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 September 30, 2011

OR

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

For the transition period from to              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.)

410 W. Francis Street, Williamsburg, Virginia 23185

Telephone Number (757) 229-5648

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    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 November 9, 2011, there were 9,766,786 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		19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		28
Item 4	Controls and Procedures		29
	PART II
Item 1.	Legal Proceedings		30
Item 1A.	Risk Factors		30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		30
Item 3.	Defaults Upon Senior Securities		30
Item 4.	Removed and Reserved		30
Item 5.	Other Information		30
Item 6.	Exhibits		30

2

PART I

Item 1. Financial Statements

MHI HOSPITALITY CORPORATION

CONSOLIDATED BALANCE SHEETS

	September 30, 2011			December 31, 2010
	(unaudited)
ASSETS
Investment in hotel properties, net	$	182,002,524		$	183,898,660
Investment in joint venture		9,115,806			9,464,389
Cash and cash equivalents		5,399,225			2,992,888
Restricted cash		3,554,450			2,205,721
Accounts receivable		2,528,793			1,868,380
Accounts receivable-affiliate		—			17,375
Prepaid expenses, inventory and other assets		1,923,747			2,335,783
Notes receivable, net		100,000			100,000
Shell Island lease purchase, net		810,662			1,080,882
Deferred income taxes		4,055,457			4,742,695
Deferred financing costs, net		3,106,362			872,415
TOTAL ASSETS	$	212,597,026		$	209,583,431
LIABILITIES
Line of credit	$	45,133,013		$	75,197,858
Mortgage debt		75,029,937			72,192,253
Series A Cumulative Redeemable Preferred Stock, par value $0.01, 27,650 shares authorized, 25,227 and 0 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		25,226,530			—
Loans payable		8,400,220			4,493,970
Accounts payable and accrued liabilities		8,901,659			6,335,145
Advance deposits		725,955			555,902
Dividends and distributions payable		258,825			—
Accounts payable – affiliate		3,351			—
Warrant derivative liability		1,368,000			—
TOTAL LIABILITIES		165,047,490			158,775,128
Commitments and contingencies (see Note 6)
EQUITY
MHI Hospitality Corporation stockholders’ equity
Preferred stock, par value $0.01; 972,350 shares authorized, 0 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		—			—
Common stock, par value $0.01, 49,000,000 shares authorized, 9,701,786 shares and 9,541,286 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively		97,018			95,413
Additional paid in capital		56,195,576			55,682,976
Distributions in excess of retained earnings		(19,320,142	)		(16,837,182	)
Total MHI Hospitality Corporation stockholders’ equity		36,972,452			38,941,207
Noncontrolling interest		10,577,084			11,867,096
TOTAL EQUITY		47,549,536			50,808,303
TOTAL LIABILITIES AND EQUITY	$	212,597,026		$	209,583,431

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

3

MHI HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three months  ended September 30, 2011			Three months  ended September 30, 2010			Nine months  ended September 30, 2011			Nine months  ended September 30, 2010
REVENUE
Rooms department	$	14,154,271		$	13,736,101		$	43,223,226		$	40,784,193
Food and beverage department		4,656,014			4,657,257			14,991,087			14,395,240
Other operating departments		1,204,901			1,144,373			3,466,164			3,383,410
Total revenue		20,015,186			19,537,731			61,680,477			58,562,843
EXPENSES
Hotel operating expenses
Rooms department		4,078,235			3,972,346			12,048,335			11,495,313
Food and beverage department		3,266,031			3,227,304			10,102,863			9,756,741
Other operating departments		157,839			196,410			420,580			540,248
Indirect		8,152,905			7,770,926			23,942,063			22,610,861
Total hotel operating expenses		15,655,010			15,166,986			46,513,841			44,403,163
Depreciation and amortization		2,187,541			2,123,761			6,460,928			6,381,378
Corporate general and administrative		1,348,792			725,909			3,154,412			2,687,719
Total operating expenses		19,191,343			18,016,656			56,129,181			53,472,260
NET OPERATING INCOME		823,843			1,521,075			5,551,296			5,090,583
Other income (expense)
Interest expense		(2,747,284	)		(2,608,276	)		(8,052,832	)		(7,385,350	)
Interest income		4,281			4,843			11,819			15,779
Equity income (loss) in joint venture		(283,539	)		(184,237	)		(161,083	)		5,089
Unrealized gain on warrant derivative		646,000			—			266,000			—
Unrealized gain (loss) on hedging activities		—			(16,566	)		72,649			630,828
Gain (loss) on disposal of assets		(9,894	)		(84,128	)		2,361			(84,128	)
Net loss before income taxes		(1,566,593	)		(1,367,289	)		(2,309,790	)		(1,727,199	)
Income tax benefit (provision)		71,692			(3,461	)		(765,083	)		(365,861	)
Net loss		(1,494,901	)		(1,370,750	)		(3,074,873	)		(2,093,060	)
Add: Net loss attributable to the noncontrolling interest		377,859			366,400			785,948			564,435
NET LOSS ATTRIBUTABLE TO THE COMPANY	$	(1,117,042	)	$	(1,004,350	)	$	(2,288,925	)	$	(1,528,625	)
Net loss per share attributable to the Company
Basic	$	(0.12	)	$	(0.11	)	$	(0.24	)	$	(0.16	)
Diluted	$	(0.11	)	$	(0.11	)	$	(0.23	)	$	(0.16	)
Weighted average number of shares outstanding
Basic		9,701,786			9,541,286			9,627,006			9,415,593
Diluted		9,802,378			9,557,286			9,792,440			9,431,593

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

4

MHI HOSPITALITY CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(unaudited)

	Common Stock				Additional Paid- In Capital		Distributions in Excess of Retained Earnings			Noncontrolling Interest			Total
	Shares		Par Value
Balances at December 31, 2010		9,541,286	$	95,413	$	55,682,976	$	(16,837,182	)	$	11,867,096		$	50,808,303
Issuance of restricted common stock awards		45,500		455		74,475		—			—			74,930
Conversion of units in operating partnership		115,000		1,150		438,125		—			(439,275	)		—
Dividends and distributions declared		—		—		—		(194,035	)		(64,789	)		(258,824	)
Net loss		—		—		—		(2,288,925	)		(785,948	)		(3,074,873	)
Balances at September 30, 2011		9,701,786	$	97,018	$	56,195,576	$	(19,320,142	)	$	10,577,084		$	47,549,536

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

5

MHI HOSPITALITY CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Nine months  ended September 30, 2011			Nine months  ended September 30, 2010
Cash flows from operating activities:
Net loss	$	(3,074,873	)	$	(2,093,060	)
Adjustments to reconcile net loss attributable to the Company to net cash provided by operating activities:
Depreciation and amortization		6,460,928			6,381,378
Equity (income) loss in joint venture		161,083			(5,089	)
Unrealized (gain)loss on derivatives		(338,649	)		(630,828	)
(Gain) loss on disposal of assets		(2,361	)		84,128
Amortization of deferred financing costs		893,537			871,506
Paid-in-kind interest		226,530			—
Charges related to equity-based compensation		74,930			226,126
Changes in assets and liabilities:
Restricted cash		(123,602	)		(692,151	)
Accounts receivable		(660,413	)		(1,204,259	)
Prepaid expenses, inventory and other assets		353,800			(567,234	)
Deferred income taxes		691,481			327,919
Accounts payable and accrued liabilities		2,559,821			1,306,279
Advance deposits		170,053			309,113
Due from affiliates		20,725			26,662
Net cash provided by operating activities		7,412,990			4,340,490
Cash flows from investing activities:
Improvements and additions to hotel properties		(4,181,335	)		(2,211,195	)
Proceeds from sale of furniture and equipment		26,705			—
Distributions from joint venture		187,500			138,386
Funding of restricted cash reserves		(1,742,175	)		(1,359,144	)
Proceeds of restricted cash reserves		1,267,048			597,518
Net cash used in investing activities		(4,442,257	)		(2,834,435	)
Cash flows from financing activities:
Proceeds of cumulative mandatorily redeemable preferred stock and warrant		25,000,000			—
Proceeds of mortgage debt		7,500,000			—
Proceeds of loans		4,000,000			—
Payments on credit facility		(30,064,845	)		(325,000	)
Pledge of cash collateral		(750,000	)		—
Redemption of units in Operating Partnership		—			(17,600	)
Payment of deferred financing costs		(1,493,484	)		(530,595	)
Payments of mortgage debt and loans		(4,756,067	)		(376,875	)
Net cash used in financing activities		(564,396	)		(1,250,070	)
Net increase in cash and cash equivalents		2,406,337			255,985
Cash and cash equivalents at the beginning of the period		2,992,888			3,490,487
Cash and cash equivalents at the end of the period	$	5,399,225		$	3,746,472
Supplemental disclosures:
Cash paid during the period for interest	$	6,277,147		$	6,584,127
Cash paid during the period for income taxes	$	46,655		$	19,625
Non-cash investing and financing activities:
Issuance of warrant with cumulative mandatorily redeemable preferred stock	$	1,634,000		$	—

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-managed and self-administered real estate investment trust (“REIT”) that was incorporated in Maryland on August 20, 2004 to own primarily full-service upper-upscale and upscale hotels located in primary and secondary markets in the Mid-Atlantic and Southern 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 (the “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”). The Company also owns a 25.0% non-controlling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with CRP/MHI Holdings, LLC, an affiliate of both Carlyle Realty Partners V, L.P. and The Carlyle Group (“Carlyle”).

For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which, at September 30, 2011, was approximately 75.0% 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, MHI Hotels Services, LLC (“MHI Hotels Services”), to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

All references in this report to the “Company”, “MHI”, “we”, “us” and “our” refer to MHI Hospitality Corporation, its operating partnership and its subsidiaries and predecessors, unless the context otherwise requires or where otherwise indicated.

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

Amendments to Credit Agreement – On June 4, 2010, the Company entered into a fifth amendment to its credit agreement to address the sufficiency of the borrowing base. The amendment revises the methodology used to value the Company’s existing hotel properties in the borrowing base and modifies certain other aspects of the credit agreement, as amended, including fixing the interest rate spread for the variable LIBOR-based interest rate at 4.00% and a minimum LIBOR of 0.75%. The amendment converts the facility to non-revolving, eliminates the Company’s ability to re-borrow principal paid in the future and establishes minimum repayments equal to 50% of excess cash flow, as defined in the agreement, payable quarterly. Pursuant to the amendment, the Company is required to fund reserves for insurance and real estate taxes as well as a reserve for the replacement of furniture, fixtures and equipment equal to 3.0% of gross room revenues. The amendment also modifies the fixed charge covenant, eliminates the leverage covenant, places limits on capital expenditures and requires prepayments from a portion of the proceeds of future equity offerings of up to $21.7 million. In the event that the Company makes prepayments totaling $21.7 million, the excess cash flow prepayment requirement will terminate. The amendment allows the Company to pay additional dividends in any fiscal quarter, subject to the existing cap of 90% of the prior year’s funds from operations (“FFO”) provided certain liquidity thresholds and other conditions are met. The amendment provides for a contingent extension of the maturity date for one year to May 2012, provided that certain valuation and other criteria are met, including payment of an extension fee and an extension or refinancing of the Jacksonville mortgage.

On April 18, 2011, the Company entered into a sixth amendment to the credit agreement. Among other things, the amendment: (i) extends the final maturity date of the credit facility to May 8, 2014; (ii) provides that no additional advances may be made and no currently outstanding advances subsequently repaid or prepaid may be reborrowed; (iii) adjusts the release amounts with respect to secured hotel properties; (iv) reduces the additional interest from 4.00% to 3.50% and removes the LIBOR floor of 0.75%; and (v) adjusts certain financial covenants including restrictions relating to payment of dividends. In connection with the amendment, the Company reduced the outstanding balance on its existing credit facility by approximately $22.7 million.

Sale of Preferred Stock and Warrant – On April 18, 2011, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Essex Illiquid, LLC and Richmond Hill Capital Partners, LP (collectively, the “Investors”), under which the Company issued and sold to the Investors in a private placement 25,000 shares of the Company’s Series A Cumulative Redeemable Preferred Stock (the “Preferred Stock”), and a warrant (the “Warrant”) to purchase 1,900,000 shares of the Company’s common stock, par value $0.01 per share, for a purchase price of $25.0 million.

The Company used the net proceeds from the issuance of the Preferred Stock and the Warrant to partially prepay the amounts owed by the Company under its credit agreement.

7

Available Bridge Financing – On April 18, 2011, the Company entered into an agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which the Company has the right to borrow up to $10.0 million on or before December 31, 2011 (the “Bridge Financing”). The principal amount borrowed will bear interest at the rate of 9.25% per annum, payable quarterly in arrears and will mature on the earlier of April 18, 2015 or the redemption in full of the Preferred Stock.

Mortgage Loan Extension – On June 30, 2011, the Company entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina until June 30, 2012. Under the terms of the extension, the Company will make monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage was increased to LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00%. The Company also pledged $750,000 in cash collateral held by the lender in an interest-bearing account.

Mortgage Loan Refinancing – On August 1, 2011, the Company entered into agreements with PNC Bank, National Association, in its capacity as trustee of the AFL-CIO Building Investment Trust, to extend the maturity of the mortgage on the Crowne Plaza Jacksonville Riverfront until January 22, 2013. During the extension, and pursuant to the loan documents, the interest rate applicable to the mortgage loan is fixed at 8.0% and the lender has waived certain covenants requiring the borrower to further pay down principal under certain circumstances. In order to effect the extension, and pursuant to the loan documents, the Company tendered to the lender the sum of $4.0 million as principal curtailment of the mortgage loan, thus reducing the mortgage loan’s current outstanding principal amount to $14.0 million, and the lender waived certain covenants requiring the Company to further pay down principal under certain circumstances.

On August 5, 2011, the Company obtained a 10-year, $7.5 million mortgage with Bank of Georgetown on the Holiday Inn Laurel West hotel property. The mortgage bears interest at a rate of 5.25% per annum for the first five years. After five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest, with a floor of 5.25%. The mortgage provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. Proceeds of the mortgage were used to pay down a portion of the Company’s indebtedness under 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, the Operating Partnership, MHI TRS and subsidiaries as of September 30, 2011 and December 31, 2010 and for the three months and nine months ended September 30, 2011 and 2010. All significant inter-company balances and transactions have been eliminated.

Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at acquisition cost and allocated to land, property and equipment and identifiable intangible assets. 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 7 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.

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; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that entered into a lease agreement upon closing of the hotel acquisition with respect to the adjacent three-acre site on which is located a parking garage that is utilized by the hotel; and (iv) the entity that owned the junior participation in the existing mortgage. Carlyle owns a 75.0% controlling indirect interest in all these 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

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

Concentration of Credit Risk – The Company holds cash accounts at several institutions in excess of the FDIC protection limits of $250,000. The Company’s exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize the Company’s potential risk.

Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows, reserves for replacements of furniture, fixtures and equipment as well as cash collateral accounts maintained with its lenders or lenders’ agents pursuant to certain requirements in the Company’s various mortgage agreements and line of credit.

Inventories – Inventories which consist primarily of food and beverage are stated at the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis.

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 September 30, 2011 and December 31, 2010 were $296,240 and $331,002, respectively. Amortization expense for the three months and nine months ended September 30, 2011 totaled $11,587 and $34,763, respectively, and $12,187 and $36,562, respectively, for the three months and nine months ended September 30, 2010.

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 consolidated statements of operations.

Derivative Instruments – The Company’s derivative instruments are 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 uses derivative instruments to add stability to interest expense and to manage its exposure to interest-rate movements. To accomplish this objective, the Company primarily used an interest-rate swap, which was required under its credit agreement and acted as a cash flow hedge involving the receipts of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments without exchange of the underlying principal amount. The Company valued its interest-rate swap at fair value, which it defines 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) and included it in accounts payable and accrued liabilities. The Company also uses derivative instruments in the Company’s stock to obtain more favorable terms on its financing. The Company does not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.

The Company 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.

The Company endeavors 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. The following table represents our derivative instruments measured at fair value and the basis for that measurement:

	Level 1		Level 2			Level 3
September 30, 2011
Interest-rate swap	$	—	$	—		$	—
Warrant		—		(1,368,000	)		—
December 31, 2010
Interest-rate swap		—		(72,649	)		—
Warrant		—		—			—

9

The Company’s interest-rate swap liability is valued by discounting expected future cash flows based on quoted prices for forward interest-rate contracts.

The warrant derivative liability was valued at September 30, 2011 using the Black-Scholes option pricing model assuming an exercise price of $2.25 per share of common stock, a risk-free interest rate of 0.97%, a dividend yield of 5.00%, expected volatility of 68.0% and a remaining term of approximately 5 years.

Cumulative Mandatorily Redeemable Preferred Stock – The Company accounts for its preferred stock based upon the guidance enumerated in ASC 480, Distinguishing Liabilities from Equity. The Preferred Stock is mandatorily redeemable on April 18, 2016, or upon the earlier occurrence of certain triggering events and therefore is classified as a liability instrument on the date of issuance.

Warrants – The Company accounts for the warrant based upon the guidance enumerated in ASC 815-40, Derivatives and Hedging: Contracts in Entity’s Own Stock. The Warrant contains a provision that could require an adjustment to the exercise price if we issued securities deemed to be dilutive to the Warrant and therefore is classified as a derivative liability. The Warrant is carried at fair value with changes in fair value reported in earnings as long as the Warrant remains classified as a derivative liability.

Noncontrolling 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 noncontrolling 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 noncontrolling interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.

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

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

Income Taxes – The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “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 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. As of September 30, 2011, the Company has no uncertain tax positions. In addition, the Company recognizes obligations for interest and penalties related to uncertain tax positions, if any, as income tax expense. The period from December 21, 2004 through December 31, 2010 remains open to examination by the major taxing jurisdictions to which the Company is subject.

Stock-based Compensation – The Company’s 2004 Long Term Incentive Plan (the “Plan”) permits the grant of stock options, restricted (non-vested) stock and performance stock 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 stockholders.

Under the Plan, the Company has made restricted stock and deferred stock awards totaling 215,938 shares including 165,935 shares issued to certain executives and employees, and 50,000 restricted shares issued to its independent directors. Of the 165,935 shares issued to certain of the Company’s executives and employees, all have vested except 14,000 shares issued to the Vice President and General Counsel upon execution of his employment contract which will vest in equal amounts of 7,000 shares on each anniversary of the effective date of his employment agreement over the next two-year period. Regarding the restricted shares awarded to the Company’s independent directors, all of the shares have vested except 12,000 shares which vest at the end of 2011.

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 September 30, 2011, 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. Compensation cost recognized under the Plan was $11,698 and $35,093, respectively, for the three months and nine months ended September 30, 2011 and $46,418 and $132,337, respectively for the three months and nine months ended September 30, 2010.

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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 – 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.

Recent Accounting Pronouncements – There are no recent accounting pronouncements which the Company believes will have a material impact on its financial statements.

3. Acquisition of Hotel Properties

There were no new acquisitions during the three months or nine months ended September 30, 2011.

4. Investment in Hotel Properties

Investment in hotel properties as of September 30, 2011 and December 31, 2010 consisted of the following (in thousands):

	September 30, 2011			December 31, 2010
	(unaudited)
Land and land improvements	$	19,258		$	19,245
Buildings and improvements		178,852			176,641
Furniture, fixtures and equipment		31,788			30,345
		229,898			226,231
Less: accumulated depreciation		(47,895	)		(42,332	)
	$	182,003		$	183,899

5. Debt

Credit Facility. As of September 30, 2011, the Company had a secured credit facility with a syndicated bank group comprised of BB&T, Key Bank National Association and Manufacturers and Traders Trust Company.

On June 4, 2010, the Company entered into a fifth amendment to its credit agreement modifying certain provisions of the agreement including an increase in the rate of interest to LIBOR plus additional interest of 4.00%. The amendment established a LIBOR floor of 0.75%; converted it to a non-revolving facility; eliminated a fee of 0.25% on the unused portion of the facility; instituted a provision for mandatory quarterly pre-payments based on excess cash flow, as defined in the amendment, as well as a provision for mandatory prepayment if the Company raises equity within certain parameters; and provided an option to extend the maturity for one year if certain conditions were met.

On April 18, 2011, the Company entered into a sixth amendment to the credit agreement which, among other things, (i) extends the final maturity date of advances under the credit agreement to May 8, 2014; (ii) provides that no additional advances may be made and no currently outstanding advances subsequently repaid or prepaid may be re-borrowed; (iii) adjusts the release amounts with respect to secured hotel properties; (iv) reduces the additional interest from 4.00% to 3.50% and removes the LIBOR floor of 0.75%; and (v) adjusts certain financial covenants including restrictions relating to payment of dividends. In connection with the amendment, the Company reduced the outstanding balance on its existing credit facility by approximately $22.7 million.

The Company had borrowings under the credit facility of approximately $45.1 million and approximately $75.2 million at September 30, 2011 and December 31, 2010, respectively.

At September 30, 2011, the credit facility was secured by the Holiday Inn Brownstone in Raleigh, North Carolina, the Hilton Philadelphia Airport, the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore, 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 September 30, 2011, the four properties had a net carrying value of approximately $93.1 million. Under the terms of the credit agreement, the Company must satisfy certain financial and non-financial covenants. The Company was in compliance with all required covenants as of September 30, 2011.

Mortgage Debt. As of September 30, 2011, the Company had approximately $75.0 million of outstanding mortgage debt. The following table sets forth the Company’s mortgage debt obligations on its hotels.

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Property	Balance Outstanding as of				Prepayment Penalties			Maturity Date			Amortization Provisions			Interest Rate
	September 30, 2011		December 31, 2010
Crowne Plaza Hampton Marina	$	8,949,625	$	9,000,000		N			06/2012		$	16,000	(1)		LIBOR plus  4.55	%(2)
Crowne Plaza Jacksonville Riverfront		14,000,000		18,000,000		N			01/2013	(3)		Interest  Only	(3)		8.00	%
Hilton Savannah DeSoto		22,594,245		22,867,464			(4)		07/2017			25 years	(5)		6.06	%
Hilton Wilmington Riverside		21,997,447		22,324,789			(4)		03/2017			25 years	(6)		6.21	%
Holiday Inn Laurel West		7,488,620		—			(7)		08/2021			25 years			5.25	%(8)
Total	$	75,029,937	$	72,192,253

(1) The Company is required to make monthly principal payments of $16,000.

(2) The note bears a minimum interest rate of 5.00%.

(3) The note could not be prepaid prior to July 2009, but a prepayment may be made currently without penalty.

(4) The notes may not be prepaid during the first six years of the terms. Prepayment can be made with penalty thereafter until 90 days before maturity.

(5) The note provided for payments of interest only until August 2010 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in July 2017.

(6) The note provided for payments of interest only until March 2009 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in March 2017.

(7) The note provides for pre-payment penalties during the first through fourth years and sixth through ninth years of the term of the mortgage.

(8) The note provides that after five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury rate of interest, with a floor of 5.25%.

Total mortgage debt maturities as of September 30, 2011 without respect to any additional loan extensions or modification subsequent to September 30, 2011 for the following twelve-month periods were as follows:

September 30, 2012	$	9,988,793
September 30, 2013		15,104,620
September 30, 2014		1,173,013
September 30, 2015		1,245,652
September 30, 2016		1,321,786
Thereafter		46,196,073
Total future maturities	$	75,029,937

Loan from Carlyle Affiliate Lender. On February 9, 2009, the indirect subsidiary of the Company which is a member of the joint venture entity that owns the Crowne Plaza Hollywood Beach Resort, borrowed $4.75 million from the Carlyle entity that is the other member of such joint venture (the “Carlyle Affiliate Lender”), for the purpose of improving the Company’s liquidity. In June 2008, the joint venture that owns the property purchased a junior participation in a portion of the mortgage loan from the lender. The amount of the loan from the Carlyle Affiliate Lender approximated the amount the Company contributed to the joint venture to enable the joint venture to purchase its interest in the mortgage loan. The interest rate and maturity date of the loan are tied to a note that is secured by a mortgage on the property. The loan, which currently bears a rate of LIBOR plus additional interest of 3.00%, requires monthly payments of interest and principal equal to 50.0% of any distributions it receives from the joint venture. The maturity date of the mortgage to which the loan is tied matures in August 2014. The outstanding balance on the loan at September 30, 2011 and December 31, 2010 was $4,400,220 and $4,493,970, respectively.

Available Bridge Financing. On April 18, 2011, the Company entered into an agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which the Company has the right to borrow up to $10.0 million before the earlier of December 31, 2011 or the redemption in full of the Preferred Stock. The principal amount borrowed will bear interest at the rate of 9.25% per

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annum, payable quarterly in arrears. The Bridge Financing will mature on April 18, 2015 or upon the redemption in full of the Preferred Stock, if earlier. The outstanding balance may be prepaid at the Company’s option in whole or in part at any time without penalty. Further, the Company is obligated (i) to make prepayments in the event of, and to the extent of the proceeds from, new equity issuances, certain debt incurrences and sales of assets which do not secure the Company’s obligations under the Company’s credit agreement and (ii) to repay the Bridge Financing in full following certain trigger events which also give rise to an obligation to redeem the outstanding shares of Preferred Stock. The agreement provides for certain future securities pledges and/or asset liens to be granted from time to time to the lender to secure the Bridge Financing, under the circumstances and upon the conditions set forth in the agreement. At September 30, 2011, the Company had borrowings under the Bridge Financing of $4.0 million.

6. 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. These areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the second of five optional five-year periods expiring October 31, 2011, October 31, 2016, October 31, 2021, October 31, 2026 and October 31, 2031, respectively. Rent expense for the three months and nine months ended September 30, 2011 totaled $16,215 and $49,640, respectively, and totaled $14,251 and $44,530 for the three months and nine months ended September 30, 2010, respectively, for this operating lease.

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

The Company leases a parking lot adjacent to the Holiday Inn Brownstone in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expires August 31, 2016. There is a renewal option for up to three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. The Company holds an exclusive and irrevocable option to purchase the leased land at fair market value at the end of the original lease term, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for the three months and nine months ended September 30, 2011 totaled $23,871 and $71,612, respectively, and totaled $23,871 and $71,612 for the three months and nine months ended September 30, 2010, respectively.

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 totaled $48,750 and $146,250 for the three months and nine months ended September 30, 2011, respectively and totaled $48,750 and $146,250 for the three months and nine months ended September 30, 2010, respectively.

The Company leases a parking lot in close proximity to the Sheraton Louisville Riverside. 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 the 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. Rent expense totaled $8,400 and $25,200 for the three months and nine months ended September 30, 2011, respectively, and totaled $8,400 and $25,200 for the three months and nine months ended September 30, 2010, respectively.

The Company leases a parking lot adjacent to the Crowne Plaza Tampa Westshore under a five-year agreement with the Florida Department of Transportation that commenced in July 2009 and expires in July 2014. The agreement requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense totaled $700 and $2,116 for the three months and nine months ended September 30, 2011, respectively, and totaled $608 and $1,824 for the three months and nine months ended September 30, 2010, respectively.

The Company leases certain submerged land in the Saint Johns River in front of the Crowne Plaza Jacksonville Hotel from the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land is leased under a five-year operating lease, which expires September 18, 2012 requiring annual payments of $4,961. Rent expense totaled $1,240 and $3,720 for the three months and nine months ended September 30, 2011, respectively, and totaled $1,240 and $3,720 for the three months and nine months ended September 30, 2010, respectively.

The Company leases 3,542 square feet of commercial office space in Williamsburg, Virginia under an agreement that commenced September 1, 2009 and expires August 31, 2015. Rent expense totaled $13,750 and $41,250 for the three months and nine months ended September 30, 2011, respectively, and totaled $13,750 and $41,250 for the three months and nine months ended September 30, 2010, respectively.

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The Company leases 1,632 square feet of commercial office space in Rockville, Maryland under an agreement that commenced December 14, 2009 and expires February 28, 2017. The agreement requires monthly payments at an annual rate of $22,848 for the first year of the lease term and monthly payments at an annual rate of $45,696 for the second year of the lease term, increasing 2.75% per year for the remainder of the lease term. Rent expense totaled $11,046 and $33,274 for the three months and nine months ended September 30, 2011, respectively, and totaled $11,013 and $33,039 for the three months and nine months ended September 30, 2010, respectively.

The Company also leases certain furniture and equipment under financing arrangements expiring between October 2011 and March 2014.

A schedule of minimum future lease payments for the following twelve-month periods is as follows:

September 30, 2012	$	500,559
September 30, 2013		653,720
September 30, 2014		496,601
September 30, 2015		268,899
September 30, 2016		211,467
Thereafter		27,888
Total future minimum lease payments	$	2,159,134

Management Agreements – Each of the operating hotels that the Company wholly-owned at September 30, 2011, except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. The Company entered into a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019 (see Note 9).

Franchise Agreements – As of September 30, 2011, the Company’s hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, the Company is required to pay a franchise fee generally between 2.5% and 5.0% of room revenues, plus additional fees that amount to between 2.5% and 6.0% of room revenues from the hotels. The franchise agreements currently expire between November 2011 and April 2023.

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 to¹/₁₂ 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 4.0% of gross revenues for the Hilton Savannah DeSoto and the Hilton Wilmington Riverside.

Pursuant to the terms of the mortgage on the Crowne Plaza Jacksonville Riverfront, the Company is required to make monthly contributions equal to 4.0% of room revenues into a property improvement fund.

Pursuant to the terms of the mortgage on the Crowne Plaza Hampton Marina, the Company is required to make monthly contributions equal to 4.0% of gross revenues to a property improvement fund.

Pursuant to the terms of the fifth amendment to the credit agreement, the Company is required to escrow with its lender an amount sufficient to pay the real estate taxes as well as property and liability insurance for the encumbered properties when due. In addition, the Company is required to make monthly contributions equal to 3.0% of room revenues into a property improvement fund.

Litigation – The Company is not involved in any material litigation, nor, to its knowledge, is any material litigation threatened against the Company. The Company is involved in routine legal proceedings arising out of the ordinary course of business, all of which the Company expects to be covered by insurance. The Company does not expect any pending legal proceedings to have a material impact on its financial condition or results of operations.

7. Preferred Stock and Warrant

On April 18, 2011, the Company completed a private placement to the Investors pursuant to the Securities Purchase Agreement for gross proceeds of $25.0 million. The Company issued 25,000 shares of Preferred Stock and the Warrant to purchase 1,900,000 shares of the Company’s common stock, par value $0.01 per share.

The Company has designated a class of preferred stock, the Preferred Stock, consisting of 27,650 shares with $0.01 par value per share, having a liquidation preference of $1,000.00 per share pursuant to Articles Supplementary (the “Articles Supplementary”), which sets forth the preferences, rights and restrictions for the Preferred Stock. The Preferred Stock is non-voting and non-convertible. The holders of the Preferred Stock have a right to payment of a cumulative dividend payable quarterly (i) in cash at an annual rate of 10.0% of the liquidation preference per share and (ii) in additional shares of Preferred Stock at an annual rate of 2.0% of

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the liquidation preference per share. As set forth in the Articles Supplementary, the holder(s) of the Company’s Preferred Stock will have the exclusive right, voting separately as a single class, to elect one (1) member of the Company’s board of directors. As of September 30, 2011, there were approximately 25,227 shares of the Preferred Stock issued and outstanding. In addition, under certain circumstances as set forth in the Articles Supplementary, the holder(s) of the Company’s Preferred Stock will be entitled to appoint a majority of the members of the board of directors. The holder(s) of the Company’s Preferred Stock will be entitled to require that the Company redeem the Preferred Stock under certain circumstances, but no later than April 18, 2016, and on such terms and at such price as is set forth in the Articles Supplementary.

The Warrant entitles the holder(s) to purchase up to 1,900,000 shares of the Company’s common stock at an exercise price of $2.25 per share. The Warrant expires on October 18, 2016. The Warrant holders have no voting rights. The exercise price and number of shares of common stock issuable upon exercise of the Warrant are both subject to adjustment under certain circumstances. The Warrant also contains a cashless exercise right. Under certain circumstances as set forth in the Warrant, the holders of the Warrant will be entitled to participate in certain future securities offerings of the Company.

The Company determined the fair market value of the Warrant was approximately $1.6 million on the issuance date using the Black-Scholes option pricing model assuming an exercise price of $2.25 per share of common stock, a risk-free interest rate of 2.26%, a dividend yield of 5.00%, expected volatility of 60.0%, and an expected term of 5.5 years, and is included in deferred financing costs. The deferred cost is amortized to interest expense in the accompanying consolidated statement of operations over the period of issuance to the mandatory redemption date of the preferred stock.

8. Stockholders’ Equity

Preferred Stock – The Company has authorized 1,000,000 shares of preferred stock, of which 27,650 shares have been designated Series A Cumulative Redeemable Preferred Stock, as described above. None of the remaining authorized shares have been issued.

Common Stock – The Company is authorized to issue up to 49,000,000 shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company’s common stock are entitled to receive distributions when authorized by the Company’s board of directors out of assets legally available for the payment of distributions.

On June 7, 2011, one holder of units in the Operating Partnership redeemed 115,000 units for an equivalent number of shares of the Company’s common stock.

On March 22, 2011, the Company issued 17,500 shares of non-restricted stock to certain executives and employees as well as 12,000 shares of restricted stock to its then serving independent directors.

On January 25, 2011, the Company issued 16,000 non-restricted shares to its Chief Operating Officer and President in accordance with the terms of his employment contract, as amended.

On June 7, 2010, the Company issued 21,000 shares of restricted stock to its Vice President and General Counsel in accordance with the terms of his employment contract.

On March 22, 2010, one holder of units in the Operating Partnership redeemed 368,168 units for an equivalent number of shares of the Company’s common stock.

During February 2010, the Company issued 18,175 shares of non-restricted stock to certain executives and 12,000 shares of restricted stock to its independent directors.

In addition, on February 1, 2010, the Company issued 15,000 shares of non-restricted stock to its Chief Executive Officer in accordance with the terms of his renewed employment contract.

As of September 30, 2011 and December 31, 2010, the Company had 9,701,786 and 9,541,286 shares of common stock outstanding, respectively.

Warrants – As of September 30, 2011, the Company has granted no warrants representing the right to purchase common stock other than the Warrant described in Note 7.

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.

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As of September 30, 2011, the total number of Operating Partnership units outstanding was 3,239,439, with a fair market value of approximately $7.0 million based on the price per share of the common stock on that date.

9. Related Party Transactions

As of September 30, 2011, the members of MHI Hotels Services (a company that is majority-owned and controlled by the Company’s chief executive officer, its chief financial officer, a current member and a former member of its Board of Directors) owned approximately 8.3% of the Company’s outstanding common stock and 2,103,670 Operating Partnership units. The following is a summary of the transactions between the Company and MHI Hotels Services:

Accounts Receivable – At September 30, 2011, and December 31, 2010, the Company owed $3,351 and was due $17,375, 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. Leasehold revenue for each of the three months and nine months ended September 30, 2011 and 2010 was $160,000 and $480,000, respectively.

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

Management Agreements – Each of the hotels that the Company owned at September 30, 2011, except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. The Company entered into a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019. Under both management agreements, 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 any hotel is 2.0% of gross revenues for the first full fiscal year and partial fiscal year from the commencement date through December 31 of that year, 2.5% of gross revenues the second full fiscal year, and 3.0% of gross revenues for every year 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 agreed that the property in Jeffersonville, Indiana shall substitute for the Williamsburg property under the master management agreement. The incentive management fee, if any, is due annually in arrears within 90 days of the end of the fiscal year and will be equal to 10.0% of the amount by which the gross operating profit of the hotels, on an aggregate basis, for a given year exceeds the gross operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive management fee may not exceed 0.25% of gross revenues of all of the hotels included in the incentive fee calculation.

Management fees earned by MHI Hotels Services totaled $582,737 and $1,799,360 for the three months and nine months ended September 30, 2011, respectively, and $502,397 and $1,494,556 for the three months and nine months ended September 30, 2010, respectively. In addition, estimated incentive management fees of $(16,188) and $68,431 were accrued for the three months and nine months ended September 30, 2011, respectively, and estimated management fees of $36,263 and $42,358 were accrued for the three months and nine months ended September 30, 2010, 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. Premiums for employee medical benefits paid by the Company were $608,502 and $1,876,807 for the three months and nine months ended September 30, 2011, respectively and $617,763 and $1,593,923 for the three months ended September 30, 2010, respectively.

Construction Management Services – The Company has engaged MHI Hotels Services to manage certain aspects of the renovations at the Crowne Plaza Tampa Westshore and the Holiday Inn Brownstone. The Company paid no construction management fees for the three months and nine months ended September 30, 2011 and $66,667 and $141,733 for the three months and nine months ended September 30, 2010, respectively.

10. Retirement Plan

The Company maintains a 401(k) plan for qualified employees which is subject to “safe harbor” provisions and which requires 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 totaled $9,440 and $40,994 for the three months and nine months ended September 30, 2011, respectively, and $16,434 and $37,396 for the three months and nine months ended September 30, 2010, respectively.

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11. Unconsolidated Joint Venture

The Company owns a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that entered into a lease agreement upon closing of the hotel acquisition with respect to the adjacent three-acre site on which is located a parking garage that is utilized by the hotel; and (iv) the entity that owned the junior participation in the existing mortgage. Carlyle owns a 75.0% indirect controlling interest in all these 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:

	September 30, 2011		December 31, 2010
	(unaudited)
ASSETS
Investment in hotel properties, net	$	68,221,019	$	69,678,303
Cash and cash equivalents		3,204,574		1,952,687
Accounts receivable		98,141		271,822
Prepaid expenses, inventory and other assets		2,329,363		2,772,382
TOTAL ASSETS	$	73,853,097	$	74,675,194
LIABILITIES
Mortgage loans, net	$	33,600,000	$	34,100,000
Accounts payable and other accrued liabilities		3,342,106		2,434,683
Advance deposits		447,958		283,144
TOTAL LIABILITIES		37,390,064		36,817,827
TOTAL MEMBERS’ EQUITY		36,463,033		37,857,367
TOTAL LIABILITIES AND MEMBERS’ EQUITY	$	73,853,097	$	74,675,194

	Three months  ended September 30, 2011			Three months  ended September 30, 2010			Nine months  ended September 30, 2011			Nine months ended September 30, 2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue
Rooms department	$	2,167,782		$	1,932,975		$	8,846,380		$	8,300,101
Food and beverage department		440,876			419,511			1,887,038			1,567,029
Other operating departments		265,186			250,914			837,984			827,554
Total revenue		2,873,844			2,603,400			11,571,402			10,694,684
Expenses
Hotel operating expenses
Rooms department		527,917			515,659			1,865,238			1,772,533
Food and beverage department		375,832			348,170			1,405,916			1,220,033
Other operating departments		143,074			148,313			470,174			495,053
Indirect		1,456,369			1,469,658			4,517,778			4,746,496
Total hotel operating expenses		2,503,192			2,481,800			8,259,106			8,234,135
Depreciation and amortization		549,493			548,167			1,645,602			1,642,546
General and administrative		9,037			34,166			76,130			170,532
Total operating expenses		3,061,722			3,064,133			9,980,838			10,047,213
Net operating income (loss)		(187,878	)		(460,733	)		1,590,564			647,471
Interest expense		(443,740	)		(326,972	)		(1,337,084	)		(681,675	)
Interest income		—			1,078			—			4,883
Loss on expiration of land purchase option		(75,000	)		—			(75,000	)		—
Unrealized gain (loss) on hedging activities		(427,539	)		49,678			(822,814	)		49,678
Net income (loss)	$	(1,134,157	)	$	(736,949	)	$	(644,334	)	$	20,357

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12. Income Taxes

The components of the income tax provision (benefit) for the three months and nine months ended September 30, 2011 and 2010 are as follows (in thousands):

	Three months ended September 30, 2011			Three months ended September 30, 2010			Nine months ended September 30, 2011		Nine months ended September 30, 2010
	(unaudited)			(unaudited)			(unaudited)		(unaudited)
Current:
Federal	$	2		$	—		$	16	$	—
State		2			(2	)		57		38
		4			(2	)		73		38
Deferred:
Federal		(65	)		6			580		296
State		(11	)		(1	)		112		32
		(76	)		5			692		328
	$	(72	)	$	3		$	765	$	366

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

	Three months  ended September 30, 2011			Three months  ended September 30, 2010			Nine months  ended September 30, 2011			Nine months  ended September 30, 2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Statutory federal income tax expense (benefit)	$	(533	)	$	(465	)	$	(785	)	$	(587	)
Effect of non-taxable REIT income		470			471			1,381			883
State income tax expense (benefit)		(9	)		(3	)		169			70
	$	(72	)	$	3		$	765		$	366

As of September 30, 2011 and December 31, 2010, the Company had a net deferred tax asset of approximately $4.1 million and $4.7 million, respectively, of which, approximately $4.1 million and $4.2 million, respectively, are due to accumulated net operating losses. These loss carryforwards will begin to expire in 2024 if not utilized by then. As of September 30, 2011 and December 31, 2010, approximately $0.4 million of the net deferred tax asset is attributable to the Company’s share of start-up expenses related to the Crowne Plaza Hollywood Beach Resort, start-up expenses related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore that were not deductible in the year incurred, but are being amortized over 15 years. The remainder of the net deferred tax asset is attributable to year-to-year timing differences including accrued, but not deductible, employee performance awards, vacation and sick pay, bad debt allowance and depreciation. 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 following table sets forth the reconciliation of the numerators and denominators in computing earnings per share for the three months and nine months ended September 30, 2011 and 2010.

	Three months  ended September 30, 2011			Three months  ended September 30, 2010			Nine months ended September 30, 2011			Nine months ended September 30, 2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator
Net loss attributable to the Company for basic computation	$	(1,117,042	)	$	(1,004,350	)	$	(2,288,925	)	$	(1,528,625	)
Effect of the issuance of dilutive shares on the net loss attributable to the noncontrolling interest		(6,543	)		—			(9,935	)		—
Net loss attributable to the Company for dilutive computation	$	(1,123,585	)	$	(1,004,350	)	$	(2,298,860	)	$	(1,528,625	)
Denominator
Weighted average number of common shares outstanding for basic computation		9,701,786			9,541,286			9,627,006			9,415,593
Dilutive effect of stock awards		—			16,000			—			16,000
Dilutive effect of warrants		100,592			—			165,434			—

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	Three months  ended September 30, 2011			Three months  ended September 30, 2010			Nine months ended September 30, 2011			Nine months ended September 30, 2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Weighted average number common shares outstanding for dilutive computation		9,802,378			9,557,286			9,792,440			9,431,593
Basic net loss per share	$	(0.12	)	$	(0.11	)	$	(0.24	)	$	(0.16	)
Diluted net loss per share	$	(0.11	)	$	(0.11	)	$	(0.23	)	$	(0.16	)

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. But the effect of the allocation of net income (loss) attributable to the limited partners’ interests by the issuance of dilutive shares has been included.

Diluted net income (loss) per share takes into consideration the pro forma dilution of certain unvested stock awards during 2010 as well as the Warrant discussed in Note 7 issued in April 2011.

14. Subsequent Events

On October 3, 2011, the Company issued 50,000 shares of common stock in redemption of an equivalent number of units in the Operating Partnership.

On October 11, 2011, the Company paid a quarterly dividend (distribution) of $0.02 per common share (and unit) to those stockholders (and unitholders of MHI Hospitality, L.P.) of record on September 15, 2011.

On October 17, 2011, The Company obtained a 5-year, $8.0 million mortgage with Premier Bank, Inc. on the Holiday Inn Brownstone in Raleigh, North Carolina. The mortgage bears interest at a rate of 5.25% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage may be extended for an additional 5-year period, at the Company’s option if certain conditions precedent have been satisfied, at a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest. Proceeds of the mortgage were used to pay down a portion of the Company’s indebtedness under its credit facility.

On October 17, 2011, the Company authorized payment of a quarterly dividend (distribution) of $0.02 per common share (and unit) to the stockholders (and unitholders of MHI Hospitality, L.P.) of record as of December 15, 2011. The dividend (distribution) is to be paid on January 11, 2012.

On November 1, 2011, the Company issued 15,000 shares of common stock in redemption of an equivalent number of units in the Operating Partnership and redeemed 2,600 additional units in the Operating Partnership for cash.

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

Overview

We are a self-managed and self-administered REIT incorporated in Maryland in August 2004 to pursue opportunities primarily in the full-service upper-upscale and upscale segments of the hotel industry located in primary and secondary markets in the Mid-Atlantic and Southern United States. We commenced operations in December 2004 when we completed our IPO and thereafter consummated the acquisition of the initial properties.

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Our hotel portfolio currently consists of ten full-service, upper-upscale and upscale hotels with 2,421 rooms, which operate under well-known brands such as Hilton, Crowne Plaza, Sheraton and Holiday Inn. Nine of these hotels, totaling 2,110 rooms, are 100% owned by subsidiaries of our Operating Partnership. We also own a 25.0% indirect non-controlling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with Carlyle and we have leasehold interests in a resort condominium facility in Wrightsville Beach, North Carolina. As of September 30, 2011, we owned the following hotel properties:

Property	Number of Rooms		Location	Date of Acquisition
Wholly-owned
Crowne Plaza Hampton Marina		173	Hampton, VA	April 24, 2008
Crowne Plaza Jacksonville Riverfront		292	Jacksonville, FL	July 22, 2005
Crowne Plaza Tampa Westshore		222	Tampa, FL	October 29, 2007
Holiday Inn Brownstone		188	Raleigh, NC	December 21, 2004
Holiday Inn Laurel West		207	Laurel, MD	December 21, 2004
Hilton Philadelphia Airport		331	Philadelphia, PA	December 21, 2004
Hilton Savannah DeSoto		246	Savannah, GA	December 21, 2004
Hilton Wilmington Riverside		272	Wilmington, NC	December 21, 2004
Sheraton Louisville Riverside		180	Jeffersonville, IN	September 20, 2006
		2,111
Joint Venture Property
Crowne Plaza Hollywood Beach Resort		311	Hollywood, FL	August 9, 2007
Total		2,422

We conduct substantially all our business through our Operating Partnership. We are the sole general partner of our Operating Partnership, and we own an approximate 75.9% 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 wholly-owned hotel properties to MHI Hospitality TRS, LLC, our TRS Lessee, which then engages a hotel management company to operate the hotels under a management contract. 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.

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 total room revenue divided by the total number of available rooms.

Results of Operations

The following table illustrates the actual key operating metrics for each of the three months and nine months ended September 30, 2011 and 2010, respectively, for the properties we wholly-owned during each respective reporting period.

	Three months ended September 30, 2011			Three months ended September 30, 2010			Nine months ended September 30, 2011			Nine months ended September 30, 2010
Occupancy %		68.6	%		69.2	%		68.2	%		68.1	%
ADR	$	106.23		$	102.19		$	109.97		$	104.03
RevPAR	$	72.88		$	70.76		$	75.02		$	70.80

Comparison of the Three Months Ended September 30, 2011 to the Three Months Ended September 30, 2010

Revenue. Total revenue for the three months ended September 30, 2011 increased approximately $0.5 million or 2.4% to approximately $20.0 million compared to total revenue of approximately $19.5 million for the three months ended September 30, 2010. Increases in revenue at our Tampa, Florida, and Jacksonville, Florida properties offset declines in revenue at our Hampton, Virginia property. Revenue for the period was adversely impacted by Hurricane Irene. The Company estimates the impact of Hurricane Irene on its portfolio was approximately $500,000 in lost revenue for three months ended September 30, 2011, including an approximately $1.90 negative effect on RevPAR for such period. The Company estimates that the overall effect of Hurricane Irene on its net income was approximately $350,000 for three months ended September 30, 2011.

Room revenue increased approximately $0.4 million or 3.0% to approximately $14.2 million for the three months ended September 30, 2011 compared to room revenue of approximately $13.8 million for the three months ended September 30, 2010. The

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increase in room revenue for the three months ended September 30, 2011 resulted from a 3.6% increase in ADR offset by a 0.6% decrease in occupancy as compared to the same period in 2010. Our properties in Tampa, Florida, Jacksonville, Florida and Philadelphia, Pennsylvania experienced the largest increases in room revenue.

Food and beverage revenues totaled approximately $4.7 million for the three months ended September 30, 2011, approximately the same level of food and beverage revenues for the three months ended September 30, 2010. Increases in banqueting revenue at our properties in Tampa, Florida, Raleigh, North Carolina, and Laurel, Maryland offset decreases in food and beverage revenue at our properties in Wilmington, North Carolina and Hampton, Virginia.

Revenue from other operating departments increased approximately $0.1 million or 5.3% to approximately $1.2 million for the three months ended September 30, 2011 compared to revenue from other operating departments of approximately $1.1 million for the three months ended September 30, 2010.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses and management fees, were approximately $15.7 million, an increase of approximately $0.5 million or 3.2% for the three months ended September 30, 2011 compared to total hotel operating expenses of approximately $15.2 million for the three months ended September 30, 2010. The increase in hotel operating expense was mostly attributable to an increase in operating revenue.

Rooms expense for the three months ended September 30, 2011 increased approximately $0.1 million or 2.7% to approximately $4.1 million compared to rooms expense of approximately $4.0 million for the three months ended September 30, 2010. The increase was largely attributable to higher room revenue.

Food and beverage expenses for the three months ended September 30, 2011 increased approximately $0.1 million to approximately $3.3 million or 1.2% compared to food and beverage expenses of approximately $3.2 million for the three months ended September 30, 2010.

Indirect expenses at our wholly-owned properties for the three months ended September 30, 2011 increased approximately $0.4 million or 4.9% to approximately $8.2 million compared to indirect expenses of approximately $7.8 million for the three months ended September 30, 2010. Management fees and franchise fees increased significantly due to the increase in revenue. Sales and marketing costs, repairs and maintenance, energy and utility costs, insurance, real and personal property taxes as well as general and administrative costs at the property level are also included in indirect expenses.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended September 30, 2011 increased approximately $0.1 million or 3.0% to approximately $2.2 million compared to depreciation and amortization expense of approximately $2.1 million for the three months ended September 30, 2010.

Corporate General and Administrative. Corporate general and administrative expenses for the three months ended September 30, 2011 increased approximately $0.6 million or 85.8% to approximately $1.3 million compared to corporate general and administrative expense of approximately $0.7 million for the three months ended September 30, 2010 due primarily to costs associated with our aborted stock offering.

Interest Expense. Interest expense for the three months ended September 30, 2011 increased approximately $0.1 million or 5.3% to approximately $2.7 million compared to interest expense of approximately $2.6 million for the three months ended September 30, 2010. The increase was the combined result of a higher effective interest rate due mostly to the April 2011 issuance of mandatorily redeemable preferred stock, refinance of the mortgage on the Laurel, Maryland property and borrowings on the Bridge Financing.

Equity Income in Joint Venture. Equity income in joint venture for the three months ended September 30, 2011 represents our 25.0% share of the net loss of the Crowne Plaza Hollywood Beach Resort. For the three months ended September 30, 2011, our 25.0% share of the net loss of the joint venture increased approximately $0.1 million to approximately $0.3 million compared to a net loss of approximately $0.2 million for the three months ended September 30, 2010. All of the increased net loss of the joint venture was attributable to an unrealized loss on hedging activities. For the three months ended September 30, 2011, the hotel reported occupancy of 69.4%, ADR of $109.20 and RevPAR of $75.76. This compares with results reported by the hotel for the three months ended September 30, 2010 of occupancy of 71.8%, ADR of $94.13 and RevPAR of $67.56.

Income Taxes. The income tax provision is primarily derived from the operations of our TRS Lessee. We realized an income tax benefit of approximately $0.1 million for the three months ended September 30, 2011 compared to almost no income tax benefit or expense for the three months ended September 30, 2010. Our TRS lessee experienced taxable losses during the three months ended September 30, 2011 compared to almost no taxable income or loss during the three months ended September 30, 2010.

Net Loss. The net loss for the three months ended September 30, 2011 increased approximately $0.1 million or 9.0% to approximately $1.5 million compared to a net loss of approximately $1.4 million for the three months ended September 30, 2010 as a result of the operating results discussed above.

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Comparison of the Nine Months Ended September 30, 2011 to the Nine Months Ended September 30, 2010

Revenue. Total revenue for the nine months ended September 30, 2011 increased approximately $3.1 million or 5.3% to approximately $61.7 million compared to total revenue of approximately $58.6 million for the nine months ended September 30, 2010. Increases in revenue at our Tampa, Florida, Wilmington, North Carolina, Jeffersonville, Indiana and Philadelphia, Pennsylvania properties offset declines in revenue at our Laurel, Maryland property. Revenue growth for the period was adversely impacted by Hurricane Irene.

Room revenue increased approximately $2.4 million or 6.0% to approximately $43.2 million for the nine months ended September 30, 2011 compared to room revenue of approximately $40.8 million for the nine months ended September 30, 2010. The increase in room revenue for the nine months ended September 30, 2011 resulted from a 5.6% increase in ADR and a 0.3% increase in occupancy as compared to the same period in 2010. Room revenue increased at all our properties with the exception of our property in Laurel, Maryland.

Food and beverage revenues increased approximately $0.6 million or 4.1% to approximately $15.0 million for the nine months ended September 30, 2011 compared to food and beverage revenues of approximately $14.4 million for the nine months ended September 30, 2010. Increases in banqueting revenue at our properties in Tampa, Florida and Wilmington, North Carolina offset decreases in food and beverage revenue at our properties in Hampton, Virginia and Savannah, Georgia.

Revenue from other operating departments increased approximately $0.1 million or 2.4% to approximately $3.5 million for the nine months ended September 30, 2011 compared to revenue from other operating departments of approximately $3.4 million for the nine months ended September 30, 2010.

Hotel Operating Expenses. Hotel operating expenses, which consist of room expenses, food and beverage expenses, other direct expenses and management fees, were approximately $46.5 million, an increase of approximately $2.1 million or 4.8% for the nine months ended September 30, 2011 compared to total hotel operating expenses of approximately $44.4 million for the nine months ended September 30, 2010. The increase in hotel operating expense was mostly attributable to an increase in operating revenue.

Rooms expense for the nine months ended September 30, 2011 increased approximately $0.5 million or 4.8% to approximately $12.0 million compared to rooms expense of approximately $11.5 million for the nine months ended September 30, 2010. The increase was largely attributable to higher room revenue, but was also affected by higher payroll costs related to fewer vacant positions and higher unemployment taxes in the current period and employee furloughs in the prior period.

Food and beverage expenses for the nine months ended September 30, 2011 increased approximately $0.3 million to approximately $10.1 million or 3.5% compared to food and beverage expenses of approximately $9.8 million for the nine months ended September 30, 2010. Most of the increase in food and beverage expense was directly related to the increase in food and beverage revenues. An improvement in food and beverage margins from 32.2% to 32.6% offset the cost of higher volume.

Indirect expenses at our wholly-owned properties for the nine months ended September 30, 2011 increased approximately $1.3 million or 5.9% to approximately $23.9 million compared to indirect expenses of approximately $22.6 million for the nine months ended September 30, 2010. Management fees and franchise fees increased significantly due to the increase in revenue. Energy costs increased as well due to the increase in occupancy and higher costs due to the expiration of favorable fixed rate contracts. Sales and marketing costs, repairs and maintenance, insurance, real and personal property taxes as well as general and administrative costs at the property level are also included in indirect expenses.

Depreciation and Amortization. Depreciation and amortization expense increased approximately $0.1 million or 1.2% to approximately $6.5 million for the nine months ended September 30, 2011 compared to depreciation and amortization expense of approximately $6.4 million for the nine months ended September 30, 2010.

Corporate General and Administrative. Corporate general and administrative expenses for the nine months ended September 30, 2011 increased approximately $0.5 million or 17.4% to approximately $3.2 million compared to corporate general and administrative expense of approximately $2.7 million for the nine months ended September 30, 2010 due primarily to costs associated with our aborted stock offering.

