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 March 31, 2008

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 Incorporation or Organization)	(I.R.S. Employer Identification No.)

4801 Courthouse Street, Suite 201, Williamsburg, Virginia 23188

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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act. (Check one):

Large Accelerated Filer  ¨	Accelerated Filer  ¨
Non-accelerated Filer  ¨	Smaller Reporting Company  x

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

As of May 7, 2008, there were 6,939,613 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	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	27
Item 4T	Controls and Procedures	27
PART II
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Submission of Matters to a Vote of Security Holders	28
Item 5.	Other Information	28
Item 6.	Exhibits	29

2

PART I

Item 1. Financial Statements

MHI HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS

	March 31, 2008			December 31, 2007
	(unaudited)
ASSETS
Investment in hotel properties, net	$	113,220,764		$	109,430,559
Properties under development		36,537,407			31,237,237
Investment in joint venture		5,652,584			5,583,072
Cash and cash equivalents		3,076,801			3,988,700
Restricted cash		2,156,491			1,750,029
Accounts receivable		2,053,014			1,666,417
Accounts receivable-affiliate		8,643			11,814
Prepaid expenses, inventory and other assets		4,160,363			2,550,112
Notes receivable		400,000			400,000
Shell Island lease purchase, net		2,161,764			2,264,705
Deferred financing costs, net		1,012,049			1,076,345
TOTAL ASSETS	$	170,439,880		$	159,958,990
LIABILITIES
Line of credit	$	45,887,858		$	34,387,858
Mortgage loans		55,500,000			55,000,000
Accounts payable and other accrued liabilities		8,978,604			8,478,441
Dividends and distributions payable		1,815,127			1,807,883
Advance deposits		761,466			408,912
TOTAL LIABILITIES		112,943,055			100,083,094
Minority interest in operating partnership		18,973,336			19,689,453
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, 6,939,613 shares and 6,897,000 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively		69,396			68,970
Additional paid in capital		48,501,275			48,321,505
Accumulated deficit		(9,867,182	)		(8,204,032	)
TOTAL SHAREHOLDERS’ EQUITY		38,703,489			40,186,443
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	170,439,880		$	159,958,990

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

3

MHI HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months ended March 31, 2008			Three months ended March 31, 2007
REVENUE
Rooms department	$	10,742,102		$	11,252,884
Food and beverage department		3,814,058			4,760,083
Other operating departments		961,302			905,960
Total revenue		15,517,461			16,918,926
EXPENSES
Hotel operating expenses
Rooms department		3,135,890			3,026,359
Food and beverage department		2,994,507			3,282,014
Other operating departments		194,302			209,675
Indirect		6,259,143			6,322,155
Total hotel operating expenses		12,583,842			12,840,203
Depreciation and amortization		1,390,923			1,224,461
Corporate general and administrative		962,368			879,934
Total operating expenses		14,937,133			14,944,598
OPERATING INCOME		580,328			1,974,328
Other income (expense)
Interest expense		(1,157,421	)		(1,042,352	)
Interest income		16,015			37,385
Equity in joint venture		69,512			—
Unrealized loss on hedging activities		(766,607	)		(101,215	)
Gain on disposal of assets		8,478			—
Income (loss) before minority interest in operating partnership and income taxes		(1,249,695	)		868,146
Minority interest in operating partnership		260,724			(344,469	)
Income tax benefit		505,554			78,826
NET INCOME (LOSS)	$	(483,417	)	$	602,503
Net income (loss) per share
Basic	$	(0.07	)	$	0.09
Diluted	$	(0.07	)	$	0.09
Weighted average number of shares outstanding
Basic		6,930,045			6,764,750
Diluted		6,968,045			6,824,750

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-		Accumulated Deficit			Total
	Shares	Par Value		In Capital
Balances at December 31, 2007	6,897,000	$	68,970	$	48,321,505	$	(8,204,032	)	$	40,186,443
Issuance of restricted common stock awards	42,613		426		151,270		—			151,696
Amortization of deferred stock grants	—		—		28,500		—			28,500
Net (loss)	—		—		—		(483,417	)		(483,417	)
Dividends declared	—		—		—		(1,179,733	)		(1,179,183	)
Balances at March 31, 2008	6,939,613	$	69,396	$	48,501,275	$	(9,867,182	)	$	38,703,489

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

5

MHI HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three months Ended March 31, 2008			Three months ended March 31, 2007
Cash Flows from Operating Activities:
Net income (loss)	$	(483,417	)	$	602,503
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		1,390,923			1,224,461
Equity in joint venture		(69,512	)		—
Gain on disposal of assets		(8,478	)		—
Unrealized loss on hedging activities		766,607			101,215
Amortization of deferred financing costs		64,296			43,019
Charges related to equity-based compensation		180,196			39,671
Minority interest in operating partnership		(260,724	)		344,469
Changes in assets and liabilities:
Restricted cash		(126,000	)		(90,428	)
Accounts receivable		(386,596	)		(1,208,241	)
Inventory, prepaid expenses and other assets		(1,468,029	)		(340,072	)
Accounts payable and other accrued liabilities		(266,444	)		544,035
Advance deposits		352,554			263,249
Due from affiliates		3,171			(8,562	)
Net cash provided by (used in) operating activities		(311,453	)		1,515,319
Cash flows from investing activities:
Improvements and additions to hotel properties		(10,512,101	)		(2,505,254	)
Funding of restricted cash reserves		(280,462	)		(249,961	)
Proceeds of restricted cash reserves		—			824,466
Proceeds of notes receivable		—			4,030,000
Net cash provided by (used in) investing activities		(10,792,563	)		2,099,251
Cash flows from financing activities:
Dividends and distributions paid		(1,807,883	)		(1,803,038	)
Proceeds of mortgage refinancing		500,000			9,232,921
Net proceeds of (payments of) credit facility		11,500,000			(505,113	)
Payment of deferred financing costs		—			(136,565	)
Payment of loans		—			(283,490	)
Net cash provided by financing activities		10,192,117			6,504,715
Net increase (decrease) in cash and cash equivalents		(911,899	)		10,119,285
Cash and cash equivalents at the beginning of the period		3,988,700			1,445,491
Cash and cash equivalents at the end of the period	$	3,076,801		$	11,564,776
Supplemental disclosures:
Cash paid during the period for interest	$	1,499,417		$	1,158,274
Cash paid during the period for income taxes	$	158,265		$	287,819

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 upper-upscale, upscale and mid-scale hotels located in primary and secondary markets in the mid-Atlantic, Midwest and Southeastern regions of the United States. The hotels operate under well-known national hotel brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn.

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”). Substantially all of the Company’s assets are held by, and all of its operations are conducted through, MHI Hospitality, L.P. (the “Operating Partnership”). For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which is approximately 65.0% 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.

Significant transactions occurring during the current and prior fiscal year include the following:

On March 29, 2007, the Company closed a $23.0 million refinancing of the mortgage on the Hilton Wilmington Riverside. Approximately $13.8 million of the proceeds were used to satisfy the existing indebtedness. The remainder of the proceeds, approximately $9.2 million, is being used to fund renovations to the property. The new mortgage matures March 29, 2017 and bears interest at a rate of 6.21%, with payments of interest-only due for the first 24 months. Thereafter, payments of interest and principal are required under a 20-year amortization schedule.

On April 26, 2007, the Company entered into a program agreement and related operating agreements with CRP/MHI Holdings, LLC, an affiliate of Carlyle Realty Partners V, L.P. and The Carlyle Group (“Carlyle”). The agreements provide for the formation of entities to be jointly owned by the Company and Carlyle, which will source, underwrite, acquire, develop and operate hotel assets and/or hotel portfolios. Under the agreement, the Company will offer the joint venture the first right to acquire potential investment opportunities identified by the Company with total capitalization requirements in excess of $30.0 million. Carlyle has agreed to commit up to $100.0 million of equity capital to the joint venture over a three-year period. Carlyle will fund up to 90% of the equity of an acquisition, and the Company will provide between 10% and 25%.

The Company will receive an asset management fee of 1.5% of the gross revenues of the hotels owned by the venture. In addition, the Company will have a first right of offer with respect to any investment disposed by the joint venture. It is expected that hotels acquired by the joint venture will be managed by MHI Hotels Services, LLC (“MHI Hotels Services”).

On August 1, 2007, the Company entered into an amendment to its credit agreement with Branch Banking & Trust Company (“BB&T”), as administrative agent and lender, dated May 8, 2006. The amended credit agreement with BB&T and certain other lenders reduced the rate of interest on the Company’s revolving credit facility by 0.375%, so that it bears a rate equal to LIBOR plus additional interest ranging from 1.625% to 2.125%. The amendment also reduced the capitalization rate to 8.5% from 10.0% for purposes of determining the asset value of the collateral for the credit facility. Finally, the amendment extended the maturity date of the Company’s revolving credit facility from May 8, 2010 to May 8, 2011.

On August 2, 2007, the Company closed a $23.0 million refinancing of the mortgage on the Hilton Savannah DeSoto. Approximately $9.6 million of the proceeds were used to satisfy the existing indebtedness and pay closing costs. At closing, approximately $2.4 million of the proceeds was paid to the Company. The remainder of the proceeds will be used to fund renovations to the property. The new mortgage matures August 1, 2017 and bears interest at a rate of 6.06%, with payments of interest-only due for the first 36 months. Thereafter, payments of interest and principal are required under a 20-year amortization schedule.

On August 8, 2007, through a joint venture with Carlyle, the Company completed the acquisition of the Crowne Plaza Hollywood Beach Resort, a newly renovated 311-room hotel in Hollywood, Florida for $74.0 million, with Carlyle retaining a 75% equity position. A portion of the purchase was financed with a two-year $57,600,000 non-recourse loan from Société Générale. The loan has three one-year extensions and is interest-only bearing a rate of LIBOR plus 1.94%. The hotel will be managed by MHI Hotels Services. The Company will receive an asset management fee of 1.5% of gross revenues of the hotel in addition to its share of the operating profits and proceeds of sale pursuant to the joint venture agreement.

7

On October 29, 2007, the Company purchased a 250-room hotel in Tampa, Florida, formerly known as the Tampa Clarion Hotel for approximately $13.8 million, including transfer costs. The hotel is located in Tampa’s Westshore corridor and is within two miles of the Tampa International Airport. The Company intends to make extensive renovations and re-open the hotel as the Crowne Plaza Tampa Westshore, as is consistent with the Company’s repositioning strategy, in the first quarter 2009. The Company financed the acquisition with funds drawn on its credit facility.

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 and three months ended March 31, 2008 and 2007.

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.

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 MONY Life Insurance Company (“MONY”). MONY 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 Safe Deposit and Trust Company (“Mercantile”), trustee for the mortgage holder.

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.

Properties Under Development – Investments in hotel property that have been taken out of service for an extensive renovation in anticipation of re-opening under a new brand are included in properties under development. As of March 31, 2008 and December 31, 2007, there were two properties under development; one, in Jeffersonville, Indiana which re-opened on May 1, 2008 as the Sheraton Louisville Riverside, and one in Tampa, Florida which is expected to re-open in the first quarter 2009 as the Crowne Plaza Tampa Westshore.

For properties under development, interest and real estate taxes incurred during the renovation period are capitalized and depreciated over the lives of the renovated assets. Capitalized interest for the three months ended March 31, 2008 and 2007 was $561,888 and $164,400, respectively.

Investment in Joint Venture – Investment in joint venture represents the Company’s non-controlling indirect 25.0% equity interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract. Carlyle owns a 75.0% controlling indirect interest in both the entities. The Company accounts for its investment in the joint venture under the equity method of accounting and is entitled to receive its pro rata share of annual cash flow. The Company also has the opportunity to earn an incentive participation in net sale proceeds based upon the achievement of certain overall investment returns, in addition to its pro rata share of net sale proceeds.

8

Derivative Instruments – The Company accounts for derivative instruments in accordance with the provisions of Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted (“SFAS 133”). Under SFAS 133, all derivative instruments are required to be reflected as assets or liabilities on the balance sheet and measured at fair value. Derivative instruments used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as an interest rate risk, are considered fair value hedges. Derivative instruments used to hedge exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. For a derivative instrument designated as a cash flow hedge, the change in fair value each period is reported in accumulated other comprehensive income in stockholders’ equity to the extent the hedge is effective. For a derivative instrument designated as a fair value hedge, the change in fair value each period is reported in earnings along with the change in fair value of the hedged item attributable to the risk being hedged. For a derivative instrument that does not qualify for hedge accounting or is not designated as a hedge, the change in fair value each period is reported in earnings. The Company does not enter into derivative instruments for speculative trading purposes.

At March 31, 2008 and December 31, 2007, the Company’s interest-rate swap agreement had an estimated fair value of $(1,947,101) and $(1,180,494), respectively, and is included in accounts payable and other accrued liabilities.

Franchise License Fees – Fees expended to obtain or renew a franchise license are amortized over the life of the license or renewal. The un-amortized franchise fees as of March 31, 2008 and December 31, 2007 were $389,195 and $347,862, respectively. Amortization expense totaled $8,698 and $6,238 for the three months ended March 31, 2008 and 2007, 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.

On March 1, 2007, two holders of units in the Operating Partnership redeemed 120,000 units for an equivalent number of shares of the Company’s common stock. On August 28, 2007, one holder redeemed 50,000 units for an equivalent number of shares as well.

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.

Occupancy and Other Taxes – Revenues are reported net of occupancy and other taxes collected from customers and remitted to governmental authorities.

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.

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 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 subsidiaries of 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.

9

The Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FAS No. 109”), on January 1, 2007. As a result of the implementation of FIN 48, the Corporation recognized no material adjustments regarding its tax accounting treatment. The Corporation expects to recognize interest and penalties related to uncertain tax positions, if any, as income tax expense. 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 interests of its employees with those of its shareholders.

Under the Plan, the Company has made restricted stock and deferred stock awards totaling 105,613 shares including 60,000 shares granted under a deferred stock award to its Chief Operating Officer, 25,613 restricted shares issued to certain executives and employees, and 20,000 restricted shares issued to its directors. The 60,000 shares granted under the deferred stock award vest over five years. Regarding the restricted shares awarded to the Company’s directors, the shares vest at the end of the year of service for which the shares are awarded. Of the 60,000 shares granted to the Company’s Chief Operating Officer, only 10,000 shares have vested. Another 14,000 shares were issued January 14, 2008, but do not vest until January 1, 2011. The 25,613 restricted shares issued to certain of the Company’s executives and employees have all vested.

The value of the awards is 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 March 31, 2008, no performance-based stock awards have been granted. 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 $40,695 and $39,671 for the three months ended March 31, 2008 and 2007, respectively.

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. Such reclassifications had no effect on the previously reported net assets.

Recent Account Pronouncements – On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS 157 was originally effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years but was amended on February 6, 2008 to defer the effective date for one year for certain non-financial assets and liabilities. The Company adopted SFAS 157 on January 1, 2008, which had no material impact on its financial statements.

SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). SFAS 157 classifies the inputs used to measure fair value into the following hierarchy:

Level 1	Unadjusted quoted prices in active markets for identical assets or liabilities
Level 2	Unadjusted quoted prices in active markets for similar assets or liabilities, or
	Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
	Inputs other than quoted prices that are observable for the asset or liability
Level 3	Unobservable inputs for the asset or liability

10

We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our interest rate swap liability was valued by discounting future cash flows based on quoted prices for forward interest-rate contracts. As such, these derivative instruments are classified within level 2.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 is effective for fiscal years beginning after November 15, 2007. SFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. The Company adopted SFAS 159 on January 1, 2008, which had no material impact on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R “Business Combinations,” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for acquisitions consummated in fiscal years beginning after December 15, 2008. The Company expects SFAS 141R will have an impact on its consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions the Company consummates after the effective date.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008 with early application prohibited. The Company is currently evaluating what impact SFAS 160 will have on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”(“SFAS 161”). SFAS 161 requires expanded disclosures regarding the location and amounts of derivative instruments in an entity’s financial statements, how derivative instruments and related hedged items are accounted for under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, and how derivative instruments and related hedged items affect an entity’s financial position, operating results and cash flows. SFAS 161 is effective for periods beginning on or after November 15, 2008. The Company is currently evaluating what impact SFAS 161 will have on its consolidated financial statements.

3. Acquisition of Hotel Properties

There were no new acquisitions during the three months ended March 31, 2008.

4. Investment in Hotel Properties

Investment in hotel properties as of March 31, 2008 and December 31, 2007 consisted of the following (in thousands):

	March 31, 2008			December 31, 2007
	(unaudited)
Land and land improvements	$	12,586		$	12,586
Buildings and improvements		106,141			101,205
Furniture, fixtures and equipment		19,553			19,470
		138,280			133,261
Less: accumulated depreciation		(25,059	)		(23,830	)
	$	113,221		$	109,431

5. Credit Facility

As of March 31, 2008, the Company had a secured, revolving credit facility with a syndicated bank group comprised of BB&T, Key Bank National Association and Manufacturers and Traders Trust Company that enables the Company to borrow up to $60.0 million, subject to borrowing base and loan-to-value limitations. The credit facility was established during the

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second quarter of 2006 and replaced a $23.0 million secured, revolving credit facility with BB&T. On August 1, 2007, the Company entered into an amendment to its credit agreement reducing the rate of interest on the credit facility by 0.375%, reducing the capitalization rate to 8.5% from 10.0% for purposes of determining the asset value of the collateral for the credit facility and extending the maturity date by one year. On April 15, 2008, the Company entered into a second amendment to its credit agreement modifying certain provisions of the agreement including increases in the lenders’ revolver commitments by $20.0 million, thereby enabling the Company to borrow up to $80.0 million. The Company had borrowings of $45,887,858 and $34,387,858 at March 31, 2008 and December 31, 2007, respectively.

The facility matures during May 2011 and bears interest at a floating rate of LIBOR plus additional interest ranging from 1.625% to 2.125%. On March 31, 2008, LIBOR was 2.70%. 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 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 was required to purchase an interest rate swap in order to hedge against interest rate risk.

The facility is secured by the Holiday Inn Brownstone in Raleigh, North Carolina, the Hilton Philadelphia Airport, the property under renovation in Jeffersonville, Indiana and the property under renovation in Tampa, Florida, as well as a lien on all business assets of those properties including, but not limited to, equipment, accounts receivable, inventory, furniture, fixtures and proceeds thereof. At March 31, 2008, the four properties had a net carrying value of approximately $71.9 million. Under the terms of the credit facility, the Company must satisfy certain financial and non-financial covenants. As of March 31, 2008 and December 31, 2007, the Company was in compliance with all of the required covenants.

6. Mortgage Debt

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

On August 2, 2007, the Company closed a $23.0 million refinancing of the mortgage on the Hilton Savannah DeSoto. Approximately $9.6 million of the proceeds were used to satisfy the existing indebtedness and pay closing costs. At closing, approximately $2.4 million of the proceeds was paid to the Company. The remaining $11.0 million of the proceeds will fund a product improvement plan for the hotel in connection with the Hilton relicensing. The new mortgage matures August 1, 2017 and bears interest at a rate of 6.06%, with payments of interest-only due for the first 36 months. Thereafter, payments of interest and principal are required under a 25-year amortization schedule. The outstanding balance due on the loan as of March 31, 2008 and December 31, 2007 was $14,500,000 and $14,000,000, respectively.

On March 29, 2007, the Company closed a $23.0 million refinancing of the mortgage on the Hilton Wilmington Riverside. Approximately $13.8 million of the proceeds were used to satisfy the existing indebtedness. The remainder of the proceeds, approximately $9.2 million, is being used to fund renovations to the property. The new mortgage matures March 29, 2017 and bears interest at a rate of 6.21% with payments of interest-only due for the first 24 months. Thereafter, payments of interest and principal are required under a 25-year amortization schedule.

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 $22.0 million. The Trust, for which Mercantile acts as trustee, financed a portion of the purchase price by extending an $18.0 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 mortgage debt maturities as of March 31, 2008 for the following twelve-month periods were as follows ($000s):

March 31, 2009	$	—
March 31, 2010		363
March 31, 2011		18,688
March 31, 2012		869
March 31, 2013		924
Thereafter		43,156
Total future maturities	$	64,000
Less: Funds remaining to be drawn on Hilton Savannah DeSoto mortgage		(8,500	)
Mortgage loan balance, March 31, 2008	$	55,500

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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. In December 2007, the Company signed an amendment to the lease to include rights to the outdoor esplanade adjacent to the leased commercial space. The areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the first of three optional five-year periods expiring October 31, 2011, October 31, 2016 and October 31, 2021, respectively. Rent expense for this operating lease was $13,795 and $10,795 for the three months ended March 31, 2008 and 2007, 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. For the three months ended March 31, 2008 and 2007, rent expense was $23,871.

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 $42,034 for the three months ended March 31, 2008 and 2007.

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, 2012 requiring annual payments of $4,961. Rent expense for the three months ended March 31, 2008 and 2007 was $1,240 and $1,160, respectively.

The Company leases 1,890 square feet of commercial office space in Williamsburg, Virginia under a two-year agreement that expires August 31, 2008. There is a one-year renewal option. For the three months ended March 31, 2008 and 2007, rent expense was $10,707 and $10,395, respectively.

The Company has agreed to lease a parking lot in close proximity to the property under renovation in Jeffersonville, Indiana. The land is leased under an agreement dated August 17, 2007 with the City of Jeffersonville, which in turn leases the property from the State of Indiana. The lease term for the parking lot coincides with that of the lease with the State of Indiana, which expires December 31, 2011. The Company has the right to renew or extend its lease with the City of Jeffersonville pursuant to the conditions of the original lease provided that the City of Jeffersonville is able to renew or extend the underlying lease with the State of Indiana. Minimum annual rents of $33,600 commenced April 1, 2008.

Purchase Commitment – On January 23, 2008, the Company entered into a definitive agreement to purchase the 176-room Hampton Marina Hotel in Hampton, Virginia, for the aggregate purchase price of $7.85 million. On April 24, 2008, the Company completed the purchase. To facilitate the purchase, the Company assumed $5.75 million of existing indebtedness, which bears a rate of 6.5% and matures on July 1, 2016. The loan requires payments of interest as well as escrow deposits for real estate taxes and insurance on a monthly basis. Annual payments of principal are required under a sinking fund schedule beginning July 1, 2008. The remainder of the purchase price as well as closing costs was funded with borrowings on the Company’s credit facility.

Management Agreement – Each of the operating hotels that the Company owned at March 31, 2008 operates under a ten-year master management agreement with MHI Hotels Services, which expires between December 2014 and April 2018 (see Note 9).

Franchise Agreements – As of March 31, 2008, the Company’s hotels, except for those under development, operate under franchise licenses from national hotel companies. Franchise licenses have been obtained for both the Sheraton Louisville Riverside, which opened on May 1, 2008, and the Crowne Plaza Tampa Westshore, expected to open in the first quarter 2009. A franchise license has also been obtained to operate the Hampton Marina Hotel, which the Company purchased in April 2008, as a Crowne Plaza. 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.

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Restricted Cash Reserves – Each month, 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. Each month, contributions to the property improvement fund equal to 4.0% of gross revenues for the Savannah DeSoto Hilton and the Wilmington Riverside Hilton.

Pursuant to the terms of the mortgage on the Crowne Plaza Jacksonville, the Company is required to contribute 4.0% of room revenues to a property improvement fund.

Litigation – The Company is not involved in any legal proceedings other than routine legal proceedings accruing in the ordinary course of business. The Company believes that these routine legal proceedings, in the aggregate, are not material to the Company’s financial condition or results of operation.

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.

In January 2007, the Company issued 13,500 shares of restricted stock to certain executives and independent directors. In March 2007, two holders of units in the Operating Partnership redeemed 120,000 units for an equivalent number of shares of the Company’s common stock. In April 2007, the Company issued 1,500 shares of restricted stock to a new independent director. In August 2007, one holder of units in the Operating Partnership redeemed 50,000 units for an equivalent number of shares of the Company’s common stock. On January 1, 2008 and January 14, 2008, the Company issued 10,000 non-restricted shares and 14,000 restricted shares, respectively to its Chief Operating Officer in accordance with the terms of his employment contract, as amended. On February 6, 2008, the Company issued 18,613 shares of restricted stock to certain executives and independent directors. As of March 31, 2008 and December 31, 20007, the Company had 6,939,613 and 6,897,000 shares of common stock outstanding, respectively.

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 March 31, 2008, 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 March 31, 2008, the total number of Operating Partnership units outstanding was 3,737,607.

9. Related Party Transactions

The following is a summary of the transactions between the Company and MHI Hotels Services (a company that is majority-owned and controlled by the Company’s CEO, its CFO and two members of its Board of Directors):

Accounts Receivable – At March 31, 2008 and December 31, 2007, the Company was due $8,643 and $11,814, 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 March 31, 2008 and 2007, the Company earned $160,000 in leasehold revenue.

Sublease of Office Space – The Company subleases office space in Greenbelt, MD from MHI Hotels Services. Rent expense was $9,510 for the three months ended March 31, 2008 and 2007.

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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 operating hotels that the Company owned at March 31, 2008 are managed by MHI Hotels Services under a master management agreement. MHI Hotels Services also manages the property in Hampton, Virginia which was acquired in April 2008. The master management agreement expires between December 2014 and April 2018. 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. Pursuant to the sale of the Holiday Inn Downtown in Williamsburg, Virginia, one of the hotels initially contributed to the Company upon its formation, MHI Hotels Services has agreed to substitute the Sheraton Louisville Riverside for the Williamsburg property under the master management agreement. The base management fee for the property in Hampton, Virginia is 2.0% through 2009, 2.5% in 2010 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 revenue of all the hotels included in the incentive fee calculation.

The Company paid MHI Hotels Services $458,456 and $486,225 for the three months ended March 31, 2008 and 2007, respectively, in management fees. In addition, estimated incentive management fees of $0 and $41,897 were accrued, but not paid, as of March 31, 2008 and 2007, respectively.

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 $311,870 and $313,350 for the three months ended March 31, 2008 and 2007, respectively.

Construction Management Services – The Company engaged MHI Hotels Services to manage the renovation of the Crowne Plaza Jacksonville and the Hilton Wilmington Riverside as well as the newly acquired property in Jeffersonville, Indiana. For the three months ended March 31, 2008 and 2007, the Company paid $0 and $200,000, respectively in construction management fees.

Charter Vessel Rental – The Company leased the “Jacksonville Princess”, a charter vessel docked adjacent to the Crowne Plaza Jacksonville from MHI Hotels, Inc., an affiliate of MHI Hotels Services on an event-by-event basis for guests of the hotel. Charter rentals for the three months ended March 31, 2008 and 2007 were $0 and $27,791, respectively. Beginning June 1, 2007, the Company no longer charters the “Jacksonville Princess” from MHI Hotels, Inc., but sold catering service to MHI Hotels, Inc. for events on the charter vessel. For the three months ended March 31, 2008, total sales of catering services to MHI Hotels, Inc. was $0.

10. Retirement Plan

The Company began a 401(k) plan for qualified employees on April 1, 2006. The plan is subject to “safe harbor” provisions which require that the Company match 100% of the first 3% of employee contributions and 50% of the next 2% of employee contributions. All Company matching funds vest immediately in accordance with the “safe harbor” provision. Company contributions to the plan for the three months ended March 31, 2008 and 2007 were $22,746 and $10,083, respectively.

11. Unconsolidated Joint Venture

The Company owns a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort and (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract. Carlyle owns a 75.0% indirect controlling interest in both the entities. The joint venture purchased the property on August 8, 2007 and began operations on September 18, 2007. Summarized financial information for this investment, which is accounted for under the equity method, is as follows:

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	March 31, 2008
	(unaudited)
ASSETS
Investment in hotel properties, net	$	75,869,613
Cash and cash equivalents		2,825,487
Restricted cash		1,010,674
Accounts receivable		562,474
Prepaid expenses, inventory and other assets		1,373,169
TOTAL ASSETS	$	81,641,417
LIABILITIES
Mortgage loans	$	57,600,000
Accounts payable and other accrued liabilities		1,309,740
Advance deposits		121,342
TOTAL LIABILITIES		59,031,082
TOTAL MEMBERS’ EQUITY		22,610,335
TOTAL LIABILITIES AND MEMBERS’ EQUITY	$	81,641,417

	Three Months Ended March 31, 2008
	(unaudited)
Revenue
Rooms department	$	3,670,974
Food and beverage department		589,269
Other operating departments		521,480
Total revenue		4,781,723
Expenses
Hotel operating expenses
Rooms department		697,212
Food and beverage department		536,486
Other operating departments		122,986
Indirect		1,657,930
Total hotel operating expenses		3,014,614
Depreciation and amortization		543,076
General and administrative		39,630
Total operating expenses		3,597,320
Operating income		1,184,403
Interest expense		(915,832	)
Interest income		9,478
Net income	$	278,049

12. Income Taxes

The components of the income tax provision (benefit) for the three months ended March 31, 2008 and 2007 are as follows (in thousands):

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	Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
	(unaudited)			(unaudited)
Current:
Federal	$	—		$	—
State		113			1
		113			1
Deferred:
Federal		(520	)		(73	)
State		(99	)		(7	)
		(619	)		(80	)
	$	(506	)	$	(79	)

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

	Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
	(unaudited)			(unaudited)
Statutory federal income tax expense	$	(425	)	$	295
Effect of non-taxable REIT income		(95	)		(368	)
State income tax expense		14			(6	)
	$	(506	)	$	(79	)

As of March 31, 2008, the Company had a net deferred tax asset of approximately $2.0 million; primarily due to current and past years’ net operating losses. These loss carryforwards will begin to expire in 2024 if not utilized by then. The Company believes that it is more likely than not that the deferred tax asset will be realized and that no valuation allowance is required.

13. Earnings per Share

The limited partners’ outstanding limited partnership units in the Operating Partnership (which may be redeemed for common stock upon notice from the limited partners and following the Company’s election to redeem the units for stock rather than cash) have been excluded from the diluted earnings per share calculation as there would be no effect on the amounts since the limited partners’ share of income would also be added back to net income. The computation of basic and diluted earnings per share is presented below.

	Three months ended March 31, 2008			Three months ended March 31, 2007
	(unaudited)			(unaudited)
Net income (loss)	$	(483,417	)	$	602,503
Basic:
Weighted average number of common shares outstanding		6,930,045			6,764,750
Net income per share—basic	$	(0.07	)	$	0.09
Diluted:
Dilutive awards		60,000			60,000
Diluted weighted average number common shares outstanding		6,968,045			6,824,750
Net income per share—diluted	$	(0.07	)	$	0.09

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

14. Subsequent Events

On April 11, 2008, the Company paid the dividend for the first quarter of 2008 that was authorized on January 14, 2008 to those stockholders and unitholders of MHI Hospitality, L.P. of record on March 15, 2008. The dividend was $0.17 per share (unit).

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On April 21, 2008, the Company authorized the payment of a quarterly dividend of $0.17 per share (unit) to the stockholders and unitholders of record as of June 16, 2008. The dividend is to be paid on July 11, 2008.

On April 15, 2008, the Company entered into a second amendment to its credit agreement modifying certain provisions of the agreement including increases in the lenders’ revolver commitments by $20.0 million thereby enabling the Company to borrow up to $80.0 million.

On April 24, 2008, the Company completed the purchase of the 172-room Hampton Marina Hotel in Hampton, Virginia for the aggregate purchase price of $7.85 million. To facilitate the purchase, a subsidiary of the Company assumed $5.75 million of existing indebtedness, which bears a rate of 6.50% and matures on July 1, 2016. The loan requires payments of interest as well as escrow deposits for real estate taxes and insurance on a monthly basis. Annual payments of principal are required under a sinking fund schedule beginning July 1, 2008. The remainder of the purchase price as well as closing costs was funded with borrowings on the Company’s credit facility. The Company intends to make significant renovations and re-brand the hotel as is consistent with the Company’s repositioning strategy.

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 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 (“IPO”) and thereafter consummated the acquisition of six hotel properties (“initial properties”).

Our hotel portfolio currently consists of eight full-service, upper up-scale and mid-scale hotels with 1,971 rooms, which operate under well-known brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn. We also own 25.0% indirect non-controlling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with The Carlyle Group (“Carlyle”) and we have a leasehold interest in a resort condominium facility in Wrightsville Beach, North Carolina.

As of March 31, 2008, we owned the following hotel properties:

Property	Number of Rooms	Location	Date of Acquisition
Operating properties
Hilton Philadelphia Airport	331	Philadelphia, PA	December 21, 2004
Holiday Inn Laurel West	207	Laurel, MD	December 21, 2004
Holiday Inn Brownstone	187	Raleigh, NC	December 21, 2004
Hilton Wilmington Riverside	272	Wilmington, NC	December 21, 2004
Hilton Savannah DeSoto	246	Savannah, GA	December 21, 2004
Crowne Plaza Jacksonville	292	Jacksonville, FL	July 22, 2005
Properties under development
Sheraton Louisville Riverside (1)	186	Jeffersonville, IN	September 20, 2006
Crowne Plaza Tampa Westshore (2)	250	Tampa, FL	October 29, 2007
Total	1,971

(1) The property previously operated as the Louisville Ramada Riverfront Inn re-opened in on May 1, 2008 as the Sheraton Louisville Riverside after undergoing extensive renovations.

(2) The property formerly operated as the Tampa Clarion Hotel in Tampa, Florida is undergoing extensive renovations and is expected to re-open as the Crowne Plaza Tampa Westshore in the first quarter 2009.

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 64.4% 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 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.

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Recent Portfolio Changes

On April 26, 2007, we entered into a program agreement and related operating agreements with CRP/MHI Holdings, LLC, an affiliate of Carlyle Realty Partners V, L.P. and The Carlyle Group (“Carlyle”). The agreements provide for the formation of entities to be jointly owned by us and Carlyle, which will source, underwrite, acquire, develop and operate hotel assets and/or hotel portfolios. Under the agreement, we will offer the joint venture the first right to acquire potential investment opportunities identified by us with total capitalization requirements in excess of $30.0 million. Carlyle has agreed to commit up to $100.0 million of equity capital to the joint venture over a three-year period. Carlyle will fund up to 90% of the equity of an acquisition, and we will provide between 10% and 25%.

We will receive an asset management fee of 1.5% of the gross revenues of the hotels owned by the venture. In addition, we will have a first right of offer with respect to any investment disposed by the joint venture. It is expected that hotels acquired by the joint venture will be managed by MHI Hotels Services.

On August 8, 2007, through our joint venture with Carlyle, we completed the acquisition of the Crowne Plaza Hollywood Beach Resort, a newly renovated 311-room hotel in Hollywood, Florida for $74.0 million, with Carlyle retaining a 75.0% equity position. A portion of the purchase was financed with a two-year $57,600,000 non-recourse loan from Société Générale. The loan has three one-year extensions and is interest-only bearing a rate of LIBOR plus 1.94%. The hotel will be managed by MHI Hotels Services. We also will receive an asset management fee of 1.5% of gross revenues of the hotel in addition to our share of the operating profits and proceeds of sale pursuant to the joint venture agreement.

On October 29, 2007, we purchased a 250-room hotel in Tampa, Florida, formerly known as the Tampa Clarion Hotel for the aggregate purchase price of $13.5 million. We intend to make extensive renovations and re-brand the hotel as a Crowne Plaza, as is consistent with our repositioning strategy. Renovation costs are estimated at $25.0 million. The cost to acquire and renovate the hotel will be funded by additional borrowings on the credit facility.

