10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2005
	Or
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                            to                           

Commission file number: 000-51802

Morgans Hotel Group Co.

(Exact name of registrant as specified in its charter)

Delaware	16-1736884
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
475 Tenth Avenue	10018
New York, New York	(Zip Code)
(Address of principal executive offices)

(212) 277-4100

(Registrant’s telephone number, including area code)

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

None

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

(Title of Class)
Common Stock, $0.01 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o    No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o    No x

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 o    No x

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

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

Large accelerated filer o Accelerated filer o Non-accelerated filer x

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

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2005:  Not applicable as trading of the registrant’s common stock on the Nasdaq National Market did not commence until February 17, 2006.

As of March 27, 2006, the registrant had issued and outstanding 33,500,000 shares of common stock, par value $0.01 per share.

INDEX

		Page
PART I
ITEM 1	BUSINESS	2
ITEM 1A.	RISK FACTORS	20
ITEM 1B.	UNRESOLVED STAFF COMMENTS	39
ITEM 2	PROPERTIES	40
ITEM 3	LEGAL PROCEEDINGS	53
ITEM 4	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	54
PART II
ITEM 5	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	55
ITEM 6	SELECTED FINANCIAL INFORMATION	56
ITEM 7	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	60
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	82
ITEM 8	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	83
ITEM 9	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	83
ITEM 9A.	CONTROLS AND PROCEDURES	83
ITEM 9B.	OTHER INFORMATION	84
PART III
ITEM 10	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT	85
ITEM 11	EXECUTIVE COMPENSATION	91
ITEM 12	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	96
ITEM 13	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS	97
ITEM 14	PRINCIPAL ACCOUNTANT FEES AND SERVICES	104
PART IV
ITEM 15	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES	106

FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements relate to, among other things, the operating performance of our investments and financing needs. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “overestimate,” “underestimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions.

The forward-looking statements contained in this Annual Report on Form 10-K reflect our current views about future events and are subject to risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. The factors that could cause actual results to differ materially from expected results include changes in economic, business, competitive market and regulatory conditions. Important risks and factors that could cause our actual results to differ materially from any forward-looking statements include, but are not limited to:

·the factors discussed in this Annual Report on Form 10-K set forth under the sections titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

·downturns in economic and market conditions, particularly levels of spending in the business, travel and leisure industries;

·hostilities, including future terrorist attacks, or fear of hostilities that affect travel;

·risks related to natural disasters, such as earthquakes and hurricanes;

·the completion of the transactions described under “Business—Recent Developments” and the integration of those properties with our existing business;

·the seasonal nature of the hospitality business;

·changes in the tastes of our customers;

·increases in real property tax rates;

·increases in interest rates and operating costs;

·general volatility of the capital markets and our ability to access the capital markets; and

·changes in the competitive environment in our industry and the markets where we invest.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. These forward-looking statements involve risks, uncertainties and other factors that may cause our actual results in future periods to differ materially from forecasted results. We are under no duty to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform these statements to actual results.

Factors that could have a material adverse effect on our operations and future prospects are set forth in the Risk Factors section of this Annual Report on Form 10-K beginning on page 19. The factors set forth in the Risk Factors section could cause our actual results to differ significantly from those contained in any forward-looking statement contained in this report.

PART I

ITEM 1BUSINESS

Background

We are a fully integrated hospitality company that operates, owns, acquires and redevelops boutique hotels in gateway cities and select resort markets in the United States and Europe. We are widely credited with establishing and defining the rapidly expanding boutique hotel sector. Over our 21 year history, we have gained experience operating in a variety of market conditions. We own or partially own and manage a portfolio of nine luxury hotel properties comprising over 2,500 rooms (as more fully described under “Item 1. Business—Summary of Hotel Properties” and “Item 2. Properties” below), including:

·Morgans, Royalton and Hudson in New York

·Delano and Shore Club in Miami

·Mondrian in Los Angeles

·Clift in San Francisco

·St. Martins Lane and Sanderson in London

In addition to our current portfolio, we expect to operate, own, acquire, redevelop and develop new hotel properties that are consistent with our portfolio in major metropolitan cities and select resort markets in the United States, Europe and elsewhere. See “Item 1. Business—Recent Developments” below for a discussion of our planned development of Delano Las Vegas and Mondrian Las Vegas through a 50/50 joint venture, our pending acquisition of James Hotel Scottsdale and our recently completed acquisition to expand Delano.

Immediately prior to the completion of our initial public offering, we and certain other entities entered into a series of transactions to create our new corporate structure. These transactions, which we call our “Formation and Structuring Transactions”, are described below. As a result of the Formation and Structuring Transactions:

·we are the managing member of and own approximately 97.1% of the membership interests in Morgans Group LLC (the remaining membership interests in Morgans Group LLC are owned by Morgans Hotel Group LLC and are exchangeable for our common stock);

·Morgans Group LLC owns the hotel properties owned by Morgans Hotel Group LLC prior to the consummation of the Formation and Structuring Transactions;

·the hotel properties continue to be managed by MHG Management Company, which is a wholly owned subsidiary of Morgans Group LLC; and

·Morgans Group LLC is the joint venture partner in the restaurant joint venture.

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The diagram below sets forth a simplified presentation of our corporate structure immediately following the Formation and Structuring Transactions:

(1)NorthStar Partnership, L.P. and its partners, including NorthStar Capital Investment Corp. (“NCIC”), beneficially owns approximately 14 million shares of our common stock, including shares issuable upon exchange of Morgans Group LLC membership units held by Morgans Hotel Group LLC (to be renamed Residual Hotel Interest LLC).

(2)Percentage ownership interests in Morgans Hotel Group Co. assume that all 1,000,000 Morgans Group LLC membership units owned by Residual Hotel Interest LLC are distributed to its members and exchanged by us for our common stock.

(3)Morgans Hotel Group LLC changed its name to Residual Hotel Interest LLC.

Formation And Structuring Transactions

Morgans Hotel Group Co. was formed as a Delaware corporation in October 2005 to complete the initial public offering that was part of the Formation and Structuring Transactions described below.

Prior to the initial public offering of our common stock on February 17, 2006, the following steps occurred:

·Morgans Hotel Group Management LLC, which we refer to as MHG Management Company, and other subsidiaries of Morgans Hotel Group LLC distributed available unrestricted cash in to Morgans Hotel Group LLC.

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·MHG Management Company borrowed $80 million under a new secured term loan facility from a syndicate of lenders. Morgans Hotel Group LLC guaranteed MHG Management Company’s obligations under this loan.

·MHG Management Company distributed the proceeds of the $80 million loan described above, to Morgans Hotel Group LLC and Morgans Hotel Group LLC contributed that amount to one of its wholly-owned subsidiaries, MMRDH Parent Holding Company LLC, which, together with certain of its wholly-owned subsidiaries, used that amount to repay a portion of its outstanding mortgage borrowings.

·Morgans Hotel Group LLC contributed to Morgans Group LLC all of its interests in its subsidiaries, except certain identified interests and its interest in MHG Management Company and except for its cash balances, for no consideration. The interests contributed by Morgans Hotel Group LLC to Morgans Group LLC will included:

·100% of the membership interests in MMRDH Parent Holding Company LLC, the Morgans Group subsidiary that indirectly through other subsidiaries owns Morgans, Delano, Royalton,  Hudson and Mondrian;

·100% of the membership interests in the Morgans Group subsidiary that is the managing member of the limited liability company that leases Hudson;

·100% of the membership interests in the Morgans Group subsidiary that owns a 7% interest in Shore Club;

·100% of the membership interests in the Morgans Group subsidiary that is the lessee under the Clift lease;

·100% of the membership interests in the Morgans Group subsidiary that manages St. Martins Lane and Sanderson;

·100% of the membership interests in the Morgans Group subsidiary that is a 50% joint venture partner in the joint venture that owns St. Martins Lane and Sanderson;

·100% of the membership interests in the Morgans Group subsidiaries that are parties to the limited liability company agreement with Echelon Resorts Corporation relating to the development of Delano Las Vegas and Mondrian Las Vegas, the entity that will purchase James Hotel Scottsdale and the entity that acquired the property across Collins Avenue from Delano; and

·50% of the membership interests in the United States and London restaurant joint ventures.

·Subsequent to the contribution of the interests for no consideration described above, the limited liability company agreement of Morgans Group LLC was amended and restated to provide for:

·a managing member interest that we will hold, which will give us the exclusive responsibility and power to manage the business and affairs of Morgans Group LLC;

·a fixed number of membership units in Morgans Group LLC to be held by Morgans Hotel Group LLC prior to the contribution of MHG Management Company for additional membership units; and

·redemption/exchange of membership units in Morgans Group LLC held by non-managing members for shares of our common stock on a one-for-one basis.

·Morgans Hotel Group LLC distributed its retained cash as described below and all of the membership units in Morgans Group LLC held by it to its members and other certain persons with

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rights under participation agreements, which we call collectively the Morgan Hotel Group Investors, in accordance with their membership interests in and other entitlements from Morgans Hotel Group LLC. Those membership units in Morgans Group LLC were subsequently exchanged for shares of our common stock.

·Morgans Hotel Group LLC contributed all of the membership interests in MHG Management Company to Morgans Group LLC in return for membership units in Morgans Group LLC exchangeable for shares of Morgans Hotel Group Co. common stock.

After completing the transactions described above, we completed the initial public offering of our common stock. In the initial public offering, we issued 15,000,000 shares for cash and selling stockholders sold 3,000,000 shares for cash. We contributed the net proceeds of the offering of shares by us to Morgans Group LLC in exchange for a number of membership units equal to the number of shares issued  As a result of our initial public offering and the related transactions, we own a 97.1% managing membership interest in Morgans Group LLC.

Overview

We are a fully integrated hospitality company that operates, owns, acquires and redevelops boutique hotels in gateway cities and select resort markets in the United States and Europe. We are widely credited with establishing and defining the rapidly expanding boutique hotel sector. Over our 21-year operating history, we have gained experience operating in a variety of market conditions. We own or partially own and manage a portfolio of nine luxury hotel properties in New York, Miami, Los Angeles, San Francisco and London comprising over 2,500 rooms. Each of our owned hotels was acquired and renovated by the Morgans Group and was designed by a world-renowned designer.

Unlike traditional brand-managed or franchised hotels, boutique hotels provide their guests with what we believe is a distinctive lodging experience. Each of our hotels has a personality specifically tailored to reflect the local market environment and features modern, sophisticated design that includes critically acclaimed public spaces; popular “destination” bars and restaurants; and highly personalized service. Significant media attention has been devoted to our hotels which we believe is as a result of their distinctive nature, renowned design, dynamic and exciting atmosphere, celebrity guests and high-profile events. We believe that the Morgans Group brand, and each of our individual property brands are synonymous with style, innovation and service. We believe this combination of lodging and social experiences, and association with our brands, increases our occupancy levels and pricing power.

In addition to our current portfolio, we expect to operate, own, acquire, redevelop and develop new hotel properties that are consistent with our portfolio in major metropolitan cities and select resort markets in the United States, Europe and elsewhere, including our planned development of Delano Las Vegas and Mondrian Las Vegas through a 50/50 joint venture, our pending acquisition of James Hotel Scottsdale and our recently completed acquisition to expand Delano.

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Summary of Hotel Properties

Set forth below is a summary of certain information related to our hotel properties as of December 31, 2005, giving effect to the Formation and Structuring Transactions. For further information regarding our hotel properties, see “Item 2. Properties” below.

		Year		Interest			Number			Twelve Months Ended December 31, 2005									Restaurants
Hotel	City	Opened		Owned			of Rooms			ADR(1)			Occupancy(2)			RevPAR(3)			and Bars(4)
Morgans	New York		1984		100	%		113			295			83.4	%		246		Asia de Cuba Morgans Bar
Royalton	New York		1988		100	%		169			316			86.2	%		272		44 Lobby Bar Round Bar Library Table
Hudson	New York		2000		(5	)		804	(5)		247			85.3	%		211		Hudson Cafeteria Hudson Bar Private Park Library Bar Sky Terrace
Delano	Miami		1995		100	%		194			474			72.1	%		342		Blue Door Blue Sea Rose Bar
Mondrian	Los Angeles		1996		100	%		237			301			79.5	%		239		Asia de Cuba Seabar Skybar
Clift	San Francisco		2001		(6	)		363			221			68.7	%		152		Asia de Cuba Redwood Room Living Room
St. Martins Lane	London		1999		50	%		204			359			73.6	%		264		Asia de Cuba Light Bar Rum Bar
Sanderson	London		2000		50	%		150			438			69.6	%		305		Spoon Long Bar Purple Bar
Shore Club	Miami		2001		7	%		307			349			63.6	%		222		Nobu Ago Skybar Redroom Rumbar Sandbar
Total/Weighted Average								2,541			$	302		76.9	%		$	232

(1)Average daily rate, or ADR.

(2)Average daily occupancy.

(3)Revenue per available room, or RevPAR, is the product of ADR and average daily occupancy. RevPAR does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services.

(4)We operate the restaurants in Morgans, Hudson, Delano, Mondrian, Clift, Sanderson and St. Martins Lane as well as the bars in Delano, Sanderson and St. Martins Lane through a joint venture arrangement with Chodorow Ventures LLC in which we own a 50% ownership interest. See “Related Party Transactions—Joint Venture Agreements”.

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(5)We own 100% of Hudson, which is part of a property that is structured as a condominium, in which Hudson constitutes 96% of the square footage of the entire building. Hudson has a total of 920 rooms, including 116 single room occupancies (SROs), of which 21 are vacant. SROs are single room dwelling units. Each SRO is for occupancy by a single eligible individual. The unit need not, but may, contain food preparation or sanitary facilities, or both. SROs remain from the prior ownership of the building and we are by statute required to maintain these long-term tenants, unless we get their consent, as long as they pay us their rent.

(6)Clift is operated under a long-term lease, which is accounted for as a financing.

(7)The currency translation is based on an exchange rate of 1 British pound = 1.82 U.S. dollars, which is an average monthly exchange rate provided by www.oanda.com for the last twelve months ending December 31, 2005.

Recent Developments

Planned Development of Delano Las Vegas and Mondrian Las Vegas.   On January 3, 2006, we entered into a limited liability company agreement with Echelon Resorts Corporation, a subsidiary of Boyd Gaming Corporation, through which we will develop, as 50/50 owners, Delano Las Vegas and Mondrian Las Vegas, which will be located within a new development on the Las Vegas Strip to be called Echelon Place.

Delano Las Vegas is expected to include 600 guest rooms and suites and feature a nightclub, spa, lobby bar and restaurant, and a private pool and recreation area. Mondrian Las Vegas is expected to include 1,000 guest rooms and suites and feature a distinctive bar and restaurant, meeting and conference space, and a private pool and recreation area. We expect to open Delano Las Vegas and Mondrian Las Vegas concurrently with the opening of Echelon Place in early 2010.

Echelon Place is the planned redevelopment of the 63-acre Las Vegas Strip property on which the Stardust Resort & Casino is currently located. In addition to Delano Las Vegas and Mondrian Las Vegas, Echelon Place is expected to include the Echelon Resort, with approximately 3,300 guest rooms and suites, The Shangri-La Las Vegas Hotel, with approximately 400 guest rooms and suites, the Las Vegas ExpoCenter at Echelon Place, over 350,000 square feet of shopping, dining, nightlife and cultural space within the Retail Promenade, and a 140,000 square foot casino.

We and Echelon Resorts Corporation will jointly seek to arrange non-recourse project financing for the development of Delano Las Vegas and Mondrian Las Vegas. Once non-recourse project financing has been obtained, we have agreed to make a contribution in an amount necessary to have our total contribution at such time equal approximately $97.5 million in cash. We expect these contributions to be completed in 2007, with approximately $15.0 million to $17.5 million of that amount to be contributed as a part of pre-development in 2006 and 2007 prior to obtaining financing. All further contributions will be made pro rata, although we and Echelon Resorts Corporation may be individually responsible for certain cost overruns.

The joint venture will be dissolved if the project financing is not obtained by June 30, 2008.

Purchase of James Hotel Scottsdale.   On December 21, 2005, we agreed to acquire the James Hotel Scottsdale for approximately $47.5 million in cash, including an approximate initial 10% deposit paid at the time of signing of the purchase agreement. The James Hotel Scottsdale is a 194-room boutique hotel located in Scottsdale, Arizona. The purchase is scheduled to close in April 2006. We expect to initially finance the remainder of the purchase price out of the net proceeds of our initial public offering, cash from operations or borrowings under our new revolving credit facility described below. Any initial financing may be replaced with permanent mortgage financing in the future.

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Extension of Delano.   On January 24, 2006, we acquired the property across Collins Avenue from Delano for approximately $14.3 million. We financed this purchase with cash from working capital and the issuance of a $10.0 million promissory note by us to the seller, which initially bears interest at 7%.

There can be no assurances that any of these uncompleted transactions will be completed on the schedule or on the terms described above, if at all. In addition, there are risks associated with acquiring and developing or redeveloping hotels, as described below under “Risk Factors—Our strategy to acquire and develop or redevelop hotels creates timing, financing, operational and other risks that may adversely affect our business and operations”.

Competitive Advantages

We believe we have significant competitive advantages relative to other industry participants.

Segment Creation and Leadership

Our predecessor companies, founded in 1983 by Ian Schrager, created what is often credited as the original “boutique” hotel and established what we believe was a new segment in the hospitality industry. We created these hotels to provide an alternative to the uniformity of branded chain hotels which dominated the industry since the emergence of national and international branded hotel chains in the middle of the twentieth century based on the principle of sameness, offering customers predictable levels of accommodation and tightly scripted service within a standardized setting. The concepts we pioneered challenged previous hotel industry norms. These concepts included the modification of the standard hotel design aesthetic to include attention-grabbing design elements, and the reinvention of the traditional hotel lobby to include the attraction of sought-after restaurants and bars, which together establish the hotel as a destination in itself both for travelers and for patrons from the local community.

We have continued to lead the boutique hotel segment as we developed and grew our business beyond our initial concepts. Since 1983 we have continued to acquire, redevelop and operate hotels in response to a growing demand for interesting and distinctive hotels providing individualized service to an increasingly sophisticated and style-conscious guest. We expanded domestically and internationally in both urban and resort markets, in several instances having a large influence on the improvement of neighborhoods such as South Beach in Miami and West Hollywood in California. We further expanded the concept to a larger format with the 804-room Hudson as well as to a variety of different price points.

Distinctive Lodging Experience

The customer experience in our hotels is unlike that in most branded hotel chains. Our hotels are characterized by eclectic, leading-edge design; noteworthy public spaces, restaurants and bars; and outstanding personalized service. Taken together, these elements create what we believe is a distinctive lodging experience that translates into customer loyalty and the potential for superior RevPAR.

·Leading-Edge Design. While a typical hotel chain offers a standard “box”, we offer architecturally striking properties in locations that are not only convenient but interesting. The lobby and other public spaces in a typical chain hotel must often conform to strict guidelines designed to promote standardization. In contrast, our lobbies and public spaces feature what we believe are unique, innovative contemporary designs that make them attractive gathering places with a dynamic feel. Our guestrooms are similarly stylish, containing memorable design elements such as the modern, all-white simplicity of Delano or the black and white tiled bathrooms at Morgans.

·Noteworthy Public Spaces, Restaurants and Bars. Each of our hotels has noteworthy public spaces, including critically-acclaimed restaurants and bars, such as Asia de Cuba and Skybar. For example, Zagat Survey ranks the Asia de Cuba restaurants in our hotels among the most popular in New

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York, Los Angeles and London. These restaurants and bars, unlike most such hotel facilities, attract significant patronage from the local community which makes them desirable destinations for hotel guests and other patrons while generating substantial direct revenue and publicity.

·Outstanding Personalized Service. Our service culture is focused on meeting luxury service standards while providing our guests with an engaging experience that drives customer loyalty. We combine disciplined performance management and best practices with innovative training techniques across the business. In contrast to the impersonal service that often results from rigid and scripted customer-interaction routines, our staff is trained to meet our guests’ needs through personalized exchanges. We regularly evaluate customer satisfaction using third-party customer research and have achieved customer satisfaction ratings for our hospitality that often exceeds that of comparable hotels.

Brand Strength and Awareness

Our portfolio of brands includes an umbrella brand under which all of our properties operate, the Morgans Group; distinctive individual property brands, such as Delano, Mondrian, Hudson, and Royalton; and restaurant and bar brands such as Asia de Cuba and Skybar. We believe that the Morgans Group brand, and each of our individual property, restaurant and bar brands, are synonymous with style, innovation, a dynamic and exciting atmosphere, and personalized service. Our hotels generate significant media attention through their distinctive nature, renowned design, atmosphere, celebrity guests and high-profile events. Some examples of these events include parties for awards shows such as the Academy Awards, the Grammy Awards, Video Music Awards, ESPN’s ESPY Awards; events associated with Fashion Week in New York and London; and movie and magazine launches. We help sustain this profile through an aggressive marketing effort that focuses on favorable publicity which results in extensive media coverage with each hotel having been featured in national and international magazines such as Vogue, Vanity Fair, Harper’s Bazaar, Travel & Leisure, and Condé Nast Traveler, and newspapers such as The New York Times, USA Today, The Washington Post, The Times of London, and The Los Angeles Times.

We believe this public profile is an important component of making the traveling public aware of our brands and keeping the public’s perception of those brands current and positive. Our brand strength and awareness in turn is an important demand driver that is difficult to imitate and a potent and cost-effective marketing tool. Moreover, we believe that these brands offer attractive opportunities to grow our business by exporting them to new markets and expanding them within our existing markets. Similarly, we believe our brand portfolio improves our ability to secure joint ventures and management agreements with third parties. We believe many of our brands may be extended to residential and other non-hotel opportunities.

Premier Locations in International Gateway Cities

Our nine properties are centrally located in key gateway cities—New York, Miami, San Francisco, Los Angeles and London—which attract both business and leisure travelers. These markets generally offer superior demographics and multiple demand drivers, such as a high concentration of business activity and tourist points of interest. In addition, these markets have significant barriers to entry for new competitive supply including scarcity of available land for new development and extensive regulatory requirements resulting in a longer development lead time and additional expense for new competitors. We believe these markets provide a strong foundation from which to realize material RevPAR growth. During 2004 and 2005, RevPAR growth in these markets averaged 132.5% and 12.0%, respectively, as compared to the U.S. average of 7.8% and 8.4%, respectively, as Miami, New York, Los Angeles and San Francisco grew faster than the industry average. The London market experienced slower growth in 2005 due in part to the strength of the British pound against the U.S. dollar and most recently to the terrorist attacks of July 7 and July 21, 2005.

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Within each of these cities, our hotels are strategically located to provide our guests with convenient access to major business, cultural and shopping districts. For example, our New York hotels are located in midtown Manhattan; our Miami hotels are located on the ocean front in South Beach; our London hotels are situated in the theater and media districts with St. Martins Lane across the street from Trafalgar Square; our San Francisco hotel is located close to Union Square; and our Los Angeles hotel is located on Sunset Boulevard in the heart of West Hollywood.

Experienced Management Team and Extensive Infrastructure

Our management team of executive officers and other significant professionals consists of a group of individuals with the experience necessary to operate and grow our business, including property management, asset management, brand management, sales, marketing, revenue management, internet commerce, acquisition, redevelopment, and finance. Many of our professionals have traditional hotel backgrounds having studied at hotel schools and worked at more traditional hotel companies, although only Richard Szymanski, our Chief Financial Officer, has been an officer of a public company.

In addition, our management team has been operating and growing its collection of boutique—as opposed to traditional—hotels and brands throughout the United States and in London for many years. We have extensive experience with, and an understanding of, the customer segment that appreciates alternatives to the traditional chain hotel products and is willing to pay for the distinctiveness of the product. With an average 16 years experience in the hospitality and real estate industries and eight years affiliated with our company, our management team of executive officers and other significant professionals has led our company through cyclical operating environments.

As our business and asset base have expanded, we have created processes and systems supported by technology that we believe result in a state-of-the-art operating infrastructure with certain best-of-class proprietary capabilities. Our processes and systems ensure consistency and quality of execution. Recent initiatives include centralization of our telephone reservations office, centralization of our computer reservations systems, creation of a proprietary revenue management system, globalization of our sales system, and deployment of a company-wide customer relationship management system. In addition, we institutionalized our service culture and other facets of our human capital processes through a training and monitoring system. We believe the experience of our management team and quality of our systems provide us with the infrastructure necessary to maximize the performance of our existing portfolio and a platform to grow while maintaining quality. We believe the cost, time, and other complexities involved in establishing such an infrastructure create significant barriers to entry for potential new competition in the hospitality business.

Our Growth Strategy

We intend to grow through our proven ability to replicate our model on an individualized but consistent basis across a growing portfolio and by leveraging our portfolio of brands for expansion in both new and existing markets. We have enhanced our management team through new hires with a renewed focus on acquisitions and growth. We believe that our current management team and existing operating infrastructure provide us with the ability to successfully integrate assets into our portfolio as we grow and expand. We believe that with the establishment of a public market for our common stock, the significant reduction of our debt through our initial public offering, and our entry into a new revolving credit facility, we will have the financial flexibility to capitalize on our internal and external growth opportunities.

Internal Growth

We believe our portfolio is poised for internal growth driven by continued industry-wide growth, selected renovation and expansion projects, and operational and technology infrastructure initiatives.

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Well Positioned to Benefit from Industry-wide Growth.   The hospitality industry is experiencing sustained RevPAR growth at historically high levels. Rebounding economic growth and corporate profits coupled with historically low levels of new supply generated 2005 RevPAR growth of 8.4%. Our RevPAR growth has on average outperformed most other hotel companies and brands. RevPAR growth throughout our portfolio has exceeded all national chain scale segments, including the Luxury sector in which our hotels are categorized. In addition, the markets in which our hotels are located are materially outpacing broader industry averages for RevPAR growth.

U.S. Hospitality Industry Performance(1)

	2005			2004			2003
Occupancy	63.1		%	61.3		%	59.1		%
ADR	$	90.84		$	86.24		$	83.11
RevPAR	$	57.34		$	52.88		$	49.11
RevPAR growth	8.4		%	7.8		%
Demand growth	3.3		%	4.6		%
Supply growth	0.4		%	1.0		%

Footnotes:

(1)Data provided by Smith Travel Research

U.S. Hospitality Industry RevPAR Growth by Chain Scale(1)

	2005 vs. 2004			2004 vs. 2003
Morgans (U.S. hotels)		16.2	%		17.4	%
Industry		8.4	%		7.8	%
Luxury		11.5	%		10.8	%
Upper Upscale		9.8	%		8.2	%
Upscale		10.1	%		8.7	%
Midscale with F&B		8.4	%		6.3	%
Midscale without F&B		11.7	%		7.2	%
Economy		7.5	%		4.6	%
Independents		5.0	%		7.5	%

Footnotes:

(1)Data provided by Smith Travel Research

Hospitality Industry RevPAR Growth by Market(1)

	2005 vs. 2004			2004 vs. 2003
Industry Average—U.S.		8.4	%		7.8	%
New York		16.6	%		19.6	%
Miami		18.6	%		14.1	%
Los Angeles		11.6	%		12.9	%
San Francisco		11.3	%		9.3	%
London		2.0	%		11.5	%

Footnotes:

(1)U.S. data provided by Smith Travel Research. London data provided by Deloitte London.

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Targeted Renovations and Expansions.   We have targeted and are pursuing a number of specific renovation and expansion projects throughout our portfolio that we believe will increase our appeal to our guests and generate increased revenue at our properties. For example, subsequent to December 31, 2005, we acquired a property across Collins Avenue from Delano, which we intend to convert to new guest rooms at Delano and additional guest facilities, including a new restaurant and a new bar. See “Business—Recent Developments—Extension of Delano”. These projects also include utilization of unused space, room refurbishments and upgrades, reconfiguration of public areas with the addition of amenities and revenue drivers, such as health clubs, meeting spaces and retail shops in certain properties. For example, we are planning to undertake room renovation projects, including technology upgrades, in Delano, Mondrian and Royalton. We are also planning renovation of the lobbies at Mondrian and Royalton, and are planning to undertake expansion projects at St. Martins Lane to include a new bar and a gym. We continuously evaluate alternative uses throughout our portfolio including residential conversion and other opportunities.

Operational and Infrastructure Initiatives.   We implement state-of-the-art operational systems and apply best practices to maximize synergies at the portfolio level. Within the past few years, we have launched a number of operational and technology initiatives that are expected to result in revenue growth, significant improvements in our operating costs and efficiencies, an improved guest experience and an enhanced ability to market to our customers’ specific lodging needs. Recent initiatives include centralization of our telephone reservations office, centralization of our computer reservations systems, utilization of a proprietary revenue management system, globalization of our sales system, and deployment of a company-wide customer relationship management system. Specifically, our website was launched in July 2002 and during 2005 generated approximately 10.2% of our total bookings and approximately 11.0% of our total rooms revenue. Our historical results of operations do not reflect the full benefits of these recently implemented measures.

External Growth

We believe we are poised for external growth that will be driven by growth in major metropolitan markets and select resort locations as we extend our hotel, restaurant and bar brands. We intend to be flexible with respect to transaction structures and real estate requirements as we grow our business.

Target Markets.   We intend to base our decisions to enter new markets on a number of criteria, with a focus on markets that attract affluent travelers who value a distinctive and sophisticated atmosphere and outstanding service. Specifically, we target key gateway destinations for both domestic and foreign travelers that attract both business and leisure travelers as well as select resort markets. We believe Las Vegas and Scottsdale, where we have a planned development project and a pending acquisition, are examples of such markets. See “Business—Recent Developments—Planned Development of Delano Las Vegas and Mondrian Las Vegas” and “—Purchase of James Hotel Scottsdale”. Consistent with our prior expansion activities, we will continue to seek to grow in markets with multiple demand drivers and high barriers to entry:

·Major North American metropolitan markets with vibrant urban locations, including existing markets such as Los Angeles and new markets such as Chicago, Boston, and Washington, DC;

·Select resort locations such as Las Vegas and Hawaii; and

·Key European destinations that, we believe, offer a similar customer base as our established US and UK markets, such as Paris and Milan.

Brand Extensions.   We believe that our existing brand portfolio has considerable development potential. Many of our brands, including hotel brands such as Delano, Mondrian, Hudson and Royalton,

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and restaurant and bar brands such as Asia de Cuba and Skybar, may be extended to other hotels, restaurants, bars in our existing and new markets. For example, we intend to re-brand the James Hotel Scottsdale, described under “—Recent Developments—Purchase of James Hotel Scottsdale”, as Mondrian Scottsdale. Similarly, we believe our brand portfolio improves our ability to secure joint ventures and management agreements with third parties. We also believe that, based on market trends, we may have new growth opportunities through the extension of our brands into condominium development and other residential projects, including condominiums or apartments with hotel services provided, condominiums that may be contributed to a hotel rental pool when not occupied by the owner, or otherwise. In part because of our strong portfolio, Boyd Gaming chose our Delano and Mondrian brands and our management team for a portion of its Echelon Place development in Las Vegas. See “Business—Recent Developments—Planned Development of Delano Las Vegas and Mondrian Las Vegas”. Furthermore, we believe we have additional brand extension opportunities outside the hospitality and real estate industries, such as selective retail product placement opportunities.

Flexible Business Model.   We intend to be flexible with respect to transaction structures and real estate requirements as we grow our business. We will pursue acquisition, joint venture and other opportunities. As we pursue these opportunities, we will focus on our critical objectives of providing ourselves with a meaningful percentage of any equity growth or a significant total dollar return on investment. The acquisition market and the specifics of any particular deal will influence each transaction’s structure. Our flexibility should allow us greater access to strategically important hotels and other opportunities. Joint ventures with management agreements should provide us with enhanced return on investment through management and other fee income and access to strategically important hotels and other opportunities. We have demonstrated our ability to joint venture effectively through, among others, our restaurant joint venture with Jeffrey Chodorow and the joint venture structures through which we own our interests in St. Martins Lane, Sanderson and Shore Club.

We have proven our ability to expand into new regions, new types of markets, operate internationally and operate in larger formats. We believe that this demonstrated acquisition expertise gives us a broad range of possible options with respect to future development. Moreover, our flexibility with respect to the physical configuration of buildings gives us more options to grow in any given market as compared to our competitors who require very particular specifications so their hotels will all look the same. In addition, the destination nature of our hotels has enabled us in the past to acquire assets in locations that are less established and, therefore, more attractively priced, due to our ability to create a destination hotel rather than be located directly adjacent to existing popular destinations.

Company History

Our predecessor company was founded in 1983 by Ian Schrager. In 1984, our predecessor company opened Morgans in New York and thus launched what has come to be known as the boutique hotel sector. From 1984 our predecessor grew its business by acquiring, redeveloping, and operating additional assets initially in New York, such as Royalton, and thereafter in other markets, such as Miami with the opening of Delano in 1995 and Los Angeles with the opening of Mondrian in 1997. In 1997 and 1998, NCIC acquired a majority interest in our predecessor company in a series of transactions that resulted in the integration of the management, development and ownership components of our business.

NCIC is a Maryland corporation founded in 1997 by W. Edward Scheetz, our President and Chief Executive Officer, and David Hamamoto, the Chairman of our Board. NCIC was organized for the purpose of investing in real estate and real-estate related companies.

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In 1993, our President and Chief Executive Officer, W. Edward Scheetz, was a partner with Apollo Real Estate Advisors when he was introduced to Ian Schrager and our predecessor company. Apollo Real Estate Advisors financed the development of Delano and subsequently certain of our other projects. Since NCIC’s investment in our predecessor company, our Chairman, David Hamamoto, and W. Edward Scheetz, our President and Chief Executive Officer, were members of the Board of our predecessor company, and principals of NCIC, including our Chairman, President and Chief Executive Officer and Chief Investment Officer and Executive Vice President of Capital Markets, have been actively involved in our business, including strategic decision-making, capital markets activity, and asset management while taking a lead role in acquisitions, dispositions and financings. With NCIC’s investment, the predecessor continued its expansion with the openings of St. Martins Lane and Sanderson in London in 1999 and 2000, Hudson in New York in 2000 and Clift in San Francisco in 2001. In 2002, Morgans Group for the first time entered into a transaction with substantially less than majority ownership when it acquired a minority interest and took over operations at Shore Club in Miami. All of our interests in assets that are operated by MHG Management Company were contributed to Morgans Group in the Formation and Structuring Transactions. Since NCIC’s initial investment, our predecessor has disposed of certain assets to capitalize on market opportunities, such as Paramount which was a hotel marketed as part of the same group of hotels that are contributed to Morgans Group LLC.

In June 2005, Ian Schrager, our then Chairman, President and Chief Executive Officer, resigned. We retain Ian Schrager’s services as a consultant, at our election, through December 31, 2007, as described under “Related Party Transactions—Agreements with Ian Schrager—Consulting Agreement”.

Our Properties

See “Item 2. Properties.”

Our Restaurant Joint Venture

As a central element to our operating strategy, we focus significant resources on identifying exciting and creative restaurant concepts. Consistent with this objective and to further enhance the dining experience offered by our hotels, we have an established joint venture relationship with well-known restaurateur Jeffrey Chodorow to develop, own and operate restaurants and bars at hotels operated by Morgans Group. Currently, the joint venture operates the restaurants (including in-room dining, banquet catering and other food and beverage operations) at Morgans, Hudson, Delano, Mondrian, Clift, St. Martins Lane and Sanderson as well as the bars in Delano, St. Martins Lane and Sanderson. See “Related Party Transactions” for a description of our restaurant joint venture.

Management and Operations

We manage and operate each of our hotels which are staffed by our employees and the employees of our joint venture operating companies with personnel dedicated to each of the properties, including a general manager, controller, director of sales and marketing, director of human resources and other employees. The personnel in each hotel report to the general manager of the hotel. Each general manager reports to our Executive Vice President of Operations. The corporate office provides support directly to certain functions at the hotel such as sales, revenue management and human resources. This organizational structure allows for each property to operate in a responsive and dynamic fashion while ensuring integrity of our guest experience and core values. Our management team is headquartered in New York City and coordinates management and operations of the Company. The management team reviews business contracts, oversees the financial budgeting and forecasting for our hotels, performs internal accounting and audit functions, administers insurance plans and identifies new systems and

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procedures to employ within our hotels to improve efficiency and profitability. In addition, the management team is responsible for coordinating the sales and marketing activities at each of our hotels, designing sales training programs, tracking future business prospects and identifying, employing and monitoring marketing programs. The management team is also responsible for the design of our hotels and overall product and service quality levels.

Our Engaging Dynamic Guest Experience, or EDGE, service program has been implemented across our portfolio. This initiative is designed to enhance employee initiative and responsiveness which results in high customer satisfaction. Our EDGE initiative further allows the sharing of best practices and expertise across our employee base, creating a culture that we believe is more service-oriented than many of our competitors.

Marketing, Sales and Public Relations

Strong direct sales has been an integral part of our success. We employ a sales force of greater than 60 people with multiple sales managers stationed in each of our markets. They are responsible for sourcing new corporate accounts in the United States and Europe. We have also opened sales offices in other markets. These offices are deployed by industry focus and geography. We derive about one third of our business from corporate accounts. Our core corporate business comes from the entertainment, fashion, retail, finance, advertising, automotive, technology, insurance and consumer goods industries. Approximately 60% of our guests are travelling on business.

Unlike many hotel companies, our sales managers are trained to sell the experience, not simply the rate. Our objective is to create differentiation by selling an “experience” and “brand”.

While marketing initiatives are customized in order to account for local preferences and market conditions, consistent major campaign and branding concepts are utilized throughout all our marketing activities. These concepts are developed by our central sales and marketing teams, but a significant amount of discretion is left to the local sales managers who are often more able to promptly respond to local changes and market trends and to customize marketing concepts to meet each hotel’s specific needs.

We place significant emphasis on our public relations promotional strategy, which we believe is a highly cost-effective marketing tool for our Company. Through highly publicized events, prospective guests are more likely to be made aware of our hotels through word-of-mouth or magazine and newspaper articles and high-profile events rather than direct advertising. This publicity is supplemented with focused marketing activities to our existing customers. Our in-house professionals coordinate the efforts of third-party public relations firms to promote the Morgans Group properties through travel magazines and various local, national and international newspaper travel sections. We regularly host events that attract celebrity guests and journalists generating articles in newspapers and magazines around the world. Our marketing efforts also include hosting other special events which have recently included the ESPY awards and the Grammy Awards post-event celebration.

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Integration and Centralization Efforts

We have centralized certain aspects of our operations in an effort to provide further revenue growth and reduce operating costs. Beginning in 2002, we embarked on a number of technological and process initiatives including the launch of a new website, www.morganshotelgroup.com, which during 2005 generated approximately 10.2% of our total bookings and approximately 11.0% of our total rooms revenue. In an effort to reduce expenses and to drive revenue growth, we employ what we believe to be the state-of-the-art systems available to the hospitality industry. These include our:

·Property Management System—Our property management system provides management solutions to improve operations and profitability for a global hotel organization. Our property management system is designed for comprehensive guest management by, among other things, allowing the user to track and retrieve information pertaining to guests, groups and company accounts. Additional features of this system allow the user to extract information on a customized basis from its customer database. We believe that this increases the possibility of maximizing revenue by allowing us to efficiently respond and cater to guest demands and trends and decreases expenses by centralizing the information database in an easy to use format.

·Central Reservations System—Our central reservations system and related distribution and reservations services provide hotel reservations-related services and technology.

·Central Reservations Office—Our central reservations office provides contact management solutions. It is managed by a third-party out of its facility in New Brunswick, Canada.

·Sales and Catering—Our sales and catering system is a strategic tool specifically designed to maximize the effectiveness of the sales process, increase revenues and efficiency, and reduce costs.

·Revenue Management—Our revenue management system is a proprietary system which provides hospitality focused pricing and revenue optimization solutions.

·Accounting and Reporting—Our accounting and reporting is performed under The Uniform System of Accounts for the Lodging Industry and utilizes a widely used international accounting system that allows for customizing and analyzing data while ensuring consistent controls.

·Customer Relationship Management—Our customer relationship management system is designed specifically for the hospitality industry and provides personalized guest recognition, high service quality, improved guest satisfaction and loyalty, which we believe results in increased revenues. This centralized database tracks guest sales history and guest preferences to provide our staff in our hotels and sales agents with a method of efficiently responding to and targeting guest needs.

Competition

Competition in the hospitality industry reflects a highly fragmented group of owners and operators offering a wide range of quality and service levels. Our hotels compete with other hotels in the segments of the hospitality market in their respective locations. These segments of the market consist of traditional hotels in the luxury sector and boutique hotels in the same local area.

We compete by providing a differentiated combination of location, design, amenities and service. We are constantly striving to enhance the experience and service we are providing for our guests and have a continuing focus on improving our customer experience.

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Insurance

We believe that our insurance policies provide sufficient coverage of the risks facing our business and are consistent with or exceed industry standards.

Our hotels are currently insured under property, commercial general liability, commercial umbrella, excess liability, workers’ compensation, pollution, automobile liability, garage keeper’s legal liability, crime and fiduciary policies for which we are the named insured. Excess earthquake, windstorm, and flood policies are in place at specific locations which are highly susceptible to these perils. These policies cover, in addition to our hotels, the restaurants and bars that operate in our hotels. Our managed locations are covered under our employee related insurance policies only. Stand alone policies are maintained by the property owners for their general liability and property insurance. Employees at our hotels and wholly-owned bars are also insured under workers’ compensation and employment practices liability policies. Employees working at the joint venture restaurants and bars are covered by a separate set of workers’ compensation and employment practices liability policies.

Each of the commercial general liability and commercial umbrella policies provides a maximum annual coverage of $20.0 million and $200.0 million, respectively, and the property insurance policies provide up to $380.0 million of coverage per occurrence, subject to some exceptions relating to earthquake and flood. Non-domestic terrorism coverage is included on all existing policies.

We believe that the premiums we pay for our insurance policies are reasonable and consistent with those paid by comparable businesses of our size and risk profile. For the year ending December 31, 2005, we paid $3.3 million in insurance premiums, which represented 1.3% of our total revenues. Our insurance policies require annual renewal. Given current trends, our insurance expense may continue to increase in the foreseeable future.

Many of these insurance policies have deductibles or self-insured retentions, consistent with industry standards. For example, while we do not have a deductible on our general liability policy, our property coverage includes a $250,000 deductible per occurrence. Our employer practice liability coverage deductible is $250,000 for the hotels and $100,000 for the food and beverage joint venture. Commencing in 2002, we modified our primary workers compensation program to incorporate a $150,000 self-insured retention. We believe that the deductibles are reasonable given the values of our properties, the amounts insured, and the frequency and cost of claims realized.

The property owner’s interest in each of our owned properties in which we have a fee simple ownership interest is insured by an American Land Title Association owner’s title insurance policy, or its equivalent as adopted in the applicable jurisdiction. Each title policy has been issued by a nationally recognized title insurance company and insures the owner of the property, as well as its successors and assigns, as to the fee simple ownership interest in the property, subject only to limited permitted encumbrances.

Employees

As of December 31, 2005 we employed approximately 1,900 individuals, about 27.5% of whom are represented by labor unions, and our restaurant joint venture employed approximately 1,200 individuals, about 20% of whom are represented by labor unions.

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Relations with Labor Unions.

New York.   The terms of employment of our employees that are represented by labor unions and are working at our New York hotels are governed by a collective bargaining agreement. While we are not a named party to the agreement, we believe that, pursuant to federal labor law, we could be deemed employers. If we were deemed employers, we would be bound by, and liable for breaches of, the collective bargaining agreement. The term of the agreement is from July 1, 2001 through June 30, 2006, and generally incorporates by reference the industry-wide agreement between the Hotel Association of New York City, Inc., a multi-employer association composed of New York City hotel operators, and the union. The agreement governs wages, hours and terms and conditions of employment of employees at these hotels. It provides that there will be no strikes or lockouts during its term, and that all disputes arising under the agreement or concerning the relations of the parties shall be resolved through arbitration at the Office of the Impartial Chairman of the Hotel Industry. The employees of our New York bars and restaurants are represented by unions and this concessionaire is considered a joint employer. We agreed to adopt any successor agreement to the industry-wide agreement currently in place and the New York Hotel and Motel Trades Council, AFL-CIO has agreed not to strike at the expiration of that agreement.

San Francisco.   The majority of our Clift employees that are represented by labor unions are represented by UNITE/HERE Local 2. We have agreed that we will adopt whatever industry-wide agreement is adopted between the union and a multi-employer association composed of San Francisco hotel operators. UNITE/HERE Local 2 is currently in talks with the multi-employer association over a new labor agreement. The employees of the Asia de Cuba Restaurant are members of UNITE/HERE Local 2 and this concessionaire is considered a joint employer with Clift. Accordingly, if there is any breach of our labor agreement by the concessionaire, Clift would be liable for such breach. Labor agreements with the unions representing the remaining employees at the Clift that are represented by labor unions are set to expire next year. We expect that we will renew those agreements on similar terms and conditions to those that are agreed to by the multi-employer association and UNITE/HERE Local 2.

Government Regulation

Our businesses are subject to numerous laws, including those relating to the preparation and sale of food and beverages, such as health and liquor license laws. Our businesses are also subject to laws governing employees in our hotels in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits. Also, our ability to expand our existing properties may be dependent upon our obtaining necessary building permits or zoning variances from local authorities.

Under the Americans with Disabilities Act, or ADA, all public accommodations are required to meet federal requirements related to access and use by disabled persons. These requirements became effective in 1992. Although significant amounts have been invested to ensure that our hotels comply with ADA requirements, determination that our hotels are not in compliance with the ADA could result in a judicial order requiring compliance, imposition of fines or an award of damages to private litigants. We believe that we are currently in compliance in all material respects with all statutory and administrative government regulations with respect to our business.

Our hotel properties expose us to possible environmental liabilities, including liabilities related to activities that predated our acquisition or operation of a property. Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be required to investigate and clean up certain hazardous substances released at the property and may be held liable to a governmental entity or to third parties for property damages and for investigation and cleanup costs incurred by such parties in connection with the contamination. Environmental liability can be incurred by a

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current owner or operator of a property for environmental problems or violations that occurred on a property prior to acquisition or operation. These laws often impose liability whether or not the owner knew of, or was responsible for, the presence of hazardous or toxic substances. In addition, some environmental laws create a lien on the contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. The presence of contamination or the failure to remediate contamination may adversely affect the owner’s ability to sell or lease real estate or to borrow using the real estate as collateral. The owner or operator of a site may be liable under common law to third parties for damages and injuries resulting from environmental contamination emanating from the site.

All of our properties have been subject to environmental site assessments, or ESAs, prepared by independent third-party professionals. These ESAs were intended to evaluate the environmental conditions of these properties and included a site visit, a review of certain records and public information concerning the properties, the preparation of a written report and, in some cases, invasive sampling. We obtained the ESAs before we acquired our hotels to help us identify whether we might be responsible for cleanup costs or other environmental liabilities. The ESAs on our properties did not reveal any environmental conditions that are likely to have a material adverse effect on our business, assets, results of operations or liquidity. However, ESAs do not always identify all potential problems or environmental liabilities. Consequently, we may have material environmental liabilities of which we are unaware. Moreover, it is possible that future laws, ordinances or regulations could impose material environmental liabilities, or that the current environmental condition of our properties could be adversely affected by third parties or by the condition of land or operations in the vicinity of our properties. We believe that we are currently in compliance with all applicable environmental regulations in all material aspects.

Trademarks

Our trademark registrations include, without limitation, Morgans®, Agua Baby®, Agua Bath House®, Agua Home®, Blue Door®, Blue Door at Delano and Design®, Clift Hotel®, Delano®, Mondrian®, Skybar®, Skybar and Design®, Royalton®, The Royalton®, The Royalton Hotel®, Sanderson Hotel®, St. Martins® and St. Martins Lane Hotel®. The majority of these trademarks are registered in the United States. Several of these trademarks are also registered in the European Community. We are in the process of registering Morgans Hotel Groupä. Our trademarks are very important to the success of our business and we actively enforce, maintain and protect these marks.

Corporate Governance and Internet Address

We emphasize the importance of professional business conduct and ethics through our corporate governance initiatives. Our board of directors consists of a majority of independent directors; the audit, nominating/corporate governance, and compensation committees of our board of directors are composed exclusively of independent directors. We have adopted corporate governance guidelines and a code of business conduct and ethics, which delineate our standards for our officers, directors and employees.

Our internet address is www.morganshotelgroup.com. We make available, free of charge through a link on our site, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, if any, as filed with the SEC as soon as reasonably practicable after such filing. Our site also contains our code of business conduct and ethics, code of ethics for senior financial officers, corporate governance guidelines, and the charters of the audit committee, nominating/corporate governance committee and compensation committee of our board of directors.

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ITEM 1A.RISK FACTORS

This section describes risk factors that could have a material adverse effect on our operations and future prospects. The risk factors set forth in this section could cause our actual results to differ significantly from those contained in this Annual Report on Form 10-K. In connection with the forward-looking statements that appear in this Annual Report on Form 10-K, you should carefully review the factors discussed below and the cautionary statements referred to under “ Forward-Looking Statements.”

Risks Related to Our Business

Boutique hotels are a highly competitive segment of the hospitality industry, which is generally subject to greater volatility than other segments of the industry. As a result, if we are unable to compete effectively or an economic slowdown occurs, our business and operations will be adversely affected by declines in our average daily room rates or occupancy.

We compete in the boutique hotel segment of the hospitality industry. This segment is highly competitive, is closely linked to economic conditions and is more susceptible to changes in economic conditions than other segments of the hospitality industry. The boutique hotel segment’s sensitivity to economic conditions is likely to persist for the foreseeable future. Competition within the boutique hotel segment is also likely to increase in the future. Economic downturns will, among other things, lead to a decrease in our revenues and intense competition may lead to a loss of market share by our hotels, and as a result, our business and operations may be adversely affected.

Competitive factors in the hospitality industry include name recognition, quality of service, convenience of location, quality of the property, pricing, and range and quality of food services and amenities offered. Market perception that we no longer provide innovative property concepts and designs would adversely affect our ability to compete effectively. If we are unable to compete effectively, we would lose market share, which could adversely affect our business and operations.

All of our properties are located in areas where there are numerous competitors, many of whom have substantially greater resources than us. In addition, new hotels may be constructed in the areas in which our properties are located, possibly without corresponding increases in demand for hotel rooms. New or existing competitors could offer significantly lower rates or more convenient locations, services or amenities or significantly expand, improve or introduce new service offerings in markets in which our hotels compete, thereby posing a greater competitive threat than at present. The resulting lower revenues to us could adversely affect our business and operations.

The performance of the hospitality industry, and the boutique hotel segment in particular, has traditionally been closely linked with the general economy. Furthermore, the boutique hotel segment is more susceptible to changes in economic conditions than other segments of the hospitality industry. In an economic downturn, boutique hotels such as ours may be more susceptible to a decrease in revenues, as compared to hotels in other segments that have lower room rates. This characteristic may result from the fact that our hotels generally target business and high-end leisure travelers. In periods of economic difficulties, business and high-end leisure travelers may seek to reduce travel costs by limiting travel or otherwise generally reducing the costs of their trips. In periods of weak demand, profitability is negatively affected by the relatively high fixed costs of operating hotels such as ours, when compared to other classes of hotels. If an economic slowdown occurs, this could result in declines in average daily room rates or occupancy or both and thereby have a material adverse effect on our business and operations.

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Our success depends on the value of our name, image and brand, and if demand for our hotels and their features decreases or the value of our name, image or brand diminishes, our business and operations would be adversely affected.

Our success depends, to a large extent, on our ability to shape and stimulate consumer tastes and demands by producing and maintaining innovative, attractive, and exciting properties and services, as well as our ability to remain competitive in the areas of design and quality. There can be no assurance that we will be successful in this regard or that we will be able to anticipate and react to changing consumer tastes and demands in a timely manner.

Furthermore, a high media profile is an integral part of our ability to shape and stimulate demand for our hotels with our target customers. A key aspect of our marketing strategy is to focus on attracting media coverage. If we fail to attract that media coverage, we may need to substantially increase our advertising and marketing costs, which would adversely affect our results of operations. In addition, other types of marketing tools, such as traditional advertising and marketing, may not be successful in attracting our target customers.

Our business would be adversely affected if our public image or reputation were to be diminished. Our brand names and trademarks are integral to our marketing efforts. If the value of our name, image or brands were diminished, our business and operations would be adversely affected.

Any failure to protect our trademarks could have a negative impact on the value of our brand names and adversely affect our business.

We believe our trademarks are critical to our success. We rely on trademark laws to protect our proprietary rights. The success of our business depends in part upon our continued ability to use our trademarks to increase brand awareness and further develop our brand in both domestic and international markets. Monitoring the unauthorized use of our intellectual property is difficult. Litigation has been and may continue to be necessary to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. Litigation of this type could result in substantial costs and diversion of resources, may result in counterclaims or other claims against us and could significantly harm our results of operations. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. From time to time, we apply to have certain trademarks registered. There is no guarantee that such trademark registrations will be granted. We cannot assure that all of the steps we have taken to protect our trademarks in the United States and foreign countries will be adequate to prevent imitation of our trademarks by others. The unauthorized reproduction of our trademarks could diminish the value of our brand and its market acceptance, competitive advantages or goodwill, which could adversely affect our business.

We may have disputes with, or be sued by, third parties for infringement or misappropriation of their proprietary rights, which could have a negative impact on our business.

Other parties may assert trademark, copyright or other intellectual property rights that are important to our business. We cannot assure that others will not seek to block our use of certain marks or seek monetary damages or other remedies for the prior use of our brand names or other intellectual property or the sale of our products or services as a violation of their trademark, copyright or other proprietary rights. Defending any claims, even claims without merit, could divert our management’s attention, be time-consuming, result in costly settlements, litigation or restrictions on our business and damage our reputation.

In addition, there may be prior registrations or use of trademarks in the United States or foreign countries for similar or competing marks or other proprietary rights of which we are not aware. In all such countries it may be possible for any third-party owner of a national trademark registration or other

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proprietary right to enjoin or limit our expansion into those countries or to seek damages for our use of such intellectual property in such countries. In the event a claim against us were successful and we could not obtain a license to the relevant intellectual property or redesign or rename our products or operations to avoid infringement, our business, financial condition or results of operations could be harmed. Securing registrations does not fully insulate us against intellectual property claims, as another party may have rights superior to our registration or our registration may be vulnerable to attack on various grounds.

Our hotels are geographically concentrated in a limited number of cities and, accordingly, we could be disproportionately harmed by an economic downturn in these cities or a disaster, such as a terrorist attack.

The concentration of our hotels in a limited number of cities exposes us to greater risk to local economic, business and other conditions than more geographically diversified hotel companies. Morgans, Royalton and Hudson, located in Manhattan, represent approximately 43% of our guest rooms and approximately $124.0 million, or 47.6%, of our combined revenues for the year ended December 31, 2005. Like other hotel markets, the Manhattan hotel market has experienced economic slowdowns in the past, including in the late 1980s, early 1990s and the most recent slowdown, which began in October 2000 and was exacerbated by the terrorist attacks of September 11, 2001. A decline in the Manhattan hotel market, in particular, due to a downturn in regional or local economic or business conditions or another terrorist attack or similar disaster would adversely affect occupancy rates and financial performance of our New York hotels and our overall results of operations.

In addition, certain of our hotels are located in markets that are more susceptible to natural disasters than others, which could adversely affect those hotels, the local economies, or both. Specifically, the Miami area, where Delano and Shore Club are located, is susceptible to hurricanes and California, where Mondrian and Clift are located, is susceptible to earthquakes. A variety of factors affecting the local markets in which our hotels operate, including such natural disasters, could have a material adverse affect on our business and operations.

The threat of terrorism has adversely affected the hospitality industry generally and these adverse effects may continue or worsen.

The threat of terrorism has caused, and may in the future cause, a significant decrease in hotel occupancy and average daily room rates due to disruptions in business and leisure travel patterns and concerns about travel safety. The attacks of September 11, 2001 had a dramatic adverse impact on business and leisure travel and RevPAR. Hotels in major metropolitan areas, such as New York and London that represent approximately 56.7% of our guest rooms, were adversely affected due to concerns about travel safety and a significant overall decrease in the amount of air travel, particularly transient business travel, which includes the corporate and premium business segments that generally pay the highest average room rates. The possibility of future attacks may hamper business and leisure travel patterns and, accordingly, the performance of our business and our operations.

We are exposed to the risks of a global market which could hinder our ability to maintain and expand our international operations.

We have properties in the United States and the United Kingdom and may expand to other international markets. The success and profitability of any future international operations are subject to numerous risks and uncertainties, many of which are outside of our control, such as:

·political or economic instability;

·changes in governmental regulation;

·trade restrictions;

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·foreign currency controls;

·difficulties and costs of staffing and managing operations in certain foreign countries;

·work stoppages or other changes in labor conditions;

·taxes;

·payments terms; and

·seasonal reductions in business activity in some parts of the world.

Furthermore, changes in policies and/or laws of the United States or foreign governments resulting in, among other things, higher taxation, currency conversion limitations or the expropriation of private enterprises could reduce the anticipated benefits of our international operations. Any actions by countries in which we conduct business to reverse policies that encourage foreign trade could adversely affect our business relationships and gross profit. In addition, we may be restricted in moving or repatriating funds attributable to our international properties without the approval of foreign governmental authorities or courts. For example, because of our historical net losses in our United Kingdom operations, any funds repatriated from the United Kingdom are considered a return of capital and require court approval. These limitations could have a material adverse effect on our business and results of operations.

Establishing operations in any foreign country or region presents risks such as those described above, as well as risks specific to the particular country or region. We may not be able to maintain and expand our international operations successfully, and as a result, our business operations could be adversely affected.

We have incurred substantial losses and have a significant net deficit, and we expect that our net losses will continue and remain substantial for the foreseeable future, which may reduce our ability to raise capital.

We reported net losses of $27.2 million, $23.8 million, $42.5 million, $31.6 million and $30.2 million for the years ended December 31, 2001, 2002, 2003, 2004 and 2005, respectively. Our net losses primarily reflect our high interest expense and depreciation and amortization charges, which we expect will continue to be significant. We believe that our net losses may continue for the foreseeable future. Our continuing net losses may limit our ability to raise needed financing, or to do so on favorable terms.

The hotel business is capital intensive; financing the rising cost of capital improvements and increasing operating expenses could reduce our cash flow and adversely affect our financial performance.

Our hotel properties have an ongoing need for renovations and other capital improvements to remain competitive, including replacement, from time to time, of furniture, fixtures and equipment. To compete effectively, we will need to make capital expenditures to maintain our innovative property concepts and designs. In addition, we will need to make capital expenditures to comply with applicable laws and regulations. For the year ended December 31, 2005, we spent approximately $5.6 million for capital improvements related to our hotels and we expect to undertake more capital improvement projects in the future. We may not be able to fund capital improvements solely from cash provided from our operating activities. If not, we will need to rely upon the availability of debt or equity capital.

In addition, renovations and other capital improvements to our hotels may be expensive and may require us to close all or a portion of the hotels to customers during such renovations, affecting occupancy and ADR. These capital improvements may give rise to the following additional risks, among others:

·construction cost overruns and delays;

·uncertainties as to market demand or a loss of market demand after capital improvements have begun;

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·disruption in service and room availability causing reduced demand, occupancy and rates; and

·possible environmental problems.

As a result, capital improvement projects may increase our expenses and reduce our cash flows and our revenues. If capital expenditures exceed our expectations, this excess would have an adverse effect on our available cash.

We have high fixed costs, including property taxes and insurance costs, which we may be unable to adjust in a timely manner in response to a reduction in revenues. In addition, our property taxes have increased in recent years and we expect those increases to continue.

The costs associated with owning and operating hotels are significant, some of which may not be altered in a timely manner in response to changes in demand for services, and failure to adjust our expenses may adversely affect our business and operations. For example, pursuant to the terms of our agreements with the labor unions for our New York City and San Francisco hotels, we may not unilaterally reduce the wages of the employees subject to these agreements, and are restricted in the manner in which we may layoff or schedule employees.

Property taxes and insurance costs are a significant part of our operating expenses. In recent years, our real property taxes have increased and we expect those increases to continue. Our real property taxes may increase as property tax rates change and as the values of properties are assessed and reassessed by taxing authorities. In addition, our real property tax rates will increase as property tax abatements expire. For example, the property tax abatement applicable to Hudson phases out over a 5-year period beginning in 2008. Our real estate taxes do not depend on our revenues, and generally we could not reduce them other than by disposing of our real estate assets.

Insurance premiums for the hospitality industry have increased significantly since 2002, and continued escalation may result in our inability to obtain adequate insurance at acceptable premium rates. A continuation of this trend would appreciably increase the operating expenses of our hotels. If we do not obtain adequate insurance, to the extent that any of the events not covered by an insurance policy materialize, our financial condition may be materially adversely affected.

In the future, our properties may be subject to increases in real estate and other tax rates, utility costs, operating expenses, insurance costs, repairs and maintenance and administrative expenses, which could reduce our cash flow and adversely affect our financial performance. If our revenues decline and we are unable to reduce our expenses in a timely manner, our results of operations could be adversely affected.

Our strategy to acquire and develop or redevelop hotels creates timing, financing, operational and other risks that may adversely affect our business and operations.

We intend to acquire and develop or redevelop hotel properties as suitable opportunities arise. See “Business—Recent Developments” for a discussion of our planned development of Delano Las Vegas and Mondrian Las Vegas through a 50/50 joint venture, our pending acquisition of James Hotel Scottsdale and our recently completed acquisition to expand Delano. The acquisition, development and redevelopment of hotel properties involve a number of risks. We cannot assure you that any development or redevelopment project will be completed on time or within budget. Our inability to complete a project on time or within budget may adversely affect our operating results and financial performance.

Acquisitions, development or redevelopment of hotel properties, including the development of Delano Las Vegas and Mondrian Las Vegas, the renovation of James Hotel Scottsdale and the conversion of the Delano extension to guest rooms and guest facilities, will require significant capital expenditures. We will not be able to fund acquisitions solely from cash provided from our operating activities. Consequently, we will rely upon the availability of debt or equity capital to fund hotel acquisitions and

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development or redevelopment. Our ability to grow through acquisitions, development or redevelopment of hotels will be limited if we cannot obtain satisfactory debt or equity financing, which will depend on, among other things, market conditions. Neither our charter nor our by-laws limits the amount of debt that we can incur. However, we cannot assure you that we will be able to obtain additional equity or debt financing or that we will be able to obtain such financing on favorable terms.

We may not be able to successfully compete for additional hotel properties.

We may not be successful in identifying or completing acquisitions that are consistent with our strategy. We compete with institutional pension funds, private equity investors, REITs, owner-operators of hotels and others who are engaged in real estate investment activities for the acquisition of hotels, which may or may not have similar investment objectives as we do. In addition, competition for suitable investment properties may increase in the future. Some competitors may have substantially greater financial resources than we do and, as such, will be able to accept more risk than we can prudently manage. These competitors may limit the number of suitable investment opportunities for us by driving up the price we must pay for real property or other assets we seek to acquire. In addition, our potential acquisition targets may find our competitors to be more attractive suitors because they may have greater resources, be willing to pay more, have a more compatible operating philosophy, or better relationships with hotel franchisors, seller or lenders.

Even if we are able to successfully identify and acquire other hotel properties, acquisitions may not yield the returns we expect and, if financed using our equity capital, may be dilutive. We also may incur significant costs and divert management attention in connection with evaluating and negotiating potential acquisitions, including ones that we are subsequently unable to complete. We may underestimate the costs necessary to bring an acquired property up to the standards established for its intended market position or the costs to integrate an acquired hotel property with our existing operations. Significant costs of acquisitions could materially impact our operating results, including costs of uncompleted acquisitions as they would generally be expensed in the time period during which they are incurred.

Integration of new hotels may be difficult and may adversely affect our business and operations.

The success of any acquisition or development project will depend, in part, on our ability to realize the anticipated benefits from integrating acquired hotels with our existing operations. For instance, we may develop or acquire new hotels in geographic areas in which our management may have little or no operating experience and in which potential customers may not be familiar with our existing hotels, name, image or brands. Our recently announced development project for Delano Las Vegas and Mondrian Las Vegas and our acquisition of James Hotel Scottsdale, which we intend to re-brand as Mondrian Scottsdale, are in new cities where we currently do not own hotel properties. These hotels may attract fewer customers than our existing hotels, while at the same time, we may incur substantial additional costs with these new hotel properties. As a result, the results of operations at new hotel properties may be inferior to those of our existing hotels. None of our individual hotel brands is currently used for more than one hotel. Extension of those brands may jeopardize what we believe are the distinct reputations of our existing properties. Unanticipated expenses and insufficient demand at a new hotel property, therefore, could adversely affect our business. Our success in realizing anticipated benefits and the timing of this realization depend upon the successful integration of the operations of the acquired hotel. This integration is a complex, costly and time-consuming process. The difficulties of combining acquired properties with our existing operations include, among others:

·coordinating sales, distribution and marketing functions;

·integrating information systems;

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·preserving the important licensing, distribution, marketing, customer, labor, and other relationships of the acquired hotel;

·costs relating to the opening, operation and promotion of new hotel properties that are substantially greater than those incurred in other areas; and

·converting hotels to our brand.

We may not accomplish the integration of acquired hotels smoothly or successfully. The diversion of the attention of our management from our existing operations to integration efforts and any difficulties encountered in combining operations could prevent us from realizing the anticipated benefits from the acquisition and could adversely affect our business and operations.

The use of joint ventures, over which we may not have full control, for hotel acquisitions could prevent us from achieving our objectives.

We may acquire, develop or redevelop hotel properties through joint ventures with third parties. Joint venturers often share control over the operation of the joint venture assets.

We have recently entered into a 50/50 joint venture with Boyd Gaming Corporation to develop Delano Las Vegas and Mondrian Las Vegas. Although we will be responsible for the operation and management of Delano Las Vegas and Mondrian Las Vegas under the terms of a management agreement, we do not have a controlling interest in the joint venture and specified major decisions will require joint approval. If agreement is not reached, the parties will continue construction and development in accordance with the then existing plans. Once non-recourse project financing has been obtained, we have agreed to make a contribution to the joint venture in an amount necessary to have our total contribution at such time equal approximately $97.5 million in cash. If the joint venture is unsuccessful in obtaining that financing by June 30, 2008, the joint venture will be dissolved and, although we will not be required to complete our $97.5 million cash contribution, we may not be able to recover between $15.0 million and $17.5 million of contributions for pre-development costs. We are also individually responsible for cost overruns for development costs associated with Delano Las Vegas and Mondrian Las Vegas.

Our joint venture partners might have economic or business objectives that are inconsistent with our objectives. Our joint venture partners could go bankrupt, leaving us liable for their share of joint venture liabilities. Although we generally will seek to maintain sufficient control of any joint venture to permit our objectives to be achieved, we might not be able to take action without the approval of our joint venture partners. Also, our joint venture partners could take actions binding on the joint venture without our consent. Accordingly, the use of joint ventures could prevent us from achieving our objectives.

The terms of our joint venture agreements may limit our business opportunities. For example, our joint venture with Boyd Gaming Corporation to develop Delano Las Vegas and Mondrian Las Vegas prevents us from acquiring, developing, owning or operating any other hotels in Las Vegas until five years after the date when both the Delano Las Vegas and Mondrian Las Vegas are opened to the public.

We have substantial debt, a majority of which is variable rate debt, and we may incur additional indebtedness, which may negatively affect our business and financial results.

As of December 31, 2005, on a pro forma basis, giving effect to the transactions completed in connection with the Formation and Structuring Transactions and our initial public offering and the application of the proceeds thereof, we would have had $447.1 million of outstanding indebtedness. Approximately $365.0 million of our pro forma debt bears interest at a variable rate of which $285.0 million has been effectively capped through interest rate swap transactions to create a maximum fixed rate through June 2010. Increases in interest rates on our existing variable rate indebtedness could increase our interest expense, which could harm our cash flow. Our indebtedness and the covenants

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applicable to our indebtedness are described under “Management’s Discussion and Analysis of Financial Condition and Result of Operations—Debt”.

Our substantial debt may negatively affect our business and operations, including:

·requiring us to use a substantial portion of our funds from operations to make required payments on principal and interest, which will reduce funds available for operations and capital expenditures, future business opportunities and other purposes;

·making us more vulnerable to economic and industry downturns and reducing our flexibility in responding to changing business and economic conditions;

·limiting our ability to borrow more money for operations, capital or to finance acquisitions in the future; and

·requiring us to dispose of properties in order to make required payments of interest and principal.

In connection with the Formation and Structuring Transactions, we assumed our operating company’s guarantee of the full $80.0 million principal amount of the MHG Management Company secured term loan facility that is expected to contain financial and operating covenants, including interest coverage and leverage ratios and other limitations on our ability to sell all or substantially all of our assets and engage in mergers, consolidations and certain acquisitions. Failure to meet these covenants could result from, among other things, changes in our results of operations, the incurrence of debt or changes in general economic conditions. These covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders. Failure to comply with any of these covenants could result in a default under one or more of our other debt instruments. This could cause one or more of our lenders to accelerate the timing of payments on their respective indebtedness, which could harm our business and operations.

Some of our existing notes payable contain limitations on our ability to incur additional debt on specific properties, as well as financial covenants relating to the performance of those properties. If these covenants restrict us from engaging in activities that we believe would benefit those properties, our growth may be limited. If we fail to comply with these covenants, we will need to obtain consents or waivers from compliance with these covenants, which may take time or cause us to incur additional expenses, or we may be required to prepay the debt containing the restrictive covenants.

A majority of our debt is secured by first deeds of trust on our properties. If we were to default on our secured debt in the future, the loss of property securing the debt would harm our ability to satisfy other obligations. Using our properties as collateral increases our risk of property losses because defaults on indebtedness secured by properties may result in foreclosure and ultimately our loss of the property that secures any loans for which we are in default. For tax purposes, a foreclosure on any of our properties would be treated as a sale of the property for a purchase price equal to the outstanding balance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceeds our tax basis in the property, we would recognize taxable income on foreclosure but would not receive any cash proceeds. In addition, because of various cross-default provisions in our debt, our default under some of our mortgage debt obligations may result in a default on our other indebtedness. If this occurs, our business and operations would be materially adversely affected.

We also would incur additional debt in connection with any future acquisitions. For example, we are issuing a $10.0 million promissory note to the seller of the property for our Delano extension in connection with that acquisition. We may, in some instances, borrow under our revolving credit facility or borrow other funds to acquire properties. In addition, we may incur further mortgage debt by obtaining loans secured by the properties we acquire.

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Our working capital and liquidity reserves may not be adequate to cover all of our cash needs and we may have to obtain additional debt financing. Sufficient financing may not be available or, if available, may not be available on terms acceptable to us. Additional borrowings for working capital purposes will increase our interest expense, and therefore may harm our business and operations.

Our organizational documents do not limit the amount of indebtedness that we may incur. If we increase our leverage, the resulting increase in debt service could adversely affect our ability to make payments on our indebtedness and harm our business and operations.

We anticipate that we will refinance our indebtedness from time to time to repay our debt, and our inability to refinance on favorable terms, or at all, could harm our business and operations.

Since we anticipate that our internally generated cash will be inadequate to repay our indebtedness prior to maturity, we expect that we will be required to repay debt from time to time through refinancings of our indebtedness and/or offerings of equity or debt. The amount of our existing indebtedness may harm our ability to repay our debt through refinancings. If we are unable to refinance our indebtedness on acceptable terms, or at all, we might be forced to sell one or more of our properties on disadvantageous terms, which might result in losses to us. We have placed mortgages on our hotel properties to secure our indebtedness. To the extent we cannot meet our debt service obligations, we risk losing some or all of those properties to foreclosures. If prevailing interest rates or other factors at the time of any refinancing result in higher interest rates on any refinancing, our interest expense would increase, which would harm our business and operations.

Our revolving credit facility contains financial covenants that limit our operations and could lead to adverse consequences if we fail to comply.

Our revolving credit facility contains financial and operating covenants, including interest coverage and leverage ratios and other limitations on our ability to sell all or substantially all of our assets, pay dividends on our common stock and engage in mergers, consolidations and certain acquisitions. Failure to meet these financial covenants could result from, among other things, changes in our results of operations, the incurrence of debt or changes in general economic conditions. These covenants may restrict our ability to engage in transactions that we believe would otherwise be in the best interests of our stockholders. Failure to comply with any of the covenants could result in a default under one or more of our other debt instruments. This could cause one or more of our lenders to accelerate the timing of payments on their respective indebtedness, which could harm our business and operations.

Our hedging strategies may not be successful in mitigating our risks associated with interest rates.

We use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. When interest rates change, we may be required to record a gain or loss on those derivatives that we currently hold. Our hedging activities may include entering into interest rate swaps, caps and floors and options to purchase these items. We currently use interest rate caps to manage our interest rate risks related to our variable rate indebtedness; however, our actual hedging decisions will be determined in light of the facts and circumstances existing at the time and may differ from our currently anticipated hedging strategy. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses, and such losses could harm our results of operations, financial condition and business prospects.

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Our operations are sensitive to currency exchange risks, and we cannot predict the impact of future exchange-rate fluctuations on our business and operating results.

Our operations are sensitive to currency exchange risks. Changes in exchange rates between foreign currencies and the U.S. dollar may adversely affect our operating results. For example, all else being equal, a weaker U.S. dollar will promote international tourism in our domestic markets. As foreign currencies appreciate against the U.S. dollar it becomes less expensive, in terms of those appreciating foreign currencies, to pay for our U.S. hotel services. Conversely, all else being equal, an appreciating U.S. dollar could affect demand for our U.S. hotel services. We cannot predict the impact of future exchange-rate fluctuations on our business and operations.

Our management has limited experience managing a public company.

Until recently, our management team has operated our business as a privately owned limited liability company and has limited experience managing a publicly owned company. We continue to develop control systems and procedures adequate to support a public company and this transition could place a significant strain on our management systems, infrastructure, overhead and other resources. Given our recent organization and our management’s experience, you will be unable to fully evaluate our management’s public company abilities.

As a result of our initial public offering, we are subject to financial reporting and other requirements for which our accounting, internal audit and other management systems and resources may not be adequately prepared.

As a result of our initial public offering, we became subject to reporting and other obligations under the Securities Exchange Act of 1934, including the requirements of Section 404 of the Sarbanes-Oxley Act. Section 404 requires annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent auditors addressing these assessments. These reporting and other obligations will place significant demands on our management, administrative, operational, internal audit and accounting resources and will cause us to incur significant expenses that we did not incur as a private company. We anticipate that we will need to upgrade our systems; implement additional financial and management controls, reporting systems and procedures; expand our internal audit function; and hire additional accounting, internal audit and finance staff. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, operating results and stock price.

We are a holding company with no operations.

We are a holding company and conduct all of our operations through our subsidiaries. We do not have, apart from our ownership of Morgans Group LLC, any independent operations. As a result and although we have no current plan to do so, we will rely on dividends and other payments or distributions from Morgans Group LLC and our other subsidiaries to pay dividends on our common stock. We will also rely on dividends and other payments or distributions from Morgans Group LLC and our other subsidiaries to meet our debt service and other obligations. The ability of Morgans Group LLC and our other subsidiaries to pay dividends or make other payments or distributions to us will depend on Morgans Group LLC’s operating results.

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In addition, because we are a holding company, claims of our stockholders will be structurally subordinated to all existing and future liabilities and obligations (whether or not for borrowed money) of our subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of our subsidiaries will be able to satisfy the claims of our stockholders only after all of our and our subsidiaries’ liabilities and obligations have been paid in full.

All of our businesses are held through our direct subsidiary, Morgans Group LLC. After giving effect to our initial public offering, other than with respect to 1,000,000 membership units held by Morgans Hotel Group LLC and membership units issued as part of our employee compensation plans, we own all the outstanding membership units of Morgans Group LLC. We may, in connection with acquisitions or otherwise, issue additional membership units of Morgans Group LLC in the future. Such issuances would reduce our ownership of Morgans Group LLC. Because you do not directly own Morgans Group LLC units, you do not have any voting rights with respect to any such issuances or other corporate level activities of Morgans Group LLC.

We depend on our key personnel for the future success of our business and the loss of one or more of our key personnel could have an adverse effect on our ability to manage our business and implement our growth strategies, or could be negatively perceived in the capital markets.

Our future success and our ability to manage future growth depend, in large part, upon the efforts and continued service of our senior management team who has substantial experience in the hospitality industry. Our President and Chief Executive Officer, W. Edward Scheetz, and our Chairman, David Hamamoto, have been actively involved in the acquisition and ownership of hotel assets and are actively engaged in our management. Messrs. Scheetz and Hamamoto substantially determine our strategic direction, especially with regard to operational, financing, acquisition and disposition activity. The departure of either of them could have a material adverse effect on our business and operations.

It could be difficult for us to find replacements for our key personnel, as competition for such personnel is intense. The loss of services of one or more members of our senior management team could have an adverse effect on our ability to manage our business and implement our growth strategies. Further, such a loss could be negatively perceived in the capital markets, which could reduce the market value of our securities.

The recent departure of our founder and certain members of our development and design teams could have an adverse effect on our ability to manage our business and implement our growth strategies.

On June 24, 2005, Ian Schrager, our then Chairman, President and Chief Executive Officer, resigned. Ian Schrager founded our predecessor company in 1983 and was involved with all aspects of our business. We retained Ian Schrager’s services as a consultant, at our election, through December 31, 2007. None of our agreements with Ian Schrager, however, restrict his ability to compete with us. Certain members of our development and design team who recently departed were closely involved in the acquisition, development and design of our portfolio of hotel properties. We cannot assure you that the loss of Ian Schrager and other employees in our development and design teams will not have an adverse effect on our ability to manage our business and implement our growth strategies.

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We depend on Jeffrey Chodorow for the management of our restaurants and certain of our bars.

The restaurants in Morgans, Hudson, Delano, Mondrian, Clift, Sanderson and St. Martins Lane as well as the bars in Delano, Sanderson and St. Martins Lane are owned and managed through several joint venture operations with restaurateur Jeffrey Chodorow pursuant to a master agreement between our subsidiaries and Chodorow Ventures LLC. If any of the risks outlined below materialize, our results of operations may be adversely affected. The joint ventures involve risks not otherwise present in our business, including:

·the risk that Mr. Chodorow or Chodorow Ventures LLC has economic or other interests or goals that are inconsistent with our interests and goals and that he may not take, or may veto, actions which may be in our best interests;

·the risk that a joint venture entity or Chodorow Ventures LLC may default on its obligations under the agreement or the leases with our hotels, or not renew those leases when they expire, and therefore we may not continue to receive its services;

·the risk that disputes between us and partners or co-venturers may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing their time and effort on our business;

·the risk that we may in certain circumstances be liable for the actions of our third party partners or co-venturers; and

·the risk that Chodorow Ventures LLC may become bankrupt and will be unable to continue to provide services to us.

Because land underlying Sanderson is subject to a ground lease, Clift is leased pursuant to a 99-year lease and a portion of Hudson is the lease of a condominium interest, we are subject to the risk that these leases could be terminated and could cause us to lose the ability to operate these hotels.

Our rights to use the land underlying Sanderson in London are based upon our interest under a long-term ground lease. Our rights to operate Clift in San Francisco are based upon our interest under a 99-year lease. In addition, a portion of Hudson in New York is a condominium interest that is leased to us. Pursuant to the terms of the leases for these hotels, we are required to pay all rent due and comply with all other lessee obligations under the leases. Any transfer, including a pledge, of our interest in a lease may require the consent of the applicable lessor and its lenders. As a result, we may not be able to sell, assign, transfer or convey our lessee’s interest in any hotel subject to a lease in the future absent consent of such third parties even if such transactions may be in the best interest of our stockholders.

The lessor may require us, at the expiration or termination of the lease to surrender or remove any improvements, alterations or additions to the land or hotel at our own expense. The leases also generally require us to restore the premises following a casualty or taking and to apply in a specified manner any proceeds received in connection therewith. We may have to restore the premises if a material casualty, such as a fire or an act of God, occurs; the cost of which may exceed any available insurance proceeds.

The termination of any of these leases could cause us to lose the ability to continue operating these hotels, which would materially affect our business and results of operations.

We are party to numerous contracts and operating agreements, certain of which limit our activities through restrictive covenants or consent rights. Violation of those covenants or failure to receive consents could lead to termination of those contracts or operating agreements.

We are party to numerous contracts and operating agreements, many of which are integral to our business operations. Certain of those contracts and operating agreements, including our joint venture

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agreements, require that we obtain the consent of the other party or parties before taking certain actions and/or contain restrictive covenants that could affect the manner in which we conduct our business. Our failure to comply with restrictive covenants or failure to obtain consents, including actions by our predecessor prior to our initial public offering, could provide the beneficiaries of those covenants or consents with the right to terminate the relevant contract or operating agreement or seek damages against us. If those claims relate to agreements that are integral to our operations, any termination could have a material adverse effect on our results of operations or financial condition.

We are currently involved in litigation regarding our management of Shore Club. This litigation may harm our business or reputation and defense of this litigation may divert management resources from the operations of our business.

In 2002, we invested in Shore Club and our management company, MHG Management Company, took over management of the property. The management agreement pursuant to which we manage Shore Club expires in 2022.

On January 17, 2006, Phillips South Beach LLC filed a lawsuit in New York state court against MHG Management Company. The lawsuit alleges, among other things, (i) that MHG Management Company engaged in fraudulent or willful misconduct with respect to Shore Club entitling Phillips South Beach LLC to terminate the Shore Club management agreement without the payment of a termination fee to us, (ii) breach of fiduciary duty by MHG Management Company, (iii) tortious interference with business relations by redirecting guests and events from Shore Club to Delano, (iv) misuse of free and complimentary rooms at Shore Club, and (v) misappropriation of confidential business information. The allegations include that we took actions to benefit Delano at the expense of Shore Club, billed Shore Club for expenses that had already been billed by us as part of chain expenses, misused barter agreements to obtain benefits for our employees, and failed to collect certain rent and taxes from retail tenants. The lawsuit also asserts that we falsified or omitted information in monthly management reports related to the alleged actions. Messrs. Schrager, Scheetz and Hamamoto are also named as defendants in the lawsuit.

The remedies sought by Phillips South Beach LLC include (a) termination of the management agreement without the payment of a termination fee to us, (b) recovery of all previously paid management fees, (c) a full accounting of all of the affairs of Shore Club from the inception of the management agreement, (d) at least $5.0 million in compensatory damages and (e) at least $10.0 million in punitive damages and attorneys fees.

We have retained outside counsel and intend to challenge the litigation vigorously. Although we do not expect that the outcome of this litigation will have a material adverse effect on our financial condition, results of operations or liquidity, it may harm our business or reputation and defense of this litigation may divert management resources from the operations of our business.

Risks Related to the Hospitality Industry

In addition to the risks enumerated above, a number of factors, many of which are common to the hospitality industry and beyond our control, could affect our business, including the following:

·increased threat of terrorism, terrorist events, airline strikes, natural disasters or other factors that may affect travel patterns and reduce the number of business and commercial travelers and tourists and other factors that may not be offset by increased room rates;

·increased competition from other hotels in our markets;

·new hotel supply in our markets, which could harm our occupancy levels and revenue at our hotels;

·dependence on business and commercial travel, leisure travel and tourism;

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·increases in operating costs due to inflation, labor costs (including the impact of unionization), workers’ compensation and health-care related costs, utility costs, insurance and unanticipated costs such as acts of nature and their consequences and other factors that may not be offset by increased room rates;

·changes in interest rates and in the availability, cost and terms of debt financing;

·changes in governmental laws and regulations, fiscal policies and zoning ordinances and the related costs of compliance with laws and regulations, fiscal policies and ordinances;

·adverse effects of international market conditions, which may diminish the desire for high-end leisure travel or the need for business travel, as well as national, regional and local economic and market conditions where our hotels operate and where our customers live; and

·adverse effects of a downturn in the hospitality industry.

These factors could harm our financial condition and results of operations.

Seasonal variations in revenue at our hotels can be expected to cause quarterly fluctuations in our revenues.

The hospitality industry is seasonal in nature. This seasonality can be expected to cause quarterly fluctuations in our revenues. Our revenue is generally highest in the second and fourth quarters. Our quarterly earnings may also be adversely affected by factors outside our control, including weather conditions and poor economic factors. As a result, we may have to enter into short-term borrowings in certain quarters in order to offset these fluctuations in revenues.

The hospitality industry is heavily regulated, including with respect to food and alcohol sales, employee relations, construction and taxation. Failure to comply with regulatory requirements may result in an adverse effect on our business.

Our failure to comply with regulatory requirements may result in an adverse effect on our business. Our various properties are subject to numerous laws, including those relating to the preparation and sale of food and beverages, including alcohol. We are also subject to laws governing our relationship with our employees in such areas as minimum wage and maximum working hours, overtime, working conditions, hiring and firing employees and work permits. Also, our ability to remodel, refurbish or add to our existing properties may be dependent upon our obtaining necessary building permits from local authorities. The failure to obtain any of these permits could adversely affect our ability to increase revenues and net income through capital improvements of our properties. In addition, we are subject to the numerous rules and regulations relating to state and federal taxation. Compliance with these rules and regulations requires significant management attention. Any failure to comply with all such rules and regulations could subject us to fines or audits by the applicable taxation authority.

The illiquidity of real estate investments and the lack of alternative uses of hotel properties could significantly limit our ability to respond to adverse changes in the performance of our properties and harm our financial condition.

Because real estate investments are relatively illiquid, our ability to promptly sell one or more of our properties in response to changing economic, financial and investment conditions is limited. We cannot predict whether we will be able to sell any property for the price or on the terms set by us, or whether any price or other terms offered by a prospective purchaser would be acceptable to us. We also cannot predict the length of time needed to find a willing purchaser and to close the sale of a property.

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Although we evaluate alternative uses throughout our portfolio, including residential conversion and other opportunities, hotel properties may not readily be converted to alternative uses. The conversion of a hotel to alternative uses would also generally require substantial capital expenditures and may not provide a more profitable return than the use of the hotel property prior to that conversion.

We may be required to expend funds to correct defects or to make improvements before a property can be sold. We may not have funds available to correct those defects or to make those improvements and as a result our ability to sell the property would be limited. In acquiring a hotel, we may agree to lock-out provisions that materially restrict us from selling that hotel for a period of time or impose other restrictions on us. These factors and any others that would impede our ability to respond to adverse changes in the performance of our properties could significantly harm our financial condition and results of operations.

Uninsured and underinsured losses could adversely affect our financial condition and results of operations.

We are responsible for insuring our hotel properties as well as for obtaining the appropriate insurance coverage to reasonably protect our interests in the ordinary course of business. Additionally, each of our leases and loans typically specifies that comprehensive insurance be maintained on each of our hotel properties, including liability, fire and extended coverage. There are certain types of losses, generally of a catastrophic nature, such as earthquakes and floods or terrorist acts, which may be uninsurable or not economically insurable, or may be subject to insurance coverage limitations, such as large deductibles or co-payments. We will use our discretion in determining amounts, coverage limits, deductibility provisions of insurance and the appropriateness of self-insuring, with a view to maintaining appropriate insurance coverage on our investments at a reasonable cost and on suitable terms. Uninsured and underinsured losses could harm our financial condition and results of operations. We could incur liabilities resulting from loss or injury to our hotels or to persons at our hotels. Claims, whether or not they have merit, could harm the reputation of a hotel or cause us to incur expenses to the extent of insurance deductibles or losses in excess of policy limitations, which could harm our results of operations.

In the event of a catastrophic loss, our insurance coverage may not be sufficient to cover the full current market value or replacement cost of our lost investment. Should an uninsured loss or a loss in excess of insured limits occur, we could lose all or a portion of the capital we have invested in a property, as well as the anticipated future revenue from the property. In that event, we might nevertheless remain obligated for any mortgage debt or other financial obligations related to the property. In the event of a significant loss, our deductible may be high and we may be required to pay for all such repairs and, as a consequence, it could materially adversely affect our financial condition. Inflation, changes in building codes and ordinances, environmental considerations and other factors might also keep us from using insurance proceeds to replace or renovate a hotel after it has been damaged or destroyed. Under those circumstances, the insurance proceeds we receive might be inadequate to restore our economic position on the damaged or destroyed property.

Since September 11, 2001, it has generally become more difficult and expensive to obtain property and casualty insurance, including coverage for terrorism. When our current insurance policies expire, we may encounter difficulty in obtaining or renewing property or casualty insurance on our properties at the same levels of coverage and under similar terms. Such insurance may be more limited and for some catastrophic risks (e.g., earthquake, hurricane, flood and terrorism) may not be generally available at current levels. Even if we are able to renew our policies or to obtain new policies at levels and with limitations consistent with our current policies, we cannot be sure that we will be able to obtain such insurance at premium rates that are commercially reasonable. If we were unable to obtain adequate insurance on our properties for certain risks, it could cause us to be in default under specific covenants on certain of our indebtedness or other contractual commitments that require us to maintain adequate insurance on our properties to protect against the risk of loss. If this were to occur, or if we were unable to obtain adequate insurance and our properties experienced damage which would otherwise have been covered by insurance, it could materially adversely affect our financial condition and the operations of our properties.

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In addition, insurance coverage for our hotel properties and for casualty losses does not customarily cover damages that are characterized as punitive or similar damages. As a result, any claims or legal proceedings, or settlement of any such claims or legal proceedings that result in damages that are characterized as punitive or similar damages may not be covered by our insurance. If these types of damages are substantial, our financial resources may be adversely affected.

Environmental and other governmental laws and regulations could increase our compliance costs and liabilities and adversely affect our financial condition and results of operations.

Our hotel properties are subject to various Federal, state and local laws relating to the environment, fire and safety and access and use by disabled persons. Under these laws, courts and government agencies have the authority to require us, if we are the owner of a contaminated property, to clean up the property, even if we did not know of or were not responsible for the contamination. These laws also apply to persons who owned a property at the time it became contaminated. In addition to the costs of cleanup, environmental contamination can affect the value of a property and, therefore, an owner’s ability to borrow funds using the property as collateral or to sell the property. Under such environmental laws, courts and government agencies also have the authority to require that a person who sent waste to a waste disposal facility, such as a landfill or an incinerator, to pay for the clean-up of that facility if it becomes contaminated and threatens human health or the environment.

Furthermore, various court decisions have established that third parties may recover damages for injury caused by property contamination. For instance, a person exposed to asbestos while staying in or working at a hotel may seek to recover damages for injuries suffered. Additionally, some of these environmental laws restrict the use of a property or place conditions on various activities. For example, some laws require a business using chemicals (such as swimming pool chemicals at a hotel) to manage them carefully and to notify local officials that the chemicals are being used.

We could be responsible for the types of costs discussed above. The costs to clean up a contaminated property, to defend against a claim, or to comply with environmental laws could be material and could reduce the funds available for distribution to our stockholders. Future laws or regulations may impose material environmental liabilities on us, or the current environmental condition of our hotel properties may be affected by the condition of the properties in the vicinity of our hotels (such as the presence of leaking underground storage tanks) or by third parties unrelated to us.

Our hotel properties are also subject to the Americans with Disabilities Act of 1990, or the ADA. Under the ADA, all public accommodations must meet various Federal requirements related to access and use by disabled persons. Compliance with the ADA’s requirements could require removal of access barriers and non-compliance could result in the U.S. government imposing fines or in private litigants’ winning damages. If we are required to make substantial modifications to our hotels, whether to comply with the ADA or other changes in governmental rules and regulations, our financial condition and results of operations could be harmed. In addition, we are required to operate our hotel properties and laundry facilities in compliance with fire and safety regulations, building codes and other land use regulations, as they may be adopted by governmental agencies and become applicable to our properties.

Our hotels may be faced with labor disputes or, upon expiration of the collective bargaining agreement, a strike, which would adversely affect the operation of our hotels.

We rely heavily on our employees providing high-quality personal service at our hotels and any labor dispute or stoppage caused by poor relations with a labor union or the hotels’ employees could adversely affect our ability to provide those services, which could reduce occupancy and room revenue, tarnish our reputation and hurt our results of operations. Most of our employees who work at Morgans, Royalton, Hudson and Clift are members of local labor unions. Our relationship with our employees or the union could deteriorate due to disputes relating to, among other things, wage or benefit levels or management

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responses to various economic and industry conditions. The collective bargaining agreement governing the terms of employment for employees working in our New York hotels is due to expire on June 30, 2006, and, although we have agreed to adopt any successor agreement and the union has agreed not to strike our hotels at the current agreement’s expiration, if the agreement is terminated the union could engage in a strike or picketing against our New York hotels. Major San Francisco hotels are currently involved in a labor dispute with unions representing their employees. While to date that labor dispute has not involved Clift, the union could engage in a strike or picketing against San Francisco hotels including Clift especially if the dispute is not resolved.

Risks Related to Our Organization and Structure

We may experience conflicts of interest with significant stockholders and those stockholders may also exercise significant influence over our affairs.

Our two largest stockholders, NorthStar Capital Investment Corp., which we refer to as NCIC, and RSA Associates, L.P., which we refer to as RSA Associates, beneficially own approximately 30.3% and 6.9%, respectively, of the outstanding shares of our common stock. We may experience conflicts of interest in connection with competition with NCIC and its affiliates and RSA Associates over the acquisition or disposition of hotel properties.

Our President and Chief Executive Officer, W. Edward Scheetz, and our Chairman, David Hamamoto, are the Co-Chief Executive Officers of NCIC. In addition, Mr. Hamamoto is the President and Chief Executive Officer of Northstar Realty Finance Corp., an affiliate of Northstar. We expect that Mr. Scheetz will devote substantially all of his business time to the performance of his duties as our President and Chief Executive Officer and to be subject to a non-competition agreement and Mr. Hamamoto, as our Chairman, will devote an amount of time customary for the performance of his duties as Chairman. Messrs. Scheetz and Hamamoto’s management obligations to NCIC and its affiliates may present them with conflicts of interest in making decisions and their time spent managing NCIC will reduce the time and effort they each spend managing us. Under Delaware corporate law, our officers and directors owe fiduciary duties to us and our stockholders. However, we have not instituted a formal plan or arrangement to address potential conflicts of interest that may arise among us, NCIC, RSA Associates and their respective affiliates.

Some of our officers may also serve as directors or officers of NCIC and RSA Associates and may have conflicts of interest because they may own equity interests in NCIC, RSA Associates or their respective affiliates, or they may receive cash- or equity-based awards based on the performance of NCIC, RSA Associates or their respective affiliates, as the case may be.

In addition, the shares of common stock owned by NCIC and RSA Associates constitute a significant portion of the votes needed to approve matters required to be submitted to our stockholders for approval, including decisions relating to the election of our board of directors, and the determination of our day-to-day corporate and management policies. The ownership interest in our company of our significant stockholders may discourage third parties from seeking to acquire control of our company which may adversely affect the market price of our common stock.

If a third-party acquires all or a controlling interest in NCIC, RSA Associates or their respective affiliates, that third-party may be able to significantly influence us in the same manner that NCIC and RSA Associates are able to significantly influence us.

We may experience conflicts of interest with certain of our directors and officers and significant stockholders as a result of their tax positions.

Messrs. Scheetz and Hamamoto and Marc Gordon, our Chief Investment Officer and Executive Vice President of Capital Markets, may suffer adverse tax consequences upon our sale of certain properties and may therefore have different objectives regarding the appropriate pricing and timing of a particular

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property’s sale. At the completion of our initial public offering, Morgans Hotel Group LLC guaranteed approximately $225.0 million of the indebtedness of subsidiaries of Morgans Group LLC and W. Edward Scheetz, David Hamamoto and Marc Gordon agreed to reimburse Morgans Hotel Group LLC for up to $98.3 million, $98.3 million and $7.0 million of its guarantee obligation, respectively. These guarantees and reimbursement undertakings were provided so that Messrs. Scheetz, Hamamoto and Gordon did  not realize taxable capital gains in connection with the Formation and Structuring Transactions in the amount that each has agreed to reimburse. The guarantees and reimbursement undertakings are for a fixed term and are renewable at the option of the provider. Messrs. Scheetz, Hamamoto and Gordon may influence us to not sell or refinance certain properties, even if such sale or refinancing might be financially advantageous to our stockholders, in order for them to avoid realizing built-in gains that would be incurred once they ceased to agree to reimburse Morgans Hotel Group LLC for its guarantee of portions of our debt. Alternatively, to avoid realizing such built-in gains they may have to agree to additional reimbursements or guarantees involving additional financial risk.

In addition, Messrs. Scheetz, Hamamoto and Gordon may be subject to tax on a disproportionately large amount of the built-in gain that would be realized upon the sale of certain properties. Messrs. Scheetz, Hamamoto and Gordon may therefore influence us to not sell certain properties, even if such sale might be financially advantageous to our stockholders, or to enter into tax deferred exchanges with the proceeds of such sales when such a reinvestment might not otherwise be in our best interest, as they may wish to avoid realization of their share of the built-in gains in those properties.

Our basis in the hotels contributed to us is generally substantially less than their fair market value which will decrease the amount of our depreciation deductions and increase the amount of recognized gain upon sale.

Our hotels were contributed to us in tax-free transactions. Accordingly, our basis in the assets contributed was not adjusted in connection with our initial public offering and is generally substantially less than the fair market value of the contributed hotels as of the date of our initial public offering. We also intend to generally use the “traditional” method for making allocations under Section 704(c) of the Internal Revenue Code as opposed to the “curative” or “remedial” method for making such allocations. Consequently, (i) our depreciation deductions with respect to our hotels will likely be substantially less than the depreciation deductions that would have been available to us had our tax basis been equal to the fair market value of the hotels as of the date of our initial public offering and (ii) we may recognize gain upon the sale of an asset that is attributable to appreciation in the value of the asset that accrued prior to the date of our initial public offering.

Upon an indirect transfer of an interest in our three New York City hotels as a result of subsequent sales of our common stock by NCIC or RSA Associates, we may be obligated to pay New York City and New York State transfer tax based on the value of our three New York hotels.

Upon a transfer of a controlling interest in our three New York City hotels, New York City and New York State assess a real property transfer tax that aggregates approximately 3% of the fair market value of those hotels. Under the applicable regulations, subject to certain exceptions, a transfer of a 50% or greater interest in our company, either as a result of our initial public offering or as a result of our initial public offering aggregated with sales by NCIC or RSA Associates, would constitute a sale of a controlling interest in our New York City hotels, giving rise to a tax on the aggregate percentage interest transferred. We have agreed with NCIC and RSA Associates to pay any transfer tax resulting from sales of our common stock by them.

In connection with our initial public offering , there was a transfer of a controlling interest in our company that resulted in a transfer tax payable by us to New York City and New York State based on the aggregate interest transferred and the fair market value of our New York City hotels at the time of our initial public offering. In addition, if NCIC and RSA Associates subsequently transfer an interest in our company in a transaction that the applicable rules aggregate with our initial public offering, an additional

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transfer tax would be payable by us to New York City and New York State based on the aggregate interest subsequently transferred and the fair market value of our New York City hotels at the time of the transfer.

Non-U.S. holders owning more than 5% of our common stock may be subject to U.S. federal income tax on gain recognized on the disposition of our common stock.

Because of our significant U.S. real estate holdings, we believe that we are a “United States real property holding corporation” as defined under Section 897 of the Internal Revenue Code. As a result, any “non-U.S. holder” (as defined under “Material U.S. Federal Income Tax Considerations for Non-U.S. Holders”) will be subject to U.S. federal income tax on gain recognized on a disposition of our common stock if such non-U.S. holder has held, directly or indirectly, 5% of our common stock at any time during the five-year period ending on the date of the disposition and such non-U.S. holder is not eligible for any treaty exemption.

Risks Relating to Our Common Stock

An exemption from the registration requirements of the Securities Act may not be available in the Formation and Structuring Transactions, which may give rise to rights of rescission.

The offering and issuance of membership units in Morgans Group LLC and shares of our common stock in the Formation and Structuring Transactions was structured as a private placement transaction exempt from the registration requirements of the Securities Act pursuant to the exemption afforded by Section 4(2) thereof and/or Regulation D promulgated thereunder.

Under federal securities laws as interpreted by the Securities and Exchange Commission, an exemption from the registration requirements of the Securities Act may not be available for an otherwise valid private placement if that private placement is determined to be “integrated” with a registered public offering. Generally, a valid private placement will not be “integrated” with a registered public offering if the investors in the private placement have completed their investment decision with regard to the private placement before the initial filing of the registration statement for the registered offering and the definitive investment agreement executed prior to the initial filing of the registration statement is complete and encompasses all material terms.

Because the Formation and Structuring Agreement, which is filed as an exhibit to this Annual Report on Form 10-K, did not specify the number of Morgans Group LLC membership units or shares of our common stock to be received by the parties to the Formation and Structuring Agreement, a question may arise under federal securities laws as to whether the investment decisions by those persons made prior to the initial filing of our registration statement were sufficiently definitive. If the investment decisions were not sufficiently definitive, a private placement exemption may not be available for the private placement made as part of the Formation and Structuring Transactions.

Federal securities laws provide for a one-year rescission right for investors who purchase securities in an unregistered transaction for which the private offering or another exemption was not available. An investor successfully asserting a rescission right during the one-year time period has the right to require the issuer to repurchase the securities issued to the investor at the price paid by the investor for the securities. The aggregate value, based on the initial public offering price for our common stock, of all of the membership units of Morgans Group LLC and shares of common stock issued in the Formation and Structuring Transactions is approximately $390 million.

In addition, we expect to avoid any possible liability or repurchase obligation arising out of the private placement of the shares of our common stock and membership units of Morgans Group LLC because each party to the Formation and Structuring Agreement agreed that such party (i) waives and releases any claim against us and Morgans Group LLC arising out of or based on any aspect of the Formation and Structuring Transactions being not exempt from registration under federal or state securities laws, (ii) will not, under any circumstances, exercise any right of rescission arising out of the Formation and Structuring

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Transactions, and (iii) will contribute to Morgans Group LLC any proceeds received by such party as a result of any rescission action arising out of the Formation and Structuring Transactions. There is, however, a risk that the agreements and waivers described above may not be enforceable.