Interest Expense. Interest expense for the nine months ended September 30, 2011 increased approximately $0.7 million or 9.0% to approximately $8.1 million compared to interest expense of approximately $7.4 million for the nine months ended September 30, 2010. The increase was the combined result of a lower effective interest rate on our line of credit in the period prior to the June 2010 amendment to the credit agreement as well as higher interest costs in the current period associated with the April 2011 issuance of mandatorily redeemable preferred stock.

Equity Income in Joint Venture. Equity income in joint venture for the nine months ended September 30, 2011 represents our 25.0% share of the net loss of the Crowne Plaza Hollywood Beach Resort. For the nine months ended September 30, 2011, our 25.0% share of the net loss of the joint venture was approximately $0.2 million compared to almost no net loss or income from the joint venture for the nine months ended September 30, 2010. All of the net loss of the joint venture was attributable to an unrealized loss

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on hedging activities. For the nine months ended September 30, 2011, the hotel reported occupancy of 79.9%, ADR of $130.47 and RevPAR of $104.19. This compares with results reported by the hotel for the nine months ended September 30, 2010 of occupancy of 79.7%, ADR of $122.59 and RevPAR of $97.76.

Income Taxes. The income tax provision is primarily derived from the operations of our TRS Lessee. We realized income tax expense of approximately $0.8 million for the nine months ended September 30, 2011, an increase of approximately $0.4 million, compared to income tax expense of approximately $0.4 million for the nine months ended September 30, 2010. The income of our TRS lessee subject to tax for the nine months ended September 30, 2011 was significantly larger than the income subject to tax for the nine months ended September 30, 2010.

Net Loss. The net loss for the nine months ended September 30, 2011 increased approximately $1.0 million or 46.9% to approximately $3.1 million as compared to a net loss of approximately $2.1 million for the nine months ended September 30, 2010 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 noncontrolling 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. Management believes 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 loss to FFO for each of the three months and nine months ended September 30, 2011 and 2010, respectively, (unaudited):

	Three months ended September 30, 2011			Three months ended September 30, 2010			Nine months ended September 30, 2011			Nine months ended September 30, 2010
Net loss attributable to the Company	$	(1,117,042	)	$	(1,004,350	)	$	(2,288,925	)	$	(1,528,625	)
Add noncontrolling interest		(377,859	)		(366,400	)		(785,948	)		(564,435	)
Add depreciation and amortization		2,187,541			2,123,761			6,460,928			6,381,378
Add equity in depreciation of joint venture		156,123			136,695			430,150			409,660
Add loss (Subtract gain) on disposal of assets		9,894			84,128			(2,361	)		84,128
FFO	$	858,657		$	973,834		$	3,813,844		$	4,782,106
Weighted average shares outstanding		9,701,786			9,541,286			9,627,006			9,415,593
Weighted average units outstanding		3,239,439			3,366,656			3,305,574			3,476,389
Weighted average shares and units		12,941,225			12,907,942			12,932,580			12,891,982
FFO per share and unit	$	0.07		$	0.08		$	0.29		$	0.37

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 provided by operating activities for the nine months ended September 30, 2011 was approximately $7.4 million. We expect that the net cash provided by operations will be

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adequate to fund our continuing operations, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) 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.

Investing Activities. Approximately $4.2 million was spent during the nine months ended September 30, 2011 on capital improvements and the replacement of furniture, fixtures and equipment.

Financing Activities. In April 2011, we issued 25,000 shares of the Preferred Stock and a Warrant to purchase shares of common stock for gross proceeds of $25.0 million, of which we used approximately $22.7 million to reduce our indebtedness on the line of credit. In August 2011, we obtained an 18-month extension on the mortgage on the Crowne Plaza Jacksonville repaying $4.0 million in principal which we obtained by accessing an equivalent amount of Bridge Financing. Also in August 2011, we obtained a $7.5 million mortgage on the Holiday Inn Laurel and used the proceeds to repay a portion of the balance on the line of credit.

During the nine months ended September 30, 2011, we paid approximately $0.8 million of scheduled principal payments toward the mortgages on the Hilton Wilmington Riverside, the Hilton Savannah DeSoto, the Holiday Inn Laurel and the Crowne Plaza Hampton Marina.

During the nine months ended September 30, 2011, we also paid approximately $1.5 million in deferred financing costs in relation to the sixth amendment to the credit agreement, issuance of the Preferred Stock and the refinance or extension of the mortgages on several of our properties and provided $0.75 million in cash collateral in conjunction with the extension of the mortgage on the Crowne Plaza Hampton Marina.

Capital Expenditures

Since mid-2004, we have completed product improvement plans (“PIPs”) in connection with the licensing or re-licensing at eight of our nine wholly-owned properties. With the exception of a PIP in connection with the re-licensing of the Holiday Inn Brownstone as the Doubletree by Hilton Brownstone-University before its current franchise license expires in December 2011, we anticipate that capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment over the next 12 to 24 months will be lower than historical norms for our properties and the industry. Historically, we have aimed to maintain overall capital expenditures at 4.0% of gross revenue. However, in light of the recent slowdown of the economy and current economic climate as well as in the interest of preserving capital, we aim to restrict capital expenditures to the replacement of broken or damaged furniture and equipment and the acquisition of items mandated by our licensors that are necessary to maintain our brand affiliations. We anticipate that capital expenditures for the replacement and refurbishment of furniture, fixtures and equipment that are not related to a PIP should total 2.75% to 3.25% of gross revenues during the next 12 to 24 months.

We estimate the remaining capital expenditures related to the PIP underway in Raleigh, North Carolina will be approximately $0.7 million and expect to fund it out of operations. We expect that most of the capital expenditures for the replacement or refurbishment of furniture, fixtures and equipment at our remaining properties will be funded by our replacement reserve accounts, other than costs that we incur to make capital improvements that may be required by our franchisors. We maintain escrow accounts with most of our lenders which are reserved for capital improvements or expenditures. On a monthly basis, we deposit an amount equal to 4.0% of gross revenue for the Hilton Savannah DeSoto, the Hilton Wilmington Riverside and the Crowne Plaza Hampton Marina and 4.0% of room revenues for the Crowne Plaza Jacksonville Riverfront. Commencing in June 2010, we began depositing an amount equal to 3.0% of room revenues for our remaining wholly-owned properties.

Liquidity and Capital Resources

As of September 30, 2011, we had cash and cash equivalents of approximately $9.0 million, of which approximately $3.6 million was in restricted reserve accounts and real estate tax and insurance escrows. As of September 30, 2011, our credit facility had an outstanding balance of approximately $45.1 million. We expect that our cash on hand combined with 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, monthly and quarterly scheduled payments of principal and interest (excluding any balloon payments due upon maturity of a debt) and dividends on the Preferred Stock.

In April 2011, we sold 25,000 shares of redeemable Preferred Stock and generated gross proceeds of approximately $25.0 million. In conjunction with the sale of redeemable Preferred Stock, we executed an amendment to our credit agreement and used approximately $22.7 million of the proceeds to reduce the outstanding balance on the credit facility. Among other modifications to the existing amended credit agreement, the amendment extends the maturity date for three years to May 2014, reduces the additional interest from 4.00% to 3.50% and removes the LIBOR floor of 0.75%, and modifies certain covenants. We estimate that the reduced interest expense related to the reduced additional interest on the remaining balance on the credit facility is approximately the same as the increased cost related to the redeemable Preferred Stock.

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Coincident with the sale of redeemable Preferred Stock and execution of the sixth amendment to the credit agreement, we executed an agreement with Essex Equity High Income Joint Investment Vehicle, LLC allowing us to borrow up to $10.0 million (“Bridge Financing”) at a fixed rate of 9.25%. As of September 30, 2011, we have $6.0 million of borrowing capacity.

In June 2011, we entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina until September 30, 2012. Under the terms of the extension, we will make monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage was increased to LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00%. We also pledged $750,000 in cash collateral held by the lender in an interest-bearing account, which will be used to reduce the outstanding balance of the mortgage in December 2011 if the property does not meet certain profitability thresholds.

In August 2011, we entered into an agreement to extend the maturity of the mortgage on the Crowne Plaza Jacksonville Riverfront to January 2013. In conjunction with the extension, we drew upon the Bridge Financing to reduce the outstanding indebtedness on the property by $4.0 million, thus reducing the mortgage loan’s current outstanding principal amount to $14.0 million.

On August 5, 2011, we obtained a 10-year, $7.5 million mortgage with Bank of Georgetown on the Holiday Inn Laurel West hotel property. The mortgage will bear interest at a rate of 5.25% per annum for the first five years. After five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest, with a floor of 5.25%. Proceeds of the mortgage were used to pay down a related portion of our indebtedness under the credit facility.

On October 17, 2011, we obtained a 5-year, $8.0 million mortgage with Premier Bank, Inc. on the Holiday Inn Brownstone in Raleigh, North Carolina. The mortgage bears interest at a rate of 5.25% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage may be extended for an additional 5-year period, if certain conditions have been met, at a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest. Proceeds of the mortgage were used to pay down a portion of our indebtedness under the credit facility.

We believe the recovering economy will provide opportunities to acquire properties at attractive prices. However, with the constraints of the covenants in our credit agreement and other financing agreements, we have limited, if any, ability to incur additional debt in order to take advantage of such opportunities. Given the potential for attractive acquisitions emerging from the recent economic downturn, we intend to pursue joint venture transactions and additional equity financing in the future to enable us to take advantage of such opportunities. However, should additional joint venture transactions and equity financing not be available on acceptable terms, we may not be able to take advantage of such opportunities.

Beyond the funding of any required principal reduction on our existing indebtedness or acquisitions in the near-term, our medium and long-term capital needs will generally include the retirement of maturing mortgage debt, amounts outstanding under our secured credit facility, redemption of the Preferred Stock, repayment of draws under the Bridge Financing and obligations under our tax indemnity agreements, if any. We remain committed to maintaining a flexible capital structure. Accordingly, we expect to meet our long-term liquidity needs through a combination of some or all the following:

• The issuance of additional shares of preferred stock;

• The issuance of additional shares of our common stock;

• The issuance of additional units in the Operating Partnership;

• The incurrence by the subsidiaries of the Operating Partnership of mortgage indebtedness in connection with the refinancing of hotel properties;

• The selective disposition of core or non-core assets;

• The sale or contribution of some of our wholly-owned properties, development projects or 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 contribution;

• The issuance by the Operating Partnership of the Company and/or their subsidiary entities of secured and unsecured debt securities to the extent permitted by our credit agreement; or

• The incurrence by the subsidiaries of the Operating Partnership of mortgage indebtedness in connection with the acquisition or refinancing of hotel properties.

Dividend Policy

Our ability to make distributions is constrained by the terms of our credit agreement, as amended, the Preferred Stock instrument and the Note Agreement. The credit agreement, as amended, the Preferred Stock instrument and the Note Agreement permit us to pay a dividend on our common stock subject to certain requirements, including liquidity thresholds. At present, we meet and exceed these requirements to pay a dividend on our common stock in an amount minimally necessary in order to maintain our status as a REIT. The credit agreement also provides that we may make additional dividend distributions so long as no event of default exists at the time, or after giving effect to such additional distributions, if we maintain both a minimum liquidity position of

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$7.5 million and satisfy a debt yield ratio of EBITDA to total liabilities of at least 10.0% before and after giving effect to such distribution, provided the aggregate amount of total distributions cannot exceed 90.0% of FFO (including distributions on Preferred Stock in the calculation of FFO) for the previous twelve months, all as defined in the credit agreement, as amended. Pursuant to the sixth amendment to the credit agreement, total liabilities and FFO are defined such that it eases our compliance with the credit agreement’s restrictions on additional distributions. The Preferred Stock instrument similarly requires a minimum liquidity position of $7.5 million as a condition to payment of a dividend on common stock. The Note Agreement further provides that we may make additional dividend distributions if we have, and will have after giving effect to such distributions, at least $10.0 million in total cash or cash equivalents. Up to $5.0 million in undrawn commitments under the Note Agreement may be included in calculating the liquidity requirements under the credit agreement, the Preferred Stock instrument and the Note Agreement.

In December 2008, in the interest of capital preservation and based on the expectation that the U.S. economy, and in particular the lodging industry, would continue to face declining operating trends through 2009, we amended our dividend policy and reduced the level of our cash dividend payments. In July 2011, in part due to improving operating trends, we reevaluated our quarterly dividend policy and reinstated our quarterly dividend (distribution). On July 18, 2011, we authorized payment of a quarterly dividend (distribution) of $0.02 per common share (and unit) to our stockholders (and unitholders of MHI Hospitality, L.P.) of record as of September 15, 2011. The dividend (distribution) was paid on October 11, 2011. On October 17, 2011, we authorized payment of another quarterly dividend (distribution) of $0.02 per common share (and unit) to our stockholders (and unitholders of MHI Hospitality, L.P.) of record as of December 15, 2011. The dividend (distribution) is to be paid on January 11, 2012.

The amount of future distributions will be based upon quarterly operating results, general economic conditions, requirements for capital improvements, the availability of debt and equity capital, the Internal Revenue Code’s annual distribution requirements, the terms of our credit agreement, as amended, or any future or similar credit agreement, the Preferred Stock instrument and the Note Agreement and other factors which our board of directors deems relevant. The amount, timing and frequency of distributions will be authorized by our board of directors and declared by us based upon a variety of factors deemed relevant by our board of directors, and no assurance can be given that our distribution policy will not change in the future.

The holders of the Preferred Stock have a right to payment of a cumulative dividend payable quarterly (i) in cash at an annual rate of 10.0% of the liquidation preference per share and (ii) in additional shares of the preferred stock at an annual rate of 2.0% of the $1,000 liquidation preference per share. With respect to dividends on Preferred Stock, the credit agreement, as amended, provides that they may only be paid from unrestricted cash, if all interest then owing under the credit agreement has been paid, and if no event of default, or breach of certain financial covenants, exists on the payment date both before and after giving effect to the payment of preferred dividends.

Off-Balance Sheet Arrangements

Through a joint venture with a Carlyle subsidiary, 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 and we have 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 interest.

The acquisition of the property was funded in part by a mortgage loan in the amount of $57.6 million. The mortgage, which had an original two-year term maturing on August 1, 2009, was restructured on June 13, 2008 so that the first $35.6 million bore interest at a rate of LIBOR plus additional interest of 0.98%. The remaining $22.0 million bore a rate of LIBOR plus additional interest of 3.50%. Upon that restructure, a fourth entity, in which we own a 25.0% indirect non-controlling interest, purchased the $22.0 million junior participation for $19.0 million. The loan had been extended for one year and was modified in August 2010 to extend the maturity date to August 2014, require monthly payments of interest at a rate of LIBOR plus additional interest of 1.94% and require annual principal payments of $0.5 million. In conjunction with the loan modification, the joint venture made an additional $1.5 million payment of principal and executed an interest-rate swap with a notional amount and maturity tied to the projected outstanding balance and maturity date of the loan. The Crowne Plaza Hollywood Beach Resort secures the mortgage. We have provided limited guarantees to the lender with respect to this mortgage.

Carlyle owns a 75.0% controlling interest in the JV Owner, the Joint Venture Lessee, the entity with the purchase option and the entity that held the junior participation. 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 all of these entities under the equity method of accounting.

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.

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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 our hotel properties have historically been seasonal. The months of April and May are traditionally strong, as is October. The periods from mid-November through mid-February are traditionally slow with the exception of the Crowne Plaza Jacksonville Hotel, the Crowne Plaza Tampa Westshore and our joint venture property, the Crowne Plaza Hollywood Beach Resort. The remaining months are generally good, but can be impacted by bad weather and can vary significantly.

Geographic Concentration

Our hotels are located in Florida, Georgia, Indiana, Maryland, North Carolina, 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 improvements and 3-10 years for furniture and equipment. In accordance with generally accepted accounting principles, the controlling interests in hotels comprising our accounting predecessor, MHI Hotels Services Group, and noncontrolling interests held by the controlling holders of our accounting predecessor in hotels acquired from third parties are recorded at historical cost basis. Noncontrolling interests in those entities that comprise our accounting predecessor and the interests in hotels, other than those held by the controlling members of our accounting predecessor, acquired from third parties are recorded at fair value at time of acquisition.

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

There were no charges for impairment recorded for the nine months ended September 30, 2011 or 2010.

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 revenue, including room, food, beverage and other hotel revenue, is 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.

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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 September 30, 2011. 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

For a summary of recently adopted and newly issued accounting pronouncements, please refer to the Recent Accounting Pronouncements section of Note 2, Summary of Significant Accounting Policies, in the Notes to 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:

• national and local economic and business conditions, including the recent economic downturn, that affect occupancy rates at our hotels and the demand for hotel products and services;

• risks associated with the hotel industry, including competition, increases in wages, energy costs and other operating costs;

• the magnitude, sustainability and timing of the economic recovery in the hospitality industry and in the markets in which we operate;

• the availability and terms of financing and capital and the general volatility of the securities markets, specifically, the impact of the recent credit crisis which has severely constrained the availability of debt financing;

• risks associated with the level of our indebtedness and our ability to meet covenants in our debt agreements;

• management and performance of our hotels;

• risks associated with the conflicts of interest of our officers and directors;

• risks associated with redevelopment and repositioning projects, including delays and cost overruns;

• 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;

• our ability to successfully expand into new markets;

• legislative/regulatory changes, including changes to laws governing taxation of REITs;

• our ability to maintain our qualification as a REIT; and

• our ability to maintain adequate insurance coverage.

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 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 could 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. In August 2006, we purchased an interest-rate swap with a notional amount of $30.0 million in order to comply with the terms of our credit agreement. In June 2010, we replaced the interest-rate swap with another interest-rate swap with a notional amount of $30.0 million which expired in May 2011. 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 derivative contracts for trading or speculative purposes.

As of September 30, 2011, we had approximately $95.3 million of fixed-rate debt and approximately $58.5 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 8.02%. 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 our mortgage on the Crowne Plaza Hampton Marina – to the extent that 30-day LIBOR exceeds 0.45% – as well as the loan from the Carlyle Affiliate Lender and the balance on the credit facility. Assuming that the amount outstanding on our mortgage on the Crowne Plaza Hampton Marina, the loan from the Carlyle Affiliate Lender and the amount outstanding under our credit facility remain at approximately $58.5 million, the balance at September 30, 2011, the impact on our annual interest incurred and cash flows of a one percent increase in 30-day LIBOR would be approximately $573,000.

As of December 31, 2010, we had approximately $63.2 million of fixed-rate debt and approximately $88.7 million of variable-rate debt. The weighted-average interest rate on the fixed-rate debt was 6.67%. 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 our mortgage on the Crowne Plaza Hampton Marina – to the extent that 30-day LIBOR exceeds 2.0% – as well as the loan from the Carlyle Affiliate Lender and the gap between the balance on the credit facility and the $30.0 million notional amount of the interest-rate swap purchased on June 10, 2010. Assuming that the amount outstanding on our mortgage on the Crowne Plaza Hampton Marina, the loan from the Carlyle Affiliate Lender and the amount outstanding under our credit facility remain at approximately $88.7 million, the balance at December 31, 2010, the impact on our annual interest incurred and cash flows of a one percent change in 30-day LIBOR would be approximately $587,000.

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 September 30, 2011, there was no change in MHI Hospitality Corporation’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act during MHI Hospitality Corporation’s last fiscal quarter that materially affected, or is reasonably likely to materially affect, MHI Hospitality Corporation’s internal control over financial reporting.

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PART II

Item 1. Legal Proceedings

We are not involved in any 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

There have been no material changes in our risk factors from those disclosed in our annual report on Form 10-K for the year ended December 31, 2010 and our subsequent periodic reports.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. [Removed and Reserved]

Item 5. Other Information

Not applicable.

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)
3.4	Articles Supplementary of MHI Hospitality Corporation.(2)
3.5	Amended and Restated Bylaws of MHI Hospitality Corporation. (2)
10.4	Strategic Alliance Agreement among MHI Hospitality Corporation, MHI Hospitality, L.P. and MHI Hotels Services, LLC.
10.5	Master Management Agreement by and between MHI Hospitality TRS, LLC and MHI Hotels Services, LLC.
10.11	Agreement to Assign and Sublease Common Space Lease by and between MHI Hospitality L.P. and MHI Hotels, LLC.
10.12	Agreement to Assign and Sublease Commercial Space Lease by and between MHI Hospitality L.P. and MHI Hotels Two, Inc.
10.13	Lease Agreement by and between Philadelphia Hotel Associates LP and MHI Hospitality TRS, LLC (with a schedule of eight additional agreements that are substantially identical in all material respects to the Lease Agreement, except as identified in such schedule, and are not being filed herewith per Instruction 2 to Item 601 of Regulation S-K).
10.15	Contribution Agreement by and between MHI Hotels Services, LLC, MHI Hotels, LLC and MHI Hotels Two, Inc.
31.1	Certification of 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 Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Exhibit Number	Description of 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.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

(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 Current Report on form 8-K filed with the Securities and Exchange Commission on April 18, 2011.

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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: November 9, 2011	By:	/s/ Andrew M. Sims
		Andrew M. Sims
		Chief Executive Officer
	By:	/s/ William J. Zaiser
		William J. Zaiser
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit Number	Description of Exhibit
3.1	Articles of Amendment and Restatement of MHI Hospitality Corporation.(1)
3.4	Articles Supplementary of MHI Hospitality Corporation.(2)
3.5	Amended and Restated Bylaws of MHI Hospitality Corporation. (2)
10.4	Strategic Alliance Agreement among MHI Hospitality Corporation, MHI Hospitality, L.P. and MHI Hotels Services, LLC.
10.5	Master Management Agreement by and between MHI Hospitality TRS, LLC and MHI Hotels Services, LLC.
10.11	Agreement to Assign and Sublease Common Space Lease by and between MHI Hospitality L.P. and MHI Hotels, LLC.
10.12	Agreement to Assign and Sublease Commercial Space Lease by and between MHI Hospitality L.P. and MHI Hotels Two, Inc.
10.13	Lease Agreement by and between Philadelphia Hotel Associates LP and MHI Hospitality TRS, LLC (with a schedule of eight additional agreements that are substantially identical in all material respects to the Lease Agreement, except as identified in such schedule, and are not being filed herewith per Instruction 2 to Item 601 of Regulation S-K).
10.15	Contribution Agreement by and between MHI Hotels Services, LLC, MHI Hotels, LLC and MHI Hotels Two, Inc.
31.1	Certification of 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 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.
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

(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 Current Report on form 8-K filed with the Securities and Exchange Commission on April 18, 2011.

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EX-10.4

EXHIBIT 10.4

STRATEGIC ALLIANCE AGREEMENT

THIS STRATEGIC ALLIANCE AGREEMENT (“Agreement”) is made and entered into as of the 21st day of December 2004 (the “Effective Date”) by and among (i) MHI Hospitality, L.P., a Delaware limited partnership (the “Partnership”), (ii) MHI Hospitality Corporation, a Maryland corporation and the general partner of the Partnership (the “REIT”) (the REIT and the Partnership are sometimes collectively referred to herein as the “Company”), and (iii) MHI Hotels Services LLC (“MHI Hotels Services”).

RECITALS

THE PARTIES ENTER THIS AGREEMENT on the basis of the following facts, understandings and intentions:

A. The REIT proposes to undertake an underwritten initial public offering (the “Offering”) of shares of its common stock, par value $0.01 per share (“Shares”).

B. The REIT will serve as general partner of the Partnership and initially will own a majority interest in the Partnership.

C. The Company has designated MHI Hotels Services as its preferred hotel management company. In conjunction with the execution of this Agreement, MHI Hotels Services will amend and restructure its existing management agreements by entering into a master management agreement (the “Master Management Agreement”) with respect to certain of the initial hotel properties upon contribution of those assets to the Partnership in exchange for a cash payment of $2.0 million.

D. MHI Hotels Services desires to provide the Company, on an exclusive basis, with information regarding hotel investment opportunities that become known to MHI Hotels Services as set forth herein.

E. The parties have determined that, in connection with the Offering, it is desirable to set forth in this Agreement certain covenants and agreements among the parties.

AGREEMENTS

NOW THEREFORE, IN CONSIDERATION of the mutual covenants and promises of the parties provided for in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

1. Acquisition Opportunities.

(a) During the Term (as defined in Article V below), MHI Hotels Services agrees to promptly notify the Company, on an exclusive basis, of any opportunity to invest in, acquire or develop a property, whether in fee or leasehold, and, whether in whole or in part, that

is suitable for, the development or operation of a hotel (“Hotel Property”) which is presented to MHI Hotels Services or its subsidiaries and that meets the Company’s acquisition criteria, as the Company may communicate such acquisition criteria to MHI Hotels Services from time to time. For purposes of this Agreement, a Hotel Property includes, but is not limited to, full-service upper up-scale, up-scale and mid-scale hotels (as such terms are used by Smith Travel Research or similar industry source), whether or not such hotels are underperforming in their respective marketplace, or may be functionally obsolete. MHI Hotels Services shall promptly provide to the Company all information, materials and documents reasonably available to MHI Hotels Services or its subsidiaries with respect to such Hotel Property or opportunity, subject to the requirements of any confidentiality agreements with third parties, provided, however, that any confidentiality agreement must permit MHI Hotels Services to notify the Company of such hotel property investment, acquisition or development opportunity. Notwithstanding the foregoing, MHI Hotels Services shall refer any such opportunity directly to the Company prior to execution of a confidentiality agreement but otherwise will use its best efforts, at no additional out-of-pocket expense to MHI Hotels Services, to negotiate any confidentiality agreement so as to permit disclosure of the opportunity, and all information, materials and documents with respect thereto, to the Company.

(b) The Company shall notify MHI Hotels Services, within 10 business days following the Company’s receipt from MHI Hotels Services of the information with respect to a Hotel Property investment, acquisition or development opportunity as described in Section 2(a), whether the Company intends to pursue such opportunity. During such 10 day period, if the Company notifies MHI Hotels Services that the Company intends to pursue such opportunity, MHI Hotels Services shall not provide any information regarding such opportunity to any third party until otherwise notified by the Company, provided that the Company is making commercially reasonable efforts to conduct due diligence or is otherwise actively pursuing the investment, acquisition or development opportunity. If the Company (i) notifies MHI Hotels Services that the Company does not intend to pursue the opportunity, or (ii) fails to notify MHI Hotels Services by the end of the 10 business day period that the Company intends to pursue the opportunity, then, in either event, MHI Hotels Services may (A) pursue the opportunity on its own behalf or (B) notify other capital sources of the opportunity; provided, however, that, if MHI Hotels Services subsequently becomes aware that the price or other terms with respect to the opportunity previously presented to the Company have changed materially and MHI Hotels Services is pursuing the acquisition opportunity on its own behalf, rather than in conjunction with another capital source, MHI Hotels Services will notify the Company of any such change in terms with respect to such opportunity in accordance with the provisions of this Article I, Section 2 and agrees to provide the Company with another chance to pursue the opportunity in accordance with the provisions set forth in this Article I(b).

ARTICLE II

2. Management Agreements.

(a) Subject to the provisions of this Article II, the Company agrees to cause MHI Hospitality TRS, LLC (the “TRS Lessee”) to offer to MHI Hotels Services the opportunity to manage any Hotel Property acquired by the Company or one of its subsidiaries and leased to

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TRS Lessee during the Term which meets any of the following criteria:

(i) the Hotel Property is not encumbered by a management contract that would continue beyond the date of the Company’s acquisition of the Hotel Property; or

(ii) no termination fee is payable by the Company in connection with termination of any then existing management contract for the Hotel Property; or

(iii) if the then existing management agreement for the Hotel Property can be terminated at the time of the Company’s purchase of the Hotel Property upon payment of a termination fee, MHI Hotels Services pays such termination fee.

(b) Not less than 30 days prior to the Company’s acquisition of a Hotel Property that meets the criteria described in Section 2(a) above, the Company will notify MHI Hotels Services of the Company’s proposed acquisition of the Hotel Property and will make available to MHI Hotels Services all information reasonably available to the Company with respect to the Hotel Property. MHI Hotels Services shall have 10 business days from receipt of such notice from the Company to notify the Company in writing that MHI Hotels Services elects to manage the Hotel Property pursuant to the master management agreement which is substantially in the form of Annex A (the “Master Management Agreement”). If MHI Hotels Services (i) notifies the Company that MHI Hotels Services does not intend to manage the Hotel Property or (ii) fails by the end of the 10 business day period to notify the Company of its election to manage the Hotel Property, then, in either event, the Company may offer management of the Hotel Property to other hotel management companies on such terms as the Company shall determine and MHI Hotels Services shall have no further rights with respect thereto.

(c) With respect to Hotel Properties acquired by the Company in the future, the parties intend to utilize the Master Management Agreement between the TRS Lessee and MHI Hotels Services. Notwithstanding the foregoing, any material change in the provisions of the Master Management Agreement, as they relate to the rights and obligations of the TRS Lessee, shall be subject to approval by a majority of the directors of the REIT who, at the time, are “independent” in accordance with rules promulgated from time to time by the American Stock Exchange (“AMEX”) for companies listed on the AMEX (“Independent Directors”).

(d) Notwithstanding the provisions of this Article II, if a majority of the Independent Directors in good faith conclude for valid business reasons that a management company other than MHI Hotels Services should manage one or more Hotel Properties, the Company shall so notify MHI Hotels Services and MHI Hotels Services shall not have the right to manage such Hotel Properties.

ARTICLE III

3. Right to Designate Director of the REIT.

(a) During the Term, MHI Hotels Services shall have the right to designate one (1) person (the “Designee”) as nominee for election to the Board of Directors of the REIT at each

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meeting of stockholders of the REIT at which directors are elected (the “Designation Right”), for so long as Andrew Sims, Christopher Sims, Kim Sims, and their families and affiliates hold, in the aggregate, not less than 1.5 million units of operating partnership interest in the Partnership or shares of the Company’s common stock. MHI Hotels Services shall submit the name of the Designee to the REIT’s Corporate Governance and Nominating Committee of the Board of Directors (the “Nominating Committee”) not less than 90 days prior to the anniversary date of the prior year’s annual stockholder meeting of the REIT but no earlier than 120 days prior to the first anniversary of the date of the mailing notice for the preceding year’s annual meeting or, in the case of election of directors other than at the annual meeting of stockholders, not less than 60 days prior to the meeting date set by the Board of Directors of the REIT. The Designee shall satisfy the standards established by the Nominating Committee for membership on the Board of Directors of the REIT and shall provide to the REIT (i) a written consent to being named as a nominee for director of the REIT and to serving as a director if elected, (ii) a questionnaire prepared by the REIT and completed by the Designee, and (iii) such other information regarding the Designee as the REIT may reasonably request. A Designee shall not serve on the Nominating Committee and shall not automatically be deemed to be an Independent Director.

(b) The Nominating Committee shall respond to MHI Hotels Services as to whether the Nominating Committee approves the Designee for nomination within 20 days following MHI Hotels Services submission of the Designee’s name and the information described in Section 2(a) above. In the event the Designee is not approved and nominated by the Nominating Committee for election as a director of the REIT, MHI Hotels Services may submit to the Nominating Committee another Designee for approval and nomination by the Nominating Committee in accordance with Section 2(a) and the Nominating Committee will respond to any such new submission within 10 days thereafter. When a Designee is approved by the Nominating Committee as a nominee for election as a director, the REIT shall include such Designee in the proxy materials delivered to stockholders in connection with the meeting and shall recommend such Designee for election in the same manner as other nominees approved by the Nominating Committee.

(c) In the event that the Designee who is elected as a director resigns, refuses to stand for re-election, is removed, dies or becomes disabled while serving as a director, MHI Hotels Services shall submit a new Designee to the Nominating Committee and, upon approval by the Nominating Committee, such Designee shall be appointed by the Board of Directors to fill the resulting vacancy on the Board of Directors. Unless MHI Hotels Services otherwise submits a new Designee to the Nominating Committee in accordance with Section 2(a) above, such then current Designee shall be nominated by the Nominating Committee as a nominee for election at the next succeeding meeting of stockholders at which directors are to be elected.

(d) Notwithstanding the foregoing, (i) if MHI Hotels Services fails to designate a Designee who is approved by the Nominating Committee not less than 45 days prior to a meeting of stockholders at which directors are to be elected, the Designation Right with respect to directors to be elected at that meeting of stockholders shall terminate; provided, however, that if (A) the Designee is then serving on the REIT’s Board of Directors, and (B) the Designee continues to satisfy the standards established by the Nominating Committee for membership on the Board of Directors of the REIT, and consents to being named as a nominee for director of the

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REIT, such Designee shall be the Designee for election at any such meeting of stockholders at which directors are to be elected notwithstanding that MHI Hotels Services has not formally submitted such Designee as a nominee in accordance with the procedures set forth herein.

ARTICLE IV

4. Termination

This Agreement may be terminated:

(a) by the Company, if the Master Management Agreement is terminated by the TRS Lessee, provided that the TRS Lessee has paid all required termination fees related to such termination;

(b) by MHI Hotels Services in the event that the Master Management Agreement is terminated by the TRS Lessee or by MHI Hotels Services as a result of a breach by the TRS Lessee or MHI Hotels Services or is otherwise terminated in accordance with its terms.

In the event of the termination of this Agreement pursuant to this Article 4, this Agreement shall become null and void.

ARTICLE V

5. Miscellaneous.

(a) The term of this Agreement shall commence on the date hereof and shall continue until the tenth anniversary of the date of closing of the Offering (the “Term”).

(b) This Agreement, and the other agreements and documents referred to herein, shall constitute the entire agreement among the parties with respect to the subject matter thereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter.

(c) This Agreement shall be governed by and construed in accordance with the laws of the jurisdiction of the State of Maryland without regard to the principles of conflicts of laws thereof.

(d) All notices and other communications required or permitted hereunder shall be in writing, shall be deemed duly given upon actual receipt, and shall be delivered (i) in person, (ii) by registered or certified mail (air mail if addressed to an address outside of the country in which mailed), postage prepaid, return receipt requested, or (iii) by facsimile or other generally accepted means of electronic transmission (provided that a copy of any notice delivered pursuant to this clause (iii) shall also be sent pursuant to clause (ii), addressed as follows (or to such other addresses as may be specified by like notice to the other parties):

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To MHI Hotels Services:	MHI Hotels Services LLC 6411 Ivy Lane – Suite 510 Greenbelt, Maryland 20770 Attention Kim E. Sims
To the Company:	MHI Hospitality Corporation 814 Capitol Landing Road Williamsburg, Virginia 23185 Attention: Andrew M. Sims President and Chief Executive Officer

(e) No amendment, modification or supplement to this Agreement shall be binding on any of the parties hereto unless it is in writing and signed by the parties in interest at the time of the modification, and further provided any such modification is approved by a majority of the Independent Directors. No provision hereof may be waived except by a writing signed by the party against whom any such waiver is sought and further provided any such waiver by the Company is approved by a majority of the Independent Directors. The waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach.

(f) Neither this Agreement nor any rights or obligations hereunder shall be assignable by a party to this Agreement without the prior, express written consent of the other party and further provided any such assignment by MHI Hotels Services is approved by a majority of the Independent Directors. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns.

(g) This Agreement is solely for the benefit of the parties to this Agreement and should not be deemed to confer upon third-parties any remedy, claim, liability, reimbursement, claims or action or other right in excess of those existing without reference to this Agreement.

(h) Titles and headings to sections in this Agreement are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.

(i) Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without prejudice to any rights or remedies otherwise available to any party to this Agreement, each party hereto acknowledges that damages would not be an adequate remedy for any breach of the provisions of this Agreement and agrees that the obligations of the parties hereunder shall be specifically enforceable.

(j) The parties to this Agreement will execute and deliver or cause the execution and delivery of such further instruments and documents and will take such other

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actions as any other party to the Agreement may reasonably request in order to effectuate the purpose of this Agreement and to carry out the terms hereof.

(k) This Agreement may be executed in counterparts, each of which shall be deemed an original but together shall be deemed one and the same Agreement.

(l) If any provision of this Agreement is held unenforceable, this Agreement shall be construed without such provision.

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers, as of the Effective Date.

REIT:
MHI Hospitality Corporation a Maryland corporation
By:	/S/  ANDREW M. SIMS
	Andrew M. Sims President and Chief Executive Officer
MANAGER:
MHI HOTELS SERVICES LLC, a Maryland limited liability company
By:	/S/  KIM E. SIMS
	Kim E. Sims
OPERATING PARTNERSHIP
MHI Hospitality, L.P. a Delaware limited partnership
By:	MHI Hospitality Corporation
	its General Partner

By:	/S/  ANDREW M. SIMS
	Andrew M. Sims
	President and Chief Executive Officer

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EX-10.5

Exhibit 10.5

HOTEL MASTER MANAGEMENT AGREEMENT

BY AND BETWEEN

MHI HOSPITALITY TRS, LLC

A DELAWARE LIMITED LIABILITY COMPANY

AND

MHI HOTELS SERVICES LLC,

A VIRGINIA LIMITED LIABILITY COMPANY

ARTICLE I DEFINITION OF TERMS		1
1.1	Definition of Terms	1
ARTICLE II TERM OF AGREEMENT		10
2.1	Term	10
2.2	Actions to be taken upon Termination	11
2.3	Early Termination Rights, Liquidated Damages	12
2.4	Substitution of Hotel	15
ARTICLE III PREMISES		16
ARTICLE IV APPOINTMENT OF MANAGER		16
4.1	Appointment	16
4.2	Delegation of Authority	16
4.3	Contracts, Equipment Leases and Other Agreements	16
4.4	Alcoholic Beverage/Liquor Licensing Requirements	17
ARTICLE V REPRESENTATIONS AND WARRANTIES		17
5.1	Lessee Representations	17
5.2	Manager Representations	18
ARTICLE VI OPERATION		18
6.1	Name of Premises, Standard of Operation	18
6.2	Use of Premises	20
6.3	Group Services	20
6.4	Right to Inspect	21
ARTICLE VII WORKING CAPITAL AND INVENTORIES		21
7.1	Working Capital and Inventories	21
7.2	Fixed Asset Supplies	21
ARTICLE VIII MAINTENANCE, REPLACEMENT AND CHANGES		21
8.1	Routine and Non-Routine Repairs and Maintenance	21
8.2	Capital Improvement Budget	22
ARTICLE IX EMPLOYEES		24
9.1	Employee Hiring	24
9.2	Costs, Benefit Plans	24
9.3	Manager’s Employees	24
9.4	Special Projects – Corporate Employees	25
9.5	Termination	25
9.6	Employee Use of Hotel	26
9.7	Non-Solicitation	26
ARTICLE X BUDGET, STANDARDS AND CONTRACTS		26
10.1	Annual Operating Budget	26
10.2	Budget Approval	27
10.3	Operation Pending Approval	27
10.4	Budget Meetings	27
ARTICLE XI OPERATING DISTRIBUTIONS		28
11.1	Management Fee	28
11.2	Accounting and Interim Payment	29
ARTICLE XII INSURANCE		30
12.1	Insurance	30

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12.2	Replacement Cost	31
12.3	Increase in Limits	31
12.4	Blanket Policy	31
12.5	Costs and Expenses	31
12.6	Policies and Endorsements	32
12.7	Termination	32
ARTICLE XIII TAXES AND DEBT SERVICE		32
13.1	Taxes	32
13.2	Debt Service, Ground Lease Payments	32
ARTICLE XIV BANK ACCOUNTS		33
14.1	Operating Account	33
14.2	Payroll Account	33
14.3	Management of Operating Account	33
14.4	Advance of Funds	34
14.5	Reserve Accounts	34
ARTICLE XV ACCOUNTING SYSTEM		34
15.1	Books and Records	34
15.2	Monthly Financial Statements	34
15.3	Annual Financial Statements	35
ARTICLE XVI PAYMENT BY LESSEE		35
16.1	Payment of Base Management Fee	35
16.2	Payment of Incentive Management Fee	35
16.3	Distributions	35
ARTICLE XVII RELATIONSHIP AND AUTHORITY		36
ARTICLE XVIII DAMAGE, CONDEMNATION AND FORCE MAJEURE		36
18.1	Damage and Repair	36
18.2	Condemnation	36
18.3	Force Majeure	37
ARTICLE XIX DEFAULT AND TERMINATION		37
19.1	Events of Default	37
19.2	Consequence of Default	38
ARTICLE XX WAIVER AND INVALIDITY		38
20.1	Waiver	38
20.2	Partial Invalidity	38
ARTICLE XXI ASSIGNMENT		39
ARTICLE XXII NOTICES		39
ARTICLE XXIII SUBORDINATION; NON-DISTURBANCE		40
23.1	Subordination	40
23.2	Non-Disturbance Agreement	41
ARTICLE XXIV PROPRIETARY MARKS; INTELLECTUAL PROPERTY		41
24.1	Computer Software and Equipment	41
24.2	Intellectual Property	42
24.3	Books and Records	42
ARTICLE XXV INDEMNIFICATION		42
25.1	Manager Indemnity	42

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25.2	Lessee Indemnity	42
25.3	Indemnification Procedure	43
25.4	Survival	43
ARTICLE XXVI FUTURE HOTELS		44
ARTICLE XXVII GOVERNING LAW VENUE		44
ARTICLE XXVIII MISCELLANEOUS		44
28.1	Rights to make Agreement	44
28.2	Agency	45
28.3	Failure to Perform	45
28.4	Headings	45
28.5	Attorneys’ Fees and Costs	45
28.6	Entire Agreement	45
28.7	Consents	45
28.8	Eligible Independent Contractor	45
28.9	Subleasing	46
28.10	Environmental Matters	47
28.11	Equity and Debt Offerings	47
28.12	Estoppel Certificates	47
28.13	Confidentiality	48
28.14	Modification	48
28.15	Counterparts	48
LIST OF EXHIBITS		50
LIST OF SCHEDULES

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HOTEL MASTER MANAGEMENT AGREEMENT

THIS HOTEL MASTER MANAGEMENT AGREEMENT is made and entered into as of the 21st day of December, 2004, by and between MHI Hospitality TRS, LLC, a Delaware limited liability company (hereinafter referred to as “Lessee”), MHI Hotels Services LLC, a Virginia limited liability company (hereinafter referred to as “Manager”), and for the limited purposes of Article VIII herein, the Landlords (defined below).

RECITALS:

A. Lessee is the tenant under the Leases (defined below) covering those certain hotel properties, fully equipped with furniture and fixtures, and more particularly described by address location, franchise name and room number information, on Exhibit “A” attached hereto (the hotels, together with all ancillary facilities, improvements and amenities set forth on Exhibit A attached hereto as such exhibit exists as of the date of this Agreement, herein called the “Initial Hotels”).

B. Lessee desires to retain Manager to manage and operate the Initial Hotels and any Future Hotels (as defined below), and Manager is willing to perform such services for the account of Lessee, all as more particularly set forth in this Agreement.

AGREEMENTS:

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

ARTICLE I

DEFINITION OF TERMS

1.1 Definition of Terms. The following terms when used in this Agreement shall have the meanings indicated below.

“Accounting Period” shall mean a calendar month.

“Agreement” shall mean this Master Management Agreement, and all amendments, modifications, supplements, consolidations, extensions and revisions to this Master Management Agreement approved by Lessee and Manager in accordance with the provisions hereof.

“Amendment” shall have the meaning as set forth in Article XXVI.

“Annual Operating Budget” shall have the meaning as set forth in Section 10.1.

“AOB Objection Notice” shall have the meaning as set forth in Section 10.2.

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“Applicable Standards” shall mean standards of operation for the Premises which are (a) in accordance with the requirements of the applicable Franchise Agreement, this Agreement and all CCRs affecting the Premises and of which true and complete copies have been made available by Lessee to Manager, (b) in accordance with applicable Legal Requirements, (c) in accordance with the terms and conditions of any Hotel Mortgage or Ground Lease to the extent not otherwise inconsistent with the terms of this Agreement (to the extent Lessee has made available to Manager true and complete copies of the applicable loan documents relating to any such Hotel Mortgage and/or the Ground Leases), (d) in accordance with the Leases (to the extent Lessee has made available to Manager a true and complete copy thereof), (e) in accordance with the requirements of any carrier having insurance on the Hotels or any part thereof (to the extent Manager has been given written notice of such requirements or policies or has coordinated same on behalf of Lessee), and (f) in accordance with the requirements of Section 856(d)(9)(D) of the Code for qualifying each of the Hotels as a Qualified Lodging Facility.

“Base Management Fee” shall have the meaning as set forth in Section 11.1(a).

“Benefit Plans” shall have the meaning as set forth in Section 9.2.

“Business Day” shall mean any day excluding (i) Saturday, (ii) Sunday, (iii) any day which is a legal holiday under the laws of the Commonwealth of Virginia, and (iv) any day on which banking institutions located in such states are generally not open for the conduct of regular business.

“Budgeted GOP” shall mean the Gross Operating Profit as set forth in the Annual Operating Budget for the applicable Fiscal Year, as approved by Lessee and Manager pursuant to Article X hereof.

“CCR” shall mean those certain restrictive covenants encumbering the Premises recorded in the real property records of the county where such premises are located, as described in the owner policies of title insurance relating to such premises, a copy of which are acknowledged received by the Manager.

“Capital Improvement Budget” shall have the meaning as set forth in Section 8.2(e).

“Cash Management Agreements” shall mean agreements, if any, entered into by Lessee, Landlord and a Holder for the collection and disbursement of any lease payments by Lessee to Landlord under the applicable Lease with respect to the applicable Premises, which constitute a part of the loan documents executed and delivered in connection with any Hotel Mortgage by Landlord.

“CIB Objection Notice” shall have the meaning as set forth in Section 8.2(a).

“CPI” means the Consumer Price Index, published for all Urban Consumers for the U.S. City Average for All Items, 1982-84=100 issued by the Bureau of Labor Statistics of the United States Department of Labor, as published in the Wall Street Journal.

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“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Commencement Date” shall have the meaning as set forth in Section 2.1.

“Competitive Set” shall initially mean for each Hotel, the hotels situated in the same market segment as such Hotel as noted on Schedule 1 attached hereto, which competitive set shall include the applicable Hotel. The Competitive Set may be changed from time to time by mutual agreement of Lessee and Manager to reasonably and accurately reflect a set within the market of such Hotel that is comparable in rate quality and in operation to such Hotel and directly competitive with such Hotel. The requirements for the Competitive Set are not applicable to any of the Initial Hotels until after the expiration of the initial 10-year term of this Agreement.

“Contract(s)” shall have the meaning as set forth in Section 4.3.

“Debt Service” shall mean actual scheduled payments of principal and interest, including accrued and cumulative interest, payable by a Landlord with respect to any Hotel Mortgage.

“Deductions” shall mean the following matters:

(a) Employee Costs and Expenses (including, Employee Claims but excluding Excluded Employee Claims);

(b) Administrative and general expenses and the cost of advertising and business promotion, heat, light, power, communications (i.e., telephone, fax, cable service and internet) and other utilities and routine repairs, maintenance and minor alterations pertaining to the Premises;

(c) The cost of replacing, maintaining or replenishing Inventories and Fixed Asset Supplies consumed in the operation of the Premises;

(d) A reasonable reserve for uncollectible accounts receivable as reasonably determined by Manager and approved by Lessee (such approval not to be unreasonably withheld);

(e) All costs and fees of independent accountants, attorneys or other third parties who perform services related to the Hotels or the operation thereof;

(f) The cost and expense of non-routine technical consultants and operational experts for specialized services in connection with the Premises, including, without limitation, an allocation of costs of Manager’s corporate staff who may perform special services directly related to the Hotels such as sales and marketing, revenue management, training, property tax services, federal, state and/or local tax services, recruiting, and similar functions or services as set forth in Section 9.4, to be allocated on a fair and equitable cost basis as reasonably determined by Manager and approved by Lessee (such approval not to be unreasonably withheld);

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(g) Insurance costs and expenses as provided in Article XII;

(h) Real estate and personal property taxes levied or assessed against the Premises by duly authorized taxing authorities and such other taxes, if any, assessed against Manager or the Premises and the responsibility of the Lessee related to the operation and/or ownership of the Premises;

(i) Franchise fees, royalties, license fees, or compensation or consideration paid or payable to the Franchisor (as hereinafter defined), or any successor Franchisor, pursuant to a Franchise Agreement (as hereinafter defined);

(j) The Premises’ allocable share of the actual costs and expenses incurred by Manager in providing Group Services as provided in Section 6.3 hereof;

(k) The Management Fee;

(l) Rental payments made under equipment leases; and

(m) Other expenses incurred in connection with the maintenance or operation of the Premises not expressly set forth above and authorized pursuant to this Agreement.

Deductions shall not include: (a) depreciation and amortization, (b) Debt Service, or (c) Ground Lease Payments;

“Effective Date” shall mean the date this Agreement is fully executed and delivered.

“Eligible Independent Contractor” shall have the meaning as set forth in Section 28.8.

“Emergency Expenses” shall mean any expenses, regardless of amount, which, in Manager’s reasonable judgment, are immediately necessary to protect the physical integrity or lawful operation of the Hotels or the health or safety of its occupants.

“Employee Claims” shall mean any claims (including all fines, judgments, penalties, costs, litigation and/or arbitration expenses, attorneys’ fees and expenses, and costs of settlement with respect to any such claim) made by or in respect of an employee or potential hire of Manager against Manager and/or Lessee which are based on a violation or alleged violation of the Employment Laws or alleged contractual obligations.

“Employee Costs and Expenses” shall have the meaning as set forth in Section 9.3.

“Employee Related Termination Costs” shall have the meaning as set forth in Section 9.5.

“Employment Laws” shall mean all applicable federal, state and local laws (including, without limitation, any statutes, regulations, ordinances or common laws) regarding the employment, hiring or discharge of persons.

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“Event(s) of Default” shall have the meaning set forth in Article XIX.

“Excluded Employee Claims” shall mean any Employee Claims (a) to the extent attributable to a substantial violation by Manager of Employment Laws, or (b) which do not arise from an isolated act of an individual employee but rather is the direct result of corporate policies of Manager which either encourage or fail to discourage the conduct from which such Employee Claim arises.

“Executive Employees” shall mean the senior executives of the Manager.

“Expiration Date” shall have the meaning as set forth in Section 2.1.

“FF&E” shall have the meaning as set forth in Section 8.1.

“Fiscal Year” shall mean the twelve (12) month calendar year ending December 31, except that the first Fiscal Year and last Fiscal Year of the term of this Agreement may not be full calendar years.

“Fixed Asset Supplies” shall mean supply items included within “Property and Equipment” under the Uniform System of Accounts, including linen, china, glassware, silver, uniforms, and similar items.

“Force Majeure” shall mean any act of God (including adverse weather conditions); act of the state or federal government in its sovereign or contractual capacity; war; civil disturbance, riot or mob violence; terrorism; earthquake, flood, fire or other casualty; epidemic; quarantine restriction; labor strikes or lock out; freight embargo; civil disturbance; or similar causes beyond the reasonable control of Manager.

“Franchisor” shall mean those certain franchisors and any successor franchisors selected by Lessee (subject to the terms of the Leases) identified on Exhibit “C” attached hereto (as modified from time to time).

“Franchise Agreement” shall mean those certain license agreements between a Franchisor and Lessee as such license agreements are amended from time to time, and any other contract hereafter entered into between Lessee and such Franchisor pertaining to the name and operating procedures, systems and standards for the Hotels, as described on Exhibit “C” attached hereto (as modified from time to time).

“Full Replacement Cost” shall have the meaning as set forth in Section 12.2.

“Future Hotels” shall mean any hotel or motel properties leased after the date hereof by Lessee from Affiliates of the Partnership as more particularly described in Article XXVI hereof.

“GAAP” shall mean generally accepted accounting principles consistently applied as recognized by the accounting industry and standards within the United States.

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“General Manager” or “General Managers” shall have the meanings as set forth in Section 9.7.

“Gross Operating Profit” shall mean the actual gross operating profit of the Premises determined generally in accordance with the Uniform System of Accounts, consistently applied and consistent with the determination thereof in the Annual Operating Budget.

“Gross Operating Profit Margin” shall mean for any applicable Fiscal Year, the quotient expressed as a percentage, (i) the numerator of which is the Gross Operating Profit, and (ii) the denominator of which is Gross Revenues.

“Gross Revenues” shall mean all revenues and receipts of every kind received from operating the Premises and all departments and parts thereof, including but not limited to, income from both cash and credit transactions, income from the rental of rooms, stores, offices, banquet rooms, conference rooms, exhibits or sale space of every kind, license, lease and concession fees and rentals (not including gross receipts of licensees, lessees and concessionaires), vending machines, health club membership fees, food and beverage sales, wholesale and retail sales of merchandise, service charges, and proceeds, if any, from business interruption or other loss of income insurance; provided, however, Gross Revenues shall not include (a) gratuities to the Premises’ employees, (b) federal, state or municipal excise, sales or use taxes or similar impositions collected directly from customers, patrons or guests or included as part of the sales prices of any goods or services paid over to federal, state or municipal governments, (c) property insurance or condemnation proceeds (excluding proceeds from business interruption or other loss of income coverage), (d) proceeds from the sale or refinance of assets other than sales in the ordinary course of business, (e) funds furnished by the Lessee, (f) judgments and awards other than for lost business, (g) the amount of all credits, rebates or refunds (which shall be deductions from Gross Revenues) to customers, patrons or guests, (h) receipts of licensees, concessionaires, and tenants, (i) payments received at any of the Hotels for hotel accommodations, goods or services to be provided at other hotels, although arranged by, for or on behalf of Manager; (j) the value of complimentary rooms, food and beverages, (k) interest income, (l) lease security deposits, and (m) items constituting “allowances” under the Uniform System of Accounts.

“Ground Lease Payments” shall mean payments due under any of the Ground Leases and payable by Landlord thereunder.

“Ground Leases” shall mean any ground lease agreements relating to any of the Hotels, executed by Landlord with any third party landlords.

“Group Services” shall have the meaning as set forth in Section 6.3.

“Holder” shall mean the holder of any Hotel Mortgage and the indebtedness secured thereby, and such holder’s successors and assigns.

“Hotels” shall collectively mean the Initial Hotels and any Future Hotels.

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“Hotel Mortgage” shall mean, collectively, any mortgage or deed of trust hereafter from time to time, encumbering all or any portion of the Premises (or the leasehold interest therein), together with all other instruments evidencing or securing payment of the indebtedness secured by such mortgage or deed of trust and all amendments, modifications, supplements, extensions and revisions of such mortgage, deed of trust, and other instruments.

“Hotel’s Revpar Yield Penetration” shall mean, for a Hotel for any applicable Fiscal Year, the quotient, stated as a percentage, of (i) such Hotel’s actual occupancy rate multiplied by the actual average daily rate, divided by (ii) the Competitive Set’s occupancy rate multiplied by the Competitive Set’s average daily rate for the same Fiscal Period. The determination of the Competitive Set’s occupancy and rate shall be made by reference to the Smith Travel Research reports or its successor or comparable market research reports prepared by another nationally recognized hospitality firm reasonably acceptable to Lessee and Manager.

“Incentive Management Fee” shall have the meaning as set forth in Section 11.1(b).

“Indemnifying Party” shall have the meaning as set forth in Section 25.3.

“Independent Directors” shall mean those directors of MHI who are “independent” within the meaning of the rules of the American Stock Exchange or such other national securities exchange or interdealer quotation system on which MHI’s common stock is then principally traded.

“Initial Hotels” shall have the meaning as set forth in Recital A.

“Intellectual Property” shall have the meaning as set forth in Section 24.2.

“Inventories” shall mean “Inventories” as defined in the Uniform System of Accounts, such as provisions in storerooms, refrigerators, pantries and kitchens, beverages in wine cellars and bars, other merchandise intended for sale, fuel, mechanical supplies, stationery, and other supplies and similar items.

“Issuing Party” shall have the meaning as set forth in Section 28.11.

“Key Employees” shall have the meaning as set forth in Section 9.7.

“Landlords” shall mean the landlords under the Leases as described on Exhibit “C” attached hereto (as amended from time to time).

“Leases” shall mean those certain lease agreements as amended, modified, supplemented, and extended from time to time, as described on Exhibit “B” attached hereto, executed by Lessee as tenant and the Landlords.

“Legal Requirements” shall mean all laws, statutes, ordinances, orders, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments and

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governmental authorities, which now or hereafter may be applicable to the Premises and the operation of the Hotels.