On April 24, 2008, we completed the purchase of the 172-room Hampton Marina Hotel in Hampton, Virginia for the aggregate purchase price of $7.85 million. To facilitate the purchase, we assumed $5.75 million of existing indebtedness, which bears a rate of 6.50% and matures on July 1, 2016. The loan requires payments of interest as well as escrow deposits for real estate taxes and insurance on a monthly basis. Annual payments of principal are required under a sinking fund schedule beginning July 1, 2008. The remainder of the purchase price as well as closing costs was funded with borrowings on our credit facility. We intend to make significant renovations and re-brand the hotel as is consistent with our repositioning strategy. Renovation costs are estimated at $5.75 million. The cost to renovate the hotel will be initially funded by additional borrowings on the credit facility and subsequently refinancing the existing mortgage on the property.

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.

Results of Operations

The following table illustrates the key operating metrics for the three months ended March 31, 2008 and 2007 for the properties we owned during the respective reporting periods and reflected in net income from continuing operations.

	Three months ended March 31, 2008			Three months ended March 31, 2007
Occupancy %		65.1	%		70.9	%
ADR	$	118.21		$	114.77
RevPAR	$	76.90		$	81.35

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Comparison of the Three Months Ended March 31, 2008 to the Three Months Ended March 31, 2007

Revenue. Total revenue for the three months ended March 31, 2008 was approximately $15.5 million, a decrease of approximately $1.4 million or 8.3% from the three months ended March 31, 2007.

The six properties whose operating results are reflected in net operating income experienced a 4.5% decrease in room revenue despite a 3.0% increase in ADR, which was offset by an 8.2% decrease in occupancy. Most of the decrease in room revenue is attributable to renovations in progress at our Wilmington, North Carolina and Savannah, Georgia properties which impacted occupancy during the quarter. We expect improvements in room revenue at these properties once renovations are completed. We anticipate that renovations in Wilmington will be completed in the second quarter 2008 and that renovations in Savannah will be complete in the first quarter 2009.

The largest decrease in revenue was from food and beverage revenues, which, for the three months ended March 31, 2008 declined to approximately $3.8 million, a decrease of approximately $0.9 million or 19.9% compared to food and beverage revenues for the three months ended March 31, 2007. While room sales from group business has remained strong at properties not undergoing renovation, there has been less demand for banqueting services resulting in a decrease in food and beverage revenue.

Revenue from other operating departments for the three months ended March 31, 2008 increased approximately $0.1 million or 6.1% to approximately $1.0 million compared to other operating revenue for the three months ended March 31, 2007.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses, and management fees, were approximately $12.6 million, an decrease of approximately $0.2 million or 2.0% for the three months ended March 31, 2008 compared to approximately $12.4 million for the three months ended March 31, 2007.

Rooms expense for the three months ended March 31, 2008 increased to approximately $3.1 million, an increase of approximately $0.1 million or 3.6% for the three months ended March 31, 2008 compared to approximately $3.0 million for the three months ended March 31, 2007. Additional charges for laundry services at our Philadelphia property caused by the breakdown of laundry equipment in mid-January have contributed to the increase in rooms expense. New equipment was installed in late April suspending such additional charges.

Food and beverage expenses for the three months ended March 31, 2008 decreased approximately $0.3 million to approximately $3.0 million compared to food and beverage expenses of approximately $3.3 million for the three months ended March 31, 2007. A significant decrease in sales of food and beverage through lower orders of banqueting services at our hotels was partially offset by higher food costs. Indirect expenses at our properties for the three months ended March 31, 2008 remained at approximately the same level of expense for the three months ended March 31, 2007, or approximately $6.3 million.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended March 31, 2008 increased approximately $0.2 million or 13.6% to approximately $1.4 million compared to depreciation and amortization expense of approximately $1.2 million for the three months ended March 31, 2007. With the opening of the Sheraton Louisville Riverside on May 1, 2008 and the purchase of the Hampton Marina Hotel in April 2008, depreciation and amortization expense is expected to increase significantly.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended March 31, 2008 increased approximately $0.1 million or 9.4% to approximately $1.0 million compared to corporate general and administrative expense for the three months ended March 31, 2007 totaling approximately $0.9 million. Additional costs associated with preparation of management’s report on internal controls contributed to the increase.

Interest Expense. Interest expense for the three months ended March 31, 2008 increased approximately $0.1 million or 11.0% to approximately $1.1 million compared to interest expense for the three months ended March 31, 2007, primarily due to increased borrowings on the credit facility. As a result of opening the Sheraton Louisville Riverside and the increased borrowings associated with the purchase of the Hampton Marina Hotel, we expect to see increases in interest expense.

Equity in Joint Venture. Equity in joint venture for the three months ended March 31, 2008 represents our share of the net income of the Crowne Plaza Hollywood Beach Resort. During the three months ended March 31, 2008, the hotel reported occupancy of 65.1%, ADR of $199.36 and RevPAR of $129.71.

Income Taxes. The income tax benefit for the three months ended March 31, 2008 increased to approximately $0.5 million. The income tax benefit is primarily derived from the operations of our TRS lessee. The net operating loss of our TRS lessee for the three months ended March 31, 2008 was greater than the net operating loss attributable to continuing operations for the three months ended March 31, 2007.

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Net Income. The net income for the three months ended March 31, 2008 decreased approximately $1.1 million to a loss of approximately $0.5 million from net income of approximately $0.6 million for the three months ended March 31, 2007 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 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 ended March 31, 2008 and 2007 (unaudited):

	Three Months Ended March 31, 2008			Three Months Ended March 31, 2007
Net income (loss)	$	(483,417	)	$	602,503
Add minority interest		(260,724	)		344,469
Add depreciation and amortization		1,390,923			1,224,461
Add equity in depreciation of joint venture		135,768			—
Subtract gain on disposal of assets		(8,478	)		—
FFO	$	774,072		$	2,171,433
Weighted average shares outstanding		6,930,045			6,764,750
Weighted average units outstanding		3,737,607			3,827,607
Weighted average shares and units		10,667,652			10,632,357
FFO per share and unit	$	0.07		$	0.20

Sources and Uses of Cash

Operating Activities. Our principal source of cash to meet our operating requirements, including distributions to unitholders and stockholders as well as repayments of indebtedness, is the operations of our hotels. Cash flow used in operating activities for the three months ended March 31, 2008 was approximately $0.3 million. We currently expect that the net cash provided by operations will be adequate to fund our continuing operations, debt service and the payment of dividends in accordance with federal income tax laws which require us to make annual distributions to our stockholders of at least 90% of our REIT taxable income, excluding net capital gains. We paid dividends of $0.17 per share (unit) on April 11, 2008, which we funded out of working capital.

Investing Activities. Approximately $10.5 million was spent during the three months ended March 31, 2008 on renovations and capital improvements. Approximately $7.5 million was spent on renovations at the Wilmington Hilton Riverside and the Sheraton Louisville Riverside in order to bring those projects close to completion. We expect that renovations at the both properties will be complete in the second quarter 2008. Renovations at the Savannah Hilton DeSoto and the property in Tampa, Florida continued during the period.

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Financing Activities. During the three months ended March 31, 2008, we borrowed $11.5 million on the credit facility and $0.5 million on the mortgage on the Savannah Hilton DeSoto in order to fund renovations at the Wilmington Hilton Riverside, the Hilton Savannah DeSoto, the Sheraton Louisville Riverside and the property in Tampa, Florida as well as provide working capital.

Capital Expenditures

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. With respect to three of our hotels, the reserve accounts are escrowed accounts with funds deposited monthly and reserved for capital improvements or expenditures. We deposit an amount equal to 4% of gross revenue for both the Hilton Savannah DeSoto and Hilton Wilmington Riverside and 4% of room revenues for the Crowne Plaza Jacksonville. Our intent for the capital expenditures at all hotels is to maintain overall capital expenditures at 4% of gross revenue.

On September 20, 2006, we purchased the Louisville Ramada Riverfront Inn in Jeffersonville, Indiana with the intention of renovating and re-branding the hotel. On February 23, 2007, we obtained a 15-year franchise license agreement with Starwood Hotels and Resorts to brand the property as a Sheraton hotel. Renovation costs are estimated at approximately $15.9 million and the property re-opened May 1, 2008. Approximately $13.4 million had been expended as of March 31, 2008. All costs have been and will be funded by additional borrowings on our credit facility.

In February 2007, the franchise license for the Hilton Wilmington Riverside was renewed and extended to March 2018. To comply with the re-licensing agreement, we must complete a property improvement plan (“PIP”). We estimate the cost of the required renovations to total approximately $11.2 million and be completed in the second quarter 2008. Approximately $10.2 million had been expended as of March 31, 2008. The remaining costs will be funded by additional borrowings on our credit facility.

In July 2007, the franchise license for the Hilton Savannah DeSoto Hotel was renewed and extended to July 2018. To comply with the re-licensing agreement, we must complete a PIP, which we expect to be completed in February 2009 and total approximately $11.0 million. Approximately $3.4 million had been expended as of March 31, 2008. The renovations will be funded by additional draws of $8.5 million on the mortgage that was refinanced in August 2007.

On October 29, 2007, we purchased the property formerly known as the Tampa Clarion Hotel in Tampa, Florida with the intention of renovating and re-branding the hotel. On October 31, 2007, we obtained a 10-year franchise agreement with InterContinental Hotels Group to brand the property as a Crowne Plaza hotel. Renovation costs are estimated at approximately $20.0 million, of which approximately $1.6 million had been expended as of March 31, 2008. The renovations will be funded by additional borrowings on our credit facility.

On April 24, 2008, we purchased the Hampton Marina Hotel in Hampton, Virginia for the aggregate purchase price of $7.85 million. On February 27, 2008, we obtained a 10-year franchise agreement with InterContinental Hotels Group to brand the property as the Crowne Plaza Hampton Harborside. In conjunction with the license agreement, we expect that we will be required to complete a PIP. However, the scope of the required renovations has not been determined. We estimate the cost of renovation to range between $3.0 million and $6.0 million and anticipate that the costs will be expended between the third quarter 2008 and the first quarter 2009. The purchase was facilitated by the assumption of an existing indebtedness of $5.75 million with the remainder funded by borrowings on our credit facility. We anticipate that the required renovations will be funded through a refinance of the existing mortgage and by additional borrowings on our credit facility.

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Liquidity and Capital Resources

As of March 31, 2008, we had cash and cash equivalents of approximately $5.2 million, of which approximately $1.8 million was in restricted reserve accounts and approximately $0.3 million was in real estate tax escrows. As of March 31, 2008, our revolving credit facility, which was amended on April 15, 2008 so that we may borrow up to $80.0 million, had an outstanding balance of approximately $45.9 million We expect that our cash flow from our hotels should be adequate to fund continuing operations, recurring capital expenditures for the refurbishment and replacement of furniture, fixtures and equipment as well as debt service.

We estimate that to complete the capital projects to which we are committed, we will require capital ranging from approximately $46.0 to $50.0 million including the assumption of $5.75 million in mortgage debt in connection with our acquisition of the Hampton Marina Hotel. Most of the capital will be required before the end of the year with no more than $8.0 million required in the first quarter 2009. We expect that $8.5 million will be obtained through additional draws on the mortgage on the Hilton Savannah DeSoto. We believe that the additional borrowing capacity on our credit facility provides us sufficient capital to accommodate our needs for committed capital projects as well as working capital.

Our ability to fund future acquisitions relies on our ability to raise additional capital. Sources of additional capital may include a combination of some or any 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.

Without additional capital, we would have to forego future acquisitions.

Beyond the funding of future acquisitions and development activity, our medium and long-term liquidity needs will generally include 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.

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.

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Off-Balance Sheet Arrangements

Through a joint venture with Carlyle, we own a 25.0% indirect non-controlling interest in an entity (the “JV Owner”) that acquired the 311-room Crowne Plaza Hollywood Beach Resort in Hollywood, Florida. We have the right to receive a pro rata share of operating surpluses as well as an obligation to fund our pro rata share of operating shortfalls. We also have the opportunity to earn an incentive participation in the net proceeds realized from the sale of the hotel based upon the achievement of certain overall investment returns, in addition to our pro rata share of net sale proceeds. The Crowne Plaza Hollywood Beach Resort is leased to another entity (the “Joint Venture Lessee”) in which we also own a 25.0% indirect non-controlling equity interest. Carlyle owns a 75.0% controlling interest in both the Joint Venture and the Joint Venture Lessee. Carlyle may elect to dispose of the Crowne Plaza Hollywood Beach Resort without our consent. We account for our non-controlling 25.0% interest in both the JV Owner and the Joint Venture Lessee under the equity method of accounting.

The acquisition of the Crowne Plaza was funded in part by a mortgage loan in the amount of $57.6 million. The mortgage has a two-year term maturing on August 1, 2009 and bears interest at a rate of LIBOR plus additional interest of 1.94%. The loan can be extended for three one-year periods. The JV Owner executed an interest rate cap agreement capping LIBOR at 6.25%, effectively limiting the rate on the mortgage to 8.19%. Monthly interest-only payments are due throughout the term. The Crowne Plaza Hollywood Beach Resort secures the mortgage. We have provided the lender limited guarantees with respect to this mortgage.

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.

Our expenses, including hotel operating expenses, administrative expenses, real estate taxes and property and casualty insurance are subject to inflation. These expenses are expected to grow with the general rate of inflation, except for energy, liability insurance, property and casualty insurance, property tax rates, employee benefits, and some wages, which are expected to increase at rates higher than inflation.

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.

Geographic Concentration

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

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,

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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 ended March 31, 2008 or 2007.

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 March 31, 2008. 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.

Recent Accounting Pronouncements

On September 15, 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements. The changes to current practice resulting from the application of SFAS 157 relate to the definition of fair value, the methods used to measure fair value, and the expanded disclosures about fair value measurements. SFAS 157 was originally effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years but was amended on February 6, 2008 to defer the effective date for one year for certain non-financial assets and liabilities. We adopted SFAS 157 on January 1, 2008, which had no material impact on our financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 is effective for fiscal years beginning after November 15, 2007. SFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at fair value that are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect different measurement attributes for similar assets and liabilities. We adopted SFAS 159 on January 1, 2008, which had no material impact on our consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141R “Business Combinations,” (“SFAS 141R”). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination, recognizing assets acquired and liabilities assumed arising from contingencies, and determining what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS 141R is effective for acquisitions consummated in fiscal years beginning after December 15, 2008. We expect SFAS 141R will have an impact on our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date.

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In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. This new consolidation method significantly changes the accounting for transactions with minority interest holders. SFAS 160 is effective for fiscal years beginning after December 15, 2008 with early application prohibited. We are currently evaluating what impact SFAS 160 will have on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”(“SFAS 161”). SFAS 161 requires expanded disclosures regarding the location and amounts of derivative instruments in an entity’s financial statements, how derivative instruments and related hedged items are accounted for under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, and how derivative instruments and related hedged items affect an entity’s financial position, operating results and cash flows. SFAS 161 is effective for periods beginning on or after November 15, 2008. We are currently evaluating what impact SFAS 161 will have on our consolidated financial statements.

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 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 Annual Report on Form 10-K and subsequent reports filed with the Securities and Exchange Commission.

These risks and uncertainties 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.

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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 credit facility required us to hedge at least one-half of the maximum borrowing amount with an interest-rate swap, which we purchased on August 8, 2006 on a notional amount of $30.0 million. As of March 31, 2008, derivatives with a fair value of approximately $(2.0) million were included in accounts payable and other accrued liabilities. 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 March 31, 2008, we had $55.5 million of fixed-rate debt and approximately $45.9 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.75%. 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. Our variable-rate debt is exposed to changes in interest rates, specifically the change in 30-day LIBOR, but would be limited to the effect on the gap between the balance on the credit facility and the $30.0 million notional amount of the interest-rate swap purchased on August 8, 2006. Assuming that the amount outstanding under our credit facility remains at approximately $45.9 million, the balance at March 31, 2008, the impact on our annual interest incurred and cash flows of a one percent change in 30-day LIBOR would be approximately $159,000.

As of December 31, 2007, we had $55.0 million of fixed-rate debt and approximately $34.4 million of variable-rate debt. The weighted average interest rate on the fixed-rate debt was 6.76%. At that date, our variable-rate debt was exposed to changes in interest rates, specifically the change in 30-day LIBOR, but was limited to the effect on the gap between the balance on the credit facility and the $30.0 million notional amount of the interest-rate swap. Had the amount outstanding under the credit facility remained at approximately $34.4 million, the balance at December 31, 2007, the impact on our annual interest incurred and cash flows of a one percent change in 30-day LIBOR would have been approximately $44,000.

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.

As of March 31, 2008, 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.

Item 4T. Controls and Procedures

Not applicable.

27

PART II

Item 1. Legal Proceedings

We are not involved in any legal proceedings other than routine legal proceedings occurring in the ordinary course of business. We believe that these routine legal proceedings, in the aggregate, are not material to our financial condition and results of operations.

Item 1A. Risk Factors

Not applicable.

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

At the Company’s 2008 Annual Meeting of Stockholders on April 22, 2008 (“Annual Meeting”), the total number of shares of the Company’s voting capital stock entitled to vote was 6,939,613, and a total of 6,710,846 shares of the Company’s voting capital stock were present in person or by proxy.

At the Annual Meeting, the Company’s stockholders re-elected all seven incumbent directors listed below as Directors of the Company until its 2009 Annual Meeting of Stockholders. The following table sets forth, for each of the directors elected, the number of votes cast for and the number of votes withheld:

	Votes For	Votes Withheld
Andrew M. Sims	6,468,385	242,460
General Anthony C. Zinni	6,656,114	54,730
Kim E. Sims	6,469,085	241,760
Christopher L. Sims	6,464,095	246,750
Edward S. Stein	6,653,725	57,120
James P. O’Hanlon	6,657,515	53,330
J. Paul Carey	6,657,514	53,330

The Company’s stockholders also ratified the selection of PKF Witt Mares, PLC, an independent registered public accounting firm, as the Company’s independent accountants for the 2008 fiscal year. There were 6,447,682 votes cast for ratification, 250,519 votes against, and 12,645 shares abstained.

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
3.1	Articles of Amendment and Restatement of MHI Hospitality Corporation.(1)
3.2	Amended and Restated Bylaws of MHI Hospitality Corporation.(2)
10.21B	Second Amendment to Credit Agreement dated April 15, 2008 (3)
10.31	Assumption and Consent Agreement by and among Hampton Hotel Associates LLC, US Bank National Association and Hampton Redevelopment and Housing Authority dated April 24, 2008
10.32	Loan Agreement between Hampton Redevelopment and Housing Authority and Olde Hampton Hotel Associates dated December 1, 1998
10.33	$7,430,000 Hampton Redevelopment and Housing Authority First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project) Series 1998A
10.34	Indenture of Trust between Hampton Redevelopment and Housing Authority and Crestar Bank dated December 1, 1998
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

(1) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrant’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on October 20, 2004. (333-118873)

(2) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrant’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004. (333-118873)

(3) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 17, 2008.

29

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: May 7, 2008	By:	/s/ Andrew M. Sims
		Andrew M. Sims
		Chief Executive Officer and Chairman of the Board
	By:	/s/ William J. Zaiser
		William J. Zaiser
		Chief Financial Officer

30

EXHIBIT INDEX

Exhibit Number	Description of Exhibit
3.1	Articles of Amendment and Restatement of MHI Hospitality Corporation.(1)
3.2	Amended and Restated Bylaws of MHI Hospitality Corporation.(2)
10.21B	Second Amendment to Credit Agreement dated April 15, 2008 (3)
10.31	Assumption and Consent Agreement by and among Hampton Hotel Associates LLC, US Bank National Association and Hampton Redevelopment and Housing Authority dated April 24, 2008
10.32	Loan Agreement between Hampton Redevelopment and Housing Authority and Olde Hampton Hotel Associates dated December 1, 1998
10.33	$7,430,000 Hampton Redevelopment and Housing Authority First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project) Series 1998A
10.34	Indenture of Trust between Hampton Redevelopment and Housing Authority and Crestar Bank dated December 1, 1998
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

(1) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrant’s Pre-Effective Amendment No. 1 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on October 20, 2004. (333-118873)

(2) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrant’s Pre-Effective Amendment No. 5 to its Registration Statement on Form S-11 filed with the Securities and Exchange Commission on December 13, 2004. (333-118873)

(3) Incorporated by reference to the corresponding exhibit previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 17, 2008.

31

EX-10.31

Exhibit 10.31

Document prepared by

Williams Mullen

222 Central Park Ave., Suite 1700

Virginia Beach, VA 23462

ASSUMPTION AND CONSENT AGREEMENT

(OLDE HAMPTON HOTEL ASSOCIATES PROJECT)

THIS ASSUMPTION AND CONSENT AGREEMENT (this “Agreement”) is made as of April 24, 2008, by and among HAMPTON HOTEL ASSOCIATES LLC, a Delaware limited liability company (“Purchaser”), U.S. BANK NATIONAL ASSOCIATION, as trustee (the “Trustee”) and HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY (the “Issuer”).

WITNESSETH:

WHEREAS, pursuant to that certain Indenture of Trust, dated as of December 1, 1998 (the “Indenture”), by and between the Issuer and Crestar Bank, predecessor-in-interest to the Trustee, the Issuer issued its $8,640,000 First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project), Series 1998A (the “1998A Bonds”) and its $390,000 Taxable First Mortgage Revenue Bonds (Olde Hampton Hotel Associates Project), Series 1998B (the “1998B Bonds”, and together with the 1998A Bonds, collectively the “Bonds”); and

WHEREAS, the 1998A Bonds were issued as Bond R-1 in the principal amount of $1,210,000 with a maturity date of July 1, 2003, and as Bond R-2 in the principal amount of $7,430,000 with a maturity date of July 1, 2016; and

WHEREAS, Bond R-1 has matured and is no longer outstanding and Bond R-2 remains outstanding with an outstanding principal balance of $5,750,000; and

WHEREAS, the 1998B Bonds have matured and are no longer outstanding; and

WHEREAS, the proceeds of the Bonds were loaned to Olde Hampton Hotel Associates, a Virginia limited partnership (“OHHA”) pursuant to a Loan Agreement, dated as of December 1, 1998 (the “Loan Agreement”), by and between the Issuer and OHHA for the purpose of refinancing a 172-room hotel and parking facility, including certain retail space located in Hampton, Virginia with all necessary related equipment (the “Project”); and

WHEREAS, OHHA’s obligations under the Loan Agreement are evidenced by its $8,640,000 Promissory Note, dated December 18, 1998 (the “Series A Note”), and its $390,000 Promissory Note, dated December 18, 1998 (the “Series B Note”, and together with the Series A Note, collectively the “Notes”); and

WHEREAS, the Series B Note has been fully paid and the outstanding principal balance on the Series A Note is $5,750,000; and

WHEREAS, as additional security for the payment of the Notes, OHHA (i) assigned its rights, title and interest in all leases of the Project and rents and profits therefrom pursuant to an Assignment of Rents and Leases, dated as of December 1, 1998 (the “Assignment”), between OHHA and the Trustee and (ii) granted a security interest to the Trustee in certain Collateral as defined and described in the Security Agreement dated as of December 1, 1998 (the “Security Agreement”), between OHHA and the Trustee; and

WHEREAS, the Issuer assigned to the Trustee, all of its rights, title and interest in the Loan Agreement and the Notes; and

WHEREAS, to secure the payment of the Notes, OHHA granted a lien on, and security interest in, the Project pursuant to a Deed of Trust and Security Agreement, dated as of December 1, 1998 (the “Deed of Trust”), from OHHA to the deed of trust trustees named therein for the benefit of the Trustee, which Deed of Trust is recorded in the Clerk’s Office of the Circuit Court of the City of Hampton, Virginia in Deed Book 1269, at page 456; and

WHEREAS, on October 1, 2007, OHHA conveyed fee simple title to the Project to Hampton Economic Development Corporation, a Virginia corporation (“HEDC”), subject to the lien of the Deed of Trust, but HEDC did not assume the obligations of OHHA under the Loan Agreement or the Notes; and

WHEREAS, HEDC now desires to convey the Project to the Purchaser, and in connection therewith the Purchaser desires to assume the obligations of OHHA accruing from and after the date hereof under the documents appearing on Exhibit A attached hereto and made a part hereof, all such documents being hereinafter collectively referred to as the “Documents”; and

WHEREAS, Section 5.11 of the Loan Agreement prohibits the sale of the Project; and

WHEREAS, Section 5.8(c) of the Loan Agreement requires that any franchise for the operation of the Project must be acceptable to the Majority Owners, as that term is defined in the Loan Agreement; and

WHEREAS, Section 5.15 of the Loan Agreement requires that any management company for the Project must be acceptable to the Majority Owners; and

WHEREAS, the Purchaser wishes to obtain the consent of the Issuer, the Trustee and the Majority Owners to (i) the sale of the Project to the Purchaser by HEDC pursuant to the Agreement for Sale and Purchase of Property, dated January 23, 2008 and any subsequent amendments thereto (the “Purchase Agreement”), (ii) the assumption of all obligations of OHHA under the Documents by the Purchaser, (iii) the management of the Project subsequent to such sale by MHI Hotel Services, LLC pursuant to the Hotel Master Management Agreement, dated as of December 31, 2004 (the “Management Agreement”), between MHI Hotel Services, LLC and MHI Hospitality TRS, LLC and (iv) the operation of the Project subsequent to such sale as a Crowne Plaza Hotel pursuant to a Crowne Plaza Hotel Conversion License Agreement with Holiday Hospitality Franchising, Inc. to be dated the date of its execution and delivery (the “License Agreement”); and

2

WHEREAS, the form of the opinion to be rendered by counsel for the Purchaser providing that this Agreement is binding and enforceable against the Purchaser and the form of the opinion to be rendered by Bond Counsel have each been tendered to the Issuer and Trustee and are being executed and delivered simultaneously with the execution and delivery hereof.

NOW, THEREFORE, in consideration of the foregoing and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties, as applicable, here agree as follows:

1. Purchaser hereby assumes all of OHHA’s rights and obligations under the Documents accruing on or after the date hereof. Purchaser assumes no obligations for any losses, claims, lawsuits or damages of any kind arising in connection with the operation of the Project prior to the date hereof or any violations of the Documents or obligations incurred or arising thereunder prior to the date hereof. Notwithstanding anything contained herein to the contrary, Purchaser’s assumption of obligations set forth herein is expressly made pursuant to the liabilities and obligations under the Documents and subject to all exculpatory, non-recourse and other similar provisions contained in the Documents which limit the liability of the “Company” thereunder.

2. By their execution of this Agreement, the Issuer and the Trustee, duly acting pursuant to written authorization on behalf of the Majority Owners, hereby consent to (i) HEDC’s sale of the Project to the Purchaser pursuant to the Purchase Agreement, (ii) to the assumption of all obligations under the Documents by the Purchaser as described herein, (iii) to the management of the Project subsequent to the sale of the Project to the Purchaser by MHI Hotel Services, LLC pursuant to the Management Agreement, and (iv) the operation of the Project subsequent to the sale of the Project to the Purchaser as a Crowne Plaza Hotel pursuant to the License Agreement.

3. The Purchaser agrees to observe and perform all requirements imposed upon the “Company” by the Indenture.

4. The Supplement to Loan Agreement and Restructure Agreement, dated as of December 31, 2004 (the “Supplement”), by and between the Issuer and OHHA is hereby terminated and the modifications made to the Loan Agreement pursuant to Section 3.1 of the Supplement are hereby cancelled and of no further legal force and effect. The assumption by the Purchaser of OHHA’s obligations under the Loan Agreement hereunder shall be as if the Supplement was never executed and delivered, and as a result the original provisions of Section 5.8(a) of the original Loan Agreement shall govern the Issuer, the Purchaser and the Trustee.

5. This Agreement shall be binding upon and inure to the benefit of the parties, and their successors and assigns, and the provisions hereof may not be modified without the written approval and consent of all parties hereto.

3

6. This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute one and the same instrument.

7. From and after the date hereof, all notices required or permitted to be sent to the “Company” under the Documents and the Indenture shall be sent to Purchaser at the following address, in the manner required under the Documents or the Indenture:

Hampton Hotel Associates LLC

c/o MHI Hospitality Corporation

4801 Courthouse Street, Suite 201

Williamsburg, Virginia 23188

Attn: David Folsom, Chief Operating Officer

All notices required or permitted to be sent to the Trustee under the Documents and the Indenture shall be sent to the Trustee at the following address, in the manner required under the Documents or the Indenture:

U.S. Bank National Association

Corporate Trust Services

1021 East Cary Street, 18^th Floor

Richmond, Virginia 23219

8. This Agreement shall be governed in all respects by the laws of the Commonwealth of Virginia.

(Signature pages to follow)

4

IN WITNESS WHEREOF, the parties have caused this Assumption and Consent Agreement to be executed by their duly authorized representatives as of the date first written above.

ISSUER:
HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY
By:	/s/ Eleanor Brown
	Chairman

COMMONWEALTH OF VIRGINIA

CITY/COUNTY OF                             ; to wit:

The foregoing instrument was acknowledged before me,                                         , Notary Public, this          day of April, 2008, by                                         , who is personally known to me/presented                      as identification.                              voluntarily acknowledged this instrument as Chairman of the Hampton Redevelopment and Housing Authority.

Notary Public

Registration Number:

My commission expires:

5

PURCHASER:
HAMPTON HOTEL ASSOCIATES LLC, a Delaware limited liability company
By:	/s/ David R. Folsom
	David R. Folsom
	Managing Member

COMMONWEALTH OF VIRGINIA

CITY/COUNTY OF                             ; to wit:

The foregoing instrument was acknowledged before me,                                         , Notary Public, this          day of April, 2008, by David R. Folsom, who is personally known to me/who presented                      as identification. David R. Folsom voluntarily acknowledged this instrument as Managing Member of Hampton Hotel Associates, LLC.

Notary Public

Registration Number:

My commission expires:

6

TRUSTEE:
U.S. BANK NATIONAL ASSOCIATION, as Trustee
By:	/s/ Christopher H. Gehman
Name:	Christopher H. Gehman
Title:	Vice President

STATE OF                             

CITY/COUNTY OF                             ; to wit:

The foregoing instrument was acknowledged before me,                                         , Notary Public, this          day of April, 2008, by                                         , who is personally known to me/who presented                      as identification.                      voluntarily acknowledged this instrument as                      of U.S. Bank National Association.

Notary Public

Registration Number:

My commission expires:

7

EXHIBIT A

TO ASSUMPTION AND CONSENT AGREEMENT

1. Loan Agreement

2. Series A Note

3. Deed of Trust

4. Security Agreement

5. Assignment of Rents and Leases

6. Continuing Disclosure Agreement, dated December 1, 1998

7. Any and all ancillary documents and certificates (including any amendments thereto) executed by OHHA and relating to the Bonds

8

EX-10.32

Exhibit 10.32

LOAN AGREEMENT

between

HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY

and

OLDE HAMPTON HOTEL ASSOCIATES, A VIRGINIA LIMITED PARTNERSHIP

Dated as of December 1, 1998

NOTE: THIS LOAN AGREEMENT HAS BEEN ASSIGNED TO, AND IS SUBJECT TO A SECURITY INTEREST IN FAVOR OF, CRESTAR BANK, RICHMOND, VIRGINIA, AS TRUSTEE UNDER AN INDENTURE OF TRUST DATED AS OF THE DATE HEREOF, BETWEEN THE AUTHORITY AND SUCH TRUSTEE, AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME. INFORMATION CONCERNING SUCH SECURITY INTEREST MAY BE OBTAINED FROM THE TRUSTEE AT 919 EAST MAIN STREET, RICHMOND, VIRGINIA 23219.

TABLE OF CONTENTS

ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION
SECTION 1.1.	Definitions	1
SECTION 1.2.	Rules of Construction	4
ARTICLE II REPRESENTATIONS AND FINDINGS
SECTION 2.1.	Representations and Findings by Authority	4
SECTION 2.2.	Representations, Covenants and Warranties of the Company	5
ARTICLE III THE PROJECT; ISSUANCE OF THE BONDS
SECTION 3.1.	Issuance of Bonds; Application of Bond Net Proceeds	7
SECTION 3.2.	Compliance with Indenture	7
SECTION 3.3.	Limitation of Authority’s Liability	7
SECTION 3.4.	Title Insurance	7
SECTION 3.5.	Recordation	7
ARTICLE IV PAYMENT
SECTION 4.1.	Amounts Payable	8
SECTION 4.2.	Payments Assigned	9
SECTION 4.3.	Default in Payments	9
SECTION 4.4.	Obligations of Company Unconditional	9
SECTION 4.5,	Actions Concerning Company	9
ARTICLE V SPECIAL REPRESENTATIONS AND COVENANTS
SECTION 5.1.	Maintenance and Use of Project	10
SECTION 5.2.	Insurance of Project	10
SECTION 5.3.	Inspection of Project	12
SECTION 5.4.	Indemnification by Company	12
SECTION 5.5.	Liens and Encumbrances	13
SECTION 5.6.	Governmental Charges	13
SECTION 5.7	Financial Records	14
SECTION 5.8.	Additional Covenants	15
SECTION 5.9.	Maintenance of Existence and Management	16
SECTION 5.10.	Environmental Matters	16
SECTION 5.11.	Restrictions on Mortgage, Sale or Assignments	17

i

SECTION 5.12.	References to Bonds Ineffective after Bonds Paid and Other Obligations Satisfied	17
SECTION 5.13.	Certificate as to No Event of Default	17
SECTION 5.14.	Notice of Suits	17
SECTION 5.15.	Management Fee Subordination and Selection of Successor Management Company	18
SECTION 5.16.	Permitted Debt	18
SECTION 5.17.	Continuing Disclosure	19
SECTION 5.18.	Special Arbitrage Covenants	19
SECTION 5.19.	Tax-Exempt Status of Series 1998A Bonds	20
ARTICLE VI DAMAGE, DESTRUCTION, CONDEMNATION AND OTHER LOSS OF TITLE
SECTION 6.1.	Damage, Destruction, Condemnation and Other Loss of Title	21
SECTION 6.2	Net Proceeds of Business Interruption Insurance	23
ARTICLE VII EVENTS OF DEFAULT AND REMEDIES
SECTION 7.1.	Event of Default Defined	23
SECTION 7.2.	Remedies on Default	25
SECTION 7.3.	No Remedy Exclusive	25
SECTION 7.4.	Attorneys’ Fees and Other Expenses	25
SECTION 7.5.	No Additional Waiver Implied by One Waiver	26
ARTICLE VIII TERMINATION OF AGREEMENT AND PREPAYMENT
SECTION 8.1.	Prepayment in Certain Events	26
SECTION 8.2.	General Option to Prepay the Notes	27
SECTION 8.3.	Mandatory Payments	27
SECTION 8.4.	Amount Required for and Manner of Payment	27
SECTION 8.5.	Effect of Prepayment	27
ARTICLE IX MISCELLANEOUS
SECTION 9.1.	Term of Agreement; Amounts Remaining in Funds	27
SECTION 9.2.	Notices, etc	27
SECTION 9.3.	Amendments to Agreement and Notes	28
SECTION 9A	Successors and Assigns	28
SECTION 9.5.	Severability	28
SECTION 9.6.	Non-Recourse	28
SECTION 9.7.	Applicable Law; Entire Understanding	29
SECTION 9.8.	Counterparts	29

ii

Testimonium	30
Signatures	30
Receipt	31
Exhibit A: Form of Notes

iii

This LOAN AGREEMENT, dated as of December 1, 1998, between the HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY, a political subdivision of the Commonwealth of Virginia (the “Authority”), and OLDE HAMPTON HOTEL ASSOCIATES, A VIRGINIA LIMITED PARTNERSHIP (the “Company”), provides;

W I T N E S S E T H :

WHEREAS, the Authority is a political subdivision of the Commonwealth of Virginia created by Chapter 1, Title 36, Code of Virginia of 1950, as amended (the “Act”) and, authorized thereby to make loans for assistance in acquisition, construction, equipping or maintaining commercial or other buildings and to issue its revenue bonds therefor;

WHEREAS, the Peninsula Ports Authority of Virginia issued its $10,000,000 Revenue Refunding Bonds (Olde Hampton Hotel Associates Project), Series 1986 (the “PPAV Bonds”), to refund its prior bonds issued to finance a portion of the cost of the acquisition, construction and equipping of a hotel, currently operated as a Radisson Hotel, and a parking garage containing certain retail space, all located in a redevelopment project in the City of Hampton, Virginia (the “Project”);

WHEREAS, to further the purposes of the Act, the Authority proposes to issue and sell its $8,640,000 First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project), Series 1998A (the “Series 1998A Bonds”), and its $390,000 Taxable First Mortgage Revenue Bonds (Olde Hampton Hotel Associates Project), Series 1998B (the “Series 1998B Bonds” and collectively with the Series 1998A Bonds, the “Bonds”), pursuant to an Indenture of Trust dated as of the date hereof (the “Indenture”), between the Authority and Crestar Bank, as Trustee, for the benefit of the Company for the purpose of redeeming the outstanding principal, amount of the PPAV Bonds and paying certain costs related to such issuance and redemption, in order to refinance the Project; and

WHEREAS, in consideration thereof, the Company will deliver to the Authority two non-recourse promissory notes (the “Notes”), one in the principal amount of $8,640,000, with respect to the Series 1998A Bonds, and one in the principal amount of $390,000 with respect to the Series 1998B Bonds, each in the form attached as Exhibit A ;

NOW, THEREFORE, for and in consideration of the premises and the mutual covenants hereinafter contained, the parties hereto covenant and agree as follows:

ARTICLE I

DEFINITIONS AND RULES OF CONSTRUCTION

SECTION 1.1. Definitions. All words and terms defined in Article I of the Indenture shall have the same meanings in this Loan Agreement, unless the context otherwise requires. In addition, the following words and terms shall have the following meanings, unless the context otherwise requires:

“Bond Documents” shall mean this Loan Agreement, the Indenture, the Bond Purchase and Placement Agreement, the Notes, the Bonds, the Deed of Trust, the Security Agreement and the Assignment.