If a significant number of shares of our common stock are sold into the market, the market price of our common stock could significantly decline, even if our business is doing well.

Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the market price of our common stock and could materially impair our future ability to raise capital through offerings of our common stock. Subject to certain extensions, beginning on August 13, 2006, our directors and executive officers, NCIC and RSA Associates will be able to sell an aggregate total of 13,994,000 shares of our common stock, subject to significant restrictions.

Upon the consummation of our initial public offering, we entered into registration rights agreements, under which NorthStar’s partners or RSA Associates will have the right to cause us to file a registration statement under the Securities Act covering the resale of any shares of our common stock beneficially owned by NorthStar’s partners or RSA Associates any time after August 17, 2006. These shares represent approximately 46.6% of our outstanding common stock.

Finally, 3,500,000 shares of our common stock are issuable pursuant to our 2006 Omnibus Stock Incentive Plan and our Annual Bonus Plan. Sales of shares issued under our stock incentive plan and our annual bonus plan, or the perception that these sales could occur, could adversely affect the market price of our common stock.

Provisions in our charter documents and Delaware law could discourage potential acquisition proposals, could delay, deter or prevent a change in control and could limit the price certain investors might be willing to pay for our stock.

Certain provisions of our certificate of incorporation and by-laws may inhibit changes in control of our company not approved by our board of directors or changes in the composition of our board of directors, which could result in the entrenchment of current management. These provisions include:

·a prohibition on stockholder action through written consents;

·a requirement that special meetings of stockholders be called by the board of directors;

·advance notice requirements for stockholder proposals and director nominations;

·limitations on the ability of stockholders to amend, alter or repeal the by-laws; and

·the authority of the board of directors to issue, without stockholder approval, preferred stock with such terms as the board of directors may determine and additional shares of our common stock.

We will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which would prevent us from engaging in a business combination with a person who becomes a 15% or greater stockholder for a period of three years from the date such person acquired such status unless certain board or stockholder approvals were obtained. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock. See “Description of Capital Stock”.

ITEM 1B.UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 2PROPERTIES

Summary of Our Hotel Properties

Set forth below is a summary of certain information related to our hotel properties as of December 31, 2005, giving effect to the Formation and Structuring Transactions.

									Twelve Months
		Year	Interest			Number			Ended December 31, 2005				Restaurants
Hotel	City	Opened	Owned			of Rooms			ADR(1)	Occupancy(2)	RevPAR(3)		and Bars(4)
Morgans	New York	1984		100	%		113		295	83.4%		246	Asia de Cuba Morgans Bar
Royalton	New York	1988		100	%		169		316	86.2%		272	44 Lobby Bar Round Bar Library Table
Hudson	New York	2000			(5)		804	(5)	247	85.3%		211	Hudson Cafeteria Hudson Bar Private Park Library Bar Sky Terrace
Delano	Miami	1995		100	%		194		474	72.1%		342	Blue Door Blue Sea Rose Bar
Mondrian	Los Angeles	1996		100	%		237		301	79.5%		239	Asia de Cuba Seabar Skybar
Clift	San Francisco	2001			(6)		363		221	68.7%		152	Asia de Cuba Redwood Room Living Room
St. Martins Lane	London	1999		50	%		204		359	73.6%		264	Asia de Cuba Light Bar Rum Bar
Sanderson	London	2000		50	%		150		438	69.6%		305	Spoon Long Bar Purple Bar
Shore Club	Miami	2001		7	%		307		349	63.6%		222	Nobu Ago Skybar Redroom Rumbar Sandbar
Total/Weighted Average							2,541		$302	76.9%	$	232

(1)Average daily rate, or ADR.

(2)Average daily occupancy.

(3)Revenue per available room, or RevPAR, is the product of ADR and average daily occupancy. RevPAR does not include food and beverage revenues or other hotel operations revenues such as telephone, parking and other guest services.

(4)We operate the restaurants in Morgans, Hudson, Delano, Mondrian, Clift, Sanderson and St. Martins Lane as well as the bars in Delano, Sanderson and St. Martins Lane through a joint venture arrangement with Chodorow Ventures LLC in which we own a 50% ownership interest. See “Related Party Transactions—Joint Venture Agreements”.

(5)We own 100% of Hudson, which is part of a property that is structured as a condominium, in which Hudson constitutes 96% of the square footage of the entire building. Hudson has a total of 920 rooms, including 116 single room occupancies (SROs), of which 21 are vacant. SROs are single room dwelling units. Each SRO is for occupancy by a single eligible individual. The unit need not, but may, contain food preparation or sanitary facilities, or both. SROs remain from the prior ownership of the building and we are by statute required to maintain these long-term tenants, unless we get their consent, as long as they pay us their rent.

(6)Clift is operated under a long-term lease, which is accounted for as a financing.

(7)The currency translation is based on an exchange rate of 1 British pound = 1.82 U.S. dollars, which is an average monthly exchange rate provided by www.oanda.com for the last twelve months ending December 31, 2005.

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Our Hotel Properties

We own or partially own and manage a portfolio of nine luxury hotel properties in gateway cities and select resort markets in the United States and Europe. Each of our hotels is positioned in its respective market as a gathering place or destination hotel offering outstanding personalized service with renowned restaurants and bars.

The chart below summarizes certain information relating to our six Owned Hotels in New York, Miami, Los Angeles and San Francisco for the year ended December 31, 2005:

Location	Delano Miami			Royalton New York				Mondrian Los Angeles				Morgans New York				Hudson New York				Clift San Francisco
Year Opened	1995				1988				1996				1984				2000				2001
Total Rooms	194				169				237				113				804		(1)		363
Ownership	100		%		100		%		100		%		100		%		100		%				(2)
Restaurants & Bars	3				2				3				2				4				3
Occupancy	72.1		%		86.2		%		79.5		%		83.4		%		85.3		%		68.7		%
ADR	$	474			$	316			$	301			$	295			$	247			$	221
RevPAR	$	342			$	272			$	239			$	246			$	211			$	152
RevPAR Change(3)	9.2		%		18.4		%		14.2		%		18.4		%		25.0		%		8.0		%
Total Revenue (000’s)	$	49,546			$	21,963			$	43,056			$	21,526			$	80,548			$	34,231
Depreciation (000’s)	$	3,272			$	2,097			$	2,238			$	1,485			$	9,415			$	7,246
Operating Income (Loss) (000’s)(4)	$	15,877			$	4,595			$	14,925			$	4,398			$	24,756			$	(2,616	)

(1)We own 100% of Hudson, which is part of a property that is structured as a condominium, in which Hudson constitutes 96% of the square footage of the entire building. Hudson has a total of 920 rooms, including 116 single room occupancies (SROs), of which 21 are vacant. SROs are single room dwelling units. Each SRO is for occupancy by a single eligible individual. The unit need not, but may, contain food preparation or sanitary facilities, or both. SROs remain from the prior ownership of the building and we are by statute required to maintain these long-term tenants, unless we get their consent, as long as they pay us their rent.

(2)Clift is operated under a long-term lease, which is accounted for as a financing.

(3)The RevPAR change is provided as a comparison of the year ended December 31, 2005 versus the year ended December 31, 2004.

(4)Operating Income for each hotel represents property level operating income and does not include allocations or charges for corporate expenses.

The chart below summarizes certain information relating to our three Joint Venture Hotels in London and Miami for the year ended December 31, 2005:

Location	Sanderson London(1)				Shore Club Miami				St. Martins Lane London(1)
Year Opened		2000				2001				1999
Total Rooms		150				307				204
Ownership		50		%		7		%		50		%
Restaurants & Bars		3				3				3
Occupancy		69.6		%		63.6		%		73.6		%
ADR		$	438			$	349			$	359
RevPAR		$	305			$	222			$	264
RevPAR Change(2)		1.7		%		10.3		%		0.2		%
Total Revenue (000’s)		$	33,366			$	39,726			$	40,059
Depreciation (000’s)		$	5,587			$	8,824			$	5,325
Operating Income (Loss) (000’s)(3)		$	957			$	2,004			$	5,594

(1)The currency translation is based on an exchange rate 1 British pound = 1.82 U.S. dollars, which is an average monthly exchange rate provided by www.oanda.com for the last twelve months ending December 31, 2005.

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(2)The RevPAR change is provided as a comparison of the year ended December 31, 2005 versus the year ended December 31, 2004.

(3)Operating Income for each hotel is after a deduction of approximately 4.5% of revenues for Shore Club and 4.0% of revenues for Sanderson and St. Martins Lane for management fees and 2.5% of revenues for chain services. We operate each hotel under management agreements. See “Related Party Transactions—Burford Hotels Limited Joint Venture” for a description of the management agreement for the two London hotels and “—Ownership and Management of Shore Club” for a description of the management agreement for Shore Club.

Individual Property Information

Each of our hotel properties reflects the strength of our operating platform and our ability to create branded destination hotels. The tables below reflect the results of operations of our individual properties before any third-party ownership interests in the hotels or restaurants.

Morgans

Overview

Opened in 1984, Morgans was the first Morgans Group hotel. It was named after the nearby Morgan Library located on Madison Avenue on the site of the former home of J. Pierpont Morgan. Morgans has 113 rooms, including 29 suites, and is situated in midtown Manhattan’s fashionable East Side, offering guests a residential neighborhood within midtown Manhattan and walking distance of the midtown business district, Fifth Avenue shopping and Times Square. Conceived by French designer Andrée Putman, Morgans is a quietly sophisticated hotel offering an intimate, friendly, home-away-from-home atmosphere. Morgans features Asia de Cuba restaurant, Morgans Bar, Living Room, and the Penthouse, a duplex that is also used for special functions.

Property highlights include:

Location	·  237 Madison Avenue, New York, NY
Guest Rooms	·  113, including 29 suites
Food and Beverage	·  Asia de Cuba Restaurant with seating for 175
	·  Morgans Bar with capacity for 75
Meetings Space	·  Multi-service meeting facility consisting of one suite with capacity for 150
Other Amenities	·  Living Room—a guest lounge that includes televisions, computers and books in one of the suites
	·  24-hour concierge service

We are currently planning to undertake a renovation project at Morgans to upgrade furniture, fixtures and equipment, including technology upgrades.

We own a fee simple interest in Morgans. The hotel is subject to mortgage as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt”.

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Selected Financial and Operating Information

The following table shows selected financial and operating information for Morgans:

	2005			2004			2003			2002			2001
Selected Operating Information:
Occupancy	83.4		%	82.0		%	70.5		%	71.0		%	68.5		%
ADR	$	295		$	254		$	230		$	230		$	231
RevPAR	$	246		$	208		$	162		$	163		$	159
Selected Financial Information (in thousands):
Room Revenue	$	10,161		$	8,605		$	6,693		$	6,724		$	6,537
Total Revenue	21,526			19,882			18,086			18,923			19,212
Depreciation	1,485			1,909			2,025			2,268			1,936
Operating Income	4,398			3,122			2,074			2,452			3,248

Royalton

Overview

Opened in 1988, Royalton is located in the heart of midtown Manhattan, steps away from Times Square, Fifth Avenue shopping and the Broadway Theater District. Royalton has 169 rooms and suites, 37 of which feature working fireplaces. Designed by Philippe Starck, the hotel is widely regarded for its distinctive lobby which spans a full city block and rooms that are reminiscent of a posh stateroom on a luxury steamship liner. Royalton features 44 Restaurant, Lobby Bar, Round Bar and the Library Table (both of which are available for meetings and special events), and three penthouses with terraces offering views of midtown Manhattan.

Property highlights include:

Location	·  44 West 44th Street, New York, NY
Guest Rooms	·  169, including 27 suites
Food and Beverage	·  “44” Restaurant with seating for 200
	·  Lobby Bar with capacity for 250
	·  Round Bar with capacity for 23
	·  Library Table with seating for 10
Meetings Space	·  Multi-service meeting facilities consisting of three suites with total capacity for 150
Other Amenities	·  37 working fireplaces and 5 foot round tubs in 41 guest rooms
	·  24-hour concierge service

We are currently planning to undertake a renovation and expansion project at Royalton, including rooms and lobby renovations, technology upgrades and the addition of a new restaurant and bar.

We own a fee simple interest in Royalton. The hotel is subject to mortgage as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt”.

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Selected Financial and Operating Information

The following table shows selected financial and operating information for Royalton:

	Year Ended December 31,
	2005			2004			2003			2002			2001
Selected Operating Information:
Occupancy	86.2		%	82.3		%	70.6		%	72.0		%	70.6		%
ADR	$	316		$	280		$	266		$	268		$	279
RevPAR	$	272		$	230		$	188		$	193		$	197
Selected Financial Information (in thousands):
Room Revenue	$	16,793		$	14,149		$	11,543		$	11,913		$	12,136
Total Revenue	21,963			19,341			16,950			18,222			19,824
Depreciation	2,097			1,968			2,346			2,550			2,880
Operating Income	4,595			2,636			1,593			2,186			2,955

Hudson

Overview

Opened in 2000, Hudson is our newest and largest New York City hotel, with 804 guest rooms and suites, including two ultra-luxurious accommodations—a 3,355 square foot penthouse with a landscaped terrace and an apartment with a 2,500 square foot tented terrace. Hudson occupies the former clubhouse of the American Women’s Association, which was originally constructed in 1929 by J.P. Morgan’s daughter. The hotel, which is only a few blocks away from Columbus Circle, Time Warner Center and Central Park, was designed by Philippe Starck to offer guests affordable luxury and style. Hudson’s notable design includes a 40-foot high ivy-covered lobby and a lobby ceiling fresco by renowned artist Francesco Clemente. The hotel’s food and beverage offerings include Private Park, a restaurant and bar in the indoor/outdoor lobby garden, Hudson Cafeteria restaurant, Hudson Bar and the Library bar and Sky Terrace, a private landscaped terrace on the 15th floor.

Property highlights include:

Location	·  356 West 58th Street, New York, NY
Guest Rooms	·  804, including 43 suites
Food and Beverage	·  Hudson Cafeteria restaurant with seating for 200
	·  Hudson Bar with capacity for 334
	·  Library Bar with capacity for 170
Meeting Space	·  Multi-service meeting facilities, consisting of three executive boardrooms, two suites and other facilities, with total capacity for 1,260
Other Amenities	·  24-hour concierge service and business center
	·  Indoor/outdoor private park
	·  Library with antique billiard tables and books
	·  Sky Terrace, a private landscaped terrace and solarium
	·  Fitness center

We are currently exploring alternatives for an expansion project at Hudson, including the possibility of building out approximately 27,000 square feet of the basement to be used as a banquet facility and/or a gym.

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We own 100% of Hudson, which is part of a property that is structured as a condominium, in which Hudson constitutes 96% of the square footage of the entire building. Hudson has a total of 920 rooms, including 116 single room occupancies (SROs), of which 21 are vacant. SROs are single room dwelling units. Each SRO is for occupancy by a single eligible individual. The unit need not, but may, contain food preparation or sanitary facilities, or both. SROs remain from the prior ownership of the building and we are by statute required to maintain these long-term tenants, unless we get their consent, as long as they pay us their rent. The hotel is subject to mortgage as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt”.

Since 2000, we have leased our interests in Hudson to Hudson Leaseco LLC, an entity in which we own a 0.1% membership interest, under a 35-year lease. The remaining 99.9% membership interest is owned by Chevron TCI, Inc. The lease to Hudson Leaseco allowed for the pass-through of tax credits to Chevron TCI, which used the tax credits on a current basis. Hudson Leaseco pays us an annual rent, which approximates the annual cash flow of Hudson less a payment of approximately $0.3 million to Chevron TCI. Chevron TCI has the right to put its interest in Hudson Leaseco to us in early 2006, for approximately $2.8 million, and if Chevron TCI does not exercise that right, we have the right to call Chevron TCI’s interest in Hudson Leaseco at a price equal to an appraised value. Because we receive the majority of the cash flow under the lease, Hudson Leaseco is consolidated for accounting purposes. See note 5 of the Notes to the Combined Financial Statements.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Hudson:

	Year Ended December 31,
	2005			2004			2003			2002			2001
Selected Operating Information:
Occupancy	85.3		%	80.0		%	73.0		%	72.1		%	70.9		%
ADR	$	247		$	211		$	187		$	180		$	190
RevPAR	$	211		$	168		$	136		$	130		$	135
Selected Financial Information (in thousands):
Room Revenue	$	61,673		$	49,431		$	39,833		$	38,618		$	40,520
Total Revenue	80,548			67,965			58,520			59,242			61,811
Depreciation	9,415			10,185			9,950			9,753			9,771
Operating Income (Loss)	24,756			14,644			10,219			12,741			13,903

Delano

Overview

Opened in 1995, Delano has 194 guest rooms, suites and lofts and is located in the heart of Miami Beach’s fashionable South Beach Art Deco district. Designed by Philippe Starck from a 1947 landmark hotel, Delano is noted for its simple white Art Deco decor and features an “indoor/outdoor” lobby, the Water Salon and Orchard (which is Delano’s landscaped orchard and 100-foot long pool) and beach facilities. The hotel’s accommodations also include 8 poolside bungalows and a penthouse and apartment located on its top two floors. Delano’s restaurant and bar offerings include Blue Door and Blue Sea restaurants, a poolside bistro and the Rose Bar. The hotel also features Agua Bathhouse Spa, a full-service rooftop spa facility, and the David Barton Gym.

Property highlights include:

Location ·  1685 Collins Avenue, Miami Beach, FL

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Guest Rooms	·  194, including 11 suites, 5 lofts and 8 poolside bungalows and 9 cabanas
Food and Beverage	·  Blue Door Restaurant with seating for 225
	·  Blue Sea Restaurant with seating for 16
	·  Rose Bar and lobby lounge with capacity for 334
Meeting Space	·  Multi-service meeting facilities, consisting of one executive boardroom and other facilities, with total capacity for 223
Other Amenities	·  Swimming pool and water salon
	·  Agua Bathhouse Spa and solarium
	·  David Barton gym
	·  Beach Village
	·  Billiards area
	·  Interactive multi-media room
	·  24-hour concierge service

We are currently planning to undertake a rooms renovation project at Delano, including technology upgrades and upgrading of suites and bungalows.

We own a fee simple interest in Delano. The hotel is subject to mortgage as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt”.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Delano:

	Year Ended December 31,
	2005			2004			2003			2002			2001
Selected Operating Information:
Occupancy	72.1		%	66.2		%	72.0		%	72.4		%	74.5		%
ADR	$	474		$	473		$	413		$	398		$	399
RevPAR	$	342		$	313		$	298		$	288		$	297
Selected Financial Information (in thousands):
Room Revenue	$	24,276		$	22,362		$	21,182		$	20,493		$	22,560
Total Revenue	49,546			45,847			43,607			42,327			43,733
Depreciation	3,272			3,288			3,116			2,952			2,786
Operating Income	15,877			14,683			14,095			14,097			16,493

Shore Club

Overview

Opened in 2001, Shore Club has 307 rooms including 70 suites, 7 duplex bungalows with private outdoor showers and dining areas, executive suites, an expansive penthouse suite encompassing 6,000 square feet and spanning three floors with a private elevator and private terrace, pool and panoramic views of Miami. Located on one of Miami’s main streets, Collins Avenue, Shore Club was designed by David Chipperfield. Some notable design elements of Shore Club include an Art Deco Lobby with a polished terrazzo floor and lit metal wall mural as well as custom silver and glass lanterns. Shore Club offers on-site access to restaurants and bars such as Nobu, Ago and Skybar (which is made up of the Red Room, Red Room Garden, Rum Bar and Sand Bar), shopping venues such as Scoop and Me & Ro and Pipino Salon, a hair care and accessories salon.

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Property highlights include:

Location	·  1901 Collins Avenue, Miami Beach, FL
Guest Rooms	·  307, including 22 suites, 7 bungalows, 1 oceanfront beach house
Food and Beverage	·  Nobu Restaurant with seating for 120
	·  Nobu Lounge with capacity for 140
	·  Ago Restaurant with seating for 275
	·  Skybar
	·  Red Room with seating for 144
	·  Red Room Garden with capacity for 250
	·  Rum Bar with capacity for 415
	·  Sand Bar with capacity for 75
Meeting Space	·  Multi-service meeting facilities, consisting of two executive boardrooms, three suites and other facilities, with total capacity for 473
Other Amenities	·  Two elevated infinity edge pools (one Olympic size and one lap pool with hot tub)
	·  Two deep blue wading pools
	·  Salon, jewelry shop and clothing shop
	·  24-hour concierge service

We operate Shore Club under a management contract and own a minority ownership interest of approximately 7%. See “Related Party Transactions”.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Shore Club:

	Year Ended December 31,
	2005			2004			2003			2002(1)
Selected Operating Information:
Occupancy	63.6		%	61.6		%	55.8		%	34.9		%
ADR	$	349		$	327		$	296		$	289
RevPAR	$	222		$	201		$	165		$	101
Selected Financial Information (in thousands):
Room Revenue	$	24,922		$	23,668		$	19,398		$	11,052
Total Revenue	39,726			37,539			32,122			14,266
Depreciation	8,824			9,326			9,168			937
Operating Income (Loss)	2,004			520			(4,630		)	(2,129		)

(1)Partial year as MHG Management Company took over management of the hotel in July 2002.

Mondrian

Overview

Acquired in 1996 and reopened after an extensive renovation by Philippe Starck, Mondrian has 237 guest rooms, studios and suites, each of which has a fully-equipped kitchen. The hotel, which was built as an apartment complex in 1959 and converted to a hotel in 1984, is located on Sunset Boulevard in close proximity to Beverly Hills, Hollywood and the downtown Los Angeles business district. Mondrian’s

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accommodations also feature a two bedroom, 2,025 square foot penthouse which includes its own screening room, and an apartment, each of which has an expansive terrace affording city-wide views. The hotel features Asia de Cuba and Seabar restaurants, Skybar, the Pool and Outdoor Living Room and Agua Bathhouse Spa.

Property highlights include:

Location	·  8440 West Sunset Boulevard, Los Angeles, CA
Guest Rooms	·  237, including 183 suites, with fully equipped kitchens in every room
Food and Beverage	·  Asia de Cuba Restaurant with seating for 225
	·  Seabar Restaurant with seating for 50
	·  Skybar with capacity for 491
Meeting Space	·  Multi-service meeting facilities, consisting of two executive boardrooms and one suite, with total capacity for 165
Other Amenities	·  Indoor/outdoor lobby
	·  Agua Bathhouse Spa
	·  Heated swimming pool and water salon
	·  Outdoor living room
	·  24-hour concierge service
	·  Full service business center
	·  24-hour fitness center

We are currently planning to undertake a renovation project at Mondrian, including minor lobby renovations, room renovations, including the replacement of bathrooms and kitchenettes and technology upgrades.

We own a fee simple interest in Mondrian. The hotel is subject to mortgage as more fully described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt”.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Mondrian:

	Year Ended December 31,
	2005			2004			2003			2002			2001
Selected Operating Information:
Occupancy	79.5		%	75.3		%	70.3		%	63.5		%	61.9		%
ADR	$	301		$	278		$	258		$	269		$	299
RevPAR	$	239		$	209		$	182		$	171		$	185
Selected Financial Information (in thousands):
Room Revenue	$	20,674		$	18,153		$	15,721		$	14,814		$	16,086
Total Revenue	43,056			39,692			35,566			34,018			34,674
Depreciation	2,238			2,116			2,802			2,883			3,543
Operating Income	14,925			12,502			9,006			8,075			9,627

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Clift

Overview

Acquired in 1998 and reopened after an extensive renovation in 2001, Clift has 363 guestrooms and suites designed by Philippe Starck. Built in 1915, Clift is located in the heart of San Francisco’s Union Square district, within walking distance of San Francisco’s central retail, dining, cultural and business activities. The hotel features Asia de Cuba Restaurant; the Redwood Room Bar, a paneled San Francisco landmark; and the Living Room, which is available for private events.

Property highlights include:

Location	·  495 Geary Street, San Francisco, CA
Guest Rooms	·  363, including 29 suites
Food and Beverage	·  Asia de Cuba restaurant with seating for 129
	·  Redwood Room bar with capacity for 139
	·  Living Room with capacity for 60
Meeting Space	·  Multi-service meeting facilities, consisting of two executive boardrooms, one suite and other facilities, with total capacity for 545
Other Amenities	·  24-hour concierge service
	·  24-hour business center
	·  24-hour fitness center

Since its emergence from bankruptcy in 2004, we have operated Clift under a 99-year lease, which due to our continued involvement, is treated as a sale leaseback financing. Under the lease, our wholly-owned subsidiary, Clift Holdings LLC, is required to fund operating shortfalls, including the lease payments, and to fund all capital expenditures. The annual lease payments, which are payable in monthly installments, are as follows:

·$2.8 million for the first two years following the commencement of the lease,

·$6.0 million for the third through tenth year following the commencement of the lease, and

·an amount that is reset every five years for the remainder of the lease term based on the percentage change in the consumer price index, subject, however, to certain maximum and minimum limitations on the amount of increase.

Under the lease, the failure of Clift Holding LLC to pay rent or perform our other obligations under the lease may constitute an event of default. If such an event of default goes uncured, the lessor will have specified rights and remedies, such as termination of the lease.

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Selected Financial and Operating Information

The following table shows selected financial and operating information for Clift:

	Year Ended December 31,
	2005			2004			2003			2002			2001(1)
Selected Operating Information:
Occupancy	68.7		%	66.5		%	63.8		%	47.0		%	46.6		%
ADR	$	221		$	211		$	205		$	230		$	214
RevPAR	$	152		$	141		$	130		$	108		$	100
Selected Financial Information (in thousands):
Room Revenue	$	20,098		$	18,666		$	17,285		$	13,725		$	7,271
Total Revenue	34,230			32,766			31,458			27,917			13,814
Depreciation	7,245			7,200			7,548			7,303			4,114
Operating Income (Loss)	(2,616		)	(2,669		)	(3,828		)	(8,480		)	(12,679		)

(1)Operating statistics are based on the number of rooms in service which was less than the total rooms due to a renovation.

St. Martins Lane

Overview

Opened in 1999, St. Martins Lane has 204 guestrooms and suites, including 7 rooms with private patio gardens, and a loft-style luxury penthouse and apartment with expansive views of London. The renovated 1960s building that previously housed the Mickey Mouse Club and the Lumiere Cinema is located in the hub of Covent Garden and the West End theatre district, within walking distance of Trafalgar Square, Leicester Square and the London business district. Designed by Philippe Starck, the hotel’s meeting and special event space includes the Back Room and an executive boardroom. St. Martins Lane features Asia de Cuba Restaurant; The Rum Bar, which is a modern twist on the classic English pub; and the Light Bar, an exclusive destination which has attracted significant celebrity patronage and received frequent media coverage.

Property highlights include:

Location	·  45 St. Martins Lane, London, UK
Guest Rooms	·  204, including 21 suites
Food and Beverage	·  Asia de Cuba restaurant with seating for 180
	·  Rum Bar with capacity for 30
	·  Light Bar with capacity for 150
Meeting Space	·  Multi-service meeting facilities, consisting of one executive boardroom, two suites and other facilities, with total capacity for 430
Other Amenities	·  24-hour concierge service
	·  Full service business center
	·  24-hour fitness center

We are currently planning to undertake expansion projects at St. Martins Lane, including the addition of a new bar and gym.

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We operate St. Martins Lane through Morgans Hotels Group Europe Limited, a 50/50 joint venture with Burford Hotels Limited. See “Related Party Transactions” for a description of the joint venture.

Selected Financial and Operating Information

The following table shows selected financial and operating information for St. Martins Lane:

	Year Ended December 31,
	2005			2004			2003			2002			2001
Selected Operating Information:
Occupancy	73.6		%	75.4		%	66.6		%	63.1		%	61.9		%
ADR(1)	$	359		$	350		$	341		$	365		$	405
RevPAR(1)	$	264		$	264		$	227		$	230		$	250
Selected Financial Information (in thousands):(1)
Room Revenue	$	19,343		$	19,509		$	16,764		$	17,039		$	18,517
Total Revenue	40,059			40,007			35,781			38,225			39,991
Depreciation	5,325			4,864			4,371			4,368			4,766
Operating Income	5,594			6,608			5,392			6,515			4,908

(1)The currency translation is based on an exchange rate of 1 British pound 1.82 U.S. dollars, which is an average monthly exchange rate provided by www.oanda.com for the last twelve months ending December 31, 2005.

Sanderson

Overview

Opened in 2000, Sanderson has 150 guestrooms and suites, 9 with private courtyards, and 19 penthouse and apartment suites each 2,440 square feet with its own private elevator. The hotel is located in London’s Soho district, within walking distance of Trafalgar Square, Leicester Square and the West End business district. Sanderson’s structure is considered a model of 1960s British architecture and the hotel has been designated as a landmark building. Designed by Philippe Starck, the guestrooms do not have interior walls (the dressing room and bathroom are encased in a glass box that is wrapped in layers of sheer curtains). Dining and bar offerings include Spoon restaurant, Long Bar, the Purple Bar, Courtyard Garden, the Billiard Room, and Agua Bathhouse Spa. Like the Light Bar at St. Martins Lane, the Long Bar is an extremely popular destination that attracts a high-profile celebrity clientele and generates significant media coverage.

Property highlights include:

Location	·  50 Berners Street, London, UK
Guest Rooms	·  150, including 19 suites
Food and Beverage	·  Spoon Restaurant with seating for 135
	·  Long Bar with capacity for 290
	·  Purple Bar with capacity for 30
Meeting Space	·  Multi-service facilities, consisting of one executive boardroom and two suites with total capacity for 170

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Other Amenities	·  Courtyard Garden
	·  Indoor/Outdoor Lobby
	·  Billiard Room
	·  Agua Bathhouse Spa
	·  24-hour concierge service
	·  24-hour business center
	·  24-hour fitness center

We operate Sanderson through Morgans Hotel Group Europe Limited, a 50/50 joint venture with Burford Hotels Limited. See “Related Party Transactions” for a description of the joint venture. Through Morgans Hotel Group Europe Limited, we operate Sanderson under a 150-year lease. The terms of the lease provide for an annual rent, which is subject to reset on specified review dates based on changes in the index of retail prices. Under the lease, our failure to perform or observe our covenants and obligations, including our failure to pay rent for a specified period, will constitute a default.

Selected Financial and Operating Information

The following table shows selected financial and operating information for Sanderson:

	Year Ended December 31,
	2005			2004			2003			2002			2001
Selected Operating Information:
Occupancy	69.6		%	73.0		%	65.5		%	64.6		%	58.0		%
ADR(2)	$	438		$	411		$	404		$	411		$	458
RevPAR(2)	$	305		$	300		$	265		$	266		$	266
Selected Financial Information (in thousands):(1)
Room Revenue	$	16,400		$	16,342		$	14,385		$	14,438		$	14,454
Total Revenue	33,366			34,096			31,494			31,714			33,521
Depreciation	5,587			5,370			4,552			4,749			4,312
Operating Income (Loss)	957			2,684			2,907			1,042			3,845

(1)The currency translation is based on an exchange rate of 1 British pound = 1.82 U.S. dollars, which is an average monthly exchange rate provided by www.oanda.com for the last twelve months ending December 31, 2005.

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ITEM 3LEGAL PROCEEDINGS

On February 26, 2004, we received a Notice of Decision from the United Kingdom’s taxation authority, the Inland Revenue. The Notice of Decision stated that Morgans Hotel Group London Ltd., the entity that owns St. Martins Lane and Sanderson, was liable to pay national insurance contributions to the Inland Revenue in relation to discretionary service charges earned by the food and beverage employees of our London hotels. The Inland Revenue assessed its liability at £1,995,543 (approximately $3.6 million at the British pound / US Dollar exchange rate as of December 31, 2005) in respect of the period from April 6, 1999 to April 5, 2003. Morgans Hotel Group London Ltd. filed a Notice of Appeal on March 25, 2004 in which it stated that there was no statutory basis for the Inland Revenue to collect national insurance contributions from it. In addition, the Inland Revenue has determined that uniforms provided to the employees of our London hotels constituted a taxable benefit to those employees and as a result have calculated a separate liability in the amount of approximately £1.3 million (approximately $2.4 million at the British pound / US Dollar exchange rate as of December 31, 2005) in respect of the same period. Morgans Hotel Group London Ltd. is contesting the statutory basis for such liability as well as the amount calculated. We anticipate that these matters will be heard on appeal in 2006. In February 2006, Inland Revenue published new guidelines which reversed its previous position that national insurance was due on certain discretionary service charges. Based on this ruling, Morgans Hotel Group London Ltd. has submitted a settlement proposal and the Company has accrued approximately $0.4 million as an estimate for its share of a potential settlement amount. Based on the discussions with the Inland Revenue, we believe that a material unfavorable outcome is remote. If Morgans Hotel Group London Ltd. is responsible for these liabilities, it will be required to change its procedures for complying with United Kingdom wage obligations and the payments of these liabilities for the period from April 6, 1999 through the date of adopting such new procedures could have a material adverse effect on our results of operations and financial position in the quarter of the payment.

We are currently involved in litigation regarding our management of Shore Club. In 2002, we invested in Shore Club and our management company, MHG Management Company, took over management of the property. The management agreement pursuant to which we manage Shore Club expires in 2022. For the year ended December 31, 2002 (reflecting six months of data based on information provided to us and not generated by us and six months of operations after MHG Management Company took over management of Shore Club in July 2002), Shore Club had an operating loss plus depreciation of negative $3.7 million, and its owner, Philips South Beach LLC, was in dispute with its investors and lenders. Under our management of the property, the financial performance improved and Shore Club had operating income plus depreciation of $9.8 million in 2004. We believe this improvement was the direct result of our repositioning and operation of the hotel. This improved performance has continued. Operating income plus depreciation in 2005 was $10.8 million. In addition, during the fourth quarter of 2005, the debt on the hotel was refinanced. For 2004 and 2005, we had revenues of $3.3 million and $3.6 million, respectively, under the management agreement.

On January 17, 2006, Phillips South Beach LLC filed a lawsuit in New York state court against MHG Management Company. The lawsuit alleges, among other things, (i) that MHG Management Company engaged in fraudulent or willful misconduct with respect to Shore Club entitling Phillips South Beach LLC to terminate the Shore Club management agreement without the payment of a termination fee to us, (ii) breach of fiduciary duty by MHG Management Company, (iii) tortious interference with business relations by redirecting guests and events from Shore Club to Delano, (iv) misuse of free and complimentary rooms at Shore Club, and (v) misappropriation of confidential business information. The allegations include that we took actions to benefit Delano at the expense of Shore Club, billed Shore Club for expenses that had already been billed by us as part of chain expenses, misused barter agreements to obtain benefits for our employees, and failed to collect certain rent and taxes from retail tenants. The

53

lawsuit also asserts that we falsified or omitted information in monthly management reports related to the alleged actions. Messrs. Schrager, Scheetz and Hamamoto are also named as defendants in the lawsuit.

The remedies sought by Phillips South Beach LLC include (a) termination of the management agreement without the payment of a termination fee to us, (b) recovery of all previously paid management fees, (c) a full accounting of all of the affairs of Shore Club from the inception of the management agreement, (d) at least $5.0 million in compensatory damages and (e) at least $10.0 million in punitive damages and attorneys fees.

We believe that we have abided by the terms of the management agreement. We believe that Philips South Beach has filed the lawsuit as part of a strategy to pressure us to renegotiate our management agreement with Shore Club. We have retained outside counsel and intend to challenge the litigation vigorously. Although we cannot predict the outcome of this litigation, on the basis of current information, we do not expect that the outcome of this litigation will have a material adverse effect on our financial condition, results of operations or liquidity. This litigation may harm our reputation and defense of this litigation may divert management resources from the operations of our business.

On March 23, 2006, Century Operating Associates filed a lawsuit in New York state court naming several defendants, including Morgans Hotel Group LLC, our predecessor company, Morgans Hotel Group Co, W. Edward Scheetz, our president and Chief Executive Officer, and David T. Hamamoto, our chairman of the Board of Directors. The lawsuit alleges breach of contract, breach of fiduciary duty and fraudulent conveyance in connection with the Formation and Structuring Transactions that were part of our initial public offering. In particular, the lawsuit alleges that the Formation and Structuring Transactions constituted a fraudulent conveyance of the assets of Morgans Hotel Group LLC, in which Century Operating Associates has a non-voting membership interest, to Morgans Hotel Group Co. The plaintiff claims that the defendants knowingly and intentionally structured and participated in the Formation and Structuring Transactions in a manner designed to leave Morgans Hotel Group LLC without any ability to satisfy its obligations to Century Operating Associates. The Formation and Structuring Transactions are described in greater detail under “Business—Formation and Structuring Transactions” on page 3 on this annual report.

The remedies sought by Century Operating Associates include (a) Century Operating Associates’ distributive share of the initial public offering proceeds and (b) at least $17.5 million in punitive damages and attorney fees.

Morgans Hotel Group LLC (now named Residual Hotel Interest LLC) has retained outside counsel on behalf of each of the defendants, including us and Messrs. Scheetz and Hamamoto, and intends to challenge the litigation vigorously. Although we believe that these claims are without merit, we cannot predict the outcome of this litigation.

In addition, we are subject to various claims and legal proceedings arising in the normal course of business. We are not party to any other litigation or legal proceedings that, in the opinion of our management, could have a material adverse effect on our business, operating results and financial condition.

ITEM 4SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our security holders during the fourth quarter of 2005.

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PART II

ITEM 5MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock has been listed on the Nasdaq National Market under the symbol “MHGC” since our IPO in February 2006.

On March 27, 2006, the closing sale price for our common stock, as reported on the Nasdaq National Market was $18.82. As of March 27, 2006, there were 15 record holders of our common stock. This figure does not reflect the beneficial ownership of shares held in nominee name.

Dividend Policy

We have never declared or paid any cash dividends on our capital stock and we do not currently intend to pay any cash dividends on our common stock. The revolving credit facility we intend to enter into in connection with our initial public offering will contain a covenant prohibiting us from paying dividends on our common stock. We expect to retain future earnings, if any, to fund the development and growth of our business. Any future determination to pay dividends on our common stock will be, subject to applicable law, at the discretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition, capital requirements and contractual restrictions.

Equity Compensation Plan Information

The following table summarizes information, as of February 17, 2006, relating to our equity compensation plan pursuant to which grants of securities may be made from time to time.

Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights			Number of securities available for issuance under equity compensation plans (excluding securities reflected in first column)
Approved by Security Holders:
2006 Omnibus Stock Incentive Plan		1,879,600	(1)		$	20		1,620,400	(2)
Total		1,879,600	(1)		$	20		1,620,400	(2)

(1)Includes 1,017,100 options that are subject to vesting conditions and 862,500 units of membership interests in a limited liability company which are structured as profits interest, or LTIP units, in our operating company which are also subject to vesting conditions. Conditioned on minimum allocation to the capital accounts of the LTIP unit for federal income tax purposes, each LTIP unit may be converted, at the election of the holder, into one membership unit, which represents an ownership of interest in our operating company, or Membership Units. Each of the Membership Units underlying these LTIP units are redeemable at the election of the Membership Unit holder for (i) cash equal to the then fair market value of one share of our common stock, or (ii) at the option of the Company in its capacity as managing member of our operating company, one share of our common stock.

(2)Of these shares, 99,500 shares may be issued pursuant to outstanding RSUs, all of which are subject to vesting conditions.

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ITEM 6SELECTED FINANCIAL INFORMATION

You should read the following selected historical financial and operating data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and the accompanying notes included elsewhere in this prospectus.

The following table contains selected combined historical financial data derived from our Company’s predecessor audited combined financial statements for the years ended December 31, 2005, 2004, 2003 and 2002, and from our Company’s unaudited combined financial statements for the year ended December 31, 2001. The historical results do not necessarily indicate results expected for any future period.

	Year Ended December 31,
	2005			2004			2003			2002			2001
	(in thousands, except operating data)
Statement of Operations Data:
Total hotel revenues	$	250,870		$	225,567		$	204,187		$	200,849		$	193,081
Total revenues	260,349			234,398			210,643			204,925			198,168
Total hotel operating costs	163,183			153,961			143,522			142,136			134,063
Corporate expenses	17,982			15,375			13,994			9,530			11,012
Depreciation and amortization	26,215			27,348			28,503			28,256			25,351
Total operating costs and expenses	207,380			196,684			186,019			179,922			170,425
Operating income	52,969			37,714			24,624			25,003			27,743
Interest expense, net	72,257			67,173			57,293			42,248			45,106
Net (loss)	(30,216		)	(31,595		)	(42,471		)	(23,845		)	(27,179		)
Other Financial Data:
EBITDA(1)	$	85,655		$	76,591		$	55,172		$	57,185		$	52,790
Adjusted EBITDA(2)	79,452			67,994			54,586			57,828			65,068
Adjusted debt(3)	685,494			577,583			585,983			582,437			565,988
Capital expenditures	5,603			5,236			4,250			9,854			42,345
Number of rooms available	2,541			2,539			2,539			2,539			2,232
Selected Operating Data:(4)
Occupancy %	76.9		%	73.7		%	68.0		%	62.2		%	66.0		%
Average daily rate (ADR)	$	301.60		$	277.42		$	252.00		$	249.50		$	258.90
Revenue per Available Room (RevPAR)	$	231.80		$	204.53		$	171.26		$	155.23		$	170.88
Cash Flow Data:
Net cash provided by (used in):
Operating activities	$	19,870		$	(22,820	)	$	7,050		$	(528	)	$	16,750
Investing activities	(20,251		)	(12,630		)	(9,065		)	(15,410		)	(41,672		)
Financing activities	9,301			44,637			3,659			12,962			11,060

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	As of December 31,
	2005			2004		2003			2002		2001
	(in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	21,835		$	12,915	$	3,728		$	2,083	$	5,058
Restricted cash	32,754			19,269		14,979			11,892		12,037
Property and equipment, net	426,927			446,811		468,676			492,804		507,883
Total assets	606,275			612,683		616,722			629,102		640,405
Mortgage notes payable	577,968			473,000		541,043			543,631		546,854
Financing and capital lease obligations	81,664			77,951		6,849			6,236		3,999
Long term debt and capital lease obligations	659,632			550,951		547,892			549,867		550,853
Total stockholders’ equity (deficit)	(110,573		)	4,165		(17,422		)	15,014		25,207

(1)We believe that earnings before interest, income taxes, depreciation and amortization (EBITDA) is a useful financial metric to assess our operating performance before the impact of investing and financing transactions and income taxes. It also facilitates comparison between us and our competitors. Given the significant investments that we have made in the past in property, plant and equipment, depreciation and amortization expense comprises a meaningful portion of our cost structure. We believe that EBITDA will provide investors with useful tool for assessing the comparability between periods because it eliminates depreciation and amortization expense attributable to capital expenditures.

The use of EBITDA and Adjusted EBITDA has certain limitations. Our presentation of EBITDA and Adjusted EBITDA may be different from the presentation used by other companies and therefore comparability may be limited. Depreciation expense for various long-term assets, interest expense, income taxes and other items have been and will be incurred and are not reflected in the presentation of EBITDA or Adjusted EBITDA. Each of these items should also be considered in the overall evaluation of our results. Additionally, EBITDA and Adjusted EBITDA do not consider capital expenditures and other investing activities and should not be considered as a measure of our liquidity. We compensate for these limitations by providing the relevant disclosure of our depreciation, interest and income tax expense, capital expenditures and other items both in our reconciliations to the GAAP financial measures and in our consolidated financial statements, all of which should be considered when evaluating our performance. The term EBITDA is not defined under accounting principles generally accepted in the United States, or U.S. GAAP, and EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP. In addition, EBITDA is impacted by reorganization of businesses and other restructuring-related charges. When assessing our operating performance, you should not consider this data in isolation, or as a substitute for, our net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, our EBITDA may not be comparable to EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate EBITDA in the same manner as we do. A reconciliation of net income (loss), the most directly comparable U.S. GAAP measure, to EBITDA and Adjusted EBITDA for each of the respective periods indicated is as follows:

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	Year Ended December 31,
	2005			2004			2003			2002			2001
	(in thousands)
Net (loss)	$	(30,216	)	$	(31,595	)	$	(42,471	)	$	(23,845	)	$	(27,179	)
Interest expense, net	72,257			67,173			57,293			42,248			45,106
Income tax expense	822			827			652			576			645
Depreciation and amortization expense	26,215			27,348			28,503			28,256			25,351
Proportionate share of interest expense from unconsolidated joint ventures	10,669			7,694			7,080			6,408			5,479
Proportionate share of depreciation expense from unconsolidated joint ventures	6,390			5,754			4,707			4,190			3,771
Proportionate share of depreciation expense of minority interests in consolidated joint ventures	(482		)	(610		)	(592		)	(648		)	(383		)
EBITDA	$	85,655		$	76,591		$	55,172		$	57,185		$	52,790
Other non-operating expense (income)	(1,574		)	(5,482		)	2,077			(534		)	2,969
Less: EBITDA from leased hotels	(4,629		)	(3,115		)	(2,663		)	1,177			9,309
Adjusted EBITDA	$	79,452		$	67,994		$	54,586		$	57,828		$	65,068

(2)We disclose Adjusted EBITDA because we believe it provides a meaningful comparison to our EBITDA as it excludes other non-operating (income) expenses that do not relate to the on-going performance of our assets and excludes the operating performance of assets in which we do not have a fee simple ownership interest.

We exclude from Adjusted EBITDA the following:

·other non-operating (income) expenses such as gains and losses on dispositions and asset restructurings, costs of abandoned development projects and financings, gains and losses on early extinguishment of debt and other items that relate to the financing and investing activities of our assets and do not relate to the on-going operating performance of our assets.

·the EBITDA related to leased hotels to more accurately reflect the operating performance of assets in which we have a fee simple ownership interest.

(3)We disclose Adjusted Debt because we believe it provides a more meaningful comparison to our Adjusted EBITDA and is a useful tool to assess the value of our company.

We exclude from Adjusted Debt the following:

·the capitalized lease obligation related to Clift, which is operated pursuant to a non-recourse leasehold interest, to more accurately reflect the debt of assets in which the Company has a fee simple ownership interest or a proportionate share of a fee simple ownership interest and to conform to our Adjusted EBITDA presentation.

The lease became effective in October 2004. For comparability purposes, we have excluded the debt associated with the hotel for all periods presented.

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We include in Adjusted Debt the following:

·our proportionate share of debt of unconsolidated joint ventures which are accounted for under the equity method of accounting and therefore excluded from Total debt.

We believe this more accurately reflects the debt associated with the assets in which we have a fee simple ownership interest or a proportionate share of a fee simple ownership interest. A reconciliation of Adjusted Debt to Total debt is set forth below.

	As of December 31,
	2005			2004			2003			2002			2001
	(in thousands)
Total debt	$	659,632		$	550,951		$	547,892		$	549,867		$	550,853
Clift Debt	(75,140		)	(71,255		)	(57,000		)	(57,000		)	(60,000		)
Proportionate share of debt of unconsolidated joint ventures	101,002			97,887			95,091			89,570			75,135
Adjusted debt	$	685,494		$	577,583		$	585,983		$	582,437		$	565,988

(4)Includes information for the six consolidated and three unconsolidated hotels.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “Selected Historical Financial and Operating Data” and our combined financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including but not limited to, those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

We are a fully integrated hospitality company that operates, owns, acquires and redevelops boutique hotels in gateway cities and select resort markets in the United States and Europe. We are widely credited with establishing and defining the rapidly expanding boutique hotel sector. Over our 21-year history, we have gained experience operating in a variety of market conditions. We own or partially own and manage a portfolio of nine luxury hotel properties in New York, Miami, Los Angeles, San Francisco and London comprising over 2,500 rooms. Each of our owned hotels was acquired and renovated by the Morgans Group and was designed by a world-renowned designer.

Unlike traditional brand-managed or franchised hotels, boutique hotels provide their guests with what we believe is a distinctive lodging experience. Each of our hotels has a personality specifically tailored to reflect the local market environment and features modern, sophisticated design that includes critically acclaimed public spaces; popular “destination” bars and restaurants; and highly personalized service. Significant media attention has been devoted to our hotels which we believe is as a result of their distinctive nature, renowned design, dynamic and exciting atmosphere, celebrity guests and high-profile events. We believe that the Morgans Group brand, and each of our individual property brands are synonymous with style, innovation and service. We believe this combination of lodging and social experiences, and association with our brands, increases our occupancy levels and pricing power.

In addition to our current portfolio, we expect to operate, own, acquire, redevelop and develop new hotel properties that are consistent with our portfolio in major metropolitan cities and select resort markets in the United States, Europe and elsewhere.

We were incorporated as a Delaware corporation in October 2005 to acquire, own, and manage boutique hotels in the United States, Europe and elsewhere. As of December 31, 2005, on a pro forma basis giving effect to the Formation and Structuring Transactions described above, we owned:

·six hotels in New York, Miami, Los Angeles and San Francisco, comprising approximately 1,900 rooms (the “Owned Hotels”);

·a 50% interest in two hotels in London comprising approximately 350 rooms and a 7% interest in the 300-room Shore Club in Miami, all of which we also manage (the “Joint Venture Hotels”).

We conduct our operations through our operating company, Morgans Group LLC, which holds all of our assets. We are the managing member of Morgans Group LLC and will hold approximately 97.1% of its membership units upon completion of our initial public offering. We manage all aspects of Morgans Group LLC including the operation, investment and sale and purchase of hotels and the financing of Morgans Group LLC.

The historical financial data presented herein is the historical financial data for:

·our Owned Hotels;

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·our Joint Venture Hotels;

·our management company subsidiary, MHG Management Company; and

·the rights and obligations of Morgans Hotel Group LLC contributed to Morgans Group LLC in the Formation and Structuring Transactions described above.

See “Formation and Structuring Transactions”.

We consolidate the results of operations for all of our Owned Hotels. Certain food and beverage operations at five of our Owned Hotels are operated under 50/50 joint ventures with restaurateur Jeffrey Chodorow. We believe that we are the primary beneficiary of the entities because we absorb the majority of any restaurant ventures’ expected losses or residual returns. Therefore, these restaurant ventures are consolidated in our financial statements with our partner’s share of the results of operations recorded as minority interest in the accompanying financial statements. This minority interest is based upon 50% of the income of the venture after giving effect to rent and other administrative charges payable to the hotel.

We own partial interests in the Joint Venture Hotels and certain food and beverage operations at two of the Joint Venture Hotels. We account for these investments using the equity method as we believe we do not exercise control over significant asset decisions such as buying, selling or financing nor are we the primary beneficiary of the entities. Under the equity method, we increase our investment in unconsolidated joint ventures for our proportionate share of net income and contributions and decrease our investment balance for our proportionate share of net losses and distributions. We operate Joint Venture Hotels under management agreements which expire as follows:

·Sanderson—April 2010 (with two ten year extensions at our option)

·St. Martins Lane—September 2009 (with two ten year extensions at our option)

·Shore Club—July 2022

We generated net losses for the years ended December 31, 2005, 2004 and 2003 primarily due to our interest expense exceeding our operating income. Revenues increased by $26.0 million in 2005 compared to 2004 and by $23.8 million in 2004 compared to 2003. Despite these revenue increases, we continued to generate net losses principally due to increased interest expense. Interest expense increased by $5.1 million in 2005 compared to 2004 primarily due to the write-off of deferred financing costs due to the refinancing of the debt on our five jointly financed U.S. hotel properties, prepayment fees from the June 2005 refinancing of the debt on those 5 hotels and increased interest expense on mortgage debt due to additional mortgage debt on those 5 hotels. Interest expense increased by $9.9 million in 2004 compared to 2003 due to the write-off of deferred financing costs, extension fees, exit fees and other fees related to the refinancing of debt in 2004. With the refinancing of our debt on our five jointly financed U.S. hotel properties in June 2005 and after giving effect to the Formation and Structuring Transactions, we anticipate a reduction in our interest expense in 2006.

Factors Affecting Our Results of Operations

Revenues.   Changes in our revenues are most easily explained by three performance indicators that are commonly used in the hospitality industry:

·occupancy,

·average daily rate, or ADR, and

·revenue per available room, or RevPAR, which is the product of ADR and average daily occupancy; but, however, does not include food and beverage revenue, other hotel operating revenue such as telephone, parking and other guest services, or management fee revenue.

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Substantially all of our revenue is derived from the operation of our hotels. Specifically, our revenue consists of:

·Rooms revenue. Occupancy and ADR are the major drivers of rooms revenue.

·Food and beverage revenue. Most of our food and beverage revenue is earned by our 50/50 joint ventures and is driven by occupancy of our hotels and the popularity of our bars and restaurants with our local customers.

·Other hotel revenue, which consists of ancillary revenue such as telephone, parking, spa, entertainment and other guest services, are principally driven by hotel occupancy.

·Management fee—related parties revenue. We earn fees under our management agreements that total 4.5% of Shore Club’s total revenues and 4% of the total revenues for our two London properties. In addition, we are reimbursed for allocated chain services, which include certain overhead costs for the hotels that we manage and which are currently recovered at approximately 2.5% of revenues of the hotels we manage.

Fluctuations in revenues, which tend to correlate with changes in gross domestic product, are driven largely by general economic and local market conditions but can also be impacted by major events, such as terrorist attacks or natural disasters, which in turn affect levels of business and leisure travel.

The seasonal nature of the hospitality business can also impact revenues. We experience some seasonality in our business; our Miami hotels are generally strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth quarter.

In addition to economic conditions, supply is another important factor that can affect revenues. Room rates and occupancy tend to fall when supply increases unless the supply growth is offset by an equal or greater increase in demand. One reason why we focus on boutique hotels in key gateway cities is because these markets have significant barriers to entry for new competitive supply, including scarcity of available land for new development and extensive regulatory requirements resulting in a longer development lead time and additional expense for new competitors. A recent trend among hotel owners is the conversion of hotel rooms to condominium apartments which further reduces the available supply of hotel rooms resulting in increased demand for the remaining hotels.

Finally, competition within the hospitality industry can affect revenues. Competitive factors in the hospitality industry include name recognition, quality of service, convenience of location, quality of the property, pricing, and range and quality of food services and amenities offered. In addition, all of our hotels, restaurants and bars are located in areas where there are numerous competitors, many of whom have substantially greater resources than us. New or existing competitors could offer significantly lower rates or more convenient locations, services or amenities or significantly expand, improve or introduce new service offerings in markets in which our hotels compete, thereby posing a greater competitive threat than at present. If we are unable to compete effectively, we would lose market share, which could adversely affect our revenues.

Operating Costs and Expenses.   Our operating costs and expenses consist of the costs to provide hotel services, including:

·Rooms expense. Rooms expense includes the payroll and benefits for the front office, housekeeping, concierge and reservations departments and related expenses, such as laundry, rooms supplies, travel agents commission and reservation expense. Like rooms revenue, occupancy is a major driver of rooms expense, which has a significant correlation with rooms revenue.

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·Food and beverage expense. Similar to food and beverage revenue, occupancy of our hotels and the popularity of our restaurants and bars are the major drivers of food and beverage expense, which has a significant correlation with food and beverage revenue.

·Other departmental expense. Occupancy is the major driver of other departmental expense, which includes telephone and other expenses related to the generation of other hotel revenue.

·Hotel selling, general and administrative expense consist of administrative and general expenses, such as payroll and related costs, travel expenses and office rent, advertising and promotion expenses, comprising the payroll of the hotel sales teams, the global sales team and advertising, marketing and promotion expenses for our hotel properties, utility expense and repairs and maintenance expenses comprising the ongoing costs to repair and maintain our hotel properties.

·Property taxes, insurance and other consist primarily of insurance costs and property taxes.

·Corporate expenses consist of the cost of our corporate office, net of any cost recoveries, which consists primarily of payroll and related costs, office rent and legal and professional fees. They also include an allocation of the cost of Morgans Hotel Group LLC.

·Depreciation and amortization expense. Hotel properties are depreciated using the straight-line method over estimated useful lives of 39.5 years for buildings and five years for furniture, fixtures and equipment.

Other Items

·Interest expense, net. Includes interest on our debt and amortization of financing costs and is reduced by interest income.

·Equity in loss of unconsolidated joint ventures. Equity in loss of unconsolidated joint ventures constitutes our share of the net profits and losses of our U.K. hotel joint venture, our U.K. food and beverage joint venture (both of which are 50% owned by us) and Shore Club (in which we have a 7% ownership interest).

·Minority interest. Minority interest expense constitutes the third-party food and beverage joint venture partner’s interest in the profits of the restaurant ventures at certain of our hotels.

·Other non-operating (income) expenses include gains and losses on sale of assets and asset restructurings, costs of abandoned development projects and financings, gain on early extinguishment of debt and other items that do not relate to the ongoing operating performance of our assets.

·Income tax expense. The United States entities included in our predecessor’s combined financial statements are either partnerships or limited liability companies, which are treated similarly to partnerships for tax reporting purposes. Accordingly, Federal and state income taxes have not been provided for in the accompanying combined financial statements as the partners or members are responsible for reporting their allocable share of our predecessor’s income, gains, deductions, losses and credits on their individual income tax returns. One of our foreign subsidiaries is subject to U.K. corporate income taxes. Income tax expense is reported at the applicable rate for the periods presented. Certain of our predecessor’s subsidiaries are subject to the New York City Unincorporated Business Tax (“UBT”). Income tax expense in our predecessor’s financial statements comprises the income taxes paid in the U.K. on the management fees earned by our wholly-owned U.K. subsidiary.

Most categories of variable operating expenses, such as operating supplies and certain labor such as housekeeping, fluctuate with changes in occupancy. Increases in RevPAR attributable to increases in

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occupancy are accompanied by increases in most categories of variable operating costs and expenses. Increases in RevPAR attributable to improvements in ADR typically only result in increases in limited categories of operating costs and expenses, primarily credit card and travel agent commissions. Thus, improvements in ADR have a more significant impact on improving our operating margins than occupancy.

Notwithstanding our efforts to reduce variable costs, there are limits to how much we can accomplish because we have significant fixed costs, such as depreciation and amortization, labor costs and employee benefits, insurance and other expenses associated with owning hotels that do not necessarily decrease when circumstances such as market factors cause a reduction in our hotel revenues.

Recent Trends and Events

Recent Trends.   The U.S. hospitality industry is undergoing a strong recovery from the severe downturn that started in 2001, which was precipitated by the recession of the U.S. economy and was exacerbated by the dramatic decline in travel following the terrorist acts of September 11, 2001. Highlighting the severity of the downturn, year-over-year ADR declined for three consecutive years (2001 - 2003) for the first time since the Great Depression. The decline in ADR in 2003, however, was marginal as industry fundamentals stabilized. In most of the markets in which we own and operate hotels, the recovery commenced in the fourth quarter of 2003 and strengthened in 2004.

The U.S. hospitality industry has continued to recover in 2005, with particularly strong growth in New York City. We believe that, in general, current industry fundamentals are similar to those observed following the last industry downturn, which occurred in the early 1990s. That downturn, which also resulted from a recession in the general economy, was followed by several years of RevPAR growth. We believe that given the current industry relationship between supply and demand and the improving health of the U.S. economy, occupancy and ADR will continue the improvement that began in the fourth quarter of 2003, and that U.S. hospitality RevPAR will follow the business cycle on its upward swing, although there can be no assurances that such improvements will occur.

The London hospitality market has experienced slower growth in 2005 due in part to the strength of the British pound against the U.S. dollar and most recently to the terrorist attacks of July 7 and July 21, 2005.

Recent Events.   In addition to the recent trends described above, we expect that the following events will cause our future results of operations to differ from our historical performance.

Formation and Structuring Transactions.   The following items associated with the consummation of the Formation and Structuring Transactions described above under “Business—Formation and Structuring Transactions” and our initial public offering will affect our future results of operations:

·as a result of the refinancing of existing debt obligations, interest expense will decline. Assuming we had $285.0 million of mortgage debt, our new $80.0 million term loan and $82.1 million of financing and capital lease obligations (the amounts we expect to have outstanding after giving effect to our initial public offering and the use of proceeds therefrom) outstanding during such periods, based on the actual interest rates applicable during such periods, our interest expense would have been $29.6 million and $28.8 million for the years ended December 31, 2005 and 2004, as compared to the $71.6 million and $67.2 million of interest expense actually incurred during the respective periods;

·as a result of stock-based compensation issued in connection with our initial public offering, we will begin recording stock-based compensation expense of approximately $7.0 million per year over the 3-year vesting period of the related awards;

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·we will be subject to New York State and New York City real property transfer taxes as a result of sales of our shares by the current owners of our predecessor; and

·we will be subject to income taxes.

Development of Delano Las Vegas and Mondrian Las Vegas, purchase of James Hotel Scottsdale and extension of Delano.   The results of Delano Las Vegas and Mondrian Las Vegas will be included in equity in income (loss) of unconsolidated joint ventures, the acquisition of the James Hotel Scottsdale and the extension of Delano are expected to increase revenues and operating costs.

Operating Results

Comparison of Year Ended December 31, 2005 To Year Ended December 31, 2004

The following table presents our operating results for the year ended December 31, 2005 and the year ended December 31, 2004, including the amount and percentage change in these results between the two periods.

	2005			2004			Change ($)				Change (%)
	(in thousands)
Revenues:
Rooms	$	153,675		$	131,367			$	22,308			17.0	%
Food and beverage	85,573			82,475				3,098				3.8	%
Other hotel	11,622			11,725				(103		)		(1	)
Total hotel revenues	250,870			225,567				25,303				11.2	%
Management fee—related parties	9,479			8,831				648				7.3	%
Total revenues	$	260,349		$	234,398			$	25,951			11.1	%
Operating Costs and Expenses:
Rooms	39,666			37,070				2,596				7.0	%
Food and beverage	54,294			51,876				2,418				4.7	%
Other departmental	4,546			3,452				1,094				31.7	%
Hotel selling, general and administrative	51,346			48,944				2,402				4.9	%
Property taxes, insurance and other	13,331			12,619				712				5.6	%
Total hotel operating expenses	163,183			153,961				9,222				6.0	%
Corporate expenses	17,982			15,375				2,607				17.0	%
Depreciation and amortization	26,215			27,348				(1,133		)		(4.1	)%
Total operating costs and expenses	207,380			196,684				10,696				5.4	%
Operating income	52,969			37,714				15,255				40.4	%
Interest expense, net	72,257			67,173				5,084				7.6	%
Equity in loss of unconsolidated joint ventures	7,593			2,958				4,635				156.7	%
Minority interest	4,087			3,833				254				6.6	%
Other non-operating (income) expenses	(1,574		)	(5,482		)		3,908				(71.3	)%
Loss before income tax expense	(29,394		)	(30,768		)		1,374				4.5	%
Income tax expense	822			827				(5		)		(1	)
Net loss	(30,216		)	(31,595		)		1,379				4.4	%
Other comprehensive income:
Foreign currency translation (loss) gain	(705		)	202				(907		)		(1	)
Comprehensive loss	$	(30,921	)	$	(31,393	)		$	472			1.5	%

(1)Not meaningful.

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Total Hotel Revenues.   Total hotel revenues increased 11.2% to $250.9 million in 2005 compared to $225.6 million in 2004. RevPAR from our Owned Hotels increased 17.3% to $224 in 2005 compared to $191 in 2004. The components of RevPAR from our Owned Hotels in 2005 and 2004 are summarized as follows:

	2005			2004			Change ($)			Change (%)
Occupancy	80.0		%	75.7		%		—			5.7	%
ADR	$	280		$	253			$	27		11.0	%
RevPAR	$	224		$	191			$	33		17.3	%

Rooms revenue increased 17.0% to $153.7 million in 2005 compared to $131.4 million in 2004, which is directly attributable to the increase in occupancy and ADR shown above. This growth was driven by our three New York City properties, each of which experienced RevPAR growth exceeding 20% in 2005 compared to 2004. In late 2003 and into 2004, the hotel industry in New York City began undergoing a robust recovery from the downturn that followed the recession of 2001 and the terrorist attacks of September 11, 2001.

Food and beverage revenue increased 3.8% to $85.6 million in 2005 compared to $82.5 million in 2004, driven in part by the increase in hotel occupancy. Since our restaurants and bars are destinations in their own right, with a local customer base in addition to hotel guests, their revenue performance is driven by local market factors in the restaurant and bar business in addition to hotel occupancy. The strongest food and beverage revenue growth was achieved at Delano and Mondrian, which achieved growth of 5.7% and 5.3%, respectively.

Other hotel revenue decreased by 1.0% to $11.6 million in 2005 as compared to $11.7 million in 2004, due to the continued decline of telephone revenues, which is an industry-wide phenomenon primarily caused by the increased use of cell phones. Telephone revenues decreased by $0.7 million from $4.1 million in 2004 to $3.4 million in 2005.

Management Fee—Related Parties.   During 2005 and 2004, management fee—related parties comprised continuing fee income from our contracts to manage our Joint Venture Hotels. Additionally, from November 2003 until its termination in June 2005, management fee revenue also included fees earned on the management contract with the Gramercy Park Hotel. Management fee—related parties increased 7.3% to $9.5 million in 2005 compared to $8.8 million in 2004, due primarily to the increase in hotel revenues.

Operating Costs and Expenses

Rooms expense increased 7.0% to $39.7 million in 2005 compared to $37.1 million in 2004. In particular, this increase took place in the three New York hotels, which experienced the largest increases in occupancies and rooms revenue. Increased occupancies caused increased variable labor costs in housekeeping, bell staff and the front office. The increased occupancy also causes increases in other expenses, such as room supplies and laundry. Increased revenues also result in increased travel agents commission, which is a component of rooms expenses and is a fixed percentage of commissionable revenue.

Food and beverage expense increased 4.7% to $54.3 million in 2005 compared to $51.9 million in 2004. The 4.7% increase in food and beverage expenses from 2004 to 2005 was slightly greater than the 3.8% growth in food and beverage revenues from 2004 to 2005. The increase is primarily due to the phase-in of

66

union pay and benefit rates at Hudson, where food and beverage expenses increased by 7.9% from 2004 to 2005, while revenues only increased by 4.3% from 2004 to 2005.

Other departmental expense increased 31.7 % to $4.5 million in 2005 compared to $3.5 million in 2004, primarily due to a change in the Delano valet parking contract. In May 2005, Delano changed its valet parking contract and now recognizes gross revenues and expenses from the valet parking operation. Prior to the change, Delano only recognized the fee it received from the valet parking operator.

Hotel selling, general and administrative expense increased 4.9% to $51.3 million in 2005 compared to $48.9 million in 2004. Of this $2.4 million increase, $1.2 million was attributable to increased electric and gas costs which are a result of increased utility costs, a trend seen throughout the industry in our hotel markets. An addition $.6 million increase was attributable to increased credit card commissions, which is directly related to the increase in revenues.

Property taxes, insurance and other expense increased 5.6% to $13.3 million in 2005 compared to $12.6 million in 2004, due to increases in insurance premiums and increases in management fees related to our joint venture partner for restaurant and bar operations. These fees are based on revenue.

Corporate expenses increased 17.0% to $18.0 million in 2005 compared to $15.4 million in 2004. This increase is primarily due to an increase in incentive bonus payments in 2005 of $1.2 million, due to the recovery in the business which resulted in bonus targets being achieved to a greater extent than they were in 2004 and inflationary increases.

Depreciation and amortization decreased 4.1% to $26.2 million in 2005 compared to $27.3 million in 2004. Some of our assets, including furniture, fixtures and equipment, are depreciated over five years, and a portion of these assets became fully depreciated during 2005 and 2004.

Interest Expense, net.   Interest expense, net increased 7.6% to $72.3 million in 2005 compared to $67.2 million in 2004. The $5.1 million increase in interest expense, net was due to:

·increased amortization of deferred financing costs of $9.8 million due to the refinancing of the debt on our five jointly financed U.S. hotel properties (Morgans, Royalton, Hudson, Delano and Mondrian) on June 29, 2005, which required all deferred financing costs related to the old debt to be written off and charged to interest expense, net;

·prepayment fees of $10.3 million resulting from the June 29, 2005 refinancing; and

·increased interest expense on mortgage and other debt of $9.4 million due to additional mortgage debt on our five jointly financed U.S. hotels, the proceeds of which were used to pay off more expensive mezzanine debt in the August 2004 refinancing.

Partly offsetting the above increases in interest expense, net was:

·reduced mezzanine debt interest expense (excluding amortization of deferred financing costs and prepayment fees) of $21.1 million due to the repayment in full during 2004 of a $100.0 million loan and $55.0 million mezzanine debt on Hudson.

The components of “Interest expense, net” in 2005 are summarized as follows:

·mortgage debt ($37.5 million);

·mezzanine debt ($12.1 million);

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·other debt ($11.0 million);

·amortization of financing costs ($15.5 million); offset by

·interest income ($0.8 million).

The mortgage and mezzanine debt categories include prepayment/exit fees incurred in June 2005, when the existing debt on the five jointly financed U.S hotel properties was re-financed.

The weighted average interest rates in 2005 and 2004 were 10% and 11%, respectively.

Equity in loss of unconsolidated joint ventures increased 156.7% to $7.6 million in 2005 compared to $3.0 million in 2004, due primarily to the loss of revenues and profits, as a result of the terrorist attacks in London which occurred in August 2005 and approximately $2.2 million for the writeoff of deferred financings costs and interest rate protection termination in connection with the refinancing of debt in November 2005. Furthermore, we recognize an increase of $0.4 million for our share in our U.K. joint venture’s tax contingency potential settlement (discussed further in Note 7 to the financial statements).

The components of RevPAR from the Joint Venture Hotels for 2005and 2004 are summarized as follows:

	2005			2004			Change ($)			Change (%)
Occupancy	68.0		%	68.3		%		—			(0.4	)%
ADR	$	374		$	354			$	20		5.7	%
RevPAR	$	255		$	242			$	13		5.3	%

Other non-operating income in 2005 decreased by $3.9 million to $1.6 million in 2005 compared to $5.5 million in 2004. The decrease is due to non-recurring gains recognized in 2004 which were not recognized in 2005. Other non-operating income recognized only in 2004 was a $4.0 million discount on the repayment of $100.0 million of corporate debt and $2.2 million of a gain on the purchase at a discount of certain creditor claims in connection with the Clift bankruptcy partially offset by impairment charges related to food and beverage operations at Royalton and certain equipment at Hudson. The other non-operating income in 2005 relates to $1.7 million of a gain on the sale of tax credits, which was also a gain in 2004.

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Comparison of Year Ended December 31, 2004 To Year Ended December 31, 2003

The following table presents our operating results for the year ended December 31, 2004 and the year ended December 31, 2003, including the amount and percentage change in these results between the two periods.

	2004			2003			Change ($)				Change (%)
	(in thousands)
Revenues:
Rooms	$	131,367		$	112,257			$	19,110			17.0	%
Food and beverage	82,475			78,900				3,575				4.5	%
Other hotel	11,725			13,030				(1,305		)		(10.0	)%
Total hotel revenues	225,567			204,187				21,380				10.5	%
Management fee—related parties	8,831			6,456				2,375				36.8	%
Total revenues	$	234,398		$	210.643			$	23,755			11.3	%
Operating Costs and Expenses:
Rooms	37,070			33,520				3,550				10.6	%
Food and beverage	51,876			48,252				3,624				7.5	%
Other departmental	3,452			4,341				(889		)		(20.5	)%
Hotel selling, general and administrative	48,944			44,430				4,514				10.2	%
Property taxes, insurance and other	12,619			12,979				(360		)		(2.8	)%
Total hotel operating expenses	153,961			143,522				10,439				7.3	%
Corporate expenses	15,375			13,994				1,381				9.9	%
Depreciation and amortization	27,348			28,503				(1,155		)		(4.1	)%
Total operating costs and expenses	196,684			186,019				10,665				5.7	%
Operating income	37,714			24,624				13,090				53.2	%
Interest expense, net	67,173			57,293				9,880				17.2	%
Equity in loss of unconsolidated joint ventures	2,958			3,727				(769		)		(20.6	)%
Minority interest	3,833			3,346				487				14.6	%
Other non-operating (income) expenses	(5,482		)	2,077				(7,559		)			(1)
Loss before income tax expense	(30,768		)	(41,819		)		11,051				(26.4	)%
Income tax expense	827			652				175				(26.8	)%
Net loss	(31,595		)	(42,471		)		10,876				25.6	%
Other comprehensive income:
Foreign currency translation (loss) gain	202			946				(744		)			(1)
Comprehensive loss	$	(31,393	)	$	(41,525	)		$	10,132			(24.4	)%

(1)Not meaningful.

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Total Hotel Revenues.   Total hotel revenues increased 10.5% to $225.6 million in 2004 compared to $204.2 million in 2003. RevPAR from our Owned Hotels increased 16.7% to $191 in 2004 compared to $164 in 2003. The components of RevPAR from our Owned Hotels in 2004 and 2003 are summarized as follows:

	2004			2003			Change ($)			Change (%)
Occupancy	75.7		%	70.4		%		—			7.5	%
ADR	$	253		$	233			$	20		8.5	%
RevPAR	$	191		$	164			$	27		16.7	%

Rooms revenue increased 17.0% to $131.4 million in 2004 compared to $112.3 million in 2003, which is directly attributable to the increase in occupancy and ADR shown above. This growth was driven by our three New York City properties, each of which experienced RevPAR growth exceeding 20% in 2004 compared to 2003. In late 2003, the hotel industry in New York City began undergoing a robust recovery from the downturn that followed the recession of 2001 and the terrorist attacks of September 11, 2001.

Food and beverage revenue increased 4.5% to $82.5 million in 2004 compared to $78.9 million in 2003, driven in part by the increase in hotel occupancy. Since our restaurants and bars are destinations in their own right, with a local customer base in addition to hotel guests, their revenue performance is driven by local market factors in the restaurant and bar business in addition to hotel occupancy. Despite strong occupancy growth at our three New York hotels, Hudson achieved food and beverage revenue growth of 2.3% in 2004 compared to 2003, whereas Royalton and Morgans experienced food and beverage revenue declines of 3.3% and 0.2%, respectively, due to competition from other New York restaurants. The strongest food and beverage revenue growth was achieved at Delano and Mondrian, which achieved growth of 6.2% and 13.2%, respectively.

Other hotel revenue decreased by 10.0% to $11.7 million in 2004 as compared to $13.0 million in 2003, due to the continued decline of telephone revenues, which is an industry-wide phenomenon primarily caused by the increased use of cell phones. Telephone revenues decreased by $0.8 million from $4.9 million in 2003 to $4.1 million in 2004. Additionally, there was a $0.5 million reduction in parking revenues (and an offsetting reduction in parking expenses) at Mondrian as a result of the change in the Mondrian valet parking contract in June 2003 that resulted in a change to the commission structure.

Management Fee—Related Parties.   During 2004 and 2003, management fee—related parties comprised continuing fee income from our contracts to manage our Joint Venture Hotels. Additionally, from November 2003 until its termination in June 2005, management fee revenue also included fees earned on the management contract with the Gramercy Park Hotel. Management fee—related parties increased 36.8% to $8.8 million in 2004 compared to $6.5 million in 2003, due primarily to the fees earned from the Gramercy Park Hotel, which were $1.2 million higher in 2004 compared to 2003. We commenced management of this hotel in November 2003, and fees earned in 2003 were minimal. Our management agreement with this hotel terminated in June 2005. Additionally, management fees earned under the contracts with the two London hotels showed strong growth ($0.7 million increase in 2004) as the London market began to recover from its downturn. Management fees earned from Shore Club also showed strong growth ($0.4 million increase in 2001) as Shore Club, which opened in 2001, became more established in the Miami market.

Operating Costs and Expenses

Rooms expense increased 10.6% to $37.0 million in 2004 compared to $33.5 million in 2003. In particular, this increase took place in the three New York hotels, which experienced the largest increases in occupancies and rooms revenue. Increased occupancies caused increased variable labor costs in housekeeping, bell staff and the front office. The increased occupancy also causes increases in other

70

expenses, such as room supplies and laundry. Increased revenues also result in increased travel agents commission, which is a component of rooms expenses and is a fixed percentage of commissionable revenue. Finally, in 2004 we recognized a one-time expense of $0.6 million resulting from the write-off of certain inventory items previously carried on the balance sheet, such as linens and room supplies, which are now expensed when purchased.

Food and beverage expense increased 7.5% to $51.9 million in 2004 compared to $48.3 million in 2003, due to the phase-in of union pay and benefit rates at Hudson, where food and beverage expenses increased by 15.6%, while revenues only increased by 2.3%. The 7.5% increase in food and beverage expenses from 2003 to 2004 was greater than the 4.5% growth in food and beverage revenues from 2003 to 2004.

Other departmental expense declined 20.5 % to $3.5 million in 2004 compared to $4.3 million in 2003, primarily due to the change in the Mondrian parking contract described above, which resulted in the gross revenues and expenses of the parking operation being transferred to the books of the third-party parking company.

Hotel selling, general and administrative expense increased 10.2% to $48.9 million in 2004 compared to $44.4 million in 2003.

·This increase was primarily attributable to higher advertising and promotion expenses, which increased by $2.1 million. The increase of $2.1 million is attributable to increased sales commissions ($0.6 million increase in 2004 as compared to 2003) and a return of other sales and marketing expenses to more normal levels after internal spending restrictions imposed during the Iraq War were lifted.

·Administrative and general expenses, which consist primarily of payroll and related costs, professional fees, travel expenses and office rent, increased by $0.9 million. This increase was directly attributable to increased credit card commissions ($0.6 million increase), which is directly attributable to the increase in revenues.

·Repair and maintenance expenses increased by $1.0 million due to the increase in hotel occupancies, which led to greater wear and tear on the properties and higher needs for maintenance. Despite this increase, repairs and maintenance expense as a percentage of total hotel revenues remained steady at approximately 4% in 2004.

Property taxes, insurance and other expense decreased 2.8% to $12.6 million in 2004 compared to $13.0 million in 2003, due to reductions achieved in property insurance as insurance market conditions improved in 2004 compared to 2003.

Corporate expenses increased 9.9% to $15.4 million in 2004 compared to $14.0 million in 2003, primarily attributable to an increase in incentive bonus payments in 2004 of $0.9 million, due to the recovery in the business which resulted in bonus targets being achieved to a greater extent than they were in 2003.

Depreciation and amortization decreased 4.1% to $27.3 million in 2004 compared to $28.5 million in 2003. Some of our assets, including furniture, fixtures and equipment, are depreciated over five years, and a portion of these assets became fully depreciated during 2003 and 2004.

Interest Expense, net.   Interest expense, net increased 17.2% to $67.2 million in 2004 compared to $57.3 million in 2003. The $9.9 million increase in interest expense, net was due to:

·$3.4 million increase in amortization of deferred financing costs, as a result of the write-off of all remaining deferred financing costs related to $100 million of mezzanine debt and $255 million of mortgage debt in connection with a refinancing of that debt in August 2004; and

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·$5.7 million increase in extension fees, exit fees and other fees relating to the $255 million of mortgage debt secured on Morgans, Royalton, Delano and Mondrian that was refinanced in August 2004.

The components of “Interest expense, net” in 2004 are summarized as follows:

·mortgage debt ($32.6 million);

·mezzanine debt ($23.5 million);

·other debt ($5.8 million);

·amortization of financing costs ($5.6 million); offset by

·interest income ($0.3 million).

The weighted average interest rates in 2004 and 2003 were 11% and 10%, respectively.

Equity in loss of unconsolidated joint ventures decreased 20.6% to $3.0 million in 2004 compared to $3.7 million in 2003, due primarily to the improved revenues and profits of our U.K. food and beverage joint venture—specifically the food and beverage operations and bars at St Martins Lane and the bars at Sanderson.

The components of RevPAR from the Joint Venture Hotels for 2003 and 2004 are summarized as follows:

	2004			2003			Change ($)			Change (%)
Occupancy	68.3		%	61.2		%		—			11.6	%
ADR	$	354		$	314			$	40		12.8	%
RevPAR	$	242		$	192			$	50		25.9	%

Other non-operating (income) expense in 2004 improved by $7.6 million to income of $5.5 million in 2004 compared to expense of $2.1 million in 2003. Other non-operating (income) expense in 2004 was primarily comprised of a $4.0 million discount on the repayment of $100.0 million of corporate debt, $2.2 million of a gain on the purchase at a discount of certain creditor claims in connection with the Clift bankruptcy and $1.7 million of a gain on the sale of tax credits. These amounts were partially offset by $0.8 million in impairment charges related to food and beverage operations at the Royalton and certain equipment at the Hudson. Other non-operating (income) expense in 2003 included a $2.6 million provision related to a contract with a third-party. This was partially offset by the $0.4 million increase in Clift bankruptcy expenses and the $0.5 million one-time impact of the consolidation of Royalton food and beverage operations in 2004. In August 2003, Clift Holdings LLC, our wholly-owned subsidiary which owned Clift filed for voluntary Chapter 11 bankruptcy protection. In October 2004, Clift Holdings LLC emerged out of bankruptcy protection pursuant to a plan of reorganization whereby Clift Holdings LLC sold the hotel to an unrelated party for $71.0 million and then leased it back for a 99-year lease term. This transaction is accounted for as a financing.

Income tax expenseincreased 26.8% to $0.8 million in 2004 compared to $0.7 million in 2003 due to increased revenues from the U.K. hotels, plus the change in the U.S. dollar/British pound exchange rate from 2003 to 2004.

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Liquidity and Capital Resources

Our short-term liquidity requirements consist primarily of funds necessary to pay for operating expenses and other expenditures directly associated with our properties, including:

·recurring maintenance capital expenditures necessary to maintain our properties properly;

·interest expense and scheduled principal payments on outstanding indebtedness; and

·capital expenditures incurred to improve our properties.

During the years presented, we have funded our short-term liquidity requirements through various sources of capital, including our operating activities, working capital and contributions from our predecessor company’s members. In future periods, we expect our primary sources of cash will come from the operations of our hotels, our working capital and amounts available under our revolving credit facility. To the extent that cash flows from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may have to enter into short-term borrowings to meet cash requirements.

Our short-term liquidity requirements include $2.8 million after March 2006 to fund the Chevron put described further in Note 5 of the financial statements  and working capital to fund our reserve accounts. Our reserve accounts consist of restricted cash that is swept by our lenders beginning on the ninth day of each month to fund monthly debt service payments, property, sales and occupancy taxes and insurance premiums of our hotels. After funding these reserve accounts, we fund operating expenses, our furniture, fixtures and equipment reserve (approximately 4% of total revenues) and interest on our mezzanine loans.

The purchase of the property across Collins Avenue from Delano for approximately $14.3 million closed in January 2006. We financed this purchase with cash from working capital and the issuance of a $10.0 million promissory note by us to the seller, which initially bears interest at 7%.

The purchase of the James Hotel Scottsdale is scheduled to close in April 2006. We paid an initial 10% deposit at the time of signing of the purchase agreement in January 2006. We expect to finance the remaining approximately $42.8 million of purchase price out of the net proceeds of our initial public offering, which may be later replaced with permanent mortgage financing. The Company’s initial public offering was completed on February 14, 2006 and net proceeds to the company are estimated to be $275.0 million. See below for further discussion on the use of the initial public offering net proceeds.

We plan to renovate several of our existing hotel properties over the next two years at an estimated cost of between $50.0 million and $60.0 million, including the renovation of the James Hotel Scottsdale and the extension of Delano. We also expect to spend additional amounts on pre-development of Delano Las Vegas and Mondrian Las Vegas (as described below). We expect to fund these activities through existing balances, restricted cash, free cash flow and borrowings under our revolving credit facility.

Once non-recourse project financing has been obtained for our Boyd Gaming Corporation joint venture in Las Vegas (which we expect to obtain by June 30, 2008), we have agreed to contribute approximately $97.5 million in cash to the joint venture ($15.0 million to $17.5 million of which will already have been contributed as part of predevelopment during 2006 and 2007, with approximately half of such amounts to be paid in 2006 and the first quarter of 2007 and the other half to be paid in the second quarter of 2007). We expect to fund this contribution through free cash flow and borrowings under our revolving credit facility.

Subsequent to December 31, 2005 and concurrent with the completion of our initial public offering, the Company paid down $294.6 of long-term debt which included outstanding principal and interest (see Note 6 of the financial statements), paid in full the preferred equity in Clift due to a related party of $11.1 million which included outstanding interest (see Note 5 of the financial statements), distributed

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$19.4 million to related parties and entered into an $80.0 million term loan which matures in 2009.  We anticipate that the pay down of this indebtedness will result in savings on interest expense and increased cash flow in future periods. We believe this new capital structure, including new revolving credit facility and cash flow from operations will provide us with sufficient liquidity to meet our operating expenses and other expenses directly associated with our business and properties.

Our long-term liquidity requirements consist primarily of funds necessary to pay for scheduled debt maturities, renovations, expansions and other non-recurring capital expenditures that need to be made periodically to our properties, and the costs associated with acquisitions of properties that we pursue. Our long-term liquidity requirements are also affected by a potential liability to a designer for which we have accrued $6.3 million (see Note 5 of the Notes to the financial statements) and the phase-out from July 2008 through July 2012 of approximately $3.1 million in annual benefits resulting from the property tax abatement at Hudson. During the years presented, we have funded our long-term liquidity requirements through various sources of capital, including our existing working capital, cash provided by operations and long-term property mortgage indebtedness. We believe that these sources of capital will continue to be available to us in the future to fund our long-term liquidity requirements. However, there are certain factors that may have a material adverse effect on our access to these capital sources. Our ability to incur additional debt is dependent upon a number of factors, including our degree of leverage, the value of our unencumbered assets and borrowing restrictions imposed by existing lenders. See “—Capital Expenditures and Reserve Funds”.

Operating Activities.   Net cash provided by operating activities was $19.9 million for 2005 compared to $22.8 million of cash used in operating activities for 2004. The increase in cash provided by operating activities was due to increased earnings before depreciation and amortization in the year ended December 31, 2005 and payments of accrued interest made on the refinancing of debt in the year ended December 31, 2004.

Net cash used in operating activities was $22.8 million for 2004 compared to $7.1 million of cash provided by operating activities for 2003. The negative cash from operating activities in 2004 primarily resulted from the debt refinancing that took place in August 2004, which resulted in all accrued interest of $27.1 million on a $100.0 million mezzanine loan being paid in full, including approximately $12.0 million of accrued interest at December 31, 2003. Additionally, with the sale and leaseback of Clift in October 2004, the accrued interest of $14.5 million on the Clift senior debt and a junior secured obligation of $5.8 million net of debt discount were paid in full in 2004—the two items totaling approximately $13.0 million at December 31, 2003.

Investing Activities.   Net cash used in investing activities amounted to $20.3 million for 2005 compared to $12.6 million for 2004. The significant investing activities are summarized below:

·we funded $5.6 million and $5.2 million during 2005 and 2004, respectively, for capital expenditures for renewals, replacements and room renovations;

·we funded, net of withdrawals, $15.7 million and $2.7 million into reserves for capital replacements during 2005 and 2004, respectively;

·we funded $5.0 million as a deposit on the purchase of James Hotel Scottsdale in December 2005;

·we funded $12.4 million and $4.9 million during 2005 and 2004, respectively, to our non-consolidated joint ventures, including $5.3 million and $3.4 million in 2005 and 2004, respectively, to Morgans Hotel Group London Limited (a wholly-owned subsidiary of Morgans Hotel Group Europe Limited, the joint venture operating company for our U.K. hotels) to fund debt service shortfalls resulting from the substantial principal amortization requirements of our existing U.K. debt and, in 2005, $4.9 million to acquire a one-third interest in Blackacre’s Class B and Class C membership interests in Shore Club. The funding to Morgans Hotel Group London Limited

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increased in 2005 compared to 2004 due to increased principal amortization, interest and loan fees incurred by Morgans Hotel Group London Limited due to its inability to satisfy these obligations without additional funding from its stockholders; and

·Offsetting the cash used in investing, distributions from our non-consolidated joint ventures were received during 2005. In November 2005,  Morgans Hotel Group London Limited and Shore Club refinanced their debt and distributed approximately $9.7 million and $6.7 million, respectively to the Company.

Net cash used in investing activities amounted to $12.6 million for 2004 compared to $9.1 million used in investing activities for 2003. The significant investing activities are summarized below:

·we disbursed $5.2 million and $4.3 million during 2004 and 2003, respectively, related to capital expenditures for renewals, replacements and major capital programs;

·we funded, net of withdrawals, $2.7 million and $1.9 million into reserves for capital replacements during 2004 and 2003, respectively; and

·we funded $4.9 million and $3.0 million during 2004 and 2003, respectively, to our non-consolidated joint ventures, primarily Morgans Hotel Group Europe Limited., the joint venture operating company for our U.K. hotels to fund debt service shortfalls.

Financing Activities.   Net cash provided by financing activities amounted to $9.3 million for 2005 compared to $44.6 million for 2004.

Net cash provided by financing activities amounted to $44.6 million for 2004 compared to $3.7 million provided by financing activities for 2003 and $13.0 million provided by financing activities for 2002.

The significant recent financing activities are described below:

·In 2005, the debt on five of our hotels in the United States was refinanced for a total of $580.0 million. In addition to repayment of the debt being refinanced and payment of deferred costs, approximately $100.9 million was distributed to Morgans Hotel Group LLC, the majority of which was used to repay convertible debt and preferred equity of Income Opportunity Fund, an investor in Morgans Hotel Group LLC. No distributions were made to Morgans Hotel Group LLC’s equity holders.

·In 2004, the prior debt on five of our hotels in the United States was refinanced for a total of $475.0 million, which was used to repay the existing debt on these hotels. An additional $75.0 million debt repayment was funded from the sale of a hotel by our predecessor’s equity owners, which enabled us to repay in full a $100.0 million mezzanine loan. Additionally, Clift exited bankruptcy through a sale and leaseback transaction for total proceeds of $71.0 million, which is accounted for as a financing. The sale and leaseback transaction enabled the former debt on this hotel to be paid off in full.

Debt

Our debt consists primarily of mortgage notes payable and mezzanine loans in the amount of $579.0 million as of December 31, 2005 secured by five hotels (the “5 Hotel Debt”). The 5 Hotel Debt bears interest at a blended rate of the 30-day LIBOR rate (4.4% at December 31, 2005) plus 360 basis points. The 5 Hotel Debt matures in June 2007. Subsequent to December 31, 2005 and in connection with the completion our initial public offering in February 2006, we have paid down all of our mezzanine 5 Hotel debt (which amounted to $105.5 million outstanding at December 31, 2005) and $192.4 million of our mortgage 5 Hotel Debt resulting in a outstanding mortgage debt of $285.0 under the 5 Hotel Debt arrangement which matures in 2010. Furthermore, we have maintained an interest rate cap for the

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remaining mortgage amount of 5 Hotel Debt and entered into a forward starting swap that will effectively cap the interest rate on the remaining 5 Hotel Debt through the extended maturity date in June 2010.

The prepayment clause permits us to prepay in whole or in part the 5 Hotel Debt on any payment date, along with a Spread Maintenance Premium (equal to the amount of the prepayment multiplied by the applicable LIBOR margin multiplied by the ratio of the number of months between the prepayment date and July 2006 divided by 12) and an Exit Fee (equal to 0.25% of the prepayment amount). As the 5 Hotel Debt was prepaid in February 2006 with proceeds of our initial public offering, the Spread Maintenance Premium and Exit Fees were waived except on prepayments of the Class A Portion of our mortgage notes, which we did not prepay. There were no prepayment fees associated with the portion of the debt we repaid.

The 5 Hotel Debt loan documents prohibit the incurrence of additional debt on these hotels unless a prepayment occurs as a result of an initial public offering. In the event of a prepayment with proceeds of such an offering, we may borrow up to the original amount of the loan subject to certain conditions, such as not increasing debt service costs. The 5 Hotel Debt also contains certain covenants including debt service coverage requirements . The debt service coverage covenant requires that the adjusted net cash flow of the hotels, as defined, must not be less than 1.05 times the debt balance multiplied by an imputed interest rate of 8.68%. The debt service coverage ratio increases each year, reaching 1.15 in July 2009. As of December 31, 2005 we were in compliance with the debt service coverage covenant and we are in compliance subsequent to the completion of the initial public offering and repayment of debt.

We lease Clift under a 99-year non-recourse lease agreement expiring in 2103. The lease is accounted for as a financing with a balance of $75.1 million at December 31, 2005. The lease payments are $2.8 million per year through October 2006 and $6.0 million per year through October 2014 with inflationary increases at five-year intervals thereafter beginning in October 2014.

We lease two condominium units at Hudson which are reflected as capital leases with balances of $6.1 million at December 31, 2005. Currently annual lease payments total approximately $800,000 and are subject to increase in line with inflation. The leases expire in 2096 and 2098. We also have capital lease obligations related to equipment of $0.4 million at December 31, 2005.

Existing Borrowings

As of February 17, 2006, material borrowings are as follows:

·A $285.0 million first mortgage note, which bears interest at LIBOR (4.4% and 2.3% at December 31, 2005 and December 31, 2004, respectively) plus a spread of 100 basis points. The note is scheduled to mature June 2010 as a result of our exercise of three consecutive one-year extension options, provided that certain conditions are met at the start of each one-year extension. The note may not be prepaid, in whole or in part, unless the following provisions as set forth in each related security instrument are followed:

·the lender has received at least 30 but not more than 90 days’ notice of such prepayment;

·all accrued interest and any other amounts due are paid;

·any partial prepayment is in a minimum amount of not less than $25,000 and is in multiples of $1,000 in excess thereof;

·any partial prepayment of principal amounts will be applied to the last amount due and shall not relieve us of minimum principal amortization payments; and

·all prepayment fees are paid.

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The note contains certain covenants including debt service coverage requirements. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Debt” on page 80 for a discussion of such requirements. We are required to fund reserve accounts to cover monthly debt service payments. We are also required to fund reserves for property, sales and occupancy taxes, insurance premiums, capital expenditures and the operation and maintenance of our hotels. Reserves are deposited into restricted cash accounts and are released as certain conditions are met. Our subsidiary borrowers are not permitted to have any liabilities other than certain ordinary trade payables, purchase money indebtedness and capital lease obligations. Furthermore, our subsidiary borrowers are not permitted to incur additional mortgage debt or partnership interest debt without complying with various covenants or obtaining the prior written approval of the lender. In addition, we are not permitted to transfer more than 49% of the interest in our subsidiary borrowers without the prior written consent of the lender.

The mortgage note is secured by a first mortgage on Morgans, Royalton, Hudson, Delano and Mondrian.

·In October 2004, when Clift emerged from bankruptcy, we sold the hotel for $71 million and then leased it back for a 99-year lease term. Due to our continued involvement, this transaction is treated as a financing. Under the 99-year lease, our wholly-owned subsidiary, Clift Holdings LLC, is required to fund operating shortfalls, including the lease payments, and to fund all capital expenditures. The annual lease payments, which are payable in monthly installments, are as follows:

·$2.8 million for the first two years following the commencement of the lease,

·$6 million for the third through tenth year following the commencement of the lease, and

·an amount that is reset every five years for the remainder of the lease term based on the percentage change in the consumer price index, subject, however, to certain maximum and minimum limitations on the amount of increase.

·£107.5 million loan (approximately $184.9 million based on the British pound/U.S. dollar exchange rate provided by www.oanda.com as of December 31, 2005) to Morgans Hotel Group London Limited, a wholly-owned subsidiary of our 50% owned joint venture vehicle, Morgans Hotel Group Europe Limited. The debt bears interest at a weighted average of approximately 6.3%. The loan has a five-year term and contains certain covenants including debt service coverage requirements. The loan may be prepaid, in whole or in part, subject to certain conditions, upon notice. Morgans Hotel Group London Limited is the party liable under the loan.

The loan is secured by a first mortgage on Sanderson and St. Martins Lane.

Description of Our Concurrent Financings

Concurrently with the closing of our initial public offering, our operating company, Morgans Group LLC, entered into a three-year revolving credit facility of $125.0 million, with an option to add one or more incremental revolving loan facilities of up to $25.0 million.

The revolving credit facility is unconditionally guaranteed by Morgans Hotel Group Co., three direct or indirect wholly-owned subsidiaries of Morgans Group LLC (MMRDH Parent Holding Company LLC, MMRDH Junior Mezz Holding Company LLC and MMRDH Intermediate Mezz Holding Company LLC), which we refer to as the Guarantors, and MHG Management Company.

In connection with the Formation and Structuring Transactions, Morgans Hotel Group Co. assumed Morgans Hotel Group LLC’s guarantee of the MHG Management Company secured three-year term loan facility of $80.0 million. The term loan facility is unconditionally guaranteed by the Guarantors and Morgans Group LLC.

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The facilities were proposed to have been secured by a first-priority security interest in substantially all the assets of Morgans Group LLC, MHG Management Company and each of the Guarantors, including a first-priority pledge of all the capital stock held by Morgans Group LLC, MHG Management Company and the Guarantors and a first-priority security interest in substantially all tangible and intangible assets of Morgans Group LLC, MHG Management Company and the Guarantors. Our ability to provide the requested pledges is subject to the satisfaction or waiver of certain conditions under the terms of our mortgage debt (including that we receive “no-downgrade” letters from the ratings agencies with respect to the securitization facilities in which our existing mortgage indebtedness has been included and that the maturity date of these new loans is later than the maturity date of the mortgage debt) and these have not yet been satisfied or waived. Our lenders have agreed to make the loans on an unsecured basis. We and our lenders have agreed to use commercially reasonable efforts to satisfy the required conditions (or obtain relevant waivers) as soon as practicable.

The term loan facility amortizes in equal quarterly installments in an amount equal to 0.25% of the original principal amount, commencing with the third quarter of 2006, with the balance payable at the final maturity.

The interest rate per annum applicable to the loans is a fluctuating rate of interest measured by reference to, at our election, either adjusted LIBOR or an alternative base rate, plus a borrowing margin. Alternative base rate loans will have an initial borrowing margin of 1.0%. Adjusted LIBOR loans will have an initial borrowing margin of 2.0%. If we have not provided the requested pledges referred to above by April 1, 2006, the margin on alternative base rate loans and adjusted LIBOR loans will increase by 1.5% until we provide the requested pledges. An increase of 1.5% on our term loan facility would increase our annual interest expense by approximately $1.2 million. The revolving credit facility initially is undrawn as of March    , 2006. If that facility were fully drawn, an increase of 1.5% on our revolving credit facility would increase our annual interest expense by approximately $1.9 million. After the full first quarter after the closing of the revolving credit facility, the borrowing margins under the revolving credit facility may vary depending on our total leverage ratio.

The facilities require us to maintain for each four-quarter period an adjusted debt to adjusted EBITDA ratio of no more than 6.5x, an adjusted EBITDA to fixed charges ratio of no less than 2.0x, and a senior secured indebtedness to adjusted EBITDA ratio of not more than 5.0x. The facilities contain, among other things, a covenant prohibiting us from paying dividends on our common stock.

At closing, the term loan facility was fully funded but our revolving credit facility is undrawn and will be available on a revolving basis for general corporate purposes, including acquisitions.

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Contractual Obligations

The following table summarizes our future payment obligations and commitments as of December 31, 2005:

	Payments due by period
	Total		Less than 1 year			1 to 3 years			4 to 5 years			After 5 years
	(in thousands)
Mortgage Notes Payable	$	577,968		$	5,157		$	572,811
Interest on Notes Payable	$	84,761		$	42,579		$	42,182
Capitalized Lease Obligations including amounts representing interest	$	120,244		$	667		$	1,752		$	489		$	117,337
Operating Lease Obligations	$	24,982		$	526		$	1,027		$	532		$	22,897
Preferred Equity in Clift due NorthStar including interest	$	11,094		$	11,094
Clift pre-petition liabilities	$	3,416		$	978		$	2,438
Payable due investor member of Hudson Leaseco LLC.	$	2,855		$	2,855
Purchase of James Hotel Scottsdale	$	43,000		$	43,000
Purchase of Delano extension	$	3,650		$	3,650

The following table summarizes our future payment obligations and commitments as of February 17, 2006, subsequent to our initial public offering:

	Payments due by period
	Total		Less than 1 year			1 to 3 years			4 to 5 years			After 5 years
	(in thousands)
Mortgage Notes Payable	$	285,000		$	—		$	—		$	285,000
Interest on Notes Payable	$	68,265		$	15,170		$	45,510		$	7,585
Capitalized Lease Obligations including amounts representing interest	$	120,244		$	667		$	1,752		$	489		$	117,337
Operating Lease Obligations	$	24,982		$	526		$	1,027		$	532		$	22,897
Clift pre-petition liabilities	$	3,416		$	978		$	2,438
Payable due investor member of Hudson Leaseco LLC	$	2,855		$	2,855
Purchase of James Hotel Scottsdale	$	43,000		$	43,000

We have a 50/50 joint venture with Chodorow Ventures (“Chodorow”) for the purpose of owning and operating restaurants, bars and other food and beverage operations at certain of our hotels. Currently, the joint venture operates the restaurants in Morgans, Hudson, Delano, Mondrian, Clift, Sanderson and St. Martins Lane as well as the bars in Delano, Sanderson and St. Martins Lane. Pursuant to various agreements, the joint venture leases space from the hotel and pays a management fee to Chodorow or its affiliates. The management fee is equal to 3% of the gross revenues generated by the operation. The agreements expire between 2007 and 2010 and generally have two five year renewal periods at the restaurant venture’s option.

Seasonality

The hospitality business is seasonal in nature and we experience some seasonality in our business as indicated in the table below. Our Miami hotels are strongest in the first quarter, whereas our New York hotels are strongest in the fourth quarter. Quarterly revenues also may be adversely affected by events

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beyond our control, such as extreme weather conditions, terrorist attacks or alerts, natural disasters, airline strikes, economic factors and other considerations affecting travel. Room revenues by quarter for our Owned Hotels during 2004 and 2005 were as follows:

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter
	(in millions)
Rooms Revenue
2004		$	30.0		$	33.2		$	30.1		$	38.0
2005		$	35.4		$	38.9		$	36.6		$	42.8

To the extent that cash flows from operations are insufficient during any quarter, due to temporary or seasonal fluctuations in revenues, we may have to enter into additional short-term borrowings to meet cash requirements.