“Lessee” shall have the meaning as set forth in the introductory paragraph of this Agreement.

“Management Fee” shall collectively mean the Base Management Fee and the Incentive Management Fee, and any other fees payable to Manager pursuant to the terms of this Agreement.

“Manager” shall have the meaning as set forth in the introductory paragraph of this Agreement.

“Manager Affiliate Entity” shall have the meaning as set forth in Article XXI.

“Market Service Fees” shall have the meaning set forth in Section 8.2(g).

“MHI” means MHI Hospitality Corporation, a Maryland corporation.

“Necessary Expenses” shall mean any expenses, regardless of amount, which are necessary for the continued operation of the Hotels in accordance with Legal Requirements and the Applicable Standards and which are not within the reasonable control of Manager (including, but not limited to those for taxes, utility charges, approved leases and contracts, licensing and permits).

“Net Operating Income” shall be equal to Gross Operating Profit less Rental Payments to the extent that such rental payments are not properly chargeable as an operating expense.

“Non-Disturbance Agreement” means an agreement, in recordable form in the jurisdiction in which a Hotel is located, executed and delivered by the Holder of a Hotel Mortgage or a Landlord, as applicable, (which agreement shall by its terms be binding upon all assignees of such lender or landlord and upon any individual or entity that acquires title to or possession of a Hotel (referred to as a “Subsequent Owner”), for the benefit of Manager, pursuant to which, in the event such holder (or its assignee) or landlord (or its assignee) or any Subsequent Owner comes into possession of or acquires title to a Hotel, such holder (and its assignee) or landlord (or its assignee) and all Subsequent Owners shall (x) recognize Manager’s rights under this Agreement, and (y) shall not name Manager as a party in any foreclosure action or proceeding, and (z) shall not disturb Manager in its right to continue to manage the Hotels pursuant to this Agreement; provided, however, that at such time, (i) this Agreement has not expired or otherwise been earlier terminated in accordance with its terms, and (ii) there are no outstanding Events of Default by Manager, and (iii) no material event has occurred and no material condition exists which, after notice or the passage of time or both, would entitle Lessee to terminate this Agreement.

“Non-Issuing Party” shall have the meaning as set forth in Section 28.11.

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“Notice” shall have the meaning as set forth in Article XXII.

“Operating Account” shall have the meaning as set forth in Section 14.1.

“Partnership” means MHI Hospitality L.P., a Delaware limited partnership.

“Performance Cure Period” shall have the meaning as set forth in Section 2.3(b)(i)(2).

“Performance Failure” shall have the meaning as set forth in Section 2.3(b)(i)(1).

“Performance Test” shall have the meaning as defined in Section 2.3(b)(i).

“Premises” shall mean collectively the Lessee’s leasehold interest in the Hotels and the Sites, as both terms are defined herein, pursuant to the terms and conditions of the Leases.

“Prime Rate” shall have the meaning as set forth in Section 28.3.

“Project Management Fee” shall have the meaning set forth in Section 8.2(e).

“Property Service Account” shall have the meaning as set forth in Section 13.2.

“Prospectus” shall have the meaning as set forth in Section 28.11.

“Qualified Lodging Facility” shall mean a “qualified lodging facility” as defined in Section 856(d)(9)(D) of the Code and means a “Lodging Facility” (defined below), unless wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with such facility. A “Lodging Facility” is a hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis, and includes customary amenities and facilities operated as part of, or associated with, the lodging facility so long as such amenities and facilities are customary for other properties of a comparable size and class owned by other owners unrelated to MHI.

“Reasonable Working Capital” shall have the meaning as set forth in Section 16.3.

“Related Person” shall have the meaning as set forth in Section 28.8(e).

“Rental Payments” shall mean rental payments made under equipment leases permitted pursuant to the terms of this Agreement.

“Revpar” shall mean the revenue per available room, determined by taking the actual occupancy rate of the applicable hotel and multiplying such rate by the actual average daily rate of such hotel.

“Sale” shall mean any sale, assignment, transfer or other disposition, for value or otherwise, voluntary or involuntary of Landlord’s title (whether fee or leasehold) in the Hotel, or

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of a controlling interest therein, other than a collateral assignment intended to provide security for a loan, and shall include any such disposition through the disposition of the ownership interests in the entity that holds such title and any lease or sublease of the Hotel.

“Sites” shall collectively mean those certain tracts or parcels of land described in Exhibit “B-1” hereto, as amended from time to time.

“Software” shall have the meaning as set forth in Section 24.1.

“Strategic Alliance Agreement” shall mean that certain Strategic Alliance Agreement dated the date hereof between the Partnership and Manager.

“Subject Hotel” shall have the meaning set forth in Section 2.3(b)(i).

“Term” shall mean the contractual duration of this Agreement, as defined in Section 2.1.

“Termination” shall mean the expiration or sooner cessation of this Agreement, with respect to one or more of the Hotels.

“Termination Date” shall have the meaning as set forth in Section 2.1.

“Uniform System of Accounts” shall mean the Uniform System of Accounts for the Lodging Industry, 9th Revised Edition, as may be modified from time to time by the International Association of Hospitality Accountants.

“Unrelated Person” shall have the meaning as set forth in Section 28.8(e).

“Working Capital” shall mean the amounts by which current assets exceed current liabilities as defined by the Uniform System of Accounts which are reasonably necessary for the day-to-day operation of the Premises’ business, including, without limitation, the excess of change and petty cash funds, operating bank accounts, receivables, prepaid expenses and funds required to maintain Inventories, over the amount of accounts payable and accrued current liabilities.

ARTICLE II

TERM OF AGREEMENT

2.1 Term. The term (“Term”) of this Agreement shall commence on the “Commencement Date” for each of the Hotels as noted on Exhibit “A” attached hereto and, unless sooner terminated as herein provided, shall continue with respect to such Hotels until the “Termination Date.” For purposes of this Agreement, the “Termination Date” for each of the Hotels shall be the earlier to occur of (i) the Expiration Date applicable to such Hotel, (ii) termination at the option of Lessee in connection with the bona fide Sale of the Hotel by Landlord to an unaffiliated third party as provided in and subject to the terms of Section 2.3(a) hereof, (iii) termination at the option of Lessee in the event that the Performance Test has not

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been satisfied pursuant to and subject to the terms and conditions of Section 2.3(b) below, (iv) termination at the option of Lessee for convenience pursuant to and subject to the terms and conditions of Section 2.3(c) below (and subject to Section 2.3(a) with respect to any sale of the Hotel), or (v) termination by either Lessee or Manager pursuant to Article XVIII hereof in connection with a condemnation, casualty or Force Majeure, subject to the terms thereof. The “Expiration Date” with respect to a Hotel shall mean the 10th anniversary of the Commencement Date applicable to such Hotel, provided that such initial 10-year term may thereafter be renewed by Manager on the same terms and conditions contained herein, for two (2) successive periods of five (5) Fiscal Years each, provided that upon completion of the initial term and the first renewal period, both Lessee and Manager mutually agree to renew the Agreement and, provided further, that at the time of exercise of any such option to renew an Event of Default by Manager does not then exist beyond any applicable grace or cure period. If at the time of the exercise of any renewal period, Manager is then in default under this Agreement, then the exercise of the renewal option will be conditional on timely cure of such default, and if such default is not timely cured, then Lessee may terminate this Agreement regardless of the exercise of such renewal period and without the payment of any fee or liquidated damages. If Manager desires to exercise any such option to renew, it shall give Lessee Notice to that effect not less than ninety (90) days prior to the expiration of the then current Term. Notwithstanding the expiration or earlier termination of the Term, Lessee and Manager agree that the obligations of Lessee to pay, remit, reimburse and to otherwise indemnify Manager for any and all expenses and fees incurred or accrued by Manager pursuant to the provisions of this Agreement prior to the expiration or earlier termination of the Term (or actually incurred by Manager after the termination) shall survive Termination, provided such expenses and fees have been incurred consistent with the then current terms of this Agreement and the applicable Annual Operating Budget, including, without limitation but only to the extent so consistent, all costs, expenses and liabilities arising from the termination of the Premises’ employees such as accrued vacation and sick leave, severance pay and other accrued benefits, employer liabilities pursuant to the Consolidated Omnibus Budget Reconciliation Act and employer liabilities pursuant to the Worker Adjustment and Retraining Notification Act. In addition, subject to Section 19.2 below and the foregoing sentence, upon Termination of this Agreement, Lessee and Manager shall have no further obligations to one another pursuant to this Agreement, except that Section 2.2, obligations to make payments under Section 2.3 or Section 9.5, Section 9.7, the last sentence of Section 15.1, obligations to make payments of termination fees pursuant to Article XVIII, Article XXIV, Article XXV, Article XXVII and Section 28.13 shall survive Termination.

2.2 Actions to be taken upon Termination. Upon a Termination of this Agreement with respect to one or more of the Hotels, the following shall be applicable:

(a) Manager shall, within forty-five (45) days after Termination of this Agreement, prepare and deliver to Lessee a final accounting statement with respect to such Hotels, in form and substance consistent with the statements provided pursuant to Section 15.2, along with a statement of any sums due from Lessee to Manager pursuant hereto, dated as of the date of Termination. Within thirty (30) days after the receipt by Lessee of such final accounting statement, the parties will make whatever cash adjustments are necessary pursuant to such final statement. The cost of preparing such final accounting statement shall be a Deduction. Manager and Lessee acknowledge that there may be certain adjustments for which the necessary

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information will not be available at the time of such final accounting, and the parties agree to readjust such amounts and make the necessary cash adjustments when such information becomes available.

(b) As of the date of the final accounting referred to in subsection (a) above, Manager shall release and transfer to Lessee any of Lessee’s funds which are held or controlled by Manager with respect to such Hotels, with the exception of funds to be held in escrow pursuant to Section 9.5 and Section 12.7. During the period between the date of Termination and the date of such final accounting, Manager shall pay (or reserve against) all Deductions which accrued (but were not paid) prior to the date of Termination, using for such purpose any Gross Revenues which accrued prior to the date of Termination.

(c) Manager shall make available to Lessee such books and records respecting such Hotels (including those from prior years, subject to Manager’s reasonable records retention policies in accordance with applicable law and legal requirements) as will be needed by Lessee to prepare the accounting statements, in accordance with the Uniform System of Accounts, for such Hotels for the year in which the Termination occurs and for any subsequent year. Such books and records shall not include:

(i) employee records which must remain confidential pursuant to either Legal Requirements or confidentiality agreements, or (ii) any Intellectual Property.

(d) Manager shall (to the extent permitted by Legal Requirements) assign to Lessee, or to any other manager employed by Lessee to operate and manage such Hotels, all operating licenses for such Hotels which have been issued in Manager’s name; provided that if Manager has expended any of its own funds in the acquisition of any of such licenses, Lessee shall reimburse Manager therefor if it has not done so already.

(e) Lessee agrees that Hotel reservations and any and all contracts made in connection with Hotel convention, banquet or other group services made by Manager in the ordinary and normal course of business consistent with this Agreement, for dates subsequent to the date of Termination and at rates prevailing for such reservations at the time they were made, shall be honored and remain in effect after Termination of this Agreement.

(f) Manager shall cooperate with the new operator of such Hotels as to effect a smooth transition and shall peacefully vacate and surrender the Hotels to Lessee.

(g) Manager and Lessee agree to use best efforts to resolve any disputes amicably and promptly under this Section 2.2 to effect a smooth transition of such Hotels to Lessee and/or Lessee’s new manager.

2.3 Early Termination Rights, Liquidated Damages.

(a) Termination Upon Sale. Upon Notice to Manager, Lessee shall have the option to terminate this Agreement with respect to one, more or all of the Hotels effective as of the closing of the Sale of such Hotels to a third party. Such Notice shall be given at least

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forty-five (45) days’ in advance (unless otherwise required by Legal Requirements, in which case Lessee shall provide such additional notice in order to comply with such Legal Requirements) and shall inform Manager of the identity of the contract purchaser. Manager, at its election, may offer to provide management services to such contract purchaser after the closing of the sale. Lessee shall, in connection with such Sale, by a separate document reasonably acceptable to Lessee and Manager, indemnify and save Manager harmless against any and all losses, costs, damages, liabilities and court costs, claims and expenses, including, without limitation, reasonable attorneys’ fees arising or resulting from the failure of Lessee or such prospective purchaser to provide any of the services contracted for in connection with the business booked for such hotels to, and including, the date of such Termination, in accordance with the terms of this Agreement, including without limitation, any and all business so booked as to which facilities and/or services are to be furnished subsequent to the date of Termination, provided that any settlement by Manager of any such claims shall be subject to the prior written approval of Lessee which shall not be unreasonably withheld, conditioned or delayed. In addition, the following terms shall apply in connection with the sale of any Hotel:

(i) Sale of Future Hotel. If this Agreement is terminated pursuant to Section 2.3(a) with respect to any of the Future Hotels prior to the first anniversary of the Commencement Date applicable to such Future Hotel, then Lessee shall pay to Manager on such termination, a termination fee as liquidated damages and not as a penalty (provided that an Event of Default by Manager is not then existing beyond any cure or grace periods set forth in this Agreement) in an amount equal to the estimated Base Management Fee and Incentive Management Fee that was estimated to be paid to Manager with respect to such Future Hotel pursuant to the Annual Operating Budget for the remaining Accounting Periods until the first anniversary of the Commencement Date for such Future Hotel (irrespective of the Management Fees paid to Manager prior to the date of the Termination with respect to the Hotels). If this Agreement is terminated pursuant to Section 2.3(a) with respect to any of the Future Hotels after the first anniversary of the Date applicable to such Future Hotel, then no termination fees shall be payable by Lessee.

(ii) Sale of Initial Hotel. If this Agreement is terminated pursuant to Section 2.3(a) with respect to any of the Initial Hotels prior to the expiration of the initial 10-year term of this Agreement applicable to such Initial Hotel, then Lessee shall pay to Manager on such termination, a termination fee, with respect to each such Hotel as liquidated damages and not as a penalty (provided that an Event of Default by Manager is not then existing beyond any cure or grace periods set forth in this Agreement), an amount equal to the sum obtained by multiplying (1) the aggregate Base Management Fees and Incentive Management Fees budgeted in the Annual Operating Budget applicable to such Initial Hotel for the full current Fiscal Year in which such termination is to occur (but in no event less than the Base Management Fees and Incentive Management Fees for the preceding full Fiscal Year) by (2) the number of years remaining in the initial 10-year Term of this Agreement applicable to such Initial Hotel. Notwithstanding the foregoing, if this Agreement is terminated pursuant to Section 2.3(a) with respect to any of the Initial Hotels after the initial 10-year term of this Agreement applicable to such Initial Hotel, then no termination fees shall be payable by Lessee.

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(b) Termination Due to Failure to Satisfy Performance Test.

(i) Performance Test. Lessee shall have the right to terminate this Agreement with respect to any Initial Hotel after the initial 10-year term of this Agreement applicable to such Initial Hotel and any Future Hotel (for the purposes of this Section 2.3(b)(i) called “Subject Hotel”), in the event of the occurrence of the following (collectively herein called, the “Performance Test”):

(1) If, commencing with the first Fiscal Year after the initial 10-year term for an Initial Hotel and commencing with the first full Fiscal Year following the Commencement Date for any Future Hotel, and for each Fiscal Year thereafter (a) a Subject Hotel’s Gross Operating Profit Margin for such Fiscal Year is less than seventy-five percent (75%) of the average Gross Operating Profit Margin of comparable hotels in similar markets and geographic locations to the subject Hotel as reasonably determined by Lessee and Manager, and (b) such Subject Hotel’s Revpar Yield Penetration is less than 80% for such Fiscal Year (herein (a) and (b) collectively called “Performance Failure”); then

(2) Manager shall have a period of two (2) years, commencing with the next ensuing Fiscal Year (the “Performance Cure Period”), to cure the Performance Failure after Manager’s receipt of Notice from Lessee of such Performance Failure and Lessee’s intent to terminate this Agreement with respect to the Subject Hotel if the Performance Failure is not cured within such Performance Cure Period; and

(3) If after the end of the Performance Cure Period, the Performance Failure remains uncured, then Lessee may, at its election, terminate this Agreement upon forty-five (45) days’ prior Notice to Manager.

(ii) Finance Reports. Determinations of the performance of the Subject Hotel shall be in accordance with the audited annual financial statements delivered by Lessee’s accountant pursuant to Section 15.3 hereof.

(iii) Extension of Performance Cure Period. Notwithstanding the foregoing, if at any time during the Performance Cure Period (a) Lessee is in material default under any of its obligations under this Agreement, or (b) Lessee has terminated, terminates or causes a termination of the Franchise Agreement (other than defaults due to Manager) and does not obtain a new franchise agreement with a comparable franchisor, or (c) the operation of the Hotel or the use of the Hotel’s facilities are materially disrupted by casualty, condemnation, or events of Force Majeure that are beyond the reasonable control of Manager, or by major repairs to or major refurbishment of the Hotel, then, for such period, the Performance Cure Period shall be extended.

(iv) Renewal Period. If at the time of Manager’s exercise of a renewal period with respect to any Hotel, such hotel is a Subject Hotel within a Performance Cure Period, the exercise of such renewal period shall be conditional upon timely cure of the Performance Failure, and if such Performance Failure is not timely cured, then, notwithstanding the foregoing provisions, Lessee may elect to terminate this Agreement with respect to such Subject Hotel pursuant to the terms of this Section 2.3(b).

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(c) Termination for Convenience. Lessee may terminate this Agreement as to any Hotel for convenience (except if due to a Sale of a Hotel, whereupon Section 2.3(a) shall govern) upon ninety (90) days Notice to Manager, and shall pay to Manager as liquidated damages but not as a penalty, a termination fee (provided that there does not then exist an Event of Default by Manager under this Agreement beyond any applicable cure or grace periods) in an amount equal to the product of (1) the aggregate Base Management Fees and Incentive Management Fees budgeted in the Annual Operating Budget applicable to such Hotel for the full current Fiscal Year in which such termination is to occur (but in no event less than the Base Management Fees and Incentive Management Fees for the preceding full Fiscal Year) by (2) the number of years remaining in the initial 10-year Term of this Agreement applicable to such Hotel or any applicable renewal period.

(d) Payment of liquidated damages. With respect to any termination fees payable in connection with any early termination right set forth in this Section 2.3, Lessee recognizes and agrees that, if this Agreement is terminated with respect to any of the Hotels for the reasons specified in this Section 2.3 thereby entitling Manager to receive the termination fees as set forth in this Section 2.3, Manager would suffer an economic loss by virtue of the resulting loss of management fees which would otherwise have been earned under this Agreement. Because such fees vary in amount depending on the total gross revenues earned at the Hotels and accordingly would be extremely difficult and impractical to ascertain with certainty, the parties agree that the termination fees provided in this Section 2.3 constitute a reasonable estimate of liquidated damages to Manager for purposes of any and all legal requirements, and it is agreed that Manager shall not be entitled to maintain a cause of action against Lessee, except as specifically provided herein, for actual damages in excess of the termination fees in any context where the termination fees are provided by this Agreement, and receipt of such fees (together with all other amounts due and payable by Lessee to Manager with respect to events occurring prior to termination of this Agreement with respect to the applicable Hotel or as otherwise provided herein) shall be Manager’s sole remedy for damages against Lessee in any such case.

The foregoing shall in no way affect any other sums due Manager under this Article II or otherwise hereunder, including, without limitation, the Management Fees earned during the Term, or any other rights or remedies, at law or in equity of Manager under this Agreement or under Legal Requirements, including any indemnity obligations of Lessee to Manager under this Agreement.

2.4 Substitution of Hotel. Notwithstanding the foregoing, if, in event of a termination of this Agreement with respect to a Hotel, a termination fee becomes payable by Lessee, Lessee may (in its sole and absolute discretion) avoid payment of such termination fee by substituting for the terminated Hotel within 120 days of such termination, another hotel facility reasonably comparable to the terminated Hotel in size, number of rooms, quality of franchise operation, market and geographical location, and gross revenues, to be governed by the terms and conditions of this Agreement as an “Initial Hotel” from and after the date of such substitution, and this Agreement shall be amended accordingly pursuant to a form of amendment similar to Exhibit “E” attached hereto.

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ARTICLE III

PREMISES

Manager shall be responsible, at the sole cost and expense of Lessee, for keeping and maintaining the Premises fully equipped in accordance with plans, specifications, construction safety and fire safety standards, and designs pursuant to applicable Legal Requirements, the standards and requirements of a Franchisor pursuant to any applicable Franchise Agreement, any applicable Hotel Mortgage, the Leases, the Capital Improvement Budgets and the Annual Operating Budgets approved pursuant to the terms hereof, subject in all respects to performance by Lessee of its obligations pursuant to this Agreement.

ARTICLE IV

APPOINTMENT OF MANAGER

4.1 Appointment. Lessee hereby appoints Manager as its sole, exclusive and continuing operator and manager to supervise and direct, for and at the expense of Lessee, the management and operation of the Premises under the terms and conditions set forth herein. In exercising its duties hereunder, Manager shall act as agent and for the account of Lessee. Manager hereby accepts said appointment and agrees to manage the Premises during the Term of this Agreement under the terms and conditions set forth herein.

4.2 Delegation of Authority. The operation of the Premises shall be under the exclusive supervision and control of Manager who, except as otherwise specifically provided in this Agreement, shall be responsible for the proper and efficient management and operation of the Premises in accordance with this Agreement, the Leases, the Franchise Agreements, the Capital Improvement Budget and the Annual Operating Budget. Subject to the terms of such agreements and budgets, the Manager shall have discretion and control in all matters relating to the management and operation of the Premises, including, without limitation, charges for rooms and commercial space, the determination of credit policies (including entering into agreements with credit card organizations), food and beverage service and policies, employment policies, procurement of inventories, supplies and services, promotion, advertising, publicity and marketing, and, generally, all activities necessary for the operation of the Premises. Manager shall also be responsible for the receipt, holding and disbursement of funds and maintenance of bank accounts in compliance with the Cash Management Agreements, if applicable.

4.3 Contracts, Equipment Leases and Other Agreements. Manager is hereby authorized to grant concessions, lease commercial space and enter into any other contract, equipment lease, agreement or arrangement pertaining to or otherwise reasonably necessary for the normal operation of the Premises (such concession, lease, equipment lease, contract, agreement or arrangement hereinafter being referred to individually as a “Contract” and collectively as “Contracts”) on behalf of Lessee, as may be necessary or advisable and reasonably prudent business judgment in connection with the operation of the Premises and consistent with the Annual Operating Budget, and subject to any restrictions imposed by the Franchise Agreements, Leases, any Hotel Mortgage and this Agreement, and subject to the Lessee’s prior written approval of: (i) any Contract which provides for a term exceeding one (1) year (unless such Contract is cancellable on thirty days notice without cost, premium or penalty

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exceeding $25,000.00) or (ii) any tenant space lease, license or concession concerning any portion of the public space in or on the Premises for stores, office space, restaurant space, or lobby space. Lessee’s approval of any Contract shall not be unreasonably withheld, delayed or conditioned. Unless otherwise agreed, all Contracts for the Premises shall be entered into in Lessee’s name. Manager shall make available to Lessee, its agents, and employees, at the Premises during business hours, executed counterparts or certified true copies of all Contracts it enters into pursuant to this Section 4.3.

4.4 Alcoholic Beverage/Liquor Licensing Requirements. With respect to any licenses and permits held by Lessee or any of its subsidiaries for the sale of any liquor and alcoholic beverages at any of the Premises, Manager agrees, as part of its management duties and services under this Agreement, to fully cooperate with any applicable liquor and/or alcoholic beverage authority and to assist Lessee with any documentation and other requests of such authority to the extent necessary to comply with any licensing and/or permitting requirements applicable to the Premises.

ARTICLE V

REPRESENTATIONS AND WARRANTIES

5.1 Lessee Representations. Lessee, in order to induce Manager to enter into this Agreement, hereby represents and warrants to Manager as follows:

5.1.1 The execution of this Agreement is permitted by the Certificate of Formation and limited liability company agreement of Lessee and this Agreement has been duly authorized, executed and delivered on behalf of Lessee and constitutes the legal, valid and binding obligation of Lessee enforceable in accordance with the terms hereof;

5.1.2 There is no claim, litigation, proceeding or governmental investigation pending, or, to the best knowledge and belief of Lessee, threatened, against or relating to Lessee, the properties or businesses of Lessee or the transactions contemplated by this Agreement which does, or may reasonably be expected to, materially or adversely affect the ability of Lessee to enter into this Agreement or to carry out its obligations hereunder, and, to the best knowledge and belief of Lessee, there is no basis for any such claim, litigation, proceeding or governmental investigation except as has been fully disclosed in writing by Lessee to Manager;

5.1.3 Neither the consummation of the transactions contemplated by this Agreement on the part of Lessee to be performed, nor the fulfillment of the terms, conditions and provisions of this Agreement, conflicts with or will result in the breach of any of the terms, conditions or provisions of, or constitute a default under, any agreement, indenture, instrument or undertaking to which Lessee is a party or by which it is bound;

5.1.4 No approval of any third party (including any Landlord or the Holder of any Hotel Mortgage in effect as of the date of this Agreement) is required for Lessee’s execution, delivery and performance of this Agreement that has not been obtained prior to the execution hereof;

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5.1.5 Lessee holds all required governmental approvals required (if applicable) to be held by it to lease the Hotels; and

5.1.6 As of the date of this Agreement there are no defaults under any of the Leases.

5.2 Manager Representations. Manager, in order to induce Lessee to enter into this Agreement, hereby represents and warrants to Lessee as follows:

5.2.1 The execution of this Agreement is permitted by the limited liability company operating agreement of Manager and this Agreement has been duly authorized, executed and delivered on behalf of Manager and constitutes a legal, valid and binding obligation of Manager enforceable in accordance with the terms hereof;

5.2.2 There is no claim, litigation, proceeding or governmental investigation pending, or, to the best knowledge and belief of Manager, threatened, against or relating to Manager, the properties or business of Manager or the transactions contemplated by this Agreement which does, or may reasonably be expected to, materially or adversely affect the ability of Manager to enter into this Agreement or to carry out its obligations hereunder, and, to the best knowledge and belief of Manager, there is no basis for any such claim, litigation, proceeding or governmental investigation, except as has been fully disclosed in writing by Manager to Lessee;

5.2.3 Neither the consummation of the transactions contemplated by this Agreement on the part of Manager to be performed, nor the fulfillment of the terms, conditions and provisions of this Agreement, conflicts with or will result in the breach of any of the terms, conditions or provisions of, or constitute a default under, any agreement, indenture, instrument or undertaking to which Manager is a party or by which it is bound;

5.2.4 No approval of any third party is required for Manager’s execution, delivery and performance of this Agreement that has not been obtained prior to the execution and delivery hereof;

5.2.5 Manager holds all required governmental approvals required to be held by it to perform its obligations under this Agreement; and

5.2.6 Manager qualifies as an Eligible Independent Contractor, and during the Term of this Agreement, agrees to continue to qualify as an Eligible Independent Contractor.

ARTICLE VI

OPERATION

6.1 Name of Premises, Standard of Operation. During the Term of this Agreement, the Premises shall be known and operated by Manager as hotels licensed with the applicable

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Franchisor as noted on Exhibit C, with additional identification as may be necessary to provide local identification, provided Manager and/or Lessee have obtained and are successful in continuously maintaining the right to so operate the Premises, which Manager agrees to use its reasonable best efforts to do. Manager agrees to manage the Premises, for the account of Lessee, and so far as is legally possible, in accordance with the Annual Operating Budget and Applicable Standards subject to Force Majeure. In the event of termination of a Franchise Agreement for one or more of the Premises, Manager shall operate such Premises under such other franchise agreement, if any, as Lessee enters into or obtains as franchisee. If the name of a Franchisor’s hotel system is changed, Lessee shall have the right to change the name of the applicable Hotel to conform thereto.

Notwithstanding the foregoing or any other provision in this Agreement to the contrary, Manager’s obligation with respect to operating and managing the Hotels in accordance with any Hotel Mortgage, Ground Leases, the Leases and the CCRs shall be limited to the extent (i) true and complete copies thereof have been made available to Manager by Lessee reasonably sufficient in advance to allow Manager to manage the Hotels in compliance with such documents, and (ii) the provisions thereof and/or compliance with such provisions by Manager (a) are applicable to the day-to-day management, maintenance and routine repair and replacement of the Hotels, the FF&E or any portion thereof, (b) do not require contribution of funds from Manager, (c) do not materially increase Manager’s obligations hereunder or materially decrease Manager’s rights or benefits hereunder, (d) do not limit or restrict, or attempt to limit or restrict any corporate activity or transaction with respect to Manager or any Manager Affiliate Entity or any other activity, transfer, transaction, property or other matter involving Manager or the Manager Affiliate Entities other than at the Site of the Hotels and (e) are otherwise within the scope of Manager’s duties under this Agreement. Lessee acknowledges and agrees, without limiting the foregoing, that any failure of (i) Lessee to comply with the provisions of any Hotel Mortgage, Ground Leases, the Leases and the CCRs or Legal Requirements or (ii) Manager to comply with the provisions of any such agreements or Legal Requirements arising out of, in the case of both (i) and (ii), (A) the condition of the Hotels, and/or the failure of the Hotels to comply with the provisions of such agreements, prior to the Commencement Date, (B) construction activities at the Hotels prior to the Commencement Date, (C) inherent limitations in the design and/or construction of, location of the Hotels and/or parking at the Hotels prior to the Commencement Date, (D) failure of Lessee to provide funds, from operations or otherwise, sufficient to allow timely compliance with the provisions of the Applicable Standards or the Leases, the Ground Leases, any Hotel Mortgage and/or the CCRs through reasonable and customary business practices, and/or (E) Lessee’s failure to approve any matter reasonably requested by Manager in Manager’s good faith business judgment as necessary or appropriate to achieve compliance with such items, shall not be deemed a breach by Manager of its obligations under this Agreement. Manager and Lessee agree, that Manager may from time to time, so long as Manager is in compliance with the Franchise Agreements and Legal Requirements, provide collateral marketing materials in the rooms of the Hotels which advertise other hotels or programs of Manager or its Affiliates (including, through a dedicated television channel in the rooms of the Hotels), at the sole cost and expense of Manager, provided such other hotels or programs being marketed by Manager are not competing directly in the same market with the Hotel where the marketing materials and information are being placed by

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Manager or any other Hotel owned by Landlord, Lessee or the Partnership and managed by Manager.

6.2 Use of Premises. Manager shall use the Premises solely for the operation of the Hotels in accordance with the Applicable Standards and for all activities in connection therewith which are customary and usual to such an operation. Subject to the terms of this Agreement, Manager shall comply with and abide by all applicable Legal Requirements, and the requirements of any insurance companies covering any of the risks against which the Premises are insured, any Hotel Mortgage, the Ground Leases, the Leases, and the Franchise Agreements. If there are insufficient funds in the Operating Account to make any expenditure required to remedy non-compliance with such Legal Requirements or with the requirements of any Hotel Mortgage, the Ground Leases, the Leases, or the Franchise Agreements or applicable insurance, Manager shall promptly notify Lessee of such non-compliance and estimated cost of curing such non-compliance. If Lessee fails to make funds available for the expenditure so requested by Manager within thirty (30) days, Lessee agrees to indemnify and hold Manager harmless from and against any and all costs, expenses and other liabilities incurred by Manager resulting from such non-compliance (which such indemnity shall survive any termination of this Agreement). In no event shall Manager be required to make available or distribute, as applicable, sexually explicit materials or items of any kind, whether through retail stores or gift shops located at the Hotels or through “pay for view” programming in the guest rooms of the Hotels.

6.3 Group Services. Manager may cause to be furnished to the Premises certain services (“Group Services”) which are furnished generally on a central or regional basis to other hotels or other properties managed by Manager or any Manager Affiliate Entity and which benefit each hotel managed by Manager including, by way of example and not by way of limitation, (i) marketing, advertising and promotion; (ii) centralized accounting payroll processing, ADP management, management and administration of accounts payable, accounts receivable and cash management accounting and MIS support services; (iii) the preparation and maintenance of the general ledger and journal entries, internal audit, budgeting and financial statement preparation, (iv) recruiting, training, career development and relocation in accordance with Manager’s or any Manager Affiliate Entities’ relocation plan; (v) employee benefits administration; (vi) engineering and risk management; (vii) information technology; (viii) legal support (such as license and permit coordination, filing and completion, standardized contracts, negotiation and preparation, and similar legal services benefiting the Hotels); (ix) purchasing arising out of ordinary hotel operations not otherwise contemplated in Section 8.2(g) hereof; (x) internal audit services; (xi) reservation systems; and (xii) such other additional services as are or may be, from time to time, furnished for the benefit of Manager’s or any Manager Affiliate Entities’ hotels or other properties managed by Manager or in substitution for services now performed at Manager’s individual hotels which may be more efficiently performed on a group basis. Manager shall assure that the costs and expenses incurred in providing Group Services to the Premises shall have been allocated to the Premises on a pro-rata basis consistent with the method of allocation to all of Manager’s (and any Manager Affiliate Entities’) hotels or other properties receiving the same services, shall be incurred at a cost consistent with the Annual Operating Budget and shall constitute Deductions. All Group Services provided by Manager shall be at the actual costs (without mark up for fee or profit to Manager or any Manager Affiliate Entity, but including salary and employee benefit costs and costs of equipment used in

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performing such services and overhead costs, and taking into account any rebate, give-up or participation in any reciprocal business arrangement with Manager or any Manager Affiliate Entity) of Group Services for the benefit of all of Manager’s hotels receiving the same services, and shall be of a quality comparable to which Manager could obtain from other providers for similar services.

6.4 Right to Inspect. Lessee, the beneficial owners of Lessee, the Landlords (to the extent permitted under such Leases), any Holder under any Hotel Mortgage (to the extent permitted under such Hotel Mortgage), and their respective agents, shall have access to the Premises at any and all reasonable times for any purpose. Manager will be available to consult with and advise such parties, at their reasonable request, concerning all policies and procedures affecting all phases of the conduct of business at the Hotels.

ARTICLE VII

WORKING CAPITAL AND INVENTORIES

7.1 Working Capital and Inventories. The Lessee shall cause funds to be deposited in one or more operating accounts established by Manager, in amounts sufficient to operate the Premises in accordance with the Annual Operating Budget, including the establishment and maintenance of positive Working Capital and Inventories as reasonably determined by Manager. All Working Capital and Inventories are and shall remain the property of Lessee. Lessee acknowledges that liabilities arising in connection with the operation and management of the applicable Hotel including, without limitation, all Deductions, incurred in accordance with the terms of this Agreement, are and shall remain the obligations of Lessee, and Manager shall have no liability therefor unless otherwise expressly provided herein.

7.2 Fixed Asset Supplies. Lessee shall provide the funds necessary to supply the Premises initially with Fixed Asset Supplies as reasonably determined by Manager consistent with the cost budgeted therefor in the Annual Operating Budget and otherwise consistent with the intent of the parties that the level of such supplies will be adequate for the proper and efficient operation of the Premises at the Applicable Standards. Fixed Asset Supplies shall remain the property of Lessee.

ARTICLE VIII

MAINTENANCE, REPLACEMENT AND CHANGES

8.1 Routine and Non-Routine Repairs and Maintenance. Manager, at the expense of Lessee, shall maintain the Premises in good repair and condition as is required by the Applicable Standards. Manager, on behalf of Lessee, shall make or cause to be made such routine maintenance, repairs and minor alterations as Manager from time to time deems reasonably necessary for such purposes, the cost of which: (i) can be expensed under GAAP, (ii) shall be paid from Gross Revenues, and treated as a Deduction, and (iii) is consistent with the Annual Operating Budget. In addition, Lessee shall make or cause to be made such non-routine repairs and maintenance, either to the Premises’ building or its fixtures, furniture, furnishings and

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equipment (“FF&E”), pursuant to the Capital Improvement Budget approved by Lessee and Landlord, the cost of which shall be paid for by Landlord. Manager and Lessee shall use their respective best efforts to prevent any liens from being filed against the Premises which arise from any maintenance, changes, repairs, alterations, improvements, renewals or replacements in or to the Premises. Lessee and Manager shall cooperate fully in obtaining the release of any such liens. If the lien arises as a result of the fault of either party, then the party at fault shall bear the cost of obtaining the lien release. All changes, repairs, alterations, improvements, renewals or replacements made pursuant to this Article VIII shall be the property of the Lessee.

8.2 Capital Improvement Budget.

(a) Manager shall prepare a budget (“Capital Improvement Budget”) of the expenditures necessary for replacement of FF&E and building repairs of the nature contemplated by Section 8.1 during the ensuing Fiscal Year and shall provide such Capital Improvement Budget to Lessee and Landlord for approval at the same time Manager submits the Annual Operating Budget. The Capital Improvement Budget shall not be deemed accepted by Lessee and Landlord in the absence of their respective express written approval. Not later than thirty (30) days after receipt by Lessee and Landlord of a proposed Capital Improvement Budget (or such longer period as Lessee and Landlord may reasonably request on Notice to the Manager), Lessee and/or Landlord may deliver a Notice (a “CIB Objection Notice”) to the Manager stating that Lessee and/or Landlord objects to any information contained in or omitted from such proposed Capital Improvement Budget and setting forth the nature of such objections with reasonable specificity. Failure of Lessee and/or Landlord to deliver a CIB Objection Notice shall be deemed rejection of the Manager’s proposed Capital Improvement Budget in its entirety. Upon receipt of any CIB Objection Notice, the Manager shall, after consultation with Lessee and Landlord, modify the proposed Capital Improvement Budget, taking into account Lessee’s and/or Landlord’s objections, and shall resubmit the same to Lessee and Landlord for Lessee’s approval within fifteen (15) days thereafter, and Lessee and/or Landlord may deliver further CIB Objection Notices (if any) within fifteen (15) days thereafter (in which event, the re-submission and review process described above in this sentence shall continue until the proposed Capital Improvement Budget in question is accepted and consented to by Lessee and Landlord). Notwithstanding anything to the contrary set forth herein, Lessee and Landlord shall have the right at any time subsequent to the acceptance and consent with respect to any Capital Improvement Budget, on Notice to the Manager, to revise, with the reasonable approval of Manager, such Capital Improvement Budget or to request that the Manager prepare for Lessee’s and/or Landlord’s approval a revised Capital Improvement Budget, taking into account such circumstances as Lessee and Landlord deem appropriate; provided, however, that the revision of a Capital Improvement Budget shall not be deemed a revocation of the Manager’s authority with respect to such actions as the Manager may have already taken prior to receipt of such revision notice in implementing a previously approved budget or plan.

(b) Manager shall, in accordance with and subject to the Capital Improvement Budget described in Section 8.2(a), from time to time make such substitutions and replacements of or renewals to FF&E and non-routine repairs and maintenance as described in Section 8.1 as it deems necessary to maintain the Hotels as required by this Agreement. Except as hereinafter provided, no expenditures will be made except as otherwise provided in the Capital Improvement

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Budget without the approval of Lessee and Landlord, and provided further, however, that if any such expenditures which are required by reason of any (i) emergency, or (ii) applicable Legal Requirements, or (iii) the terms of the Franchise Agreement, or (iv) are otherwise required for the continued safe and orderly operation of the Hotels, Manager shall immediately give Lessee and Landlord notice thereof and shall be authorized to take appropriate remedial action without such approval whenever there is a clear and present danger to life, limb or property of the Hotels or its guests or employees. The cost of all such changes, repairs, alterations, improvements, renewals, or replacements will be paid for by Landlord.

(c) All changes, repairs, alterations, improvements, renewals or replacements made pursuant to this Article VIII shall be the property of Landlord.

(d) It is the intent of Manager and Lessee to maintain the Premises in conformance with the Applicable Standards. Accordingly, as the Hotels age, if the Capital Improvement Budget prepared in good faith by Manager and approved by Lessee and Landlord is insufficient for purposes of allowing the Premises to conform with the Applicable Standards, Lessee, Landlord and Manager will consider the matter and Lessee and Landlord may elect to:

(i) provide the additional funds required; or

(ii) obtain financing for the additional funds required.

(e) In consideration of the Project Management Fee (as defined below), Manager shall be responsible for managing, coordinating, planning and executing the Capital Improvement Budget and all major repositionings of the Hotels.

Manager shall be paid a project management fee (herein, the “Project Management Fee”) equal to five percent (5%) of the total project costs associated with the implementation of the Capital Improvement Budget (both hard and soft) payable monthly in arrears based upon the prior calendar month’s total expenditures under the Capital Improvement Budget until such time that the Capital Improvement Budget and/or renovation project involves the expenditure of an amount in excess of five percent (5%) of Gross Revenues of the applicable Hotel, whereupon the Project Management Fee shall be reduced to three Percent (3%) of the total project costs in excess of the five percent 5% of Gross Revenue threshold. The Project Management Fee shall be accounted for and documented and consistent with the requirements of Section 11.2 herein. Any onsite or dedicated personnel required for the direct supervision of the implementation of a Capital Improvement Budget or other renovation project will be a direct cost to, and shall be reimbursed by, the Landlord.

(f) Except as otherwise provided herein, in no event shall Manager realize any kick backs, rebates, cash incentives, administration fees, concessions, profit participations, investment rights or similar payments or economic consideration from or in, as applicable, vendors or suppliers of goods or services. Manager agrees that any such amounts or benefits derived shall be held in trust for the benefit of Lessee or Landlord (as applicable).

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(g) Any additional fees payable to Manager shall be submitted for approval by a majority of the Independent Directors of MHI. In the event that the majority of the Independent Directors of MHI affirmatively votes that the Market Service Fees proposed by Manager are not market, the Lessee and Manager agree to engage a consultant reasonably satisfactory to both Lessee and Manager to provide then current market information with respect to the proposed Market Service Fees and a written recommendation as to whether such fees are market or not. If the consultant’s recommendation provides that such Market Service Fees as proposed by Manager are market, then the Landlord agrees to pay any consultant fees incurred by such consultant in making the recommendation. If the consultant’s recommendation does not support the Market Service Fees as proposed by Manager, then Manager agrees to pay the consultant’s fees incurred in connection with the Recommendation and agrees to either re-submit Manager’s proposed Market Service Fees to the Independent Directors of MHI consistent with the market research and recommendation of the consultant for approval to Lessee and Landlord, or elect by Notice to Lessee and Landlord that Manager will not provide the Project Related Service.

ARTICLE IX

EMPLOYEES

9.1 Employee Hiring. Manager, subject to the approval of the Lessee, will hire, train, promote, supervise, direct the work of and discharge all personnel working on the Premises. Manager shall be the sole judge of the fitness and qualification of such personnel and is vested with absolute discretion in the hiring, discharging, supervision, and direction of such personnel during the course of their employment and in the operation of the Premises. Such approval shall not be unreasonably withheld.

9.2 Costs, Benefit Plans. Manager shall fix the employees’ terms of compensation and establish and maintain all policies relating to employment, so long as they are reasonable and in accordance with the Applicable Standards and the Annual Operating Budget. Without limiting the foregoing, Manager may, consistent with the applicable budgets, enroll the employees of the Hotels in pension, medical and health, life insurance, and similar employee benefit plans (“Benefit Plans”) substantially similar to plans reasonably necessary to attract and retain employees and generally remain competitive. The Benefit Plans may be joint plans for the benefit of employees at more than one hotel owned, leased or managed by Manager or Manager Affiliate Entities. Employer contributions to such plans (including any withdrawal liability incurred upon Termination of this Agreement) and reasonable administrative fees (but without further markup by Manager), which Manager may expend in connection therewith, shall be the responsibility of Lessee and shall be a Deduction. The administrative expenses of any joint plans will be equitably apportioned by Manager among properties covered by such plan.

9.3 Manager’s Employees. It is expressly understood and agreed that all such personnel employed at the Hotels, including the Manager’s acting General Managers for each of the Hotels, will be the employees of Manager for all purposes including, without limitation, federal, state and local tax and reporting purposes, but the expense incurred in connection therewith will be a Deduction and for Lessee’s account. A General Manager’s compensation and the compensation of other employees may be allocated to other Hotels on a fair and equitable

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basis if such employees provide services with respect to the operations of such other Hotels. Manager shall use such care when hiring any employees as may be common to the hospitality business and consistent with the Manager’s standards of operation. Lessee acknowledges and agrees that Manager, as the employer of all of the Hotels’ employees, shall be entitled to all federal, state and/or local tax credits or benefits allowed to employers relating to the Hotels’ employees including, without limitation, the Work Opportunity Tax Credit, the Targeted Jobs Tax Credit, and similar tax credits (provided that Manager shall pay all incremental fees, if applicable, to qualify for such tax credits). Manager, in accordance with the Annual Operating Budget, may draw down from Gross Revenues all costs and expenses, of whatever nature, incurred in connection with such employees, including, but not limited to, wages, salaries, on-site staff, bonuses, commissions, fringe benefits, employee benefits, recruitment costs, workmen’s compensation and unemployment insurance premiums, payroll taxes, vacation and sick leave (collectively, “Employee Costs and Expenses”).

9.4 Special Projects – Corporate Employees. The costs, fees, compensation and other expenses of any persons engaged by Manager to perform duties of a special nature, directly related to the operation of the Premises, including, but not limited to, in-house or outside counsel, accountants, bookkeepers, auditors, employment search firms, marketing and sales firms, and similar firms of personnel, shall be operating expenses, payable from and consistent with the Annual Operating Budget and not the responsibility of the Manager. The costs, fees, compensation and other expenses of those personnel of Manager assigned to special projects for the Hotels shall also be operating expenses payable by the Lessee and not the responsibility of Manager. The daily per diem rate for those personnel shall be based upon the actual costs of Manager in providing its personnel for such special services or projects, without mark-up for fee or profit but including salary and employee benefit costs and costs of equipment used in performing such services, overhead costs, travel costs and long distance telephone. Such special services shall include, but not be limited to, those matters which are not included within the scope of the duties to be performed by Manager hereunder and, if not provided by Lessee, would involve the Lessee’s engagement of a third party to perform such services; for example, special sales or marketing programs, market reviews, assistance in opening new food and beverage facilities, legal services, accounting services, tax services, insurance services, data processing, engineering personnel, and similar services.

9.5 Termination. At Termination, subject to Section 2.1 above, Lessee shall reimburse Manager for costs and expenses incurred by Manager which arise out of either the transfer or termination of Manager’s employees at the Hotels, such as reasonable transfer costs, compensation in lieu of vacation and sick leave, severance pay (including a reasonable allowance for severance pay for Executive Employees of the Hotels, the amount of such allowance not to exceed an amount equal to Manager’s then current severance benefits for such terminated Executive Employees, unless Lessee otherwise approves), unemployment compensation, employer liability pursuant to the Consolidated Omnibus Budget Reconciliation Act (Cobra liability) and the Worker Adjustment and Retraining Notification Act (Warn Act) and other employment liability costs arising out of the termination of the employment of the Manager’s employees at the Premises (herein collectively called “Employee Related Termination Costs”). This reimbursement obligation shall not apply to any corporate personnel of Manager assigned to the Hotels for special projects or who perform functions for Manager at the corporate level. In

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order to be reimbursable hereunder, any Employee Related Termination Costs must be pursuant to policies of Manager which shall be consistent with those of other managers managing similar hotels in similar markets and geographical locations and which shall be subject to review and reasonable approval of Lessee from time to time upon Notice from Lessee and which review and approval shall occur no more than one time during each Fiscal Year during the term of this Agreement.

At Termination, an escrow fund shall be established from Gross Revenues (or, if Gross Revenues are not sufficient, with funds provided by Lessee) to reimburse Manager for all reimbursable Employee Related Termination Costs.

9.6 Employee Use of Hotel. Manager, in its discretion, may (i) provide lodging for Manager’s Executive Employees and corporate staff visiting the Hotels in connection with the performance of Manager’s services hereunder and allow them the use of the facilities of the Hotels, and (ii) provide the management of the Hotels with temporary living quarters within the Hotels and the use of all facilities of the Hotels, in either case at a discounted price or without charge, as the case may be. Manager shall, on a space available basis, provide lodging at the Hotels for Lessee’s employees, officers and directors visiting the Hotels and allow them the use of all facilities of the Hotels in either case without charge, except for recreational facilities for which a charge will apply.

9.7 Non-Solicitation. During the term of this Agreement and for a period of two (2) years thereafter, unless an Event of Default by Manager exists under this Agreement beyond applicable grace or cure periods, or the Agreement has been terminated as a result of an uncured Event of Default by Manager, Lessee agrees that it (and its Affiliates) will not, without the prior written consent of Manager, either directly or indirectly, alone or in conjunction with any other person or entity, (i) solicit or attempt to solicit any general manager (each a “General Manager” and, collectively, “General Managers”) of the Hotels or any other hotels managed by Manager or any of Manager’s Executive Employees (collectively, the General Manager and Executive Employees are herein called the “Key Employees”) to terminate, alter or lessen Key Employees’ employment or affiliation with Manager or to violate the terms of any agreement or understanding between any such Key Employee and Manager, as the case may be, or (ii) employ, retain, or contract with any Key Employee.

ARTICLE X

BUDGET, STANDARDS AND CONTRACTS

10.1 Annual Operating Budget. Not less than forty-five (45) days prior to the beginning of each Fiscal Year, Manager shall submit to Lessee for each of the Hotels, a budget (the “Annual Operating Budget”) setting forth in detail an estimated profit and loss statement for the next twelve (12) Accounting Periods, or for the balance of the Fiscal Year in the event of a partial first Fiscal Year, including a schedule of hotel room rentals and other rentals and a marketing and business plan for each of the Hotels, such budget to be substantially in the format of Exhibit “D” attached hereto.

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10.2 Budget Approval. The Annual Operating Budget submitted to Lessee by Manager shall be subject to the approval of Lessee (such approval not to be unreasonably withheld). The Annual Operating Budget shall not be deemed accepted by Lessee in the absence of its express written approval. Not later than thirty (30) days after receipt by Lessee of a proposed Annual Operating Budget (or such longer period as Lessee may reasonably request on Notice to Manager), Lessee may deliver an AOB Objection Notice with reasonable detail to the Manager stating that Lessee objects to any information contained in or omitted from such proposed Annual Operating Budget and setting forth the nature of such objections with reasonable specificity. Failure of Lessee to deliver express written approval of the Annual Operating Budget and an AOB Objection Notice shall be deemed rejection of the Manager’s proposed Annual Operating Budget in its entirety. Upon receipt of any AOB Objection Notice, the Manager shall, after consultation with Lessee, modify the proposed Annual Operating Budget, taking into account Lessee’s objections, and shall resubmit the same to Lessee for Lessee’s approval within fifteen (15) days thereafter, and Lessee may deliver further AOB Objection Notices (if any) within fifteen (15) days thereafter (in which event, the re-submission and review process described above in this sentence shall continue until the proposed Annual Operating Budget in question is accepted and consented to by Lessee). Notwithstanding anything to the contrary set forth herein, Lessee shall have the right at any time subsequent to the acceptance and consent with respect to any Annual Operating Budget, on Notice to the Manager, to revise such Annual Operating Budget or to request that the Manager prepare for Lessee’s approval a revised Annual Operating Budget (with the approval of Manager, such approval not to be unreasonably withheld), taking into account such circumstances as Lessee deems appropriate; provided, however, that the revision of an Annual Operating Budget shall not be deemed a revocation of the Manager’s authority with respect to such actions as the Manager may have already taken prior to receipt of such revision notice in implementing a previously approved budget or plan. Lessee and Manager acknowledge and agree that the Annual Operating Budgets are merely forecasts of operating revenues and expenses for an ensuing year and shall be revised, by agreement of Lessee and Manager, from time to time as business and operating conditions shall demand. However, Manager shall use its reasonable efforts to operate the Premises in accordance with the Annual Operating Budget. The failure of any of the Hotels to perform in accordance with such Annual Operating Budget shall not constitute a default by Manager of this Agreement, however, the Lessee has a right to terminate this Agreement with respect to a Subject Hotel if such Subject Hotel fails to satisfy the Performance Test as set forth in Section 2.3(c) above.

10.3 Operation Pending Approval. If the Annual Operating Budget (or any component thereof) has not yet been approved by Lessee prior to any applicable Fiscal Year, then, until approval of such Annual Operating Budget (or such component) by Lessee, Manager shall operate the Hotels substantially in accordance with the prior year’s Annual Operating Budget except for (a) those components of the Annual Operating Budget for the applicable Fiscal Year approved by Lessee, (b) the Necessary Expenses which shall be paid as required, (c) the Emergency Expenses which shall be paid as required, and (d) those expenses that vary in correlation with Gross Revenues and/or occupancy in the aggregate.

10.4 Budget Meetings. At each budget meeting and at any additional meetings during a Fiscal Year reasonably called by Lessee or Manager, Manager shall consult with Lessee

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on matters of policy concerning management, sales, room rates, wage scales, personnel, general overall operating procedures, economics and operation and other matters affecting the operation of the Hotels.

ARTICLE XI

OPERATING DISTRIBUTIONS

11.1 Management Fee. As consideration for the services to be rendered by Manager pursuant to this Agreement as manager and operator of the Premises, Manager shall be paid the following Base Management Fee and Incentive Management Fee (as such terms are hereinafter defined), collectively called the “Management Fee”, for each of the Hotels as follows:

(a) Base Management Fee. The base management fee (“Base Management Fee”) for each of the Initial Hotels and any future Hotels shall be equal to a percentage of the Gross Revenues attributed to each such Hotel as determined on a property by property basis pursuant to the following tables, and shall be due monthly:

Base Management Fee for an Initial Hotel

2004	-	2.0%
2005	-	2.0%
2006	-	2.5%
2007	-	3.0%
and thereafter

Base Management Fee for a Future Hotel

First year managed	-	2.0%
Second year managed	-	2.5%
Third year                         managed and thereafter	-	3.0%

If this Agreement shall commence or expire on other than the first and last day of a calendar month, respectively, the Base Management Fee shall be apportioned based on the actual number of days of service in the month. The Base Management Fee for a Future Hotel first leased to Lessee other than on the first day of a Fiscal Year shall be determined on the basis of the rate applicable to the “First year managed” for both the partial Fiscal Year in which the Hotel is first leased to Lessee and to the first full Fiscal Year such Hotel is managed by Manager.

(b) The incentive management fee (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

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to ten percent (10%) of the amount by which the Gross Operating Profit of the Hotels on an aggregate basis, for a given year exceeds the Gross Operating Profit for the same Hotels, on an aggregate basis, for the prior year. The Incentive Management Fee may not exceed 0.25% of Gross Revenues of all of the Hotels included in the incentive fee calculation. The calculation of the Incentive Management Fee will not include results of Hotels for the Fiscal Year in which they are initially leased by Landlord to Lessee or for the Fiscal Year in which sold and newly acquired or leased Hotels will be included in the calculation beginning with the second full Fiscal Year such Hotel is managed pursuant to this Agreement.

11.2 Accounting and Interim Payment.

(a) Manager shall submit monthly, pursuant to Section 15.2, an interim accounting to Lessee showing Gross Revenues, Deductions, Gross Operating Profit and Net Operating Income before Debt Service.

(b) Calculations and payments of the Base Management Fee for each Hotel made with respect to each Accounting Period shall be made on an interim accounting basis and shall be accounted for cumulatively for each Fiscal Year. After the end of each Fiscal Year, Manager shall submit to Lessee an accounting for such Fiscal Year, consistent with Section 15.3, which accounting shall be controlling over the interim accountings. Any adjustments required by the Fiscal Year accounting shall be made promptly by the parties.

(c) The Incentive Fee for the Hotels shall be calculated and earned on an annual basis for each Fiscal Year. If Lessee raises no objection for any reason (excluding fraud) within one (1) year from the receipt of annual accounting statements as provided herein (or for fraud within any applicable statute of limitations period, and if no statute of limitations period exists, then in no event to exceed four (4) years from receipt of annual accounting statements as provided herein), such accounting shall be deemed to have been accepted by Lessee as true and correct, and Lessee shall have no further right to question its accuracy. Manager will provide Lessee profit and loss statements for the current period and year-to-date, including actual, budget and last year comparisons, as required by Section 15.3.