“City” means the City of Hampton, Virginia.

“Consultant” means a nationally recognized consultant or firm of consultants, or an independent certified public accountant or firm of independent certified public accountants, which is qualified and has skill and experience in the preparation of lodging industry management studies and financial feasibility studies for use in connection with the financing and operation of facilities similar to the Project and which is approved by the Majority Owners.

“Continuing Disclosure Agreement” means the Continuing Disclosure Agreement dated as of the date hereof entered into by the Company in accordance with Section 5.17.

“Damages” means liabilities, obligations, claims, damages, penalties, fines, losses, costs and expenses, including without limitation reasonable legal counsel fees and expenses.

“Debt” means, without duplication, (a) all indebtedness or obligations of the Company for borrowed moneys or which has been incurred in connection with the acquisition, equipping or operating of the Project; (b) all indebtedness, no matter how created or the purpose for the incurrence of such indebtedness, secured by the Project or any portion thereof or its revenues; (c) the liability of the Company under any lease or installment purchase contract of real or personal property which is properly capitalized on the balance sheet of the Company in accordance with generally accepted accounting principles; and (d) with respect to any guaranty by the Company, that portion of the principal amount of the indebtedness or other obligation guaranteed or in effect guaranteed by the Company.

“Equipment Debt” means debt incurred or assumed by the Company to acquire (by lease, purchase or otherwise), and to be secured solely by, equipment, machinery, fixtures, motor vehicles and other personal property to be used in the operation of the Project.

“Event of Default” shall mean any of the events enumerated in Section 7.1.

“GAAP” means generally accepted accounting principles, consistently applied.

“Indemnitees” means the Authority, the Trustee, the Deed of Trust Trustees, Bondholders and their respective past, present and future officers, commissioners, directors, employees and agents.

“Insurance Consultant” shall mean a person or firm appointed by the Company and reasonably satisfactory to the Trustee, qualified to assess insurance risks and to recommend insurance coverage for lodging facilities and organizations engaged in operations similar to that of the Project, and who may be a broker or agent with whom the Company transacts business.

“Majority Owners” means the holders of a majority in principal amount of Bonds then Outstanding.

“Management Company” shall mean (a) KSW Management, L.L.C., a Virginia limited liability company or (b) such successors and assigns which are approved by the Majority Owners,

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“Net Income” shall mean (a) all operating revenues of the Company actually received by the Company plus interest earned on funds and accounts held under the Indenture and available for transfer to the Bond Fund (not including bad debt allowances, unrealized gains or losses or any gain or loss from release of debt or sale of an asset not in the ordinary course of business or other extraordinary items and not including proceeds of insurance other than business interruption insurance) less (b) all reasonable operating expenses of the Company relating to the Project, including regular management fees and deposits to the Replacement Reserve Fund, but excluding from such operating expenses, interest on any line of credit held in the Debt Service Reserve Fund, interest or principal on the Bonds or any other indebtedness, depreciation, amortization, any extraordinary fees or expenses payable to any partner of the Company, bad debt reserves, partnership dues, or losses on sales of assets, all determined in accordance with generally accepted accounting principles consistently applied.

“Net Proceeds” when used with respect to any insurance recovery or condemnation award, shall mean the gross proceeds from such insurance recovery or condemnation award remaining after payment of reasonable attorneys’ fees, fees and expenses of the Trustee and all other expenses properly incurred in the collection of such gross proceeds.

“Payment of the Bonds” shall mean payment in full of the principal of, premium, if any, and interest on the Bonds or provision for such payment sufficient to discharge the Indenture as provided therein.

“Permitted Debt” means (a)(i) the Company’s obligations to make payments pursuant to this Loan Agreement under the Notes and (ii) any Debt incurred to redeem or refund Permitted Debt, and (b)(i) any Equipment Debt, (ii) any unsecured Debt and (iii) any Subordinated Debt incurred by the Company, all in accordance with Section 5.16 of this Agreement.

“Permitted Encumbrances” shall mean, as of any particular time, (a) liens for ad valorem taxes and special assessments not then due or payable; (b) the Loan Agreement, the Security Agreement, the Deed of Trust, the Assignment and any security interests or other liens created thereby; (c) utility, access and other easements and rights of way, reciprocal easements, operating agreements, management contracts, mineral rights, restrictions and exceptions that will not interfere with or impair the operations of the Project and specifically including those set forth on Schedule B-l to, or that are insured over by, the mortgagee title policy described in Section 207(e) of the Indenture, or that will not interfere with or impair the operation of the Project; (d) unfiled mechanics’ and materialmen’s liens or mechanics’ and materialmen’s liens permitted by Section 18 of the Deed of Trust; (e) easements and other rights permitted to be granted pursuant to Section 7 of the Deed of Trust; and (f) liens on equipment or other property subject to leases or subordinate liens to the extent permitted by Section 5.16 of this Loan Agreement.

“Significant Owner” shall mean any owner of $500,000 or more of the principal amount of Bonds, including beneficial owners thereof. For purposes of determining whether an owner holds at least $500,000 in aggregate principal amount of Bonds Outstanding for the purposes of this Loan Agreement, (a) ownership by owners which are affiliates shall be aggregated, and (b) the amount of the Bonds owned shall be based upon the original principal amount of the Bonds owned without regard to redemptions. For such purpose, an owner is an affiliate of another if the first controls the second, is controlled by the second or is under common control with the second, or if both owners share a common investment advisor (or affiliated investment advisors). The Trustee shall be entitled to rely upon a certificate of any owner with respect to such matters.

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“Subordinated Debt” means (a) the $1,851,000 loan to the Company from the Authority evidenced by the Company’s amended and restated promissory note and secured by an amended and restated deed of trust, each dated as of April 1, 1994, pursuant to the terms of Urban Development Action Grant Agreement No. B-85-AA-51-0203, with a Revision and Amendment thereto dated February 28, 1986, and a Second Revised Loan Agreement dated as of December 5, 1985, amended by a Modification and Extension Agreement dated as of April 1, 1994 (the “Second Agreement”), among the Authority, the City and the Company; (b) the $3,477,000 loan to the Company from the Authority evidenced by the Company’s amended and restated promissory note and secured by an amended and restated deed of trust, each dated as of April 1, 1994, pursuant to the terms of the Second Agreement; (c) the $1,000,000 line of credit to the Company from the Authority evidenced by the Company’s amended and restated promissory note and an amended and restated deed of trust each dated as of April 1, 1994, pursuant to the terms of the Second Agreement; and (d) any replacement Debt issued therefor secured by a lien on the Project or Project revenues that is subordinate to the lien of the Deed of Trust and to the payments secured thereby.

SECTION 1.2. Rules of Construction. The following rules shall apply to the construction of this Loan Agreement unless the context otherwise requires:

(a) Words importing the singular number shall include the plural number and vice versa.

(b) Words importing the prepayment or redemption or calling for prepayment or redemption of Bonds shall not be deemed to refer to or connote the Payment of the Bonds at their stated maturity.

(c) All references herein to particular articles or sections are references to articles or sections of this Loan Agreement.

(d) The headings herein are solely for convenience of reference and shall not constitute apart of this Loan Agreement, nor shall they affect its meaning, construction or effect.

ARTICLE II

REPRESENTATIONS AND FINDINGS

SECTION 2.1. Representations and Findings by Authority. The Authority makes the following representations and findings as the basis for its undertakings hereunder:

(a) The Authority is duly organized under the Act and has the power to (i) execute and deliver this Loan Agreement, the assignments of the Notes, the Indenture and the Bonds and to perform its obligations hereunder and thereunder, (ii) issue the Bonds to refinance the Company’s acquisition and construction of the Project, and (iii) carry out its other obligations hereunder, under the Indenture and the Bonds. The Authority by proper corporate action has duly authorized the execution and delivery of this Loan Agreement the assignments of the Notes, and the Indenture, the performance of its obligations hereunder and thereunder and the issuance of the Bonds and, simultaneously with the execution and delivery of this Loan Agreement, has duly executed and delivered the Indenture, and issued and sold the Bonds.

(b) The Authority is not in default in the payment of the principal of or interest on any of its indebtedness for borrowed money and is not in default under any instrument under or subject to which any indebtedness for borrowed money has been incurred, and no event has occurred and is continuing under the provisions of any such instrument that with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder.

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(c) The Authority is not (i) in violation of the Act or any existing law, rule or regulation applicable to it or (ii) in default under any indenture, mortgage, deed of trust, lien, lease, contract, note, order, judgment, decree or other agreement, instrument or restriction of any kind to which any of its assets are subject. The execution and delivery by the Authority of this Loan Agreement, the assignments of the Notes, the Indenture and the Bonds, and its compliance with the terms and conditions hereof and thereof will not conflict with or result in the breach of or constitute a default under any of the above described documents or other restrictions.

(d) No further approval, consent or withholding of objection on the part of any regulatory body, federal, state or local, is required in connection with (i) the issuance and delivery of the Bonds by the Authority, (ii) the execution or delivery of or compliance by the Authority with the terms and conditions of this Loan Agreement or the Indenture, or (iii) the assignment by the Authority of its rights under this Loan Agreement and the Notes (except for the Unassigned Rights of the Authority). The performance by the Authority of its obligations in the manner and under the terms and conditions as provided herein will comply with all applicable federal, state and local laws and any rules and regulations promulgated thereunder by any regulatory authority or agency,

(e) No litigation, inquiry or investigation of any kind in or by any judicial or administrative court or agency is pending or, to its knowledge, threatened against the Authority with respect to (i) the organization and existence of the Authority, (ii) its authority to execute or deliver this Loan Agreement, the Indenture or the Bonds, (iii) the validity or enforceability of any of such documents or instruments or the transactions contemplated hereby or thereby, (iv) the title of any officer of the Authority who executed such documents or instruments, or (v) any authority or proceedings related to the execution or delivery of such documents or instruments on behalf of the Authority, and no such authority or proceedings have been repealed, revoked, rescinded or amended but are in full force and effect.

(f) The Authority has found and determined that issuance of the Bonds to refinance the Project will be consistent with the purposes of the Act.

SECTION 2.2. Representations, Covenants and Warranties of the Company. The Company makes the following representations as the basis for the Company’s undertakings hereunder:

(a) The Company is a limited partnership duly formed and validly existing under the laws of the Commonwealth of Virginia.

(b) The Company has the partnership power to enter into the Bond Documents to which it is a party and the transactions contemplated hereby and thereby and to perform its obligations hereunder and thereunder and by proper partnership action has duly authorized the execution and delivery of the Bond Documents to which it is a party and the performance of its obligations hereunder and thereunder.

(c) The execution and delivery of the Bond Documents to which it is a party and the performance by the Company of the Company’s obligations hereunder and thereunder, and the consummation of the transactions contemplated therein are within the powers of the Company and will not (i) violate its partnership agreement or certificate of partnership, (ii) constitute a default under any material agreement or other instrument to which the Company is a party or by which the Company is bound, (iii) to the best of its knowledge, violate any

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constitutional or statutory provision or material order, rule, regulation, decree or ordinance of any court, government or governmental authority having jurisdiction over the Company or the Company’s property, or (iv) except as contemplated by the Bond Documents, result in the creation or imposition of any lien, charge or encumbrance whatsoever upon any of the property or assets of the Company under the terms of any instrument or agreement.

(d) The Company currently intends to operate the Project as a hotel or similar overnight lodging facility (including associated restaurant and dining facilities) and a parking garage and retail facility until Payment of the Bonds.

(e) The Company is not in default in the payment of the principal of or interest on any of its indebtedness for borrowed money and is not in default under any material instrument under and subject to which any indebtedness has been incurred, and no event has occurred and is continuing under the provisions of any such agreement that with the lapse of time or the giving of notice, or both, would constitute an event of default thereunder.

(f) There is no litigation at law or in equity or any proceeding before any governmental agency involving the Company pending or, to the best of the knowledge of the Company, threatened, in which any liability of the Company is not adequately covered by insurance or in which any judgment or order would have a material adverse effect upon the business or assets of the Company or which would affect its existence or authority to do business, the operation of the Project, the validity of the Bond Documents or the performance of the Company’s obligations thereunder.

(g) The Company has obtained (i) all consents, approvals, authorizations and orders of any governmental or regulatory authority that are required to be obtained by the Company as a condition precedent to the issuance of the Bonds or the execution and delivery of the Bond Documents to which it is a party or the performance by the Company of its obligations hereunder or thereunder and (ii) all permits and licenses necessary to operate the Project, which all are in full force and effect and with respect to which the Company has no notice of any pending violations that have not been remedied.

(h) The Company will cause the proceeds of the Bonds to be applied as described in Article V of the Indenture.

(i) The Project complies in all material respects with all zoning and land use ordinances and environmental protection laws presently applicable to the operations and the occupancy and use of the Project.

(j) No document or instrument executed or delivered by the Company, nor any information (financial or otherwise) furnished by or on behalf of the Company in connection with the negotiation of the sale of the Bonds contains any untrue statement of a material fact or omits a material fact necessary to make the statements contained herein or therein not misleading. There is no fact that the Company has not disclosed in writing to the Authority that materially adversely affects, or so far as the Company can now foresee, based on facts known to it and based on opinions of the Company’s partners, employees, agents and advisors concerning such facts, will materially adversely affect the properties, business, prospects, profits or condition, financial or otherwise, of the Company, or the ability of the Company to perform its obligations under the Bond Documents.

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ARTICLE III

THE PROJECT; ISSUANCE OF THE BONDS

SECTION 3.1. Issuance of Bonds; Application of Bond Proceeds. To provide funds to refinance the Project, the Authority, concurrently with or as soon as practicable after the execution of this Loan Agreement, will issue the Bonds and deposit the proceeds thereof with the Trustee as provided in Article V of the Indenture.

SECTION 3.2. Compliance with Indenture. The Authority, at the request of the Company, shall (a) at any time moneys held pursuant to the Indenture are sufficient to effect redemption or prepayment of the Bonds and if the same are redeemable or may be prepaid under the Indenture, take all steps that may be necessary to effect redemption or prepayment thereunder; and (b) take any other action authorized under the Indenture.

SECTION 3.3. Limitation of Authority’s Liability. Anything contained in this Loan Agreement to the contrary notwithstanding, any obligation the Authority may incur hereunder for the payment of money shall not be deemed to constitute a debt or general obligation of the Authority within any constitutional or statutory limitations but shall be payable solely from the revenues and receipts derived pursuant to this Loan Agreement, including payments received under the Notes.

No covenant, agreement or obligation contained herein shall be deemed to be a covenant, agreement or obligation of a present or future director, officer, employee or agent of the Authority in his individual capacity, and neither the directors of the Authority nor any officer thereof executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof. No director, officer, employee or agent of the Authority shall incur any personal liability with respect to any other action taken by him pursuant to this Loan Agreement or the Act, provided he does not act in bad faith.

The obligations of the Authority hereunder shall not be deemed to constitute a debt or pledge of the faith and credit of the Commonwealth of Virginia or any political subdivision thereof, including the Authority. Neither the Commonwealth of Virginia nor any political subdivision thereof, including the Authority, shall be obligated to pay the obligation hereunder or other costs incident thereto except from the revenues and receipts pledged therefor, and neither the faith and credit nor the taxing power of the Commonwealth of Virginia or any political subdivision thereof, including the Authority, is pledged to the payment of the obligations hereunder. The Authority has no taxing power.

SECTION 3.4. Title Insurance. The Company shall promptly obtain title insurance on the Project in favor of the Trustee in the form of a mortgagee title policy in the face amount equal to $9,030,000 issued by a company duly authorized to issue the same. Any Net Proceeds payable to the Trustee thereunder shall be used as provided in Section 9 of the Deed of Trust.

SECTION 3.5. Recordation. The Company shall record the Deed of Trust and the Assignment and any amendments thereto in the Clerk’s Office of the Circuit Court for the City of Hampton, Virginia (the “Clerk’s Office”) and shall file Virginia UCC-1 forms in the Clerk’s Office and at the State Corporation Commission offices in Richmond, Virginia,

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ARTICLE IV

PAYMENT

SECTION 4.1. Amounts Payable. (a) Subject to the provisions of Section 9.6, the Company shall make all payments required by the Notes as and when they become due.

(b) The Company shall also pay, as and when the same become due:

(1) To the Trustee, its reasonable fees for services rendered and for expenses reasonably incurred by it as Trustee under the Indenture and as bond registrar and paying agent on the Bonds, including the reasonable fees and disbursements of its counsel, the reasonable fees and expenses of any other paying agents and all other amounts that the Company herein assumes or agrees to pay, including any cost or expense necessary to cancel and discharge the Indenture upon Payment of the Bonds.

(2) On the closing date, to the Authority its one time administration fee of $45,000.

(3) To the Trustee and the Authority, all other amounts that the Company agrees to pay under the terms of this Loan Agreement.

(4) To the Trustee, (i) to fund the Replacement Reserve Fund for payment of capital expenses of replacing furniture, fixtures and equipment and such other expenditures described in Section 604 of the Indenture, 3% of the preceding month’s gross revenues of the Project not later than the 15^th day of each month beginning in January, 1999 and (ii) for deposit in the Debt Service Reserve Fund, amounts in cash or alternatives in lieu thereof in accordance with the Indenture necessary to replenish the Debt Service Reserve Requirement not later than (A) 90 days after the occurrence of such deficiency and (B) 30 days prior to the stated expiration of any such alternative which has not been extended in accordance with Section 603(a) of the Indenture.

(5) All other amounts that the Company agrees to pay under the terms of this Loan Agreement, including payments required by Section 5.4.

(c) (1) Commencing January 4, 1999, and continuing thereafter on the first Business Day of each month, the Company shall deposit or cause to be deposited with the Trustee an amount equal to 1/6 of the semi-annual estimated real estate taxes with respect to the Project on the next date when such taxes shall be due and payable.

(2) Commencing January 4, 1999, and continuing on the first Business Day of each month thereafter the Company shall deposit or cause to be deposited with the Trustee an amount equal to 1/12 of the amount of aggregate annual insurance premiums with respect to insurance required by Section 5.2 estimated to be due with respect to the Project.

(3) The Trustee shall disburse such amounts described in this subsection (c) to or at the direction of the Company upon receipt of a copy of the real estate tax bill from the taxing authority or invoice from the insurance provider, as applicable, specifying the amount due and its due date. The Company shall have the responsibility for paying the real estate taxes and insurance premiums with respect to the Project on a timely basis prior to their being due and payable, without the incurrence of any additional changes, interest or penalties.

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SECTION 4.2. Payments Assigned. It is understood and agreed that all payments hereunder, as well as the Authority’s other rights under this Loan Agreement and the Notes (except the Unassigned Rights of the Authority) are assigned by the Indenture to the Trustee. The Company consents to such assignment and agrees to pay to the Trustee all amounts payable by the Company that are so assigned.

SECTION 4.3. Default in Payments. If the Company should fail to make payments required by the Notes or this Loan Agreement when due, the Company shall pay interest on such overdue principal at the interest rate on such overdue principal and, to the extent permitted by law, the Company shall pay interest on such overdue interest at such interest rate.

SECTION 4.4. Obligations of Company Unconditional. Subject to the provisions of Section 9.6, the obligation of the Company to make payments pursuant to Section 4.1 and to perform and observe all other covenants, conditions and agreements hereunder shall be a general obligation of the Company and shall be absolute and unconditional, irrespective of any defense or any rights of setoff, recoupment or counterclaim it might otherwise have against the Authority or the Trustee. Subject to prepayment of the Notes in full and termination of this Loan Agreement as provided herein, the Company shall not suspend or discontinue any such payment hereunder or fail to observe and perform any of its other covenants, conditions and agreements hereunder for any cause, including without limitation, any acts or circumstances that may constitute an eviction or constructive eviction, failure of consideration, failure of title to any part or all of the Project, or commercial frustration of purpose, or any damage to or destruction or condemnation of all or any part of the Project, or any change in the tax or other laws of the Commonwealth of Virginia or any political subdivision of either, or any failure of the Trustee, as assignee of the Authority, to observe and perform any covenant, condition or agreement, whether express or implied, or any duty, liability or obligation arising out of or in connection with the Indenture or this Loan Agreement. Notwithstanding the foregoing or any other provision of this Loan Agreement, the Company does not waive, and shall not be prevented from otherwise enforcing, any rights it may have against the Authority or the Trustee; provided, however, that the Company may not recover damages from the Authority. The Company may, after giving to the Authority and the Trustee ten days’ notice of its intention to do so, at its own expense and in its own name or, with the consent of the Authority, which consent shall not be unreasonably withheld, in the name of the Authority, prosecute or defend any action or proceeding or take any other action involving third persons that the Company deems reasonably necessary in order to secure or protect any of its rights hereunder or the rights of the Authority under the Indenture; and in such event the Authority shall cooperate fully with the Company and take all necessary action to effect the substitution of the Company for the Authority in any such action or proceeding if the Company shall so request.

SECTION 4.5. Actions Concerning Company. If any payment is ever required to be made hereunder by the Trustee or the Authority to the Company, any instrument evidencing such payments shall be payable to the Company. It shall be sufficient delivery of such instrument if it is delivered to the Company at the address set forth in Section 1304 of the Indenture.

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ARTICLE V

SPECIAL REPRESENTATIONS AND COVENANTS

SECTION 5.1. Maintenance and Use of Project. (a) At its own cost and expense the Company shall operate and maintain the Project in compliance with all legal requirements and in good repair and operating condition, reasonable wear and tear excepted, and from time to time shall make all reasonably necessary repairs, renewals and replacements and any repairs, renewals and replacements required to maintain any then existing license or franchise with respect to the Project.

(b) The Company shall (i) use or cause the Project to be used as a hotel or similar overnight lodging facility (including associated restaurant and dining facilities), and a parking garage and retail portion thereof to be used for garage and retail purposes, respectively, (ii) obtain or cause to be obtained and maintained all necessary permits and approvals for the operation of the Project, (iii) comply with all lawful requirements of any governmental authority regarding the Project whether existing or later enacted, whether foreseen or unforeseen or whether involving any change in governmental policy or requiring structural or other changes to the Project, irrespective of the cost of such compliance, a breach or violation of which would materially adversely affect the value of the Project or the financial condition or operations of the Company, and (iv) neither commit nor suffer others to commit a nuisance in or about or any waste upon the Project.

SECTION 5.2. Insurance of Project. The Company shall maintain insurance of such types and in such amounts as are carried, and against such risks as are customarily insured against, by lodging facilities of like size and character as the Project, paying as the same become due all premiums in respect thereto, including without limitation:

(a) All risk insurance in the amount of the full replacement cost of the Project against loss or damage by fire and lightning, with broad form extended coverage for damage by windstorm, explosion, aircraft, smoke, sprinkler leakage, vandalism, malicious mischief and such other risks as are normally included within such coverage (limited only as may be provided in the standard form for such coverage at the time in use in Virginia). If there is any limitation on the period of indemnity, such period shall be specified.

(b) Use and occupancy or business interruption or rent loss insurance in the amount necessary to assure, in the event of damage to or destruction of the Project, for a period of not less than 12 months next succeeding such damage or destruction, payment of (1) principal of and interest on the Bonds, and (2) an amount that the Company has reasonably determined to be adequate to pay all operating costs, including but not limited to, the salaries of officers and employees whose continued employment is necessary to assure the prompt and efficient resumption of operations after the repair or replacement of the Project and to continue operations to the extent possible during such repairs or replacement.

(c) Boiler and machinery insurance, including repair and replacement endorsements, on steam boilers, pressure vessels, pressure piping and miscellaneous apparatus at the Project, covering boiler explosion, similar risks, resulting property damage and use and occupancy losses.

(d) Comprehensive general liability insurance in the amount of at least $2,000,000 per occurrence and an umbrella policy in the amount of at least $5,000,000 against liability for bodily injury, including death resulting therefrom, and for damage to property, including loss of use thereof, arising out of the Company’s maintenance or use of the Project.

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(e) Comprehensive automobile liability insurance, including uninsured motorists coverage, against liability for bodily injury, including death resulting therefrom, and against liability for damage to property, including loss of use thereof, for vehicles owned or operated by or on behalf of the Company, Auto medical liability insurance shall be included.

(f) Workers’ compensation insurance with respect to the Project as required by the laws of the Commonwealth of Virginia and employer’s liability insurance.

(g) Flood hazard insurance on all or any part of the Project located in a special flood hazard area as designated by the Department of Housing and Urban Development, in an amount equal to the aggregate Outstanding amount of the Bonds from time to time or the maximum limit of coverage as may be available with respect to the Project under the National Flood Insurance Act of 1968, as amended, whichever is less.

(h) Any other insurance with respect to the Project that the Trustee in its reasonable discretion shall deem necessary.

Any determination of replacement cost required by this Section shall be made by a recognized appraiser or Insurance Consultant selected by the Company.

All such insurance shall be taken out and maintained with insurers selected by the Company and that are licensed to do business in Virginia and may be written with deductible amounts comparable to those on similar policies carried by other lodging facilities of like size and character as the Project. In each policy, other than policies of workers’ compensation and employer’s liability insurance, the Trustee shall be named as an additional insured. The policies required by Sections 5.2(a), (b) and (c) shall contain standard clauses naming the Trustee as mortgagee and requiring that all Net Proceeds resulting from any claim be paid to the Trustee. Unless a policy with such an undertaking is unavailable or is available only at a cost which the Company, with the approval of the Trustee, determines to be unreasonable, each policy shall contain an undertaking by the insurer that such policy shall not be modified adversely to the interests of the Trustee or cancelled without at least 30 days’ prior notice to the Trustee.

All such policies shall be deposited with the Trustee, provided that in lieu of such policies there may be deposited with the Trustee a certificate or certificates of the respective insurers attesting the fact that the insurance required by this Section 5.2 is in full force and effect At the request of the Trustee, the Company shall furnish to the Trustee an annual certificate of the Insurance Consultant reciting that all policies required to be in effect at that time are in full force and effect and that the amount and types of insurance evidence thereby comply with and satisfy all the requirements of this Section 5.2. Prior to the expiration of any such policy, the Company shall furnish the Trustee evidence satisfactory to the latter that the policy has been renewed or replaced or is no longer required by this Loan Agreement.

In lieu of separate policies the Company may maintain blanket or umbrella policies if such policies provide the same coverage required by this Section 5.2 with protection against each risk not reducible by claims for other risks to amounts less than that specified in this Section 5.2 and the Company deposits with the Trustee a certificate or certificates of the respective insurers evidencing such coverage and stating, as required, the amount of coverage with respect to the Project or any part thereof.

To the extent losses for any damage to the Project, however caused, are paid from the Net Proceeds of any insurance required by this Section 5.2, no claim shall be made and no suit shall be brought against the Company by the Authority, the Deed of Trust Trustees, the Trustee or anyone else claiming by, through or under any of them.

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SECTION 5.3. Inspection of Project. (a) The Authority and the Trustee and their duly authorized agents shall have the right during business hours between 9:00 a.m. and 5:00 p.m. and upon at least one Business Day’s notice to enter upon and to examine and inspect any part of the Project, and (b) the Authority and the Trustee and their duly authorized agents shall also have the right at all reasonable times and upon reasonable notice to examine the books and records of the Company insofar as such books and records relate to the Company, maintenance and operation of the Project.

SECTION 5.4. Indemnification by Company. The Company shall at all times protect, indemnify and save harmless the Indemnitees from and against all Damages imposed upon or incurred by or asserted against the Indemnitees on account of (a) any failure of the Company to comply with any of the terms of this Loan Agreement, or (b) any loss or damage to property or any injury to or death of any person that may be occasioned by any cause whatsoever, pertaining to the Project or the use thereof, and shall further indemnify and save harmless the Indemnitees from and against all “Damages”, including without limitation:

(a) all amounts paid in settlement of any litigation commenced or threatened against the Indemnitees, if such settlement is effected with the written consent of the Company not to be unreasonably withheld;

(b) all expenses reasonably incurred in the investigation of, preparation for or defense of any litigation, proceeding or investigation of any nature whatsoever, commenced or threatened against the Company, the Project or the Indemnitees;

(c) any judgments, penalties, fines, damages, assessments, indemnitees or contributions; and

(d) the reasonable fees of attorneys, auditors and consultants; provided that the Damages arise out of:

(1) any failure by the Company or its officers, partners, employees or agents to comply with the terms of the Bond Documents to which it is a party and any agreements, covenants, obligations or prohibitions set forth herein or therein;

(2) any action, suit, claim or demand contesting or affecting the title of the Project;

(3) any breach of any representation or warranty of the Company set forth in the Bond Documents to which it is a party or any certificate or any letter of representation delivered by the Company pursuant thereto, and any claim that any statement, representation or warranty of the Company contains or contained any untrue or misleading statement of material fact or omits or omitted to state any material facts necessary to make the statements made therein not misleading in light of the circumstances under which they were made;

(4) any action, suit, claim, proceeding or investigation of a judicial, legislative, administrative or regulatory nature arising from or in connection with the issuance of the Bonds or the financing, acquisition, management, operation or use of the Project; or

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(5) any suit, action, administrative proceeding, enforcement action, or governmental or private action of any kind whatsoever commenced against the Company, the Project, or the Indemnitees that might adversely affect the validity or enforceability of the Bonds, the Bond Documents, or the performance by the Company or the Indemnitees of any of their respective obligations thereunder;

provided that such indemnity shall be effective only to the extent of any loss that may be sustained by the Indemnitees in excess of the Net Proceeds received by it or them from insurance, if any, required hereunder or under any of the Bond Documents with respect to such loss, and provided further that the benefits of this section shall not inure to any person other than the Indemnitees and their successors and assigns. Nothing contained herein shall require the Company to indemnify the Authority for any claim or liability resulting from its negligence or willful, wrongful acts or the Trustee, for any claim or liability resulting from its negligence or its willful, wrongful acts.

If any action, suit or proceeding is brought against any Indemnitee for any loss or damage for which the Company is required to provide indemnification under this Section, such Indemnitee shall promptly notify the Company and the Company shall have the right, upon request and at its expense, to resist and defend such action, suit or proceeding, or cause the same to be resisted and defended, by counsel designated by the Company and approved by such Indemnitee, which approval shall not be unreasonably withheld; provided that such approval shall not be required in the case of defense by counsel designated by any insurance company undertaking such defense pursuant to any applicable policy of insurance. The obligations of the Company under this section shall survive any termination of this Loan Agreement. The Company shall have full power to litigate, compromise or settle the same in its sole discretion. A Bondholder shall have the right to employ a separate counsel at the Company’s reasonable expense in any such action and to participate in the defense thereof if such Bondholder can demonstrate it is protecting an interest which is materially different from those of the Company or the other Bondholders.

SECTION 5.5. Liens and Encumbrances. The Company shall not permit any liens or encumbrances including, without limitation, mechanics’ liens, incurred by it or on its behalf to be or to remain perfected against the Project, except for Permitted Encumbrances and Permitted Debt. Any mechanics’ liens which may be filed shall promptly be satisfied or secured by posting with Trustee, a title insurance company or an appropriate court a bond sufficient in amount to discharge such lien and any costs related thereto, in which event, the suffering of such lien shall not constitute an Event of Default under Section 7.1(c) hereof.

SECTION 5.6. Governmental Charges. The Company shall pay before penalties accrue all taxes, fees, assessments, levies, utility charges and other governmental charges of any kind whatsoever (collectively, “Governmental Charges”) which are (i) assessed, levied or imposed against the Project, any machinery, equipment or other property installed or brought by the Company in or on the Project or the Company’s interest therein, or (ii) incurred in the operation, maintenance, use and occupancy of the Project. The Company, however, at its own expense and in its own name, may contest in good faith any Governmental Charges. In the event of such a contest, the Company may permit the Governmental Charges to remain unpaid during the period of the contest and any subsequent appeal unless such action may impair the lien or security interest of any of the Bond Documents on any part of the Project, in which event, such Governmental Charges promptly shall be satisfied or secured by posting with the Trustee, a title insurance company or an appropriate court a bond with surety or letter of credit in an amount sufficient to discharge such obligation. Upon request, the Company shall furnish to the Trustee proof of payment of all Governmental Charges required to be paid by the Company under this Loan Agreement.

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SECTION 5.7. Financial Records and Reports. (a) The Company shall maintain proper books of record and account, in which full and correct entries shall be made in accordance with generally accepted accounting principles, of all its business and affairs.

