. The balance of the Purchase Price of Four Hundred Thousand Dollars ($400,000.00) shall be paid by Buyer to Seller by the execution and delivery of a negotiable promissory note (“the Note”) made by Buyer payable to the order of Seller in the original principal amount of Four Hundred Thousand Dollars ($400,000.00), together with interest at an annual rate equal to eight percent (8.0%). The Note will be in the form of the promissory note attached to this Agreement as Exhibit “D”, secured by a third lien deed of trust against the Property and guaranteed by a guaranty executed by Hiren Patel and Champaklal Patel, each in form and substance acceptable to Seller. During the first four years of the term of the Note, the maker will make payments of interest only on the outstanding principal balance of the Note, and beginning in the fifth year of the term of the Note the Buyer will amortize the outstanding principal balance of the Note using a 16 year amortization schedule. The Note will mature on

3

the twentieth anniversary of the date of the Note and all outstanding principal, interest, late charges, and other costs and expenses payable under the Note will be due and payable in full on that date. Within ten (10) days of the date of this Agreement, Champaklal Patel shall also execute and deliver to Seller a letter in form and content acceptable to Seller pursuant to which Champaklal Patel agrees to purchase the Note from Seller on the date that is four (4) years after the date of execution of the Note together with a personal financial statement of Champaklal Patel. If Champaklal Patel does not execute and deliver such letter to Seller within such ten (10) day period so agreeing to purchase the Note, Seller shall have the right to terminate this Agreement, whereupon the Deposit shall be refunded to Buyer, and Seller and Buyer shall have no further obligations to each other except as specifically set forth in this Agreement.

3. Escrow of Deposit. The Deposit shall be held in escrow by Stewart Title Guaranty Company (“Escrow Agent”) or other title insurance company acceptable to Buyer and Seller as a good faith deposit. Buyer and Seller will execute Escrow Agent’s standard escrow agreement in connection with the Deposit.

4. Conditions.

A. Buyer shall have a period (“Inspection Period”) beginning on the date this Agreement is executed by all parties and expiring forty (40) days thereafter on July 25, 2006 (assuming that both parties executed this Agreement on June 15, 2006). Buyer shall have until the expiration of such Inspection Period to notify Seller in writing that Buyer does not wish to close on the purchase of the Assets, in which event Seller shall terminate this Agreement, and neither party shall have any further obligation to the other with respect to this Agreement except as specifically set forth herein and the Deposit shall be promptly refunded to Buyer. If Buyer elects to proceed forward to closing, the Deposit will become non-refundable upon the expiration of the Inspection Period and Closing will occur no later than August 10, 2006.

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B. Notwithstanding anything to the contrary in this Agreement, Buyer shall have affirmative requirements to meet certain deadlines during the Inspection Period as outlined below. Failure to meet said deadlines during the Inspection Period shall at Seller’s option, render this Agreement null and void. In the event Seller elects to terminate this Agreement pursuant to these specific provisions, the Deposit will be refunded and neither party shall have any further obligation to the other with respect to this Agreement except as specifically set forth herein.

C. Requirements:

(i) Buyer will have ten (10) days to make full application with a lender of its choosing and verify same to Seller.

(ii) Buyer will make a full and complete franchise application with Holiday Inns on or before June 16, 2006, including application fee, and verify same to Seller. Buyer acknowledges that Seller has informed Buyer that Holiday Inns will review Buyer’s application for a franchise for the Hotel on July 10^th as long as Buyer promptly applies for a franchise.

D. Seller agrees:

(i) At any reasonable time and from time to time during the Inspection Period, Buyer shall have the right to fully inspect the Assets and to satisfy itself that the Assets, as of the date of such inspection, are in good operating condition and repair, all guest rooms are fully equipped and suitable for rental in the ordinary course of business; there are no material defects in the improvements constituting part of the Hotel; and the roof, all plumbing, heating, electrical and air conditioning and the water and sewer systems are in good working order and condition. Seller shall use its best efforts to assure that Buyer has access to the Assets during

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normal business hours, and Seller shall provide all available information concerning the Assets that Buyer may reasonably request to assist Buyer in making such determinations. Buyer may only contact Seller’s designated representative when seeking access to the Hotel. Buyer may not contact any employee of the Hotel directly to seek access to the Hotel. The subject transaction is confidential and shall not be communicated to Seller’s employees other than the designated representative. Buyer agrees to indemnify, defend, and hold harmless Seller from and against any and all claims, demands, damages, liability or losses of any kind or nature including, without limitation, attorney’s fees and expenses arising from any due diligence or inspection activities conducted on or about the Hotel or the Property by Buyer or its employees, agents, contractors or consultants, and Buyer expressly agrees that this indemnity obligation shall survive the closing of the sale of the Property or the termination of this Agreement. In the event that Buyer does not close on the purchase of the Property Buyer agrees to repair any damage to the Property or the Hotel resulting from the due diligence or inspection activities of Buyer or its agents, employees, contractors or consultants and to restore the Property and the Hotel to the same condition that each was in before Buyer commenced any due diligence or inspection activities. Buyer acknowledges and agrees that this repair and restoration obligation shall survive the termination of this Agreement.