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ARTICLE XII

INSURANCE

12.1 Insurance. Manager shall coordinate with Lessee, at all times during any period of development, construction, renovation, furnishing and equipping of the Premises, the procurement and maintenance in amount and scope as available for the hotel lodging industry for hotels of similar type and in similar markets and geographical locations as the Hotels, public liability and indemnity and property insurance with minimum limits of liability as required by Lessee, the Landlords, any Holder, or Franchisors, if applicable, and in accordance with the Annual Operating Budget to protect Lessee, Landlord, Manager, any Holder, and any Franchisor, if applicable, against loss or damage arising in connection with the development, construction, renovation, furnishing and equipping of the Premises (and pre-opening activities, if applicable), including, without limitation, the following:

12.1.1 Extended Coverage, Boiler, Business Interruption and Liability Insurance.

(a) Building insurance on the “Special Form” (formerly “All Risk” form) (including earthquake and flood in reasonable amounts as determined by Lessee) in an amount not less than 100% of the then “Full Replacement Cost” thereof (as defined below) or such other amount which is acceptable to Lessee, and personal property insurance on the “Special Form” in the full amount of the replacement cost thereof;

(b) Insurance for loss or damage (direct and indirect) from steam boilers, pressure vessels or similar apparatus, now or hereafter installed in the Hotels, in the minimum amount of $5,000,000 or in such greater amounts as are then customary or as may be reasonably requested by Lessee from time to time;

(c) Loss of income insurance on the “Special Form”, in the amount of one year of the sum of Base Rent plus Percentage Rent (as such terms are defined in and as determined pursuant to the Leases) for the benefit of Landlords, and business interruption insurance on the “Special Form” in the amount of one year of Gross Operating Profit, for the benefit of Lessee. All loss of income insurance proceeds shall be part of Gross Revenues;

(d) Commercial general liability insurance, with amounts not less than $1,000,000 combined single limit for each occurrence and $2,000,000.00 for the aggregate of all occurrences within each policy year, as well as excess liability (umbrella) insurance with limit of at least $35,000,000 per occurrence, covering each of the following: bodily injury, death, or property damage liability per occurrence, personal and advertising injury, general aggregate, products and completed operations, and “all risk legal liability” (including liquor law or “dram shop” liability if liquor or alcoholic beverages are served at the Hotels);

(e) Automobile insurance on vehicles operating in conjunction with the Hotels with limits of liability of at least $1,000,000.00 combined, single limit coverage; and

(f) Insurance covering such other hazards and in such amounts as may be customary for comparable properties in the area of the Hotels and that is available from insurance companies, insurance pools or other appropriate companies authorized to do business in the states where the Hotels are located at rates which are economically practicable in relation to the risks covered as may be reasonably requested by Lessee and otherwise consistent with the costs allocated therefor in the Annual Operating Budget.

12.1.2 Operational Insurance.

(a) Workers’ compensation and employer’s liability insurance as may be required under Legal Requirements and as Manager may deem reasonably prudent

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covering all of Manager’s employees at the Premises, with such deductible limits or self-insured retentions as may be reasonably established from time to time by Manager;

(b) Fidelity bonds, or dishonest employee insurance with limits and deductibles as may be reasonably requested by Lessee, covering Manager’s employees in job classifications normally bonded under prudent hotel management practices in the United States or otherwise required by law; and

(c) Such other insurance in amounts as Manager in its reasonable judgment deems advisable for its protection against claims, liabilities and losses arising out of or connected with its performance under this Agreement, and otherwise consistent with the costs allocated therefor in the Annual Operating Budget.

12.2 Replacement Cost. The term “Full Replacement Cost” as used herein shall mean the actual replacement cost of the Hotels requiring replacement from time to time including an increased cost of construction endorsement, if available, and the cost of debris removal. In the event either party to this Agreement believes that full replacement cost (the then-replacement cost less such exclusions) has increased or decreased at any time during the Term, it shall have the right to have such full replacement cost re-determined.

12.3 Increase in Limits. If either party to this Agreement at any time deems the limits of the personal injury or property damage under the comprehensive commercial general liability insurance then carried to be either excessive or insufficient, such parties shall endeavor in good faith to agree on the proper and reasonable limits for such insurance to be carried and such insurance shall thereafter be carried with the limits thus agreed on until further change pursuant to the provisions of this Section.

12.4 Blanket Policy. Notwithstanding anything to the contrary contained in this Article XII, Manager may include the insurance required hereunder within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Manager; provided, however, that the coverage afforded to the parties as required herein will not be reduced or diminished or otherwise be different from that which would exist under a separate policy meeting all other requirements of this Agreement by reason of the use of such blanket policy of insurance, and provided further that the requirements of this Article XII are otherwise satisfied.

12.5 Costs and Expenses. The cost of maintaining insurance and costs related thereto shall be the responsibility of the Lessee. Insurance premiums and any costs or expenses with respect to the insurance, including, without limitation, agent’s and consultant’s costs used to place insurance or adjust claims, shall be Deductions. Premiums on policies for more than one year shall be charged pro-rata against Gross Revenues over the period of the policies and to the extent, through blanket policies, such premiums cover other hotels managed by Manager or owned by Lessee or any of its Affiliates, they shall be allocated based on rooms, number of employees, values or other methods as determined to be reasonable by Manager and Lessee. Any reserves, losses, costs, damages or expenses which are uninsured, self-insured, or fall within deductible limits shall be treated as a cost of insurance and shall be Deductions, subject to Article XXV.

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12.6 Policies and Endorsements.

(a) Where permitted, all insurance provided for under this Article XII shall name Lessee as insured, and Manager, any Holder, the Landlords, and, if required, the Franchisors, as additional insureds. The party procuring such insurance shall deliver to the other party certificates of insurance with respect to all policies so procured, including existing, additional and renewal policies and, in the event of insurance about to expire, shall deliver certificates of insurance with respect to the renewal policies not less than ten (10) days prior to the respective dates of expiration.

(b) All policies of insurance provided for under this Article XII shall, to the extent obtainable, be with insurance companies licensed or authorized to do business in the state in which the Premises are located, with a minimum rating of A or better in the Best’s Insurance Guide and an S&P rating of at least A+V (or such higher rating if so required by any Holder, Landlord or Franchisor), and shall have attached thereto an endorsement that such policy shall not be cancelled or materially changed without at least thirty (30) days’ prior written notice to Lessee. All insurance policies obtained pursuant to this Article XII shall contain a standard waiver of subrogation endorsement.

12.7 Termination. Upon Termination of this Agreement with respect to one or more of the Hotels, an escrow fund in an amount reasonably acceptable to Manager and Lessee shall be established from Gross Revenues (or, if Gross Revenues are not sufficient, with funds provided by Lessee) to cover the amount of any costs which, in Manager’s reasonable business judgment, will likely need to be paid by Manager with respect to pending or contingent claims, including those which arise after Termination for causes arising during the Term of this Agreement. Upon the final disposition of all such pending or contingent claims, any unexpended funds remaining in such escrow shall be paid to Lessee.

ARTICLE XIII

TAXES AND DEBT SERVICE

13.1 Taxes. All real estate and ad valorem property taxes, assessments and similar charges on or relating to the Premises during the Term of this Agreement shall be paid by Lessee or Landlord.

13.2 Debt Service, Ground Lease Payments. In the event of a Hotel Mortgage and/or Ground Lease and upon direction of Lessee, Manager shall establish an account (the “Property Service Account”) to pay Debt Service and/or Ground Lease Payments in such periodic payments as required by any applicable Holder under any applicable Hotel Mortgage and/or landlord under any Ground Lease. The Property Service Account shall be funded by Landlord under the Lease from funds paid by Landlord to Lessee. In the event sufficient funds are unavailable for the payment of Debt Service and/or Ground Lease Payments from the Property Service Account, then Manager shall notify Lessee in writing of such insufficiency who shall in

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turn advise the Landlord under the applicable Lease to replenish the Property Service Account to provide funds for payment of Debt Service and/or Ground Lease Payments.

ARTICLE XIV

BANK ACCOUNTS

14.1 Operating Account. All funds made available to Manager by Lessee for operation of the Premises, exclusive of those amounts described in Article VIII, shall be deposited into a checking account or accounts to be established in the name of Lessee (the “Operating Account”), consistent with the requirements of any Cash Management Agreements, if any. The Operating Account shall be interest bearing when possible. Subject to the limitation of Manager’s authority set forth herein, both Manager and Lessee shall be authorized to withdraw funds from said Operating Account, except that Lessee may withdraw funds from said account only if an Event of Default by Manager has occurred under this Agreement or an event has occurred that with the passage of time might be an Event of Default by Manager. Prior to any such withdrawal by Lessee, Lessee shall provide Notice of same to Manager, and Manager shall not be liable to Lessee for any checks written by Manager for operating expenses which are returned due to insufficient funds caused by such Lessee withdrawal. From time to time both Manager and Lessee shall designate signatory parties on such account and shall provide written notice of such designation or change in designation to the other party, and the signatures of such persons shall be formally and expressly recognized by the bank in which such account or accounts are maintained. The bank or banks to be utilized shall be selected and approved by Lessee and Manager. All monies received shall be deposited in, including, but not limited to, Gross Revenues, and expenses paid, including, but not limited to, Deductions, shall be paid from such bank checking account(s) except that Manager shall have the right to maintain payroll and petty cash funds and to make payments therefrom as the same are customary and utilized in the lodging business. Such funds shall not be commingled with Manager’s funds. Lessee shall have the right, as a Deduction to the respective Hotel, to audit said account or accounts at any reasonable time.

14.2 Payroll Account. Manager may establish one or more separate bank accounts for handling payroll costs in the name of Lessee. Such accounts shall be in a bank selected by Lessee, and shall be handled exclusively by the individuals designated by Manager and approved in writing by Lessee. Funds shall be deposited in the payroll account or accounts from the Operating Account, as needed, in order to meet payroll requirements.

14.3 Management of Operating Account. Until otherwise prescribed by Lessee in writing, the Operating Account shall be under the control of Manager, without prejudice, however, to Manager’s obligation to account to Lessee as and when provided herein. All receipts and income, including without limitation, Gross Revenues shall be promptly deposited in the Operating Account. Checks or other documents of withdrawal shall be signed only by the individual representatives of Manager approved in writing by Lessee and duly recognized for such purpose by the bank or banks in which the referenced accounts are maintained. Manager shall supply Lessee with fidelity bonds or other insurance insuring the fidelity of authorized signatories to such accounts, unless said bonds or other insurance shall have been placed by

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Lessee and delivered directly by the bonding or insurance company to Lessee. The cost of such fidelity bonds or other insurance shall be a Deduction, at Lessee’s expense, and subject to Lessee’s approval. Neither Lessee nor Manager shall be responsible for any losses occasioned by the failure or insolvency of the bank or banks in which the referenced accounts are maintained. Upon expiration or termination of this Agreement and the payment to Manager of all amounts due Manager hereunder upon such expiration or termination, as provided in this Agreement, all remaining amounts in the referenced accounts shall be transferred forthwith to Lessee, or made freely available to Lessee.

14.4 Advance of Funds. Manager shall not be required to advance funds, and Manager shall not be obligated to incur any liability or obligation for Lessee’s account, without assurance that necessary funds for the discharge thereof will be provided by Lessee.

14.5 Reserve Accounts. All reserve accounts established pursuant to this Agreement shall be placed in segregated interest-bearing accounts in the name of Lessee which interest shall be added to such reserve and serve to reduce the amount required to be placed in such reserve account.

ARTICLE XV

ACCOUNTING SYSTEM

15.1 Books and Records. Manager shall maintain an adequate and separate accounting system in connection with its management and operation of the Premises. The books and records shall be kept in accordance with GAAP and the Uniform System of Accounts (to the extent consistent with GAAP) and shall be maintained at all times either on the Premises, at the principal office of the Manager, or in storage, for at least three (3) years after the Fiscal Year to which the books and records relate. Lessee, the beneficial owners of Lessee, the Landlords (to the extent permitted under the Leases), any Holder (to the extent permitted under the Hotel Mortgage), any Franchisor (to the extent permitted under any applicable Franchise Agreement), or their respective employees or duly authorized agents, shall have the right and privilege of examining and inspecting the books and records at any reasonable time. Upon termination of this Agreement, all such books and records shall be turned over to Lessee so as to insure the orderly continuance of the operation of the Hotels; provided however, that all such books and records thereafter shall be available to Manager at the Hotels at all reasonable times for inspection, audit, examination and copying for a period of three (3) years.

15.2 Monthly Financial Statements. Within twenty-five (25) days following each Accounting Period, Manager shall furnish Lessee with respect to each of the Hotels an accrual basis balance sheet on Manager’s standard format in reasonable detail, together with a reasonably detailed accrual basis profit and loss statement for the calendar month next preceding and with a cumulative calendar year accrual basis profit and loss statement to date, including a comparison to the Annual Operating Budget and the Capital Improvements Budget and a statement of cash flows for each monthly and cumulative period for which a profit and loss statement is prepared. Further, from time to time as reasonably requested by Lessee, Manager shall provide a statement of bank account balances, an allocation to reserve accounts, a sources and uses statement, a

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narrative discussing any of the aforementioned reports and material variances from the Annual Operating Budget and the Capital Improvements Budget, such other reports and financial statements as Lessee may reasonably request and as are customarily provided by managers of similar hotel properties in the area of the Hotels without Manager receiving additional fees to provide same.

15.3 Annual Financial Statements. Within forty-five (45) days after the end of each Fiscal Year, Manager shall furnish to Lessee year-end financial statements for the Hotels (including a balance sheet, income statement and statement of sources and uses of funds) which statements shall be unaudited and shall be prepared in accordance with GAAP and the Uniform System of Accounts (to the extent consistent with GAAP). Lessee will engage an independent certified public accounting firm to provide audited annual financial statements. Manager shall cooperate in all respects with such accountant in the preparation of such statements, including the delivery of any financial information generated by Manager pursuant to the terms of this Agreement and reasonably required by the Lessee’s accountant to prepare such audited financial statements.

ARTICLE XVI

PAYMENT BY LESSEE

AND DISTRIBUTIONS TO LESSEE

16.1 Payment of Base Management Fee. On the tenth (10th) day of each month during the term of this Agreement, Manager shall be paid out of the Operating Account, the Base Management Fee for the preceding Accounting Period, as determined from the books and records referred to in Article XV.

16.2 Payment of Incentive Management Fee. On the sixtieth (60) day after the end of each Fiscal Year during the Term of this Agreement, Manager shall be paid out of the Operating Account the Incentive Management Fee for the preceding Accounting Period, if any, as determined from the books and records referred to in Article XV.

16.3 Distributions. Subject to retention of Reasonable Working Capital (including any amounts as required by the Capital Improvement Budget) and retention of such reserves as may be required under any Hotel Mortgage and/or Ground Lease, as applicable, Manager shall deliver to Lessee from the Operating Account, any Excess Working Capital for the preceding Accounting Period on the 25th day of the following month, and such amounts of Lessee’s money in the possession or under the control of Manager as Lessee shall from time to time request. “Excess Working Capital” shall mean any Working Capital remaining after payment of Deductions, Management Fees, allocations for reserves and retention of Reasonable Working Capital. For purposes of this Article “Reasonable Working Capital” shall mean an amount reasonably determined by Manager as shall be necessary for Manager to operate the Hotels in accordance with the Applicable Standards based upon the Annual Operating Budget and projected Gross Revenues for such Fiscal Year. Manager’s determination of Reasonable Working Capital shall be made at the same time as the monthly financial statements are prepared pursuant to Section 15.2 hereof, but in no event shall such amount exceed a sum equal to a ratio

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of current assets to current liabilities of 2:1 (but excluding from such calculation cash restricted or unavailable under any Cash Management Agreement).

ARTICLE XVII

RELATIONSHIP AND AUTHORITY

Lessee and Manager shall not be construed as partners, joint venturers or as members of a joint enterprise and neither shall have the power to bind or obligate the other except as set forth in this Agreement. Nevertheless, Manager is granted such authority and power as may be reasonably necessary for it to carry out the provisions of this Agreement. This Agreement, either alone or in conjunction with any other documents, shall not be deemed to constitute a lease of any portion of the Premises. Nothing contained herein shall prohibit or restrict Manager or any affiliate of Manager from operating, owning, managing, leasing or constructing any hotel of any nature or description which may in any manner compete with that of the Premises, except as otherwise set forth in the Strategic Alliance Agreement; provided that Manager agrees to comply with the conflicts policies of MHI. Except as otherwise expressly provided in this Agreement, (a) all debts and liabilities to third persons incurred by Manager in the course of its operation and management of the Hotels in accordance with the provisions of this Agreement shall be the debts and liabilities of Lessee only, and (b) Manager shall not be liable for any such obligations by reason of its management, supervision, direction and operation of the Hotels as agent for Lessee. Manager may so inform third parties with whom it deals on behalf of Lessee and may take any other reasonable steps to carry out the intent of this paragraph.

ARTICLE XVIII

DAMAGE, CONDEMNATION AND FORCE MAJEURE

18.1 Damage and Repair. If, during the Term hereof, a Hotel is damaged or destroyed by fire, casualty, or other cause or in the event the underlying Lease relating to such damaged Hotel is terminated pursuant to the provisions of such Lease, Lessee may terminate this Agreement with respect to such Hotel upon sixty (60) days’ Notice from the date of such damage or destruction, in which case this Agreement shall then terminate with respect to such Hotel sixty (60) days from the date of such notice and neither party shall have any further rights, obligations, liabilities or remedies one to the other hereunder with respect to such Hotel, except as otherwise provided in Article II; provided, however, that Lessee shall not be required to pay Manager any termination fee.

18.2 Condemnation.

(a) In the event all or substantially all of a Hotel shall be taken in any eminent domain, condemnation, compulsory acquisition, or similar proceeding by any competent authority for any public or quasi-public use or purpose, this Agreement shall terminate with respect to such Hotel, subject to the requirements of the applicable underlying Lease. However, in any event of such termination, Lessee shall give Manager at least fifteen (15) days prior Notice of such termination. In the event of such termination, neither party shall have any further

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rights, remedies, obligations or liabilities one to the other hereunder with respect to such Hotel except as otherwise provided in Article II above.

(b) If a portion of the Premises shall be taken by the events described in Section 18.2(a) or the entire Premises are temporarily affected, the result of either of which is not to make it, in the reasonable business judgment of Lessee, unreasonable to continue to operate the applicable Hotel, subject to the requirements of the applicable underlying Lease, this Agreement shall not terminate with respect to such Hotel. However, so much of any award for any such partial taking or condemnation shall be made available to the extent necessary to render the applicable Premises equivalent to its condition prior to such event and the balance shall be paid to Lessee or the Holder, if required by any Hotel Mortgage covering the Premises.

18.3 Force Majeure. If an event of Force Majeure directly involves a Hotel and has a significant adverse effect upon the continued operations of such Hotel, then Lessee shall be entitled to terminate this Agreement with respect to the applicable Hotel by written Notice within sixty (60) days from the date of such Force Majeure, and this Agreement shall then terminate with respect to the applicable Hotel sixty (60) days from such notice, in which event neither Lessee nor Manager shall have any further rights, remedies, obligations or liabilities, one to the other, hereunder, with respect to the applicable Premises except as otherwise provided in Article II; provided, however, that Lessee shall not be required to pay Manager any termination fee.

ARTICLE XIX

DEFAULT AND TERMINATION

19.1 Events of Default. The following shall constitute events of default (each an “Event of Default”):

(a) The filing of a voluntary petition in bankruptcy or insolvency or a petition for reorganization under any bankruptcy law by Lessee or Manager;

(b) The consent to any involuntary petition in bankruptcy or the failure to vacate, within ninety (90) days from the date of entry thereof, any order approving an involuntary petition by Lessee or Manager;

(c) The entering of an order, judgment or decree by any court of competent jurisdiction, on the application of a creditor, adjudicating Lessee or Manager as bankrupt or insolvent, or approving a petition seeking reorganization or appointing a receiver, trustee, or liquidator of all or a substantial part of such party’s assets, and such order, judgment or decree continues unstayed and in effect for any period of ninety (90) days or more;

(d) The appointment of a receiver for all or any substantial portion of the property of Lessee or Manager;

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(e) The failure of Lessee or Manager to make any payment required to be made in accordance with the terms of this Agreement within ten (10) days after receipt of Notice, specifying said default with reasonable specificity, when such payment is due and payable; or

(f) The failure of Lessee or Manager to perform, keep or fulfill any of the other covenants, undertakings, obligations or conditions set forth in this Agreement, and the continuance of such default for a period of thirty (30) days after written notice of said failure; provided, however, if such default cannot be cured within such thirty (30) day period and Lessee or Manager, as the case may be, commences to cure such default within such thirty (30) day period and thereafter diligently and expeditiously proceeds to cure the same, such thirty (30) day period shall be extended so long as it shall require Lessee or Manager, as the case may be, in the exercise of due diligence to cure such default, it being agreed that no such extension (including the original 30 day cure period) shall be for a period in excess of one hundred twenty (120) days.

(g) The occurrence of a default under the applicable Lease or ground lease which results in termination thereof.

(h) The Manager does not qualify as an Eligible Independent Contractor.

19.2 Consequence of Default. Upon the occurrence of any Event of Default, the non-defaulting party may give the defaulting party Notice of intention to terminate this Agreement (after the expiration of any applicable grace or cure period provided in Section 19.1), and upon the expiration of thirty (30) days from the date of such notice, this Agreement shall terminate, whereupon the non-defaulting party shall be entitled to pursue all of its rights and remedies, at law or in equity, under this Agreement (including, without limitation, any indemnity obligations which shall survive termination of this Agreement) and any other rights and remedies available under Legal Requirements except as otherwise expressly limited by the terms of Article II. Notwithstanding the foregoing, in the event that an Event of Default is applicable to one or more of the Hotels but not all of the Hotels, such termination shall only be as to such applicable Hotel(s).

ARTICLE XX

WAIVER AND INVALIDITY

20.1 Waiver. The failure of either party to insist upon a strict performance of any of the terms or provisions of this Agreement or to exercise any option, right or remedy herein contained, shall not be construed as a waiver or as a relinquishment for the future of such term, provision, option, right or remedy, but the same shall continue and remain in full force and effect. No waiver by either party of any term or provision hereof shall be deemed to have been made unless expressed in writing and signed by such party.

20.2 Partial Invalidity. In the event that any portion of this Agreement shall be declared invalid by order, decree or judgment of a court, this Agreement shall be construed as if such portion had not been inserted herein except when such construction would operate as an undue hardship on the Manager or Lessee or constitute a substantial deviation from the general

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intent and purpose of said parties as reflected in this Agreement, in which event it shall be terminated.

ARTICLE XXI

ASSIGNMENT

Subject to the requirements of any Hotel Mortgage, Franchise Agreement, Ground Lease or any of the Leases, neither party shall assign or transfer (by operation of law or otherwise) or permit the assignment or transfer of this Agreement without the prior written consent of the other (which may be withheld in its sole discretion) and any such prohibited assignment or transfer shall be null and void; provided, however, that Manager shall have the right, without such consent, to assign its interest in this Agreement to any “Manager Affiliate Entity”, provided such Manager Affiliate Entity qualifies as an Eligible Independent Contractor as of the date of such transfer. The term “Manager Affiliate Entity” shall mean any entity controlled directly or indirectly by (i) Drew Sims, Chris Sims and/or Kim Sims, (ii) family partnerships or trusts (the sole members or beneficiaries of which are at all times lineal descendants of Drew Sims, Chris Sims and/or Kim Sims (including step-children) and spouses of any of the foregoing), or (iii) by lineal descendants of Drew Sims, Chris Sims and/or Kim Sims (including step-children) and spouses of any of the foregoing. For purposes hereof, “controlled” shall mean (i) the possession, directly or indirectly of a majority of the voting power and capital stock or ownership interest of such entity, or (ii) the power to direct or cause the direction of the management and policies of such entity in the capacity of chief executive officer, president, chairman, or other similar capacity where they are actively engaged and/or involved in providing such direction or control and spend a substantial amount of time managing such entity. Any such permitted assignee shall be deemed to be the Manager for purposes of this Agreement provided such assignee assumes all of Manager’s future obligations under this Agreement pursuant to an assumption agreement reasonably acceptable to Lessee. Any and all such assignments, however, shall at all times be subject to the prior right, title and interest of Lessee with respect to the Premises. An assignment by Manager or any permitted assignee of its interest in this Agreement, shall not relieve Manager or any such permitted assignee, as the case may be, from their respective obligations under this Agreement, and shall inure to the benefit of, and be binding upon, their permitted successors and assigns. For purposes of this Article XXI any change in the ownership of the Manager or other event that would cause the Manager to fail to be a Manager Affiliate Entity shall be deemed to be a transfer of this Agreement, prohibited by this Article XXI unless first consented to in writing by Lessee (which may be withheld in its sole discretion).

ARTICLE XXII

NOTICES

All notices, demands, elections, or other communications that any party this Agreement may desire or be required to be given hereunder shall be in writing and shall be given by hand, by depositing the same in the United States mail, first class, postage prepaid, certified mail, return receipt requested, or by a recognized overnight courier service providing confirmation of

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delivery, to the addresses set forth below, or at such address as may be designated by the addressee upon written notice to the other party, (herein called “NOTICE”).

To Lessee:	MHI Hospitality TRS, LLC 6411 Ivy Lane, Suite 510 Greenbelt, MD 20770 Attn: William Zaiser Fax: 301/474-0807
With a copy to:	Andrew M. Sims President & Chief Executive Officer 814 Capitol Landing Road Williamsburg, VA 23185 Fax: 757/564-8801
To Manager:	MHI Hotels Services, LLC 6411 Ivy Lane – Suite 510 Greenbelt, Maryland 20770 Attn: Kim E. Sims Fax: 301/474-0808
To the Landlords:	MHI Hospitality, L.P. 814 Capitol Landing Road Williamsburg, Virginia 23185 Fax: (757) 564-8801

All notices given pursuant to this Article XXII shall be deemed to have been given (i) if delivered by hand on the date of delivery or on the date that delivery was refused by the addressee, or (ii) if delivered by certified mail or by overnight courier, on the date of delivery as established by the return receipt or courier service confirmation (or the date on which the return receipt or courier service confirms that acceptance of delivery was refused by the addressee).

ARTICLE XXIII

SUBORDINATION; NON-DISTURBANCE

23.1 Subordination. This Agreement shall be subject and subordinate to any Hotel Mortgage and Lease, and Manager agrees to enter into a lender-manager or landlord-manager (as applicable) agreement with respect to each Hotel, which agreement shall contain reasonable provisions, including, without limitation, Manager’s acknowledgment that its real estate interest in and to the applicable Hotel, if any, created by this Agreement is subject and subordinate to the

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applicable Hotel Mortgage or Lease, including providing any purchaser of such Hotel at a foreclosure sale or deed-in-lieu of foreclosure, including the Holder, with the right to terminate this Agreement with respect to the applicable Hotel; provided, however, in no event will Manager agree to subordinate or waive its right to receive fees, reimbursements or indemnification payments under this Agreement arising prior to termination (but (a) if this Agreement is terminated by the Holder or such purchaser or Landlord (or its assignee) with respect to such Hotel, Manager shall not look to the Holder for payment of such fees, reimbursements or indemnification payments and Manager’s right to receive such fees, reimbursements or indemnification payments shall be subordinated to the Holder’s rights and (b) if this Agreement is not terminated by the Holder or such purchaser with respect to such Hotel, then such fees, reimbursements or indemnification payments shall be payable by the Holder or such purchaser). Notwithstanding the foregoing, Manager shall in no event be obligated to perform its duties hereunder without payment and/or reasonable assurance of payment of such fees, reimbursements or indemnification payments.

23.2 Non-Disturbance Agreement. Notwithstanding Section 23.1, Lessee agrees that, prior to obtaining any Hotel Mortgage or executing any Lease, Lessee will use its commercially reasonable efforts to obtain from each prospective Holder or Landlord (as applicable), a Non-Disturbance Agreement pursuant to which Manager’s rights under this Agreement will not be disturbed as a result of a default stemming from non-monetary factors which (i) relate to Lessee and do not relate solely to the applicable Hotel, and (ii) are not defaults by Manager under Section 19.1 of this Agreement. If Lessee desires to obtain a Hotel Mortgage or to execute a Lease, Manager, on written request from Lessee, shall promptly identify those provisions in the proposed Hotel Mortgage or Lease documents which fall within the categories described in clauses (i) and (ii) above, and Manager shall otherwise assist in expediting the preparation of an agreement between the prospective Holder and/or Landlord and Manager which will implement the provisions of this Section 23.2.

ARTICLE XXIV

PROPRIETARY MARKS; INTELLECTUAL PROPERTY

24.1 Computer Software and Equipment. All “Software” (meaning all computer software and accompanying documentation, other than software which is commercially available, which are used by Manager in connection with the property management system, any reservation system and all future electronic systems developed by Manager for use in the Hotels) is and shall remain the exclusive property of Manager or any one of its Manager Affiliate Entities (or the licensor of such Software, as the case may be), and Lessee shall have no right to use, or to copy, any Software. Upon Termination, Manager shall have the right to remove from the Hotels, without compensation to Lessee, all Software, and any computer equipment which is utilized as part of a centralized property management system or is otherwise considered proprietary by Manager, excepting any software which is owned by the applicable Franchisor; provided that Manager shall cooperate with Lessee in the transition of the centralized management system to the new manager, including in the change of any Software and computer equipment. If any of such computer equipment is owned by Lessee, Manager shall reimburse

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Lessee for previous expenditures made by Lessee for the purchase of such equipment, subject to a reasonable allowance for depreciation.

24.2 Intellectual Property. All “Intellectual Property” (meaning all Software and manuals, brochures and directives issued by Manager to its employees at the Hotel regarding procedures and techniques to be used in operating the Hotel) shall at all times be proprietary to Manager or its Affiliates, and shall be the exclusive property of Manager or its Affiliates. Upon Termination, all Intellectual Property shall be removed from the Hotels by Manager, without compensation to Lessee.

24.3 Books and Records. All Books and Records maintained with respect to the Hotels, including guest records but excluding employee records, shall be the sole property of Lessee but may be used by the Manager during the Term in connection with its management and operation of the Hotels.

ARTICLE XXV

INDEMNIFICATION

25.1 Manager Indemnity. Manager shall indemnify and hold Lessee (and Lessee’s agents, shareholders, officers, directors, and employees) harmless from and against all liabilities, losses, claims, damages, costs and expenses (including, but not limited to, reasonable attorneys’ fees and expenses) which are not covered by insurance proceeds that may be incurred by or asserted against any such party and that arise from (a) the fraud, willful misconduct or gross negligence of Manager; provided, however, that the act or omission of any employee of Manager who is not an Executive Employee, which act or omission is willful or constitutes fraud or gross negligence on the part of such employee, shall not constitute fraud, gross negligence or willful misconduct on the part of Manager unless Manager’s home office or regional staff, or an Executive Employee, acted with gross negligence in employing, training, supervising or continuing the employment of such employee; (b) the infringement of any of Manager’s intellectual property rights (including trademarks, software, etc.) on the intellectual property rights of any third party; (c) any Excluded Employee Claims; (d) knowing or reckless placing, discharge, leakage, use or storage, of hazardous materials on the Premises or in the Hotels by Manager during the Term of this Agreement as set forth in Section 28.10(c); or (e) the breach by Manager of any provision of this Agreement, including, without limitation, any action taken by Manager which is beyond the scope of Manager’s authority under this Agreement, which is not cured within any applicable notice and cure periods. Lessee shall promptly provide Manager with written notice of any claim or suit brought against it by a third party which might result in such indemnification.

25.2 Lessee Indemnity. Except with respect to matters for which Manager is obligated to provide indemnification pursuant to Section 25.1, Lessee shall indemnify and hold Manager (and Manager’s agents, principals, partners, members, officers, directors, and employees) harmless from and against all liabilities, losses, claims, damages, costs and expenses (including, but not limited to, reasonable attorneys’ fees and expenses) which are not covered by insurance proceeds and that may be incurred by or asserted against such party and that arise from

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or in connection with (a) the performance of Manager’s services under this Agreement; (b) the condition or use of the Hotels, to the fullest extent permitted by law, including without limitation, any injury to person(s) or damage to property or business by reason of any cause whatsoever in or about the Hotels; (c) any Employee Related Termination Costs, including any liability to which Manager is subjected pursuant to the Warn Act in connection with the termination of this Agreement, provided that Manager has provided notices in the form (other than any reference to the time period) required by the Warn Act within five (5) business days of Manager’s receipt of a notice of the termination of this Agreement (excluding any termination of this Agreement which results from the commission of any theft, embezzlement or other criminal misappropriation of funds of the Hotels or from the Lessee or any fraud or felony by any Executive Employee that relates to or materially affects the operation or reputation of the Hotels); (d) the Employee Costs and Expenses as set forth in Article IX herein above; or (e) any Employee Claims, but excluding any Excluded Employee Claims. Manager shall promptly provide Lessee with written Notice of any claim or suit brought against it by a third party which might result in such indemnification.

25.3 Indemnification Procedure. Any party obligated to indemnify the other party under this Agreement (the “Indemnifying Party”) shall have the right, by Notice to the other party, to assume the defense of any claim with respect to which the other party is entitled to indemnification hereunder. If the Indemnifying Party gives such notice, (i) such defense shall be conducted by counsel selected by the Indemnifying Party and approved by the other party, such approval not to be unreasonably withheld or delayed (provided, however, that the other party’s approval shall not be required with respect to counsel designated by the Indemnifying Party’s insurer); (ii) so long as the Indemnifying Party is conducting such defense with reasonable diligence, the Indemnifying Party shall have the right to control said defense and shall not be required to pay the fees or disbursements of any counsel engaged by the other party for services rendered after the Indemnifying Party has given the Notice provided for above to the other party, except if there is a conflict of interest between the parties with respect to such claim or defense; and (iii) the Indemnifying Party shall have the right, without the consent of the other party, to settle such claim, but only provided that such settlement involves only the payment of money, the Indemnifying Party pays all amounts due in connection with or by reason of such settlement and, as part thereof, the other party is unconditionally released from all liability in respect of such claim. The other party shall have the right to participate in the defense of such claim being defended by the Indemnifying Party at the expense of the other party, but the Indemnifying Party shall have the right to control such defense (other than in the event of a conflict of interest between the parties with respect to such claim or defense). In no event shall (i) the other party settle any claim without the consent of the Indemnifying Party so long as the Indemnifying Party is conducting the defense thereof in accordance with this Agreement; or (ii) if a claim is covered by the Indemnifying Party’s liability insurance, take or omit to take any action which would cause the insurer not to defend such claim or to disclaim liability in respect thereof.

25.4 Survival. The provisions of this Article shall survive the termination of this Agreement with respect to acts, omissions and occurrences arising during the Term.

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ARTICLE XXVI

FUTURE HOTELS

Lessee acknowledges and agrees that any motel and/or hotel properties leased by Lessee from any Affiliates of the Partnership (including the Landlords) from and after the Effective Date (“Future Hotels”), may at the election of the parties to the Strategic Alliance Agreement either be subject to the terms and provisions of this Agreement effective upon execution of an amendment to this Agreement (the “Amendment”) in the form of Exhibit “E” attached hereto; provided that there does not then exist an uncured Event of Default by Manager under this Agreement and the independent director approval requirements under the Strategic Alliance Agreement have been satisfied. Upon execution of such Amendment (as set forth therein), Exhibit “A” (Hotel Information), Exhibit “B” (Description of Leases), Exhibit “B-1” (Legal Descriptions for Sites), Exhibit “C” (Description of Franchise Agreements and Franchisors), Exhibit “D” (Annual Operating Budget) to this Agreement shall be amended to add the applicable information required by this Agreement with respect to the Future Hotel(s) subject of the Amendment. Effective upon execution of said Amendment, all terms and conditions of this Agreement shall be deemed amended to include and apply to such Future Hotel(s).

ARTICLE XXVII

GOVERNING LAW VENUE

This Agreement and its interpretation, validity and performance shall be governed by the laws of the Commonwealth of Virginia without regard to its conflicts of laws principles. In the event any court of law of appropriate judicial authority shall hold or declare that the law of another jurisdiction is applicable, this agreement shall remain enforceable under the laws of the appropriate jurisdiction. The parties hereto agree that venue for any action in connection herewith shall be proper in James City County, Virginia. Each party hereto consents to the jurisdiction of any local, state or federal court situated in any of such locations and waives any objection which it may have pertaining to improper venue or forum non conveniens to the conduct of any proceeding in any such court.

ARTICLE XXVIII

MISCELLANEOUS

28.1 Rights to make Agreement. Each party warrants, with respect to itself, that neither the execution of this Agreement nor the finalization of the transactions contemplated hereby shall violate any provision of law or judgment, writ, injunction, order or decree of any court or governmental authority having jurisdiction over it; result in or constitute a breach or default under any indenture, contract, other commitment or restriction to which it is a party or by which it is bound; or require any consent, vote or approval which has not been given or taken. Each party covenants that it has and will continue to have throughout the term of this Agreement and any extensions thereof, the full right to enter into this Agreement and perform its obligations hereunder.

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28.2 Agency. Manager’s limited agency established by this Agreement is coupled with an interest and may not be terminated by Lessee until the expiration of the Term of this Agreement except as otherwise provided in this Agreement.

28.3 Failure to Perform. If Manager or Lessee at any time fails to make any payments as specified or required hereunder or fails to perform any other act required on its part to be made or performed hereunder without limitation, then the other party after thirty (30) days’ written notice to the defaulting party may (but shall not be obligated to) pay any such delinquent amount or perform any such other act on the defaulting party’s part. Any sums thus paid and all costs and expenses incurred in connection with the making of such payment or the proper performance of any such act, together with interest thereon at the lesser of (i) the interest rate allowed by the applicable usury laws or (ii) at the Prime Rate plus three percent (3%), from the date that such payment is made or such costs and expenses incurred, shall constitute a liquidated amount to be paid by the defaulting party under this Agreement to the other party on demand. For the purposes of this Section 28.3, the term “Prime Rate” shall mean the “prime rate” as published in the “Money Rates” section of The Wall Street Journal; however, if such rate is, at any time during the Term of this Agreement, no longer so published, the term “Prime Rate” shall mean the average of the prime interest rates which are announced, from time to time, by the three (3) largest banks (by assets) headquartered in the United States which publish a “prime rate”.

28.4 Headings. Headings of Articles and Sections are inserted only for convenience and are in no way to be construed as a limitation on the scope of the particular Articles or Sections to which they refer.

28.5 Attorneys’ Fees and Costs. If any action at law or in equity is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys’ fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.

28.6 Entire Agreement. This Agreement, together with other writings signed by the parties expressly stated to be supplementary hereto and together with any instruments to be executed and delivered pursuant to this Agreement, constitutes the entire agreement between the parties and supersedes all prior understandings and writings.

28.7 Consents. Whenever the consent or approval of Lessee is required under the terms of this Agreement, unless otherwise stated to the contrary, such consent or approval may be granted or withheld by Lessee in its reasonable discretion.

28.8 Eligible Independent Contractor. During the Term of this Agreement, Manager shall at all times qualify as an “eligible independent contractor” as defined in Section 856(d)(9) of the Code (“Eligible Independent Contractor”). To that end, during the Term of this Agreement, Manager agrees that:

(a) Manager shall not permit wagering activities to be conducted at or in connection with the Hotels by any person who is engaged in the business of accepting wagers and who is legally authorized to engage in such business at or in connection with the Hotels;

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(b) Manager shall not own, directly or indirectly (within the meaning of Section 856(d)(5) of the Code), more than thirty-five percent (35%) of the outstanding stock of MHI;

(c) no more than thirty-five percent (35%) of the Manager’s membership interests (in its assets or net profits) shall be owned (within the meaning of Section 856(d)(5) of the Code), directly or indirectly, by one or more persons owning thirty-five percent (35%) (within the meaning of Section 856(d)(5) of the Code) or more of the outstanding stock of MHI;

(d) neither MHI, the Partnership, the Landlords, nor the Lessee, shall derive any income from the Manager or any of its subsidiaries; and

(e) Manager (or a person who is a “related person” within the meaning of Section 856(d)(9)(F) of the Code (a “Related Person”) with respect to Manager) shall be actively engaged in the trade or business of operating “qualified lodging facilities” within the meaning of Section 856(d)(9)(D) of the Code (defined below) for one or more persons who are not Related Persons with respect to MHI or Lessee (“Unrelated Persons”). For purposes of determining whether the requirement of this paragraph (e) has been met, Manager shall be treated as being “actively engaged” in such a trade or business if Manager (i) derives at least 10% of both its profits and revenue from operating “qualified lodging facilities” within the meaning of Section 856(d)(9)(D) of the Code for Unrelated Persons or (ii) complies with any regulations or other administrative guidance under Section 856(d)(9) of the Code that provide a “safe harbor” rule with respect to the hotel management business with Unrelated Persons that is necessary to qualify as an “eligible independent contractor” within the meaning of such Code section.

A “qualified lodging facility” is defined in Section 856(d)(9)(D) of the Code and means a “Lodging Facility” (defined below), unless wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is fully authorized to engage in such business at or in connection with such facility. A “Lodging Facility” is a hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis, and includes customary amenities and facilities operated as party of, or associated with, the lodging facility so long as such amenities and facilities are customary for other properties of a comparable size and class owned by other owners unrelated to MHI.

28.9 Subleasing. During the Term of this Agreement, Manager shall not sublet the Hotels or enter into any similar arrangement on any basis such that the rental or other amounts to be paid by the sublessee thereunder would be based, in whole or in part, on either (i) the net income or profits derived by the business activities of the sublessee, or (ii) any other formula such that any portion of the rent would fail to qualify as “rents from real property” within the meaning of Section 856(d) of the Code, or any similar or successor provision thereto.

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28.10 Environmental Matters.

(a) For purposes of this Section 28.10, “hazardous materials” means any substance or material containing one or more of any of the following: “hazardous material,” “hazardous waste,” “hazardous substance,” “regulated substance,” “petroleum,” “pollutant,” “contaminant,” or “asbestos,” as such terms are defined in any applicable environmental law, in such concentration(s) or amount(s) as may impose clean-up, removal, monitoring or other responsibility under any applicable environmental law, or which may present a significant risk of harm to guests, invitees or employees of the Hotels.

(b) Regardless of whether or not a given hazardous material is permitted on the Premises under applicable environmental law, Manager shall only bring on the Premises such hazardous materials as are needed in the normal course of business of the Hotels.

(c) In the event of the discovery of hazardous materials (as such term may be defined in any applicable environmental law) on the Premises or in the Hotels during the Term of this Agreement, Lessee shall promptly remove, if required by applicable environmental law, such hazardous materials, together with all contaminated soil and containers, and shall otherwise remedy the problem in accordance with all environmental laws (except to the extent knowingly or recklessly caused by Manager during the Term of this Agreement, whereupon the responsibility to promptly remove and/or remedy the environmental problem shall be that of Manager and at Manager’s sole cost and expense). All costs and expenses of the compliance with all environmental laws shall be paid by Lessee from its own funds (except to the extent knowingly or recklessly caused by Manager during the Term of this Agreement as set forth herein above).

28.11 Equity and Debt Offerings. The Lessee or Manager (as an “Issuing Party”) may make reference to the other party (the “Non-Issuing Party”) or any of its Affiliates in any prospectus, private placement memorandum, offering circular or offering documentation related thereto (collectively, referred to as the “Prospectus”), issued by the issuing party. In no event will the non-issuing party be deemed a sponsor of the offering described in any such Prospectus, nor will it have any responsibility for the Prospectus. The issuing party shall be entitled to include in the Prospectus an accurate summary of this Agreement but shall not include any proprietary mark of the non-issuing party without prior written consent of the non-issuing party. The issuing party shall indemnify, defend and hold the non-issuing party and its Affiliates (and their respective directors, officers, shareholders, employees and agents) harmless from and against all loss, costs, liability and damage (including attorneys’ fees and expenses, and the cost of litigation), arising out of any Prospectus or the offering described therein, except for any such losses, costs, liability and damage arising from material misstatements or omissions in a Prospectus based on information provided in writing by the non-issuing party expressly for inclusion in the Prospectus.

28.12 Estoppel Certificates. Lessee and Manager will, at any time and from time to time within fifteen (15) days of the request of the other party or a Holder, or a Franchisor (if so permitted under the applicable Franchise Agreement), or a Landlord (if so permitted under the applicable Lease), execute, acknowledge, and deliver to the other party and such Holder, Franchisor or Landlord, as applicable, a certificate certifying:

(a) That the Agreement is unmodified and in full force and effect (or, if there have been modifications, that the same is in full force and effect as modified and stating such modifications);

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(b) The dates, if any, with respect to which the distributions of excess Working Capital have been paid;

(c) Whether there are any existing Event(s) of Default or events which, with the passage of time, would become an Event of Default, by the other party to the knowledge of the party making such certification, and specifying the nature of such Event(s) of Default or defaults or events which, with the passage of time, would become an Event of Default, if any; and

(d) Such other matters as may be reasonably requested.

Any such certificates may be relied upon by any party to whom the certificate is directed.

28.13 Confidentiality. The Manager shall keep confidential all non-public information obtained in connection with the services rendered under this Agreement and shall not disclose any such information or use any such information except in furtherance of its duties under this Agreement or as may be required by applicable Legal Requirements or court order, or as may be required under any Franchise Agreement, Hotel Mortgage, Lease or Ground Lease.

28.14 Modification. Any amendment, supplement or modification of this Agreement must be in writing signed by both parties hereto; provided that a majority of the Independent Directors of MHI approve such amendment, supplement or modification.

28.15 Counterparts. This Agreement may be executed in multiple counterparts, each of which is an original and all of which collectively constitute one instrument.

[Signatures follow on next page]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their duly authorized officers, as of the Effective Date.

LESSEE:
MHI Hospitality TRS, LLC, a Delaware limited liability company
By:	/s/  ANDREW M. SIMS
	Andrew M. Sims
	Manager
MANAGER:
MHI HOTELS SERVICES LLC, a Virginia limited liability company
By:	/s/  KIM E. SIMS
	Kim E. Sims
	President
LANDLORDS:
Philadelphia Hotel Associates LP a Pennsylvania limited partnership
By:	MHI GP LLC, its general partner
By:	MHI Hospitality, L.P., its sole member
By:	MHI Hospitality Corporation, its general partner
By:	/s/  ANDREW M. SIMS
Name:	Andrew M. Sims
Title:	President and Chief Executive Officer

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Capitol Hotel Associates, L.P., L.L.P., a Virginia limited partnership
By:	MHI GP LLC, its general partner
By:	MHI Hospitality, L.P., its sole member
By:	MHI Hospitality Corporation, its general partner
By:	/s/  ANDREW M. SIMS
Name:	Andrew M. Sims
Title:	President and Chief Executive Officer
Savannah Hotel Associates, L.L.C., a Virginia limited liability company
By:	MHI Hospitality, L.P., its sole member
By:	MHI Hospitality Corporation, its general partner
By:	/s/  ANDREW M. SIMS
Name:	Andrew M. Sims
Title:	President and Chief Executive Officer
Brownestone Partners, LLC, a North Carolina limited liability company
By:	MHI Hospitality, L.P., its sole member
By:	MHI Hospitality Corporation, its general partner
By:	/s/  ANDREW M. SIMS
Name:	Andrew M. Sims
Title:	President and Chief Executive Officer

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Laurel Hotel Associates LP, a Maryland limited partnership
By:	MHI Hospitality, L.P., its sole member
By:	MHI Hospitality Corporation, its general partner
By:	/s/  ANDREW M. SIMS
Name:	Andrew M. Sims
Title:	President and Chief Executive Officer

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LIST OF EXHIBITS

Exhibit “A”	- Hotel Information
Exhibit “B”	- Description of Leases
Exhibit “B-1”	- Legal Descriptions of Sites
Exhibit “C”	- Description of Franchise Agreements and Franchisors
Exhibit “D”	- Annual Operating Budget
Exhibit “E”	- Form of Amendment to Hotel Master Management Agreement

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EX-10.11

Exhibit 10.11

AGREEMENT TO ASSIGN AND SUBLEASE COMMON SPACE LEASE

This Agreement to Assign and Sublease Common Space Lease (“Agreement”) is made and entered into as of the 21^st day of December, 2004 by and among MHI Hotels, L.L.C., a Virginia limited liability company (“Assignor”) and MHI Hospitality L.P., a Delaware limited partnership (“Assignee”).

RECITALS

A. Pursuant to a lease agreement between Shell Island Homeowners Association, Inc., a North Carolina non-profit corporation (“Owner”), and MHI Recovery Management, Inc., a Maryland corporation and legal predecessor of Assignor, dated December 31, 1993, as amended by a lease addendum dated as of July 31, 2004 (as amended, the “Lease”), the Owner leased certain common areas and facilities (collectively, the “Demised Premises”) of the Shell Island Resort condominium in Wrightsville Beach, North Carolina (the “Facility”), as specifically described in the Lease, to MHI Recovery, as the central rental agent for the Facility.

B. Subject to and effective upon the consummation of the IPO (as defined below), Assignor desires to assign to Assignee, and Assignee desires to assume from Assignor, all of Assignor’s rights and obligations under the Lease, on the terms set forth in the form of assignment attached hereto as Exhibit A.

C. Subject to and effective upon the consummation of the IPO, Assignee desires to sublease to Assignor, and Assignor desires to sublease from Assignee, the Demised Premises on the terms set forth in the form of sublease attached hereto as Exhibit B (the “Sublease”).

D. The Assignee is the operating partnership of a Maryland corporation which will seek to qualify as a real estate investment trust for Federal income tax purposes and will seek to complete an underwritten public offering of shares of its common stock (the “IPO”).

E. Pursuant to a separate agreement, MHI Hotels Services LLC has agreed, in the event of a monetary default under the Sublease on the part of Assignor, as subtenant under the Sublease, to make a contribution to the capital of Assignor in an amount sufficient to cure such default, and the Assignee is entering into this Agreement partially in reliance on the agreements set forth in such separate agreement.

AGREEMENT

NOW, THEREFORE, in consideration of the premises set forth above, the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are mutually acknowledged, the parties, desiring to be legally bound hereby, agree as follows:

1. Assignment and Assumption of Lease. Subject to the terms and conditions of this Agreement and the consummation of the IPO, Assignor hereby agrees to assign, transfer, convey and deliver to Assignee (the “Assignment”), and Assignee agrees to then accept such assignment, transfer, conveyance and delivery of, all of Assignor’s right, title and interest in, to and under the Lease pursuant to an instrument of assignment attached hereto and incorporated by reference as Exhibit A to be executed and delivered by Assignor and Assignee at the closing of the IPO.

2. Assignment Fee and Agreement to Sublease. Subject to the consummation of the IPO and concurrent with the Assignment, Assignee shall pay Assignor Three Million Dollars

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($3,000,000.00) (the “Assignment Fee”) and shall sublease back to Assignor the Demised Premises on the terms and conditions of the Sublease.

3. Assignment Fee Adjustment. The assignment fee set forth in paragraph 2 hereof is based on the assumption of the parties that the term of the Sublease shall be for not less than 10 years. In the event that the Sublease or the Lease is terminated prior to the expiration of such 10-year period due to either (x) termination of the Lease by Owner for any reason (assuming that termination of the Lease also causes termination of the Sublease), or (y) termination of the Sublease by Assignor (except in the case of Assignee’s election to terminate or a default by Assignee), then the Assignment Fee shall be reduced by an amount equal to the product of (i) the assignment fee paid under paragraph 2, and (ii) the fraction the numerator of which is the number of months remaining in such ten-year period at the time of termination of the Sublease and the denominator of which is 120. Assignor shall pay such amount (the “Damages”) to Assignee in twelve equal quarterly payments over a 36 month period commencing on the last day of the first fiscal quarter following such termination of the Sublease, provided that if, in the opinion of tax counsel reasonably acceptable to Assignee, receipt of all or any portion of the Damages could adversely affect the qualification of MHI Hospitality Corporation (the “Corporation”) as a real estate investment trust (“REIT”) for Federal income tax purposes for any fiscal year, then the amount of the Damages payable by Assignor to Assignee for such fiscal year shall be limited to the amount, if any, which could be paid by Assignor to Assignee without adversely affecting the Corporation’s status as a REIT, and any unpaid portion shall be carried over to and paid in such subsequent fiscal year (if any) in which tax counsel concludes that payment can be made without adversely affecting Corporation’s status as a REIT.

4. Further Acts. Each party hereto shall execute, deliver and file any and all agreements, instruments or the like necessary to effect the foregoing.

5. Indemnification. Assignor indemnifies and holds Assignee harmless against all of the liabilities and obligations of Assignor under the Lease arising or accruing on or prior to the time of closing of the IPO. Subject to Assignor’s obligations under the Sublease, Assignee indemnifies and holds harmless Assignor against all of the liabilities and obligations under the Lease arising or accruing after the time of the closing of the IPO.

6. Governing Law. This Agreement shall be governed by the law of the State of Delaware without regard to Delaware principles of conflict of laws.

[signatures follow on next page]

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to Assign and Sublease Common Space Lease to be signed by a duly authorized officer this 21^st day of December, 2004.

MHI HOTELS, L.L.C., a Virginia limited liability company
By:	/S/  KIM E. SIMS
Kim E. Sims President
MHI HOSPITALITY L.P., a Delaware Limited partnership
By: MHI HOSPITALITY CORPORATION,        its general partner
By:	/S/  ANDREW M. SIMS
Andrew M. Sims President

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Exhibit A

ASSIGNMENT AND ASSUMPTION OF LEASE

This Assignment and Assumption of Lease (“Assignment”) is made and entered into this          day of                         , 2004 by and among MHI Hotels, L.L.C., a Virginia limited liability company (“Assignor”) and MHI Hospitality L.P., a Delaware limited partnership (“Assignee”).

RECITAL

Assignor desires to assign to Assignee, and Assignee desires to assume from Assignor all of Assignor’s rights and obligations under a lease agreement between Shell Island Homeowners Association, Inc., a North Carolina non-profit corporation and MHI Recovery Management, Inc., a Maryland corporation and legal predecessor of Assignor (“MHI Recovery”), dated December 31, 1993, as amended by a lease addendum dated as of July 31, 2004 (as amended, the “Lease Agreement”), on the terms set forth below. The Assignee is the operating partnership of a Maryland corporation which will seek to qualify as a real estate investment trust for Federal income tax purposes and will seek to complete an underwritten public offering of shares of its common stock (the “IPO”).

AGREEMENT

NOW, THEREFORE, in consideration of Three Million Dollars ($3,000,000.00) subject to adjustment as set forth in the Agreement to Assign and Sublease Commercial Space Lease, dated as of                         , 2004, by and between Assignor and Assignee, paid to Assignor and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned agree as follows:

1. Assignment of Lease. Assignor hereby assigns, transfers, conveys and delivers to Assignee all of Assignor’s right, title and interest in, to and under the Lease Agreement.

2. Assumption. Assignee unconditionally accepts such assignment, transfer, conveyance and delivery and assumes and covenants that it shall promptly, fully, completely and faithfully keep, fulfill, observe, perform and discharge each and every covenant and obligation that may accrue and become performable, due or owing under the Lease.

3. Governing Law. This Agreement shall be governed by the law of the State of Delaware without regard to Delaware principles of conflict of laws.

4. Indemnification. Assignor indemnifies and holds Assignee harmless against all of the liabilities and obligations of Assignor under the Lease arising or accruing on or prior to the time of closing of the IPO. Subject to Assignor’s obligations under the Sublease, Assignee indemnifies and holds harmless Assignor against all of the liabilities and obligations under the Lease arising or accruing after the time of the closing of the IPO.

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IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be signed by a duly authorized officer this              day of             , 2004

MHI HOTELS, L.L.C., a Virginia limited liability company

By:

[                                 ]

President

MHI HOSPITALITY L.P.