(b) The Company shall from time to time_: render such reports concerning the condition of the Project or compliance with this Loan Agreement as the Authority, the Trustee and each Significant Owner may request, and provide them to the Trustee, the Authority (only if requested by the Authority) and any such Significant Owner (each, a “Reporting Party”), including but not limited to, the following reports:

(1) Within 120 days after each December 31 (the “Annual Evaluation Date”) a certificate signed by the general partner of the general partner of the Company stating that the Company has caused its operations for the year to be reviewed and that in the course of that review: (i) no default under the Indenture, or this Loan Agreement or the Deed of Trust has come to its attention or, if such a default has appeared, a description of the default and a plan for the remedy of the default, and (ii) the Company is in compliance with the Debt Service Coverage Ratio Requirement which certificate shall be accompanied by a certification of a certified public accountant,

(2) Within 120 days after each Annual Evaluation Date, copies of its audited financial statements, including a balance sheet, operating statement and cash flow statements prepared in accordance with GAAP, and copies of the management letter delivered by the Company’s auditors in connection with such financial statements.

(3) Within 30 days after the close of each month beginning within 30 days after the end of December, 1998, copies of its internally generated financial statements with respect to the hotel portion of the Project for such month (setting forth a balance sheet, operating statement and cash flow statements prepared in accordance with GAAP for the month in question, year to date, and with respect to the operating statement, comparing budgeted to actual operations), prepared on an accrual basis, together with supplemental reporting of the operating statistics of the Project, credit card receivables, occupancy and payor mix for the Project Debt Service Coverage Ratio, fund balances and any other operating information which any such Significant Owner or the Trustee may reasonably request.

(4) Within 45 days after each March 31, July 31, September 30 and December 31, (each a “Quarterly Evaluation Date”) copies of its internally generated financial statements with respect to the hotel portion of the Project of such fiscal quarter (setting forth balance sheet, operating statement and cash flow statements prepared in accordance with GAAP for the quarter in question, year to date, and with respect to the operating statement, comparing budgeted to actual operation, and if operating expenses exceed, or operating revenues are less than, budgeted amounts by greater than 10 percent, a written explanation of the causes of such variation by the Management Company), prepared on an accrual basis, together with (i) supplemental reporting of the operating statistics of the Project, credit card receivables, payor mix statistics, rental and vacancy information, and any other operating information which any Significant Owner or the Trustee may reasonably request, and (ii) an officer’s certificate evidencing the Company’s compliance or non-compliance with the Debt Service Reserve Coverage Ratio as of such Quarterly Evaluation Date.

(5) Promptly upon receipt of the Company, copies of any correspondence from the Internal Revenue Service as to an audit or potential audit of the tax-exempt status of the Series 1998A Bonds.

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(6) Prompt written notice of any litigation or proceeding in which the Company is a party if such litigation, if decided against the Company, would materially and adversely affect the Project or the operations, financial conditions, property or business of the Company, and, to the extent feasible, the status of the Company’s defense of such claim.

(7) Prompt written notice of: (i) any Event of Default, and (ii) the occurrence or nonoccurrence of any event that would cause any of the representations and warranties contained in Article V hereof to be incorrect if made at such time of such event.

(8) Such information with respect to the Project, the Company and the Management Company as the Trustee, the Authority, or any Significant Owner may reasonably request, including without limitation:

(i) any correspondence or filing with any state or federal regulatory agency regulating any portion of the Project;

(ii) copies of all licenses authorizing the Company to operate the Project for its primary intended uses;

(iii) confirmation as to the licensure of the Company as any Reporting Party may reasonably request from time to time; and

(iv) all citations, summons or deficiency reports, and all material correspondence relating thereto, concerning compliance with or enforcement of licensure requirements.

(c) Copies of the reports and statements required to be filed with the Trustee pursuant to this Section 5.7 shall be filed with the Trustee in sufficient quantity to permit the Trustee to retain at |east one copy for inspection by owners of the Bonds and to permit the Trustee to mail a copy to each owner of the Bonds who requests it. The Trustee shall maintain a list of owners of the Bonds who have made such a request.

(d) The Company covenants that the Trustee, the Authority and each Significant Owner by its duly authorized representatives, at reasonable times, upon reasonable notice to the Company in writing, may (i) discuss the financial affairs of the Company with the chief financial officer and chief executive officer of the Company, the senior officer of the Management Company charged with primary responsibility for the Project and chief operating officer of the Management Company, the Company’s accountant reporting on its audited financial statement and any Consultant retained by the Company to analyze its operations or financial affairs and (ii) inspect any part of the Project and the Company books and records and discuss the financial affairs of the Company with respect to the Project with the chief financial officer or chief executive officer of the Company or their duly designated representative.

(e) The Company shall provide to any Bondholder upon request copies of all state inspection reports on the Project.

(f) The Company will provide to the Authority information and materials related to the Project or the Company that are reasonably requested by the Authority from time to time.

SECTION 5.8. Additional Covenants. From the date hereof until Payment of the Bonds the Company covenants as follows:

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(a) Debt Service Coverage Ratio. The Company covenants to set rates and charges related to the Project such that Debt Service Coverage Ratio will be at least 1.25 for any four consecutive calendar quarters (the “Debt Service Coverage Ratio Requirement”), where the “Debt Service Coverage Ratio” shall equal the ratio of Net Income to maximum annual debt service requirements of all indebtedness of the Company relating to the Project, provided that if the Debt Service Coverage Ratio falls below 1.20 on any Quarterly Evaluation Date, within 30 days of receipt of such quarterly report the Company shall employ, at the Company’s expense, a Consultant to evaluate the business and recommend changes in the operations to attain the 1.25 coverage. Within 90 days of receipt of such quarterly report of non-compliance, the Company shall deliver to the Authority, the Trustee, the Management Company, each Significant Owner, and any other Holder so requesting, a written report prepared by the Consultant which shall set forth why the Company failed to meet the Debt Service Coverage Ratio Requirement and shall suggest remedies and time periods therefor, all in form and substance satisfactory to the Majority Owners. If the Debt Service Coverage Ratio is at least 1.20 or the Company continuously complies with the recommendations of the Consultant to the extent required hereunder, failure to comply with the Debt Service Coverage Ratio Requirement shall not constitute an Event of Default under this Loan Agreement provided, however, that failure to attain at least a 1.00 Debt Service Coverage Ratio for two consecutive Quarterly Evaluation Dates shall be an Event of Default under this Loan Agreement in accordance with Section 7.1(i).

(b) Debt Service Reserve Fund. The Company is required to fund, upon issuance of the Bonds the Debt Service Reserve Fund to an aggregate amount equal to the Debt Service Reserve Requirement. In lieu of any deposit of cash to the Debt Service Reserve Fund; the Company may fund the Debt Service Reserve Fund with a line or letter of credit, surety bond or bond insurance policy. If the line or letter of credit, surety bond or bond insurance policy expires while any Bonds remain Outstanding and is not extended, replaced or drawn upon in accordance with Section 603(a) of the Indenture at least 30 days prior to its expiration, it shall constitute an Event of Default under the Indenture. If the amount on deposit in the Debt Service Reserve Fund is less than the Debt Service Reserve Requirement at any time, the Company is required to replenish any such deficiency within 90 days after the occurrence of such deficiency.

(c) Franchise and Permits. The Company covenants to maintain the existing franchise as provided in the License Agreement on the hotel portion of the Project or such other franchise as may be acceptable to the Majority Owners. In addition, the Company covenants to maintain all permits and licenses with respect to the Project required to operate a hotel, garage and restaurant facilities, including catering.

SECTION 5.9. Maintenance of Existence. The Company shall maintain its existence as a limited partnership and its qualification to do business in Virginia and shall not dissolve or otherwise dispose of all or substantially all of its assets or consolidate with or merge into another entity without prior consent of the Majority Owners.

SECTION 5.10. Environmental Matters. (a) The Company hereby certifies, represents and warrants that all chemicals, hazardous wastes or other substances used or stored at the Project by the Company will be used and stored in proper containers and will be disposed of properly in accordance with any federal, state or local environmental protection laws or regulations. The Company covenants that it shall make reasonable efforts to cause any user of the Project to comply with all federal, state, local and environmental protection laws and regulations in its occupancy and use of the Project.

(b) The Company, shall comply in all material respects with all federal, state and local environmental protection laws and regulations applicable to the operations of its business and the occupancy and use of the Project.

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(c) (i) The Company shall indemnify and hold harmless the Indemnitees and Craigie Incorporated, as initial placement agent with respect to issuance and sale of the Bonds, from and against all losses and Damages suffered by the Indemnitees except those caused by the Indemnitees and Craigie Incorporated, as a result of any claims, liabilities, damages, penalties, costs and expenses (including attorneys’ fees) incurred by the Indemnitees, relating to, or arising as a result of any releases or discharges of hazardous wastes, contamination or pollution on, in, or under the Project, including, without limitation, remedial investigation and feasibility study costs, cleanup costs and other response costs under the Comprehensive Environmental Response Compensation and Liability Act, as modified by the Superfund Amendments and Reauthorization Act of 1986 or any other environmental legislation or regulation, whether federal, state or local. This indemnification shall be effective regardless of whether the Indemnitees have exercised their right to foreclose or take possession of the Project.

(ii) If any claim is made against the Indemnitees which is or may be subject to this indemnification, the Indemnitees and Craigie Incorporated shall promptly, upon receiving written notice thereof, give notice of such claim to the Company; provided, however, that the failure to give such notice shall not release the Company from any of its obligations under this Section 5.10. The Indemnitees and Craigie Incorporated shall have the right, at their option, after reasonable written notice thereof to the Company (including the Company’s option to pay therefor), to comply with the environmental legal requirement which is the subject of such claim and the Company shall promptly reimburse the Indemnitees for the cost of such compliance in order to avoid risks of criminal sanctions or material civil penalties, costs or liabilities to the Indemnitees and Craigie Incorporated. Except as provided in the preceding sentence, the Indemnitees and Craigie Incorporated shall not take steps to comply with such environmental legal requirement so long as the Company is proceeding diligently and in good faith so to comply and so long as noncompliance shall not involve any material risk of forfeiture of the Project or the imposition of a lien thereon having priority over the lien of the Deed of Trust, the Assignment or the Security Agreement.

SECTION 5.11. Restrictions on Mortgage, Sale or Assignments. Except for the lien and security interest provided in the Deed of Trust, the Assignment and the Security Agreement the Permitted Encumbrances or Permitted Debt in accordance with Section 5.16, the Company will not sell, mortgage, assign, transfer or convey the Project or any of its interest hereunder.

SECTION 5.12. Reference to Bonds Ineffective after Bonds Paid and Other Obligations Satisfied. Upon Payment of the Bonds and upon payment of all obligations under this Loan Agreement and the Notes, all references in this Loan Agreement to the Bonds, the Trustee and the Authority shall be ineffective, and neither the Trustee, the holder of the Notes, the Authority nor the holders of any of the Bonds shall thereafter have any rights hereunder except as provided in Sections 5.4 and 5.10 with respect to the Indemnitees.

SECTION 5.13. Certificate as to No Event of Default. The Company shall deliver within 120 days after each December 31, the certificate required by Section 5.7(b)(1).

SECTION 5.14. Notice of Suits. The Company shall notify the Trustee as soon as it has knowledge of any actions, suits or proceedings at law, in equity or before or by any governmental authority, pending, or to its knowledge threatened involving the validity or enforceability of the Bond Documents to which it is a party.

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SECTION 5.15. Management Fee Subordination and Selection of Successor Management Company. (a) The Company covenants and agrees that any management agreement with respect to the Project entered into by the Company with the Management Company, or any entity affiliated with the Company or any partners of the Company, shall expressly state that all management fees to be paid by the Company thereunder for Management Company services at the Project will be subordinated to payment of the Notes and other payments due hereunder and in respect of the Bonds upon the occurrence of an Event of Default. This Loan Agreement and the rights and privileges of the Company hereunder are specifically made subject and subordinate to the rights and privileges of the Trustee and the Bondholders set forth in the Indenture.

(b) The Company at all times shall retain a Management Company for the Project pursuant to the management agreement dated as of June 1, 1997, between the Company and KSW Management, L.L.C., a Virginia limited liability company or such other management agreement acceptable to the Majority Owners (in either case, the “Management Agreement”). Any Management Company shall be qualified and have significant experience in the operation of similar facilities and services or comparable operational experience and shall otherwise be acceptable to the Majority Owners. If the Company fails to retain a management company as set forth in the preceding sentence, the Majority Owners shall have the right to retain a Management Company on behalf of the Company, at the sole cost and expense of the Company.

(c) The Company must obtain the written consent of the Majority Owners with respect to (i) any amendment of the Management Agreement, and if there exists on Event of Default, any renewal thereof, or (ii) consent of the Company to assignment or cancellation of the Management Agreement or for any new Management Company and shall notify the Trustee of any appointment of or change in the identity of any Management Company.

(d) The Management Agreement shall provide that the Trustee and the Significant Owners shall be provided notice of any defaults thereunder and, at the option of the Trustee or the Majority Owners, an opportunity to cure such default and shall otherwise be in form and substance satisfactory to the Majority Owners in their sole and absolute discretion. If the Trustee or any Bondholders shall cure any of the Company’s defaults under the Management Agreement, the cost of such cure shall be payable to the Trustee or such Bondholders by the Company upon demand with interest accruing from the demand date at the rate on the Bonds plus 2% and the Trustee or such Bondholders as the case may be, shall have the same rights and remedies for failure to pay such costs on demand as for the Company’s failure to make payments on the Bonds pursuant to Section 4.1. The Company shall deliver to the Trustee any instrument requested by the Majority Owners to implement the intent of the foregoing provision.

SECTION 5.16. Permitted Debt. (a) Except as otherwise provided in this Section, the Company covenants not to incur or assume any Debt, other than Permitted Debt. Except as provided herein, Permitted Debt may be incurred so long as no Event of Default under this Loan Agreement (except in the case of Permitted Debt incurred to refund or redeem the Bonds or other Permitted Debt) has occurred and is continuing.

(b) The Company may incur unsecured Debt in an aggregate outstanding principal amount that, at any time, does not exceed $90,000.

(c) The Company may incur or assume, Equipment Debt, if the principal amount to be so incurred or assumed, taken together with all other Equipment Debt then outstanding, is not in excess of $450,000. Equipment Debt may be secured solely by a lien on and security interest in the equipment or other personal property financed with the proceeds of such Equipment Debt, but not by a lien on or security interest in the Project or its revenues (unless such debt otherwise qualifies as Subordinated Debt).

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(d) The Company may incur Subordinated Debt, provided that the proceeds thereof must be used to refinance existing Subordinated Debt and to pay related financing and issuance costs.

SECTION 5.17. Continuing Disclosure. The Company for the benefit of the holders of the Bonds in accordance with Rule 15c2-12 under the Securities Exchange Act of 1934, as amended, has entered into the Continuing Disclosure Agreement pursuant to which it covenants to provide (a) certain annual reports described therein and audited financial statements to certain information repositories and (b) notices of certain events described therein, to certain information repositories or to the Municipal Securities Rulemaking Board. The Company covenants to provide all information provided to information repositories pursuant to the Continuing Disclosure Agreement to the Trustee as well.

SECTION 5.18. Special Arbitrage Covenants. (a) The Authority and the Company certify each to the other and to and for the benefit of the holders of the Series 1998A Bonds that neither the Company nor the Authority shall (1) take any action, or approve the Trustee’s making any investment or use of the proceeds of the Series 1998A Bonds or taking any other action, which would cause the Series 1998A Bonds to be “arbitrage bonds” within the meaning of Section 148 of the Code and the regulations thereunder as may be applicable to the Series 1998A Bonds, or (2) barring unforeseen circumstances, approve the use of the proceeds from the sale of the Series 1998A Bonds otherwise than in accordance with the Authority’s “non-arbitrage” certificate given immediately prior to the issuance of the Series 1998A Bonds.

(b) (i) In the event that, in accordance with Section 148(f) of the Code, any rebate of earnings or profits on investment of any amounts constituting gross proceeds of the Series 1998A Bonds shall be required to be made to the United States of America in order to preserve the tax-exempt status of interest on the Series 1998A Bonds, the Company shall make such rebatable arbitrage payment or cause the same to be made in installments at least once every five years as required by Section 148(f)(3) of the Code and clause (iii) below. In no event shall the Authority or the Trustee have any responsibility or liability for the payment of any rebatable arbitrage, it being understood and agreed that all such responsibility and liability shall be vested in the Company.

(ii) Within 55 days of the anniversary of the issuance of the Series 1998A Bonds, which shall be referred to herein as the end of each Bond Year, and within 55 days of the date of Payment of the Series 1998A Bonds, the Company shall deliver to the Trustee a determination (the “Rebate Certificate”) of the amount of rebatable arbitrage calculated with respect to the Series 1998A Bonds as set forth in Treasury Regulation 1.148-3 or any successor regulation (the “Rebatable Arbitrage Requirement”); provided, however, that the annual determination required by this subparagraph shall be at the option of the Company so long as the amounts in the Bond Fund constitute the only proceeds of the Series 1998A Bonds within the meaning of Section 148 of the Code. The Company hereby agrees to keep a record of such determinations on behalf of the Authority until at least six years after Payment of the Series 1998A Bonds.

(iii) Not later than 60 days after each fifth Bond Year and upon Payment of the Series 1998A Bonds, the Company shall pay or cause to be paid to the United States out of its available funds an amount not less than the rebatable arbitrage then due in respect of the Series 1998A Bonds.

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(iv) Notwithstanding anything to the contrary in this Loan Agreement, no payment shall be made by or on behalf of the Company to the United States if the Company obtains an opinion of Bond Counsel to the effect that such payment is not required under Section 148 of the Code in order to prevent the Series 1998A Bonds from becoming “arbitrage bonds.”

(v) The Company agrees to consult with independent certified public accountants of recognized standing, with nationally recognized bond counsel or with other similarly qualified professionals when making the determinations required by this Section 5.20(b).

(vi) Each payment required to be paid to the United States shall be filed with the Internal Revenue Service Center, Philadelphia, Pennsylvania 19255, or such other place as may be hereafter designated by the Internal Revenue Service, accompanied by any forms or documentation required by the Internal Revenue Service. The Trustee and the Authority shall be fully protected in acting on any rebate certificate made by or on behalf of the Company and shall not be liable in any manner to any person for so acting, notwithstanding any error in any such rebate certificate.

(c) The Authority covenants that, if so requested by the Company, it shall execute any form required to be signed by an issuer of tax-exempt bonds in connection with the payment of any rebatable arbitrage requirement, including a Form 8038-T. The Company shall supply all information required to be stated on such form and the Authority shall have no responsibility for the accuracy or completeness of any such information.

SECTION 5.19. Tax-Exempt Status of Series 1998A Bonds. (a) The Authority will not knowingly take any affirmative action or omit to take any action, which act or omission will adversely affect the exclusion from gross income for federal income tax purposes of interest paid on the Series 1998A Bonds. In the event it should do so unknowingly or omit to do so, promptly upon having such matter brought to its attention it will, at the expense of the Company, taken such reasonable actions as may rescind or otherwise negate its unknowing action or omission. The Authority, at the request of the Company, hereby elects to have the provisions of Section 144(a)(4) of the Code relating to “qualified small issue bonds” (including the provisions of Section 144(a)(4)(F) relating to urban development action grants) apply to the Series 1998A Bonds, in accordance with applicable regulations or procedures of the Internal Revenue Service.

(b) The Company covenants and agrees that it will not take or permit any action to be taken or omit to take any action which will cause the interest on the Series 1998A Bonds to become includable in gross income for federal income tax purposes so long as the Series 1998A Bonds are Outstanding; provided that the Company shall not have violated this covenant if interest on any of the Series 1998A Bonds becomes taxable to a person who is a “substantial user” of the Project or a “related person” as such terms are used in Section 147(a) of the Code.

(c) The Company covenants and agrees that the principal amount of the Series 1998A Bonds does not exceed the outstanding principal balance of the PPAV Bonds. As of the date the PPAV Bonds will be redeemed, such principal balance of the PPAV Bonds will equal at least $8,700,000.

(d) The Company covenants and agrees that, within the meaning of Section 147(b) of the Code, the “average maturity” of the Series 1998A Bonds, as calculated by Craigie Incorporated, Richmond, Virginia, as placement agent with respect to the initial offering of the Bonds, does not exceed 120% of the remaining “average reasonably expected economic life” of the Project, such “average maturity” and “average reasonably expected economic life” being computed in the manner contemplated by Section 147(b) of the Code.

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(e) The Company covenants and agrees that no more than 25% of the proceeds of the bonds refunded by the PPAV Bonds, the PPAV Bonds or the Series 1998A Bonds have been or will be used to provide a Project the primary purpose of which is one of the following: retail food and beverage services, automobile sales or service, or the provision of recreation or entertainment. The Company further covenants and agrees that no part of the proceeds of the bonds refunded by the PPAV Bonds or the Series 1998A Bonds have been or will be used to provide any of the following and that no part of the Project will be used for any of the following purposes or activities: any airplane, skybox or other private luxury box, health club facility, facility used primarily for gambling, store the principal business of which is the sale of alcoholic beverages for consumption off premises, private or commercial golf course, country club, massage parlor, tennis club, skating facility (including roller skating, skateboard and/or ice skating), racquet sports facility (including any handball or racquetball court), hot tub facility, suntan facility, racetrack, banks, savings and loan institutions or mortgage loan companies, or single or multi-family residences (including residential rental property for family units, as described in Section 145(d) of the Code).

(f) The Company covenants and warrants that the Project is located only at the place or places specified in the notice of public hearing published with respect to the bonds refunded by the PPAV Bonds pursuant to Section 103(k) of the Internal Revenue Code of 1954, as amended.

(g) The Company covenants and agrees that no portion of the payments of principal and interest to be made under the Series 1998A Bonds is directly or indirectly “federally guaranteed,” within the meaning of Section 149(b) of the Code.

(h) The Company represents, covenants and warrants that, within six months before or after the date of issuance of the Series 1998A Bonds, (i) it has not contracted to sell any portion of the Project and will not sell or contract to sell any portion of the Project and (ii) no partnership interests in the Company have been transferred or will be transferred.

ARTICLE VI

DAMAGE, DESTRUCTION, CONDEMNATION AND OTHER LOSS OF TITLE

SECTION 6.1. Damage, Destruction, Condemnation and Other Loss of Title. (a) The Company shall give prompt notice to the Trustee and any Significant Owner of (1) any damage to, or destruction of, any part of the Project, (2) a taking of all or any part of the Project or any right therein under the exercise of the power of eminent domain, (3) any loss of any part of the Project because of failure of title thereto, or (4) the commencement of any proceedings or negotiations that might result in such a taking or loss. Each such notice shall describe generally the nature and extent of such damage, destruction, taking, loss; proceedings or negotiations.

(b)(1) If the Net Proceeds as a result of any damage, destruction, condemnation taking under the threat of condemnation with respect to the Project appear in the Company’s reasonable judgement to be equal to or less than $100,000, such Net Proceeds shall be applied by the Company to repair, restore, modify, improve or replace that portion of the Project so damaged, destroyed, condemned or taken. Any balance of the Net Proceeds remaining after the Project has been repaired, restored or replaced to a state substantially like that prior to the event of damage, destruction or taking shall be used to prepay a portion of the Notes in accordance with Section 8.l(b) and shall be transferred to the Trustee for deposit into Bond Fund to effect a redemption of Bonds in accordance with the extraordinary redemption provisions of the Indenture.

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(2) In the event of any damage, destruction, condemnation or taking under the threat of condemnation with respect to the Project that appears in the Company’s reasonable judgment will result in receipt of Net Proceeds in excess of $100,000, the Company shall promptly engage the services of an Insurance Consultant, which shall make a determination within 15 days of the occurrence of such damage, destruction, condemnation or taking as to the amount of Net Proceeds anticipated to result therefrom. The Company shall give prompt notice of such determination to the Trustee and any Significant Owner.

(3) If the Net Proceeds of any damage, destruction, condemnation or taking under the threat of condemnation with respect to the Project appear in the Company’s reasonable judgment to exceed $100,000, but according to the Insurance Consultant engaged pursuant to Section 6.1(b)(2) are not anticipated to exceed $1,500,000, then such Net Proceeds shall be transferred to the Trustee for deposit in the Replacement Reserve Fund and;

(i) The Company shall immediately request that a Consultant prepare a report to determine if (A) the repair, reconstruction, restoration or replacement of the Project or the portion thereof damaged, destroyed or taken is economically feasible and will restore the Project or the portion thereof damaged, destroyed or taken to the physical and operating condition as previously existed, (B) if the Company will have sufficient funds from the Net Proceeds, business interruption insurance proceeds and other available funds to make the payments required hereunder when due, to pay the cost of repairing, reconstructing, restoring or replacing the portion of the Project affected by such damage, destruction or condemnation (including without limitation architects’ and attorneys’ fees and expenses), to pay operating expenses until completion of the repair, reconstruction or replacement of such damaged, destroyed or taken portion of the Project, and (C) the Company is projected to meet the requirements set forth in Section 5.8(a) for the first two Fiscal Years after completion of the repair, reconstruction or replacement, which report shall be delivered to the Trustee and each Significant Owner, within 30 days of the occurrence of such damage, destruction, condemnation or taking. If the report determines the foregoing conditions are satisfied, then within 30 days after delivery thereof, the Company shall deliver to the Trustee:

(x) the plans and specifications, prepared by an architect, necessary to effect such repair, reconstruction or replacement and an executed construction contract for such work; and

(y) cash in an amount equal to the funds, if any, in excess of Net Proceeds and business interruption insurance proceeds required by the report delivered under clause (i) above; and

(z) any other documents which the Trustee may, or at the request of the Majority Owners shall, require including an assignment of the construction contract, surety bonds, and an agreement with a construction monitor acceptable to the Majority Owners to oversee the construction; and

the Company shall promptly proceed to repair, reconstruct and replace the affected portion of the Project, including all fixtures, furniture and equipment and

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effects, to the extent possible, to its condition immediately prior to the occurrence giving rise to the Net Proceeds. Any balance of the Net Proceeds remaining after the Project has been repaired, restored or replaced to a state substantially like that prior to the event of damage, destruction or taking shall be used to prepay a portion of the Notes in accordance with Section 8.l(b) and shall be transferred to the Trustee for deposit into the Bond Fund to effect a redemption of Bonds in accordance with the extraordinary redemption provisions of the Indenture.

(ii) If the report delivered determines that the conditions are not satisfied or fail to meet the requirements relating to repair or reconstruction or replacement in clause (i) above, the Company shall repay the Notes and the Bonds shall be redeemed as set forth in paragraph (4) below.

(4) Under the circumstances set forth in Section 6.1(b)(3)(ii) hereof and if the Company has not received the written approval of the Majority Owners waiving the requirement of Section 6.1(b)(3)(ii), or if the Net Proceeds are anticipated by the Insurance Consultant to exceed $1,500,000 and the Company has not received the written approval of the Majority Owners waiving a resulting repayment of the Notes and redemption of the Bonds, the Notes shall be paid and the Bonds redeemed in full without premium and the Net Proceeds shall be deposited in the Bond Fund for such purpose. If the Net Proceeds are insufficient to redeem the Bonds in full, the Company shall provide to the Trustee for deposit into the Bond Fund moneys which, together with the Net Proceeds, will be sufficient to redeem all of the Bonds pursuant to the extraordinary redemption provisions of the Indenture.

SECTION 6.2 Net Proceeds of Business Interruption Insurance. The Company shall receive the Net Proceeds of any use and occupancy, business interruption or rent loss insurance required by Section 5.2(b), provided that if any Event of Default has occurred and is continuing, the Trustee shall hold and apply such Net Proceeds as provided in Section 907 of the Indenture.

ARTICLE VII

EVENTS OF DEFAULT AND REMEDIES

SECTION 7.1. Event of Default Defined. Each of the following events is hereby declared an Event of Default hereunder:

(a) Failure of the Company to make any payment on the Notes when due and payable, whether at the stated maturity thereof or upon its maturity thereof by acceleration;

(b) Any Event of Default under the Indenture, the Bonds, the Notes, the Deed of Trust, the Security Agreement or the Assignment of Rents and Leases or an event of default under any instrument or instruments pursuant to which Subordinated Debt was incurred and not cured within applicable cure periods, if any;

(c) Failure of the Company to observe and perform any of its other covenants, conditions or agreements hereunder or in any other Bond Document for a period of 30 days after notice specifying such failure and requesting that it be remedied, given by the Authority or the Trustee to the Company, or in the case of any such default that cannot with due diligence be cured within such 30 day period, failure of the Company to proceed promptly to cure the same and thereafter prosecute the curing of such default within 60 days after notice from the Trustee;

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(d) Any warranty, representation or other statement by or on behalf of the Company contained in this Loan Agreement or the Bond Documents or in any instrument furnished in compliance with or in reference to this Loan Agreement or the Bond Documents or in connection with the issuance and sale of the Bonds is false and misleading in any material respect;

(e) (1) Failure of the Company to pay generally its debts as they become due, (2) commencement by the Company of a voluntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable federal or state bankruptcy, insolvency or similar law and not withdrawn within 45 days after filing, (3) consent by the Company to the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official for the Company or any substantial part of its property, or to the taking possession by any such official of any substantial part of the property of the Company and not dismissed within 60 days, (4) making by the Company of any assignment for the benefit of creditors generally, or (5) taking of corporate action by the Company in furtherance of any of the foregoing;

(f) The (1) entry of any final non-appealable decree or order for relief by a court having jurisdiction over the Company or its property in an involuntary case under the federal bankruptcy laws, as now or hereafter constituted, or any other applicable state bankruptcy, insolvency or similar law, (2) appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator or similar official for the Company or any substantial part of its property not dismissed within 45 days, or (3) entry of any final, non-applicable order for the termination or liquidation of the Company or its affairs;

(g) Failure of the Company within 90 days after the commencement of any proceedings against it under the federal bankruptcy laws or state bankruptcy, insolvency or similar law, to have such proceedings dismissed or stayed;

(h) The commencement of foreclosure or other enforcement proceeding by the holder of any secured Subordinated Debt permitted by Section 5.16 that is not dismissed within 30 days; or

(i) Failure of the Company to achieve a 1.00 Debt Service Coverage Ratio for two consecutive Quarterly Evaluation Dates.

The foregoing provisions of subsections (b) or (c) are subject to the limitation that if by reason of force majeure the Company is unable in whole or in part to observe and perform any of its covenants, conditions or agreements hereunder, other than its obligations contained in Sections 3.4, 4.1(b), 5.2, 5.4, 5.5, 5.8, 5.9, 5.10 and 5.11, the Company shall not be deemed in default during the continuance of such inability. The term “force majeure” as used herein shall include without limitation acts of God; strikes, lockouts or other disturbances; acts of public enemies; orders of any kind of the government of the United States of America or the Commonwealth of Virginia or any political subdivision thereof or any of their departments, agencies or officials, or any civil or military authority; insurrections; riots; epidemics; landslides; lightning; earthquakes; fires; hurricanes; tornadoes; storms; floods; washouts; droughts; restraint of government and people; civil disturbances; or explosions. The Company shall remedy with all reasonable dispatch the cause or causes preventing the Company from carrying out its covenants, conditions and agreements; provided that the settlement of strikes, lockouts and other industrial disturbances shall be entirely within the discretion of the Company, and the Company shall not be required to make settlement of strikes, lockouts and other industrial disturbances by acceding to the demands of any opposing party when such course is in the judgment of the Company not in its best interests.

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SECTION 7.2. Remedies on Default. Whenever any Event of Default hereunder shall have occurred and is continuing, the Trustee shall have the following rights and remedies:

(a) The Trustee may, and upon request of holders of 25% of outstanding principal amount of Bonds, regardless of whether there has been an acceleration of the Bonds under the Indenture shall, declare all amounts payable as principal and interest on the Notes to be immediately due and payable, whereupon the same shall become immediately due and payable with a 5% premium due and payable thereon, provided, however, that no such premium shall be payable unless such Event of Default and acceleration shall be for the purpose of or have the result of accomplishing a sale of the Project, either by or on behalf of the Company, not initiated by the Trustee or a refinancing of the Project or in conjunction with the transfer of the Project to any person or entity related to, or any one or more of the stockholders, partners or members of which are related to, the Company, its general partner, or any partner of its general partner.

(b) The Trustee may inform the Deed of Trust Trustees of the Event of Default and pursuant to the Deed of Trust instruct the Deed of Trust Trustees to enter, take possession of and sell, lease, rent or otherwise transfer or use all or any part of the Project.

(c) The Trustee may have access to and inspect, examine and copy the financial books, records and accounts of the Company.

(d) The Trustee may take whatever action at law or in equity may appear necessary or desirable to collect the amounts then due and thereafter to become due or to enforce observance or performance of any covenant, condition or agreement of the Company under the Notes, this Loan Agreement, the Deed of Trust, the Security Agreement or the Assignment.

(e) The Trustee may exercise all rights and remedies provided in the Deed of Trust.

(f) The Trustee may provide for the satisfaction of any covenant on behalf of the Company, in which case the Trustee shall be entitled to reimbursement for any expenses incurred in connection therewith plus interest at a rate equal to the applicable interest rate on the Notes plus 2%.

(g) The Trustee may arrange to have a receiver appointed with respect to the Project.

SECTION 7.3. No Remedy Exclusive. No remedy set forth in Section 7.2 is intended to be exclusive of any other remedy, and every remedy shall be cumulative and in addition to every other remedy herein or now or hereafter existing at law, in equity or by statute. No delay or failure to exercise any right or power accruing upon an Event of Default shall impair any such right or power or shall be construed to be a waiver thereof, and any such right or power may be exercised from time to time and as often as may be deemed expedient.

SECTION 7.4. Attorneys’ Fees and Other Expenses. The Company shall on demand pay to the Authority and the Trustee the reasonable fees of attorneys and other reasonable expenses incurred by either of them in the collection of payments due hereunder or under the Notes or the enforcement of any other obligation of the Company upon an Event of Default.

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SECTION 7.5. No Additional Waiver Implied by One Waiver. If either party or its assignee waives a default by the other party under any covenant, condition or agreement herein, such waiver shall be limited to the particular breach so waived and shall not be deemed to waive any other breach hereunder.

ARTICLE VIII

TERMINATION OF AGREEMENT AND PREPAYMENT

SECTION 8.1. Prepayment in Certain Events. (a) The Company shall be required to prepay the Notes without premium in full or in part and, if in full, to terminate this Loan Agreement at any time if one of the following has occurred:

(1) Damage or destruction of the Project by fire or other casualty to such extent that, (i) in accordance with Section 6.1(b)(4), the Notes are required to be paid, or (ii) the Company elects not to repair, rebuild or restore the Project.

(2) Loss of title to or use of substantially all of the Project as a result of the exercise of the power of eminent domain or failure of title which, in the opinion of the Company’s general partner expressed in a certificate filed with the Trustee, prevents or is likely to prevent the Company from carrying on its normal operations at the Project for a period of 12 months.

(3) A change in the Constitution of Virginia or of the United States of America or a legislative or administrative action (whether local, state or federal) or a final decree, judgment or order of any court or administrative body (whether local, state or federal) contested by the Company in good faith that causes this Loan Agreement, the Deed of Trust, the Security Agreement, or the Notes to become void or unenforceable or impossible of performance in accordance with the intent and purpose of the parties as expressed herein or that causes unreasonable burdens or excessive liabilities to be imposed on the Authority or the Company not being imposed as of December 1, 1998.