(ii) At any reasonable time and from time to time during the Inspection Period, Buyer shall have the right to fully examine all accounting ledgers, audit materials, bonds, operating reports, files and other materials relating to the financial condition and the operation of the Hotel as are available to Seller. Buyer shall bear the cost of all inspections referred to in this Paragraph. Buyer agrees to keep all such books, records and information strictly confidential.

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(iii) Seller shall furnish to Buyer within ten (10) days of this Agreement being signed by both parties year-end financial statements and federal tax returns for 2003, 2004, and 2005, plus year-to-date financial statements. Buyer shall bear the cost of all inspections referred to in this Paragraph. Buyer agrees to keep all such books, records and financial information strictly confidential.

(iv) Seller shall furnish to Buyer within ten (10) days of this Agreement being signed by both parties a copy of its title insurance policy, and all surveys, architectural plans and drawings, engineering reports, elevator reports, and any and all other reports relating to the roof, structure, mechanical, electrical, plumbing, heating or air-conditioning systems, and environmental reports. In this regard, Buyer acknowledges that Seller delivered to Buyer on June 14, 2006, a notebook containing due diligence and inspection items relating to the Property, the Hotel, and the Assets. Buyer will inform Seller on or before June 22, 2006, of any additional due diligence or inspection materials that Buyer needs from Seller. To the extent that Seller has such materials in its possession, Seller will promptly furnish such materials to Buyer for its review. Buyer agrees to keep all such information strictly confidential and to return all such materials and all copies thereof to Seller if Buyer does not close on the purchase of the Property.

(v) Seller shall furnish to Buyer copies of all existing contracts (e.g. cleaning service, waste disposal contracts, outside payroll service, etc.), employment agreements and personal service contracts relating to the operation of the Hotel within ten (10) days of this Agreement being signed by both parties.

(vi) Seller shall furnish to Buyer a copy, of the Holiday Inn License Agreement and the most recent inspection report. Additionally Seller shall provide Buyer a copy

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of the Ledo franchise agreement. Buyer acknowledges and agrees that Seller has advised Buyer that such license and franchise agreements are not assignable and that Buyer will have to apply for new license and franchise agreements. Seller agrees to cooperate with Buyer in connection with its application for a new Holiday Inn franchise and its effort to obtain the assignment of the Ledo franchise agreement or the issuance of a new Ledo franchise agreement.

(vii) Buyer will apply for a new franchise in Buyer’s name on or before June 16, 2006, in order that Buyer can have its application reviewed by Holiday Inns on July 10, 2006. Buyer will be required to pay the customary application and transfer fees, and, in the event any Product Improvement Plan expenditures are required by Holiday Inns in order for it to approve a new license for Buyer, Seller will be liable to Buyer for up to Two Hundred and Fifty Thousand Dollars ($250,000) in costs associated with such Product Improvement Plan expenditures required by Holiday Inns.

5. Closing. Closing shall take place within thirty (30) days after the expiration of the Inspection Period but in no event later than August 10, 2006. Buyer acknowledges and agrees that time is of the essence of this Agreement. In the event that Holiday Inns is willing to extend the date, without cost or expense to Seller, through which it will allow Seller to sell the Assets to a buyer without the necessity for Product Improvement Plan expenditures by such buyer, Seller agrees that it will allow Buyer one thirty (30) day extension of the Closing Date upon the payment by Buyer to Escrow Agent of the additional amount of One Hundred Thousand Dollars ($100,000) which shall be non-refundable and shall become part of the Deposit.

6. Title and Conveyances. A. At Closing, Seller shall convey good marketable fee simple title to the Property to Buyer by special warranty deed, free and clear of

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any and all lien or encumbrances, and subject to all conditions, easements, rights-of-way, assessments, restrictions and other matters of record affecting the Property including, without limitation, the following:

(i) General real estate taxes for the year in which Closing occurs and subsequent tax years;

(ii) All building restrictions and zoning regulations now or hereafter in effect, to the extent adopted by any municipal or other public authority and related to all or any portion of the Property.

B. Seller shall convey the Personal Property to Buyer by a bill of sale that warrants that Seller owns and is conveying to Buyer good and marketable title to the Personal Property, free and clear of all liens and encumbrances. Seller shall assign its franchise rights, warranties, and all other contract rights to the extent that the same are assignable by properly executed assignments.

7. Seller’s Representations and Warranties. Buyer has agreed to purchase the Assets as a result of Buyer’s review and inspection of the Assets, and not because of or in reliance upon any representation made by the Seller or any principal or employee of Seller, or by any agent of the Seller, except as expressly set forth in this Agreement, and that Buyer has agreed to purchase the Assets in their present condition, unless otherwise specified herein.

Notwithstanding the foregoing, Seller represents that, to the best of Seller’s knowledge, Seller is not in possession of any information, and no information has come to Seller’s attention that would cause Seller to conclude that: the Hotel, or any related facilities or utilities are not in conformance with applicable zoning, building codes or other laws and regulations; the Hotel is not free from faulty materials and constructed according to sound

9

engineering standards and constructed in a workmanlike manner; or there is any environmental contamination, hazardous waste, asbestos, or other toxic substances, in the Hotel or on the land upon which it is situate in any greater amount or degree than indicated in the environmental studies, if any. Seller further represents that, to the best of Seller’s knowledge, the roof and structure of the Hotel are sound and that all appliances, elevators, heating, air conditioning, plumbing , and other systems are now and will, at the Closing, be in good working order, ordinary wear and tear excepted. As used herein, “Seller’s knowledge” is limited to the actual knowledge of Andrew M. Sims and Scott Kucinski, employees of Seller who are engaged in matters directly related to the Property. Except to the extent of any title insurance policy or environmental report or study in the possession of Seller, copies of which Seller has agreed to provide to Buyer, in accordance with this Agreement, Seller has not undertaken any independent investigation or verification of the matters described in this Paragraph.