By: MHI HOSPITALITY CORPORATION,

       its general partner

By:                                                                                       

[                                 ]

President

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Exhibit B

SUBLEASE AGREEMENT

THIS SUBLEASE AGREEMENT (the “Sublease”) is made as of the              day of [            ], 2004 by and between MHI Hospitality L.P., a Delaware limited partnership (the “Sublessor”) and MHI Hotels, L.L.C., a Virginia limited liability company (the “Subtenant”). Any capitalized word or term used and not defined herein shall have the meaning ascribed to such word or term in the Prime Lease.

RECITAL

WHEREAS, by a written lease dated December 31, 1993, as amended by a lease addendum dated as of July 31, 2004 (as amended, the “Lease”) by and between Shell Island Homeowners Association (the “Prime Landlord”) and the legal predecessor of Subtenant, Prime Landlord leased to Subtenant, as Tenant, certain common areas and facilities of Shell Island Resort Hotel (the “Leased Premises”), at the rent and upon and subject to the terms and conditions set forth in the Prime Lease;

WHEREAS, effective as of the closing of the initial public offering of Sublessor’s general partner (the “IPO”), Subtenant assigned all of its right, title and interest in the Prime Lease to Sublessor with effect as of the concurrent entry of this Sublease (the “Assignment”);

WHEREAS, Subtenant desires to sublet from Sublessor, and Sublessor desires to sublet to Subtenant subject to the terms and conditions of this Sublease, the Leased Premises; and

WHEREAS, pursuant to a separate agreement, MHI Hotels Services LLC has agreed, in the event of a monetary default under this Sublease on the part of Subtenant, or a termination of the Prime Lease or this Sublease (other than at the election of or as a result of a default by the Sublessor), to make a contribution to the capital of Subtenant in an amount sufficient to cure such default or make Sublessor whole in accordance with the Assignment Fee adjustment included in the Agreement to Assign and Sublease Commercial Space Lease, dated             , 2004, between Sublessee and Sublessor, and the Sublessor is entering into this Sublease partially in reliance on the agreements set forth in such separate agreement.

AGREEMENT

NOW, THEREFORE, the parties hereto, for themselves, their successors and assigns, mutually covenant and agree as follows:

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1. Terms of Prime Lease. Except as otherwise expressly provided in this Sublease: (i) all of the terms, provisions, representations, warranties, covenants and conditions of the Prime Lease are incorporated herein by reference and are hereby made a part of this Sublease as if the Prime Lease was fully set forth in this Section 1; (ii) Subtenant hereby expressly assumes and agrees to be bound by all of the Sublessor’s obligations under the Prime Lease as if Subtenant were the tenant thereunder, unless the context clearly otherwise requires, including, without limitation and for the purposes of illustration of such context, that the Subtenant shall not have the right to exercise any renewal option held by the Sublessor under the Prime Lease, or except in such cases where a term of this Sublease is more restrictive than a term of the Prime Lease dealing with the same subject matter; and (iii) Subtenant agrees that Sublessor may enforce all of the terms, provisions, representations, warranties, covenants and conditions of the Prime Lease against Subtenant as if Subtenant and Sublessor executed the Prime Lease as tenant and landlord respectively, unless the context clearly otherwise requires, or except in such cases where a term of this Sublease is more restrictive than a term of the Prime Lease dealing with the same subject matter. Subtenant represents to Sublessor and acknowledges that Subtenant has received a true and complete copy of the Prime Lease and that it has reviewed and is familiar with the complete contents thereof.

2. Leased Premises. Sublessor hereby sublets to Subtenant, and Subtenant hereby subleases from Sublessor, for the term and upon the conditions provided herein, the Leased Premises. Subtenant agrees that the Leased Premises are in a commercially acceptable condition and hereby subleases the Leased Premises in “AS-IS” condition.

3. Term. The term of this Sublease shall commence on the closing of the IPO (the “Commencement Date”) and shall be co-terminus with the Prime Lease, as the term of the Prime Lease may be extended or renewed but in no event shall be less than ten years following the Commencement Date. Each lease year under the Prime Lease shall be a lease year for purposes of this Sublease, subject to any partial initial lease year or partial final lease year under the Sublease.

4. Conditions. This Sublease is conditioned upon and shall be effective only upon obtaining the written consent of Prime Landlord. If Prime Landlord’s consent to this Sublease has not been obtained, this Sublease shall be null and void and of no further force or effect.

5. Rent. Subtenant shall pay Sublessor annual rent (the “Annual Rent”) in the amount of Five Hundred Forty-Eight Thousand Five Hundred Sixty-Nine Dollars and Sixty Cents ($548,569.60) in six equal installments of Ninety-One Thousand Four Hundred Twenty-Eight Dollars and Twenty-Seven Cents ($91,428.27) on the first day of each of the months of May, June, July, August, September and October each lease year during the term of this Sublease (the “Payment Dates”), commencing on the first such Payment Date immediately after the Commencement Date, which amount shall be payable without any demand, deduction, setoff or abatement whatsoever. In the event the term of this Sublease expires on a date other than an anniversary of the Commencement Date, Subtenant’s Annual Rent obligation for the lease year of such expiration shall be pro rated for the number of calendar months in the lease year prior to the expiration date and any unpaid portion shall be paid on or prior to the expiration date.

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6. Additional Rent. Throughout the term of this Sublease, Subtenant agrees to pay to Sublessor, as additional rent under this Sublease, all charges for any additional services provided to Subtenant and any other amounts payable under the Prime Lease by the tenant thereunder which are not included within the amounts payable by Subtenant under Section 5 above.

7. Insurance. Subtenant shall obtain and maintain, with respect to the Leased Premises, all insurance types and coverages as specified in the Prime Lease to be obtained and maintained by Sublessor, as Tenant, in amounts not less than those specified in the Prime Lease. All policies of insurance obtained by Subtenant shall name Prime Landlord and Sublessor as additional insureds and loss payees thereon in accordance with the Prime Lease. Subtenant’s insurance shall be primary over Prime Landlord’s and Sublessor’s insurance.

8. Compliance with Laws. Subtenant, at its sole cost and expense, shall comply with all present and future laws, rules, orders, regulations, ordinances and requirements of all federal, state and municipal governments, courts, departments, commissions, boards, and offices having jurisdiction over the Leased Premises, as well as all lawful rules, orders, and regulations of the board of fire underwriters having jurisdiction over the Leased Premises (together “Laws”), which pertain to the Leased Premises or any equipment or furnishings therein.

9. Alterations. Subtenant shall not make any alteration, improvement, or installation (hereinafter called “Alterations”) in or to the Leased Premises, without in each instance obtaining the prior written consent of Prime Landlord and Sublessor.

10. Brokers. Each party hereby represents and warrants to the other that it has not dealt with any person or company acting as a broker in connection with this Sublease for the Leased Premises, and agrees to indemnify and hold harmless against any claim or claims for brokerage or other commission or fee arising from or out of any breach of the foregoing representation or warranty.

11. Successors and Assigns. Sublessee cannot assign this Sublease without the prior written consent of Sublessor. The obligations of this Sublease shall bind and benefit the successors and permitted assigns of the parties with the same effect as if mentioned in each instance where a party hereto is named or referred to.

12. Notices. Any and all communications delivered hereunder shall be sent by hand delivery or recognized overnight courier: if to Prime Landlord, Shell Island Resort Homeowners’ Association, Inc., P.O. Box 31, Wrightsville Beach North Carolina 28480; and if to Subtenant, 6411 Ivy Lane, Suite 510, Greenbelt, MD 20770 and if to Sublessor, 814 Capitol Landing Road, Williamsburg, VA 23185 or to such other address and attention as any of the above shall notify the others in writing. Any such notices shall be deemed given when deposited with such overnight courier or when actually hand delivered.

13. Defaults of Subtenant.

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(a) Event of Default. Each of the following events shall constitute an “Event of Default” by Subtenant under this Sublease:

(i) If Subtenant fails to pay any rent when due, or any other charge required to be paid by Subtenant hereunder within six (6) business days after Sublessor delivers notice that the same is past due and payable;

(ii) If Subtenant fails to maintain insurance required hereunder or fails to timely deliver any estoppel certificate required hereunder;

(iii) If Subtenant fails to perform or observe any other term, provision, covenant, condition, representation, warranty or requirement of this Sublease, or any term provision, covenant, condition, representation, warranty or requirement of the Prime Lease incorporated in this Sublease and binding on Subtenant, on the part of Subtenant to be performed or observed, and such failure continues for twelve (12) days after written notice from Sublessor (except that such twelve (12) day period shall be extended for such additional period of time as may reasonably be necessary to cure such Event of Default, if such Event of Default, by its nature, cannot be cured within such twelve (12) day period, provided that Subtenant commences to cure such Event of Default (and so notifies Sublessor in writing) within such twelve (12) day period and is, at all times thereafter, in the process of diligently curing the same;

(iv) The assignment, transfer, mortgaging or encumbering of this Sublease or the subletting of the Leased Premises in a manner not permitted in accordance with the Prime Lease; or

(v) The taking of this Sublease or the Leased Premises, or any part thereof, upon execution or by other process of law directed against Subtenant, or upon or subject to any attachment at the insistence of any creditor of or claimant against Subtenant, which execution or attachment shall not be discharged or disposed of within thirty (30) days after the levy thereof, or the occurrence of any of the events listed in Section 12 of the Prime Lease.

(b) Remedies. Upon the occurrence of an Event of Default, Sublessor shall have the same rights and remedies as to Subtenant and the Leased Premises as Prime Landlord would have following the occurrence of an event of default by Sublessor as tenant under the Prime Lease.

14. Miscellaneous.

(a) Entire Agreement. This Sublease, the Prime Lease, and any Exhibits or Addenda attached thereto contain the entire integrated agreement of the parties hereto and there are no promises, agreements, conditions, undertakings, warranties or representations between them other than as herein or therein set forth. This Sublease may be amended only by a written amendment duly executed by Sublessor and Subtenant.

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(b) Governing Law; Venue. This Sublease shall be governed by the laws of the State of North Carolina without regard to its conflict of laws principles.

(c) Captions and Section References. Captions and numbers contained in this Sublease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such sections of this Sublease nor in any other way affect this Sublease. Section references shall refer to sections of this Sublease, unless otherwise stated.

(d) Days. Unless expressly stated to the contrary, all references in this Sublease to “days” shall mean calendar days, not business days. The term “business day” shall mean each calendar day Monday through Friday except for legal holidays.

(e) Subtenant Authority. Subtenant represents that it has the power and authority to enter into this Sublease, and that all requisite action to authorize Subtenant to enter into this Sublease has been duly taken.

(f) Counterparts. This Sublease may be executed in several counterparts, but all counterparts shall constitute one and the same instrument.

(g) No Waiver. No delay or failure by Sublessor to exercise or enforce any of Sublessor’s rights or remedies or Subtenant’s obligations shall constitute a waiver of any such rights, remedies or obligations.

(h) Savings Clause. If any provision of this Sublease or the application thereof to any person or circumstance is to any extent held invalid, then the remainder of this Sublease or the application of such provision to persons or circumstances other than those as to which it is held invalid shall not be affected thereby, and each provision of this Sublease shall be valid and enforced to the fullest extent permitted by law.

(i) Termination of Prime Lease. Sublessor agrees that it will not voluntarily terminate the Prime Lease so long as this Sublease is in full force and effect. Sublessee agrees to use its best efforts to avoid a termination of the Prime Lease.

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IN WITNESS WHEREOF, the parties have duly executed this Sublease as of the day and year first above written.

SUBLESSOR:
By:	MHI HOSPITALITY CORPORATION, its general partner
By:
[                                 ]
President
SUBTENANT:
MHI HOTELS, L.L.C., a Virginia limited liability company
By:
[                                 ]
President

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EX-10.12

Exhibit 10.12

AGREEMENT TO ASSIGN AND SUBLEASE COMMERCIAL SPACE LEASE

This Agreement to Assign and Sublease Commercial Space Lease (“Agreement”) is made and entered into as of the 21^st day of December, 2004 by and among MHI Hotels Two, Inc., a North Carolina corporation (“Assignor”), and MHI Hospitality, L.P., a Delaware limited partnership (“Assignee”).

RECITALS

A. Pursuant to a lease agreement between Shell Island Homeowners Association, Inc. (“Owner”) and Assignor, dated May 12, 2003, as amended by a lease addendum dated as of July 31, 2004 (as amended, the “Lease”), Owner leased to Assignor the reconstructed C-1 Commercial Unit within the Shell Island Resort condominium in Wrightsville Beach, North Carolina and certain parts or portions of the facilities associated with the C-1 Commercial Unit, as specifically described in the Lease Agreement (collectively, the “Demised Premises”).

B. Subject to and effective upon the consummation of the IPO (as defined below), Assignor desires to assign to Assignee, and Assignee desires to assume from Assignor, all of Assignor’s rights and obligations under the Lease, on the terms set forth in the form of assignment attached hereto as Exhibit A.

C. Subject to and effective upon the consummation of the IPO, Assignee desires to sublease to Assignor, and Assignor desires to sublease from Assignee, the Demised Premises on the terms set forth in the form of sublease attached hereto as Exhibit B (the “Sublease”).

D. The Assignee is the operating partnership of a Maryland corporation which will seek to qualify as a real estate investment trust for Federal income tax purposes and will seek to complete an underwritten public offering of shares of its common stock (the “IPO”).

E. Pursuant to a separate agreement, MHI Hotels Services LLC has agreed, in the event of a monetary default under the Sublease on the part of Assignor, as subtenant under the Sublease, to make a contribution to the capital of Assignor in an amount sufficient to cure such default, and the Assignee is entering into this Agreement partially in reliance on the agreements set forth in such separate agreement.

AGREEMENT

NOW, THEREFORE, in consideration of the premises set forth above, the mutual promises and covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are mutually acknowledged, the parties, desiring to be legally bound hereby, agree as follows:

1. Assignment and Assumption of Lease. Subject to the terms and conditions of this Agreement and the consummation of the IPO, Assignor hereby agrees to assign, transfer, convey and deliver to Assignee (the “Assignment”), and Assignee agrees to then accept such assignment, transfer, conveyance and delivery of, all of Assignor’s right, title and interest in, to and under the Lease pursuant to an instrument of assignment attached hereto and incorporated by reference as Exhibit A to be executed and delivered by Assignor and Assignee at the closing of the IPO.

2. Assignment Fee and Agreement to Sublease. Subject to the consummation of the IPO and concurrent with the Assignment, Assignee shall pay Assignor Five Hundred Thousand Dollars

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($500,000) (the “Assignment Fee”) and shall sublease back to Assignor the Demised Premises on the terms and conditions of the Sublease.

3. Assignment Fee Adjustment. The assignment fee set forth in paragraph 2 hereof is based on the assumption of the parties that the term of the Sublease shall be for not less than 10 years. In the event that the Sublease or the Lease is terminated prior to the expiration of such 10-year period due to either (x) termination of the Lease by Owner for any reason (assuming that termination of the Lease also causes termination of the Sublease), or (y) termination of the Sublease by Assignor (except in the case of Assignee’s election to terminate or a default by Assignee), then the Assignment Fee shall be reduced by an amount equal to the product of (i) the assignment fee paid under paragraph 2, and (ii) the fraction the numerator of which is the number of months remaining in such ten-year period at the time of termination of the Sublease and the denominator of which is 120. Assignor shall pay such amount (the “Damages”) to Assignee in twelve equal quarterly payments over a 36 month period commencing on the last day of the first fiscal quarter following such termination of the Sublease, provided that if, in the opinion of tax counsel reasonably acceptable to Assignee, receipt of all or any portion of the Damages could adversely affect the qualification of MHI Hospitality Corporation (the “Corporation”) as a real estate investment trust (“REIT”) for Federal income tax purposes for any fiscal year, then the amount of the Damages payable by Assignor to Assignee for such fiscal year shall be limited to the amount, if any, which could be paid by Assignor to Assignee without adversely affecting the Corporation’s status as a REIT, and any unpaid portion shall be carried over to and paid in such subsequent fiscal year (if any) in which tax counsel concludes that payment can be made without adversely affecting Corporation’s status as a REIT.

4. Further Acts. Each party hereto shall execute, deliver and file any and all agreements, instruments or the like necessary to effect the foregoing.

5. Indemnification. Assignor indemnifies and holds Assignee harmless against all of the liabilities and obligations of Assignor under the Lease arising or accruing on or prior to the time of closing of the IPO. Subject to Assignor’s obligations under the Sublease, Assignee indemnifies and holds harmless Assignor against all of the liabilities and obligations under the Lease arising or accruing after the time of the closing of the IPO.

6. Governing Law. This Agreement shall be governed by the law of the State of Delaware without regard to Delaware principles of conflict of laws.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to Assign and Sublease Commercial Space Lease to be signed by a duly authorized officer this 21^st day of December, 2004

MHI HOTELS TWO, INC., a North Carolina corporation
By:	/S/  STEVE SMITH
Steve Smith President
MHI HOSPITALITY, L.P., a Delaware Limited partnership
By: MHI HOSPITALITY CORPORATION,        its general partner
By:	/S/  ANDREW M. SIMS
Andrew M. Sims President

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Exhibit A

ASSIGNMENT AND ASSUMPTION OF LEASE

This Assignment and Assumption of Lease (“Assignment”) is made and entered into this      day of                         , 2004 by and among MHI Hotels Two, Inc., a North Carolina corporation (“Assignor”) and MHI Hospitality L.P., a Delaware limited partnership (“Assignee”).

RECITAL

Assignor desires to assign to Assignee, and Assignee desires to assume from Assignor all of Assignor’s rights and obligations under a lease agreement between Shell Island Homeowners Association, Inc. and Assignor dated May 12, 2003, as amended by a lease addendum dated as of July 31, 2004 (as amended, the “Lease”), on the terms set forth below. The Assignee is the operating partnership of a Maryland corporation which will seek to qualify as a real estate investment trust for Federal income tax purposes and will seek to complete an underwritten public offering of shares of its common stock (the “IPO”).

AGREEMENT

NOW, THEREFORE, in consideration of Five Hundred Thousand Dollars ($500,000), subject to adjustment as set forth in the Agreement to Assign and Sublease Commercial Space Lease, dated as of                         , 2004, by and between Assignor and Assignee, paid to Assignor and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned agree as follows:

1. Assignment of Lease. Assignor hereby assigns, transfers, conveys and delivers to Assignee all of Assignor’s right, title and interest in, to and under the Lease.

2. Assumption. Assignee unconditionally accepts such assignment, transfer, conveyance and delivery and assumes and covenants that it shall promptly, fully, completely and faithfully keep, fulfill, observe, perform and discharge each and every covenant and obligation that may accrue and become performable, due or owing under the Lease.

3. Governing Law. This Assignment shall be governed by the law of the State of Delaware without regard to Delaware principles of conflict of laws.

4. Indemnification. Assignor indemnifies and holds Assignee harmless against all of the liabilities and obligations of Assignor under the Lease arising or accruing on or prior to the time of closing of the IPO. Subject to Assignor’s obligations under the Sublease, Assignee indemnifies and holds harmless Assignor against all of the liabilities and obligations under the Lease arising or accruing after the time of the closing of the IPO.

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IN WITNESS WHEREOF, the parties hereto have caused this Assignment to be signed by a duly authorized officer this          day of             , 2004

MHI Hotels Two, Inc., a North Carolina corporation

By:

[                         ]

President

MHI HOSPITALITY L.P.

By: MHI HOSPITALITY

       CORPORATION,

        its general partner

By:

[                         ]

President

Exhibit B

SUBLEASE AGREEMENT

THIS SUBLEASE AGREEMENT (the “Sublease”) is made as of the              day of [            ], 2004 by and between MHI Hospitality L.P., a Delaware limited partnership (the “Sublessor”) and MHI Hotels Two, Inc., a North Carolina corporation (the “Subtenant”). Any capitalized word or term used and not defined herein shall have the meaning ascribed to such word or term in the Prime Lease.

RECITAL

WHEREAS, by a written lease (the “Prime Lease”) dated May 12, 2003 by and between Shell Island Homeowners Association (the “Prime Landlord”) and the legal predecessor of Subtenant, Prime Landlord leased to Subtenant, as Tenant, certain common areas and facilities of Shell Island Resort Hotel referred to as Commercial Unit C-1 (the “Leased Premises”), at the rent and upon and subject to the terms and conditions set forth in the Prime Lease;

WHEREAS, effective as of the closing of the initial public offering of Sublessor’s general partner (the “IPO”), Subtenant assigned all of its right, title and interest in the Prime Lease to Sublessor with effect as of the concurrent entry of this Sublease (the “Assignment”);

WHEREAS, Subtenant desires to sublet from Sublessor, and Sublessor desires to sublet to Subtenant subject to the terms and conditions of this Sublease, the Leased Premises; and

WHEREAS, pursuant to a separate agreement, MHI Hotels Services LLC has agreed, in the event of a monetary default under this Sublease on the part of Subtenant or a termination of the Prime Lease or this Sublease (other than at the election of or as a result of a default by the Sublessor), to make a contribution to the capital of Subtenant in an amount sufficient to cure such default or make Sublessor whole in accordance with the Assignment Fee adjustment included in the Agreement to Assign and Sublease Commercial Space Lease, dated                     , 2004, between Sublessee and Sublessor, and the Sublessor is entering into this Sublease partially in reliance on the agreements set forth in such separate agreement.

AGREEMENT

NOW, THEREFORE, the parties hereto, for themselves, their successors and assigns, mutually covenant and agree as follows:

1. Terms of Prime Lease. Except as otherwise expressly provided in this Sublease: (i) all of the terms, provisions, representations, warranties, covenants and conditions of the Prime Lease are incorporated herein by reference and are hereby made a part of this Sublease as if the Prime Lease was fully set forth in this Section 1; (ii) Subtenant hereby expressly assumes and agrees to be bound by all of the Sublessor’s obligations under the Prime Lease as if Subtenant were the tenant thereunder, unless the context clearly otherwise requires, including, without limitation and for the purposes of illustration of such context, that the Subtenant shall not have the right to exercise any renewal option held by the Sublessor under the Prime Lease, or except in such cases where a term of this Sublease is more restrictive than a term of the Prime Lease dealing with the same subject matter; and (iii) Subtenant agrees that Sublessor may enforce all of the terms, provisions, representations, warranties, covenants and conditions of the Prime Lease against Subtenant as if Subtenant and Sublessor executed the Prime Lease as tenant and landlord respectively, unless the context clearly otherwise requires, or except in such cases where a term of this Sublease is more restrictive than a term of the Prime Lease dealing with the same subject matter. Subtenant represents to Sublessor and acknowledges that Subtenant has received a true and complete copy of the Prime Lease and that it has reviewed and is familiar with the complete contents thereof.

2. Leased Premises. Sublessor hereby sublets to Subtenant, and Subtenant hereby subleases from Sublessor, for the term and upon the conditions provided herein, the Leased Premises. Subtenant agrees that the Leased Premises are in a commercially acceptable condition and hereby subleases the Leased Premises in “AS-IS” condition.

3. Term. The term of this Sublease shall commence on the closing of the IPO (the “Commencement Date”) and shall be co-terminus with the Prime Lease, as the term of the Prime Lease may be extended or renewed but in no event shall be less than ten years following the Commencement Date. Each lease year under the Prime Lease shall be a lease year for purposes of this Sublease, subject to any partial initial lease year or partial final lease year under the Sublease.

4. Conditions. This Sublease is conditioned upon and shall be effective only upon obtaining the written consent of Prime Landlord. If Prime Landlord’s consent to this Sublease has not been obtained, this Sublease shall be null and void and of no further force or effect.

5. Rent. Subtenant shall pay the Sublessor rent in two components. With regard to the first component (the “Fixed Rental Payment”), Subtenant shall pay Sublessor annual rent in the amount of Ninety-One Thousand Four Hundred Thirty Dollars and Forty Cents ($91,430.40) in six equal installments of Fifteen Thousand Two Hundred Thirty-Eight Dollars and Forty Cents ($15,238.40) on the first day of each of the months of May, June, July, August, September and October each lease year during the term of this Sublease (the “Payment Dates”), commencing on the first such Payment Date immediately after the Commencement Date, which amount shall be payable without any demand, deduction, setoff or abatement whatsoever. In the event the term of this Sublease expires on a date other than an anniversary of the Commencement Date, Subtenant’s Fixed Rental Payments for the lease year of such expiration shall be pro rated for the number of calendar months in the lease year prior to the expiration date and any unpaid portion shall be paid on or prior to the expiration date. With regard to the second component, Subtenant

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shall pay Sublessor “seasonal rent” in the months of May, June, July, August and September of each year during the term of this Sublease in the amount due under the Prime Lease by Sublessor to Prime Landlord on or before the first day of May, June, July, August and September each year, which amount shall be payable without any demand, deduction, setoff or abatement whatsoever. The current amount of such “seasonal rent” is Twenty-Four Thousand Three Hundred Dollars and No Cents ($24,300) annually. Sublessor shall provide Subtenant prior notice of any change in the amount of such seasonal rent.

6. Additional Rent. Throughout the term of this Sublease, Subtenant agrees to pay to Sublessor, as additional rent under this Sublease, all charges for any additional services provided to Subtenant and any other amounts payable under the Prime Lease by the tenant thereunder which are not included within the amounts payable by Subtenant under Section 5 above.

7. Insurance. Subtenant shall obtain and maintain, with respect to the Leased Premises, all insurance types and coverages as specified in the Prime Lease to be obtained and maintained by Sublessor, as Tenant, in amounts not less than those specified in the Prime Lease. All policies of insurance obtained by Subtenant shall name Prime Landlord and Sublessor as additional insureds and loss payees thereon in accordance with the Prime Lease. Subtenant’s insurance shall be primary over Prime Landlord’s and Sublessor’s insurance.

8. Compliance with Laws. Subtenant, at its sole cost and expense, shall comply with all present and future laws, rules, orders, regulations, ordinances and requirements of all federal, state and municipal governments, courts, departments, commissions, boards, and offices having jurisdiction over the Leased Premises, as well as all lawful rules, orders, and regulations of the board of fire underwriters having jurisdiction over the Leased Premises (together “Laws”), which pertain to the Leased Premises or any equipment or furnishings therein.

9. Alterations. Subtenant shall not make any alteration, improvement, or installation (hereinafter called “Alterations”) in or to the Leased Premises, without in each instance obtaining the prior written consent of Prime Landlord and Sublessor.

10. Brokers. Each party hereby represents and warrants to the other that it has not dealt with any person or company acting as a broker in connection with this Sublease for the Leased Premises, and agrees to indemnify and hold harmless against any claim or claims for brokerage or other commission or fee arising from or out of any breach of the foregoing representation or warranty.

11. Successors and Assigns. Sublessee cannot assign this Sublease without the prior written consent of Sublessor. The obligations of this Sublease shall bind and benefit the successors and permitted assigns of the parties with the same effect as if mentioned in each instance where a party hereto is named or referred to.

12. Notices. Any and all communications delivered hereunder shall be sent by hand delivery or recognized overnight courier: if to Prime Landlord, Shell Island Resort Homeowners’ Association, Inc., P.O. Box 31, Wrightsville Beach North Carolina 28480; and if to Subtenant, 6411 Ivy Lane, Suite 510, Greenbelt, MD 20770 and if to Sublessor, 814 Capitol Landing Road,

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Williamsburg, VA 23185 or to such other address and attention as any of the above shall notify the others in writing. Any such notices shall be deemed given when deposited with such overnight courier or when actually hand delivered.

13. Defaults of Subtenant.

(a) Event of Default. Each of the following events shall constitute an “Event of Default” by Subtenant under this Sublease:

(i) If Subtenant fails to pay any rent when due, or any other charge required to be paid by Subtenant hereunder within six (6) business days after Sublessor delivers notice that the same is past due and payable;

(ii) If Subtenant fails to maintain insurance required hereunder or fails to timely deliver any estoppel certificate required hereunder;

(iii) If Subtenant fails to perform or observe any other term, provision, covenant, condition, representation, warranty or requirement of this Sublease, or any term provision, covenant, condition, representation, warranty or requirement of the Prime Lease incorporated in this Sublease and binding on Subtenant, on the part of Subtenant to be performed or observed, and such failure continues for twelve (12) days after written notice from Sublessor (except that such twelve (12) day period shall be extended for such additional period of time as may reasonably be necessary to cure such Event of Default, if such Event of Default, by its nature, cannot be cured within such twelve (12) day period, provided that Subtenant commences to cure such Event of Default (and so notifies Sublessor in writing) within such twelve (12) day period and is, at all times thereafter, in the process of diligently curing the same;

(iv) The assignment, transfer, mortgaging or encumbering of this Sublease or the subletting of the Leased Premises in a manner not permitted in accordance with the Prime Lease; or

(v) The taking of this Sublease or the Leased Premises, or any part thereof, upon execution or by other process of law directed against Subtenant, or upon or subject to any attachment at the insistence of any creditor of or claimant against Subtenant, which execution or attachment shall not be discharged or disposed of within thirty (30) days after the levy thereof, or the occurrence of any of the events listed in Section 12 of the Prime Lease.

(b) Remedies. Upon the occurrence of an Event of Default, Sublessor shall have the same rights and remedies as to Subtenant and the Leased Premises as Prime Landlord would

have following the occurrence of an event of default by Sublessor as tenant under the Prime Lease.

14. Miscellaneous.

(a) Entire Agreement. This Sublease, the Prime Lease, and any Exhibits or Addenda attached thereto contain the entire integrated agreement of the parties hereto and there are no promises, agreements, conditions, undertakings, warranties or representations between them other than as herein or therein set forth. This Sublease may be amended only by a written amendment duly executed by Sublessor and Subtenant.

(b) Governing Law; Venue. This Sublease shall be governed by the laws of the State of North Carolina without regard to its conflict of laws principles.

(c) Captions and Section References. Captions and numbers contained in this Sublease are inserted only as a matter of convenience and in no way define, limit, construe or describe the scope or intent of such sections of this Sublease nor in any other way affect this Sublease. Section references shall refer to sections of this Sublease, unless otherwise stated.

(d) Days. Unless expressly stated to the contrary, all references in this Sublease to “days” shall mean calendar days, not business days. The term “business day” shall mean each calendar day Monday through Friday except for legal holidays.

(e) Subtenant Authority. Subtenant represents that it has the power and authority to enter into this Sublease, and that all requisite action to authorize Subtenant to enter into this Sublease has been duly taken.

(f) Counterparts. This Sublease may be executed in several counterparts, but all counterparts shall constitute one and the same instrument.

(g) No Waiver. No delay or failure by Sublessor to exercise or enforce any of Sublessor’s rights or remedies or Subtenant’s obligations shall constitute a waiver of any such rights, remedies or obligations.

(h) Savings Clause. If any provision of this Sublease or the application thereof to any person or circumstance is to any extent held invalid, then the remainder of this Sublease or the application of such provision to persons or circumstances other than those as to which it is held invalid shall not be affected thereby, and each provision of this Sublease shall be valid and enforced to the fullest extent permitted by law.

(i) Termination of Prime Lease. Sublessor agrees that it will not voluntarily terminate the Prime Lease so long as this Sublease is in full force and effect. Sublessee agrees to use its best efforts to avoid a termination of the Prime Lease.

[signatures follow on next page]

IN WITNESS WHEREOF, the parties have duly executed this Sublease as of the day and year first above written.

SUBLESSOR:

MHI HOSPITALITY L.P.
By:	MHI HOSPITALITY CORPORATION, its general partner

By:

[                                 ]

President

SUBTENANT:

MHI HOTELS TWO, INC., a North Carolina corporation

By:

[                                 ]

President

EX-10.13

Exhibit 10.13

LEASE AGREEMENT

DATED AS OF DECEMBER 21, 2004

BETWEEN

PHILADELPHIA HOTEL ASSOCIATES LP

AS LESSOR

AND

MHI HOSPITALITY TRS, LLC

AS LESSEE

TABLE OF CONTENTS

Article 1 LEASED PROPERTY; TERM		4
1.1	Leased Property	4
1.2	Term	5
Article 2 DEFINITIONS		5
2.1	Definitions	5
Article 3 BASE RENT; PERCENTAGE RENT; ADDITIONAL CHARGES		16
3.1	Rent	16
3.2	Confirmation of Percentage Rent	18
3.3	Additional Charges	19
3.4	Net Lease Provision	19
3.5	Conversion of Property	20
Article 4 IMPOSITIONS		20
4.1	Payment of Impositions	20
4.2	Notice of Impositions	21
4.3	Adjustment of Impositions	21
4.4	Utility Charges	21
Article 5 NO TERMINATION; ABATEMENT		21
5.1	No Termination, Abatement, etc.	21
5.2	Abatement Procedures	22
Article 6 PERSONAL PROPERTY; LANDLORD’S LIEN		22
6.1	Ownership of the Leased Property	22
6.2	Lessee’s Personal Property	22
6.3	Lessor’s Lien	23
Article 7 CONDITIONS; USE		23
7.1	Condition of the Leased Property	23
7.2	Use of the Leased Property	24
7.3	Lessor to Grant Easements, etc.	24
Article 8 COMPLIANCE WITH APPLICABLE LAWS		25
8.1	Compliance with Legal and Insurance Requirements, etc.	25
8.2	Legal Requirement Covenants	25
8.3	Environmental Covenants	26
Article 9 MAINTENANCE AND REPAIRS		28
9.1	Maintenance and Repair	28
9.2	Encroachments, Restrictions, etc.	29
Article 10 ALTERATIONS		29
10.1	Alterations	29
Article 11 PROHIBITED LIENS AND ENCUMBRANCES		29
11.1	Liens	29
Article 12 PERMITTED CONTESTS		30
12.1	Permitted Contests	30
Article 13 INSURANCE REQUIREMENTS		31
13.1	General Insurance Requirements	31
13.2	Replacement Cost	32
13.3	Waiver of Subrogation	33
13.4	Form Satisfactory, etc.	33
13.5	Increase in Limits	33
13.6	Blanket Policy	33
13.7	No Separate Insurance	33

Article 14 INSURANCE PROCEEDS		34
14.1	Insurance Proceeds	34
14.2	Reconstruction in the Event of Damage or Destruction Covered by Insurance	34
14.3	Reconstruction in the event of Damage or Destruction not covered by Insurance	35
14.4	Lessee’s Property	35
14.5	Abatement of Rent	35
14.6	Damage near end of Term	35
14.7	Waiver	35
Article 15 CONDEMNATION; TAKING		36
15.1	Definitions	36
15.2	Parties’ Rights and Obligations	36
15.3	Total Taking	36
15.4	Allocation of Award	36
15.5	Partial Taking	36
15.6	Temporary Taking	37
Article 16 EVENTS OF DEFAULT; REMEDIES; DAMAGES		38
16.1	Events of Default	38
16.2	Surrender	39
16.3	Damages	39
16.4	Waiver	40
16.5	Application of Funds	40
Article 17 LESSOR’S RIGHT TO CURE		41
17.1	Lessor’s Right to Cure Lessee’s Default	41
Article 18 RESERVED		41
Article 19 REIT REQUIREMENTS		41
19.1	REIT Requirements	41
19.2	Lessee Officer and Employee Limitation	42
19.3	Management Agreement	43
Article 20 HOLDING OVER		43
20.1	Holding Over	43
Article 21 RISK OF LOSS		44
21.1	Risk of Loss	44
Article 22 INDEMNIFICATION		44
22.1	Indemnification	44
Article 23 SUBLETTING AND ASSIGNMENT		45
23.1	Subletting and Assignment	45
23.2	Attornment	45
Article 24 REPORTING AND CERTIFICATION REQUIREMENTS		46
24.1	Officer’s Certificates; Financial Statements; Budgets; Lessor’s Estoppel Certificates and Covenants	46
24.2	Operating Budget	46
24.3	Capital Budget	47
Article 25 LESSOR’S DEFAULT; CURE RIGHTS		48
25.1	Lessee’s Right to Cure	48
25.2	Breach by Lessor	48
Article 26 NOTICES		48
26.1	Notices	48

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Article 27 MISCELLANEOUS PROVISIONS		49
27.1	Transfer of Licenses	49
27.2	Early Termination Rights; Termination Fees	49
27.3	Substitution of Initial Hotel	49
27.4	Compliance with Franchise Agreement	49
27.5	Lessor’s Right to Inspect	50
27.6	Conveyance by Lessor	50
27.7	Lessor may Grant Liens	50
27.8	Non Disturbance Agreement	50
27.9	Waiver of Presentment, etc.	50
27.10	Memorandum of Lease	50
27.11	Usury	50
27.12	No Waiver	51
27.13	Remedies Cumulative	51
27.14	Acceptance of Surrender	51
27.15	No Merger of Title	51
27.16	Quiet Enjoyment	51
27.17	Binding Effect	51
27.18	Entire Agreement; No Offer	51
27.19	Severability	52
27.20	Counterparts	52
27.21	Governing Law	52
27.22	Recitals; Headings	52
27.23	Survival	52
27.24	Exhibits	53
Exhibit A Land		55
Exhibit B Base Rent and Percentage Rent		56
Exhibit C Management Agreement		57

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LEASE AGREEMENT

THIS LEASE AGREEMENT (hereinafter called “Lease”), is made as of the 21st day of December, 2004, by and between Philadelphia Hotel Associates LP, a Pennsylvania limited partnership (hereinafter called “Lessor”), and MHI Hospitality TRS, LLC, a Delaware limited liability company (hereinafter called “Lessee”), and provides as follows:

WITNESSETH:

Lessor owns fee title to the Leased Property (as defined below); and

Lessor desires to lease to Lessee and Lessee desires to lease from Lessor, the Leased Property, pursuant to the terms and conditions of this Lease.

NOW, THEREFORE, intending to be legally bound, Lessor, in consideration of the payment of rent by Lessee to Lessor, the covenants and agreements to be performed by Lessee, and upon the terms and conditions hereinafter stated, does hereby rent and lease unto Lessee, and Lessee does hereby rent and lease from Lessor, the Leased Property, as follows:

ARTICLE 1

LEASED PROPERTY; TERM

1.1 Leased Property. The Leased Property is comprised of all of Lessor’s right, title and interest in that certain hotel located at 4501 Island Avenue, Philadelphia, PA in Philadelphia County, Pennsylvania and known as the “Hilton, Philadelphia Airport”:

(a) the land and/or ground leasehold interests described in Exhibit “A” attached hereto and by reference incorporated herein (the “Land”);

(b) all buildings, structures and other improvements of every kind including, but not limited to, alleyways and connecting tunnels, sidewalks, utility pipes, conduits and lines (on-site and offsite), parking areas and roadways appurtenant to such buildings and structures presently situated upon the Land (collectively, the “Improvements”);

(c) all easements, rights and appurtenances relating to the Land and the Improvements;

(d) all equipment, machinery, fixtures, and other items of property required or incidental to the use of the Improvements as a hotel, including all components thereof, now and hereafter permanently affixed to or incorporated into the Improvements, including, without limitation, all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and

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theft protection equipment, all of which to the greatest extent permitted by law are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereto (collectively, the “Fixtures”);

(e) all furniture and furnishings and all other items of personal property (excluding Inventory and personal property owned by Lessee) located on, and used in connection with, the operation of the Improvements as a hotel, together with all replacements, modifications, alterations and additions thereto; and

(f) all existing occupancy leases within the Leased Property (including any security deposits or collateral held by Lessor pursuant thereto).

THE LEASED PROPERTY IS DEMISED IN ITS PRESENT CONDITION WITHOUT REPRESENTATION OR WARRANTY (EXPRESSED OR IMPLIED) BY LESSOR AND SUBJECT TO THE RIGHTS OF PARTIES IN POSSESSION, AND TO THE EXISTING STATE OF TITLE INCLUDING ALL COVENANTS, CONDITIONS, RESTRICTIONS, EASEMENTS AND OTHER MATTERS OF RECORD INCLUDING ALL APPLICABLE LEGAL REQUIREMENTS, THE LIEN OF FINANCING INSTRUMENTS, MORTGAGES, DEEDS OF TRUST AND SECURITY DEEDS, AND INCLUDING OTHER MATTERS WHICH WOULD BE DISCLOSED BY AN INSPECTION OF THE LEASED PROPERTY OR BY AN ACCURATE SURVEY THEREOF.

1.2 Term. The term of the Lease (the “Term”) shall commence on December 21, 2004 (the “Commencement Date”) and shall end on December 21, 2014 (the “Expiration Date”), unless sooner terminated in accordance with the provisions hereof, provided however that the Lessor and Lessee will renegotiate the Rent for the period commencing on December 21, 2004.

ARTICLE 2

DEFINITIONS

2.1 Definitions. For all purposes of this Lease, used in this Lease and not otherwise defined, shall except as otherwise expressly provided or unless the context otherwise requires, (a) the terms used in this Lease and not otherwise defined, shall have the meanings assigned to them in this Article II and include the plural as well as the singular, (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles as are at the time applicable, (c) all references in this Lease to designated “Articles,” “Sections” and other subparagraphs are to the designated Articles, Sections and other subparagraphs of this Lease and (d) the words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Lease as a whole and not to any particular Article, Section or other subparagraphs.

“Additional Charges” shall have the meaning as set forth in Section 3.3.

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“Affiliate” as used in this Lease the term “Affiliate” of a person shall mean (a) any person that, directly or indirectly, controls or is controlled by or is under common control with such person, (b) any other person that owns, beneficially, directly or indirectly, ten percent or more of the outstanding capital stock, shares or equity interests of such person, or (c) any officer, director, employee, member, partner or trustee of such person or any person controlling, controlled by or under common control with such person (excluding trustees and persons serving in similar capacities who are not otherwise an Affiliate of such person). The term “Person” as used within this definition means and includes individuals, corporations, general and limited partnerships, stock companies or associations, joint ventures, associations, companies, trusts, banks, trust companies, land trusts, business trusts, or other entities and governments and agencies and political subdivisions thereof. For the purposes of this definition, “Control” (including the correlative meanings of the terms “Controlled By” and “Under Common Control With”), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, through the ownership of voting securities, partnership interests or other equity interests.

“Award” shall have the meaning as set forth in Section 15.1(c).

“Base Rent” shall have the meaning as set forth in Section 3.1(a).

“Beverage Sales” shall mean gross revenue from (i) the sale of wine, beer, liquor or other alcoholic beverages, whether sold in the bar or lounge, delivered to a guest room, sold at meetings or banquets or at any other location at the Leased Property, or (ii) non-alcoholic beverages sold in the bar or lounge. Such revenues shall not include the following:

(a) Any gratuity or service charge added to a customer’s bill or statement in lieu of a gratuity which is paid to an employee;

(b) Any revenues that are subsequently credited, rebated or refunded in the ordinary course of business; and

(c) Sales taxes or taxes of any other kind imposed on the sale of alcoholic or other beverages.

“Business Day” shall mean each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on which national banks in the Commonwealth of Virginia, or in the municipality wherein the Leased Property is located are closed.

“Capital Budget” shall have the meaning as set forth in Section 24.3.

“Capital Expenditures” shall mean amounts expended to pay the costs of replacement and renewals to the FF&E of the Leased Property and Capital Improvements.

“Capital Improvements” shall mean certain non-routine repairs and maintenance to the building(s) of the Leased Property which are normally capitalized under generally accepted accounting principles such as, but not limited to, exterior and interior repainting, resurfacing, building walls, floors, roofs and parking areas, and replacing folding walls and the like, and

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major repairs, alterations, improvements, renewals or replacement to the building structure of the Leased Property or to its mechanical, electrical, heating, ventilating, air conditioning, plumbing or vertical transportation systems.

“CERCLA” means The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended.

“Claims” shall have the meaning as set forth in Section 12.1.

“Code” shall mean the Internal Revenue Code of 1986, as amended.

“Commencement Date” shall mean the date set forth in Section 1.2 as the commencement date with respect to the Facility.

“Condemnation” shall have the meaning as set forth in Section 15.1(a).

“Condemnor” shall have the meaning as set forth in Section 15.1(d).

“Consumer Price Index” means Consumer Price Index, published for Urban Consumers for the U.S. City Average for all Items, 1982-84 = 100 issued by the Bureau of Labor Statistics of the United States Department of Labor, as published in The Wall Street Journal.

“CPI Adjustment Year” shall mean the calendar year next following the year in which the Commencement Date occurs, if the Commencement Date occurs between January 1 and June 30, or the second calendar year following the year in which the Commencement Date occurs, if the Commencement Date occurs between July 1 and December 31.

“Date of Taking” shall have the meaning as set forth in Section 15.1(b).

“Encumbrance” shall have the meaning as set forth in Section 27.7.

“Eligible Independent Contractor” shall mean a management company that meets the following requirements:

(a) The management company does not permit wagering activities to be conducted at or in connection with the Facility.

(b) The management company does not own, directly or indirectly (within the meaning of Section 856(d)(5) of the Code), more than 35% of the outstanding stock of MHI.

(c) No more than 35% of its interest in assets or net profits is owned, directly or indirectly (within the meaning of Section 856(d)(5) of the Code), by one or more Persons owning 35% (within the meaning of Section 856(d) of the Code) or more of the outstanding stock of MHI.

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(d) Neither MHI, the Lessor, nor the Lessee, derives or receives any income from the management company or any of its subsidiaries.

(e) At the time that the management company enters into a management agreement with the Lessee to operate the Leased Property, the management company (or any “Related Person” within the meaning of Section 856(d)(9)(F) of the Code) is actively engaged in the trade or business of operating “qualified lodging facilities” within the meaning of Section 856(d)(9)(D) of the Code for any Person who is not a “related person” within the meaning of Section 856(d)(9)(F) of the Code with respect to MHI or the Lessee (an “Unrelated Person”). For purposes of determining whether the requirement of this paragraph (e) has been met, a management company shall be treated as being “actively engaged” in such a trade or business if the management company (i) derives at least 10% of both its profits and revenue from operating “qualified lodging facilities” within the meaning of Section 856(d)(9)(D) of the Code for Unrelated Persons or (ii) complies with any regulations or other administrative guidance under Section 856(d)(9) of the Code that provide a “safe harbor” rule with respect to the amount of hotel management business with Unrelated Persons that is necessary to qualify as an “eligible independent contractor” within the meaning of such Code section.

A “qualified lodging facility” is defined in Section 856(d)(9)(D) of the Code and means a “Lodging Facility” (defined below), unless wagering activities are conducted at or in connection with such facility by any person who is engaged in the business of accepting wagers and who is fully authorized to engage in such business at or in connection with such facility. A “Lodging Facility” is a hotel, motel or other establishment more than one-half of the dwelling units in which are used on a transient basis, and includes customary amenities and facilities operated as party of, or associated with, the lodging facility so long as such amenities and facilities are customary for other properties of a comparable size and class owned by other owners unrelated to MHI.

“Environmental Authority” shall mean any department, agency or other body or component of any Government that exercises any form of jurisdiction or authority under any Environmental Law.

“Environmental Authorization” shall mean any license, permit, order, approval, consent, notice, registration, filing or other form of permission or authorization required under any Environmental Law.

“Environmental Laws” shall mean all applicable federal, state, local and foreign laws and regulations relating to pollution of the environment (including without limitation, ambient air, surface water, ground water, land surface or subsurface strata), including, without limitation, laws and regulations relating to emissions, discharges, a Release or threatened Release of Hazardous Materials or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials. Environmental Laws include but are not limited to CERCLA, FIFRA, RCRA, SARA and TSCA.

“Environmental Liabilities” shall mean any and all obligations to pay the amount of any judgment or settlement, the cost of complying with any settlement, judgment or order for injunctive or other equitable relief, the cost of compliance or corrective action in response to any

8

notice, demand or request from an Environmental Authority, the amount of any civil penalty or criminal fine, and any court costs and reasonable amounts for attorney’s fees, fees for witnesses and experts, and costs of investigation and preparation for defense of any claim or any Proceeding, regardless of whether such Proceeding is threatened, pending or completed, that may be or have been asserted against or imposed upon Lessor, Lessee, any Predecessor, the Leased Property or any property used therein and arising out of:

(a) Failure of Lessee, Lessor, any Predecessor or the Leased Property to comply at any time with all Environmental Laws;

(b) Presence of any Hazardous Materials on, in, under, at or in any way affecting the Leased Property;

(c) A Release at any time of any Hazardous Materials on, in, at, under or in any way affecting the Leased Property;

(d) Identification of Lessee, Lessor or any Predecessor as a potentially responsible party under CERCLA or under any Environmental Law similar to CERCLA;

(e) Presence at any time of any above-ground and/or underground storage tanks, as defined in RCRA or in any applicable Environmental Law on, in, at or under the Leased Property or any adjacent site or facility; or

(f) Any and all claims for injury or damage to persons or property arising out of exposure to Hazardous Materials originating or located at the Leased Property, or resulting from operation thereof or any adjoining property.

“Event of Default” shall have the meaning as set forth in Section 16.1.

“Expiration Date” the date set forth in Section 1.2 as the expiration date with respect to the Facility.

“Facility” shall mean the hotel and/or other facility offering lodging and other services or amenities being operated or proposed to be operated on the Leased Property.

“FF&E” shall mean all Fixtures, furniture, furnishings and equipment.

“FIFRA” means The Federal Insecticide, Fungicide, and Rodenticide Act, as amended.

“First Annual Room Revenues Break Point” shall mean the amount of Room Revenues for the applicable Lease Year corresponding to such term as set forth on Exhibit B.

“First Tier Room Revenue Recognition” shall mean all Lease Year to date Room Revenues in excess of the First Tier Rent Floor up to but not exceeding the First Annual Room Revenues Break Point.

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“First Tier Rent Floor” shall mean the amount of Room Revenues for the applicable Lease Year corresponding to such term as set forth on Exhibit B.

“Fiscal Year” shall mean the 12-month period from January 1 to December 31.

“Fixtures” shall have the meaning as set forth in Section 1.1(d).

“Food Sales” shall mean gross revenue from the sale, for on-site consumption, of food and non-alcohol beverages sold at the Leased Property, including in respect to guest rooms, banquet rooms, meeting rooms and other similar rooms. Such revenues shall not include the following:

(a) Vending machine sales;

(b) Any gratuities or service charges added to a customer’s bill or statement in lieu of a gratuity which is paid to an employee;

(c) Non-alcoholic beverages sold from the bar or lounge;

(d) Sales taxes or taxes of any other kind imposed on the sale of food or non-alcoholic beverages; and

(e) Any revenues that are subsequently credited, refunded or rebated in the ordinary course of business.

“Franchise Agreement” shall mean any franchise license agreement with a national franchisor under which the Facility is operated.

“Full Replacement Cost” shall have the meaning as set forth in Section 13.2.

“GAAP” shall mean, as of any date of determination, generally accepted accounting principles consistently applied as recognized by the accounting industry and standards within the United States.

“Government” shall mean The United States of America, any state, district or territory thereof, any foreign nation, any state, district, department, territory or other political division thereof, or any political subdivision of any of the foregoing.

“Gross Revenues” shall mean all revenues and receipts of every kind received from operating the Facility and all departments and parts thereof, including but not limited to, income from both cash and credit transactions, income from the rental of rooms, stores, offices, banquet rooms, conference rooms, exhibits or sale space of every kind, license, lease and concession fees and rentals (not including gross receipts of licensees, lessors and concessionaires), vending machines, health club membership fees, food and beverage sales, wholesale and retail sales of merchandise, service charges, and proceeds, if any, from business interruption or other loss of income insurance; provided, however, Gross Revenues shall not include (a) gratuities to the Facility’s employees, (b) federal, state or municipal excise, sales or use taxes or similar

10

impositions collected directly from customers, patrons or guests or included as part of the sales prices of any goods or services paid over to federal, state or municipal governments, (c) property insurance or condemnation proceeds (excluding proceeds from business interruption coverage), (d) proceeds from the sale or refinance of assets other than sales in the ordinary course of business, (e) funds furnished by the Lessor, (f) judgments and awards, (g) the amount of all credits, rebates or refunds (which shall be deductions from Gross Revenues) to customers, patrons or guests, (h) the value of complimentary rooms, food and beverages, (i) interest income, (j) lease security deposits, and (k) items constituting “allowances” under the Uniform System.

“Hazardous Materials” shall mean all chemicals, pollutants, contaminants, wastes and toxic substances, including without limitation:

(a) Solid or hazardous waste, as defined in RCRA or in any Environmental Law;

(b) substances, as defined in CERCLA or in any Environmental Law;

(c) substances, as defined in TSCA or in any Environmental Law;

(d) Insecticides, fungicides, or rodenticides, as defined in FIFRA or in any Environmental Law; and

(e) Gasoline or any other petroleum product or byproduct, polychlorinated biphenols, asbestos and urea formaldehyde.

“Impositions” shall mean collectively, all taxes (including, without limitation, all ad valorem, sales and use, single business, gross receipts, transaction privilege, rent or similar taxes as the same relate to or are imposed upon Lessee or its business conducted upon the Leased Property), assessments (including, without limitation, all assessments for public improvements or benefit, whether or not commenced or completed prior to the date hereof and whether or not to be completed within the Term), ground rents, water, sewer or other rents and charges, excises, tax inspection, authorization and similar fees and all other governmental charges, in each case whether general or special, ordinary or extraordinary, or foreseen or unforeseen, of every character in respect of the Leased Property or the business conducted thereon by Lessee (including all interest and penalties thereon caused by any failure in payment by Lessee), which at any time prior to, during or with respect to the Term hereof may be assessed or imposed on or with respect to or be a lien upon (a) Lessor’s interest in the Leased Property, (b) the Leased Property, or any part thereof or any rent therefrom or any estate, right, title or interest therein, or (c) any occupancy, operation, use or possession of, or sales from, or activity conducted on or in connection with the Leased Property, or the leasing or use of the Leased Property or any part thereof by Lessee. Nothing contained in this definition of Impositions shall be construed to require Lessee to pay (1) any tax based on net income (whether denominated as a franchise or capital stock or other tax) imposed on Lessor or any other person, or (2) any net revenue tax of Lessor or any other person, or (3) any tax imposed with respect to the sale, exchange or other disposition by Lessor of any Leased Property or the proceeds thereof, or (4) any single business, gross receipts (other than a tax on any rent received by Lessor from Lessee), transaction, privilege or similar taxes as the same relate to or are imposed upon Lessor, except to the extent

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that any tax, assessment, tax levy or charge that Lessee is obligated to pay pursuant to the first sentence of this definition and that is in effect at any time during the Term hereof is totally or partially repealed, and a tax, assessment, tax levy or charge set forth in clause (1) or (2) is levied, assessed or imposed expressly in lieu thereof.

“Improvements” shall have the meaning as set forth in Section 1.1(b).

“Indemnified Party” shall mean either Lessee Indemnified Party or a Lessor Indemnified Party.

“Indemnifying Party” shall mean any party obligated to indemnify an Indemnified Party pursuant to Sections 8.3 or 22.1.

“Insurance Requirements” shall mean all terms of any insurance policy required by this Lease and all requirements of the issuer of any such policy.

“Inventory” shall mean all “Inventories of Merchandise” and “Inventories of Supplies” as defined in the Uniform System and including any property of the type described in Section 1221(1) of the Code.

“Land” shall have the meaning as set forth in Section 1.1(a).

“Lease” shall mean this Lease Agreement.

“Lease Year” shall mean any 12-month period from January 1 through December 31 during the Term, or any shorter period at the beginning or end of the Term.

“Leased Property” shall have the meaning as set forth in Section 1.1.

“Legal Requirements” shall mean all federal, state, county, municipal and other governmental statutes, laws, rules, orders, regulations, ordinances, judgments, decrees and injunctions affecting either the Leased Property or the maintenance, construction, use or alteration thereof (whether by Lessee or otherwise),whether or not hereafter enacted and in force, including (a) all laws, rules or regulations pertaining to the environment, occupational health and safety and public health, safety or welfare, and (b) any laws, rules or regulations that may (1) require repairs, modifications or alterations in or to the Leased Property or (2) in any way adversely affect the use and enjoyment thereof; and all permits, licenses and authorizations and regulations relating thereto and all covenants, agreements, restrictions and encumbrances contained in any instruments, either of record or known to Lessee (other than encumbrances created by Lessor without the consent of Lessee), at any time in force affecting the Leased Property.

“Lessee” shall mean the Lessee designated on this Lease and its respective permitted successors and assigns.