(4) The Company is dissolved.

(b) In the case of partial damage or destruction of the Project or of a partial condemnation, or sale under threat thereof, of failure of title to part of the Project, the Company shall have the option to prepay the Notes in part without premium, provided that in the opinion the Company’s general partner’s general partner filed with the Trustee stating that (A) the property forming a part of the Project that was damaged, destroyed, taken by or sold under threat of such condemnation proceeding or lost because of such failure of title is not essential to the normal use or occupancy of the Project, or (B) the Project has been restored to substantially its same condition as before such damage, destruction, condemnation proceeding, sale, or failure of title, or (C) improvements to the Project have been constructed or acquired which give the Project a ratio of value to amount of the Bonds Outstanding not less than that existing before such damage, destruction, condemnation proceeding, sale, or failure of title. In such case, the Bonds will be redeemed to the extent of the Net Proceeds of such condemnation or insurance carried for such damage or destruction and not applied to the restoration, construction or acquisition.

(c) To exercise any option or election contained in this Section 8.1, the Company shall within 90 days after the event permitting its exercise file the required resolutions with the Trustee and specify a date not more than 35 days after receipt of the Net Proceeds for making such prepayment. In such case the Authority shall cause the Trustee to redeem the Bonds as provided in Section 302 of the Indenture.

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SECTION 8.2. General Option To Prepay the Notes.

(a) The Company shall have the option to prepay the Notes in whole or in part at any time on or after July 1, 2008, with any applicable premium, upon making arrangements satisfactory to the Trustee for the giving of any required notice of redemption of the Bonds and upon payment of an amount equal to the redemption price of the Bonds to be redeemed, all in accordance with the provisions of the Indenture.

(b) Notwithstanding Section 8.2(a), the covenants in Sections 5.4 shall continue, as long as any claim may be brought against the Authority related to the Bonds or the Project.

SECTION 8.3. Mandatory Payments. The Company shall pay its obligations under the Notes to the same extent that the Bonds must be redeemed under Section 304 of the Indenture.

SECTION 8.4. Amount Required for and Manner of Payment. To prepay or pay the Notes, as the case may be, under Sections 8.1, 8.2 or 8.3, the Company (a) shall pay to the Trustee for deposit into the Bond Fund moneys in an amount which, together with moneys then held by the Trustee and available for such purpose, will be sufficient to pay the redemption price of the Bonds to be redeemed in connection with such prepayment and (c) shall make arrangements satisfactory to the Authority and the Trustee for full or partial redemption of the Bonds as soon as permitted or required by the Indenture and for payment of the fees and expenses of the Authority and the Trustee in connection with such redemption. The Trustee shall accept such payment for deposit in the Bond Fund for redemption of the Bonds in the manner, at the time and to the extent provided in the Indenture.

SECTION 8.5. Effect of Prepayment. Prepayment of the Notes in full pursuant to this Article shall terminate the obligations of the Company under the Notes and this Loan Agreement, but only if (a) the Indenture shall thereby have been discharged, and (b) the fees and expenses of the Trustee and the Authority shall have been paid, or satisfactory arrangements for payment thereof shall have been made.

ARTICLE IX

MISCELLANEOUS

SECTION 9.1. Term of Agreement; Amounts Remaining in Funds. This Loan Agreement shall be effective upon execution and delivery hereof, and subject to earlier termination upon discharge of the Indenture pursuant to Article VIII thereof shall expire at midnight on July 1, 2016, after Payment of the Bonds, or if discharge of the Indenture has not occurred on such date, when such discharge shall have occurred. Any amounts remaining in the funds established by the Indenture after Payment of the Bonds and payment of the fees and expenses of the Trustee and the Authority in accordance with the Indenture shall belong to and be paid to the Company or its order by the Trustee as overpayment of amounts due.

SECTION 9.2. Notices, etc. Unless otherwise provided herein, all demands, notices, approvals, consents, requests and other communications hereunder shall be given as provided in Section 1304 of the Indenture.

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SECTION 9.3. Amendments to Agreement and Notes. Neither this Loan Agreement nor the Notes shall be amended or supplemented subsequent to the issuance of the Bonds and before Payment of the Bonds, without the consent of the Trustee, as assignee of the Authority and the Company, given in accordance with Article XII of the Indenture.

SECTION 9.4. Successors and Assigns. This Loan Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns, including the Trustee.

SECTION 9.5. Severability. If any provision of this Loan Agreement shall be held invalid by any court of competent jurisdiction, such holding shall not invalidate any other provision hereof.

SECTION 9.6. Non-Recourse. Anything contained in any provision of this Loan Agreement, the Deed of Trust, the Security Agreement, the Assignment or the Notes notwithstanding, in the event of any proceeding to foreclose under the Deed of Trust or otherwise to enforce the provisions of the Notes, this Loan Agreement, or the Deed of Trust, the Security Agreement or the Assignment, neither the Authority nor the Trustee or other holder of the Notes (collectively, the “Noteholder”), nor any Bondholder, nor any beneficiary of, nor any trustee under the Deed of Trust shall be entitled to take any action to procure any personal money judgment or any deficiency decree against present or future general or limited partner of the Company or its or their heirs, personal representatives, successors and assigns as obligor hereunder, it being understood and agreed that recourse hereon and under the Deed of Trust, the Security Agreement, the Assignment, and the Notes shall be limited to the security from time to time provided with respect to the Notes and this Loan Agreement and any other property of the Company; provided, however, nothing herein contained shall limit or be construed to limit or impair the enforcement against the premises covered thereby or any other additional security as may from time to time be given to the beneficiary hereof as security for the performance of this Loan Agreement, the Deed of Trust, the Security Agreement, the Assignment, the Notes, or any other instrument now or hereafter securing the Notes or this Loan Agreement, the Deed of Trust, the Security Agreement, the Assignment, or the Notes, or any other instruments. Notwithstanding the foregoing, the provisions of this Section shall be null and void and have no force and effect to the extent of any loss suffered by the Noteholder or any Bondholder or any beneficiary of or any trustee under the Deed of Trust related to, or on account of (a) fraud or any material misrepresentation by the Company in connection with the Loan, (b) the retention of any income arising with respect to the Project and collected by the Company after an Event of Default (to the full extent of the income collected by the Company and not applied to the costs and expenses of operating the Project), (c) the removal or disposal by the Company (other than in accordance with the terms of the Deed of Trust or the Security Agreement) of any tangible personally (to the extent of the fair market value of the tangible personally so removed or disposed of), (d) the misapplication by the Company contrary to the provisions of the Deed of Trust or the Security Agreement or the Loan Agreement of (1) any Bond proceeds, (2) any Net Proceeds paid under any insurance policies by reason of damage, loss or destruction to any portion of the Project (to the full extent of such Net Proceeds so misapplied), or (3) any Net Proceeds or awards resulting from the condemnation of all or any part of the Project (to the full extent of such Net Proceeds or awards so misapplied), or (e) Company’s obligations under Sections 5.4 and 5.10. Nothing herein shall be deemed to prohibit the naming of the Company, its successors and assigns, in an action to realize upon the remedies provided herein either at law or in equity, subject to the foregoing limitation against a personal money judgment or deficiency decree against any general or limited partner of the Company.

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SECTION 9.7. Applicable Law; Entire Understanding. This Loan Agreement shall be governed by the applicable laws of the Commonwealth of Virginia. This Loan Agreement, the Notes, and the other agreements and instruments referred to herein or therein, express the entire understanding of the parties, and none of the agreements between the parties may be modified except in writing signed by the parties.

SECTION 9.8. Counterparts. This Loan Agreement may be executed in several counterparts, each of which shall be an original and all of which together shall constitute but one and the same instrument; except that to the extent, if any, that this Loan Agreement shall constitute personal property under the Uniform Commercial Code of Virginia, no security interest in this Loan Agreement may be created or perfected through the transfer or possession of any counterpart of this Loan Agreement other than the original counterpart, which shall be the counterpart containing the receipt therefor executed by the Trustee following the signatures to this Loan Agreement.

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IN WITNESS WHEREOF, the Authority and the Company have caused this Loan Agreement to be executed in their respective names by their duly authorized officers, all dated as of the date first above written.

HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY
By:
	Chairman
OLDE HAMPTON HOTEL ASSOCIATES, A VIRGINIA LIMITED PARTNERSHIP
By its general partner HHA, Ltd., a Virginia limited partnership
By:
	Jack H. Shiver, General Partner
By:
	J. Edward Watson, III, General Partner

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RECEIPT

Receipt of the foregoing original counterpart of the Loan Agreement, dated as of December 1, 1998, between the Hampton Redevelopment and Housing Authority and Olde Hampton Hotel Associates, A Virginia Limited Partnership is hereby acknowledged, this 18th day of December 1998.

CRESTAR BANK, as Trustee
By:
Its:	VP

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EXHIBIT A

Exhibit A to Loan Agreement between the Hampton Redevelopment and Housing Authority and Olde Hampton Hotel Associates, A Virginia Limited Partnership.

Promissory Note

$             December     , 1998

Olde Hampton Hotel Associates, A Virginia Limited Partnership (the “Company”), for value received, hereby promises to pay to the Hampton Redevelopment & Housing Authority (the “Authority”), or assigns, the principal sum of $             as follows.

Principal of the Series 1998   Bonds, hereinafter defined, shall be payable on July 1 of each year beginning             , with interest thereon payable on                     , and thereafter semiannually on each January 1 and July 1, in amounts and at the rates and in the manner set forth in Sections 202, 302, 303 and 304 of the Indenture, hereinafter defined.

Payments on the installments of principal on this Note shall be payable on the first day of each month, [(a)] commencing in                     , 1999, [through                          , with the amount payable on each such date being 1/     of the amount of principal of the Series 1998   Bonds due on                    , and (b) thereafter,] with the amount payable in each such installment being 1/12 of the amount of principal of the Series 1998   Bonds due, whether by sinking fund redemption or maturity, on the next July 1, and with credits toward such amounts determined in accordance with the Indenture, but with the full amount of each such installment of principal for each year to be paid by July 1 of each year. Payments of interest shall be payable on the first day of each month, commencing in January 1999, with amounts payable on each such date being 1/6 of the amount of interest on the Series 1998   Bonds due on the next succeeding January 1 or July 1, as applicable, and with credits toward such amounts determined in accordance with the Indenture and the Loan Agreement, hereinafter defined. All payments hereon shall be applied first to interest and then to principal.

Payments shall be made in lawful money of the United States of America at the corporate trust office of the Trustee, hereinafter defined, in Richmond, Virginia, or at such other place as the Trustee may direct in writing. The principal hereof, premium, if any, and interest hereon shall be payable by the Company depositing the same with or to the account of the Trustee at or prior to the opening of business on the day such payments shall become due and payable (or the next preceding business day if such date is a Saturday, Sunday or holiday in the city in which the principal office of the Trustee is located).

If at any time the amount held by the Trustee in the Bond Fund, as defined in the Indenture, should be sufficient to pay at the times required the principal of, and premium, if any, and interest on the Bonds, hereinafter defined, then remaining unpaid and to pay all fees and expenses of the Trustee and the paying agent accrued and to accrue through final payment of the Bonds, the Company shall not be obligated to make any further payments hereunder, except to the extent losses may be incurred in connection with investment of moneys in such funds.

The Authority, by the execution of the Indenture and the assignment forms at the foot of this Promissory Note and of the Parity Note, as hereinafter defined, is assigning this Promissory Note and the Parity Note and the payments thereon to Crestar Bank (the “Trustee”), acting

pursuant to an Indenture of Trust dated as of December 1, 1998 (the “Indenture”), between the Authority and the Trustee, as security for the Authority’s $8,700,000 First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Association Project), Series 1998A (the “Series 1998A Bonds”) and its $370,000 Taxable First Mortgage Revenue Bonds (Olde Hampton Hotel Association Project), Series 1998B (the “Series 1998B Bonds” and, collectively with the Series 1998A Bonds, the “Bonds”), as issued pursuant to the Indenture. Payments of principal of and interest on this Promissory Note and on the Parity Note shall be made directly to the Trustee for the account of the Authority pursuant to such assignment and applied only to the principal of and premium, if any, and interest on the Bonds. All obligations of the Company hereunder shall terminate when all sums due and to become due pursuant to the Indenture, this Promissory Note, the Loan Agreement, hereinafter defined, and the Bonds have been paid or provided for in full.

Anything contained in any provision of this Promissory Note, the Loan Agreement, the Deed of Trust, the Security Agreement or the Assignment, each as defined in the Loan Agreement, notwithstanding, neither the Noteholder nor any Bondholder shall be entitled to take any action to procure any personal money judgment or any deficiency decree against the Company or any present or future partner thereof or its or their heirs, personal representatives, successors and assigns as obligor hereunder, it being understood and agreed by the acceptance hereof by such beneficiary that recourse hereon and under the Loan Agreement, the Deed of Trust, the Security Agreement and the Assignment shall be limited to the security from time to time provided with respect to this Promissory Note, if any; provided, however, nothing herein contained shall limit or be construed to limit or impair the enforcement against the premises covered thereby or any other additional security as may from time to time be given to the beneficiary hereof as security for the performance of this Promissory Note, the Loan Agreement, the Deed of Trust, the Security Agreement, the Assignment or any other instrument now or hereafter securing this Promissory Note, or the rights and remedies of the Noteholder, its successors and assigns, under this Promissory Note, the Loan Agreement, the Deed of Trust, the Security Agreement, the Assignment or any other instruments. Notwithstanding the foregoing, the provisions of this Section shall be null and void and have no force and effect to the extent of any loss suffered by the Noteholder or any Bondholder or any beneficiary of or the Trustees under the Deed of Trust as a result of the Company’s committing any act of fraud (which shall mean an intentional misrepresentation of a material fact reasonably relied upon by another party). Nothing herein shall be deemed to prohibit the naming of the Company, its partners, their successors and assigns, in an action to realize upon the remedies provided herein either at law or in equity, subject to the foregoing limitation against a personal money judgment or deficiency decree against the partners of the Company or their heirs, personal representative, successors and assigns.

The Company shall have the option to prepay this Promissory Note in whole or in part upon the terms and conditions and in the manner specified in the Loan Agreement dated as of December 1, 1998 (the “Loan Agreement”), between the Authority and the Company.

This Promissory Note and the Company’s $             promissory note dated the date hereof (the “Parity Note”) are issued to evidence the Company’s payment obligation in Section 4.1 of the Loan Agreement and are entitled to the benefits and subject to the conditions thereof, including the provisions of Section 4.4 thereof that the Company’s obligations thereunder and hereunder, except as provided above, shall be unconditional.

Upon the occurrence of certain Events of Default, as defined in the Indenture, the principal of this Promissory Note may be declared, and the same shall become, due in accordance with the Indenture.

A-2

IN WITNESS WHEREOF, the Company has caused this Promissory Note to be executed by its duly authorized General Partner as of the date first above written,

OLDE HAMPTON HOTEL ASSOCIATES, A VIRGINIA LIMITED PARTNERSHIP
By its general partner HHA, Ltd., a Virginia limited partnership
By:
	Jack H. Shiver, General Partner
By:
	J. Edward Watson, III, General Partner

A-3

ASSIGNMENT

The Hampton Redevelopment and Housing Authority (the “Authority”) hereby irrevocably assigns, without recourse, the foregoing Promissory Note to Crestar Bank (the “Trustee”), as trustee under an Indenture of Trust dated as of December 1, 1998 (the “Indenture”), between the Authority and the Trustee and hereby directs Olde Hampton Hotel Associates, A Virginia Limited Partnership as the maker of the Promissory Note, to make all payments of principal of and premium, if any, and interest thereon, directly to the Trustee at its office in Richmond, Virginia, or at such other place as the Trustee may direct in writing. Such assignment is made as security for the payment of the Authority’s Revenue Refunding Bonds (Olde Hampton Hotel Associates Project), Series 1998A, and its Taxable First Mortgage Revenue Bonds (Olde Hampton Hotel Associates Project), Series 1998B, issued pursuant to the Indenture.

HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY
By:
	Chairman

A-4

EX-10.33

Exhibit 10.33

No. R-2 $7,430,000

UNITED STATES OF AMERICA

COMMONWEALTH OF VIRGINIA

HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY

First Mortgage Revenue Refunding Bonds

(Olde Hampton Hotel Associates Project) Series 1998A

INTEREST RATE	MATURITY DATE	DATED DATE	CUSIP
6.5%	July 1, 2016	December 18, 1998	40958N AB3

REGISTERED OWNER:	CEDE & CO.
PRINCIPAL AMOUNT:	SEVEN MILLION FOUR HUNDRED THIRTY THOUSAND DOLLARS

The HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY, a political subdivision of the Commonwealth of Virginia (the “Authority”), for value received, hereby promises to pay, upon surrender hereof at the corporate trust office of Crestar Bank, Richmond, Virginia, as trustee, or its successor in trust (the “Trustee”), solely from the source and as hereinafter provided, to the registered Company hereof, or registered assigns or legal representative, the principal sum stated above on the maturity date stated above, subject to prior redemption as hereinafter provided, and to pay, solely from such source, interest hereon semiannually on each January 1 and July 1, commencing on July 1, 1999 (each an “Interest Payment Date”), at the annual rate stated above.

Interest is payable (a) from the dated date set forth above, if this Bond is authenticated prior to July 1999, or (b) otherwise from the January 1 or July 1 that is, or immediately precedes, the date on which the Bond is authenticated (unless payment of interest hereon is in default, in which case this Bond shall bear interest from the date to which interest has been paid). Interest is payable by check or draft mailed to the registered owner hereof at his address as it appears on the 15th day of the month preceding each Interest Payment Date on registration books kept by the Trustee; provided, however, that if the Bonds are registered in the name of a securities depository or its nominee as registered owner or at the option of an owner of at least $500,000 principal amount of Bonds, payment will be made by wire transfer pursuant to the most recent wire instructions received by the Trustee from such registered owner. Principal, premium, if any, and interest are payable in lawful money of the United States of America.

THE BONDS AND THE PREMIUM, IF ANY, AND THE INTEREST THEREON ARE LIMITED OBLIGATIONS OF THE AUTHORITY PAYABLE SOLELY FROM THE REVENUES AND RECEIPTS DERIVED BY THE AUTHORITY UNDER THE LOAN AGREEMENT AND THE NOTES, WHICH REVENUES AND RECEIPTS HAVE BEEN PLEDGED AND ASSIGNED TO SECURE PAYMENT THEREOF. THE BONDS, THE PREMIUM, IF ANY, AND THE INTEREST THEREON SHALL NOT BE DEEMED TO CONSTITUTE A DEBT OR A PLEDGE OF THE FAITH AND CREDIT OF THE COMMONWEALTH OF VIRGINIA OR ANY POLITICAL SUB DIVISION THEREOF, INCLUDING THE AUTHORITY. NEITHER THE COMMONWEALTH OF VIRGINIA, NOR ANY POLITICAL SUBDIVISION THEREOF, INCLUDING THE AUTHORITY, SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF OR PREMIUM, IF ANY, OR INTEREST ON THE BONDS OR OTHER COSTS INCIDENT THERETO EXCEPT FROM THE REVENUES AND RECEIPTS PLEDGED AND ASSIGNED THEREFOR, AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE COMMONWEALTH OF VIRGINIA, OR ANY POLITICAL SUBDIVISION THEREOF, INCLUDING THE AUTHORITY, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR PREMIUM, IF ANY, OR INTEREST ON THE BONDS OR OTHER COSTS INCIDENT THERETO. THE AUTHORITY HAS NO TAXING POWER.

All acts, conditions and things required to happen, exist or be performed precedent to and in the issuance of this Bond have happened, exist and have been performed.

This Bond shall not become obligatory for any purpose or be entitled to any security or benefit under the Indenture or be valid until the Trustee has executed the Certificate of Authentication appearing hereon and inserted the date of authentication hereon.

This Bond is one of an issue of $8,640,000 First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project), Series 1998A (the “Series 1998A Bonds” and collectively with the Authority’s Taxable First Mortgage Revenue Bonds, Series 1998B, the “Bonds”), of like date and tenor, except as to number, denomination, rate of interest, maturity and privilege of redemption, authorized and issued pursuant to the Housing Authorities Law Chapter I, Title 36, Code of Virginia of 1950, as amended (the “Act”). This Bond is executed under and secured by an Indenture of Trust dated as of December 1, 1998 (the “Indenture”), between the Authority and the Trustee, for the purpose of refunding the outstanding principal amount of the Peninsula Ports Authority’s Revenue Refunding Bonds (Olde Hampton Hotel Associates Project), Series 1986, which refinanced a portion of the cost of the acquisition, construction and equipping of a Radisson Hotel complex and a parking garage containing certain retail space all located in the City of Hampton, Virginia (collectively the “Project”) for the benefit of Olde Hampton Hotel Associates, A Virginia Limited Partnership (the “Company”).

As security for the Bonds, the Authority has pledged to the Trustee, and granted the Trustee a security interest in, the Authority’s interest in a Loan Agreement dated as of December 1, 1998 (the “Loan Agreement”), between the Authority and the Company, pursuant to which the Company has delivered its non-recourse promissory notes dated the date of delivery (the “Notes”), in the original principal amounts of $8,640,000 and $390,000 payable to the Authority. The Company

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has agreed to pay to the Trustee, for the account of the Authority, amounts sufficient to pay principal of and premium, if any, and interest on the Bonds when due. The Notes are secured by a Deed of Trust and Security Agreement dated as of December 1, 1998 (the “Deed of Trust”), between the Company and the individual trustees named therein, which creates a lien on the Project, which lien is more fully described in the Deed of Trust, a Security Agreement dated as of December 1, 1998 (the “Security Agreement”) between the Company and the Trustee, which creates a lien on and a security interest in, certain personal property of the Company, as more completely described in the Security Agreement, and an Assignment of Rents and Leases dated as of December 1, 1998 (the “Assignment”) between the Company and the Trustee, which assigns the rents and leases of the Project, as more particularly described in the Assignment.

If the Company exercises its option or is required to prepay the Notes upon damage to, condemnation of or failure of title to the Project or certain other extraordinary events as provided in Section 8.1(a) of the Loan Agreement, the Bonds are required to be redeemed in whole or in part at any time and upon payment of 100% of the principal amount of the Bonds to be redeemed plus interest accrued to the redemption date.

The Series 1998A Bonds maturing on July 1, 2016, may be redeemed at the option of the Authority at the direction of the Company as follows. The redemption prices of such Bonds shall be the percentage of principal amount of the Bonds to be redeemed as shown below plus interest accrued to the redemption date:

Redemption Period (Both Dates Inclusive)	Redemption Date
July 1, 2008 through June 30, 2009	102	%
July 1, 2009 through June 30, 2010	101
July 1, 2010 and thereafter	100

Series 1998A Bonds shall be redeemed prior to maturity on July 1 in years and amounts upon payment of 100% of the principal amount thereof plus interest accrued to the redemption date, as follows;

Series 1998A Bonds Maturing July 1, 2003

Year	Amount
2000	$	190,000
2001		320,000
2002		340,000
2003 (final maturity)		360,000

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Series 1998A Bonds Maturing July 1, 2016

Amount	Year		Year	Amount
2004	$	380,000	2011	$	595,000
2005		405,000	2012		630,000
2006		435,000	2013		670,000
2007		460,000	2014		715,000
2008		490,000	2015		760,000
2009		525,000	2016 (final maturity)		815,000
2010		555,000

The Trustee shall provide for redemption of Series 1998A Bonds in accordance with the foregoing schedule; provided, however, that on or before the 70th day next preceding any such sinking fund payment date the Company may:

(a) deliver to the Trustee for cancellation Series 1998A Bonds in any aggregate principal amount desired; or

(b) receive a credit against the sinking fund redemption obligation on such sinking fund payment date for Series 1998A Bonds that previously have been redeemed (other than through the operation of the sinking fund) and canceled by the Trustee but not theretofore applied as a credit against any sinking fund redemption.

Upon the occurrence of any of the events described in (a) or (b) of this Section, the Trustee shall credit against the sinking fund redemption obligation on such sinking fund payment date the amount of such Bonds so delivered or previously redeemed and any excess over such obligation will be credited against future mandatory redemption obligations in inverse order of redemption dates, and the principal amounts of Bonds to be redeemed by mandatory redemption will be reduced accordingly.

If less than all the Bonds are called for extraordinary or optional redemption, the Bonds to be redeemed shall be selected pro rata among the Holders of the Bonds by the Trustee. If less than all Bonds with the same series designation and maturity are called for redemption, such Bonds to be redeemed shall be provided that the principal portion of any Bonds to be redeemed shall result in the unredeemed portion being in $100,000 denominations or any multiple of $5,000 in excess thereof. If a portion of a Bond shall be called for redemption, a new Bond in principal amount equal to the unredeemed portion thereof shall be issued to the registered owner upon the surrender thereof. If a notice of redemption is unconditional, or if the conditions of a conditional notice of redemption have been satisfied, then upon presentation and surrender of the Bonds so called for redemption at the place or places of payment, such Bonds will be redeemed.

If any of the Bonds or portions thereof are called for redemption, the Trustee shall send a notice of the call for redemption, identifying the Bonds or portions thereof to be redeemed, by registered or certified mail, not less than 30 nor more than 60 days prior to the redemption date, to the registered owner of each Bond to be redeemed, at his address as it appears on the registration books kept by the Trustee. Provided funds for their redemption are on deposit at the place of

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payment on the redemption date, all Bonds so called for redemption shall cease to bear interest on such date, shall no longer be secured by the Indenture and shall not be deemed to be outstanding under the terms of the Indenture. If a portion of this Bond is called for redemption, a new Bond in principal amount equal to the unredeemed portion hereof will be issued to the registered owner upon the surrender hereof.

The registered owner of this Bond shall have no right to enforce the provisions of the Indenture or to institute action to enforce the covenants therein or to take any action with respect to any Event of Default under the Indenture or to institute, appear in or defend any suit or other proceedings with respect thereto, except as provided in the Indenture. In certain events, on conditions, in the manner and with the effect set forth in the Indenture, the principal of all the Bonds issued under the Indenture and then outstanding may become or may be declared due and payable before their stated maturity, together with interest accrued thereon. Modifications or alterations of the Indenture may be made only to the extent and in the circumstances permitted by the Indenture.

The Bonds are issuable as fully registered Bonds in denominations of $5,000 and multiples thereof. Upon surrender of this Bond at the corporate trust office of the Trustee, together with an assignment duly executed by the registered owner or his duly authorized attorney or legal representative in such form as shall be satisfactory to the Trustee, the Authority shall execute, and the Trustee shall authenticate and deliver in exchange, a new Bond or Bonds in the manner and subject to the limitations and conditions provided in the Indenture, having an equal aggregate principal amount, in authorized denominations, of the same series, form and maturity, bearing interest at the same rate, and registered in names as requested by the then registered owner hereof or his duly authorized attorney or legal representative. Any such exchange shall be at the expense of the Company, except that the Trustee may charge the person requesting such exchange the amount of any tax or other governmental charge required to be paid with respect thereto.

The Trustee shall treat the registered owner as the person exclusively entitled to payment of principal, premium, if any, and interest and the exercise of all other rights and powers of the owner, except that as set forth above interest payments shall be made to the person shown as owner on the 15th day of the month preceding each Interest Payment Date.

All acts, conditions and things required to happen, exist or be performed precedent to and in the issuance of this Bond have happened, exist and have been performed.

This Bond shall not become obligatory for any purpose or be entitled to any security or benefit under the Indenture or be valid until the Trustee has executed the Certificate of Authentication appearing hereon and inserted the date of authentication hereon.

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IN WITNESS WHEREOF, the Hampton Redevelopment and Housing Authority, has caused this Bond to be executed in its name by the manual or facsimile signature of its Chairman or Vice Chairman, an actual or facsimile of its seal to be imprinted or impressed hereon and attested by the manual or facsimile signature of its Secretary or Assistant Secretary, and this Bond to be dated the date set forth above.

	HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY
(SEAL)	By
		Chairman
Attest:
Asst. Secretary

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CERTIFICATE OF AUTHENTICATION

Date Authenticated: December 18, 1998

This Bond is one of the Bonds described in the within-mentioned Indenture.

CRESTAR BANK, as Trustee
By
	Authorized Officer

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EX-10.34

Exhibit 10.34

INDENTURE OF TRUST

between

HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY

and

CRESTAR BANK,

as Trustee

Dated as of December 1, 1998

Relating to

$8,640,000 FIRST MORTGAGE REVENUE REFUNDING BONDS

(OLDE HAMPTON HOTEL ASSOCIATES PROJECT), SERIES 1998A

and

$390,000 TAXABLE FIRST MORTGAGE REVENUE BONDS

(OLDE HAMPTON HOTEL ASSOCIATES PROJECT), SERIES 1998B

TABLE OF CONTENTS

Parties		1
Recitals		1
Granting Clauses		2
ARTICLE I DEFINITIONS AND RULES OF CONSTRUCTION
Section 101.	Definitions	2
Section 102.	Rules of Construction	5
ARTICLE II AUTHORIZATION, DETAILS, EXECUTION, AUTHENTICATION, REGISTRATION AND DELIVERY OF BONDS
Section 201.	Authorization of the Bonds	6
Section 202.	Details of Bonds	6
Section 203.	Series 1998A Bonds Book Entry Provisions	6
Section 204.	Execution of Bonds	7
Section 205.	Authentication of Bonds	7
Section 206.	Form of Bonds	7
Section 207.	Delivery of The Bonds	8
Section 208.	Exchange of Bonds; Persons Treated as Owners	9
Section 209.	Charges for Exchange	9
Section 210.	Temporary Bonds	9
Section 211.	Mutilated, Lost or Destroyed Bonds	10
Section 212.	Cancellation and Disposition of Bonds	10
ARTICLE III REDEMPTION OF BONDS
Section 301.	Redemption	10
Section 302.	Extraordinary Redemption at Par	10
Section 303.	Optional Redemption Dates and Prices	10
Section 304.	Mandatory Sinking Redemption Fund	10
Section 305.	Selection of Bonds for Redemption	11
Section 306.	Notice of Redemption	12
ARTICLE IV GENERAL COVENANTS AND PROVISIONS
Section 401.	Payment of Bonds	12
Section 402.	Covenants and Representations of Authority	13
Section 403.	Liens; Further Assurances	13
Section 404.	Inspection of Books	13
Section 405.	Rights under Loan Agreement, Notes, Security Agreement and Deed of Trust	13
Section 406.	Reports by Trustee	13
Section 407.	Disclosure of Information	13
Section 408.	Prohibited Activities	14
Section 409.	Arbitrage Rebate	14

ARTICLE V APPLICATION OF BOND PROCEEDS
Section 501.	Payment into Bond Fund	14
Section 502.	Remaining Proceeds	14
ARTICLE VI REVENUES AND FUNDS
Section 601.	Establishment of Bond Fund	14
Section 602.	Use of Moneys in Bond Fund	15
Section 603.	Use of Debt Service Reserve Fund	16
Section 604.	Use of Replacement Reserve Fund	16
Section 605.	Non-Presentment of Bonds	18
Section 606.	Trustee’s and Authority’s Fees, and Expenses	18
Section 607.	Moneys To Be Held in Trust	18
Section 608.	Payment to Company from Bond Fund, Debt Service Reserve Fund and Replacement Reserve Fund	18
Section 609.	Other Funds and Accounts	18
ARTICLE VII SECURITY FOR DEPOSITS AND INVESTMENT OF FUNDS
Section 701.	Investment of Moneys in Funds	18
Section 702.	Investments through Trustee’s Department	20
ARTICLE VIII DISCHARGE OF INDENTURE
Section 801.	Bonds Deemed Paid; Discharge of Indenture	20
Section 802.	Application of Trust Money	21
Section 803.	Repayment to Company	21
Section 804.	Notification to City of Payment of Bonds	22
ARTICLE IX DEFAULT PROVISIONS AND REMEDIES OF TRUSTEE AND BONDHOLDERS
Section 901.	Events of Default	22
Section 902.	Acceleration	22
Section 903.	Remedies Under Deed of Trust, Security Agreement and Assignment	23
Section 904.	Other Remedies; Rights of Bondholders	23
Section 905.	Right of Bondholders to Direct Proceedings	23
Section 906.	Appointment of Receivers	24
Section 907.	Application of Moneys	24
Section 908.	Remedies Vested in Trustee	25
Section 909.	Limitations on Suits	25
Section 910.	Unconditional Right to Receive Principal, Premium and Interest	25
Section 911.	Termination of Proceedings	26
Section 912.	Waivers of Events of Default	26

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Section 913.	Notice of Defaults; Opportunity to Cure Defaults	26
ARTICLE X THE TRUSTEE
Section 1001.	Acceptance of Trusts	27
Section 1002.	Fees, Charges and Expenses of Trustee	29
Section 1003.	Intervention by Trustee	29
Section 1004.	Merger or Consolidation of Trustee	29
Section 1005.	Resignation of Trustee	29
Section 1006.	Removal of Trustee	29
Section 1007.	Appointment of Successor Trustee; Temporary Trustee	29
Section 1008.	Concerning any Successor Trustee	30
Section 1009.	Successor Trustee as Paying Agent Registrar and Custodian of Funds	30
ARTICLE XI SUPPLEMENTAL INDENTURES
Section 1101.	Supplemental Indentures Not Requiring Consent of Bondholders	30
Section 1102.	Supplemental Indentures Requiring Consent of Bondholders	31
Section 1103.	Opinion of Counsel Required	31
Section 1104.	Consent of Company Required	32
Section 1105.	Amendment Without Consent of Authority	32
ARTICLE XII AMENDMENTS TO LOAN AGREEMENT, SECURITY AGREEMENT, DEED OF TRUST, ASSIGNMENT AND NOTES
Section 1201.	Amendments to Loan Agreement, Security Agreement, Deed of Trust, Assignment and Notes Not Requiring Consent of Bondholders	33
Section 1202.	Amendments to Loan Agreement, Security Agreement, Deed of Trust, Assignment and Notes	33
Section 1203.	Requiring Consent of Bondholders Opinion of Counsel Required	33
ARTICLE XIII MISCELLANEOUS
Section 1301.	Consents, etc., of Bondholders	33
Section 1302.	Limitation of Rights	34
Section 1303.	Limitation of Liability of Members, etc., of Authority	34
Section 1304.	Notices	34
Section 1305.	Successors and Assigns	35
Section 1306.	Severability	35
Section 1307.	Applicable Law	35
Section 1308.	Counterparts	35
Testimonium		35

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Signatures		35
Exhibit A -	Form of Bond
Exhibit B-l	Form of Requisition for Issuance Costs
Exhibit B-2	Form of Requisition From Replacement Reserve Fund

iv

This INDENTURE OF TRUST, dated as of December 1, 1998, by and between the HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY, a political subdivision of the Commonwealth of Virginia (the “Authority”), and CRESTAR BANK, a banking corporation organized under the laws of the Commonwealth of Virginia and having a corporate trust office in Richmond, Virginia, as trustee (in such capacity herein, together with any successor in such capacity, called the “Trustee”);

W I T N E S S E T H :

WHEREAS, the Authority is a political subdivision of the Commonwealth of Virginia created by Chapter 1, Title 36, Code of Virginia of 1950, as amended (the “Act”), and is authorized thereby to make loans for assistance in acquisition, construction, equipping or maintaining commercial or other buildings and to issue its revenue bonds therefor;

WHEREAS, the Peninsula Ports Authority of Virginia issued its $10,000,000 Refunding Revenue Bonds (Olde Hampton Hotel Associates Project), Series of 1986 (the “PPAV Bonds”), currently outstanding in the amount of $8,700,000, to refund its prior bonds issued to finance a portion of the cost of the acquisition, construction and equipping of a hotel, currently operated as a Radisson Hotel, and a parking garage containing certain retail space (collectively, the “Project”), all located in a redevelopment project in the City of Hampton, Virginia (the “City”);

WHEREAS, in furtherance of the purposes of the Act, the Authority at the request of Olde Hampton Hotel Associates, A Virginia Limited Partnership (the “Company”), has determined to issue and sell its $8,640,000 First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project), Series 1998A (the “Series 1998A Bonds”), and its $390,000 Taxable First Mortgage Revenue Bonds (Olde Hampton Hotel Associates Project), Series 1998B (the “Series 1998B Bonds” and collectively with the Series 1998A Bonds, the “Bonds”), for the benefit of the Company for the purpose of refinancing the Project by redeeming the outstanding principal amount of the PPAV Bonds and paying certain costs related to such issuance and redemption;

WHEREAS, simultaneously with the issuance of the Bonds, the Authority and the Company will enter into a Loan Agreement dated as of the date hereof (the “Loan Agreement”), under the terms of which the Authority has agreed to authorize, issue, sell and deliver the Bonds to accomplish the refinancing, and the Company will deliver its $8,700,000 non-recourse promissory note with respect to the Series 1998A Bonds and its $370,000 non-recourse promissory note with respect to the Series 1998B Bonds, each dated the date of issuance of the Bonds (collectively the “Notes”) promising to make payments sufficient to pay the principal of and premium, if any, and interest on the Bonds; and

WHEREAS, all things necessary to make the Bonds, when authenticated by the Trustee and issued as in this Indenture provided, valid, binding and legal limited obligations of the Authority and to constitute this Indenture a valid and binding agreement securing the payment of the principal of and premium, if any, and interest on the Bonds have been done and performed and the execution and delivery of this Indenture and the execution and issuance of the Bonds, subject to the terms hereof, have in all respects been duly authorized;

NOW, THEREFORE, THIS INDENTURE FURTHER WITNESSETH that as security for payment of the principal of and premium, if any, and interest on the Bonds and for the funds that may be advanced by the Trustee pursuant hereto, the Authority does hereby pledge and assign to the Trustee the following described property:

A. the Notes (assigned to the Trustee by the Authority), all rights of the Authority under the Loan Agreement (except for certain rights to payment of fees and expenses pursuant to Section 4.1 thereof, its rights to indemnification pursuant to Section 5.4 thereof and its rights to notice pursuant to Section 9.2 thereof) and all revenues and receipts derived by the Authority therefrom and thereunder, including the Authority’s rights under the Deed of Trust, the Security Agreement and the Assignment, each as defined herein;

B. the funds, including moneys and investments therein, held by the Trustee pursuant to this Indenture; and

C. any other property of every name and nature from time to time mortgaged, pledged, assigned or hypothecated as and for additional security hereunder by the Authority or by anyone in its behalf or with its consent in favor of the Trustee, which is hereby authorized to receive all such property at any time and to apply and hold the same subject to the terms hereof;

TO HAVE AND TO HOLD all the same with all privileges and appurtenances hereby conveyed and assigned, or agreed or intended to be, to the Trustee and its successors in such trust and their assigns forever,

IN TRUST, however, for the equal and proportionate benefit and security of the holders from time to time of the Bonds without privilege, priority or distinction as to lien or otherwise of any of the Bonds over any of the others, upon the terms and conditions hereinafter stated.