Capital Expenditures and Reserve Funds

We are obligated to maintain reserve funds for capital expenditures at our hotels as determined pursuant to our debt and lease agreements. These capital expenditures relate primarily to the periodic replacement or refurbishment of furniture, fixtures and equipment. Our debt and lease agreements require us to reserve funds at amounts equal to 4% of the hotel’s revenues and require the funds to be set aside in restricted cash. In addition, the restaurant joint ventures require the ventures to set aside restricted cash of between 2% to 4% of gross revenues of the restaurant. As of December 31, 2005, $7.2 million was available in restricted cash reserves for future capital expenditures. In addition, under our existing loan agreements, as of December 31, 2005, we had funded a $15.1 million reserve for major capital improvements and were obligated to fund an additional $5.0 million into this reserve in the 12 months commencing June 30, 2005, and an additional $1.0 million in each of the subsequent 12-month periods.

We plan to renovate several of our hotel properties over the next two years at an estimated cost of between $50.0 million to $60.0 million, including the renovation of the James Hotel Scottsdale and the extension of Delano. We also expect to spend additional amounts during 2006 and 2007 on pre-development of Delano Las Vegas and Mondrian Las Vegas ($15.0 million to $17.5 million). The majority of our capital expenditures at our existing hotels are expected to be funded from these restricted cash and reserve accounts. Our capital expenditures could increase if we decide to acquire, renovate or develop hotels or additional space at existing hotels.

Derivative Financial Instruments

We use derivative financial instruments to manage our exposure to the interest rate risks related to our variable rate debt. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. We generally will use outside consultants to determine the fair value of our derivative financial instruments. Such methods incorporate standard market conventions and techniques such as discounted cash flow and option pricing models to determine fair value. We believe these methods of estimating fair value result in general approximation of value, and such value may or may not be realized.

On June 29, 2005 we entered into an interest rate cap agreement for $580.0 million, the full amount of debt secured by five hotels, with a LIBOR cap of 4.25%. We recognize the change in the fair value of this agreement in interest expense.

On February 18, 2006, subsequent to our initial public offering, we entered in to an interest rate forward starting swap that will effectively cap the interest rate on the remaining 5 Hotel Debt through the

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extended maturity date in June 2010. This forward has been deemed effective per the application of SFAS 133 and we intend to recognize the change in fair value of this agreement in other comprehensive income.

Off-Balance Sheet Arrangements

We own interests in two hotels through a 50/50 joint venture known as Morgans Hotel Group Europe Limited with Burford Hotels Ltd., or Burford. Morgans Hotel Group Europe Limited owns two hotels located in London, England, St. Martins Lane, a 204-room hotel, and Sanderson, a 150-room hotel. Net income or loss and cash distributions or contributions are allocated to the partners in accordance with ownership interests. At December 31, 2005, our book investment in Morgans Hotel Group Europe Limited was $9.4 million. We account for this investment under the equity method of accounting. Our equity in loss of the joint venture amounted to $7.6 million, $2.1 million, and $2.8 million for the years ended December 31, 2005, 2004 and 2003, respectively.

Under a management agreement with Morgans Hotel Group Europe Limited, we earn management fees and a reimbursement for allocable chain service and technical service expenses. The management fees are equal to 4.0% of total hotel revenues, including food and beverage, the reimbursement of allocable chain expenses are currently recovered at approximately 2.5% of hotel revenues excluding food and beverage and the technical services fees are a recovery of project specific costs. We also are entitled to an incentive management fee and a capital incentive fee. We did not earn any incentive fees during the years ended December 31, 2005, 2004, and 2003.

See Existing Borrowings for a description of the debt.

Related Party Transactions

We have in the past engaged in and currently engage in a number of transactions with related parties. Please see “Related Transactions” for a discussion of these and other transactions with related parties.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our combined financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We evaluate our estimates on an ongoing basis. We base our estimates on historical experience, information that is currently available to us and on various other assumptions that we believe are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our combined financial statements.

·Impairment of long-lived assets. We periodically review each property for possible impairment. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. In this analysis of fair value, we use discounted cash flow analysis to estimate the fair value of our properties taking into account each property’s expected cash flow from operations, holding period and net proceeds from the dispositions of the property. The factors we address in determining estimated net proceeds from disposition include anticipated operating cash flow in the year of disposition, terminal capitalization rate and selling price per room. Our judgment is required in determining the discount rate applied

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to estimated cash flows, the growth rate of the properties, the need for capital expenditures, as well as specific market and economic conditions. Additionally, the classification of these assets as held-for-sale requires the recording of these assets at our estimate of their fair value less estimated selling costs which can affect the amount of impairment recorded.

·Depreciation and amortization expense. Depreciation expense is based on the estimated useful life of our assets. The respective lives of the assets are based on a number of assumptions made by us, including the cost and timing of capital expenditures to maintain and refurbish our hotels, as well as specific market and economic conditions. Hotel properties and other completed real estate investments are depreciated using the straight-line method over estimated useful lives of 39.5 years for buildings and five years for furniture, fixtures and equipment. While our management believes its estimates are reasonable, a change in the estimated lives could affect depreciation expense and net income or the gain or loss on the sale of any of our hotels or other assets. We have not changed the estimated useful lives of any of our assets during the periods discussed.

·Derivative instruments and hedging activities. Derivative instruments and hedging activities require us to make judgments on the nature of our derivatives and their effectiveness as hedges. These judgments determine if the changes in fair value of the derivative instruments are reported as a component of interest expense in the consolidated and combined statements of operations or as a component of equity on the consolidated and combined balance sheets. While we believe our judgments are reasonable, a change in a derivative’s fair value or effectiveness as a hedge could affect expenses, net income and equity. None of our derivatives held during the periods presented qualified for effective hedge accounting treatment.

·Consolidation Policy. We evaluate our variable interests in accordance with FIN 46R to determine if they are variable interests in variable interest entities. Certain food and beverage operations at five of our Owned Hotels are operated under 50/50 joint ventures. We believe that we are the primary beneficiary of the entities because we absorb the majority of the restaurant ventures’ expected losses and residual returns. Therefore, the restaurant ventures are consolidated in our financial statements with our partner’s share of the results of operations recorded as minority interest in the accompanying financial statements. We own partial interests in the Joint Venture Hotels and certain food and beverage operations at two of the Joint Venture Hotels. We account for these investments using the equity method as we believe we do not exercise control over significant asset decisions such as buying, selling or financing nor are we the primary beneficiary of the entities. Under the equity method, we increase our investment in unconsolidated joint ventures for our proportionate share of net income and contributions and decrease our investment balance for our proportionate share of net loss and distributions.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. Some of our outstanding debt has a variable interest rate. As described in “Management’s Discussion and Analysis of Financial Results of Operations—Derivative Financial Instruments” above, we use some derivative financial instruments, primarily interest rate caps, to manage our exposure to interest rate risks related to our floating rate debt. We do not use derivatives for trading or speculative purposes and only enter into contracts with major financial institutions based on their credit rating and other factors. As of December 31, 2005, our total outstanding debt, including capitalized lease obligations, was approximately $659.6 million, of which approximately $578.2 million, or 87.6%, was variable rate debt. Our agreement caps LIBOR at 4.25% and expires in July 2007. At December 31, 2005,

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the LIBOR rate was 4.4%, thereby making our cap in the money. An increase in market rates of interest will not impact our interest expense. If market rates of interest on our variable rate debt decrease by 1.0%, or 100 basis points, the decrease in interest expense would increase pre-tax earnings and cash flows by approximately $4.9 million annually. If market rates of interest increase by 1.0%, or approximately 100 basis points, the fair value of our fixed rate debt would decrease by approximately $9.4 million. If market rates of interest decrease by 1.0%, or approximately 100 basis points, the fair value of our fixed rate debt would increase by $12.3 million.

Interest risk amounts were determined by considering the impact of hypothetical interest rates on our financial instruments and future cash flows. These analyses do not consider the effect of a reduced level of overall economic activity. If overall economic activity is significantly reduced, we may take actions to further mitigate our exposure. However, because we cannot determine the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

Currency Exchange Risk

As we have international operations with our two London hotels, currency exchange risk between the U.S. dollar and the British pound arises as a normal part of our business. We reduce this risk by transacting this business in British pounds. We have not repatriated earnings from our London hotels because of our historical net losses in our United Kingdom operations. As a result, any funds repatriated from the United Kingdom are considered a return of capital and require court approval. A change in prevailing rates would have, however, an impact on the value of our equity in Morgans Hotel Group Europe Limited. The U.S. dollar/British pound currency exchange is currently the only currency exchange rate to which we are directly exposed. Generally, we do not enter into forward or option contracts to manage our exposure applicable to net operating cash flows. We do not foresee any significant changes in either our exposure to fluctuations in foreign exchange rates or how such exposure is managed in the future.

ITEM 8FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated and combined financial statements of Morgans Hotel Group Co. and the notes related to the foregoing financial statements, together with the independent registered public accounting firm’s reports thereon, are set forth on pages F-1 through F-25 of this report.

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

Not applicable.

ITEM 9A.   CONTROLS AND PROCEDURES

Attached as exhibits to this Form 10-K are certifications of the Company’s Chief Executive Officer and Chief Financial Officer, which are required in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications.

Disclosure Controls and Procedures

The management of the Company established and maintains disclosure controls and procedures that are designed to ensure that material information relating to the Company and its subsidiaries required to be disclosed in the reports that are filed or submitted under the 1934 Act are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

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As of the end of the period covered by this report, the Company’s management conducted an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures are effective. Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.

There have been no changes in the Company’s internal control over financial reporting during the most recent quarter ended December 31, 2005 that have materially affected, or are reasonably likely to affect, internal controls over financial reporting.

Inherent Limitations on Effectiveness of Controls

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) or our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.

ITEM 9B.OTHER INFORMATION

Not applicable.

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PART III

ITEM 10DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Our board of directors consist of 7 members. In accordance with the independence requirements of Rule 10A-3(b) under the Exchange Act and independent director standards of the Nasdaq Stock Market, Inc., a majority of our directors will be independent after the consummation of our initial public offering.

The following table sets forth information concerning the individuals who will be our directors and executive officers upon the consummation of the offering. Ages are as of March 27, 2006.

Name	Age		Position
David T. Hamamoto	46	Chairman of the Board of Directors
W. Edward Scheetz	41	President, Chief Executive Officer and Director
Marc Gordon	41	Chief Investment Officer and Executive Vice President of Capital Markets
Richard Szymanski	48	Chief Financial Officer
Edwin L. Knetzger, III	54	Director
Lance Armstrong	34	Director
Fred J. Kleisner	61	Director and Chairman of the Audit Committee
Thomas L. Harrison	58	Director
Robert Friedman	50	Director

The following is a biographical summary of the experience of our directors and executive officers:

David T. Hamamoto is the Chairman of our Board of Directors. In 1997, Mr. Hamamoto co-founded NorthStar Capital Investment Corp. with W. Edward Scheetz and currently is the Co-Chairman of its Board of Directors and its Co-Chief Executive Officer. Prior to that time, Mr. Hamamoto was a partner, co-head and co-founder of the Real Estate Principal Investment Area at Goldman, Sachs & Co. Additionally, Mr. Hamamoto serves on the boards of NorthStar Capital Investment Corp., NorthStar Realty Finance Corp., Koll Development and MDLinx. Mr. Hamamoto is also the President and Chief Executive Officer of NorthStar Realty Finance Corp., a NYSE-listed commercial real estate company. Mr. Hamamoto received a Bachelor of Science degree from Stanford University and a Master of Business Administration from the Wharton School of the University of Pennsylvania.

W. Edward Scheetzis our President, Chief Executive Officer and one of our Directors. In July 1997, Mr. Scheetz co-founded NorthStar Capital Investment Corp. with David T. Hamamoto, and currently is the Co-Chairman of its Board of Directors and its Co-Chief Executive Officer. Since NorthStar Capital Investment Corp.’s investment in 1997 in our predecessor company, Mr. Scheetz has been a member of the Board of our predecessor company. Mr. Scheetz also serves on the boards of NorthStar Capital Investment Corp., NorthStar Realty Finance Corp. (where he is the Chairman), Koll Development, 401Kexchange.com and tutor.com and serves on the Investment Committee of NS Advisors. Prior to founding NorthStar Capital, Mr. Scheetz was a partner at Apollo Real Estate Advisors from 1993 to 1997, where he was responsible for the investment activities of Apollo Real Estate Investment Fund I and II, which included, among others, financing the development of Delano and certain of our other projects. Mr. Scheetz received an A.B. in economics from Princeton University.

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Marc Gordonis our Chief Investment Officer and Executive Vice President of Capital Markets. Prior to joining us, Mr. Gordon served as a Vice President of NorthStar Capital Investment Corp. At NCIC, Mr. Gordon was responsible for the origination, structuring and negotiation of investment and financing transactions as well as the raising of capital for NCIC’s investment activities. Mr. Gordon joined NCIC in October 1997. Prior to joining NCIC, Mr. Gordon was a Vice President in the Real Estate Investment Banking Group at Merrill Lynch & Co., where he executed corporate finance and strategic transactions for public and private real estate ownership companies, including REITs, real estate service companies, and hospitality companies. Mr. Gordon graduated from Dartmouth College with an A.B. in economics and also holds a J.D. from the UCLA School of Law.

Richard Szymanski is our Chief Financial Officer. Before joining us in 2005, Mr. Szymanski was the Senior Vice President and Chief Financial Officer of Prime Hospitality LLC. From 2003 to 2004, Mr. Szymanski was the Senior Vice President and Chief Financial Officer of Prime Hospitality Corp. From 1998 to 2003, Mr. Szymanski was the Vice President of Finance to Prime Hospitality Corp. In these positions, Mr. Szymanski was responsible for overseeing the accounting department, budget and planning, internal audits and cash management. Mr. Szymanski received a Bachelor of Science degree in accounting from Rutgers University.

Edwin L. Knetzger, III is one of our Directors. Mr. Knetzger is one of the co-founders and is the current Vice Chairman of Greenwich Capital Markets, Inc., a leading fixed income institutional investor, where he previously served at various times as President, Chief Executive Officer and Chairman from 1981 to 2003. Prior to joining Greenwich Capital Markets, Inc., Mr. Knetzger was employed by Kidder Peabody & Company where he served as Co-Manager and Head Trader of the Government Bond Trading Department from 1975 to 1980. Additionally, Mr. Knetzger serves on the boards of Paul Newman’s The Hole In The Wall Gang Camp and The Hole In The Wall Gang Association, which are non-profit organizations for children and families afflicted by cancer and serious blood diseases. Mr. Knetzger received a Bachelor of Arts and a Master of Business Administration from University of Virginia.

Lance Armstrongis one of our Directors. Mr. Armstrong is a retired professional road racing cyclist and winner of seven consecutive Tour de France races from 1999 to 2005. In 2002, Sports Illustrated magazine named him their Sportsman of the Year. He was also named Associated Press Male Athlete of the Year for 2002, 2003, 2004 and 2005, received ESPN’s ESPY Award for Best Male Athlete in 2003, 2004 and 2005, and won the BBC Sports Personality of the Year Overseas Personality Award in 2003. Mr. Armstrong is the founder of the Lance Armstrong Foundation, a nonprofit organization which seeks to support cancer victims and raise awareness about cancer through education, advocacy, public health and research programs. Mr. Armstrong has been a member of President George W. Bush’s Cancer Panel since 2002.

Fred J. Kleisner is the Chairman of our Audit Committee and one of our Directors. Mr. Kleisner is currently a consultant to the hotel industry. From March 2000 to August 2005, Mr. Kleisner was the Chief Executive Officer of Wyndham International, a hotel company that owned, leased, managed and franchised hotels and resorts in the U.S., Canada, Mexico, the Caribbean and Europe. Mr. Kleisner also served as the Chairman of Wyndham International’s Board from October 13, 2000. From August 1999 to October 2000, Mr. Kleisner served as President and from July 1999 to March 2000, Mr. Kleisner also served as Chief Operating Officer. From March 1998 to August 1999, he served as President and Chief Operating Officer of The Americas for Starwood Hotels & Resorts Worldwide, Inc. Hotel Group. His experience in the industry also includes senior positions with Westin Hotels and Resorts, where he served as President and Chief Operating Officer from 1995 to 1998; Interstate Hotels Company where he served as Executive Vice President and Group President of Operations from 1990 to 1995; The Sheraton Corporation, where he served as Senior Vice President, Director of Operations, North America Division—East from 1985 to 1990; and Hilton Hotels, where for 16 years he served as General Manager of several

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landmark hotels, including The Waldorf Astoria and The Waldorf Towers in New York, The Capital Hilton in Washington, D.C., and The Hilton Hawaiian Village in Honolulu. Mr. Kleisner, who holds a B.A. degree in Hotel Management from Michigan State University, completed advanced studies at the University of Virginia and Catholic University of America.

Thomas L. Harrison is one of our Directors. Mr. Harrison is Chairman and Chief Executive Officer of Diversified Agency Services (“DAS”), a group of marketing services companies. A division of the Omnicom Group, DAS provides a broad range of marketing communication services. Mr. Harrison has been the President of DAS since 1997 and was named Chairman and Chief Executive Officer in 1998. Prior to joining DAS, Mr. Harrison was Co-founder and Chairman of Harrison & Star Business Group. Mr. Harrison serves on the boards of The Children’s Hospital at Montefiore and the New York Chapter of the Arthritis Foundation. He is a member of the President’s council at Tulane University School of Medicine and was a member of the Dean’s council at Tulane School of Public Health and Tropical Medicine. He is also the chairman of the Dean’s council of The Steinhardt School at New York University. He has served as co-chairman of the New York Chapter of the U.S. Olympic Committee. Mr. Harrison holds an advanced degree in cell biology and physiology from West Virginia University.

Robert Friedman is one of our Directors. Mr. Friedman is President of Classic Media: Harvey & Golden Books Entertainment, a New York-based family entertainment company, that owns a portfolio of family-oriented titles, including the former UPA, Harvey Entertainment and Golden Books entertainment libraries. From 1991 to 2003 Mr. Friedman held a variety of senior positions at AOL Time Warner, including as Head of Corporate Marketing for Time Warner and President of AOL, Interactive Marketing & TV. Mr. Friedman was President of New Line TV and Co-Chairman of Worldwide Theatrical Marketing, Licensing and Merchandising. Mr. Friedman was a member of the original development team of MTV Networks from 1981 to 1989. Mr. Friedman serves on the Board of Directors of Vassar College, Columbia Business School, The Mount Sinai Medical Center and The Big Apple Circus. Mr. Friedman also serves on the International Advisory Boards for Abercrombie and Kent Destinations and New Zealand. Mr. Friedman received a Bachelor of Arts from Vassar College and a Master of Business Administration from Columbia University.

Other Significant Professionals

The following is a biographical summary of the experience of our other significant professionals:

Niels Sherryis our Executive Vice President of Operations. Mr. Sherry joined us in 1999 as the General Manager of St. Martins Lane. From 2001 until 2004, Mr. Sherry was the Regional Vice President London, overseeing both St. Martins Lane and Sanderson. Prior to joining us in 1999, Mr. Sherry held positions as hotel manager, rooms division and manager of the front desk during his employment with Starwood Hotels, St. Andrews Old Course Hotel and with The Savoy. Mr. Sherry graduated in Hotel Administration from the Westminster Hotel School, London.

David Weidlich is our Executive Vice President of Asset Management. From 2000 to 2004, Mr. Weidlich was our Regional Vice President and General Manager—West Coast, based at Mondrian. From 1998 to 2000, Mr. Weidlich was the General Manager of Mondrian. Prior to joining us in 1997, Mr. Weidlich was the Executive Director of the Rooms Division at The Plaza Hotel in New York City. Mr. Weidlich received a Bachelor of Science degree from University of Nevada, Las Vegas’ School of Hotel Administration.

T. Blake Danneris our Senior Vice President of Sales. Mr. Danner joined us in 1998 and since that time has served as Director of Sales and Marketing at the St. Moritz, the Regional Director of New York Sales and Marketing, and the Corporate Vice President of Sales and Marketing. Prior to joining us, Mr. Danner was with Regal Hotels International (currently known as Millennium Copethorne) for 14

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years, where he last served as the Senior Corporate Director, sales and marketing. Mr. Danner holds a Bachelor of Science degree from Oklahoma State University.

M. Thomas Buoyis our Vice President of Distribution and Revenue Management. Mr. Buoy joined us in 1999. Prior to joining us, Mr. Buoy was a Manager in Ernst & Young, LLP’s Hospitality Services Group where he managed various Hospitality and Healthcare related engagements. Mr. Buoy also served as Chairman of the International Quality & Productivity Center’s 2002 Revenue Management for the Hospitality Industry National Conference. Mr. Buoy received a Bachelor of Science and received a Masters of Management from Cornell University.

David Freibergeris our Director of Brand Integrity. Mr. Freiberger joined us in 1989 in the housekeeping department and has been involved in the opening of all our hotels except Morgans, working in both housekeeping and front office. Currently, Mr. Freiberger’s responsibilities include maintaining our brands as well as the integrity of their design. Mr. Freiberger received a Bachelor of Science from New York University.

Kim Walkeris our Director of Creative Services. Ms. Walker joined us in 1991 and her responsibilities include the strategy, planning and management of all marketing and hotel collateral, promotional material, advertising, and uniform programs for all our properties. In addition, Ms. Walker is responsible for overseeing public relations and special events. Ms. Walker received a Bachelor of Science from Boston University.

Board Committees

Audit Committee

Our Audit Committee consists of Messrs. Kleisner (chairman), Knetzger and Harrison. The committee is responsible for, among other things, (i) overseeing management’s maintenance of the reliability and integrity of our financial reporting and disclosure practices, (ii) overseeing management’s establishment and maintenance of processes to assure that an adequate system of internal control is functioning, (iii) overseeing management’s establishment and maintenance of processes to assure our compliance with all applicable laws, regulations and corporate policy, (iv) reviewing our annual and quarterly financial statements prior to their filing or prior to the release of earnings and (v) reviewing the performance of the independent accountants, (vi) appointing, retaining or terminating the independent accountants, and (vii) pre-approving all audit, audit-related and other services, if any, to be provided by the independent accountants. Mr. Kleisner serves as our audit committee financial expert as that term is defined by the SEC. The audit committee has the power to investigate any matter brought to its attention within the scope of its duties and to retain counsel for this purpose where appropriate.

Compensation Committee

Our Compensation Committee initially consists of Mr. Knetzger. Our Compensation Committee is responsible for, among other things, (i) reviewing employee compensation policies, plans and programs, (ii) setting relevant goals and benchmarks for performance and monitoring performance and the compensation of our executive officers and other significant professionals, (iii) administering our incentive compensation plans and programs and (iv) preparing recommendations and periodic reports to the board of directors concerning these matters. The committee will also produce an annual report on executive compensation for inclusion in our annual meeting proxy statement.

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Corporate Governance and Nominating Committee

Our Corporate Governance and Nominating Committee initially consists of Mr. Knetzger. Our Corporate Governance and Nominating Committee is responsible for, among other things, (i) seeking, considering and recommending to the board qualified candidates for election as directors and to fill any vacancies on the board, (ii) recommending a slate of nominees for election as directors at the annual meeting, (iii) preparing and submitting to the board qualifications for the position of director and policies concerning the term of office of directors and the composition of the board and (iv) considering and recommending to the board other actions relating to our corporate governance. The committee will also annually recommend to the board nominees for each committee of the board and facilitate the assessment of the board of directors’ performance as a whole and of the individual directors.

Compensation Committee Interlocks and Insider Participation

None of our executive officers will serve as a member of our compensation committee, and none of them have served, or will be permitted to serve, on the compensation committee, or other committee serving a similar function, of any entity of which an executive officer is expected to serve as a member of our compensation committee.

Involvement in Certain Legal Proceedings

As disclosed previously under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Comparison of Year Ended December 31, 2004 to Year Ended December 31, 2003—Other non-operating (income) expense” on page 73 above, Clift Holdings, one of our wholly-owned operating subsidiaries that owns Clift previously sought Chapter 11 bankruptcy protection. It emerged from Chapter 11 bankruptcy protection in October 2004. David Hamamoto, our Chairman, and W. Edward Scheetz, our President and Chief Executive Officer, were directors of Clift Holdings at the time of its bankruptcy filing in August 2003.

Code of Business Conduct and Ethics

We have adopted a code of corporate ethics relating to the conduct of our business by our employees, officers and directors. We intend to maintain the highest standards of ethical business practices and compliance with all laws and regulations applicable to our business, including those relating to doing business outside the United States.

Director Compensation

Our director compensation is as follows:

·the chairman of our board of directors is paid an annual fee of $35,000;

·each of our non-employee directors is paid an annual director’s fee of $25,000;

·the non-employee director who serves as chairman of our Audit Committee is paid an additional annual fee of $10,000;

·each non-employee director who serves as chairman of another board committee (initially our Compensation Committee and our Corporate Governance and Nominating Committee) is paid an additional annual fee ($7,500 for the chairman of our Compensation Committee and $5,000 for the chairman of our Corporate Governance and Nominating Committee);

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·each non-employee director is also paid $1,000 per board meeting attended in person and $500 per board meeting attended by telephone; and

·each non-employee director is also paid $1,000 per committee meeting attended in person and $600 per committee meeting attended by telephone.

Directors who are our officers or employees will receive no compensation as directors. In addition, we will reimburse all directors for reasonable and customary out-of-pocket expenses incurred in connection with their services on the board of directors and our directors are entitled to free or discounted rooms at our hotel properties.

Pursuant to our stock incentive plan, we grant to each of our non-employee directors restricted stock units, as described in “—Stock Incentive Plan” below. Upon the consummation of our initial public offering, we granted restricted stock units having a value of approximately $100,000 to each person who became a non-employee director. We will also provide automatic grants of $100,000 worth of restricted stock units to non-employee directors who become directors after the consummation of our initial public offering which will be made on the date the new non-employee director attends his or her first meeting of our board of directors. The actual number of shares of restricted stock units that we will automatically grant will be determined: (1) for those grants that are to occur upon the consummation of our initial public offering, by dividing the fixed value of the grant by the price per share in our initial public offering; and (2) for those grants that occur after our initial public offering, by dividing the fixed value of the grant by the closing sale price of our common stock on the Nasdaq National Market on the grant date. The restrictions on the initial grants of restricted stock units will lapse as to 1/3 of the amount granted on the first anniversary of the grant date and as to the remainder in 24 equal installments at the end of each month following the first anniversary of the grant date (lapsing fully on the third anniversary of the grant date).

In lieu of the $100,000 restricted stock unit award in the preceding paragraph, upon the consummation of our initial public offering, our Chairman was given a one-time grant of $6,500,000 worth of LTIP units in Morgans Group LLC and stock options to purchase $6,000,000 worth of our stock (in both instances using the initial public offering price), 1/3 of which will vest on the first anniversary of the grant date and the remainder of which will vest in 24 equal installments at the end of each month following the first anniversary of the grant date (becoming fully vested on the third anniversary of the grant date) and will be subject to the terms and conditions of our 2006 Omnibus Stock Incentive Plan.

Each year, pursuant to our stock incentive plan, we will automatically grant each of our non-employee directors restricted stock units having a value of approximately $25,000. These annual automatic grants will be made on the first business day following each annual meeting of our stockholders and the actual number of shares of common stock covered by such units that we will grant will be determined by dividing the fixed value of the annual grant by the closing sale price of our common stock on the Nasdaq National Market on the grant date.

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ITEM 11EXECUTIVE COMPENSATION

Although subject to change, the following table sets forth the compensation that we expect to be paid to our chief executive officer and our two other executive officers, who are collectively referred to as our “named executive officers” for our fiscal year ending December 31, 2006, commencing upon consummation of our initial public offering:

	Annual Compensation										Long-Term Compensation Awards
Name and Principal Position	Year	Salary(1)		Bonus(2)			Other Annual Compensation				Securities Underlying Options/SARs
W. Edward Scheetz, President and Chief Executive Officer	2006	$	750,000		(3	)		$	6,500,000	(4)		(4	)
Marc Gordon, Chief Investment Officer and Executive Vice President of Capital Markets	2006	$	650,000		(5	)		$	3,750,000	(6)		(6	)
Richard Szymanski, Chief Financial Officer	2006	$	350,000		(7	)		$	500,000	(8)		(8	)

(1)Amounts given are annualized projections for the year ending December 31, 2006 based on employment agreements that became effective upon consummation of our initial public offering, or in the case of Mr. Szymanski his existing offer letter.

(2)Bonuses will be granted at the discretion of our compensation committee in accordance with applicable corporate and individual performance targets determined by our compensation committee.

(3)Under his employment agreement, Mr. Scheetz is eligible for an annual cash bonus based on the satisfaction of performance goals as established by our compensation committee. Mr. Scheetz’s annual bonus will have a target of 100% of his base salary and a maximum level of 200% of his base salary.

(4)Upon consummation of our initial public offering, Mr. Scheetz received a one-time grant of $6,500,000 worth of LTIP units in Morgans Group LLC and stock options to purchase $6,000,000 worth of stock (in both instances using the initial public offering price), 1/3 of which will vest on the first anniversary of the grant date and the remainder of which will vest in 24 equal installments at the end of each month following the first anniversary of the grant date (becoming fully vested on the third anniversary of the grant date) and will be subject to the terms and conditions of our 2006 Omnibus Stock Incentive Plan. See “—Stock Incentive Plan” below.

(5)Under his employment agreement, Mr. Gordon is eligible for an annual cash bonus based on the satisfaction of performance goals as established by our compensation committee. Mr. Gordon’s annual bonus will have a target of 100% of his base salary and a maximum level of 120% of his base salary.

(6)Upon consummation of our initial public offering, Mr. Gordon received a one-time grant of $3,750,000 worth of LTIP units in Morgans Group LLC and stock options to purchase $3,000,000 worth of stock (in both instances using the initial public offering price), 1/3 of which will vest on the first anniversary of the grant date and the remainder of which will vest in 24 equal installments at the end of each month following the first anniversary of the grant date (becoming fully vested on the third anniversary of the grant date) and will be subject to the terms and conditions of our 2006 Omnibus Stock Incentive Plan. See “—Stock Incentive Plan” below.

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(7)Mr. Szymanski is eligible for an annual cash bonus based on the satisfaction of performance goals as established by our compensation committee. Mr. Szymanski’s offer letter provides that his 2006 bonus shall not be less than $100,000.

(8)Upon consummation of our initial public offering, Mr. Szymanski received a one-time grant of $500,000 worth of LTIP units in Morgans Group LLC and stock options to purchase $500,000 worth of stock (in both instances using the initial public offering price), 1/3 of which will vest on the first anniversary of the grant date and the remainder of which will vest in 24 equal installments at the end of each month following the first anniversary of the grant date (becoming fully vested on the third anniversary of the grant date) and will be subject to the terms and conditions of our 2006 Omnibus Stock Incentive Plan. See “—Stock Incentive Plan” below.

Employment Agreements

We have employment agreements with W. Edward Scheetz, our President and Chief Executive Officer and Marc Gordon, our Chief Investment Officer and Executive Vice President of Capital Markets. Richard Szymanski, our Chief Financial Officer, has an accepted offer letter.

Mr. Scheetz’s employment agreement provide for him to serve as our President and Chief Executive Officer on the following terms:

·an initial contract term through the fourth anniversary of the consummation of our initial public offering, renewing annually thereafter unless either party gives written notice of non-renewal at least 90 days prior to the end of each contract term;

·an annual base salary of $750,000, subject to annual review for increase;

·eligibility for an annual cash bonus based on the satisfaction of performance goals as established by our compensation committee. Mr. Scheetz’s annual bonus will have a target of 100% of his base salary and a maximum level of 200% of his base salary;

·a one-time grant of $6,500,000 worth of LTIP units in Morgans Group LLC and stock options to purchase $6,000,000 worth of stock on the consummation of our initial public offering (in both instances using the initial public offering price), 1/3 of which will vest on the first anniversary of the grant date and the remainder of which will vest in 24 equal installments at the end of each month following the first anniversary of the grant date (becoming fully vested on the third anniversary of the grant date) and will be subject to the terms and conditions of our 2006 Omnibus Stock Incentive Plan; and

·medical and other group welfare plan coverage and fringe benefits provided to our employees.

In the event of our termination of Mr. Scheetz without “cause” (as will be defined in the proposed agreement) or Mr. Scheetz’s termination of employment for “good reason” (as will be defined in the proposed agreement), Mr. Scheetz will receive the following amounts:

·salary through the date of termination;

·a pro rata bonus for the portion of the year elapsed during which termination occurs based on the greater of target annual bonus for the year in which termination occurs or average annual bonus for the two preceding years;

·a lump sum amount equal to 2.5 times Mr. Scheetz’s then current base salary plus 2.5 times the greater of target annual bonus for the year in which termination occurs or average annual bonus for the two preceding years;

·full vesting of all his equity awards; and

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·30 months of continued medical, dental, vision and prescription drug coverage for Mr. Scheetz and his dependents.

In the event Mr. Scheetz’s employment agreement is not extended by us, Mr. Scheetz will receive the following amounts upon the date of termination:

·salary through the date of termination;

·a lump sum amount equal to Mr. Scheetz’s then current base salary plus 1.0 times the greater of target annual bonus for the year in which termination occurs or average annual bonus for the two preceding years;

·12 months of continued medical, dental, vision and prescription drug coverage for Mr. Scheetz and his dependents; and

·vesting of the next applicable tranche of any of Mr. Scheetz’s equity awards.

In addition, in the event a payment to Mr. Scheetz is deemed to be a golden parachute payment under Section 280G of the Internal Revenue Code, Mr. Scheetz would also receive a tax gross-up payment to cover his excise tax liability under Section 4999.

In his employment agreement, Mr. Scheetz has agreed that during the course of his employment and, unless he terminates his employment for “good reason” or is terminated without cause, for a one year period thereafter, he will not, subject to certain exceptions, engage in competition with our business of the management and operation of “full service hotels” in North America or Western Europe. In his employment agreement, Mr. Scheetz has also agreed to non-solicitation provisions that cover the period of his employment and, subject to certain exceptions, a one year period thereafter.

Mr. Gordon’s employment agreement will provide for him to serve as our Chief Investment Officer and Executive Vice President of Capital Markets on substantially the same terms as except that:

·his initial annual base salary will be $650,000;

·his annual bonus will have a target of 100% of his base salary and a maximum level of 120% of his base salary; and

·he received a one-time grant of $3,750,000 LTIP units in Morgans Group LLC and stock options to purchase $3,000,000 worth of stock on the consummation of our initial public offering (in both instances using the initial public offering price), 1/3 of which will vest on the first anniversary of the grant date and the remainder of which will vest in 24 equal installments at the end of each month following the first anniversary of the grant date (becoming fully vested on the third anniversary of the grant date) and will be subject to the terms and conditions of our 2006 Omnibus Stock Incentive Plan.

Mr. Szymanski’s accepted offer letter provides for him to serve as our Chief Financial Officer. Mr. Szymanski is to receive an annual base salary of $350,000, a 2006 annual bonus of at least $100,000 and pension and welfare benefits in accordance with our general policies. Mr. Szymanski’s employment is on an “at will” basis.

Stock Incentive Plan

The Morgans Hotel Group Co. 2006 Omnibus Stock Incentive Plan, or our stock incentive plan, has been adopted by our board of directors and was approved by our sole stockholder prior to the consummation of our initial public offering. The stock incentive plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation rights, stock, restricted stock and other equity based awards, or any combination of the foregoing. The

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eligible participants of the stock incentive plan include our directors, officers and employees. An aggregate of 3,500,000 shares has been reserved for issuance under the stock incentive plan, and, in the event that the underwriters exercise their option to purchase additional shares, the number of shares reserved will automatically increase by a number of shares equal to 10% of the number of shares sold to the underwriters as a result of the exercise of the over-allotment option. The number of shares reserved under our stock incentive plan is also subject to equitable adjustment upon the occurrence of certain corporate events.

The stock incentive plan may be administered by either our board of directors or any committee appointed by our board of directors in accordance with the requirements of Section 162(m) of the Internal Revenue Code (but only to the extent necessary and desirable to satisfy the requirements of Section 162(m) of the Internal Revenue Code) and, to the extent applicable, Rule 16b-3 under the Exchange Act, the board or committee being referred to as the “plan administrator.” The plan administrator may interpret the stock incentive plan and may enact, amend and rescind rules, make all other determinations necessary or desirable for the administration of the stock incentive plan and generally determine the terms and conditions of awards granted under the stock incentive plan.

We may issue incentive stock options or non-qualified stock options under the stock incentive plan. The incentive stock options granted under the stock incentive plan are intended to qualify as “incentive stock options” within the meaning of Section 422 of the Internal Revenue Code. The option price of each stock option granted under the stock incentive plan will be determined by the plan administrator and must be at least equal to the par value of a share of common stock on the date the stock option is granted and, in the case of an incentive stock option, may be no less than the fair market value of the stock underlying the option as of the date the incentive stock option is granted.

Stock appreciation rights may be granted under the stock incentive plan either alone or in conjunction with all or part of any stock option granted under the stock incentive plan. A stock appreciation right granted under the stock incentive plan entitles its holder to receive per share, at the time of exercise, an amount in cash or stock (or a combination of cash and stock) equal to the excess of the fair market value (at the date of exercise) of a share of common stock over a specified price fixed by the plan administrator, with the plan administrator determining the form of payment.

Restricted common stock may be granted under the stock incentive plan. The plan administrator will determine the purchase price, performance period and performance goals, if any, with respect to the grant of restricted common stock. Participants with restricted common stock generally have all of the rights of a stockholder. If the performance goals or other restrictions are not attained, the participant will forfeit his or her shares of restricted common stock.

Other equity based awards under the stock incentive plan will include grants of membership units in our operating company, which are structured as profits interests, or Long Term Incentive Plan units (LTIP units). Because the LTIP units are structured as profits interests, we do not expect the grant, vesting or conversion of such units to produce a tax deduction for us. Each LTIP unit awarded will be deemed to be equivalent to an award of one share of our common stock reserved under our stock incentive plan. Each LTIP unit award will reduce the amount of our shares of common stock available for other equity awards on a one-for-one basis. The plan administrator will determine the purchase price, performance period and performance goals, if any, with respect to the grant of LTIP units. If the performance goals or other restrictions are not attained, the participant will forfeit his or her LTIP units.

LTIP units, whether vested or not, will receive the same quarterly per unit distributions as membership units in our operating company, which equal per share dividends on our common stock. Initially, LTIP units will not have full parity with other membership units of our operating company with respect to liquidating distributions. Upon the occurrence of specified events, LTIP units may over time achieve full parity with other membership units for all purposes, and therefore accrete to an economic

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value for participants equivalent to our common stock on a one-for-one basis. If such parity is reached, vested LTIP units may be converted into an equal number of membership units at any time, and thereafter enjoy all the rights of membership units of our operating company. Holders of membership units of the operating company may redeem their membership units for an equivalent number of shares of our common stock, at any time beginning one year after the consummation of our initial public offering, unless the managing member of our operating company determines, in its reasonable discretion, that such redemption would create a material risk that the operating company would be classified as a publicly traded partnership under Section 7704 of the Internal Revenue Code. However, there are circumstances under which the LTIP units will not achieve full parity with membership units. Until and unless such parity is reached, the value that a participant will realize for a given number of vested LTIP units will be less than the value of an equal number of shares of our common stock.

Upon consummation of our initial public offering, we caused our operating company to issue 862,500 LTIP units, 74,500 restricted stock units and 1,017,100 options to purchase our common stock to our chairman, officers and our other key employees. Such LTIP units and stock options will vest as to 1/3  of the amount granted on the first anniversary of the grant date and as to the remainder in 24 equal installments at the end of each month following the first anniversary of the grant date (becoming fully vested on the third anniversary of the grant date).

In addition, upon the consummation of our initial public offering we issued 5,000 restricted stock units worth $100,000 of our common stock to each of our non-employee directors (other than our chairman) and we will issue $100,000 worth of restricted stock units to non-employee directors who join the board after the consummation of our initial public offering on the date such person attends his or her first board meeting. The stock incentive plan also provides for automatic annual grants of restricted stock units to each of our non-employee directors having a value of approximately $25,000. These annual automatic grants will be made on the first business day following each annual meeting of our stockholders. The annual grants will be fully vested on the date of grant, and the initial grants will vest as to 1/3 of the amount granted on the first anniversary of the grant date and as to the remainder in 24 equal installments at the end of each month following the first anniversary of the grant date (becoming fully vested on the third anniversary of the grant date).

The terms of the stock incentive plan provide that the plan administrator may amend, suspend or terminate the stock incentive plan at any time, but stockholder approval of any such action will be obtained if required to comply with applicable law. Further, no action may be taken that adversely affects any rights under outstanding awards without the holder’s consent. The stock incentive plan will terminate on the tenth anniversary of the effectiveness of the registration statement of which this Annual Report on Form 10-K is a part.

Annual Bonus Plan

The Morgans Hotel Group Co. Annual Bonus Plan, or our annual bonus plan, was adopted by our board of directors and approved by our sole stockholder prior to the consummation of our initial public offering. The annual bonus plan will be administered by our compensation committee, which will select the participants and establish the performance goals, target bonus opportunity and maximum bonus opportunity for each participant. Upon completion of each performance period, the compensation committee will evaluate our performance against the established performance goals and thereafter determine the amount of bonuses payable to each participant. The compensation committee reserves the right to increase or decrease the amount of the bonuses payable to any participant to reflect such quantitative or qualitative considerations as the compensation committee deems relevant. The annual bonuses payable to Messrs. Scheetz, Gordon and Szymanski are expected to be payable under and in accordance with our annual bonus plan.

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ITEM 12SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table sets forth, as of March 27, 2006, certain information regarding the beneficial ownership information of our common stock by:

·each person known to us to be the beneficial owner of more than 5% of our common stock;

·each named executive officer;

·each of our directors; and

·all of our executive officers and directors as a group.

Beneficial ownership is determined according to the rules of the SEC, and generally means that a person has beneficial ownership of a security if he or she possesses sole or shared voting or investment power of that security, and includes options that are currently exercisable or exercisable within 60 days. Each director, officer or 5% or more stockholder, as the case may be, has furnished us with information with respect to beneficial ownership. Except as otherwise indicated, we believe that the beneficial owners of common stock listed below, based on the information each of them has given to us, have sole investment and voting power with respect to their shares, except where community property laws may apply. We have based our calculations of the percentage of beneficial ownership on 33,500,000 shares of common stock outstanding as of March 27, 2006.

Unless otherwise noted below, the address of the persons and entities listed on the table is c/o Morgans Hotel Group Co., 475 Tenth Avenue, New York, New York 10018.

Beneficial Owner	Shares Beneficially Owned		% of Shares of Common Stock Beneficially Owned
5% Stockholders:
NorthStar Capital Investment Corp.(1)		10,164,698		30.3	%
NorthStar Partnership, L.P.(2)		2,000,000		6.0	%
RSA Associates, L.P.(3)		2,319,595		6.9	%
Directors and Named Executive Officers:
David T. Hamamoto(4)		2,057,035		6.1	%
W. Edward Scheetz(5)		2,079,900		6.2	%
Marc Gordon(6)		31,922		*
Richard Szymanski		0		*
Lance Armstrong		1,000		*
Edwin L. Knetzger, III		5,000		*
Fred J. Kleisner		1,500		*
Thomas L. Harrison		0		*
Robert Friedman		500		*
Executive Officers and Directors as a group (9 persons)		4,176,857		12.5	%

*Less than 1%.

(1)Includes 8,164,698 shares of our common stock held by NCIC MHG Subsidiary LLC, a wholly-owned subsidiary of NorthStar Capital Investment Corp. Voting and investment decisions with respect to investments held by NorthStar Capital Investment Corp. are made through its board of directors. The address of NorthStar Capital Investment Corp. is 527 Madison Avenue, New York, NY 10022. W. Edward Scheetz, our President and Chief Executive Officer, and David T. Hamamoto, our Chairman, are shareholders in and co-chairmen of the board of directors and co-chief executive officers of

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NorthStar Capital Investment Corp. Also, includes 2,000,000 shares of our common stock owned by NorthStar Partnership, L.P. NorthStar Capital Investment Corp. is the general partner of NorthStar Partnership, L.P. W. Edward Scheetz, our President and Chief Executive Officer, David T. Hamamoto, our Chairman, and Marc Gordon, our Chief Investment Officer and Executive Vice President of Capital Markets, are limited partners in NorthStar Partnership, L.P.

(2)The general partner of NorthStar Partnership, L.P. is NorthStar Capital Investment Corp. Voting and investment decisions with respect to investments held by NorthStar Partnership, L.P. are made by its general partner, NorthStar Capital Investment Corp., acting through its board of directors. The address of NorthStar Partnership, L.P. is 527 Madison Avenue, New York, NY 10022. W. Edward Scheetz, our President and Chief Executive Officer, David T. Hamamoto, our Chairman, and Marc Gordon, our Chief Investment Officer and Executive Vice President of Capital Markets, are limited partners in NorthStar Partnership, L.P., and Messrs. Scheetz and Hamamoto are shareholders in and co-chairmen of the board of directors and co-chief executive officers of NorthStar Capital Investment Corp., the general partner of NorthStar Partnership, L.P.

(3)The general partner of RSA Associates, L.P. is RSA GP Corp. Voting and investment decisions with respect to investments held by RSA Associates, L.P. are made by its general partner, RSA GP Corp., acting through its controlling stockholder, Ian Schrager. The address of RSA Associates, L.P. is 818 Greenwich Street, New York, NY 10014.

(4)Includes 365,938 shares of our common stock representing Mr. Hamamoto’s indirect pecuniary interest in the 2,000,000 shares of our common stock indirectly beneficially owned by NorthStar Capital Investment Corp. through its majority-owned subsidiary, NorthStar Partnership, L.P., which directly beneficially owns such 2,000,000 shares of our common stock, and 954,755 shares of our common stock representing Mr. Hamamoto’s indirect pecuniary interest in the 8,164,698 shares of our common stock beneficially owned indirectly by NorthStar Capital Investment Corp. through its wholly-owned subsidiary, NCIC MHG Subsidiary LLC.

(5)Includes 365,734 shares of our common stock representing Mr. Scheetz’s indirect pecuniary interest in the 2,000,000 shares of our common stock indirectly beneficially owned by NorthStar Capital Investment Corp. through its majority-owned subsidiary, NorthStar Partnership, L.P., which directly beneficially owns such 2,000,000 shares of our common stock, 953,924 shares of our common stock representing Mr. Scheetz’s indirect pecuniary interest in the 8,164,698 shares of our common stock beneficially owned indirectly by NorthStar Capital Investment Corp. through its wholly-owned subsidiary, NCIC MHG Subsidiary LLC, 2,400 shares of our common stock indirectly beneficially owned by Mr. Scheetz through two trusts which directly own 2,400 shares of our common stock for the benefit of Mr. Scheetz’s two minor children and 10,000 shares of our common stock are indirectly beneficially owned by Mr. Scheetz through his spouse who directly beneficially owns such 10,000 shares of our common stock.

(6)The shares of our common stock distributed to Mr. Gordon by NorthStar Partnership, L.P. are pledged as security for a loan from NorthStar Partnership, L.P. to Mr. Gordon.

ITEM 13CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Formation and Structuring Transactions

In connection with the Formation and Structuring Transactions, the ownership interests in Morgans Group LLC, the entity through which we own our hotel properties, was restated, following the contribution of our initial hotel properties, to represent membership units that are exchangeable for shares of our common stock. In addition, as described below, membership units were issued to Morgans Hotel Group

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LLC for the contribution of MHG Management Company. These membership units were allocated as follows:

·15,000,000 membership units issued to us in exchange for the contribution of the net proceeds of our initial public offering;

·approximately 15,693,000 membership units received by us on a one-for-one basis in consideration for our exchange of shares of our common stock for NorthStar’s interest in Morgans Group LLC;

·approximately 2,769,000 membership units received by us on a one-for-one basis in consideration for our exchange of shares of our common stock for RSA Associates’ interest in Morgans Group LLC;

·approximately 38,000 membership units received by us on a one-for-one basis in consideration for our exchange of shares of our common stock for the other Morgans Hotel Group Investors’ interest in Morgans Group LLC; and

·1,000,000 membership units issued to Morgans Hotel Group LLC for the contribution of MHG Management Company.

As a result of the above transactions, we hold a 97.1% managing membership interest in Morgans Group LLC.

Debt Guarantees

As part of the Formation and Structuring Transactions, Morgans Hotel Group LLC provided a guarantee of approximately $225.0 million of indebtedness of Morgans Group LLC. David T. Hamamoto, our Chairman, has agreed to reimburse Morgans Hotel Group LLC for up to $98.3 million of any amount that Morgans Hotel Group LLC is required to pay under its guarantee, W. Edward Scheetz, our President and Chief Executive Officer, has agreed to reimburse Morgans Hotel Group LLC for up to $98.3 million of any amount that Morgans Hotel Group LLC is required to pay under its guarantee, and Marc Gordon, our Chief Investment Officer and Executive Vice President of Capital Markets, has agreed reimburse Morgans Hotel Group LLC for up to $7.0 million of any amount Morgans Hotel Group LLC is required to pay under its guarantee. The guarantee by Morgans Hotel Group LLC and these reimbursement obligations were provided so that the providers of the reimbursement obligations will not recognize taxable capital gains in connection with the Formation and Structuring Transactions in the amount that each has agreed to reimburse. The reimbursement obligations are for a fixed term and be renewable at the option of each provider.

Registration Rights

RSA Associates, L.P.

Demand Registration.   Beginning on the six-month anniversary of our initial public offering, RSA Associates will have certain rights, subject to certain limitations, to request that we register shares of our common stock owned by it; provided that the number of shares included in such a demand registration would yield gross proceeds to RSA Associates of at least $25,000,000. If the value of our shares held by RSA Associates is less than $25,000,000 but greater than $15,000,000, the request for registration must be for all of the shares held by RSA Associates. Upon such request, we will be required to use our reasonable best efforts to file a registration statement within 30 days of such a request, and cause the registration statement to be declared effective by the SEC as soon as practicable thereafter. Subject to certain conditions, we may withdraw a previously filed registration statement or postpone the initial filing of that registration for up to 90 days if, based on our good faith judgment, such withdrawal or postponement

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would avoid premature disclosure of a matter that we determine would not be in our best interests to disclose at such time.

Piggy-back Registration.   Beginning on the six-month anniversary of our initial public offering, whenever we propose to register any shares of our common stock (other than on a Form S-8 or Form S-4), RSA Associates will have the right to include its shares of our common stock on the registration statement.

Shelf Registration.   After we become eligible to file a registration statement on Form S-3, RSA Associates will be entitled to request that we file and maintain a shelf registration statement for the resale of all or any portion of shares owned by them, subject to certain limitations. Upon such request, we will be required to use our reasonable best efforts to file such a registration statement within 30 days of the request, and cause it to be declared effective by the SEC as soon as reasonably practicable thereafter.

Expenses.   In connection with a demand, piggy-back or shelf registration, any underwriting discounts or commissions attributable to the sale of the registrable shares or fees and expenses of counsel representing RSA Associates in excess of the amount specified below shall be borne by RSA Associates. All other expenses of such registration, including applicable federal and state filing fees and up to $15,000 of fees and disbursements of counsel to RSA Associates, shall be borne by us.

NorthStar Partnership, L.P.

Demand Registration.   Beginning on the six month anniversary of our initial public offering, NorthStar and its affiliates will have certain rights, subject to certain limitations, to request that we register shares of our common stock owned by them; provided that the number of shares included in such a demand registration would yield gross proceeds to the entities requesting registration of at least $25,000,000. If the value of our shares held by those entities is less than $25,000,000 but greater than $15,000,000, the request for registration must be for all of the shares held by the entities requesting registration. Upon such request, we will be required to use our reasonable best efforts to file a registration statement within 30 days of such a request, and cause the registration statement to be declared effective by the SEC as soon as practicable thereafter. Subject to certain conditions, we may withdraw a previously filed registration statement or postpone the initial filing of that registration for up to 90 days if, based on our good faith judgment, such withdrawal or postponement would avoid premature disclosure of a matter that we had determined would not be in our best interests to disclose at such time.

Piggy-back Registration.   Beginning on the six month anniversary of our initial public offering, whenever we propose to register any shares of our common stock (other than on a Form S-8 or Form S-4), NorthStar and its affiliates will have the right to include shares of our common stock owned by them on the registration statement.

Shelf Registration.   After we become eligible to file a registration statement on Form S-3, any of NorthStar or its affiliates will be entitled to request that we file and maintain a shelf registration statement for the resale of all or any portion of shares owned by them, subject to certain limitations. Upon such request, we will be required to use our reasonable best efforts to file such a registration statement within 30 days of the request, and cause it to be declared effective by the SEC as soon as reasonably practicable thereafter.

Transfer of Registration Rights.   To the extent NorthStar or its affiliates distribute shares of our common stock to its members, investors or beneficial owners, those distributees will obtain the benefits of these registration rights if they are otherwise restricted from freely transferring those distributed shares of our common stock.

Expenses.   In connection with a demand, piggy-back or shelf registration, any underwriting discounts or commissions attributable to the sale of the registrable shares or fees and expenses of counsel

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representing the entities requesting registration in excess of the amount specified below shall be borne by those entities. All other expenses of such registration, including applicable federal and state filing fees and up to $15,000 of fees and disbursements of one counsel to the entities requesting registration, shall be borne by us.

Agreements with Ian Schrager

Consulting Agreement.   We are party to a consulting agreement, dated June 24, 2005, with Ian Schrager under which he acts as a consultant to us on a non-exclusive basis through December 31, 2007. We are permitted to terminate the consulting agreement for any reason in our sole and absolute discretion.

Pursuant to that agreement, we may ask Ian Schrager to oversee certain specific projects at our hotel properties, such as renovations, marketing, public relations and other special events. We would retain no control over the manner, means, details and methods used by Ian Schrager in performing those projects.

We have agreed to pay Ian Schrager a minimum base compensation per year of $1,067,240 for calendar year 2005 (which shall be pro-rated for 2005), $750,000 for calendar year 2006 and $500,000 for calendar year 2007, as well as an annual bonus based on a percentage of the increase in our EBITDA subject to a cap of $750,000 in 2006 and $500,000 in 2007. The base compensation, estimated bonus and other benefits and expense reimbursements for 2005 are due regardless of any prior termination of the agreement. In addition, subject to certain limitations, Ian Schrager will be entitled to reimbursement from us for business, entertaining and reasonable and customary business travel expenses that he incurs on our behalf, as well as to certain other benefits including support services, fixed payments per year for use of a private aircraft regardless of actual usage ($500,000 for 2005 (which shall be pro-rated) and $250,000 for 2006), exclusive use of an automobile leased by us, a full-time driver, a full-time secretary, complimentary rooms at any of our hotel properties (whether owned or managed) for him, his immediate family members and any other person whom he believes could advance or further our objectives, and participation in our medical insurance programs.

Under this consulting agreement, we have paid Ian Schrager through December 31, 2005 base compensation of $.6 million, reimbursement of expenses of $131,426 and $250,000 for use of a private aircraft. Furthermore, Ian Schrager received an approximately $1.1 million bonus for 2005.

Pursuant to the agreement, we have also agreed to indemnify Ian Schrager for any claims made against him in connection with any future condominium conversions of any of our existing properties.

None of our agreements with Ian Schrager restrict his ability to compete with us.

Services Agreement.   We are also party to a services agreement with Ian Schrager in connection with the use of certain of each other’s employees for a transitional period. The transitional period ends on June 30, 2006. During the transitional period, Ian Schrager will be able to use certain of the existing design and development personnel currently employed by us for the performance of work in connection with Ian Schrager’s other businesses in a manner consistent with past practice, and those employees’ time and attention will be allocated between Ian Schrager’s businesses and our business in the exact proportion as they were prior to June 24, 2005 (the effective date of the services agreement). We will reimburse Ian Schrager for 50% of the costs that he incurs for those employees who accept or have accepted employment with him during the term of this agreement. Ian Schrager will in turn reimburse us for 50% of the costs that we incur for those employees whose time and attention is allocated between Ian Schrager’s business and our business. In each instance, these costs include a reasonable allocation of corporate overhead, rent and other similar costs relating to such employees.

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Option Agreement.   Prior to the initial filing of the registration statement for our initial public offering, RSA Associates, of which RSA GP Corp., a company controlled by Ian Schrager, is the general partner, had an option to purchase up to approximately an additional 5% ownership interest in Morgans Hotel Group LLC at the time of completion of our initial public offering. Prior to the initial filing of the registration statement for our initial public offering, Morgans Hotel Group LLC provided RSA Associates with notice of our proposed initial public offering transaction and RSA Associates notified Morgans Hotel Group LLC that it would not exercise its option. Instead, and in accordance with the terms of the Option Agreement, RSA Associates will receive a cash “put” payment of $9.0 million from Morgans Hotel Group LLC on the closing date of our initial public offering.

Joint Venture Agreements

Chodorow Joint Venture.   Morgans Hotel Group LLC and Chodorow Ventures LLC are parties to a joint venture agreement in which the two parties agreed, through the establishment of limited liability companies or partnerships, to jointly own, operate and/or manage on a 50/50 basis restaurants and bars, in-room dining, banquet catering and other food and beverage operations in select hotel properties designated by Morgans Hotel Group LLC. The rights and obligations of Morgans Hotel Group LLC under the joint venture agreements are being transferred to us in connection with the Formation and Structuring Transactions.

Entities formed under this joint venture arrangement operate the restaurants in:

·Morgans

·Hudson

·Delano

·Mondrian

·Clift

·St. Martins Lane

·Sanderson

Entities formed under this joint venture arrangement operate the bars in:

·Delano

·St. Martins Lane

·Sanderson

Chodorow Ventures LLC, or an affiliate, typically receives a management fee equal to three percent of the gross receipts of each joint venture operation. The management fee is generally only paid to the extent the specific joint venture operation in question produces a positive net cash flow (after the payment of all operating expenses, reserves and rent). Any management fee not paid accrues and is paid out of the next available positive net cash flow period from that joint venture operation. However, at Hudson and Clift, we are currently responsible for 100% of any losses and guarantee the management fee.

The joint venture entity typically enters into a lease, or other similar agreement where necessary to comply with applicable liquor laws, with the entity that owns the relevant hotel on market terms. The rent is the greater of (a) a negotiated market base rent or fee, and (b) a percentage that is typically seven or eight percent of the gross receipts of the joint venture operation, as such percentage may be adjusted to reflect relevant market conditions.

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The terms of each joint venture operation are substantially the same but include such modifications we believed necessary to reflect differences in circumstances among the various venture operations. Therefore, each lease or related agreement sets out the specific rent or fee arrangements and the specific obligations of the joint venture entity and the hotel-owning entity, respectively.

Each joint venture agreement typically requires both parties to agree on specified major decisions including, but not limited to:

·approving the budget;

·incurring any obligations not provided for in an approved budget; and

·approving plans relating to the build-out or construction of improvements at any restaurant to be operated by the joint venture entity.

In the event the parties cannot agree on any such decision, either party has the right to buy out the other party’s interests in the joint venture at a pre-determined price equal to 5.5 times EBITDA (as defined in the joint venture agreement) for the previous twelve months for each of the joint venture operations. No party has the right to require the other party to buy out its interests in the joint venture.

Burford Hotels Limited Joint Venture.   We have a joint venture relationship with Burford Hotels Limited, a private limited liability company incorporated in England and Wales, through which we own Sanderson and St. Martins Lane. We manage Sanderson and St. Martins Lane under hotel management agreements between our joint venture operator and one of our subsidiaries. Under these management agreements, we earn fees that total 4% of the total revenues of our two London properties. In addition, we are reimbursed for allocated chain services, which include certain overhead costs for Sanderson and St. Martins Lane and which are currently recorded at approximately 2.5% of total revenues of our two London properties.

We own a 50% equity interest in our joint venture operator, Morgans Hotel Group Europe Ltd., which we established for the purpose, directly or through one or more subsidiaries, of carrying on the business of acquiring, developing and managing hotels with Burford Hotels Limited in Europe.

We have equal representation with Burford Hotels Limited on the Board of Directors of our joint venture. In the event the parties cannot agree on certain specified major decisions, such as approving the hotel budgets, either party has the right to buy all the shares in the joint venture of the other party or, if its offer is rejected, require the other party to buy all of its shares at the same offered price per share in cash.

Our joint venture with Burford Hotels Limited does not limit our ability to acquire, develop, own or operate hotels in Europe, either on our own or through joint ventures with others.

Boyd Gaming Corporation Joint Venture.   We have a joint venture relationship with Boyd Gaming Corporation, a leading diversified owner and operator of gaming entertainment properties, to design, develop and construct Delano Las Vegas and Mondrian Las Vegas as part of its 63-acre Las Vegas Strip property redevelopment project, referred to as Echelon Place, and scheduled to open in early 2010. We will also be responsible for the operation and management of Delano Las Vegas and Mondrian Las Vegas under the terms of a management agreement. We own, through wholly-owned subsidiaries, a 50% equity interest in the joint venture entity.

Capital contributions will be made on a pro rata basis in accordance with an agreed budget. Specified major decisions require joint approval. If agreement is not reached, the parties will continue construction and development in accordance with the then existing plans. Once non-recourse project financing has been obtained, Boyd Gaming Corporation will contribute approximately 6.5 acres of land to the joint venture and we will contribute in cash the fair market value of the land contributed which we have agreed is equal to $15.0 million for each acre ($15.0 million to $17.5 million of which will by that time already have been

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contributed as part of predevelopment). The joint venture will be dissolved if the project financing is not obtained by June 30, 2008. We expect to open Delano Las Vegas and Mondrian Las Vegas concurrently with the opening of Echelon Place in early 2010.

Our joint venture prevents us from acquiring, developing, owning or operating any other hotels in Las Vegas until five years after the date when both the Delano Las Vegas and Mondrian Las Vegas are opened to the public.

Ownership and Management of Shore Club

We own a 6.8% interest in Philips South Beach, LLC, the entity that owns Shore Club. We also manage Shore Club under a hotel management agreement with Philips South Beach, LLC. Subject to certain limitations, we have been granted complete and full control and discretion in the operation, direction, management and supervision of Shore Club through 2022 and, subject to the early termination provisions described below, are entitled to the compensation described below through such period.

The owner of Shore Club is required to fund all items in the annual budget for the hotel and to pay all reasonable costs and expenses for items necessary to the operation and management of the hotel.

We are reimbursed by the owner of the hotel out of gross revenues of the hotel for our reasonable costs and expenses, which include out-of-pocket expenses, certain extraordinary types of expense for projects which involve a substantial time commitment on the part of our employees and which are not already covered by the annual budget, and the hotel’s pro rata share of our expenses for benefits and services provided by us to all the hotels we own and manage (such as sales promotion services), which we refer to as allocable chain expenses.

In addition to these reimbursements, we receive an annual fee of 4.5% of gross revenues of the hotel and are entitled to an incentive fee based on the performance of the hotel which is measured by reference to net operating profits. The incentive fees are potentially up to 20% of the net operating profits of the hotel in any given calendar year. As of December 31, 2005, we have not earned any incentive fees since the inception of the management agreement.

The owner may terminate the hotel management agreement if, among other things, we file for bankruptcy, commit fraud or willful misconduct, fail to perform our obligations under the agreement resulting in the hotel or a material portion of the hotel being shut down by governmental authorities, default in our performance of a material term of the management agreement, or assign or lose our interest as a result of a judgment or foreclosure. In addition to these customary termination provisions, the owner may terminate the hotel management agreement if the hotel fails to generate net operating profits in each of three consecutive calendar years equal to or greater than 85% of the projected net operating profit for that year or if the relative occupancy of the hotel for any calendar year shall be less than 80% of Delano’s occupancy for that year. The hotel has met the required percentage of projected operating profit or occupancy requirement every year to date. The occupancy requirement is tied to Delano to ensure that our management of Shore Club is not impacted by our ownership of Delano, which is located nearby.

Indemnification Agreement with Morgans Hotel Group LLC

We are entering into an indemnification agreement with Morgans Hotel Group LLC that will govern certain indemnification obligations of ours for the benefit of Morgans Hotel Group LLC, its members and the affiliates, managers, officers and employees of Morgans Hotel Group LLC. Under the indemnification agreement, we have agreed to indemnify Morgans Hotel Group LLC, its members and the affiliates, managers, officers and employees of Morgans Hotel Group LLC for (i) contingent claims and obligations, including litigation of claims against Morgans Hotel Group LLC related to the hotel properties, restaurants and bars it is contributing to us, (ii) any transfer tax payable as a result of the sale of shares of

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our common stock in the offering or future sales of our common stock that are aggregated with the offering, and (iii) any payments made to the hotel designer in connection with our agreement with the hotel designer described in Note 5 to our combined financial statements. Any distributee of the shares of our common stock issued in exchange for membership units in connection with the Formation and Structuring Transactions or membership units of Morgans Group LLC issued to Morgans Hotel Group LLC in connection with the Formation and Structuring Transactions will be a third-party beneficiary under this agreement.

NorthStar Hospitality LLC Preferred Equity Interest in Clift

In connection with our initial public offering, we contributed approximately $11.4 million to our wholly-owned subsidiary, Clift Holdings, LLC, the entity through which we lease Clift. Clift Holdings, LLC in turn redeemed the preferred equity that is currently held by NorthStar Hospitality LLC, a wholly-owned subsidiary of NorthStar.

In July 2002, NorthStar Hospitality LLC made a contribution of $6.125 million to the capital structure of Clift Holdings LLC. The contribution entitled NorthStar Hospitality LLC to a 0.1% membership interest in Clift Holdings, LLC, with the remaining 99.9% membership interest being held by our predecessor, as managing member. The limited liability company agreement required Clift Holdings, LLC to, among other things, make monthly payments of interest (“preferred return”) on NorthStar Hospitality’s equity contribution.

In October 2004, in connection with the sale and leaseback transaction involving Clift, the limited liability company agreement was amended to, among other things, extend the original redemption date for the preferred equity to October 2006, with an option to further extend it until October 2007 if certain conditions were met. Upon redemption, NorthStar Hospitality LLC will be entitled to (i) its equity contribution less any distributions received from Clift Holdings, (ii) any and all accrued and unpaid preferred return, (iii) an amount sufficient to yield it an internal rate of return (as defined in the limited liability company agreement) of 25.27% and (iv) an equity participation equal to 25% of the aggregate amount that would be distributed to the members of Clift Holdings LLC if the entire interest of Clift Holdings LLC in Clift was sold for its fair market value.

NorthStar Hospitality LLC distributed the approximately $11.4 million it received in redemption of its preferred interest in Clift Holdings LLC to NorthStar and NorthStar intended to use such amounts, along with other amounts distributed to it from Morgans Hotel Group LLC, to repay existing obligations to non-partners. Even though they will not receive any cash payment, Messrs. Scheetz, Hamamoto and Gordon, along with the other partners in NorthStar, will indirectly benefit by the cash payments received by NorthStar which NorthStar will use to repay existing obligations to non-partners.

ITEM 14PRINCIPAL ACCOUNTANT FEES AND SERVICES

Independent Accountants’ Fees

Aggregate fees for professional services rendered for the Company and its predecessor by BDO Seidman, LLP and its affiliates for the fiscal years ended December 31, 2005 were as follows:

Type of Fee	2005
Audit Fees	$	1,072,653
Audit-Related Fees	—
Tax Fees	—
All Other Fees	—
Total	$	1,072,653

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Audit Fees billed were for professional services rendered for the audit of the Company’s consolidated financial statements as of December 31, 2005, 2004, 2003 and 2002 including the Company’s predecessor’s combined financial statements as of December 31, 2005, 2004, 2003 and 2002. Additionally, for the fiscal year ended December 31, 2005, fees associated with the issuance of consents, review of the Company’s registration statement on Form S-1 and other such services are included herein.

No Audit Fees were paid to BDO Seidman, LLP and its affiliates for the fiscal year ended December 31, 2004.

No Tax Fees, Audit-Related or All Other Fees were incurred for the fiscal years ended December 31, 2005 and December 31, 2004.

Audit Committee Pre-Approval Policy

In accordance with applicable laws and regulations, the Audit Committee reviews and pre-approves any audit and non-audit services to be performed by BDO Seidman, LLP to ensure that the work does not compromise its independence in performing audit services. The responsibility for pre-approval of audit and permitted non-audit services includes pre-approval of the fees for such services and the other terms of the engagement. The Audit Committee annually reviews and pre-approves all audit, audit-related, tax and all other services that are performed by the Company’s independent registered public accounting firm. The Audit Committee did not approve the audit and tax services listed above, as the Company was not a publicly traded company and as such, did not have an Audit Committee. The Audit Committee will approve all of the audit and tax services going forward in 2006.

In some cases, the Audit Committee pre-approves the provision of a particular category or group of services for up to a year, subject to a specific budget. In other cases, one or more of the members of the Audit Committee have the delegated authority from the Audit Committee to pre-approve services, and such pre-approvals are then communicated to the full Audit Committee.

105

PART IV

ITEM 15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) and (c) Financial Statements and Schedules.

Reference is made to the “Index to the Financial Statements” on page F-1 of this report.

All other financial statement schedules are not required under the related instructions, or they have been omitted either because they are not significant, the required information has been disclosed in the consolidated and combined financial statements and the notes related thereto.

(b) Exhibits

Exhibit Number		Description
	3.1*	Amended and Restated Certificate of Incorporation of Morgans Hotel Group Co.
	3.2*	Amended and Restated By-laws of Morgans Hotel Group Co.
	4.1*	Specimen Certificate of Common Stock of Morgans Hotel Group Co.
	10.1	Amended and Restated Limited Liability Company Agreement of Morgans Group LLC
	10.2	Registration Rights Agreement, dated as of February 17, 2006, by and between Morgans Hotel Group Co. and NorthStar Partnership, L.P. (incorporated by reference to Exhibit 99.9 to the Company’s Statement on Schedule 13D filed on February 27, 2006)
	10.3	Registration Rights Agreement, dated as of February 17, 2006, by and between Morgans Hotel Group Co. and RSA Associates, L.P.
	10.4*	Formation and Structuring Agreement, dated as of October 25, 2005, by and among Morgans Group LLC, Morgans Hotel Group LLC, NorthStar Hospitality LLC, NorthStar Partnership, L.P. and RSA Associates, L.P.
	10.5*	Consulting Agreement, dated as of June 24, 2005, by and between Morgans Hotel Group LLC and Ian Schrager
	10.6*	Services Agreement, dated as of June 24, 2005, by and between Morgans Hotel Group LLC and Ian Schrager
	10.7*	Joint Venture Agreement, dated as of September 7, 1999, by and between Ian Schrager Hotels LLC and Chodorow Ventures LLC
	10.8*	Restated Joint Venture Agreement, dated as of June 18, 1998, by and between Ian Schrager Hotels LLC and Burford Hotels Limited
	10.9*	Operating Agreement of Hudson Leaseco LLC, dated as of August 28, 2000, by and between Hudson Managing Member LLC and Chevron TCI, Inc.
	10.10*	Lease, dated as of August 28, 2000, by and between Henry Hudson Holdings LLC and Hudson Leaseco LLC
	10.11*	Ground Lease, dated October 14, 2004, by and between Geary Hotel Holding, LLC and Clift Holdings, LLC
	10.12*	Lease, dated January 3, 1997, by and among Mrs. P. A. Allsopp, Messrs. M. E. R. Allsopp, W. P. Harriman and A. W. K. Merriam, and Burford (Covent Garden) Limited
	10.13*	Agreement of Consolidation and Modification of Mortgage, Security Agreement, Assignment of Rents and Fixture Filing, dated as of June 29, 2005, by and among Wachovia Bank, National Association and Morgans Holding LLC, Royalton, LLC and Henry Hudson Holdings LLC

106

10.14*	Third Amended and Restated Mortgage, Security Agreement, Assignment of Rents and Fixture Filing, dated as of June 29, 2005, by and between Wachovia Bank, National Association and Beach Hotel Associates LLC
10.15*	Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filings, dated as of June 29, 2005, by and between Wachovia Bank, National Association and Mondrian Holdings LLC
10.16*	Senior Mezzanine Loan and Security Agreement, dated as of June 29, 2005, by and between Wachovia Bank, National Association and MMRDH Senior Mezz Holdings Company LLC
10.17*	Intermediate Mezzanine Loan and Security Agreement, dated as of June 29, 2005, by and between Wachovia Bank, National Association and MMRDH Intermediate Mezz Holdings Company LLC
10.18*	Junior Mezzanine Loan and Security Agreement, dated as of June 29, 2005, by and between Wachovia Bank, National Association and MMRDH Junior Mezz Holdings Company LLC
10.19*	Facility Agreement, dated as of November 24, 2005, by and among Ian Schrager London Limited (to be renamed Morgans Hotel Group London Limited), Citigroup Global Markets Limited, the Financial Institutions Listed in Schedule 1 thereto and Citibank International plc
10.20	Indemnification Agreement, dated as of February 17, 2006, by and among Morgans Hotel Group Co., Morgans Hotel Group LLC, NorthStar Partnership, L.P. and RSA Associates, L.P.
10.21*	Agreement of Purchase and Sale, dated as of December 22, 2005, by and between James Hotel Scottsdale, LLC and Morgans Hotel Group LLC
10.22	Morgans Hotel Group Co. 2006 Omnibus Stock Incentive Plan
10.23*	Joint Venture Agreement, dated as of January 3, 2006, between Morgans/LV Investment LLC and Echelon Resorts Corporation
10.24	Employment Agreement dated as of February 14, 2006, by and between W. Edward Scheetz and Morgans Hotel Group Co.
10.25	Employment Agreement dated as of February 14, 2006, by and between Marc Gordon and Morgans Hotel Group Co.
10.26*	Accepted Offer Letter, dated July 25, 2005, of Richard Szymanski
10.27*	Amendment No. 1 to the Formation and Structuring Agreement, dated as of January 26, 2005, by and among Morgans Group LLC, Morgans Hotel Group LLC, NorthStar Hospitality LLC, NorthStar Partnership, L.P. and RSA Associates, L.P.
10.28	Morgans Hotel Group Co. Annual Bonus Plan
10.29*	Form of Morgans Hotel Group Co. Director RSU Award Agreement
10.30*	Form of Morgans Hotel Group Co. Stock Option Award Agreement
10.31*	Form of Morgans Hotel Group Co. LTIP Unit Vesting Agreement
10.32	Credit Agreement, dated as of February 17, 2006, by and among Morgans Hotel Group Co., Morgans Group LLC, the Lenders Party thereto, CitiCorp North America, Inc., Morgan Stanley Senior Funding, Inc. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC and Bank of America N.A.
10.33	Credit Agreement, dated as of February 17, 2006, by and among Morgans Hotel Group Co., Morgans Hotel Group Management LLC, the Lenders Party thereto, CitiCorp North America, Inc., Morgan Stanley Senior Funding, Inc. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Citigroup Global Markets Inc. and Bank of America N.A.

107

14.1	Code of Ethics
21.1	Subsidiaries of the Registrant
24.1	Power of attorney (included on the signature page hereof)
31.1	Certification by the Chief Executive Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification by the Chief Financial Officer pursuant to 17 CFR 240.13a-14(a)/15(d)-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification by the Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification by the Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*Incorporated by reference to the like-numbered exhibit to the Company’s Registration Statement on Form S-1 (File No. 333-129277)

108

Index to Financial Statements
And Financial Statements

INDEX TO COMBINED FINANCIAL STATEMENTS

Combined Financial Statements:
Report of Independent Registered Public Accounting Firm	F-2
Combined Balance Sheets
As of December 31, 2005 and 2004	F-3
Combined Statements of Operations and Comprehensive Loss
For years ended December 31, 2005, 2004 and 2003	F-4
Combined Statements of Net Assets (Deficit)
For years ended December 31, 2005, 2004 and 2003	F-5
Combined Statements of Cash Flows
For the years ended December 31, 2005, 2004 and 2003	F-6
Notes to Combined Financial Statements	F-7
Morgans Hotel Group Co.:
Report of Independent Registered Public Accounting Firm	F-24
Balance Sheet of December 31, 2005	F-25
Note to Balance Sheet	F-26

F-1

Report of Independent Registered Public Accounting Firm

To the Owners of
Morgans Hotel Group Co. Predecessor:

We have audited the accompanying combined balance sheets of Morgans Hotel Group Co. Predecessor (the “Predecessor” or the “Company”) as of December 31, 2005 and 2004, and the related combined statements of operations and comprehensive loss, changes in net assets (deficit), and cash flows for each of the three years in the period ended December 31, 2005. These combined financial statements are the responsibility of management. Our responsibility is to express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Predecessor is not required to have, nor have we been engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Predecessor as of December 31, 2005 and 2004, and the combined results of their operations and their cash flows for the three years then ended in conformity with accounting principles generally accepted in the United States.

/s/ BDO SEIDMAN, LLP

New York, New York

March 3, 2006, except for Note 10(c) for which

the date is March 30, 2006

F-2

Morgans Hotel Group Co. Predecessor
Combined Balance Sheets
(in thousands)

	As of December 31,
	2005			2004
Assets
Property and equipment, net	$	426,927		$	446,811
Goodwill	73,698			73,698
Investments in and advances to unconsolidated joint ventures	7,529			21,924
Cash and cash equivalents	21,835			12,915
Restricted cash	32,754			19,269
Accounts receivable, net	7,530			8,884
Related party receivables	3,037			4,681
Prepaid expenses and other assets	12,687			6,771
Other, net	20,278			17,730
Total assets	$	606,275		$	612,683
Liabilities and Net Assets (Deficit)
Long term debt and capital lease obligations	$	659,632		$	550,951
Accounts payable and accrued liabilities	32,309			33,990
Other liabilities	23,751			22,610
Total liabilities	715,692			607,551
Minority interest	1,156			967
Commitments and contingencies
Net assets (deficit)	(110,573		)	4,165
Total liabilities and net assets (deficit)	$	606,275		$	612,683

See accompanying notes to combined financial statements.

F-3

Morgans Hotel Group Co. Predecessor
Combined Statements of Operations and Comprehensive Loss
(in thousands)

	Year ended December 31,
	2005			2004			2003
Revenues:
Rooms	$	153,675		$	131,367		$	112,257
Food and beverage	85,573			82,475			78,900
Other hotel	11,622			11,725			13,030
Total hotel revenues	250,870			225,567			204,187
Management fee-related parties	9,479			8,831			6,456
Total revenues	260,349			234,398			210,643
Operating Costs and Expenses:
Rooms	39,666			37,070			33,520
Food and beverage	54,294			51,876			48,252
Other departmental	4,546			3,452			4,341
Hotel selling, general and administrative	51,346			48,944			44,430
Property taxes, insurance and other	13,331			12,619			12,979
Total hotel operating expenses	163,183			153,961			143,522
Corporate expenses	17,982			15,375			13,994
Depreciation and amortization	26,215			27,348			28,503
Total operating costs and expenses	207,380			196,684			186,019
Operating income	52,969			37,714			24,624
Interest expense, net	72,257			67,173			57,293
Equity in loss of unconsolidated joint ventures	7,593			2,958			3,727
Minority interest	4,087			3,833			3,346
Other non-operating (income) expenses	(1,574		)	(5,482		)	2,077
Loss before income tax expense	(29,394		)	(30,768		)	(41,819		)
Income tax expense	822			827			652
Net loss	(30,216		)	(31,595		)	(42,471		)
Other comprehensive income:
Foreign currency translation (loss) gain	(705		)	202			946
Comprehensive loss	$	(30,921	)	$	(31,393	)	$	(41,525	)

See accompanying notes to combined financial statements.

F-4

Morgans Hotel Group Co. Predecessor
Combined Statements of Net Assets (Deficit)
(in thousands)

	Net Assets (Deficit)			Other Comprehensive Income (Loss)				Total Net Assets (Deficit)
Balance, January 1, 2003	$	17,365			$	(2,351	)		$	15,014
Contributions	16,460				—				16,460
Distributions	(7,371		)		—				(7,371		)
Net loss	(42,471		)		—				(42,471		)
Foreign currency translation adjustment	—				946				946
Balance, December 31, 2003	(16,017		)		(1,405		)		(17,422		)
Contributions	75,122				—				75,122
Distributions	(22,142		)		—				(22,142		)
Net loss	(31,595		)		—				(31,595		)
Foreign currency translation adjustment	—				202				202
Balance, December 31, 2004	5,368				(1,203		)		4,165
Contributions	17,760				—				17,760
Distributions	(101,577		)		—				(101,577		)
Net loss	(30,216		)		—				(30,216		)
Foreign currency translation adjustment	—				(705		)		(705		)
Balance, December 31, 2005	$	(108,665	)		$	(1,908	)		$	(110,573	)

See accompanying notes to combined financial statements.

F-5

Morgans Hotel Group Co. Predecessor
Combined Statements of Cash Flows
(in thousands)

	Year ended December 31,
	2005			2004			2003
Cash flows from operating activities:
Net loss	$	(30,216	)	$	(31,595	)	$	(42,471	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation	25,489			26,711			27,916
Amortization of other costs	726			637			587
Amortization of deferred financing costs	16,018			5,724			2,196
Equity in losses from unconsolidated joint ventures	7,593			2,958			3,727
Impairment losses	—			800			—
Gain on tax credits	(1,731		)	(1,731		)	(1,731		)
Gain on extinguishment of debt and legal settlement	—			(6,246		)	—
Other non cash interest expense, net	(2,331		)	733			823
Minority interest	189			279			(23		)
Changes in assets and liabilities:
Accounts receivable, net	1,354			(2,182		)	504
Related party receivables	1,644			7,110			(6,435		)
Restricted cash	2,258			(1,540		)	(1,181		)
Prepaid expenses and other assets	(916		)	1,463			293
Accounts payable and accrued liabilities	(3,079		)	(27,562		)	18,704
Other liabilities	2,872			1,621			4,141
Net cash provided by (used in) operating activities	19,870			(22,820		)	7,050
Cash flows from investing activities:
Additions to property and equipment	(5,603		)	(5,236		)	(4,250		)
(Deposits into) withdrawals from capital improvement escrows, net	(15,743		)	(2,749		)	(1,906		)
Deposits on properties to be acquired	(5,000		)	—			—
Distributions from unconsolidated joint ventures	18,497			297			111
Investment in unconsolidated joint ventures	(12,402		)	(4,942		)	(3,020		)
Net cash used in investing activities	(20,251		)	(12,630		)	(9,065		)
Cash flows from financing activities:
Proceeds from long term debt	580,000			546,255			—
Payments on long term debt and capital lease obligations	(471,319		)	(539,197		)	(2,685		)
Contributions	17,760			75,122			16,460
Distributions	(101,577		)	(22,142		)	(7,371		)
Financing costs	(15,563		)	(15,401		)	(2,745		)
Net cash provided by financing activities	9,301			44,637			3,659
Net increase in cash and cash equivalents	8,920			9,187			1,644
Cash and cash equivalents, beginning of period	12,915			3,728			2,084
Cash and cash equivalents, end of period	$	21,835		$	12,915		$	3,728
Supplemental disclosure of cash flow information:
Cash paid for interest	$	53,091		$	75,771		$	34,505
Cash paid for taxes	$	905		$	843		$	606

See accompanying notes to combined financial statements.

F-6

Morgans Hotel Group Co. Predecessor
Notes to Combined Financial Statements

1.   Organization and Formation transaction

Morgans Hotel Group Co. (“MHGC”) was incorporated on October 19, 2005 as a Delaware corporation to complete an initial public offering (“IPO”) that was part of the formation and structuring transactions below. The Company owns, manages and invests in hotel properties.

The Morgans Hotel Group Co. Predecessor (the “Predecessor” or the “Company”) comprised the subsidiaries and ownership interests that were contributed as part of the formation and structuring transactions from Morgans Hotel Group LLC (“Former Parent”) to Morgans Group LLC. The Former Parent is owned approximately 85% by NorthStar Hospitality, LLC (“NorthStar”), a subsidiary of NorthStar Capital Investment Corp. (“NCIC”) and approximately 15% by RSA Associates, L.P. (“RSA”).

In connection with the IPO, the Former Parent contributed the subsidiaries and ownership interests in nine operating hotels in the United States and the United Kingdom, to Morgans Group LLC in exchange for membership units. Simultaneously, Morgans Group LLC issued additional membership units to the Company in exchange for cash raised by the Company from the IPO. The Former Parent also contributed all the membership interests in its hotel management business to Morgans Group LLC in return for 1,000,000 membership units in Morgans Group LLC exchangeable for shares of Morgans Hotel Group Co. common stock. The Company will be the Managing Member of the operating company, Morgans Group LLC, and will have full management control.

On February 17, 2006, MHGC completed its initial public offering (“IPO”). MHGC issued 15,000,000 shares at $20 per share resulting in estimated net proceeds to the Company of approximately $275.0 million after underwriters’ discounts and estimated offering expenses. On February 17, 2006, the Company paid down $294.6 million of long term debt which included principal and interest (see Note 6), paid in full the preferred equity in Clift due a related party of $11.4 million, which included outstanding interest (see Note 5) and distributed $19.4 million to shareholders. Concurrent with the closing of the IPO, the Company borrowed $80.0 million under a new three-year term loan.

These financial statements have been presented on a combined basis and reflect the Company’s assets, liabilities and results from operations. The assets and liabilities are presented at the historical cost of the Former Parent. The equity method of accounting is utilized to account for investments in joint ventures over which the Company has significant influence, but not control.

The Company has one reportable operating segment; it operates, owns, acquires and redevelops boutique hotels.

F-7

Operating Hotels

The Company’s operating hotels are as follows:

Hotel Name	Location	Number of Rooms	Date Acquired	Ownership
Delano	Miami Beach, FL	194	1998	(1)
Hudson	New York, NY	804	1997	(5)
Mondrian	Los Angeles, CA	237	1998	(1)
Morgans	New York, NY	113	1998	(1)
Royalton	New York, NY	169	1998	(1)
Sanderson	London, England	150	1998	(2)
St. Martins Lane	London, England	204	1998	(2)
Shore Club	Miami Beach, FL	307	2002	(3)
Clift	San Francisco, CA	363	1999	(4)

(1)Wholly owned hotels.

(2)Owned through a 50:50 unconsolidated joint venture.

(3)Operated under a management contract, with a minority ownership interest of approximately 7%.

(4)The hotel is operated under a long-term lease, which is accounted for as a financing.

(5)The hotel is structured as a condominium, in which the Former Parent owns approximately 96% of the square footage of the entire building.

Restaurant Joint Venture

The food and beverage operations of certain of the hotels are operated under a 50:50 joint venture with a third party restaurant operator.

2.   Summary of Significant Accounting Policies

Basis of Presentation

The accompanying combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The Company consolidates all wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in combination.

As further discussed in Note 6, Clift was operated as a debtor-in-possession from August 15, 2003 to October 14, 2004, when it emerged from bankruptcy. For financial reporting purposes, the assets, liabilities and operations of the hotel have been included in the combined results for all periods presented.

FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51, as amended (“FIN 46R”), requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. Pursuant to FIN 46R, the Company consolidates five ventures that provide food and beverage services at the Company’s hotels as the Company absorbs a majority of the ventures’ expected losses and residual returns. FIN 46R has been applied retroactively. These services include operating restaurants including room service at five hotels, banquet and catering services at four hotels and a bar at one hotel. No assets of the Company are collateral for the venturers’ obligations and creditors of the venturers’ have no recourse to the Company.

F-8

Use of Estimates

The preparation of 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.

Cash and Cash Equivalents

Cash and cash equivalents include investments with maturities of three months or less from the date of purchase.

Restricted Cash

The loan agreements require the hotels to deposit 4% of Gross Revenues, as defined, in restricted cash escrow accounts for the future replacement of furniture, fixtures and equipment. In addition, under our existing loan agreements, we have funded a $15.0 million reserve for major capital improvements and are obligated to fund an additional $1.0 million in each of the subsequent 12-month periods commencing July 1, 2006. As replacements occur, the Company’s subsidiaries are eligible for reimbursement from these escrow accounts.

As further required by the loan agreements, restricted cash also consists of cash held in escrow accounts for taxes and insurance payments.

The restaurants owned by the joint venture require the ventures to deposit between 2% and 4% of Gross Revenues, as defined, in an escrow account for the future replacement of furniture, fixtures and equipment.

Accounts Receivable

Accounts receivable are carried at their estimated recoverable amount, net of allowances. Management provides for the allowances based on a percentage of aged receivables and assesses accounts receivable on a periodic basis to determine if any additional amounts will potentially be uncollectible. After all attempts to collect accounts receivable are exhausted, the uncollectible balances are written off against the allowance. The allowance for doubtful accounts is immaterial for all periods presented.

Property and Equipment

Building and building improvements are depreciated on a straight-line method over their estimated useful life of 39.5 years. Furniture, fixtures and equipment are depreciated on a straight-line method using five years. Building and equipment under capital leases and leasehold improvements are amortized on a straight-line method over the shorter of the lease term or estimated useful life of the asset.

Goodwill

Goodwill represents the excess purchase price over the fair value of net assets attributable to business acquisitions. In accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets, the Company tests for impairment at least annually. The Company will test for impairment more frequently if events or circumstances indicate that an asset may be impaired. In accordance with SFAS No. 142, the Company identifies potential impairments by comparing the fair value of the reporting unit with its book value, including goodwill. If the fair value of the reporting unit exceeds the carrying amount, including goodwill, the asset is not impaired. Any excess of carrying

F-9

value over the implied fair value of goodwill would be recognized as an impairment loss in continuing operations.

During the years ended December 31, 2005, 2004 and 2003, the Company utilized the discounted cash flow method to perform its fair value impairment test and determined that no impairment existed.

Impairment of Long-Lived Assets

In accordance with SFAS Statement No. 144, Accounting for the Impairment of Disposal of Long Lived Assets, long-lived assets currently in use are reviewed periodically for possible impairment and will be written down to fair value if considered impaired. Long-lived assets to be disposed of are written down to the lower of cost or fair value less the estimated cost to sell. The Company reviews its portfolio of long-lived assets for impairment at least annually. When events or changes of circumstances indicate that an asset’s carrying value may not be recoverable, we test for impairment by reference to the asset’s estimated future cash flows. In this analysis of fair value, we use discounted cash flow analysis to estimate the fair value of our properties taking into account each property’s expected cash flow from operations, holding period and net proceeds from the dispositions of the property. The factors we address in determining estimated net proceeds from disposition include anticipated operating cash flow in the year of disposition, terminal capitalization rate and selling price per room. There were $800,000 of impairment losses in 2004 and no other impairment write-downs during the years ended December 31, 2005 or 2003.

Investments in and Advances to Unconsolidated Joint Ventures

The Company accounts for its investments in unconsolidated joint ventures using the equity method as it does not exercise control over significant asset decisions such as buying, selling or financing nor is it the primary beneficiary under FIN 46R, as discussed above. Under the equity method, the Company increases its investment for its proportionate share of net income and contributions to the joint venture and decreases its investment balance by recording its proportionate share of net loss and distributions.

The Company periodically reviews its investment in unconsolidated joint ventures for other temporary declines in market value. Any decline that is not expected to be recovered in the next twelve months is considered other than temporary and an impairment charge is recorded as a reduction in the carrying value of the investment. No impairment charges were recognized in the years ended December 31, 2005, 2004 or 2003.

Other Assets

Other assets consist primarily of deferred financing costs and the costs the Company incurred to invest in Shore Club, which has been accounted for as costs to obtain the management contract on that hotel. The costs associated with the management contract are being amortized over the 20 year life of the contract. Deferred financing costs are being amortized over the terms of the related debt agreements.

Foreign Currency Translation

The Company has entered into certain transactions with its foreign joint ventures. The translation of transactions with its foreign joint ventures has resulted in foreign currency transaction gains and losses, which have been reflected in the results of operations based on exchange rates in effect at the translation date or the date of the transactions, as applicable. Such transactions did not have a material effect on the Company’s earnings. The Company’s investments in its foreign joint ventures have been translated at the applicable year-end exchange rate with the translation adjustment presented as a component of other comprehensive loss. The accumulated other comprehensive loss as of December 31, 2005, 2004 and 2003 was approximately $1.9 million, $1.2 million, and $1.4 million, respectively.

F-10

Revenue Recognition

The Company’s revenues are derived from lodging, food and beverage and related services provided to hotel customers such as telephone, minibar and rental income from tenants, as well as hotel management services. Revenue is recognized when the amounts are earned and can reasonably be estimated. Rental revenue is recorded on a straight-line basis over the term of the related lease agreement.

Additionally, the Company recognizes base and incentive management fees and chain service fees related to the management of the operating hotels in unconsolidated joint ventures. These fees are recognized as revenue when earned in accordance with the applicable management agreement. The Company recognizes base management and chain service fees as a percentage of revenue and incentive management fees as a percentage of net operating income or Net Capital or Refinancing Proceeds, as defined. The chain service fees represent cost reimbursements from managed hotels, which are incurred, and reimbursable costs to the Manager.

Concentration of Credit Risk

The Company places its temporary cash investments in high credit financial institutions. However, a portion of temporary cash investments may exceed FDIC insured levels from time to time.

Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred and are included in hotel selling, general and administrative expenses on the accompanying combined statements of operations and comprehensive loss. These costs amounted to approximately $10.7 million, $11.7 million, $9.6 million for the years ended December 31, 2005, 2004, and 2003, respectively.

Repairs and Maintenance Costs

Repairs and maintenance costs are expensed as incurred and are included in hotel selling, general and administrative expenses on the accompanying combined statements of operations and comprehensive loss.

Income Taxes

The United States entities included in the accompanying combined financial statements are either partnerships or limited liability companies, which are treated similarly to partnerships for tax reporting purposes. Accordingly, Federal and state income taxes have not been provided for in the accompanying combined financial statements as the partners or members are responsible for reporting their allocable share of the Company’s income, gains, deductions, losses and credits on their individual income tax returns.

One of the Company’s foreign subsidiaries is subject to UK corporate income taxes. Income tax expense is reported at the applicable rate for the periods presented.

Certain of the Company’s subsidiaries are subject to the New York City Unincorporated Business Tax (“UBT”). The Company did not incur any amounts related to UBT during the years ended December 31, 2005, 2004 or 2003.

Subsequent to the IPO, the Company is subject to Federal and state income taxes. The Company has not reflected a pro-forma income tax provision, since any benefit would be fully reserved.

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Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued liabilities, capital lease obligations, and long-term debt. Substantially all of the Company’s long-term debt accrues interest at a floating rate, which re-prices frequently. Management believes the carrying amount of the aforementioned financial instruments is a reasonable estimate of fair value as of December 31, 2005 and 2004 due to the short-term maturity of these items or variable interest rate.

Interest Rate Cap

The Company has entered into an interest rate cap agreement to reduce the Company’s exposure to interest rate fluctuations. The Company records all derivative instruments on the balance sheet as either assets or liabilities, depending on the rights or obligations under the contract, at their estimated fair value and recognizes the change in fair value in interest expense on the accompanying combined statements of operations and comprehensive loss. The Company’s interest rate cap does not qualify for hedge accounting treatment. The value of the interest rate cap at December 31, 2005 is approximately $3.6 million and is included in other assets on the accompanying combined balance sheet.

3.   Property and Equipment

Property and equipment consist of the following (000’s omitted):

	As of December 31, 2005				As of December 31, 2004
Land		$	73,616			$	73,616
Building		397,556				397,423
Furniture, fixtures and equipment		61,604				84,441
Construction in progress		2,334				1,586
Property subject to capital lease		6,256				6,298
Subtotal		541,366				563,364
Less accumulated depreciation		(114,439		)		(116,553		)
Property and equipment, net		$	426,927			$	446,811

Depreciation on property and equipment was $25.5 million, $26.7 million, $27.9 million, for the years ended December 31, 2005, 2004, and 2003, respectively. Included in this expense was $0.3 million, $0.3 million and $0.2 million for the years ended December 31, 2005, 2004 and 2003, respectively, related to depreciation on property subject to capital leases.

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4.Investments in and Advances to Unconsolidated Joint Ventures

The Company’s investments in and advances to unconsolidated joint ventures and its equity in earnings (losses) of unconsolidated joint ventures are summarized as follows (000’s omitted):

Investments

Entity	As of December 31, 2005				As of December 31, 2004
Morgans Hotel Group Europe Ltd.		$	8,337			$	20,554
Restaurant Venture—SC London		(973		)		(656		)
Shore Club		123				2,026
Other		42				—
Total		$	7,529			$	21,924

Equity in income (losses) from unconsolidated joint ventures

	Year ended December 31, 2005				Year ended December 31, 2004				Year ended December 31, 2003
Morgans Hotel Group Europe Ltd.		$	(6,481	)		$	(3,045	)		$	(3,075	)
Restaurant Venture—SC London		1				958				312
Shore Club		(1,113		)		(871		)		(964		)
Total		$	(7,593	)		$	(2,958	)		$	(3,727	)

Morgans Hotel Group Europe Limited

The Company owns interests in two hotel properties through a joint venture known as Morgans Hotel Group Europe Limited (“MHG Europe”) with Burford Hotels Ltd. (“Burford”). MHG Europe owns two hotels located in London, England, St. Martins Lane, a 204-room hotel and Sanderson, a 150-room hotel. The Company and Burford each own a 50% interest in MHG Europe. Net income (loss) and cash distributions are to be allocated to the joint venturers in accordance with their interests.

The Company is entitled to an incentive management fee (“Incentive Fee”), as defined, equal to 20% of Net Operating Income, as defined, after the joint venture partners receive a 15% return on its investment capital (“15% Return”), as defined. The Company will also be entitled to a Capital Incentive Fee, as defined, from sales or refinancings of the hotels equal to 25% of Net Capital or Refinancing Proceeds, as defined, after the joint venture partners receive a 15% internal rate of return on its Invested Capital, as defined. The Company did not earn any incentive fees during the years ended December 31, 2005, 2004, and 2003.

In November 2005, Morgans Hotel Group London Limited (“MHG London”), a wholly owned subsidiary of MHG Europe, refinanced the existing debt with a new lender. The existing debt was replaced with debt of £107.5 million (approximately $184.9 million). In connection with this refinancing, the Company received approximately $9.7 million as payment on shareholder loans it had advanced to MHG Europe.

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Summarized consolidated balance sheet information of MHG Europe is as follows (000’s omitted):

	As of  December 31, 2005			As of  December 31, 2004
Property and equipment, net		$	168,997		$	193,449
Other assets		21,683			15,748
Total assets		$	190,680		$	209,197
Other liabilities		$	4,532		$	6,669
Debt		184,910			178,071
Loans from joint venture partners		—			8,784
Total equity		1,238			15,673
Total liabilities and equity		$	190,680		$	209,197
Company’s share of equity		$	1,019		$	7,836
Advance to MHG Europe		—			4,364
Capitalized costs and designer fee		7,718			8,354
Company’s investment balance		$	8,337		$	20,554

Included in the capitalized costs and designer fee is approximately $4.7 million, $4.8 million and $5.1 million of capitalized interest as of December 31, 2005, 2004 and 2003, respectively. The capitalized interest costs are being amortized on a straight-line basis over 39.5 years into equity in earnings in the accompanying combined statements of operations and comprehensive loss.

Summarized consolidated income statement information of MHG Europe is as follows (000’s omitted):

	Year ended December 31,
	2005			2004			2003
Hotel operating revenues	$	47,713		$	47,812		$	38,711
Hotel operating expenses	30,955			30,158			24,072
Depreciation and amortization	9,602			9,193			6,839
Operating income	7,156			8,461			7,800
Interest expense	20,157			13,217			12,659
Net loss for period	(13,001		)	(4,756		)	(4,859		)
Other comprehensive gain (loss)	(1,410		)	986			2,082
Comprehensive loss	$	(14,411	)	$	(3,770	)	$	(2,777	)
Company’s share of net loss	$	(6,501	)	$	(2,378	)	$	(2,429	)
Company’s share of other comprehensive gain (loss)	(705		)	493			1,042
Company’s share of comprehensive loss	$	(7,206	)	$	(1,885	)	$	(1,387	)
Other depreciation	(646		)	(667		)	(646		)
Elimination of intercompany transactions	666			—			—
Amount recorded in combined statement of operations and comprehensive loss	$	(6,481	)	$	(3,045	)	$	(3,075	)

Included in interest expense for the year ended December 31, 2005 is approximately $4.3 million for the write off of deferred financing costs and interest rate protection agreements.

The foreign currency exchange rate used to convert British pounds to United States dollars for the years ended December 31, 2005, 2004 and 2003 were approximately 1.82, 1.83, and 1.64, respectively.

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5.Other Liabilities

Other liabilities consist of the following (000’s omitted):

	As of  December 31, 2005			As of  December 31, 2004
Payable due investor member of HL		$	2,855		$	2,855
Deferred gain		—			1,731
Designer fee payable		6,386			6,256
Preferred equity in Clift due NorthStar		11,094			8,585
Clift pre-petition liabilities		3,416			3,183
		$	23,751		$	22,610

Payable due Investor Member of Hudson Leaseco LLC and Deferred Gain

The Company has redeveloped Hudson in a manner to permit the use of federal rehabilitation tax credits (“Historic Tax Credits”). The Company formed Hudson Leaseco LLC (“HL”) for the purpose of operating Hudson and admitted a new member (“investor member”) into HL who could use the Historic Tax Credits. The Company is the Managing Member with a 0.1% membership interest. The investor member, a 99.9% member, has contributed approximately $11.3 million in equity and is entitled to a preferred return with an effective annual rate of approximately 3% on its capital investment. The investor member’s interest in HL is subject to put/call rights during 2006 and 2007, the fifth and sixth years after Hudson’s fixed assets were placed in service in 2000 and 2001. Upon the purchase of the investor member’s interest pursuant to the put/call, it is estimated that HL will retain approximately $8.6 million of the capital contributed by the investor member, based on the formula used to determine the purchase price for the investor member’s interest. Through the creation of a master lease between Hudson and HL, the Company’s effective ownership percentage on the net cash flow of Hudson is approximately 100% after the payment of the distribution of the preferred returns.