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“Lessee Indemnified Party” shall mean the Lessee, any Affiliate of Lessee, any other Person against whom any claim for indemnification may be asserted hereunder as a result of a direct or indirect ownership interest (including a stockholder’s interest) in Lessee, the officers, directors, stockholders, employees, agents and representatives of Lessee and any corporate stockholder, agent, or representative of Lessee, and the respective heirs, personal representatives, successors and assigns of any such officer, director, stockholder, employee, agent or representative.

“Lessee’s Personal Property” shall have the meaning as set forth in Section 6.2.

“Lessor” shall mean the Lessor designated on this Lease and its respective successors and assigns.

“Lessor Indemnified Party” shall mean the Lessor, any Affiliate of Lessor, including MHI, any other Person against whom any claim for indemnification may be asserted hereunder as a result of a direct or indirect ownership interest in Lessor, the officers, trustees, directors, stockholders, partners, members, employees, agents and representatives of any of the foregoing Persons and of any stockholder, partner, member, agent, or representative of any of the foregoing Persons, and the respective heirs, personal representatives, successors and assigns of any such officer, trustee, director, partner, member, stockholder, employee, agent or representative.

“Licenses” shall have the meaning as set forth in Section 27.1.

“Management Agreement” shall have the meaning as set forth in Section 19.3.

“Manager” shall have the meaning as set forth in Section 19.3.

“MHI” shall mean MHI Hospitality Corporation, a Maryland corporation.

“Notice” shall mean a notice given pursuant to Article XXVI.

“Officer’s Certificate” shall mean a certificate of Lessee signed by the chief financial officer or another officer authorized so to sign by the board of directors or by-laws of Lessee, or any other person whose power and authority to act has been authorized by delegation in writing by any such officer.

“Operating Budget” shall have the meaning as set forth in Section 24.2.

“Other Revenues” shall mean all revenues, receipts, and income of any kind derived directly or indirectly from or in connection with the Facility and included in Gross Revenues, other than Room Revenues, Food Sales and Beverage Sales.

“Overdue Rate” shall mean on any date, a rate equal to the Prime Rate plus 3% per annum, but in no event greater than the maximum rate then permitted under applicable law.

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“Payment Date” shall mean any due date for the payment of any installment of Base Rent.

“Percentage Rent” shall have the meaning as set forth in Section 3.1(b).

“Period Revenues Computation” shall have the meaning as set forth in Section 3.1(b).

“Person” shall mean any Government, natural person, corporation, partnership or other legal entity.

“Predecessor” shall mean any Person whose liabilities arising under any Environmental Law have or may have been retained or assumed by Lessee, either contractually or by operation of law, relating to the Leased Property.

“Primary Intended Use” shall have the meaning as set forth in Section 7.2(b).

“Prime Rate” shall mean the “prime rate” as published in the “Money Rates” section of The Wall Street Journal; however, if such rate is, at any time during the Term of this Agreement, no longer so published, the term “Prime Rate” shall mean the average of the prime interest rates which are announced, from time to time, by the three (3) largest banks (by assets) headquartered in the United States which publish a “prime rate”.

“Proceeding” shall mean any judicial action, suit or proceeding (whether civil or criminal), any administrative proceeding (whether formal or informal), any investigation by a governmental authority or entity (including a grand jury),and any arbitration, mediation or other non-judicial process for dispute resolution.

“RCRA” shall mean The Resource Conservation and Recovery Act, as amended.

“Real Estate Taxes” shall mean all real estate taxes, including general and special assessments, if any, which are imposed upon the Land, and any improvements thereon.

“REIT Requirements” shall have the meaning as set forth in Section 19.1(a).

“Release” shall mean a “Release” as defined in CERCLA or in any Environmental Law, unless such Release has been properly authorized and permitted in writing by all applicable Environmental Authorities or is allowed by such Environmental Law without authorizations or permits.

“Rent” shall have the meaning as set forth in Section 3.1.

“Room Revenues” shall mean gross revenue from the rental of guest rooms, whether to individuals, groups or transients, but excluding the following:

(a) The amount of all credits, rebates or refunds to customers, guests or patrons;

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(b) All sales taxes or any other taxes imposed on the rental of such guest rooms; and

(c) Any fees collected for amenities including, but not limited to: telephone, laundry, Internet, movies or concessions.

“SARA” shall mean the Superfund Amendments and Reauthorization Act of 1986, as amended.

“Second Annual Room Revenues Break Point” shall mean the amount of Room Revenues for the applicable Lease Year corresponding to such term as set forth on Exhibit B.

“Second Tier Room Revenue Recognition” shall mean all Lease Year to date Room Revenues in excess of the Second Annual Room Revenues Break Point.

“State” shall mean the State or Commonwealth of the United States in which the Leased Property is located.

“Subsidiaries” shall mean one or more corporations in which Lessee owns, directly or indirectly, more than 50% of the voting stock or control, as applicable.

“Taking” shall mean a taking or voluntary conveyance during the Term hereof of all or part of the Leased Property, or any interest therein or right accruing thereto or use thereof, as the result of, or in settlement of, any Condemnation or other eminent domain proceeding affecting the Leased Property whether or not the same shall have actually been commenced.

“Term” shall have the meaning as set forth in Section 1.2.

“Termination Fee” shall have the meaning as set forth in Section 27.2.

“TSCA” shall mean the Toxic Substances Control Act, as amended.

“Unavoidable Delay” shall mean delays due to acts of God (including adverse weather conditions), acts of the state or federal government in its sovereign or contractual capacity, war, civil disturbance, riot or mob violence, terrorism, earthquake, flood, fire or other casualty, epidemic, quarantine restriction, labor strikes or lockout, freight embargo, or similar causes beyond the control of the parties hereto.

“Uneconomic for its Primary Intended Use” shall mean a state or condition of the Facility such that, in the good faith judgment of Lessee, reasonably exercised and evidenced by the resolution of the board of directors or other governing body of Lessee, the Facility cannot be operated on a commercially practicable basis for its Primary Intended Use, taking into account, among other relevant factors, the number of usable rooms and projected revenues, such that Lessee intends to, and shall, complete the cessation of operations at the Leased Facility.

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“Uniform System” shall mean the Uniform System of Accounts for the Lodging Industry, 9th Revised Edition, as may be modified from time to time by the International Association of Hospitality Accountants.

“Unsuitable for its Primary Intended Use” shall mean a state or condition of the Facility such that, in the good faith judgment of Lessee, reasonably exercised and evidenced by the resolution of the board of directors or other governing body of Lessee, due to casualty damage or loss through Condemnation, the Facility cannot function as an integrated hotel facility consistent with standards applicable to a well maintained and operated hotel.

ARTICLE 3

BASE RENT; PERCENTAGE RENT; ADDITIONAL CHARGES

3.1 Rent. Lessee will pay to Lessor, in lawful money of the United States of America which shall be legal tender for the payment of public and private debts, in immediately available funds, at Lessor’s address set forth in Article XXVI hereof or at such other place or to such other Person, as Lessor from time to time may designate in a Notice, rent (“Rent”), which shall be equal to the greater of the following:

(a) Base Rent: the annual amount of Base Rent set forth on Exhibit B (the “Base Rent”), which shall be payable one-twelfth (1/12th) monthly in arrears on or before the first Business Day of the subsequent calendar month beginning on the date as set forth on Exhibit B; provided, however, that Base Rent shall be prorated as to any partial Lease Year; plus

(b) Percentage Rent: an amount of percentage rent (“Percentage Rent”), calculated for each calendar quarter, equal to the Period Revenues Computation through the end of such calendar quarter for the applicable Lease Year, which amount shall be payable on or before the fifteenth (15th) day of the following calendar quarter, beginning on the date as set forth on Exhibit B.

The term “Period Revenues Computation” as used herein shall equal the sum of, for the applicable Lease Year: (i) an amount equal to 0.35 times the First Tier Room Revenue Recognition and (ii) an amount equal 0.70 times the Second Tier Room Revenue Recognition.

If the Term begins or ends in the middle of a calendar year, then the number of calendar quarters falling within the Term during such calendar year shall constitute a separate Lease Year. In that event, the First Annual Room Revenues Break Point and the Second Annual Room Revenues Break Point shall be multiplied by a fraction equal to (x) the number of calendar quarters (including partial calendar quarters) in the Lease Year divided by (y) four.

(c) Officer’s Certificates. Additionally, an Officer’s Certificate in a form reasonably acceptable to Lessor shall be delivered to Lessor quarterly of each Lease Year during the Term with each Percentage Rent payment, setting forth the calculation of such rent payment for such quarter. Such quarterly payments shall be as set forth in Section 3.1(b).

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In addition, on or before January 25 of each year, commencing with January 25 first following the end of the Fiscal Year in which the Commencement Date occurs, Lessee shall deliver to Lessor an Officer’s Certificate reasonably acceptable to Lessor setting forth the computation of Percentage Rent accrued and paid during the Fiscal Year that ended on the immediately preceding December 31. If the annual Percentage Rent due and payable for any Fiscal Year (as shown in the applicable Officer’s Certificate) exceeds the amount actually paid as Percentage Rent by Lessee for such year, Lessee shall pay such excess to Lessor at the time such certificate is delivered. If the Percentage Rent actually due and payable for such Fiscal Year is shown by such certificate to be less than the amount actually paid as Percentage Rent for the applicable Fiscal Year, Lessor, at its option, shall reimburse such amount to Lessee or credit such amount against the following months’ Rent payments.

Any difference between the annual Percentage Rent due and payable for any Fiscal Year (as shown in the applicable Officer’s Certificate or as adjusted pursuant to this Section 3.1(c)) and the total amount of quarterly payments for such Fiscal Year actually paid by Lessee as Percentage Rent, whether in favor of Lessor or Lessee, shall bear interest at the Overdue Rate, which interest shall accrue from the close of such Fiscal Year until the amount of such difference shall be paid or otherwise discharged. Any such interest payable to Lessor shall be deemed to be and shall be payable as Additional Charges.

The obligation to pay Percentage Rent shall survive the expiration or earlier termination of the Term, and a final reconciliation, taking into account, among other relevant adjustments, any adjustments which are accrued after such expiration or termination date but which related to Percentage Rent accrued prior to such termination date, and Lessee’s good faith best estimate of the amount of any unresolved contractual allowances, shall be made not later than two years after such expiration or termination date, but Lessee shall advise Lessor within sixty (60) days after such expiration or termination date of Lessee’s best estimate at that time of the approximate amount of such adjustments, which estimate shall not be binding on Lessee or have any legal effect whatsoever.

(d) CPI Adjustments to Rent. For each Fiscal Year of the Term beginning on or after the CPI Adjustment Year, the Base Rent then in effect, the First Annual Room Revenues Break Point and the Second Annual Room Revenues Break Point shall be adjusted from time to time beginning in the CPI Adjustment Year as follows:

(i) The average Consumer Price Index for the most recently ended Fiscal Year shall be divided by the average Consumer Price Index for the immediately preceding Fiscal Year.

(1) The new Base Rent for the then current Fiscal Year shall be the adjusted amount obtained by multiplying the Base Rent for the immediately preceding Fiscal Year by the quotient obtained in subparagraph (d)(1) above.

(2) The new threshold dollar amount in the Period Revenues Computations described in Section 3.1(b) above for the then current Fiscal Year shall be the product of the threshold dollar amount of Room Revenues in effect in the most recently ended Fiscal Year and the quotient obtained in subparagraph (d)(1)above.

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By way of example, if the CPI Adjustment Year were 2004, the amount of Base Rent and the threshold Room Revenues amounts in the Period Revenues Computations for the Fiscal Year commencing January 1, 2005 would be adjusted to reflect any change in the average Consumer Price Index from the Fiscal Year ended December 31, 2003 as compared to the Fiscal Year ended December 31, 2004. Base Rent and the threshold Room Revenues amounts in the Period Revenues Computations for the Fiscal Year commencing January 1, 2005 would be the Base Rent and threshold Room Revenues amounts applicable for the fiscal year ended December 31, 2004 as further adjusted to reflect any change in the average Consumer Price Index from December 31, 2004 as compared to December 31, 2003.

Lessor shall calculate the annual adjustments as soon as reasonably possible after the Consumer Price Index becomes available and shall notify Lessee in writing of the amount of the annual adjustment, together with a copy of the computation showing the adjustment amount. Adjustments calculated as set forth above in the Base Rent and threshold Room Revenues amounts shall be effective on January 1 of the Fiscal Year to which such adjusted amounts apply. If Rent is paid in any Fiscal Year prior to the determination of the amount of any adjustment to Base Rent or the threshold Room Revenues applicable for such Fiscal Year, payment adjustments for any shortfall in or overpayment of rent paid shall be made with the first Base Rent payment due after the amount of the adjustments are determined.

The “Average Consumer Price Index” for any period shall be the average of the Consumer Price Index for each month during the period.

(ii) If (i) a significant change is made in the number or nature (or both) of items used in determining the Consumer Price Index, or (ii) the Consumer Price Index shall be discontinued for any reason, the Bureau of Labor Statistics shall be requested to furnish a new index comparable to the Consumer Price Index, together with information which will make possible a conversion to the new index in computing the adjustments to Rent hereunder. If for any reason the Bureau of Labor Statistics does not furnish such an index and such information, the parties will instead mutually select, accept and use such other index or comparable statistics on the cost of living that is computed and published by an agency of the United States or a responsible financial periodical of recognized authority.

3.2 Confirmation of Percentage Rent. Lessee shall utilize, or cause to be utilized, an accounting system for the Leased Property in accordance with its usual and customary practices, and in accordance with GAAP and the Uniform System, that will accurately record all data necessary to compute Percentage Rent, and Lessee shall retain, for at least four (4) years after the expiration of each Fiscal Year (and in any event until the reconciliation described in Section 3.1(c) for such Fiscal Year has been made), reasonably adequate records conforming to such accounting system showing all data necessary to compute Percentage Rent for the applicable Fiscal Years. Lessor, at its expense (except as provided herein below), shall have the right from time to time to have its accountants or representatives audit the information that formed the basis for the data set forth in any Officer’s Certificate provided under Section 3.1(c) and, in connection with such audits, to examine all Lessee’s records (including supporting data, franchisor reports and sales and excise tax returns) reasonably required to verify Percentage Rent, subject to any prohibitions or limitations on disclosure of any such data under Legal

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Requirements. If any such audit discloses a deficiency in the payment of Percentage Rent, and either Lessee agrees with the result of such audit or the matter is otherwise determined or compromised, Lessee shall forthwith pay to Lessor the amount of the deficiency, as finally agreed or determined, together with interest at the Overdue Rate from the date when said payment should have been made to the date of payment thereof; provided, however, that as to any audit that is commenced more than two years after the date Percentage Rent for any Fiscal Year is reported by Lessee to Lessor, the deficiency, if any, with respect to such Percentage Rent shall bear interest at the Overdue Rate only from the date such determination of deficiency is made unless such deficiency is the result of gross negligence or willful misconduct on the part of Lessee, in which case interest at the Overdue Rate will accrue from the date such payment should have been made to the date of payment thereof. If any such audit discloses that the Percentage Rent actually due from Lessee for any Fiscal Year exceed those reported and paid by Lessee by more than 3%, Lessee shall pay the cost of such audit and examination. Any proprietary information obtained by Lessor pursuant to the provisions of this Section shall be treated as confidential, except that such information may be used, subject to appropriate confidentiality safeguards, in any litigation between the parties and except further that Lessor may disclose such information to prospective lenders. The obligations of Lessee contained in this Section shall survive the expiration or earlier termination of this Lease.

3.3 Additional Charges. In addition to the Base Rent and Percentage Rent, (a) Lessee also will pay and discharge as and when due and payable all other amounts, liabilities, obligations and Impositions that Lessee assumes or agrees to pay under this Lease, and (b) in the event of any failure on the part of Lessee to pay any of those items referred to in clause (a) of this Section 3.3, Lessee also will promptly pay and discharge every fine, penalty, interest and cost that may be added for non-payment or late payment of such items (the items referred to in clauses (a) and (b) of this Section 3.3 being additional rent hereunder and being referred to herein collectively as the “Additional Charges”), and Lessor shall have all legal, equitable and contractual rights, powers and remedies provided either in this Lease or by statute or otherwise in the case of non-payment of the Additional Charges as in the case of non-payment of the Base Rent, including, but not limited to, the right, but not the obligation to pay such Additional Charges on behalf of the Lessee and to require reimbursement thereof by Lessee, together with interest thereon at the Overdue Rate. If any installment of Base Rent, Percentage Rent or Additional Charges (but only as to those Additional Charges that are payable directly to Lessor) shall not be paid on its due date, Lessee will pay Lessor on demand, as Additional Charges, a late charge (to the extent permitted by law) computed at the Overdue Rate on the amount of such installment, from the due date of such installment to the date of payment thereof. To the extent that Lessee pays any Additional Charges to Lessor pursuant to any requirement of this Lease, Lessee shall be relieved of its obligation to pay such Additional Charges to the entity to which they would otherwise be due and Lessor shall pay same from monies received from Lessee.

3.4 Net Lease Provision. The Rent shall be paid absolutely net to Lessor, so that this Lease shall yield to Lessor the full amount of the installments of Base Rent, Percentage Rent and Additional Charges throughout the Term, all as more fully set forth in Article V, but subject to any other provisions of this Lease that expressly provide for adjustment or abatement of Rent or other charges or expressly provide that certain expenses or maintenance shall be paid or performed by Lessor.

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3.5 Conversion of Property. If, during the Term, Lessee wishes to cease food and beverage operations or institute food and beverage operations at the Facility (all in accordance with the requirements of any applicable Franchise Agreement), Lessee shall give Notice of such desire to Lessor. If, during the Term, Lessor wishes (a) Lessee to cease food and beverage operations or to institute food and beverage operations at the Facility (all in accordance with the requirements of any applicable Franchise Agreement), or (b) to change the franchise affiliation of the Facility or to make substantial renovations to the Facility, Lessor shall give Notice thereof to Lessee. Following any such notice, Lessor and Lessee shall commence negotiations to adjust Rent to reflect the proposed renovation or change to the operation of the Facility, each acting reasonably and in good faith, and subject to Lessor’s reasonable satisfaction that any Rent adjustment will not adversely affect MHI’s status as a real estate investment trust under the Code. All other terms of this Lease will remain substantially the same. During negotiations, which shall not extend beyond sixty (60) days, Lessee shall not “convert” the Facility and Lessor shall not change the franchise or commence substantial renovations and Lessee shall continue fulfilling its obligations under the existing terms of this Lease. If no agreement is reached after such 60-day period, Lessee or Lessor, as appropriate, shall withdraw such notice and this Lease shall continue in full force.

ARTICLE 4

IMPOSITIONS

4.1 Payment of Impositions. Subject to Article XII relating to permitted contests, Lessee will pay, or cause to be paid, all Impositions (other than Real Estate Taxes, which shall be paid by Lessor) before any fine, penalty, interest or cost may be added for non-payment, such payments to be made directly to the taxing or other authorities where feasible, and will promptly furnish to Lessor copies of official receipts or other satisfactory proof evidencing such payments. Lessee’s obligation to pay such Impositions shall be deemed absolutely fixed upon the date such Impositions become a lien upon the Leased Property or any part thereof. If any such Imposition may, at the option of the taxpayer, lawfully be paid in installments (whether or not interest shall accrue on the unpaid balance of such Imposition), Lessee may exercise the option to pay the same (and any accrued interest on the unpaid balance of such Imposition) in installments and in such event, shall pay such installments during the Term hereof (subject to Lessee’s right of contest pursuant to the provisions of Article XII) as the same respectively become due and before any fine, penalty, premium, further interest or cost may be added thereto. Lessor, at its expense, shall, to the extent required or permitted by applicable law, prepare and file all tax returns in respect of Lessor’s net income, gross receipts, sales and use, single business, transaction privilege, rent, ad valorem, franchise taxes, Real Estate Taxes and taxes on its capital stock, and Lessee, at its expense, shall, to the extent required or permitted by applicable laws and regulations, prepare and file all other tax returns and reports in respect of any Imposition as may be required by governmental authorities. If any refund shall be due from any taxing authority in respect of any Imposition paid by Lessee, the same shall be paid over to or retained by Lessee if no Event of Default shall have occurred hereunder and be continuing. If an Event of Default shall have occurred and be continuing, any such refund shall be paid over to or retained by Lessor. Any such funds retained by Lessor due to an Event of Default shall be applied as

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provided in Article XVI. Lessor and Lessee shall, upon request of the other, provide such data as is maintained by the party to whom the request is made with respect to the Leased Property as may be necessary to prepare any required returns and reports. Lessee shall file all personal property tax returns in such jurisdictions where it is legally required to so file. Lessor, to the extent it possesses the same, and Lessee, to the extent it possesses the same, will provide the other party, upon request, with cost and depreciation records necessary for filing returns for any property so classified as personal property. Where Lessor is legally required to file personal property tax returns, Lessor shall provide Lessee with copies of assessment notices in sufficient time for Lessee to file a protest. Lessee may, upon notice to Lessor, at Lessee’s option and at Lessee’s sole expense, protest, appeal, or institute such other proceedings (in its or Lessor’s name) as Lessee may deem appropriate to effect a reduction of real estate or personal property assessments for those Impositions to be paid by Lessee, and Lessor, at Lessee’s expense as aforesaid, shall fully cooperate with Lessee in such protest, appeal, or other action. Lessee hereby agrees to indemnify, defend, and hold harmless Lessor from and against any claims, obligations, and liabilities against or incurred by Lessor in connection with such cooperation. Billings for reimbursement of personal property taxes by Lessee to Lessor shall be accompanied by copies of a bill therefor and payments thereof which identify the personal property with respect to which such payments are made. Lessor, however, reserves the right to effect any such protest, appeal or other action and, upon notice to Lessee, shall control any such activity, which shall then go forward at Lessor’s sole expense. Upon such notice, Lessee, at Lessor’s expense, shall cooperate fully with such activities.

4.2 Notice of Impositions. To the extent Lessor is notified of any Impositions, Lessor shall give prompt Notice to Lessee of such Impositions payable by Lessee hereunder, provided that Lessor’s failure to give any such Notice shall in no way diminish Lessee’s obligations hereunder to pay such Impositions, but such failure shall obviate any default hereunder for a reasonable time after Lessee receives Notice of any Imposition which it is obligated to pay during the first taxing period applicable thereto.

4.3 Adjustment of Impositions. Impositions imposed in respect of the tax-fiscal period during which the Term terminates shall be adjusted and prorated between Lessor and Lessee, whether or not such Imposition is imposed before or after such termination, and Lessee’s obligation to pay its prorated share thereof after termination shall survive such termination.

4.4 Utility Charges. Lessee will be solely responsible for obtaining and maintaining utility services to the Leased Property and will pay or cause to be paid all charges for electricity, gas, oil, water, sewer and other utilities used in the Leased Property during the Term.

ARTICLE 5

NO TERMINATION; ABATEMENT

5.1 No Termination, Abatement, etc. Except as otherwise specifically provided in this Lease, Lessee, to the extent permitted by law, shall remain bound by this Lease in accordance with its terms and shall neither take any action without the written consent of Lessor

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to modify, surrender or terminate the same, nor seek nor be entitled to any abatement, deduction, deferment or reduction of the Rent, or setoff against the Rent, nor shall the obligations of Lessee be otherwise affected by reason of (a) any damage to, or destruction of, any Leased Property or any portion thereof from whatever cause or any Taking of the Leased Property or any portion thereof, (b) the lawful or unlawful prohibition of, or restriction upon, Lessee’s use of the Leased Property, or any portion thereof, or the interference with such use by any Person, corporation, partnership or other entity, or by reason of eviction by paramount title, (c) any claim which Lessee has or might have against Lessor by reason of any default or breach of any warranty by Lessor under this Lease or any other agreement between Lessor and Lessee, or to which Lessor and Lessee are parties, (d) any bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding up or other proceedings affecting Lessor or any assignee or transferee of Lessor, or (e) for any other cause whether similar or dissimilar to any of the foregoing other than a discharge of Lessee from any such obligations as a matter of law. Lessee hereby specifically waives all rights, arising from any occurrence whatsoever, which may now or hereafter be conferred upon it by law to (1) modify, surrender or terminate this Lease or quit or surrender the Leased Property or any portion thereof, or (2) entitle Lessee to any abatement, reduction, suspension or deferment of the Rent or other sums payable by Lessee hereunder, except as otherwise specifically provided in this Lease. The obligations of Lessee hereunder shall be separate and independent covenants and agreements and the Rent and all other sums payable by Lessee hereunder shall continue to be payable in all events unless the obligations to pay the same shall be terminated pursuant to the express provisions of this Lease or by termination of this Lease other than by reason of an Event of Default.

5.2 Abatement Procedures. In the event of a partial Taking as described in Section 15.5, the Lease shall not terminate, but the Base Rent shall be abated in the manner and to the extent that is fair, just and equitable to both Lessee and Lessor, taking into consideration, among other relevant factors, the number of usable rooms, the amount of square footage, or the revenues affected by such partial Taking. If Lessor and Lessee are unable to agree upon the amount of such abatement within thirty (30) days after such partial Taking, the matter may be submitted by either party to a court of competent jurisdiction for resolution.

ARTICLE 6

PERSONAL PROPERTY; LANDLORD’S LIEN

6.1 Ownership of the Leased Property. Lessee acknowledges that the Leased Property is the property of Lessor and that Lessee has only the right to the possession and use of the Leased Property upon the terms and conditions of this Lease.

6.2 Lessee’s Personal Property. At all times during the Term, Lessee will maintain Inventory as is required to operate the Leased Property in the manner contemplated by this Lease. Lessee may (and shall as provided herein below), at its expense, install, affix or assemble or place on any parcels of the Land or in any of the Improvements, any items of personal property (including Inventory) owned by Lessee (the “Lessee’s Personal Property”). Lessee may, subject to the conditions set forth herein, remove any of Lessee’s Personal Property upon the

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expiration or any prior termination of the Term. All of Lessee’s Personal Property, other than Inventory, not removed by Lessee within ten days following the expiration or earlier termination of the Term shall be considered abandoned by Lessee and may be appropriated, sold, destroyed or otherwise disposed of by Lessor without first giving Notice thereof to Lessee, without any payment to Lessee and without any obligation to account therefor. Lessee will, at its expense, restore the Leased Property to the condition required by Section 9.1(d), including repair of all damage to the Leased Property caused by the removal of Lessee’s Personal Property, whether effected by Lessee or Lessor.

6.3 Lessor’s Lien. To the fullest extent permitted by applicable law, Lessor is granted a lien and security interest on all of Lessee’s Personal Property now or hereinafter placed in or upon the Leased Property, and such lien and security interest shall remain attached to Lessee’s Personal Property until payment in full of all Rent and satisfaction of all of Lessee’s obligations hereunder; provided, however, Lessor shall subordinate its lien and security interest to that of any non-Affiliate of Lessee which finances such Lessee’s Personal Property or any non-Affiliate conditional seller of such Lessee’s Personal Property, the terms and conditions of such subordination to be satisfactory to Lessor in the exercise of reasonable discretion. Lessee shall, upon the request of Lessor, execute such financing statements or other documents or instruments reasonably requested by Lessor to perfect the lien and security interests herein granted.

ARTICLE 7

CONDITIONS; USE

7.1 Condition of the Leased Property. Lessee acknowledges receipt and delivery of possession of the Leased Property. Lessee has examined and otherwise has knowledge of the condition of the Leased Property and has found the same to be satisfactory for its purposes hereunder. LESSEE IS LEASING THE LEASED PROPERTY “AS IS” IN ITS PRESENT CONDITION. LESSEE WAIVES ANY CLAIM OR ACTION AGAINST LESSOR IN RESPECT OF THE CONDITION OF THE LEASED PROPERTY. LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, IN RESPECT OF THE LEASED PROPERTY, OR ANY PART THEREOF, EITHER AS TO ITS FITNESS FOR USE, DESIGN OR CONDITION FOR ANY PARTICULAR USE OR PURPOSE OR OTHERWISE, AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP THEREIN, LATENT OR PATENT, IT BEING AGREED THAT ALL SUCH RISKS ARE TO BE BORNE BY LESSEE. LESSEE ACKNOWLEDGES THAT THE LEASED PROPERTY HAS BEEN INSPECTED BY LESSEE AND IS SATISFACTORY TO IT. Provided, however, to the extent permitted by law, Lessor hereby assigns to Lessee all of Lessor’s rights to proceed against any predecessor in title other than Lessee for breaches of warranties or representations or for defects in the Leased Property. Lessor shall fully cooperate with Lessee in the prosecution of any such claim, in Lessor’s or Lessee’s name, all at Lessee’s sole cost and expense. Lessee hereby agrees to indemnify, defend and hold harmless Lessor from and against any claims, obligations and liabilities against or incurred by Lessor in connection with such cooperation.

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7.2 Use of the Leased Property.

(a) Lessee covenants that it will proceed with all due diligence and will exercise its best efforts to obtain and to maintain all approvals needed to use and operate the Leased Property and the Facility under applicable local, state and federal law.

(b) Lessee shall use or cause to be used the Leased Property only as a hotel facility, and for such other uses as may be necessary or incidental to such use or such other use as otherwise approved by Lessor (the “Primary Intended Use”). Lessee shall not use the Leased Property or any portion thereof or any other use without the prior written consent of Lessor, which consent may be granted, denied or conditioned in Lessor’s sole discretion. No use shall be made or permitted to be made of the Leased Property, and no acts shall be done, which will cause the cancellation or increase the premium of any insurance policy covering the Leased Property or any part thereof (unless another adequate policy satisfactory to Lessor is available and Lessee pays any premium increase), nor shall Lessee sell or permit to be kept, used or sold in or about the Leased Property any article which may be prohibited by law or fire underwriter’s regulations. Lessee shall, at its sole cost, comply with all of the requirements pertaining to the Leased Property of any insurance board, association, organization or company necessary for the maintenance of insurance, as herein provided, covering the Leased Property and Lessee’s Personal Property.

(c) Subject to the provisions of Articles XIV, XV, XXI and XXII, Lessee covenants and agrees that during the Term it will (1) operate or cause to operate continuously the Leased Property as a hotel facility, (2) keep in full force and effect and comply with all the provisions of the Franchise Agreement, (3) not terminate or amend the Franchise Agreement without the consent of Lessor, (4) maintain appropriate certifications and licenses for such use and (5) will seek to maximize the gross revenues generated therefrom consistent with sound business practices.

(d) Lessee shall not commit or suffer to be committed any waste on the Leased Property, or in the Facility, nor shall Lessee cause or permit any nuisance thereon.

(e) Lessee shall neither suffer nor permit the Leased Property or any portion thereof, or Lessee’s Personal Property, to be used in such a manner as (1) might reasonably tend to impair Lessor’s (or Lessee’s, as the case may be) title thereto or to any portion thereof, or (2) may reasonably make possible a claim or claims of adverse usage or adverse possession by the public, as such, or of implied dedication of the Leased Property or any portion thereof, except as necessary in the ordinary and prudent operation of the Facility on the Leased Property.

7.3 Lessor to Grant Easements, etc. Lessor will, from time to time, so long as no Event of Default has occurred and is continuing, at the request of Lessee and at Lessee’s cost and expense (but subject to the approval of Lessor, which approval shall not be unreasonably withheld or delayed), (a) grant easements and other rights in the nature of easements with respect to the Leased Property to third parties, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Leased Property, (c) dedicate or transfer unimproved portions of the Leased Property for road, highway or other public purposes, (d) execute petitions to have the Leased Property annexed to any municipal corporation or utility

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district, (e) execute amendments to any covenants and restrictions affecting the Leased Property and (f) execute and deliver to any person any instrument appropriate to confirm or effect such grants, releases, dedications, transfers, petitions and amendments (to the extent of its interests in the Leased Property), but only upon delivery to Lessor of an Officer’s Certificate stating that such grant, release, dedication, transfer, petition or amendment is not detrimental to the proper conduct of the business of Lessee on the Leased Property and does not materially reduce the value of the Leased Property.

ARTICLE 8

COMPLIANCE WITH APPLICABLE LAWS

8.1 Compliance with Legal and Insurance Requirements, etc. Subject to Section 8.3(b) below and Article XII relating to permitted contests, and subject further to the obligations of Lessor with respect to Capital Improvements as set forth in Section 9.1 (b), Lessee, at its expense, will promptly (a) comply with all applicable Legal Requirements and Insurance Requirements in respect of the use, operation, maintenance, repair and restoration of the Leased Property, and (b) procure, maintain and comply with all appropriate licenses and other authorizations required for any use of the Leased Property and Lessee’s Personal Property then being made, and for the proper erection, installation, operation and maintenance of the Leased Property or any part thereof.

8.2 Legal Requirement Covenants. Subject to Section 8.3(b) below, Lessee covenants and agrees that the Leased Property and Lessee’s Personal Property shall not be used for any unlawful purpose, and that Lessee shall not permit or suffer to exist any unlawful use of the Leased Property by others. Lessee shall acquire and maintain all appropriate licenses, certifications, permits and other authorizations and approvals needed to operate the Leased Property in its customary manner for the Primary Intended Use, and any other lawful use conducted on the Leased Property as may be permitted from time to time hereunder. Lessee further covenants and agrees that Lessee’s use of the Leased Property and maintenance, alteration, and operation of the same, and all parts thereof, shall at all times conform to all Legal Requirements, unless the same are finally determined by a court of competent jurisdiction to be unlawful (and Lessee shall cause all such sub-tenants, invitees or others to so comply with all Legal Requirements). Lessee may, however, upon prior Notice to Lessor, contest the legality or applicability of any such Legal Requirement or any licensure or certification decision if Lessee maintains such action in good faith, with due diligence, without prejudice to Lessor’s rights hereunder, and at Lessee’s sole expense. If by the terms of any such Legal Requirement compliance therewith pending the prosecution of any such proceeding may legally be delayed without the incurrence of any lien, charge or liability of any kind against the Facility or Lessee’s leasehold interest therein and without subjecting Lessee or Lessor to any liability, civil or criminal, for failure so to comply therewith, Lessee may delay compliance therewith until the final determination of such proceeding. If any lien, charge or civil or criminal liability would be incurred by reason of any such delay, Lessee, on the prior written consent of Lessor, which consent shall not be unreasonably withheld, may nonetheless contest as aforesaid and delay as aforesaid provided that such delay would not subject Lessor to criminal liability and Lessee both

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(a) furnishes to Lessor security reasonably satisfactory to Lessor against any loss or injury by reason of such contest or delay and (b) prosecutes the contest with due diligence and in good faith.

8.3 Environmental Covenants. Lessor and Lessee (in addition to, and not in diminution of, Lessee’s covenants and undertakings in Sections 8.1 and 8.2 hereof) covenant and agree as follows:

(a) At all times hereafter until such time as all liabilities, duties or obligations of Lessee to the Lessor under the Lease have been satisfied in full, Lessee shall fully comply with all Environmental Laws applicable to the Leased Property and the operations thereon unless caused by the acts or grossly negligent failures to act of Lessor. Lessee agrees to give Lessor written notice of the following, promptly after Lessee receives knowledge thereof: (1) all Environmental Liabilities; (2) all pending, threatened or anticipated Proceedings, and all notices, demands, requests or investigations, relating to any Environmental Liability or relating to the issuance, revocation or change in any Environmental Authorization required for operation of the Leased Property; (3) all Releases at, on, in, under or in any way affecting the Leased Property, or any Release at, on, in or under any property adjacent to the Leased Property; and (4) all facts, events or conditions that could reasonably lead to the occurrence of any of the above-referenced matters.

(b) Lessee hereby agrees to defend, indemnify and save harmless any and all Lessor Indemnified Parties from and against any and all Environmental Liabilities except to the extent caused by the willful misconduct or gross negligence of Lessor.

(c) Lessor hereby agrees to defend, indemnify and save harmless any and all Lessee Indemnified Parties from and against any and all Environmental Liabilities caused by the willful misconduct or gross negligence of Lessor.

(d) If any Proceeding is brought against any Indemnified Party in respect of an Environmental Liability with respect to which such Indemnified Party may claim indemnification hereunder the Indemnifying Party, upon request, shall at its sole expense resist and defend such Proceeding, or cause the same to be resisted and defended by counsel designated by the Indemnified Party and approved by the Indemnifying Party, which approval shall not be unreasonably withheld; provided, however, 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. Each Indemnified Party shall have the right to employ separate counsel in any such Proceeding and to participate in the defense thereof, but the fees and expenses of such counsel will be at the sole expense of such Indemnified Party unless such counsel has been approved by the Indemnifying Party, which approval shall not be unreasonably withheld. The Indemnifying Party shall not be liable for any settlement of any such Proceeding made without its consent, which shall not be unreasonably withheld, but if settled with the consent of the Indemnifying Party, or if settled without its consent (if its consent shall be unreasonably withheld), or if there be a final, nonappealable judgment for an adversary party in any such Proceeding, the Indemnifying Party shall indemnify and hold harmless the Indemnified Parties from and against any liabilities incurred by such Indemnified Parties by reason of such settlement or judgment.

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(e) At any time any Indemnified Party has reason to believe circumstances exist which could reasonably result in an Environmental Liability, upon reasonable prior written notice to Lessee stating such Indemnified Party’s basis for such belief, an Indemnified Party shall be given immediate access to the Leased Property (including, but not limited to, the right to enter upon, investigate, drill wells, take soil borings, excavate, monitor, test, cap and use available land for the testing of remedial technologies), Lessee’s employees, and to all relevant documents and records regarding the matter as to which a responsibility, liability or obligation is asserted or which is the subject of any Proceeding; provided that such access may be conditioned or restricted as may be reasonably necessary to ensure compliance with law and the safety of personnel and facilities or to protect confidential or privileged information. All Indemnified Parties requesting such immediate access and cooperation shall endeavor to coordinate such efforts to result in as minimal interruption of the operation of the Leased Property as practicable.

(f) The indemnification rights and obligations provided for in this Article VIII shall be in addition to any indemnification rights and obligations provided for elsewhere in this Lease.

(g) The indemnification rights and obligations provided for in this Article VIII shall survive the termination of this Lease.

(h) For purposes of this Section 8.3, all amounts for which any Indemnified Party seeks indemnification shall be computed net of (a) any actual income tax benefit resulting therefrom to such Indemnified Party, (b) any insurance proceeds received (net of tax effects) with respect thereto, and (c) any amounts recovered (net of tax effects) from any third parties based on claims the Indemnified Party has against such third parties which reduce the damages that would otherwise be sustained; provided that in all cases, the timing of the receipt or realization of insurance proceeds or income tax benefits or recoveries from third parties shall be taken into account in determining the amount of reduction of damages. Each Indemnified Party agrees to use its reasonable efforts to pursue, or assign to Lessee or Lessor, as the case may be, any claims or rights it may have against any third party which would materially reduce the amount of damages otherwise incurred by such Indemnified Party.

(i) Notwithstanding anything to the contrary contained in this Lease, if Lessor shall become entitled to the possession of the Leased Property by virtue of the termination of the Lease or repossession of the Leased Property, then Lessor may assign its indemnification rights under Section 8.3 of this Lease (but not any other rights hereunder) to any Person to whom the Lessor subsequently transfers the Leased Property, subject to the following conditions and limitations, each of which shall be deemed to be incorporated into the terms of such assignment, whether or not specifically referred to therein:

(i) The indemnification rights referred to in this section may be assigned only if a known Environmental Liability then exists or if a Proceeding is then pending or, to the knowledge of Lessee or Lessor, then threatened with respect to the Leased Property;

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(ii) Such indemnification rights shall be limited to Environmental Liabilities relating to or specifically affecting the Leased Property; and

(iii) Any assignment of such indemnification rights shall be limited to the immediate transferee of Lessor, and shall not extend to any such transferee’s successors or assigns.

ARTICLE 9

MAINTENANCE AND REPAIRS

9.1 Maintenance and Repair.

(a) Except as provided in Section 9.1(b) or Articles VIII or XIV, Lessee, at its sole expense, will keep the Leased Property in good order and repair except for ordinary wear and tear (whether or not the need for such repairs occurred as a result of Lessee’s use, any prior use, the elements or the age of the Leased Property, or any portion thereof), and, with reasonable promptness, make all necessary and appropriate repairs, replacements, and improvements thereto of every kind and nature, whether interior or exterior, ordinary or extraordinary, foreseen or unforeseen or arising by reason of a condition existing prior to the commencement of the Term of this Lease (concealed or otherwise), or required by any governmental agency having jurisdiction over the Leased Property. Lessee, however, shall be permitted to prosecute claims against Lessor’s predecessors in title for breach of any representation or warranty or for any latent defects in the Leased Property to be maintained by Lessee unless Lessor is already diligently pursuing such a claim. All repairs shall, to the extent reasonably achievable, be at least equivalent in quality to the original work. Lessee will not take or omit to take any action, the taking or omission of which might materially impair the value or the usefulness of the Leased Property or any part thereof for its Primary Intended Use.

(b) Except as set forth in Article XVIII of this Lease, Lessee shall be required to make (at the sole cost and expense of Lessor) all Capital Expenditures required in connection with (i) Emergency Situations, (ii) Legal Requirements, (iii) maintenance of the Franchise Agreement, (iv) the performance by Lessee of its obligations under this Lease, and (v) other additions to the Leased Property as it may reasonably deem appropriate and that are permitted hereunder during the Term.

(c) Lessee will, upon the expiration or prior termination of the Term, vacate and surrender the Leased Property to Lessor in the condition in which the Leased Property was originally received from Lessor, except as repaired, rebuilt, restored, altered or added to as permitted or required by the provisions of this Lease and except for ordinary wear and tear (subject to the obligation of Lessee to maintain the Leased Property in good order and repair, as would a prudent owner, during the entire Term of the Lease, to the extent required in Section 9.1(a)), or damage by casualty or Condemnation (subject to the obligations of Lessee to restore or repair as set forth in the Lease.)

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9.2 Encroachments, Restrictions, etc. If any of the Improvements, at any time, materially encroach upon any property, street or right-of-way adjacent to the Leased Property, or violate the agreements or conditions contained in any lawful restrictive covenant or other agreement affecting the Leased Property, or any part thereof, or impair the rights of others under any easement or right-of-way to which the Leased Property is subject, then promptly upon the request of Lessor or at the behest of any person affected by any such encroachment, violation or impairment, Lessee shall, at its expense, subject to its right to contest the existence of any encroachment, violation or impairment and in such case, in the event of an adverse final determination, either (a) obtain valid and effective waivers or settlements of all claims, liabilities and damages resulting from each such encroachment, violation or impairment, whether the same shall affect Lessor or Lessee or (b) make such changes in the Improvements, and take such other actions, as Lessee in the good faith exercise of its judgment deems reasonably practicable to remove such encroachment, and to end such violation or impairment, including, if necessary, the alteration of any of the Improvements, and in any event take all such actions as may be necessary in order to be able to continue the operation of the Improvements for the Primary Intended Use substantially in the manner and to the extent the Improvements were operated prior to the assertion of such violation, impairment or encroachment. Any such alteration shall be made in conformity with the applicable requirements of Article X. Lessee’s obligations under this Section 9.2 shall be in addition to and shall in no way discharge or diminish any obligation of any insurer under any policy of title or other insurance held by Lessor.

ARTICLE 10

ALTERATIONS

10.1 Alterations. Lessor shall have the right to make additions, modifications or improvements to the Leased Property from time to time as Lessor, in its discretion, may deem to be desirable for the permitted uses and purposes of the Leased Property, provided that such action will not significantly alter the character or purposes or significantly detract from the value or operating efficiency thereof and will not significantly impair the revenue-producing capability of the Leased Property or adversely affect the ability of the Lessee to comply with the provisions of this Lease. The cost of such additions, modifications or improvements to the Leased Property shall be paid by Lessor, and all such additions, modifications and improvements shall, be included under the terms of this Lease and shall at all times be the property of Lessor.

ARTICLE 11

PROHIBITED LIENS AND ENCUMBRANCES

11.1 Liens. Subject to the provision of Article XII relating to permitted contests, Lessee will not directly or indirectly create or allow to remain and will promptly discharge at its expense any lien, encumbrance, attachment, title retention agreement or claim upon the Leased Property or any attachment, levy, claim or encumbrance in respect of the Rent, not including,

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however, (a) this Lease, (b) the matters, if any, included as exceptions in the title policy insuring Lessor’s interest in the Leased Property, (c) restrictions, liens and other encumbrances which are consented to in writing by Lessor or any easements granted pursuant to the provisions of Section 7.3 of this Lease, (d) liens for those taxes upon Lessor which Lessee is not required to pay hereunder, (e) subleases permitted by Article XXIII hereof, (f) liens for Impositions or for sums resulting from noncompliance with Legal Requirements so long as (1) the same are not yet payable or are payable without the addition of any fine or penalty or (2) such liens are in the process of being contested as permitted by Article XII, (g) liens of mechanics, laborers, material-men, suppliers or vendors for sums either disputed or not yet due provided that (1) the payment of such sums shall not be postponed under any related contract for more than sixty (60) days after the completion of the action giving rise to such lien and such reserve or other appropriate provisions as shall be required by law or generally accepted accounting principles shall have been made therefor or (2) any such liens are in the process of being contested as permitted by Article XII hereof, and (h) any liens which are the responsibility of Lessor pursuant to the provisions of Article IV of this Lease.

ARTICLE 12

PERMITTED CONTESTS

12.1 Permitted Contests. Lessee shall have the right to contest the amount or validity of any Imposition to be paid by Lessee or any Legal Requirement or Insurance Requirement or any lien, attachment, levy, encumbrance, charge or claim (“Claims”) not otherwise permitted by Article XI, by appropriate legal proceedings in good faith and with due diligence (but this shall not be deemed or construed in any way to relieve, modify or extend Lessee’s covenants to pay or its covenants to cause to be paid any such charges at the time and in the manner as in this Article XII provided), on condition, however, that such legal proceedings shall not operate to relieve Lessee from its obligations hereunder and shall not cause the sale or risk the loss of the Leased Property, or any part thereof, or cause Lessor or Lessee to be in default under any mortgage, deed of trust or security deed encumbering the Leased Property or any interest therein. Upon the request of Lessor, Lessee shall either (a) provide a bond or other assurance reasonably satisfactory to Lessor that all Claims which may be assessed against the Leased Property together with interest and penalties, if any, thereon will be paid, or (b) deposit within the time otherwise required for payment with a bank or trust company as trustee upon terms reasonably satisfactory to Lessor, as security for the payment of such Claims, money in an amount sufficient to pay the same, together with interest and penalties in connection therewith, as to all Claims which may be assessed against or become a Claim on the Leased Property, or any part thereof, in said legal proceedings. Lessee shall furnish Lessor and any lender of Lessor with reasonable evidence of such deposit within five days of the same. Lessor agrees to join in any such proceedings if the same be required to legally prosecute such contest of the validity of such Claims; provided, however, that Lessor shall not thereby be subjected to any liability for the payment of any costs or expenses in connection with any proceedings brought by Lessee; and Lessee covenants to indemnify and save harmless Lessor from any such costs or expenses. Lessee shall be entitled to any refund of any Claims and such charges and penalties or interest thereon which have been paid by Lessee or paid by Lessor and for which Lessor has been fully reimbursed. In the event

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that Lessee fails to pay any Claims when due or to provide the security therefor as provided in this paragraph and to diligently prosecute any contest of the same, Lessor may, upon ten days advance Notice to Lessee, pay such charges together with any interest and penalties and the same shall be repayable by Lessee to Lessor as Additional Charges at the next Payment Date provided for in this Lease. Provided, however, that should Lessor reasonably determine that the giving of such Notice would risk loss to the Leased Property or cause damage to Lessor, then Lessor shall give such Notice as is practical under the circumstances. Lessor reserves the right to contest any of the Claims at its expense not pursued by Lessee. Lessor and Lessee agree to cooperate in coordinating the contest of any Claims.

ARTICLE 13

INSURANCE REQUIREMENTS

13.1 General Insurance Requirements. During the Term of this Lease, Lessee and/or Lessor, as applicable shall at all times keep the Leased Property insured (or cause the Leased Property to be insured) with the kinds and amounts of insurance described below. This insurance shall be written by companies authorized to issue insurance in the State. The policies must name Lessor and/or Lessee, as the insured or as an additional named insured, as the case may be. Losses shall be payable to Lessor or Lessee as provided in this Lease. Any loss adjustment shall require the written consent of Lessor and Lessee, each acting reasonably and in good faith. Evidence of insurance shall be deposited with Lessor (with a copy to Lessee). The policies on the Leased Property, including the Improvements, Fixtures and Lessee’s Personal Property, shall include:

(a) To be paid for by Lessor as primary insured, with Lessee (lender or ground lessor, as applicable) as additional insured:

(i) Building insurance on the “Special Form” (formerly “All Risk” form) (including earthquake and flood in reasonable amounts as determined by Lessor) in an amount not less than 100% of the then full replacement cost thereof (as defined in Section 13.2) or such other amount which is acceptable to Lessor, and personal property insurance on the “Special Form” in the full amount of the replacement cost thereof;

(ii) Insurance for loss or damage (direct and indirect) from steam boilers, pressure vessels or similar apparatus, now or hereafter installed in the Facility, in the minimum amount of $5,000,000 or in such greater amounts as are then customary or as may be reasonably requested by Lessor from time to time;

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(b) To be paid for by Lessee as primary insured, with Lessor, franchisor and Manager, as required, as additional insured:

(i) Personal property insurance on the “Special Form” in the full amount of the replacement cost thereof for any personal property owned by Lessee;

(ii) Loss of income insurance on the “Special Form”, in the amount of one year of the sum of Base Rent plus Percentage Rent (based on the most recently completed Lease Year of operation or, to the extent the Leased Property has not been operated for an entire 12-month Lease Year, based on prorated Percentage Rent) for the benefit of Lessor, and business interruption insurance on the “Special Form” in the amount of one year of gross operating profit, for the benefit of Lessee;

(iii) Commercial general liability insurance, with amounts not less than $1,000,000 combined single limit for each occurrence and $2,000,000 for the aggregate of all occurrences within each policy year, as well as excess liability (umbrella) insurance with limited of at least $35,000,000 per occurrence, covering each of the following: bodily injury, death, or property damage liability per occurrence, personal and advertising injury, general aggregate, products and completed operations, with respect to Lessor, and “all risk legal liability” including liquor law or “dram shop” liability if liquor or alcoholic beverages are served on the Leased Property) with respect to Lessor and Lessee;

(c) To be paid for by Lessee for the benefit of Manager as primary insured, with Lessor and Lessee as additional insured:

(i) Automobile insurance on vehicles operating in conjunction with the Facility with limits of liability of at least $1,000,000 combined, single limit coverage;

(ii) Workers’ compensation and employer’s liability insurance as may be required under applicable laws to the extent necessary to protect Lessor, Lessee, and the Leased Property against workers’ compensation claims covering all employees at the Facility, with such deductible limits or self insured retentions as may be established from time to time by Lessee and/or it’s Manager;

(iii) Fidelity bonds, or dishonest employee insurance with limits and deductibles as may be reasonably requested by Lessor, covering Manager’s employees in job classifications normally bonded under prudent hotel management practices in the United States or otherwise required by law; and

(d) Such other insurance covering such other hazards and in such amounts as may be customary for comparable properties in the area of the Leased Property to be paid for and carried by Lessor or Lessee, as customary, and which is available from insurance companies, insurance pools or other appropriate companies authorized to do business in the State at rates which are economically practicable in relation to the risks covered as may be reasonably requested by Lessor.

13.2 Replacement Cost. The term “Full Replacement Cost” as used herein shall mean the actual replacement cost of the Leased Property requiring replacement from time to time including an increased cost of construction endorsement, if available, and the cost of debris removal. In the event either party believes that full replacement cost (the then-replacement cost

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less such exclusions) has increased or decreased at any time during the Term, it shall have the right to have such full replacement cost re-determined.

13.3 Waiver of Subrogation. All insurance policies carried by Lessor or Lessee covering the Leased Property, the Fixtures, the Facility or Lessee’s Personal Property, including, without limitation, contents, fire and casualty insurance, shall expressly waive any right of subrogation on the part of the insurer against the other party. The parties hereto agree that their policies will include such waiver clause or endorsement so long as the same are obtainable without extra cost, and in the event of such an extra charge the other party, at its election, may pay the same, but shall not be obligated to do so.

13.4 Form Satisfactory, etc. All of the policies of insurance referred to in this Article XIII shall be written in a form, with deductibles and by insurance companies satisfactory to Lessor and shall satisfy the requirements of the Franchise Agreement, if any. Lessee shall pay or cause the payment of all of the premiums required for any insurance required to be carried by Lessee hereunder, and shall deliver such policies or certificates thereof to Lessor prior to their effective date (and, with respect to any renewal policy, thirty (30) days prior to the expiration of the existing policy), and in the event of the failure by Lessee either to effect such insurance as herein called for or to pay the premiums therefor, or to deliver such policies or certificates thereof to Lessor at the times required, Lessor shall be entitled, but shall have no obligation, after ten (10) days’ Notice to Lessee, to effect such insurance and pay the premiums therefor, and to be reimbursed for any premium or premiums upon written demand therefore. Each insurer mentioned in this Article XIII shall agree, by endorsement to the policy or policies issued by it, or by independent instrument furnished to Lessee, that it will give to Lessor thirty (30) days’ written notice before the policy or policies in question shall be materially altered, allowed to expire or canceled.

13.5 Increase in Limits. If either Lessor or Lessee at any time deems the limits of the personal injury or property damage under the comprehensive commercial general liability insurance then carried to be either excessive or insufficient, Lessor or Lessee shall endeavor in good faith to agree on the proper and reasonable limits for such insurance to be carried and such insurance shall thereafter be carried with the limits thus agreed on until further change pursuant to the provisions of this Section.

13.6 Blanket Policy. Notwithstanding anything to the contrary contained in this Article XIII, Lessee may bring the insurance provided for herein within the coverage of a so-called blanket policy or policies of insurance carried and maintained by Lessee or by manager at Lessee’s direction; provided, however, that the coverage afforded to Lessor and Lessee will not be reduced or diminished or otherwise be different from that which would exist under a separate policy meeting all other requirements of this Lease by reason of the use of such blanket policy of insurance, and provided further that the requirements of this Article XIII are otherwise satisfied.

13.7 No Separate Insurance. Lessee shall not on Lessee’s own initiative or pursuant to the request or requirement of any third party, take out separate insurance concurrent in form or contributing in the event of loss with that required in this Article XIII to be furnished, or increase the amount of any then existing insurance by securing an additional policy or additional policies,

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unless all parties having an insurable interest in the subject matter of the insurance, including in all cases Lessor, are included therein as additional insureds, and the loss is payable under such additional separate insurance in the same manner as losses are payable under this Lease. Lessee shall immediately notify Lessor that Lessee has obtained any such separate insurance or of the increasing of any of the amounts of the then existing insurance.

ARTICLE 14

INSURANCE PROCEEDS

14.1 Insurance Proceeds. Subject to the provisions of Section 14.6 and the terms of any lender mortgage, all proceeds payable by reason of any loss or damage to the Leased Property, or any portion thereof, and insured under any policy of insurance required by Article XIII of this Lease shall be paid to Lessor and held by Lessor in an interest-bearing account, shall be made available, if applicable, for reconstruction or repair, as the case may be, of any damage to or destruction of the Leased Property, or any portion thereof, and, if applicable, shall be paid out by Lessor from time to time for the reasonable costs of such reconstruction or repair upon satisfaction of reasonable terms and conditions specified by Lessor. Any excess proceeds of insurance remaining after the completion of the restoration or reconstruction of the Leased Property shall be paid to Lessor. If neither Lessor nor Lessee is required or elects to repair and restore, all insurance proceeds shall be retained by Lessor. All salvage resulting from any risk covered by insurance shall belong to Lessor.