The Authority covenants and agrees with the Trustee and with the respective holders from time to time of the Bonds or any part thereof as follows:

ARTICLE I

DEFINITIONS AND RULES OF CONSTRUCTION

SECTION 101. Definitions. All words and terms defined in Article I of the Loan Agreement shall have the same meanings in this Indenture of Trust, unless the context otherwise requires. In addition, the following words and terms as used in this Indenture shall have the following meanings unless the context otherwise requires.

“Act” shall mean the Housing Authorities Law, Chapter 1, Title 36, Code of Virginia of 1950, as amended.

“Agreement” shall mean the Loan Agreement dated as of the date hereof, between the Authority and the Company, including any amendments thereto as herein permitted.

“Assignment” shall mean the Assignment of Rents and Leases dated as of the date hereof between the Company and the Trustee, which assigns the leases, rents and room charges of the Project, including any amendments thereto.

“Authority” shall mean the Hampton Redevelopment and Housing Authority, a political subdivision of the Commonwealth of Virginia, its successors and assigns.

“Authorized Representative of the Company” shall mean a general partner of HHA, Ltd., a Virginia limited partnership which is the general partner of the Company, or such other person or persons as may be designated to act on behalf of the Company by a certificate signed by a general partner of HHA, Ltd. and filed with the Authority and the Trustee.

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“Bond Counsel” shall mean a firm of attorneys nationally recognized on the subject of municipal bonds as may be acceptable to the Authority and the Trustee.

“Bond Fund” shall mean the Bond Fund established by Section 601.

“Bondholder” or “holder” shall mean the registered owner and the beneficial owner of any Bond, provided that any beneficial owner desiring to receive any notices or other reports hereunder to holders shall have provided their names and addresses in writing to the Trustee.

“Bonds” shall mean, collectively the Series 1998A Bonds and Series 1998B Bonds.

“Business Day” shall mean any Monday, Tuesday, Wednesday, Thursday or Friday on which commercial banking institutions generally are open for business in the Commonwealth of Virginia.

“Company” shall mean Olde Hampton Hotel Associates, A Virginia Limited Partnership.

“Debt Service Reserve Fund” shall mean the Debt Service Reserve Fund established by Section 601.

“Debt Service Reserve Requirement” shall mean $1,000,000.

“Deed of Trust” shall mean the Deed of Trust and Security Agreement between the Company and the Deed of Trust Trustees, dated as of the date hereof, which grants a lien on and a security interest in the Project as security for the Notes, including any amendments thereto.

“Deed of Trust Trustees” shall mean J. Lee Judy a resident of the County of Amelia, Virginia, and Eric T. Rodriguez a resident of the County of New Kent, Virginia, together with any successor in such capacity.

“Defeasance Obligations” shall mean

(i) noncallable Government Obligations, and

(ii) government participations, which shall mean evidences of ownership of a proportionate interest in specified noncallable Government Obligations, which Government Obligations are held by a bank or trust company organized and existing under the laws of the United States of America or any state thereof in the capacity of custodian.

“Event of Default” shall mean any of the events enumerated in Section 901.

“Government Certificates” shall mean certificates representing ownership of United States Treasury obligations principal at maturity or interest coupons for accrued periods, which obligations or coupons are held by a bank or trust company organized and existing under the laws of the United States of America or any of its states reasonably acceptable to the Trustee. Such bank or trust company shall hold Government Certificates in the capacity of custodian and shall be independent of the seller of such certificates.

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“Government Obligations” shall mean (i) bonds, notes and other obligations of the United States of America and securities unconditionally guaranteed as to the payment of principal and interest by the United States of America or any of its agencies, and (ii) obligations of the Resolution Funding Corporation.

“Indenture” shall mean this Indenture, as supplemented by any Supplemental Indenture.

“Interest Payment Date” shall mean each January 1 and July 1, beginning July 1, 1999, for so long as any Bonds are Outstanding.

“Land” shall mean the real estate described in Exhibit A attached to the Deed of Trust and any real estate becoming part of the Project subsequent to the date hereof, less such real estate as may be released from the lien of the Deed of Trust pursuant to the provisions thereof or taken by the exercise of the power of eminent domain or lost because of failure of title.

“Letter of Representations” shall mean the Blanket Issuer Letter of Representations from the Authority dated July 29, 1996, with the initial Securities Depository and any amendments thereto or any successor agreements between the Authority and any successor Securities Depository, relating to a book-entry system to be maintained by the Securities Depository with respect to the Series 1998A Bonds. Notwithstanding any provisions of this Indenture, including Article XI or XII, the Authority and, if necessary, the Trustee may enter into any such amendment or successor agreement without the consent of the Holder of the Bonds.

“Notes” shall mean the two non-recourse promissory notes of the Company, the form of which is attached to the Loan Agreement as Exhibit A, in the principal amounts of $8,640,000 and $390,000 each dated the date of issuance of the Bonds, issued to the Authority pursuant to the Loan Agreement, including any amendments thereto or substitutions therefor as herein permitted.

“Opinion of Counsel” shall mean a written opinion of an attorney or firm of attorneys acceptable to the Trustee, who may be counsel for the Authority or the Company but shall not be a fulltime employee of the Authority, the Company or the Trustee,

“Outstanding” or “Bonds Outstanding” shall mean all Bonds which have been issued pursuant to this Indenture except Bonds cancelled after purchase in the open market or because of payment at or redemption prior to maturity.

“Project” shall mean the buildings and improvements thereto, currently operated as a Radisson Hotel, and a parking garage containing certain retail space, all located in the City, as further described in Exhibit A to the Deed of Trust, as the same may from time to time exist.

“Replacement Reserve Fund” shall mean the Replacement Reserve Fund established by Section 601.

“Securities Depository” shall mean, initially, The Depository Trust Company, a corporation organized and existing under the laws of the state of New York, and its successors.

“Security Agreement” shall mean the Security Agreement dated as of the date hereof between the Company and the Trustee, which grants a security interest in certain personal property of the Company, including any amendments thereto.

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“Series 1998A Bonds” shall mean the Authority’s $8,640,000 First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project), Series 1998A, authorized in Section 201 (a).

“Series 1998B Bonds” shall mean the Authority’s $390,000 Taxable First Mortgage Revenue Bonds (Olde Hampton Hotel Associates Project), Series 1998B, authorized in Section 201(b).

“Series of Bonds” or “Bonds of a Series” or “Series” shall mean a series of Bonds issued pursuant to this Indenture and the terms of a Supplemental Indenture.

“Supplemental Indenture” shall mean any supplemental indenture entered into pursuant to Article XI.

“Trustee” shall mean Crestar Bank, Richmond, Virginia, or its successors serving as such hereunder.

“Unassigned Rights of the Authority” shall mean the rights of the Authority (a) to payment of fees and expenses pursuant to Section 4.1 of the Loan Agreement, (b) to indemnification pursuant to Section 5.4 thereof, and (c) to receive notices as provided in the Loan Agreement and the Indenture.

“Virginia Code” shall mean the Code of Virginia of 1950, as amended.

SECTION 102. Rules of Construction. Unless the context clearly indicates to the contrary, the following rules shall apply to the construction of this Indenture:

(a) Words importing the singular number shall include the plural number and vice versa.

(b) Words importing the redemption or calling for redemption of Bonds shall not be deemed to refer to or connote the payment of Bonds at their stated maturity.

(c) All references herein to particular Articles or Sections are references to Articles or Sections of this Indenture unless otherwise indicated.

(d) The headings and Table of Contents herein are solely for convenience of reference and shall not constitute a part of this Indenture nor shall they affect its meaning, construction or effect.

(e) All references herein to the payment of Bonds are references to payment of principal of and premium, if any, and interest on Bonds.

(f) All references herein to the time of day shall mean Richmond, Virginia, time.

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ARTICLE II

AUTHORIZATION, DETAILS,

EXECUTION, AUTHENTICATION,

REGISTRATION AND DELIVERY OF BONDS

SECTION 201. Authorization of the Bonds. (a) There are authorized to be issued first mortgage revenue refunding bonds of the Authority in the aggregate principal amount of $8,640,000.

(b) There are authorized to be issued taxable first mortgage revenue bonds of the Authority in the aggregate principal amount of $390,000.

SECTION 202. Details of Bonds. (a) The bonds authorized in Section 201 (a) shall be designated “First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project), Series 1998A,” and the bonds authorized in Section 201(b) shall be designated “Taxable First Mortgage Revenue Bonds (Olde Hampton Hotel Associates Project), Series 1998B.” The Bonds shall be issuable only as registered Bonds, each series shall be numbered R-l upward, shall be dated the date of their initial delivery, and shall bear interest, payable semiannually beginning July 1, 1999, on each Interest Payment Date until payment of the principal thereof. The Bonds shall be issued in authorized denominations of $100,000 and multiples of $5,000 in excess thereof.

The Bonds shall bear interest at the rates and shall mature as follows: $1,210,000 Series 1998A Bonds shall bear interest at a rate of 6.0% per annum and shall mature on July 1, 2003; $7,430,000 Series 1998A Bonds shall bear interest at a rate of 6.5% per annum and shall mature on July 1, 2016; $390,000 Series 1998B Bonds shall bear interest at a rate of 8.0% and shall mature on July 1, 2000.

(b) Interest on the Bonds shall be calculated on the basis of a year of 360 days and 12 months of 30 days each. All interest determinations and calculations shall be made by the Trustee. Each Bond shall bear interest at the rate described herein (i) from the dated date, if such Bond is authenticated prior to July 1, 1999, or (ii) otherwise from the Interest Payment Date that is, or immediately precedes, the date on which such Bond is authenticated, unless payment of interest is in default, in which case such Bond shall bear interest from the date to which interest has been paid.

(c) Principal of, and premium if any, on the Bonds shall be paid upon presentation of the Bonds to the Trustee. The Trustee shall pay interest on the Bonds by check or draft mailed on each Interest Payment Date to registered owners of Bonds as of the 15^th day of the month next preceding such Interest Payment Date, at the addresses as they appear on the registration books maintained by the Trustee, provided that so long as Bonds are held by the Security Depository, or at the request of any Significant Owner, payment shall be made on each Interest Payment Date by wire transfer pursuant to the most recent wire instructions received by the Trustee from such Significant Owner.

SECTION 203. Series 1998A Bonds Securities Depository Provisions. (a) One bond certificate for each maturity of the Series 1998A Bonds initially will be issued and registered to the Securities Depository, or its nominee. The Authority and the Trustee have entered into the Letter of Representations relating to a book-entry system to be maintained by the Securities Depository for the Series 1998A Bonds.

(b) In the event that (1) the Securities Depository determines not to continue to act as a securities depository for the Series 1998A Bonds by giving notice to the Trustee and the Authority discharging its responsibilities hereunder, or (2) the Authority in its sole discretion

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determines (A) that purchasers of such Series 1998A Bonds in book-entry form, herein called “beneficial owners,” shall be able to obtain certificated Bonds, or (B) to select a new Securities Depository, then the Trustee shall, at the direction of the Authority, attempt to locate another qualified securities depository to serve as Securities Depository or authenticate and deliver certificated Series 1998A Bonds to the beneficial Holders or to the Securities Depository participants on behalf of beneficial Holders substantially in the form set forth as Exhibit A. In delivering the certificated Series 1998A Bonds, the Trustee shall be entitled to rely on the records of the Securities Depository as to the beneficial owners or the records of the Securities Depository participants acting on behalf of beneficial owners. Such certificated Series 1998A Bonds will then be registrable, transferable and exchangeable as set forth in Section 208.

So long as there is a Securities Depository for the Series 1998A Bonds (I) the Securities Depository or its nominee shall be the registered owner of such Series 1998A Bonds, (2) notwithstanding anything to the contrary in the Indenture, determinations of persons entitled to payment of principal, premium, if any, and interest, transfers of ownership and exchanges and receipt of notices shall be the responsibility of the Securities Depository and shall be effected pursuant to rules and procedures established by such Securities Depository, (3) the Authority and the Trustee shall not be responsible or liable for maintaining, supervising or reviewing the records maintained by the Securities Depository, its participants or persons acting through such participants, (4) references in the Indenture to registered owners of such Series 1998A Bonds means such Securities Depository or its nominee and shall not mean the beneficial owners of such Series 1998A Bonds, and (5) in the event of any inconsistency between the provisions of the Indenture and the provisions of the Letter of Representations such provisions of the Letter of Representations, except to the extent set forth in this paragraph and the next preceding paragraph, shall control.

SECTION 204. Execution of Bonds. The Bonds shall be signed by the manual or facsimile signature of the Chairman or Vice Chairman of the Authority and its seal shall be affixed hereto or a facsimile thereof printed thereon and attested by the manual or facsimile signature of its Secretary or Assistant Secretary. In case any officer whose signature or a facsimile of whose signature shall appear on any Bond shall cease to be such officer before the delivery of the Bonds, such signature or such facsimile shall nevertheless be valid and sufficient for all purposes the same as if he had remained in office until such delivery. Any Bond may bear the facsimile signature of or may be signed by such persons as at the actual time of the execution thereof shall be the proper officers to sign such Bond although at the date of such Bond such persons may not have been such officers.

SECTION 205. Authentication of Bonds. The Bonds shall bear a certificate of authentication, substantially in the form set forth as Exhibit A, and shall not be valid until the Trustee shall have duly executed the certificate of authentication and inserted the date of authentication thereon. The Trustee shall authenticate each Bond with the signature of an authorized person or employee, but it shall not be necessary for the same officer to authenticate all of the Bonds. Only such authenticated Bonds shall be entitled to any right or benefit under this Indenture, and such certificate on any Bond issued hereunder shall be conclusive evidence, that the Bond has been duly issued and is secured by the provisions hereof.

SECTION 206. Form of the Bonds. The Bonds shall be in substantially the form attached hereto as Exhibit A, with such appropriate variations, omissions and insertions as are permitted or required by this Indenture; provided that the Series 1998B Bonds shall bear a legend substantially as follows: “THIS BOND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND IT MAY BE TRANSFERRED ONLY (A) IN ACCORDANCE WITH REGULATION D OF SUCH SECURITIES ACT, (B) PURSUANT TO A VALID REGISTRATION UNDER SUCH SECURITIES ACT, OR (C) PURSUANT TO AN EXEMPTION FROM SUCH REGISTRATION REQUIREMENT.”

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SECTION 207. Delivery of the Bonds. The Trustee shall authenticate and deliver the Bonds when there have been filed with or delivered to it the following:

(a) A certified copy of a resolution or resolutions of the Authority authorizing the execution and delivery of this Indenture, the Loan Agreement, the assignment of the Notes, the Deed of Trust, the Assignment and the Security Agreement and the issuance, sale, execution and delivery of the Bonds.

(b) An original executed counterpart of this Indenture.

(c) An original executed counterpart of the Loan Agreement.

(d) An original executed counterpart of the Deed of Trust together with evidence of its recordation.

(e) A mortgagee title insurance binder or policy on the Land in the face amount of $9,030,000 issued by a company duly authorized to issue the same, to the effect that the Deed of Trust creates a first lien on the Land for the benefit of the Trustee as holder of the Notes, subject only to Permitted Encumbrances. In lieu of the final policy, the Company may furnish a commitment for title insurance with all Schedule B-1 conditions marked satisfied and an insured closing letter covering the Company’s counsel, but in such case the final policy shall be issued within 30 days of the issuance of the Bonds.

(f) An original executed counterpart of the Security Agreement.

(g) An original executed counterpart of the Assignment, together with evidence of its recordation.

(h) An Opinion of Counsel, which may rely upon the mortgagee title policy and be subject to customary exceptions and qualifications, to the effect that the security interests created by the Security Agreement and the Deed of Trust have been duly created and perfected in favor of the Trustee, and that the appropriate records for the filing of financing statements do not disclose any security interests, except Permitted Encumbrances, taking priority over the security interests created by the Loan Agreement, the Security Agreement, the Assignment and the Deed of Trust.

(i) An Opinion of Counsel, subject to customary exceptions and qualifications, including those as to bankruptcy, to the effect that the Company is a Virginia limited partnership duly organized and validly existing in the Commonwealth, and that the Loan Agreement, the Notes, the Security Agreement, the Assignment, and the Deed of Trust have been properly authorized, executed and delivered and constitute valid and binding obligations, enforceable against the Company in accordance with their respective terms.

(j) The Notes, duly authorized and executed by the Company and assigned to the Trustee.

(k) A certificate of an Insurance Consultant reciting that all policies of insurance required by Section 5.2 of the Loan Agreement to be in effect upon delivery of the Bonds are in full force and effect and that the amounts and types of insurance comply with and satisfy all the requirements of Section 5.2 of the Loan Agreement.

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(l) Internal Revenue Service Form 8038 completed by the Authority with respect to the Series 1998A Bonds, together with a certificate of the Company with respect to the information contained in it.

(m) The written opinion of Bond Counsel, subject to customary exceptions and qualifications, that the issuance of such Bonds has been duly authorized, that the Bonds are valid and binding limited obligations of the Authority, that the interest on such Bonds is exempt from income taxation by the Commonwealth of Virginia and that the interest on the Series 1998A Bonds is excludable from gross income for purposes of federal income taxation.

(n) The Bonds, executed by the Authority in accordance with Section 204.

(o) A request and authorization of the Authority, signed by its Chairman or Vice Chairman, to the Trustee to authenticate and deliver the Bonds to such purchaser or purchasers named therein upon payment to the Trustee for the account of the Authority of a specified sum plus accrued interest to the date of delivery.

The proceeds of the Bonds will be deposited and used by the Trustee as provided in Article V.

SECTION 208. Exchange of Bonds; Persons Treated as Owners. The Trustee shall maintain registration books for the registration or exchange of Bonds. Upon surrender of any Bonds at a corporate trust office of the Trustee, together with an assignment duly executed by the registered owner or his duly authorized attorney or legal representative in such form as shall be satisfactory to the Trustee, such Bond may be exchanged for an equal aggregate principal amount of Bonds, in authorized denominations, of the same series, form and maturity, bearing interest at the same rate as the Bonds surrendered, and registered in the name or names as requested by the then registered owner thereof or his duly authorized attorney or legal representative. The Authority shall execute and the Trustee shall authenticate any Bonds necessary to provide for exchange of Bonds pursuant to this Section; provided that registration of Series 1998B Bonds in the name of any person other than the initial holder thereof shall occur only upon receipt by the Trustee of an opinion of counsel addressed to the Authority and to the Trustee to the effect that such transfer complies with the securities law limitation upon the transfer thereof set forth in the legend in accordance with Section 206.

The Trustee shall treat the registered owner as the person exclusively entitled to payment of principal, premium, if any, and interest and the exercise of all other rights and powers of the owner, except that all interest payments shall be made to the person shown as owner on the registration books on the 15th day of the month preceding each Interest Payment Date.

SECTION 209. Charges for Exchange. Any exchange of Bonds shall be at the expense of the Company, except that the Trustee may charge the person requesting such exchange the amount of any tax or other governmental charge required to be paid with respect thereto.

SECTION 210. Temporary Bonds. Prior to the preparation of Bonds in definitive form the Authority may issue temporary Bonds in registered form and in such denominations as the Authority may determine, but otherwise in substantially the form hereinabove set forth, with appropriate variations, omissions and insertions. The Authority promptly shall prepare, execute and deliver to the Trustee before the first Interest Payment Date Bonds in definitive form and thereupon, upon surrender of Bonds in temporary form, the Trustee shall authenticate and deliver in exchange therefor Bonds in definitive form of the same maturity having an equal aggregate principal amount. Until exchanged for Bonds in definitive form, Bonds in temporary form shall be entitled to the lien and benefit of this Indenture.

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SECTION 211. Mutilated, Lost or Destroyed Bonds. If any Bond has been mutilated, lost or destroyed, the Authority shall cause to be executed, and the Trustee shall authenticate and deliver, a new Bond of like date and tenor in exchange and substitution for, and upon cancellation of, such mutilated Bond or in lieu of and in substitution for such lost or destroyed Bond; provided, however, that the Authority and the Trustee shall so execute and deliver only if the holder has paid the reasonable expenses and charges of the Authority and the Trustee in connection therewith and, in the case of a lost or destroyed Bond, (a) has filed with the Authority and the Trustee evidence satisfactory to them that such Bond was lost or destroyed and (b) has furnished to the Authority and the Trustee indemnity satisfactory to them. If any such Bond has matured, instead of issuing a new Bond the Trustee may pay the same without the surrender thereof.

SECTION 212. Cancellation and Disposition of Bonds. All Bonds that have been surrendered for exchange pursuant to Section 208, paid (whether at maturity, by acceleration or call for redemption or otherwise), or delivered to the Trustee by the Authority for cancellation shall not be reissued, and the Trustee shall, unless otherwise directed Bonds. The Trustee shall deliver to the Authority a certificate of any such cremation, shredding or other disposition.

ARTICLE III

REDEMPTION OF BONDS

SECTION 301. Redemption. The Bonds may not be called for redemption by the Authority except as provided in this Article.

SECTION 302. Extraordinary Redemption at Par, If the Company exercises its option or is required to prepay the Notes upon damage to, condemnation of or failure of title to the Project or certain other extraordinary events as provided in Section 8.1 of the Loan Agreement, the Bonds are required to be redeemed in whole or in part at any time and upon payment of 100% of the principal amount of the Bonds to be redeemed plus interest accrued to the redemption date,

SECTION 303. Optional Redemption Dates and Prices. The Series 1998A Bonds maturing on July 1, 2016, are subject to optional redemption by the Authority on or after July 1, 2008, from any amounts available for such purpose, in whole or in part at any time during the following periods at the following redemption prices, which are expressed as percentages of the principal amount of the Bonds to be redeemed, plus accrued interest to the redemption date:

Redemption Period (Both Dates Inclusive)	Redemption Date
July 1, 2008 through June 30,2009	102	%
July 1,2009 through June 30,2010	101
July 1, 2010 and thereafter	100

SECTION 304. Mandatory Sinking Fund Redemption. Bonds shall be redeemed prior to maturity on July 1 in the years and amounts upon payment of 100% of the principal amount thereof plus interest accrued to the redemption date, as follows:

Series 1998 A Bonds Maturing July 1,2003

Year	Amount
2000	$	190,000
2001		320,000
2002		340,000
2003 (final maturity)		360,000

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Series 1998A Bonds Maturing July 1. 2016

Year	Amount		Year	Amount
2004	$	380,000	2011	$	595,000
2005		405,000	2012		630,000
2006		435,000	2013		670,000
2007		460,000	2014		715,000
2008		490,000	2015		760,000
2009		525,000	2016 (final maturity)		810,000
2010		555,000

Series 1998B Bonds

Year	Amount
1999	$	280,000
2000 (final maturity)		110,000

The Trustee shall provide for redemption of Bonds in accordance with the foregoing schedule; provided, however, that on or before the 70th day next preceding any such sinking fund payment date the Company may:

(a) deliver to the Trustee for cancellation Bonds in any aggregate principal amount desired; or

(b) receive a credit against the sinking fund redemption obligation on such sinking fund payment date for Bonds that previously have been redeemed (other than through the operation of the sinking fund) and canceled by the Trustee but not theretofore applied as a credit against any sinking fund redemption.

Upon the occurrence of any of the events described in (a) or (b) of this Section, the Trustee shall credit against the sinking fund redemption obligation on such sinking fund payment date the amount of such Bonds so delivered or previously redeemed and any excess over such obligation will be credited against future mandatory redemption obligations in inverse order of redemption dates, and the principal amounts of Bonds to be redeemed by mandatory redemption will be reduced accordingly.

SECTION 305. Selection of Bonds for Redemption. (a) If less than all Bonds of any maturity are called for redemption pursuant to Section 302 or 303, the Bonds to be redeemed shall be selected pro rata among the holders of the Bonds of such maturity by the Trustee. If less than all Series 1998A Bonds bearing interest at the same rate are called for redemption, such Series 1998A Bonds to be redeemed, as applicable, shall be selected pro rata among the holders of the Series 1998A Bonds by the Trustee provided that the principal portion of any Series 1998 A Bonds to be redeemed shall result in the unredeemed portion being in $100,000 denominations or any integral multiple of $5,000 in excess thereof. There shall be no restriction on the denomination of the Series 1998B Bonds after the July 1,1999, redemption. If a portion of a Bond shall be called for redemption, a new Bond in principal amount equal to the unredeemed portion thereof shall be issued to the registered owner upon the surrender thereof. If a notice of redemption is unconditional, or if the conditions of a conditional notice of redemption have been satisfied, then upon presentation and surrender of the Bonds so called for redemption at the place or places of payment, such Bonds will be redeemed.

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(b) If the Company exercises any option to prepay the Notes under Article VIII of the Loan Agreement or requests any redemption of Bonds permitted hereunder and sufficient amounts are in the funds created herein, the Trustee shall, in the name of the Authority, redeem Bonds as then permitted or required at the earliest practicable date permitted hereunder.

SECTION 306. Notice of Redemption. (a) If less than all Bonds are to be redeemed, and subject to the provisions of Subsection (b) hereof, the Bonds to be redeemed shall be identified by reference to the series designation, date of issue, serial numbers and maturity date. Each notice of redemption shall specify: (1) the date fixed for redemption, (2) the principal amount of Bonds or portions thereof to be redeemed, (3) the applicable redemption price, (4) the place or places of payment, including the address and a contact person or department and telephone number, upon presentation and surrender of the Bonds, (5) that payment of the principal amount and premium, if any, will be made upon presentation and surrender of the Bonds to be redeemed, (6) that interest accrued to the date fixed for redemption will be paid as specified in such notice, (7) that on and after such date interest on Bonds which have been redeemed will cease to accrue, (8) the certificate and CUSIP numbers of the Bonds to be redeemed and if less than the face amount of any such Bond is to be redeemed, the principal amount to be redeemed, (9) the issuance and maturity dates and interest rates of the Bonds to be redeemed, and (10) state any condition to such redemption. Such notice may set forth any additional information relating to such redemption. Notice of redemption of any Bonds shall be mailed at the times and in the manner set forth in Subsection (b) of this Section.

(b) Any notice of redemption shall be sent by the Trustee by registered or certified mail not less than 30 nor more than 60 days prior to the date set for redemption (I) to the holder of each such Bond to be redeemed in whole or in part at his address as it appears on the registration books maintained by the Trustee, (2) to all organizations registered with the Securities and Exchange Commission as securities depositories, and (3) to at least one information service of national recognition that disseminates redemption information with respect to tax-exempt securities. Failure to give any notice specified in (b)(1) of this Subsection, or any defect therein, shall not affect the validity of any proceedings for the redemption of any Bonds with respect to which no such failure has occurred. Failure to give any notice specified in (b)(2) or (b)(3) of this Subsection, or any defect therein, shall not affect the validity of any proceedings for the redemption of any Bonds with respect to which the notice specified in (b)(1) of this Subsection is given correctly.

ARTICLE IV

GENERAL COVENANTS AND PROVISIONS

SECTION 401. Payment of Bonds. The Authority shall promptly pay, or cause to be paid, the principal of, whether at maturity, by acceleration, call for redemption, or otherwise, and premium, if any, and interest on the Bonds, to the Trustee for payment to the registered owners of the Bonds on the dates and in the manner provided herein or in any Supplemental Indenture authorizing the issuance thereof and in the Bonds, according to the true intent and meaning thereof; provided, however, that such obligations are not general obligations of the Authority but are limited obligations payable solely from the revenues and receipts derived from and under the Loan Agreement and the Notes, which revenues and receipts are hereby pledged and assigned specifically to such purposes in the manner and to the extent provided herein.

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SECTION 402. Covenants and Representations of Authority. The Authority shall observe and perform all covenants, conditions and agreements on its part contained in this Indenture, in every Bond executed, authenticated and delivered hereunder and in all of its proceedings pertaining thereto; provided, however, that the liability of the Authority under any such covenant, condition or agreement for any breach or default by the Authority thereof or thereunder shall be limited solely to the revenues and receipts derived from and under the Loan Agreement and the Notes. The Authority represents that it is duly authorized under the Constitution and laws of the Commonwealth of Virginia, including particularly and without limitation the Act, to issue the Bonds authorized by this Indenture and to execute this Indenture, to assign the Loan Agreement and the Notes and to pledge the revenues and receipts in the manner and to the extent herein set forth; that all action on its part with respect to the issuance of the Bonds and the execution and delivery of this Indenture duly and effectively has been taken; and that the Bonds in the hands of the owners thereof are and will be valid and enforceable limited obligations of the Authority according to the terms thereof except as limited by bankruptcy and usual equity principles.

SECTION 403. Liens; Further Assurances. The Authority shall not convey, pledge, assign, encumber or otherwise dispose of any of its rights under the Loan Agreement or the Notes except as provided herein. Subject to the provisions of Section 401 hereof and Section 4.1(b) of the Loan Agreement, the Authority shall do, execute, acknowledge and deliver, or cause to be done, executed, acknowledged and delivered, such indentures supplemental hereto and such further acts, instruments and transfers as the Trustee reasonably may require for the better assuring, transferring, conveying, mortgaging, pledging and assigning to the Trustee of the rights assigned hereby and the revenues and receipts pledged hereby to the payment of the principal of and premium, if any, and interest on the Bonds.

SECTION 404. Inspection of Books. All books and accounts in the possession of the Authority relating to the Loan Agreement, the Notes, the revenues and receipts derived therefrom, the Company and any and all transactions contemplated by the Indenture shall be open to inspection during regular business hours by the Trustee, the Company and their accountants and agents upon reasonable notice.

SECTION 405. Rights under Loan Agreement, Notes, Security Agreement, Assignment and Deed of Trust. The Authority grants to the Trustee the right to enforce, in its name or in the name of the Authority, for and on behalf of the Bondholders, regardless of whether the Authority is in default hereunder, all rights of the Authority and all obligations of the Company under and pursuant to the Loan Agreement, the Notes, the Security Agreement, the Assignment and the Deed of Trust.

SECTION 406. Reports by Trustee. The Trustee shall make annual reports to the Authority and the Company of all moneys received and expended by it. In addition, the Trustee shall make such reports available to the holders of the Bonds who request the same.

SECTION 407. Disclosure of Information. Pursuant to Section 5.17 of the Loan Agreement, the Company has agreed to provide certain continuing disclosure of information with respect to the Project to the Trustee. The Trustee shall receive the information disclosed by the Company and shall distribute such information to such holders of the Bonds as request such information and to the entities as set forth in such Section of the Loan Agreement. If the Annual Reports required by Section 5.17 of the Loan Agreement are not received by the dates set forth therein, the Trustee shall send an appropriate notice to the Municipal Securities Rulemaking Board in accordance with Rule 15c2-12 under The Securities Exchange Act of 1934, as amended. This section shall constitute written direction by the Authority to the Trustee to comply with the disclosure guidelines established by the National Corporate Trust Committee of the American Bankers Association.

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SECTION 408. Prohibited Activities. The Authority shall not knowingly engage in any activities or take any action that might result in (a) the income of the Authority under the Notes becoming taxable to it, (b) any Series 1998A Bond becoming an “arbitrage bond” within the meaning of Section 148 of the Code, or (c) any interest on any Series 1998A Bond becoming included in the gross income of the recipients thereof under the Code.