Seller is selling the Assets and Buyer is purchasing the Assets, “AS-IS, WHERE-IS” and “WITH ALL FAULTS”.

B. Seller additionally represents and warrants to Buyer that to the best of Seller’s knowledge:

(i) Seller is duly qualified under the laws of the Commonwealth of Virginia and has full and absolute power and authority to enter into this Agreement and all ancillary documents delivered pursuant hereto; to provide the financing described above, and to perform all of its obligations hereunder. The individual or individuals executing this Agreement and all other instruments, documents and agreements to be executed by Seller hereunder are duly authorized to execute documents on behalf of Seller. The execution and delivery of this Agreement and the performance by the Seller of its obligations hereunder have been duly

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authorized by all requisite action or approval that is required in order to constitute this Agreement as a binding and enforceable obligation of the Seller, subject to the limitations and qualifications set forth herein, Seller has the full right to sell the Assets pursuant to this Agreement, and no further authorization or consent to this Agreement is necessary for Seller to sell the Assets to Buyer except as set forth herein.

(ii) There are no judgments, orders, or decrees of any kind against Seller unpaid or unsatisfied of record, nor, any legal action, suit or other legal proceeding pending before any court, or any administrative proceeding pending before any administrative agency relating to the Assets (including any notice of any proposed, pending or threatened condemnation proceeding) which would materially adversely affect the Assets and their intended use, nor has Seller received any actual notice of any such threatened legal action, suit or other legal or administrative proceeding relating to the Assets.

(iii) Seller has received no notice of any proposed, pending or actual assessment made or to be made against the Assets by any governmental authority or instrumentality.

(iv) Seller covenants and represents that it has no personal knowledge of any handling, transportation, storage, treatment or usage of hazardous or toxic substances that has occurred in or on the Property during its ownership thereof in any greater amount or degree than indicated in the environmental studies, if any, or other than as permitted in connection with the ordinary cleaning, operation, and maintenance of the Hotel and the Property. Seller further represents that it has no knowledge of any leak, spill, discharge, emission or disposal of hazardous or toxic substances which has occurred on the Property, and to the best of its knowledge the soil, groundwater, soil vapor on or under the land is free of toxic or hazardous substances as of the date hereof other than that indicated in the environmental studies, if any.

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8. Contingencies. Conditions in favor of Buyer. Notwithstanding anything in this Agreement to the contrary, Buyer’s obligation to purchase the Property shall be expressly subject to and contingent upon the satisfaction or waiver in writing of the following conditions during time periods indicated in each paragraph:

A) Buyer’s inspection and approval, within the Inspection Period, of all physical, environmental (including, without limitation, hazardous waste), economic, feasibility, title, and legal matters relating to the Property, and Buyer’s determination that the Property is suitable in all respects for Buyer’s intended use.

B) Buyer’s determination, during the Inspection Period, that a national title insurance company acceptable to Buyer is prepared to issue, upon the sole condition of the payment of its regularly scheduled premium, its ALTA Owner’s Policy of title insurance (the “Title Policy”), insuring in the amount of the Purchase Price that title to the Property is vested of record in Buyer on the Closing Date, subject only to printed conditions of such policy together with such additional endorsements as Buyer may reasonably require, at Buyer’s sole cost;

C) Confirmation, during the Inspection Period, that the Property is a legal parcel within the meaning of any state and local subdivision laws, the completion of any further subdivision of the Property necessary for the Buyer’s intended use, and the completion of any platting or re-platting required by Buyer;

D) Buyer’s determination, during the Inspection Period, that Buyer has obtained or will be able to obtain all other governmental and private licenses, permits,

12

rights, and authorizations (including, without limitation, governmental approvals, the receipt of public and/or private easements, if any, from third parties, and all required or desired building permit(s)), all on conditions reasonably acceptable to Buyer, as necessary for construction and operation of the Buyer’s business on Property;

E) Buyer’s review and approval, during the Inspection Period, of (i) any environmental assessment of the Property desired by Buyer, and (ii) any other soils test reports, (including, but not limited to, soils boring and testing for stability, subsidence, topography, hazardous wastes, and other toxic substances), procured and paid for by Buyer;

F) Verification, during the Inspection Period, that the Property does not lie within a 100-year flood plain, as established by the U.S. Army Corps of Engineers, or within any area subject to flooding or within any area designated as wetlands or wetlands buffer;

G) Determination, during the Inspection Period, that no portion of the Property has been taken by, or is the subject of, any condemnation proceeding, which would adversely affect the Buyer’s intended use;

H) Verification, during the Inspection Period, that no federal, state, or local governmental restrictions, or requirements exist which would preclude construction and operation of the intended use on the Property;