14.2 Reconstruction in the Event of Damage or Destruction Covered by Insurance.

(a) Except as provided in Section 14.6, if during the Term the Leased Property is totally or partially destroyed by a risk covered by the insurance described in Article XIII, whether or not such damage or destruction renders the Facility Unsuitable for its Primary Intended Use, Lessee shall be obligated, but only to the extent of any insurance proceeds made available to Lessee and any other sums advanced by Lessor pursuant to the next sentence, to restore the Facility to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with the terms of the Lease. If the insurance proceeds are not adequate to restore the Facility to that condition, each of Lessor and Lessee shall have the right to terminate this Lease, without in any way affecting any other leases in effect between Lessor and Lessee, by giving Notice to the other and all insurance proceeds shall be retained by Lessor; provided, however, that, if such termination is by Lessee, Lessor shall have the right, in its sole discretion, to nullify the termination and keep this Lease in full force by providing, within thirty (30) days after Lessee’s Notice of termination, a Notice to Lessee of Lessor’s unconditional, legally binding obligation to be responsible for all restoration costs in excess of the insurance proceeds. If this Lease is not terminated and Lessee restores the Facility, the insurance proceeds, and any other sums made available by Lessor as aforesaid, shall be paid out by Lessor from time to time for the reasonable costs of such restoration upon satisfaction of reasonable terms and conditions, and any excess proceeds remaining after such restoration shall be retained by Lessor.

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(b) Notwithstanding the provisions of Section 14.2(a) above, if Lessee cannot within a reasonable time obtain all necessary government approvals, including building permits, licenses and conditional use permits, after diligent efforts to do so, to perform all required repair and restoration work and to operate the Facility for its Primary Intended Use in substantially the same manner as that existing immediately prior to such damage or destruction and otherwise in accordance with the terms of the Lease, either Lessor or Lessee may terminate this Lease by providing Notice to the other party, without in any way affecting any other Leases then in effect between Lessor and Lessee.

14.3 Reconstruction in the event of Damage or Destruction not covered by Insurance. Except as provided in Section 14.6, if during the Term the Facility is totally or materially destroyed by a risk not covered by the insurance described in Article XIII, whether or not such damage or destruction renders the Facility Unsuitable for its Primary Intended Use, the provisions of Section 14.2 applicable to casualties for which insurance proceeds are inadequate shall govern.

14.4 Lessee’s Property. All insurance proceeds payable by reason of any loss of or damage to any of Lessee’s Personal Property shall be paid to Lessee; provided, however, that no such payments shall diminish or reduce the insurance payments otherwise payable to or for the benefit of Lessor hereunder.

14.5 Abatement of Rent. Any damage or destruction due to casualty notwithstanding, this Lease shall remain in full force and effect (unless otherwise terminated as set forth hereinabove) and Lessee’s obligation to make rental payments and to pay Rent required by this Lease shall remain unabated by any damage or destruction which does not result in a reduction of Gross Revenues. If and to the extent that any damage or destruction results in a reduction of Gross Revenues which would otherwise be realizable from the operation of the Facility, then Lessor shall receive all loss of income insurance and Lessee shall have no obligation to pay Rent in excess of the amount of Percentage Rent, if any, realizable from Gross Revenues generated by the operation of the Leased Property during the existence of such damage or destruction.

14.6 Damage near end of Term. Notwithstanding any provisions of Section 14.2 or 14.3 to the contrary, if damage to or destruction of the Facility unsuitable for its Primary Intended Use occurs during the last twenty-four (24) months of the Term, then Lessee shall have the right to terminate this Lease by giving written notice to Lessor within thirty (30) days after the date of damage or destruction, whereupon all accrued Rent shall be paid immediately, and this Lease shall automatically terminate five days after the date of such notice.

14.7 Waiver. Lessee hereby waives any statutory rights of termination that may arise by reason of any damage or destruction of the Facility that Lessor is obligated to restore or may restore under any of the provisions of this Lease.

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ARTICLE 15

CONDEMNATION; TAKING

15.1 Definitions.

(a) “Condemnation” means a Taking resulting from (1) the exercise of any governmental power, whether by legal proceedings or otherwise, by a Condemnor, and (2) a voluntary sale or transfer by Lessor to any Condemnor, either under threat of condemnation or while legal proceedings for condemnation are pending.

(b) “Date of Taking” means the date the Condemnor has the right to possession of the property being condemned.

(c) “Award” means all compensation, sums or anything of value awarded, paid or received on a total or partial Condemnation.

(d) “Condemnor” means any public or quasi-public authority, or private corporation or individual, having the power of Condemnation.

15.2 Parties’ Rights and Obligations. If during the Term there is any Condemnation of all or any part of the Leased Property or any interest in this Lease, the rights and obligations of Lessor and Lessee shall be determined by this Article XV.

15.3 Total Taking. If title to the fee of the whole of the Leased Property is condemned by any Condemnor, this Lease shall cease and terminate as of the Date of Taking by the Condemnor. If title to the fee of less than the whole of the Leased Property is so taken or condemned, which nevertheless renders the Leased Property Unsuitable or Uneconomic for its Primary Intended Use, Lessee and Lessor shall each have the option, by notice to the other, at any time prior to the Date of Taking, to terminate this Lease as of the Date of Taking. Upon such date, if such Notice has been given, this Lease shall thereupon cease and terminate. All Base Rent, Percentage Rent and Additional Charges paid or payable by Lessee hereunder shall be apportioned as of the Date of Taking, and Lessee shall promptly pay Lessor such amounts.

15.4 Allocation of Award. The total Award made with respect to the Leased Property in connection with a Total Taking shall be equitably apportioned between Lessor and Lessee in proportion to the then fair market values of the respective estates and interests of Lessor and Lessee in and to the Leased Property and under this Lease.

15.5 Partial Taking. If less than the whole of the Leased Property is condemned, and the Leased Property is still suitable for its Primary Intended Use, and not Uneconomic for its Primary Intended Use, or if Lessee or Lessor is entitled but neither elects not to terminate this Lease as provided in Section 15.3, Lessee at its cost shall with all reasonable dispatch, but only to the extent of any condemnation awards made available to Lessee and any other sums advanced by Lessor pursuant to the next sentence, restore the untaken portion of any Improvements so that such Improvements constitute a complete architectural unit of the same general character and condition (as nearly as may be possible under the circumstances) as the Improvements existing immediately prior to the Condemnation. If the condemnation awards are

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not adequate to restore the Facility to that condition, each of Lessor and Lessee shall have the right to terminate this Lease, without in any way affecting any other leases in effect between Lessor and Lessee, by giving Notice to the other; provided, however, that if such termination is by Lessee, Lessor shall have the right, in its sole discretion, to nullify the termination and keep this Lease in full force by providing, within thirty (30) days after Lessee’s Notice of termination, a Notice to Lessee of Lessor’s unconditional, legally binding obligation to be responsible for all restoration costs in excess of the condemnation awards. If this Lease is not terminated and Lessee restores the Facility, the condemnation awards, and any other sums made available by Lessor as aforesaid, subject to the terms of any lender mortgage, shall be held in trust by Lessor and paid out by Lessor from time to time for the reasonable costs of such restoration upon satisfaction of reasonable terms and conditions, and any excess awards remaining after such restoration shall be retained by Lessor unless the partial condemnation materially impairs the operations or financial performance of the Facility, in which latter event the award shall be equitably apportioned between Lessor and Lessee in proportion to the then fair market values of the respective estates and interests of Lessor and Lessee in and to the Leased Property and under this Lease.

15.6 Temporary Taking. If the whole or any part of the Leased Property or of Lessee’s interest under this Lease is condemned by any Condemnor for its temporary use or occupancy, this Lease shall not terminate by reason thereof, and Lessee shall continue to pay, in the manner and at the terms herein specified, the full amounts of the Base Rent, Percentage Rent and Additional Charges. In addition, the entire amount of any Award made for such Condemnation allocable to the Term of this Lease, whether paid by way of damages, rent or otherwise, shall be paid to Lessee and, except for any portion thereof utilized for restoration, shall be deemed to be Room Revenues for the purpose of calculating the Percentage Rent payable hereunder during such temporary taking. Except only to the extent that Lessee may be prevented from so doing pursuant to the terms of the order of the Condemnor, Lessee shall continue to perform and observe all of the other terms, covenants, conditions and obligations hereof on the part of the Lessee to be performed and observed, as though such Condemnation had not occurred. Lessee covenants that upon the termination of any such period of temporary use or occupancy it will, at its sole cost and expense (subject to Lessor’s contribution as set forth below), restore the Leased Property as nearly as may be reasonably possible to the condition in which the same was immediately prior to such Condemnation, unless (a) such period of temporary use or occupancy extends beyond the expiration of the Term, in which case Lessee shall not be required to make such restoration, or (b) the condemnation award is inadequate to cover the costs of such restoration, in which case the provisions of Section 15.5 applicable to inadequate awards shall govern. If restoration is required in connection with such temporary taking and the condemnation award (together with any other sums Lessor elects, in its sole discretion, to advance) is adequate to pay the costs thereof, the provisions of Section 15.5 shall govern the disbursement of the awards (and other sums, if applicable) and the disposition of any awards in excess of restoration costs. If restoration is required hereunder, Lessor shall contribute to the cost of such restoration that portion of its entire Award that is specifically allocated to such restoration in the judgment or order of the court, if any, and Lessee shall fund the balance of such costs in advance of restoration in a manner reasonably satisfactory to Lessor.

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ARTICLE 16

EVENTS OF DEFAULT; REMEDIES; DAMAGES

16.1 Events of Default.

If any one or more of the following events (individually, an “Event of Default”) occurs:

(a) if Lessee fails to make payment of the Base Rent or Percentage Rentor Additional Charges when the same become due and payable for a period of ten (10) days after receipt by the Lessee of Notice from the Lessor thereof;

(b) if Lessee fails to observe or perform any term, covenant or condition of this Lease, other than the payment of Rent or Additional Rent, and such failure is not cured by Lessee within a period of thirty (30) days after receipt by the Lessee of Notice thereof from Lessor, unless such failure cannot with due diligence be cured within a period of thirty (30) days, in which case it shall not be deemed an Event of Default if Lessee proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof provided, however, that in no event shall such cure period extend beyond one hundred and twenty (120) days after such Notice; or

(c) if the Lessee shall file a petition in bankruptcy or reorganization for an arrangement pursuant to any federal or state bankruptcy law or any similar federal or state law, or shall be adjudicated a bankrupt or shall make an assignment for the benefit of creditors or shall admit in writing its inability to pay its debts generally as they become due, or if a petition or answer proposing the adjudication of the Lessee as a bankrupt or its reorganization pursuant to any federal or state bankruptcy law or any similar federal or state law shall be filed in any court and the Lessee shall be adjudicated a bankrupt and such adjudication shall not be vacated or set aside or stayed within sixty (60) days after the entry of an order in respect thereof, or if a receiver of the Lessee or of the whole or substantially all of the assets of the Lessee shall be appointed in any proceeding brought by the Lessee or if any such receiver, trustee or liquidator shall be appointed in any proceeding brought against the Lessee and shall not be vacated or set aside or stayed within sixty (60) days after such appointment; or

(d) if Lessee is liquidated or dissolved, or begins proceedings toward such liquidation or dissolution, or, in any manner, permits the sale or divestiture of substantially all of its assets; or

(e) if the estate or interest of Lessee in the Leased Property or any part thereof is voluntarily or involuntarily transferred, assigned, conveyed, levied upon or attached in any proceeding (unless Lessee is contesting such lien or attachment in good faith in accordance with Article XII hereof); or

(f) if, except as a result of and to the extent required by damage, destruction, partial or complete Condemnation or Unavoidable Delay, Lessee voluntarily ceases operations on the Leased Property for a period in excess of thirty (30) days; or

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(g) if: (A) an Event of Default has been declared by the franchisor under the Franchise Agreement with respect to the Facility on the Leased Premises as a result of any action or failure to act by Lessee or any Person with whom Lessee contracts for management services at the Facility, and (B) Lessee has failed, within thirty (30) days thereafter, to cure such default by either (1) curing the underlying default under the Franchise Agreement and paying all costs and expenses associated therewith, or (2) obtaining at Lessee’s sole cost and expense a substitute franchise license agreement with a substitute franchisor acceptable to Lessor, on terms and conditions acceptable to Lessor; provided, however, that if Lessee is in good faith disputing an assertion of default by the franchisor or is proceeding diligently to cure such default, the 30-day period shall be extended for such period of time as Lessee continues to dispute such default in good faith or diligently proceeds to cure such default, so long as there is no period during which the Facility is not operated pursuant to a Franchise Agreement approved by Lessor; then, and in any such event, Lessor may exercise one or more remedies available to it herein or at law or in equity, including, but not limited to, its right to terminate this Lease by giving Lessee not less than ten (10) days’ Notice of such termination.

If litigation is commenced with respect to any alleged default under this Lease, the prevailing party in such litigation shall receive, in addition to its damages incurred, such sum as the court shall determine as its reasonable attorneys’ fees, and all costs and expenses incurred in connection therewith.

No Event of Default (other than a failure to make a payment of money) shall be deemed to exist under clause (c) above during any time the curing thereof is prevented by an Unavoidable Delay, provided that upon the cessation of such Unavoidable Delay, Lessee remedies such default or Event of Default without further delay.

16.2 Surrender. If an Event of Default occurs (and the event giving rise to such Event of Default has not been cured within the curative period relating thereto as set forth in Section 16.1) and is continuing, whether or not this Lease has been terminated pursuant to Section 16.1, Lessee shall, if requested by Lessor so to do, immediately surrender to Lessor the Leased Property including, without limitation, any and all books, records, files, licenses, permits and keys relating thereto, and quit the same and Lessor may enter upon and repossess the Leased Property by reasonable force, summary proceedings, ejectment or otherwise, and may remove Lessee and all other persons and any and all personal property from the Leased Property, subject to rights of any hotel guests and to any requirement of law. Lessee hereby waives any and all requirements of applicable laws for service of notice to re-enter the Leased Property. Lessor shall be under no obligation to, but may if it so chooses, re-let the Leased Property or otherwise mitigate Lessor’s damages, except unless otherwise required by applicable law.

16.3 Damages. Neither (a) the termination of this Lease, (b) the repossession of the Leased Property, (c) the failure of Lessor to re-let the Leased Property, nor (d) the re-letting of all or any portion thereof, shall relieve Lessee of its liability and obligations hereunder, all of which shall survive any such termination, repossession or re-letting. In the event of any such termination, Lessee shall forthwith pay to Lessor all Rent due and payable with respect to the Leased Property to and including the date of such termination.

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Lessee shall forthwith pay to Lessor, at Lessor’s option, as and for liquidated and agreed current damages for Lessee’s default, either:

(a) Without termination of Lessee’s right to possession of the Leased Property, each installment of Rent and other sums payable by Lessee to Lessor under the Lease as the same becomes due and payable, which Rent and other sums shall bear interest at the Overdue Rate, and Lessor may enforce, by action or otherwise, any other term or covenant of this Lease; or

(b) the sum of:

(i) the unpaid Rent which had been earned at the time of termination, repossession or reletting, and

(ii) the amount at the time of termination, repossession or reletting of the amount by which the unpaid Rent for the balance of the Term after the time of termination, repossession or reletting, exceeds the amount of such rental loss that Lessee proves could be reasonably avoided, and

(iii) any other amount necessary to compensate Lessor for all the detriment proximately caused by Lessee’s failure to perform its obligations under this Lease or which in the ordinary course of things, would be likely to result therefrom. The amount at the time of termination, repossession or reletting referred to in subparagraph (B) is computed by discounting such amount at the discount rate of the Federal Reserve Bank of New York at the time of award plus 1%.

Rent for the purposes of this Section 16.3 shall be a sum equal to (i) the average of the annual amounts of the greater of the Base Rent or Percentage Rent for the three Fiscal Years immediately preceding the Fiscal Year in which the termination, re-entry or repossession takes place, or (ii) if three Fiscal Years shall not have elapsed, the average of the greater of the Base Rent or Percentage Rent during the preceding Fiscal Years during which the Lease was in effect, or (iii) if one Fiscal Year has not elapsed, the amount derived by annualizing the greater of the Base Rent or Percentage Rent from the effective date of this Lease.

16.4 Waiver. If this Lease is terminated pursuant to Section 16.1, Lessee waives, to the extent permitted by applicable law, (a) any right to a trial by jury in the event of summary proceedings to enforce the remedies set forth in this Article XVI, and (b) the benefit of any laws now or hereafter in force exempting property from liability for rent or for debt and Lessor waives any right to “pierce the corporate veil” of Lessee other than to the extent funds shall have been inappropriately paid to any Affiliate of Lessee following a default resulting in an Event of Default.

16.5 Application of Funds. Any payments received by Lessor under any of the provisions of this Lease during the existence or continuance of any Event of Default shall be applied to Lessee’s obligations in the order that Lessor may determine or as may be prescribed by the laws of the State.

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ARTICLE 17

LESSOR’S RIGHT TO CURE

17.1 Lessor’s Right to Cure Lessee’s Default. If Lessee fails to make any payment or to perform any act required to be made or performed under this Lease including, without limitation, Lessee’s failure to comply with the terms of any Franchise Agreement, and fails to cure the same within the relevant time periods provided in Section 16.1, Lessor, without waiving or releasing any obligation of Lessee, and without waiving or releasing any obligation or default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of Lessee, and may, to the extent permitted by law, enter upon the Leased Property for such purpose and, subject to Section 16.4, take all such action thereon as, in Lessor’s opinion, may be necessary or appropriate therefor. No such entry shall be deemed an eviction of Lessee. All sums so paid by Lessor and all costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses, in each case to the extent permitted by law) so incurred, together with a late charge thereon (to the extent permitted by law) at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessor, shall be paid by Lessee to Lessor on demand. The obligations of Lessee and rights of Lessor contained in this Article XVII shall survive the expiration or earlier termination of this Lease.

ARTICLE 18

RESERVED

ARTICLE 19

REIT REQUIREMENTS

19.1 REIT Requirements.

(a) Lessee understands that, in order for MHI to qualify as a REIT, the following requirements (the “REIT Requirements”) must be satisfied:

(i) The average of the fair market values of Lessor’s personal property that is leased to Lessee under a lease at the beginning and end of a calendar year cannot exceed 15% of the average of the aggregate fair market values of all of Lessor’s property that is leased to Lessee under such lease at the beginning and end of such calendar year.

(ii) Lessee cannot sublet the property that is leased to it by Lessor, or enter into any similar arrangement, on any basis such that the rental or other amounts

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paid by the sublessee thereunder would be based, in whole or in part, on either (i) the net income or profits derived by the business activities of the sublessee or (ii) any other formula such that any portion of the rent paid by Lessee to Lessor would fail to qualify as “rents from real property” within the meaning of Section 856(d) of the Code.

(iii) Lessee cannot sublease the property leased to it by Lessor to, or enter into any similar arrangement with, any person in which MHI owns, directly or indirectly, a 10% or more interest, within the meaning of Section 856(d)(2)(B) of the Code.

(iv) Lessee agrees to make an election to be, and to operate as a “Taxable REIT Subsidiary” of MHI within the meaning of Section 856(l) of the Code.

(v) No person can own, directly or directly, capital stock of MHI that exceeds the “LIMIT” (as defined in MHI’s certificate of incorporation, as amended and restated).

(vi) Lessee shall not (i) directly or indirectly operate or manage a “Lodging Facility” within the meaning of Section 856(d)(9)(D)(ii) of the Code or a “Health Care Facility” within the meaning of Section 856(e)(6)(D)(ii) or (ii) directly or indirectly provide to any other person (under a franchise, license, or otherwise) rights to any brand name under which any lodging facility or health care facility is operated; provided, however, that Lessee may provide such rights to Manager to operate or manage a lodging facility as long as such rights are held by Lessee as a franchisee, licensee, or in a similar capacity and such lodging facility is either owned by Lessee or is leased to Lessee by Lessor or one of its Affiliates.

(b) Lessee agrees, and agrees to use reasonable efforts to cause its Affiliates, to use its best efforts to permit the REIT Requirements to be satisfied. Lessee agrees, and agrees to use reasonable efforts to cause its Affiliates, to cooperate in good faith with MHI and Lessor to ensure that the REIT Requirements are satisfied, including but not limited to, providing MHI with information about the ownership of Lessee, and its Affiliates to the extent that such information is reasonably available. Lessee agrees, and agrees to use reasonable efforts to cause its Affiliates, upon request by MHI, and, where appropriate, at MHI’s expense, to take reasonable action necessary to ensure compliance with the REIT Requirements. Immediately after becoming aware that the REIT Requirements are not, or will not be, satisfied, Lessee shall notify, or use reasonable efforts to cause its Affiliates to notify, MHI of such noncompliance.

19.2 Lessee Officer and Employee Limitation. Anything contained in this Lease to the contrary notwithstanding, none of the officers or employees of the Lessee or any subsidiary of Lessee shall be officers or employees of Manager (or any Person who operates or manages the Leased Property). In addition, if a Person serves as both (a) a director of the Lessee or any subsidiary of Lessee and (b) a director and officer (or employee) of Manager (or any Person who operates or manages the Leased Property), that Person shall not receive any compensation for serving as a director of the Lessee or any subsidiary of Lessee. If a person serves as both (a) a director of Manager or any subsidiary of Manager (or any Person who operates or manages the Leased Property) and (b) a director and officer (or employee) of Lessee, that Person shall not receive any compensation for serving as a director of Manager.

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19.3 Management Agreement. Lessee agrees that, in order to comply with certain of the REIT Requirements, it will, at all times during the Term, cause the Leased Property to be operated and managed by a management company (“Manager”) that is an Eligible Independent Contractor. Effective as of the Commencement Date, the Lessee shall enter into an initial management agreement in the form of Exhibit C attached hereto (the “Management Agreement”) and Lessee shall provide Lessor with an executed copy thereof. The Management Agreement is a hotel master management agreement which covers the Leased Property and all of the other hotel properties currently (or to be in the future) leased by Lessee from Affiliates of Lessor. Lessee may not amend, modify or terminate the Management Agreement in any material respect or change the Manager without the prior written consent of Lessor, which consent shall not be unreasonably withheld; provided that a majority of the independent directors of MHI as determined under the AMEX rules and regulations approves such amendment, modification or termination of the Management Agreement. Lessee shall also provide Lessor with copies of any amendments or modifications to the Management Agreement which are entered into from time to time or any other management agreement. Lessor shall have the right to approve in advance any Manager.

ARTICLE 20

HOLDING OVER

20.1 Holding Over. If Lessee for any reason remains in possession of the Leased Property after the expiration or earlier termination of the Term, such possession shall be as a tenant at sufferance during which time Lessee shall pay as rental each month two times the aggregate of (a) one-twelfth of the Base Rent and Percentage Rent payable with respect to the last Fiscal Year of the Term, (b) all Additional Charges accruing during the applicable month and(c) all other sums, if any, payable by Lessee under this Lease with respect to the Leased Property. During such period, Lessee shall be obligated to perform and observe all of the terms, covenants and conditions of this Lease, but shall have no rights hereunder other than the right, to the extent given by law to tenancies at sufferance, to continue its occupancy and use of the Leased Property. Nothing contained herein shall constitute the consent, express or implied, of Lessor to the holding over of Lessee after the expiration or earlier termination of this Lease.

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ARTICLE 21

RISK OF LOSS

21.1 Risk of Loss. During the Term, the risk of loss or of decrease in the enjoyment and beneficial use of the Leased Property in consequence of the damage or destruction thereof by fire, the elements, casualties, thefts, riots, wars or otherwise, or in consequence of foreclosures, attachments, levies or executions (other than those caused by Lessor and those claiming from, through or under Lessor) is assumed by Lessee except as specifically provided in this Lease, and, Lessor shall in no event be answerable or accountable therefor, nor shall any of the events mentioned in this Section entitle Lessee to any abatement of Rent except as specifically provided in this Lease.

ARTICLE 22

INDEMNIFICATION

22.1 Indemnification. Notwithstanding the existence of any insurance, and without regard to the policy limits of any such insurance or self-insurance, but subject to Articles VIII, XIV and XV, Lessee will protect, indemnify, hold harmless and defend Lessor from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, reasonable attorneys’ fees and expenses), to the extent permitted by law, imposed upon or incurred by or asserted against Lessor Indemnified Parties by reason of: (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Leased Property or adjoining sidewalks, including without limitation any claims under liquor liability, “dramshop” or similar laws, (b) any past, present or future use, misuse, non-use, condition, management, maintenance or repair by Lessee or any of its agents, employees or invitees of the Leased Property or Lessee’s Personal Property or any litigation, proceeding or claim by governmental entities or other third parties to which a Lessor Indemnified Party is made a party or participant related to such use, misuse, non-use, condition, management, maintenance, or repair thereof by Lessee or any of its agents, employees or invitees, including any failure of Lessee or any of its agents, employees or invitees to perform any obligations under this Lease or imposed by applicable law (other than arising out of Condemnation proceedings), (c) any Impositions that are the obligations of Lessee pursuant to the applicable provisions of this Lease, (d) any failure on the part of Lessee to perform or comply with any of the terms of this Lease, and (e) the non-performance of any of the terms and provisions of any and all existing and future subleases of the Leased Property to be performed by the landlord thereunder.

Lessor shall indemnify, save harmless and defend Lessee Indemnified Parties from and against all liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses imposed upon or incurred by or asserted against Lessee Indemnified Parties as a result of (a) the gross negligence or willful misconduct of Lessor arising in connection with this Lease or (b) any failure on the part of Lessor to perform or comply with any of its obligations under this Lease.

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Any amounts that become payable by an Indemnifying Party under this Section shall be paid within ten days after liability therefor on the part of the Indemnifying Party is determined by litigation or otherwise, and if not timely paid, shall bear a late charge (to the extent permitted by law) at the Overdue Rate from the date of such determination to the date of payment. An Indemnifying Party, at its expense, shall contest, resist and defend any such claim, action or proceeding asserted or instituted against the Indemnified Party. The Indemnified Party, at its expense, shall be entitled to participate in any such claim, action, or proceeding, and the Indemnifying Party may not compromise or otherwise dispose of the same without the consent of the Indemnified Party, which may not be unreasonably withheld. Nothing herein shall be construed as indemnifying a Lessor Indemnified Party against its own grossly negligent acts or omissions or willful misconduct.

Lessee’s or Lessor’s liability for a breach of the provisions of this Article XXII shall survive any termination of this Lease.

ARTICLE 23

SUBLETTING AND ASSIGNMENT

23.1 Subletting and Assignment. Subject to the provisions of Article XIX and Section 23.2 and any other express conditions or limitations set forth herein, Lessee may, but only with the prior written consent of Lessor which consent shall not be unreasonably withheld, (a) assign this Lease or sublet all or any part of the Leased Property to an Affiliate of Lessee, or (b) sublet any retail or restaurant portion of the Improvements in the normal course of the Primary Intended Use; provided that any subletting to any party other than an Affiliate of Lessee shall not individually as to any one such subletting, or in the aggregate, materially diminish the actual or potential Percentage Rent payable under this Lease. In the case of a subletting, the sublessee shall comply with the provisions of Section 23.2, and in the case of an assignment, the assignee shall assume in writing and agree to keep and perform all of the terms of this Lease on the part of Lessee to be kept and performed and shall be, and become, jointly and severally liable with Lessee for the performance thereof. In case of either an assignment or subletting made during the Term, Lessee shall remain primarily liable, as principal rather than as surety, for the prompt payment of the Rent and for the performance and observance of all of the covenants and conditions to be performed by Lessee hereunder. An original counterpart of each such sublease and assignment and assumption, duly executed by Lessee and such sublessee or assignee, as the case may be, in form and substance satisfactory to Lessor, shall be delivered promptly to Lessor.

23.2 Attornment. Lessee shall insert in each sublease permitted under Section 23.1 provisions to the effect that (a) such sublease is subject and subordinate to all of the terms and provisions of this Lease and to the rights of Lessor hereunder, (b) if this Lease terminates before the expiration of such sublease, the sublessee thereunder will, at Lessor’s option, attorn to Lessor and waive any right the sublessee may have to terminate the sublease or to surrender possession thereunder as a result of the termination of this Lease, and (c) if the sublessee receives a written Notice from Lessor or Lessor’s assignees, if any, stating that an uncured Event of Default exists

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under this Lease, the sublessee shall thereafter be obligated to pay all rentals accruing under said sublease directly to the party giving such Notice, or as such party may direct. All rentals received from the sublessee by Lessor or Lessor’s assignees, if any, as the case may be, shall be credited against the amounts owing by Lessee under this Lease.

ARTICLE 24

REPORTING AND CERTIFICATION REQUIREMENTS

24.1 Officer’s Certificates; Financial Statements; Budgets; Lessor’s Estoppel Certificates and Covenants.

(a) At any time and from time to time upon not less than twenty (20) days Notice by Lessor, Lessee will furnish to Lessor an Officer’s Certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which the Rent has been paid, whether to the knowledge of Lessee there is any existing default or Event of Default exists thereunder by Lessor or Lessee, and such other information as may be reasonably requested by Lessor. Any such certificate furnished pursuant to this Section may be relied upon by Lessor, any lender and any prospective purchaser of the Leased Property.

(b) Throughout the Term, Lessee will furnish to Lessor such historical financial information of Lessee and the Facility as Lessor may reasonably request and shall provide Lessor access to Lessee’s books and records with respect thereto.

(c) Within five (5) days of Lessee’s receipt thereof, any inspection reports received from the franchisor under the Franchise Agreement.

(d) At any time and from time to time upon not less than twenty (20) days notice by Lessee, Lessor will furnish to Lessee or to any person designated by Lessee an estoppel certificate certifying that this Lease is unmodified and in full force and effect (or that this Lease is in full force and effect as modified and setting forth the modifications), the date to which Rent has been paid, whether to the knowledge of Lessor there is any existing default or Event of Default on Lessee’s part hereunder, and such other information as may be reasonably requested by Lessee.

24.2 Operating Budget. Not later than forty-five (45) days prior to the commencement of each Lease Year, Lessee, in consultation with the Manager, shall prepare and submit to Lessor an operating budget for the Lease Year (the “Operating Budget”) in form and substance reasonably satisfactory to Lessor, prepared in accordance with the requirements of this Section 24.2. The Operating Budget shall be prepared in accordance with the Uniform System to the extent applicable and show by month and quarter and for the Lease Year as a whole in the degree of detail specified by the Uniform System for monthly statements, and in accordance with the detail level of monthly financial statements, the following:

(a) Lessee’s reasonable estimate of Gross Revenues, Room Revenues, Food Sales and Beverage Sales (including room rates) for the Facility for the forthcoming Lease Year itemized on schedules on a monthly and quarterly basis as approved by Lessor and Lessee, together with the assumptions, in narrative form, forming the basis of such schedules;

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(b) A cash flow projection for the Lease Year; and

(c) Lessee’s reasonable estimate for each quarter of the Lease Year of Percentage Rent.

24.3 Capital Budget. Not later than forty-five (45) days prior to the commencement of each Lease Year, Lessee shall prepare and submit to Lessor a capital improvement budget for the Lease Year (the “Capital Budget”) prepared in accordance with the Uniform System to the extent applicable, and shall set forth the proposed Capital Expenditures for the ensuing Lease Year.

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ARTICLE 25

LESSOR’S DEFAULT; CURE RIGHTS

25.1 Lessee’s Right to Cure. Subject to the provisions of Section 25.2, if Lessor breaches any covenant to be performed by it under this Lease, Lessee, after Notice to and demand upon Lessor, without waiving or releasing any obligation hereunder, and in addition to all other remedies available to Lessee, may (but shall be under no obligation at any time thereafter to) make such payment or perform such act for the account and at the expense of Lessor. All sums so paid by Lessee and all costs and expenses (including, without limitation, reasonable attorneys’ fees) so incurred, together with interest thereon at the Overdue Rate from the date on which such sums or expenses are paid or incurred by Lessee, shall be paid by Lessor to Lessee on demand or, following entry of a final, nonappealable judgment against Lessor for such sums, may be offset by Lessee against the Base Rent payments next accruing or coming due. The rights of Lessee hereunder to cure and to secure payment from Lessor in accordance with this Section 25.1 shall survive the termination of this Lease with respect to the Leased Property.

25.2 Breach by Lessor. It shall be a breach of this Lease if Lessor fails to observe or perform any term, covenant or condition of this Lease on its part to be performed and such failure continues for a period of thirty (30) days after Notice thereof from Lessee, unless such failure cannot with due diligence be cured within a period of thirty (30) days, in which case such failure shall not be deemed to continue if Lessor, within such 30-day period, proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof. The time within which Lessor shall be obligated to cure any such failure also shall be subject to extension of time due to the occurrence of any Unavoidable Delay.

ARTICLE 26

NOTICES

26.1 Notices. All notices, demands, requests, consents approvals and other communications (“Notice” or “Notices”) hereunder shall be in writing and personally served, mailed (by registered or certified mail, return receipt requested and postage prepaid) or sent by facsimile, addressed to Lessor at 814 Capital Landing Road, Williamsburg, VA 23185, Facsimile 757-564-8801, Attention: Andrew M. Sims, and addressed to Lessee at 6411 Ivy Lane, Suite 510, Greenbelt, MD 20770, Attention: William Zaiser, Facsimile 301-474-0807, or to such other address or addresses as either party may hereafter designate. Personally delivered Notice shall be effective upon receipt, and Notice given by mail shall be complete at the time of deposit in the U.S. Mail system, but any prescribed period of Notice and any right or duty to do any act or make any response within any prescribed period or on a date certain after the service of such Notice given by mail shall be extended five days.

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ARTICLE 27

MISCELLANEOUS PROVISIONS

27.1 Transfer of Licenses. Upon the expiration or earlier termination of the Term, Lessee shall use its best efforts (i) to transfer to Lessor or Lessor’s nominee or designee all Franchise Agreements, licenses, operating permits and other governmental authorizations and all contracts, including contracts with governmental or quasi-governmental entities, that may be necessary for the operation of the Facility (collectively, “Licenses”), or (ii) if such transfer is prohibited by law or Lessor otherwise elects, to cooperate with Lessor or Lessor’s nominee in connection with the processing by Lessor or Lessor’s nominee of any applications for, all Licenses; provided, in either case, that the costs and expenses of any such transfer or the processing of any such application shall be paid by Lessor or Lessor’s nominee.

27.2 Early Termination Rights; Termination Fees. Lessor may terminate the Lease as to any Leased Property prior to the Expiration Date by reason of a sale of the Facility, (pursuant to the notice requirements contained herein), provided Lessor pays to Lessee a termination fee (the “Termination Fee”) equal to the fair market value of the leasehold estate.

27.3 Substitution of Initial Hotel. Notwithstanding the foregoing Section 27.2, in the event of a termination of this Lease, Lessor may (in its sole and absolute discretion) avoid payment of the Termination Fee by offering to substitute for the Leased Property within 120 days of such termination, another hotel facility reasonably comparable in size, number of rooms, quality of franchise operation, market and geographical location, and gross revenues, to be governed by the terms and conditions of this Lease from and after the date of such substitution, and, in the event Lessee desires to lease such substitute hotel, this Lease shall be amended accordingly. In the event of a substitution, any Rent and other charges payable under this Lease shall be suspended until the substitution is fully consummated.

27.4 Compliance with Franchise Agreement. To the extent any of the provisions of the Franchise Agreement impose a greater obligation on Lessee than the corresponding provisions of this Lease, then Lessee shall be obligated to comply with the provisions of the Franchise Agreement except in regard to those obligations which are the responsibility of Lessor as provided herein. It is the intent of the parties hereto that Lessee shall comply in every respect with the provisions of the Franchise Agreement so as to avoid any default thereunder during the term of this Lease. Lessee shall not terminate, extend or enter into any modification of the Franchise Agreement without in each instance first obtaining Lessor’s prior written consent. Lessor and Lessee agree to cooperate with each other in the event it becomes necessary to obtain a franchise extension or modification or a new franchise for the Leased Property, and in any transfer of the Franchise Agreement to Lessor (if applicable) or any designee of or any successor to Lessee (as applicable) upon the termination of this Lease. In the event of expiration or termination of a Franchise Agreement, for whatever reason, the Lessor will have the right, in its sole discretion, to approve any new Franchise Agreement for the Facility. If, upon any expiration or earlier termination of this Lease (other than upon an Event of Default by Lessee), a Franchise Agreement remains in effect, or would but for such expiration or termination remain in effect,

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Lessor shall indemnify, defend and hold Lessee harmless with respect to the obligations and liabilities arising thereunder after the date of expiration or termination of this Lease.

27.5 Lessor’s Right to Inspect. Lessee shall permit Lessor and its authorized representatives as frequently as reasonably requested by Lessor to inspect the Leased Property and Lessee’s accounts and records pertaining thereto and make copies thereof, during usual business hours upon reasonable advance notice, subject only to any business confidentiality requirements reasonably requested by Lessee, provided that Lessor shall not cause any interference with the operation of the Leased Property.

27.6 Conveyance by Lessor. If Lessor or any successor owner of the Leased Property conveys the Leased Property to a Person other than a wholly owned Affiliate of Lessor in accordance with the terms hereof other than as security for a debt, and the grantee or transferee of the Leased Property expressly assumes all obligations of Lessor hereunder arising or accruing from and after the date of such conveyance or transfer, Lessor or such successor owner, as the case may be, shall thereupon be released from all future liabilities and obligations of Lessor under this Lease arising or accruing from and after the date of such conveyance or other transfer as to the Leased Property and all such future liabilities and obligations shall thereupon be binding upon the new owner.

27.7 Lessor may Grant Liens. Without the consent of Lessee, Lessor may, subject to the terms and conditions set forth below in this Section 27.7, from time to time, directly or indirectly, create or otherwise cause to exist any lien, encumbrance or title retention agreement (“Encumbrance”) upon the Leased Property, or any portion thereof or interest therein, whether to secure any borrowing or other means of financing or refinancing. Upon the request of Lessor, Lessee shall subordinate this Lease to the lien of a new mortgage on the Leased Property.

27.8 Non Disturbance Agreement. Lessor agrees, subject to any restrictions or limitations imposed by any lender of Lessor, to execute in favor of Manager a non disturbance and attornment agreement in form and substance reasonably acceptable to Lessor and Manager.

27.9 Waiver of Presentment, etc. Lessee waives all presentments, demands for payment and for performance, notices of nonperformance, protests, notices of protest, notices of dishonor, and notices of acceptance and waives all notices of the existence, creation, or incurring of new or additional obligations, except as expressly granted herein.

27.10 Memorandum of Lease. Lessor and Lessee shall promptly upon the request of either enter into a short form memorandum of this Lease, in form suitable for recording under the laws of the State in which reference to this Lease, and all options contained herein, shall be made. Lessee shall pay all costs and expenses of recording such memorandum of this Lease.

27.11 Usury. If any late charges or any interest rate provided for in any provision of this Lease are based upon a rate in excess of the maximum rate permitted by applicable law, the parties agree that such charges shall be fixed at the maximum permissible rate.

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27.12 No Waiver. No failure by Lessor or Lessee to insist upon the strict performance of any term hereof or to exercise any right, power or remedy consequent upon a breach thereof, and no acceptance of full or partial payment of Rent during the continuance of any such breach, shall constitute a waiver of any such breach or of any such term. To the extent permitted by law, no waiver of any breach shall affect or alter this Lease, which shall continue in full force and effect with respect to any other then existing or subsequent breach.

27.13 Remedies Cumulative. To the extent permitted by law, each legal, equitable or contractual right, power and remedy of Lessor or Lessee now or hereafter provided either in this Lease or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power and remedy and the exercise or beginning of the exercise by Lessor or Lessee of any one or more of such rights, powers and remedies shall not preclude the simultaneous or subsequent exercise by Lessor or Lessee of any or all of such other rights, powers and remedies.

27.14 Acceptance of Surrender. No surrender to Lessor of this Lease or of the Leased Property or any part thereof, or of any interest therein, shall be valid or effective unless agreed to and accepted in writing by Lessor and no act by Lessor or any representative or agent of Lessor, other than such a written acceptance by Lessor, shall constitute an acceptance of any such surrender.

27.15 No Merger of Title. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same person or entity may acquire, own or hold, directly or indirectly: (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate and (b) the fee estate in the Leased Property.

27.16 Quiet Enjoyment. So long as Lessee pays all Rent as the same becomes due and complies with all of the terms of this Lease and performs its obligations hereunder, in each case within the applicable grace periods, if any, Lessee shall peaceably and quietly have, hold and enjoy the Leased Property for the Term hereof, free of any claim or other action by Lessor or anyone claiming by, through or under Lessor, but subject to all liens and encumbrances subject to which the Leased Property was conveyed to Lessor or hereafter consented to by Lessee or provided for herein. Notwithstanding the foregoing, Lessee shall have the right by separate and independent action to pursue any claim it may have against Lessor as a result of a breach by Lessor of the covenant of quiet enjoyment contained in this Section.

27.17 Binding Effect. The covenants, terms, conditions, provisions and undertakings in this Lease shall extend to and be binding upon the heirs, personal representatives, executors, administrators and permitted successors and assigns of the respective parties hereto.

27.18 Entire Agreement; No Offer. This Lease contains the entire agreement of Lessor and Lessee with respect to the subject matter hereof, and no representations, warranties, inducements, promises or agreements, oral or otherwise, between the parties not embodied in this Lease shall be of any force or effect. This Lease may be modified only by a written agreement executed by both parties with the same formalities as this Lease. All prior agreements or communications are and shall be merged into this Lease and shall have no force or effect.

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Neither any submission of this Lease by one party to the other, nor any correspondence or other communications between the parties in connection therewith, is intended or shall be deemed to constitute an offer of any kind or to create any obligations between the parties unless and until one or more duplicates of this Lease has been fully executed and delivered between the parties. Accordingly, any such submission or communications or correspondence between the parties or their respective agents or attorneys is intended only as non-binding discussions, and either party shall have the absolute right to withdraw from such discussions without any liability whatsoever to the other party.

27.19 Severability. If any clause or provision of this Lease is illegal, invalid or unenforceable under applicable present or future Laws effective during the Term, the remainder of this Lease shall not be affected. In lieu of each clause or provision of this Lease which is illegal, invalid or unenforceable, there shall be added as a part of this Lease a clause or provision as nearly identical as may be possible and as may be legal, valid and enforceable. Notwithstanding the foregoing, in the event any clause or provision of this Lease is illegal, invalid or unenforceable as aforesaid and the effect of such illegality, invalidity or unenforceability is that Lessor no longer has the substantial benefit of its bargain under this Lease, then, in such event, Lessor may in its discretion cancel and terminate this Lease upon providing at least ninety (90) days advance notice thereof to Lessee.

27.20 Counterparts. This Lease may be executed in several counterparts, each of which shall be deemed an original, and all of such counterparts together shall constitute one and the same instrument.

27.21 Governing Law. This lease and its interpretation, validity and performance shall be governed by the laws of the state in which the Land is situate. In the event any court of law of appropriate judicial authority shall hold or declare that the law of another jurisdiction is applicable, this lease shall remain enforceable under the laws of the appropriate jurisdiction. The parties hereto agree that venue for any action in connection herewith shall be proper in the state or federal courts in or having jurisdiction over the county where the Land is situated. Each party hereto consents to the jurisdiction of any local, state or federal court situated in any of such locations and waives any objection which it may have pertaining to improper venue or forum non conveniens to the conduct of any proceeding in any such court.

27.22 Recitals; Headings. The recitals set forth in this Lease are true and correct, and are incorporated herein by this reference. The use of headings, captions and numbers in this Lease is solely for the convenience of identifying and indexing the various paragraphs and shall in no event be considered in construing or interpreting any provision in this Lease.

27.23 Survival. Notwithstanding anything to the contrary contained in this Lease, the provisions (including, without limitation, covenants, agreements, representations, warranties, obligations and liabilities described therein) of this Lease which from their sense and context are intended to survive the expiration or sooner termination of this Lease shall survive such expiration or sooner termination of this Lease and continue to be binding upon the applicable party.

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27.24 Exhibits. The exhibits referred to in, and attached to, this Lease are hereby incorporated in full by reference. Unless otherwise expressly provided in the exhibit or the body of this Lease, in the event of any conflict or inconsistency with the provisions contained in the body of this Lease and the exhibits, the provisions contained in the body of this Lease shall control.

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IN WITNESS WHEREOF, the parties have executed this Lease by their duly authorized officers as of the date first above written.

“LESSOR”
Philadelphia Hotel Associates LP,
a Virginia limited partnership
By:	MHI GP LLC
	its General Partner
By:	MHI GP Hospitality, L.P.
	its sole member
By:	MHI Hospitality Corporation
	its General Partner
By:	/s/    Andrew M. Sims
Andrew M. Sims
Its: President

“LESSEE”
MHI Hospitality TRS, LLC
A Delaware limited liability company
By:	/s/    Andrew M. Sims
Andrew M. Sims
Its: Manager

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Exhibit A

Land

DESCRIPTION OF REAL PROPERTY

ALL of that certain lot, piece or parcel of land, with the

buildings and improvements erected thereon, lying and being

SITUATE in the 40th Ward of the City of Philadelphia, described according to a survey and Plan of property made for Marriott Corporation by Israel Zeitz, Surveyor and Regulator of the 10th Survey District, dated August 19, 1982, to wit:

BEGINNING at a point on the Southerly side of Penrose Avenue (170 feet wide) State Highway Route #67053 which point is measured South 75 degrees 49 minutes 42 seconds East along the said Southerly side of Penrose Avenue and Penrose Avenue produced the distance of 92.287 feet from a point of intersection formed by the said Southern side of Penrose Avenue and the Northeasterly side of Island Avenue both lines produced thence extending South 75 degrees 49 minutes 42 seconds East along the said Southerly side of Penrose Avenue the distance of 137.081 feet to a point of curve thence Southeastwardly still along the said Southerly side of Penrose Avenue on the arc of a circle curving to the left having a radius of 1514.825 feet the arc distance of 475.891 feet to a point thence South 27 degrees 02 minutes 21.52 seconds West crossing a relocated 16 inch pipe line 819.427 feet to a point on the said Northeasterly side of Island Avenue thence North 19 degrees 04 minutes 48 seconds West along the said Northeasterly side of Island Avenue recrossing said relocated 16 inch pipe line 361.732 feet to an angle point; thence North 22 degrees 41 minutes 49 seconds West still along the said Northeasterly side of Island Avenue 430.04 feet to a point of curve; thence along the arcs of circles curving to the right connecting the said Northeasterly side of Island Avenue and the Southerly side of Penrose Avenue the two following courses and distances (1) Northeastwardly on the arc of a circle having a radius of 79.066 feet the arc distance of 45.383 feet to a point of compound curve; (2) Northeastwardly, Eastwardly and Southeastwardly arc of a circle having a radius of 40.000 feet the arc distance of 56.596 feet to a point of tangent on the said Southerly side of Penrose Avenue being the first mentioned point and place of beginning.

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Exhibit B

Base Rent and Percentage Rent

Base Rent equals $3,100,000

First Tier Rent Floor	Second Annual Room Revenues Break Point
$7,850,000	$8,400,000
Commencement Date: December 21, 2004

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Schedule of Differences to Exhibit 10.13

MHI Hospitality Corporation

Filed herewith as Exhibit 10.13 to the Form 10-Q for the quarterly period ended September 30, 2011, is a copy of the Lease Agreement by and between MHI Hospitality TRS, LLC and Philadelphia Hotel Associates LP, entered into effective as of December 21, 2004 (the “Lease Agreement”). The Company has also entered into eight additional lease agreements that are substantially identical in all material respects to the Lease Agreement except as to the parties thereto, dates of execution, terms, base and percentage rent and other details as indicated below (the “Additional Agreements”). Per Instruction 2 to Item 601 of Regulation S-K, the Company is not filing the Additional Agreements as exhibits to the Form 10-Q, but is filing this Schedule with Exhibit 10.13 describing the differences between the Lease Agreement and the Additional Agreements.

Description of Differences

Name of Agreement	Parties	Date	Term	Hotel Asset	Base and Percentage  Rent
Lease Agreement by and between  Capitol Hotel Associates, L.P., L.L.P. and MHI Hospitality TRS, LLC dated as of the 21st day of December, 2004 and as amended by Amendment No. 1 dated July 15, 2010.	Lessee: MHI Hospitality TRS, LLC Lessor: Capitol Hotel Associates, L.P., L.L.P.	12/21/2004	12/31/2013	Hilton Wilmington Riverside	Base Rent – $3,000,000 First Tier Rent Floor – $7,000,000 Second Annual Room Revenues Break Point – $7,300,000
Lease Agreement by and between Savannah Hotel Associates LLC and MHI Hospitality TRS, LLC dated as of the 21st day of December, 2004 and as amended by Amendment No. 1 dated July 15, 2010.	Lessee: MHI Hospitality TRS, LLC Lessor: Savannah Hotel Associates, L.L.C.	12/21/2004	12/31/2013	Hilton Savannah DeSoto	Base Rent – $3,100,000 First Tier Rent Floor – $8,200,000 Second Annual Room Revenues Break Point – $8,500,000
Lease Agreement by and between Brownestone Partners, LLC, and MHI Hospitality TRS, LLC dated as of the 21st day of December, 2004 and as amended by Amendment No. 1 dated July 15, 2010.	Lessee: MHI Hospitality TRS, LLC Lessor: Brownestone Partners, LLC	12/21/2004	12/31/2013	Holiday Inn Brownstone Raleigh	Base Rent – $800,000 First Tier Rent Floor – $2,850,000 Second Annual Room Revenues Break Point – $3,500,000
Lease Agreement by and between Laurel Hotel Associates LLC, and MHI Hospitality TRS, LLC dated as of the 21st day of December, 2004 and as amended by Amendment No. 1 dated July 15, 2010.	Lessee: MHI Hospitality TRS, LLC Lessor: Laurel Hotel Associates LLC	12/21/2004	12/31/2013	Holiday Inn Laurel West	Base Rent – $800,000 First Tier Rent Floor – $4,200,000 Second Annual Room Revenues Break Point – $4,600,000
Lease Agreement by and between MHI Jacksonville LLC and MHI Hospitality TRS, LLC, dated as of the 22nd day of July, 2005 and as amended by Amendment No. 1 dated July 15, 2010.	Lessee: MHI Hospitality TRS, LLC Lessor: MHI Jacksonville LLC	07/22/2005	12/31/2013	Crowne Plaza Jacksonville Riverfront	Base Rent – $924,000 First Tier Rent Floor – $3,352,000 Second Annual Room Revenues Break Point – $6,146,000
Lease Agreement by and between Capitol Hotel Associates L.P., L.L.P. and MHI Hospitality TRS, LLC, dated as of the 21st day of December, 2004 and as amended by Amendment No. 1 by and between Capitol Hotel Associates, L.P., L.L.P., MHI Hospitality TRS, LLC and Louisville Hotel Associates LLC dated July 15, 2010 and Amendment No. 2 dated July 15, 2010.	Lessee: MHI Hospitality TRS, LLC Lessor: Louisville Hotel Associates, LLC	12/21/2004	12/31/2013	Sheraton Louisville Riverside	Base Rent – $1,377,000 First Tier Rent Floor – $3,633,000 Second Annual Room Revenues Break Point – $6,661,000
Lease Agreement by and between Hampton Hotel Associates LLC and MHI Hospitality TRS, LLC as of the 24th day of April, 2008 and as amended by Amendment No. 1 dated October 7, 2008.	Lessee: MHI Hospitality TRS, LLC Lessor: Hampton Hotel Associates LLC	04/24/2008	10/07/2018	Crowne Plaza Hampton Marina	Rent – 20% of Gross Room Revenue

Name of Agreement	Parties	Date	Term	Hotel Asset	Base and Percentage  Rent
Lease Agreement by and between Tampa Hotel Associates LLC and MHI Hospitality TRS, LLC as of the 1st day of January, 2009.	Lessee: MHI Hospitality TRS, LLC Lessor: Tampa Hotel Associates LLC	01/01/2009	01/01/2019	Crowne Plaza Tampa Westshore	Base Rent – $2,683,296 First Tier Rent Floor 1st full Lease Year plus any initial stub Lease Year – 20% 2nd full Lease Year – 25% 3rd full Lease Year – $400,000 Thereafter until Expiration Date prior year’s First Tier Rent Floor plus a Consumer Price Index adjustment calculated consistent with Section 3.1(d) First Annual Room Revenues Break Point shall equal the applicable First Tier Rent Floor

EX-10.15

Exhibit 10.15

CONTRIBUTION AGREEMENT

THIS CONTRIBUTION AGREEMENT (the “Agreement”) is made and entered into as of the 21st day of December, 2004, by and among MHI Hotels Services LLC, a Maryland limited liability company (hereinafter referred to as “Services”), MHI Hotels, L.L.C., a Virginia limited liability company (hereinafter referred to as “Hotels”), and MHI Hotels Two, Inc., a North Carolina corporation (hereinafter referred to as “MHI Two”).

RECITALS

A. MHI Hospitality, L.P., a Delaware limited partnership (the “Partnership”), is the operating partnership of MHI Hospitality Corporation, a Maryland corporation, which will seek to qualify as a real estate investment trust for federal income tax purposes (the “REIT”), and the REIT intends to complete an underwritten initial public offering of shares of its common stock (the “IPO”).

B. In connection with the IPO, the Partnership will acquire all of Hotels’ rights and obligations as tenant under a lease agreement between Shell Island Homeowners Association, Inc., a North Carolina non-profit corporation (“Owner”), and MHI Recovery Management, Inc., a Maryland corporation and legal predecessor of Hotels, dated December 31, 1993, as amended by a lease addendum dated as of July 31, 2004 (as amended, the “Common Space Lease”), and, pursuant to a separate sublease agreement (the “Common Space Sublease Agreement”), the Partnership will sublease back to Hotels the premises subject to the Common Space Lease.

C. In connection with the IPO, the Partnership will acquire all of MHI Two’s rights and obligations as tenant under a lease agreement between Owner and MHI Two dated May 12, 2003, as amended by a lease addendum dated as of July 31, 2004 (as amended, the “Commercial Space Lease”), and pursuant to a separate sublease agreement (the “Commercial Space Sublease Agreement”), the Partnership will sublease back to MHI Two the premises subject to the Commercial Space Lease.

D. In consideration of the benefits Services will receive as a result of the consummation of the IPO and the performance of certain other agreements connected with the IPO to which Services is a party, including but not limited to, management agreements between Services and the Partnership and certain of its subsidiaries with respect to the hotels to be owned by the Partnership and its subsidiaries upon completion of the IPO and related formation transactions and as a condition to the assignment of the Commercial Space Lease and the Common Space Lease, Services agrees to commit to make a capital contribution to Hotels and MHI Two, as the case may be, in the event of a payment default under the Commercial Space Lease or the Common Space Lease in an amount sufficient for the defaulting party to cure such payment default or in the event that the Commercial Space Lease, the Common Space Lease, the Commercial Space Sublease Agreement or the Common Space Sublease Agreement is terminated (other than at the election of or fault of the Partnership) in an amount equal to the Assignment Fee

adjustment under the Agreement to Assign and Sublease Commercial Space Lease dated December 21, 2004, by and between MHI Two and the Partnership (“Commercial Space Agreement”) or the Agreement to Assign and Sublease Common Space Lease dated December 21, 2004 by and between Hotels and the Partnership (“Common Space Agreement”), and each of Hotels and MHI Two desires to receive and accept such capital contribution and cure such payment default and make the Assignment Fee adjustment, as the case may be, in such an event.