SECTION 409. Arbitrage Rebate. Upon request by the Authority or the Company, the Trustee shall provide the requesting party, on a timely basis that will facilitate compliance with any related deadlines necessary to comply with covenants in the Loan Agreement, such reports and information with respect to investments and earnings thereon of any amounts held under this Indenture as may be requested to comply with any rebate requirements pursuant to Section 148 of the Code and with Section 5.18 or 5.19 of the Loan Agreement. The above provisions of this Section and the related provisions of Section 5.18 or 5.19 of the Loan Agreement shall be amended by the Authority and the Trustee at the request of the Company if the Company shall furnish the parties hereto an opinion of Bond Counsel stating that regulations have been proposed or implemented not in existence on the date of this Indenture directing the calculation of the rebate amount in a manner different from that set forth in Section 5.18 or 5.19 of the Loan Agreement. Notwithstanding anything to the contrary in this Indenture, no payment shall be made by the Company to the United States of America if the Company shall furnish to the Trustee an opinion of Bond Counsel to the effect that such payment is not required under Section 148(f) of the Code to prevent the Bonds from becoming “arbitrage bonds.”

ARTICLE V

APPLICATION OF BOND PROCEEDS

SECTION 501. Payments into Bond Fund. The Trustee shall deposit into the Interest Account in the Bond Fund the amount of any accrued interest received from the sale of the Bonds.

SECTION 502. Remaining Proceeds. All of the remaining sale proceeds of the Bonds shall be deposited in the Proceeds Fund and shall be used as follows: (a) all of the remaining sale proceeds of the Series 1998A Bonds ($8,640,000) shall be transferred immediately to The Bank of New York, as trustee with respect to the PPAV Bonds, to be used together with other amounts to redeem the PPAV Bonds on January 1, 1999, and (b) all of the remaining sale proceeds of the Series 1998B Bonds shall be retained by the Trustee to be used at the direction of the Company, by requisition in substantially the form attached hereto as Exhibit B-l, to pay costs, or to reimburse or pay the Company for costs or expenses paid or incurred, associated with issuing the Bonds.

ARTICLE VI

REVENUES AND FUNDS

SECTION 601. Establishment of Funds. The following trust funds, all of which shall be held by the Trustee, are hereby established: “Hampton Redevelopment and Housing Authority, Proceeds Fund – Olde Hampton Hotel Associates 1998;” “Hampton Redevelopment and Housing Authority, Bond Fund – Olde Hampton Hotel Associates 1998,” in which there are established an Interest Account and a Principal Account, “Hampton Redevelopment and Housing Authority, Debt Service Reserve Fund – Olde Hampton Hotel Associates, 1998” and “Hampton Redevelopment and Housing Authority, Replacement Reserve Fund – Olde Hampton Hotel

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Associates, 1998.” In addition the following trust funds shall be held by the Trustee and are hereby established to be used for the purposes described in Section 4.1(c) of the Loan Agreement: “Hampton Redevelopment and Housing Authority, Real Estate Tax Fund – Olde Hampton Hotel Associates 1998” and “Hampton Redevelopment and Housing Authority, Insurance Premium Fund – Old Hampton Hotel Associates 1998.”

SECTION 602. Use of Moneys in Bond Fund. (a) The Trustee shall deposit into the Bond Fund all payments and receipts derived from the Notes, the Loan Agreement or the security therefor in the following order, subject to the provisions for the use of certain prepayments as provided in (c) below and subject to credits as provided in this Article VI:

(i) To the Interest Account (A) on the closing date, pursuant to Section 501, and (B) monthly such that by the third Business Day before each Interest Payment Date, the amount of interest that will become due on the Bonds on such Interest Payment Date or such lesser amount that, together with amounts already on deposit in the Interest Account, will be sufficient to pay interest on the Bonds to become due on such Interest Payment Date. The Trustee shall pay interest on the Bonds from the Interest Account as the same becomes due.

(ii) To the Principal Account monthly such that by the third Business Day before each July 1 beginning July 1, 1999, the amount of principal that will become due, whether at maturity or upon mandatory sinking fund redemption, on the Bonds on such July 1 or such lesser amount that, together with amounts already on deposit in the Principal Account, will be sufficient to pay principal of the Bonds to become due on such July 1. The Trustee shall pay the principal of the Bonds from the Principal Account at their maturity and make sinking fund redemptions and will provided a redemption of Bonds in accordance with any applicable redemption provision.

(iii) To the Principal Account, amounts that correspond to principal of or premium, if any, in connection with an optional redemption of the Bonds.

Investment earnings on amounts in the Bond Fund shall be credited to the Account therein in which such investments are held as earned and credited against required transfers thereto.

If sufficient funds are not in the Bond Fund on the third Business Day before each Interest Payment Date the Trustee shall immediately notify the Company of such by telecopy with receipt confirmed by telephone at the numbers provided in Section 1304 hereof.

(b) On each Interest Payment Date investment earnings on amounts in the Interest Account or the Principal Account shall be retained in such Account and credited to payments, if any, of interest or principal then due on the Bonds. If the balance in the Interest Account or the Principal Account calculated semi-annually on any Interest Payment Date shall exceed the amount payable, if any, on account of interest or principal on the Bonds on such Interest Payment Date, the Trustee shall notify the Company and such excess may be remitted to the Company or used as a credit against required deposits to such Account on or before the immediately following Interest Payment Date.

(c) The Trustee shall deposit any prepayments of the Notes upon certain extraordinary events, as provided in Section 8.1 of the Loan Agreement, in the Principal Account and use such amounts to redeem Bonds in accordance with Sections 302 and 305.

(d) When the balances in the Bond Fund and the Debt Service Reserve Fund are sufficient to redeem or pay at maturity all Bonds then Outstanding and to pay all interest to accrue thereon prior to redemption or maturity, the balance in the Bond Fund and the Debt Service Reserve

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Fund shall be held for redemption or payment of the Bonds in accordance with the provisions of Article III, at the earliest practicable date and the payment of interest thereon and premium, if any, and for no other purpose.

(e) If the Company shall fail to make any payment under the Notes for deposit in the Bond Fund on the day such payment is due and payable, the Trustee shall give notice thereof by telephone or telecopy to the Company on the next succeeding Business Day. In the event of (i) failure by the Company to make any of the payments to the Trustee as required by Section 4.1 of the Loan Agreement or (ii) notification to the Trustee by the holders of at least 25% in aggregate principal amount of Bonds then outstanding of any Event of Default hereunder, then the Trustee shall give notice thereof to each registered owner of Bonds.

SECTION 603. Use of Debt Service Reserve Fund. (a) Pursuant to Section 5.8(b) of the Loan Agreement, the Company is required to fund the Debt Service Reserve Fund to an aggregate amount equal to the Debt Service Reserve Requirement. In lieu of any deposit of cash to the Debt Service Reserve Fund, the Company may fund the Debt Service Reserve Fund with a line or letter of credit, surety bond or bond insurance. If the Debt Service Reserve Fund is funded with any such alternative to a cash deposit and at least 100 days prior to its stated expiration date the Company has not (i) provided the Trustee with evidence that the expiration date of such alternative has been extended or (ii) otherwise funded the Debt Service Reserve Fund, then 60 days prior to such expiration date the Trustee shall draw thereunder the amount of the Debt Service Reserve Requirement and deposit the amount drawn to fund the Debt Service Reserve Fund. If the Debt Service Reserve Fund is not funded in an amount equal to the Debt Service Reserve Requirement at least 30 days prior to the stated expiration of the line or letter of credit, surety bond or bond insurance policy which has not been extended it shall constitute an Event of Default hereunder.

(b) The Trustee shall transfer funds from the Debt Service Reserve Fund to the Bond Fund on any Interest Payment Date on which there are insufficient funds on deposit in the Bond Fund to pay the interest and principal, if any, due on such Interest Payment Date with respect to the Bonds. Upon the final maturity of all of the Bonds, any amount remaining on deposit in the Debt Service Reserve Fund in excess of the principal of and interest on the outstanding Bonds shall be paid to the Company.

(c) All investment earnings on amounts in the Debt Service Reserve Fund shall be retained therein, provided that in the event that the amount in the Debt Service Reserve Fund immediately following each July 1 debt service payment exceeds the Debt Service Reserve Requirement, the Trustee shall transfer such excess to the Company.

(d) In the event that the amount in the Debt Service Reserve Fund immediately following each Interest Payment Date is less than the Debt Service Reserve Requirement, the Company shall replenish such deficiency pursuant to Section 4. l(b)(4)(ii) of the Loan Agreement

SECTION 604. Use of Replacement Reserve Fund. (a) Pursuant to Section 4.l(b)(4) of the Loan Agreement, the Company is required to make monthly transfers of amounts to the Trustee to fund the Replacement Reserve Fund. All moneys held in the Replacement Reserve Fund and any investments of such moneys are pledged and otherwise subject to a security interest in favor of the Bondholders. The Trustee shall deposit any Net Proceeds of insurance and all condemnation awards received by it in the Replacement Reserve Fund and shall use such Net Proceeds or condemnation awards in accordance with the requirements of Section 6.1 of the Loan Agreement. Any such Net Proceeds or condemnation awards remaining after being utilized as required by Section 6.1 of the Loan Agreement shall be (i) if the Company is in default under the Loan Agreement, retained in the Replacement Reserve Fund for uses described in subsection (b), or (ii) otherwise transferred to the Bond Fund and credited against required transfers thereto.

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(b) The Trustee shall use amounts, if any, in the Replacement Reserve Fund to make transfers to the Bond Fund to the extent necessary to pay the principal of (whether due at maturity, by redemption or by acceleration) and interest on the Bonds as the same become due if, on any date such amounts are due, amounts in the Bond Fund and the Debt Service Reserve Fund are insufficient therefor.

(c) At the direction of the Company, the Trustee shall use amounts in the Replacement Reserve Fund to pay the cost of acquiring, constructing and equipping fixtures, machinery, equipment, furniture, real property and additions to, or improvements, extensions, refurbishments or enlargements of, the Project, and the cost of extraordinary maintenance or repairs (repairs or maintenance not recurring annually), renewals and replacements and repairs resulting from an emergency caused by an extraordinary occurrence; provided, however, that such disbursements shall only be made to pay costs that (i) are capital expenditures subject to depreciation in accordance with generally accepted accounting principles, or (ii) would be refurbishments or replacements of furniture, fixtures and equipment that may be expensed in accordance with generally accepted accounting principles but are not recurring annually. Property acquired with payments made pursuant to this section shall become part of the Project.

(d) The Trustee shall disburse moneys from the Replacement Reserve Fund for utilization pursuant to subsections (a) and (c) above as follows:

(1) Before any payment shall be made from the Replacement Reserve Fund, there shall be filed with the Trustee a requisition, substantially in the form of attached hereto as Exhibit B-2 signed by an Authorized Representative of the Company stating:

(i) The name of the person, firm or corporation to whom the payment is due;

(ii) The amount to be paid;

(iii) Either an invoice or description in reasonable detail of the purpose for which the obligation to be paid was incurred; and

(iv) That there has been received no notice (A) of any lien, right to lien or attachment upon, or claim affecting the right of the payee to receive payment of, any of the moneys payable under such requisition to any of the persons, firms or corporations named therein, and (B) that any materials, supplies or equipment covered by such requisition are subject to any lien or security interest, or if any notice of any such lien, attachment, claim or security interest has been received, such lien, attachment, claim or security interest has been released or discharged or will be released or discharged upon payment of the requisition, or stating that if there is such a lien, claim or attachment, that the Company has posted bond sufficient to discharge or pay such lien claim or attachment (in which case, the Trustee may require the Company to furnish reasonable evidence of such bond).

(2) All payments from the Replacement Reserve Fund shall be made by check or draft payable either (i) directly to the person, firm or corporation to be paid; (ii) to both the Company and such person, firm or corporation; or (iii) upon certification by the Company that it has previously paid such amount together with the invoice therefor, to the Company.

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(e) If the balances in the Bond Fund, the Debt Service Reserve Fund and the Replacement Reserve Fund are sufficient to redeem or pay at maturity all the Bonds then outstanding and to pay all interest to accrue thereon prior to redemption or maturity, the balances in the Replacement Reserve Fund and the Debt Service Reserve Fund may be transferred to the Bond Fund to be held for redemption or payment of the Bonds, in accordance with the provisions of Article III, at the earliest practicable date and the payment of interest thereon and premium, if any, for no other purpose.

SECTION 605. Non-Presentment of Bonds. If any Bond shall not be presented for payment when the principal thereof becomes due whether at maturity, by acceleration, call for redemption or otherwise, all liability of the Authority to the owner thereof for the payment of such Bond shall forthwith cease, determine and be completely discharged if funds sufficient to pay the principal of and premium, if any, on such Bond and interest due thereon, if any, shall be held by the Trustee for the benefit of the owner thereof, and thereupon it shall be the duty of the Trustee to hold such funds, without liability for interest thereon, for the benefit of the owner of such Bond who shall thereafter be restricted exclusively to such funds for any claim of whatever nature on his part under this Indenture or on, or with respect to, such Bond.

SECTION 606. Trustee’s and Authority’s Fees, Costs and Expenses. All reasonable fees and expenses of the Trustee and reasonable costs, fees and expenses of the Authority directly related to the issuance of the Bonds are to be paid by the Company under Section 4.l(b) of the Loan Agreement.

SECTION 607. Moneys To Be Held in Trust. All moneys required to be deposited with or paid to the Trustee for the account of any of the funds under any provision of this Indenture, except amounts other than Net Proceeds in the Replacement Reserve Fund, shall be held by the Trustee in trust and shall, while held by the Trustee, constitute part of the trust estate and be subject to the lien hereof.

SECTION 608. Payment To Company from Bond Fund, Debt Service Reserve Fund and Replacement Reserve Fund. After payment in full of the Bonds and after payment of the fees and expenses of the Trustee and other amounts required to be paid hereunder and the costs and expenses of the Authority and any other amounts required to be paid to the Authority under the Loan Agreement, all amounts remaining in the Bond Fund, the Debt Service Reserve Fund and the Replacement Reserve Fund and in the Debt Service Reserve Fund shall be paid to the Company as provided in Section 9.1 of the Loan Agreement.

SECTION 609. Other Funds and Accounts. The Trustee shall create such other funds or accounts as are necessary or desirable hereunder.

ARTICLE VII

DEPOSITS AND INVESTMENT OF FUNDS

SECTION 701. Investment of Moneys in Funds. Moneys held in the Bond Fund, the Debt Service Reserve’ Fund and the Replacement Reserve Fund may be invested and reinvested by the Trustee, at the request of and as directed by the Company as follows:

(a) Bonds, notes and other evidences of indebtedness of the United States of America, securities unconditionally guaranteed as to the timely payment of principal and interest by the United States of America and certificates representing ownership of either Treasury bond principal at maturity or its coupons for accrued periods; provided, however, that the underlying Treasury bond or coupons are held by a bank or trust company;

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(b) Bonds, notes and other evidences of indebtedness of the Federal National Mortgage Association, Federal Home Loan Banks, Federal Land Banks, Federal Farm Credit Banks, Federal Intermediate Credit Banks and Federal Banks for Cooperatives which are rated in either of the two highest rating categories by Moody’s Investors Service, Inc. (“Moody’s”) and Standard & Poor’s Corporation (“Standard & Poor’s”);

(c) Bonds, notes and other evidences of indebtedness of the Commonwealth of Virginia and securities unconditionally guaranteed as to the timely payment of principal and interest by the Commonwealth of Virginia;

(d) Bonds, notes and other evidences of indebtedness that are direct general obligations of any county, city, town, district, authority or other public body of the Commonwealth of Virginia upon which there is no default, and revenue bonds issued by agencies or authorities of the Commonwealth of Virginia or its political subdivisions upon which there is no default that are rated in either of the two highest rating categories by Moody’s and Standard & Poor’s;

(e) Bonds, notes and other evidences of indebtedness of any city, county, town or district situated in any one of the states of the United States of America upon which there is no default and which comply with the requirements of Section 26-40(5) of the Virginia Code, or any successor provision of law, that are rated in either of the two highest rating categories by Moody’s and Standard & Poor’s;

(f) Commercial paper with a maturity of 270 days or less rated by Moodys within its rating of P-l and by Standard & Poor’s within its rating of A-l which complies with the requirements of Section 2.1-328.1 of the Virginia Code, or any successor provision of law;

(g) Time deposits, certificates of .deposit or other interest bearing accounts of any commercial bank within the Commonwealth of Virginia that are approved for the deposit of funds of the Commonwealth of Virginia or any political subdivision thereof and are rated in either of the two highest rating categories of Moody’s and Standard & Poor’s; provided, however, that (1) such investments are secured in the manner required by the Virginia Security for Public Deposits Act, or any successor provision of law, or (2) such investments are fully insured by the Federal Deposit Insurance Corporation or any successor federal agency, and (3) no such investments shall be made for a period in excess of one year; and

(h) Money market funds rated “AAAm” or “AAAm-G” by Standard & Poor’s.

Any investments described in paragraphs (a), (b), (c), (d), (e) and (f) above may be held directly or in the form of securities of any open-end or closed-end management company or investment trust registered under the Investment Company Act of 1940, as amended; provided, however, that the portfolio of such investment company or investment trust is limited to such evidences of indebtedness.

Any investments described in paragraphs (a) and (b) above may be purchased by the Trustee pursuant to an overnight, term or open repurchase agreement with any bank within or without the Commonwealth of Virginia, having a combined capital, surplus and undivided profits

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of not less than $50,000,000, or with any primary government bond dealer trading with and recognized by the New York Federal Reserve (“Primary Dealer”); provided, however, that the obligation of the bank or Primary Dealer to repurchase shall not exceed the lesser of 12 months or the time limitations for investments set forth below. Such repurchase agreement shall be considered a purchase of such securities even if title to and/or possession of such securities is not transferred to the Trustee, so long as (1) the repurchase obligation of the bank or Primary Dealer is collateralized by the securities themselves, (2) such investments have on the date of the repurchase agreement a fair market value equal to at least 103% of the amount of the repurchase obligation of the bank or Primary Dealer, including principal and interest, (3) such securities are held by a third party as agent for the benefit of the Trustee and are segregated from securities owned generally by such third party, and (4) a perfected security interest in such securities is created for the benefit of the Bondholders under the Uniform Commercial Code of Virginia or book entry procedures prescribed at 31 C.F.R. 306.1 et seq. or 31 C.F.R. 350.0 et seq.

Any such investments shall be held by or under the control of the Trustee and while so held shall be deemed a part of the fund in which such moneys originally were held. The interest accruing thereon and any profit realized therefrom shall be credited to such funds, and any loss resulting from such investments shall be charged to such funds. The Trustee shall value such investments not less than semi-annually and shall sell and reduce to cash a sufficient amount of such investments to provide for the payment of amounts to the funds established under this Indenture.

Investments of moneys in the Bond Fund shall mature not later than the respective dates when the money will be required for the purposes intended. Investment of moneys in the Debt Service Reserve Fund and the Replacement Reserve Fund shall mature not later than the next Interest Payment Date. Any investments subject to repurchase or redemption at the option of the holder thereof, at a price not less than 100% of the principal thereof, shall be deemed, for purposes of this paragraph, to mature on any date when they are so subject to repurchase or redemption.

SECTION 702. Investments through Trustee’s Bond Department. The Trustee may make investments permitted by Section 701 through its own bond department or the bond department of any affiliated entity.

ARTICLE VIII

DISCHARGE OF INDENTURE

SECTION 801. Bonds Deemed Paid; Discharge of Indenture. Any series of Bonds will be deemed paid for all purposes of this Indenture when (a) payment of the principal of and interest and premium on the Bonds to the due date of such principal and interest (whether at maturity, upon redemption or otherwise) either (1) has been made in accordance with the terms of the Bonds or (2) has been provided for by depositing with the Trustee (A) money sufficient to make such payment, and/or (B) Defeasance Obligations maturing as to principal and interest in such amounts and at such times as will insure the availability of sufficient money to make such payment (and the Company must deliver to the Trustee at the time of such deposit an Opinion of Counsel experienced in bankruptcy matters to the effect that such deposit will not constitute a voidable preference or transfer under the United States Bankruptcy Code in the event the Authority or the Company becomes a debtor within the meaning of the United States Bankruptcy Code and a verification report of an independent certified public accountant), and (b) all compensation and expenses of the Trustee pertaining to such series of Bonds in respect of which such deposit is made have been paid or provided for to the Trustee’s satisfaction and all other obligations of the Company under the Bond Documents have been fully performed. When a Bond is deemed paid, it

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will no longer be subject to redemption except as specifically provided pursuant to this Article VIII and will no longer be secured by or entitled to the benefits of this Indenture or be an obligation of the Authority, except for: (x) payment from money or Defeasance Obligations under (a)(2) above; (y) such Bond may be transferred, exchanged, registered, discharged from registration or replaced as provided in Section 208.

Notwithstanding the foregoing, no deposit under clause (a)(2) of the first paragraph of this Section shall be deemed a payment of a series of Bonds until either: (a) the actual maturity of the Bonds; or (b)(i) the Trustee receives an Opinion of Bond Counsel to the effect that the advance refunding of such series of Bonds shall not adversely affect the tax exempt status of the interest on such Bonds and that the applicable Bonds have been defeased within the meaning of this Article VIII; (ii) notice of redemption of such series of Bonds is given in accordance with Article III hereof or, if such series of Bonds is not to be redeemed or paid within the next 60 days, until the Authority, at the request of the Company, has given the Trustee, in form satisfactory to the Trustee, irrevocable instruction (I) to notify, as soon as practicable, the holders of such series of Bonds in accordance with Article III hereof, that the deposit required by (a)(2) above has been made with the Trustee and that such series of Bonds is deemed to be paid under this Article and stating the maturity or redemption date upon which money is to be available for the payment of the principal of such series of Bonds, and, if the series of Bonds is to be redeemed rather than paid, and (II) to give timely notice of the redemption date for such series of Bonds as provided in Article III hereof; and (iii) the Trustee receives written evidence that the series of Bonds in question will, upon the deposit under clause (a)(2) of the first paragraph of this Section, be rated in the highest rating category of at least two national credit rating agencies (without regard to gradation).

When all Bonds Outstanding are deemed paid under the foregoing provisions of this Section, and all payments and obligations under the Loan Agreement and the Deed of Trust and all obligations hereunder are satisfied and provision is made to the satisfaction of the Trustee for its expenses, the Trustee will upon request acknowledge the discharge of the lien of this Indenture, provided, however that (a) the obligations under Section 208 hereof in respect of the transfer, exchange, registration, discharge from registration and replacement of Bonds hereof shall survive the discharge of the lien of the Indenture and (b) the Trustee shall have received an Opinion of Counsel to the effect that (i) all conditions precedent to the discharge of the lien as provided in this Indenture have been satisfied; and (ii) any deposit of funds and proposed application thereof will not cause any Bonds to be treated as arbitrage bonds for the purposes of Section 148 of the Code.

Such Bonds shall be subject to redemption as stated therein and as expressly provided for in any escrow agreement entered into in connection with (a)(2) above, such escrow agreement to be in form and substance satisfactory to the Trustee and shall contain a covenant that neither the Authority nor the Company shall redeem the Bonds other than in accordance with the redemption contemplated in such escrow agreement.

SECTION 802. Application of Trust Money. The Trustee shall hold in trust money or Defeasance Obligations deposited with it pursuant to the preceding Section and shall apply the deposited money and the money from the Defeasance Obligations in accordance with this Indenture only to the payment of principal of and interest on the Bonds.

SECTION 803. Repayment of Company. The Trustee shall promptly pay to the Company upon request any excess money or securities held by the Trustee at any time under this Article VIII and any money held by the Trustee under any provision of this Indenture for the payment of principal or interest or for the purchase of Bonds that remains unclaimed for four years and thereafter the owners must look to the Company only for payment of such amounts; provided, however, that before being required to make any such payment to Company, the Trustee shall, at the expense of the Company, cause to be published at least twice, at an interval of not less than

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seven days between publications, in a newspaper of general circulation in Hampton, Virginia and a financial newspaper in New York, New York, notice that said moneys remain unclaimed and that, after a date named in said notice, which date shall be not less than 10 nor more than 20 days after the date of first publication of such notice, the balance of such moneys then unclaimed will be returned to the Company. The Trustee shall, by first class mail, also send copies of any such notice to at least two registered securities depositories and the S & P Called Bond Index.

SECTION 804. Notification to Authority of Payment of Bonds. The Trustee shall notify the Authority of the final maturity and payment of the Bonds or of the redemption and prepayment of the Bonds upon such payment or prepayment.

ARTICLE IX

DEFAULT PROVISIONS AND REMEDIES OF TRUSTEE

AND BONDHOLDERS

SECTION 901. Events of Default. Each of the following shall be an Event of Default:

(a) Default in the due and punctual payment of any interest on any Bond;

(b) Default in the due and punctual payment of the principal or redemption price of any Bond (whether at maturity, by acceleration, call for redemption or otherwise);

(c) Subject to the provisions of Section 912, (i) default in the observance or performance of any either covenant, condition or agreement on the part of the Authority under this Indenture or the Bonds and (ii) an Event of Default described in Section 603(a);

(d) An “Event of Default” under the Loan Agreement, the Deed of Trust, the Security Agreement or the Assignment, including, without limitation, any failure on the part of the Company in making any payment required thereunder or under the Notes not cured within any cure period applicable thereto after notice to the Company; and

(e) If the Company or the Authority shall have applied for or consented to the appointment of a receiver, trustee, or liquidator of all or a substantial part of its assets; admitted in writing the inability to pay its debts as they mature; made a general assignment for the benefit of creditors; been the subject of an order for relief under the United States Bankruptcy Code, or been adjudicated a bankrupt, or filed a petition or an answer seeking reorganization, liquidation or any arrangement with creditors or taken advantage of any insolvency law, or submitted an answer admitting the material allegations of a petition in bankruptcy, reorganization, liquidation or insolvency proceedings; or an order, judgment or decree shall have been entered, without the application, approval or consent of the Company or the Authority, as the case may be, by any court of competent jurisdiction approving a petition seeking reorganization of the Company or the Authority, as the case may be, or appointing a receiver, trustee or liquidator of a substantial part of its assets and such order, judgment or decree shall continue unstayed and in effect for any period of 60 consecutive days; or filed a voluntary petition in bankruptcy or failed to remove an involuntary petition in bankruptcy filed against it within 60 days of the filing thereof.

SECTION 902. Acceleration. (a) Upon the occurrence and continuation of an Event of Default the Trustee may, and if requested by the holders of at least 25% in aggregate

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principal amount of Bonds then outstanding shall, by notice to the Authority, declare the entire unpaid principal of and premium, if any, and interest on Bonds due and payable and, thereupon, the entire unpaid principal of and premium, if any, and interest on the Bonds shall forthwith become due and payable. Trustee shall immediately mail notice of declaration of acceleration to the holders, the Company and the Authority.

(b) Upon any declaration set forth in this Section the Authority will forthwith pay to the owners of Bonds the entire unpaid principal of and accrued interest on such Bonds, but only from the payments, revenues, receipts and proceeds herein specifically pledged for such purpose.

SECTION 903. Remedies under Deed of Trust, Security Agreement and Assignment. Upon the occurrence of an Event of Default, the Trustee may exercise its remedies under the Loan Agreement, the Deed of Trust, the Security Agreement and the Assignment, including without limitation, the taking of possession of and/or foreclosing upon the Project.

SECTION 904. Other Remedies; Rights of Bondholders. Upon the occurrence and continuation of an Event of Default the Trustee may proceed to protect and enforce its rights and the rights of the Bondholders by mandamus or other suit, action or proceeding at law or in equity, provided that the Trustee acknowledges the non-recourse provisions of the Notes, the Loan Agreement, the Security Agreement, the Deed of Trust and the Assignment. Acceleration of the Bonds shall not be a condition to the exercise of remedies hereunder and under the Loan Agreement.

Upon the occurrence and continuation of an Event of Default, if requested to do so by the holders of at least 25% in aggregate principal amount of Bonds then outstanding and if arrangements satisfactory to it have been made for the payment or reimbursement of expenses as provided in Section 1001(k), the Trustee shall exercise such one or more of the rights and powers conferred by this Article as/the Trustee, upon being advised by counsel, shall deem most expedient in the interests of the Bondholders.

No remedy conferred by this Indenture upon or reserved to the Trustee or to the Bondholders is intended to be exclusive of any other remedy, but each such remedy shall be cumulative and shall be in addition to any other remedy given to the Trustee or to the Bondholders hereunder or now or hereafter existing at law or in equity or by statute.

No delay or omission to exercise any right or power accruing upon any default or Event of Default shall impair any such right or power or shall be construed to be a waiver of any such default or Event of Default or acquiescence therein, and every such right and power may be exercised from time to time and as often as may be deemed expedient.

No waiver of any default or Event of Default hereunder, whether by the Trustee pursuant to Section 912 or by the Bondholders, shall extend to or shall affect any subsequent default or Event of Default or shall impair any rights or remedies consequent thereon.

SECTION 905. Right of Bondholders To Direct Proceedings. Anything in this Indenture to the contrary notwithstanding, the owners of a majority in aggregate principal amount of Bonds then outstanding shall have the right, at any time, by an instrument or instruments in writing executed and delivered to the Trustee, to direct the method and place of conducting all proceedings to be taken in connection with the enforcement of the terms and conditions of this Indenture; provided, however, that such direction shall not be otherwise than in accordance with the provisions of law and of this indenture.

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SECTION 906. Appointment of Receivers. Upon the occurrence of an Event of Default and upon the filing of a suit or other commencement of judicial proceedings to enforce the rights of the Trustee and the Bondholders under this Indenture, the Trustee shall be entitled, as a matter of right under this Indenture, to the appointment of a receiver or receivers for the Project and for the rents and revenues thereof pending such proceedings, with such powers as the court making such appointment shall confer.

SECTION 907. Application of Moneys. All moneys received by the Trustee pursuant to any right given or action taken under the provisions of this Article shall, after payment of the cost and expenses of the proceedings resulting in the collection of such moneys, the expenses, liabilities and advances incurred or made by the Trustee and its fees and expenses and the expenses of the Authority in carrying out this Indenture, the Loan Agreement and the Notes, be deposited in the Bond Fund and applied as follows:

(a) Unless the principal of all the Bonds shall have become or shall have been declared due and payable, all such moneys shall be applied:

First—To the payment of operating expenses, consented to by the Majority Owners, and real estate taxes with respect to the Project;

Second—the payment to the persons entitled thereto of all installments of interest then due on the Bonds, including, to the extent permitted by law, interest on over due installments of interest, in the order of the maturity of the installments of such interest and, if the amount available shall not be sufficient to pay in full any particular installment, then to the payment ratably, according to the amounts due on such installment, to the persons entitled thereto, without any discrimination or preference except as to any difference in respective rates of interest specified in the Bonds; and

Third—To the payment to the persons entitled thereto of the unpaid principal of and premium, if any, on any of the Bonds that shall have become due (other than Bonds called for redemption for the payment of which moneys are held pursuant to the provisions of this Indenture), in the order of their due dates, with interest on such Bonds at the respective rates specified therein from the respective dates upon which they become due and, if the amount available shall not be sufficient to pay in full Bonds due on any particular date, together with such interest, then first to the payment of such interest, ratably, according to the amount of such interest due on such date, and then to the payment of such principal and premium, if any, ratably, according to the amount of such principal and premium, if any, due on such date, to the persons entitled thereto, without any discrimination or preference except as to any difference in the respective rates of interest specified in the Bonds.

(b) If the principal of all the Bonds shall have become due or shall have been declared due and payable, all such moneys shall be applied to the payment of the principal and interest then due and unpaid upon the Bonds, without preference or priority of principal over interest or of interest over principal, or of any installment of interest over any other installment of interest, or of any Bond over any other Bond, ratably, according to the amounts due respectively for principal and interest, to the persons entitled thereto, without any discrimination or preference except as to any difference in the respective rates of interest specified in the Bonds.

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(c) If the principal of all the Bonds shall have been declared due and payable and if such declaration shall thereafter have been rescinded and annulled under the provisions of this Article, then subject to the provision of Subsection (b) of this Section in the event that the principal of all the Bonds shall later become due or be declared due and payable, the moneys shall be applied in accordance with the provisions of Subsection (a) of this Section.

Whenever moneys are to be applied pursuant to the provisions of this Section, such moneys shall be applied at such times and from time to time as the Trustee shall determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Trustee shall apply such moneys, it shall fix the date (which shall be an Interest Payment Date unless it shall deem another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such dates shall cease to accrue. The Trustee shall give such notice as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date.

SECTION 908. Remedies Vested in Trustee. All rights of action (including the right to file proof of claims) under this Indenture, the Loan Agreement, the Notes or any of the Bonds may be enforced by the Trustee without the possession of any of the Bonds or the production thereof in any trial or other proceeding relating thereto and any such suit or proceeding instituted by the Trustee shall be brought in its name as Trustee without the necessity of joining as plaintiffs or defendants any Bondholders, and any recovery of judgment shall be for the equal benefit of the owners of the outstanding Bonds.

SECTION 909. Limitations on Suits. Except to enforce the rights given under Sections 902 and 908, no holder of any Bond shall have any right to institute any action, suit or proceeding at law or in equity for the enforcement of this Indenture or for the execution of any trust thereof or any other remedy hereunder, unless (a) a default has occurred and is continuing of which the Trustee has been notified as provided in Section 1001(h) or of which by such section it is deemed to have notice, (b) such default has become an Event of Default and the holders of 25% in aggregate principal amount of Bonds then outstanding have made request to the Trustee and offered it reasonable opportunity either to proceed to exercise the powers hereinbefore granted or to institute such action, suit or proceeding in its own name, (c) they have offered to make arrangements for the payment or reimbursement of expenses as provided in Section 1001(k), (d) the Trustee has for 30 days after such notice failed or refused to exercise the powers hereinbefore granted, or to institute such action, suit or proceeding in its, his or their own name or names, (e) no direction inconsistent with such written request has been given to the Trustee during such 30 day period by the holders of a majority in aggregate principal amount of Bonds then outstanding, and (f) notice of such action, suit or proceeding is given to the Trustee; it being understood and intended that no one or more holders of the Bonds shall have any right in any manner whatsoever to affect, disturb or prejudice this Indenture by its, his or their action or to enforce any right hereunder except in the manner herein provided, and that all proceedings at law or in equity shall be instituted and maintained in the manner herein provided and for the equal benefit of the holders of all Bonds. The notification, request and offer of arrangements for the payment or reimbursement of expenses set forth above, at the option of the Trustee, shall be conditions precedent to the execution of the powers and trusts of this Indenture and to any action or cause of action for the enforcement of this Indenture or for any other remedy hereunder.

SECTION 910. Unconditional Right To Receive Principal, Premium and Interest. Nothing in this Indenture shall, however, affect or impair the right of any Bondholder to enforce, by action at law, payment of any Bond at and after the maturity thereof, or on the date fixed for redemption or (subject to the provisions of Section 902) upon the same being declared due prior to maturity as herein provided, or the obligation of the Authority to pay the principal of and premium, if any, and interest on each Bond issued hereunder to the respective holders thereof at the time, place, from the source and in the manner herein and in the Bonds expressed.

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SECTION 911. Termination of Proceedings. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned for any reason or shall have been determined adversely, then and in every such case the Authority and the Trustee shall be restored to their former positions and rights hereunder, and all rights, remedies and powers of the Trustee shall continue as if no such proceedings had been taken.