I) Determination, during the Inspection Period, of the availability of public water (including any mains or other equipment required by any fire marshal or other public official), telephone, electric power, natural gas, and gravity flow sewers and storm drainage, all sufficient to handle the requirements of the Buyer’s intended use, and the availability of such utilities at or within the property lines of the Property, without cost to Buyer;

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J) Determination, during the Inspection Period that there are no pending or threatened referendum, moratorium, or any other public or private actions which would in any way materially frustrate or adversely affect the Buyer’s intended use of the Property;

K) As of the Closing Date, there shall have been no material adverse change in the condition of the Property, or in any document, in any applicable laws and restrictions, contractual relations, or other circumstances affecting the Property which have been previously approved by Buyer;

L) As of the Closing Date, the due performance by Seller of each and every covenant, undertaking and agreement to be performed by Seller pursuant to this Agreement, the truth in all material respects, of each representation and warranty made in this Agreement by Seller at the time made and on the Closing Date, and the delivery to Buyer by Seller on the Closing Date of a certificate certifying that each representation and warranty made in this Agreement by Seller is true as of the Closing Date (“Sellers Certificate”), in the form attached hereto as Exhibit “E”; and

M) During, the Inspection Period, Buyer’s review and approval, in Buyer’s sole discretion, of the ALTA Survey and Title Commitment.

9. Failure or Waiver of Conditions Precedent.

A) At any time or times on or before the Closing Date, Buyer may (in its sole and absolute discretion) waive any of the conditions in Section 8 hereinabove by written notice to Seller, or elect to cure the failure of such condition. No such waiver shall reduce the rights or remedies of Buyer arising from any breach of any undertaking, agreement, covenant, warranty, or representation of Seller under this Agreement.

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B) In the event any of the conditions to this Agreement which are for the benefit of Buyer are neither fulfilled, nor waived or cured pursuant to Paragraph 8 above, this Agreement shall terminate and Buyer shall be released from all obligations under this Agreement except for those obligations that specifically survive termination of this Agreement. In the event of such termination, the Deposit and all funds deposited with the Escrow Agent by Buyer or paid by Buyer to Seller (together with all interest accrued on such funds) shall be returned immediately to Buyer, and all documents deposited with the Escrow Agent by Buyer or Seller shall be returned to the depositing party.

10. Fire or Casualty. Seller shall keep the Hotel insured against loss by fire or casualty in any amount not less than full replacement cost. If, prior to Closing, the Hotel is damaged and the cost of restoring such damage exceeds One Million Dollars ($1,000,000.00), or if the Hotel is destroyed by casualty, then Buyer may, by written notice to Seller given within ten (10) days after such loss, terminate this Agreement and receive a refund of the Deposit. Upon such termination, neither party shall have any further liability to the other party hereunder except as specifically set forth herein. Any other loss or damage to the Property shall not be in any way void or impair the obligations of the parties hereunder. If this Agreement is not terminated, insurance proceeds payable with respect to such damage shall be assigned to Buyer at Closing, the full Purchase Price shall be paid, and the Property shall be delivered to Buyer at closing subject to damage.

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11. Adjustments.

A. Real estate taxes, personal property taxes, utilities, water and sewer, rents, and other governmental assessments on the Property shall be prorated between Buyer and Seller on a calendar or fiscal year basis, using the fiscal year of the applicable taxing authority or the billing period for any utility service as the basis for accrual thereof, as of the date of the settlement or Closing. Seller shall pay all expenses of deed preparation, the grantor’s tax on said deed, and the cost, if any, for removal of title defects, if Seller agrees to remove any title defects. Buyer agrees to pay in cash at closing all clerk’s fees, recording fees, recording taxes, and other costs and expenses of recording all documents, including the deed, the deed of trust, assignments, financing statements, and other collateral documents. Each party shall pay its respective attorney’s fees.

B. Seller shall receive at Closing either in cash or as a credit towards the Purchase Price an amount equal to all monies in house banks and cash registers. Such house banks and cash drawers will be counted jointly by representatives of Seller and Buyer at 6:00 a.m. on the date of Closing.

C. Seller shall receive from Buyer at Closing either in cash or as a credit towards the Purchase Price an amount equal to the transient guest ledger balance for all occupied rooms as of 6:00 a.m. on the date of Closing.

D. Travel agent commissions liability incurred prior to the date of Closing shall be paid by Seller.

E. All prepaid unapplied room rentals, and all deposits for advance reservations for banquets, and future services shall be delivered to Buyer. Copies of all agreements relating to banquets and future service shall be jointly compiled by representatives of Buyer and Seller prior to Closing. Buyer shall expressly assume the obligation to perform the

16

agreements in accordance with the terms and honor the advanced deposits received by written instrument delivered at Closing in which Buyer shall agree to defend and indemnify Seller from all claims arising with respect to Buyer’s failure to perform in accordance with the Agreement.

F. Seller shall be entitled to all accounts receivable balances originating prior to the date of Closing and due from tenants, guests, and patrons of the Hotel for rents and other customary hotel direct bill charges. Seller shall have the exclusive right to institute any proceedings and to take any steps to effect collection thereof. Buyer agrees that if any such accounts receivable payments are received by Buyer, they shall be received in trust for Seller and shall be promptly remitted to Seller.

G. Seller shall receive credit for an amount equal to all prepaid expenses paid by Seller that inure to the benefit of Buyer.