The Company has accrued the estimated buyout price of the investor member in HL and is recognizing the gain on a straight-line basis over five years, the tax recapture period of the tax credits. The gain is included in other non-operating (income) expenses in the accompanying combined statements of operations and comprehensive loss.

Designer Fee Payable

The Former Parent had an agreement with a hotel designer. The designer has various claims related to the agreement. The Company may have liability as the successor to the Former Parent, and therefore the liability is included in these Company financial statements. According to the agreement, the designer is due for each designed hotel, a base fee plus 1% of Gross Revenues, as defined, for a ten-year period from the opening of each hotel. The estimated costs of the design services were capitalized as a component of the applicable hotel and are being amortized over the five-year estimated life of the related design elements. Interest is accreted each year on the liability and charged to interest expense using a rate of 9%. Changes to the estimated liability are recorded as an adjustment to the capitalized design fee and amortized prospectively. Adjustments to the estimated liability after the five-year life of the design asset will be charged directly to operations.

In addition, the agreement also called for the designer to design a minimum number of projects for which the designer would be paid a minimum fee. Included in other non-operating (income) expenses in the accompanying combined statement of operations and comprehensive loss for the year ended December 31, 2003 and in accounts payable and accrued liabilities as of December 31, 2005, 2004 and 2003 on the accompanying combined balance sheets is approximately $2.6 million of fees related to the difference between its minimum number of projects and the actual number designed.

F-15

Preferred Equity in Clift Due NorthStar

In July 2002, the limited liability company agreement of Clift was amended and restated and Clift issued Preferred Equity to NorthStar in exchange for $6.125 million. The Preferred Equity agreement, as amended, entitled NorthStar to an internal rate of return (24% through October 2004 and 25.27% thereafter) on its Unreturned Base, as defined, and equity participation equal to 25% of the aggregate amount that would be distributed to the members if the entire interest in the Clift was sold for its fair market value. The Preferred Equity’s redemption date was October 2006 (with an option to extend to October 2007) and all accrued but unpaid preferred interest plus the equity participation, if any, was due at redemption.

The amounts reflected in the accompanying combined balance sheets reflect the preferred return due to NorthStar plus accrued interest.

In accordance with Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity the mandatorily redeemable preferred equity was accounted for as a debt instrument and payments were recorded as interest expense in the accompanying combined statements of operations and comprehensive loss. Included in interest expense for the years ended December 31, 2005, 2004, and 2003 is $2.5 million, $1.9 million, and $1.6 million respectively, related to this preferred equity.

As discussed in Note 1, the preferred equity and related accrued interest was fully paid off in February 2006 with proceeds from the IPO.

Clift Pre-petition Liabilities

As of December 31, 2005 and 2004, the pre-petition liabilities, including accrued interest, related to the bankruptcy of Clift were approximately $3.4 million and $3.1 million, respectively. Under the court approved Reorganization Plan, these liabilities are payable over a period of up to 48 months from the date of the approved plan, which was October 14, 2004. Interest accrues on these liabilities under the plan at rates ranging from 6% to 10%. All payments have been made and are planned to be made according to the court approved payment schedule.

6.Long-Term Debt and Capital Lease Obligations

Long-term debt consists of the following (000’s omitted):

Description	As of December 31, 2005			As of December 31, 2004			Interest rate at December 31, 2005
Notes secured by five hotels (a)		$	472,449		$	423,882		LIBOR + 2.36	%
Mezzanine loan (a)		105,519			49,118			LIBOR + 9.14	%
Clift debt (b)		75,140			71,255			9.6	%
Capital lease obligations (c)		6,524			6,696			(c)
Total long term debt		$	659,632		$	550,951

(a)5 Hotel Debt

On June 29, 2005, the Company refinanced its debt secured on Morgans, Mondrian, Royalton, Delano and Hudson for a total of $580 million (collectively, the “5 Hotel Debt”). The 5 Hotel Debt consists of $473.8 million first mortgage notes bearing interest at LIBOR (4.4% and 2.3% as of December 31, 2005 and December 31, 2004, respectively) plus a spread of 236 basis points and $105.5 million of mezzanine loans bearing interest at LIBOR plus a spread of 914 basis points. The maturity date for the 5 Hotel Debt was June 2007 with three one-year extension options and a right to extend to 2010 upon completion of an IPO.

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At closing, the Company paid a 1.125% origination fee. In addition, the Company purchased an interest rate cap for the full amount of the 5 Hotel Debt with a LIBOR cap of 4.25%.

Part of the proceeds from this refinancing was used to pay off the previous first mortgage loan secured by the five hotels that bore interest at LIBOR plus a spread of 350 basis points, the mezzanine loan which bore interest at LIBOR plus 13.0%, and approximately $65.2 million of debt of the Former Parent.

In connection with this refinancing, the Company signed a cash management agreement whereby all cash receipts are deposited into a lockbox controlled by the lender and are released by the lender, monthly, in the following order of priority to pay: (1) sales and occupancy taxes, (2) escrow for real estate taxes and insurance, (3) debt service due under the first mortgage loans, (4) operating expenses which are reimbursed to the Company, (5) escrow deposits to fund a recurring replacement reserve, (6) debt service due under the mezzanine loans and (7) a capital expenditure reserve which is to be used for future renovation of the hotels.

The 5 Hotel Debt contains certain covenants including debt service coverage requirements as defined per the loan documents.

As discussed in Note 1, in connection with the IPO, the Company repaid the principal and accrued interest relating to the $106.3 million of mezzanine loans, which bore interest at LIBOR plus 9.14% and $188.3 million of the first mortgage notes, which bore interest at LIBOR, plus 4.40%. Furthermore, the Company exercised its right to extend the maturity date on the remaining first mortgage debt to 2010. The Company also entered into an interest rate protection agreement, which effectively converted the LIBOR rate to fixed rate of 5.0% from July 2007 to July 2010 on a notional amount of $285.0 million.

The Company may prepay in whole or in part the 5 Hotel Debt on any payment date, along with a Spread Maintenance Premium, as defined, and an Exit Fee, as defined. The Spread Maintenance Premium is equal to the amount of the prepayment multiplied by the applicable LIBOR margin multiplied by the ratio of the number of months between the prepayment date and July 2006 divided by 12. The Exit Fee is equal to 0.25% of the prepayment amount. Pursuant to the agreement, in connection with this debt prepaid with proceeds of the IPO, the Spread Maintenance Premium, as defined, and Exit Fees, as defined, were waived.

Included in interest expense for the year ended December 31, 2005, is approximately $18.1 million representing the write off of deferred financing costs and the prepayment consideration incurred in connection with the refinancing on June 29, 2005.

In 2004, the Company recognized a gain of approximately $4.0 million in connection with the repayment of the mezzanine loan. The gain is included in other non-operating (income) expenses in the accompanying combined statements of operations and comprehensive loss for the year ended December 31, 2004.

(b)  Clift Debt

During 2003, the Company had a $57.0 million loan, which bore interest at 9% and was secured by its interest in Clift. The loan was not paid at its July 2003 maturity and, as a result, the interest rate on the loan increased to 14% effective from July 2002. In August 2003, Clift Holdings LLC (the “debtor”) filed for voluntary Chapter 11 bankruptcy protection.

In October 2004, Clift emerged out of bankruptcy pursuant to a plan of reorganization whereby the debtor sold the hotel to an unrelated party for $71.0 million and then leased it back for a 99-year lease term. Under this lease, the Company is required to fund operating shortfalls including the lease payments and to fund all capital expenditures. This transaction does not qualify as a sale due to the Company’s

F-17

continued involvement and therefore is treated as a financing. The proceeds from this transaction were used in part to repay the existing mortgage loan on Clift.

The lease payment terms are as follows:

Years 1 and 2	$2.8 million per annum
Years 3 to 10	$6.0 million per annum
Thereafter	Increased at 5-year intervals by a formula tied to increases in Consumer Price Index. At year 10, the increase has a maximum of 40% and a minimum of 20%. At each increased date thereafter, the maximum increase is 20% and the minimum is 10%.

(c)    Capital Lease Obligations

The Company has leased two condominium units at Hudson, which are reflected as capital leases. One of the leases requires the Company to make annual payments of $450,000 (subject to increases due to increases in the Consumer Price Index) from acquisition through November 2096. Effective January 1, 2003, and as of December 31, 2004, the annual lease payments under this lease increased to $506,244. This lease also allows the Company to purchase the unit at fair market value after November 2015.

The second lease requires the Company to make annual payments of $250,000 (subject to increases due to increases in the Consumer Price Index) through December 2098. Effective January 2004, payments under this lease increased to $285,337. The Company has allocated both of the leases’ payments between the land (see Note 7) and building based on their estimated fair values. The portion of the payments allocated to building has been capitalized at the present value of the future minimum lease payments. The portion of the payments allocable to land is treated as operating lease payments. The imputed interest rate on both of these leases is 8%. The capital lease obligations related to the units amounted to approximately $6.1 million and $6.1 million as of December 31, 2005 and 2004 , respectively. Substantially all of the principal payments on the capital lease obligations are due at the end of the lease agreements.

The Company has also entered into capital lease obligations related to equipment at certain of the hotels.

(d)Term Loan and Revolving Credit Facility

Concurrently with the closing of the IPO, the Company borrowed $80.0 million under a three- year term loan and entered into a three-year revolving credit facility of $125.0 million, with an option to add one or more incremental revolving loan facilities of up to $25.0 million.

The facilities were proposed to have been secured by a first-priority security interest in substantially all the assets of the Company. The Company’s ability to provide the requested pledges is subject to the satisfaction or waiver of certain conditions under the terms of our mortgage debt (including that we receive “no-downgrade” letters from the ratings agencies with respect to the securitization facilities in which our existing mortgage indebtedness has been included and that the maturity date of these new loans is later than the maturity date of the mortgage debt) and these have not yet been satisfied or waived. The Company’s lenders have agreed to make the loans on an unsecured basis. The Company and the lenders have agreed to use commercially reasonable efforts to satisfy the required conditions (or obtain relevant waivers) as soon as practicable.

The term loan will amortize in equal quarterly installments in an amount equal to 0.25% of the original principal amount, commencing with the third quarter of 2006, with the balance payable at the final maturity.

The interest rate per annum applicable to the loans are a fluctuating rate of interest measured by reference to, at our election, either adjusted LIBOR or an alternative base rate, plus a borrowing margin.

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Alternative base rate loans have an initial borrowing margin of 1.0%. Adjusted LIBOR loans have an initial borrowing margin of 2.0%. If we have not provided the requested pledges referred to above by April 1, 2006, the margin alternative base rate loans and adjusted LIBOR loans will increase by 1.5% until we provide the requested pledges. After the full first quarter after the closing of the revolving credit facility, the borrowing margins under the revolving credit facility may vary depending on our total leverage ratio.

The facilities will require us to maintain for each four-quarter period an adjusted debt to adjusted EBITDA ratio of no more than 6.5x, and adjusted EBITDA to fixed charges ratio of no less than 2.0x, and a senior secured indebtedness to adjusted EBITDA ratio of not more than 5.0x. The facilities contain among other things a covenant prohibiting us from paying dividends on our common stock.

The revolving credit facility is undrawn and will be available on a revolving basis for general corporate purposes, including acquisitions.

Principal Maturities

The following is a schedule, by year, of principal payments on notes payable (including capital lease obligations) as of December 31, 2005:

	Capital lease obligations and debt payable			Amount representing interest on capital lease obligations			Principal payments on capital lease obligations and debt payable
2006		180,053			518			179,535
2007		656			507			149
2008		608			492			116
2009		80,489			488			80,001
2010		280,489			488			280,001
Thereafter		117,337			36,087			81,250
		$	659,632		$	38,580		$	621,052

The average interest rate on all of the Company’s debt for the years ended December 31, 2005, 2004 and 2003 is 10%, 11% and 10%, respectively.

7.Commitments and Contingencies

As Lessee

Future minimum lease payments for noncancellable leases in effect as of December 31, 2005 are as follows (000’s omitted):

	Land (see Note 6)			Other
2006		$	266		$	260
2007		266			267
2008		266			228
2009		266			—
2010		266			—
Thereafter		22,897			—
Total		$	24,227		$	755

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Future minimum lease payments do not include amounts for renewal periods or amounts that may need to be paid to landlords for real estate taxes, electricity and operating costs.

Management Fee on Restaurants

The Company owns a 50% interest in a restaurant joint venture with Chodorow Ventures LLC (“CV LLC”). The Company entered into the joint venture agreement (“Restaurant Venture”) in September 1999 for the purpose of establishing, owning, operating and/or managing restaurants, bars and other food and beverage operations in certain hotels affiliated with the Company. This agreement is implemented through operating agreements and leases at each hotel which expire between 2007 and 2010. These leases generally give the Restaurant Venture two additional five year renewal periods. CV LLC or an affiliated entity manages the operations of the Restaurant Venture and earns a 3% management fee.

Master Development Agreement

During 1998, in conjunction with the Company’s investment in MHG Europe, MHG Europe entered into a Master Development Agreement (the “Development Agreement”) with an affiliate of the Company, which provides for them to be the exclusive developer of any future hotel of MHG Europe. The Development Agreement is for a period of 10 years and may be extended under certain circumstances for an additional 10 years.

Construction Settlement

In 2002, Clift agreed to pay $10.1 million in connection with the settlement of a construction related lawsuit. In 2002, Clift made an initial principal payment of $2.5 million. The remaining balance of $7.6 million plus interest, at 10%, was due in monthly installments of at least $100,000 plus any interest. The total outstanding principal amount was due on January 2, 2004 and was secured by a lien on Clift. Clift did not make any payments on this obligation during the period it operated under bankruptcy protection.

In October 2004, the Company paid approximately $5.8 million to settle this liability. The difference between the original liability and the final payoff amount of approximately $2.2 million is included in other non-operating (income) expenses in the accompanying combined statements of operations and comprehensive loss for the year ended December 31, 2004.

Repurchase and Reimbursement Agreement

The Company signed a repurchase and reimbursement agreement in connection with its investment in Shore Club. Under this agreement, the Company was responsible for paying the difference between a 12.5% Preferred Return and a 15% Preferred Return to Blackacre, one of the other investors in Shore Club, on Blackacre’s Class B and Class C membership, each as defined. In addition, under this agreement, the Company would have been required to purchase Blackacre’s Class B membership interest in Shore Club under certain circumstances.

In November 2005, the Shore Club refinanced its existing debt and Blackacre’s Class B and Class C interests were redeemed at par plus accrued interest. The Company was reimbursed by Blackacre for its share of these interests, net of the amounts owed to Blackacre for the incremental return, thereby terminating any further liability on the part of the Company in respect of the Blackacre agreements.

Multi-employer Retirement Plan

Approximately 30% of the Company’s employees are subject to collective bargaining agreements. The Company is a participant, through these collective bargaining agreements, in multi-employer defined contribution retirement plans in New York and multi-employer defined benefit retirement plans in

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California covering union employees. Plan contributions are based on a percentage of employee wages. The Company’s contributions to the multi-employer retirement plans amounted to approximately $1.4 million, $1.3 million and $1 million, for the years ended December 31, 2005, 2004 and 2003, respectively.

Purchase of James Hotel Scottsdale

On December 21, 2005, the Company agreed to acquire the James Hotel Scottsdale for approximately $47.5 million, including an approximate initial $4.5 million deposit paid at the time of signing of the purchase agreement, which is included in prepaid expenses and other assets as of December 31, 2005 in the accompanying combined balance sheets. The James Hotel Scottsdale is a 194-room boutique hotel located in Scottsdale, Arizona. The purchase is scheduled to close in April 2006.

Tax Contingency

On February 26, 2004, Morgans Hotel Group London Ltd. received a Notice of Decision from the United Kingdom’s taxation authority, the Inland Revenue. The Notice of Decision stated that MHG London, the entity that owns St. Martins Lane and Sanderson, was liable to pay national insurance contributions to the Inland Revenue in relation to discretionary service charges earned by the food and beverage employees of the London hotels. The Inland Revenue assessed its liability at £1,995,543 (approximately $3.4 million at the British pound / US Dollar exchange rate as of December 31, 2005) in respect of the period from April 6, 1999 to April 5, 2003. MHG London filed a Notice of Appeal on March 25, 2004 in which it stated that there was no statutory basis for the Inland Revenue to collect national insurance contributions from it. In addition, the Inland Revenue has determined that uniforms provided to the employees of the London hotels constituted a taxable benefit to those employees and as a result have calculated a separate liability in the amount of approximately £1.3 million (approximately $2.2 million at the British pound / US Dollar exchange rate as of December 31, 2005) in respect of the same period. MHG London is contesting the statutory basis for such liability as well as the amount calculated. In February 2006, Inland Revenue published new guidelines which reversed its previous position that national insurance was due on certain discretionary service charges. Based on this ruling, the Company has submitted a settlement proposal and has accrued approximately $0.4 million as an estimate for its share of a potential settlement amount, which is included in investments and advances to unconsolidated joint ventures as of December 31, 2005 in the accompanying combined balance sheets. Based on the discussions with the Inland Revenue, we believe that a material unfavorable outcome is remote. However, if MHG London is responsible for the full amount of these liabilities, it will be required to change its procedures for complying with United Kingdom wage obligations and the payments of these liabilities for the period from April 6, 1999 through the date of adopting such new procedures could have a material adverse effect on the Company’s combined financial position or combined results of operations.

Litigation

We are currently involved in litigation regarding our management of Shore Club. In 2002, we invested in Shore Club and our management company, MHG Management Company, took over management of the property. The management agreement pursuant to which we manage Shore Club expires in 2022. For the year ended December 31, 2002 (reflecting six months of data based on information provided to us and not generated by us and six months of operations after MHG Management Company took over management of Shore Club in July 2002), Shore Club had an operating loss plus depreciation of ($3.7 million), and its owner, Philips South Beach LLC, was in dispute with its investors and lenders. After we took over management of the property, the financial performance improved and Shore Club had operating income plus depreciation of $9.8 million in 2004. We believe this improvement was the direct result of our repositioning and operation of the hotel. This improved performance has continued.

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Operating income plus depreciation for the twelve months ended December 31, 2005 was $11.3 million. In addition, during the fourth quarter of 2005, the debt on the hotel was refinanced. For the years ending December 31, 2005 and 2004, we had revenues of $3.6 million and $3.3 million, respectively, under the management agreement.

On January 17, 2006, Phillips South Beach LLC filed a lawsuit in New York state court against MHG Management Company. The lawsuit alleges, among other things, (i) that MHG Management Company engaged in fraudulent or willful misconduct with respect to Shore Club entitling Phillips South Beach LLC to terminate the Shore Club management agreement without the payment of a termination fee to us, (ii) breach of fiduciary duty by MHG Management Company, (iii) tortious interference with business relations by redirecting guests and events from Shore Club to Delano, (iv) misuse of free and complimentary rooms at Shore Club, and (v) misappropriation of confidential business information. The allegations include that we took actions to benefit Delano at the expense of Shore Club, billed Shore Club for expenses that had already been billed by us as part of chain expenses, and misused barter agreements to obtain benefits for our employees, and failed to collect certain rent and taxes from retail tenants. The lawsuit also asserts that we falsified or omitted information in monthly management reports related to the alleged actions. Messrs. Schrager, Scheetz and Hamamoto are also named as defendants in the lawsuit.

The remedies sought by Phillips South Beach LLC include (a) termination of the management agreement without the payment of a termination fee to us, (b) recovery of all previously paid management fees, (c) a full accounting of all of the affairs of Shore Club from the inception of the management agreement, (d) at least $5.0 million in compensatory damages and (e) at least $10.0 million in punitive damages and attorneys fees.

We believe that we have abided by the terms of the management agreement. We believe that Philips South Beach has filed the lawsuit as part of a strategy to pressure us to renegotiate our management agreement with Shore Club. We have retained outside counsel and intend to challenge the litigation vigorously. Although we cannot predict the outcome of this litigation, on the basis of current information, we do not expect that the outcome of this litigation will have a material adverse effect on our financial condition, results of operations or liquidity. In addition, this litigation may harm our reputation and defense of this litigation may divert management resources from the operations of our business.

The Company is involved in various lawsuits and administrative actions in the normal course of business. In management’s opinion, disposition of these lawsuits is not expected to have a material adverse effect on the Company’s combined financial position or combined results of operations.

Environmental

As a holder of real estate, the Company is subject to various environmental laws of federal and local governments. Compliance by the Company with existing laws has not had an adverse effect on the Company and management does not believe that it will have a material adverse impact in the future. However, the Company cannot predict the impact of new or changed laws or regulations on its current investment or on investments that may be made in the future.

8.Related Party Transactions

The Company earned management fees, chain services fees and fees for certain technical services and has receivables from hotels it owns through investments in unconsolidated joint ventures as well as hotels owned by the Former Parent. These fees totaled approximately $9.5 million, $8.8 million, and $6.5 million during the years ended December 31, 2005, 2004 and 2003, respectively.

F-22

As of December 31, 2005 and 2004, the Company had receivables from these affiliates of approximately $3.0 million and $4.7 million, respectively, which are included in receivables from related parties on the accompanying consolidated balance sheets.

9.Other Non-Operating (Income) Expenses

Other non-operating (income) expenses consist of the following (000’s omitted):

	Year ended December 31, 2005				Year ended December 31, 2004				Year ended December 31, 2003
Gain on extinguishment of debt (Note 6)		$	—			$	(4,000	)		$	—
Gain on legal settlement (Note 7)		—				(2,242		)		—
Gain on tax credits (Note 5)		(1,731		)		(1,731		)		(1,731		)
Payments due designer (Note 5)		—				—				2,550
Clift bankruptcy related expenses		—				1,050				593
Other		157				1,441				665
		$	(1,574	)		$	(5,482	)		$	2,077

10.Subsequent Events

(a)   On January 3, 2006, the Company entered into a limited liability company agreement with Echelon Resorts Corporation (“Echelon”), a subsidiary of Boyd Gaming Corporation, through which it will develop, as 50/50 owners, Delano Las Vegas and Mondrian Las Vegas, both of which are expected to open in 2010. After certain milestones in the joint venture development process have been met, the Company is expected to contribute approximately $97.5 million in cash and Echelon will contribute approximately 6.5 acres of land to the joint venture. It is expected that these contributions will be completed by 2007, as part of pre-development. All further contributions will be made pro rata, although the Company and Echelon may be individually responsible for certain cost overruns. In addition, the Company and Echelon will jointly seek to arrange non-recourse project financing for the development of Delano Las Vegas and Mondrian Las Vegas.

(b)   On January 24, 2006, the Company acquired the property across Collins Avenue from Delano for approximately $14.3 million. This purchase was financed with cash from working capital and the issuance of a $10.0 million three- year promissory note by the Company to the seller, which initially bears interest at 7%. The Company intends to convert this property to new guest rooms at Delano and additional guest facilities, including a new restaurant and a new bar.

(c)   On March 23, 2006, Century Operating Associates filed a lawsuit in New York state court naming several defendants, including Morgans Hotel Group LLC, Morgans Hotel Group Co. (“MHGC”), W. Edward Scheetz, President and Chief Executive Officer of MHGC, and David T. Hamamoto, chairman of the Board of Directors of MHGC. The lawsuit alleges breach of contract, breach of fiduciary duty and fraudulent conveyance in connection with the structuring transactions that were part of MHGC’s initial public offering. In particular, the lawsuit alleges that the transactions constituted a fraudulent conveyance of the assets of Morgans Hotel Group LLC, in which Century Operating Associates has a non-voting membership interest, to MHGC. The plaintiff claims that the defendants knowingly and intentionally structured and participated in the transactions in a manner designed to leave Morgans Hotel Group LLC without any ability to satisfy its obligations to Century Operating Associates.

The remedies sought by Century Operating Associates include (a) Century Operating Associates’ distributive share of the initial public offering proceeds and (b) at least $17.5 million in punitive damages and attorney fees.

Morgans Hotel Group LLC (now named Residual Hotel Interest LLC) has retained outside counsel on behalf of each of the defendants. Although we believe that these claims are without merit, we cannot predict the outcome of this litigation.

F-23

Report of Independent Registered Public Accounting Firm

The Stockholder
Morgans Hotel Group Co.:

We have audited the accompanying balance sheet of Morgans Hotel Group Co. (the “Company”) as of December 31, 2005. The balance sheet is the responsibility of the Company’s management. Our responsibility is to express an opinion on the balance sheet based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. The Company is not required to have, nor have we been engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provide a reasonable basis for our opinion.

In our opinion, the balance sheet referred to above presents fairly, in all material respects, the financial position of Morgans Hotel Group Co. as of December 31, 2005 in conformity with accounting principles generally accepted in the United States.

/s/ BDO SEIDMAN, LLP

New York, New York

March 30, 2006

F-24

Morgans Hotel Group Co.
Balance Sheet
December 31, 2005

ASSETS
Cash	$	1
Total assets	$	1
LIABILITIES AND STOCKHOLDER’S EQUITY
Liabilities	$	—
Stockholder’s equity
Common stock, $0.01 par value, 1,000 shares authorized, 100 shares issued and outstanding	1
Retained earnings	—
Total stockholder’s capital	1
Total liabilities and stockholder’s capital	$	1

See accompanying notes to financial statements

F-25

Note to Balance Sheet
December 31, 2005

Note 1. Organization and Description of Business

Morgans Hotel Group Co. (the “Company”) was incorporated as a Delaware corporation on October 19, 2005. The Company anticipates filing a registration statement with the Securities and Exchange Commission with respect to a proposed initial public offering (the “Offering”) of shares of its common stock. The Company was formed for the purpose of owning and operating interests in hotels to be contributed by Morgans Hotel Group LLC (“Morgans”). Operations are planned to commence upon completion of the Offering and contribution of the interests by Morgans.

On February 17, 2006, the Company completed its initial public offering. The Company issued 15,000,000 shares at $20 per share resulting in estimated net proceeds to the Company of approximately $275.0 million after underwriter’s discounts and estimated offering expenses.

Concurrent with the Offering, Morgans contributed to the Company’s operating company its subsidiaries and ownership interests in nine operating hotels in the United States and the United Kingdom, and its hotel management business, in exchange for membership units in the operating company.

On March 23, 2006, Century Operating Associates filed a lawsuit in New York state court naming several defendants, including Morgans Hotel Group LLC, Morgans Hotel Group Co. (“MHGC”), W. Edward Scheetz, President and Chief Executive Officer of MHGC, and David T. Hamamoto, chairman of the Board of Directors of MHGC. The lawsuit alleges breach of contract, breach of fiduciary duty and fraudulent conveyance in connection with the structuring transactions that were part of MHGC’s initial public offering. In particular, the lawsuit alleges that the transactions constituted a fraudulent conveyance of the assets of Morgans Hotel Group LLC, in which Century Operating Associates has a non-voting membership interest, to MHGC. The plaintiff claims that the defendants knowingly and intentionally structured and participated in the transactions in a manner designed to leave Morgans Hotel Group LLC without any ability to satisfy its obligations to Century Operating Associates.

The remedies sought by Century Operating Associates include (a) Century Operating Associates’ distributive share of the initial public offering proceeds and (b) at least $17.5 million in punitive damages and attorney fees.

Morgans Hotel Group LLC (now named Residual Hotel Interest LLC) has retained outside counsel on behalf of each of the defendants. Although we believe that these claims are without merit, we cannot predict the outcome of this litigation.

F-26

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 28, 2006.

MORGANS HOTEL GROUP CO.
By:	/s/ W. EDWARD SCHEETZ
	Name:	W. Edward Scheetz
	Title:	Chief Executive Officer

Date:  March 28, 2006

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints W. Edward Scheetz, Marc Gordon and Richard Szymanski and each of them severally, his true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his name, place and stead, in any and all capacities, to do any and all things and execute and all instruments that such attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments hereto, as fully for all intents and purposes as he might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below on behalf of the Registrant in the capacities and on the dates indicated. MORGANS HOTEL GROUP CO.

	Signature		Title		Date
/s/ W. EDWARD SCHEETZ		President, Chief Executive Office and Director		March 28, 2006
W. Edward Scheetz		(Principal Executive Officer)
/s/ MARC GORDON		Chief Investment Officer and		March 28, 2006
Marc Gordon		Executive Vice President of Capital Markets
/s/ RICHARD SZYMANSKI		Chief Financial Officer and Secretary		March 28, 2006
Richard Szymanski
/s/ DAVID T. HAMAMOTO		Chairman of the Board of Directors		March 28, 2006
David T. Hamamoto
/s/ EDWIN L. KNETZGER, III		Director		March 28, 2006
Edwin L. Knetzger, III
/s/ LANCE ARMSTRONG		Director		March 28, 2006
Lance Armstrong
/s/ FRED J. KLEISNER		Director		March 28, 2006
Fred J. Kleisner
/s/ THOMAS L. HARRISON		Director		March 28, 2006
Thomas L. Harrison
/s/ ROBERT FRIEDMAN		Director		March 28, 2006
Robert Friedman

EX-10.1

Exhibit 10.1

AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT
OF
MORGANS GROUP LLC

THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT, dated as of February 17, 2006 of Morgans Group LLC (the “Company”) is entered into by and among Morgans Hotel Group Co., as Managing Member (the “Managing Member”), and the Persons identified on the signature pages hereto (the “Non-Managing Members”), together with any other Persons who become Members (as defined herein) in the Company as provided herein;

WHEREAS, the Company was formed by the filing of a certificate of formation with the Secretary of State of the State of Delaware on October 25, 2005 (the “Formation Date”) by an authorized person of the Company;

WHEREAS, on the Formation Date, Morgans Hotel Group LLC, a Delaware limited liability company (“MHG LLC”), as the sole initial member of the Company, entered into the Limited Liability Company Agreement (the “Original Operating Agreement”);

WHEREAS, this Agreement is being entered into in accordance with the provisions of Section 17 of the Original Operating Agreement;

WHEREAS, as part of the Formation and Structuring Transactions (as defined below), the Company will issue Non-Managing Membership Interests to each of NorthStar Partnership, L.P. and RSA Associates, L.P.;

WHEREAS, as part of the Formation and Structuring Transactions, the Non-Managing Membership Interests of each of NorthStar Partnership, L.P. and RSA Associates, L.P. will be transferred to the Managing Member and each of NorthStar Partnership, L.P. and RSA Associates, L.P. shall cease to be a Member of the Company;

WHEREAS, the Members desire that the Managing Member be the sole Managing Member of the Company upon the completion of the Managing Member’s initial public offering of its common stock and the contribution by the Managing Member of certain of the net proceeds from its initial public offering and borrowings under its new revolving credit facility;  and

WHEREAS, the Members desire to continue to operate the Company as a limited liability company under the Act (as defined below) and to amend and restate the Original Operating Agreement in its entirety and the terms of such Original Operating Agreement are hereby amended and restated in their entirety as hereinafter set forth;

NOW, THEREFORE, in consideration of the mutual promises and agreements herein made, and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Members hereby agree as follows:

ARTICLE I
DEFINED TERMS

The following definitions shall be for all purposes, unless otherwise clearly indicated to the contrary, applied to the terms used in this Agreement.

“Act” means the Delaware Limited Liability Company Act, as it may be amended from time to time, and any successor to such statute.

“Additional Non-Managing Member” means a Person admitted to the Company as a Non-Managing Member pursuant to Section 4.2 and who is shown as such on the books and records of the Company.

“Adjusted Capital Account” means the Capital Account maintained for each Member as of the end of each Partnership Year (a) increased by any amounts which such Member is obligated to restore pursuant to any provision of this Agreement or is deemed to be obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5) and (b) decreased by the items described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), and 1.704-1(b)(2)(ii)(d)(6).  The foregoing definition of Adjusted Capital Account is intended to comply with the provisions of Regulations Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently therewith.

“Adjusted Capital Account Deficit” means, with respect to any Member, the deficit balance, if any, in such Member’s Adjusted Capital Account as of the end of the relevant Partnership Year.

“Adjusted Property” means any property the Carrying Value of which has been adjusted pursuant to Section 4.4.

“Adjustment Event” has the meaning set forth in Section 4.5(b).

“Affiliate” means, with respect to any Person, any Person directly or indirectly controlling, controlled by or under common control with such Person.  For purposes of this definition, “control” when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “affiliated,” “controlling” and “controlled” have meanings correlative to the foregoing.

“Agreed Value” means in the case of any Contributed Property and as of the time of its contribution to the Company, the 704(c) Value of such property or other consideration, reduced by any liabilities either assumed by the Company upon such contribution or to which such property is subject when contributed, and (c) in the case of any property distributed to a Member by the Company, the Company’s Carrying Value of such property at the time such property is distributed, reduced by any indebtedness either assumed by such Member upon such distribution or to which such property is subject at the time of distribution as determined under Section 752 of the Code and the Regulations thereunder.

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“Agreement” means this Amended and Restated Limited Liability Company Agreement and all Exhibits attached hereto, as the same may be amended, supplemented or restated from time to time.

“Assignee” means a Person to whom one or more Membership Units have been transferred but who has not been admitted as a Substituted Non-Managing Member, and who has the rights set forth in Section 11.5.

“Bankruptcy” as to any Person, shall be deemed to have occurred when (i) such Person commences a voluntary proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect, (ii) such Person is adjudged as bankrupt or insolvent, or a final and nonappealable order for relief under any bankruptcy, insolvency or similar law now or hereafter in effect has been entered against such Person, (iii) such Person executes and delivers a general assignment for the benefit of such Person’s creditors, (iv) such Person files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against such Person in any proceeding of the nature described in clause (ii) above, (v) such Person seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator for such Person or for all or any substantial part of such Person’s properties, (vi) any proceeding seeking liquidation, reorganization or other relief under any bankruptcy, insolvency or other similar law now or hereafter in effect has not been dismissed within 120 days after the commencement thereof, (vii) the appointment without such Person’s consent or acquiescence of a trustee, receiver or liquidator has not been vacated or stayed within 90 days of such appointment, or (viii) an appointment referred to in clause (vii) is not vacated within 90 days after the expiration of any such stay.

“Book-Tax Disparities” means, with respect to any item of Contributed Property or Adjusted Property, as of the date of any determination, the difference between the Carrying Value of such Contributed Property or Adjusted Property and the adjusted basis thereof for Federal income tax purposes as of such date.  A Member’s share of the Company’s Book-Tax Disparities in all of its Contributed Property and Adjusted Property will be reflected by the difference between such Member’s Capital Account balance as maintained pursuant to Section 4.4 and the hypothetical balance of such Member’s Capital Account computed as if it had been maintained strictly in accordance with Federal income tax accounting principles.

“Business Day” means any day except a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to close.

“Capital Account” means the capital account maintained by the Company for each Member pursuant to Section 4.4.

“Capital Account Limitation” has the meaning set forth in Section 4.6.

“Capital Contribution” means, with respect to each Member, the total amount of cash, cash equivalents and the Agreed Value of Contributed Property which such Member contributes or is deemed to contribute to the Company pursuant to Section 4.1 or 4.2 and which are intended to be treated as a contribution to the Company pursuant to Section 721(a) of the Code.

3

“Carrying Value” means (a) with respect to a Contributed Property or Adjusted Property, the 704(c) Value of such property (or in the case of an Adjusted Property, the fair market value of such property at the time of its latest adjustment under Section 4.4(d)) reduced (but not below zero) by all Depreciation with respect to such Contributed Property or Adjusted Property charged to the Members’ Capital Accounts and (b) with respect to any other Company property, the adjusted basis of such property for Federal income tax purposes, all as of the time of determination.  The Carrying Value of any property shall be adjusted from time to time in accordance with Section 4.4(d), and to reflect changes, additions or other adjustments to the Carrying Value for dispositions and acquisitions of Company Properties, as deemed appropriate by the Managing Member to the extent consistent with Section 704(b) of the Code and the Regulations issued thereunder.

“Cash Amount” means an amount of cash per Unit equal to the number of Units offered for redemption by the Redeeming Member (multiplied by the Unit Adjustment Factor) multiplied by the Value of a Common Share on the Valuation Date.

“Certificate” means the Certificate of Formation relating to the Company filed in the office of the Secretary of State of the State of Delaware, as amended from time to time in accordance with the terms hereof and the Act.

“Charter” means the Certificate of Incorporation of the Managing Member filed in the office of the Secretary of State of the State of Delaware on October 19, 2005, as amended from time to time in accordance with the terms thereof and the Delaware General Corporation Law, and any successor to such statute.

“Code” means the Internal Revenue Code of 1986, as amended.  Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law.

“Common Share Rights” has the meaning set forth in Section 4.2(e).

“Common Shares” means the shares of common stock, $0.01 par value per share, of the Managing Member.

“Company” means Morgans Group LLC, the limited liability company formed under the Act and any successor thereto.

“Company Property” means such interests in real property and personal property including without limitation, fee interests, interests in ground leases, interests in joint ventures, interests in mortgages, and Debt instruments as the Company may hold from time to time.

“Consent” means the consent or approval of a proposed action by a Member given in accordance with Section 14.1.

“Constituent Person” has the meaning set forth in Section 4.6.

“Contributed Property” means each property or other asset (but excluding cash and cash equivalents), in such form as may be permitted by the Act contributed or deemed contributed to

4

the Company.  Once the Carrying Value of a Contributed Property is adjusted pursuant to Section 4.4, such property shall no longer constitute a Contributed Property, but shall be deemed an Adjusted Property for purposes of Section 4.4.

“Conversion Date” has the meaning set forth in Section 4.6.

“Conversion Notice” has the meaning set forth in Section 4.6.

“Conversion Right” has the meaning set forth in Section 4.6.

“Debt” means, as to any Person, as of any date of determination, (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services, which purchase price is due more than six months after the date of placing such property in service or taking delivery and title thereto or the completion of such services, (b) all amounts owed by such Person to banks or other Persons in respect of reimbursement obligations under letters of credit, surety bonds and other similar instruments guaranteeing payment or other performance of obligations by such Person, (c) all indebtedness for borrowed money or for the deferred purchase price of property or services secured by any lien on any property owned by such Person, to the extent attributable to such Person’s interest in such property, even though such Person has not assumed or become liable for the payment thereof, (d) lease obligations of such Person which, in accordance with generally accepted accounting principles, should be capitalized and (e) all guarantees and other contingent obligations of such Person with respect to Debt of others.

“Depreciation” means for each fiscal year or other period, an amount equal to the Federal income tax depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Carrying Value of an asset differs from its adjusted basis for Federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Carrying Value as the Federal income tax depreciation, amortization, or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the Federal income tax depreciation, amortization, or other cost recovery deduction for such year is zero, Depreciation shall be determined with reference to such beginning Carrying Value using any reasonable method selected by the Managing Member.

“Economic Capital Account Balance” has the meaning set forth in Section 6.3(a).

“Effective Date” means the date of closing of the initial public offering of the Common Shares.

“Events of Dissolution” has the meaning set forth in Section 13.1.

“Exchange Act” has the meaning set forth in Section 7.1(a)(2).

 “Forced Conversion” has the meaning set forth in Section 4.6.

“Forced Conversion Notice” has the meaning set forth in Section 4.6.

5

“Formation and Structuring Agreement” means the Formation and Structuring Agreement, dated October 25, 2005, by and among the Company, Morgans Hotel Group LLC and other parties thereto.

“Formation and Structuring Transactions” means the transactions outlined in Exhibit A to the Formation and Structuring Agreement.

“Formation Date” has the meaning set forth in the recitals.

“Guaranty” has the meaning set forth in Section 11.2(e).

“Holder” means either (a) a Member or (b) an Assignee, owning a Membership Interest, that is treated as a Member for federal income tax purposes.

“IRS” means the Internal Revenue Service, which is charged with administering the internal revenue laws of the United States.

“Immediate Family” means, with respect to any natural Person, such natural Person’s spouse, parents, grandparents, descendants (including adopted children and step-children), nephews, nieces, brothers, and sisters.

“Incapacity” or “Incapacitated” means (a) as to any individual Member, death, total physical disability or entry by a court of competent jurisdiction adjudicating him incompetent to manage his Person or his estate, (b) as to any corporation that is a Member, the filing of a certificate of dissolution, or its equivalent, for the corporation or the revocation of its charter, (c) as to any partnership that is a Member, the dissolution and commencement of winding up of the partnership, (d) as to any estate that is a Member, the distribution by the fiduciary of the estate’s entire interest in the Company, (e) as to any trust that is a Member, the termination of the trust (but not the substitution of a new trustee), or (f) as to any Member, the Bankruptcy of such Member.

“Incentive Plans” means Common Share or Unit incentive plans or other employee benefit plans established by, or for the benefit of the employees of, the Managing Member, the Company or any Subsidiary, including the Morgans Hotel Group Co. 2006 Omnibus Stock Incentive Plan and the Morgans Hotel Group Co. Annual Bonus Plan.

“Indemnitee” means (a) any Person made a party to a proceeding by reason of his status as (i) the Managing Member (including as a guarantor of any Membership Debt) or (ii) an officer of the Company or a director or officer of the Managing Member, and (b) such other Persons (including Affiliates of the Managing Member or the Company) as the Managing Member may designate from time to time, in its sole and absolute discretion.

“Liquidating Gains means any net capital gain realized in connection with the actual or hypothetical sale of all or substantially all of the assets of the Company (including any Liquidating Transaction), including but not limited to net capital gain realized in connection with an adjustment to the Carrying Value of the Company’s assets under Section 4.4(d).

6

“Liquidating Transaction” means any sale or other disposition of all or substantially all of the assets of the Company or a related series of transactions that, taken together, results in the sale or other disposition of all or substantially all of the assets of the Company.

“Liquidator” has the meaning set forth in Section 13.2.

“LTIP” means Long Term Incentive Plan .

“LTIP Unit” means a Membership Interest which is designated as an LTIP Unit and which has the rights, preferences and other privileges designated in Section 4.5 hereof and elsewhere in this Agreement in respect of Holders of LTIP Units.  The allocation of LTIP Units among the Members shall be set forth on Exhibit A, as may be amended from time to time.

“LTIP Unitholder” means a Member that holds LTIP Units.

“Managing Member” means Morgans Hotel Group Co., a Delaware corporation, and its successors as a Managing Member of the Company in accordance with the terms of this Agreement.

“Managing Membership Interest” means a Membership Interest held by the Managing Member (including any Membership Interest acquired by the Managing Member pursuant to Section 4.2 hereof) that is a Managing Membership interest and includes any and all benefits to which the Managing Member may be entitled and all obligations of the Managing Member hereunder.  A Managing Membership Interest may be expressed as a number of Membership Units.  All Membership Units held by the Managing Member shall be deemed to be the Managing Member Interest.

“Member” means individually, the Managing Member or a Non-Managing Member, and “Members” means collectively, the Managing Member and the Non-Managing Members.

“Membership Interest” means an ownership interest in the Company representing a Capital Contribution by either a Non-Managing Member or the Managing Member and includes any and all benefits to which the holder of such a Membership Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement.  A Membership Interest may be expressed as a number of Membership Units.

“Membership Record Date” means the record date established by the Managing Member for the distribution pursuant to Section 5.1 hereof, which record date shall be the same as the record date established by the Managing Member for a distribution to its shareholders of some or all of its portion of such distribution, and also means any record date established by the Managing Member in connection with any vote or consent of the Non-Managing Members pursuant to this Agreement.

“Membership Unit” or “Unit” means a fractional, undivided share of the Membership Interests of all Members issued pursuant to Sections 4.1 and 4.2, in such number as set forth on Exhibit A, as such Exhibit may be amended from time to time.  Any rights and preferences or

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other obligations with respect to Units as may be authorized hereunder shall be set forth in an exhibit hereto.

“Membership Unit Economic Balance” has the meaning set forth in Section 6.3(a).

“Net Income” means for any taxable period, the excess, if any, of the Company’s items of income and gain for such taxable period over the Company’s items of loss and deduction for such taxable period.  The items included in the calculation of Net Income shall be determined in accordance with Section 4.4.  Once an item of income, gain, loss or deduction that has been included in the initial computation of Net Income is subjected to the special allocation rules in Sections 6.3 and 6.4, Net Income or the resulting Net Loss, whichever the case may be, shall be recomputed without regard to such item.

“Net Loss” means for any taxable period, the excess, if any, of the Company’s items of loss and deduction for such taxable period over the Company’s items of income and gain for such taxable period.  The items included in the calculation of Net Loss shall be determined in accordance with Section 4.4.  Once an item of income, gain, loss or deduction that has been included in the initial computation of Net Loss is subjected to the special allocation rules in Sections 6.3 and 6.4, Net Loss or the resulting Net Income, whichever the case may be, shall be recomputed without regard to such item.

“New Securities” has the meaning set forth in Section 4.2(c).

“Non-Managing Member” means any Person named as a Non-Managing Member on Exhibit A, as such Exhibit may be amended from time to time, including any Substituted Non-Managing Member or Additional Non-Managing Member, in such Person’s capacity as a Non-Managing Member in the Company.

“Non-Managing Membership Interest” means a Membership Interest held by a Non-Managing Member representing a fractional part of the Membership Interests of all Non-Managing Members and includes any and all benefits to which such Non-Managing Member may be entitled and all obligations of such Non-Managing Member hereunder.  A Non-Managing Membership Interest may be expressed as a number of Membership Units.

“Nonrecourse Built-in Gain” means, with respect to any Contributed Properties or Adjusted Properties that are subject to a mortgage or negative pledge securing a Nonrecourse Liability, the amount of any taxable gain that would be allocated to the Members pursuant to Section 6.4(b) if such properties were disposed of in a taxable transaction in full satisfaction of such liabilities and for no other consideration.

“Nonrecourse Deductions” has the meaning set forth in Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(c).

“Nonrecourse Liability” has the meaning set forth in Regulations Section 1.752-1(a)(2).

“Notice of Redemption” means a Notice of Redemption substantially in the form of Exhibit B.

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“Original Operating Agreement” has the meaning set forth in the recitals.

“Partner Minimum Gain” means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Regulations Section 1.704-2(i)(3).

“Partner Nonrecourse Debt” has the meaning set forth in Regulations Section 1.704-2(b)(4).

“Partnership Minimum Gain” has the meaning set forth in Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain, as well as any net increase or decrease in Partnership Minimum Gain, for a Partnership Year shall be determined in accordance with the rules of Regulations Section 1.704-2(d).

“Partnership Year” means the fiscal year of the Company, which shall be the calendar year.

“Percentage Interest” means, as to any Member, its interest in the Company as determined by dividing the Membership Units owned by such Member by the total number of Membership Units then outstanding and as specified on Exhibit A, as such Exhibit may be amended from time to time.

“Person” means an individual or a corporation, partnership, trust, unincorporated organization, association, limited liability company, estate or other entity.

“Plan Asset Regulations” means the regulations promulgated by the United States Department of Labor in Title 29, Code of Federal Regulations, Part 2510, Section 101.3, and any successor regulations thereto.

“Preferred Shares” has the meaning set forth in Section 4.2(c).

 “Recapture Income” means any gain recognized by the Company (computed without regard to any adjustment required by Section 734 or Section 743 of the Code) upon the disposition of any property or asset of the Company, which gain is characterized as ordinary income because it represents the recapture of deductions previously taken with respect to such property or asset.

“Recourse Liabilities” has the meaning set forth in Regulations Section 1.752-1(a)(1).

“Redeeming Member” shall have the meaning as set forth in Section 4.2(e)(1).

“Redemption Right” shall have the meaning as set forth in Section 4.2(e)(1).

 “Regulations” means the Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

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“Residual Gain” or “Residual Loss” means any item of gain or loss, as the case may be, of the Company recognized for Federal income tax purposes resulting from a sale, exchange or other disposition of Contributed Property or Adjusted Property, to the extent such item of gain or loss is not allocated pursuant to Section 6.4(b)(1)(i) or 6.4(b)(2)(i) to eliminate Book-Tax Disparities.

“Securities Act” shall have the meaning set forth in Section 4.2(e)(4).

“704(c) Value” of any Contributed Property means the fair market value of such property or other consideration at the time of contribution as determined by the Managing Member using such reasonable method of valuation as it may adopt.  Subject to Section 4.4, the Managing Member shall use such method as it deems reasonable and appropriate to allocate the aggregate of the 704(c) Value of Contributed Properties among each separate property on a basis proportional to its fair market value.

“Shares” means any Common Shares, of any class, and Preferred Shares issued to a Non-Managing Member pursuant to Section 4.2(e).

“Shares Amount” shall mean a number of Common Shares equal to the number of Units offered for redemption by a Redeeming Member, multiplied by the Unit Adjustment Factor.

“Specified Redemption Date” means the tenth Business Day after receipt by the Managing Member of a Notice of Redemption.

“Stock Incentive Plan” means the Morgans Hotel Group Co. 2006 Omnibus Stock Incentive Plan, as such plan may be amended, modified or supplemented from time to time.

“Subsidiary” means, with respect to any Person, any corporation or other entity of which a majority of (a) the voting power of the voting equity securities or (b) the outstanding equity interests is owned, directly or indirectly, by such Person.

“Substituted Non-Managing Member” means a Person who is admitted as a Non-Managing Member to the Company pursuant to Section 11.4.

“Tendered Units” shall have the meaning set forth in Section 4.2(e)(1).

“Transaction” has the meaning set forth in Section 11.2(c).

“Unit Adjustment Factor” means initially 1.0, unless provided otherwise in an exhibit hereto setting forth rights, preferences and obligations with respect to any specific class or series of Membership Units issued after the date hereof; provided, however, that in the event that the Managing Member (a) declares or pays a dividend on its outstanding Common Shares in Common Shares or makes a distribution to all holders of its outstanding Common Shares in Common Shares, (b) subdivides its outstanding Common Shares, or (c) combines its outstanding Common Shares into a smaller number of Common Shares, the Unit Adjustment Factor, as applicable, shall be adjusted by multiplying the Unit Adjustment Factor by a fraction, the numerator of which shall be the number of Common Shares issued and outstanding on the record date (assuming for such purposes that such dividend, distribution, subdivision or combination

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has occurred as of such time), and the denominator of which shall be the actual number of Common Shares (determined without the above assumption) issued and outstanding on the record date for such dividend, distribution, subdivision or combination.  Any adjustment to the Unit Adjustment Factor shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.  Any adjustment to the Unit Adjustment Factor shall be carried forward to successive adjustments.

“Unrealized Gain” attributable to any item of Company Property means, as of any date of determination, the excess, if any, of (a) the fair market value of such property (as determined under Section 4.4) as of such date, over (b) the Carrying Value of such property (prior to any adjustment to be made pursuant to Section 4.4) as of such date.

“Unrealized Loss” attributable to any item of Company Property means, as of any date of determination, the excess, if any, of (a) the Carrying Value of such property (prior to any adjustment to be made pursuant to Section 4.4) as of such date, over (b) the fair market value of such property (as determined under Section 4.4) as of such date.

“Unvested LTIP Units” has the meaning set forth in Section 4.5(d)(i).

“Valuation Date” means the date of receipt by the Managing Member of a Notice of Redemption or, if such date is not a Business Day, the first Business Day thereafter.

“Value” means, with respect to a Common Share, of any class, the average of the daily market price for the twenty (20) consecutive trading days immediately preceding the Valuation Date.  The market price for each such trading day shall be: (a) if the Common Shares are listed or admitted to trading on any securities exchange or the NASDAQ-National Market System, the closing price, regular way, on such day, or if no such sale takes place on such day, the average of the closing bid and asked prices on such day; (b) if the Common Shares are not listed or admitted to trading on any securities exchange or the NASDAQ-National Market System, the last reported sale price on such day or, if no sale takes place on such day, the average of the closing bid and asked prices on such day, as reported by a reliable quotation source designated by the Managing Member; or (c) if the Common Shares are not listed or admitted to trading on any securities exchange or the NASDAQ-National Market System and no such last reported sale price or closing bid and asked prices are available, the average of the reported high bid and low asked prices on such day, as reported by a reliable quotation source designated by the Managing Member, or if there shall be no bid and asked prices on such day, the average of the high bid and low asked prices, as so reported, on the most recent day (not more than 20 days prior to the date in question) for which prices have been so reported; provided, however, that if there are no bid and asked prices reported during the 20 days prior to the date in question, the Value of the Common Shares shall be determined by the Managing Member acting in good faith on the basis of such quotations and other information as it considers, in its judgment, appropriate.  In the event a holder of Common Shares, of any class, would be entitled to receive Common Share Rights, then the Value of such Common Share Rights shall be determined by the Managing Member acting in good faith on the basis of such quotations and other information as it considers, in its reasonable judgment, appropriate.

“Vested LTIP Units” has the meaning set forth in Section 4.5(d)(i).

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“Vesting Agreement” means each of any, as the context implies LTIP Unit Vesting Agreement entered into by a LTIP Unitholder upon acceptance of any award of LTIP Units under the Stock Incentive Plan (as such agreement may be amended, modified or supplemented from time to time).

ARTICLE II
ORGANIZATIONAL MATTERS

Section 2.1Organization and Continuation; Application of Act.

(a)Organization and Continuation of Company.  The Managing Member and the Non-Managing Members do hereby continue the Company as a limited liability company according to all of the terms and provisions of this Agreement and otherwise in accordance with the Act.  The Managing Member is the sole Managing Member and the Non-Managing Members are the sole Non-Managing Members of the Company.

(b)Application of Act.  The Company is a limited liability company subject to the provisions of the Act and the terms and conditions set forth in this Agreement.  Except as expressly provided herein to the contrary, the rights and obligations of the Members and the administration and termination of the Company shall be governed by the Act.  No Member has any interest in any Company Property and the Membership Interests of each Member shall be personal property for all purposes.

Section 2.2Name.  The name of the Company is Morgans Group LLC.  The Company’s business may be conducted under any other name or names deemed advisable by the Managing Member, including the name of the Managing Member or any Affiliate thereof.  The words “limited liability company,” or “LLC” or similar words or letters shall be included in the Company’s name where necessary for the purposes of complying with the laws of any jurisdiction that so requires.  The Managing Member in its sole and absolute discretion may change the name of the Company at any time and from time to time and shall notify the Non-Managing Members of such change in the next regular communication to the Non-Managing Members.

Section 2.3Registered Office and Agent; Principal Office.  The address of the registered office of the Company in the State of Delaware is located c/o Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801, County of New Castle and the registered agent for service of process on the Company in the State of Delaware at such registered office is the Corporation Trust Company.  The principal office of the Company is located at 475 Tenth Avenue, New York, New York 10018, or such other place as the Managing Member may from time to time designate by notice to the Non-Managing Members.  The Company may maintain offices at such other place or places within or outside the State of Delaware as the Managing Member deems advisable.

Section 2.4Term.  The term of the Company shall continue until dissolved pursuant to the provisions of Article XIII or as otherwise provided by law.

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ARTICLE III
PURPOSE

Section 3.1Purpose and Business.  The purpose and nature of the business to be conducted by the Company is (a) to conduct any business that may be lawfully conducted by a limited liability company organized pursuant to the Act, (b) to enter into any partnership, joint venture or other similar arrangement to engage in any of the foregoing or the ownership of interests in any entity engaged in any of the foregoing and (c) to do anything necessary or incidental to the foregoing which, in each case, is not in breach of this Agreement.

Section 3.2Powers.  The Company is empowered to do any and all acts and things necessary, appropriate, proper, advisable, incidental to or convenient for the furtherance and accomplishment of the purposes and business described herein and for the protection and benefit of the Company including, without limitation, full power and authority, directly or through its ownership interest in other entities, to enter into, perform and carry out contracts of any kind, borrow money and issue evidences of indebtedness, whether or not secured by mortgage, deed of trust, pledge or other lien, acquire, own, manage, improve and develop real property, and lease, sell, transfer and dispose of real property.

ARTICLE IV
CAPITAL CONTRIBUTIONS;
ISSUANCE OF UNITS; CAPITAL ACCOUNTS

Section 4.1Capital Contributions of the Members.

(a)Initial Capital Contributions.  At the time of the execution of this Agreement, the Members shall make or shall have made initial Capital Contributions.  The Members shall own Membership Units in the amounts set forth on Exhibit A and shall have a Percentage Interest in the Company as set forth on Exhibit A, which Percentage Interest shall be adjusted on Exhibit A from time to time by the Managing Member to the extent necessary to reflect accurately redemptions, conversions, Capital Contributions, the issuance of additional Membership Units, or similar events having an effect on a Member’s Percentage Interest.  The ownership of Membership Units may be evidenced by a form of certificate for units designated by the Managing Member; provided, however, that the Managing Member may provide that some or all of any or all classes or series of the Membership Units shall be uncertificated.  Each certificate for Membership Units shall be consecutively numbered or otherwise identified.  Certificates of Membership Units shall be signed by or in the name of the Company by the Chief Executive Officer, the President or a Vice President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Company.  Where a certificate is countersigned by a transfer agent, other than the Company or an employee of the Company, or by a registrar, the signatures of one or more officers of the Company may be facsimiles.  In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, the certificate may be

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issued by the Company with the same effect as if such officer, transfer agent or registrar were such officer, transfer agent or registrar at the date of its issue.

(b)Additional Capital Contributions.

(1)No Member shall be assessed or, except as provided for in Section 4.1(b)(2) and except for any such amounts which a Non-Managing Member may be obligated to repay under Section 10.4, be required to contribute additional funds or other property to the Company.  Any additional funds or other property required by the Company, as determined by the Managing Member in its sole discretion, may, at the option of the Managing Member and without an obligation to do so (except as provided for in Section 4.1(b)(2)), be contributed by the Managing Member as additional Capital Contributions.  If and as the Managing Member or any other Member makes additional Capital Contributions to the Company, each such Member shall receive additional Membership Units as provided for in Section 4.2.

(2)Except to the extent provided in Section 7.5 below relating to interests in Company Properties held directly by the Company or through Subsidiaries, the net proceeds of any and all funds raised by or through the Managing Member through the issuance of additional Shares of the Managing Member shall be contributed to the Company as additional Capital Contributions, and in such event the Managing Member shall be issued additional Membership Units pursuant to Section 4.2 below.

(c)Return of Capital Contributions.  Except as otherwise expressly provided herein, the Capital Contribution of each Member will be returned to that Member only in the manner and to the extent provided in Article V and Article XIII hereof, and no Member may withdraw from the Company or otherwise have any right to demand or receive the return of its Capital Contribution to the Company (as such), except as specifically provided herein.  Under circumstances requiring a return of any Capital Contribution, no Member shall have the right to receive property other than cash, except as specifically provided herein.  No Member shall be entitled to interest on any Capital Contribution or Capital Account notwithstanding any disproportion therein as between the Members.  Except as specifically provided herein, the Managing Member shall not be liable for the return of any portion of the Capital Contribution of any Non-Managing Member, and the return of such Capital Contributions shall be made solely from Company assets.

(d)Liability of Members.  No Member shall have any further personal liability to contribute money to, or in respect of, the liabilities or the obligations of the Company, nor shall any Member be personally liable for any obligations of the Company, except as otherwise provided in this Article IV or in the Act.

Section 4.2Issuances of Additional Membership Interests.

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(a)Issuance to Other Than the Managing Member.  The Managing Member is hereby authorized to cause the Company to issue such additional Membership Interests in the form of Membership Units for any Company purpose at any time or from time to time, to the Members (other than issuances to the Managing Member, which issuances are governed by Section 4.2(b) and Section 4.2(c)) or to other Persons for such consideration and on such terms and conditions as shall be established by the Managing Member in its sole and absolute discretion, all without the approval of any Non-Managing Members except to the extent provided herein; provided, however, that the Company also may from time to time issue to third parties additional Membership Interests (other than any such issuance to the Managing Member which is governed by Sections 4.2(b) and 4.2(c)) in one or more classes, or one or more series of any of such classes, with such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions senior to Non-Managing Membership Interests, as may be set forth an exhibit hereto from time to time, subject to Delaware law, including, without limitation, with respect to (i) the allocations of items of income, gain, loss, deduction and credit to each such class or series of Membership Interests, (ii) the right of each such class or series of Membership Interests to share in distributions, and (iii) the rights of each such class or series of Membership Interests upon dissolution and liquidation of the Company.  To the extent more than one class of Membership Units is outstanding, the Membership Units in this Agreement shall be referred to as Class A Units.  To the extent more than one class of Common Shares is outstanding, the Common Shares in this Agreement shall be referred to as Class A Common Shares.

(b)Issuance to the Managing Member.  The Company also may from time to time issue to the Managing Member additional Membership Units or other Membership Interests in one or more classes, or one or more series of any of such classes, with such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions senior to Non-Managing Membership Interests, as may be set forth in an exhibit hereto from time to time, all as shall be determined by the Managing Member, subject to Delaware law, including, without limitation, with respect to (i) the allocations of items of income, gain, loss, deduction and credit to each such class or series of Membership Interests, (ii) the right of each such class or series of Interests to share in distributions, and (iii) the rights of each such class or series of Membership Interests upon dissolution and liquidation of the Company; provided, however, that (x) the additional Membership Interests are issued in connection with an issuance of shares of the Managing Member, which shares have designations, preferences and other rights, all such that the economic interests are substantially similar to the designations, preferences and other rights of the additional Membership Interests issued to the Managing Member in accordance with this Section 4.2(b), and (y) the Managing Member shall make a Capital Contribution to the Company (1) in an amount equal to the net proceeds raised in connection with the issuance of such shares of the Managing Member in the event such shares are sold for

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cash or cash equivalents or (2) in the form of the property received in consideration for such shares, in the event such shares are issued in consideration for other property.

(c)Issuance of Additional Common Shares or Preferred Shares.  The Managing Member is explicitly authorized to issue additional Common Shares, of any class, or preferred shares of beneficial interest of the Managing Member (“Preferred Shares”), or rights, options, warrants or convertible or exchangeable securities containing the right to subscribe for or purchase Common Shares, of any class, or Preferred Shares (“New Securities”) and in connection therewith, as further provided in Section 4.2(b), (i) the Managing Member shall cause the Company to issue to the Managing Member Membership Interests or rights, options, warrants or convertible or exchangeable securities of the Company having designations, preferences and other rights, as may be set forth on an exhibit hereto from time to time, all such that the economic interests are substantially similar to those of the New Securities, and (ii) the Managing Member shall contribute the net proceeds from, or the property received in consideration for, the issuance of such New Securities and from the exercise of rights contained in such New Securities to the Company.  In connection with the issuance of Membership Interests which are substantially similar to New Securities, the Managing Member is authorized to modify or amend the distributions or allocations hereunder solely to the extent necessary to give effect to the designations, preferences and other rights pertaining to such Membership Interests.

(d)Issuance Pursuant to Option Plans.

(1)Upon the exercise of an option granted by the Managing Member for Common Shares, of any class, the Managing Member shall cause the Company to issue to the Managing Member one Membership Unit for each such Common Share acquired upon such exercise pursuant to the Option Plans (or such other number of Membership Units based on the relationship a different class of Common Shares bears to Common Shares), and the Managing Member shall contribute to the Company the net proceeds received upon such exercise (it being understood that the Managing Member may issue Common Shares in connection with the Option Plans without receiving a specified amount of proceeds and that the issuance of such Common Shares shall nonetheless entitle the Managing Member to additional Membership Units).

(2)The Managing Member shall cause the Company to issue Membership Units to employees of the Company upon the exercise by any such employees of an option to acquire Membership Units granted by the Company pursuant to the Option Plans in accordance with the terms of the Option Plans.  Membership Units so issued shall represent Non-Managing Membership Interests.

(3)The Managing Member shall cause the Company to issue Membership Units to any Subsidiary upon the exercise by an employee of such Subsidiary of an option to acquire Membership Units granted by such Subsidiary pursuant to the Option Plans, and such Subsidiary shall transfer to the Company the price per Membership Unit required by the Option Plans to be paid by

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Subsidiaries.  Membership Units issued to any such Subsidiary shall represent Non-Managing Membership Interests.

(e)Redemption of Units.

(1)Subject to Section 11.3(d) and the further provisions of this Section 4.2(e), and except as otherwise set forth in an exhibit hereto setting forth rights, preferences and obligations with respect to any particular class or series of Membership Units issued after the date hereof, each Non-Managing Member shall have the right (i) on or after the date twelve (12) months after the Effective Date, with respect to the Membership Units acquired on or contemporaneously with the Effective Date, or (ii) on or after such other date as expressly provided in any agreement entered into between the Company and any Non-Managing Member, including the Formation and Structuring Agreement, to require the Company to redeem (the “Redemption Right”) on a Specified Redemption Date all or a portion of the Membership Units held by such Non-Managing Member at a redemption price equal to and in the form of the Cash Amount to be paid by the Company.  The Redemption Right shall be exercised pursuant to a Notice of Redemption delivered to the Company (with a copy to the Managing Member) by the Non-Managing Member who is exercising the Redemption Right (the “Redeeming Member”); provided, however, that the Company shall not be obligated to satisfy such Redemption Right if the Managing Member elects to purchase the Membership Units subject to the Notice of Redemption (the “Tendered Units”); provided, further, that in the event the Managing Member issues to all holders of Common Shares rights, options, warrants or convertible or exchangeable securities entitling the shareholders to subscribe for or purchase Common Shares, or any other securities or property (collectively, the “Common Share Rights”) then (except to the extent such rights have already been reflected in an adjustment to the Unit Adjustment Factor as provided in Section 4.2(e)(2) below) the Redeeming Member shall also be entitled to receive such Common Share Rights that a holder of that number of Common Shares would be entitled to receive.  A Non-Managing Member may not exercise the Redemption Right for less than ten thousand (10,000) Membership Units or, if such Non-Managing Member holds less than ten thousand (10,000) Membership Units, all of the Membership Units held by such Non-Managing Member.

(2)Notwithstanding the provisions of Section 4.2(e)(1), a Non-Managing Member that exercises the Redemption Right shall be deemed to have offered to sell the Membership Units described in the Notice of Redemption to the Managing Member, and the Managing Member may, in its sole and absolute discretion, elect to assume directly and satisfy a Redemption Right, and acquire some or all of such Membership Units by paying to the Redeeming Member either the Cash Amount, or the Shares Amount, as elected by the Managing Member (in its sole and absolute discretion), on the Specified Redemption Date, whereupon the Managing Member shall acquire the Membership Units offered for redemption by the Redeeming Member.  If the Managing Member shall elect to exercise its right to purchase Membership Units under this Section 4.2(e)(2) with

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respect to a Notice of Redemption, it shall so notify the Redeeming Member promptly after the receipt by the Company of such Notice of Redemption.  In the event the Managing Member shall exercise its right to purchase Membership Units with respect to the exercise of a Redemption Right in the manner described in the first sentence of this Section 4.2(e)(2), the Company shall have no obligation to pay any amount to the Redeeming Member with respect to Redeeming Member’s exercise of the Redemption Right, and each of the Redeeming Member, the Company and the Managing Member shall treat the transaction between the Managing Member and the Redeeming Member for federal income tax purposes as a sale of the Redeeming Member’s Membership Units to the Managing Member.

(3)In the event of any change in the Unit Adjustment Factor, the number of Membership Units held by each Member shall be proportionately adjusted by multiplying the number of Membership Units held by such Member immediately prior to the change in the Unit Adjustment Factor by the new Unit Adjustment Factor; the intent of this provision is that one Membership Unit remains equivalent in value to one Common Share without dilution (including any securities for which Shares are exchanged in a transaction contemplated by Section 11.2(c)).  In the event the Managing Member issues any Common Shares in exchange for Membership Units pursuant to this Section 4.2(e), any such Membership Units so acquired by the Managing Member shall immediately thereafter be canceled by the Company and the Company shall issue to the Managing Member new Membership Units pursuant to Section 4.2(c) hereof.  Each Redeeming Member agrees to execute such documents as the Managing Member may reasonably require in connection with the issuance of Common Shares upon exercise of the Redemption Right.

(4)The Shares Amount, if applicable, shall be delivered as duly authorized, validly issued, fully paid and nonassessable Common Shares and, if applicable, free of any pledge, lien, encumbrance or restriction, other than those provided in the Charter, the Bylaws of the Managing Member, the Securities Act of 1933, as amended (the “Securities Act”), relevant state securities or blue sky laws and any applicable registration rights agreement with respect to such Common Shares entered into by the Redeeming Member. Notwithstanding any delay in such delivery (but subject to Section 4.2(e)(6)), the Redeeming Member shall be deemed the owner of such Common Shares for all purposes, including without limitation, rights to vote or consent, and receive dividends, as of the Specified Redemption Date.

(5)Each Non-Managing Member covenants and agrees with the Managing Member that all Tendered Units shall be delivered to the Managing Member free and clear of all liens, claims and encumbrances whatsoever and should any such liens, claims and/or encumbrances exist or arise with respect to such Tendered Units, the Managing Member shall be under no obligation to acquire the same. Each Non-Managing Member further agrees that, in the event any state or local property transfer tax is payable solely with respect to its

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Tendered Units transferred to the Managing Member (or its designee), such Non-Managing Member shall assume and pay such transfer tax.

(6)Notwithstanding the provisions of Section 4.2(e) or any other provision of this Agreement, a Member (i) shall not be entitled to effect a Redemption for cash or an exchange for Common Shares to the extent the ownership or right to acquire Common Shares pursuant to such exchange by such Member on the Specified Redemption Date could cause such Member or any other Person to violate the restrictions on ownership and transfer of Common Shares set forth in the Charter and (ii) shall have no rights under this Agreement to acquire Common Shares which would otherwise be prohibited under the Charter. To the extent any attempted redemption or exchange for Common Shares would be in violation of this Section 4.2(e)(6), it shall be null and void ab initio and such Member shall not acquire any rights or economic interest in the cash otherwise payable upon such redemption or the Common Shares otherwise issuable upon such exchange.

(7)Notwithstanding anything herein to the contrary (but subject to Section 4.2(e)(6)), with respect to any redemption or exchange for Common Shares pursuant to this Section 4.2(e):

(i)All Membership Units acquired by the Managing Member pursuant thereto shall automatically, and without further action required, be converted into and deemed to be Managing Member Interests comprised of the same number and class of Membership Units.

(ii)The consummation of any redemption or exchange for Common Shares shall be subject to the expiration or termination of the applicable waiting period, if any, under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.

(iii)Each Redeeming Member shall continue to own all Membership Units subject to any redemption or exchange for Common Shares, and be treated as a Non-Managing Member with respect to such Membership Units for all purposes of this Agreement, until the Specified Redemption Date. Until a Specified Redemption Date, the Redeeming Member shall have no rights as a stockholder of the Managing Member with respect to such Redeeming Member’s Membership Units, except as may be provided in the Investors Agreement.

Section 4.3No Preemptive Rights.  Except as specifically provided in this Agreement, no Person shall have any preemptive, preferential or other similar right with respect to (a) additional Capital Contributions or loans to the Company, or (b) issuance or sale of any Membership Units.

Section 4.4Capital Accounts of the Members.

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(a)General.  The Company shall maintain for each Member a separate Capital Account in accordance with the rules of Regulations Section 1.704-1(b)(2)(iv).  Such Capital Account shall be increased by (a) the amount of all Capital Contributions made by such Member to the Company pursuant to this Agreement and (b) all items of income and gain (including income and gain exempt from tax) computed in accordance with Section 4.4(b) hereof and allocated to such Member pursuant to Sections 6.1 through Section 6.3 of the Agreement, and decreased by (i) the amount of cash or Agreed Value of all actual and deemed distributions of cash or property made to such Member pursuant to this Agreement and (ii) all items of deduction and loss computed in accordance with Section 4.4(b) hereof and allocated to such Member pursuant to Sections 6.1 through Section 6.3 of the Agreement.

(b)Income, Gains, Deductions and Losses.  For purposes of computing the amount of any item of income, gain, loss or deduction to be reflected in the Members’ Capital Accounts, unless otherwise specified in this Agreement, the determination, recognition and classification of any such item shall be the same as its determination, recognition and classification for Federal income tax purposes determined in accordance with Section 703(a) of the Code (for this purpose all items of income, gain, loss or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code shall be included in taxable income or loss), with the following adjustments:

(1)Except as otherwise provided in Regulations Section 1.704-1(b)(2)(iv)(m), the computation of all items of income, gain, loss and deduction shall be made without regard to any election under Section 754 of the Code which may be made by the Company.

(2)The computation of all items of income, gain, loss and deduction shall be made without regard to the fact that items described in Sections 705(a)(1)(B) or 705(a)(2)(B) of the Code are not includable in gross income or are neither currently deductible nor capitalized for Federal income tax purposes.

(3)Any income, gain or loss attributable to the taxable disposition of any Company Property shall be determined as if the adjusted basis of such property as of such date of disposition were equal in amount to the Company’s Carrying Value with respect to such property as of such date.

(4)In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year.

(5)In the event the Carrying Value of any Company asset is adjusted pursuant to Section 4.4(d) hereof, the amount of any such adjustment shall be taken into account as gain or loss from the disposition of such asset.

(6)Any items specially allocated under Section 6.4 hereof shall not be taken into account.

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(c)Transfers of Membership Units.  A transferee of a Membership Unit shall succeed to a pro rata portion of the Capital Account of the transferor.

(d)Unrealized Gains and Losses.

(1)Consistent with the provisions of Regulations Section 1.704-1(b)(2)(iv)(f), and as provided in Section 4.4(d)(2), the Carrying Values of all Company assets shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Company Property, as of the times of the adjustments provided in Section 4.4(d)(2) hereof, as if such Unrealized Gain or Unrealized Loss had been recognized on an actual sale of each such property and allocated pursuant to Section 6.1 of the Agreement.

(2)Such adjustments shall be made as of the following times: (i) immediately prior to the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (ii) immediately prior to the distribution by the Company to a Member of more than a de minimis amount of Property as consideration for an interest in the Company; (iii) immediately prior to the issuance of any LTIP Units; and (iv) immediately prior to the liquidation of the Company or the Managing Member’s interest in the Company within the meaning of Regulations Section 1.704-l(b)(2)(ii)(g).

(3)In accordance with Regulations Section 1.704-1(b)(2)(iv)(e), the Carrying Values of Company assets distributed in kind shall be adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss attributable to such Company Property, as of the time any such asset is distributed.

(4)In determining such Unrealized Gain or Unrealized Loss, the aggregate cash amount and fair market value of all Company assets (including cash or cash equivalents) shall be determined by the Managing Member using such reasonable method of valuation as it may adopt, or in the case of a liquidating distribution pursuant to Article XIII of this Agreement, be determined and allocated by the Liquidator using such reasonable methods of valuation as it may adopt.  The Managing Member, or the Liquidator, as the case may be, shall allocate such aggregate value among the assets of the Company (in such manner as it determines in its sole and absolute discretion to arrive at a fair market value for individual properties).

(e)Modification by Managing Member.  The provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations issued under Sections 704(b) of the Code, and shall be interpreted and applied in a manner consistent with such Regulations.  In the event the Managing Member shall determine that it is prudent to modify the manner in which the Capital Accounts, or any debits or credits thereto (including, without limitation, debits or credits relating to liabilities which are secured by contributed or distributed property or which are assumed by the Company, the Managing Member, or any Non-Managing Members) are computed

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in order to comply with such Regulations, the Managing Member may make such modification; provided, however, that it will not have a material effect on the amounts distributable to any Person pursuant to Article XIII of this Agreement upon the liquidation of the Company.  The Managing Member also shall (a) make any adjustments that are necessary or appropriate to maintain equality between the Capital Accounts of the Members and the amount of Company capital reflected on the Company’s balance sheet, as computed for book purposes, in accordance with Regulations Section 1.704-1(b)(2)(iv)(q), and (b) make any appropriate modifications in the event unanticipated events might otherwise cause this Agreement not to comply with Regulations Section 1.704-1(b).

Section 4.5LTIP Units.

(a)Issuance of LTIP Units.  The Managing Member may from time to time issue LTIP Units to Persons who provide services to the Company, for such consideration (or no consideration) as the Managing Member may determine to be appropriate, and admit such Persons as Non-Managing Members.  Subject to the following provisions of this Section and the special provisions of Sections 4.6, 6.3(a) and 14.3, LTIP Units shall be treated as Membership Units, with all of the rights, privileges and obligations attendant thereto.  For purposes of computing the Members’ Percentage Interests, LTIP Units shall be treated as Membership Units.

(b)Adjustments to LTIP Units.  The Company shall maintain at all times a one-to-one correspondence between LTIP Units and Membership Units for conversion, distribution and other purposes, including without limitation complying with the following procedures:  If an Adjustment Event (as defined below) occurs, then the Managing Member shall make a corresponding adjustment to the LTIP Units to maintain a one-for-one correspondence between Membership Units and LTIP Units.  The following shall be “Adjustment Events”:  (A) the Company makes a distribution on all outstanding Membership Units in Membership Units, (B) the Company subdivides the outstanding Membership Units into a greater number of units or combines the outstanding Membership Units into a smaller number of units, or (C) the Company issues any Membership Units in exchange for its outstanding Membership Units by way of a reclassification or recapitalization of its Membership Units.  If more than one Adjustment Event occurs, the adjustment to the LTIP Units need be made only once using a single formula that takes into account each and every Adjustment Event as if all Adjustment Events occurred simultaneously.  For the avoidance of doubt, the following shall not be Adjustment Events:  (x) the issuance of Membership Units in a financing, reorganization, acquisition or other similar business transaction, (y) the issuance of Membership Units pursuant to any employee benefit or compensation plan or distribution reinvestment plan, or (z) the issuance of any Membership Units to the Managing Member in respect of a capital contribution to the Company of proceeds from the sale of securities by the Managing Member.  If the Company takes an action affecting the Membership Units other than actions specifically described above as “Adjustment Events” and in the opinion of the Managing Member such action would require an adjustment to the LTIP Units to maintain the one-to-one correspondence described above, the Managing Member shall have the right to make such adjustment to the LTIP Units, to the extent permitted by

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law and by the terms of any plan pursuant to which the LTIP Units have been issued, in such manner and at such time as the Managing Member, in its sole discretion, may determine to be appropriate under the circumstances.  If an adjustment is made to the LTIP Units as herein provided the Company shall promptly file in the books and records of the Company an officer’s certificate setting forth such adjustment and a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment absent manifest error.  Promptly after filing of such certificate, the Company shall mail a notice to each LTIP Unitholder setting forth the adjustment to his or her LTIP Units and the effective date of such adjustment.

For the avoidance of doubt, maintenance of the one-to-one correspondence between LTIP Units and Membership Units as provided above is not intended to alter the Capital Account Limitation applicable to LTIP Units, the special allocations to be made with respect to LTIP Units under Section 6.3(a), or any differences in liquidating distributions to be made under Section 13.2 in the event that the Company has recognized insufficient Liquidating Gains to make the full special allocations under Section 6.3(a).

(c)Priority.  The LTIP Units shall rank pari passu with the Membership Units as to the payment of regular and special periodic or other distributions and, subject to the provisions of Section 13.2, as to distribution of assets upon liquidation, dissolution or winding up.

(d)Special Provisions.  LTIP Units shall be subject to the following special provisions:

(i)Vesting Agreements and Transferability.  LTIP Units may, in the sole discretion of the Managing Member, be issued subject to vesting, forfeiture and additional restrictions on transfer pursuant to the terms of a Vesting Agreement.  The terms of any Vesting Agreement may be modified by the Managing Member from time to time in its sole discretion, subject to any restrictions on amendment imposed by the relevant Vesting Agreement or by the plan pursuant to which the LTIP Units were issued, if applicable.  LTIP Units that have vested under the terms of a Vesting Agreement are referred to as “Vested LTIP Units”; all other LTIP Units shall be treated as “Unvested Incentive Units.”  Subject to the terms of any Vesting Agreement, an LTIP Unitholder shall be entitled to transfer his or her LTIP Units to the same extent, and subject to the same restrictions as holders of Membership Units are entitled to transfer their Membership Units pursuant to Article XI.

(ii)Forfeiture.  Unless otherwise specified in the Vesting Agreement, upon the occurrence of any event specified in a Vesting Agreement as resulting in either the right of the Company or the Managing Member to repurchase LTIP Units at a specified purchase price or some other forfeiture of any LTIP Units, then if the Company or the Managing Member exercises such right to repurchase or forfeiture in accordance with the applicable Vesting Agreement, the relevant LTIP Units shall immediately, and without any further action, be treated as cancelled and no longer outstanding for any purpose.  Unless otherwise specified in the Vesting Agreement, no consideration or other payment shall be due with respect to any LTIP Units that have been forfeited, other than any

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distributions declared with a Membership Record Date prior to the effective date of the forfeiture.  In connection with any repurchase or forfeiture of LTIP Units, the balance of the portion of the Capital Account of the LTIP Unitholder that is attributable to all of his or her LTIP Units shall be reduced by the amount, if any, by which it exceeds the target balance contemplated by Section 6.3(a), calculated with respect to the LTIP Unitholder’s remaining LTIP Units, if any.

(iii)Allocations.  LTIP Units shall generally be treated as Membership Units for purposes of Article VI, but shall also be entitled to certain special allocations of gain under Section 6.3(a).

(iv)Redemption.  The Redemption Right provided to Non-Managing Members under Section 4.2(e)(1) shall not apply with respect to LTIP Units unless and until they are converted to Membership Units as provided in Section 4.6.  Thereafter, the Redemption Right under Section 4.2(e)(1) shall apply to such converted Membership Units.

(v)Legend.  Any certificate evidencing an LTIP Unit shall bear an appropriate legend indicating that additional terms, conditions and restrictions on transfer, including without limitation any Vesting Agreement, apply to the LTIP Unit.

(vi)Conversion to Membership Units.  Vested LTIP Units are eligible to be converted into Membership Units under Section 4.6.

Section 4.6Conversion of LTIP Units.

(a)Right to Convert LTIP Units into Membership Units.  A LTIP Unitholder shall have the right (the “Conversion Right”), at his or her option, at any time to convert all or a portion of his or her Vested LTIP Units into Membership Units; provided, however, that a LTIP Unitholder may not exercise the Conversion Right for fewer than one thousand (1,000) Vested LTIP Units or, if such LTIP Unitholder holds fewer than one thousand Vested LTIP Units, all of the LTIP Unitholder’s Vested LTIP Units.  LTIP Unitholders shall not have the right to convert Unvested LTIP Units into Membership Units until they become Vested LTIP Units; provided, however, that when a LTIP Unitholder is notified of the expected occurrence of an event that will cause his or her Unvested LTIP Units to become Vested LTIP Units, such Person may give the Company a Conversion Notice conditioned upon and effective as of the time of vesting, and such Conversion Notice, unless subsequently revoked by the LTIP Unitholder, shall be accepted by the Company subject to such condition.  The Managing Member shall have the right at any time to cause a conversion of Vested LTIP Units into Membership Units.  In all cases, the conversion of any LTIP Units into Membership Units shall be subject to the conditions and procedures set forth in this Section 4.6.

(b)Number of Units Convertible.  A LTIP Unitholder who holds Vested LTIP Units may convert such Units into an equal number of fully paid and non-assessable Membership Units, giving effect to all adjustments (if any) made pursuant to Section 4.5(b).  Notwithstanding the foregoing, in no event may a LTIP Unitholder

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convert a number of Vested LTIP Units that exceeds (x) the Economic Capital Account Balance of such LTIP Unitholder, to the extent attributable to its ownership of LTIP Units, divided by (y) the Membership Unit Economic Balance, in each case as determined as of the effective date of conversion (the “Capital Account Limitation”).

(c)Notice.  In order to exercise his or her Conversion Right, a LTIP Unitholder shall deliver a notice (a “Conversion Notice”) in the form attached as Exhibit C to the Company (with a copy to the Managing Member) not less than 10 nor more than 60 days prior to a date (the “Conversion Date”) specified in such Conversion Notice; provided, however, that if the Managing Member has not given to the LTIP Unitholders notice of a proposed or upcoming Transaction at least thirty (30) days prior to the effective date of such Transaction, then LTIP Unitholders shall have the right to deliver a Conversion Notice until the earlier of (x) the tenth (10th) day after such notice from the Managing Member of a Transaction or (y) the third business day immediately preceding the effective date of such Transaction.  A Conversion Notice shall be provided in the manner provided in Section 15.1.  Each LTIP Unitholder covenants and agrees with the Company that all Vested LTIP Units to be converted pursuant to this Section 4.6 shall be free and clear of all liens.  Notwithstanding anything herein to the contrary, a LTIP Unitholder may deliver a redemption notice relating to those Membership Units that will be issued to such LTIP Unitholder upon conversion of such LTIP Units into Membership Units in advance of the Conversion Date; provided, however, that the redemption of such Membership Units by the Company shall in no event take place until after the Conversion Date.  For clarity, it is noted that the objective of this paragraph is to put a LTIP Unitholder in a position where, if he or she so wishes, the Membership Units into which his or her Vested LTIP Units will be converted can be redeemed by the Company simultaneously with the conversion, with the further consequence that, if the Managing Member elects to assume the Company’s redemption obligation with respect to such Membership Units under Section 4.2(e)(1) by delivering to such LTIP Unitholder Common Shares rather than cash, then such LTIP Unitholder can have such Common Shares issued to him or her simultaneously with the conversion of his or her Vested LTIP Units into Membership Units.  The Managing Member shall cooperate with LTIP Unitholders to coordinate the timing of the different events described in the foregoing sentence.

(d)Forced Conversion.  The Company, at any time at the election of the Managing Member, may cause any number of Vested LTIP Units held by a LTIP Unitholder to be converted (a “Forced Conversion”) into an equal number of Membership Units, giving effect to all adjustments (if any) made pursuant to Section 4.2(b); provided, that the Company may not cause Forced Conversion of any LTIP Units that would not at the time be eligible for conversion at the option of such LTIP Unitholder pursuant to paragraph (b) above.  In order to exercise its right of Forced Conversion, the Company shall deliver a notice (a “Forced Conversion Notice”) in the form attached as Exhibit D to the applicable LTIP Unitholder not less than 10 nor more than 60 days prior to the Conversion Date specified in such Forced Conversion Notice.  A Forced Conversion Notice shall be provided in the manner provided in Section 15.1.

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(e)Conversion Procedures.  A conversion of Vested LTIP Units for which the LTIP Unitholder has given a Conversion Notice or the Company has given a Forced Conversion Notice shall occur automatically after the close of business on the applicable Conversion Date without any action on the part of such LTIP Unitholder, as of which time such ,Member shall be credited on the books and records of the Company with the issuance as of the opening of business on the next day of the number of Membership Units issuable upon such conversion.  After the conversion of LTIP Units, the Company shall deliver to the LTIP Unitholder, upon his or her written request, a certificate of the Managing Member certifying the number of Membership Units and remaining LTIP Units, if any, held by such Person immediately after such conversion in the manner provided in Section 15.1.

(f)Treatment of Capital Account.  For purposes of making future allocations under Section 6.3(a) and applying the Capital Account Limitation, the portion of the Economic Capital Account Balance of the applicable LTIP Unitholder that is treated as attributable to his or her LTIP Units shall be reduced, as of the date of conversion, by the product of the number of LTIP Units converted and the Membership Unit Economic Balance.

(g)Mandatory Conversion in Connection with a Transaction.  If the Company or the Managing Member shall be a party to any Transaction, as a result of which Membership Units shall be exchanged for or converted into the right, or the LTIP Unitholders of such Units shall otherwise be entitled, to receive cash, securities or other property or any combination thereof, then the Managing Member shall, immediately prior to the Transaction, exercise its right to cause a Forced Conversion with respect to the maximum number of LTIP Units then eligible for conversion, taking into account any allocations that occur in connection with the Transaction or that would occur in connection with the Transaction if the assets of the Company were sold at the Transaction price or, if applicable, at a value determined by the Managing Member in good faith using the value attributed to the Membership Units in the context of the Transaction (in which case the Conversion Date shall be the effective date of the Transaction).

In anticipation of such Forced Conversion and the consummation of the Transaction, the Company shall use commercially reasonable efforts to cause each LTIP Unitholder to be afforded the right to receive in connection with such Transaction in consideration for the Membership Units into which his or her LTIP Units will be converted the same kind and amount of cash, securities and other property (or any combination thereof) receivable upon the consummation of such Transaction by a holder of the same number of Membership Units, assuming such holder of Membership Units is not a Person with which the Company consolidated or into which the Company merged or which merged into the Company or to which such sale or transfer was made, as the case may be (a “Constituent Person”), or an affiliate of a Constituent Person.  In the event that holders of Membership Units have the opportunity to elect the form or type of consideration to be received upon consummation of the Transaction, prior to such Transaction the Managing Member shall give prompt written notice to each LTIP Unitholder of such election, and shall use commercially reasonable efforts to afford such LTIP Unitholders the right to elect, by written notice to the Managing Member, the form

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or type of consideration to be received upon conversion of each LTIP Unit held by such LTIP Unitholder into Membership Units in connection with such Transaction.  If a LTIP Unitholder fails to make such an election, such LTIP Unitholder (and any of its transferees) shall receive upon conversion of each LTIP Unit held by him or her (or by any of his or her transferees) the same kind and amount of consideration that a holder of a Membership Unit would receive if such Person failed to make such an election.

Subject to the rights of the Company and the Managing Member under any Vesting Agreement and the terms of any plan or plans under which the LTIP Units were issued, the Company shall use commercially reasonable effort to cause the terms of any Transaction to be consistent with the provisions of this Section 4.6 and to enter into an agreement with the successor or purchasing entity, as the case may be, for the benefit of any LTIP Unitholders whose LTIP Units will not be converted into Membership Units in connection with the Transaction that will (i) contain provisions enabling the holders of LTIP Units that remain outstanding after such Transaction to convert their LTIP Units into securities as comparable as reasonably possible under the circumstances to the Membership Units and (ii) preserve as far as reasonably possible under the circumstances the distribution, special allocation, conversion, and other rights set forth in the Agreement for the benefit of the LTIP Unitholders.

ARTICLE V
DISTRIBUTIONS

Section 5.1Distributions.  The Managing Member shall cause the Company to distribute such amounts as the Managing Member may in its discretion determine among the Members (i) first, with respect to any class of Membership Interests issued pursuant to Section 4.2(a) or 4.2(b) which are entitled to a preference over Membership Units on distribution and are specially allocated items under Section 6.1 prior to allocated items with respect to amounts distributed pursuant to clause (ii) below (and within and among such classes, in order of the preferences designated therein and pro rata among any such classes), and (ii) thereafter, pro rata in accordance with their respective Percentage Interests from time to time as determined by the Managing Member; provided that in no event may a Member receive a distribution with respect to a Unit if such Member is entitled to receive a dividend from the Managing Member which is derived from a distribution to the Managing Member with respect to a Common Share for which such Unit has been redeemed or exchanged.  In the event the Company is subject to any tax or other obligation that is attributable to the interest of one or more Members in the Company, but fewer than all the Members, such tax or other obligation shall be specially allocated to, and charged against the Capital Account of, such Member or Members, and the amounts otherwise distributable to such Member or Members pursuant to this Agreement shall be reduced by such amount.

Section 5.2Amounts Withheld.  All amounts withheld pursuant to the Code or any provisions of any state or local tax law and Section 10.4 hereof with respect to any allocation, payment or distribution to the Managing Member, or any Non-Managing Members or Assignees

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shall be treated as amounts distributed to the Managing Member or such Non-Managing Members, or Assignees pursuant to Section 5.1 for all purposes under this Agreement.

Section 5.3Distributions Upon Liquidation.  Proceeds from a Liquidating Transaction shall be distributed to the Members in accordance with Section 13.2.

ARTICLE VI
ALLOCATIONS

Section 6.1Allocations For Capital Account Purposes Other than the Taxable Year of Liquidation.  Subject to a preferential allocation of gain or net income to any class of Membership Interests issued pursuant to Section 4.2(a) or 4.2(b) which is entitled to a preference over Membership Units on distributions, for purposes of maintaining the Capital Accounts and in determining the rights of the Members among themselves, the Company’s items of income, gain, loss and deduction (computed in accordance with Section 4.4 hereof) shall be allocated among the Members for each taxable year (or portion thereof) as provided herein below:

(a)Net Income.  After giving effect to the special allocations set forth in Sections 6.2 and 6.3 below, Net Income shall be allocated to the Members in accordance with their respective Percentage Interests.

(b)Net Losses.  After giving effect to the special allocations set forth in Sections 6.2 and 6.3 below, Net Losses shall be allocated to the Members in accordance with their respective Percentage Interests.

(c)Nonrecourse Liabilities.  For purposes of Regulations Section 1.752-3(a), the Members agree that Nonrecourse Liabilities of the Company in excess of the sum of (i) the amount of Partnership Minimum Gain and (ii) the total amount of Nonrecourse Built-in Gain shall be allocated among the Members in the manner determined by the Managing Member, provided that such allocation shall be permissible under Regulations Section 1.752-3.

(d)Gains.  Any gain allocated to the Members upon the sale or other taxable disposition of any Company asset shall to the extent possible, after taking into account other required allocations of gain pursuant to Section 6.3 below, be characterized as Recapture Income in the same proportions and to the same extent as such Members have been allocated any deductions directly or indirectly giving rise to the treatment of such gains as Recapture Income, all in such a manner consistent with Regulations Section 1.1245-1.

Section 6.2Allocations for Capital Account Purposes in the Taxable Year of Liquidation.  Subject to Section 6.3, the Net Income and Net Loss of the Company for the taxable year of liquidation of the Company shall be allocated prior to the final liquidating distributions of the Company and shall be allocated first to eliminate any Member’s Adjusted Capital Account Deficit and then, to the extent permissible under Sections 704(b) of the Code, in a manner such that the Capital Accounts of the Members immediately prior to such final

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liquidating distributions are equal to the amount which would have been distributable to the Members under Section 5.1 if such distributions were to be governed by Section 5.1.  Notwithstanding the preceding sentence, actual distributions made subsequent to the allocations under this Section 6.2 shall be made pursuant to Section 5.3.

Section 6.3Special Allocation Rules.  Notwithstanding any other provision of this Agreement, the following special allocations shall be made in the following order:

(a)Special Allocations With Respect to LTIP Units.  After giving effect to the special allocations set forth in the following provisions of this Section 6.3, and subject to any preferential allocation of gain or net income to any class of Membership Interests issued pursuant to Section 4.2(a) or 4.2(b) which is entitled to a preference over Membership Units on liquidating distributions, any Liquidating Gains shall first be allocated to the LTIP Unitholders until the Economic Capital Account Balances of such Holders, to the extent attributable to their ownership of LTIP Units, are equal to (i) the Membership Unit Economic Balance, multiplied by (ii) the number of their LTIP Units.  The “Economic Capital Account Balances” of the LTIP Unitholders will be equal to their Capital Account balances, plus the amount of their shares of any Partner Minimum Gain or Partnership Minimum Gain, in either case to the extent attributable to their ownership of LTIP Units.  Similarly, the “Membership Unit Economic Balance” shall mean (i) the Capital Account balance of the Managing Member, plus the amount of the Managing Member’s share of any Partner Minimum Gain or Partnership Minimum Gain, in either case to the extent attributable to the Managing Member’s ownership of Membership Units and computed on a hypothetical basis after taking into account all allocations through the date on which any allocation is made under this Section 6.3(a), divided by (ii) the number of the Managing Member’s Membership Units.  Any such allocations shall be made among the LTIP Unitholders in proportion to the amounts required to be allocated to each under this Section 6.3(a).  The parties agree that the intent of this Section 6.3(a) is to make the Capital Account balance associated with each LTIP Unit economically equivalent to the Capital Account balance associated with the Managing Member’s Membership Units (on a per-unit basis).

(b)Minimum Gain Chargeback.  Notwithstanding any other provisions of Article VI, if there is a net decrease in Partnership Minimum Gain during any Partnership Year, each Member shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Member’s share of the net decrease in Partnership Minimum Gain, as determined under Regulations Section 1.704-2(g).  Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto.  The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(f)(6).  This Section 6.3(b) is intended to comply with the minimum gain chargeback requirements in Regulations Section 1.704-2(f) and for purposes of this Section 6.3(b) only, each Member’s Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Article VI of this Agreement with respect to such Partnership Year, and without regard to any decrease in Partner Minimum Gain during such fiscal year.

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(c)Partner Minimum Gain Chargeback.  Notwithstanding any other provision of Article VI (except Section 6.3(b) hereof), if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any Partnership Year, each Member who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5), shall be specially allocated items of Company income and gain for such year (and, if necessary, subsequent years) in an amount equal to such Member’s share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(5).  Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto.  The items to be so allocated shall be determined in accordance with Regulations Section 1.704-2(i)(4).  This Section 6.3(c) is intended to comply with the minimum gain chargeback requirement in such Section of the Regulations and shall be interpreted consistently therewith.  Solely for purposes of this Section 6.3(c), each Member’s Adjusted Capital Account Deficit shall be determined prior to any other allocations pursuant to Article VI of this Agreement with respect to such fiscal year, other than allocations pursuant to Sections 6.3(a) and 6.3(b) hereof.

(d)Qualified Income Offset.  In the event any Member unexpectedly receives any adjustments, allocations or distributions described in Regulations Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), and after giving effect to the allocations required under Sections 6.3(a), 6.3(b) and 6.3(c) hereof, such Member has an Adjusted Capital Account Deficit, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, its Adjusted Capital Account Deficit created by such adjustments, allocations or distributions as quickly as possible. It is intended that this Section 6.3(d) qualify and be construed as a “qualified income offset” within the meaning of Regulations 1.704-1(b)(2)(ii)(d), which shall be controlling in the event of a conflict between such Regulations and this Section 6.3(d).

(e)Nonrecourse Deductions.  Nonrecourse Deductions for any taxable period shall be allocated to the Members in the manner determined by the Managing Member, provided that such allocation shall be permissible under Section 704(b) of the Code.

(f)Partner Nonrecourse Deductions.  Any Partner Nonrecourse Deductions for any fiscal year shall be specially allocated to the Member who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Sections 1.704-2(b)(4) and 1.704-2(i)(2).

(g)Code Section 754 Adjustments.  To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Section 734(b) or 743(b) of the Code is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Regulations.

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Section 6.4Allocations for Tax Purposes.

(a)General.  Except as otherwise provided in this Section 6.4, for Federal income tax purposes, each item of income, gain, loss and deduction shall be allocated among the Members in the same manner as its correlative item of “book” income, gain, loss or deduction is allocated pursuant to Sections 6.1 and 6.3 of this Agreement.

(b)To Eliminate Book-Tax Disparities.  In an attempt to eliminate Book-Tax Disparities attributable to a Contributed Property or Adjusted Property, items of income, gain, loss, and deduction shall be allocated for Federal income tax purposes among the Members as follows:

(1)(i)  In the case of a Contributed Property, such items attributable thereto shall be allocated among the Members consistent with the principles of Section 704(c) of the Code in a manner that takes into account the variation between the 704(c) Value of such property and its adjusted basis at the time of contribution, and (ii) any item of Residual Gain or Residual Loss attributable to a Contributed Property shall be allocated among the Members in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Sections 6.1 and 6.3 of this Agreement.

(2)(i)  In the case of an Adjusted Property, such items shall (A) first, be allocated among the Members in a manner consistent with the principles of Section 704(c) of the Code in a manner to take into account the adjustments to the Carrying Value of such property pursuant to Section 4.4(d) and (B) second, in the event such property was originally a Contributed Property, be allocated among the Members in a manner consistent with Section 6.4(b)(1)(i), and (ii) any item of Residual Gain or Residual Loss attributable to an Adjusted Property shall be allocated among the Members in the same manner as its correlative item of “book” gain or loss is allocated pursuant to Sections 6.1 and 6.4 of this Agreement.

(3)All other items of income, gain, loss and deduction shall be allocated among the Members in the same manner as their correlative item of “book” gain or loss is allocated pursuant to Sections 6.1 and 6.3 of this Agreement.

(c)Power of Managing Member to Elect Method.  To the extent Treasury Regulations promulgated pursuant to Section 704(c) of the Code permit a partnership to utilize alternative methods to eliminate the disparities between the agreed value of property and its adjusted basis, and subject to any agreements existing between the Company and any Member or Members prior to the date hereof, the Managing Member shall have the authority to elect the method to be used by the Company and such election shall be binding on all Members.

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ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS

Section 7.1Management.