SECTION 912. Waivers of Events of Default The Trustee may in its discretion waive any Event of Default hereunder and its consequences and rescind any declaration of acceleration of principal of and interest on the Bonds, and shall do so upon the written request of the holders of (a) a majority in aggregate principal amount of the Bonds in respect to which default in the payment of principal and/or premium, if any, and/or interest exists, or (b) a majority in aggregate principal amount of Bonds then outstanding in the case of any other default; provided, however, that

(1) there shall not be waived without the consent of the holders of all Bonds then outstanding (A) any default in the payment when due of the principal of Bonds, or (B) any default in the payment when due of the interest on any such Bonds unless, prior to such waiver or rescission,

(i) there shall have been paid or provided for all arrears of interest, all arrears of principal and premium, if any, and all expenses of the Trustee in connection with such default, and

(ii) in case of any such waiver or recision or in case of any discontinuance, abandonment or adverse determination of any proceeding taken by the Trustee on account of any such default, the Authority, the Trustee and the Bondholder shall be restored to their former positions and rights hereunder respectively, and

(2) no declaration of maturity under Section 902 made at the request of the holder of at least 25% in aggregate principal amount of Bonds then outstanding shall be rescinded unless requested by the holders of a majority in aggregate principal amount of Bonds then outstanding.

No such waiver or recision shall extend to any subsequent or other default or impair any right consequent thereon.

SECTION 913. Notice of Defaults; Opportunity To Cure Defaults. The Trustee shall notify the Authority and the Company immediately of the occurrence of any default specified in Section 901(a) or (b). Anything herein to the contrary notwithstanding; no default specified in Section 901(c) on the part of the Authority shall constitute an Event of Default until (a) notice of such default shall be given (1) by the Trustee to the Authority and the Company or (2) by the holders of at least 25% in aggregate principal amount of the Bonds then outstanding to the Trustee, the Authority and the Company, and (b) the Authority and the Company shall have had 30 days after such notice to correct such default or cause such default to be corrected, and shall not have corrected such default or caused such default to be corrected within such period; provided, however, if any default specified in Section 901(c) shall be such that it cannot be corrected within such period, it shall not constitute an Event of Default if corrective action is instituted by the Authority or the Company within such period and diligently pursued until such default is corrected.

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ARTICLE X

THE TRUSTEE

SECTION 1001. Acceptance of Trusts. The Trustee hereby accepts the trusts and obligations imposed upon it by the Indenture, the Loan Agreement and the Notes, and agrees to perform such trusts and obligations, but only upon and subject to the express terms and conditions set forth below, and no implied covenants or obligations shall be read into this Indenture against the Trustee.

(a) The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture and the Loan Agreement and as a corporate trustee ordinarily would perform such duties under a corporate indenture. Upon the occurrence and continuation of an Event of Default (which has not been waived), the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent man would exercise or use in the circumstances in the conduct of his own affairs.

(b) The Trustee may execute any of the trusts or powers hereof and perform any of its duties by or through attorneys, agents, receivers or employees but shall be answerable for the conduct of the same in accordance with the standard specified above, and shall be entitled to act upon the opinion or advice of its counsel concerning all matters of trust hereof and the duties hereunder, and may in all cases be reimbursed hereunder for reasonable compensation paid to all such attorneys, agents, receivers and employees as may reasonably be employed in connection with the trust hereof. The Trustee may act upon an Opinion of Counsel and shall not be responsible for any loss or damage resulting from any action or non-action by it taken or omitted to be taken in good faith and/in reliance upon such Opinion of Counsel.

(c) The Trustee shall not be responsible for any recital herein or in the Bonds (except in respect to the certificate of the Trustee endorsed on the Bonds), or for the validity of the execution by the Authority of this Indenture or of any supplements hereto or instruments of further assurance, or for the sufficiency of the security for the Bonds issued hereunder or intended to be secured hereby, and the Trustee shall not be bound to ascertain or inquire as to the observance or performance of any covenants, conditions or agreements on the part of the Authority or on the part of the Company, except as hereinafter set forth. The Trustee shall not be responsible or liable for any loss suffered in connection with any investment made by it in accordance with Section 701 or 802.

(d) The Trustee shall not be accountable for the use of any Bonds authenticated or delivered hereunder. The bank or trust company acting as Trustee and its directors, officers, employees or agents may in good faith buy, sell, own, hold and deal in the Bonds and may join in any action which any Bondholder may be entitled to take with like effect as if such bank or trust company were not the Trustee. To the extent permitted by law, such bank of trust company also may receive tenders and purchase in good faith Bonds from itself, including any department, affiliate or subsidiary, with like effect as if it were not the Trustee.

(e) The Trustee shall be protected in acting upon any notice, request, consent, certificate, order, affidavit, letter, telegram or other paper or document reasonably believed by it to be genuine and correct and to have been signed or sent by the proper person or persons. Any action taken by the Trustee pursuant to this Indenture upon the request or authority or consent of any person who at the time of making such request or giving such authority or consent is the owner of any Bonds shall be conclusive and binding upon all future owners of the same Bond and upon Bonds issued in exchange therefor or in place thereof.

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(f) As to the existence or non-existence of any fact or as to the sufficiency or validity of any instrument, paper or proceeding, the Trustee shall be entitled to rely upon a certificate signed on behalf of the Authority by its Chairman or Vice Chairman and attested by its Secretary under its seal, or such other person or persons as may be designated for such purposes by resolution of the Authority, as sufficient evidence of the facts therein contained and prior to the occurrence of a default of which the Trustee has been notified as provided in Subsection (h) of this Section, or of which by said Subsection it is deemed to have notice, may also accept a similar certificate to the effect that any particular dealing, transaction or action is necessary or expedient, but may at its discretion secure such further evidence deemed necessary or advisable, but shall in no case be bound to secure the same. The Trustee may accept a certificate of the Secretary of the Authority under its seal to the effect that a resolution in the form therein set forth has been adopted by the Authority as conclusive evidence that such resolution has been duly adopted and is in full force and effect.

(g) The permissive right of the Trustee to do things enumerated in this Indenture shall not be construed as a duty, and the Trustee shall not be answerable for other than its negligence or willful misconduct.

(h) The Trustee shall not be required to take notice or be deemed to have notice of any default hereunder, except failure by the Authority to cause to be made any of the payments to the Trustee required to be made by Section 401, the occurrence of an Event of Default under Section 901(a) or (b), failure by the Company to make any payments under the Notes or failure by the Authority or the Company to file with the Trustee any document required by this Indenture or the Loan Agreement to be so filed, unless the Trustee shall be notified of such default by the Authority or by the holders of at least 25% in aggregate principal amount of Bonds then outstanding.

(i) The Trustee shall not be required to give any bond or surety in respect of the execution of such trusts and powers or otherwise in respect of the premises.

(j) Notwithstanding anything elsewhere contained in this Indenture, the Trustee shall have the right, but shall not be required, to demand, in respect of the authentication of any Bonds, the withdrawal of any moneys or any action whatsoever within the purview of this Indenture, any showings, certificates, opinions, appraisals or other information, or corporate action or evidence thereof, in addition to that required by the terms hereof, as a condition of such action by the Trustee deemed desirable for the purpose of establishing the right of the Authority to the authentication of any Bonds, the withdrawal of any moneys or the taking of any other action by the Trustee.

(k) Before taking any action under this Indenture, the Trustee may require arrangements satisfactory to it to be made for the payment or reimbursement of all expenses to which it may be put and to protect it against all liability by reason of any action so taken, except liability which results from its negligence or willful default.

(l) All moneys received by the Trustee shall, until used or applied or invested as herein provided, be held in trust in the manner and for the purposes for which they were received but need not be segregated from other funds except to the extent required by this Indenture or law. The Trustee shall not be under any liability for interest on any moneys received hereunder except such as may be agreed upon.

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(m) The Trustee shall cooperate with the Company in the contest, at the expense of the Company, of any condemnation proceeding or contest over title with respect to the Project. In no event shall the Trustee voluntarily settle, or consent to the settlement of, any condemnation proceeding or contest over title with respect to the Project without the consent of the Company.

(n) The Trustee shall not be responsible for the tax exempt status of interest on the Bonds from Virginia income status.

SECTION 1002. Fees, Charges and Expenses of Trustee. The Trustee shall be entitled to payment and reimbursement for such fees, charges and expenses as specifically may be agreed upon with the Company and, absent such agreement, for reasonable fees for services rendered hereunder and all advances, counsel fees and other expenses reasonably and necessarily made or incurred by the Trustee in connection with such services rendered hereunder. Upon an Event of Default, Trustee shall have a first lien, with right of payment prior to payment on account of principal of or premium, if any, or interest on any Bond, upon the trust estate for the foregoing fees, charges and expenses incurred by Trustee. When the Trustee incurs expenses or renders services after the occurrence of an Event of Default hereunder caused by the occurrence of an “Event of Default” specified in Section 7.1(e), (f) or (g) of the Loan Agreement, the expenses and the compensation for the services are intended to constitute expenses of administration under any federal or state bankruptcy, insolvency, arrangement, moratorium, reorganization or other debtor relief law.

SECTION 1003. Intervention by Trustee. In any judicial proceeding to which the Authority or the Company is a party, which in the opinion of the Trustee and its counsel has a substantial bearing on the interests of the Bondholders, the Trustee may intervene on behalf of the Bondholders and, subject to Section 1001(k), shall do so if requested by the holders of at least 25% in aggregate principal amount of Bonds then outstanding.

SECTION 1004. Merger or Consolidation of Trustee. Any corporation or association into which the Trustee may be converted or merged, or with which it may be consolidated, or to which it may sell or transfer its trust business and assets as a whole or substantially as a whole, or any corporation or association resulting from any such conversion, sale, merger, consolidation or transfer to which it is a party shall be and become successor Trustee hereunder and vested with all the trusts, powers, discretion, immunities, privileges and all other matters as was its predecessor, without the execution or filing of any instrument or any further act, deed or conveyance on the part of any of the parties hereto, anything herein to the contrary notwithstanding.

SECTION 1005. Resignation of Trustee. The Trustee may at any time resign from the trusts hereby created by giving 60 days’ notice to the Authority, the Company and each Company of Bonds then outstanding. Such resignation shall take effect upon the appointment of a successor or temporary Trustee by the Bondholders, the Authority or a court of competent jurisdiction.

SECTION 1006. Removal of Trustee. The Trustee may be removed at any time by the Authority by an instrument in writing delivered to the Trustee with the written consent of all Significant Owners, if any.

SECTION 1007. Appointment of Successor Trustee; Temporary Trustee. In case the Trustee hereunder shall resign, be removed, be dissolved, be in course of dissolution or liquidation, or otherwise become incapable of acting hereunder, or in case it shall be taken under the control of any public officer or officers or of a receiver appointed by a court, a successor may be

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appointed by the holders of a majority in aggregate principal amount of Bonds then outstanding by an instrument or concurrent instruments in writing signed by such holders; provided, however, that in case of such vacancy the Authority, by an instrument signed by its Chairman or Vice Chairman and attested by its Secretary under its seal, may appoint a temporary Trustee to fill such vacancy until a successor Trustee shall be appointed by the Bondholders in the manner provided above; and any such temporary Trustee so appointed by the Authority shall immediately and without further act be superseded by the Trustee so appointed by such Bondholders. Every such Trustee appointed pursuant to this Section shall be a bank or trust company permitted to engage in the trust business in the Commonwealth, under applicable Commonwealth or United States statutes, in good standing and having a reported capital, surplus and undivided profits of not less than $100,000,000.

SECTION 1008. Concerning any Successor Trustee. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to its predecessor and also to the Authority an instrument in writing accepting such appointment hereunder, and thereupon such successor, without any further act, deed or conveyance, shall become fully vested with all the properties, rights, powers, trusts, duties and obligations of its predecessor; but such predecessor shall, nevertheless, on the written request of the Authority, or its successor, execute and deliver an instrument transferring to such successor Trustee all the properties, rights, powers and trusts of such predecessor hereunder; and every predecessor Trustee shall deliver all securities and moneys held by it as Trustee hereunder to its successor. Should any instrument in writing from the Authority be required by any successor Trustee for more fully and certainly vesting in such successor the properties, rights, powers and duties hereby vested or intended to be vested in the predecessor, any and all such instruments in writing shall, on request, be executed, acknowledged and delivered by the Authority.

SECTION 1009. Successor Trustee as Paying Agent, Registrar and Custodian of Funds. In the event of a change in the office of Trustee the predecessor Trustee which has resigned or been removed shall cease to be paying agent and registrar for the Bonds and custodian of the funds created hereunder, and the successor Trustee shall become such paying agent and custodian.

ARTICLE XI

SUPPLEMENTAL INDENTURES

SECTION 1101. Supplemental Indentures Not Requiring Consent of Bondholders. The Authority and the Trustee may, without the consent of or notice to any of the Bondholders, enter into an indenture or indentures supplemental to this Indenture for any one or more of the following purposes:

(a) to cure any ambiguity, formal defect or omission in this Indenture;

(b) to grant to or confer upon the Trustee for the benefit of the Bondholders any additional rights, remedies, powers or authority that may lawfully be granted to or conferred upon the Bondholders or the Trustee or either of them;

(c) to subject to this Indenture additional revenues, properties or collateral;

(d) to modify, amend or supplement this Indenture in such manner as required (1) to permit the qualification hereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute hereafter in effect or any state securities (Blue Sky) law, or (2) to prevent the Authority, the Trustee or the Company from being subject to the Investment Company Act of 1940, as amended, or any similar federal statute hereafter in effect;

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(e) to amend the provisions of Article VII; and

(f) to make any other change that, in the opinion of the Trustee, shall not prejudice in any material respect the rights of the holders of Bonds then outstanding.

SECTION 1102. Supplemental Indentures Requiring Consent of Bondholders. Except for the Supplemental Indentures authorized by Section 1101 and subject to the terms and provisions contained in this Section, the holders of a majority in aggregate principal amount of Bonds then Outstanding shall have the right from time to time to consent to and approve the execution by the Authority and the Trustee of such other indenture or indentures supplemental hereto as shall be deemed necessary or desirable by the Authority for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in this Indenture or in any Supplemental Indenture; provided, however, that nothing in this Indenture shall permit, or be construed as permitting (a) an extension of the maturity of the principal amount of any Bond or an increase in the interest rate on any Bond, (b) a reduction in the principal amount of, or premium, if any, on any Bond or the rate of interest thereon, (c) a privilege or priority of any Bond or Bonds over any other Bond or Bonds, or (d) a reduction in the aggregate principal amount of Bonds required for consent to such Supplemental Indenture, without the consent and approval of the holders of all of Bonds then outstanding.

If at any time the Authority shall request the Trustee to enter into any such Supplemental Indenture for any of the purposes of this Section, the Trustee shall, upon arrangements satisfactory to it to provide for payment or reimbursement of any expenses, cause notice of the proposed execution of such Supplemental Indenture to be sent by registered or certified mail to the registered owner of each Bond at his address as it appears in the registration books. Such notice shall briefly set forth the nature of the proposed Supplemental Indenture and shall state that copies thereof are on file at the corporate trust office of the Trustee for inspection by all Bondholders. If, within 60 days or such longer period as shall be prescribed by the Authority following the giving of such notice, the holders of a majority in aggregate principal amount of Bonds then outstanding shall have consented to the execution thereof as herein provided, no holder of any Bond shall have any right to object to any of the terms and provisions contained therein, or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Trustee or the Authority from executing the same or from taking any action pursuant to the provisions thereof. Upon the execution of any such Supplemental Indenture as in this Section permitted and provided, this Indenture shall be deemed to be modified and amended in accordance therewith.

Anything contained in this Indenture to the contrary notwithstanding, the Authority and the Trustee may enter into and execute any indenture supplemental to this Indenture upon receipt of the consent of the holders of all Bonds.

Bonds owned or held by or for the account of the Authority shall not be deemed outstanding for the purpose of consent or any calculation of Bonds provided for in this Article. At the time of any such calculation the Authority shall furnish the Trustee a certificate of an officer of the Authority, upon which the Trustee may rely, describing all Bonds so to be excluded.

SECTION 1103. Opinion of Counsel Required. The Trustee shall not execute any Supplemental Indenture pursuant to this Article unless there shall have been filed with the Trustee an Opinion of Counsel stating that such supplemental indenture is authorized or permitted by this Indenture and complies with its terms, that upon execution it will be valid and binding upon

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the Authority and that execution of such Supplemental Indenture will not affect adversely the exclusion from gross income of interest on the Series 1998A Bonds for federal income tax purposes.

SECTION 1104. Consent of Company Required. Notwithstanding any other provision of this Indenture, a Supplemental Indenture under this Article that affects any rights of the Company shall not become effective until the Company shall have consented to the execution and delivery of such supplemental indenture.

SECTION 1105. Amendment without Consent of Authority. In the event the Authority is unable to enter into any supplemental indenture permitted by this article, the Trustee may, without the consent of the Authority, amend or supplement this Indenture in any manner otherwise permitted by this article so long as such supplemental indenture does not adversely affect the rights of the Authority.

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ARTICLE XII

AMENDMENTS TO LOAN AGREEMENT,

SECURITY AGREEMENT, DEED OF TRUST, ASSIGNMENT AND NOTES

SECTION 1201. Amendments to Loan Agreement, Security Agreement, Deed of Trust, Assignment and Notes Not Requiring Consent of Bondholders. The Authority and the Trustee may, without the consent of or notice to any of the Bondholders, consent to any amendment, change or modification of the Loan Agreement, the Security Agreement, the Deed of Trust, the Assignment or the Notes as may be required:

(a) by the provisions of the Loan Agreement, the Security Agreement, the Deed of Trust, the Assignment, the Notes or this Indenture;

(b) to cure any ambiguity or formal defect or omission therein; or

(c) in connection with any other change therein that, in the opinion of the Trustee, shall not prejudice in any material respect the rights of the holders of the Bonds then outstanding.

SECTION 1202. Amendments to Loan Agreement, Security Agreement, Deed of Trust, Assignment and Notes Requiring Consent of Bondholders. Except as provided in Section 1201, neither the Authority nor the Trustee shall consent to any amendment, change or modification of the Loan Agreement, the Security Agreement, the Deed of Trust, the Assignment or the Notes without the approval or consent of the holders of a majority in aggregate principal amount of Bonds then outstanding; provided, however, that in no event shall the Authority or the Trustee consent to any amendment, change or modification that would diminish the obligation of the Company to pay amounts sufficient to pay the principal of and interest on the Bonds. The Trustee shall give notice of any proposed amendment, change or modification requiring the consent of Bondholders in the same manner as provided in Section 1102 with respect to supplemental indentures.

SECTION 1203. Opinion of Counsel Required. The Trustee shall not consent to any amendment, change or modification of the Loan Agreement, the Security Agreement, the Deed of Trust, the Assignment or the Notes unless there shall have been filed with the Trustee an Opinion of Counsel that such amendment, change or modification is authorized or permitted by this Indenture and complies with its terms, that upon execution it will be a valid and binding obligation of the party or parties executing it and that execution of such amendment, change or modification will not affect adversely the exclusion from gross income of interest on the Series 1998A Bonds for federal income tax purposes.

ARTICLE XIII

MISCELLANEOUS

SECTION 1301. Consents, etc., of Bondholders. Any consent, request, direction, approval, objection or other instrument (collectively, a “Consent”) required by this Indenture to be executed by the Bondholders may be in any number of concurrent writings of similar tenor and may be executed by such Bondholders in person or by agent appointed in writing. Proof of the execution of a Consent or of the writing appointing any such agent shall be sufficient for any of the purposes of this Indenture, and shall be conclusive in favor of the Trustee with regard

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to any action taken under the Consent, if the fact and date of the execution by any person of any such writing is proved by a certificate of any officer in any jurisdiction who by law has power to take acknowledgements within such jurisdiction that the person signing such writing acknowledged before him the execution thereof, or by affidavit or any witness to such execution.

SECTION 1302. Limitation of Rights. With the exception of rights herein expressly conferred, nothing express or mentioned in or to be implied from this Indenture or the Bonds is intended or shall be construed to give to any person or company other than the parties hereto and the holders of the Bonds any legal or equitable right, remedy or claim under or in respect to this Indenture or any covenants, conditions and agreements hereof; this Indenture and all of the covenants, conditions and agreements hereof being intended to be and being for the sole and exclusive benefit of the parties hereto and the holders of the Bonds as herein provided.

SECTION 1303. Limitation of Liability of Directors, etc., of Authority. No covenant, agreement or obligation contained herein shall be deemed to be a covenant, agreement or obligation of any present or future director, officer, employee or agent of the Authority in his individual capacity, and neither the directors of the Authority nor any officer thereof executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance thereof. No director, officer, employee or agent of the Authority shall incur any personal liability with respect to any other action taken by him pursuant to this Indenture or the Act, provided such member, officer, employee or agent does not act in bad faith.

SECTION 1304. Notices. Unless otherwise provided herein, all demands, notices, approvals, consents, requests, opinions and other communication hereunder shall be in writing and shall be deemed to have been given when delivered in person or mailed by first class registered or certified mail, postage prepaid, addressed as follows:

if to the Authority,

Hampton Redevelopment and Housing Authority

P. O. Box 280

Hampton, Virginia 23669

(Attention: Executive Director)

(Telecopy: (757) 727-6368)

(Telephone: (757) 727-6337)

if to the Trustee,

Crestar Bank

919 East Main Street

Richmond, Virginia 23219

(Attention: Corporate Trust Administration)

(Telecopy: (804)782-7855)

(Telephone: (804) 782-5853)

if to the Company,

Olde Hampton Hotel Associates

700 Settlers Landing Road

Hampton, Virginia 23669

(Attn: Jack H. Shiver and J. Edward Watson, III)

(Telecopy: (757) 722-4557)

(Telephone: (757) 727-9700)

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A duplicate copy of each demand, notice, approval, consent, request, opinion or other communication given hereunder by either the Authority or the Trustee to the other shall also be given to the Company. The Authority, the Trustee and the Company may, by notice given hereunder, designate any further or different addresses to which subsequent demands, notices, approvals, consents, requests, opinions or other communications shall be sent or persons to whose attention the same shall be directed.

SECTION 1305. Successors and Assigns. This Indenture shall be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns.

SECTION 1306. Severability. If any provision of this Indenture shall be held invalid by any court of competent jurisdiction, such holding shall not invalidate any other provision hereof.

SECTION 1307. Applicable Law. This indenture shall be governed by the applicable laws of the Commonwealth of Virginia.

SECTION 1308. Counterparts. This Indenture may be executed in several counterparts, each of which shall be an original and all of which together shall constitute but one and the same instrument.

IN WITNESS WHEREOF, the Authority and the Trustee have caused this Indenture to be executed in their respective names as of the date first above written.

HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY
By:
	Chairman
CRESTAR BANK, as Trustee
By:
	Vice President

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No. R-2 $7,430,000

UNITED STATES OF AMERICA

COMMONWEALTH OF VIRGINIA

HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY

First Mortgage Revenue Refunding Bonds

(Olde Hampton Hotel Associates Project) Series 1998A

INTEREST RATE	MATURITY DATE	DATED DATE	CUSIP
6.5%	July 1, 2016	December 18, 1998	40958N AB3

REGISTERED OWNER:	CEDE & CO.
PRINCIPAL AMOUNT:	SEVEN MILLION FOUR HUNDRED THIRTY THOUSAND DOLLARS

The HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY, a political subdivision of the Commonwealth of Virginia (the “Authority”), for value received, hereby promises to pay, upon surrender hereof at the corporate trust office of Crestar Bank, Richmond, Virginia, as trustee, or its successor in trust (the “Trustee”), solely from the source and as hereinafter provided, to the registered Company hereof, or registered assigns or legal representative, the principal sum stated above on the maturity date stated above, subject to prior redemption as hereinafter provided, and to pay, solely from such source, interest hereon semiannually on each January 1 and July 1, commencing on July 1, 1999 (each an “Interest Payment Date”), at the annual rate stated above.

Interest is payable (a) from the dated date set forth above, if this Bond is authenticated prior to July 1999, or (b) otherwise from the January 1 or July 1 that is, or immediately precedes, the date on which the Bond is authenticated (unless payment of interest hereon is in default, in which case this Bond shall bear interest from the date to which interest has been paid). Interest is payable by check or draft mailed to the registered owner hereof at his address as it appears on the 15th day of the month preceding each Interest Payment Date on registration books kept by the Trustee; provided, however, that if the Bonds are registered in the name of a securities depository or its nominee as registered owner or at the option of an owner of at least $500,000 principal amount of Bonds, payment will be made by wire transfer pursuant to the most recent wire instructions received by the Trustee from such registered owner. Principal, premium, if any, and interest are payable in lawful money of the United States of America.

THE BONDS AND THE PREMIUM, IF ANY, AND THE INTEREST THEREON ARE LIMITED OBLIGATIONS OF THE AUTHORITY PAYABLE SOLELY FROM THE REVENUES AND RECEIPTS DERIVED BY THE AUTHORITY UNDER THE LOAN AGREEMENT AND THE NOTES, WHICH REVENUES AND RECEIPTS HAVE BEEN PLEDGED AND ASSIGNED TO SECURE PAYMENT THEREOF. THE BONDS, THE PREMIUM, IF ANY, AND THE INTEREST THEREON SHALL NOT BE DEEMED TO CONSTITUTE A DEBT OR A PLEDGE OF THE FAITH AND CREDIT OF THE COMMONWEALTH OF VIRGINIA OR ANY POLITICAL SUB DIVISION THEREOF, INCLUDING THE AUTHORITY. NEITHER THE COMMONWEALTH OF VIRGINIA, NOR ANY POLITICAL SUBDIVISION THEREOF, INCLUDING THE AUTHORITY, SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF OR PREMIUM, IF ANY, OR INTEREST ON THE BONDS OR OTHER COSTS INCIDENT THERETO EXCEPT FROM THE REVENUES AND RECEIPTS PLEDGED AND ASSIGNED THEREFOR, AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE COMMONWEALTH OF VIRGINIA, OR ANY POLITICAL SUBDIVISION THEREOF, INCLUDING THE AUTHORITY, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR PREMIUM, IF ANY, OR INTEREST ON THE BONDS OR OTHER COSTS INCIDENT THERETO. THE AUTHORITY HAS NO TAXING POWER.

All acts, conditions and things required to happen, exist or be performed precedent to and in the issuance of this Bond have happened, exist and have been performed.

This Bond shall not become obligatory for any purpose or be entitled to any security or benefit under the Indenture or be valid until the Trustee has executed the Certificate of Authentication appearing hereon and inserted the date of authentication hereon.

This Bond is one of an issue of $8,640,000 First Mortgage Revenue Refunding Bonds (Olde Hampton Hotel Associates Project), Series 1998A (the “Series 1998A Bonds” and collectively with the Authority’s Taxable First Mortgage Revenue Bonds, Series 1998B, the “Bonds”), of like date and tenor, except as to number, denomination, rate of interest, maturity and privilege of redemption, authorized and issued pursuant to the Housing Authorities Law Chapter I, Title 36, Code of Virginia of 1950, as amended (the “Act”). This Bond is executed under and secured by an Indenture of Trust dated as of December 1, 1998 (the “Indenture”), between the Authority and the Trustee, for the purpose of refunding the outstanding principal amount of the Peninsula Ports Authority’s Revenue Refunding Bonds (Olde Hampton Hotel Associates Project), Series 1986, which refinanced a portion of the cost of the acquisition, construction and equipping of a Radisson Hotel complex and a parking garage containing certain retail space all located in the City of Hampton, Virginia (collectively the “Project”) for the benefit of Olde Hampton Hotel Associates, A Virginia Limited Partnership (the “Company”).

As security for the Bonds, the Authority has pledged to the Trustee, and granted the Trustee a security interest in, the Authority’s interest in a Loan Agreement dated as of December 1, 1998 (the “Loan Agreement”), between the Authority and the Company, pursuant to which the Company has delivered its non-recourse promissory notes dated the date of delivery (the “Notes”), in the original principal amounts of $8,640,000 and $390,000 payable to the Authority. The Company

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has agreed to pay to the Trustee, for the account of the Authority, amounts sufficient to pay principal of and premium, if any, and interest on the Bonds when due. The Notes are secured by a Deed of Trust and Security Agreement dated as of December 1, 1998 (the “Deed of Trust”), between the Company and the individual trustees named therein, which creates a lien on the Project, which lien is more fully described in the Deed of Trust, a Security Agreement dated as of December 1, 1998 (the “Security Agreement”) between the Company and the Trustee, which creates a lien on and a security interest in, certain personal property of the Company, as more completely described in the Security Agreement, and an Assignment of Rents and Leases dated as of December 1, 1998 (the “Assignment”) between the Company and the Trustee, which assigns the rents and leases of the Project, as more particularly described in the Assignment.

If the Company exercises its option or is required to prepay the Notes upon damage to, condemnation of or failure of title to the Project or certain other extraordinary events as provided in Section 8.1(a) of the Loan Agreement, the Bonds are required to be redeemed in whole or in part at any time and upon payment of 100% of the principal amount of the Bonds to be redeemed plus interest accrued to the redemption date.

The Series 1998A Bonds maturing on July 1, 2016, may be redeemed at the option of the Authority at the direction of the Company as follows. The redemption prices of such Bonds shall be the percentage of principal amount of the Bonds to be redeemed as shown below plus interest accrued to the redemption date:

Redemption Period (Both Dates Inclusive)	Redemption Date
July 1, 2008 through June 30, 2009	102	%
July 1, 2009 through June 30, 2010	101
July 1, 2010 and thereafter	100

Series 1998A Bonds shall be redeemed prior to maturity on July 1 in years and amounts upon payment of 100% of the principal amount thereof plus interest accrued to the redemption date, as follows;

Series 1998A Bonds Maturing July 1, 2003

Year	Amount
2000	$	190,000
2001		320,000
2002		340,000
2003 (final maturity)		360,000

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Series 1998A Bonds Maturing July 1, 2016

Amount	Year		Year	Amount
2004	$	380,000	2011	$	595,000
2005		405,000	2012		630,000
2006		435,000	2013		670,000
2007		460,000	2014		715,000
2008		490,000	2015		760,000
2009		525,000	2016 (final maturity)		815,000
2010		555,000

The Trustee shall provide for redemption of Series 1998A Bonds in accordance with the foregoing schedule; provided, however, that on or before the 70th day next preceding any such sinking fund payment date the Company may:

(a) deliver to the Trustee for cancellation Series 1998A Bonds in any aggregate principal amount desired; or

(b) receive a credit against the sinking fund redemption obligation on such sinking fund payment date for Series 1998A Bonds that previously have been redeemed (other than through the operation of the sinking fund) and canceled by the Trustee but not theretofore applied as a credit against any sinking fund redemption.

Upon the occurrence of any of the events described in (a) or (b) of this Section, the Trustee shall credit against the sinking fund redemption obligation on such sinking fund payment date the amount of such Bonds so delivered or previously redeemed and any excess over such obligation will be credited against future mandatory redemption obligations in inverse order of redemption dates, and the principal amounts of Bonds to be redeemed by mandatory redemption will be reduced accordingly.

If less than all the Bonds are called for extraordinary or optional redemption, the Bonds to be redeemed shall be selected pro rata among the Holders of the Bonds by the Trustee. If less than all Bonds with the same series designation and maturity are called for redemption, such Bonds to be redeemed shall be provided that the principal portion of any Bonds to be redeemed shall result in the unredeemed portion being in $100,000 denominations or any multiple of $5,000 in excess thereof. If a portion of a Bond shall be called for redemption, a new Bond in principal amount equal to the unredeemed portion thereof shall be issued to the registered owner upon the surrender thereof. If a notice of redemption is unconditional, or if the conditions of a conditional notice of redemption have been satisfied, then upon presentation and surrender of the Bonds so called for redemption at the place or places of payment, such Bonds will be redeemed.

If any of the Bonds or portions thereof are called for redemption, the Trustee shall send a notice of the call for redemption, identifying the Bonds or portions thereof to be redeemed, by registered or certified mail, not less than 30 nor more than 60 days prior to the redemption date, to the registered owner of each Bond to be redeemed, at his address as it appears on the registration books kept by the Trustee. Provided funds for their redemption are on deposit at the place of

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payment on the redemption date, all Bonds so called for redemption shall cease to bear interest on such date, shall no longer be secured by the Indenture and shall not be deemed to be outstanding under the terms of the Indenture. If a portion of this Bond is called for redemption, a new Bond in principal amount equal to the unredeemed portion hereof will be issued to the registered owner upon the surrender hereof.

The registered owner of this Bond shall have no right to enforce the provisions of the Indenture or to institute action to enforce the covenants therein or to take any action with respect to any Event of Default under the Indenture or to institute, appear in or defend any suit or other proceedings with respect thereto, except as provided in the Indenture. In certain events, on conditions, in the manner and with the effect set forth in the Indenture, the principal of all the Bonds issued under the Indenture and then outstanding may become or may be declared due and payable before their stated maturity, together with interest accrued thereon. Modifications or alterations of the Indenture may be made only to the extent and in the circumstances permitted by the Indenture.

The Bonds are issuable as fully registered Bonds in denominations of $5,000 and multiples thereof. Upon surrender of this Bond at the corporate trust office of the Trustee, together with an assignment duly executed by the registered owner or his duly authorized attorney or legal representative in such form as shall be satisfactory to the Trustee, the Authority shall execute, and the Trustee shall authenticate and deliver in exchange, a new Bond or Bonds in the manner and subject to the limitations and conditions provided in the Indenture, having an equal aggregate principal amount, in authorized denominations, of the same series, form and maturity, bearing interest at the same rate, and registered in names as requested by the then registered owner hereof or his duly authorized attorney or legal representative. Any such exchange shall be at the expense of the Company, except that the Trustee may charge the person requesting such exchange the amount of any tax or other governmental charge required to be paid with respect thereto.

The Trustee shall treat the registered owner as the person exclusively entitled to payment of principal, premium, if any, and interest and the exercise of all other rights and powers of the owner, except that as set forth above interest payments shall be made to the person shown as owner on the 15th day of the month preceding each Interest Payment Date.

All acts, conditions and things required to happen, exist or be performed precedent to and in the issuance of this Bond have happened, exist and have been performed.

This Bond shall not become obligatory for any purpose or be entitled to any security or benefit under the Indenture or be valid until the Trustee has executed the Certificate of Authentication appearing hereon and inserted the date of authentication hereon.

5

IN WITNESS WHEREOF, the Hampton Redevelopment and Housing Authority, has caused this Bond to be executed in its name by the manual or facsimile signature of its Chairman or Vice Chairman, an actual or facsimile of its seal to be imprinted or impressed hereon and attested by the manual or facsimile signature of its Secretary or Assistant Secretary, and this Bond to be dated the date set forth above.

	HAMPTON REDEVELOPMENT AND HOUSING AUTHORITY
(SEAL)	By
		Chairman
Attest:
Asst. Secretary

6

CERTIFICATE OF AUTHENTICATION

Date Authenticated: December 18, 1998

This Bond is one of the Bonds described in the within-mentioned Indenture.

CRESTAR BANK, as Trustee
By
	Authorized Officer

7

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)) and for internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting , or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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: May 7, 2008
	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)) and for internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) 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) Designed such internal control over financial reporting , or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) 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: May 7, 2008
	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 March 31, 2008 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: May 7, 2008
	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 March 31, 2008 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: May 7, 2008
	By:	/s/ William J. Zaiser
	Name:	William J. Zaiser
	Title:	Chief Financial Officer