12. Notices. All notices hereunder shall be in writing and sent by depositing it with a nationally recognized overnight courier services that obtains receipts, addressed to the appropriate party (and marked to a particular individual’s attention if so indicated) as hereinafter provided. Each notice shall be effective upon being so deposited. Rejection or other refusal by the addressee to accept or the inability to deliver because of a changed address of which no notice was given shall be deemed to be the receipt of the notice sent. Any party shall have the right from time to time to change the address or individual’s attention to which notice to it or them shall be sent by giving the other party at least ten (10) days’ prior notice thereof. The notice address of the parties shall be as follows:

If to Seller:	Mr. Andrew M. Sims
	MHI Hospitality Corporation
	814 Capitol Landing Road
	Williamsburg, VA 23185

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With a copy to:	Thomas J. Egan, Esquire
	Baker & McKenzie
	815 Connecticut Avenue, NW
	Washington, DC 20006
if to Buyer:	Hiren Patel
	a/k/a Aaron Patel
	4688 Church Point Place
	Virginia Beach, VA 23455
With a copy to:	John W. Richardson, Attorney at Law
	Kaufman & Canoles, P.C.
	2101 Parks Avenue, Suite 700
	Virginia Beach, VA 23451
if to Guarantor:	Hiren Patel
	a/k/a Aaron Patel
	4688 Church Point Place
	Virginia Beach, VA 23455

Notwithstanding anything in this paragraph to the contrary, any notice received in fact shall be deemed given in accordance with this paragraph.

13. Commission and Other Fees. There are no brokerage fees or commissions incurred as a result of the consummation of this Agreement other than those payable by Seller to Jones, Lang & LaSalle Hotels. Each party agrees to indemnify, protect, defend and hold harmless the other party from any and all claims for such fees or real estate commissions. The provisions of this Paragraph shall survive Closing.

14. Default.

A. If Buyer does not terminate this Agreement during the Inspection Period, and Buyer fails to complete Closing for the purchase of the Property within the time period specified in Paragraph 4 hereof, Buyer shall be in default hereunder, and Seller shall retain the Deposit as liquidated damages; provided, however, if Buyer’s failure to close on the purchase

18

described herein is caused by Seller’s inability to deliver good title to the Assets, if demanded by Buyer, Seller shall return the Deposit, and neither party shall have any further obligation to the other with respect to this Agreement.

B. If Seller fails to complete Closing in accordance with this Agreement through no fault of Buyer, Buyer shall be entitled to obtain the return of the Deposit or to seek and obtain specific performance of this Agreement.

15. Entire Agreement and Modifications. This Agreement embodies and constitutes the final and entire agreement between the parties hereto and they shall not be bound by any terms, covenants, conditions, representations, or warranties not expressly contained herein. This Agreement may not be altered, changed, or amended by an instrument in writing, executed by both parties hereto.

16. Applicable Law. This Agreement is an instrument under seal and shall be governed, construed, and enforced according to the laws of the Commonwealth of Virginia.

17. Headings. Descriptive headings are for convenience only and shall not control or affect the meanings or construction of any provision of this Agreement.

18. Interpretation. Whenever the context hereof shall so require, the singular shall include the plural, the plural the singular, and the use of any gender shall be applicable to all genders.

19. Severability. If any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein.

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20. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and assigns. The rights of Buyer under this Agreement may be assigned to any entity comprised of Buyer and another investor without the prior written consent of Seller.

21. Seller’s Right to Like-Kind Exchange. Buyer agrees that, in lieu of the payment of the Purchase Price in cash, Seller shall have the right to transfer and convey the Assets in exchange for other real property of a like-kind (the “Exchange Property”) to be designated by Seller at or after the Closing Date such that the exchange will qualify for non-recognition of gain or loss under Section 1031 of the Internal Revenue Code of 1986, as amended. If Seller elects to make a like-kind exchange, Seller shall deliver written notice of such election to Buyer prior to the Closing Date. In this event, Buyer agrees to cooperate in all reasonable respects in effecting the exchange, so long as Buyer does not assume any additional liability as a result of such cooperation. The exchange shall be completed through the use of a °qualified intermediary” or an escrow agent pursuant to Section 1031.

Buyer acknowledges that if Seller elects to effect a like-kind exchange of the subject real estate, Seller shall assign all of its right, title and interest under this Agreement to the qualified intermediary, and Buyer will pay the Purchase Price directly to the qualified intermediary. The Buyer and the qualified intermediary may then complete the like-kind exchange in the manner they agree upon. Buyer agrees to execute any additional documents as may be reasonably requested by Seller to carry out the like-kind exchange. Buyer’s agreement to participate shall not result in additional liability to the Buyer.

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22. Contract and Note Guarantee. Hiren Patel will fully guarantee the performance of this Agreement and the repayment of the Note. Yogesh Patel will also fully guarantee, jointly and severally, with Hiren Patel the repayment of the Note.

23. Counterpart Signature Pages. This Agreement may be executed in one or more counterparts, and each counterpart shall constitute an original of this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement by their duly authorized representatives on the date set forth below.