(a)Powers of Managing Member.  Except as otherwise expressly provided in this Agreement, all management powers over the business and affairs of the Company are exclusively vested in the Managing Member, and no Non-Managing Member shall have any right to participate in or exercise control or management power over the business and affairs of the Company.  Notwithstanding anything to the contrary in this Agreement, the Managing Member may not be removed by the Non-Managing Members with or without cause.  In addition to the powers now or hereafter granted a Managing Member of a limited liability company under applicable law or which are granted to the Managing Member under any other provision of this Agreement, the Managing Member, subject to Section 7.3 hereof, shall have full power and authority to do all things deemed necessary or desirable by it to conduct the business of the Company, to exercise all powers set forth in Section 3.2 hereof and to effectuate the purposes set forth in Section 3.1 hereof including, without limitation:

(1)the making of any expenditures, the lending or borrowing of money, the assumption or guarantee of, or other contracting for, indebtedness and other liabilities, the issuance of evidences of indebtedness (including the securing of same by mortgage, deed of trust or other lien or encumbrance on the Company’s assets) and the incurring of any obligations it deems necessary for the conduct of the activities of the Company;

(2)the making of tax, regulatory and other filings, or rendering of periodic or other reports to the New York Stock Exchange, governmental or other agencies having jurisdiction over the business or assets of the Company, the registration of any class of securities of the Company under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the listing of any debt securities of the Company on any exchange;

(3)the acquisition, disposition, sale, conveyance, financing, refinancing, mortgage, pledge, encumbrance, hypothecation, contribution or exchange of any assets of the Company or the merger or other combination of the Company with or into another entity on such terms as the Managing Member deems proper;

(4)the use of the assets of the Company (including, without limitation, cash on hand) for any purpose consistent with the terms of this Agreement and on any terms it sees fit including, without limitation, the financing of the assets and the operations of the Managing Member, the Company or any of the Company’s Subsidiaries, the lending of funds to other Persons (including the Managing Member or any of the Company’s Subsidiaries) and the repayment of obligations of the Company and its Subsidiaries and any other Person in which it has an equity investment and the making of capital contributions to its Subsidiaries, the

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holding of any real, personal and mixed property of the Company in the name of the Company or in the name of a nominee or trustee (subject to Section 7.10), the creation, by grant or otherwise, of easements or servitudes, and the performance of any and all acts necessary or appropriate to the operation of the Company assets including, but not limited to, applications for rezoning, objections to rezoning, constructing, altering, improving, repairing, renovating, rehabilitating, razing, demolishing or condemning any improvements or property of the Company or any Subsidiary of the Company;

(5)the negotiation, execution, and performance of any contracts, conveyances or other instruments (including with Affiliates of the Company to the extent provided in Section 7.6) that the Managing Member considers useful or necessary to the conduct of the Company’s operations or the implementation of the Managing Member’s powers under this Agreement including, without limitation, the execution and delivery of leases on behalf of or in the name of the Company (including the lease of Company Property for any purpose and without limit as to the term thereof, whether or not such term (including renewal terms) shall extend beyond the date of termination of the Company and whether or not the portion so leased is to be occupied by the lessee or, in turn, subleased in whole or in part to others);

(6)the opening and closing of bank accounts, the investment of Company funds in securities, certificates of deposit and other instruments, and the distribution of Company cash or other Company assets in accordance with this Agreement;

(7)the selection and dismissal of employees of the Company or the Managing Member (including, without limitation, employees having titles such as “president”, “vice president”, “secretary” and “treasurer”), and the engagement and dismissal of agents, outside attorneys, accountants, engineers, appraisers, consultants, contractors and other professionals on behalf of the Managing Member or the Company and the determination of their compensation and other terms of employment or hiring;

(8)the maintenance of such insurance for the benefit of the Company and the Members and the directors and officers of the Company as it deems necessary or appropriate;

(9)the formation of, or acquisition of an interest in, and the contribution of property to, any further limited or general partnerships, joint ventures or other relationships that it deems desirable (including, without limitation, the acquisition of interests in, and the contribution of property to, its Subsidiaries and any other Person in which it has an equity investment from time to time);

(10)the control of any matters affecting the rights and obligations of the Company, including the conduct of litigation and the incurring of legal

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expense and the settlement of claims and litigation, and the indemnification of any Person against liabilities and contingencies to the extent permitted by law;

(11)the undertaking of any action in connection with the Company’s direct or indirect investment in its Subsidiaries or any other Person (including, without limitation, the contribution or loan of funds to, incurring indebtedness on behalf of, or guaranteeing the obligations of any such Persons);

(12)the determination of the fair market value of any Company property distributed in kind using such reasonable method of valuation as it may adopt;

(13)the management, operation, leasing, landscaping, repair, alteration, demolition or improvement of any real property or improvements owned by the Company or any Subsidiary of the Company or any Person in which the Company has made a direct or indirect equity investment;

(14)holding, managing, investing and reinvesting cash and other assets of the Company;

(15)the collection and receipt of revenues and income of the Company;

(16)the exercise, directly or indirectly through any attorney-in-fact acting under a general or limited power of attorney, of any right, including the right to vote, appurtenant to any asset or investment held by the Company;

(17)the exercise of any of the powers of the Managing Member enumerated in this Agreement on behalf of or in connection with any Subsidiary of the Company or any other Person in which the Company has a direct or indirect interest, or jointly with any such Subsidiary or other Person;

(18)the exercise of any of the powers of the Managing Member enumerated in this Agreement on behalf of any Person in which the Company does not have an interest pursuant to contractual or other arrangements with such Person;

(19)the making, execution and delivery of any and all deeds, leases, notes, deeds to secure debt, mortgages, deeds of trust, security agreements, conveyances, contracts, guarantees, warranties, indemnities, waivers, releases or legal instruments or agreements in writing necessary or appropriate in the judgment of the Managing Member for the accomplishment of any of the powers of the Managing Member enumerated in this Agreement;

(20)the issuance of Membership Interests, as appropriate, pursuant to Section 4.2 of this Agreement; and

(21)the consummation of the Formation and Structuring Transactions.

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(b)No Approval Required for Above Powers.  Except as expressly provided in this Agreement (including, without limitation, the last sentence of this Section 7.1(b)), each of the Members agrees that the Managing Member is authorized to execute, deliver and perform the above-mentioned agreements and transactions on behalf of the Company without any further act, approval or vote of the Members, notwithstanding any other provision of this Agreement, the Act or any applicable law, rule or regulation to the fullest extent permitted under the Act or other applicable law, rule or regulation.  The execution, delivery or performance by the Managing Member or the Company of any agreement authorized or permitted under this Agreement shall not constitute a breach by the Managing Member of any duty that the Managing Member may owe the Company or the Non-Managing Members or any other Persons under this Agreement or of any duty stated or implied by law or equity.

(c)Insurance.  At all times from and after the date hereof, the Managing Member may cause the Company to obtain and maintain casualty, liability and other insurance on Company Properties and liability insurance for the Indemnitees hereunder. The right to procure such insurance on behalf of the Indemnitees shall in no way mitigate or otherwise affect the right of any such Indemnitee to indemnification under Section 7.7.

(d)Working Capital Reserves.  At all times from and after the date hereof, the Managing Member may cause the Company to establish and maintain working capital reserves in such amounts as the Managing Member, in its sole and absolute discretion, deems appropriate and reasonable from time to time.

(e)No Obligation to Consider Tax Consequences to Non-Managing Members.  In exercising its authority under this Agreement, the Managing Member may, but shall be under no obligation to, take into account the tax consequences to any Member of any action taken by it.  The Managing Member and the Company shall not have liability to a Non-Managing Member under any circumstances as a result of an income tax liability incurred by such Non-Managing Member as a result of an action (or inaction) by the Managing Member pursuant to its authority under this Agreement.

(f)No Obligation To Expend Individual Funds, etc.  Except as otherwise provided herein, to the extent the duties of the Managing Member require expenditures of funds to be paid to third parties, the Managing Member shall not have any obligations hereunder except to the extent that Company funds are reasonably available to it for the performance of such duties, and nothing herein contained shall be deemed to authorize or require the Managing Member, in its capacity as such, to expend its individual funds for payment to third parties or to undertake any individual liability or obligation on behalf of the Company.

Section 7.2Certificate of Formation.  To the extent that such action is determined by the Managing Member to be reasonable and necessary or appropriate, the Managing Member shall file amendments to and restatements of the Certificate and do all the things to maintain the Company as a limited liability company (or an entity in which the Non-Managing Members have limited liability) under the laws of the State of Delaware and each other jurisdiction in which the Company may elect to do business or own property.  Subject to the terms of Section 8.5(a)(4)

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hereof, the Managing Member shall not be required, before or after filing, to deliver or mail a copy of the Certificate, as it may be amended or restated from time to time, to any Non-Managing Member.  The Managing Member shall use all reasonable efforts to cause to be filed such other certificates or documents as may be reasonable and necessary or appropriate for the formation, continuation, qualification and operation of a limited liability company (or an entity in which the Non-Managing Members have limited liability) in the State of Delaware and any other jurisdiction in which the Company may elect to do business or own property.

Section 7.3Restrictions on Managing Member’s Authority.  The Managing Member may not, without the written Consent of all of the Non-Managing Members, take any action in contravention of this Agreement including, without limitation:

(a)take any action that would make it impossible to carry on the ordinary business of the Company, except as otherwise provided in this Agreement (provided that this restriction shall not be deemed to restrict the sale, lease, transfer or disposition of all or substantially all of the Company’s assets as may otherwise be provided herein);

(b)possess Company property, or assign any rights in specific Company property, for other than a Company purpose except as otherwise provided in this Agreement (other than this Section 7.3);

(c)admit a Person as a Member, except as otherwise provided in this Agreement; or

(d)perform any act that would subject a Member to personal liability for the debts, obligations and liabilities of the Company except as provided herein or under the Act.

Section 7.4Responsibility for Expenses.

(a)No Compensation.  Except as provided in this Section 7.4 and elsewhere in this Agreement (including the provisions of Articles V and VI regarding distributions, payments and allocations to which it may be entitled), the Managing Member shall not be compensated for its services as Managing Member of the Company.

(b)Responsibility for Ownership and Operation Expenses.  The Company shall be responsible for and shall pay all expenses relating to the Company’s ownership of its assets, and the operation of, or for the benefit of, the Company.  The Managing Member is hereby authorized to pay compensation for accounting, administrative, legal, technical, management and other services rendered to the Company.  The Managing Member shall be reimbursed on a monthly basis, or such other basis as the Managing Member may determine in its sole and absolute discretion, for all expenses it incurs relating to the Company’s ownership of its assets and the operation of, or for the benefit of, the Company; provided, however, that the amount of any such reimbursement shall be reduced by any interest or other amounts earned by the Managing Member with respect to bank accounts or other instruments held by it as permitted in Section 7.5(a).  The Non-Managing Members acknowledge that all such expenses of the Managing Member are deemed to be for the benefit of the Company.  Such reimbursements shall be in addition

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to any reimbursement to the Managing Member as a result of indemnification pursuant to Section 7.7 hereof.  In the event that certain expenses are incurred for the benefit of the Company and other entities (including the Managing Member), such expenses shall be allocated to the Company and such other entities in such a manner as the Managing Member in its sole and absolute discretion deems fair and reasonable. All payments and reimbursements hereunder shall be characterized for federal income tax purposes as expenses of the Company incurred on its behalf, and not as expenses of the Managing Member.

(c)Responsibility for Organization Expenses.  The Company shall be responsible for and shall pay all expenses incurred relating to the admission of the Managing Member to the Company.

(d)Common Share Repurchases.  If the Managing Member shall elect to purchase from its stockholders Common Shares for the purpose of delivering such Common Shares to satisfy an obligation under any dividend reinvestment program adopted by the Managing Member, any employee stock purchase plan adopted by the Managing Member, or any similar obligation or arrangement undertaken by the Managing Member in the future or for the purpose of retiring such Common Shares, the purchase price paid by the Managing Member for such Common Shares and any other expenses incurred by the Managing Member in connection with such purchase shall be considered expenses of the Company and shall be advanced to the Managing Member or reimbursed to the Managing Member, subject to the condition that: (i) if such Common Shares subsequently are sold by the Managing Member, the Managing Member shall pay to the Company any proceeds received by the Managing Member for such Common Shares (which sales proceeds shall include the amount of dividends reinvested under any dividend reinvestment or similar program; provided, that a transfer of Common Shares for Membership Units pursuant to Section 4.2(e) would not be considered a sale for such purposes); and (ii) if such Common Shares are not retransferred by the Managing Member within thirty (30) days after the purchase thereof, or the Managing Member otherwise determines not to retransfer such Common Shares, the Managing Member shall cause the Company to redeem a number of Membership Units held by the Managing Member equal to the number of such Common Shares, as adjusted (x) pursuant to Section 7.5 (in the event the Managing Member acquires material assets, other than on behalf of the Company) and (y) for stock dividends and distributions, stock splits and subdivisions, reverse stock splits and combinations, distributions of rights, warrants or options, and distributions of evidences of indebtedness or assets relating to assets not received by the Managing Member pursuant to a pro rata distribution by the Company (in which case such advancement or reimbursement of expenses shall be treated as having been made as a distribution in redemption of such number of Membership Units held by the Managing Member).

(e)If and to the extent any reimbursements to the Managing Member pursuant to this Section 7.4 constitute gross income of the Managing Member (as opposed to the repayment of advances made by the Managing Member on behalf of the Company), such amounts shall constitute guaranteed payments within the meaning of Section 707(c) of the Code, shall be treated consistently therewith by the Company and

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all Members, and shall not be treated as distributions for purposes of computing the Members’ Capital Accounts.

Section 7.5Outside Activities of the Managing Member.

(a)The Managing Member shall not directly or indirectly enter into or conduct any business, other than in connection with the ownership, acquisition and disposition of Membership Interests as a Managing Member or Non-Managing Member and the management of the business of the Company, its operation as a public reporting company with a class (or classes) of securities registered under the Exchange Act and listed on the New York Stock Exchange and such activities as are incidental thereto.  The Managing Member shall not own any assets other than Membership Interests (except for certain interests in Company Properties held directly by the Managing Member or which have been caused by the Managing Member to be contributed to or purchased by Subsidiaries, which interests shall not exceed 1% of the aggregate economic interests of any property) and other than such bank accounts or similar instruments as it deems necessary to carry out its responsibilities contemplated under this Agreement and the Charter.  The Managing Member and Affiliates of the Managing Member may acquire Non-Managing Membership Interests and shall be entitled to exercise all rights of a Non-Managing Member relating to such Non-Managing Membership Interests.

(b)Purchases of Shares.  In the event the Managing Member purchases Shares, then the Managing Member shall cause the Company to purchase from it an equal number of Membership Units (after application of the Unit Adjustment Factor) on the same terms that the Managing Member purchased such Shares.

Section 7.6Contracts with Affiliates.

(a)Loans.  The Managing Member may cause the Company to lend or contribute to its Subsidiaries or other Persons in which the Company has an equity investment, and such Persons may borrow funds from the Company, on terms and conditions established in the sole and absolute discretion of the Managing Member.  The foregoing authority shall not create any right or benefit in favor of any Subsidiary or any other Person.

(b)Transfers of Assets.  Except as provided in Section 7.5(a), the Managing Member may cause the Company to transfer assets to joint ventures, other partnerships, corporations or other business entities in which the Company is or thereby becomes a participant upon such terms and subject to such conditions consistent with this Agreement and applicable law as the Managing Member in its sole discretion deems advisable.

(c)Employee Benefit Plans.  The Managing Member, in its sole and absolute discretion and without the approval of the Non-Managing Members, may propose and adopt on behalf of the Managing Member and the Company employee benefit plans funded by the Company for the benefit of employees of the Managing Member, the Company, Subsidiaries of the Company or any Affiliate of any of them in respect of

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services performed, directly or indirectly, for the benefit of the Company, the Managing Member, or any of the Company’s Subsidiaries, including any such plan which requires the Company, the Managing Member or any of the Company’s Subsidiaries to issue or transfer Membership Units to employees.  The Managing Member also is expressly authorized to cause the Company to issue to it Membership Units corresponding to Common Shares issued by the Managing Member pursuant to any such plan or any similar or successor plan and to repurchase such Membership Units to the extent necessary to permit the Managing Member to repurchase such Common Shares in accordance with such plan.

(d)Other Agreements.  The Managing Member is expressly authorized to enter into, on its own behalf or in the name and on behalf of the Company, asset management agreements, cross-indemnity agreements, registration rights agreements with respect to the Common Shares, right of first opportunity arrangements or other conflict avoidance agreements with various Affiliates of the Company and the Managing Member on such terms as the Managing Member, in its sole and absolute discretion, believes are advisable.  Any indemnification pursuant to this Section 7.7 shall be made only out of the assets of the Company, and any insurance proceeds from any liability policy covering the Managing Member and any Indemnitee, and neither the Managing Member nor any Non-Managing Member shall have any obligation to contribute to the capital of the Company or otherwise provide funds to enable the Company to fund its obligations under this Section 7.7, except to the extent otherwise expressly agreed to by such Member and the Company.

Section 7.7Indemnification.

(a)General.  The Company shall indemnify, in accordance with and to the fullest extent now or hereafter permitted by law, any Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the Person is or was a Member, director, officer, employee or agent of the Company or the Managing Member, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the Person in connection with such action, suit or proceeding if the Person acted in good faith and in a manner the Person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the Person’s conduct was unlawful.  The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Person did not act in good faith and in a manner which the Person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the Person’s conduct was unlawful.

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(b)Actions in the Right of the Company.  The Company shall indemnify any Person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company to procure a judgment in its favor by reason of the fact that the Person is or was a Member, director, officer, employee or agent of the Company or the Managing Member, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the Person in connection with the defense or settlement of such action or suit if the Person acted in good faith and in a manner the Person reasonably believed to be in or not opposed to the best interests of the Company and except that no indemnification shall be made in respect of any claim, issue or matter as to which such Person shall have been adjudged to be liable to the Company unless and only to the extent that the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such Person is fairly and reasonably entitled to indemnity or such expenses which such court shall deem proper.

(c)Authorization. Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the Company only as authorized in the specific case upon a determination that indemnification of the present or former Member, director, officer, employee or agent is proper in the circumstances because the Person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section.  Such determination shall be made in the sole and absolute discretion of the Managing Member.

(d)In Advance of Final Disposition. Expenses (including attorneys’ fees) incurred by a Person entitled to indemnification hereunder in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Company in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Person to repay such amount if it shall ultimately be determined that such Person is not entitled to be indemnified by the Company as authorized in this section.  Such expenses (including attorneys’ fees) incurred by such Persons may be so paid upon such terms and conditions, if any, as the Managing Member deems appropriate.

(e)Non-Exclusive Section.  The indemnification and advancement of expenses provided by, or granted pursuant to, this Agreement shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any agreement, or otherwise, both as to action in such Person’s official capacity and as to action in another capacity while holding such office.

(f)Insurance.  The Company shall have power to purchase and maintain insurance on behalf of any Person who is or was a Member, director, officer, employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such Person and incurred by such Person in any such capacity, or arising out of such Person’s status as such, whether or not the

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Company would have the power to indemnify such Person against such liability under this section.

(g)Merger and Consolidation; Other Enterprises.  For purposes of this section, references to “the Company” shall include, in addition to the resulting entity, any constituent entity (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its members, directors, officers, and employees or agents, so that any person who is or was a Member, director, officer, employee, or agent of such constituent entity, or is or was serving at the request of such constituent entity as a director, officer, employee or agent of another corporation, partnership, joint venture trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such Person would have with respect to such constituent entity if its separate existence had continued.  For purposes of this section, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a Person with respect to any employee benefit plan; and references to “serving at the request of the Company” shall include any service as a Member, director, officer, employee or agent of the Company which imposes duties on, or involves services by, such Member, director, officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries; and a Person who acted in good faith and in a manner such Person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Company” as referred to in this section.

(h)Continuation.  The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a Person who has ceased to be a Member, director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a Person.

(i)Interested Transactions.  A Person entitled to indemnification hereunder shall not be denied indemnification in whole or in part under this Section 7.7 because the Indemnitee had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement.

(j)Binding Effect.  The provisions of this Section 7.7 are for the benefit of the Indemnitees, their heirs, successors, assigns and administrators and shall not be deemed to create any rights for the benefit of any other Persons.  Any amendment, modification or repeal of this Section 7.7 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the Company’s liability to any Indemnitee under this Section 7.7 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

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(k)Reimbursements to Managing Member Shall Not Be Treated As Distributions.  If and to the extent any reimbursements to the Managing Member pursuant to this Section 7.7 constitute gross income of the Managing Member (as opposed to the repayment of advances made by the Managing Member on behalf of the Company) such amounts shall constitute guaranteed payments within the meaning of Section 707(c) of the Code, shall be treated consistently therewith by the Company and all Members, and shall not be treated as distributions for purposes of computing the Members’ Capital Accounts.

Section 7.8Liability of the Managing Member.

(a)General.  Notwithstanding anything to the contrary set forth in this Agreement, the Managing Member shall not be liable for monetary damages to the Company, any Members or any Assignees for losses sustained or liabilities incurred as a result of errors in judgment or of any act or omission, unless (i) the Managing Member actually received an improper benefit in money, property or services (in which case, such liability shall be for the amount of the benefit in money, property or services actually received), or (ii) the Managing Member’s action or failure to act was the result of active and deliberate dishonesty, gross negligence or bad faith and was material to the cause of action being adjudicated; provided, however, that the Managing Member shall owe the same duty of care to the Non-Managing Members as its directors owe to the Shareholders of the Managing Member.

(b)No Obligation to Consider Interests of Non-Managing Members.  The Non-Managing Members expressly acknowledge that the Managing Member is acting on behalf of the Company, the Non-Managing Members and the Managing Member’s shareholders collectively, that, except as otherwise provided in Section 7.8(a), the Managing Member is under no obligation to give priority to the separate interests of the Managing Member’s shareholders or the Non-Managing Members (including, without limitation, the tax consequences to Non-Managing Members or Assignees) in deciding whether to cause the Company to take (or decline to take) any actions which the Managing Member has undertaken in good faith on behalf of the Company.  If there is a conflict between the interests of the Managing Member’s shareholders on the one hand and the interests of the Non-Managing Members on the other, the Managing Member will endeavor in good faith to resolve the conflict in a manner not adverse to either the Managing Member’s shareholders or the Non-Managing Members; provided, however, that for so long as the Managing Member owns a controlling interest in the Company, any conflict that cannot be resolved in a manner not adverse to either the Managing Member’s shareholders or the Non-Managing Members will be resolved in favor of the Managing Member’s shareholders.  The Managing Member shall not be liable for monetary damages for losses sustained, liabilities incurred, or benefits not derived by Non-Managing Members in connection with such decisions with respect to causing the Company to take (or decline to take) any actions which the Managing Member has undertaken in good faith on behalf of the Company, unless (i) the Managing Member actually received an improper benefit in money, property or services (in which case, such liability shall be for the amount of the benefit in money, property or services actually received), or (ii) the Managing Member’s action or failure to act was the result of active

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and deliberate dishonesty, gross negligence or bad faith and was material to the cause of action being adjudicated.

(c)Acts of Agents.  Subject to its obligations and duties as Managing Member set forth in Section 7.1(a) hereof, the Managing Member may exercise any of the powers granted to it by this Agreement and perform any of the duties imposed upon it hereunder either directly or by or through its agents.  The Managing Member shall not be responsible for any misconduct or negligence on the part of any such agent appointed by it in good faith.

(d)Effect of Amendment.  Any amendment, modification or repeal of this Section 7.8 or any provision hereof shall be prospective only and shall not in any way affect the limitations on the Managing Member’s liability to the Company and the Non-Managing Members under this Section 7.8 as in effect immediately prior to such amendment, modification or repeal with respect to claims arising from or relating to matters occurring, in whole or in part, prior to such amendment, modification or repeal, regardless of when such claims may arise or be asserted.

Section 7.9Other Matters Concerning the Managing Member.

(a)Reliance on Documents.  The Managing Member may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties.

(b)Reliance on Consultants and Advisers.  The Managing Member may consult with legal counsel, accountants, appraisers, management consultants, investment bankers and other consultants and advisers selected by it, and any act taken or omitted to be taken in reliance upon the opinion of such Persons as to matters which such Managing Member reasonably believes to be within such Person’s professional or expert competence shall be conclusively presumed to have been done or omitted in good faith and in accordance with such opinion.

(c)Action Through Officers and Attorneys.  The Managing Member shall have the right, in respect of any of its powers or obligations hereunder, to act through any of its duly authorized officers and a duly appointed attorney or attorneys-in-fact.  Each such attorney shall, to the extent provided by the Managing Member in the power of attorney, have full power and authority to do and perform all and every act and duty which is permitted or required to be done by the Managing Member hereunder.

Section 7.10Title to Company Assets.  Company assets, whether real, personal or mixed and whether tangible or intangible, shall be deemed to be owned by the Company as an entity, and no Member, individually or collectively, shall have any ownership interest in such Company assets or any portion thereof.  Title to any or all of the Company assets may be held in the name of the Company, the Managing Member or one or more nominees, as the Managing Member may determine, including Affiliates of the Managing Member.  The Managing Member

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hereby covenants, declares and warrants that any Company assets as to which legal title is held in the name of the Managing Member or any nominee or Affiliate of the Managing Member shall be held by the Managing Member or such nominee or Affiliate for the exclusive use and benefit of the Company in accordance with the provisions of this Agreement; provided, however, that the Managing Member shall use its best efforts to cause beneficial and record title to such assets to be vested in the Company as soon as reasonably practicable.  All Company assets shall be recorded as the property of the Company in its books and records, irrespective of the name in which legal title to such Company assets is held.

Section 7.11Reliance by Third Parties.  Notwithstanding anything to the contrary in this Agreement, any Person dealing with the Company shall be entitled to assume that the Managing Member has full power and authority to encumber, sell or otherwise use in any manner any and all assets of the Company and to enter into any contracts on behalf of the Company, and such Person shall be entitled to deal with the Managing Member as if it were the Company’s sole party in interest, both legally and beneficially.  Each Non-Managing Member hereby waives any and all defenses or other remedies which may be available against such Person to contest, negate or disaffirm any action of the Managing Member in connection with any such dealing.  In no event shall any Person dealing with the Managing Member or its representatives be obligated to ascertain that the terms of this Agreement have been complied with or to inquire into the necessity or expedience of any act or action of the Managing Member or its representatives. Each and every certificate, document or other instrument executed on behalf of the Company by the Managing Member or its representatives shall be conclusive evidence in favor of any and every Person relying thereon or claiming thereunder that (a) at the time of the execution and delivery of such certificate, document or instrument, this Agreement was in full force and effect, (b) the Person executing and delivering such certificate, document or instrument was duly authorized and empowered to do so for and on behalf of the Company and (c) such certificate, document or instrument was duly executed and delivered in accordance with the terms and provisions of this Agreement and is binding upon the Company.

ARTICLE VIII
RIGHTS AND OBLIGATIONS OF NON-MANAGING MEMBERS

Section 8.1Limitation of Liability.  The Non-Managing Members shall have no liability under this Agreement except as expressly provided in this Agreement, including Section 10.4 hereof, or under the Act.

Section 8.2Management of Business.  No Non-Managing Member or Assignee (other than the Managing Member, any of its Affiliates or any officer, director, employee, member or agent of the Managing Member, the Company or any of their Affiliates, in their capacity as such) shall take part in the operation, management or control (within the meaning of the Act) of the Company’s business, transact any business in the Company’s name or have the power to sign documents for or otherwise bind the Company.  The transaction of any such business by the Managing Member, any of its Affiliates or any officer, director, employee, member or agent or trustee of the Managing Member, the Company or any of their Affiliates, in their capacity as such, shall not affect, impair or eliminate the limitations on the liability of the Non-Managing Members or Assignees under this Agreement.

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Section 8.3Outside Activities of Non-Managing Members.  Subject to any agreements entered into pursuant to Section 7.6 hereof and subject to any other agreements entered into by a Non-Managing Member or its Affiliates with the Managing Member, the Company or a Subsidiary, the following rights shall govern outside activities of Non-Managing Members:  (a) any Non-Managing Member (other than the Managing Member) and any officer, director, employee, agent, trustee, Affiliate or shareholder of any Non-Managing Member shall be entitled to and may have business interests and engage in business activities in addition to those relating to the Company, including business interests and activities in direct competition with the Company; (b) neither the Company nor any Members shall have any rights by virtue of this Agreement in any business ventures of any Non-Managing Member or Assignee; (c) none of the Non-Managing Members (in their capacities as Non-Managing Members) nor any other Person shall have any rights by virtue of this Agreement or the Company relationship established hereby in any business ventures of any other Person, other than the Managing Member, and such Person shall have no obligation pursuant to this Agreement to offer any interest in any such business ventures to the Company, any Non-Managing Member or any such other Person, even if such opportunity is of a character which, if presented to the Company, any Non-Managing Member or such other Person, could be taken by such Person; (d) the fact that a Non-Managing Member may encounter opportunities to purchase, otherwise acquire, lease, sell or otherwise dispose of real or personal property and may take advantage of such opportunities himself or introduce such opportunities to entities in which it has or has not any interest, shall not subject such Member to liability to the Company or any of the other Members on account of the lost opportunity; and (e) except as otherwise specifically provided herein, nothing contained in this Agreement shall be deemed to prohibit a Non-Managing Member or any Affiliate of a Non-Managing Member from dealing, or otherwise engaging in business, with Persons transacting business with the Company or from providing services relating to the purchase, sale, rental, management or operation of real or personal property (including real estate brokerage services) and receiving compensation therefor, from any Persons who have transacted business with the Company or other third parties.  Nothing in this Section 8.3 is intended to alter any fiduciary obligations of any Person under applicable Delaware law.

Section 8.4Return of Capital and Priority Among Members.  Except pursuant to the Redemption Rights set forth in Section 4.2(e) hereof, no Member shall be entitled to the withdrawal or return of his or her Capital Contribution, except to the extent of distributions made pursuant to this Agreement or upon termination of the Company as provided herein. No Member or Assignee shall have priority over any other Member or Assignee either as to the return of Capital Contributions or otherwise unless expressly provided in this Agreement, as to profits, losses, distributions or credits.

Section 8.5Rights of Non-Managing Members Relating to the Company.

(a)Copies of Business Records.  In addition to other rights provided by this Agreement or by the Act, and except as limited by Section 8.5(c) hereof, each Non-Managing Member shall have the right, for a purpose reasonably related to such Non-Managing Member’s interest as a Non-Managing Member in the Company, upon written demand with a statement of the purpose of such demand and at such Non-Managing Member’s own expense:

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(1)to obtain a copy of the most recent annual and quarterly reports filed with the Securities and Exchange Commission by the Managing Member pursuant to the Exchange Act, and each communication sent to all of the stockholders of the Managing Member;

(2)to obtain a copy of the Company’s Federal, state and local income tax returns for each Partnership Year;

(3)to obtain a current list of the name and last known business, residence or mailing address of each Member;

(4)to obtain a copy of this Agreement and the Certificate and all amendments thereto, together with executed copies of all powers of attorney pursuant to which this Agreement, the Certificate and all amendments thereto have been executed; and

(5)to obtain true and full information regarding the amount of cash and a description and statement of any other property or services contributed by each Member and which each Member has agreed to contribute in the future, and the date on which each became a Member.

(b)Notification of Changes in Unit Adjustment Factor.  The Company shall notify each Non-Managing Member in writing of any change made to the Unit Adjustment Factor within 10 Business Days of the date such change becomes effective.

(c)Confidential Information.  Notwithstanding any other provision of this Section 8.5, the Managing Member may keep confidential from the Non-Managing Members, for such period of time as the Managing Member determines in its sole and absolute discretion to be reasonable, any Company information that (i) the Managing Member believes to be in the nature of trade secrets or other information the disclosure of which the Managing Member in good faith believes is not in the best interests of the Company or (ii) the Company is required by law or by agreements with unaffiliated third parties to keep confidential.

(d)Debt Allocation.  The Managing Member shall allow any Non-Managing Member to guarantee on a “bottom dollar basis,” an amount of indebtedness of the Company or any successor thereto, as is necessary from time to time to provide an allocation of debt to such Non-Managing Member equal to the amount of debt then required to be allocated to such Non-Managing Member to enable such Non-Managing Member to avoid recognizing gain pursuant to Section 731(a)(1) of the Code as a result of a deemed distribution of money to such Non-Managing Member pursuant to Section 752(b) of the Code.  The Managing Member may, in its discretion, permit Non-Managing Members to provide similar guarantees from time to time or as a result of minimum gain chargebacks.

(e)Notice for Certain Transactions.  In the event of (a) a dissolution or liquidation of the Company or the Managing Member, (b) a merger, consolidation or combination of the Company or the Managing Member with or into another Person

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(including the events set forth in Sections 11.2(c) and 11.2(d)), (c) the sale of all or substantially all of the assets of the Company or the Managing Member, or (d) the transfer by the Managing Member of all or any part of its interest in the Company, the Managing Member shall give written notice thereof to each Non-Managing Member at least twenty (20) Business Days prior to the effective date or, to the extent applicable, record date of such transaction, whichever comes first.

ARTICLE IX
BOOKS, RECORDS, ACCOUNTING AND REPORTS

Section 9.1Records and Accounting.  The Managing Member shall keep or cause to be kept at the principal office of the Company appropriate books and records with respect to the Company’s business, including, without limitation, all books and records necessary to provide to the Non-Managing Members any information, lists and copies of documents required to be provided pursuant to Section 9.3 hereof or required by the Act. Any records maintained by or on behalf of the Company in the regular course of its business may be kept on, or be in the form of, punch cards, magnetic tape, photographs, micrographics or any other information storage device; provided, however, that the records so maintained are convertible into clearly legible written form within a reasonable period of time.  The books of the Company shall be maintained for financial purposes on an accrual basis in accordance with generally accepted accounting principles and for tax reporting purposes on the accrual basis.

Section 9.2Fiscal Year.  The fiscal year of the Company shall be the calendar year.

Section 9.3Reports.

(a)Annual Reports.  As soon as practicable, but in no event later than 120 days after the close of each Partnership Year, or such earlier date that they are filed with the Securities and Exchange Commission, the Managing Member shall cause to be mailed to each Non-Managing Member as of the close of the Company Year, an annual report containing financial statements of the Company, or of the Managing Member if such statements are prepared solely on a consolidated basis with the Managing Member, for such Partnership Year, presented in accordance with generally accepted accounting principles, such statements to be audited by a nationally recognized firm of independent public accountants selected by the Managing Member.

(b)Quarterly Reports.  As soon as practicable, but in no event later than 60 days after the close of each calendar quarter (except the last calendar quarter of each year), or such earlier date that they are filed with the Securities and Exchange Commission, the Managing Member shall cause to be mailed to each Non-Managing Member as of the last day of the calendar quarter, a report containing unaudited financial statements of the Company, or of the Managing Member, if such statements are prepared solely on a consolidated basis with the Managing Member, and such other information as may be required by applicable law or regulation, or as the Managing Member determines to be appropriate.

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ARTICLE X
TAX MATTERS

Section 10.1Preparation of Tax Returns.  The Managing Member shall arrange for the preparation and timely filing of all returns of Company income, gains, deductions, losses and other items required of the Company for Federal and state income tax purposes and shall use all reasonable efforts to furnish the tax information reasonably required by the Managing Member and the Non-Managing Members for Federal and state income tax reporting purposes within 60 days after the close of such taxable year.  Each Non-Managing Member shall promptly provide the Managing Member with any information reasonably requested by the Managing Member relating to any Contributed Property contributed (directly or indirectly) by such Non-Managing Member to the Company.

Section 10.2Tax Elections.  Except as otherwise provided herein, the Managing Member shall, in its sole and absolute discretion, determine whether to make any available election pursuant to the Code, except that the election under Section 754 of the Code in accordance with applicable regulations thereunder shall be made at the request of any Member.  The Managing Member shall have the right to seek to revoke any such election (including without limitation, any election under Section 754 of the Code) upon the Managing Member’s determination in its sole and absolute discretion that such revocation is the best interests of the Members.

Section 10.3Tax Matters Member.

(a)General.  The Managing Member shall be the “tax matters Member” of the Company for Federal income tax purposes.  Pursuant to Section 6223(c) of the Code, upon receipt of notice from the IRS of the beginning of an administrative proceeding with respect to the Company, the tax matters Member shall provide the Members notice of such receipt and shall furnish the IRS with the name, address and profit interest of each of the Non-Managing Members; provided, however, that such information is provided to the Company by the Non-Managing Members.  The Non-Managing Members shall provide such information to the Company as the Managing Member shall reasonably request.

(b)Powers.  The tax matters Member is authorized, but not required:

(1)to enter into any settlement with the IRS with respect to any administrative or judicial proceedings for the adjustment of Company items required to be taken into account by a Member for income tax purposes (such administrative proceedings being referred to as a “tax audit” and such judicial proceedings being referred to as “judicial review”), and in the settlement agreement the tax matters Member may expressly state that such agreement shall bind all Members, except that such settlement agreement shall not bind any Member (a) who (within the time prescribed pursuant to the Code and Regulations) files a statement with the IRS providing that the tax matters Member shall not have the authority to enter into a settlement agreement on behalf of such Member or (b) who is a “notice Member” (as defined in Section 6231 of the

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Code) or a member of a “notice group” (as defined in Section 6223(b)(2) of the Code);

(2)in the event that a notice of a final administrative adjustment at the Company level of any item required to be taken into account by a Member for tax purposes (a “final adjustment”) is mailed or otherwise given to the tax matters Member, to seek judicial review of such final adjustment, including the filing of a petition for readjustment with the Tax Court or the United States Claims Court, or the filing of a complaint for refund with the District Court of the United States for the district in which the Company’s principal place of business is located;

(3)to intervene in any action brought by any other Member for judicial review of a final adjustment;

(4)to file a request for an administrative adjustment with the IRS at any time and, if any part of such request is not allowed by the IRS, to file an appropriate pleading (petition, complaint or other document) for judicial review with respect to such request;

(5)to enter into an agreement with the IRS to extend the period for assessing any tax which is attributable to any item required to be taken into account by a Member for tax purposes, or an item affected by such item; and

(6)to take any other action on behalf of the Members of the Company in connection with any tax audit or judicial review proceeding to the extent permitted by applicable law or regulations.

The taking of any action and the incurring of any expense by the tax matters Member in connection with any such proceeding, except to the extent required by law, is a matter in the sole and absolute discretion of the tax matters Member, and the provisions relating to indemnification of the Managing Member set forth in Section 7.7 of this Agreement shall be fully applicable to the tax matters Member in its capacity as such.

(c)The tax matters Member shall, upon the request of any Member, provide such Member with copies of any tax returns, elections or any returns or documents to be filed with the IRS at least ten Business Days prior to the date such filing is required.

(d)Reimbursement.  The tax matters Member shall receive no compensation for its services.  All third-party costs and expenses incurred by the tax matters Member in performing its duties as such (including legal and accounting fees) shall be borne by the Company.  Nothing herein shall be construed to restrict the Company from engaging an accounting firm and a law firm to assist the tax matters Member in discharging its duties hereunder, so long as the compensation paid by the Company for such services is reasonable.

Section 10.4Withholding.  Each Non-Managing Member hereby authorizes the Company to withhold from or pay on behalf of or with respect to such Non-Managing Member any amount of Federal, state, local, or foreign taxes that the Managing Member determines that

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the Company is required to withhold or pay with respect to any amount distributable or allocable to such Non-Managing Member pursuant to this Agreement, including, without limitation, any taxes required to be withheld or paid by the Company pursuant to Section 1441, 1442, 1445 or 1446 of the Code.  Any amount paid on behalf of or with respect to a Non-Managing Member shall constitute a loan by the Company to such Non-Managing Member, which loan shall be repaid by such Non-Managing Member within 15 days after notice from the Managing Member that such payment must be made unless (a) the Company withholds such payment from a distribution which would otherwise be made to the Non-Managing Member or (b) the Managing Member determines, in its sole and absolute discretion, that such payment may be satisfied out of the available funds of the Company which would, but for such payment, be distributed to the Non-Managing Member.  Any amounts withheld pursuant to the foregoing clauses (a) or (b) shall be treated as having been distributed to such Non-Managing Member.  Each Non-Managing Member hereby unconditionally and irrevocably grants to the Company a security interest in such Non-Managing Member’s Membership Interest to secure such Non-Managing Member’s obligation to pay to the Company any amounts required to be paid pursuant to this Section 10.4.  In the event that a Non-Managing Member fails to pay any amounts owed to the Company pursuant to this Section 10.4 when due, the Managing Member may, in its sole and absolute discretion, elect to make the payment to the Company on behalf of such defaulting Non-Managing Member, and in such event shall be deemed to have loaned such amount to such defaulting Non-Managing Member and shall succeed to all rights and remedies of the Company as against such defaulting Non-Managing Member (including, without limitation, the right to receive distributions).  Any amounts payable by a Non-Managing Member hereunder shall bear interest at the base rate on corporate loans at large United States money center commercial banks, as published from time to time in the Wall Street Journal, plus four percentage points (but not higher than the maximum lawful rate) from the date such amount is due (i.e., 15 days after demand) until such amount is paid in full.  Each Non-Managing Member shall take such actions as the Company or the Managing Member shall request in order to perfect or enforce the security interest created hereunder.

ARTICLE XI
TRANSFERS AND WITHDRAWALS

Section 11.1Transfer.

(a)Definition.  The term “transfer,” when used in this Article XI with respect to a Membership Unit, shall be deemed to refer to a transaction by which the Managing Member purports to assign its Managing Membership Interest to another Person or by which a Non-Managing Member purports to assign its Non-Managing Membership Interest to another Person, and includes a sale, assignment, gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other disposition by law or otherwise.

(b)Requirements.  No Membership Interest shall be transferred, in whole or in part, except in accordance with the terms and conditions set forth in this Article XI.  Any transfer or purported transfer of a Membership Interest not made in accordance with this Article XI shall be null and void.

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Section 11.2Transfer of Managing Member’s Membership Interest.

(a)General.  The Managing Member may not transfer any of its Managing Membership Interest or withdraw as Managing Member except as provided in Section 11.2(b) or in connection with a transaction described in either Section 11.2(c) or Section 11.2(e).

(b)Transfer to Company.  The Managing Member may transfer Membership Interests held by it to the Company in accordance with Section 7.5(b) hereof.

(c)Transfer in Connection With Reclassification, Recapitalization, or Business Combination Involving Managing Member.  Except as otherwise provided in Section 11.2(d), the Managing Member shall not engage in any merger, consolidation or other business combination with or into another Person or sale of all or substantially all of its assets, or any reclassification, or recapitalization or change of outstanding Common Shares (other than a change in par value, or from par value to no par value, or as a result of a subdivision or combination as described in the definition of “Unit Adjustment Factor”) (“Transaction”), unless as a result of the Transaction each Non-Managing Member thereafter remains entitled to redeem each Membership Unit owned by such Non-Managing Member (after application of the Unit Adjustment Factor) for an amount of cash, securities, or other property equal to the greatest amount of cash, securities or other property which such Non-Managing Member would have received from such Transaction, if such Non-Managing Member had exercised its Redemption Right immediately prior to the Transaction, provided that if, in connection with the Transaction, a purchase, tender or exchange offer shall have been made to and accepted by the holders of more than 50 percent of the outstanding Common Shares, the holders of Membership Units shall receive the greatest amount of cash, securities, or other property which a Non-Managing Member would have received had it exercised the Redemption Right and received Common Shares in exchange for its Membership Units immediately prior to the expiration of such purchase, tender or exchange offer.  In connection with any merger, consolidation or business combination described in this Section 11.2(c) in which Common Shares were exchanged for securities of the acquiring Person, the Non-Managing Members shall (unless Non-Managing Members Consent is obtained) remain entitled to exercise their Redemption Right with respect to such Person and the Unit Adjustment Factor shall continue to apply.

(d)Merger Involving Managing Member Where Surviving Entity’s Assets Contributed to Company.  Notwithstanding Section 11.2(c), the Managing Member may merge with another entity if, under the terms of the transaction, Non-Managing Members will not engage in a sale or exchange for Federal income tax purposes and immediately after such merger substantially all of the assets of the surviving entity, other than Membership Units held by the Managing Member, are contributed to the Company as a Capital Contribution in exchange for Membership Units with a fair market value equal to the 704(c) Value of the assets so contributed.

(e)Pledge of Membership Units by Managing Member.  The Managing Member may (i) pledge its Managing Membership Interest as security for any obligations

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of the Company or the Managing Member under any credit facility that the Company may enter into from time to time, and (ii) transfer such Managing Membership Interest in the event of any foreclosure (or in lieu of any foreclosure) on such pledge.

Section 11.3Non-Managing Members’ Rights to Transfer.

(a)General.  Prior to twelve (12) months after the closing of the initial public offering of Common Shares, no Non-Managing Member shall transfer all or any portion of its Membership Interests to any transferee without the consent of the Managing Member, which consent may be withheld in its sole and absolute discretion.  After such twelve (12) month anniversary and subject to the remaining provisions of this Section 11.3 as well as Section 11.4, a Non-Managing Member may transfer all or any portion of his Membership Interest, or any of such Non-Managing Member’s rights as a Non-Managing Member, without the prior written consent of the Managing Member.  In order to effect such transfer, the Non-Managing Member must deliver to the Managing Member a duly executed copy of the instrument making such transfer and such instrument must evidence the written acceptance by the assignee of all of the terms and conditions of this Agreement and represent that such assignment was made in accordance with all applicable laws and regulations.  Notwithstanding the foregoing, any transferee of any transferred Membership Interest shall be subject to any and all ownership limitations contained in the Charter. Unless admitted as a Non-Managing Member, no transferee, whether by a voluntary transfer, by operation of law or otherwise, shall have any rights hereunder, other than the rights of an Assignee as provided in Section 11.5.

(b)Incapacitated Non-Managing Members.  If a Non-Managing Member is subject to Incapacity, the executor, administrator, trustee, committee, guardian, conservator or receiver of such Non-Managing Member’s estate shall have all the rights of a Non-Managing Member, but not more rights than those enjoyed by other Non-Managing Members for the purpose of settling or managing the estate and such power as the Incapacitated Non-Managing Member possessed to transfer all or any part of his or its interest in the Company.  The Incapacity of a Non-Managing Member, in and of itself, shall not dissolve or terminate the Company.

(c)Transfers Contrary to Securities Laws.  The Managing Member may prohibit any transfer otherwise permitted under this Section 11.3 by a Non-Managing Member of its Membership Units if, in the opinion of legal counsel to the Company, such transfer would require filing of a registration statement under the Securities Act or would otherwise violate any Federal or state securities laws or regulations applicable to the Company or the Company Units.

(d)Publicly Traded Partnership Restrictions.  No Transfer by a Non-Managing Member of its Membership Interests, any Redemption, or any other acquisition of Membership Units by the Company or the Managing Member may be made to or by any person if the Managing Member determines, in its reasonable discretion, that such Transfer, Redemption or acquisition creates a material risk that the Company will be classified as a publicly traded partnership under Section 7704 of the Code.

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Section 11.4Substituted Non-Managing Members.

(a)Consent of Managing Member Required.  A Non-Managing Member shall have the right in its discretion to substitute a transferee as a Non-Managing Member in his place, in which event such substitution shall occur if the Non-Managing Member so provides; provided, however, that any transferee desiring to become a Substituted Non-Managing Member must furnish to the Managing Member (i) evidence of acceptance in form satisfactory to the Managing Member of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Article XVI and (ii) such other documents or instruments as may be required in the reasonable discretion of the Managing Member in order to effect such Person’s admission as a Substituted Non-Managing Member.

(b)Rights and Duties of Substituted Non-Managing Members.  A transferee who has been admitted as a Substituted Non-Managing Member in accordance with this Article XI shall have all the rights and powers and be subject to all the restrictions and liabilities of a Non-Managing Member under this Agreement.

(c)Amendment of Exhibit A.  Upon the admission of a Substituted Non-Managing Member, the Managing Member shall amend Exhibit A to reflect the name, address, number of Membership Units, and Percentage Interest of such Substituted Non-Managing Member and to eliminate or adjust, if necessary, the name, address and interest of the predecessor of such Substituted Non-Managing Member.

Section 11.5Assignees.  If a Non-Managing Member, in its sole and absolute discretion, does not provide for the admission of any permitted transferee under Section 11.4(a) as a Substituted Non-Managing Member, as described in Section 11.4, such transferee shall be considered an Assignee for purposes of this Agreement.  An Assignee shall be entitled to all the rights of an assignee of a Non-Managing Membership Interest under the Act, including the right to receive distributions from the Company and the share of Net Income, Net Losses, gain, loss and Recapture Income attributable to the Company Units assigned to such transferee, but shall not be deemed to be a holder of Membership Units for any other purpose under this Agreement, and shall not be entitled to vote such Membership Units in any matter presented to the Non-Managing Members for a vote (such Membership Units being deemed to have been voted on such matter in the same proportion as all Membership Units held by Non-Managing Members are voted).  In the event any such transferee desires to make a further assignment of any such Membership Units, such transferee shall be subject to all the provisions of this Article XI to the same extent and in the same manner as any Non-Managing Member desiring to make an assignment of Membership Units.

Section 11.6General Provisions.

(a)Withdrawal of Non-Managing Member.  No Non-Managing Member may withdraw from the Company other than as a result of (i) a permitted transfer of all of such Non-Managing Member’s Membership Units in accordance with this Article XI and the transferee of such Membership Units being admitted to the Company as a Substituted

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Non-Managing Member or (ii) pursuant to redemption or exchange of all of its Membership Units under Section 4.2(e).

(b)Transfer of All Membership Units by Non-Managing Member.  Any Non-Managing Member who shall transfer all of his Membership Units in a transfer permitted pursuant to this Article XI where the transferee was admitted as a Substituted Non-Managing Member or pursuant to the redemption or exchange of all of its Membership Units under Section 4.2(e) shall cease to be a Non-Managing Member.

(c)Timing of Transfers.  Transfers pursuant to this Article XI may only be made on the first day of a calendar month of the Company or on a Non-Restricted Transfer Date, unless the Managing Member otherwise agrees.

(d)Allocation When Transfer Occurs.  If any Membership Interest is transferred during any quarterly segment of the Company’s fiscal year in compliance with the provisions of this Article XI or redeemed or converted pursuant to Section 4.2(e), Net Income, Net Losses, each item thereof and all other items attributable to such interest for such fiscal year shall be divided and allocated between the transferor Member and the transferee Member in accordance with the method determined by the Managing Member, provided that such method shall be permissible under Section 706(d) of the Code and the regulations issued thereunder.  Solely for purposes of making such allocations, each of such items for the calendar month in which the transfer or redemption occurs shall be allocated to the Person who is a Member as of midnight on the last day of said month.  All distributions with respect to which the Membership Record Date is before the date of such transfer or redemption shall be made to the transferor Member, and all distributions with Membership Record Dates thereafter shall be made to the transferee Member.

ARTICLE XII
ADMISSION OF MEMBERS

Section 12.1Admission of Successor Managing Member.  A successor to all of the Managing Member’s Managing Membership Interest pursuant to Section 11.2 hereof who is proposed to be admitted as a successor Managing Member shall be admitted to the Company as the Managing Member, effective upon such transfer.  Any such transferee shall carry on the business of the Company without dissolution.  In each case, the admission shall be subject to the successor Managing Member executing and delivering to the Company an acceptance of all of the terms and conditions of this Agreement and such other documents or instruments as may be required to effect the admission.

Section 12.2Admission of Additional Non-Managing Members.

(a)General.  A Person who makes a Capital Contribution to the Company in accordance with this Agreement or who exercises an option to receive Membership Units shall be admitted to the Company as an Additional Non-Managing Member only upon furnishing to the Managing Member (i) evidence of acceptance in form reasonably

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satisfactory to the Managing Member of all of the terms and conditions of this Agreement, including, without limitation, the power of attorney granted in Article XVI hereof and (ii) such other documents or instruments as may be required in the reasonable discretion of the Managing Member in order to effect such Person’s admission as an Additional Non-Managing Member.

(b)Consent of Managing Member Required.  Notwithstanding anything to the contrary in this Section 12.2, no Person shall be admitted as an Additional Non-Managing Member without the consent of the Managing Member, which consent may be given or withheld in the Managing Member’s sole and absolute discretion.  The admission of any Person as an Additional Non-Managing Member shall become effective on the date upon which the name of such Person is recorded on the books and records of the Company, following the consent of the Managing Member to such admission.

Section 12.3Amendment of Agreement and Certificate.  For the admission to the Company of any Member, the Managing Member shall take all steps necessary and appropriate under the Act to amend the records of the Company and, if necessary, to prepare as soon as practical an amendment of this Agreement (including an amendment of Exhibit A) and, if required by law, shall prepare and file an amendment to the Certificate and may for this purpose exercise the power of attorney granted pursuant to Article XVI hereof.

ARTICLE XIII
DISSOLUTION AND LIQUIDATION

Section 13.1Dissolution.  The Company shall not be dissolved by the admission of Substituted Non-Managing Members or Additional Non-Managing Members or by the admission of a successor Managing Member in accordance with the terms of this Agreement.  The Company shall dissolve, and its affairs shall be wound up, upon the first to occur of any of the following (“Events of Dissolution”):

(a)Withdrawal of Managing Member—an event of withdrawal of the Managing Member, as defined in the Act, unless, within 90 days after the withdrawal all the remaining Members agree in writing to continue the business of the Company and to the appointment, effective as of the date of withdrawal, of a substitute Managing Member;

(b)Voluntary Dissolution—from and after the date of this Agreement, with the Consent of a majority of the Percentage Interests of the Non-Managing Members, an election to dissolve the Company made by the Managing Member, in its sole and absolute discretion;

(c)Judicial Dissolution Decree—entry of a decree of judicial dissolution of the Company pursuant to the provisions of the Act;

(d)Sale of Company’s Assets--the sale or disposition of all or substantially all of the assets and properties of the Company or a related series of transactions that, taken

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together, result in the sale or other disposition of all or substantially all of the assets of the Company;

(e)Bankruptcy or Insolvency of Managing Member--the Managing Member

(1)makes an assignment for the benefit of creditors;

(2)files a voluntary petition in bankruptcy;

(3)is adjudged a bankrupt or insolvent, or has entered against it an order for relief in any bankruptcy or insolvency proceeding;

(4)files a petition or answer seeking for itself any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation;

(5)files an answer or other pleading admitting or failing to contest the material allegations of a petition filed against it in any proceeding of this nature; or

(6)seeks, consents to or acquiesces in the appointment of a trustee, receiver or liquidator of the Managing Member or of all or any substantial part of its properties; or

(f)Readjustment, etc.  One hundred and twenty (120) days after the commencement of any proceeding against the Managing Member seeking reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under any statute, law or regulation, the proceeding has not been dismissed, or if within 90 days after the appointment without the Managing Member’s consent or acquiescence of a trustee, receiver or liquidator of the Managing Member or of all or any substantial part of its properties, the appointment is not vacated or stayed, or within 90 days after the expiration of any such stay, the appointment is not vacated.

Section 13.2Winding Up.

(a)General.  Upon the occurrence of an Event of Dissolution, the Company shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Members.  No Member shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Company’s business and affairs.  The Managing Member (or, in the event there is no remaining Managing Member, any Person elected by a majority in interest of the Non-Managing Members (the “Liquidator”)) shall be responsible for overseeing the winding up and dissolution of the Company and shall take full account of the Company’s liabilities and property and the Company property shall be liquidated as promptly as is consistent with obtaining the fair value thereof, and the proceeds therefrom (which may, to the extent determined by the Managing Member, include shares of stock in the Managing Member) shall be applied and distributed in the following order:

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(1)First, to the payment and discharge of all of the Company’s debts and liabilities to creditors other than the Members;

(2)Second, to the payment and discharge of all of the Company’s debts and liabilities to the Members, pro rata in accordance with amounts owed to each such Member; and

(3)The balance, if any, to the Managing Member and Non-Managing Members in accordance with their Capital Accounts, after giving effect to all contributions, distributions, and allocations for all periods.

The Managing Member shall not receive any additional compensation for any services performed pursuant to this Article XIII other than reimbursement of its expenses as provided for in Section 7.4.

(b)Where Immediate Sale of Company’s Assets Impractical.  Notwithstanding the provisions of
Section 13.2 (a) hereof which require liquidation of the assets of the Company, but subject to the order of priorities set forth therein, if prior to or upon dissolution of the Company the Liquidator determines that an immediate sale of part or all of the Company’s assets would be impractical or would cause undue loss to the Members, the Liquidator may, in its sole and absolute discretion, defer for a reasonable time the liquidation of any assets except those necessary to satisfy liabilities of the Company (including to those Members as creditors) or, with the Consent of the Non-Managing Members holding a majority of the Non-Managing Membership Units, distribute to the Members, in lieu of cash, as tenants in common and in accordance with the provisions of Section 13.2(a) hereof, undivided interests in such Company assets as the Liquidator deems not suitable for liquidation.  Any such distributions in kind shall be made only if, in the good faith judgment of the Liquidator, such distributions in kind are in the best interest of the Members, and shall be subject to such conditions relating to the disposition and management of such properties as the Liquidator deems reasonable and equitable and to any agreements governing the operation of such properties at such time.  The Liquidator shall determine the fair market value of any property distributed in kind using such reasonable method of valuation as it may adopt.

Section 13.3Capital Contribution Obligation.  If any Member has a deficit balance in his or her Capital Account (after giving effect to all contributions, distributions and allocations for the taxable years, including the year during which such liquidation occurs), such Member shall have no obligation to make any contribution to the capital of the Company with respect to such deficit, and such deficit at any time shall not be considered a debt owed to the Company or to any other Person for any purpose whatsoever, except to the extent otherwise expressly agreed to by such Member and the Company.

Section 13.4Compliance with Timing Requirements of Regulations; Allowance for Contingent or Unforeseen Liabilities or Obligations.  Notwithstanding anything to the contrary in this Agreement, in the event the Company is “liquidated” within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant to this Article XIII to the Managing Member and Non-Managing Members who have positive Capital Accounts in

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compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2) (including any timing requirements therein).  In the discretion of the Managing Member, a pro rata portion of the distributions that would otherwise be made to the Managing Member and Non-Managing Members pursuant to this Article XIII may be:  (i) distributed to a liquidating trust established for the benefit of the Managing Member and Non-Managing Members for the purposes of liquidating Company assets, collecting amounts owed to the Company, and paying any contingent or unforeseen liabilities or obligations of the Company or of the Managing Member arising out of or in connection with the Company (the assets of any such trust shall be distributed to the Managing Member and Non-Managing Members from time to time, in the reasonable discretion of the Managing Member, in the same proportions as the amount distributed to such trust by the Company would otherwise have been distributed to the Managing Member and Non-Managing Members pursuant to this Agreement); or (ii) withheld or escrowed to provide a reasonable reserve for Company liabilities (contingent or otherwise) and to reflect the unrealized portion of any installment obligations owed to the Company, provided that such withheld or escrowed amounts shall be distributed to the Managing Member and Non-Managing Members in the manner and priority set forth in Section 13.2(a) as soon as practicable.

Section 13.5Other Events.  Notwithstanding any other provision of this Article XIII, in the event the Company is liquidated within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g) but no Event of Dissolution has occurred, the Company’s property shall not be liquidated, the Company’s liabilities shall not be paid or discharged, and the Company’s affairs shall not be wound up. Instead, for federal income tax purposes the Company shall be deemed to have contributed all of its assets and liabilities to a new limited liability company in exchange for an interest in the new limited liability company and, immediately thereafter, the terminated Company shall be deemed to distribute interests in the new Company to the Managing Member and Non-Managing Members in proportion to their respective Membership Interests in liquidation of the terminated Company.

Section 13.6Rights of Non-Managing Members.  Except as specifically provided in this Agreement, each Non-Managing Member shall look solely to the assets of the Company for the return of his Capital Contribution and shall have no right or power to demand or receive property other than cash from the Company.  Except as specifically provided in this Agreement, no Non-Managing Member shall have priority over any other Non-Managing Member as to the return of his Capital Contributions, distributions, or allocations.

Section 13.7Notice of Dissolution.  In the event an Event of Dissolution or an event occurs that would, but for provisions of Section 13.1, result in a dissolution of the Company, the Managing Member shall, within 30 days thereafter, provide written notice thereof to each of the Members and to all other parties with whom the Company regularly conducts business (as determined in the discretion of the Managing Member) and shall publish notice thereof in a newspaper of general circulation in each place in which the Company regularly conducts business (as determined in the discretion of the Managing Member).

Section 13.8Cancellation of Certificate.  Upon the completion of the liquidation of the Company as provided in Section 13.2 hereof, the Company shall be terminated and the Certificate and all qualifications of the Company as a foreign limited liability company in

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jurisdictions other than the State of Delaware shall be canceled and such other actions as may be necessary to terminate the Company shall be taken.

Section 13.9Reasonable Time for Winding-Up.  A reasonable time shall be allowed for the orderly winding-up of the business and affairs of the Company and the liquidation of its assets pursuant to Section 13.2 hereof, in order to minimize any losses otherwise attendant upon such winding-up, and the provisions of this Agreement shall remain in effect between the Members during the period of liquidation.

ARTICLE XIV
AMENDMENT OF AGREEMENT; MEETINGS

Section 14.1Amendments.

(a)General.  Amendments to this Agreement may be proposed by the Managing Member or by any Non-Managing Members holding 25 percent or more in the aggregate of the Membership Interests held by all Non-Managing Members.  Following such proposal, the Managing Member shall submit any proposed amendment to the Non-Managing Members.  The Managing Member shall seek the written vote of the Members on the proposed amendment or shall call a meeting to vote thereon and to transact any other business that it may deem appropriate.  For purposes of obtaining a written consent, the Managing Member may require a response within a reasonable specified time, but not less than 15 days, and failure to respond in such time period shall constitute a consent which is consistent with the Managing Member’s recommendation (if so recommended) with respect to the proposal; provided, that, an action shall become effective at such time as requisite consents are received even if prior to such specified time. Except as provided in Section 14.1(b), 14.1(c) or 14.1(d), a proposed amendment shall be adopted and be effective as an amendment hereto if it is approved by the Managing Member and it receives the Consent of Non-Managing Members holding a majority of the Percentage Interests of the Non-Managing Members.

(b)Managing Member’s Power to Amend.  Notwithstanding Section 14.1(a), the Managing Member shall have the power, without the consent of the Non-Managing Members, to amend this Agreement as may be required to facilitate or implement any of the following purposes:

(1)to add to the obligations of the Managing Member or surrender for the benefit of the Non-Managing Members any right or power granted to the Managing Member or any Affiliate of the Managing Member;

(2)to reflect the issuance of additional Membership Interests or the admission, substitution, termination, or withdrawal of Members in accordance with this Agreement;

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(3)to set forth the rights, powers, duties, and preferences of the holders of any additional Membership Interests issued pursuant to Section 4.2(b) hereof;

(4)to reflect a change that is of an inconsequential nature and does not adversely affect the Non-Managing Members in any material respect, or to cure any ambiguity, correct or supplement any provision in this Agreement not inconsistent with law or with other provisions;

(5)to satisfy any requirements, conditions, or guidelines contained in any order, directive, opinion, ruling or regulation of a Federal or state agency or contained in Federal or state law;

(6)to modify the manner in which Capital Accounts are computed as set forth in Section 4.4(e).

The Managing Member will provide notice to the Non-Managing Members when any action under this Section 14.1(b) is taken.

(c)Consent of Adversely Affected Member Required.  Notwithstanding Section 14.1(a) and Section 14.1(b) hereof, this Agreement shall not be amended without the Consent of each Member adversely affected if such amendment would (i) convert a Non-Managing Member’s interest in the Company into a Managing Member’s interest (except as a result of the Managing Member acquiring such interest), (ii) modify the limited liability of a Non-Managing Member, (iii) alter rights of the Member to receive distributions pursuant to Article V, or the allocations specified in Article VI (except as permitted pursuant to Section 4.2 and Section 14.1(b)(3) hereof), (iv) alter or modify the Redemption Right as set forth in Sections 4.2(e) and 11.2(b), and related definitions hereof, (v) cause the termination of the Company prior to the time set forth in Sections 2.5 or 13.1 or (vi) amend this Section 14.1(c).  Further, no amendment may alter the restrictions on the Managing Member’s authority set forth in Section 7.3 without the Consent specified in that section.  This Section 14.1(c) does not require unanimous consent of all Members adversely affected unless the amendment is to be effective against all Members adversely affected.

(d)When Consent of Majority of Non-Managing Membership Interests Required.  Notwithstanding Section 14.1(a) hereof, the Managing Member shall not amend Section 4.2(b), the second sentence of Section 7.1(a), Sections 7.5, 7.6, 7.8, 11.2, and 14.1(c), this Section 14.1(d) or Section 14.2 without the Consent of two-thirds of the Percentage Interests of the Non-Managing Members.

Section 14.2Meetings of the Members.

(a)General.  Meetings of the Members may be called by the Managing Member and shall be called upon the receipt by the Managing Member of a written request by Non-Managing Members holding 25 percent or more of the Membership Interests.  The call shall state the nature of the business to be transacted.  Notice of any such meeting shall be given to all Members not less than seven days nor more than 30

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days prior to the date of such meeting.  Members may vote in person or by proxy at such meeting.  Whenever the vote or Consent of Members is permitted or required under this Agreement, such vote or Consent may be given at a meeting of Members or may be given in accordance with the procedure prescribed in Section 14.1 hereof.  Except as otherwise expressly provided in this Agreement, the Consent of holders of a majority of the Percentage Interests shall control.

(b)Informal Action.  Any action required or permitted to be taken at a meeting of the Members may be taken without a meeting if a written Consent setting forth the action so taken is signed by a majority of the Percentage Interests of the Members (or such other percentage as is expressly required by this Agreement).  Such Consent may be in one instrument or in several instruments, and shall have the same force and effect as a vote of a majority of the Percentage Interests of the Members (or such other percentage as is expressly required by this Agreement).  Such Consent shall be filed with the Managing Member.  An action so taken shall be deemed to have been taken at a meeting held on the effective date so certified.

(c)Proxies.  Each Non-Managing Member may authorize any Person or Persons to act for him by proxy on all matters in which a Non-Managing Member is entitled to participate, including waiving notice of any meeting, or voting or participating at a meeting.  Every proxy must be signed by the Non-Managing Member or his attorney-in-fact.  No proxy shall be valid after the expiration of 11 months from the date thereof unless otherwise provided in the proxy.  Every proxy shall be revocable at the pleasure of the Non-Managing Member executing it.

(d)Conduct of Meeting.  Each meeting of Members shall be conducted by the Managing Member or such other Person as the Managing Member may appoint pursuant to such rules for the conduct of the meeting as the Managing Member or such other Person deems appropriate.

Section 14.3Voting Rights of LTIP Units.  LTIP Unitholders shall (a) have those voting rights required from time to time by applicable law, if any, (b) have the same voting rights as a holder of Membership Units, with the LTIP Units voting as a single class with the Membership Units and having one vote per LTIP Unit; and (c) have the additional voting rights that are expressly set forth below.  So long as any LTIP Units remain outstanding, the Company shall not, without the affirmative vote of the LTIP Unitholders who hold at least a majority of the LTIP Units outstanding at the time, given in person or by proxy, either in writing or at a meeting (voting separately as a class), amend, alter or repeal, whether by merger, consolidation or otherwise, the provisions of this Agreement applicable to LTIP Units so as to materially and adversely affect any right, privilege or voting power of the LTIP Units or the LTIP Unitholders as such, unless such amendment, alteration, or repeal affects equally, ratably and proportionately the rights, privileges and voting powers of the holders of Membership Units; but subject, in any event, to the following provisions:

(i)With respect to any Transaction, so long as the LTIP Units are treated in accordance with Section 4.6 hereof, the consummation of such Transaction shall not be

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deemed to materially and adversely affect such rights, preferences, privileges or voting powers of the LTIP Units or the LTIP Unitholders as such; and

(ii)Any creation or issuance of any Membership Units or of any class of series of Membership Unites including without limitation additional Membership Units or LTIP Units, whether ranking senior to, junior to, or on a parity with the LTIP Units with respect to distributions and the distribution of assets upon liquidation, dissolution or winding up, shall not be deemed to materially and adversely affect such rights, preferences, privileges or voting powers of the LTIP Units or the LTIP Unitholders as such.

The foregoing voting provisions will not apply if, at or prior to the time when the act with respect to which such vote would otherwise be required will be effected, all outstanding LTIP Units shall have been converted into Membership Units.

ARTICLE XV
GENERAL PROVISIONS

Section 15.1Addresses and Notice.  All notices and demands under this Agreement shall be in writing, and may be either delivered personally (which shall include deliveries by courier), by telefax, telex or other wire transmission (with request for assurance of receipt in a manner appropriate with respect to communications of that type, provided that a confirmation copy is concurrently sent by a nationally recognized express courier for overnight delivery) or mailed, postage prepaid, by certified or registered mail, return receipt requested, directed to the parties at their respective addresses set forth on Exhibit A, as it may be amended from time to time, and, if to the Company, such notices and demands sent in the aforesaid manner must be delivered at its principal place of business set forth above.  Unless delivered personally or by telefax, telex or other wire transmission as above (which shall be effective on the date of such delivery or transmission), any notice shall be deemed to have been made three (3) days following the date so mailed.  Any party hereto may designate a different address to which notices and demands shall thereafter be directed by written notice given in the same manner and directed to the Company at its office hereinabove set forth.

Section 15.2Titles and Captions.  All article or section titles or captions in this Agreement are for convenience only.  They shall not be deemed part of this Agreement and in no way define, limit, extend or describe the scope or intent of any provisions hereof.  Except as specifically provided otherwise, references to “Articles” and “Sections” are to Articles and Sections of this Agreement.

Section 15.3Pronouns and Plurals.  Whenever the context may require, any pronoun used in this Agreement shall include the corresponding masculine, feminine or neuter forms, and the singular form of nouns, pronouns and verbs shall include the plural and vice versa.

Section 15.4Further Action.  The parties shall execute and deliver all documents, provide all information and take or refrain from taking action as may be necessary or appropriate to achieve the purposes of this Agreement.

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Section 15.5Binding Effect.  This Agreement shall be binding upon and inure to the benefit of the parties hereto and their heirs, executors, administrators, successors, legal representatives and permitted assigns.

Section 15.6Waiver of Partition.  The Members hereby agree that the Company Properties are not and will not be suitable for partition.  Accordingly, each of the Members hereby irrevocably waives any and all rights (if any) that it may have to maintain any action for partition of any of the Company Properties.

Section 15.7Entire Agreement.  This Agreement constitutes the entire agreement among the parties with respect to the matters contained herein; it supersedes any prior agreements or understandings among them and it may not be modified or amended in any manner other than pursuant to Article XIV.

Section 15.8Securities Law Provisions.  The Membership Units have not been registered under the Federal or state securities laws of any state and, therefore, may not be resold unless appropriate Federal and state securities laws, as well as the provisions of Article XI hereof, have been complied with.

Section 15.9Remedies Not Exclusive.  Any remedies herein contained for breaches of obligations hereunder shall not be deemed to be exclusive and shall not impair the right of any party to exercise any other right or remedy, whether for damages, injunction or otherwise.

Section 15.10Time.  Time is of the essence of this Agreement.

Section 15.11Creditors.  None of the provisions of this Agreement shall be for the benefit of, or shall be enforceable by, any creditor of the Company.

Section 15.12Waiver.  No failure by any party to insist upon the strict performance of any covenant, duty, agreement or condition of this Agreement or to exercise any right or remedy consequent upon a breach thereof shall constitute waiver of any such breach or any other covenant, duty, agreement or condition.

Section 15.13Execution Counterparts.  This Agreement may be executed in counterparts, all of which together shall constitute one agreement binding on all the parties hereto, notwithstanding that all such parties are not signatories to the original or the same counterpart.  Each party shall become bound by this Agreement immediately upon affixing its signature hereto.

Section 15.14Applicable Law.  This Agreement shall be construed in accordance with and governed by the laws of the State of Delaware, without regard to the principles of conflicts of law.

Section 15.15Invalidity of Provisions.  If any provision of this Agreement is or becomes invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby.

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Section 15.16No Rights as Stockholders.  Nothing contained in this Agreement shall be construed as conferring upon the holders of Membership Units any rights whatsoever as stockholders of the Managing Member, including without limitation any right to receive dividends or other distributions made to stockholders of the Managing Member or to vote or to consent or to receive notice as stockholders in respect of any meeting of stockholders for the election of directors of the Managing Member or any other matter, except as may be provided in the Investors Agreement.

Section 15.17Uniform Commercial Code.  Each Membership Unit shall constitute a “security” within the meaning of Section 8-102(a)(15) of the Uniform Commercial Code as in effect from time to time in the States of Delaware and New York (and each Membership Unit shall be treated as such a “security” for all purposes, including, without limitation, perfection of a security interest therein under Article 8 of the applicable Uniform Commercial Code).

ARTICLE XVI
POWER OF ATTORNEY

Section 16.1Power of Attorney.

(a)Scope.  Each Non-Managing Member and each Assignee constitutes and appoints the Managing Member, any Liquidator, and authorized officers and attorneys-in-fact of each, and each of those acting singly, in each case with full power of substitution, as its true and lawful agent and attorney-in-fact, with full power and authority in its name, place and stead to:

(1)execute, swear to, acknowledge, deliver, publish, file and record in the appropriate public offices (a) all certificates, documents and other instruments (including, without limitation, this Agreement and the Certificate and all amendments or restatements thereof) that the Managing Member or the Liquidator deems appropriate or necessary to form, qualify or continue the existence or qualification of the Company as a limited liability company (or an entity in which the Non-Managing Members have limited liability) in the State of Delaware and in all other jurisdictions in which the Company may conduct business or own property; (b) all instruments that the Managing Member or any Liquidator deems appropriate or necessary to reflect any amendment, change, modification or restatement of this Agreement in accordance with its terms; (c) all conveyances and other instruments or documents that the Managing Member or any Liquidator deems appropriate or necessary to reflect the dissolution and liquidation of the Company pursuant to the terms of this Agreement, including, without limitation, a certificate of cancellation; (d) all instruments relating to the admission, withdrawal, removal or substitution of any Member pursuant to, or other events described in, Article XI, XII or XIII hereof or the Capital Contribution of any Member; and (e) all certificates, documents and other instruments relating to the determination of the rights, preferences and privileges of Membership Interests; and

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(2)execute, swear to, acknowledge and file all ballots, consents, approvals, waivers, certificates and other instruments appropriate or necessary, in the sole and absolute discretion of the Managing Member, to make, evidence, give, confirm or ratify any vote, consent, approval, agreement or other action which is made or given by the Members hereunder or is consistent with the terms of this Agreement or appropriate or necessary, in the sole discretion of the Managing Member, to effectuate the terms or intent of this Agreement.

Nothing contained herein shall be construed as authorizing the Managing Member to amend this Agreement except in accordance with Article XIV hereof or as may be otherwise expressly provided for in this Agreement.

(b)Irrevocability.  The foregoing power of attorney is hereby declared to be irrevocable and a power coupled with an interest, in recognition of the fact that each of the Members will be relying upon the power of the Managing Member to act as contemplated by this Agreement in any filing or other action by it on behalf of the Company, and it shall survive and not be affected by the subsequent Incapacity of any Non-Managing Member or Assignee and the transfer of all or any portion of such Non-Managing Member’s or Assignee’s Membership Units and shall extend to such Non-Managing Member’s or Assignee’s heirs, successors, assigns and personal representatives.  Each such Non-Managing Member or Assignee hereby agrees to be bound by any representation made by the Managing Member, acting in good faith pursuant to such power of attorney; and each such Non-Managing Member or Assignee hereby waives any and all defenses which may be available to contest, negate or disaffirm the action of the Managing Member, taken in good faith under such power of attorney.  Each Non-Managing Member or Assignee shall execute and deliver to the Managing Member or the Liquidator, within 15 days after receipt of the Managing Member’s request therefor, such further designation, powers of attorney and other instruments as the Managing Member or the Liquidator, as the case may be, deems necessary to effectuate this Agreement and the purposes of the Company.

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IN WITNESS WHEREOF, the parties hereto have executed this Amended and Restated Limited Liability Company Agreement of Morgans Group LLC as of the date first written above.

Managing Member:
MORGANS HOTEL GROUP CO.
By:	/s/ W. Edward Scheetz
Name:			W. Edward Scheetz
Title:			Chief Executive Officer
Non-Managing Members:
MORGANS HOTEL GROUP LLC
By:	/s/ W. Edward Scheetz
Name:		W. Edward Scheetz
Title:		Chief Executive Officer
NORTHSTAR PARTNERSHIP, L.P.
By:	/s/ Richard J. McCready
Name:		Richard J. McCready
Title:		President
RSA ASSOCIATES, L.P.
By:	/s/ Ian Schrager
Name:		Ian Schrager
Title:		President

66

EXHIBIT A

MEMBERS, CONTRIBUTIONS AND

MEMBERSHIP INTERESTS

Name and Address of Member	Membership Units	LTIP Units	Percentage Interest
Managing Member:
Morgans Hotel Group Co. 475 Tenth Avenue New York, New York 10018	33,500,000	0	97.1	%
Non-Managing Members:
Morgans Hotel Group LLC 475 Tenth Avenue New York, New York 10018	1,000,000	0	2.9	%
Total	34,500,000	0	100	%

EXHIBIT B

NOTICE OF REDEMPTION

The undersigned hereby irrevocably (a) elects to exercise its Redemption Right set forth in the Amended and Restated Limited Liability Company Agreement of Morgans Group LLC (the “Agreement”; capitalized terms used and not otherwise defined herein shall have the meanings assigned to such terms in the Agreement), with respect to an aggregate of            Membership Units, (b) surrenders such Membership Units and all right, title and interest therein, and (c) directs that the Cash Amount or Shares Amount (as determined by the Managing Member) deliverable upon exercise of the Redemption Right be delivered to the address specified below, and if Common Shares are to be delivered, such Common Shares be registered or placed in the name(s) and at the address(es) specified below.

Dated:

Name of Non-Managing Member:

(Signature of Non-Managing Member)

(Street Address)

(City)  (State)  (Zip Code)

Signature Guaranteed by:

If Common Shares are to be issued, issue to:

Please insert social security or identifying number:

Name:

EXHIBIT C

NOTICE OF ELECTION BY LTIP UNITHOLDER TO CONVERT LTIP UNITS INTO

MEMBERSHIP UNITS

The undersigned Holder of LTIP Units hereby irrevocably (i) elects to convert the number of LTIP Units in Morgans Group LLC (the “Company”) set forth below into Membership Units in accordance with the terms of the Amended and Restated Limited Liability Company Agreement of the Company, as amended; and (ii) directs that any cash in lieu of Membership Units that may be deliverable upon such conversion be delivered to the address specified below.  The undersigned hereby represents, warrants, and certifies that the undersigned (a) has title to such LTIP Units, free and clear of the rights or interests of any other person or entity other than the Company; (b) has the full right, power, and authority to cause the conversion of such LTIP Units as provided herein; and (c) has obtained the consent or approval of all persons or entities, if any, having the right to consent or approve such conversion.

Name of Holder:

Number of LTIP Units to be Converted:

Date of this Notice:

(Signature of Holder: Sign Exact Name as Registered with Company)
(Street Address)
(City)	(State)	(Zip Code)
Signature Guaranteed by:

EXHIBIT D

NOTICE OF ELECTION BY COMPANY TO FORCE CONVERSION OF LTIP UNITS INTO
MEMBERSHIP UNITS

Morgans Group LLC (the “Company”) hereby irrevocably elects to cause the number of LTIP Units held by the Holder of LTIP Units set forth below to be converted into Membership Units in accordance with the terms of Amended and Restated Limited Liability Company Agreement of the Company, as amended.

Name of Holder:
	(Please Print: Exact Name as Registered with Company)
Number of LTIP Units to be Converted:
Date of this Notice:

EX-10.3

Exhibit 10.3

REGISTRATION RIGHTS AGREEMENT

by and between

MORGANS HOTEL GROUP CO.

and

RSA ASSOCIATES, L.P.

Dated as of February 17, 2006

TABLE OF CONTENTS

1.	Certain Definitions				1
2.	Demand Registrations				3
	(a)			Right to Request Registration	3
	(b)			Number of Demand Registrations	4
	(c)			Priority on Demand Registrations	4
	(d)			Restrictions on Demand Registrations	4
	(e)			Selection of Underwriters	5
	(f)			Other Registration Rights	5
	(g)			Effective Period of Demand Registrations	5
3.	Piggyback Registrations.				5
	(a)		Right to Piggyback		5
	(b)		Priority on Primary Piggyback Registrations		6
	(c)		Priority on Secondary Registrations		6
	(d)		Selection of Underwriters		6
	(e)		Other Registration Rights		6
4.	S-3 Registrations				7
	(a)		Right to Request Registration		7
	(b)		Priority on Shelf Takedowns		7
	(c)		Selection of Underwriters		8
	(d)		Other Registration Rights		8
5.	Holdback Agreements				8
6.	Registration Procedures				8
7.	Registration Expenses				13
8.	Indemnification				14
9.	Participation in Underwritten Registrations				15
10.	Rule 144				16
11.	Miscellaneous				16
	(a)	Notices			16
	(b)	No Waivers			17
	(c)	Expenses			17
	(d)	Successors and Assigns			17
	(e)	Governing Law			17
	(f)	Jurisdiction			17

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(g)	Waiver of Jury Trial	18
(h)	Counterparts; Effectiveness	18
(i)	Entire Agreement	18
(j)	Captions	18
(k)	Severability	18
(l)	Amendments	18
(m)	Equitable Relief	19

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THIS REGISTRATION RIGHTS AGREEMENT (this “Agreement”), is made and entered into as of February 17, 2006, by and between Morgans Hotel Group Co., a Delaware corporation (the “Company”), and RSA Associates, L.P., a Delaware limited partnership (the “Securityholder”).

In consideration of the mutual covenants and agreements herein contained and other good and valid consideration, the receipt and sufficiency of which are hereby acknowledged, the parties to this Agreement hereby agree as follows:

1.Certain Definitions.

In addition to the terms defined elsewhere in this Agreement, the following terms shall have the following meanings:

“Affiliate” of any Person means any other Person which directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, such Person. The term “control” (including the terms “controlling,” “controlled by” and “under common control with”) as used with respect to any Person means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise.

“Agreement” means this Registration Rights Agreement, including all amendments, modifications and supplements and any exhibits or schedules to any of the foregoing, and shall refer to this Registration Rights Agreement as the same may be in effect at the time such reference becomes operative.

“Blackout Period” has the meaning set forth in Section 6(f) hereof.

“Common Stock” means any shares of common stock issued by the Company.

“Company” has the meaning set forth in the introductory paragraph.

“Delay Period” has the meaning set forth in Section 2(e) hereof.

“Demand Registration” has the meaning set forth in Section 2(a) hereof.

“Demand Registration Statement” has the meaning set forth in Section 2(a) hereof.

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

“Form S-3” means a registration statement on Form S-3 under the Securities Act or such successor form thereto permitting registration of securities under the Securities Act.

“Governmental Entity” means any national, federal, state, municipal, local, territorial, foreign or other government or any department, commission, board, bureau, agency, regulatory authority or instrumentality thereof, or any court, judicial, administrative or arbitral body or public or private tribunal.

“Holder” means the Securityholder to the extent that the Securityholder is the holder of record of (1) Registrable Common Stock or (2) OP Units. For purposes of this Agreement, the Company may deem and treat the registered holder of Registrable Common Stock and OP Units as the absolute owner thereof, and the Company shall not be affected by any notice to the contrary. In order to determine the number of shares of Registrable Common Stock held by the Holder and the number of shares of Registrable Common Stock outstanding, the OP Units held by the Securityholder shall be deemed to have been redeemed for or exchanged into shares of Common Stock.

“Morgans” means Morgans Hotel Group LLC.

“Morgans Group LLC” means Morgans Group LLC, a Delaware limited liability company, or the other entity through which the Company owns its hotel properties.

“Nasdaq” means The Nasdaq Stock Market, Inc. or any successor reporting system.

“OP Units” means any units of membership interest in Morgans Group LLC that are issued to the Securityholder.

“Person” means any individual, sole proprietorship, partnership, limited liability company, joint venture, trust, incorporated organization, association, corporation, institution, public benefit corporation, Governmental Entity or any other entity.

“Piggyback Registration” has the meaning set forth in Section 3(a) hereof.

“Prospectus” means the prospectus or prospectuses included in any Registration Statement, as amended or supplemented by any prospectus supplement with respect to the terms of the offering of any portion of the Registrable Common Stock covered by such Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus or prospectuses.

“Registrable Common Stock” means (1) any shares of Common Stock held of record by the Securityholder as of the date hereof, (2) any shares of Common Stock held of record by Morgans as of the date hereof that may be directly or indirectly issued or distributed to the Securityholder by Morgans, (3) any shares of Common Stock that may be issued to the Securityholder upon redemption or exchange of OP Units held of record by the Securityholder as of the date hereof, (4) any shares of Common Stock that may be issued upon redemption or exchange of OP Units held of record by Morgans as of the date hereof to the extent such OP Units may be issued or distributed to the Securityholder by Morgans, (5) any shares of Common Stock held by the Holder from time to time, and (6) any securities of the Company issued or issuable with respect to the shares of

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Common Stock referred to in clause (1) through (5) above by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise.

“Registration Expenses” has the meaning set forth in Section 7(a) hereof.

“Registration Statement” means any registration statement of the Company which covers any of the Registrable Common Stock pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such Registration Statement, including post-effective amendments, all exhibits and all materials incorporated by reference in such Registration Statement.

“S-3 Registration” has the meaning set forth in Section 4 hereof.

“SEC” means the Securities and Exchange Commission.

“Securities Act” means the Securities Act of 1933, as amended.

“Securityholder” has the meaning set forth in the introductory paragraph hereof.

“Suspension Notice” has the meaning set forth in Section 6(f) hereof.

“Termination Date” means the date upon which all the Registrable Common Stock may be sold in any three-month period without registration under the Securities Act.

“underwritten offering” means a registered offering in which securities of the Company are sold to underwriters for reoffering to the public.

2.Demand Registrations.

(a)Right to Request Registration.  Subject to the provisions hereof, beginning six months after the date hereof and continuing until the Termination Date, the Holder may at any time request registration for resale under the Securities Act of all or part of the Registrable Common Stock separate from an S-3 Registration (a “Demand Registration”); provided, that (based on then current market prices) the number of shares of Registrable Common Stock included in the Demand Registration would yield gross proceeds to the Holder of at least $25,000,000 unless the aggregate value (based on then current market prices) of the Registrable Common Stock held by the Holder is less than $25,000,000 but greater than $15,000,000, in which case the Demand Registration shall be for all of the Holder’s Registrable Common Stock (other than Registrable Common Stock which, as of the date of such demand, are in the form of OP Units and either held directly by the Securityholder or that the Securityholder may be entitled to receive from Morgans in a pro rata distribution of its OP Units, which such Holder shall not be required to include in such Demand Registration).  Subject to Section 2(d) below, the Company shall use its reasonable best efforts (i) to file a Registration Statement (a “Demand Registration Statement”) registering for resale such number of shares of Registrable Common Stock as requested to be so registered within 30 days of the

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Holder’s request therefor and (ii) to cause such Demand Registration Statement to be declared effective by the SEC as soon as practicable thereafter.

(b)Number of Demand Registrations.  Subject to the limitations of Section 2(a), the Holder shall be entitled to request one Demand Registration. A Registration Statement shall not count as the permitted Demand Registration unless and until it has become effective and the Holder is able to register and sell at least 50% of the Registrable Common Stock requested to be included in such registration.

(c)Priority on Demand Registrations.  The Company may include Common Stock other than Registrable Common Stock in a Demand Registration on the terms provided below and in Section 2(g) hereof, and, if such Demand Registration is an underwritten offering, only with the consent of the managing underwriters of such offering. If the managing underwriters of the requested Demand Registration advise the Company and the Holder that in their opinion the number of shares of Common Stock proposed to be included in the Demand Registration exceeds the number of shares of Common Stock which can be sold in such underwritten offering and/or the number of shares of Common Stock proposed to be included in such registration would adversely affect the price per share of the Registrable Common Stock proposed to be sold in such underwritten offering, the Company shall include in such Demand Registration (i) first, the number of shares of Common Stock that the Holder proposes to sell, and (ii) second, the number of shares of Common Stock proposed to be included therein by any other Persons (including shares of Common Stock to be sold for the account of the Company and/or other holders of Common Stock) allocated among such Persons in such manner as they may agree.

(d)Restrictions on Demand Registrations.  The Company shall not be obligated to effect any Demand Registration on behalf of the Holder within six months after the effective date of any Demand Registration, Piggyback Registration wherein the Holder was permitted to register, and actually sold, at least 50% of the shares of Registrable Common Stock requested to be included therein or S-3 Registration. The Company may (i) withdraw a Registration Statement previously filed (but not declared effective) pursuant to a Demand Registration or postpone for up to ninety (90) days the filing of a Registration Statement for a Demand Registration if, based on the good faith judgment of the Company, such postponement or withdrawal would avoid premature disclosure of a matter the Company has determined would not be in the best interest of the Company to be disclosed at such time or (ii) postpone the filing of a Demand Registration in the event the Company shall be required to prepare (A) audited financial statements as of a date other than its fiscal year end (unless the Holder agrees to pay the expenses of such an audit) or (B) pro forma financial statements that are required to be included in the Registration Statement; provided, however, that in no event shall the Company withdraw a Registration Statement under clause (i) after such Registration Statement has been declared effective; and provided, further, however, that in any of the events described in clause (i) or (ii) above, the Holder shall be entitled to withdraw such request and, if such request is withdrawn, such Demand Registration shall not count as one of the permitted Demand Registrations. The Company shall provide written notice to the Holder of (x) any postponement or withdrawal of the filing or effectiveness of a

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Registration Statement pursuant to this Section 2(d), (y) the Company’s decision to file or seek effectiveness of such Registration Statement following such withdrawal or postponement and (z) the effectiveness of such Registration Statement, which notice, if it relates to clause (x), shall include the reasons therefor if the Holder shall have previously executed a confidentiality agreement satisfactory to the Company in respect thereof. The Company may defer the filing of a particular Registration Statement pursuant to this Section 2(d) only once during any six-month period.  The period during which filing or effectiveness is so postponed hereunder is referred to as a “Delay Period”.

(e)Selection of Underwriters.  If any of the Registrable Common Stock covered by a Demand Registration is to be sold in an underwritten offering, the Company shall have the right to select the managing underwriters to administer the offering subject to the consent of the Holder for the book-running or lead managing underwriter, in its sole discretion.

(f)Other Registration Rights.  The Company shall not grant to any Person the right to request the Company (i) to register any shares of Common Stock in a Demand Registration unless such rights are consistent with the provisions hereof, or (ii) to register any securities of the Company (other than shares of Common Stock) in a Demand Registration.

(g)Effective Period of Demand Registrations.  Upon the date of effectiveness of any Demand Registration for an underwritten offering contemplated to be consummated at the time of effectiveness of the Demand Registration, the Company shall use its reasonable best efforts to keep such Demand Registration Statement effective for a period equal to 15 business days from such date or such shorter period which shall terminate when all of the Registrable Common Stock covered by such Demand Registration has been sold pursuant to such Demand Registration. If the Company shall withdraw any Demand Registration pursuant to Section 2(d) or issue a Suspension Notice pursuant to Section 6(f) within such 15 business day period and before all of the Registrable Common Stock covered by such Demand Registration has been sold pursuant thereto, the Holder shall be entitled to a replacement Demand Registration which shall be subject to all of the provisions of this Agreement.

3.Piggyback Registrations.

(a)Right to Piggyback.  Beginning six months after the date hereof, whenever the Company proposes to register any of its Common Stock under the Securities Act (other than a registration statement on Form S-8 or on Form S-4 or any similar successor forms thereto), whether for its own account or for the account of one or more stockholders of the Company and the form of registration statement to be used may be used for any registration of Registrable Common Stock (a “Piggyback Registration”), the Company shall give prompt written notice (in any event no later than 10 days prior to the filing of such registration statement) to the Holder of its intention to effect such a registration and, subject to Section 3(b), shall include in such registration statement all Registrable Common Stock with respect to which the Company has received written request for inclusion therein from the Holder within 8 days after the Holder’s receipt of

5

the Company’s notice. The Company may postpone or withdraw the filing or the effectiveness of a Piggyback Registration at any time in its sole discretion.  A Piggyback Registration shall not be considered a Demand Registration for purposes of Section 2 of this Agreement or a S-3 Registration for purposes of Section 4 of this Agreement.

(b)Priority on Primary Piggyback Registrations.  If a Piggyback Registration is initiated as a primary underwritten offering on behalf of the Company and the managing underwriters advise the Company and the Holder (if the Holder has elected to include Registrable Common Stock in such Piggyback Registration) that in their opinion the number of shares of Common Stock proposed to be included in such registration exceeds the number of shares of Common Stock which can be sold in such offering and/or that the number of shares of Common Stock proposed to be included in any such registration would adversely affect the price per share of the Common Stock to be sold in such offering, the Company shall include in such registration (i) first, the number of shares of Common Stock that the Company proposes to sell, and (ii) second, the number of shares of Common Stock requested to be included therein by holders of Common Stock, including the Holder (if the Holder has elected to include Registrable Common Stock in such Piggyback Registration), pro rata among all such holders on the basis of the number of shares of Common Stock requested to be included therein by all such holders or as such holders may otherwise agree.

(c)Priority on Secondary Registrations.  If a Piggyback Registration is initiated as an underwritten registration on behalf of a holder of Common Stock other than Registrable Common Stock, and the managing underwriters advise the Company that in their opinion the number of shares of Common Stock proposed to be included in such registration exceeds the number of shares of Common Stock which can be sold in such offering and/or that the number of shares of Common Stock proposed to be included in any such registration would adversely affect the price per share of the Common Stock to be sold in such offering, then the Company shall include in such registration (i) first, the number of shares of Common Stock requested to be included therein by the holder(s) requesting such registration, (ii) second, the number of shares of Common Stock requested to be included therein by other holders of Common Stock, including the Holder (if the Holder has elected to include Registrable Common Stock in such Piggyback Registration), pro rata among such holders on the basis of the number of shares of Common Stock requested to be included therein by such holders or as such holders may otherwise agree, and (iii) third, the number of shares of Common Stock that the Company proposes to sell.

(d)Selection of Underwriters.  If any Piggyback Registration is initiated as a primary underwritten offering, the Company shall have the right to select the managing underwriter or underwriters to administer any such offering.

(e)Other Registration Rights.  The Company shall not grant to any Person the right to request the Company (i) to register any shares of Common Stock in a Piggyback Registration unless such rights are consistent with the provisions hereof, or (ii) to register any securities of the Company (other than shares of Common Stock) in a Piggyback Registration.

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4.S-3 Registrations.

(a)Right to Request Registration.  At any time that the Company is eligible to use Form S-3 or any successor thereto, the Holder shall be entitled to request that the Company file a Registration Statement on Form S-3 or any successor thereto for a public offering of all or any portion of the Registrable Common Stock pursuant to Rule 415 promulgated under the Securities Act or otherwise. Upon such request, the Company shall use its reasonable best efforts (i) to file a Registration Statement covering the number of shares of Registrable Common Stock specified in such request under the Securities Act on Form S-3 or any successor thereto (an “S-3 Registration”) for public sale in accordance with the method of disposition specified in such request within 30 days of the Holder’s request therefor and (ii) to cause such S-3 Registration to be declared effective by the SEC as soon as reasonably practicable thereafter.  The Holder shall be entitled, upon not less than 24 hours (given on a business day and effect at the same time on the next business day) prior written notice to the Company in the manner provided below, to sell such Registrable Common Stock as are then registered pursuant to such Registration Statement (each, a “Shelf Takedown”).  The Holder shall be entitled to request that one such Shelf Takedown shall be an underwritten offering; provided, that (based on then current market prices) the number of shares of Registrable Common Stock included in such Shelf Takedown would yield gross proceeds to the Holder of at least $25,000,000. The Holder shall also give the Company prompt written notice of the consummation of such Shelf Takedown.  A notice of a proposed Shelf Takedown pursuant to this Section shall be given by e-mail and facsimile transmission to the Company’s Chief Financial Officer, with a copy to designated counsel, as provided in Section 11(a) hereof, and shall be effective when receipt of such notice has been confirmed telephonically.  The Company agrees to waive such 24-hour notice period if at the time such notice is effective, the Prospectus included in the Registration Statement related to the Registrable Common Stock proposed to be sold in the Shelf Takedown does not contain an untrue statement of a material fact and does not omit any material fact necessary to make the statements therein not misleading.

(b)Priority on Shelf Takedowns.  The Company may include Common Stock other than Registrable Common Stock in a Shelf Takedown on the terms provided below, and, if such Shelf Takedown is an underwritten offering, only with the consent of the managing underwriters of such offering.  If the managing underwriters of the requested Shelf Takedown advise the Company and the Holder that in their opinion the number of shares of Common Stock proposed to be included in any Shelf Takedown (1) exceeds the number of shares of Common Stock which can be sold in such underwritten offering or (2) would adversely affect the price per share of the Registrable Common Stock proposed to be sold in such underwritten offering, the Company shall include in such Shelf Takedown only the number of shares of Common Stock which in the opinion of such managing underwriters can be sold. If the number of shares of Common Stock which can be sold is less than the number of shares of Common Stock proposed to be registered, the amount of Common Stock to be so sold shall be allocated pro rata among the holders of Common Stock desiring to participate in such Shelf Takedown on the basis of the number of shares of Common Stock initially proposed to be registered by such holders or as such holders may otherwise agree.

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(c)Selection of Underwriters.  If any of the Registrable Common Stock covered by an S-3 Registration is to be sold in an underwritten offering, the Company shall have the right to select one of the co-managing underwriters and the Holder shall have the right to select one of the co-managing underwriters to administer the offering subject to the consent of the other for the book-running or lead managing underwriter, in its sole discretion.

(d)Other Registration Rights.  The Company shall not grant to any Person the right to request the Company (i) to register any shares of Common Stock in an S-3 Registration unless such rights are consistent with the provisions hereof, or (ii) to register any securities of the Company (other than shares of Common Stock) in an S-3 Registration.

5.Holdback Agreements.

As long as the Holder is the beneficial owner of five percent or more of the outstanding Common Stock of the Company, the Holder agrees not to sell, transfer, hedge the beneficial ownership of or otherwise dispose of any shares of Common Stock (or other securities of the Company) held by it for a period equal to the lesser of (i) ninety (90) days following the date of a prospectus or prospectus supplement, as applicable, relating to a sale of shares of Common Stock (or other securities of the Company) in an underwritten offering registered under the Securities Act or (ii) such shorter period as the managing underwriters of such underwritten offering shall agree to. Such agreement shall be in writing in form satisfactory to the Company and the managing underwriters. The Company may impose stop-transfer instructions with respect to the shares of Registrable Common Stock (or other securities) subject to the foregoing restriction until the end of said period. The foregoing restrictions shall not apply to (i) the exercise of any warrants or stock options to purchase shares of capital stock of the Company (provided that such limitation does not affect limitations on any actions specified in the first sentence of this Section 5 with respect to the shares issuable upon such exercise), (ii) transfers to Affiliates where the transferee agrees to be bound by the terms hereof, (iii) the participation in the filing of a registration statement with the Securities and Exchange Commission, including, without limitation, any S-3 Registration hereunder, or (iv) the shares of Registrable Common Stock included in the underwritten offering giving rise to the application of this Section 5.  Notwithstanding the foregoing, the holdback arrangement set forth in this Section 5 shall not apply to sale shares of Common Stock that is registered on Form S-8 or Form S-4.

6.Registration Procedures.

(a)Whenever the Holder requests that any Registrable Common Stock be registered pursuant to this Agreement, the Company shall use its reasonable best efforts to effect the registration and the sale of such Registrable Common Stock in accordance with the intended methods of disposition thereof, and, pursuant thereto, the Company shall as soon as reasonably practicable use its reasonable best efforts to:

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(i)subject to Section 2(a) and Section 4, prepare and file with the SEC a Registration Statement with respect to such Registrable Common Stock and cause such Registration Statement to become effective as soon as reasonably practicable thereafter; and before filing a Registration Statement or Prospectus or any amendments or supplements thereto, furnish to the Holder and the underwriter or underwriters, if any, copies of all such documents proposed to be filed, including documents incorporated by reference in the Prospectus and, if requested by the Holder, the exhibits incorporated by reference, and the Holder shall have the opportunity to object to any information pertaining to the Holder that is contained therein and the Company will make the corrections reasonably requested by the Holder with respect to such information prior to filing any Registration Statement or amendment thereto or any Prospectus or any supplement thereto;

(ii)prepare and file with the SEC such amendments and supplements to such Registration Statement and the Prospectus used in connection therewith as may be necessary to keep such Registration Statement effective for a period of not less than (A) 15 business days, in the case of a Demand Registration, or (B) the earlier of 2 years or the Termination Date in the case of an S-3 Registration, and no longer than is necessary to complete the distribution of the Common Stock covered by such Registration Statement and comply with the provisions of the Securities Act with respect to the disposition of all the Common Stock covered by such Registration Statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement;

(iii)furnish to each seller of Registrable Common Stock the Prospectus included in such Registration Statement (including each preliminary Prospectus) and any supplement thereto and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Common Stock owned by such seller;

(iv)register or qualify such Registrable Common Stock under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Common Stock owned by such seller (provided, that the Company will not be required to (I) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph (iv), (II) subject itself to taxation in any such jurisdiction or (III) consent to general service of process in any such jurisdiction);

(v)notify each seller of such Registrable Common Stock, at any time when a Prospectus relating thereto is required to be delivered

9

under the Securities Act, of the occurrence of any event as a result of which the Prospectus included in such Registration Statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company shall prepare a supplement or amendment to such Prospectus so that, as thereafter delivered to the purchasers of such Registrable Common Stock, such Prospectus shall not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading;

(vi)in the case of an underwritten offering on behalf of the Holder pursuant to a Demand Registration, Piggyback Registration or an S-3 Registration, enter into such customary agreements (including underwriting and lock-up agreements in customary form) and take all such other customary actions as the Holder or the managing underwriters of such offering reasonably request in order to expedite or facilitate the disposition of such Registrable Common Stock (including, without limitation, making members of senior management of the Company available to participate in “road-show” and other customary marketing activities (including one-on-one meetings with prospective purchasers of the Registrable Common Stock)) and cause to be delivered to the underwriters opinions of counsel to the Company in customary form, covering such matters as are customarily covered by opinions for an underwritten public offering as the managing underwriters may request and addressed to the underwriters;

(vii)to the extent not prohibited by applicable law or pre-existing applicable contractual restrictions, (A) make available, for inspection by the Holder, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney retained by any such underwriter, all financial and other records, pertinent corporate documents and properties of the Company, (B) cause the Company’s officers and employees to supply all information reasonably requested by the Holder or such underwriter or attorney in connection with such Registration Statement, and (C) make the Company’s independent accountants available for any such underwriter’s due diligence;

(viii)cause all such Registrable Common Stock to be listed on each securities exchange on which securities of the same class issued by the Company are then listed or, if no such similar securities are then listed, on Nasdaq or a national securities exchange selected by the Company;

(ix)provide a transfer agent and registrar for all such Registrable Common Stock not later than the effective date of such Registration Statement;

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(x)if requested, cause to be delivered at the time of delivery of any Registrable Common Stock sold pursuant to a Registration Statement, letters from the Company’s independent certified public accountants addressed to each selling Holder (unless such selling Holder does not provide to such accountants the appropriate representation letter required by rules governing the accounting profession) and each underwriter, if any, stating that such accountants are independent public accountants within the meaning of the Securities Act and the applicable rules and regulations adopted by the SEC thereunder, and otherwise in customary form and covering such financial and accounting matters as are customarily covered by letters of the independent certified public accountants delivered in connection with primary or secondary underwritten public offerings, as the case may be;

(xi)make generally available to its stockholders a consolidated earnings statement (which need not be audited) for the 12 months beginning after the effective date of a Registration Statement as soon as reasonably practicable after the end of such period, which earnings statement shall satisfy the requirements of an earning statement under Section 11(a) of the Securities Act; and

(xii)promptly notify the Holder and the underwriter or underwriters, if any:

(1)when the Registration Statement, any pre-effective amendment, the Prospectus or any Prospectus supplement or post-effective amendment to the Registration Statement has been filed and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective;

(2)of the notification to the Company by the SEC of its initiation of any proceeding with respect to the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement; and

(3)of the receipt by the Company of any notification with respect to the suspension of the qualification of any Registrable Common Stock for sale under the applicable securities or blue sky laws of any jurisdiction.