AGREEMENTS:

NOW, THEREFORE, in consideration of the premises set forth above and the mutual covenants herein contained, the parties hereto agree as follows:

ARTICLE I

AGREEMENT TO MAKE CAPITAL CONTRIBUTION

1.1 Common Space Sublease. Subject to the consummation of the IPO, the assignment of the Common Space Lease to Hotels, the execution by Hotels and the Partnership of the Common Space Sublease Agreement and the terms and conditions of this Agreement, Services hereby agrees to contribute to the capital of Hotels from time to time a sum of money in an amount sufficient for Hotels to cure any payment default that Hotels might incur from time to time during the term of the Common Space Sublease Agreement or to pay the Assignment Fee adjustment following termination of the Common Space Lease or Common Space Sublease Agreement (other than at the election or fault of the Partnership) at the times and in the amounts specified in the Common Space Agreement. Services agrees that, if Services receives notice that Hotels has so defaulted in a payment required under the Common Space Sublease Agreement or must pay the Assignment Fee adjustment as provided in the Common Space Agreement, (a) such notice shall conclusively establish that such payment default has occurred or such payment or payments must be made in accordance with such agreement and the amount of the payment default or Assignment Fee adjustment, and (b) Services shall have no right to challenge whether such a default has occurred or the amount of such payment default or whether such Assignment Fee adjustment must be made in accordance with such agreement and Services hereby waives any right it may have to file a suit or commence a proceeding of any kind whether at law or in equity seeking a declaratory judgment or otherwise, all provided that such notice was delivered in good faith. Services agrees to make a capital contribution to Hotels in cash in an amount equal to the payment default specified in the notice of default. Such capital contribution shall be made no later than five (5) days after receipt of notice of such payment default, which notice may be delivered to Services either by Hotels (with a copy to the Partnership) or by the Partnership. Services also agrees to make capital contributions to Hotels in cash in such amounts and at such time or times as shall be necessary to permit Hotels to make the Assignment Fee adjustment payments as provided in the Common Space Agreement. In the event of such payment default or Assignment Fee adjustment, Hotels agrees to accept such capital contribution or capital contributions, issue to Services equity securities

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representing the value of such capital contribution and promptly thereafter use the capital contribution to cure such default or make the applicable Assignment Fee adjustment payment. Upon making such capital contribution, Services shall deliver to the Partnership written notice that it made such capital contribution. Upon cure, Hotels shall deliver to Services and the Partnership written notice of cure.

1.2 Commercial Space Sublease. Subject to the consummation of the IPO, the assignment of the Commercial Space Lease to MHI Two, the execution by MHI Two and the Partnership of the Commercial Space Sublease Agreement and the terms and conditions of this Agreement, Services hereby agrees to contribute to the capital of MHI Two from time to time, a sum of money in an amount sufficient for MHI Two to cure any payment default that MHI Two might incur from time to time during the term of the Commercial Space Sublease Agreement or to pay the Assignment Fee adjustment following termination of the Commercial Space Lease or Commercial Space Sublease Agreement (other than at the election or fault of the Partnership) at the times and in the amounts specified in the Commercial Space Agreement. Services agrees that, if Services receives notice that MHI Two has so defaulted in a payment required under the Commercial Space Sublease Agreement or must pay the Assignment Fee adjustment as provided in the Commercial Space Agreement, (a) such notice shall conclusively establish that such payment default has occurred or such payment must be made in accordance with such agreement and the amount of the payment default or Assignment Fee adjustment, and (b) Services shall have no right to challenge whether such a default has occurred or the amount of such payment default or whether such Assignment Fee adjustment must be made in accordance with such agreement and Services hereby waives any right it may have to file a suit or commence a proceeding of any kind whether at law or in equity seeking a declaratory judgment or otherwise, all provided that such notice was delivered in good faith. Services agrees to make a capital contribution to MHI Two in cash in an amount equal to the payment default specified in the notice of default. Such capital contribution shall be made no later than five (5) days after receipt of notice of such payment default, which notice may be delivered to Services either by MHI Two (with a copy to the Partnership) or by the Partnership. Services also agrees to make capital contributions to MHI Two in cash in such amounts and at such time or times as shall be necessary to permit MHI Two to make the Assignment Fee adjustment payments as provided in the Commercial Space Agreement. In the event of such payment default or Assignment Fee adjustment, MHI Two agrees to accept such capital contribution or capital contributions, issue to Services equity securities representing the value of such capital contribution and promptly thereafter use the capital contribution to cure such default or make the applicable Assignment Fee adjustment payment. Upon making such capital contribution, Services shall deliver to the Partnership written notice that it made such capital contribution. Upon cure, MHI Two shall deliver to Services and the Partnership written notice of cure.

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ARTICLE II

NOTICES

2.1 Notices. Any notice provided for by this Agreement and any other notice, demand, or communication required hereunder shall be in writing and either delivered in person (including by confirmed facsimile transmission) or sent by hand delivered against receipt or sent by recognized overnight delivery service or by certified or registered mail, postage prepaid, with return receipt requested. All notices shall be addressed as follows:

        If to Services: MHI Hotels Services, L.L.C.

6411 Ivy Lane

Suite 510

Greenbelt, MD 20770

Attention: President

        If to Hotels: MHI Hotels, L.L.C.

6411 Ivy Lane

Suite 510

Greenbelt, MD 20770

Attention: President

        If to MHI Two: MHI Hotels Two, Inc.

6411 Ivy Lane

Suite 510

Greenbelt, MD 20770

Attention: President.

Notwithstanding anything set forth in this Agreement, any party delivering any notice required hereunder shall deliver a copy of such notice to the Partnership at:

MHI Hospitality, L.P.

814 Capitol Landing Road

Williamsburg, VA 23185.

Any address or name specified above may be changed by a notice given by the addressee to the other party. Any notice, demand or other communication shall be deemed given and effective as of the date of delivery in person or receipt set forth on the return receipt. The inability to deliver because of changed address of which no notice was given, or rejection or other refusal to accept any notice, demand or other communication, shall be deemed to be receipt of the notice, demand or other communication as of the date of such attempt to deliver or rejection or refusal to accept.

ARTICLE III

MISCELLANEOUS

3.1 Entire Agreement. This Agreement shall constitute the entire agreement among the parties with respect to the subject matter thereof and shall supersede all previous negotiations, commitments and writings with respect to such subject matter.

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3.2 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Virginia without regard to the principles of conflict of laws thereof.

3.3 Amendments and Waivers. No amendment, modification or supplement to this Agreement shall be binding on any of the parties hereto unless it is in writing and signed by the parties in interest at the time of the modification. No provision hereof may be waived except by a writing signed by the party against whom any such waiver is sought. The waiver by any party of a breach of any provision of this Agreement shall not operate as or be construed as a waiver of any subsequent breach.

3.4 Assignment. Neither this Agreement nor any rights or obligations hereunder shall be assignable or delegable by a party to this Agreement without the prior, express written consent of each other party to this Agreement. This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns.

3.5 Titles and Headings. Titles and headings to articles and sections in this Agreement are inserted for the convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement.

3.6 Further Assurances. The parties to this Agreement will execute and deliver or cause the execution and delivery of such further instruments and documents and will take such other actions as any other party to the Agreement may reasonably request in order to effectuate the purpose of this Agreement and to carry out the terms hereof.

3.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but together shall be deemed one and the same Agreement.

3.8 Term. The term of this agreement shall extend until all obligations of Hotels and MHI Two pursuant to each of the Common Space Sublease Agreement, Commercial Space Sublease Agreement, Common Space Agreement and Commercial Space Agreement shall have been satisfied in full.

3.9 Third-Party Beneficiary. The Partnership shall be a third-party beneficiary of this Agreement and shall have the right to enforce this Agreement in the event that Services is required to make a capital contribution in accordance with this Agreement.

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

MHI HOTELS SERVICES LLC, a Virginia limited liability company
By:	/S/  KIM E. SIMS
	Kim E. Sims

MHI HOTELS, L.L.C., a Virginia limited liability company
By:	/S/  KIM E. SIMS
	Kim E. Sims President

MHI HOTELS TWO, INC., a North Carolina corporation
By:	/S/  STEVE SMITH
	Steve Smith President

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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 internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and 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: November 9, 2011
	By:	/s/ Andrew M. Sims
	Name:	Andrew M. Sims
	Title:	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 internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and 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: November 9, 2011
	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 September 30, 2011 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 results of operations of the Corporation.

Date: November 9, 2011
	By:	/s/ Andrew M. Sims
	Name:	Andrew M. Sims
	Title:	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 September 30, 2011 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 results of operations of the Corporation.

Date: November 9, 2011
	By:	/s/ William J. Zaiser
	Name:	William J. Zaiser
	Title:	Chief Financial Officer

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Consolidated Balance Sheets (Parenthetical) (USD $)	Sep. 30, 2011	Dec. 31, 2010
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	972,350	972,350
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	49,000,000	49,000,000
Common stock, shares issued	9,701,786	9,541,286
Common stock, shares outstanding	9,701,786	9,541,286
Series A Cumulative Redeemable Preferred Stock [Member]
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	27,650	27,650
Preferred stock, shares issued	25,227	0
Preferred stock, shares outstanding	25,227	0

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Consolidated Statements Of Operations (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
REVENUE
Rooms department	$ 14,154,271	$ 13,736,101	$ 43,223,226	$ 40,784,193
Food and beverage department	4,656,014	4,657,257	14,991,087	14,395,240
Other operating departments	1,204,901	1,144,373	3,466,164	3,383,410
Total revenue	20,015,186	19,537,731	61,680,477	58,562,843
EXPENSES
Rooms department	4,078,235	3,972,346	12,048,335	11,495,313
Food and beverage department	3,266,031	3,227,304	10,102,863	9,756,741
Other operating departments	157,839	196,410	420,580	540,248
Indirect	8,152,905	7,770,926	23,942,063	22,610,861
Total hotel operating expenses	15,655,010	15,166,986	46,513,841	44,403,163
Depreciation and amortization	2,187,541	2,123,761	6,460,928	6,381,378
Corporate general and administrative	1,348,792	725,909	3,154,412	2,687,719
Total operating expenses	19,191,343	18,016,656	56,129,181	53,472,260
NET OPERATING INCOME	823,843	1,521,075	5,551,296	5,090,583
Other income (expense)
Interest expense	(2,747,284)	(2,608,276)	(8,052,832)	(7,385,350)
Interest income	4,281	4,843	11,819	15,779
Equity income (loss) in joint venture	(283,539)	(184,237)	(161,083)	5,089
Unrealized gain on warrant derivative	646,000		266,000
Unrealized gain (loss) on hedging activities		(16,566)	72,649	630,828
Gain (loss) on disposal of assets	(9,894)	(84,128)	2,361	(84,128)
Net loss before income taxes	(1,566,593)	(1,367,289)	(2,309,790)	(1,727,199)
Income tax benefit (provision)	71,692	(3,461)	(765,083)	(365,861)
Net loss	(1,494,901)	(1,370,750)	(3,074,873)	(2,093,060)
Add: Net loss attributable to the noncontrolling interest	377,859	366,400	785,948	564,435
NET LOSS ATTRIBUTABLE TO THE COMPANY	$ (1,117,042)	$ (1,004,350)	$ (2,288,925)	$ (1,528,625)
Net loss per share attributable to the Company
Basic	$ (0.12)	$ (0.11)	$ (0.24)	$ (0.16)
Diluted	$ (0.11)	$ (0.11)	$ (0.23)	$ (0.16)
Weighted average number of shares outstanding
Basic	9,701,786	9,541,286	9,627,006	9,415,593
Diluted	9,802,378	9,557,286	9,792,440	9,431,593

XML

Document And Entity Information	9 Months Ended
	Sep. 30, 2011	Nov. 09, 2011
Document And Entity Information [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Period Focus	Q3
Entity Registrant Name	MHI Hospitality CORP
Entity Central Index Key	0001301236
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Document Fiscal Year Focus	2011
Entity Common Stock, Shares Outstanding		9,766,786

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Commitments And Contingencies

9 Months Ended

Sep. 30, 2011

Commitments And Contingencies [Abstract]

Commitments And Contingencies

6. 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. These areas are leased under a six-year operating lease, which expired October 31, 2006 and has been renewed for the second of five optional five-year periods expiring October 31, 2011, October 31, 2016, October 31, 2021, October 31, 2026 and October 31, 2031, respectively. Rent expense for the three months and nine months ended September 30, 2011 totaled $16,215 and $49,640, respectively, and totaled $14,251 and $44,530 for the three months and nine months ended September 30, 2010, respectively, for this operating lease.

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

The Company leases a parking lot adjacent to the Holiday Inn Brownstone in Raleigh, North Carolina. The land is leased under a second amendment, dated April 28, 1998, to a ground lease originally dated May 25, 1966. The original lease is a 50-year operating lease, which expires August 31, 2016. There is a renewal option for up to three additional ten-year periods expiring August 31, 2026, August 31, 2036, and August 31, 2046, respectively. The Company holds an exclusive and irrevocable option to purchase the leased land at fair market value at the end of the original lease term, subject to the payment of an annual fee of $9,000, and other conditions. Rent expense for the three months and nine months ended September 30, 2011 totaled $23,871 and $71,612, respectively, and totaled $23,871 and $71,612 for the three months and nine months ended September 30, 2010, respectively.

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 totaled $48,750 and $146,250 for the three months and nine months ended September 30, 2011, respectively and totaled $48,750 and $146,250 for the three months and nine months ended September 30, 2010, respectively.

The Company leases a parking lot in close proximity to the Sheraton Louisville Riverside. 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 the 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. Rent expense totaled $8,400 and $25,200 for the three months and nine months ended September 30, 2011, respectively, and totaled $8,400 and $25,200 for the three months and nine months ended September 30, 2010, respectively.

The Company leases a parking lot adjacent to the Crowne Plaza Tampa Westshore under a five-year agreement with the Florida Department of Transportation that commenced in July 2009 and expires in July 2014. The agreement requires annual payments of $2,432, plus tax, and may be renewed for an additional five years. Rent expense totaled $700 and $2,116 for the three months and nine months ended September 30, 2011, respectively, and totaled $608 and $1,824 for the three months and nine months ended September 30, 2010, respectively.

The Company leases certain submerged land in the Saint Johns River in front of the Crowne Plaza Jacksonville Hotel from the Board of Trustees of the Internal Improvement Trust Fund of the State of Florida. The submerged land is leased under a five-year operating lease, which expires September 18, 2012 requiring annual payments of $4,961. Rent expense totaled $1,240 and $3,720 for the three months and nine months ended September 30, 2011, respectively, and totaled $1,240 and $3,720 for the three months and nine months ended September 30, 2010, respectively.

The Company leases 3,542 square feet of commercial office space in Williamsburg, Virginia under an agreement that commenced September 1, 2009 and expires August 31, 2015. Rent expense totaled $13,750 and $41,250 for the three months and nine months ended September 30, 2011, respectively, and totaled $13,750 and $41,250 for the three months and nine months ended September 30, 2010, respectively.

The Company leases 1,632 square feet of commercial office space in Rockville, Maryland under an agreement that commenced December 14, 2009 and expires February 28, 2017. The agreement requires monthly payments at an annual rate of $22,848 for the first year of the lease term and monthly payments at an annual rate of $45,696 for the second year of the lease term, increasing 2.75% per year for the remainder of the lease term. Rent expense totaled $11,046 and $33,274 for the three months and nine months ended September 30, 2011, respectively, and totaled $11,013 and $33,039 for the three months and nine months ended September 30, 2010, respectively.

The Company also leases certain furniture and equipment under financing arrangements expiring between October 2011 and March 2014.

A schedule of minimum future lease payments for the following twelve-month periods is as follows:

September 30, 2012	$	500,559
September 30, 2013		653,720
September 30, 2014		496,601
September 30, 2015		268,899
September 30, 2016		211,467
Thereafter		27,888
Total future minimum lease payments	$	2,159,134

Management Agreements – Each of the operating hotels that the Company wholly-owned at September 30, 2011, except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. The Company entered into a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019 (see Note 9).

Franchise Agreements – As of September 30, 2011, the Company's hotels operate under franchise licenses from national hotel companies. Under the franchise agreements, the Company is required to pay a franchise fee generally between 2.5% and 5.0% of room revenues, plus additional fees that amount to between 2.5% and 6.0% of room revenues from the hotels. The franchise agreements currently expire between November 2011 and April 2023.

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 to¹/₁₂ 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 4.0% of gross revenues for the Hilton Savannah DeSoto and the Hilton Wilmington Riverside.

Pursuant to the terms of the mortgage on the Crowne Plaza Jacksonville Riverfront, the Company is required to make monthly contributions equal to 4.0% of room revenues into a property improvement fund.

Pursuant to the terms of the mortgage on the Crowne Plaza Hampton Marina, the Company is required to make monthly contributions equal to 4.0% of gross revenues to a property improvement fund.

Pursuant to the terms of the fifth amendment to the credit agreement, the Company is required to escrow with its lender an amount sufficient to pay the real estate taxes as well as property and liability insurance for the encumbered properties when due. In addition, the Company is required to make monthly contributions equal to 3.0% of room revenues into a property improvement fund.

Litigation – The Company is not involved in any material litigation, nor, to its knowledge, is any material litigation threatened against the Company. The Company is involved in routine legal proceedings arising out of the ordinary course of business, all of which the Company expects to be covered by insurance. The Company does not expect any pending legal proceedings to have a material impact on its financial condition or results of operations.

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Unconsolidated Joint Venture

9 Months Ended

Sep. 30, 2011

Unconsolidated Joint Venture [Abstract]

Unconsolidated Joint Venture

11. Unconsolidated Joint Venture

The Company owns a 25.0% indirect interest in (i) the entity that owns the Crowne Plaza Hollywood Beach Resort; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that entered into a lease agreement upon closing of the hotel acquisition with respect to the adjacent three-acre site on which is located a parking garage that is utilized by the hotel; and (iv) the entity that owned the junior participation in the existing mortgage. Carlyle owns a 75.0% indirect controlling interest in all these 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:

	September 30, 2011		December 31, 2010
	(unaudited)
ASSETS
Investment in hotel properties, net	$	68,221,019	$	69,678,303
Cash and cash equivalents		3,204,574		1,952,687
Accounts receivable		98,141		271,822
Prepaid expenses, inventory and other assets		2,329,363		2,772,382
TOTAL ASSETS	$	73,853,097	$	74,675,194
LIABILITIES
Mortgage loans, net	$	33,600,000	$	34,100,000
Accounts payable and other accrued liabilities		3,342,106		2,434,683
Advance deposits		447,958		283,144
TOTAL LIABILITIES		37,390,064		36,817,827
TOTAL MEMBERS' EQUITY		36,463,033		37,857,367
TOTAL LIABILITIES AND MEMBERS' EQUITY	$	73,853,097	$	74,675,194

	Three months  ended September 30, 2011			Three months  ended September 30, 2010			Nine months  ended September 30, 2011			Nine months ended September 30, 2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Revenue
Rooms department	$	2,167,782		$	1,932,975		$	8,846,380		$	8,300,101
Food and beverage department		440,876			419,511			1,887,038			1,567,029
Other operating departments		265,186			250,914			837,984			827,554
Total revenue		2,873,844			2,603,400			11,571,402			10,694,684
Expenses
Hotel operating expenses
Rooms department		527,917			515,659			1,865,238			1,772,533
Food and beverage department		375,832			348,170			1,405,916			1,220,033
Other operating departments		143,074			148,313			470,174			495,053
Indirect		1,456,369			1,469,658			4,517,778			4,746,496
Total hotel operating expenses		2,503,192			2,481,800			8,259,106			8,234,135
Depreciation and amortization		549,493			548,167			1,645,602			1,642,546
General and administrative		9,037			34,166			76,130			170,532
Total operating expenses		3,061,722			3,064,133			9,980,838			10,047,213
Net operating income (loss)		(187,878	)		(460,733	)		1,590,564			647,471
Interest expense		(443,740	)		(326,972	)		(1,337,084	)		(681,675	)
Interest income		—			1,078			—			4,883
Loss on expiration of land purchase option		(75,000	)		—			(75,000	)		—
Unrealized gain (loss) on hedging activities		(427,539	)		49,678			(822,814	)		49,678
Net income (loss)	$	(1,134,157	)	$	(736,949	)	$	(644,334	)	$	20,357

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Summary Of Significant Accounting Policies

9 Months Ended

Sep. 30, 2011

Summary Of Significant Accounting Policies [Abstract]

Summary Of Significant Accounting Policies

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, the Operating Partnership, MHI TRS and subsidiaries as of September 30, 2011 and December 31, 2010 and for the three months and nine months ended September 30, 2011 and 2010. All significant inter-company balances and transactions have been eliminated.

Investment in Hotel Properties – Investments in hotel properties include investments in operating properties which are recorded at acquisition cost and allocated to land, property and equipment and identifiable intangible assets. 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 7 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.

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; (ii) the entity that leases the hotel and has engaged MHI Hotels Services to operate the hotel under a management contract; (iii) the entity that entered into a lease agreement upon closing of the hotel acquisition with respect to the adjacent three-acre site on which is located a parking garage that is utilized by the hotel; and (iv) the entity that owned the junior participation in the existing mortgage. Carlyle owns a 75.0% controlling indirect interest in all these 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.

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

Concentration of Credit Risk – The Company holds cash accounts at several institutions in excess of the FDIC protection limits of $250,000. The Company's exposure to credit loss in the event of the failure of these institutions is represented by the difference between the FDIC protection limit and the total amounts on deposit. Management monitors, on a regular basis, the financial condition of the financial institutions along with the balances there on deposit to minimize the Company's potential risk.

Restricted Cash – Restricted cash includes real estate tax escrows, insurance escrows, reserves for replacements of furniture, fixtures and equipment as well as cash collateral accounts maintained with its lenders or lenders' agents pursuant to certain requirements in the Company's various mortgage agreements and line of credit.

Inventories – Inventories which consist primarily of food and beverage are stated at the lower of cost or market, with cost determined on a method that approximates first-in, first-out basis.

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 September 30, 2011 and December 31, 2010 were $296,240 and $331,002, respectively. Amortization expense for the three months and nine months ended September 30, 2011 totaled $11,587 and $34,763, respectively, and $12,187 and $36,562, respectively, for the three months and nine months ended September 30, 2010.

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 consolidated statements of operations.

Derivative Instruments – The Company's derivative instruments are 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 uses derivative instruments to add stability to interest expense and to manage its exposure to interest-rate movements. To accomplish this objective, the Company primarily used an interest-rate swap, which was required under its credit agreement and acted as a cash flow hedge involving the receipts of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments without exchange of the underlying principal amount. The Company valued its interest-rate swap at fair value, which it defines 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) and included it in accounts payable and accrued liabilities. The Company also uses derivative instruments in the Company's stock to obtain more favorable terms on its financing. The Company does not enter into contracts to purchase or sell derivative instruments for speculative trading purposes.

The Company 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.

The Company endeavors 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. The following table represents our derivative instruments measured at fair value and the basis for that measurement:

	Level 1		Level 2			Level 3
September 30, 2011
Interest-rate swap	$	—	$	—		$	—
Warrant		—		(1,368,000	)		—
December 31, 2010
Interest-rate swap		—		(72,649	)		—
Warrant		—		—			—

The Company's interest-rate swap liability is valued by discounting expected future cash flows based on quoted prices for forward interest-rate contracts.

The warrant derivative liability was valued at September 30, 2011 using the Black-Scholes option pricing model assuming an exercise price of $2.25 per share of common stock, a risk-free interest rate of 0.97%, a dividend yield of 5.00%, expected volatility of 68.0% and a remaining term of approximately 5 years.

Cumulative Mandatorily Redeemable Preferred Stock – The Company accounts for its preferred stock based upon the guidance enumerated in ASC 480, Distinguishing Liabilities from Equity. The Preferred Stock is mandatorily redeemable on April 18, 2016, or upon the earlier occurrence of certain triggering events and therefore is classified as a liability instrument on the date of issuance.

Warrants – The Company accounts for the warrant based upon the guidance enumerated in ASC 815-40, Derivatives and Hedging: Contracts in Entity's Own Stock. The Warrant contains a provision that could require an adjustment to the exercise price if we issued securities deemed to be dilutive to the Warrant and therefore is classified as a derivative liability. The Warrant is carried at fair value with changes in fair value reported in earnings as long as the Warrant remains classified as a derivative liability.

Noncontrolling 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 noncontrolling 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 noncontrolling interest in the Operating Partnership based on the weighted average percentage ownership throughout the period.

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

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

Income Taxes – The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "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 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. As of September 30, 2011, the Company has no uncertain tax positions. In addition, the Company recognizes obligations for interest and penalties related to uncertain tax positions, if any, as income tax expense. The period from December 21, 2004 through December 31, 2010 remains open to examination by the major taxing jurisdictions to which the Company is subject.

Stock-based Compensation – The Company's 2004 Long Term Incentive Plan (the "Plan") permits the grant of stock options, restricted (non-vested) stock and performance stock 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 stockholders.

Under the Plan, the Company has made restricted stock and deferred stock awards totaling 215,938 shares including 165,935 shares issued to certain executives and employees, and 50,000 restricted shares issued to its independent directors. Of the 165,935 shares issued to certain of the Company's executives and employees, all have vested except 14,000 shares issued to the Vice President and General Counsel upon execution of his employment contract which will vest in equal amounts of 7,000 shares on each anniversary of the effective date of his employment agreement over the next two-year period. Regarding the restricted shares awarded to the Company's independent directors, all of the shares have vested except 12,000 shares which vest at the end of 2011.

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 September 30, 2011, 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. Compensation cost recognized under the Plan was $11,698 and $35,093, respectively, for the three months and nine months ended September 30, 2011 and $46,418 and $132,337, respectively for the three months and nine months ended September 30, 2010.

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 – 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.

Recent Accounting Pronouncements – There are no recent accounting pronouncements which the Company believes will have a material impact on its financial statements.

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Stockholders' Equity

9 Months Ended

Sep. 30, 2011

Stockholders' Equity [Abstract]

Stockholders' Equity

8. Stockholders' Equity

Preferred Stock – The Company has authorized 1,000,000 shares of preferred stock, of which 27,650 shares have been designated Series A Cumulative Redeemable Preferred Stock, as described above. None of the remaining authorized shares have been issued.

Common Stock – The Company is authorized to issue up to 49,000,000 shares of common stock, $0.01 par value per share. Each outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of stockholders. Holders of the Company's common stock are entitled to receive distributions when authorized by the Company's board of directors out of assets legally available for the payment of distributions.

On June 7, 2011, one holder of units in the Operating Partnership redeemed 115,000 units for an equivalent number of shares of the Company's common stock.

On March 22, 2011, the Company issued 17,500 shares of non-restricted stock to certain executives and employees as well as 12,000 shares of restricted stock to its then serving independent directors.

On January 25, 2011, the Company issued 16,000 non-restricted shares to its Chief Operating Officer and President in accordance with the terms of his employment contract, as amended.

On June 7, 2010, the Company issued 21,000 shares of restricted stock to its Vice President and General Counsel in accordance with the terms of his employment contract.

On March 22, 2010, one holder of units in the Operating Partnership redeemed 368,168 units for an equivalent number of shares of the Company's common stock.

During February 2010, the Company issued 18,175 shares of non-restricted stock to certain executives and 12,000 shares of restricted stock to its independent directors.

In addition, on February 1, 2010, the Company issued 15,000 shares of non-restricted stock to its Chief Executive Officer in accordance with the terms of his renewed employment contract.

As of September 30, 2011 and December 31, 2010, the Company had 9,701,786 and 9,541,286 shares of common stock outstanding, respectively.

Warrants – As of September 30, 2011, the Company has granted no warrants representing the right to purchase common stock other than the Warrant described in Note 7.

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 September 30, 2011, the total number of Operating Partnership units outstanding was 3,239,439, with a fair market value of approximately $7.0 million based on the price per share of the common stock on that date.

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Earnings Per Share

9 Months Ended

Sep. 30, 2011

Earnings Per Share [Abstract]

Earnings Per Share

13. Earnings per Share

The following table sets forth the reconciliation of the numerators and denominators in computing earnings per share for the three months and nine months ended September 30, 2011 and 2010.

	Three months  ended September 30, 2011			Three months  ended September 30, 2010			Nine months ended September 30, 2011			Nine months ended September 30, 2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Numerator
Net loss attributable to the Company for basic computation	$	(1,117,042	)	$	(1,004,350	)	$	(2,288,925	)	$	(1,528,625	)
Effect of the issuance of dilutive shares on the net loss attributable to the noncontrolling interest		(6,543	)		—			(9,935	)		—
Net loss attributable to the Company for dilutive computation	$	(1,123,585	)	$	(1,004,350	)	$	(2,298,860	)	$	(1,528,625	)
Denominator
Weighted average number of common shares outstanding for basic computation		9,701,786			9,541,286			9,627,006			9,415,593
Dilutive effect of stock awards		—			16,000			—			16,000
Dilutive effect of warrants		100,592			—			165,434			—
Weighted average number common shares outstanding for dilutive computation		9,802,378			9,557,286			9,792,440			9,431,593
Basic net loss per share	$	(0.12	)	$	(0.11	)	$	(0.24	)	$	(0.16	)
Diluted net loss per share	$	(0.11	)	$	(0.11	)	$	(0.23	)	$	(0.16	)

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. But the effect of the allocation of net income (loss) attributable to the limited partners' interests by the issuance of dilutive shares has been included.

Diluted net income (loss) per share takes into consideration the pro forma dilution of certain unvested stock awards during 2010 as well as the Warrant discussed in Note 7 issued in April 2011.

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Related Party Transactions

9 Months Ended

Sep. 30, 2011

Related Party Transactions [Abstract]

Related Party Transactions

9. Related Party Transactions

As of September 30, 2011, the members of MHI Hotels Services (a company that is majority-owned and controlled by the Company's chief executive officer, its chief financial officer, a current member and a former member of its Board of Directors) owned approximately 8.3% of the Company's outstanding common stock and 2,103,670 Operating Partnership units. The following is a summary of the transactions between the Company and MHI Hotels Services:

Accounts Receivable – At September 30, 2011, and December 31, 2010, the Company owed $3,351 and was due $17,375, 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. Leasehold revenue for each of the three months and nine months ended September 30, 2011 and 2010 was $160,000 and $480,000, respectively.

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

Management Agreements – Each of the hotels that the Company owned at September 30, 2011, except for the Crowne Plaza Tampa Westshore, are operated by MHI Hotels Services under a master management agreement that expires between December 2014 and April 2018. The Company entered into a separate management agreement with MHI Hotels Services for the management of the Crowne Plaza Tampa Westshore that expires in March 2019. Under both management agreements, 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 any hotel is 2.0% of gross revenues for the first full fiscal year and partial fiscal year from the commencement date through December 31 of that year, 2.5% of gross revenues the second full fiscal year, and 3.0% of gross revenues for every year 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 agreed that the property in Jeffersonville, Indiana shall substitute for the Williamsburg property under the master management agreement. The incentive management fee, if any, is due annually in arrears within 90 days of the end of the fiscal year and will be equal to 10.0% of the amount by which the gross operating profit of the hotels, on an aggregate basis, for a given year exceeds the gross operating profit for the same hotels, on an aggregate basis, for the prior year. The incentive management fee may not exceed 0.25% of gross revenues of all of the hotels included in the incentive fee calculation.

Management fees earned by MHI Hotels Services totaled $582,737 and $1,799,360 for the three months and nine months ended September 30, 2011, respectively, and $502,397 and $1,494,556 for the three months and nine months ended September 30, 2010, respectively. In addition, estimated incentive management fees of $(16,188) and $68,431 were accrued for the three months and nine months ended September 30, 2011, respectively, and estimated management fees of $36,263 and $42,358 were accrued for the three months and nine months ended September 30, 2010, 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. Premiums for employee medical benefits paid by the Company were $608,502 and $1,876,807 for the three months and nine months ended September 30, 2011, respectively and $617,763 and $1,593,923 for the three months ended September 30, 2010, respectively.

Construction Management Services – The Company has engaged MHI Hotels Services to manage certain aspects of the renovations at the Crowne Plaza Tampa Westshore and the Holiday Inn Brownstone. The Company paid no construction management fees for the three months and nine months ended September 30, 2011 and $66,667 and $141,733 for the three months and nine months ended September 30, 2010, respectively.

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Preferred Stock And Warrant

9 Months Ended

Sep. 30, 2011

Preferred Stock And Warrant [Abstract]

Preferred Stock And Warrant

7. Preferred Stock and Warrant

On April 18, 2011, the Company completed a private placement to the Investors pursuant to the Securities Purchase Agreement for gross proceeds of $25.0 million. The Company issued 25,000 shares of Preferred Stock and the Warrant to purchase 1,900,000 shares of the Company's common stock, par value $0.01 per share.

The Company has designated a class of preferred stock, the Preferred Stock, consisting of 27,650 shares with $0.01 par value per share, having a liquidation preference of $1,000.00 per share pursuant to Articles Supplementary (the "Articles Supplementary"), which sets forth the preferences, rights and restrictions for the Preferred Stock. The Preferred Stock is non-voting and non-convertible. The holders of the Preferred Stock have a right to payment of a cumulative dividend payable quarterly (i) in cash at an annual rate of 10.0% of the liquidation preference per share and (ii) in additional shares of Preferred Stock at an annual rate of 2.0% of the liquidation preference per share. As set forth in the Articles Supplementary, the holder(s) of the Company's Preferred Stock will have the exclusive right, voting separately as a single class, to elect one (1) member of the Company's board of directors. As of September 30, 2011, there were approximately 25,227 shares of the Preferred Stock issued and outstanding. In addition, under certain circumstances as set forth in the Articles Supplementary, the holder(s) of the Company's Preferred Stock will be entitled to appoint a majority of the members of the board of directors. The holder(s) of the Company's Preferred Stock will be entitled to require that the Company redeem the Preferred Stock under certain circumstances, but no later than April 18, 2016, and on such terms and at such price as is set forth in the Articles Supplementary.

The Warrant entitles the holder(s) to purchase up to 1,900,000 shares of the Company's common stock at an exercise price of $2.25 per share. The Warrant expires on October 18, 2016. The Warrant holders have no voting rights. The exercise price and number of shares of common stock issuable upon exercise of the Warrant are both subject to adjustment under certain circumstances. The Warrant also contains a cashless exercise right. Under certain circumstances as set forth in the Warrant, the holders of the Warrant will be entitled to participate in certain future securities offerings of the Company.

The Company determined the fair market value of the Warrant was approximately $1.6 million on the issuance date using the Black-Scholes option pricing model assuming an exercise price of $2.25 per share of common stock, a risk-free interest rate of 2.26%, a dividend yield of 5.00%, expected volatility of 60.0%, and an expected term of 5.5 years, and is included in deferred financing costs. The deferred cost is amortized to interest expense in the accompanying consolidated statement of operations over the period of issuance to the mandatory redemption date of the preferred stock.

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Consolidated Statements Of Cash Flows (USD $)	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Cash flows from operating activities:
Net loss	$ (3,074,873)	$ (2,093,060)
Adjustments to reconcile net loss attributable to the Company to net cash provided by operating activities:
Depreciation and amortization	6,460,928	6,381,378
Equity (income) loss in joint venture	161,083	(5,089)
Unrealized (gain)loss on derivatives	(338,649)	(630,828)
(Gain) loss on disposal of assets	(2,361)	84,128
Amortization of deferred financing costs	893,537	871,506
Paid-in-kind interest	226,530
Charges related to equity-based compensation	74,930	226,126
Changes in assets and liabilities:
Restricted cash	(123,602)	(692,151)
Accounts receivable	(660,413)	(1,204,259)
Prepaid expenses, inventory and other assets	353,800	(567,234)
Deferred income taxes	691,481	327,919
Accounts payable and accrued liabilities	2,559,821	1,306,279
Advance deposits	170,053	309,113
Due from affiliates	20,725	26,662
Net cash provided by operating activities	7,412,990	4,340,490
Cash flows from investing activities:
Improvements and additions to hotel properties	(4,181,335)	(2,211,195)
Proceeds from sale of furniture and equipment	26,705
Distributions from joint venture	187,500	138,386
Funding of restricted cash reserves	(1,742,175)	(1,359,144)
Proceeds of restricted cash reserves	1,267,048	597,518
Net cash used in investing activities	(4,442,257)	(2,834,435)
Cash flows from financing activities:
Proceeds of cumulative mandatorily redeemable preferred stock and warrant	25,000,000
Proceeds of mortgage debt	7,500,000
Proceeds of loans	4,000,000
Payments on credit facility	(30,064,845)	(325,000)
Pledge of cash collateral	(750,000)
Redemption of units in Operating Partnership		(17,600)
Payment of deferred financing costs	(1,493,484)	(530,595)
Payments of mortgage debt and loans	(4,756,067)	(376,875)
Net cash used in financing activities	(564,396)	(1,250,070)
Net increase in cash and cash equivalents	2,406,337	255,985
Cash and cash equivalents at the beginning of the period	2,992,888	3,490,487
Cash and cash equivalents at the end of the period	5,399,225	3,746,472
Supplemental disclosures:
Cash paid during the period for interest	6,277,147	6,584,127
Cash paid during the period for income taxes	46,655	19,625
Non-cash investing and financing activities:
Issuance of warrant with cumulative mandatorily redeemable preferred stock	$ 1,634,000

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Acquisition Of Hotel Properties

9 Months Ended

Sep. 30, 2011

Acquisition Of Hotel Properties [Abstract]

Acquisition Of Hotel Properties

3. Acquisition of Hotel Properties

There were no new acquisitions during the three months or nine months ended September 30, 2011.

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Investment In Hotel Properties

9 Months Ended

Sep. 30, 2011

Investment In Hotel Properties [Abstract]

Investment In Hotel Properties

4. Investment in Hotel Properties

Investment in hotel properties as of September 30, 2011 and December 31, 2010 consisted of the following (in thousands):

	September 30, 2011			December 31, 2010
	(unaudited)
Land and land improvements	$	19,258		$	19,245
Buildings and improvements		178,852			176,641
Furniture, fixtures and equipment		31,788			30,345
		229,898			226,231
Less: accumulated depreciation		(47,895	)		(42,332	)
	$	182,003		$	183,899

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Income Taxes

9 Months Ended

Sep. 30, 2011

Income Taxes [Abstract]

Income Taxes

12. Income Taxes

The components of the income tax provision (benefit) for the three months and nine months ended September 30, 2011 and 2010 are as follows (in thousands):

	Three months ended September 30, 2011			Three months ended September 30, 2010			Nine months ended September 30, 2011		Nine months ended September 30, 2010
	(unaudited)			(unaudited)			(unaudited)		(unaudited)
Current:
Federal	$	2		$	—		$	16	$	—
State		2			(2	)		57		38
		4			(2	)		73		38
Deferred:
Federal		(65	)		6			580		296
State		(11	)		(1	)		112		32
		(76	)		5			692		328
	$	(72	)	$	3		$	765	$	366

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

	Three months  ended September 30, 2011			Three months  ended September 30, 2010			Nine months  ended September 30, 2011			Nine months  ended September 30, 2010
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Statutory federal income tax expense (benefit)	$	(533	)	$	(465	)	$	(785	)	$	(587	)
Effect of non-taxable REIT income		470			471			1,381			883
State income tax expense (benefit)		(9	)		(3	)		169			70
	$	(72	)	$	3		$	765		$	366

As of September 30, 2011 and December 31, 2010, the Company had a net deferred tax asset of approximately $4.1 million and $4.7 million, respectively, of which, approximately $4.1 million and $4.2 million, respectively, are due to accumulated net operating losses. These loss carryforwards will begin to expire in 2024 if not utilized by then. As of September 30, 2011 and December 31, 2010, approximately $0.4 million of the net deferred tax asset is attributable to the Company's share of start-up expenses related to the Crowne Plaza Hollywood Beach Resort, start-up expenses related to the opening of the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore that were not deductible in the year incurred, but are being amortized over 15 years. The remainder of the net deferred tax asset is attributable to year-to-year timing differences including accrued, but not deductible, employee performance awards, vacation and sick pay, bad debt allowance and depreciation. 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.

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Debt

9 Months Ended

Sep. 30, 2011

Debt [Abstract]

Debt

5. Debt

Credit Facility. As of September 30, 2011, the Company had a secured credit facility with a syndicated bank group comprised of BB&T, Key Bank National Association and Manufacturers and Traders Trust Company.

On June 4, 2010, the Company entered into a fifth amendment to its credit agreement modifying certain provisions of the agreement including an increase in the rate of interest to LIBOR plus additional interest of 4.00%. The amendment established a LIBOR floor of 0.75%; converted it to a non-revolving facility; eliminated a fee of 0.25% on the unused portion of the facility; instituted a provision for mandatory quarterly pre-payments based on excess cash flow, as defined in the amendment, as well as a provision for mandatory prepayment if the Company raises equity within certain parameters; and provided an option to extend the maturity for one year if certain conditions were met.

On April 18, 2011, the Company entered into a sixth amendment to the credit agreement which, among other things, (i) extends the final maturity date of advances under the credit agreement to May 8, 2014; (ii) provides that no additional advances may be made and no currently outstanding advances subsequently repaid or prepaid may be re-borrowed; (iii) adjusts the release amounts with respect to secured hotel properties; (iv) reduces the additional interest from 4.00% to 3.50% and removes the LIBOR floor of 0.75%; and (v) adjusts certain financial covenants including restrictions relating to payment of dividends. In connection with the amendment, the Company reduced the outstanding balance on its existing credit facility by approximately $22.7 million.

The Company had borrowings under the credit facility of approximately $45.1 million and approximately $75.2 million at September 30, 2011 and December 31, 2010, respectively.

At September 30, 2011, the credit facility was secured by the Holiday Inn Brownstone in Raleigh, North Carolina, the Hilton Philadelphia Airport, the Sheraton Louisville Riverside and the Crowne Plaza Tampa Westshore, 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 September 30, 2011, the four properties had a net carrying value of approximately $93.1 million. Under the terms of the credit agreement, the Company must satisfy certain financial and non-financial covenants. The Company was in compliance with all required covenants as of September 30, 2011.

Mortgage Debt. As of September 30, 2011, the Company had approximately $75.0 million of outstanding mortgage debt. The following table sets forth the Company's mortgage debt obligations on its hotels.

Property	Balance Outstanding as of				Prepayment Penalties			Maturity Date			Amortization Provisions			Interest Rate
	September 30, 2011		December 31, 2010
Crowne Plaza Hampton Marina	$	8,949,625	$	9,000,000		N			06/2012		$	16,000	(1)		LIBOR plus  4.55	%(2)
Crowne Plaza Jacksonville Riverfront		14,000,000		18,000,000		N			01/2013	(3)		Interest  Only	(3)		8.00	%
Hilton Savannah DeSoto		22,594,245		22,867,464			(4)		07/2017			25 years	(5)		6.06	%
Hilton Wilmington Riverside		21,997,447		22,324,789			(4)		03/2017			25 years	(6)		6.21	%
Holiday Inn Laurel West		7,488,620		—			(7)		08/2021			25 years			5.25	%(8)
Total	$	75,029,937	$	72,192,253

(1) The Company is required to make monthly principal payments of $16,000.

(2) The note bears a minimum interest rate of 5.00%.

(3) The note could not be prepaid prior to July 2009, but a prepayment may be made currently without penalty.

(4) The notes may not be prepaid during the first six years of the terms. Prepayment can be made with penalty thereafter until 90 days before maturity.

(5) The note provided for payments of interest only until August 2010 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in July 2017.

(6) The note provided for payments of interest only until March 2009 after which payments of principal and interest under a 25-year amortization schedule are due until the note matures in March 2017.

(7) The note provides for pre-payment penalties during the first through fourth years and sixth through ninth years of the term of the mortgage.

(8) The note provides that after five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury rate of interest, with a floor of 5.25%.

Total mortgage debt maturities as of September 30, 2011 without respect to any additional loan extensions or modification subsequent to September 30, 2011 for the following twelve-month periods were as follows:

September 30, 2012	$	9,988,793
September 30, 2013		15,104,620
September 30, 2014		1,173,013
September 30, 2015		1,245,652
September 30, 2016		1,321,786
Thereafter		46,196,073
Total future maturities	$	75,029,937

Loan from Carlyle Affiliate Lender. On February 9, 2009, the indirect subsidiary of the Company which is a member of the joint venture entity that owns the Crowne Plaza Hollywood Beach Resort, borrowed $4.75 million from the Carlyle entity that is the other member of such joint venture (the "Carlyle Affiliate Lender"), for the purpose of improving the Company's liquidity. In June 2008, the joint venture that owns the property purchased a junior participation in a portion of the mortgage loan from the lender. The amount of the loan from the Carlyle Affiliate Lender approximated the amount the Company contributed to the joint venture to enable the joint venture to purchase its interest in the mortgage loan. The interest rate and maturity date of the loan are tied to a note that is secured by a mortgage on the property. The loan, which currently bears a rate of LIBOR plus additional interest of 3.00%, requires monthly payments of interest and principal equal to 50.0% of any distributions it receives from the joint venture. The maturity date of the mortgage to which the loan is tied matures in August 2014. The outstanding balance on the loan at September 30, 2011 and December 31, 2010 was $4,400,220 and $4,493,970, respectively.

Available Bridge Financing. On April 18, 2011, the Company entered into an agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which the Company has the right to borrow up to $10.0 million before the earlier of December 31, 2011 or the redemption in full of the Preferred Stock. The principal amount borrowed will bear interest at the rate of 9.25% per

annum, payable quarterly in arrears. The Bridge Financing will mature on April 18, 2015 or upon the redemption in full of the Preferred Stock, if earlier. The outstanding balance may be prepaid at the Company's option in whole or in part at any time without penalty. Further, the Company is obligated (i) to make prepayments in the event of, and to the extent of the proceeds from, new equity issuances, certain debt incurrences and sales of assets which do not secure the Company's obligations under the Company's credit agreement and (ii) to repay the Bridge Financing in full following certain trigger events which also give rise to an obligation to redeem the outstanding shares of Preferred Stock. The agreement provides for certain future securities pledges and/or asset liens to be granted from time to time to the lender to secure the Bridge Financing, under the circumstances and upon the conditions set forth in the agreement. At September 30, 2011, the Company had borrowings under the Bridge Financing of $4.0 million.

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Consolidated Statement Of Changes In Equity (USD $)	Common Stock [Member]	Additional Paid-In Capital [Member]	Distributions In Excess Of Retained Earnings [Member]	Noncontrolling Interest [Member]	Total
Balance at Dec. 31, 2010	$ 95,413	$ 55,682,976	$ (16,837,182)	$ 11,867,096	$ 50,808,303
Balance, shares at Dec. 31, 2010	9,541,286
Issuance of restricted common stock awards	455	74,475			74,930
Issuance of restricted common stock awards, shares	45,500
Conversion of units in operating partnership	1,150	438,125		(439,275)
Conversion of units in operating partnership, shares	115,000
Dividends and distributions declared			(194,035)	(64,789)	(258,824)
Net loss			(2,288,925)	(785,948)	(3,074,873)
Balance at Sep. 30, 2011	$ 97,018	$ 56,195,576	$ (19,320,142)	$ 10,577,084	$ 47,549,536
Balance, shares at Sep. 30, 2011	9,701,786

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Organization And Description Of Business

9 Months Ended

Sep. 30, 2011

Organization And Description Of Business [Abstract]

Organization And Description Of Business

1. Organization and Description of Business

MHI Hospitality Corporation (the "Company") is a self-managed and self-administered real estate investment trust ("REIT") that was incorporated in Maryland on August 20, 2004 to own primarily full-service upper-upscale and upscale hotels located in primary and secondary markets in the Mid-Atlantic and Southern 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 (the "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"). The Company also owns a 25.0% non-controlling interest in the Crowne Plaza Hollywood Beach Resort through a joint venture with CRP/MHI Holdings, LLC, an affiliate of both Carlyle Realty Partners V, L.P. and The Carlyle Group ("Carlyle").

For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the Operating Partnership, which, at September 30, 2011, was approximately 75.0% 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, MHI Hotels Services, LLC ("MHI Hotels Services"), to operate the hotels under a management contract. MHI TRS is treated as a taxable REIT subsidiary for federal income tax purposes.

All references in this report to the "Company", "MHI", "we", "us" and "our" refer to MHI Hospitality Corporation, its operating partnership and its subsidiaries and predecessors, unless the context otherwise requires or where otherwise indicated.

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

Amendments to Credit Agreement – On June 4, 2010, the Company entered into a fifth amendment to its credit agreement to address the sufficiency of the borrowing base. The amendment revises the methodology used to value the Company's existing hotel properties in the borrowing base and modifies certain other aspects of the credit agreement, as amended, including fixing the interest rate spread for the variable LIBOR-based interest rate at 4.00% and a minimum LIBOR of 0.75%. The amendment converts the facility to non-revolving, eliminates the Company's ability to re-borrow principal paid in the future and establishes minimum repayments equal to 50% of excess cash flow, as defined in the agreement, payable quarterly. Pursuant to the amendment, the Company is required to fund reserves for insurance and real estate taxes as well as a reserve for the replacement of furniture, fixtures and equipment equal to 3.0% of gross room revenues. The amendment also modifies the fixed charge covenant, eliminates the leverage covenant, places limits on capital expenditures and requires prepayments from a portion of the proceeds of future equity offerings of up to $21.7 million. In the event that the Company makes prepayments totaling $21.7 million, the excess cash flow prepayment requirement will terminate. The amendment allows the Company to pay additional dividends in any fiscal quarter, subject to the existing cap of 90% of the prior year's funds from operations ("FFO") provided certain liquidity thresholds and other conditions are met. The amendment provides for a contingent extension of the maturity date for one year to May 2012, provided that certain valuation and other criteria are met, including payment of an extension fee and an extension or refinancing of the Jacksonville mortgage.

On April 18, 2011, the Company entered into a sixth amendment to the credit agreement. Among other things, the amendment: (i) extends the final maturity date of the credit facility to May 8, 2014; (ii) provides that no additional advances may be made and no currently outstanding advances subsequently repaid or prepaid may be reborrowed; (iii) adjusts the release amounts with respect to secured hotel properties; (iv) reduces the additional interest from 4.00% to 3.50% and removes the LIBOR floor of 0.75%; and (v) adjusts certain financial covenants including restrictions relating to payment of dividends. In connection with the amendment, the Company reduced the outstanding balance on its existing credit facility by approximately $22.7 million.

Sale of Preferred Stock and Warrant – On April 18, 2011, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with Essex Illiquid, LLC and Richmond Hill Capital Partners, LP (collectively, the "Investors"), under which the Company issued and sold to the Investors in a private placement 25,000 shares of the Company's Series A Cumulative Redeemable Preferred Stock (the "Preferred Stock"), and a warrant (the "Warrant") to purchase 1,900,000 shares of the Company's common stock, par value $0.01 per share, for a purchase price of $25.0 million.

The Company used the net proceeds from the issuance of the Preferred Stock and the Warrant to partially prepay the amounts owed by the Company under its credit agreement.

Available Bridge Financing – On April 18, 2011, the Company entered into an agreement with Essex Equity High Income Joint Investment Vehicle, LLC, pursuant to which the Company has the right to borrow up to $10.0 million on or before December 31, 2011 (the "Bridge Financing"). The principal amount borrowed will bear interest at the rate of 9.25% per annum, payable quarterly in arrears and will mature on the earlier of April 18, 2015 or the redemption in full of the Preferred Stock.

Mortgage Loan Extension – On June 30, 2011, the Company entered into an agreement with TowneBank to extend the maturity of the mortgage on the Crowne Plaza Hampton Marina until June 30, 2012. Under the terms of the extension, the Company will make monthly principal payments of $16,000. Interest payable monthly pursuant to the mortgage was increased to LIBOR plus additional interest of 4.55% and a minimum total rate of interest of 5.00%. The Company also pledged $750,000 in cash collateral held by the lender in an interest-bearing account.

Mortgage Loan Refinancing – On August 1, 2011, the Company entered into agreements with PNC Bank, National Association, in its capacity as trustee of the AFL-CIO Building Investment Trust, to extend the maturity of the mortgage on the Crowne Plaza Jacksonville Riverfront until January 22, 2013. During the extension, and pursuant to the loan documents, the interest rate applicable to the mortgage loan is fixed at 8.0% and the lender has waived certain covenants requiring the borrower to further pay down principal under certain circumstances. In order to effect the extension, and pursuant to the loan documents, the Company tendered to the lender the sum of $4.0 million as principal curtailment of the mortgage loan, thus reducing the mortgage loan's current outstanding principal amount to $14.0 million, and the lender waived certain covenants requiring the Company to further pay down principal under certain circumstances.

On August 5, 2011, the Company obtained a 10-year, $7.5 million mortgage with Bank of Georgetown on the Holiday Inn Laurel West hotel property. The mortgage bears interest at a rate of 5.25% per annum for the first five years. After five years, the rate of interest will adjust to a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest, with a floor of 5.25%. The mortgage provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. Proceeds of the mortgage were used to pay down a portion of the Company's indebtedness under its credit facility.

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Retirement Plan

9 Months Ended

Sep. 30, 2011

Retirement Plan [Abstract]

Retirement Plan

10. Retirement Plan

The Company maintains a 401(k) plan for qualified employees which is subject to "safe harbor" provisions and which requires 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 totaled $9,440 and $40,994 for the three months and nine months ended September 30, 2011, respectively, and $16,434 and $37,396 for the three months and nine months ended September 30, 2010, respectively.

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Subsequent Events

9 Months Ended

Sep. 30, 2011

Subsequent Events [Abstract]

Subsequent Events

14. Subsequent Events

On October 3, 2011, the Company issued 50,000 shares of common stock in redemption of an equivalent number of units in the Operating Partnership.

On October 11, 2011, the Company paid a quarterly dividend (distribution) of $0.02 per common share (and unit) to those stockholders (and unitholders of MHI Hospitality, L.P.) of record on September 15, 2011.

On October 17, 2011, The Company obtained a 5-year, $8.0 million mortgage with Premier Bank, Inc. on the Holiday Inn Brownstone in Raleigh, North Carolina. The mortgage bears interest at a rate of 5.25% per annum and provides for level payments of principal and interest on a monthly basis under a 25-year amortization schedule. The mortgage may be extended for an additional 5-year period, at the Company's option if certain conditions precedent have been satisfied, at a rate of 3.00% per annum plus the then-current 5-year U.S. Treasury bill rate of interest. Proceeds of the mortgage were used to pay down a portion of the Company's indebtedness under its credit facility.

On October 17, 2011, the Company authorized payment of a quarterly dividend (distribution) of $0.02 per common share (and unit) to the stockholders (and unitholders of MHI Hospitality, L.P.) of record as of December 15, 2011. The dividend (distribution) is to be paid on January 11, 2012.

On November 1, 2011, the Company issued 15,000 shares of common stock in redemption of an equivalent number of units in the Operating Partnership and redeemed 2,600 additional units in the Operating Partnership for cash.

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Consolidated Balance Sheets (USD $)	Sep. 30, 2011	Dec. 31, 2010
ASSETS
Investment in hotel properties, net	$ 182,002,524	$ 183,898,660
Investment in joint venture	9,115,806	9,464,389
Cash and cash equivalents	5,399,225	2,992,888
Restricted cash	3,554,450	2,205,721
Accounts receivable	2,528,793	1,868,380
Accounts receivable-affiliate		17,375
Prepaid expenses, inventory and other assets	1,923,747	2,335,783
Notes receivable, net	100,000	100,000
Shell Island lease purchase, net	810,662	1,080,882
Deferred income taxes	4,055,457	4,742,695
Deferred financing costs, net	3,106,362	872,415
TOTAL ASSETS	212,597,026	209,583,431
LIABILITIES
Line of credit	45,133,013	75,197,858
Mortgage debt	75,029,937	72,192,253
Series A Cumulative Redeemable Preferred Stock, par value $0.01, 27,650 shares authorized, 25,277 and 0 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively	25,226,530
Loans payable	8,400,220	4,493,970
Accounts payable and accrued liabilities	8,901,659	6,335,145
Advance deposits	725,955	555,902
Dividends and distributions payable	258,825
Accounts payable - affiliate	3,351
Warrant derivative liability	1,368,000
TOTAL LIABILITIES	165,047,490	158,775,128
Commitments and contingencies (see Note 6)
EQUITY
Preferred stock, par value $0.01; 972,350 shares authorized, 0 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
Common stock, par value $0.01, 49,000,000 shares authorized, 9,701,786 shares and 9,541,286 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively	97,018	95,413
Additional paid in capital	56,195,576	55,682,976
Distributions in excess of retained earnings	(19,320,142)	(16,837,182)
Total MHI Hospitality Corporation stockholders' equity	36,972,452	38,941,207
Noncontrolling interest	10,577,084	11,867,096
TOTAL EQUITY	47,549,536	50,808,303
TOTAL LIABILITIES AND EQUITY	$ 212,597,026	$ 209,583,431