[signatures appear on following page]

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	SELLER:
	Capitol Hotel Associates, LP
June 20, 2006	By	/s/ Andrew M. Sims
Date		Andrew M. Sims
	BUYER:
	Jay Ganesh, Inc. or Permitted Assigns
June 20, 2006	By	/s/ Hiren Patel, President
Date		Hiren Patel, President
	GUARANTOR:
June 20, 2006	By	/s/ Hiren Patel
Date		Hiren Patel

22

EXHIBIT “A”

LEGAL DESCRIPTION

23

EXHIBIT “B”

PERSONAL PROPERTY INVENTORY

24

EXHIBIT “C”

SCHEDULE OF LEASES AS TO PERSONAL PROPERTY

Leases to be Assumed by Buyer:

Lease with Vend Lease for cash register/business data equipment used in connection with the operation of the Hotel

Lease with GE Capital Corporation for a photocopier

Lease of Holiday Inn Opera software used in connection with the operation of the Hotel

25

EXHIBIT “D”

PROPOSED PROMISSORY NOTE

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EXHIBIT E

SELLER’S CERTIFICATE

OF

REPRESENTATIONS AND WARRANTIES

This Certificate of Representations and Warranties is given pursuant to that certain Purchase Agreement by and between Capitol Hotel Associates, LP as Seller,                                     , as Buyer.

Seller hereby certifies to Buyer that each representation and warranty made by Seller in the Agreement is true as of the date set forth below.

Date:	June 20, 2006
Capitol Hotel Associates, LP
BY:	/s/ Andrew M. Sims
	Andrew M. Sims

27

EX-10.22A

Exhibit 10.22A

FIRST AMENDMENT TO PURCHASE AGREEMENT

THIS FIRST AMENDMENT TO PURCHASE AGREEMENT (the “First Amendment”) is made as of the 25th day of July, 2006, by and between JAY GANESH, INC., a Virginia corporation, or permitted assigns (“Buyer”), HIREN PATEL (“Guarantor”), and CAPITOL HOTEL ASSOCIATES, LP, a Virginia limited partnership (“Seller”).

W I T N E S S E T H :

WHEREAS, Buyer, Guarantor, and Seller have entered into that certain Purchase Agreement (the “Purchase Agreement”), dated as of June 15, 2006, for the purchase by Buyer from Seller of the Assets as identified and described in the Purchase Agreement; and

WHEREAS, Buyer has requested that Seller extend the Inspection Period through August 4, 2006; and

WHEREAS, Buyer, Guarantor, and Seller now desire to amend and modify the Purchase Agreement as set forth herein.

NOW, THEREFORE, in consideration of Ten Dollars ($10.00) paid by Buyer to Seller, and the mutual covenants of Buyer, Guarantor, and Seller contained herein, Buyer, Guarantor, and Seller hereby agree as follows:

1. Defined Terms. Capitalized words and phrases not otherwise defined in this First Amendment shall have the meanings that such capitalized words and phrases have in the Purchase Agreement.

2. Conditions. Buyer acknowledges and agrees that, except as set forth in Section 3 below with respect to the financing of the Purchase Price, Buyer has completed its due diligence investigation of the Assets and that Buyer is satisfied with the condition of the Assets. In connection with the completion of its arrangements for a first deed of trust loan with TowneBank

to finance a portion of the Purchase Price, Buyer requests that Seller agree to extend the Inspection Period from July 25, 2006, through 5:00 pm on Friday, August 4, 2006 (the “Extended Due Diligence Date”). In consideration of the payment by Buyer to Escrow Agent of the additional amount of Twenty-Five Thousand Dollars ($25,000.00) (the “Additional Deposit”) at the time of execution of this First Amendment, Seller agrees to extend the Inspection Period through 5:00 pm on Friday, August 4, 2006. Buyer acknowledges and agrees that the Additional Deposit shall be fully earned and non-refundable upon delivery to the Escrow Agent, and Seller agrees that the Additional Deposit shall be applied against the Purchase Price if Buyer closes on the purchase of the Property. If Buyer does not close on the purchase of the Property for any reason other than the default of Seller, the Escrow Agent shall pay the amount of the Additional Deposit to Seller.

3. Financing of the Purchase Price. Buyer acknowledges and agrees that it will finance the Purchase Price of the Assets as follows:

A. Buyer anticipates receiving, on or before the Extended Due Diligence Date, a loan commitment (the “TowneBank Commitment”) from TowneBank for a first deed of trust loan (the “First Deed of Trust Loan”) in the amount of $3,300,000 to be secured by a first lien deed of trust against the Property and a first priority security interest in the other Assets. Buyer has requested that, if TowneBank delivers the Towne Bank Commitment to Buyer, Towne Bank agree to close and fund the First Deed of Trust Loan on or before August 10, 2006 (the “Closing Date”). Buyer understands that TowneBank will make every effort to close and fund the First Deed of Trust Loan on or before the Closing Date.

B. With the assistance of TowneBank, Buyer is applying for secondary financing (the “Secondary Financing”) in the amount of $1,600,000 through the United States Small Business Administration (“SBA”) to finance a portion of the Purchase Price of the Assets. Although Buyer has not yet received approval from the SBA of the Secondary Financing, Buyer anticipates that Buyer will receive approval from the SBA for the Secondary Financing on or before Wednesday, August 2, 2006 (the “Secondary Financing Approval Date”), and that the closing and funding by the SBA of the Secondary Financing will be completed during the month of October, 2006.