(b)No Registration Statement (including any amendments thereto) shall contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein not misleading, and no Prospectus (including any supplements thereto) shall contain any untrue statement of a material fact or omit to state a material fact required to be stated therein, or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, in each case, except for any untrue statement or alleged untrue statement of a material fact or omission or alleged omission of a material fact made in reliance on

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and in conformity with written information furnished to the Company by or on behalf of the Holder specifically for use therein.

(c)The Company shall make available to the Holder such number of copies of a Prospectus, including a preliminary Prospectus, and all amendments and supplements thereto and such other documents as the Holder may reasonably request in order to facilitate the disposition of the Registrable Common Stock owned by the Holder. The Company will promptly notify the Holder of the effectiveness of each Registration Statement or any post-effective amendment. The Company will promptly respond to any and all comments received from the SEC, with a view towards causing each Registration Statement or any amendment thereto to be declared effective by the SEC as soon as reasonably practicable and shall file an acceleration request as soon as reasonably practicable following the resolution or clearance of all SEC comments or, if applicable, following notification by the SEC that any such Registration Statement or any amendment thereto will not be subject to review.

(d)At all times after the Company has filed a registration statement with the SEC pursuant to the requirements of the Securities Act, the Company shall use its reasonable best efforts to file all reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder, and use its reasonable best efforts to take such further action as the Holder may reasonably request, all to the extent required to enable the Holder to be eligible to sell Registrable Common Stock pursuant to Rule 144 (or any similar rule then in effect).

(e)The Company may require each seller of Registrable Common Stock as to which any registration is being effected to furnish to the Company any other information regarding such seller and the distribution of such securities as the Company may from time to time reasonably request in writing.

(f)Each seller of Registrable Common Stock agrees by having its stock treated as Registrable Common Stock hereunder that, upon notice of the happening of any event as a result of which the Prospectus included in such Registration Statement contains an untrue statement of a material fact or omits any material fact necessary to make the statements therein not misleading (a “Suspension Notice”), such seller will forthwith discontinue disposition of Registrable Common Stock for a reasonable length of time not to exceed 60 days until such seller is advised in writing by the Company that the use of the Prospectus may be resumed and is furnished with a supplemented or amended Prospectus as contemplated by Section 6(a)(v) hereof, and, if so directed by the Company, such seller will deliver to the Company (at the Company’s expense) all copies, other than permanent file copies then in such seller’s possession, of the Prospectus covering such Registrable Common Stock current at the time of receipt of such notice; provided, however, that such postponement of sales of Registrable Common Stock by the Holder shall not exceed one hundred and fifty (150) days in the aggregate in any one year. If the Company shall give any notice to suspend the disposition of Registrable Common Stock pursuant to a Prospectus, the Company shall extend the period of time during which the Company is required to maintain the Registration Statement effective pursuant to this Agreement by the number of days during the period from and including

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the date of the giving of such notice to and including the date such seller either is advised by the Company that the use of the Prospectus may be resumed or receives the copies of the supplemented or amended Prospectus contemplated by Section 6(a)(v) (a “Blackout Period”). In any event, the Company shall not be entitled to deliver more than four (4) Suspension Notices in any one year.

7.Registration Expenses.

(a)All expenses incident to the Company’s performance of or compliance with this Agreement, including, without limitation, all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, listing application fees, printing expenses, transfer agent’s and registrar’s fees, cost of distributing Prospectuses in preliminary and final form as well as any supplements thereto, and fees and disbursements of counsel for the Company and all independent certified public accountants and other Persons retained by the Company (all such expenses being herein called “Registration Expenses”) (but not including any underwriting discounts or commissions attributable to the sale of Registrable Common Stock or fees and expenses of more than one counsel representing the Holder), shall be borne by the Company. In addition, the Company shall pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which they are to be listed.

(b)In connection with one underwritten offering initiated by the Holder pursuant to the Demand Registration or the S-3 Registration, the Company shall reimburse the Holder covered by such registration or sale for the reasonable fees and disbursements of one law firm chosen by the Holder, subject to a maximum of $15,000.

(c)The obligation of the Company to bear the expenses described in Section 7(a) and to reimburse the Holder for the expenses described in Section 7(b) shall apply irrespective of whether a registration, once properly demanded, if applicable, becomes effective, is withdrawn or suspended, is converted to another form of registration and irrespective of when any of the foregoing shall occur; provided, however, that Registration Expenses for any Registration Statement withdrawn solely at the request of the Holder (unless withdrawn following postponement of filing by the Company in accordance with Section 2(d) or Section 3(a)) or any supplements or amendments to a Registration Statement or Prospectus resulting from a misstatement furnished to the Company by the Holder shall be borne by the Holder.  In addition to the Company’s expense reimbursement obligation under Section 7(b), if any Registration Statement is withdrawn (unless such withdrawal is solely at the request of the Holder), the Company shall reimburse the Holder for its reasonable legal fees and related disbursements in connection with such withdrawn Registration Statement.

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8.Indemnification.

(a)The Company shall indemnify, to the fullest extent permitted by law, the Holder and each Person who controls the Holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses arising out of or based upon any untrue or alleged untrue statement of material fact contained in any Registration Statement, Prospectus, free writing prospectus (as defined in Rule 405 promulgated under the Securities Act) or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are made in reliance and in conformity with information furnished in writing to the Company by the Holder expressly for use therein or caused by the Holder’s failure to deliver to the Holder’s immediate purchaser a copy of the Registration Statement, Prospectus, free writing prospectus (as defined in Rule 405 promulgated under the Securities Act) or any amendments or supplements thereto (if the same was required by applicable law to be so delivered) after the Company has furnished the Holder with a sufficient number of copies of the same prior to any written confirmation of the sale of Registrable Common Stock. In connection with an underwritten offering, the Company shall indemnify such underwriters and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the Holder.

(b)In connection with any Registration Statement in which the Holder is participating, the Holder shall furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such Registration Statement or Prospectus or free writing prospectus (as defined in Rule 405 promulgated under the Securities Act) and, shall indemnify, to the fullest extent permitted by law, the Company, its officers, directors and each Person who controls the Company (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses arising out of or based upon any untrue or alleged untrue statement of material fact contained in the Registration Statement, Prospectus, free writing prospectus (as defined in Rule 405 promulgated under the Securities Act) or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that the same are made in reliance and in conformity with information furnished in writing to the Company by the Holder expressly for use therein or caused by the Holder’s failure to deliver to the Holder’s immediate purchaser a copy of the Registration Statement, Prospectus, free writing prospectus (as defined in Rule 405 promulgated under the Securities Act) or any amendments or supplements thereto (if the same was required by applicable law to be so delivered) after the Company has furnished the Holder with a sufficient number of copies of the same prior to any written confirmation of the sale of Registrable Common Stock; provided, however, that the liability of the Holder shall be in proportion to and limited to the net amount received by the Holder from the sale of Registrable Common Stock pursuant to such Registration Statement.

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(c)Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification and (ii) permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent will not be unreasonably withheld). An indemnifying party who is entitled to, and elects to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party there may be one or more legal or equitable defenses available to such indemnified party which are in addition to or may conflict with those available to another indemnified party with respect to such claim. Failure to give prompt written notice shall not release the indemnifying party from its obligations hereunder.

(d)The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and shall survive the transfer of securities.

(e)If the indemnification provided for in or pursuant to this Section 8 is due in accordance with the terms hereof, but is held by a court to be unavailable or unenforceable in respect of any losses, claims, damages, liabilities or expenses referred to herein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified Person as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which result in such losses, claims, damages, liabilities or expenses as well as any other relevant equitable considerations. The relative fault of the indemnifying party on the one hand and of the indemnified Person on the other shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party, and by such party’s relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. In no event shall the liability of the Holder be greater in amount than the amount of net proceeds received by the Holder upon such sale or the amount for which such indemnifying party would have been obligated to pay by way of indemnification if the indemnification provided for under Section 8(a) or 8(b) hereof had been available under the circumstances.

9.Participation in Underwritten Registrations.

No Person may participate in any registration hereunder which is underwritten unless such Person (a) agrees to sell such Person’s securities on the basis provided in any underwriting arrangements approved by the Person or Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of

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attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements.

10.Rule 144.

The Company shall use its reasonable best efforts to file the reports required to be filed by it under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder, and use its reasonable best efforts to take such further action as the Holder may reasonably request to make available adequate current public information with respect to the Company meeting the current public information requirements of Rule 144(c) under the Securities Act, to the extent required to enable the Holder to sell Registrable Common Stock without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such Rule may be amended from time to time, or (ii) any similar rule or regulation hereafter adopted by the SEC. Upon the request of the Holder, the Company will deliver to the Holder a written statement as to whether it has complied with such information and requirements.

11.Miscellaneous.

(a)Notices.  Except as otherwise provided herein, all notices, requests, consents and other communications required or permitted hereunder shall be in writing and shall be hand delivered or mailed postage prepaid by registered or certified mail or by facsimile transmission (with immediate telephone confirmation thereafter),

If to the Company:

Morgans Hotel Group Co.
475 Tenth Avenue
New York, New York  10018
Attention:Chief Financial Officer
Facsimile:(212) 277-4201

E-mail:  richard.szymanski@morganshotelgroup.com

with a copy to (which shall not constitute notice):

NorthStar Capital Investment Corp.
527 Madison Avenue
New York, New York
Attention:Richard McCready
Facsimile:(212) 319-4557

with a copy to (which shall not constitute notice):

Sullivan & Cromwell LLP
125 Broad Street
New York, NY 10004
Attention:Robert W. Downes, Esq.

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Facsimile:(212) 558-3588
E-mail:  downesr@sullcrom.com

If to the Securityholder:

c/o Ian Schrager Company LLC

818 Greenwich Street

New York, New York 10014

Facsimile:(212) 898-1162

with a copy to:

Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York  10036-6522
Attention:Benjamin F. Needell, Esq.
Facsimile:(212) 735-2000

or at such other address as such party each may specify by written notice to the others, and, except as otherwise provided herein, each such notice, request, consent and other communication shall for all purposes of the Agreement be treated as being effective or having been given when delivered personally, upon receipt of facsimile confirmation if transmitted by facsimile, or, if sent by mail, at the earlier of its receipt or 72 hours after the same has been deposited in a regularly maintained receptacle for the deposit of United States mail, addressed and postage prepaid as aforesaid.

(b)No Waivers.  No failure or delay by any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by law.

(c)Expenses.  Except as otherwise provided for herein or otherwise agreed to in writing by the parties, all costs and expenses incurred in connection with the preparation of this Agreement shall be paid by the Company.

(d)Successors and Assigns.  The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, it being understood that subsequent holders of the Registrable Common Stock are intended third party beneficiaries hereof.

(e)Governing Law.  The internal laws of the State of New York shall govern the enforceability and validity of this Agreement, the construction of its terms and the interpretation of the rights and duties of the parties.

(f)Jurisdiction.  Any suit, action or proceeding seeking to enforce any provision of, or based on any matter arising out of or in connection with, this Agreement or the transactions contemplated hereby must be brought in any federal or state court

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located in the County and State of New York, and each of the parties hereby consents to the jurisdiction of such courts (and of the appropriate appellate courts therefrom) in any such suit, action or proceeding and irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of the venue of any such suit, action or proceeding in any such court or that any such suit, action or proceeding which is brought in any such court has been brought in an inconvenient forum. Process in any such suit, action or proceeding may be served on any party anywhere in the world, whether within or without the jurisdiction of any such court. Without limiting the foregoing, each party agrees that service of process on such party as provided in Section 11(a) shall be deemed effective service of process on such party.

(g)Waiver of Jury Trial.  EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

(h)Counterparts; Effectiveness.  This Agreement may be executed in any number of counterparts (including by facsimile) and by different parties hereto in separate counterparts, with the same effect as if all parties had signed the same document. All such counterparts shall be deemed an original, shall be construed together and shall constitute one and the same instrument. This Agreement shall become effective when each party hereto shall have received counterparts hereof signed by all of the other parties hereto.

(i)Entire Agreement.  This Agreement contains the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes and replaces all other prior agreements, written or oral, among the parties hereto with respect to the subject matter hereof.

(j)Captions.  The headings and other captions in this Agreement are for convenience and reference only and shall not be used in interpreting, construing or enforcing any provision of this Agreement.

(k)Severability.  If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such a determination, the parties shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.

(l)Amendments.  The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or

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consents to departures from the provisions hereof may not be given without the prior written consent of the Company and the Holder.

(m)Equitable Relief.  The parties hereto agree that legal remedies may be inadequate to enforce the provisions of this Agreement and that equitable relief, including specific performance and injunctive relief, may be used to enforce the provisions of this Agreement.

[Execution Page Follows]

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IN WITNESS WHEREOF, this Registration Rights Agreement has been duly executed by each of the parties hereto as of the date first written above.

RSA ASSOCIATES, L.P.
By:	/s/ Ian Schrager
MORGANS HOTEL GROUP CO.
By:	/s/ W. Edward Scheetz
	Name:	W. Edward Scheetz
	Title:	Chief Executive Officer

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EX-10.20

Exhibit 10.20

INDEMNIFICATION AGREEMENT

INDEMNIFICATION AGREEMENT (this “Agreement”), dated February 17, 2006, between Morgans Hotel Group LLC, a Delaware limited liability company (“MHG LLC”), and Morgans Group LLC, a Delaware limited liability company (“Morgans Group LLC”).

RECITALS

WHEREAS, the Board of Directors of NorthStar Capital Investment Corp., a Maryland corporation and the general partner of NorthStar Partnership, L.P., a Delaware limited partnership that controls NorthStar Hospitality LLC, a Delaware limited liability company that is the managing member of MHG LLC, has determined that it is in the best interests of MHG LLC and its members to complete an initial public offering (the “IPO”) of shares of Morgans Hotel Group Co., a Delaware corporation (“MHG Co.”), which will be the managing member of Morgans Group LLC;

WHEREAS, as a result of the IPO and the Formation and Structuring Transactions (as defined below), Morgans Group LLC will no longer be a wholly-owned subsidiary of MHG LLC; and

WHEREAS, in connection with the foregoing, the parties desire to set forth certain agreements regarding releases and indemnification following the separation.

NOW, THEREFORE, in consideration of the foregoing and the covenants and agreements set forth below, MHG LLC and Morgans Group LLC agree as follows:

ARTICLE I
DEFINITIONS

For the purpose of this Agreement the following capitalized terms shall have the meanings specified herein.

“Action” means any demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international governmental authority or any arbitration or mediation tribunal.

“Assumed Liabilities” shall mean (i) all Liabilities relating to, arising out of or in connection with the ownership, business or operations of the Transferred Business, whether arising before, in connection with, on or after the effective date of the Formation and Structuring Transactions, and (ii) all other Liabilities of the MHG LLC Group which relates to acts or omissions of any such parties relating to ownership, business or operations of the Transferred Business or the Formation and Structuring Transactions and the other transactions contemplated thereby prior to consummation of the Formation and Structuring Transactions (including the IPO).  For the avoidance of doubt, the term Assumed Liabilities shall include, without limitation, (i) all Liabilities for income taxes,

indemnification obligations and other contingent liabilities of MHG LLC and its direct and indirect subsidiaries relating to the ownership, business or operations of the Transferred Business relating to periods ending on or prior to the effective date of the Formation and Structuring Transactions, including any Liabilities relating to the agreement with or claims by the hotel designer described in Note 5 to the Combined Financial Statements of Morgans Hotel Group Co. Predecessor included in the Registration Statement on Form S-1 filed by MHG Co. in connection with the IPO, (ii) all Liabilities for New York City or New York State transfer taxes in connection with the transactions contemplated by the Formation and Structuring Transactions or the IPO, including resulting from any subsequent transfers of common stock of MHG Co. by the MHG LLC Group that are aggregated with the transfers contemplated by the Formation and Structuring Transactions or the IPO, and (iii) all Liabilities under that certain Agreement of Lease, dated as of December 1997, by and between Adler Realty Company and ISH Operating Corp., a wholly-owned subsidiary of Morgans Hotel Group Management LLC; provided, however, that the amount of any Assumed Liability shall be reduced by any benefits or amounts that are received by the MHG LLC after the effective date of the Formation and Structuring Transactions, including any insurance or other recoveries that are received by MHG LLC from third parties relating to, arising out of or in connection with any Assumed Liability.

“Formation and Structuring Transactions” shall have the meaning assigned thereto in the Registration Statement on Form S-1 filed by MHG Co. in connection with the IPO.

“Indemnifying Party” has the meaning set forth in Section 2.5(a) hereof.

“Indemnitee” has the meaning set forth in Section 2.5(a) hereof.

“Information” means information, in written, oral, electronic or other tangible or intangible forms, stored in any medium, including studies, reports, records, books, contracts, instruments, computer data, disks, diskettes, tapes, computer programs or other technical, financial, employee or business information or data.

“IPO Closing Date” shall mean the date on which shares of common stock of MHG Co. are issued pursuant to the IPO.

“Liabilities” means all debts, liabilities, guarantees, assurances, commitments and obligations, whether fixed, contingent or absolute, asserted or unasserted, matured or unmatured, liquidated or un-liquidated, accrued or not accrued, known or unknown, due or to become due, whenever or however arising (including, without limitation, whether arising out of any contract or tort based on negligence or strict liability) and whether or not the same would be required by generally accepted accounting principles and accounting policies to be reflected in financial statements or disclosed in the notes thereto.  For purposes of any indemnification hereunder, “Liabilities” shall be deemed also to include any and all damages, claims, suits, judgments, fines, penalties, costs and expenses of any kind or character, including attorney’s reasonable fees.

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“MHG LLC Group” or “MHG LLC Indemnitees” means MHG LLC and its wholly- and partially-owned direct and indirect subsidiaries (other than members of the Morgans Group LLC Group) and its and their respective members, affiliates, managers, directors, officers and employees (in each case, other than members of the Morgans Group LLC Group) after giving effect to the transactions contemplated by the Formation and Structuring Transactions.  For purposes hereof, “MHG LLC Group” and “MHG LLC Indemnities” shall include (i) NorthStar Partnership, L.P., a Delaware limited partnership, (ii) any general or limited partner of NorthStar Partnership, L.P., including, without limitation, NorthStar Capital Investment Corp., a Maryland corporation and the general partner of NorthStar Partnership, L.P., (iii) the Board of Directors of NorthStar Capital Investment Corp., (iv) any direct or indirect member, investor or beneficial owner of any equity interest in any partner of NorthStar Partnership, L.P. that receives shares of common stock of MHG Co. initially held by NorthStar Partnership, L.P., whether by distribution, redemption, exchange or otherwise, (v) RSA Associates, L.P., a Delaware limited partnership, (vi) any general or limited partner of RSA Associates, L.P., and (vii) any direct or indirect member, investor or beneficial owner of any equity interest in any partner of RSA Associates, L.P. that receives shares of common stock of MHG Co. initially held by RSA Associates, L.P., whether by distribution, redemption, exchange or otherwise.

“MHG Management Company” means Morgans Hotel Group Management LLC, a Delaware limited liability company.

“Morgans Group LLC Group” or “Morgans Group LLC Indemnitees” means Morgans Group LLC and its partially and wholly-owned direct and indirect subsidiaries and their respective members, managers, officers and employees after giving effect to the Formation and Structuring Transactions.

“Third Party Claim” has the meaning set forth in Section 2.5(a) of this Agreement.

“Transferred Business” means:  the business and operations of Morgans Group LLC and its partially and wholly-owned direct and indirect subsidiaries after giving effect to the consummation of the Formation and Structuring Transactions, including, without limitation, (i) MHG LLC’s interest in the ownership, business and operations of the following hotel properties, whether conducted or occurring prior to, on or after the effective date of the Formation and Structuring Transactions:

(1)Morgans;

(2)Mondrian;

(3)Royalton;

(4)Delano;

(5)Hudson;

(6)Clift;

(7)Sanderson;

(8)St. Martins Lane; and

(9)Shore Club,

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(ii) the ownership, business and operations of MHG Management Company, and (iii) MHG LLC’s interest in the ownership, business and operations of the restaurant joint ventures operating in the hotel properties named above.

ARTICLE II
MUTUAL RELEASES; INDEMNIFICATION

Section 2.1Release of Pre-Closing Claims.

(a)Morgans Group LLC Release.  Except as provided in Section 2.1(c), effective as of the IPO Closing Date, Morgans Group LLC does hereby, for itself and as agent for each member of the Morgans Group LLC Group, release and forever discharge the MHG LLC Indemnitees from any and all Assumed Liabilities and any and all other Liabilities whatsoever related to, arising from or in connection with the Transferred Business (whether arising at law or in equity (including any right of contribution), and whether arising under any contract or agreement, by operation of law or otherwise), existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed on or before the IPO Closing Date, including, without limitation, any such acts, events or conditions on or before the IPO Closing Date in connection with the Formation and Structuring Transactions, including the IPO, other than any Liabilities attributable to such member in its capacity as a selling stockholder in the IPO or asserted by another member of the MHG LLC Group.

(b)No Actions as to Released Claims.  Morgans Group LLC agrees, for itself and as agent for each member of the Morgans Group LLC Group, not to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or indemnification, against MHG LLC or any other person released pursuant to Section 2.1(a), with respect to any Liabilities released pursuant to Section 2.1(a).

(c)Excluded Liabilities; No Impairment.  Nothing contained herein shall release any claims under, or impair any right of any person to enforce, this Agreement or the IPO underwriting agreement.

Section 2.2Indemnification by Morgans Group LLC.  Except as otherwise provided in this Agreement, Morgans Group LLC shall indemnify, defend and hold harmless the MHG LLC Indemnitees from and against any and all Liabilities that any third party seeks to impose upon the MHG LLC Indemnitees, or which are imposed upon the MHG LLC Indemnitees, if and to the extent such Liabilities relate to, arise out of or result from any of the following items (without duplication):

(i)the Assumed Liabilities;

(ii)the Transferred Business or the Formation and Structuring Transactions, including the IPO, other than any Liabilities attributable to such

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member in its capacity as a selling stockholder in the IPO or asserted by another member of the MHG LLC Group;

(iii)any breach by any member of the Morgans Group LLC Group of this Agreement; and

(iv)any Liabilities of the Morgans Group LLC Group.

In the event that any member of the Morgans Group LLC Group makes a payment to the MHG LLC Indemnitees hereunder, and any of the MHG LLC Indemnitees subsequently diminishes the Liabilities on account of which such payment was made, either directly or through a third-party recovery, MHG LLC will promptly repay (or will procure an MHG LLC Indemnitee to promptly repay) such member of the Morgans Group LLC Group the amount by which the payment made by such member of the Morgans Group LLC Group exceeds the actual cost to the MHG LLC Indemnitee of the associated indemnified Liability; provided, however, that in the event that any indemnified Liability that was diminished is subsequently reinstated such that the net amount paid by such member of the Morgans Group LLC Group is less than the amount of the reinstated Liability, such member of the Morgans Group LLC Group shall pay the difference to MHG LLC or the MHG LLC Indemnitee, as applicable.

Section 2.3Indemnification by MHG LLC.  Except as otherwise provided in this Agreement, MHG LLC shall indemnify, defend and hold harmless the Morgans Group LLC Indemnitees from and against any and all Liabilities that any third party seeks to impose upon the Morgans Group LLC Indemnitees, or which are imposed upon the Morgans Group LLC Indemnitees, if and to the extent such Liabilities relate to, arise out of or result from any of the following items (without duplication):

(i)any breach by any member of the MHG LLC Group of this Agreement;

(ii)any Liabilities of the MHG LLC Group (other than the Assumed Liabilities); and

(iii)any Liability resulting from a claim by one member of the MHG LLC Group against another member of the MHG LLC Group.

In the event that any member of the MHG LLC Group makes a payment to the Morgans Group LLC Indemnitees hereunder, and any of the Morgans Group LLC Indemnitees subsequently diminishes the Liabilities on account of which such payment was made, either directly or through a third-party recovery, Morgans Group LLC will promptly repay (or will procure an Morgans Group LLC Indemnitee to promptly repay) such member of the MHG LLC Group the amount by which the payment made by such member of the MHG LLC Group exceeds the actual cost to the Morgans Group LLC Indemnitee of the indemnified Liability; provided, however, that in the event that any indemnified Liability that was diminished is subsequently reinstated such that the net amount paid by such member of the MHG LLC Group is less than the amount of the

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reinstated Liability, such member of the MHG LLC Group shall pay the difference to Morgans Group LLC or the Morgans Group LLC Indemnitee, as applicable.

Section 2.4Indemnification of Specific Claims.  Notwithstanding anything herein to the contrary:

(a)Indemnification by Morgans Group LLC.  Morgans Group LLC shall indemnify, defend and hold harmless the MHG LLC Group Indemnitees from and against any and all Liabilities that any third party seeks to impose upon the MHG LLC Group Indemnitees, or which are imposed upon the MHG LLC Group Indemnitees, if and to the extent such Liabilities relate to, arise out of or result from any of the following agreements (collectively, the “Guarantees and Other Obligations”):

(i)the Guaranty Agreement, dates as of August 28, 2000, by MHG LLC in favor of Chevron, TCI, Inc., and

(ii)the Joint Venture Agreement, dated as of September 7, 1999, between MHG LLC and Chodorow Ventures LLC;

(iii)any other guaranties or indemnification obligations granted to third parties relating to the Transferred Business.

(b)Release. Following the date hereof, Morgans Group LLC will use its reasonable best efforts to obtain a complete release of MHG LLC (and all other members of the MHG LLC Group if applicable) from all liabilities and obligations under the Guarantees and Other Obligations.  The release relating to such guarantees shall be in form and substance reasonably satisfactory to MHG LLC; provided, however, that Morgans Group LLC shall not be required to spend more than a nominal amount of its own funds to obtain such release.

(c)Limitations on Indemnification.   In determining indemnification payments pursuant to this Section 2.4, the parties shall make appropriate adjustments for recovery of tax benefits and insurance coverage. A party entitled to indemnification pursuant to this Section 2.4 shall use its commercially reasonable efforts to mitigate any damages for which it may be entitled to indemnification hereunder. If each party owes an amount to the other, the two amounts shall be offset and netted against each other and only the net amount shall be paid.

Section 2.5Procedures for Defense, Settlement and Indemnification of Third Party Claims.

(a)Notice of Claims.  If an MHG LLC Indemnitee or a Morgans Group LLC Indemnitee, as applicable (an “Indemnitee”), receives notice or otherwise learns of the assertion by a person (including any regulatory authority) who is not a member of the MHG LLC Group or the Morgans Group LLC Group of any claim or of the commencement by any such person of any Action (collectively, a “Third Party Claim”) with respect to which a party (an “Indemnifying Party”) may be obligated to provide indemnification to such Indemnitee pursuant to Section 2.2, 2.3 or 2.4, MHG LLC and

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Morgans Group LLC, as applicable, will ensure that such Indemnitee shall give such Indemnifying Party written notice thereof within thirty (30) days after becoming aware of such Third Party Claim.  Any such notice shall describe the Third Party Claim in reasonable detail.  Notwithstanding the foregoing, the delay or failure of any Indemnitee or other person to give notice as provided in this Section 2.5(a) shall not relieve the related Indemnifying Party of its obligations under this Article II, except to the extent that such Indemnifying Party is actually and substantially prejudiced by such delay or failure to give notice; provided that the failure to notify the Indemnifying Party shall not relieve it from any liability that it may have to an Indemnitee otherwise than under this Article II.

(b)Defense of Claims.  An Indemnifying Party shall retain counsel reasonably satisfactory to the Indemnitee and shall manage the defense of and may settle or compromise any Third Party Claim so long as such settlement or compromise contains a full and unconditional release of each Indemnified Party and does not include any statement as to any admission of fault, culpability or failure to act by or on behalf of any Indemnitee.  Within thirty (30) days after the receipt of notice from an Indemnitee in accordance with Section 2.5(a) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee that the Indemnifying Party will assume responsibility for managing the defense of such Third Party Claim.

(c)Defense By Indemnitee.  If an Indemnifying Party fails to assume responsibility for managing the defense of a Third Party Claim or to diligently defend such Third Party Claim, or fails to notify an Indemnitee that it will assume responsibility as provided in Section 2.5(b), such Indemnitee may manage the defense of such Third Party Claim and may settle such Third Party Claim without the consent of the Indemnifying Party.  In any proceeding relating to a Third Party Claim, any Indemnitee shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such Indemnitee unless the named parties to any such proceeding (including any impleaded parties) include both the Indemnifying Party and the Indemnitee and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them.  It is understood that the Indemnifying Party shall not, in respect of the legal expenses of all Indemnitees in connection with any Third Party Claim or related Third Party Claims in the same jurisdiction, be liable for the reasonably incurred fees and expenses of more than one separate firm (in addition to any local counsel) for all Indemnitees.

(d)No Settlement By Indemnitee Without Consent.  Unless the Indemnifying Party has failed to manage the defense of the Third Party Claim in accordance with the terms of this Agreement, or has failed to notify an Indemnitee that it will assume responsibility as provided in Section 2.5(b), no Indemnitee may settle or compromise any Third Party Claim without the consent of the Indemnifying Party.

Section 2.6Additional Matters Regarding Indemnification.

(a)Substitution.  In the event of an Action in which the Indemnifying Party is not a named defendant, if either the Indemnitee or the Indemnifying Party shall so request, the parties shall endeavor to substitute the Indemnifying Party for the named

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defendant.  If such substitution or addition cannot be achieved for any reason or is not requested, the rights and obligations of the parties regarding indemnification and the management of the defense of claims as set forth in this Article II shall not be altered.

(b)Subrogation.  In the event of payment by or on behalf of any Indemnifying Party to or on behalf of any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee, in whole or in part based upon whether the Indemnifying Party has paid all or only part of the Indemnitee’s Liability, as to any events or circumstances in respect of which such Indemnitee may have any right, defense or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person.  Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense of such Indemnifying Party, in prosecuting any subrogated right, defense or claim.

Section 2.7Survival of Indemnities.  The rights and obligations of MHG LLC and Morgans Group LLC under this Article II shall survive the sale or other transfer by any party of any assets or businesses or the assignment by it of any Liabilities or the sale by any member of the MHG LLC Group or the Morgans Group LLC Group of the capital stock or other equity interests of any subsidiary to any person.

Section 2.8Agreement For Exchange of Information.  Subject to applicable confidentiality restrictions and subject to providing the contemplated Information only to those persons who require such Information in the course of their duties, each of MHG LLC and Morgans Group LLC agree to provide, or cause to be provided, to each other, at any time after the IPO Closing Date, as soon as reasonably practicable after written request therefor, any Information in the possession or under the control of such party that the requesting party reasonably needs:

(a)to comply with reporting, disclosure, filing or other requirements imposed on the requesting party by a regulatory authority having jurisdiction over the requesting party or otherwise required by law;

(b)for use in any regulatory proceeding, judicial proceeding or other proceeding or in order to satisfy audit, accounting, claims, regulatory, litigation or other similar requirements;

(c)to comply with its obligations under this Agreement; or

(d)in connection with the ongoing businesses of MHG LLC or Morgans Group LLC as it relates to the conduct of such businesses, as the case may be;

provided, however, that in the event that either party determines that any such provision of Information could be commercially detrimental, violate any applicable law or agreement, or waive any attorney-client privilege, the parties shall take all reasonable measures to permit the compliance with such obligations in a manner that avoids any such harm or consequence.

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Section 2.9Other Agreements.

(a)Agreements Regarding Restaurant JV Agreement.  MHG LLC hereby agrees, for the benefit of Morgans Group LLC, to provide Morgans Group LLC with the benefit of any of its rights and benefits under the Joint Venture Agreement (the “Restaurant JV Agreement”), dated as of September 7, 1999, between MHG LLC and Chodorow Ventures LLC.  Morgans Group LLC hereby agrees, for the benefit of MHG LLC, to fulfill all of the obligations of Venturer A (as defined in the Restaurant JV Agreement) under the Restaurant JV Agreement.  In furtherance thereof, MHG LLC hereby agrees, if necessary pursuant to the terms of the Restaurant JV Agreement, to take any and all actions and give any notices thereunder, and, if requested by Morgans Group LLC, to exercise any rights and fulfill any obligations of Venturer A thereunder in order to permit Morgans Group LLC to obtain all of the rights and benefits of Venturer A the Restaurant JV Agreement, in all cases at the expense of Morgans Group LLC.

(b)Other Agreements.  MHG LLC and Morgans Group LLC agree to execute and deliver, or to use their reasonable commercial efforts to cause to be executed and delivered by the appropriate parties, such other agreements, instruments and other documents as may be necessary or desirable in order to effect the purposes of this Agreement and the Formation and Structuring Transactions.  The parties shall cooperate reasonably with each other in connection with any steps required to be taken as part of their respective obligations under this Agreement and the Formation and Structuring Transactions, and shall (a) furnish upon request to each other such further information; and (b) do such other acts and things, all as the other party may reasonably request for the purpose of carrying out the intent of this Agreement and the Formation and Structuring Transactions.

ARTICLE III
MISCELLANEOUS

Section 3.1Entire Agreement.  This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and shall supersede all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof.

Section 3.2Governing Law.  This Agreement shall be governed by and construed in accordance with the laws of the State of New York.

Section 3.3Notices.  All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, by facsimile with confirmation of receipt, by express or overnight mail delivered by a nationally recognized air courier (delivery charges prepaid), or by registered or certified mail (postage prepaid, return receipt requested) as follows:

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if to MHG LLC:

Morgans Hotel Group LLC
c/o NorthStar Partnership, L.P.
527 Madison Avenue, 16^th Floor
New York, New York 10022
Attn: Richard McCready
Facsimile: (212) 319-4557

if to Morgans Group LLC:

c/o Morgans Hotel Group Co.
475 Tenth Avenue
New York, New York 10018
Attn.:  Chief Financial Officer
Facsimile:  (212) 277-4260

or to such other address as the party to whom notice is given may have previously furnished to the other in writing in the manner set forth above.  Any notice or communication delivered in person shall be deemed effective on delivery.  Any notice or communication sent by facsimile or by overnight air courier shall be deemed effective on the first Business Day following the day on which such notice or communication was sent.  Any notice or communication sent by registered or certified mail shall be deemed effective on the third Business Day following the day on which such notice or communication was mailed.  As used in this Section 3.3, “Business Day” means any day other than a Saturday, a Sunday or a day on which banking institutions located in the State of New York are authorized or obligated by law or executive order to close.

Section 3.4Parties in Interest.  This Agreement and the other documents referred to herein, shall be binding upon MHG LLC and Morgans Group LLC and inure solely to the benefit of the Morgans Group LLC Group and the MHG LLC Group and their respective permitted assigns, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement.

Section 3.5Counterparts.  This Agreement and the other documents referred to herein, may be executed in counterparts, each of which shall be deemed to be an original but all of which shall constitute one and the same agreement.

Section 3.6Assignment.  The rights and obligations in this Agreement may not be assigned or delegated by any party hereto, in whole or in part, without the express prior written consent of the other party hereto.

Section 3.7Severability.  If any term or other provision of this Agreement is determined by a nonappealable decision by a court, administrative agency or arbitrator to be invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force

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and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party.  Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in an acceptable manner to the end that transactions contemplated hereby are fulfilled to the fullest extent possible.

Section 3.8Failure or Indulgence Not Waiver.  No failure or delay on the part of either party hereto in the exercise of any right hereunder shall impair such right or be construed to be a waiver of, or acquiescence in, any breach of any representation, warranty or agreement herein, nor shall any single or partial exercise of any such right preclude other or further exercise thereof or of any other right.

Section 3.9Amendment.  No change or amendment will be made to this Agreement except by an instrument in writing signed on behalf of each of the parties to this Agreement.

Section 3.10Interpretation.  The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.  When a reference is made in this Agreement to an Article or a Section, such reference shall be to an Article or Section of this Agreement unless otherwise indicated.

[signature pages follow]

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WHEREFORE, the parties have signed this Agreement effective as of the date first set forth above.

MORGANS HOTEL GROUP LLC			MORGANS GROUP LLC
			By:	Morgans Hotel Group Co., its managing member
By:	/s/ W. Edward Scheetz
	Name:	W. Edward Scheetz	By:	/s/ W. Edward Scheetz
	Title:	Chief Executive Officer		Name:	W. Edward Scheetz
				Title:	Chief Executive Officer

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EX-10.22

Exhibit 10.22

MORGANS HOTEL GROUP CO.

2006 OMNIBUS STOCK INCENTIVE PLAN

SECTION 1.GENERAL PURPOSE OF PLAN.

The name of this plan is the Morgans Hotel Group Co. 2006 Omnibus Stock Incentive Plan (the “Plan”).  The purpose of the Plan is to enable the Company to attract and retain highly qualified personnel who will contribute to the Company’s success and to provide incentives to Participants (hereinafter defined) that are linked directly to increases in stockholder value and will therefore inure to the benefit of all stockholders of the Company.  To accomplish the foregoing, the Plan provides that the Company may grant awards of Stock, Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock and Other Awards (each as hereinafter defined).

SECTION 2.DEFINITIONS.

For purposes of the Plan, the following terms shall be defined as set forth below:

(a)           “Administrator” means the Board, or if and to the extent the Board does not administer the Plan, the Committee in accordance with Section 3 below.

(b)           “Affiliate” means any entity other than the Company and its Subsidiaries that is designated by the Board as a participating employer under the Plan, provided that the Company directly or indirectly owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity.

(c)           “Automatic Non-Employee Director Stock Awards” has the meaning set forth in Section 10 hereof.

(d)           “Award” means an award of Incentive Stock Options, Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock, Stock or Other Awards under the Plan.

(e)           “Beneficial Owner” shall have the meaning set forth in Rule 13d-3 under the Exchange Act.

(f)            “Board” means the Board of Directors of the Company.

(g)           “Book Value” means, as of any given date, on a per share basis (i) the shareholders’ equity in the Company as of the end of the immediately preceding fiscal year as reflected in the Company’s consolidated balance sheet, subject to such adjustments as the Administrator shall specify at or after grant, divided by (ii) the number of then outstanding shares of Stock as of such year-end date (as adjusted by the Administrator for subsequent events).

(h)           “Change in Control” means the occurrence of any one of the following events:

(i)            individuals who, on the Effective Date, constitute the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to the Effective Date, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board shall be deemed to be an Incumbent Director;

(ii)           any Person is or becomes a Beneficial Owner, directly or indirectly, of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions:  (A) by the Company or any Subsidiary, (B) by

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any employee benefit plan (or related trust) sponsored or maintained by the Company or any Subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities, (D) pursuant to a Non-Qualifying Transaction (as defined in paragraph (iii)), (E) pursuant to any acquisition by a Participant or any group of persons including a Participant (or any entity controlled by a Participant or any group of persons including a Participant); (F) a transaction (other than one described in (iii) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approve a resolution providing expressly that the acquisition pursuant to this clause (F) does not constitute a Change in Control under this paragraph (ii); or (G) by NCIC or NorthStar Partnership, L.P. or any of their majority-owned or controlled subsidiaries, partnerships or affiliates;

(iii)          the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination:  (A) at least 50% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of at least 80% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such

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Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than NCIC or NorthStar Partnership, L.P. or any of their majority-owned or controlled subsidiaries, partnerships or affiliates or any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 35% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least half of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

(iv)          the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or the consummation of a sale of all or substantially all of the Company’s assets.

(i)            “Code” means the Internal Revenue Code of 1986, as amended from time to time, or any successor thereto.

(j)            “Committee” means any committee the Board may appoint to administer the Plan.  To the extent necessary and desirable, the Committee shall be composed entirely of individuals who meet the qualifications referred to in Section 162(m) of the Code and Rule 16b-3 under the Exchange Act.  If at any time or to any extent the Board shall not administer the Plan, then the functions of the Board specified in the Plan shall be exercised by the Committee.

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(k)           “Company” means Morgans Hotel Group Co., a Delaware corporation (or any successor corporation).

(l)            “Effective Date” has the meaning set forth in Section 15 hereof.

(m)          “Eligible Recipient” means an officer, director (including a Non-Employee Director), employee, co-employee, consultant or advisor of the Company or of any Parent or Subsidiary who provide services to the Company.

(n)           “Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.

(o)           “Fair Market Value” means, as of any given date, the fair market value of a share of Stock as determined by the Administrator using any reasonable method and in good faith (such determination will be made in a manner that satisfies Section 409A of the Code and in good-faith as required by Section 422(c)(1) of the Code); provided that (i) if shares of Stock are admitted to trading on a national securities exchange, the fair market value of a share of Stock on any date shall be the closing sale price reported for such share on the exchange on such date on which a sale was reported; (ii) if shares of Stock are admitted to quotation on the National Association of Securities Dealers Automated Quotation System (“NASDAQ”) or a successor quotation system and has been designated as a National Market System (“NMS”) security, fair market value of a share of Stock on any date shall be the closing sale price reported for such share on the system on such date on which a sale was reported; and (iii) if shares of Stock are admitted to quotation on the NASDAQ but have not been designated as an NMS security, fair market value of a share of Stock on any such date shall be the average of the highest bid and lowest asked prices for such share of Stock on the system on such date on which both the bid and asked prices were reported.

(p)           “Free Standing Rights” has the meaning set forth in Section 8 hereof.

(q)           “Free Standing Stock Appreciation Rights” has the meaning set forth in Section 8 hereof.

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(r)            “Immediate Family” means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law or sister-in-law, and shall include adoptive relationships of the Participant and family limited partnerships, trusts or similar entities which are primarily for the benefit of the Participant and his or her Immediate Family.

(s)           “Incentive Stock Option” means any Stock Option intended to be designated as an “incentive stock option” within the meaning of Section 422 of the Code.

(t)            “Initial Offering Price” means the “Price to Public” of the shares of Stock that the Company issues and sells to the IPO Underwriters pursuant to the underwriting agreement, as set forth on the cover page of the IPO Prospectus.

(u)           “Initial Public Offering” means the initial underwritten public offering of Stock pursuant to the IPO Prospectus.

(v)           “IPO Prospectus” means the Company’s prospectus relating to the Initial Public Offering as filed with the Securities and Exchange Commission pursuant to Rule 424(b) under the Securities Act and deemed a part of the Company’s registration statement on Form S-1 (No. 333-129277) at the time such registration statement is declared effective by the Securities and Exchange Commission.

(w)          “IPO Underwriters” means the underwriters of the Initial Public Offering.

(x)            “LLC Unit” or “LLC Units” means a membership interest or membership interests in Morgans Group LLC, a Delaware limited liability company and the entity through which the Company conducts a significant portion of its business.

(y)           “Non-Employee Director” means a director of the Company who is not an employee of the Company.

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(z)            “Non-Qualified Stock Option” means any Stock Option that is not an Incentive Stock Option, including any Stock Option that provides (as of the time such Stock Option is granted) that it will not be treated as an Incentive Stock Option.

(aa)         “NCIC” means NorthStar Capital Investment Corp., a Maryland corporation.

(bb)         “Other Awards” means an award granted pursuant to Section 11 hereof.

(cc)         “Overallotment IPO Shares” means any shares of Stock that the Company issues and sells to the IPO Underwriters as a result of any exercise of the overallotment option granted by the Company to the IPO Underwriters pursuant to the underwriting agreement relating to the Initial Public Offering.

(dd)         “Parent” means any corporation (other than the Company) in an unbroken chain of corporations ending with the Company, if each of the corporations in the chain (other than the Company) owns stock possessing 50% or more of the combined voting power of all classes of stock in one of the other corporations in the chain.

(ee)         “Participant” means any Eligible Recipient selected by the Administrator, pursuant to the Administrator’s authority in Section 3 below, to receive an Award.

(ff)           “Person” means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization, other entity or “group” (as defined in the Exchange Act).

(gg)         “Plan” has the meaning set forth to it in Section 1 hereof.

(hh)         “Related Rights” has the meaning set forth in Section 8 hereof.

(ii)           “Related Stock Appreciation Rights” has the meaning set forth in Section 8 hereof.

(jj)           “Restricted Period” has the meaning set forth in Section 9 hereof.

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(kk)         “Reserved Shares” has the meaning set forth in Section 4 hereof.

(ll)           “Restricted Stock” means shares of Stock subject to certain restrictions granted pursuant to Section 9 below.

(mm)       “Securities Act” means the Securities Act of 1933, as amended.

(nn)         “Stock” means the common stock, par value $0.01 per share, of the Company.

(oo)         “Stock Appreciation Right” means the right pursuant to an award granted under Section 8 below to receive an amount equal to the excess, if any, of (A) the Fair Market Value, as of the date such Stock Appreciation Right or portion thereof is surrendered, of the shares of Stock covered by such right or such portion thereof, over (B) the aggregate exercise price of the shares of Stock covered by such right or such portion thereof.

(pp)         “Stock Option” means an option to purchase shares of Stock granted pursuant to Section 7 below.

(qq)         “Subsidiary” means any corporation or other entity (other than the Company) in which the Company has a controlling interest, either directly or indirectly.

SECTION 3.ADMINISTRATION.

(a)           The Plan shall be administered in accordance with the requirements of Section 162(m) of the Code (but only to the extent necessary and desirable to maintain qualification of Awards under the Plan under Section 162(m) of the Code) and, to the extent applicable, Rule 16b-3 under the Exchange Act by the Board or, at the Board’s sole discretion, by the Committee, which shall be appointed by the Board, and which shall serve at the pleasure of the Board.

(b)           The Administrator shall have the power and authority to grant Stock Options, Stock Appreciation Rights, Restricted Stock, Stock, Other Awards or any

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combination of the foregoing hereunder to Eligible Recipients pursuant to the terms of the Plan.  In particular, but without limitation, the Administrator shall have the authority:

(i)            to select those Eligible Recipients who shall be Participants;

(ii)           to determine whether and to what extent Awards are to be granted hereunder to Participants;

(iii)          to determine the number of shares of Stock to be covered by each Award granted hereunder;

(iv)          to determine the terms and conditions, not inconsistent with the terms of the Plan, of each Award granted hereunder, including the waiver or modification of any such terms or conditions;

(v)           to determine the terms and conditions, not inconsistent with the terms of the Plan, which shall govern all written instruments evidencing Awards granted hereunder, including the waiver or modification of any such terms or conditions;

(vi)          to adopt, alter and repeal such administrative rules, guidelines and practices governing the Plan as it shall from time to time deem advisable; and

(vii)         to construe, interpret and implement the terms and provisions of the Plan and any Award issued under the Plan (and any award agreements relating thereto) and to otherwise supervise the administration of the Plan.

(c)           The Administrator may, in its absolute discretion, without amendment to the Plan, (i) accelerate the date on which any Stock Option granted under the Plan becomes exercisable, waive or amend the operation of Plan provisions respecting exercise after termination of employment or otherwise adjust any of the terms of such Stock Option, and (ii) accelerate the lapse of restrictions, or waive any condition imposed

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hereunder, with respect to any share of Restricted Stock or otherwise adjust any of the terms applicable to any such Award; provided, however, that no action under this Section 3(c) shall adversely affect any outstanding Award without the consent of the holder thereof.

(d)           All decisions made by the Administrator pursuant to the provisions of the Plan shall be final, conclusive and binding on all persons, including the Company and the Participants.  No member of the Board or the Committee, nor any officer or employee of the Company acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation.

SECTION 4.SHARES RESERVED FOR ISSUANCE UNDER THE PLAN.

(a)           The total number of shares of Stock reserved and available for issuance under the Plan (the “Reserved Shares”) shall initially be 3,500,000 shares of Stock.  The number of Reserved Shares shall be automatically increased (without any further action by the Board or the stockholders of the Company) by the number of shares of Stock that is equal to ten percent (10%) of any Overallotment IPO Shares; provided, however, that the maximum number of Reserved Shares shall not exceed 3,770,000, subject to adjustment as set forth in Section 5 below.  Such shares of Stock may consist, in whole or in part, of authorized and unissued shares of Stock or treasury shares.

(b)           Subject to the provisions of Section 162(m) of the Code, as from time to time applicable, to the extent that (i) a Stock Option expires or is otherwise cancelled or terminated without being exercised, or (ii) any shares of Stock subject to any Awards granted hereunder are cancelled, terminated, forfeited or withheld to pay taxes, such shares of Stock shall again be available for issuance in connection with future awards granted under the Plan.

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(c)           The aggregate number of shares of Stock as to which Awards may be granted to any individual during any calendar year may not, subject to adjustment as provided in Section 5, exceed 1,600,000.

(d)           The aggregate number of shares of Stock that may be delivered pursuant to the exercise of Incentive Stock Options may not, subject to adjustment as provided in Section 5, exceed 2,400,000.

SECTION 5.EQUITABLE ADJUSTMENTS.

Upon the occurrence of any merger, reorganization, consolidation, recapitalization, stock dividend or other change in corporate structure affecting the Stock or other corporate transaction, the Administrator shall make appropriate equitable adjustments, which may include, without limitation, adjustments to: (i) the aggregate number of shares of Stock reserved for issuance under the Plan, (ii) the kind, number and exercise price of outstanding Stock Options and Stock Appreciation Rights granted under the Plan set forth in Sections 4(a), 4(c) and 4(d) of the Plan, and (iii) the kind, number and purchase price of shares of Stock subject to outstanding awards of Restricted Stock granted under the Plan, in each case as may be determined by the Administrator, in its sole discretion.  Such other substitutions or adjustments shall be made as may be determined by the Administrator, in its sole discretion.  In connection with any event described in this paragraph, the Administrator may provide, in its sole discretion, for the cancellation of any outstanding Awards in exchange for payment in cash or other property equal to the Fair Market Value of the Stock covered by such Awards, reduced by the option or exercise price, if any.

SECTION 6.ELIGIBILITY.

Eligible Recipients shall be eligible to be granted Stock Options, Stock Appreciation Rights, Restricted Stock, Stock, Other Awards or any combination of the foregoing hereunder.  The Participants under the Plan shall be selected from time to time by the Administrator, in its sole discretion, from among the Eligible Recipients, and the

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Administrator shall determine, in its sole discretion, the number of shares of Stock covered by each such Award.

SECTION 7.STOCK OPTIONS.

Stock Options may be granted alone or in addition to other Awards granted under the Plan.  Any Stock Option granted under the Plan shall be in such form as the Administrator may from time to time approve, and the provisions of Stock Option awards need not be the same with respect to each Participant.  Participants who are granted Stock Options shall enter into an award agreement with the Company, in such form as the Administrator shall determine, which shall set forth, among other things, the option price of the Stock Option, the term of the Stock Option and provisions regarding exercisability of the Stock Option granted thereunder.

The Stock Options granted under the Plan may be of two types: (i) Incentive Stock Options and (ii) Non-Qualified Stock Options.

The Administrator shall have the authority to grant to any officer or employee of the Company or of any Parent or Subsidiary (including directors who are also officers of the Company) Incentive Stock Options, Non-Qualified Stock Options, or both types of Stock Options (in each case with or without Stock Appreciation Rights).  Directors who are not also employees or officers of the Company or of any Parent or Subsidiary, consultants or advisors to the Company or to any Parent or Subsidiary may only be granted Non-Qualified Stock Options (with or without Stock Appreciation Rights).  To the extent that any Stock Option does not qualify as an Incentive Stock Option, it shall constitute a separate Non-Qualified Stock Option.  More than one Stock Option may be granted to the same Participant and be outstanding concurrently hereunder.

Stock Options granted under the Plan shall be subject to the following terms and conditions and to the award agreement evidencing each Award which shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable:

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(a)           Option Price.  The option price per share of Stock purchasable under a Stock Option shall be determined by the Administrator in its sole discretion at the time of grant but shall not, in the case of Incentive Stock Options, be less than 100% of the Fair Market Value of the Stock on such date (110% of the Fair Market Value per share on such date if, on such date, the Eligible Recipient owns, or is deemed to own under the Code, stock possessing more than ten percent (a “Ten Percent Owner”) of the total combined voting power of all classes of Stock).

(b)           Option Term.  The term of each Stock Option shall be fixed by the Administrator, but no Stock Option shall be exercisable more than ten years after the date such Stock Option is granted; provided, however, that if the Eligible Recipient is a Ten Percent Owner, an Incentive Stock Option may not be exercisable after the expiration of five years from the date such Incentive Stock Option is granted.

(c)           Exercisability.  Stock Options shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Administrator at or after the time of grant; provided, however, that no action following the time of grant shall adversely affect any outstanding Stock Option without the consent of the holder thereof.  The Administrator may provide at the time of grant, in its sole discretion, that any Stock Option shall be exercisable only in installments, and the Administrator may waive such installment exercise provisions at any time, in whole or in part, based on such factors as the Administrator may determine, in its sole discretion, including but not limited to in connection with any Change in Control of the Company.

(d)           Method of Exercise.  Subject to Section 7(c), Stock Options may be exercised in whole or in part at any time during the option term, by giving written notice of exercise to the Company specifying the number of shares of Stock to be purchased, accompanied by payment in full of the purchase price in cash or its equivalent, as determined by the Administrator.  As determined by the Administrator, in its sole discretion, payment in whole or in part may also be made (i) in the form of unrestricted Stock already owned by the Participant which, (x) in the case of unrestricted Stock

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acquired upon exercise of an option, have been owned by the Participant for more than six months on the date of surrender, and (y) has a Fair Market Value on the date of surrender equal to the aggregate option price of the Stock as to which such Stock Option shall be exercised; (ii) in the case of the exercise of a Non-Qualified Stock Option, in the form of Restricted Stock subject to an award hereunder (based, in each case, on the Fair Market Value of the Stock on the date the Stock Option is exercised); provided, however, that in the case of an Incentive Stock Option, the right to make payment in the form of already owned shares of Stock may be authorized only at the time of grant; (iii) any other form of consideration approved by the Administrator and permitted by applicable law; or (iv) any combination of the foregoing.  If payment of the option price of a Non-Qualified Stock Option is made in whole or in part in the form of Restricted Stock, the shares of Stock received upon the exercise of such Stock Option shall be restricted in accordance with the original terms of the Restricted Stock award in question, except that the Administrator may direct that such restrictions shall apply only to that number of shares of Stock equal to the number of shares surrendered upon the exercise of such Stock Option.

(e)           Rights as Stockholder.  Except as otherwise provided in an individual award agreement, a Participant shall generally have the rights to dividends and any other rights of a stockholder with respect to the Stock subject to the Stock Option only after the Participant has given written notice of exercise, has paid in full for such shares of Stock, and, if requested, has given the representation described in paragraph (b) of Section 14 below.

(f)            Non-Transferability of Stock Options.  Except as otherwise provided by the Administrator or in a Participant’s award agreement, Stock Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will, by the laws of descent or distribution, by instrument to an inter vivos or testamentary trust in which the Stock Options are to be passed to beneficiaries upon the death of the Participant, or by gift to Immediate Family, and may be exercised, during the lifetime of the Participant, only by the Participant or the Participant’s legal representative.

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(g)           Termination of Employment or Service.  In the event that a Participant ceases to be employed by or to provide services to any of the Company, any Parent or any Subsidiary, any outstanding Stock Options previously granted to such Participant shall be exercisable at such time or times and subject to such terms and conditions as set forth in the award agreement or any other agreement governing such Awards.  Unless otherwise provided in the award agreement, Stock Options granted to such Participant, to the extent they were not vested and exercisable at the time of such termination, shall expire on the date of such termination.

(h)           Annual Limit on Incentive Stock Options.  In addition to the limitation applicable to Stock Options in Section 4(c) above, to the extent that the aggregate Fair Market Value (determined as of the date the Incentive Stock Option is granted) of shares of Stock with respect to which Incentive Stock Options granted to a Participant under this Plan and all other option plans of the Company or of any Parent or Subsidiary become exercisable for the first time by the Participant during any calendar year exceeds $100,000 (as determined in accordance with Section 422(d) of the Code), the portion of such Incentive Stock Options in excess of $100,000 shall be treated as Non-Qualified Stock Options.

SECTION 8.STOCK APPRECIATION RIGHTS.

Stock Appreciation Rights may be granted either alone (“Free Standing Rights”) or in conjunction with all or part of any Stock Option granted under the Plan (“Related Rights”).  In the case of a Non-Qualified Stock Option, Related Rights may be granted either at or after the time of the grant of such Stock Option.  In the case of an Incentive Stock Option, Related Rights may be granted only at the time of the grant of the Incentive Stock Option.  The Administrator shall determine the Eligible Recipients to whom, and the time or times at which, grants of Stock Appreciation Rights shall be made, the number of shares of Stock to be awarded, the exercise price, and all other conditions of Stock Appreciation Rights.  The provisions of Stock Appreciation Rights need not be the same with respect to each Participant.

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Stock Appreciation Rights granted under the Plan shall be subject to the following terms and conditions and to the award agreement evidencing such Award which shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable:

(a)           Awards. The prospective recipient of a Stock Appreciation Right shall not have any rights with respect to such Award, unless and until such recipient has executed an agreement evidencing the award and delivered a fully executed copy thereof to the Company, within a period of sixty days (or such other period as the Administrator may specify) after the award date.  Participants who are granted Stock Appreciation Rights shall have no rights as stockholders of the Company with respect to the grant or exercise of such rights.

(b)           Exercisability.

(i)            Stock Appreciation Rights that are Free Standing Rights (“Free Standing Stock Appreciation Rights”) shall be exercisable at such time or times and subject to such terms and conditions as shall be determined by the Administrator at or after grant.

(ii)           Stock Appreciation Rights that are Related Rights (“Related Stock Appreciation Rights”) shall be exercisable only at such time or times and to the extent that the Stock Options to which they relate shall be exercisable in accordance with the provisions of Section 7 above and this Section 8 of the Plan; provided, however, that a Related Stock Appreciation Right granted in connection with an Incentive Stock Option shall be exercisable only if and when the Fair Market Value of the Stock subject to the Incentive Stock Option exceeds the option price of such Stock Option.

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(c)           Payment Upon Exercise.

(i)            Upon the exercise of a Free Standing Stock Appreciation Right, the Participant shall be entitled to receive up to, but not more than, an amount in cash or that number of shares of Stock (or any combination of cash and shares of Stock, as determined by the Administrator) equal in value to the excess of the Fair Market Value of one share of Stock as of the date of exercise over the price per share of Stock specified in the Free Standing Stock Appreciation Right (which price shall be no less than 100% of the Fair Market Value of the Stock on the date of grant) multiplied by the number of shares of Stock in respect of which the Free Standing Stock Appreciation Right is being exercised, with the Administrator having the right to determine the form of payment.

(ii)           A Related Right may be exercised by a Participant by surrendering the applicable portion of the related Stock Option.  Upon such exercise and surrender, the Participant shall be entitled to receive up to, but not more than, an amount in cash or that number of shares of Stock (or any combination of cash and shares of Stock) equal in value to the excess of the Fair Market Value of one share of Stock as of the date of exercise over the option price per share of Stock specified in the related Stock Option multiplied by the number of shares of Stock in respect of which the Related Stock Appreciation Right is being exercised, with the Administrator having the right to determine the form of payment.  Stock Options which have been so surrendered, in whole or in part, shall no longer be exercisable to the extent the Related Rights have been so exercised.

(d)           Non-Transferability.

(i)            Free Standing Stock Appreciation Rights shall be transferable only when and to the extent that a Stock Option would be transferable under paragraph (f) of Section 7 of the Plan.

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(ii)           Related Stock Appreciation Rights shall be transferable only when and to the extent that the underlying Stock Option would be transferable under paragraph (f) of Section 7 of the Plan.

(e)           Termination of Employment or Service.

(i)            In the event that a Participant ceases to be employed by or to provide services to any of the Company, any Parent or any Subsidiary, any outstanding Stock Appreciation Rights previously granted to such Participant shall be exercisable at such time or times and subject to such terms and conditions as set forth in the award agreement or any other agreement governing such Awards.  Unless otherwise provided in the award agreement, Stock Appreciation Rights granted to such Participant, to the extent they were not vested and exercisable at the time of such termination, shall expire on the date of such termination.

(ii)           In the event of the termination of employment or service of a Participant who has been granted one or more Related Stock Appreciation Rights, such rights shall be exercisable at such time or times and subject to such terms and conditions as applicable to the related Stock Options.

(f)            Term.

(i)            The term of each Free Standing Stock Appreciation Right shall be fixed by the Administrator, but no Free Standing Stock Appreciation Right shall be exercisable more than ten years after the date such right is granted.

(ii)           The term of each Related Stock Appreciation Right shall be the term of the Stock Option to which it relates, but no Related Stock Appreciation Right shall be exercisable more than ten years after the date such right is granted.

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SECTION 9.RESTRICTED STOCK.

Awards of Restricted Stock may be issued either alone or in addition to other Awards granted under the Plan and shall be evidenced by an award agreement.  The Administrator shall determine the Eligible Recipients to whom, and the time or times at which, Restricted Stock awards shall be made; the number of shares of Restricted Stock to be awarded; the price, if any, to be paid by the Participant for the acquisition of Restricted Stock; the Restricted Period (as defined in Section 9(c)) applicable to Restricted Stock awards; and all other conditions applicable to Restricted Stock awards.  The provisions of the awards of Restricted Stock need not be the same with respect to each Participant.

(a)           Purchase Price. The price per share of Restricted Stock, if any, that a Participant must pay for shares of Restricted Stock purchasable under an award of Restricted Stock shall be determined by the Administrator in its sole discretion at the time of grant.

(b)           Awards and Certificates. The prospective recipient of a Restricted Stock award shall not have any rights with respect to any such Award, unless and until such recipient has executed an award agreement evidencing the Award and delivered a fully executed copy thereof to the Company, within such period as the Administrator may specify after the award date.  Each Participant who is granted an award of Restricted Stock shall be issued a stock certificate in respect of such shares of Restricted Stock, which certificate shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to any such Award; provided that the Company may require that the stock certificates evidencing Restricted Stock granted hereunder be held in the custody of the Company until the restrictions thereon shall have lapsed, and that, as a condition of any Restricted Stock award, the Participant shall have delivered a stock power, endorsed in blank, relating to the shares of Restricted Stock covered by such Award.

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(c)           Nontransferability. The Restricted Stock awards granted pursuant to this Section 9 shall be subject to the restrictions on transferability set forth in this paragraph (c).  During such period as may be set by the Administrator in the award agreement (the “Restricted Period”), the Participant shall not be permitted to sell, transfer, pledge, hypothecate or assign shares of Restricted Stock awarded under the Plan except by will or the laws of descent and distribution; provided that the Administrator may, in its sole discretion, provide for the lapse of such restrictions in installments and may accelerate or waive such restrictions in whole or in part based on such factors and such circumstances as the Administrator may determine in its sole discretion.  The Administrator may also impose such other restrictions and conditions, including the achievement of pre-established corporate performance goals, on awarded Restricted Stock as it deems appropriate.  Any attempt to dispose of any Restricted Shares in contravention of any such restrictions shall be null and void and without effect.

(d)           Rights as a Stockholder. Except as provided in Section 9(b) or as otherwise provided in an award agreement, the Participant shall possess all incidents of ownership with respect to shares of Restricted Stock during the Restricted Period, including the right to receive dividends with respect to such shares and to vote such shares.  Certificates for unrestricted shares shall be delivered to the Participant promptly after, and only after, the Restricted Period shall expire without forfeiture in respect of such awards of Restricted Stock except as the Administrator, in its sole discretion, shall otherwise determine.

(e)           Termination of Employment. In the event that a Participant ceases to be employed by or to provide services to any of the Company, any Parent or any Subsidiary during the Restricted Period, any rights pursuant to any Award of Restricted Stock previously granted to such Participant shall be subject to such terms and conditions as set forth in the award agreement or any other agreement governing such Awards.  Unless otherwise provided in the award agreement or any such other agreement, the Restricted Stock awards granted to such Participant, to the extent that restrictions have not lapsed or

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applicable conditions have not been met at the time of such cessation of employment or provision of services, shall expire on the date of such termination.

SECTION 10.AUTOMATIC GRANTS OF STOCK TO NON-EMPLOYEE DIRECTORS.

The Company shall grant awards of Stock, Restricted Stock and Other Awards to Non-Employee Directors as described in further detail below (the “Automatic Non-Employee Director Awards”).  Such grants shall be automatic and non-discretionary and otherwise subject to the terms and conditions set forth in this Section 10 and the award agreement evidencing such grant, as well as the terms of the Plan.

Each recipient of an Automatic Non-Employee Director Award shall enter into an award agreement with the Company.  The award agreement shall set forth such terms and conditions, not inconsistent with the provisions of this Section 10, with respect to such automatic grant as the Administrator may determine.

(a)           Initial Grant.  Each Non-Employee Director shall automatically be granted an Other Award of restricted stock units having a value as of the date of grant equal to approximately $100,000.  Each such Award shall be granted (i) on the date of the IPO Prospectus or as soon as practicable thereafter, to each Person who is a Non-Employee Director on the date of the IPO Prospectus, with the calculation of the number of shares of  Stock covered by the restricted stock units to be computed by dividing $100,000 by the Initial Offering Price, rounding down to the nearest whole number or (ii) to each Person who is not a Non-Employee Director on the date of the IPO Prospectus, the date of the first Board meeting attended by such Non-Employee Director, with the calculation of the number of shares of  Stock covered by the restricted stock units to be computed by dividing $100,000 by the Fair Market Value of the Stock on the date of grant and rounding down to the nearest whole number.  Forfeiture conditions with respect to one-third of each such Award shall lapse on the first anniversary of the date of the grant and forfeiture conditions with respect to the remaining two-thirds of each such award shall lapse on the last day of each month over the twenty-four month period

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thereafter, and, furthermore, the underlying shares of Stock which are vested shall be delivered at the time the Non-Employee Director ceases to be a member of the Board.  No fractional shares of Restricted Stock shall be included in such Award.

(b)           Annual Grant.  On the first business day after the first annual stockholders’ meeting of the Company, and on the first business day after each such annual stockholders’ meeting of the Company thereafter during the term of the Plan, each Non-Employee Director shall automatically be granted an Other Award of restricted stock units having a value equal to approximately $25,000 as of the date of the grant, provided, however, that each such Person is then a Non-Employee Director of the Company.  The number of shares of Stock covered by the restricted stock units shall be computed by dividing $25,000 by the Fair Market Value of the Stock on the date of grant and rounding down to the nearest whole number.  Such Awards shall be fully vested upon grant and the underlying shares of Stock shall be delivered at the time the Non-Employee Director ceases to be a member of the Board. No fractional shares of Stock shall be included in such Award.

(c)           Stock Availability.  Notwithstanding any of the foregoing, in the event that the number of shares of Stock available for grant under the Plan is not sufficient to accommodate the Automatic Non-Employee Director Awards, then the remaining shares of Stock available for such automatic awards shall be granted to each Non-Employee Director, each of whom is to receive such an award, on a pro-rata basis.  No further grants shall be made until such time, if any, as additional shares of Stock become available for grant under the Plan through action of the Board or the stockholders of the Company to increase the number of shares of Stock that may be issued under the Plan or through cancellation or expiration of Awards previously granted hereunder.

SECTION 11.OTHER AWARDS AND LLC UNITS.

(a)           Nature of Other Awards.  Other forms of Awards (“Other Awards”) that may be granted under the Plan include Awards that are valued in whole or in part by reference to, or are otherwise calculated by reference to or based on, shares of Stock,

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including without limitation, (i) LLC Units, (ii) convertible preferred stock, convertible debentures and other convertible, exchangeable or redeemable securities or equity interests (including LLC Units), (iii) membership interests in a Subsidiary or operating partnership, (iv) Awards valued by reference to Book Value, fair value or Subsidiary performance, and (v) any class of profits interest or limited liability company membership interest created or issued pursuant to the terms of a partnership agreement, limited liability company operating agreement or otherwise by an Affiliate that has elected to be treated as a partnership for federal income tax purposes and qualifies as a “profits interest” within the meaning of Revenue Procedure 93-27 with respect to a Participant who is rendering services to the issuing Affiliate.

(b)           For purposes of calculating the number of shares of Stock underlying an Other Award relative to the total number of shares of Stock reserved and available for issuance under Section 4(a), the Administrator shall establish in good faith the maximum number of shares of Stock to which a grantee of such Other Award may be entitled upon fulfillment of all applicable conditions set forth in the relevant Award documentation, including vesting, accretion factors, conversion ratios, exchange ratios and the like.  If and when any such conditions are no longer capable of being met, in whole or in part, the number of shares of Stock underlying such Other Award shall be reduced accordingly by the Administrator and the related shares of Stock shall be added back to the shares of Stock available for issuance under the Plan.  Other Awards may be issued either alone or in addition to other Awards granted under the Plan and shall be evidenced by an award agreement.  The Administrator shall determine the Eligible Recipients to whom, and the time or times at which, Other Awards shall be made; the number of shares of Stock or LLC Units to be awarded; the price, if any, to be paid by the Participant for the acquisition of Other Awards; and the restrictions and conditions applicable to Other Awards.  Conditions may be based on continuing employment (or other service relationship), computation of financial metrics and/or achievement of pre-established performance goals and objectives.  The Administrator may require that Other Awards be held through a limited partnership, or similar “look-through” entity, and the

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Administrator may require such limited partnership or similar entity to impose restrictions on its partners or other beneficial owners that are not inconsistent with the provisions of this Section 11.  The provisions of the grant of Other Awards need not be the same with respect to each Participant.

(c)           Terms and Conditions.  Other Awards made pursuant to this Section 11 shall be subject to the following terms and conditions:

(i)            Termination of Employment or Service.  In the event that a Participant ceases to be employed by or to provide services to the Company, any Parent, or any Subsidiary, any outstanding Other Awards previously granted to such Participant shall be subject to such terms and conditions as set forth in the award agreement or any other agreement governing such Other Awards.  Except as may otherwise be provided by the Administrator either in the award agreement, such other agreement, or, subject to Section 12 below, in writing after the award agreement is issued, a Participant’s rights in all Other Awards that have not vested shall automatically terminate upon the Participant’s termination of employment (or cessation of service relationship) with the Company, its Parents and its Subsidiaries for any reason.

(ii)           Subject to the provisions of this Plan and the award agreement or such other agreement, shares of Stock subject to awards made under this Section 11 may not be sold, assigned, transferred, pledged or otherwise encumbered prior to the date on which the shares are issued, or, if later, the date on which any applicable restriction, performance or deferral period lapses.

(iii)          Subject to the provisions of this Plan and the award agreement or such other agreement and unless otherwise determined by the Administrator at grant, the recipient of an award under this Section 11 shall be entitled to receive, currently or on a deferred basis, interest or

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dividends or interest or dividend equivalents with respect to the number of shares of Stock covered by the award, as determined at the time of the award by the Administrator, in its sole discretion, and the Administrator may provide that such amounts (if any) shall be deemed to have been reinvested in additional shares of Stock or otherwise reinvested.

(iv)          Shares of Stock (including securities convertible into shares of Stock) issued on a bonus basis under this Section 11 may be issued for no cash consideration.

SECTION 12.AMENDMENT AND TERMINATION.

The Board may amend, alter, suspend or discontinue the Plan in whole or in part, at any time, but no amendment, alteration, or discontinuation that would impair the rights of a Participant under any Award theretofore granted shall be made without such Participant’s consent.  Unless the Board determines otherwise, the Board shall obtain approval of the Company’s stockholders for any amendment that would require such approval in order to satisfy Sections 162(m) and 422 of the Code, stock exchange rules or other applicable law or regulation.  The Administrator may amend the terms of any award theretofore granted, prospectively or retroactively, but, subject to Section 5 of the Plan, no such amendment shall impair the rights of any Participant without his or her consent.

SECTION 13.UNFUNDED STATUS OF PLAN.

The Plan is intended to constitute an “unfunded” plan for incentive compensation.  With respect to any payments not yet made to a Participant by the Company, nothing contained herein shall give any such Participant any rights that are greater than those of a general creditor of the Company.

SECTION 14.GENERAL PROVISIONS.

(a)           Securities Laws Compliance.  Shares of Stock shall not be issued pursuant to the exercise or settlement of any Award granted hereunder unless the exercise or settlement of such Award and the issuance and delivery of such shares of Stock pursuant

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thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act, the Exchange Act and the requirements of any stock exchange upon which the Stock may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b)           Certificate Legends.  The Administrator may require each person acquiring shares of Stock hereunder to represent to and agree with the Company in writing that such person is acquiring the shares of Stock without a view to distribution thereof.  The certificates for such shares of Stock may include any legend which the Administrator deems appropriate to reflect any restrictions on transfer.

All certificates for shares of Stock delivered under the Plan shall be subject to such stock-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed, and any applicable federal or state securities law, and the Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions.

(c)           Company Actions; No Right to Employment.  Nothing contained in the Plan shall prevent the Board from adopting other or additional compensation arrangements, subject to stockholder approval, if such approval is necessary and desirable; and such arrangements may be either generally applicable or applicable only in specific cases.  The adoption of the Plan shall not confer upon any Eligible Recipient any right to continued employment or service with the Company or any Parent or Subsidiary, as the case may be, nor shall it interfere in any way with the right of the Company or any Parent or Subsidiary to terminate the employment or service of any of its Eligible Recipients at any time.

(d)           Payment of Taxes.  Each Participant shall, no later than the date as of which the value of an Award first becomes includible in the gross income of the Participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of, any federal, state, or local taxes

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of any kind required by law to be withheld with respect to such Award.  The obligations of the Company under the Plan shall be conditional on the making of such payments or arrangements, and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the Participant.

(e) Tax Notifications. Each Participant shall promptly notify the Company of any election the Participant makes under Section 83(b) of the Code or any disposition of shares of Stock delivered pursuant to the exercise of an Incentive Stock Option under the circumstances described in Section 421(b) of the Code (relating to certain disqualifying dispositions).

(f) Section 409A. If any distribution or settlement of an Award pursuant to the terms of this Plan or an Award agreement would subject a Participant to tax under Section 409A of the Code, the Company shall modify the Plan or applicable Award agreement in the least restrictive manner necessary in order to comply with the provisions of Section 409A, other applicable provision(s) of the Code and/or any rules, regulations or other regulatory guidance issued under such statutory provisions and, in each case, without any diminution in the value of the payments to an affected Participant.

SECTION 15.EFFECTIVE DATE OF PLAN.

The Plan was adopted by the Board on February 9, 2006.  The Plan was approved by the stockholders of the Company on February 9, 2006. The Plan shall become effective on the day prior to the date of consummation of the Initial Public Offering (the “Effective Date”). In the event that the date of consummation of the Initial Public Offering has not occurred by July 1, 2006, the Plan shall expire and be null an void without any force or effect.

SECTION 16.TERM OF PLAN.

No Award shall be granted pursuant to the Plan on or after the tenth anniversary of the Effective Date, but Awards theretofore granted may extend beyond that date.

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SECTION 17.GOVERNING LAW.

The Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of New York, without giving effect to the conflict of laws principles thereof.

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EX-10.24

Exhibit 10.24

EMPLOYMENT AGREEMENT

AGREEMENT, dated as of the fourteenth day of February, 2006, between Morgans Hotel Group Co., a Delaware corporation (the “Company”), and W. Edward Scheetz (the “Executive”) which shall become effective upon the closing date (the “Effective Date”) of the initial public offering of the shares of common stock, par value $0.01 per share, (the “Common Stock”) of the Company pursuant to the registration statement on Form S-1 (Reg. No. 333-129277) (the “IPO”).

1.Employment Period.  The Company hereby agrees to employ the Executive, and the Executive hereby agrees to work in the employ of the Company, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the fourth anniversary of the Effective Date (the “Employment Period”).  Commencing on the fourth anniversary of the Effective Date and on each anniversary thereafter, the Employment Period shall be automatically extended for one year terms unless either the Company or the Executive shall give the other party not less than 90days prior written notice of the intention to not extend this Agreement (a “Non-Renewal Notice”).

2.Terms of Employment.

(a)Position and Duties.

(i)During the Employment Period, the Executive shall serve as President and Chief Executive Officer of the Company with the appropriate authority, duties and responsibilities attendant to such position and any other duties that may reasonably be assigned by the Company’s Board of Directors (the “Board”) consistent with his position as President and Chief Executive Officer.  The Executive shall be appointed to the Board on or prior to the Effective Date and the Company shall use its reasonable best efforts to cause the Executive to be nominated and elected to the Board during the Employment Period.

(ii)During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of the Executive’s business time, attention and energies to the performance of the duties assigned to the Executive hereunder, and to perform such duties faithfully, diligently and to the best of the Executive’s abilities and subject to such laws, rules, regulations and policies from time to time applicable to the Company’s other executives.  Notwithstanding the above, (x) nothing in this Agreement shall preclude the Executive from devoting a portion of the Executive’s business time, attention and energies to the performance of the Executive’s duties as co-CEO of NorthStar Capital Investment Corp. (and such activity shall not violate Section 7 of this Agreement) and (y) Executive shall be entitled to attend to personal and family affairs and investments, be involved in not for profit, charitable and professional activities and serve on up to two for

profit boards, provided that the foregoing does not, in the aggregate, materially interfere with Executive’s responsibilities hereunder.  The Board hereby approves Executive’s service on the boards set forth in Exhibit A hereto.

(b)Compensation.

(i)Annual Base Salary.  During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”) of at least $750,000, which shall be subject to annual review and increase.  Noincrease in Annual Base Salary shall limit or reduce any other right of or obligation to the Executive under this Agreement.  Annual Base Salary shall not be reduced at any time (including after any such increase) without the Executive’s written consent and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased.

(ii)Annual Bonus.  During the Employment Period, the Executive shall be paid an annual cash bonus (“Annual Bonus”) with a target level of 100% of Annual Base Salary and a maximum level of 200% of Annual Base Salary.  The applicable corporate and individual performance targets shall be determined by the Compensation Committee of the Board (the “Compensation Committee”), after consultation with the Executive, within the first 90 days of each calendar year or within 30 days after the IPO if later.  The actual Annual Bonus for each calendar year shall be determined in good faith by the Compensation Committee based upon actual corporate and individual performance for such year and shall be payable in accordance with the procedures specified by the Compensation Committee; provided that the Annual Bonus shall be paid no later than March 15 of the following year.  To the extent the Annual Bonus would exceed 100 percent of Annual Base Salary, the Compensation Committee may in its discretion pay such excess in the form of fully vested equity compensation awards under Section 2(b)(v) (which may be subject to other conditions that the Compensation Committee may determine).

(iii)IPO Stock Options.  On the Effective Date, the Executive shall be granted options under the Company’s 2006 Omnibus Stock Incentive Plan (the “SIP”) to purchase $6,000,000 worth of shares of the Common Stock (using the offering price shown on the cover of the Company’s IPO Form S-1) at an exercise price equal to the offering price shown on the cover of the Company’s IPO Form S-1 (the “IPO Stock Options”).  Such IPO Stock Options shall be evidenced by, and subject to, the stock option agreement attached hereto as Exhibit B.

(iv)IPO Units.  On the Effective Date, the Executive shall be granted $6,500,000 worth of LTIP Units in Morgans Group LLC (for this purpose each unit shall be valued at the offering price of a share of Common Stock shown on the cover of the Company’s IPO Form S-1) in accordance with the Company’s SIP (the “IPO Units”).  Such IPO Units shall be evidenced by, and subject to, the unit agreement attached hereto as Exhibit C.

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(v)Subsequent Annual Equity Grants.  The Company may grant the Executive at the end of each year equity awards under the Company’s SIP, in an amount determined, and on terms and conditions specified, by the Compensation Committee in its sole discretion, which terms and conditions shall be no less favorable than the terms and conditions of equity awards granted to other senior executives of the Company.

(c)Benefits.

(i)Employee Benefits.  During the Employment Period, the Executive shall be entitled to participate in all employee benefit and other plans, practices, policies and programs and fringe benefits and perquisites on a basis no less favorable than that provided to other executives of the Company.  The Executive shall be entitled to a car and driver, financial advisory and tax preparation assistance and travel arrangements to the same extent currently provided by NorthStar Capital Investment Corp.

(ii)Indemnification.  To the fullest extent permitted by law, the Company will indemnify the Executive against any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative, arising by reason of the Executive’s status as a current or former director, officer, employee and/or agent of the Company.  The Executive shall be covered under any director and officer insurance policy obtained by the Company, if any, and shall be entitled to benefit from any officer indemnification arrangements adopted by the Company, if any, to the same extent as other directors or senior executive officers of the Company (including the right to such coverage or benefit following the Executive’s employment to the extent liability continues to exist).  However, the Executive agrees to repay any expenses paid or reimbursed by the Company if it is ultimately determined that the Executive is not legally entitled to be indemnified by the Company.

(iii)Vacations.  The Executive shall be eligible for up to five weeks of annual vacation to be accrued in accordance with the Company’s policy for its other executives.

3.Termination of Employment.

(a)Death or Disability.  The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period.  If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 10(b) of its intention to terminate the Executive’s employment.  In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not

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have returned to full-time performance of the Executive’s duties.  For purposes of this Agreement, “Disability” shall mean the inability of the Executive to perform the Executive’s duties with the Company on a full-time basis for 180 business days during any consecutive twelve month period as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company and acceptable to the Executive or the Executive’s legal representative or by the insurance company which insures the Company’s long-term disability plan in which the Executive is eligible to participate.

(b)Cause.  The Company may terminate the Executive’s employment during the Employment Period with or without Cause.  For purposes of this Agreement, “Cause” shall mean that the Executive:

(i)willfully and continually refuses to substantially perform the Executive’s responsibilities under this Agreement, after demand for substantial performance has been given by the Board that specifically identifies how the Executive has refused to perform such responsibilities;

(ii)willfully engages in misconduct (including violations of Sections 7(a), (b) or (c) of this Agreement) which is materially and demonstrably injurious to the Company; or

(iii)is convicted of a felony or pleads guilty or nolo contendere to a felony.

For purposes of this provision, no act or omission on the part of the Executive shall be considered “willful” unless it is done or omitted in bad faith or without reasonable belief that the act or omission was in the best interests of the Company.  Any act or omission based upon a resolution duly adopted by the Board or advice of counsel for the Company shall be conclusively presumed to have been done or omitted in good faith and in the best interests of the Company.  The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than 75% of the entire membership of the Board (excluding the Executive) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described above, and specifying the particulars thereof in detail.  Notwithstanding the foregoing, if the Board reasonably believes in good faith that facts exist that may justify a termination for Cause, the Board retains the right to (i) immediately terminate the Executive’s employment (without any obligation to pay or provide any benefits described in Section 4) and (ii) call the Board meeting and comply with the other requirements described in the preceding sentence within 30 days thereafter (the “Determination Period”); provided that promptly following the Determination Period, the Executive shall be paid or provided the applicable benefits described in Section 4.  If the Company does not deliver to the Executive a

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Notice of Termination within 90days after the Board has knowledge that an event constituting Cause has occurred, the event will no longer constitute Cause.

(c)Good Reason.  The Executive’s employment may be terminated by the Executive with or without Good Reason.  For purposes of this Agreement, “Good Reason” shall mean in the absence of a written consent of the Executive:

(i)the assignment to the Executive of duties materially inconsistent with the Executive’s title, position, status, reportingrelationships, authority, duties or responsibilities as contemplated by Section 2(a)(i), or any other action by the Company which results in a diminution in the Executive’s title, position, status, reportingrelationships, authority, duties or responsibilities, other than insubstantial or inadvertent actions not taken in bad faith which are remedied by the Company promptly after receipt of notice thereof given by the Executive;

(ii)any failure by the Company to comply with any of the provisions of Section 2(b) or 2(c), other than insubstantial or inadvertent failures not in bad faith which are remedied by the Company promptly after receipt of notice thereof given by the Executive;

(iii)any purported termination by the Company of the Executive’s employment otherwise than as expressly permitted by this Agreement;

(iv)any failure by the Company to comply with and satisfy Section 8(c);

(v)following a Change in Control (as defined in the SIP), any requirement that the Executive’s principal place of employment be at a location more than 50 miles from New York, New York;

(vi)if Executive is not re-elected to the Board; or

(vii)any material failure by the Company to comply with any other material provision of this Agreement (including the equity award agreements).

Notwithstanding the foregoing, placing the Executive on a paid leave for up to 30days, pending the determination of whether there is a basis to terminate the Executive for Cause, shall not constitute a “Good Reason” event; provided, further, that, if the Executive is subsequently terminated for Cause, then the Executive shall repay any amounts paid by the Company to the Executive during such paid leave period.  If the Executive does not deliver to the Company a Notice of Termination (as defined below) within 90 days after the Executive has knowledge that an event constituting Good Reason has occurred, the event will no longer constitute Good Reason.

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(d)Notice of Termination.  Any termination by the Company or by the Executive shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 10(b).  For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the Date of Termination.  The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

(e)Date of Termination.  “Date of Termination” means (i) if the Executive’s employment is terminated by the Company other than for Disability, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, (ii) if the Executive’s employment is terminated by the Executive, 30 days after receipt of the Notice of Termination (provided, that, the Company may accelerate the Date of Termination to an earlier date by providing the Executive with notice of such action, or, alternatively, the Company may place the Executive on paid leave during such period) and (iii) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be.

4.Obligations of the Company upon Termination.

(a)Other Than for Cause; For Good Reason.  If, during the Employment Period, the Company shall terminate the Executive’s employment other than for Cause or Disability, or the Executive shall terminate employment for Good Reason (or the Executive dies after delivery of a valid Notice of Termination for Good Reason or without Cause) (each, a “Qualifying Termination”), except as provided in Sections 2(c)(ii) and 6 of this Agreement, the Company shall have no further obligations to the Executive other than:

(i)the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination an amount equal to the sum of (A) the amount equal to the Executive’s Annual Base Salary through the Date of Termination to the extent theretofore unpaid plus (B) a pro-rated bonus based upon the number of days in the year of termination through the Date of Termination relative to 365 and the greater of (i) the target Annual Bonus in the year the Date of Termination occurs and (ii) the average of the Annual Bonuses earned for the two years prior to the year the Date of Termination occurs (the higher of (i) and (ii), the “Applicable Bonus Amount”) plus (C) 2.5times the sum of the Annual Base Salary plus the Applicable Bonus Amount;

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(ii)for 30months following the Date of Termination, the Company shall continue to provide medical and dental and life insurance benefits to the Executive, his spouse and his eligible dependents on the same basis and at the same cost as such benefits are then currently provided to the Executive (the “Welfare Benefits”); provided that such benefits shall be secondary to any other coverage obtained by the Executive; provided, however, that if the Company’s welfare plans do not permit such coverage, the Company will provide the Executive the Welfare Benefits with the same after tax effect;

(iii)if applicable, the Executive shall be deemed to have an additional 30 months of service credit under the Company’s retirement plans, programs, practices and policies;

(iv)all Company equity awards (including, without limitation, the IPO Stock Options and IPO Units) shall fully vest and all stock options and stock appreciation rights shall remain exercisable for the lesser of (x) 30 months after the Date of Termination or (y) the remainder of their term; and

(v)to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or other contract or agreement of the Company and its affiliated companies through the Date of Termination, including, but not limited to, any accrued but unused vacation, any unreimbursed business expenses and the percentage of target bonus payable to other senior executives of the Company with respect to any unpaid bonus for any completed fiscal year prior to the Date of Termination (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”).

(b)Death; Disability.  If, during the Employment Period, the Executive’s employment shall terminate on account of death (other than via death after delivery of a valid Notice of Termination for Good Reason or without Cause) or Disability, except as provided in Sections 2(c)(ii) and 6 of this Agreement, the Company shall have no further obligations to the Executive other than to provide the Executive (or his estate):  (i) the Annual Base Salary through the Date of Termination to the extent theretofore unpaid, (ii) a pro-rated bonus as set forth in Section 4(a)(i)(B), (iii) the Other Benefits and (iv) all Company equity awards shall be treated as set forth in Section 4(a)(iv).

(c)For Cause; Other than For Good Reason; End of Employment Period.  If, during the Employment Period, the Company shall terminate the Executive’s employment for Cause or the Executive terminates his employment without Good Reason, except as provided in Sections 2(c)(ii) and 6 of this Agreement, the Company shall have no further obligations to the Executive other than the obligation to pay to the Executive:  (i) the Annual Base Salary through the Date of Termination to the extent theretofore unpaid and (ii) the

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Other Benefits (but there shall be no payment for any unpaid bonus for any completed fiscal year prior to the Date of Termination).

(d)Non-Renewal by the Company.  If the Employment Period is not extended by the Company pursuant to a Non-Renewal Notice as provided for in Section 1 of this Agreement, except as provided in Sections 2(c)(ii) and 6 of this Agreement, the Company shall have no further obligations to the Executive other than:

(i)the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination an amount equal to the sum of (A) the amount equal to the Executive’s Annual Base Salary through the Date of Termination to the extent theretofore unpaid plus (B) 1.0times the sum of the Annual Base Salary plus the Applicable Bonus Amount;

(ii)for 12months following the Date of Termination, the Company shall continue to provide the Executive the Welfare Benefits; provided that such benefits shall be secondary to any other coverage obtained by the Executive; provided, however, that if the Company’s welfare plans do not permit such coverage, the Company will provide the Executive the Welfare Benefits with the same after tax effect; and

(iii)any Company equity awards that would have vested during the 12 month period following the Date of Termination shall immediately vest and all vested stock options and stock appreciation rights shall remain exercisable for the lesser of (x) the remainder of their term or (y) 12 months after the Date of Termination; and

(iv)to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive the Other Benefits.

(e)Condition.  The Company shall not be required to make the payments and provide the benefits specified in this Section 4 unless the Executive executes and delivers to the Company an agreement releasing the Company, its affiliates and its officers, directors and employees from all liability (other than the payments and benefits under this Agreement) in the form attached hereto as Exhibit D (the “Release Agreement”); provided, however, that the Company shall release the Executive from all liability to the Company and its affiliates that any Board members (other than the Executive) have actual knowledge of on the Date of Termination under the Release Agreement.

(f)Resignation from Certain Directorships.  Unless the Company agrees in writing to waive this requirement, upon the termination of the Executive’s employment for any reason, the Executive agrees to promptly resign from (i) office as a director of the Company, any subsidiary or affiliate of the Company or any other entity to which the Company appoints the Executive to serve as a director, (ii) from all offices held by the Executive in any or all of such entities in clause (i) above, and (iii) all fiduciary positions (including as trustee) held

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by the Executive with respect to any pension plans or trusts established by any such entities in clause (i) above.

5.Full Settlement.  The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others.  In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment.

6.Certain Additional Payments by the Company.

(a)Gross-Up.  Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates a Change in Control (as defined in the SIP) (or any of its affiliated entities) to or for the benefit of the Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 6) (the “Payments”) would be subject to the excise tax imposed by Sec­tion 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Company shall pay to the Executive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including, without limitation, any income taxes and any interest and penalties imposed with respect thereto, and any excise tax) imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of (A) any deductions disallowed because of the inclusion of the Gross-Up Payment in the Executive’s adjusted gross income and (B) the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made.  For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to (i) pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-Up Payment is to be made, (ii) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (iii) have otherwise allowable deductions for federal income tax purposes at least equal to those which could be disallowed because of the inclusion of the Gross-Up Payment in the Executive’s adjusted gross income.

(b)Determination.  Subject to the provisions of Section 6(a), all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment, the amount of any Option

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Redetermination (as defined below) and the assumptions to be utilized in arriving at such determinations, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Company or the Executive that there has been a Payment, or such earlier time as is requested by the Company (collectively, the “Determination”).  Notwithstanding the foregoing, in the event (i) the Board shall determine prior to the Change in Control that the Accounting Firm is precluded from performing such services under applicable auditor independence rules, (ii) the Audit Committee of the Board determines that it does not want the Accounting Firm to perform such services because of auditor independence concerns or (iii) the Accounting Firm is serving as accountant or auditor for the person(s) effecting the Change in Control, the Board shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder).  All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Company shall enter into any agreement requested by the Accounting Firm in connection with the performance of the services hereunder.  The Gross-Up Payment under this Section 6 with respect to any Payments shall be made no later than thirty (30) days following such Payment.  If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion to such effect, and to the effect that failure to report the Excise Tax, if any, on the Executive’s applicable federal income tax return will not result in the imposition of a negligence or similar penalty.  The Determination by the Accounting Firm shall be binding upon the Company and the Executive.  As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”) or Gross-Up Payments are made by the Company which should not have been made (“Overpayment”), consistent with the calculations required to be made hereunder.  In the event the amount of the Gross-Up Payment is less than the amount necessary to reimburse the Executive for hisExcise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to or for the benefit of the Executive.  In the event the amount of the Gross-Up Payment exceeds the amount necessary to reimburse the Executive for hisExcise Tax, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by the Executive to or for the benefit of the Company.  The Executive shall cooperate, to the extent hisexpenses are reimbursed by the Company, with any reasonable requests by the Company in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax.  In the event that the Company determines that the value of any accelerated vesting of stock options held by the Executive shall be redetermined within the context of Treasury Regulation §1.280G-1 Q/A 33 (the “Option Redetermination”), the Executive shall (i) file with the Internal Revenue Service an amended federal income tax return that claims a refund of the overpayment of the Excise Tax attributable to such Option Redetermination and (ii) promptly pay the refundable

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Excise Tax to the Company; provided that the Company shall pay all reasonable professional fees incurred in the preparation of the Executive’s amended federal income tax return.

7.Covenants Not to Compete or Solicit Company Clients and Employees; Confidential Information.

(a)Non-Compete.  During the Executive’s employment with the Company, and for a one year period after the date the Executive’s employment is terminated for any reason (other than a Qualifying Termination), the Executive shall not directly or indirectly (without the prior written consent of the Company):

(i)hold a 10% or greater equity (including stock options whether or not exercisable), voting or profit participation interest in a Competitive Enterprise (excluding any investments of the Executive held as of the Effective Date as set forth in Exhibit E hereto), or

(ii)associate (including as a director, officer, employee, partner, consultant, agent or advisor) with a Competitive Enterprise and in connection with the Executive’s association engage, or directly or indirectly manage or supervise personnel engaged, in any activity:

(A)that is substantially related to any activity that the Executive was engaged in with the Company or its subsidiary companies during the 12 months prior to the Date of Termination, or

(B)that is substantially related to any activity for which the Executive had direct managerial or supervisory responsibility with the Company or its subsidiary companies during the 12 months prior to the Date of Termination.

Notwithstanding the foregoing, this Section 7(a)(ii) and Sections 7(b)(i), 7(b)(ii) and 7(b)(iii) (provided that with respect to Section 7(b)(iii) only to the extent that an action under Section 7(b)(iii)  occurs solely as a result of an action set forth in Section 7(b)(i) or Section 7(b)(ii)) below shall not prevent the Executive from having a managerial or supervisory role at a Competitive Enterprise that does not primarily engage in a Competitive Activity or that holds a 20 percent or greater equity, voting or profit participation interest in any enterprise that engages in a Competitive Activity, as long as the Executive (1) has no direct role in such Competitive Activity and (2) does not Solicit any Client with respect to such Competitive Activity.

For purposes of this Agreement, “Competitive Enterprise” means any business enterprise that either (A) engages in the management and operation of a “full service hotel” business in North America or Western Europe (a “Competitive Activity”) or (B) holds a 20 percent or greater

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equity, voting or profit participation interest in any enterprise that engages in a Competitive Activity.

(b)Non-Solicit.  During the Executive’s employment with the Company, and for a one year period after the Executive’s employment is terminated for any reason, the Executive shall not, in any manner, directly or indirectly (without the prior written consent of the Company):  (i) solicit any Client to transact business with a Competitive Enterprise or to reduce or refrain from doing any business with the Company, (ii) transact business with any Client that would cause the Executive to be a Competitive Enterprise, (iii) interfere with or damage any relationship between the Company and a Client or (iv) solicit anyone who is then an employee of the Company (or who was an employee of the Company within the prior 12 months) to resign from the Company or to apply for or accept employment with any other business or enterprise (other than general advertising not specifically directed at such current or former employees of the Company), provided, however, that the covenants in Sections 7(b)(i), 7(b)(ii) and 7(b)(iii) (provided that with respect to Section 7(b)(iii) only to the extent that an action under Section 7(b)(iii) occurs solely as a result of an action set forth in Section 7(b)(i) or Section 7(b)(ii)) shall cease to apply after a Qualifying Termination.

For purposes of this Agreement, a “Client” means any corporation, individual or other entity that constitutes one of the top twenty clients of the Company or one of its subsidiary companies over the preceding twelve month period (each a “Top Twenty Client”) to whom the Executive provided services or for whom the Executive transacted business in any manner, directly or indirectly. A client shall be considered a Top Twenty Client where the total revenue derived from such client, either directly or indirectly, over the preceding calendar year period ranks it as one of the Company’s twenty highest revenue generating clients.  The Company will provide the Executive a list of the Top Twenty Clients at the end of each calendar year during the Employment Period.

(c)Confidential Information.  The Executive hereby acknowledges that, as an employee of the Company, he will be making use of, acquiring and adding to Confidential Information of a special and unique nature and value relating to the Company and its strategic plan and financial operations.  The Executive further recognizes and acknowledges that all Confidential Information is the exclusive property of the Company, is material and confidential, and is critical to the successful conduct of the business of the Company.  Accordingly, the Executive hereby covenants and agrees that he will use Confidential Information for the benefit of the Company only and shall not at any time, directly or indirectly, during the term of this Agreement and thereafter divulge, reveal or communicate any confidential information to any person, firm, corporation or entity whatsoever, or use any confidential information for his own benefit or for the benefit of others. Notwithstanding the foregoing, the Executive shall be authorized to disclose Confidential Information (A) as may be required by law or legal process after providing the Company with prior written notice and an

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opportunity to respond to such disclosure (unless such notice is prohibited by law), (B) in any criminal proceeding against him after providing the Company with prior written notice and an opportunity to seek protection for such confidential information and (C) with the prior written consent of the Company.

For purposes of this Agreement, “Confidential Information” shall mean confidential or proprietary information, knowledge or data concerning the Company and its subsidiary companies’ businesses, strategies, operations, financial affairs, organizational matters, personnel matters, budgets, business plans, marketing plans, studies, policies, procedures, products, ideas, processes, software systems, trade secrets and technical know-how. Notwithstanding the foregoing, Confidential Information shall not include information which (i) is or becomes generally available to the public or is, at the time in question, in the public domain other than as a result of a disclosure by Executive, (ii) was available to Executive on a non-confidential basis prior to the date of this Agreement or (iii) becomes available to Executive from a source other than the Company, its agents or representatives (or former agents or representatives)

(d)Survival.  Any termination of the Executive’s employment or of this Agreement (or breach of this Agreement by the Executive or the Company) shall have no effect on the continuing operation of this Section 7.

(e)Validity.  The terms and provisions of this Section 7 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected.  The parties hereto acknowledge that the potential restrictions on the Executive’s future employment imposed by this Section 7 are reasonable in both duration and geographic scope and in all other respects.  If for any reason any court of competent jurisdiction shall find any provisions of this Section 7 unreasonable in duration or geographic scope or otherwise, the Executive and the Company agree that the restrictions and prohibitions contained herein shall be effective to the fullest extent allowed under applicable law in such jurisdiction.

(f)Consideration.  The parties acknowledge that this Agreement would not have been entered into and the benefits described in Section 2, 4 or 6 would not have been promised in the absence of the Executive’s promises under this Section 7.

(g)Cease Payments.  In the event that the Executive materially breaches Section 7(a), 7(b) or 7(c), the Company’s obligation to make or provide payments or benefits under Section 4 or 6 shall cease, provided, however, that this Section 7(g) shall cease to apply after a Change in Control (as defined in the SIP).

(h)Non-disparagement.  For a one year period after the Executive’s employment is terminated for any reason, (i) the Executive shall not, in any manner, directly or indirectly make or publish any statement (orally or in writing) that would libel, slander, disparage, denigrate, ridicule or criticize the Company, any of its affiliates or any of their employees, officers or directors and (ii) the Board members and the Company’s executive

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officers shall not, in any manner, directly or indirectly make or publish any statement (orally or in writing) that would libel, slander, disparage, denigrate, ridicule or criticize the Executive.

8.Successors.

(a)This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution.  This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.

(b)This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns, provided that the Company may not assign this Agreement other than as described in Section 8(c) below.

(c)The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place.  As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid.

9.Disputes.

(a)Mandatory Arbitration.  Subject to the provisions of this Section 9, any controversy or claim between the Executive and the Company arising out of or relating to or concerning this Agreement (including the covenants contained in Section 7) or any aspect of the Executive’s employment with the Company or the termination of that employment (together, an “Employment Matter”) will be finally settled by arbitration in the County of New York administered by the American Arbitration Association (the “AAA”) under its Commercial Arbitration Rules then in effect.  However, the AAA’s Commercial Arbitration Rules will be modified in the following ways:  (i) notwithstanding any provision of the AAA rules to the contrary, the arbitration shall be heard by a panel of three neutral arbitrators, with each party appointing one arbitrator, who shall jointly appoint a third, (ii) each arbitrator will agree to treat as confidential evidence and other information presented to them, (iii) there will be no authority to award punitive damages (and the Executive and the Company agree not to request any such award), (iv) the optional Rules for Emergency Measures of Protections will apply, (v) there will be no authority to amend or modify the terms of this Agreement except as provided in Section 10(a) (and the Executive and the Company agree not to request any such amendment or modification) and (vi) a decision must be rendered within ten business days of the parties’ closing statements or submission of post-hearing briefs.

(b)Injunctions and Enforcement of Arbitration Awards.  The Executive or the Company may bring an action or special proceeding in a state or federal court of competent jurisdiction sitting in the County of New York to enforce any arbitration award under Section 9(a).  Also, the Company may bring such an action or proceeding, in addition to its

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rights under Section 9(a) and whether or not an arbitration proceeding has been or is ever initiated, to temporarily, preliminarily or permanently enforce any part of Section 7.  The Executive agrees that (i) violating any part of Section 7 would cause damage to the Company that cannot be measured or repaired, (ii) the Company therefore is entitled to seek an injunction, restraining order or other equitable relief restraining any actual or threatened violation of Section 7, (iii) no bond will need to be posted for the Company to receive such an injunction, order or other relief and (iv) no proof will be required that monetary damages for violations of Section 7 would be difficult to calculate and that remedies at law would be inadequate.

(c)Jurisdiction and Choice of Forum. The Executive and the Company irrevocably submit to the exclusive jurisdiction of any state or federal court located in the County of New York over any Employment Matter that is not otherwise arbitrated or resolved according to Section 9(a).  This includes any action or proceeding to compel arbitration or to enforce an arbitration award.  Both the Executive and the Company (i) acknowledge that the forum stated in this Section 9(c) has a reasonable relation to this Agreement and to the relationship between the Executive and the Company and that the submission to the forum will apply even if the forum chooses to apply non-forum law, (ii) waive, to the extent permitted by law, any objection to personal jurisdiction or to the laying of venue of any action or proceeding covered by this Section 9(c) in the forum stated in this Section 9(c), (iii) agree not to commence any such action or proceeding in any forum other than the forum stated in this Section 9(c) and (iv) agree that, to the extent permitted by law, a final and non-appealable judgment in any such action or proceeding in any such court will be conclusive and binding on the Executive and the Company.  However, nothing in this Agreement precludes the Executive or the Company from bringing any action or proceeding in any court for the purpose of enforcing the provisions of Section 9(a) and this Section 9(c).

(d)Waiver of Jury Trial.  To the extent permitted by law, the Executive and the Company waive any and all rights to a jury trial with respect to any Employment Matter.

(e)Governing Law.  This Agreement will be governed by and construed in accordance with the law of the State of New York applicable to contracts made and to be performed entirely within that State.

(f)Costs.  The Company will reimburse as incurred any reasonable expenses, including reasonable attorney’s fees, the Executive incurs as a result of any Employment Matter, provided that the Executive shall promptly return any such reimbursements if found by an arbitrator to have brought or defended such Employment Matter in bad faith.

10.Miscellaneous.

(a)The captions of this Agreement are not part of the provisions hereof and shall have no force or effect.  This Agreement may not be amended or modified

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otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

(b)All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

at the Executive’s primary residential address
as shown on the records of the Company

If to the Company:

Morgans Hotel Group Co.
475 Tenth Avenue
New York, NY 10018
Telecopy Number: 
Attention:  General Counsel

or to such other address as either party shall have furnished to the other in writing in accordance herewith.  Notice and communications shall be effective when actually received by the addressee.

(c)The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

(d)The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.

(e)If any compensation or benefits provided by this Agreement may result in the application of Section 409A of the Code, the Company shall, in consultation with the Executive, modify the Agreement in the least restrictive manner necessary in order to, where applicable, (a) exclude such compensation from the definition of “deferred compensation” within the meaning of such Section 409A or (b) comply with the provisions of Section 409A, other applicable provision(s) of the Code and/or any rules, regulations or other regulatory guidance issued under such statutory provisions and to make such modifications, in each case, without any diminution in the value of the payments to the Executive.  To the extent required in order to comply with Section 409A of the Code, amounts and benefits to be paid or provided to the Executive under Section 4 of this Agreement shall be paid or provided to the Executive on the first business day after the date that is six months following the Date of Termination.  To the extent that the Welfare Benefits are so delayed, the Executive shall be entitled to COBRA continuation coverage under Section 4980B of the Code (“COBRA Coverage”) during such

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period of delay, and the Company shall reimburse the Executive for any Company portions of such COBRA Coverage in the seventh month following the Date of Termination.

(f)The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 3(c) (subject to the limitation in the last sentence of Section 3(c)) or the Company’s right to terminate the Executive for Cause pursuant to Section 3(b) (subject to the limitation in the last sentence of Section 3(b)), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

(g)It is the parties’ intention that this Agreement not be construed more strictly with regard to the Executive or the Company.

(h)From and after the Effective Date, this Agreement shall supersede any other employment or severance agreement or arrangements between the parties (and the Executive shall not be eligible for severance benefits under any plan, program or policy of the Company).

(i)Any reference to a Section herein is a reference to a section of this Agreement unless otherwise stated.

(j)If the IPO does not occur by July 1, 2006 this Agreement shall be null and void and shall have no force or effect.

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IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.

W. EDWARD SCHEETZ
/s/ W. Edward Scheetz
MORGANS HOTEL GROUP CO.
By:	/s/ Marc Gordon
	Name:	Marc Gordon
	Title:	Chief Investment Officer and Executive Vice President of Capital Markets

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Exhibit A

Carmichael Training Systems

Loyalist Insurance Group

Morgans Hotel Group

NorthStar Realty Finance Corp.

NorthStar Capital Investment Corp.

Tutor.com

401Kexchange.com

Exhibit B

Exhibit C

Exhibit D

Exhibit E

107 Portfolio

American R/E Partners

Apollo Real Estate Advisors II

Apollo Real Estate Capital Partners

Apollo Real Estate Investment Fund I

Apollo Real Estate Investment Fund II

Apollo Real Estate Investment Fund II Co-Investors

Dr Boulevard

Golf Host Holdings

Hallwood Realty Partners

NorthStar Capital Partner

NS NM LLC

Pam Centre

EX-10.25

Exhibit 10.25

EMPLOYMENT AGREEMENT

AGREEMENT, dated as of the fourteenth day of February, 2006, between Morgans Hotel Group Co., a Delaware corporation (the “Company”), and Marc Gordon (the “Executive”) which shall become effective upon the closing date (the “Effective Date”) of the initial public offering of the shares of common stock, par value $0.01 per share, (the “Common Stock”) of the Company pursuant to the registration statement on Form S-1 (Reg. No. 333-129277) (the “IPO”).

1.Employment Period. The Company hereby agrees to employ the Executive, and the Executive hereby agrees to work in the employ of the Company, subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the fourth anniversary of the Effective Date (the “Employment Period”). Commencing on the fourth anniversary of the Effective Date and on each anniversary thereafter, the Employment Period shall be automatically extended for one year terms unless either the Company or the Executive shall give the other party not less than 90days prior written notice of the intention to not extend this Agreement (a “Non-Renewal Notice”).

2.Terms of Employment.

(a)Position and Duties.

(i)During the Employment Period, the Executive shall serve as Chief Investment Officer and Executive Vice President of Capital Markets of the Company with the appropriate authority, duties and responsibilities attendant to such position and any other duties that may reasonably be assigned by the Company’s Chief Executive Officer or the Company’s Board of Directors (the “Board”) consistent with his position as Chief Investment Officer and Executive Vice President of Capital Markets.

(ii)During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote substantially all of the Executive’s business time, attention and energies to the performance of the duties assigned to the Executive hereunder, and to perform such duties faithfully, diligently and to the best of the Executive’s abilities and subject to such laws, rules, regulations and policies from time to time applicable to the Company’s other executives. Notwithstanding the above, Executive shall be entitled to attend to personal and family affairs and investments, be involved in not for profit, charitable and professional activities and serve on up to two for profit boards, provided that the foregoing does not, in the aggregate, materially interfere with Executive’s responsibilities hereunder. The Board hereby approves Executive’s service on the boards set forth in Exhibit A hereto.

(b)Compensation.

(i)Annual Base Salary. During the Employment Period, the Executive shall receive an annual base salary (“Annual Base Salary”) of at least $650,000, which shall be subject to annual review and increase. Noincrease in Annual Base Salary shall limit or reduce any other right of or obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced at any time (including after any such increase) without the Executive’s written consent and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased.

(ii)Annual Bonus. During the Employment Period, the Executive shall be paid an annual cash bonus (“Annual Bonus”) with a target level of 100% of Annual Base Salary and a maximum level of 120% of Annual Base Salary. The applicable corporate and individual performance targets shall be determined by the Compensation Committee of the Board (the “Compensation Committee”), after consultation with the Executive, within the first 90 days of each calendar year or within 30 days after the IPO if later. The actual Annual Bonus for each calendar year shall be determined in good faith by the Compensation Committee based upon actual corporate and individual performance for such year and shall be payable in accordance with the procedures specified by the Compensation Committee; provided that the Annual Bonus shall be paid no later than March 15 of the following year. To the extent the Annual Bonus would exceed 100 percent of Annual Base Salary, the Compensation Committee may in its discretion pay such excess in the form of fully vested equity compensation awards under Section 2(b)(v) (which may be subject to other conditions that the Compensation Committee may determine).

(iii)IPO Stock Options. On the Effective Date, the Executive shall be granted options under the Company’s 2006 Omnibus Stock Incentive Plan (the “SIP”) to purchase $3,000,000 worth of shares of the Common Stock (using the offering price shown on the cover of the Company’s IPO Form S-1) at an exercise price equal to the offering price shown on the cover of the Company’s IPO Form S-1 (the “IPO Stock Options”). Such IPO Stock Options shall be evidenced by, and subject to, the stock option agreement attached hereto as Exhibit B.

(iv)IPO Units. On the Effective Date, the Executive shall be granted $3,750,000 worth of LTIP Units in Morgans Group LLC (for this purpose each unit shall be valued at the offering price of a share of Common Stock shown on the cover of the Company’s IPO Form S-1) in accordance with the Company’s SIP (the “IPO Units”). Such IPO Units shall be evidenced by, and subject to, the unit agreement attached hereto as Exhibit C.

(v)Subsequent Annual Equity Grants. The Company may grant the Executive at the end of each year equity awards under the Company’s SIP, in an amount determined, and on terms and conditions specified, by the Compensation Committee in its sole discretion, which terms and conditions shall be no less favorable

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than the terms and conditions of equity awards granted to other senior executives of the Company.

(c)Benefits.

(i)Employee Benefits. During the Employment Period, the Executive shall be entitled to participate in all employee benefit and other plans, practices, policies and programs and fringe benefits and perquisites on a basis no less favorable than that provided to other executives of the Company. The Executive shall be entitled to a car and driver, financial advisory and tax preparation assistance and travel arrangements to the same extent currently provided by NorthStar Capital Investment Corp.

(ii)Indemnification. To the fullest extent permitted by law, the Company will indemnify the Executive against any actual or threatened action, suit or proceeding, whether civil, criminal, administrative or investigative, arising by reason of the Executive’s status as a current or former director, officer, employee and/or agent of the Company. The Executive shall be covered under any director and officer insurance policy obtained by the Company, if any, and shall be entitled to benefit from any officer indemnification arrangements adopted by the Company, if any, to the same extent as other directors or senior executive officers of the Company (including the right to such coverage or benefit following the Executive’s employment to the extent liability continues to exist). However, the Executive agrees to repay any expenses paid or reimbursed by the Company if it is ultimately determined that the Executive is not legally entitled to be indemnified by the Company.

(iii)Vacations. The Executive shall be eligible for up to five weeks of annual vacation to be accrued in accordance with the Company’s policy for its other executives.

3.Termination of Employment.

(a)Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 10(b) of its intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the “Disability Effective Date”), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties. For purposes of this Agreement, “Disability” shall mean the inability of the Executive to perform the Executive’s duties with the Company on a full-time basis for 180 business days during any consecutive twelve month period as a result of incapacity due to mental or physical illness which is

3

determined to be total and permanent by a physician selected by the Company and acceptable to the Executive or the Executive’s legal representative or by the insurance company which insures the Company’s long-term disability plan in which the Executive is eligible to participate.

(b)Cause. The Company may terminate the Executive’s employment during the Employment Period with or without Cause. For purposes of this Agreement, “Cause” shall mean that the Executive:

(i)willfully and continually refuses to substantially perform the Executive’s responsibilities under this Agreement, after demand for substantial performance has been given by the Board that specifically identifies how the Executive has refused to perform such responsibilities;

(ii)willfully engages in misconduct (including violations of Sections 7(a), (b) or (c) of this Agreement) which is materially and demonstrably injurious to the Company; or

(iii)is convicted of a felony or pleads guilty or nolo contendere to a felony.

For purposes of this provision, no act or omission on the part of the Executive shall be considered “willful” unless it is done or omitted in bad faith or without reasonable belief that the act or omission was in the best interests of the Company. Any act or omission based upon a resolution duly adopted by the Board or advice of counsel for the Company shall be conclusively presumed to have been done or omitted in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than 75% of the entire membership of the Board (excluding the Executive) at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board) finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described above, and specifying the particulars thereof in detail. Notwithstanding the foregoing, if the Board reasonably believes in good faith that facts exist that may justify a termination for Cause, the Board retains the right to (i) immediately terminate the Executive’s employment (without any obligation to pay or provide any benefits described in Section 4) and (ii) call the Board meeting and comply with the other requirements described in the preceding sentence within 30 days thereafter (the “Determination Period”); provided that promptly following the Determination Period, the Executive shall be paid or provided the applicable benefits described in Section 4. If the Company does not deliver to the Executive a Notice of Termination within 90days after the Board has knowledge that an event constituting Cause has occurred, the event will no longer constitute Cause.

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(c)Good Reason. The Executive’s employment may be terminated by the Executive with or without Good Reason. For purposes of this Agreement, “Good Reason” shall mean in the absence of a written consent of the Executive:

(i)the assignment to the Executive of duties materially inconsistent with the Executive’s title, position, status, reportingrelationships, authority, duties or responsibilities as contemplated by Section 2(a)(i), or any other action by the Company which results in a diminution in the Executive’s title, position, status, reportingrelationships, authority, duties or responsibilities, other than insubstantial or inadvertent actions not taken in bad faith which are remedied by the Company promptly after receipt of notice thereof given by the Executive;

(ii)any failure by the Company to comply with any of the provisions of Section 2(b) or 2(c), other than insubstantial or inadvertent failures not in bad faith which are remedied by the Company promptly after receipt of notice thereof given by the Executive;

(iii)any purported termination by the Company of the Executive’s employment otherwise than as expressly permitted by this Agreement;

(iv)any failure by the Company to comply with and satisfy Section 8(c);

(v)following a Change in Control (as defined in the SIP), any requirement that the Executive’s principal place of employment be at a location more than 50 miles from New York, New York; or

(vi)any material failure by the Company to comply with any other material provision of this Agreement (including the equity award agreements).

Notwithstanding the foregoing, placing the Executive on a paid leave for up to 30days, pending the determination of whether there is a basis to terminate the Executive for Cause, shall not constitute a “Good Reason” event; provided, further, that, if the Executive is subsequently terminated for Cause, then the Executive shall repay any amounts paid by the Company to the Executive during such paid leave period. If the Executive does not deliver to the Company a Notice of Termination (as defined below) within 90 days after the Executive has knowledge that an event constituting Good Reason has occurred, the event will no longer constitute Good Reason.

(d)Notice of Termination. Any termination by the Company or by the Executive shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 10(b). For purposes of this Agreement, a “Notice of Termination” means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under

5

the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the Date of Termination. The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive’s or the Company’s rights hereunder.

(e)Date of Termination. “Date of Termination” means (i) if the Executive’s employment is terminated by the Company other than for Disability, the date of receipt of the Notice of Termination or any later date specified therein within 30 days of such notice, (ii) if the Executive’s employment is terminated by the Executive, 30 days after receipt of the Notice of Termination (provided, that, the Company may accelerate the Date of Termination to an earlier date by providing the Executive with notice of such action, or, alternatively, the Company may place the Executive on paid leave during such period) and (iii) if the Executive’s employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be.

4.Obligations of the Company upon Termination.

(a)Other Than for Cause; For Good Reason. If, during the Employment Period, the Company shall terminate the Executive’s employment other than for Cause or Disability, or the Executive shall terminate employment for Good Reason (or the Executive dies after delivery of a valid Notice of Termination for Good Reason or without Cause) (each, a “Qualifying Termination”), except as provided in Sections 2(c)(ii) and 6 of this Agreement, the Company shall have no further obligations to the Executive other than:

(i)the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination an amount equal to the sum of (A) the amount equal to the Executive’s Annual Base Salary through the Date of Termination to the extent theretofore unpaid plus (B) a pro-rated bonus based upon the number of days in the year of termination through the Date of Termination relative to 365 and the greater of (i) the target Annual Bonus in the year the Date of Termination occurs and (ii) the average of the Annual Bonuses earned for the two years prior to the year the Date of Termination occurs (the higher of (i) and (ii), the “Applicable Bonus Amount”) plus (C) 2.5times the sum of the Annual Base Salary plus the Applicable Bonus Amount;

(ii)for 30months following the Date of Termination, the Company shall continue to provide medical and dental and life insurance benefits to the Executive, his spouse and his eligible dependents on the same basis and at the same cost as such benefits are then currently provided to the Executive (the “Welfare Benefits”); provided that such benefits shall be secondary to any other coverage obtained by the Executive; provided, however, that if the Company’s welfare plans do not permit such

6

coverage, the Company will provide the Executive the Welfare Benefits with the same after tax effect;

(iii)if applicable, the Executive shall be deemed to have an additional 30 months of service credit under the Company’s retirement plans, programs, practices and policies;

(iv)all Company equity awards (including, without limitation, the IPO Stock Options and IPO Units) shall fully vest and all stock options and stock appreciation rights shall remain exercisable for the lesser of (x) 30 months after the Date of Termination or (y) the remainder of their term; and

(v)to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or other contract or agreement of the Company and its affiliated companies through the Date of Termination, including, but not limited to, any accrued but unused vacation, any unreimbursed business expenses and the percentage of target bonus payable to other senior executives of the Company with respect to any unpaid bonus for any completed fiscal year prior to the Date of Termination (such other amounts and benefits shall be hereinafter referred to as the “Other Benefits”).

(b)Death; Disability. If, during the Employment Period, the Executive’s employment shall terminate on account of death (other than via death after delivery of a valid Notice of Termination for Good Reason or without Cause) or Disability, except as provided in Sections 2(c)(ii) and 6 of this Agreement, the Company shall have no further obligations to the Executive other than to provide the Executive (or his estate):  (i) the Annual Base Salary through the Date of Termination to the extent theretofore unpaid, (ii) a pro-rated bonus as set forth in Section 4(a)(i)(B), (iii) the Other Benefits and (iv) all Company equity awards shall be treated as set forth in Section 4(a)(iv).

(c)For Cause; Other than For Good Reason; End of Employment Period. If, during the Employment Period, the Company shall terminate the Executive’s employment for Cause or the Executive terminates his employment without Good Reason, except as provided in Sections 2(c)(ii) and 6 of this Agreement, the Company shall have no further obligations to the Executive other than the obligation to pay to the Executive:  (i) the Annual Base Salary through the Date of Termination to the extent theretofore unpaid and (ii) the Other Benefits (but there shall be no payment for any unpaid bonus for any completed fiscal year prior to the Date of Termination).

(d)Non-Renewal by the Company. If the Employment Period is not extended by the Company pursuant to a Non-Renewal Notice as provided for in Section 1 of this Agreement, except as provided in Sections 2(c)(ii) and 6 of this Agreement, the Company shall have no further obligations to the Executive other than:

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(i)the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination an amount equal to the sum of (A) the amount equal to the Executive’s Annual Base Salary through the Date of Termination to the extent theretofore unpaid plus (B) 1.0times the sum of the Annual Base Salary plus the Applicable Bonus Amount;

(ii)for 12months following the Date of Termination, the Company shall continue to provide the Executive the Welfare Benefits; provided that such benefits shall be secondary to any other coverage obtained by the Executive; provided, however, that if the Company’s welfare plans do not permit such coverage, the Company will provide the Executive the Welfare Benefits with the same after tax effect; and

(iii)any Company equity awards that would have vested during the 12 month period following the Date of Termination shall immediately vest and all vested stock options and stock appreciation rights shall remain exercisable for the lesser of (x) the remainder of their term or (y) 12 months after the Date of Termination; and

(iv)to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive the Other Benefits.

(e)Condition. The Company shall not be required to make the payments and provide the benefits specified in this Section 4 unless the Executive executes and delivers to the Company an agreement releasing the Company, its affiliates and its officers, directors and employees from all liability (other than the payments and benefits under this Agreement) in the form attached hereto as Exhibit D (the “Release Agreement”); provided, however, that the Company shall release the Executive from all liability to the Company and its affiliates that any Board members (other than the Executive) have actual knowledge of on the Date of Termination under the Release Agreement.

(f)Resignation from Certain Directorships. Unless the Company agrees in writing to waive this requirement, upon the termination of the Executive’s employment for any reason, the Executive agrees to promptly resign from (i) office as a director of the Company, any subsidiary or affiliate of the Company or any other entity to which the Company appoints the Executive to serve as a director, (ii) from all offices held by the Executive in any or all of such entities in clause (i) above, and (iii) all fiduciary positions (including as trustee) held by the Executive with respect to any pension plans or trusts established by any such entities in clause (i) above.

5.Full Settlement. The Company’s obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts

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payable to the Executive under any of the provisions of this Agreement, and such amounts shall not be reduced whether or not the Executive obtains other employment.

6.Certain Additional Payments by the Company.

(a)Gross-Up. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Company (or any of its affiliated entities) or any entity which effectuates a Change in Control (as defined in the SIP) (or any of its affiliated entities) to or for the benefit of the Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 6) (the “Payments”) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Company shall pay to the Executive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including, without limitation, any income taxes and any interest and penalties imposed with respect thereto, and any excise tax) imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of (A) any deductions disallowed because of the inclusion of the Gross-Up Payment in the Executive’s adjusted gross income and (B) the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to (i) pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-Up Payment is to be made, (ii) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes and (iii) have otherwise allowable deductions for federal income tax purposes at least equal to those which could be disallowed because of the inclusion of the Gross-Up Payment in the Executive’s adjusted gross income.

(b)Determination. Subject to the provisions of Section 6(a), all determinations required to be made under this Section 6, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment, the amount of any Option Redetermination (as defined below) and the assumptions to be utilized in arriving at such determinations, shall be made by the public accounting firm that is retained by the Company as of the date immediately prior to the Change in Control (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Company and the Executive within fifteen (15) business days of the receipt of notice from the Company or the Executive that there has been a Payment, or such earlier time as is requested by the Company (collectively, the “Determination”). Notwithstanding the foregoing, in the event (i) the Board shall determine prior to the Change in Control that the Accounting Firm is precluded from performing such

9

services under applicable auditor independence rules, (ii) the Audit Committee of the Board determines that it does not want the Accounting Firm to perform such services because of auditor independence concerns or (iii) the Accounting Firm is serving as accountant or auditor for the person(s) effecting the Change in Control, the Board shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company and the Company shall enter into any agreement requested by the Accounting Firm in connection with the performance of the services hereunder. The Gross-Up Payment under this Section 6 with respect to any Payments shall be made no later than thirty (30) days following such Payment. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion to such effect, and to the effect that failure to report the Excise Tax, if any, on the Executive’s applicable federal income tax return will not result in the imposition of a negligence or similar penalty. The Determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Company should have been made (“Underpayment”) or Gross-Up Payments are made by the Company which should not have been made (“Overpayment”), consistent with the calculations required to be made hereunder. In the event the amount of the Gross-Up Payment is less than the amount necessary to reimburse the Executive for hisExcise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Company to or for the benefit of the Executive. In the event the amount of the Gross-Up Payment exceeds the amount necessary to reimburse the Executive for hisExcise Tax, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by the Executive to or for the benefit of the Company. The Executive shall cooperate, to the extent hisexpenses are reimbursed by the Company, with any reasonable requests by the Company in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax. In the event that the Company determines that the value of any accelerated vesting of stock options held by the Executive shall be redetermined within the context of Treasury Regulation §1.280G-1 Q/A 33 (the “Option Redetermination”), the Executive shall (i) file with the Internal Revenue Service an amended federal income tax return that claims a refund of the overpayment of the Excise Tax attributable to such Option Redetermination and (ii) promptly pay the refundable Excise Tax to the Company; provided that the Company shall pay all reasonable professional fees incurred in the preparation of the Executive’s amended federal income tax return.

7.Covenants Not to Compete or Solicit Company Clients and Employees; Confidential Information.

(a)Non-Compete. During the Executive’s employment with the Company, and for a one year period after the date the Executive’s employment is terminated for

10

any reason (other than a Qualifying Termination), the Executive shall not directly or indirectly (without the prior written consent of the Company):

(i)hold a 10% or greater equity (including stock options whether or not exercisable), voting or profit participation interest in a Competitive Enterprise (excluding any investments of the Executive held as of the Effective Date as set forth in Exhibit E hereto), or

(ii)associate (including as a director, officer, employee, partner, consultant, agent or advisor) with a Competitive Enterprise and in connection with the Executive’s association engage, or directly or indirectly manage or supervise personnel engaged, in any activity:

(A)that is substantially related to any activity that the Executive was engaged in with the Company or its subsidiary companies during the 12 months prior to the Date of Termination, or

(B)that is substantially related to any activity for which the Executive had direct managerial or supervisory responsibility with the Company or its subsidiary companies during the 12 months prior to the Date of Termination.

Notwithstanding the foregoing, this Section 7(a)(ii) and Sections 7(b)(i), 7(b)(ii) and 7(b)(iii) (provided that with respect to Section 7(b)(iii) only to the extent that an action under Section 7(b)(iii) occurs solely as a result of an action set forth in Section 7(b)(i) or Section 7(b)(ii)) below shall not prevent the Executive from having a managerial or supervisory role at a Competitive Enterprise that does not primarily engage in a Competitive Activity or that holds a 20 percent or greater equity, voting or profit participation interest in any enterprise that engages in a Competitive Activity, as long as the Executive (1) has no direct role in such Competitive Activity and (2) does not Solicit any Client with respect to such Competitive Activity.

For purposes of this Agreement, “Competitive Enterprise” means any business enterprise that either (A) engages in the management and operation of a “full service hotel” business in North America or Western Europe (a “Competitive Activity”) or (B) holds a 20 percent or greater equity, voting or profit participation interest in any enterprise that engages in a Competitive Activity.

(b)Non-Solicit. During the Executive’s employment with the Company, and for a one year period after the Executive’s employment is terminated for any reason, the Executive shall not, in any manner, directly or indirectly (without the prior written consent of the Company):  (i) solicit any Client to transact business with a Competitive Enterprise or to reduce or refrain from doing any business with the Company, (ii) transact business with any Client that would cause the Executive to be a Competitive Enterprise,

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(iii) interfere with or damage any relationship between the Company and a Client or (iv) solicit anyone who is then an employee of the Company (or who was an employee of the Company within the prior 12 months) to resign from the Company or to apply for or accept employment with any other business or enterprise (other than general advertising not specifically directed at such current or former employees of the Company), provided, however, that the covenants in Sections 7(b)(i), 7(b)(ii) and 7(b)(iii) (provided that with respect to Section 7(b)(iii) only to the extent that an action under Section 7(b)(iii) occurs solely as a result of an action set forth in Section 7(b)(i) or Section 7(b)(ii))shall cease to apply after a Qualifying Termination.

For purposes of this Agreement, a “Client” means any corporation, individual or other entity that constitutes one of the top twenty clients of the Company or one of its subsidiary companies over the preceding twelve month period (each a “Top Twenty Client”) to whom the Executive provided services or for whom the Executive transacted business in any manner, directly or indirectly. A client shall be considered a Top Twenty Client where the total revenue derived from such client, either directly or indirectly, over the preceding calendar year period ranks it as one of the Company’s twenty highest revenue generating clients. The Company will provide the Executive a list of the Top Twenty Clients at the end of each calendar year during the Employment Period.

(c)Confidential Information. The Executive hereby acknowledges that, as an employee of the Company, he will be making use of, acquiring and adding to Confidential Information of a special and unique nature and value relating to the Company and its strategic plan and financial operations. The Executive further recognizes and acknowledges that all Confidential Information is the exclusive property of the Company, is material and confidential, and is critical to the successful conduct of the business of the Company. Accordingly, the Executive hereby covenants and agrees that he will use Confidential Information for the benefit of the Company only and shall not at any time, directly or indirectly, during the term of this Agreement and thereafter divulge, reveal or communicate any confidential information to any person, firm, corporation or entity whatsoever, or use any confidential information for his own benefit or for the benefit of others. Notwithstanding the foregoing, the Executive shall be authorized to disclose Confidential Information (A) as may be required by law or legal process after providing the Company with prior written notice and an opportunity to respond to such disclosure (unless such notice is prohibited by law), (B) in any criminal proceeding against him after providing the Company with prior written notice and an opportunity to seek protection for such confidential information and (C) with the prior written consent of the Company.

For purposes of this Agreement, “Confidential Information” shall mean confidential or proprietary information, knowledge or data concerning the Company and its subsidiary companies’ businesses, strategies, operations, financial affairs, organizational matters, personnel matters, budgets, business plans, marketing plans, studies, policies, procedures, products, ideas, processes, software systems, trade secrets and technical know-how. Notwithstanding the foregoing, Confidential Information shall not include information which (i) is or becomes generally available to the public or is, at the time in question, in the public domain other than as

12

a result of a disclosure by Executive, (ii) was available to Executive on a non-confidential basis prior to the date of this Agreement or (iii) becomes available to Executive from a source other than the Company, its agents or representatives (or former agents or representatives)

(d)Survival. Any termination of the Executive’s employment or of this Agreement (or breach of this Agreement by the Executive or the Company) shall have no effect on the continuing operation of this Section 7.

(e)Validity. The terms and provisions of this Section 7 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected. The parties hereto acknowledge that the potential restrictions on the Executive’s future employment imposed by this Section 7 are reasonable in both duration and geographic scope and in all other respects. If for any reason any court of competent jurisdiction shall find any provisions of this Section 7 unreasonable in duration or geographic scope or otherwise, the Executive and the Company agree that the restrictions and prohibitions contained herein shall be effective to the fullest extent allowed under applicable law in such jurisdiction.

(f)Consideration. The parties acknowledge that this Agreement would not have been entered into and the benefits described in Section 2, 4 or 6 would not have been promised in the absence of the Executive’s promises under this Section 7.

(g)Cease Payments. In the event that the Executive materially breaches Section 7(a), 7(b) or 7(c), the Company’s obligation to make or provide payments or benefits under Section 4 or 6 shall cease, provided, however, that this Section 7(g) shall cease to apply after a Change in Control (as defined in the SIP).

(h)Non-disparagement. For a one year period after the Executive’s employment is terminated for any reason, (i) the Executive shall not, in any manner, directly or indirectly make or publish any statement (orally or in writing) that would libel, slander, disparage, denigrate, ridicule or criticize the Company, any of its affiliates or any of their employees, officers or directors and (ii) the Board members and the Company’s executive officers shall not, in any manner, directly or indirectly make or publish any statement (orally or in writing) that would libel, slander, disparage, denigrate, ridicule or criticize the Executive.

8.Successors.

(a)This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.

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(b)This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns, provided that the Company may not assign this Agreement other than as described in Section 8(c) below.

(c)The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid.

9.Disputes.

(a)Mandatory Arbitration. Subject to the provisions of this Section 9, any controversy or claim between the Executive and the Company arising out of or relating to or concerning this Agreement (including the covenants contained in Section 7) or any aspect of the Executive’s employment with the Company or the termination of that employment (together, an “Employment Matter”) will be finally settled by arbitration in the County of New York administered by the American Arbitration Association (the “AAA”) under its Commercial Arbitration Rules then in effect. However, the AAA’s Commercial Arbitration Rules will be modified in the following ways:  (i) notwithstanding any provision of the AAA rules to the contrary, the arbitration shall be heard by a panel of three neutral arbitrators, with each party appointing one arbitrator, who shall jointly appoint a third, (ii) each arbitrator will agree to treat as confidential evidence and other information presented to them, (iii) there will be no authority to award punitive damages (and the Executive and the Company agree not to request any such award), (iv) the optional Rules for Emergency Measures of Protections will apply, (v) there will be no authority to amend or modify the terms of this Agreement except as provided in Section 10(a) (and the Executive and the Company agree not to request any such amendment or modification) and (vi) a decision must be rendered within ten business days of the parties’ closing statements or submission of post-hearing briefs.

(b)Injunctions and Enforcement of Arbitration Awards. The Executive or the Company may bring an action or special proceeding in a state or federal court of competent jurisdiction sitting in the County of New York to enforce any arbitration award under Section 9(a). Also, the Company may bring such an action or proceeding, in addition to its rights under Section 9(a) and whether or not an arbitration proceeding has been or is ever initiated, to temporarily, preliminarily or permanently enforce any part of Section 7. The Executive agrees that (i) violating any part of Section 7 would cause damage to the Company that cannot be measured or repaired, (ii) the Company therefore is entitled to seek an injunction, restraining order or other equitable relief restraining any actual or threatened violation of Section 7, (iii) no bond will need to be posted for the Company to receive such an injunction, order or other relief and (iv) no proof will be required that monetary damages for violations of Section 7 would be difficult to calculate and that remedies at law would be inadequate.

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(c)Jurisdiction and Choice of Forum. The Executive and the Company irrevocably submit to the exclusive jurisdiction of any state or federal court located in the County of New York over any Employment Matter that is not otherwise arbitrated or resolved according to Section 9(a). This includes any action or proceeding to compel arbitration or to enforce an arbitration award. Both the Executive and the Company (i) acknowledge that the forum stated in this Section 9(c) has a reasonable relation to this Agreement and to the relationship between the Executive and the Company and that the submission to the forum will apply even if the forum chooses to apply non-forum law, (ii) waive, to the extent permitted by law, any objection to personal jurisdiction or to the laying of venue of any action or proceeding covered by this Section 9(c) in the forum stated in this Section 9(c), (iii) agree not to commence any such action or proceeding in any forum other than the forum stated in this Section 9(c) and (iv) agree that, to the extent permitted by law, a final and non-appealable judgment in any such action or proceeding in any such court will be conclusive and binding on the Executive and the Company. However, nothing in this Agreement precludes the Executive or the Company from bringing any action or proceeding in any court for the purpose of enforcing the provisions of Section 9(a) and this Section 9(c).

(d)Waiver of Jury Trial. To the extent permitted by law, the Executive and the Company waive any and all rights to a jury trial with respect to any Employment Matter.

(e)Governing Law. This Agreement will be governed by and construed in accordance with the law of the State of New York applicable to contracts made and to be performed entirely within that State.

(f)Costs. The Company will reimburse as incurred any reasonable expenses, including reasonable attorney’s fees, the Executive incurs as a result of any Employment Matter, provided that the Executive shall promptly return any such reimbursements if found by an arbitrator to have brought or defended such Employment Matter in bad faith.

10.Miscellaneous.

(a)The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives.

(b)All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows:

If to the Executive:

at the Executive’s primary residential address
as shown on the records of the Company

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If to the Company:

Morgans Hotel Group Co.
475 Tenth Avenue
New York, NY 10018
Telecopy Number: 
Attention:  General Counsel

or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee.

(c)The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement.

(d)The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation.

(e)If any compensation or benefits provided by this Agreement may result in the application of Section 409A of the Code, the Company shall, in consultation with the Executive, modify the Agreement in the least restrictive manner necessary in order to, where applicable, (a) exclude such compensation from the definition of “deferred compensation” within the meaning of such Section 409A or (b) comply with the provisions of Section 409A, other applicable provision(s) of the Code and/or any rules, regulations or other regulatory guidance issued under such statutory provisions and to make such modifications, in each case, without any diminution in the value of the payments to the Executive. To the extent required in order to comply with Section 409A of the Code, amounts and benefits to be paid or provided to the Executive under Section 4 of this Agreement shall be paid or provided to the Executive on the first business day after the date that is six months following the Date of Termination. To the extent that the Welfare Benefits are so delayed, the Executive shall be entitled to COBRA continuation coverage under Section 4980B of the Code (“COBRA Coverage”) during such period of delay, and the Company shall reimburse the Executive for any Company portions of such COBRA Coverage in the seventh month following the Date of Termination.

(f)The Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 3(c) (subject to the limitation in the last sentence of Section 3(c)) or the Company’s right to terminate the Executive for Cause pursuant to Section 3(b) (subject to the limitation in the last sentence of Section 3(b)), shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

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(g)It is the parties’ intention that this Agreement not be construed more strictly with regard to the Executive or the Company.

(h)From and after the Effective Date, this Agreement shall supersede any other employment or severance agreement or arrangements between the parties (and the Executive shall not be eligible for severance benefits under any plan, program or policy of the Company).

(i)Any reference to a Section herein is a reference to a section of this Agreement unless otherwise stated.

(j)If the IPO does not occur by July 1, 2006 this Agreement shall be null and void and shall have no force or effect.

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IN WITNESS WHEREOF, the Executive has hereunto set the Executive’s hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.

MARC GORDON
/s/ Marc Gordon
MORGANS HOTEL GROUP CO.
By:	/s/ W. Edward Scheetz
	Name:	W. Edward Scheetz
	Title:	Chief Executive Officer

EX-10.28

Exhibit 10.28

MORGANS HOTEL GROUP CO.
 ANNUAL BONUS PLAN

1.PURPOSE OF PLAN

The purpose of the Morgans Hotel Group Co. Annual Bonus Plan (the “Plan”) is to attract, retain and motivate selected employees of Morgans Hotel Group Co. (the “Company”) and its subsidiaries and affiliates who are executives and employees of the Company in order to promote the Company’s long-term growth and profitability.

2.ADMINISTRATION

The Plan shall be administered by the Compensation Committee (the “Committee”) of the Board of Directors (the “Board”) of the Company. The Committee shall have complete control over the administration of the Plan and shall have the authority in its sole and absolute discretion to: (i) exercise all of the powers granted to it under the Plan; (ii) construe, interpret and implement the Plan; (iii) prescribe, amend and rescind rules and regulations relating to the Plan, including rules and regulations governing its own operations; (iv) make all determinations necessary or advisable in administering the Plan (including, without limitation, calculating the size of the bonus payable to each participant); (v) correct any defect, supply any omission and reconcile any inconsistency in the Plan; and (vi) amend the Plan to reflect changes in or interpretations of applicable law, rules or regulations. The determination of the Committee (or the Board, as applicable) on all matters relating to the Plan and any amounts payable thereunder shall be final, binding and conclusive on all parties. The Committee may allocate among its members and may delegate some or all of its authority or administrative responsibility to such individual or individuals who are not members of the Committee as it shall deem necessary or appropriate.

Notwithstanding anything to the contrary contained herein, the Board may, in its sole discretion, at any time and from time to time, administer the Plan. The Board shall have all of the authority and responsibility granted to the Committee herein.

No member of the Board or the Committee, nor any officer or employee of the Company or any individual acting on behalf of the Board or the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Board or the Committee and each and any officer or employee of the Company or any individual acting on their behalf shall, to the extent permitted by law, be fully indemnified and protected by the Company in respect of any such action, determination or interpretation.

3.PARTICIPANTS

Eligibility to participate in the Plan is limited to those executives and employees who, in the Committee’s judgment based on the recommendations of the

Company’s chief executive officer (the “CEO”), have an influence on the Company’s long-term corporate performance. The Committee shall designate the individual executives and employees eligible to participate in the Plan for each performance period. At anytime during a performance period, the Committee in its sole discretion may add executives and employees to the Plan for that performance period or remove executives and employees from the Plan for that performance period. Participation in any performance period does not ensure participation in future performance periods. An individual’s active participation in any performance period shall cease in the event that he or she ceases to be employed by the Company during such period.

4.PERFORMANCE PERIODS

Unless otherwise determined by the Committee, the term over which performance shall be measured shall be a single calendar year. The first performance period shall be the 2006 calendar year and thereafter each performance period shall be one full calendar year, unless otherwise determined by the Committee.

5.PERFORMANCE GOALS

The Committee shall establish in writing the performance goals for such performance period. The Committee reserves the right, in its sole discretion, to adjust performance goals to reflect such quantitative or qualitative considerations as the Committee deems relevant.

6.TARGET AND MAXIMUM BONUS OPPORTUNITIES

The Committee shall establish the target bonus opportunity and maximum bonus opportunity for each participant at the same time that it establishes the performance goals for such performance period. In the event any participant is added to the Plan, the Committee may set the target bonus opportunity and maximum bonus opportunity for such person at that time.

7.ACTUAL BONUS AMOUNT

Upon the completion of each performance period, the Committee shall evaluate the Company’s performance against the established performance goals and shall determine the amount of bonuses payable to each participant. The Committee may, in its sole discretion, increase or decrease the amount of the bonuses payable to any participant to reflect such quantitative or qualitative considerations as the Committee deems relevant. The actual bonus earned under the Plan shall be payable in cash or, to the extent permissible by applicable law and at the Committee’s sole discretion, in shares of stock of the Company or in equity awards (which may be subject to vesting and transfer restrictions) with respect to the shares of stock of the Company under one of the Company’s equity compensation plans. The value of any such stock or equity awards and the terms of any equity awards shall be determined by the Committee in its sole discretion.

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A participant whose active participation in the Plan ceases before the last day of the performance period, or whose employment terminates before the bonus amounts are paid under the Plan, shall not be entitled to a bonus hereunder.

8.ADOPTION DATE AND EFFECTIVE DATE

The Plan was adopted by the Board on                    , 2006 and approved by the stockholders of the Company on                    , 2006. The Plan shall become effective on the day prior to the date of the consummation of the initial public offering of shares of common stock of the Company (the “IPO Date”). In the event that the IPO Date has not occurred by July 1, 2006, the Plan shall expire and be null and void without any force or effect.

9.AMENDMENT AND TERMINATION

The Board may suspend or terminate the Plan, in whole or in part, at any time, and may from time to time amend the Plan in such respects as the Board may deem advisable.

10.MISCELLANEOUS

(a)           The establishment of the Plan shall not be construed as conferring any legal rights upon any participant for a continuation of employment, nor shall it interfere with the rights of the Company to discharge a participant and treat him or her without regard to the effect which such treatment might have upon him or her as a participant in this Plan.

(b)           The Company shall have the right to deduct from any amounts otherwise payable to a participant, whether pursuant to the Plan or otherwise, or otherwise collect from the participant, any required minimum withholding taxes with respect to benefits under the Plan.

(c)           The Company, in its sole discretion, may assign the Plan and all obligations and liabilities hereunder to any parent organization without any prior notice to or consent of any participant. In the event of any assignment to any such parent organization, such parent organization shall be treated as a successor to the Company and shall exercise all rights of the Company under the Plan.

(d)           Subject to any applicable law, no benefit under the Plan shall be subject in any manner to, nor shall the Company be obligated to recognize, any purported anticipation, alienation, sale, transfer (otherwise than by will or the laws of descent and distribution), assignment, pledge, encumbrance or charge, and any attempt to do so shall be void. No such benefit shall in any manner be liable for or subject to garnishment, attachment, execution, or a levy, or liable for or subject to the debts, contracts, liabilities, engagements or torts of the participants.

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(e)           The Plan shall not be construed as conferring on a participant any right, title, interest or claim in or to any specific asset, reserve, account or property of any kind possessed by the Company. To the extent that a participant or any such person acquires a right to receive payments from the Company, such rights shall be no greater than the rights of an unsecured general creditor.

(f)            ALL RIGHTS AND OBLIGATIONS UNDER THE PLAN SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICT OF LAWS.

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EX-10.32

Exhibit 10.32

CREDIT AGREEMENT

dated as of

February 17, 2006,

among

MORGANS HOTEL GROUP CO.,

as Guarantor

MORGANS HOTEL GROUP MANAGEMENT LLC,

as Borrower,

The Lenders Party Hereto,

CITICORP NORTH AMERICA, INC.,
as Administrative Agent,

and

MORGAN STANLEY SENIOR FUNDING, INC.
and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
as Joint Lead Arrangers and Co-Syndication Agents

MORGAN STANLEY SENIOR FUNDING, INC.,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED AND CITIGROUP GLOBAL MARKETS INC.
as Joint Bookrunners

BANK OF AMERICA N.A.
as Documentation Agent

[CS&M Ref. 8669-117]

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TABLE OF CONTENTS

ARTICLE I

Definitions

SECTION 1.01.	Defined Terms	1
SECTION 1.02.	Classification of Loans and Borrowings	21
SECTION 1.03.	Terms Generally	21
SECTION 1.04.	Accounting Terms; GAAP	22
SECTION 1.05.	Pro Forma Calculations	22
ARTICLE II
The Credits
SECTION 2.01.	Commitments	22
SECTION 2.02.	Loans and Borrowings	22
SECTION 2.03.	Requests for Borrowings	23
SECTION 2.04.	Funding of Borrowings	23
SECTION 2.05.	Interest Elections	24
SECTION 2.06.	Termination and Reduction of Commitments	25
SECTION 2.07.	Repayment of Loans; Evidence of Debt	26
SECTION 2.08.	Amortization of Term Loans	26
SECTION 2.09.	Prepayment of Loans	27
SECTION 2.10.	Fees	28
SECTION 2.11.	Interest	28
SECTION 2.12.	Alternate Rate of Interest	29
SECTION 2.13.	Increased Costs	29
SECTION 2.14.	Break Funding Payments	30
SECTION 2.15.	Taxes	31
SECTION 2.16.	Payments Generally; Pro Rata Treatment; Sharing of Setoffs	34
SECTION 2.17.	Mitigation Obligations; Replacement of Lenders	35
ARTICLE III
Representations and Warranties
SECTION 3.01.	Organization; Powers	36
SECTION 3.02.	Authorization; Enforceability	36
SECTION 3.03.	Governmental Approvals; No Conflicts	37
SECTION 3.04.	Financial Condition; No Material Adverse Change	37
SECTION 3.05.	Properties	38
SECTION 3.06.	Litigation and Environmental Matters	38
SECTION 3.07.	Compliance with Laws and Agreements	38
SECTION 3.08.	Investment and Holding Company Status	39

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SECTION 3.09.	Taxes	39
SECTION 3.10.	ERISA	39
SECTION 3.11.	Disclosure	39
SECTION 3.12.	Subsidiaries	40
SECTION 3.13.	Insurance	40
SECTION 3.14.	Labor Matters	40
SECTION 3.15.	Solvency	40
ARTICLE IV
Conditions
ARTICLE V
Affirmative Covenants
SECTION 5.01.	Financial Statements and Other Information	44
SECTION 5.02.	Notices of Material Events	45
SECTION 5.03.	Information Regarding Collateral	45
SECTION 5.04.	Existence; Conduct of Business	46
SECTION 5.05.	Payment of Obligations	46
SECTION 5.06.	Maintenance of Properties	46
SECTION 5.07.	Insurance	46
SECTION 5.08.	Casualty and Condemnation	47
SECTION 5.09.	Books and Records; Inspection and Audit Rights	47
SECTION 5.10.	Compliance with Laws	47
SECTION 5.11.	Use of Proceeds	47
SECTION 5.12.	Additional Subsidiaries	47
SECTION 5.13.	Further Assurances	47
SECTION 5.14.	Interest Rate Protection	48
SECTION 5.15.	Formation and Structuring Transactions	48
ARTICLE VI
Negative Covenants
SECTION 6.01.	Indebtedness; Certain Equity Securities	48
SECTION 6.02.	Liens	51
SECTION 6.03.	Fundamental Changes	53
SECTION 6.04.	Investments, Loans, Advances, Guarantees and Acquisitions	54
SECTION 6.05.	Asset Sales	56
SECTION 6.06.	[Intentionally Omitted.]	57
SECTION 6.07.	Swap Agreements	57
SECTION 6.08.	Restricted Payments	58
SECTION 6.09.	Transactions with Affiliates	58
SECTION 6.10.	Restrictive Agreements	59

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SECTION 6.11.	Amendment of Material Documents	59
SECTION 6.12.	Interest Expense Coverage Ratio	59
SECTION 6.13.	Leverage Ratio	60
SECTION 6.14.	Senior Leverage Ratio	60
SECTION 6.15.	Changes in Fiscal Periods	60
SECTION 6.16.	Availability of Exceptions	60
SECTION 6.17.	Formation and Structuring Transactions	60
ARTICLE VII
Events of Default
ARTICLE VIII
The Administrative Agent
ARTICLE IX
Miscellaneous
SECTION 9.01.	Notices	66
SECTION 9.02.	Waivers; Amendments	66
SECTION 9.03.	Expenses; Indemnity; Damage Waiver	68
SECTION 9.04.	Successors and Assigns	69
SECTION 9.05.	Survival	72
SECTION 9.06.	Counterparts; Integration; Effectiveness	73
SECTION 9.07.	Severability	73
SECTION 9.08.	Right of Setoff	73
SECTION 9.09.	Governing Law; Jurisdiction; Consent to Service of Process	74
SECTION 9.10.	WAIVER OF JURY TRIAL	74
SECTION 9.11.	Headings	75
SECTION 9.12.	Confidentiality	75
SECTION 9.13.	Interest Rate Limitation	75
SECTION 9.14.	USA Patriot Act	76

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SCHEDULES:

Schedule 1.01 — Transactions

Schedule 2.01 — Commitments

Schedule 3.05 — Real Property Liens

Schedule 3.06 — Disclosed Matters

Schedule 3.12 — Subsidiaries

Schedule 3.13 — Insurance

Schedule 6.01 — Existing Indebtedness

Schedule 6.02 — Existing Liens

Schedule 6.04 — Existing Investments

Schedule 6.10 — Existing Restrictions

EXHIBITS:

Exhibit A	— Form of Assignment and Assumption
Exhibit B	— Form of Opinion of Sullivan & Cromwell LLP
Exhibit C	— Form of Collateral Agreement
Exhibit D	— Form of Perfection Certificate
Exhibit E	— Form of Guarantee Agreement
Exhibit F	— Form of Opinion of Sullivan & Cromwell LLP (Collateral and Guarantee Requirement)

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CREDIT AGREEMENT dated as of February 17, 2006 (this “Agreement”), among Morgans Hotel Group Co., a Delaware corporation (“Holdings”), Morgans Hotel Group Management LLC, a Delaware limited liability company (the “Borrower”), the LENDERS party hereto, CITICORP NORTH AMERICA, INC., as Administrative Agent, and MORGAN STANLEY SENIOR FUNDING, INC. and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, as Joint Lead Arrangers and Co-Syndication Agents.

In connection with the Transactions described in Schedule 1.01, the Borrower has requested that the Lenders extend credit in the form of the Term Loans on the Effective Date in an aggregate principal amount not in excess of $80,000,000.

The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions set forth herein. Accordingly, the parties hereto agree as follows:

ARTICLE I

Definitions

SECTION 1.01. Defined Terms. As used in this Agreement, the following terms have the meanings specified below:

“ABR”, when used in reference to any Loan or Borrowing, means that the Loan or Borrowing is bearing interest at a rate determined by reference to the Alternate Base Rate.

“Additional Mortgage Indebtedness” means Indebtedness incurred after the Effective Date to finance any real property or interest therein and/or the improvements thereto, or to finance the acquisition of any real property or interest therein by the Borrower or any Subsidiary and, in either case, secured by a mortgage on such property or a pledge of the Equity Interests of the entity that directly or indirectly owns or acquires such property or interest, provided that such entity is not a Loan Party.

“Adjusted LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.

“Administrative Agent” means Citicorp North America, Inc., in its capacity as administrative agent for the Lenders hereunder, and its successors in such capacity as provided in Article VIII.

“Administrative Questionnaire” means an administrative questionnaire in a form supplied by the Administrative Agent.

“Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified, provided, however, that for purposes of Section 6.09, the term “Affiliate” shall also include any person that directly, or indirectly through one or more intermediaries, owns 5% or more of any class of Equity Interests of the Person specified or that is an officer or director of the Person specified.

“Alternate Base Rate” means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus ½ of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively.

“Applicable Rate” means, for any day with respect to any Term Loan, 2.00% per annum with respect to Eurodollar Loans, or 1.00% per annum with respect to ABR Loans, provided that if the Collateral and Guarantee Requirement is not satisfied on or prior to April 1, 2006, then commencing on such date and, if applicable, continuing until the date on which the Collateral and Guarantee Requirement has been satisfied, the term “Applicable Rate” shall mean 3.50% per annum with respect to Eurodollar Loans, or 2.50% per annum with respect to ABR Loans (it being understood and agreed that “Applicable Rate” shall mean 2.00% per annum with respect to Eurodollar Loans, or 1.00% per annum with respect to ABR Loans, after the date on which the Collateral and Guarantee Requirement is satisfied if such date occurs after April 1, 2006).

“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A.

“Board” means the Board of Governors of the Federal Reserve System of the United States of America.

“Borrower” means Morgans Hotel Group Management LLC, a Delaware limited liability company.

“Borrowing” means Loans of the same Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect.

“Borrowing Request” means a request by the Borrower for a Borrowing in accordance with Section 2.03.

“Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed, provided that, when used in connection with a Eurodollar Loan, the term

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“Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

“Capital Lease Obligations” of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

“Change in Control” means (a) (i) the cessation of Holdings being the sole managing member of the Revolving Borrower or (ii) the gaining by any member of the Revolving Borrower (other than Holdings) of the right to exercise control or management power over the business and affairs of the Revolving Borrower, except as otherwise expressly permitted in the LLC Agreement and as required by applicable law, (b) (i) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934, as amended, and the rules of the SEC thereunder as in effect on the date hereof) other than the Permitted Investors, of Equity Interests representing more than 40% of either the aggregate ordinary voting power or the aggregate equity value represented by the issued and outstanding Equity Interests in Holdings, and (ii) the ownership, directly or indirectly, beneficially or of record, by the Permitted Investors of Equity Interests in Holdings representing in the aggregate a lesser percentage of either the aggregate ordinary voting power or the aggregate equity value represented by the issued and outstanding Equity Interests in Holdings than such Person or group, (c) the occupation of a majority of the seats (other than vacant seats) on the board of directors of Holdings by Persons who were neither (i) nominated by the board of directors of Holdings or the Permitted Investors nor (ii) appointed by directors so nominated or (d) the acquisition of direct or indirect Control of Holdings by any Person or group other than the Permitted Investors.

“Change in Law” means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.13(b), by any lending office of such Lender or by such Lender’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement.

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Collateral” means any and all “Collateral”, as defined in any applicable Security Document.

“Collateral Agreement” means the Guarantee and Collateral Agreement among Holdings, the Borrower, the Subsidiary Loan Parties and the Administrative Agent, substantially in the form of Exhibit C.

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“Collateral and Guarantee Requirement” means the requirement that:

(a) the Administrative Agent shall have received from each Loan Party a counterpart of the Collateral Agreement duly executed and delivered on behalf of such Loan Party;

(b) the outstanding Equity Interests listed on Schedule II to the Collateral Agreement, in each case owned by or on behalf of any Loan Party, shall have been pledged pursuant to the Collateral Agreement;

(c) all documents and instruments, including Uniform Commercial Code financing statements, required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded to create the Liens intended to be created by the Collateral Agreement and perfect such Liens to the extent required by, and with the priority required by, the Collateral Agreement, shall have been filed, registered or recorded or delivered to the Administrative Agent for filing, registration or recording;

(d) each Loan Party shall have obtained all consents and approvals required to be obtained by it in connection with the execution and delivery of all Security Documents to which it is a party, the performance of its obligations thereunder and the granting by it of the Liens thereunder; and

(e) the Administrative Agent and the Joint Lead Arrangers shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the date of the Collateral Agreement) of Sullivan & Cromwell LLP or other external counsel reasonably acceptable to the Joint Bookrunners, counsel for Holdings, the Borrower and the Subsidiaries, substantially in the form of Exhibit F. Each of Holdings and the Borrower hereby requests such counsel to deliver such opinion.

“Consolidated Cash Interest Expense” means, for any period, the excess of (a) the sum of (i) the interest expense (including imputed interest expense in respect of Capital Lease Obligations) of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) for such period, determined on a consolidated basis in accordance with GAAP, (ii) any interest accrued during such period in respect of Indebtedness of Holdings, the Borrower and any Subsidiary (other than any Excluded Subsidiary) that is required to be capitalized rather than included in consolidated interest expense for such period in accordance with GAAP (other than interest attributable to Development Debt), (iii) any cash payments made during such period in respect of obligations referred to in clause (b)(ii) below that were amortized or accrued in a previous period and (iv) all cash dividends paid during such period in respect of preferred Equity Interests of Holdings, the Revolving Borrower (but expressly excluding any such dividends paid by the Revolving Borrower to Holdings), together with the Tax Amount attributable thereto, if any, minus (b) the sum of (i) to the extent included in such consolidated interest expense for such

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period, non-cash amounts attributable to amortization of financing costs paid in a previous period, (ii) to the extent included in such consolidated interest expense for such period, non-cash amounts attributable to amortization of debt discounts or accrued interest payable in kind for such period and (iii) the minority interest share of the amounts included in clause (a) above. Consolidated Cash Interest Expense shall be deemed to be (a) for the four fiscal quarter period ended March 31, 2006, Consolidated Cash Interest Expense for the period from the Effective Date to and including March 31, 2006, multiplied by a fraction equal to (x) 365 divided by (y) the number of days actually elapsed from the Effective Date to March 31, 2006, (b) for the four fiscal quarter period ended June 30, 2006, Consolidated Cash Interest Expense for the period from the Effective Date to and including June 30, 2006, multiplied by a fraction equal to (x) 365 divided by (y) the number of days actually elapsed from the Effective Date to June 30, 2006, (c) for the four fiscal quarter period ended September 30, 2006, Consolidated Cash Interest Expense for the period from the Effective Date to and including September 30, 2006, multiplied by a fraction equal to (x) 365 divided by (y) the number of days actually elapsed from the Effective Date to September 30, 2006 and (d) for the four fiscal quarter period ended December 31, 2006, Consolidated Cash Interest Expense for the period from the Effective Date to and including December 31, 2006, multiplied by a fraction equal to (x) 365 divided by (y) the number of days actually elapsed from the Effective Date to December 31, 2006.

“Consolidated EBITDA” means, for any period, Consolidated Net Income for such period plus without duplication and to the extent deducted in determining such Consolidated Net Income, the sum of (i) consolidated interest expense for such period, (ii) consolidated income tax expense for such period, (iii) all amounts attributable to depreciation and amortization for such period (excluding amortization expense attributable to a prepaid cash item that was paid in a prior period and excluding depreciation expense of minority interests in consolidated joint ventures), (iv) other non-operating expense (or, if applicable, minus non-operating income) (in each case as defined in the Combined Statement of Operations and Comprehensive Loss of Holdings) for such period, (v) non-cash expenses resulting from the grant of stock options or other equity-related incentives to any director, officer or employee of Holdings, the Borrower or any Subsidiary pursuant to a written plan or agreement approved by the board of directors of Holdings, (vi) non-cash exchange, translation or performance losses relating to any foreign currency hedging transactions or currency fluctuations and (vii) all amounts attributable to equity in income/loss of unconsolidated subsidiaries, provided that Consolidated EBITDA for the four fiscal quarter periods ended March 31, 2006, June 30, 2006, September 30, 2006 and December 31, 2006 shall be determined on a pro forma basis giving effect to the Formation and Structuring Transactions as if they occurred on the first day of each such four consecutive fiscal quarter period (including cost savings to the extent such cost savings would be permitted to be reflected in pro forma financial information complying with the requirements of GAAP and Article XI of Regulation S-X under the Securities Act of 1933, as amended, as interpreted by the Staff of the SEC, and as certified by a Financial Officer).

“Consolidated Net Income” means, for any period, the net income or loss of Holdings, the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP (adjusted to reflect any charge, tax or expense incurred or accrued by Holdings during such period as though such charge, tax

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or expense had been incurred by the Revolving Borrower, to the extent that the Revolving Borrower has made or would be entitled under the Loan Documents to make any Restricted Payment or other payment to or for the account of Holdings in respect thereof), provided that there shall be excluded (a) the income of any Subsidiary to the extent that the declaration or payment of dividends or other distributions by such Subsidiary of that income is not at the time permitted by a Requirement of Law or any agreement or instrument applicable to such Subsidiary, except to the extent of the amount of cash dividends or other cash distributions actually paid to the Borrower or any Subsidiary during such period, (b) the income of any Person (other than the Borrower or any Subsidiary that is not accounted for using the equity method of accounting) in which the Borrower or any Subsidiary owns an Equity Interest, except to the extent of the amount of cash dividends or other cash distributions actually paid to the Borrower or any Subsidiary during such period and (c) the income of any Excluded Subsidiary.

“Consulting Agreement” means the consulting agreement, dated as of June 24, 2005, by and between Morgans Hotel Group LLC and Ian Schrager.

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies, or the dismissal or appointment of the management, of a Person, whether through the ability to exercise voting power, by contract or otherwise. “Controlling” and “Controlled” have meanings correlative thereto.

“Debt Prepayment” means the payment in cash, with proceeds of the IPO, of (a) all principal amounts of Indebtedness outstanding under, together with all interest, premiums, penalties and fees due in connection with prepayment of, the Existing Mezzanine Loans, (b) Indebtedness outstanding under the NY/CA Mortgage Loan, together with all interest, premiums, penalties and fees due in connection with such prepayment, and (c) Indebtedness outstanding under the FL Mortgage Loan, together with all interest, premiums, penalties and fees due in connection with such prepayment such that the aggregate principal amount of Indebtedness repaid under clauses (a), (b) and (c) shall equal an amount not less than $205,000,000.

“Default” means any event or condition that constitutes an Event of Default or that upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

“Development Debt” means Indebtedness of a Subsidiary that is a special purpose entity relating to a development project in respect of which interest is being capitalized in accordance with GAAP, provided that such Indebtedness is not recourse to the Loan Parties, and provided further that such Indebtedness shall cease to constitute Development Debt on the date on which interest with respect to such Indebtedness is not required to be capitalized in accordance with GAAP.

“Disclosed Matters” means the actions, suits and proceedings and the environmental matters disclosed in Schedule 3.06.

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“Disqualified Equity Interests” means Equity Interests that (a) mature or are mandatorily redeemable or subject to mandatory repurchase or redemption, or repurchase at the option of the holders thereof, in each case in whole or in part and whether upon the occurrence of any event, pursuant to a sinking fund obligation on a fixed date or otherwise, prior to the date that is 180 days after the Term Loan Maturity Date (other than (i) upon payment in full of the Loan Document Obligations and termination of the Term Loan Commitments or (ii) upon a “change in control”, provided that any payment required pursuant to this clause (ii) is contractually subordinated in right of payment to the Loan Document Obligations on terms reasonably satisfactory to the Administrative Agent and such requirement is applicable only in circumstances that are market on the date of issuance of such Equity Interests), (b) require the maintenance or achievement of any financial performance standards other than as a condition to the taking of specific actions, or provide remedies to holders thereof (other than voting and management rights and increases in pay-in-kind dividends) or (c) are convertible or exchangeable, automatically or at the option of any holder thereof, into any Indebtedness (other than Indebtedness permitted under Section 6.01), Equity Interests or other assets other than Qualified Equity Interests or trust preferred securities otherwise permitted hereunder.

“dollars” or “$” refers to lawful money of the United States of America.

“Effective Date” means the date on which the conditions specified in Article IV are satisfied (or waived in accordance with Section 9.02).

“Effective Date Guarantee Requirement” means the requirement that the Administrative Agent shall have received from each of Holdings, the Borrower and the Subsidiary Loan Parties a counterpart of the Guarantee Agreement duly executed and delivered on behalf of such entity, and that each such entity shall have obtained all consents and approvals required to be obtained by it in connection with the execution and delivery of the Guarantee Agreement and the performance of its obligations thereunder.

“Environmental Laws” means all treaties, laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by or with any Governmental Authority, relating in any way to the environment, the preservation or reclamation of natural resources or the generation, management, Release or threatened Release of any Hazardous Material.

“Environmental Liability” means any liability, contingent or otherwise (including any liability for damages, costs of medical monitoring, costs of environmental remediation or restoration, administrative oversight costs, consultants’ fees, fines, penalties or indemnities), of Holdings, the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) any actual or alleged violation of any Environmental Law or permit, license or approval issued thereunder, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened Release of any Hazardous Materials or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

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“Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person. As used herein, references to “preferred Equity Interests” include Equity Interests in the form of preferred stock, trust preferred securities and other similar securities with regularly scheduled cash or payment-in-kind dividend payments and other “debt-like” characteristics, but do not include customary real estate joint venture and other similar equity ownership arrangements, even if such arrangements involve some disproportionate sharing of cash flows of the applicable entity.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

“ERISA Affiliate” means any trade or business (whether or not incorporated) that, together with Holdings, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

“ERISA Event” means (a) any “reportable event”, as described in Section 4043(c) of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived), (b) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived, (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan, (d) the incurrence by Holdings or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan, (e) the receipt by Holdings or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan, (f) the incurrence by Holdings or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan or (g) the receipt by Holdings or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from Holdings or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA.

“Eurodollar”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate.

“Event of Default” has the meaning assigned to such term in Article VII.

“Excluded Subsidiaries” means Clift Holdings LLC, a Delaware limited liability company, and Shore Club Holdings LLC, a Delaware limited liability company.

“Excluded Taxes” means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or

8

measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction described in clause (a) above and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.17(b)), any withholding tax that (i) is in effect and would apply to amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to any withholding tax pursuant to Section 2.15(a), or (ii) is attributable to such Foreign Lender’s failure to comply with Section 2.15(f).

“Existing Hotel Properties” means the fee and leasehold estates in, and all buildings, foundations, structures and improvements on, the premises commonly known on the date hereof as the Morgans Hotel located in New York, New York, the Delano Hotel located in Miami, Florida, the Royalton Hotel located in New York, New York, the Mondrian Hotel located in Los Angeles, California and the Hudson Hotel located in New York, New York.

“Existing Hotel Property Management Contract Prepayment Event” means any termination or non-renewal of an Existing Hotel Property Management Contract, provided that if such termination or non-renewal occurs as a result of a sale, transfer or disposition of an Existing Hotel Property, a Prepayment Event will not be deemed to have occurred if the Borrower will manage or otherwise be responsible for the day-to-day operations of such property pursuant to a customary management contract under which the Borrower will receive customary management fees comparable to those in effect prior to or concurrently with such termination or non-renewal.

“Existing Hotel Property Management Contracts” means (a) the Property Management Agreement dated as of June 30, 1999 between Royalton, LLC, a Delaware limited liability company, and Ian Schrager Hotel Management LLC, a Delaware limited liability company, as amended on May 20, 2004, (b) the Property Management Agreement dated as of September 30, 1999 between Henry Hudson Holdings, LLC, a Delaware limited liability company, and Ian Schrager Hotel Management LLC, a Delaware limited liability company, (c) the Property Management Agreement dated as of June 30, 1999 between Beach Hotel Associates Limited Partnership, a Delaware limited partnership, and the Borrower, as amended on May 20, 2004 (d) the Property Management Agreement dated as of June 30, 1999 between Mondrian Holdings LLC, a Delaware limited partnership, and the Borrower, as amended on May 20, 2004 and (e) the Property Management Agreement dated as of June 30, 1999 between Morgans Holdings LLC, a Delaware limited partnership, and the Borrower, as amended on May 20, 2004.

“Existing Mezzanine Loans” means the Loan and Security Agreement dated as of June 29, 2005 between MMRDH Senior Mezz Holding Company LLC, a Delaware limited liability company, and Wachovia Bank, National Association, (b) the

9

Loan and Security Agreement dated as of June 29, 2005 between MMRDH Intermediate Mezz Holding Company LLC, a Delaware limited liability company, and Wachovia Bank, National Association and (c) the Loan and Security Agreement dated as of June 29, 2005 between MMRDH Junior Mezz Holding Company LLC, a Delaware limited liability company, and Wachovia Bank, National Association.

“Federal Funds Effective Rate” means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it.

“Financial Officer” means the chief financial officer, principal accounting officer, treasurer or controller of Holdings.

“FL Mortgage Loan” means the Amended and Restated Renewal and Future Advance Promissory Note dated June 29, 2005 by Beach Hotel Associates LLC, a Delaware limited liability company.

“Foreign Lender” means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located. For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

“Formation and Structuring Transactions” means the formation and structuring transactions described on Schedule 1.01.

“GAAP” means generally accepted accounting principles in the United States of America.

“Governmental Authority” means the government of the United States of America or any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).

“Granting Lender” has the meaning assigned to such term in Section 9.04(e).

“Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the

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purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation, provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business.

“Guarantee Agreement” means the Guarantee Agreement among Holdings, the Borrower, the Subsidiary Loan Parties and the Administrative Agent, substantially in the form of Exhibit D.

“Hazardous Materials” means all explosive, radioactive, hazardous or toxic substances, materials, wastes or other pollutants, including petroleum or petroleum by-products or distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls, radon gas, chlorofluorocarbons and other ozone-depleting substances or mold which are regulated pursuant to any Environmental Law.

“Holdings” means Morgans Hotel Group Co., a Delaware corporation.

“Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding trade accounts payable and other accrued obligations, in each case incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers’ acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. Notwithstanding the foregoing, in connection with any Permitted Acquisition, the term “Indebtedness” shall not include contingent post-closing purchase price adjustments or earn-outs to which the seller in such Permitted Acquisition may become entitled.

“Indemnified Taxes” means Taxes other than Excluded Taxes.

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“Information Memorandum” means the Confidential Information Memorandum dated January 2006, relating to the Borrower and the Transactions.

“Interest Election Request” means a request by the Borrower to convert or continue a Term Borrowing in accordance with Section 2.05.

“Interest Payment Date” means (a) with respect to any ABR Loan, the last day of each March, June, September and December and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period.

“Interest Period” means, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter (or nine or twelve months thereafter if, at the time of the relevant Borrowing, all Lenders participating therein agree to make an interest period of such duration available), as the Borrower may elect, provided, that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

“IPO” means the initial public offering of Holdings described in Schedule 1.01.

“Joint Bookrunners” means Morgan Stanley Senior Funding, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc.

“Joint Lead Arrangers” means Morgan Stanley Senior Funding, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated.

“Lenders” means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to Section 9.04, other than any such Person that ceases to be a party hereto pursuant to Section 9.04.

“Leverage Ratio” means, on any date, the ratio of (a) Total Indebtedness as of such date to (b) Consolidated EBITDA for the period of four consecutive fiscal quarters of the Borrower ended on such date (or, if such date is not the last day of a fiscal quarter, ended on the last day of the fiscal quarter of the Borrower most-recently ended prior to such date).

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“LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Dow Jones Market Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits in an amount comparable to the amount of such Eurodollar Borrowing and with a maturity comparable to such Interest Period. In the event that such rate is not available at such time for any reason, then the “LIBO Rate” with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of an amount comparable to the amount of such Eurodollar Borrowing and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period.

“Lien” means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

“LLC Agreement” means the amended and restated limited liability agreement of the Revolving Borrower dated as of February 17, 2006, as amended from time to time to the extent not prohibited by Section 6.12.

“Loan Document Obligations” has the meaning assigned to such term in the Collateral Agreement.

“Loan Documents” means this Agreement and the Security Documents.

“Loan Parties” means Holdings, the Borrower and the Subsidiary Loan Parties.

“Loans” means the loans made by the Lenders to the Borrower pursuant to this Agreement.

“Material Adverse Effect” means a material adverse effect on (a) the business, operations, properties, financial condition or results of operations of Holdings, the Borrower and the Subsidiaries, taken as a whole, (b) the ability of any Loan Party to perform any of its obligations under any Loan Document or (c) the rights of or benefits or remedies available to the Lenders under any Loan Document.

“Material Indebtedness” means Indebtedness (other than the Loans), or obligations in respect of one or more Swap Agreements, of any one or more of Holdings,

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the Borrower and the Subsidiary Loan Parties in an aggregate principal amount exceeding $10,000,000. For purposes of determining Material Indebtedness, the “principal amount” of the obligations of Holdings, the Borrower or any Subsidiary Loan Party in respect of any Swap Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that Holdings, the Borrower or such Subsidiary would be required to pay if such Swap Agreement were terminated at such time.

“MHG LLC” means Morgans Hotel Group LLC, a Delaware limited liability company.

“Moody’s” means Moody’s Investors Service, Inc.

“Mortgage Indebtedness” means Indebtedness outstanding as of the date hereof under the NY/CA Mortgage Loan and the FL Mortgage Loan.

“Multiemployer Plan” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

“Non-Consenting Lender” has the meaning assigned to such term in Section 9.02(c).

“NY/CA Mortgage Loan” means the Amended, Restated and Consolidated Promissory Note dated June 29, 2005 by Henry Hudson Holdings LLC, a Delaware limited liability company, Morgans Holdings LLC, a Delaware limited liability company, Royalton, LLC, a Delaware limited liability company, and Mondrian Holdings LLC, a Delaware limited liability company, in favor of Wachovia Bank, National Association.

“Obligations” has the meaning assigned to such term in the Guarantee Agreement or, if applicable, the Collateral Agreement.

“Other Taxes” means any and all present or future recording, stamp, documentary, excise, transfer, sales, property or similar taxes, charges or levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document.

“Participant” has the meaning assigned to such term in Section 9.04(c).

“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.

“Perfection Certificate” means a certificate in the form of Exhibit D.

“Permitted Acquisition” means any acquisition by the Borrower or a wholly-owned Subsidiary of all the outstanding Equity Interests (other than directors’ qualifying shares) in, all or substantially all the assets of, or all or substantially all the assets constituting a division or line of business of, a Person if (a) no Default has occurred and is continuing or would result therefrom, (b) such acquisition and all

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transactions related thereto are consummated in accordance with applicable laws, (c) the Borrower is in compliance, on a Pro Forma Basis after giving effect to such acquisition as of the last day of the most-recently ended fiscal quarter of the Borrower, with the covenants contained in Sections 6.12, 6.13 and 6.14, (d) the business of such Person or such assets, as the case may be, constitutes a business permitted by Section 6.03(b), (e) the Leverage Ratio, calculated on a Pro Forma Basis after giving effect to such acquisition as of the last day of the most-recently ended fiscal quarter of the Borrower, is less than 6.50 to 1.00, and (f) the Borrower has delivered to the Administrative Agent a certificate of a Financial Officer to the effect set forth in clauses (a), (b), (c), (d) and (e) above, together with all relevant financial information for the Person or assets to be acquired and setting forth reasonably detailed calculations demonstrating compliance with clauses (c) and (e) above (which calculations shall, if made as of the last day of any fiscal quarter of the Borrower for which the Borrower has not delivered to the Administrative Agent the financial statements and certificate of a Financial Officer required to be delivered by Section 5.01(a) or (b) and Section 5.01(c), respectively, be accompanied by a reasonably detailed calculation of Consolidated EBITDA and Consolidated Cash Interest Expense for the relevant period).

“Permitted Encumbrances” means:

(a) Liens imposed by law for taxes, assessments or other governmental charges that are not yet due or are being contested in compliance with Section 5.05;

(b) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s, landlords’ and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.05;

(c) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations;

(d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business;

(e) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII;

(f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary; and

(g) Liens arising from Permitted Investments described in clause (d) of the definition of the term “Permitted Investments”.

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“Permitted Investments” means:

(a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof;

(b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody’s;

(c) investments in certificates of deposit, banker’s acceptances and time or demand deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $500,000,000;

(d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and

(e) investments in “money market funds” within the meaning of Rule 2a-7 of the Investment Company Act of 1940, as amended, substantially all of whose assets are invested in investments of the type described in clauses (a) through (d) above.

“Permitted Investors” means NCIC MHG Subsidiary LLC, North Star Partnership, L.P., W. Edward Scheetz, David T. Hamamoto and Marc Gordon.

“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

“Plan” means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which Holdings or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

“Prime Rate” means the rate of interest per annum publicly announced from time to time by Citicorp North America, Inc. as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective.

“Pro Forma Basis” means, with respect to the calculation of the financial covenants contained in Sections 6.12, 6.13 and 6.14 and the negative covenant contained

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in Section 6.01(a)(iv) as of any date, that such calculation shall give pro forma effect to all acquisitions and other investments, all issuances, incurrences or assumptions of Indebtedness (with any such Indebtedness being deemed to be amortized during the applicable testing period in accordance with its terms) and all sales, transfers or other dispositions of any material assets outside the ordinary course of business that have occurred during (or, if such calculation is being made for the purpose of determining whether any proposed acquisition will constitute a Permitted Acquisition, any Additional Mortgage Indebtedness may be incurred or any Incremental Extension of Credit may be made, since the beginning of) the four consecutive fiscal quarter period of the Borrower most-recently ended on or prior to such date as if they occurred on the first day of such four consecutive fiscal quarter period (including cost savings to the extent such cost savings would be permitted to be reflected in pro forma financial information complying with the requirements of GAAP and Article XI of Regulation S-X under the Securities Act of 1933, as amended, as interpreted by the Staff of the SEC, and as certified by a Financial Officer).

“Proposed Change” has the meaning assigned to such term in Section 9.02(c).

“Qualified Equity Interests” means Equity Interests of Holdings or the Revolving Borrower other than Disqualified Equity Interests.

“Register” has the meaning assigned to such term in Section 9.04(b).

“Related Parties” means, with respect to any specified Person, such Person’s Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person’s Affiliates.

“Release” means any release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching or migration into or through the environment (including ambient air, surface water, groundwater, land surface or subsurface strata) or within or upon any building, structure, facility or fixture.

“Required Lenders” means, at any time, Lenders having Term Loans representing more than 50% of the aggregate principal amount of outstanding Term Loans at such time.

“Requirement of Law” means, with respect to any Person, (a) the charter, articles or certificate of organization or incorporation and bylaws or other organizational or governing documents of such Person and (b) any statute, law, treaty, rule, regulation, order, decree, writ, injunction or determination of any arbitrator or court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

“Restricted Payment” means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in Holdings, the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase,

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redemption, retirement, acquisition, cancelation or termination of any Equity Interests in Holdings, the Borrower or any Subsidiary or any option, warrant or other right to acquire any such Equity Interests in Holdings, the Borrower or any Subsidiary, or any other payment (including any payment under any Swap Agreement) that has a substantially similar effect to any of the foregoing.

“Revolving Borrower” means Morgans Group LLC, a Delaware limited liability company.

“Revolving Credit Agreement” means the credit agreement, dated as of the date hereof (and to be effective after the consummation of the Formation and Structuring Transactions), among Holdings, the Revolving Borrower, the lenders party thereto, Citicorp North America, Inc., as administrative agent, and Morgan Stanley Senior Funding , Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers.

“S&P” means Standard & Poor’s Ratings Group, Inc.

“SEC” means the Securities and Exchange Commission or any Governmental Authority succeeding to any of its principal functions.

“Security Documents” means the Guarantee Agreement or, if applicable, the Collateral Agreement, and each other security agreement or other instrument or document executed and delivered pursuant to Section 5.12 or 5.13 to secure any of the Obligations.

“Senior Leverage Ratio” means, on any date, the ratio of (a) Total Senior Indebtedness as of such date to (b) Consolidated EBITDA for the period of four consecutive fiscal quarters of the Borrower ended on such date (or, if such date is not the last day of a fiscal quarter, ended on the last day of the fiscal quarter of the Borrower most-recently ended prior to such date).

“SPV” has the meaning assigned to such term in Section 9.04(e).

“Statutory Reserve Rate” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is (x) the number one minus (y) the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board or any other banking authority (domestic or foreign) to which the Administrative Agent is subject with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Administrative Agent confirms that as of the Effective Date, the amount referred to in clause (y) above is zero. The Statutory

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Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

“subsidiary” means, with respect to any Person (the “parent”) at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP.

“Subsidiary” means any subsidiary of Holdings (other than the Borrower).

“Subsidiary Loan Party” means MMRDH Parent Holding Company LLC, a Delaware limited liability company, MMRDH Junior Mezz Holding Company LLC, a Delaware limited liability company, MMRDH Intermediate Mezz Holding Company LLC, a Delaware limited liability company, MHG LLC (but only prior to the consummation of the Formation and Structuring Transactions) and the Revolving Borrower (upon the consummation of the Formation and Structuring Transactions).

“Swap Agreement” means any agreement with respect to any cap, swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions, provided that no phantom stock or similar plan providing for payments only on account of services provided by current or former directors, officers, employees or consultants of Holdings, the Borrower or the Subsidiaries shall be a Swap Agreement.

“Tax Amount” means, with respect to any period, the lesser of (i) the product of any cash dividends or distributions paid by Holdings and/or the Revolving Borrower in respect of preferred Equity Interests in such period (but expressly excluding any such amounts paid by the Revolving Borrower to Holdings) and a fraction the numerator of which is one and the denominator of which is one minus the effective combined tax rate of Holdings (expressed as a decimal) for such period (as estimated by a Financial Officer in good faith), minus such cash dividends or distributions paid by Holdings and/or the Revolving Borrower in respect of such preferred Equity Interests and (ii) the aggregate estimated combined income tax to be paid by Holdings in respect of that same period (as estimated by a Financial Officer in good faith); provided that the Tax Amount shall be zero with respect to the portion of cash dividends or distributions paid by Holdings and/or the Revolving Borrower in respect of any preferred Equity Interest permitted to be deducted by Holdings for tax purposes.

“Taxes” means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority.

“Term Loan Commitment” means, with respect to each Lender, the commitment of such Lender to make a Term Loan hereunder on the Effective Date,

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expressed as an amount representing the maximum principal amount of the Term Loan to be made by such Lender hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.06 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04. The initial amount of each Lender’s Term Loan Commitment is set forth on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender shall have assumed its Term Loan Commitment, as the case may be. The initial aggregate amount of the Lenders’ Term Loan Commitments is $80,000,000.

“Term Lender” means a Lender with a Term Loan Commitment or an outstanding Term Loan.

“Term Loan Maturity Date” means February 17, 2009 or, in the event that the Collateral and Guarantee Requirement is satisfied on or prior to December 31, 2006, July 11, 2010.

“Term Loans” means Loans made pursuant to Section 2.01.

“Total Assets” means, as of any date, the total assets (without deducting accumulated depreciation) of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) determined on a consolidated basis in accordance with GAAP.

“Total Indebtedness” means, as of any date, the aggregate principal amount of Indebtedness of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) outstanding as of such date, provided that the term “Indebtedness” shall not include contingent obligations of Holdings, the Borrower or any Subsidiary as an account party or applicant in respect of any letter of credit or letter of guaranty unless such letter of credit or letter of guaranty supports an obligation that constitutes Indebtedness minus (a) Development Debt, (b) the aggregate amount of cash and cash equivalents (other than restricted cash) of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) (in each case, free and clear of all Liens, other than nonconsensual Liens permitted by Section 6.02) included in the consolidated balance sheet of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) in accordance with GAAP and all obligations to pay the deferred purchase price of property or services (other than (i) trade accounts payable in the ordinary course of business and (ii) any earn-out obligation until (A) such obligation becomes a liability on the consolidated balance sheet of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) in accordance with GAAP and (B) such obligation is earned by and payable to the applicable seller under the terms and conditions of the underlying agreement with such seller) and (c) the minority interest share of Indebtedness of any Subsidiary.

“Total Management Revenues” means, for any period, the revenues of the Borrower attributable to the Existing Hotel Property Management Contracts (as estimated by a Financial Officer in good faith) for such period determined in accordance with GAAP.

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“Total Senior Indebtedness” means, as of any date, (a) the aggregate principal amount of all outstanding Mortgage Indebtedness, any refinancing thereof permitted by Section 6.01(a)(ii), Additional Mortgage Indebtedness and any refinancing thereof permitted by Section 6.01(a)(iv) less the minority interest share of any such Indebtedness.

“Transactions” means the transactions described on Schedule 1.01.

“Type”, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate.

“wholly-owned Subsidiary” means, with respect to any Person at any date, a subsidiary of such Person of which securities or other ownership interests representing 100% of the Equity Interests (other than directors’ qualifying shares) are, as of such date, owned, controlled or held by such Person or one or more wholly-owned Subsidiaries of such Person or by such Person and one or more wholly-owned Subsidiaries of such Person.

“Withdrawal Liability” means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

SECTION 1.02. Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Type (e.g., a “Eurodollar Loan” or an “ABR Loan”). Borrowings also may be classified and referred to by Type (e.g., a “Eurodollar Borrowing” or an “ABR Borrowing”).

SECTION 1.03. Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”. The word “will” shall be construed to have the same meaning and effect as the word “shall”. Unless the context requires otherwise, (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, amended and restated, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

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SECTION 1.04. Accounting Terms; GAAP. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time, provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision (including any definition) hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.

SECTION 1.05. Pro Forma Calculations. With respect to any period during which any Permitted Acquisition or any sale, transfer or other disposition of any material assets occurs, for purposes of determining compliance with the covenants contained in Sections 6.12, 6.13 and 6.14, or for purposes of determining the Leverage Ratio, Senior Leverage Ratio, Consolidated EBITDA and Consolidated Cash Interest Expense, calculations with respect to such period shall be made on a Pro Forma Basis.

ARTICLE II

The Credits

SECTION 2.01. Commitments. Subject to the terms and conditions set forth herein, each Lender agrees to make a Term Loan to the Borrower on the Effective Date in a principal amount not exceeding its Term Loan Commitment.

SECTION 2.02. Loans and Borrowings. (a)  The Term Loans shall be made as part of a Borrowing consisting of Loans of the same Type made by the Lenders ratably in accordance with their respective Term Loan Commitments. The failure of any Lender to make the Term Loan required to be made by it shall not relieve any other Lender of its obligations hereunder, provided that the Term Loan Commitments of the Lenders are several and no Lender shall be responsible for any other Lender’s failure to make Loans as required.

(b)  Subject to Section 2.12, each Term Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith. Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan, provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.

(c)  At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $1,000,000. Borrowings of more than one Type may be

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outstanding at the same time, provided that there shall not at any time be more than a total of twelve Eurodollar Borrowings outstanding.

(d)  Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Term Loan Maturity Date.

SECTION 2.03. Requests for Borrowings. To request a Term Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information:

(i) the aggregate amount of such Borrowing;

(ii) the date of such Borrowing, which shall be a Business Day;

(iii) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;

(iv) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term “Interest Period”; and

(v) the location and number of the Borrower’s account to which funds are to be disbursed, which shall comply with the requirements of Section 2.04.

If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender’s Loan to be made as part of the requested Borrowing.

SECTION 2.04. Funding of Borrowings. (a)  Each Lender shall make the Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent designated by it for such purpose by notice to the Lenders. The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower designated by the Borrower in the applicable Borrowing Request.

(b)  Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make

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available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption and in its sole discretion, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent then the Administrative Agent shall be entitled to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent’s demand therefor, then the Administrative Agent shall promptly notify the Borrower, and the Borrower shall, within five Business Days, repay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from such Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to the then applicable rate of interest, calculated in accordance with Section 2.11, for the respective Loans. No Lender’s obligation to make any Loan shall be affected by any other Lender’s failure to make any Loan. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender’s Loan included in such Borrowing.

SECTION 2.05. Interest Elections. (a)   The Term Borrowing initially shall be of the Type specified in the Borrowing Request or designated by Section 2.03 and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request or designated by Section 2.03. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing.

(b)  To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower.

(c)  Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02:

(i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the

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information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing);

(ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;

(iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and

(iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period”.

If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.

(d)  Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender’s portion of each resulting Borrowing.

(e)  If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto.

SECTION 2.06. Termination and Reduction of Commitments. (a)  Unless previously terminated, the Term Loan Commitments shall terminate at 5:00 p.m., New York City time on the Effective Date.

(b)  The Borrower may at any time terminate, or from time to time reduce, the Term Loan Commitments, provided that each reduction of the Term Loan Commitments shall be in an amount that is an integral multiple of $5,000,000 and not less than $5,000,000.

(c)  The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Term Loan Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any such notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable. Any termination or reduction of the Term Loan Commitments shall be permanent. Each

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reduction of the Term Loan Commitments shall be made ratably among the Lenders in accordance with their respective Term Loan Commitments.

SECTION 2.07. Repayment of Loans; Evidence of Debt. (a)  The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Term Loan of such Lender as provided in Section 2.08.

(b)  Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.

(c)  The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender’s share thereof.

(d)  The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein absent manifest error, provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans and pay interest thereon in accordance with the terms of this Agreement.

(e)  Any Lender may request that Loans made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent (it being understood that any such note shall not increase the obligations of any Loan Party beyond those expressly provided for in this Agreement and the other Loan Documents). Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns).

SECTION 2.08. Amortization of Term Loans. (a)  Subject to adjustment pursuant to paragraph (c) of this Section, the Borrower shall repay Term Borrowings on the last business day of each March, June, September and December, commencing on September 30, 2006, in an aggregate principal amount equal to 0.25% of the aggregate principal amount of all Term Loans outstanding on the Effective Date.

(b)  To the extent not previously paid, all Term Loans shall be due and payable on the Term Loan Maturity Date.

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(c)  Any prepayment of a Term Borrowing shall be applied to reduce the subsequent scheduled repayments of the Term Borrowings to be made pursuant to this Section 2.08. If the initial aggregate amount of the Lenders’ Term Loan Commitments exceeds the aggregate principal amount of Term Loans that are made on the Effective Date, then the scheduled repayments of Term Borrowings to be made pursuant to this Section shall be reduced ratably by an aggregate amount equal to such excess.

(d)  Prior to any repayment of any Term Borrowings hereunder, the Borrower shall select the Borrowing or Borrowings to be repaid and shall notify the Administrative Agent by telephone (confirmed by telecopy) of such election not later than 11:00 a.m., New York City time, three Business Days before the scheduled date of such repayment. Each repayment of a Borrowing shall be applied ratably to the Loans included in the repaid Borrowing. Repayments shall be accompanied by accrued interest on the amount repaid.

SECTION 2.09. Prepayment of Loans. (a)  The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to the requirements of this Section.

(b)  Upon the occurrence of an Existing Hotel Property Management Contract Prepayment Event, if any, the Borrower shall, within three Business Days after such Existing Hotel Property Management Contract Prepayment Event, prepay Term Borrowings in a principal amount equal to the product of the aggregate principal amount of Term Loans outstanding as of such date multiplied by a fraction, the numerator of which is (x) the portion of Total Management Revenues for the most recently ended four fiscal quarter period immediately prior to the date of such Existing Hotel Property Management Contract Prepayment Event for which financial statements have been delivered pursuant to Section 5.01 attributable to the applicable terminated or non-renewed Existing Hotel Property Management Contract (as estimated by a Financial Officer in good faith), and the denominator of which is (y) the Total Management Revenues for the most recently ended four fiscal quarter period immediately prior to the date of such Existing Hotel Property Management Contract Prepayment Event for which financial statements have been delivered pursuant to Section 5.01 (determined, if applicable, on a pro forma basis giving effect to the termination or non-renewal of all other Existing Hotel Property Management Contracts having been terminated or not renewed during such four consecutive fiscal quarter period as if each such termination or non-renewal occurred on the first day of such four consecutive fiscal quarter period, and as estimated by a Financial Officer in good faith).

(c)  Prior to any optional or mandatory prepayment of Borrowings hereunder, the Borrower shall select the Borrowing or Borrowings to be prepaid and shall specify such selection in the notice of such prepayment pursuant to paragraph (d) of this Section, provided, that any Term Lender may elect, by notice to the Administrative Agent by telephone (confirmed by telecopy) at least one Business Day prior to the prepayment date, to decline all or any portion of any prepayment of its Term Loans pursuant to this Section (other than an optional prepayment pursuant to paragraph (a) of this Section,

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which may not be declined), in which case the aggregate amount of the prepayment shall be reduced by such amount.

(d)  The Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment or (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date, the principal amount of each Borrowing or portion thereof to be prepaid and, in the case of a mandatory prepayment, a reasonably detailed calculation of the amount of such prepayment. Promptly following receipt of any such notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.02, except as necessary to apply fully the required amount of a mandatory prepayment. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.11.

SECTION 2.10. Fees. The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent, in immediately available funds. Fees paid shall not be refundable under any circumstances.

SECTION 2.11. Interest. (a)  The Loans comprising each ABR Borrowing shall bear interest at the Alternate Base Rate plus the Applicable Rate.

(b)  The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate.

(c)  Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2.00% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2.00% plus the rate applicable to ABR Loans as provided in paragraph (a) of this Section.

(d)  Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan, provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan, accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest

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Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.

(e)  All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate or Adjusted LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.

SECTION 2.12. Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing:

(a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or

(b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period;

then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing.

SECTION 2.13. Increased Costs. (a)  If any Change in Law shall:

(i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate); or

(ii) impose on any Lender or the London interbank market any other condition, cost or expense affecting this Agreement or Eurodollar Loans made by such Lender;

and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then upon request, accompanied by a copy of the certificate and information referred to in clause (c) below, the Borrower will pay to such Lender such additional

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amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered.

(b)  If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement or the Loans made by such Lender to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy), then from time to time upon request,  accompanied by a copy of the certificate and information referred to in clause (c) below, the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.

(c)  A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company and the basis for calculating such amount or amounts in reasonable detail, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.

(d)  Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s right to demand such compensation, provided that the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than 270 days prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof.

SECTION 2.14. Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Term Loan on the date specified in any notice delivered pursuant hereto or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 9.02(c), then, in any such event, upon request, accompanied by a copy of the certificate and information to be delivered by the Lender to the Borrower pursuant to this Section 2.14 the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for

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the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate that such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section and the basis for calculating such amount or amounts in reasonable detail shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.

SECTION 2.15. Taxes. (a)  Any and all payments by or on account of any obligation of any Loan Party under any Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes, provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.

(b)  Without limiting the provisions of paragraph (a) above, the Borrower shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

(c)  The Borrower shall indemnify the Administrative Agent and each Lender within 10 days after written demand therefor, accompanied by a copy of the certificate and information to be delivered to the Borrower pursuant to this clause (c), for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent or such Lender, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower under any Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. The certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or by the Administrative Agent on its own behalf or on behalf of a Lender shall be conclusive absent manifest error.

(d)  As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.

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(e)  Each Lender that is a U.S. Person (as such term is defined in Section 7701(a)(30) of the Code) (a “U.S. Lender”) shall (i) deliver to the Borrower and the Administrative Agent, prior to the first day on which the Borrower is required to make any payments hereunder to Lender, two copies of United States Internal Revenue Service Form W-9 (or successor forms). Each U.S. Lender that shall become a Participant pursuant to Section 9.04 shall, upon the effectiveness of the related transfer, be required to provide all the forms and statements required pursuant to this Section 2.15(e), provided that in the case of a Participant such Participant shall furnish all such required forms and statements to the Lender from which the related participation shall have been purchased, and (ii) deliver to the Borrower and the Administrative Agent two further copies of any such form of certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower.

(f)  Each Lender that is not a U.S. Person (as such term is defined in Section 7701(a)(30) of the Code) (a “Non-U.S. Lender”) shall (i) deliver to the Borrower and the Administrative Agent, prior to the first day on which the Borrower is required to make any payments hereunder to Lender, two copies of either United States Internal Revenue Service Form W-8BEN or Form W-8ECI (or successor forms) or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of “portfolio interest,” a Form W-8BEN, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8BEN (with respect to the portfolio interest exemption), a certificate representing that such Non-U.S. Lender (x) is not a bank for purposes of Section 881(c) of the Code, is not subject to regulatory or other legal requirements as a bank in any jurisdiction, and has not been treated as a bank for purposes of any tax, securities law or other filing or submission made to any Governmental Authority, any application made to a rating agency or qualification for any exemption from tax, securities law or other legal requirements, (y) is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and (z) is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on payments by the Borrower under this Agreement, (ii) deliver to the Borrower and the Administrative Agent two further copies of any such form of certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (iii) obtain such extensions of time for filing and completing such forms or certifications as may reasonably be requested by the Borrower or the Administrative Agent; unless in any such case any change in treaty, law or regulation has occurred prior to the date on which any such delivery would otherwise be required that renders any such form inapplicable or would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Administrative Agent. Each Non-U.S. Lender that shall become a Participant or a Lender pursuant to Section 9.04 shall, upon the effectiveness of the related transfer, be required to provide all the forms and statements required pursuant to this Section 2.15(f), provided that in the case of a Participant such Participant shall furnish all such required

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forms and statements to the Lender from which the related participation shall have been purchased.

(g)  Notwithstanding anything to the contrary herein, the Borrower shall not be required to indemnify any U.S. Lender or the Administrative Agent, or to pay any additional amounts to such U.S. Lender or the Administrative Agent pursuant to this Section 2.15 to the extent that the obligation to pay such additional amounts would not have arisen but for a failure by such U.S. Lender to comply with the provisions of clause (e) above.

(h)  Notwithstanding anything to the contrary herein the Borrower shall not be required to indemnify any Non-U.S. Lender or the Administrative Agent, or to pay any additional amounts to such Non-U.S. Lender or the Administrative Agent, in respect of U.S. federal withholding tax pursuant to this Section 2.15 to the extent that (i) the obligation to withhold amounts with respect to U.S. federal withholding tax existed on the date such Non-U.S. Lender became a party to this Agreement (or, in the case of a Non-U.S. Participant, on the date such Participant became a Participant hereunder) or as of the date such Non-U.S. Lender changes its applicable lending office; provided, however, that this clause (i) shall not apply to the extent that (x) in the case of an assignee Lender or a Participant or a change in the Lender’s applicable lending office, the indemnity payments or additional amounts Lender (or Participant) would be entitled to receive (without regard to this clause (i)) do not exceed the indemnity payment or additional amounts that the Person making the assignment, participation, transfer or change in lending office would have been entitled to receive in the absence of such assignment, participation, transfer or change in lending office, or (y) such assignment, participation, transfer or change in lending office had been requested by the Borrower or made with the Borrower’s prior written consent, (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender or Non-U.S. Participant to comply with the provisions of clause (e) above or (iii) any of the representations or certifications made by a Non-U.S. Lender or Non-U.S. Participant pursuant to clause (e) above are incorrect at the time a payment hereunder is made, other than by reason of any change in treaty, law or regulation having effect after the date such representations or certifications were made.

(i)  If the Borrower determines in good faith that a reasonable basis exists for contesting any Taxes for which indemnification has been paid hereunder, the relevant Lender or the Administrative Agent, as applicable (to the extent such Lender or the Administrative Agent reasonably determines in good faith that it will not suffer any adverse effect as a result thereof), shall, subject to clause (i) of the proviso in the immediately succeeding sentence, cooperate with the Borrower in challenging such Taxes at the Borrower’s expense if so requested by the Borrower in writing. If any Lender or the Administrative Agent, as applicable, receives a refund relating to a Tax for which a payment has been made or borne by the Borrower pursuant to this Agreement, which refund in the good faith judgment of such Lender or the Administrative Agent, as the case may be, is attributable to such payment, then such Lender or the Administrative Agent, as the case may be, shall reimburse the Borrower for such amount as such Lender or the Administrative Agent, as the case may be, determines to be the proportion of the

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refund as will leave it, after such reimbursement, in no better or worse position than it would have been in if the payment by or borne by the Borrower had not been required; provided, however, that (i) any Lender or the Administrative Agent may determine, in its reasonable discretion consistent with the policies of such Lender or the Administrative Agent, whether to seek a refund and (ii) any Taxes that are imposed on a Lender or the Administrative Agent as a result of a disallowance or reduction of any refund with respect to which such Lender or the Administrative Agent has made a payment to the Borrower pursuant to this clause (h) shall be treated as a Tax for which the Borrower is obligated to indemnify such Lender or the Administrative Agent pursuant to this Section 2.15. Neither the Lenders nor the Administrative Agent shall be obliged to disclose information regarding its tax affairs or computations to the Borrower in connection with this clause (i) or any other provision of this Section 2.15.

SECTION 2.16. Payments Generally; Pro Rata Treatment; Sharing of Setoffs. (a)  The Borrower shall make each payment required to be made by it under any Loan Document (whether of principal, interest or fees, or of amounts payable under Section 2.13, 2.14 or 2.15 or otherwise) prior to the time expressly required hereunder or under such other Loan Document for such payment (or, if no such time is expressly required, prior to 12:00 noon, New York City time), on the date when due, in immediately available funds, without setoff or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at 2 Penns Way, Suite 200, New Castle, DE 19720, except that payments pursuant to Sections 2.13, 2.14, 2.15 and 9.03 shall be made directly to the Persons entitled thereto and payments pursuant to other Loan Documents shall be made to the Persons specified therein. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment under any Loan Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day (except to the extent provided in the definition of Interest Period) and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments under each Loan Document shall be made in dollars.

(b)  If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties.

(c)  If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Term Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Term Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Term Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders

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ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Term Loans, provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary or other Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.

(d)  Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption and in its sole discretion, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.

(e)  If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.04(a) or (b), 2.16(d) or 9.03(c), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender’s obligations under such Sections until all such unsatisfied obligations are fully paid.

SECTION 2.17. Mitigation Obligations; Replacement of Lenders. (a)  If any Lender requests compensation under Section 2.13, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.15, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates that would eliminate or, if elimination is not possible, reduce to the extent practicable the amounts payable pursuant to Section 2.13 or 2.15, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not be inconsistent with its internal policies or otherwise adversely affect such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.

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(b)  If any Lender requests compensation under Section 2.13, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.15, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.13 or payments required to be made pursuant to Section 2.15, such assignment will result in a material reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise (including as a result of any action taken by such Lender under paragraph (a) above), the circumstances entitling the Borrower to require such assignment and delegation cease to apply.

ARTICLE III

Representations and Warranties

Each of Holdings and the Borrower represents and warrants to the Lenders that:

SECTION 3.01. Organization; Powers. Each of Holdings, the Borrower and the Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and as proposed to be conducted, to execute, deliver and perform its obligations under each Loan Document to which it is a party and to effect the Transactions and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required.

SECTION 3.02. Authorization; Enforceability. The Transactions to be entered into by each Loan Party have been duly authorized by all necessary corporate or other action and, if required, action by the holders of such Loan Party’s Equity Interests. This Agreement has been duly executed and delivered by each of Holdings and the Borrower and constitutes, and each other Loan Document to which any Loan Party is to be a party, when executed and delivered by such Loan Party, will constitute, a legal, valid and binding obligation of Holdings, the Borrower or such Loan Party (as the case may be), enforceable in accordance with its terms, subject to applicable bankruptcy,

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 insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect and except filings necessary to perfect Liens created under the Loan Documents, (b) will not violate any Requirement of Law applicable to Holdings, the Borrower or any Subsidiary, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon Holdings, the Borrower or any Subsidiary or their respective assets, or give rise to a right thereunder to require any payment to be made by Holdings, the Borrower or any Subsidiary or give rise to a right of, or result in, termination, cancelation or acceleration of any obligation thereunder, and (d) will not result in the creation or imposition of any Lien on any asset of Holdings, the Borrower or any Subsidiary, except Liens created under the Loan Documents and liens permitted under Section 6.02.