C. In order to permit Buyer to close on the purchase of the Assets on or before the Closing Date, as contemplated by the Purchase Agreement, Seller hereby agrees to make a second deed of trust loan (“Second Deed of Trust Loan”) to Buyer. Such Second Deed of Trust Loan shall be in the amount of $850,000, with interest accruing at an annual rate of eight and one half percent (8.5%), with a term of eighteen (18) months, and secured by a second lien deed of trust against the Property and a second priority interest in the other Assets. Notwithstanding the term of such Second Deed of Trust Loan, Buyer acknowledges and agrees that Buyer will pay off such Second Deed of Trust Loan in full at such time as Buyer closes on the Secondary Financing to be provided by SBA.

D. In the event that Buyer does not receive SBA approval of the Secondary Financing on or before the Secondary Financing Approval Date, and notwithstanding any other provision of the Purchase Agreement or this First Amendment that may appear or be construed to the contrary, Seller shall have the right, exercisable in its sole discretion, to terminate the Purchase Agreement. If Seller exercises such right to terminate the Purchase Agreement, Buyer shall be entitled to receive a refund of the Deposit paid by Buyer pursuant to Section 2(A) of the

Purchase Agreement and the Additional Deposit paid by Buyer in connection with this First Amendment, and Buyer and Seller shall thereupon have no further duties and obligations to each other, except as specifically set forth in the Purchase Agreement. Seller agrees that Seller will determine whether to exercise its right to terminate the Purchase Agreement within seventy-two (72) hours of the time of that Buyer notifies Seller that SBA has not approved the Secondary Financing.

E. In addition to the Second Deed of Trust Loan, Seller will continue to permit Buyer to pay $400,000 of the Purchase Price through the execution and delivery of a promissory note in the amount of $400,000 in accordance with the provisions of Section 2(C) of the Purchase Agreement. Buyer shall remain responsible for providing the cash necessary to pay the balance of the Purchase Price and all closing costs and expenses incurred by Buyer.

4. Counterparts. This First Amendment may be executed in one or more counterparts, each of which shall constitute an original of this First Amendment.

5. Ratification of Purchase Agreement. Except as amended and modified hereby, Buyer, Guarantor, and Seller hereby affirm and ratify the Purchase Agreement and agree that the Purchase Agreement remains in full force and effect.

6. Agreement Under Seal. This First Amendment is an instrument executed under seal and shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia.

IN WITNESS WHEREOF, the parties have executed this First Amendment by their duly authorized representatives on the date set forth below.

[signatures appear on following page]

	SELLER:
	Capitol Hotel Associates, LP
July 25, 2006	By	/s/ Andrew M. Sims
Date		Andrew M. Sims
	[SEAL]
	BUYER:
	Jay Ganesh, Inc.
July 25, 2006	By	/s/ Hiren Patel, President
Date		Hiren Patel, President
	[SEAL]
	GUARANTOR:
July 25, 2006	By	/s/ Hiren Patel                                                            (SEAL)
Date		Hiren Patel

EX-10.22B

Exhibit 10.22B

SECOND AMENDMENT TO PURCHASE AGREEMENT

THIS SECOND AMENDMENT TO PURCHASE AGREEMENT (the “Second Amendment”) is made as of the 4th day of August, 2006, by and between JAY GANESH, INC., a Virginia corporation, or permitted assigns (“Buyer”), HIREN PATEL (“Guarantor”), and CAPITOL HOTEL ASSOCIATES, LP, a Virginia limited partnership (“Seller”).

W I T N E S S E T H :

WHEREAS, Buyer, Guarantor, and Seller have entered into that certain Purchase Agreement (the “Purchase Agreement”), dated as of June 15, 2006, for the purchase by Buyer from Seller of the Assets as identified and described in the Purchase Agreement; and

WHEREAS, Buyer has requested that Seller extend the Inspection Period through August 4, 2006; and

WHEREAS, Buyer and Seller executed that certain First Amendment to Contract (the “First Amendment”), dated as of July 25, 2006, in order to extend the Due Diligence Date as set forth in the Contract; and

WHEREAS, Buyer, Guarantor, and Seller now desire to further amend and modify the Purchase Agreement as set forth herein.

NOW, THEREFORE, in consideration of Ten Dollars ($10.00) paid by Buyer to Seller, and the mutual covenants of Buyer, Guarantor, and Seller contained herein, Buyer, Guarantor, and Seller hereby agree as follows:

1. Defined Terms. Capitalized words and phrases not otherwise defined in this Second Amendment shall have the meanings that such capitalized words and phrases have in the Purchase Agreement, as amended by the First Amendment.

2. Conditions. Buyer acknowledges and agrees that Buyer has completed its due diligence investigation of the Assets and that Buyer is satisfied with the condition of the Assets. Buyer further acknowledges that Buyer is prepared to accept the financing for the purchase of the Assets as proposed by Seller in the Memorandum, dated August 4, 2006, prepared by Drew Sims, and addressed to Aaron Patel, David Beatty & Stephen Brewer, a copy of which Memorandum is attached hereto and incorporated herein by this reference, and that Buyer is prepared to close on the purchase of the Assets on August 10, 2006.

3. Counterparts. This Second Amendment may be executed in one or more counterparts, each of which shall constitute an original of this Second Amendment.

4. Ratification of Purchase Agreement. Except as amended and modified hereby, Buyer, Guarantor, and Seller hereby affirm and ratify the Purchase Agreement and agree that the Purchase Agreement remains in full force and effect.

5. Agreement Under Seal. This Second Amendment is an instrument executed under seal and shall be governed by and construed in accordance with the laws of the Commonwealth of Virginia.

IN WITNESS WHEREOF, the parties have executed this Second Amendment by their duly authorized representatives on the date set forth below.

[signatures appear on following page]

2

	SELLER:
	Capitol Hotel Associates, LP
August 4, 2006	By	/s/ Andrew M. Sims
Date		Andrew M. Sims
	[SEAL]
	BUYER:
	Jay Ganesh, Inc.
August 4, 2006	By	/s/ Hiren Patel, President
Date		Hiren Patel, President
	[SEAL]
	GUARANTOR:
August 4, 2006	By	Hiren Patel                                                  (SEAL)
Date		Hiren Patel

3

814 Capitol Landing Road

Williamsburg, Virginia 23185

(757) 229-5648 telephone

(757) 564-8801 fax

www.mhihospitality.com

M E M O R A N D U M

DATE:	August 4, 2006
TO:	Aaron Patel, David Beatty, & Stephen Brewer
FROM:	Drew Sims
SUBJECT:	Williamsburg Sale
CC:	David Folsom

*     *     *     *     *     *

• We are amending the terms at your request to permit the transaction to move forward with the subject transaction. MHI is willing to move forward and provide interim financing pursuant to the terms and conditions set forth below.

• MHI will provide the following financing:

• First Mortgage                             @     $2,630,000

1) In form and substance consistent with standard Towne Bank documentation.

2) The loan will mature on December 31, 2006 and bear interest at 8% interest only monthly. The borrower may extend the loan to August 1, 2007 by paying a loan extension fee of $16,000.

• Second Mortgage                     @     $1,400,000

1) In form and substance consistent and acceptable with and to the SBA second mortgage as contemplated in the transaction’s original financing; standard Towne Bank documents to apply.

2) The loan will mature on December 31, 2006 and bear an interest rate of 8.5%, payable in monthly interest only payments. The loan may be extended to August 1, 2007 by paying a loan extension fee of $9,000.

3) The repayment source for this loan will be the SBA funding of $1,400,000.

* A publicly traded company on the American Stock Exchange (“AMEX”) under the symbol MDH

Page 2/Sims to Patel, Beatty & Brewer

• Third Mortgage                     @     $ 400,000

1) In form and substance as provided by the first amendment to the purchase and sale contract.

2) The loan will mature on August 1, 2007 and interest will accrue and be payable at an 8.0% rate, in monthly interest only installments.

•        Equity by Buyer                     @	$	320,000
TOTAL	$	4,750,000

• Coordinating Issues with regard to MHI financing:

• The current deposit of $125,000 will be applied to the purchase price at closing.

• Buyer will have until December 31, 2006 to successfully refinance MHI’s 1^st mortgage with a senior secured 1^st mortgage provided by a lender meeting SBA requirements or the loan extension fee will be due and the loan may be extended to August 1, 2007.

• Buyer will have until December 31, 2006 to successfully receive SBA approval and funding in order to refinance MHI’s second mortgage note, or the loan extension fee will be due and the loan may be extended to August 1, 2007.

• Simultaneous to the August 10 closing, MHI will issue a contingent commitment to provide a substitute third mortgage in the amount of $400,000 for a term of twenty years at an interest rate of 8.0% interest only for four years and a twenty year amortization schedule thereafter, with the understanding that the previously agreed to accelerated pay-off side letter is in effect; the contingency for MHI to fund the substitute third mortgage is the successful funding of a senior secured mortgage by a qualified lender (that is acceptable to the SBA) @ $2.63M and the SBA loan @ $1.4M.

• All loans are fully cross-default protected.

• The first and second mortgage loans will be fully guaranteed by Aaron Patel.

• The borrower will be required to acquire and own the hotel in a single purpose Virginia based corporation; all stock will be pledged to the lender as collateral. In the event of default the lender will have the right to vote the shares.

• Let me know. Thanks.

EX-31.1

EXHIBIT 31.1

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF EXECUTIVE OFFICER

I, Andrew M. Sims, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MHI Hospitality Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s

auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2006

By:	/s/ Andrew M. Sims
Name:	Andrew M. Sims
Title:	President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION PURSUANT TO SECTION 302

OF THE SARBANES-OXLEY ACT OF 2002

FOR THE CHIEF FINANCIAL OFFICER

I, William J. Zaiser, certify that:

1. I have reviewed this quarterly report on Form 10-Q of MHI Hospitality Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s

auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 8, 2006

By:	/s/ William J. Zaiser
Name:	William J. Zaiser
Title:	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of MHI Hospitality Corporation (the “Corporation”) on Form 10-Q for the period ending June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrew M. Sims, Chief Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation.

Date: August 8, 2006

By:	/s/ Andrew M. Sims
Name:	Andrew M. Sims
Title:	President and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of MHI Hospitality Corporation (the “Corporation”) on Form 10-Q for the period ending June 30, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William J. Zaiser, Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Corporation.

Date: August 8, 2006

By:	/s/ William J. Zaiser
Name:	William J. Zaiser
Title:	Chief Financial Officer