SECTION 3.04. Financial Condition; No Material Adverse Change. (a)  (i)The Borrower has heretofore furnished to the Lenders the combined balance sheet and combined statements of income, stockholders’ equity and cash flows of Morgans Hotel Group Co. Predecessor (x) as of and for the fiscal years ended December 31, 2004, reported on by BDO Seidman, LLP, independent registered public accounting firm, and (y) as of and for the fiscal quarter and the portion of the fiscal year ended September 30, 2005 (and comparable period for the prior fiscal year), certified by a Financial Officer and (ii) the balance sheet of Holdings as of October 21, 2005, reported on by BDO Seidman, LLP, independent registered public accounting firm. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of Holdings and its subsidiaries as of such dates and for such periods in accordance with GAAP consistently applied, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (i)(y) above.

(b)  The Borrower has heretofore furnished to the Lenders the pro forma consolidated balance sheet of Holdings as of September 30, 2005, prepared giving effect to the Transactions as if the Transactions had occurred on such date. Such pro forma consolidated balance sheet (i) has been prepared in good faith based on the same assumptions used to prepare the pro forma financial statements included in the Information Memorandum (which assumptions are believed by Holdings and the Borrower to be reasonable), (ii) is based on the best information available to Holdings and the Borrower after due inquiry, (iii) accurately reflects all adjustments necessary to give effect to the Transactions and (iv) presents fairly, in all material respects, the pro forma financial position of Holdings and its subsidiaries as of September 30, 2005, as if the Transactions had occurred on such date.

(c)  Except as disclosed in the financial statements referred to above or the notes thereto or in the Information Memorandum and except for the Disclosed Matters, after giving effect to the Transactions, none of Holdings, the Borrower or the Subsidiaries

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has, as of the Effective Date, any material direct or contingent liabilities, unusual long-term commitments or unrealized losses.

SECTION 3.05. Properties. (a)  Each of Holdings, the Borrower and the Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for Liens permitted hereby and other exceptions to title that do not materially interfere with its ability to conduct its business as currently conducted or as proposed to be conducted or to utilize such properties for their intended purposes.

(b)  Each of Holdings, the Borrower and the Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by Holdings, the Borrower and the Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

(c)  As of the Effective Date, none of Holdings, the Borrower or any Subsidiary has received notice of, or has knowledge of, any pending or contemplated condemnation proceeding affecting any Existing Hotel Property or any sale or disposition thereof in lieu of condemnation that could reasonably be expected to result in a Material Adverse Effect.

SECTION 3.06. Litigation and Environmental Matters. (a)  There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of Holdings or the Borrower threatened against or affecting Holdings, the Borrower or any Subsidiary (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve any challenge to the validity or enforceability of the Loan Documents or the Transactions.

(b)  Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, to the knowledge of Holdings or the Borrower, none of Holdings, the Borrower or any Subsidiary (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.

(c)  Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect.

SECTION 3.07. Compliance with Laws and Agreements. Each of Holdings, the Borrower and the Subsidiaries is in compliance with (a) all Requirements

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of Law applicable to it or its property and (b) all indentures, agreements and other instruments binding upon it or its property, except, in the case of clause (b) of this Section, where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

SECTION 3.08. Investment and Holding Company Status. None of Holdings, the Borrower or any Subsidiary is (a) an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a “holding company” as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935.

SECTION 3.09. Taxes. Each of Holdings, the Borrower and the Subsidiaries (a) has timely filed or caused to be filed all Tax returns and reports required to have been filed, except to the extent that failure to do so could not reasonably be expected to result in a Material Adverse Effect, and (b) has paid or caused to be paid all Taxes required to have been paid by it, except any Taxes that are being contested in good faith by appropriate proceedings, provided that Holdings, the Borrower or such Subsidiary, as the case may be, has set aside on its books adequate reserves therefor and the failure to pay such Taxes pending resolution of the contest would not reasonably be expected to result in a Material Adverse Effect.

SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of such Plan by an amount that could reasonably be expected to result in a Material Adverse Effect, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of all such underfunded Plans by an amount that could reasonably be expected to result in a Material Adverse Effect.

SECTION 3.11. Disclosure. The Borrower has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which Holdings, the Borrower or any Subsidiary is subject, and all other matters known to any of them, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. To the knowledge of Holdings or the Borrower, neither the Information Memorandum nor any of the other reports, financial statements, certificates or other information furnished by or on behalf of any Loan Party to the Administrative Agent or any Lender in connection with the negotiation of any Loan Document or delivered thereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided that, with respect to projected financial information, Holdings and

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the Borrower represent only that such information was prepared in good faith based upon assumptions believed by them to be reasonable at the time delivered and, if such projected financial information was delivered prior to the Effective Date, as of the Effective Date.

SECTION 3.12. Subsidiaries. After giving effect to the Formation and Structuring Transactions, Holdings does not have any subsidiaries other than the Borrower and the Subsidiaries. Schedule 3.12 sets forth, after giving effect to the Formation and Structuring Transactions, the name of, and the ownership interest of the Borrower and each Subsidiary in, each Subsidiary and identifies each Subsidiary that is a Subsidiary Loan Party.

SECTION 3.13. Insurance. Schedule 3.13 sets forth a description of all insurance maintained by or on behalf of Holdings, the Borrower or any Subsidiary as of the Effective Date. As of the Effective Date, all premiums in respect of such insurance have been paid. Holdings and the Borrower believe that the insurance maintained by or on behalf of Holdings, the Borrower and the Subsidiaries is in such amounts (with no greater risk retention) and against such risks as is (i) customarily maintained by companies of established repute engaged in the same or similar businesses operating in the same or similar locations and (ii) adequate.

SECTION 3.14. Labor Matters. Except for Disclosed Matters and such other matter that in the aggregate would not reasonably be expected to have a Material Adverse Effect, none of Holdings, Borrower, nor any of the Subsidiaries has received written notice, or otherwise has reason to believe that it is engaged in any unfair labor practice that would reasonably be expected to have a Material Adverse Effect. There is (i) no unfair labor practice complaint pending against Holdings, Borrower or any of the Subsidiaries or, to the knowledge of Holdings or the Borrower, threatened against any of them, before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against Holdings, Borrower or any of the Subsidiaries or, to the knowledge of Holdings or the Borrower, threatened against any of them, (ii) no strike, labor dispute, slowdown or stoppage pending against Holdings, Borrower or any of the Subsidiaries or, to the knowledge of Holdings or the Borrower, threatened against Holdings, Borrower or any of the Subsidiaries and (iii) to the knowledge of Holdings or the Borrower, no union representation question existing with respect to the employees of Holdings, Borrower or any of the Subsidiaries and, to the knowledge of Holdings or the Borrower, no union organizing activities are taking place.

SECTION 3.15. Solvency. Immediately after the consummation of the Transactions, (a) the fair value of the assets of each Loan Party, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise, (b) the present fair saleable value of the property of each Loan Party will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured, (c) each Loan Party will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, and (d) each

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Loan Party will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Effective Date.

ARTICLE IV

Conditions

The obligations of the Lenders to make Loans hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02):

(a) The Administrative Agent and the Joint Lead Arrangers (or their counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement.

(b) The Administrative Agent and the Joint Lead Arrangers shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of Sullivan & Cromwell LLP, counsel for Holdings, the Borrower and the Subsidiaries, substantially in the form of Exhibit B and covering such other matters relating to the Loan Parties, the Loan Documents or the Transactions as the Administrative Agent or either Joint Lead Arranger shall reasonably request. Each of Holdings and the Borrower hereby requests such counsel to deliver such opinion.

(c) The Administrative Agent and the Joint Lead Arrangers shall have received such documents and certificates as the Administrative Agent, either Joint Lead Arranger or their counsel may reasonably request relating to the organization, existence and good standing of each Loan Party, the authorization of the Transactions and any other legal matters relating to the Loan Parties, the Loan Documents or the Transactions, all in form and substance satisfactory to the Administrative Agent, the Joint Lead Arrangers and their counsel.

(d) The Administrative Agent and the Joint Lead Arrangers shall have received a certificate, dated the Effective Date and signed by a Financial Officer or the President or a Vice President of Holdings, certifying that (i) the representations and warranties of each Loan Party set forth in each Loan Document dated on or as of such date shall be true and correct on and as of such date and (ii) at the time of and immediately after giving effect to the initial Term Borrowing no Default shall have occurred and be continuing.

(e) The Administrative Agent, the Joint Bookrunners, the Joint Lead Arrangers and their Affiliates shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced,

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reimbursement or payment of all out-of-pocket expenses (including fees, charges and disbursements of counsel) required to be reimbursed or paid by any Loan Party under any Loan Document.

(f) The Effective Date Guarantee Requirement shall have been satisfied and the Administrative Agent and the Joint Lead Arrangers shall have received a completed Perfection Certificate dated the Effective Date and signed by a Financial Officer or legal officer of Holdings, together with all attachments contemplated thereby, including the results of a search of the Uniform Commercial Code (or equivalent) filings made with respect to the Loan Parties in the jurisdictions contemplated by the Perfection Certificate and copies of the financing statements (or similar documents) disclosed by such search and evidence reasonably satisfactory to the Administrative Agent and the Joint Lead Arrangers that the Liens indicated by such financing statements (or similar documents) are permitted by Section 6.02 or have been or will contemporaneously with the Debt Prepayment be released.

(g) The Administrative Agent shall have received evidence that the insurance required by Section 5.07 is in effect.

(h) All consents and approvals required to be obtained from any Governmental Authority or other Person in connection with the Transactions shall have been obtained, and all applicable waiting periods and appeal periods (including any extensions thereof) shall have expired and there shall be no governmental or judicial action, actual or threatened, that could reasonably be expected to restrain, prevent or impose burdensome conditions on the Transactions.

(i) The Lenders shall have received a pro forma consolidated balance sheet of Holdings as of September 30, 2005, reflecting all pro forma adjustments as if the Transactions had been consummated on such date, and such pro forma consolidated balance sheet shall be consistent in all material respects with the forecasts and other information previously provided to the Lenders.

(j) The Lenders shall have received (i)(a) audited combined balance sheets and combined statements of operations and comprehensive income, stockholders’ equity and cash flows of Morgans Hotel Group Co. Predecessor as of and for the fiscal years ended December 31, 2004 and the related notes thereto and (b) the audited balance sheet of Holdings as of October 21, 2005 and the related notes thereto, in each case accompanied by a true and correct copy of the reports thereon by BDO Seidman, LLP, independent registered public accounting firm, and (ii) unaudited combined balance sheets and combined statements of operations and comprehensive income, stockholders’ equity and cash flows of Morgans Hotel Group Co. Predecessor as of and for the fiscal quarter and portion of the fiscal year ended September 30, 2005 (and for the comparable periods for the prior fiscal year), prepared in accordance with GAAP consistently applied (subject to year-end audit adjustments and the absence of footnotes) and certified

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by a Financial Officer, which financial statements described in clauses (i) and (ii) shall not be materially inconsistent with the financial statements or forecasts previously provided to the Lenders.

(k) The Lenders shall have received a certificate of an executive officer of Holdings certifying that the documentation for the Formation and Structuring Transactions has been completed in all material respects, signed and delivered into escrow and that the condition precedent to the consummation of the Formation and Structuring Transactions described in Section 2.1(a) of the Formation and Structuring Agreement dated as of October 25, 2005 among MHG LLC and the shareholders of MHG LLC party thereto has been satisfied and that the Formation and Structuring Transactions shall be consummated promptly following the initial Term Loan Borrowing.

(l) After giving effect to the Transactions, none of Holdings, the Borrower or any Subsidiary shall have outstanding any shares of preferred stock or Disqualified Equity Interests or any Indebtedness, other than (i) Indebtedness incurred under the Loan Documents and (ii) Indebtedness set forth on Schedule 6.01. The terms and conditions of all Indebtedness to remain outstanding after the Effective Date (including terms and conditions relating to interest rates, fees, amortization, maturity, redemption, subordination, covenants, events of default and remedies) shall be satisfactory in all respects to the Lenders.

(m) The Administrative Agent and the Joint Lead Arrangers shall be satisfied that, after giving effect to the Transactions on the Effective Date, the Leverage Ratio for the most recently ended four fiscal quarter period ending at least 45 days prior to the Effective Date shall be no more than 5.00 to 1.00, and the Lenders shall have received a certificate of a Financial Officer certifying to that effect.

The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or prior to 5:00 p.m., New York City time, on March 15, 2006 (and, in the event such conditions are not so satisfied or waived, the Term Loan Commitments shall terminate at such time).

ARTICLE V

Affirmative Covenants

Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees, expenses and other amounts (other than contingent amounts not yet due) payable under any Loan Document shall have been paid in full, each of Holdings and the Borrower covenants and agrees with the Lenders that:

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SECTION 5.01. Financial Statements and Other Information. The Borrower will furnish to the Administrative Agent and each Joint Lead Arranger:

(a) within 90 days after the end of each fiscal year of Holdings, Holdings’s audited consolidated balance sheet and audited consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows as of the end of and for such year, and related notes thereto, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by BDO Seidman, LLP or other independent registered public accountants of recognized national standing (without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of Holdings and its subsidiaries on a consolidated basis in accordance with GAAP consistently applied, provided that the filing of such financial statements with the Securities and Exchange Commission shall constitute delivery for purposes of this Section;

(b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year of Holdings, Holdings’s unaudited consolidated balance sheet and unaudited consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by a Financial Officer as presenting fairly in all material respects the financial condition and results of operations of Holdings and its subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes, provided that the filing of such financial statements with the Securities and Exchange Commission shall constitute delivery for purposes of this Section;

(c) concurrently with any delivery of financial statements under paragraph (a) or (b) above, a certificate of a Financial Officer (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with the covenants contained in Sections 6.12, 6.13 and 6.14 and (iii) stating whether any change in the application of GAAP to the financial statements of Holdings has occurred since the later of the date of the Borrower’s audited financial statements referred to in Section 3.04 and the date of the prior certificate delivered pursuant to this paragraph (c) indicating such a change and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate;

(d) prior to the commencement of each fiscal year of the Borrower, a detailed consolidated budget for such fiscal year (including a projected consolidated balance sheet and consolidated statements of projected operations,

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comprehensive income and cash flows as of the end of and for such fiscal year and setting forth the assumptions used for purposes of preparing such budget) and, promptly when available, any significant revisions of such budget; and

(e) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of Holdings, the Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request.

SECTION 5.02. Notices of Material Events. Holdings and the Borrower will furnish to the Administrative Agent (for distribution to each Lender through the Administrative Agent) written notice of the following promptly after obtaining knowledge thereof:

(a) the occurrence of any Default;

(b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or, to the knowledge of a Financial Officer or another executive officer of Holdings, the Borrower or any Subsidiary, affecting Holdings, the Borrower or any Affiliate thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect;

(c) the occurrence of any ERISA Event or any fact or circumstance that gives rise to a reasonable expectation that any ERISA Event will occur that, in either case, alone or together with any other ERISA Events that have occurred or are reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect; and

(d) any other development (including notice of any Environmental Liability) that results in, or could reasonably be expected to result in, a Material Adverse Effect.

Each notice delivered under this Section shall be accompanied by a written statement of a Financial Officer or other executive officer of Holdings setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.

SECTION 5.03. Information Regarding Collateral. (a)  In the event that the Collateral and Guarantee Requirement has been satisfied, the Borrower will furnish to the Administrative Agent prompt written notice of any change (i) in any Loan Party’s corporate name, (ii) in the jurisdiction of incorporation or organization of any Loan Party or (iii) in any Loan Party’s organizational identification number. The Borrower agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Administrative Agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral. The Borrower also

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agrees promptly to notify the Administrative Agent if any material portion of the Collateral is damaged or destroyed.

(b)  In the event that the Collateral and Guarantee Requirement has been satisfied, at the time of delivery of financial statements pursuant to Section 5.01(a) or (b), the Borrower shall deliver to the Administrative Agent a certificate executed by a Financial Officer or chief legal officer of Holdings (i) setting forth the information required pursuant to the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate delivered on the Effective Date or the date of the most recent certificate delivered pursuant to this Section and (ii) certifying that all Uniform Commercial Code financing statements (including fixture filings, as the case may be) or other appropriate filings, recordings or registrations, including all refilings, rerecordings and reregistrations, containing a description of the Collateral have been filed of record in each governmental, municipal or other appropriate office in each jurisdiction identified pursuant to clause (i) above to the extent necessary to protect and perfect the security interests under the Collateral Agreement for a period of not less than 18 months after the date of such certificate (except as noted therein with respect to any continuation statements to be filed within such period).

SECTION 5.04. Existence; Conduct of Business. Each of Holdings and the Borrower will, and Holdings will cause each Subsidiary to, do or cause to be done all things necessary to obtain, preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges, franchises, patents, copyrights, trademarks and trade names material to the conduct of its business, provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.03.

SECTION 5.05. Payment of Obligations. Each of Holdings and the Borrower will, and Holdings will cause each Subsidiary to, pay its material obligations, including Tax liabilities, before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) Holdings, the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP, (c) such contest effectively suspends collection of the contested obligation and the enforcement of any Lien securing such obligation and (d) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect.

SECTION 5.06. Maintenance of Properties. Except to the extent the failure to do so could not reasonably be expected to result in a Material Adverse Effect, each of Holdings and the Borrower will, and Holdings will cause each Subsidiary to, keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted.

SECTION 5.07. Insurance. Each of Holdings and the Borrower will, and Holdings will cause each Subsidiary to, maintain, with financially sound and reputable insurance companies, (a) insurance in such amounts (with no greater risk retention) and against such risks as is (i) customarily maintained by companies of established repute

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engaged in the same or similar businesses operating in the same or similar locations and (ii) considered adequate by Holdings and the Borrower and (b) all other insurance as may be required by law or any other Loan Document. The Borrower will furnish to the Lenders, upon request of the Administrative Agent, information in reasonable detail as to the insurance so maintained.

SECTION 5.08. Casualty and Condemnation. In the event that the Collateral and Guarantee Requirement has been satisfied, the Borrower (a) will furnish to the Administrative Agent (for distribution to each Lender through the Administrative Agent) prompt written notice of any casualty or other insured damage to any material portion of the Collateral or the commencement of any action or proceeding for the taking of any material portion of or any material interest in the Collateral under power of eminent domain or by condemnation or similar proceeding.

SECTION 5.09. Books and Records; Inspection and Audit Rights. Each of Holdings and the Borrower will, and Holdings will cause each Subsidiary to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. Each of Holdings and the Borrower will, and Holdings will cause each Subsidiary to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested.

SECTION 5.10. Compliance with Laws. Each of Holdings and the Borrower will, and Holdings will cause each Subsidiary to, comply with all Requirements of Law with respect to it or its property except to the extent that the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

SECTION 5.11. Use of Proceeds. The proceeds of the Term Loans will be used to prepay Indebtedness outstanding under the Existing Mezzanine Loans. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations T, U and X.

SECTION 5.12. Additional Subsidiaries. If any additional Subsidiary is formed or acquired after the Effective Date, Holdings will, within thirty Business Days after such Subsidiary is formed or acquired, notify the Administrative Agent and the Lenders thereof.

SECTION 5.13. Further Assurances. (a)  Each of Holdings and the Borrower will, and Holdings will cause each Subsidiary Loan Party to, execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements, fixture filings, mortgages, deeds of trust and other documents), that may be required under any applicable law, or that the Administrative Agent or the Required Lenders may reasonably

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request, to cause the Effective Date Guarantee Requirement to be and remain satisfied and to cause the Collateral and Guarantee Requirement, if satisfied, to remain satisfied, all at the expense of the Loan Parties. Each of Holdings and the Borrower also agrees to provide to the Administrative Agent, from time to time upon request, evidence reasonably satisfactory to the Administrative Agent as to the perfection and priority of the Liens created or intended to be created by the Security Documents.

(b)  In the event that the Collateral and Guarantee Requirement has been satisfied, if any material assets (including any real property or improvements thereto or any interest therein with a fair market value in excess of $5,000,000) are acquired by the Borrower or any Subsidiary Loan Party after the Effective Date (other than assets constituting Collateral under the Collateral Agreement that become subject to the Lien created by the Collateral Agreement upon acquisition thereof), the Borrower will notify the Administrative Agent and the Lenders thereof.

SECTION 5.14. Interest Rate Protection. Holdings will, directly or indirectly, maintain in effect one or more Swap Agreements the effect of which is that at least 50% of Total Indebtedness will be subject to interest at a fixed rate or the interest cost in respect of which will be fixed, in each case on terms and conditions reasonably acceptable to the Joint Lead Arrangers.

SECTION 5.15. Formation and Structuring Transactions. Holdings will cause each of (a)  the Formation and Structuring Transactions to be consummated and (b) the Debt Prepayment to occur no later than three days following the Effective Date.

ARTICLE VI

Negative Covenants

Until the Term Loan Commitments have expired or been terminated and the principal of and interest on each Loan and all fees, expenses and other amounts payable (other than contingent amounts not yet due) under any Loan Document have been paid in full, each of Holdings and the Borrower covenants and agrees with the Lenders that:

SECTION 6.01. Indebtedness; Certain Equity Securities. (a)  The Borrower will not, and Holdings will not permit any Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except:

(i) Indebtedness created under the Loan Documents;

(ii) Indebtedness existing on the date hereof and set forth in Schedule 6.01 and extensions, renewals and replacements of any such Indebtedness, provided that such extending, renewal or replacement Indebtedness (A) shall not be Indebtedness of an obligor that was not an obligor with respect to the Indebtedness being extended, renewed or replaced (unless such obligor is a Subsidiary formed specifically for that purpose), (B) shall not be in a principal amount that exceeds the principal amount of the Indebtedness being extended,

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renewed or replaced (plus any accrued but unpaid interest and redemption premium thereon), (C) shall not have an earlier maturity date or shorter weighted average life than the Indebtedness being extended, renewed or replaced and (D) shall not have terms (including covenants, events of default, remedies, redemption provisions and sinking fund provisions, but excluding financial terms such as interest rates and redemption provisions) less favorable in any material respect to the Lenders than the terms of the Indebtedness being extended, renewed or replaced;

(iii) Indebtedness outstanding under the Revolving Credit Agreement and extensions, renewals and replacements of such Indebtedness, provided that such extending, renewal or replacement Indebtedness (A) shall not be Indebtedness of an obligor that was not an obligor with respect to Indebtedness being extended, renewed or replaced (unless such obligor is a Subsidiary formed specifically for that purpose), (B) shall not be in a principal amount that exceeds the principal amount of the Indebtedness being extended, renewed or replaced (plus any accrued but unpaid interest and redemption premium thereon), (C) shall not have an earlier maturity date or shorter weighted average life than the Indebtedness being extended, renewed or replaced, (D) if applicable, shall rank pari passu or junior in right of payment in respect of the Collateral and with the obligations in respect of the Term Loans and (E) shall not have terms (including covenants, events of default, remedies, redemption provisions and sinking fund provisions, but excluding financial terms such as interest rates and redemption provisions) less favorable in any material respect to the Lenders than the terms of the Revolving Credit Agreement;

(iv) Additional Mortgage Indebtedness and extensions, renewals and replacements thereof if, on the date of such incurrence or extension, renewal or replacement and after giving effect thereto on a Pro Forma Basis, the Senior Leverage Ratio shall not exceed 5.00 to 1.00;

(v) Indebtedness of the Borrower to any Subsidiary and of any Subsidiary to the Borrower or any other Subsidiary, provided (A) that Indebtedness of any Subsidiary that is not a Loan Party to the Borrower or any Subsidiary Loan Party shall be subject to Section 6.04 and (B) Indebtedness of the Borrower to any Subsidiary and Indebtedness of any Subsidiary Loan Party to any Subsidiary that is not a Subsidiary Loan Party shall be subordinated to the Obligations on terms reasonably satisfactory to the Administrative Agent;

(vi) Guarantees by the Borrower of Indebtedness of any Subsidiary and by any Subsidiary of Indebtedness of the Borrower or any other Subsidiary, provided that (A) the Indebtedness so Guaranteed is permitted by this Section (other than clause (a)(ii) or (a)(viii)), (B) Guarantees by the Borrower or any Subsidiary Loan Party of Indebtedness of any Subsidiary that is not a Loan Party shall be subject to Section 6.04 and (C) Guarantees permitted under this clause (vi) shall be subordinated to the Obligations of the applicable Subsidiary Loan Party to the

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same extent and on the same terms as the Indebtedness so Guaranteed is subordinated to the Obligations;

(vii) (A) Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of any fixed or capital assets, including Capital Lease Obligations and any Indebtedness assumed by the Borrower or any Subsidiary in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, provided that such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement, and (B) extensions, renewals and replacements of any such Indebtedness so long as the outstanding principal amount of such extensions, renewals and replacements does not exceed the principal of the Indebtedness being extended, renewed or replaced (plus any accrued but unpaid interest and premium thereon), provided that the aggregate principal amount of Indebtedness permitted by this clause (vii) shall not exceed $5,000,000 at any time outstanding;

(viii) Indebtedness of any Person that becomes a Subsidiary after the date hereof, provided that such Indebtedness exists at the time such Person becomes a Subsidiary and is not created in contemplation of or in connection with such Person becoming a Subsidiary, and extensions, renewals and replacements of any such Indebtedness so long as the principal amount of such extensions, renewals and replacements does not exceed the principal of the Indebtedness being extended, renewed or replaced (plus any accrued but unpaid interest and redemption premium thereon), provided that the aggregate principal amount of Indebtedness permitted by this clause (viii) shall not exceed $5,000,000 at any time outstanding;

(ix) other unsecured Indebtedness of the Borrower or any Subsidiary in an aggregate principal amount not exceeding $5,000,000 at any time outstanding;

(x) Indebtedness owed to any Person (including obligations in respect of letters of credit for the benefit of such Person) providing workers’ compensation, health, disability or other employee benefits or property, casualty or liability insurance, pursuant to reimbursement or indemnification obligations to such Person, in each case incurred in the ordinary course of business;

(xi) Indebtedness of the Borrower or any Subsidiary in respect of performance bonds, bid bonds, appeal bonds, surety bonds, performance and completion guarantees and similar obligations (other than in respect of other Indebtedness), in each case provided in the ordinary course of business;

(xii) Indebtedness in respect of Swap Agreements permitted by Section 6.07;

(xiii) Capital Lease Obligations of the Borrower or any Subsidiary resulting from any arrangement whereby the Borrower or such Subsidiary sells or transfers

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any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rents or leases such property or other property that it intends to use for substantially the same purpose or purposes as the property sold or transferred if, on the date of such incurrence on a Pro Forma Basis, the Senior Leverage Ratio shall not exceed 5.00 to 1.00; and

(xiv) Guarantees and/or indemnities (other than in respect of payment of principal or interest) by the Borrower or any Subsidiary in respect of capital contributions, project completions and cost-overruns and other performance matters (including environmental, fraud, misappropriation, bankruptcy and other customary non-recourse carveouts), in each case in connection with investments or Indebtedness otherwise permitted under this Agreement.

(b)  Holdings will not create, incur, assume or permit to exist any Indebtedness except (i) Indebtedness created under the Loan Documents and the Revolving Credit Agreement and (ii) Indebtedness that would be permitted to be created, incurred or assumed by the Borrower or any Subsidiary under Sections 6.01(a)(vi), (x), (xi), (xii) and (xiv).

(c)  Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, issue any preferred Equity Interests except in the case of Holdings or the Revolving Borrower, preferred Equity Interests that are Qualified Equity Interests or trust preferred securities in an aggregate principal amount not exceeding $150,000,000 at any time outstanding, provided that any such preferred Equity Interests or trust preferred securities issued by the Revolving Borrower to Holdings for purposes of matching preferred Equity Interests or trust preferred securities issued by Holdings shall be excluded from the calculation of such amount.

SECTION 6.02. Liens. (a)  Neither Holdings nor the Borrower will, nor will Holdings permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except:

(i) Liens created under the Loan Documents;

(ii) Permitted Encumbrances;

(iii) any Lien on any property or asset of the Borrower or any Subsidiary existing on the date hereof and set forth in Schedule 6.02, provided that (A) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary (other than assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business) and (B) such Lien shall secure only those obligations that it secures on the date hereof and extensions, renewals and replacements thereof so long as the principal amount of such extensions, renewals and replacements does not exceed the principal amount

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of the obligations being extended, renewed or replaced (plus any accrued but unpaid interest and premium thereon);

(iv) Liens securing Indebtedness permitted by clause (a)(iii) of Section 6.01, provided that such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary (other than assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business);

(v) Liens securing Indebtedness permitted by clause (a)(iv) of Section 6.01, provided that (A) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary (other than assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business) and (B) the Indebtedness secured thereby does not exceed the fair market value of the property or assets securing such Indebtedness at the time such security interest attaches;

(vi) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary after the date hereof prior to the time such Person becomes a Subsidiary, provided that (A) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary, as the case may be, (B) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary (other than assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business) and (C) such Lien shall secure only those obligations that it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be, and extensions, renewals and replacements thereof so long as the principal amount of such extensions, renewals and replacements does not exceed the principal amount of the obligations being extended, renewed or replaced (plus any accrued but unpaid interest and premium thereon);

(vii) Liens on fixed or capital assets acquired, constructed or improved (including any such assets made the subject of a Capital Lease Obligation incurred) by the Borrower or any Subsidiary, provided that (A) such Liens secure Indebtedness incurred to finance such acquisition, construction or improvement and permitted by clause (vii)(A) of Section 6.01(a) or to extend, renew or replace such Indebtedness and permitted by clause (vii)(B) of Section 6.01(a), (B) such Liens and the Indebtedness secured thereby are incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement (provided that this clause (B) shall not apply to any Indebtedness permitted by clause (vii)(B) of Section 6.01(a) or any Lien securing such Indebtedness), (C) the Indebtedness secured thereby does not exceed the lesser of the cost of acquiring, constructing or improving such fixed or capital asset or, in the case of Indebtedness permitted by clause (vii)(A) of Section 6.01, its fair market value at the time such security interest attaches, and in any event, the aggregate principal amount of such Indebtedness does not exceed $5,000,000 at any time outstanding

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and (D) such Liens shall not apply to any other property or assets of the Borrower or any Subsidiary (except assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business);

(viii) Liens of a collecting bank arising in the ordinary course of business under Section 4-208 of the Uniform Commercial Code in effect in the relevant jurisdiction covering only the items being collected upon;

(ix) Liens representing any interest or title of a licensor, lessor or sublicensor or sublessor under any lease or license permitted by this Agreement;

(x) Liens that are rights of setoff relating to deposit accounts in favor of banks and other depositary institutions arising in the ordinary course of business;

(xi) Liens not otherwise permitted by this Section to the extent that neither (A) the aggregate outstanding principal amount of the obligations secured thereby nor (B) the aggregate fair market value (determined as of the date such Lien is incurred) of the assets subject thereto exceeds $1,000,000 at any time outstanding;

(xii) Liens granted by a Subsidiary that is not a Loan Party in favor of the Borrower or another Loan Party in respect of Indebtedness or other obligations owed by such Subsidiary to such Loan Party; and

(xiii) Liens securing Indebtedness permitted by clause (a)(xiii) of Section 6.01, provided that such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary (other than assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business).

SECTION 6.03. Fundamental Changes. (a)  Neither Holdings nor the Borrower will, nor will Holdings permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any Person may merge into the Borrower in a transaction in which the Borrower is the surviving entity, (ii) any Person (other than the Borrower) may merge into any Subsidiary in a transaction in which the surviving entity is a Subsidiary and (if any party to such merger is a Subsidiary Loan Party) is a Subsidiary Loan Party, (iii) any Subsidiary (other than a Subsidiary Loan Party) may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders and (iv) any Subsidiary (other than the Revolving Borrower and any Subsidiary Loan Party) may merge into another Person in a transaction permitted by Section 6.05 in which such Person is the surviving entity, provided that any such merger involving a Person that is not a wholly-owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Sections 6.04 and 6.05.

(b)  The Borrower will not, and Holdings will not permit any Subsidiary to, engage to any material extent in any business other than businesses of the type

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conducted by the Borrower and the Subsidiaries on the Effective Date and businesses reasonably related thereto.

(c)  Holdings will not engage in any business or activity other than the ownership of Equity Interests of the Borrower and activities incidental thereto and compliance with its obligations under the Loan Documents and the Revolving Credit Agreement. Holdings will not own or acquire any assets (other than Equity Interests of the Borrower, cash and Permitted Investments) or incur any liabilities (other than liabilities under the Loan Documents and the Revolving Credit Agreement, liabilities imposed by law, including tax liabilities, and other liabilities incidental to its existence as a public holding company and permitted business and activities).

SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions. Neither Holdings nor the Borrower will, nor will Holdings permit any Subsidiary to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly-owned Subsidiary prior to such merger) any Equity Interests (but specifically excluding (x) Holdings’s right to acquire and hold additional Equity Interests in (including, for this purpose, to the extent not otherwise falling within the definition of “Equity Interests”, any trust preferred securities of) the Revolving Borrower and (y) redemptions or other repurchases by the Revolving Borrower or Holdings of any such Equity Interests in accordance with the provisions of Sections 4.2(e) and 7.4(d) of the LLC Agreement) in or evidences of Indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except:

(a) Permitted Investments;

(b) Permitted Acquisitions;

(c) investments existing on the date hereof and set forth on Schedule 6.04;

(d) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses of Holdings, the Borrower or any Subsidiary for accounting purposes and that are made in the ordinary course of business;

(e) (i) investments by Holdings in Equity Interests of the Revolving Borrower, by the Borrower or any other Loan Party (other than Holdings) in Equity Interests of a Subsidiary Loan Party or any direct or indirect wholly owned Subsidiary of any Loan Party and (ii) loans or advances made by the Borrower or any other Loan Party (other than Holdings) to any Subsidiary Loan Party or any direct or indirect wholly owned Subsidiary of any Loan Party and (iii) any contribution of assets from a Loan Party or a wholly owned direct or indirect

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Subsidiary of a Loan Party to another Loan Party or wholly owned direct or indirect Subsidiary of a Loan Party;

(f) investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business;

(g) investments in the form of Swap Agreements permitted by Section 6.07;

(h) investments of any Person existing at the time such Person becomes a Subsidiary or consolidates or merges with the Borrower or any Subsidiary (including in connection with a Permitted Acquisition) so long as such investments were not made in contemplation of such Person becoming a Subsidiary or of such consolidation or merger;

(i) investments resulting from pledges or deposits described in clause (c) or (d) of the definition of the term “Permitted Encumbrance”;

(j) investments received in connection with the disposition of any asset permitted by Section 6.05;

(k) receivables or other trade payables owing to the Borrower or a Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms, provided that such trade terms may include such concessionary trade terms as the Borrower or any Subsidiary deems reasonable under the circumstances;

(l) investments by the Borrower or a Subsidiary in Equity Interests in joint ventures the primary business of which are businesses of the type conducted by the Borrower and the Subsidiaries on the Effective Date and businesses reasonably related thereto, provided that immediately after giving effect to such investment, (i) the Borrower or such Subsidiary will own Equity Interests in such joint venture representing at least 50% of the aggregate equity value represented by the issued and outstanding Equity Interests in such joint venture, (ii) the Borrower or a Subsidiary will manage or otherwise be responsible for the day-to-day operations of such joint venture pursuant to a customary management contract (or will have been designated to act in such capacity upon project completion) or will have influence over such day-to-day operations by virtue of a franchise arrangement (or will have been designated to have such influence upon project completion) or (iii) the Borrower or a Subsidiary will be the managing member or day-to-day administrative member of such joint venture, or will have approval rights over major decisions with respect to such joint venture;

(m) other investments, loans and advances by the Borrower or any Subsidiary in an aggregate amount, as valued at cost at the time each such investment, loan or advance is made and including all related commitments for future investments, loans or advances (and the principal amount of any

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Indebtedness that is assumed or otherwise incurred in connection with such investment, loan or advance) and without giving effect to any write-downs or write-offs thereof, that at the time of, and after giving effect to, the making thereof would not exceed 25% of Total Assets as of the end of the fiscal quarter immediately prior to the date of such investment for which financial statements have been delivered pursuant to Section 5.01;

(n) repurchases by either of Holdings or the Revolving Borrower of common Equity Interests previously issued by such entity, subject to an aggregate limit of not more than 5% of the outstanding shares of common stock or common membership interests, as applicable; and

(o) any Guarantees and/or indemnities permitted by Section 6.01(a)(xiv).

SECTION 6.05. Asset Sales. Neither Holdings nor the Borrower will, nor will Holdings permit any Subsidiary to, sell, transfer, lease or otherwise dispose of any asset, including any Equity Interest owned by it, nor will the Borrower issue any additional Equity Interests (other than to the Revolving Borrower), nor will Holdings permit any Subsidiary to issue any additional Equity Interest in such Subsidiary (in each case, other than issuing directors’ qualifying shares and other than issuing Equity Interests to the Borrower or another Subsidiary in compliance with Section 6.04(e)(i)), except:

(a) sales, transfers, leases and other dispositions of (i) inventory, (ii) used or surplus equipment and (iii) Permitted Investments, in each case in the ordinary course of business;

(b) sales, transfers, leases and other dispositions to the Borrower or a Subsidiary, provided that any such sales, transfers, leases or other dispositions involving a Subsidiary that is not a Loan Party shall be made in compliance with Section 6.09;

(c) sales, transfers and other dispositions of accounts receivable in connection with the compromise, settlement or collection thereof consistent with past practice;

(d) sales, transfers, leases and other dispositions of property to the extent that such property constitutes an investment permitted by clause (f), (h) or (j) of Section 6.04 or another asset received as consideration for the disposition of any asset permitted by this Section (in each case, other than Equity Interests in a Subsidiary, unless all Equity Interests in such Subsidiary are sold);

(e) sale and leaseback transactions not prohibited by any other Section of this Article VI;

(f) leases entered into in the ordinary course of business, to the extent that they do not materially interfere with the business of Holdings, the Borrower or any Subsidiary;

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(g) licenses or sublicenses of intellectual property in the ordinary course of business, to the extent that they do not materially interfere with the business of Holdings, the Borrower or any Subsidiary;

(h) dispositions resulting from any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of the Borrower or any Subsidiary;

(i) sales, transfers and other dispositions of assets or any direct or indirect interest therein, provided that promptly following the receipt of any cash proceeds from such sale, transfer or disposition, the Borrower or the applicable Subsidiary will use such proceeds to (x) acquire, maintain, develop, construct, improve, upgrade or repair assets useful in the business of the Loan Parties, or make investments pursuant to Section 6.04(b), in each case within nine months of such receipt or (y) repay outstanding Indebtedness, and

(j) sales, transfers and other dispositions of assets (other than Equity Interests in a Subsidiary unless all Equity Interests in such Subsidiary are sold) that are not permitted by any other clause of this Section, provided that the aggregate fair market value of all assets sold, transferred or otherwise disposed of in reliance upon this clause (i) shall not exceed $5,000,000 during any fiscal year of the Borrower,

provided that all sales, transfers, leases and other dispositions permitted hereby (other than those permitted by clause (b)) shall be made for fair value (as determined by a Financial Officer in good faith) and, in the event of sale, transfer, lease or other disposition of all or substantially all of the Borrower’s or the applicable Subsidiary’s interest in any Existing Hotel Property, for at least 75% cash consideration and/or like-kind consideration payable at the time of such sale, transfer or other disposition, provided that assumed debt shall be deemed to be cash for purposes of such determination.

SECTION 6.06. [Intentionally Omitted.]

SECTION 6.07. Swap Agreements. Neither Holdings nor the Borrower will, nor will Holdings permit any Subsidiary to, enter into any Swap Agreement, except (a) Swap Agreements required by Section 5.14 or entered into to hedge or mitigate risks to which the Borrower or any Subsidiary has actual exposure (other than those in respect of shares of capital stock or other equity ownership interests of the Borrower or any Subsidiary), (b) Swap Agreements entered into in order to effectively cap, collar or exchange interest rates (from fixed to floating rates, from one floating rate to another floating rate or otherwise) with respect to any interest-bearing liability or investment of the Borrower or any Subsidiary and (c) the Borrower or any Subsidiary will be entitled to issue interest rate protection pursuant to one or more Swap Agreements if and to the extent that one or more other wholly-owned Subsidiaries of the Revolving Borrower or such Subsidiary is purchasing or already owns offsetting interest rate protection for the same duration (or longer) and notional amount (or greater), provided that any such

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offsetting Swap Agreement arrangements will be disregarded for purposes of determining Holdings’s compliance with the requirements of Section 5.14.

SECTION 6.08. Restricted Payments. (a)  Neither Holdings nor the Borrower will, nor will Holdings permit any Subsidiary to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except (i) the Borrower and the Subsidiaries (other than the Revolving Borrower) may declare and pay dividends ratably with respect to their Equity Interests, (ii) Holdings may declare and pay dividends with respect to its common stock payable solely in shares of common stock, (iii) the Revolving Borrower may, or may make Restricted Payments to Holdings so that Holdings may (and Holdings may), make Restricted Payments pursuant to and in accordance with stock option plans or other benefit plans approved by Holdings’s board of directors for management or employees of Holdings, the Borrower and the Subsidiaries, (iv) the Revolving Borrower may make Restricted Payments to Holdings at such times and in such amounts (A) as shall be necessary to permit Holdings to discharge its general corporate and overhead (including franchise taxes and directors fees) expenses incurred in the ordinary course and other permitted liabilities and (B) as shall be necessary to pay the Tax liabilities of Holdings directly attributable to (or arising as a result of) the operations of the Borrower and the Subsidiaries; provided, however, that (1) the amount of Restricted Payments pursuant to clause (B) of this clause (iv) shall not exceed the amount that the Borrower and the Subsidiaries would be required to pay in respect of federal, State and local taxes were the Borrower and the Subsidiaries to pay such taxes as stand-alone taxpayers, (2) all Restricted Payments made to Holdings pursuant to this clause (iv) are used by Holdings for the purposes specified herein within ten Business Days after Holdings’s receipt thereof and (3) no Default shall have occurred and be continuing or would result therefrom, (v) each of Holdings and the Revolving Borrower may declare and pay dividends in respect of Qualified Equity Interests and/or trust preferred securities otherwise permitted hereunder and (vi) Holdings and the Revolving Borrower may make repurchases of common Equity Interests permitted by Section 6.04(n).

SECTION 6.09. Transactions with Affiliates. Neither Holdings nor the Borrower will, nor will Holdings permit any Subsidiary to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (i) transactions in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties or, in the case of management and/or franchise agreements arising in the ordinary course of business, agreements between any Subsidiary and the Borrower or any other Subsidiary as reasonably deemed appropriate by the Borrower, (ii) transactions between or among the Borrower and the Subsidiary Loan Parties not involving any other Affiliate, (iii) payroll, travel and similar advances to cover matters permitted under Section 6.04(d), (iv)  the payment of reasonable fees to directors or managers of Holdings, the Borrower or any Subsidiary who are not employees of Holdings, the Borrower or any Subsidiary, and compensation and employee benefit arrangements paid to, and indemnities provided for the benefit of, directors, managers, officers or employees of Holdings, the Borrower or the Subsidiaries

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in the ordinary course of business, (v) any issuances of securities or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment agreements, stock options and stock ownership plans approved by Holdings’s board of directors, (vi) employment and severance arrangements entered into in the ordinary course of business between Holdings, the Borrower or any Subsidiary and any employee thereof and approved by Holdings’s board of directors, (vii) transactions contemplated by and payments due to Ian Schrager under the Consulting Agreement and the Services Agreement, (viii) any Restricted Payment permitted by Section 6.08 or any distributions of cash or other assets from any Person to any Loan Party or any Subsidiary in respect of Equity Interests held by such Loan Party or Subsidiary in that Person and (ix) capital contributions by the Borrower to a Subsidiary or by a Subsidiary to any other Subsidiary, provided that a Financial Officer has determined in good faith that the terms of such contribution are fair and reasonable to the contributing party.

SECTION 6.10. Restrictive Agreements. Neither Holdings nor the Borrower will, nor will Holdings permit any Subsidiary to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of Holdings, the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any of its Equity Interests or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary, provided that (i) the foregoing shall not apply to restrictions and conditions imposed by (A) law or (B) any Loan Document or the Revolving Credit Agreement, (ii) the foregoing shall not apply to restrictions and conditions existing on the date hereof identified on Schedule 6.10 (but shall apply to any extension or renewal of, or any amendment, modification or replacement expanding the scope of, any such restriction or condition), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary or any assets pending such sale, provided that such restrictions and conditions apply only to the Subsidiary or assets that is or are to be sold and such sale is permitted hereunder, (iv) the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (v) clause (a) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof.

SECTION 6.11. Amendment of Material Documents. Neither Holdings nor the Borrower will, nor will Holdings permit any Subsidiary to, amend, modify, waive, terminate or release (a) its certificate of incorporation, by-laws or other organizational documents, (b) the Indebtedness permitted under Section 6.01(a)(ii) or (a)(iii), (c) any Existing Management Contract or (d) any agreements governing joint ventures of the Borrower or any Subsidiary as of the Effective Date, in each case if the effect of such amendment, modification, waiver, termination or release is adverse to Holdings, the Borrower, any Subsidiary or the Lenders.

SECTION 6.12. Interest Expense Coverage Ratio. Holdings will not permit the ratio of (a) Consolidated EBITDA to (b) Consolidated Cash Interest Expense

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(determined on a Pro Forma Basis in accordance with Section 1.05), in each case for any period of four consecutive fiscal quarters of Holdings ending on or about any date during any such period to be less than 2.0 to 1.0.

SECTION 6.13. Leverage Ratio. Holdings will not permit the Leverage Ratio (determined on a Pro Forma Basis in accordance with Section 1.05) to exceed 6.5 to 1.0.

SECTION 6.14. Senior Leverage Ratio. Holdings will not permit the Senior Leverage Ratio (determined on a Pro Forma Basis in accordance with Section 1.05) to exceed 5.0 to 1.0.

SECTION 6.15. Changes in Fiscal Periods. Holdings will neither (a) permit its fiscal year or the fiscal year of the Borrower or any Subsidiary to end on a day other than December 31, nor (b) change its method of determining fiscal quarters.

SECTION 6.16. Availability of Exceptions.  For the avoidance of doubt, in determining compliance with the restrictions set forth in this Article VI with respect to any proposed financing, purchase, sale or other transaction, the Loan Parties shall be entitled to elect and rely upon any single exception or any combination of applicable exceptions as they deem appropriate.

SECTION 6.17. Formation and Structuring Transactions. Any limitations or prohibitions on Holdings, the Borrower or any Subsidiary set forth in this Article VI shall not apply with respect to the consummation of the Formation and Structuring Transactions.

ARTICLE VII

Events of Default

If any of the following events (any such event, an “Event of Default”) shall occur:

(a) the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise;

(b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in paragraph (a) of this Article) payable under any Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of three Business Days;

(c) any representation or warranty made or deemed made by or on behalf of Holdings, the Borrower or any Subsidiary in any Loan Document or any amendment or modification thereof or waiver thereunder, or in any written report,

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certificate, financial statement or other document furnished pursuant to or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been incorrect in any material respect when made or deemed made;

(d) Holdings or the Borrower shall fail to observe or perform any covenant, condition or agreement contained in (i) Section 5.02, 5.04 (with respect to keeping in effect the existence of Holdings or the Borrower), 5.11 or 5.15 or Section 6.01 (indebtedness), Section 6.03 (fundamental change), Section 6.08 (restricted payments) or (ii) any other Section of Article VI not referred to in clause (i) above and such failure shall continue unremedied for a period of 10 days after the Borrower receives written notice thereof from any Lender or the Administrative Agent;

(e) any Loan Party shall fail to observe or perform any covenant, condition or agreement contained in any Loan Document (other than those specified in paragraph (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after Borrower receives written notice thereof from any Lender or the Administrative Agent to the Borrower, provided that if such default is susceptible of cure but cannot reasonably be cured within such 30 day period and the Borrower shall have commenced to cure such default within such 30 day period and is working in good faith to cure the same, such 30 day period shall be extended for up to an additional 30 days;

(f) (i) Holdings, the Borrower or any Subsidiary Loan Party shall fail to make any payment of principal or interest (regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable or (ii) the Subsidiary borrower thereunder shall fail to make any payment of principal or interest (regardless of amount) in respect of Indebtedness outstanding under the NY/CA Mortgage Loan or any refinancing thereof permitted hereunder or Indebtedness outstanding under the FL Mortgage Loan or any refinancing thereof permitted hereunder, when and as the same shall become due and payable;

(g) any event or condition occurs that results in any Material Indebtedness, Indebtedness outstanding under the NY/CA Mortgage Loan or any refinancing thereof permitted hereunder or Indebtedness outstanding under the FL Mortgage Loan or any refinancing thereof permitted hereunder becoming due prior to its scheduled maturity, provided that this paragraph (g) shall not apply to secured Indebtedness that becomes due as a result of the sale, transfer or other disposition (including as a result of a casualty or condemnation event) of the property or assets securing such Indebtedness (to the extent such sale, transfer or other disposition is not prohibited under this Agreement);

(h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of Holdings, the Borrower or any Subsidiary Loan Party or its debts, or of a substantial part of its assets, under any federal, state or foreign bankruptcy,

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insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings, the Borrower or any Subsidiary Loan Party or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

(i) Holdings, the Borrower or any Subsidiary Loan Party shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in paragraph (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings, the Borrower or any Subsidiary Loan Party or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any formal action for the purpose of effecting any of the foregoing;

(j) Holdings, the Borrower or any Subsidiary Loan Party shall become unable, admit in writing its inability or fail generally to pay its debts as they become due;

(k) one or more judgments for the payment of money in an aggregate amount in excess of $5,000,000 shall be rendered against Holdings, the Borrower, any Subsidiary Loan Party or any combination thereof (provided that in determining whether the foregoing threshold is satisfied, there shall be excluded any portion of such judgments that is fully covered by a solvent third party insurance company (less any applicable deductible) and as to which the insurer has not disputed, in writing, its responsibility to cover such judgment, order, decree or arbitration award) and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of Holdings, the Borrower or any Subsidiary Loan Party to enforce any such judgment;

(l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect;

(m) in the event that the Collateral and Guarantee Requirement has been satisfied, any Lien purported to be created under any Security Document shall cease to be, or shall be asserted by any Loan Party not to be, a valid and perfected Lien on any Collateral with a fair value in excess of $5,000,000, with the priority required by the applicable Security Document, except (i) as a result of the sale or other disposition of the applicable Collateral in a transaction permitted under the

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Loan Documents or (ii) as a result of the Administrative Agent’s failure to (A) maintain possession of any stock certificates, promissory notes or other instruments delivered to it under the Collateral Agreement or (B) file Uniform Commercial Code continuation statements;

(n) any Loan Document or any Guarantee of the Loan Document Obligations shall for any reason be asserted by any Loan Party in writing not to be a legal, valid and binding obligation of any Loan Party party thereto;

(o) the Guarantees of the Loan Document Obligations by Holdings, the Borrower and the Subsidiary Loan Parties pursuant to the Guarantee Agreement or, if applicable, the Collateral Agreement shall cease to be in full force and effect (in each case, other than in accordance with the terms of the Loan Documents); or

(p) a Change in Control shall occur;

then, and in every such event (other than an event with respect to Holdings or the Borrower described in paragraph (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to Holdings or the Borrower described in paragraph (h) or (i) of this Article, the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

ARTICLE VIII

The Administrative Agent

Each of the Lenders hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto.  The provisions of this Article are solely for the benefit of the Administrative Agent and the Lenders, and the Borrower shall not have rights as a third party beneficiary of any of such provisions.

The bank serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates

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may accept deposits from, lend money to and generally engage in any kind of business with Holdings, the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder.

The Administrative Agent shall not have any duties or obligations except those expressly set forth in the Loan Documents.  Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated by the Loan Documents that the Administrative Agent is required to exercise in writing as directed by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary or believed by the Administrative Agent in good faith to be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth in the Loan Documents, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to Holdings, the Borrower or any Subsidiary that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity.  The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or wilful misconduct.  The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by Holdings, the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.

The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed or sent or otherwise authenticated by the proper Person.  The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon.  The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

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The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent.  The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers by or through their respective Related Parties.  The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.

In determining compliance with any condition hereunder to the making of a Loan that by its terms must be fulfilled to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender unless the Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Loan.

Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time upon notice to the Lenders and the Borrower.  Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor approved by the Borrower, such approval not to be unreasonably withheld.  If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent that shall be a bank with an office in New York, New York, or an Affiliate of any such bank.  Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from all its duties and obligations under the Loan Documents.  The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor.  After the Administrative Agent’s resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Administrative Agent was acting as Administrative Agent.

Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement.  Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this any Loan Document or any related agreement or any document furnished thereunder.

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Notwithstanding anything herein to the contrary, none of the Bookrunners or Arrangers or syndication or documentation agents listed on the cover page hereof shall have any powers, duties or responsibilities under any Loan Document, except in its capacity, as applicable, as the Administrative Agent or a Lender hereunder.

ARTICLE IX

Miscellaneous

SECTION 9.01.  Notices.  Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows:

(a) if to Holdings or the Borrower, to it at 475 Tenth Avenue, New York, New York 10018 (Telecopy No. (212) 277-4270);

(b) if to the Administrative Agent, to Citicorp North America, Inc., 399 Park Avenue, New York, NY 10022, Attention of Susan Godwin (Telecopy No. (212) 994-0961); and

(c) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire.

Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto.  Notices and other communications to the Lenders hereunder may also be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication.  The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.  All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt.

SECTION 9.02.  Waivers; Amendments.  (a)  No failure or delay by the Administrative Agent or any Lender in exercising any right or power under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power.  The rights and remedies of the Administrative Agent and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have.  No waiver of any provision of

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any Loan Document or consent to any departure by any Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given.  Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time.  No notice or demand on the Borrower or Holdings in any case shall entitle the Borrower or Holdings to any other or further notice or demand in similar or other circumstances.

(b)  Neither any Loan Document nor any provision thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by Holdings, the Borrower and the Required Lenders or, in the case of any other Loan Document, pursuant to an agreement or agreements in writing entered into by the Administrative Agent and the Loan Party or Loan Parties that are parties thereto, in each case with the consent of the Required Lenders, provided that no such agreement shall (i) increase the Term Loan Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the maturity of any Loan, the date of any scheduled payment of the principal amount of any Term Loan under Section 2.11 or any date for the payment of any interest or fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Term Loan Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.16(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender adversely affected thereby, (v) change any of the provisions of this Section or the percentage set forth in the definition of “Required Lenders” or any other provision of any Loan Document specifying the number or percentage of Lenders required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the written consent of each Lender, (vi) release any Subsidiary Loan Party from its Guarantee under the Guarantee Agreement or, if applicable, the Collateral Agreement (except as expressly provided in the Guarantee Agreement or, if applicable, the Collateral Agreement), or limit its liability in respect of such Guarantee, without the written consent of each Lender, (vii) in the event that the Collateral and Guarantee Requirement has been satisfied, release all or substantially all the Collateral from the Liens of the Security Documents, without the written consent of each Lender, (viii) modify the protections afforded to an SPV pursuant to the provisions of Section 9.04(e) without the written consent of such SPV or (x) change the rights of the Term Lenders to decline mandatory prepayments as provided in Section 2.11; provided further that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent without the prior written consent of the Administrative Agent.

(c)  In connection with any proposed amendment, modification, waiver or termination (a “Proposed Change”) requiring the consent of all Lenders or all affected Lenders, if the consent of the Required Lenders to such Proposed Change is obtained, but

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the consent to such Proposed Change of other Lenders whose consent is required is not obtained (any such Lender whose consent is not obtained as described in paragraph (b) of this Section being referred to as a “Non-Consenting Lender”), then, so long as the Lender that is acting as Administrative Agent is not a Non-Consenting Lender, the Borrower may, at its sole expense and effort, upon notice to such Non-Consenting Lender and the Administrative Agent, require such Non-Consenting Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that (a) the Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld and (b) such Non-Consenting Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts).

SECTION 9.03.  Expenses; Indemnity; Damage Waiver.  (a)  The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent, the Joint Bookrunners and the Joint Lead Arrangers and their respective Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, the Joint Bookrunners and the Joint Lead Arrangers, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of the Loan Documents or any amendments, modifications or waivers of the provisions thereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights in connection with the Loan Documents, including its rights under this Section, or in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans.

(b)  The Borrower shall indemnify the Administrative Agent and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”), against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee by any third party or by Holdings, the Borrower or any Subsidiary arising out of, in connection with, or as a result of (i) the execution or delivery of any Loan Document or any other agreement or instrument contemplated thereby, the performance by the parties to the Loan Documents of their respective obligations thereunder, (ii) any Loan or the use of the proceeds therefrom, (iii) any actual or alleged presence or Release of Hazardous Materials on, at, to or from any property currently or formerly owned or operated by Holdings, the Borrower or any Subsidiary, or any other Environmental Liability related in any way to Holdings, the Borrower or any Subsidiary, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to

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any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by Holdings, the Borrower or any Subsidiary and regardless of whether any Indemnitee is a party thereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses result from the gross negligence, bad faith or wilful misconduct of such Indemnitee.

(c)  To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent under paragraph (a) or (b) of this Section, each Lender severally agrees to pay to the Administrative Agent such Lender’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent in its capacity as such.  For purposes hereof, a Lender’s “pro rata share” shall be determined based upon its share of the outstanding Term Loans at the time.  The obligations of the Lenders under this paragraph (c) are subject to the last sentence of Section 2.02(a) (which shall apply mutatis mutandis to the Lenders’ obligations under this paragraph (c)).

(d)  To the fullest extent permitted by applicable law, neither Holdings nor the Borrower shall assert, and each hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, any Loan Document or any agreement or instrument contemplated thereby, the Transactions, any Loan or the use of the proceeds thereof.

(e)  All amounts due under this Section shall be payable not later than ten Business Days after written demand therefor.

SECTION 9.04.  Successors and Assigns.  (a)  The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that (i) the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section.  Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants (to the extent provided in paragraph (c) of this Section) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

(b)  (i) Subject to the conditions set forth in paragraph (b)(ii) below, any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Term Loan Commitment and the Loans at the time owing to it) with the prior written consent (such consent not to be

69

unreasonably withheld or delayed) of the Administrative Agent; provided further that no Lender may assign or otherwise transfer its rights or obligations hereunder to Holdings, the Borrower, any Subsidiary Loan Party or any of their respective Affiliates.

(ii) Assignments shall be subject to the following additional conditions: (A) except in the case of an assignment to a Lender, an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender’s Term Loan Commitment or Loans, the amount of the Term Loan Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $1,000,000 unless the Administrative Agent otherwise consent (such consent not to be unreasonably withheld or delayed), (B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement, (C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, provided that assignments made pursuant to Section 2.17(b) or Section 9.02(c) shall not require the signature of the assigning Lender to become effective, and (D) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire and any tax forms required by Section 2.15(e) or (f).

(iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(v) of this Section, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.13, 2.14, 2.15 and 9.03 and to any fees payable hereunder that have accrued for such Lender’s account but have not yet been paid).  Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (c)(i) of this Section.

(iv) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Term Loan Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”).  The entries in the Register shall be conclusive, and Holdings, the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary.  The Register shall be available for

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inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(v) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee, the assignee’s completed Administrative Questionnaire and any tax forms required by Section 2.15(e) or (f) (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register.  No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.

(vi) The words “execution”, “signed”, “signature” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act or any other similar state laws based on the Uniform Electronic Transactions Act.

(c)  (i)  Any Lender may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Lender’s rights and obligations under this Agreement (including all or a portion of its Term Loan Commitment and the Loans owing to it), provided that (A) such Lender’s obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) Holdings, the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement.  Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce the Loan Documents and to approve any amendment, modification or waiver of any provision of the Loan Documents, provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant.  Subject to paragraph (c)(ii) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.13, 2.14 and 2.15 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section.  To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided that such Participant agrees to be subject to Section 2.16(c) as though it were a Lender.

(ii)  A Participant shall not be entitled to receive any greater payment under Section 2.13 or Section 2.15 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the

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participation to such Participant is made with the Borrower’s prior written consent.  A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.15 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.15(e) and (f) as though it were a Lender.

(d)  Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest, provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(e)  Notwithstanding anything to the contrary contained herein, any Lender (a “Granting Lender”) may grant to a special purpose funding vehicle (an “SPV”), identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement, provided that (i) nothing herein shall constitute a commitment by any SPV to make any Loan and (ii) if an SPV elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof.  The making of a Loan by an SPV hereunder shall utilize the Term Loan Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender.  Each party hereto hereby agrees that no SPV shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender).  In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPV, such party will not institute against, or join any other person in instituting against, such SPV any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof.  In addition, notwithstanding anything to the contrary contained in this Section 9.04, any SPV may (i) with notice to, but without the prior written consent of, the Borrower and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Granting Lender or to any financial institutions (consented to by the Borrower and Administrative Agent) providing liquidity or credit support to or for the account of such SPV to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPV.

SECTION 9.05.  Survival.  All covenants, agreements, representations and warranties made by the Loan Parties in the Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to any Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the

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execution and delivery of the Loan Documents and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Term Loan Commitments have not expired or terminated.  The provisions of Sections 2.13, 2.14, 2.15 and 9.03 and Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Term Loan Commitments or the termination of this Agreement or any provision hereof.

SECTION 9.06.  Counterparts; Integration; Effectiveness.  This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract.  This Agreement, the other Loan Documents and any separate letter agreements with respect to fees payable to the Administrative Agent or to the Joint Lead Arrangers, the Joint Bookrunners or any of their Affiliates, or the syndication of the Loans and Term Loan Commitments constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof.  Except as provided in Article IV, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns.  Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

SECTION 9.07.  Severability.  Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.

SECTION 9.08.  Right of Setoff.  If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender or any such Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured or are owed to a branch or

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office of such Lender different from the branch or office holding such deposit or obligated on such Indebtedness.  The applicable Lender shall notify the Borrower and the Administrative Agent of such setoff and application, provided that any failure to give or any delay in giving such notice shall not affect the validity of any such setoff and application under this Section.  The rights of each Lender and its Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender and its respective Affiliates may have.

SECTION 9.09.  Governing Law; Jurisdiction; Consent to Service of Process.  (a)  This Agreement shall be construed in accordance with and governed by the law of the State of New York.

(b)  Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such federal court.  Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.  Nothing in any Loan Document shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to any Loan Document against Holdings, the Borrower or their respective properties in the courts of any jurisdiction.

(c)  Each of the parties hereto hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to any Loan Document in any court referred to in paragraph (b) of this Section.  Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(d)  Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01.  Nothing in any Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

SECTION 9.10.  WAIVER OF JURY TRIAL.  EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY).  EACH PARTY HERETO (A) CERTIFIES THAT NO

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REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

SECTION 9.11.  Headings.  Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

SECTION 9.12.  Confidentiality.  Each of the Administrative Agent, the Joint Lead Arrangers, the Joint Bookrunners and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to any Loan Document or the enforcement of rights thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than Holdings or the Borrower.  For the purposes of this Section, “Information” means all information received from Holdings or the Borrower or any Subsidiary relating to Holdings or the Borrower or any Subsidiary or the business of any of them, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by Holdings or the Borrower, provided that, in the case of information received from Holdings, the Borrower or any Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential.  Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

SECTION 9.13.  Interest Rate Limitation.  Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts that are treated as interest on such Loan under applicable law (collectively the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) that may be contracted for, charged, taken, received or reserved by the

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Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender.

SECTION 9.14.  USA Patriot Act.  Each Lender hereby notifies Holdings and the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies Holdings and the Borrower, which information includes the name and address of Holdings and the Borrower and other information that will allow such Lender to identify Holdings and the Borrower in accordance with the Act.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

MORGANS HOTEL GROUP CO.,
	by
		/s/ Marc Gordon
		Name:		Marc Gordon
		Title:		Chief Investment Officer and Executive Vice President of Capital Markets
MORGANS HOTEL GROUP MANAGEMENT LLC,
	by
		/s/ Marc Gordon
		Name:	Marc Gordon
		Title:	Authorized Signatory
CITICORP NORTH AMERICA, INC., individually and as Administrative Agent,
	by
		/s/ David Bouton
		Name:				David Bouton
		Title:				Vice President
MORGAN STANLEY SENIOR FUNDING, INC., as Joint Lead Bookrunner and Co-Syndication Agent,
	by
		/s/ Eugene F. Martin
		Name:				Eugene F. Martin
		Title:				Vice President
MORGAN STANLEY BANK,
	by
		/s/ Eugene F. Martin
		Name:			Eugene F. Martin
		Title:			Vice President

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MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, as Joint Lead Bookrunner and Co-Syndication Agent
	by
		/s/ Stephen Paras
		Name:	Stephen Paras
		Title:	Managing Director
MERRILL LYNCH CAPITAL CORPORATION,
	by
		/s/ Stephen Paras
		Name:	Stephen Paras
		Title:	Managing Director
BANK OF AMERICA, N.A., individually and as Documention Agent
	by
		/s/ Roger C. Davis
		Name:	Roger C. Davis
		Title:	Senior Vice President
BANK OF AMERICA, N.A,
	by
		/s/ Roger C. Davis
		Name:	Roger C. Davis
		Title:	Senior Vice President

78

EX-10.33

Exhibit 10.33

CREDIT AGREEMENT

dated as of

February 17, 2006,

among

MORGANS HOTEL GROUP CO.,

MORGANS GROUP LLC,

as Borrower,

The Lenders Party Hereto,

CITICORP NORTH AMERICA, INC.,
as Administrative Agent,

and

MORGAN STANLEY SENIOR FUNDING, INC.
and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
as Joint Lead Arrangers and Co-Syndication Agents

MORGAN STANLEY SENIOR FUNDING, INC.,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED AND BANC OF AMERICA SECURITIES LLC
as Joint Bookrunners

BANK OF AMERICA N.A.
as Documentation Agent

[CS&M Ref. 8669-117]

TABLE OF CONTENTS

ARTICLE I
Definitions
SECTION 1.01.	Defined Terms	1
SECTION 1.02.	Classification of Loans and Borrowings	22
SECTION 1.03.	Terms Generally	23
SECTION 1.04.	Accounting Terms; GAAP	23
SECTION 1.05.	Pro Forma Calculations	23
ARTICLE II
The Credits
SECTION 2.01.	Commitments	24
SECTION 2.02.	Loans and Borrowings	24
SECTION 2.03.	Requests for Borrowings	24
SECTION 2.04.	Funding of Borrowings	25
SECTION 2.05.	Interest Elections	26
SECTION 2.06.	Termination and Reduction of Commitments	27
SECTION 2.07.	Repayment of Loans; Evidence of Debt	28
SECTION 2.08.	Prepayment of Loans	28
SECTION 2.09.	Fees	29
SECTION 2.10.	Interest	30
SECTION 2.11.	Alternate Rate of Interest	30
SECTION 2.12.	Increased Costs	31
SECTION 2.13.	Break Funding Payments	32
SECTION 2.14.	Taxes	32
SECTION 2.15.	Payments Generally; Pro Rata Treatment; Sharing of Setoffs	36
SECTION 2.16.	Mitigation Obligations; Replacement of Lenders	37
SECTION 2.17.	Incremental Extensions of Credit	38
ARTICLE III
Representations and Warranties
SECTION 3.01.	Organization; Powers	39
SECTION 3.02.	Authorization; Enforceability	40
SECTION 3.03.	Governmental Approvals; No Conflicts	40
SECTION 3.04.	Financial Condition; No Material Adverse Change	40
SECTION 3.05.	Properties	41
SECTION 3.06.	Litigation and Environmental Matters	41
SECTION 3.07.	Compliance with Laws and Agreements	42
SECTION 3.08.	Investment and Holding Company Status	42

2

SECTION 3.09.	Taxes	42
SECTION 3.10.	ERISA	42
SECTION 3.11.	Disclosure	42
SECTION 3.12.	Subsidiaries	43
SECTION 3.13.	Insurance	43
SECTION 3.14.	Labor Matters	43
SECTION 3.15.	Solvency	44
ARTICLE IV
Conditions
SECTION 4.01.	Effective Date	44
SECTION 4.02.	Each Credit Event	46
ARTICLE V
Affirmative Covenants
SECTION 5.01.	Financial Statements and Other Information	47
SECTION 5.02.	Notices of Material Events	48
SECTION 5.03.	Information Regarding Collateral	49
SECTION 5.04.	Existence; Conduct of Business	49
SECTION 5.05.	Payment of Obligations	50
SECTION 5.06.	Maintenance of Properties	50
SECTION 5.07.	Insurance	50
SECTION 5.08.	Casualty and Condemnation	50
SECTION 5.09.	Books and Records; Inspection and Audit Rights	50
SECTION 5.10.	Compliance with Laws	50
SECTION 5.11.	Use of Proceeds	51
SECTION 5.12.	Additional Subsidiaries	51
SECTION 5.13.	Further Assurances	51
SECTION 5.14.	Interest Rate Protection	51
ARTICLE VI
Negative Covenants
SECTION 6.01.	Indebtedness; Certain Equity Securities	52
SECTION 6.02.	Liens	54
SECTION 6.03.	Fundamental Changes	56
SECTION 6.04.	Investments, Loans, Advances, Guarantees and Acquisitions	57
SECTION 6.05.	Asset Sales	59
SECTION 6.06.	[Intentionally Omitted.]	61
SECTION 6.07.	Swap Agreements	61
SECTION 6.08.	Restricted Payments	61
SECTION 6.09.	Transactions with Affiliates	61

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SECTION 6.10.	Restrictive Agreements	62
SECTION 6.11.	Amendment of Material Documents	63
SECTION 6.12.	Interest Expense Coverage Ratio	63
SECTION 6.13.	Leverage Ratio	63
SECTION 6.14.	Senior Leverage Ratio	63
SECTION 6.15.	Changes in Fiscal Periods	63
SECTION 6.16.	Availability of Exceptions	63
ARTICLE VII
Events of Default
ARTICLE VIII
The Administrative Agent
ARTICLE IX
Miscellaneous
SECTION 9.01.	Notices	69
SECTION 9.02.	Waivers; Amendments	70
SECTION 9.03.	Expenses; Indemnity; Damage Waiver	72
SECTION 9.04.	Successors and Assigns	73
SECTION 9.05.	Survival	76
SECTION 9.06.	Counterparts; Integration; Effectiveness	77
SECTION 9.07.	Severability	77
SECTION 9.08.	Right of Setoff	77
SECTION 9.09.	Governing Law; Jurisdiction; Consent to Service of Process	78
SECTION 9.10.	WAIVER OF JURY TRIAL	78
SECTION 9.11.	Headings	79
SECTION 9.12.	Confidentiality	79
SECTION 9.13.	Interest Rate Limitation	79
SECTION 9.14.	USA Patriot Act	80

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SCHEDULES:

Schedule 1.01 — Transactions

Schedule 2.01 — Commitments

Schedule 3.05 — Real Property Liens

Schedule 3.06 — Disclosed Matters

Schedule 3.12 — Subsidiaries

Schedule 3.13 — Insurance

Schedule 6.01 — Existing Indebtedness

Schedule 6.02 — Existing Liens

Schedule 6.04 — Existing Investments

Schedule 6.10 — Existing Restrictions

EXHIBITS:

Exhibit A	— Form of Assignment and Assumption
Exhibit B	— Form of Opinion of Sullivan & Cromwell LLP
Exhibit C	— Form of Collateral Agreement
Exhibit D	— Form of Perfection Certificate
Exhibit E	— Form of Guarantee Agreement
Exhibit F	— Form of Opinion of Sullivan & Cromwell LLP (Collateral and Guarantee Requirement)

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CREDIT AGREEMENT dated as of February 17, 2006 (this “Agreement”), among Morgans Hotel Group Co., a Delaware corporation (“Holdings”), Morgans Group LLC, a Delaware limited liability company (the “Borrower”), the LENDERS party hereto, CITICORP NORTH AMERICA, INC., as Administrative Agent, and MORGAN STANLEY SENIOR FUNDING, INC. and MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, as Joint Lead Arrangers.

In connection with the Transactions described in Schedule 1.01, the Borrower has requested that the Revolving Lenders extend credit in the form of Revolving Loans at any time and from time to time during the Revolving Availability Period such that the aggregate Revolving Exposures will not exceed $125,000,000 at any time.  In addition, the Borrower may request that prospective Additional Lenders agree to make available Incremental Revolving Loans and Revolving Commitment increases pursuant to Section 2.17 from time to time after the Closing Date in an aggregate amount not to exceed $25,000,000.  The proceeds of the Revolving Loans will be used only for general corporate purposes, including Permitted Acquisitions.

The Lenders are willing to extend such credit to the Borrower on the terms and subject to the conditions set forth herein.  Accordingly, the parties hereto agree as follows:

ARTICLE I

Definitions

SECTION 1.01.  Defined Terms.  As used in this Agreement, the following terms have the meanings specified below:

“ABR”, when used in reference to any Loan or Borrowing, means that the Loan or Borrowing is bearing interest at a rate determined by reference to the Alternate Base Rate.

“Additional Lender” has the meaning assigned to such term in Section 2.17.

“Additional Mortgage Indebtedness” means Indebtedness incurred after the Effective Date to finance any real property or interest therein and/or the improvements thereto, or to finance the acquisition of any real property or interest therein by the Borrower or any Subsidiary and, in either case, secured by a mortgage on such property or a pledge of the Equity Interests of the entity that directly or indirectly owns or acquires such property or interest, provided that such entity is not a Loan Party.

“Adjusted LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/100 of 1%) equal to (a) the LIBO Rate for such Interest Period multiplied by (b) the Statutory Reserve Rate.

“Administrative Agent” means Citicorp North America, Inc., in its capacity as administrative agent for the Lenders hereunder, and its successors in such capacity as provided in Article VIII.

“Administrative Questionnaire” means an administrative questionnaire in a form supplied by the Administrative Agent.

“Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified, provided, however, that for purposes of Section 6.09, the term “Affiliate” shall also include any person that directly, or indirectly through one or more intermediaries, owns 5% or more of any class of Equity Interests of the Person specified or that is an officer or director of the Person specified.

“Alternate Base Rate” means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus ½ of 1%.  Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively.

“Applicable Rate” means, for any day with respect to any Revolving Loan, or with respect to the commitment fees payable hereunder, as the case may be, the applicable rate per annum set forth below under the caption “Revolving Loan ABR Spread”, “Revolving Loan Eurodollar Spread” or “Commitment Fee Rate”, as the case may be, based upon the Leverage Ratio as of the most recent determination date, provided that until the delivery to the Administrative Agent pursuant to Sections 5.01(b) and (c) of the Borrower’s consolidated financial statements and related certificate of a Financial Officer, respectively, for the first fiscal quarter of the Borrower beginning after the Effective Date, the “Applicable Rate” shall be the applicable rate per annum set forth below in Category 2; provided further that if the Collateral and Guarantee Requirement is not satisfied on or prior to April 1, 2006, then commencing on such date and, if applicable, continuing until the date on which the Collateral and Guarantee Requirement has been satisfied, each percentage set forth below under the headings “Revolving Loan ABR Spread” and “Revolving Loan Eurodollar Spread” shall increase by 1.00% (it being understood and agreed that such increases shall cease to apply to the percentages set forth below under the headings “Revolving Loan ABR Spread” and “Revolving Loan Eurodollar Spread” after the date on which the Collateral and Guarantee Requirement is satisfied if such date occurs after April 1, 2006) :

Leverage Ratio:	Revolving Loan ABR Spread		Revolving Loan Eurodollar Spread		Commitment Fee Rate
Category 1 Greater than or equal to 6.00 to 1.00	1.25	%	2.25	%	0.375	%
Category 2 Less than 6.00 to 1.00 but greater than or equal to 5.00 to 1.00	1.00	%	2.00	%	0.375	%
Category 3 Less than 5.00 to 1.00 but greater than or equal to 4.50 to 1.00	0.75	%	1.75	%	0.375	%
Category 4 Less than 4.50 to 1.00	0.50	%	1.50	%	0.375	%

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For purposes of the foregoing, (a) the Leverage Ratio shall be determined as of the end of each fiscal quarter of the Borrower’s fiscal year based upon the consolidated financial statements delivered pursuant to Section 5.01(a) or (b) and (b) each change in the Applicable Rate resulting from a change in the Leverage Ratio shall be effective during the period commencing on and including the date of delivery to the Administrative Agent of such consolidated financial statements and related certificate of a Financial Officer indicating such change and ending on the date immediately preceding the date of the next such change, provided that the Leverage Ratio shall be deemed to be in Category 1 (i) at any time that an Event of Default has occurred and is continuing or (ii) at the option of the Administrative Agent or at the request of the Required Lenders if the Borrower fails to deliver the consolidated financial statements or related certificate of a Financial Officer required to be delivered by it pursuant to Section 5.01(a) or (b) and Section 5.01(c), as the case may be, during the period from the expiration of the time for delivery thereof until such consolidated financial statements and related certificate of a Financial Officer are delivered.

“Approved Fund” has the meaning assigned to such term in Section 9.04(b).

“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent, in the form of Exhibit A.

“Board” means the Board of Governors of the Federal Reserve System of the United States of America.

“Borrower” means Morgans Group LLC, a Delaware limited liability company.

“Borrowing” means Loans of the same Class and Type, made, converted or continued on the same date and, in the case of Eurodollar Loans, as to which a single Interest Period is in effect.

“Borrowing Request” means a request by the Borrower for a Borrowing in accordance with Section 2.03.

“Business Day” means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to

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remain closed, provided that, when used in connection with a Eurodollar Loan, the term “Business Day” shall also exclude any day on which banks are not open for dealings in dollar deposits in the London interbank market.

“Capital Lease Obligations” of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.

“Change in Control” means (a) (i) the cessation of Holdings being the sole managing member of the Borrower or (ii) the gaining by any member of the Borrower (other than Holdings) of the right to exercise control or management power over the business and affairs of the Borrower, except as otherwise expressly permitted in the LLC Agreement and as required by applicable law, (b) (i) the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934, as amended, and the rules of the SEC thereunder as in effect on the date hereof) other than the Permitted Investors, of Equity Interests representing more than 40% of either the aggregate ordinary voting power or the aggregate equity value represented by the issued and outstanding Equity Interests in Holdings, and (ii) the ownership, directly or indirectly, beneficially or of record, by the Permitted Investors of Equity Interests in Holdings representing in the aggregate a lesser percentage of either the aggregate ordinary voting power or the aggregate equity value represented by the issued and outstanding Equity Interests in Holdings than such Person or group, (c) the occupation of a majority of the seats (other than vacant seats) on the board of directors of Holdings by Persons who were neither (i) nominated by the board of directors of Holdings or the Permitted Investors nor (ii) appointed by directors so nominated or (d) the acquisition of direct or indirect Control of Holdings by any Person or group other than the Permitted Investors.

“Change in Law” means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by any Lender (or, for purposes of Section 2.12(b), by any lending office of such Lender or by such Lender’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement.

“Class”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans or Incremental Revolving Loans and, when used in reference to any Commitment, refers to whether such Commitment is a Revolving Commitment or a Commitment in respect of any Incremental Revolving Loans.  Incremental Revolving Loans that have different terms and conditions (together with the Commitments in respect thereof) shall be construed to be in different Classes.

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“Class”, when used in reference to any Lender, refers to whether such Lender has a Loan or Commitment with respect to a particular Class.

“CLO” has the meaning assigned to such term in Section 9.04(b).

“Code” means the Internal Revenue Code of 1986, as amended from time to time.

“Collateral” means any and all “Collateral”, as defined in any applicable Security Document.

“Collateral Agreement” means the Guarantee and Collateral Agreement among Holdings, the Borrower, the Subsidiary Loan Parties and the Administrative Agent, substantially in the form of Exhibit C.

“Collateral and Guarantee Requirement” means the requirement that:

(a) the Administrative Agent shall have received from each Loan Party a counterpart of the Collateral Agreement duly executed and delivered on behalf of such Loan Party;

(b) the outstanding Equity Interests listed on Schedule II to the Collateral Agreement, in each case owned by or on behalf of any Loan Party, shall have been pledged pursuant to the Collateral Agreement;

(c) all documents and instruments, including Uniform Commercial Code financing statements, required by law or reasonably requested by the Administrative Agent to be filed, registered or recorded to create the Liens intended to be created by the Collateral Agreement and perfect such Liens to the extent required by, and with the priority required by, the Collateral Agreement, shall have been filed, registered or recorded or delivered to the Administrative Agent for filing, registration or recording;

(d) each Loan Party shall have obtained all consents and approvals required to be obtained by it in connection with the execution and delivery of all Security Documents to which it is a party, the performance of its obligations thereunder and the granting by it of the Liens thereunder; and

(e) the Administrative Agent and the Joint Lead Arrangers shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the date of the Collateral Agreement) of Sullivan & Cromwell LLP or other external counsel reasonably acceptable to the Joint Bookrunners, counsel for Holdings, the Borrower and the Subsidiaries, substantially in the form of Exhibit F.  Each of Holdings and the Borrower hereby requests such counsel to deliver such opinion.

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“Commitment” means with respect to any Lender, such Lender’s Revolving Commitment or commitment in respect of any Incremental Revolving Loans or any combination thereof (as the context requires).

“Consolidated Cash Interest Expense” means, for any period, the excess of (a) the sum of (i) the interest expense (including imputed interest expense in respect of Capital Lease Obligations) of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) for such period, determined on a consolidated basis in accordance with GAAP, (ii) any interest accrued during such period in respect of Indebtedness of Holdings, the Borrower and any Subsidiary (other than any Excluded Subsidiary) that is required to be capitalized rather than included in consolidated interest expense for such period in accordance with GAAP (other than interest attributable to Development Debt), (iii) any cash payments made during such period in respect of obligations referred to in clause (b)(ii) below that were amortized or accrued in a previous period and (iv) all cash dividends paid during such period in respect of preferred Equity Interests of Holdings and the Borrower (but expressly excluding any such dividends paid by the Borrower to Holdings), together with the Tax Amount attributable thereto, if any, minus (b) the sum of (i) to the extent included in such consolidated interest expense for such period, non-cash amounts attributable to amortization of financing costs paid in a previous period, (ii) to the extent included in such consolidated interest expense for such period, non-cash amounts attributable to amortization of debt discounts or accrued interest payable in kind for such period and (iii) the minority interest share of the amounts included in clause (a) above.  Consolidated Cash Interest Expense shall be deemed to be (a) for the four fiscal quarter period ended March 31, 2006, Consolidated Cash Interest Expense for the period from the Effective Date to and including March 31, 2006, multiplied by a fraction equal to (x) 365 divided by (y) the number of days actually elapsed from the Effective Date to March 31, 2006, (b) for the four fiscal quarter period ended June 30, 2006, Consolidated Cash Interest Expense for the period from the Effective Date to and including June 30, 2006, multiplied by a fraction equal to (x) 365 divided by (y) the number of days actually elapsed from the Effective Date to June 30, 2006, (c) for the four fiscal quarter period ended September 30, 2006, Consolidated Cash Interest Expense for the period from the Effective Date to and including September 30, 2006, multiplied by a fraction equal to (x) 365 divided by (y) the number of days actually elapsed from the Effective Date to September 30, 2006 and (d) for the four fiscal quarter period ended December 31, 2006, Consolidated Cash Interest Expense for the period from the Effective Date to and including December 31, 2006, multiplied by a fraction equal to (x) 365 divided by (y) the number of days actually elapsed from the Effective Date to December 31, 2006.

“Consolidated EBITDA” means, for any period, Consolidated Net Income for such period plus without duplication and to the extent deducted in determining such Consolidated Net Income, the sum of (i) consolidated interest expense for such period, (ii) consolidated income tax expense for such period, (iii) all amounts attributable to depreciation and amortization for such period (excluding amortization expense attributable to a prepaid cash item that was paid in a prior period and excluding depreciation expense of minority interests in consolidated joint ventures), (iv) other non-operating expense (or, if applicable, minus non-operating income) (in each case as

6

defined in the Combined Statement of Operations and Comprehensive Loss of Holdings) for such period, (v) non-cash expenses resulting from the grant of stock options or other equity-related incentives to any director, officer or employee of Holdings, the Borrower or any Subsidiary pursuant to a written plan or agreement approved by the board of directors of Holdings, (vi) non-cash exchange, translation or performance losses relating to any foreign currency hedging transactions or currency fluctuations and (vii) all amounts attributable to equity in income/loss of unconsolidated subsidiaries, provided that Consolidated EBITDA for the four fiscal quarter periods ended March 31, 2006, June 30, 2006, September 30, 2006 and December 31, 2006 shall be determined on a pro forma basis giving effect to the Formation and Structuring Transactions as if they occurred on the first day of each such four consecutive fiscal quarter period (including cost savings to the extent such cost savings would be permitted to be reflected in pro forma financial information complying with the requirements of GAAP and Article XI of Regulation S-X under the Securities Act of 1933, as amended, as interpreted by the Staff of the SEC, and as certified by a Financial Officer).

“Consolidated Net Income” means, for any period, the net income or loss of Holdings, the Borrower and the Subsidiaries for such period determined on a consolidated basis in accordance with GAAP (adjusted to reflect any charge, tax or expense incurred or accrued by Holdings during such period as though such charge, tax or expense had been incurred by the Borrower, to the extent that the Borrower has made or would be entitled under the Loan Documents to make any Restricted Payment or other payment to or for the account of Holdings in respect thereof), provided that there shall be excluded (a) the income of any Subsidiary to the extent that the declaration or payment of dividends or other distributions by such Subsidiary of that income is not at the time permitted by a Requirement of Law or any agreement or instrument applicable to such Subsidiary, except to the extent of the amount of cash dividends or other cash distributions actually paid to the Borrower or any Subsidiary during such period, (b) the income of any Person (other than the Borrower or any Subsidiary that is not accounted for using the equity method of accounting) in which the Borrower or any Subsidiary owns an Equity Interest, except to the extent of the amount of cash dividends or other cash distributions actually paid to the Borrower or any Subsidiary during such period and (c) the income of any Excluded Subsidiary.

“Consulting Agreement” means the consulting agreement, dated as of June 24, 2005, by and between Morgans Hotel Group LLC and Ian Schrager.

“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies, or the dismissal or appointment of the management, of a Person, whether through the ability to exercise voting power, by contract or otherwise.  “Controlling” and “Controlled” have meanings correlative thereto.

“Debt Prepayment” means the payment in cash, with proceeds of the IPO, of (a) all principal amounts of Indebtedness outstanding under, together with all interest, premiums, penalties and fees due in connection with prepayment of, the Existing Mezzanine Loans, (b) Indebtedness outstanding under the NY/CA Mortgage Loan,

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together with all interest, premiums, penalties and fees due in connection with such prepayment, and (c) Indebtedness outstanding under the FL Mortgage Loan, together with all interest, premiums, penalties and fees due in connection with such prepayment such that the aggregate principal amount of Indebtedness repaid under clauses (a), (b) and (c) shall equal an amount not less than $205,000,000.

“Default” means any event or condition that constitutes an Event of Default or that upon notice, lapse of time or both would, unless cured or waived, become an Event of Default.

“Development Debt” means Indebtedness of a Subsidiary that is a special purpose entity relating to a development project in respect of which interest is being capitalized in accordance with GAAP, provided that such Indebtedness is not recourse to the Loan Parties, and provided further that such Indebtedness shall cease to constitute Development Debt on the date on which interest with respect to such Indebtedness is not required to be capitalized in accordance with GAAP.

“Disclosed Matters” means the actions, suits and proceedings and the environmental matters disclosed in Schedule 3.06.

“Disqualified Equity Interests” means Equity Interests that (a) mature or are mandatorily redeemable or subject to mandatory repurchase or redemption or repurchase at the option of the holders thereof, in each case in whole or in part and whether upon the occurrence of any event, pursuant to a sinking fund obligation on a fixed date or otherwise, prior to the date that is 180 days after the Revolving Maturity Date or, if such Equity Interests are issued after the Borrower has obtained any Incremental Revolving Loans or while any Commitments from Additional Lenders to make Incremental Revolving Loans remain in effect, after the maturity date for such Incremental Revolving Loans, unless all such Incremental Revolving Loans have been repaid in full and all Commitments in respect thereof shall have been terminated (other than (i) upon payment in full of the Loan Document Obligations and termination of the Commitments or (ii) upon a “change in control”, provided that any payment required pursuant to this clause (ii) is contractually subordinated in right of payment to the Loan Document Obligations on terms reasonably satisfactory to the Administrative Agent and such requirement is applicable only in circumstances that are market on the date of issuance of such Equity Interests), (b) require the maintenance or achievement of any financial performance standards other than as a condition to the taking of specific actions, or provide remedies to holders thereof (other than voting and management rights and increases in pay-in-kind dividends) or (c) are convertible or exchangeable, automatically or at the option of any holder thereof, into any Indebtedness (other than Indebtedness permitted under Section 6.01), Equity Interests or other assets other than Qualified Equity Interests or trust preferred securities otherwise permitted hereunder.

“dollars” or “$” refers to lawful money of the United States of America.

“Effective Date” means the date on which the conditions specified in Section 4.01 are satisfied (or waived in accordance with Section 9.02).

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“Effective Date Guarantee Requirement” means the requirement that the Administrative Agent shall have received from each of Holdings, the Borrower and the Subsidiary Loan Parties a counterpart of the Guarantee Agreement duly executed and delivered on behalf of such entity, and that each such entity shall have obtained all consents and approvals required to be obtained by it in connection with the execution and delivery of the Guarantee Agreement and the performance of its obligations thereunder.

“Environmental Laws” means all treaties, laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by or with any Governmental Authority, relating in any way to the environment, the preservation or reclamation of natural resources or the generation, management, Release or threatened Release of any Hazardous Material.

“Environmental Liability” means any liability, contingent or otherwise (including any liability for damages, costs of medical monitoring, costs of environmental remediation or restoration, administrative oversight costs, consultants’ fees, fines, penalties or indemnities), of Holdings, the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) any actual or alleged violation of any Environmental Law or permit, license or approval issued thereunder, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened Release of any Hazardous Materials or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.

“Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person.  As used herein, references to “preferred Equity Interests” include Equity Interests in the form of preferred stock, trust preferred securities and other similar securities with regularly scheduled cash or payment-in-kind dividend payments and other “debt-like” characteristics, but do not include customary real estate joint venture and other similar equity ownership arrangements, even if such arrangements involve some disproportionate sharing of cash flows of the applicable entity.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.

“ERISA Affiliate” means any trade or business (whether or not incorporated) that, together with Holdings, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

“ERISA Event” means (a) any “reportable event”, as described in Section 4043(c) of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived), (b) the existence with respect to any Plan of an “accumulated funding deficiency” (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived, (c) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of

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the minimum funding standard with respect to any Plan, (d) the incurrence by Holdings or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan, (e) the receipt by Holdings or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan, (f) the incurrence by Holdings or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan or (g) the receipt by Holdings or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from Holdings or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA.

“Eurodollar”, when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Adjusted LIBO Rate.

“Event of Default” has the meaning assigned to such term in Article VII.

“Excluded Subsidiaries” means Clift Holdings LLC, a Delaware limited liability company, and Shore Club Holdings LLC, a Delaware limited liability company.

“Excluded Taxes” means, with respect to the Administrative Agent, any Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) income or franchise taxes imposed on (or measured by) its net income by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable lending office is located, (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction described in clause (a) above and (c) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 2.16(b)), any withholding tax that (i) is in effect and would apply to amounts payable to such Foreign Lender at the time such Foreign Lender becomes a party to this Agreement (or designates a new lending office), except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new lending office (or assignment), to receive additional amounts from the Borrower with respect to any withholding tax pursuant to Section 2.14(a), or (ii) is attributable to such Foreign Lender’s failure to comply with Section 2.14(f).

“Existing Hotel Properties” means the fee and leasehold estates in, and all buildings, foundations, structures and improvements on, the premises commonly known on the date hereof as the Morgans Hotel located in New York, New York, the Delano Hotel located in Miami, Florida, the Royalton Hotel located in New York, New York, the Mondrian Hotel located in Los Angeles, California and the Hudson Hotel located in New York, New York.

“Existing Mezzanine Loans” means the Loan and Security Agreement dated as of June 29, 2005 between MMRDH Senior Mezz Holding Company LLC, a

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Delaware limited liability company, and Wachovia Bank, National Association, (b) the Loan and Security Agreement dated as of June 29, 2005 between MMRDH Intermediate Mezz Holding Company LLC, a Delaware limited liability company, and Wachovia Bank, National Association and (c) the Loan and Security Agreement dated as of June 29, 2005 between MMRDH Junior Mezz Holding Company LLC, a Delaware limited liability company, and Wachovia Bank, National Association.

“Federal Funds Effective Rate” means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average (rounded upwards, if necessary, to the next 1/100 of 1%) of the quotations for such day for such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it.

“Financial Officer” means the chief financial officer, principal accounting officer, treasurer or controller of Holdings.

“FL Mortgage Loan” means the Amended and Restated Renewal and Future Advance Promissory Note dated June 29, 2005 by Beach Hotel Associates LLC, a Delaware limited liability company.

“Foreign Lender” means any Lender that is organized under the laws of a jurisdiction other than that in which the Borrower is located.  For purposes of this definition, the United States of America, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.

“Formation and Structuring Transactions” means the formation and structuring transactions described on Schedule 1.01.

“GAAP” means generally accepted accounting principles in the United States of America.

“Governmental Authority” means the government of the United States of America or any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).

“Granting Lender” has the meaning assigned to such term in Section 9.04(e).

“Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of

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the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation, provided, that the term Guarantee shall not include endorsements for collection or deposit in the ordinary course of business.

“Guarantee Agreement” means the Guarantee Agreement among Holdings, the Borrower, the Subsidiary Loan Parties and the Administrative Agent, substantially in the form of Exhibit D.

“Hazardous Materials” means all explosive, radioactive, hazardous or toxic substances, materials, wastes or other pollutants, including petroleum or petroleum by-products or distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls, radon gas, chlorofluorocarbons and other ozone-depleting substances or mold which are regulated pursuant to any Environmental Law.

“Holdings” means Morgans Hotel Group Co., a Delaware corporation.

“Incremental Extensions of Credit” has the meaning assigned to such term in Section 2.17.

“Incremental Facility Amendment” has the meaning assigned to such term in Section 2.17.

“Incremental Facility Closing Date” has the meaning assigned to such term in Section 2.17.

“Incremental Revolving Loans” has the meaning assigned to such term in Section 2.17.

“Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding trade accounts payable and other accrued obligations, in each case incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all

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obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers’ acceptances.  The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such Person’s ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor.  Notwithstanding the foregoing, in connection with any Permitted Acquisition, the term “Indebtedness” shall not include contingent post-closing purchase price adjustments or earn-outs to which the seller in such Permitted Acquisition may become entitled.

“Indemnified Taxes” means Taxes other than Excluded Taxes.

“Information Memorandum” means the Confidential Information Memorandum dated January 2006, relating to the Borrower and the Transactions.

“Interest Election Request” means a request by the Borrower to convert or continue a Revolving Borrowing in accordance with Section 2.05.

“Interest Payment Date” means (a) with respect to any ABR Loan, the last day of each March, June, September and December and (b) with respect to any Eurodollar Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurodollar Borrowing with an Interest Period of more than three months’ duration, each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period.

“Interest Period” means, with respect to any Eurodollar Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter (or nine or twelve months thereafter if, at the time of the relevant Borrowing, all Lenders participating therein agree to make an interest period of such duration available), as the Borrower may elect, provided, that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period.  For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.

“IPO” means the initial public offering of Holdings described in Schedule 1.01.

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“Joint Bookrunners” means Morgan Stanley Senior Funding, Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banc of America Securities LLC.

“Joint Lead Arrangers” means Morgan Stanley Senior Funding, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated.

“Lenders” means the Persons listed on Schedule 2.01 and any other Person that shall have become a party hereto pursuant to Section 9.04 or Section 2.17, other than any such Person that ceases to be a party hereto pursuant to Section 9.04.

“Leverage Ratio” means, on any date, the ratio of (a) Total Indebtedness as of such date to (b) Consolidated EBITDA for the period of four consecutive fiscal quarters of the Borrower ended on such date (or, if such date is not the last day of a fiscal quarter, ended on the last day of the fiscal quarter of the Borrower most-recently ended prior to such date).

“LIBO Rate” means, with respect to any Eurodollar Borrowing for any Interest Period, the rate appearing on Page 3750 of the Dow Jones Market Service (or on any successor or substitute page of such Service, or any successor to or substitute for such Service, providing rate quotations comparable to those currently provided on such page of such Service, as determined by the Administrative Agent from time to time for purposes of providing quotations of interest rates applicable to dollar deposits in the London interbank market) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, as the rate for dollar deposits in an amount comparable to the amount of such Eurodollar Borrowing and with a maturity comparable to such Interest Period.  In the event that such rate is not available at such time for any reason, then the “LIBO Rate” with respect to such Eurodollar Borrowing for such Interest Period shall be the rate at which dollar deposits of an amount comparable to the amount of such Eurodollar Borrowing and for a maturity comparable to such Interest Period are offered by the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period.

“Lien” means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities.

“LLC Agreement” means the amended and restated limited liability agreement of the Borrower dated as of February 17, 2006, as amended from time to time to the extent not prohibited by Section 6.12.

“Loan Document Obligations” has the meaning assigned to such term in the Collateral Agreement.

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“Loan Documents” means this Agreement, any Incremental Facility Amendment and the Security Documents.

“Loan Parties” means Holdings, the Borrower and the Subsidiary Loan Parties.

“Loans” means the loans made by the Lenders to the Borrower pursuant to this Agreement.

“Management Term Loan Credit Agreement” means the credit agreement, dated as of the date hereof, among Holdings, the Term Loan Borrower, the lenders party thereto, Citicorp North America, Inc., as administrative agent, and Morgan Stanley Senior Funding, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as joint lead arrangers.

“Management Term Loan Borrower” means Morgans Hotel Group Management LLC, a Delaware limited liability company.

“Material Adverse Effect” means a material adverse effect on (a) the business, operations, properties, financial condition or results of operations of Holdings, the Borrower and the Subsidiaries, taken as a whole, (b) the ability of any Loan Party to perform any of its obligations under any Loan Document or (c) the rights of or benefits or remedies available to the Lenders under any Loan Document.

“Material Indebtedness” means Indebtedness (other than the Loans), or obligations in respect of one or more Swap Agreements, of any one or more of Holdings, the Borrower and the Subsidiary Loan Parties in an aggregate principal amount exceeding $10,000,000.  For purposes of determining Material Indebtedness, the “principal amount” of the obligations of Holdings, the Borrower or any Subsidiary Loan Party in respect of any Swap Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that Holdings, the Borrower or such Subsidiary would be required to pay if such Swap Agreement were terminated at such time.

“Moody’s” means Moody’s Investors Service, Inc.

“Mortgage Indebtedness” means Indebtedness outstanding as of the date hereof under the NY/CA Mortgage Loan and the FL Mortgage Loan.

“Multiemployer Plan” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

“Non-Consenting Lender” has the meaning assigned to such term in Section 9.02(c).

“NY/CA Mortgage Loan” means the Amended, Restated and Consolidated Promissory Note dated June 29, 2005 by Henry Hudson Holdings LLC, a Delaware limited liability company, Morgans Holdings LLC, a Delaware limited liability company, Royalton, LLC, a Delaware limited liability company, and Mondrian Holdings

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LLC, a Delaware limited liability company, in favor of Wachovia Bank, National Association.

“Obligations” has the meaning assigned to such term in the Guarantee Agreement or, if applicable, the Collateral Agreement.

“Other Taxes” means any and all present or future recording, stamp, documentary, excise, transfer, sales, property or similar taxes, charges or levies arising from any payment made under any Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, any Loan Document.

“Participant” has the meaning assigned to such term in Section 9.04(c).

“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.

“Perfection Certificate” means a certificate in the form of Exhibit D.

“Permitted Acquisition” means any acquisition by the Borrower or a wholly-owned Subsidiary of all the outstanding Equity Interests (other than directors’ qualifying shares) in, all or substantially all the assets of, or all or substantially all the assets constituting a division or line of business of, a Person if (a) no Default has occurred and is continuing or would result therefrom, (b) such acquisition and all transactions related thereto are consummated in accordance with applicable laws, (c) the Borrower is in compliance, on a Pro Forma Basis after giving effect to such acquisition as of the last day of the most-recently ended fiscal quarter of the Borrower, with the covenants contained in Sections 6.12, 6.13 and 6.14, (d) the business of such Person or such assets, as the case may be, constitutes a business permitted by Section 6.03(b), (e) the Leverage Ratio, calculated on a Pro Forma Basis after giving effect to such acquisition as of the last day of the most-recently ended fiscal quarter of the Borrower, is less than 6.50 to 1.00, and (f) the Borrower has delivered to the Administrative Agent a certificate of a Financial Officer to the effect set forth in clauses (a), (b), (c), (d), and (e) above, together with all relevant financial information for the Person or assets to be acquired and setting forth reasonably detailed calculations demonstrating compliance with clauses (c) and (e) above (which calculations shall, if made as of the last day of any fiscal quarter of the Borrower for which the Borrower has not delivered to the Administrative Agent the financial statements and certificate of a Financial Officer required to be delivered by Section 5.01(a) or (b) and Section 5.01(c), respectively, be accompanied by a reasonably detailed calculation of Consolidated EBITDA and Consolidated Cash Interest Expense for the relevant period).

“Permitted Encumbrances” means:

(a) Liens imposed by law for taxes, assessments or other governmental charges that are not yet due or are being contested in compliance with Section 5.05;

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(b) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s, landlords’ and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 5.05;

(c) pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations;

(d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business;

(e) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article VII;

(f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary; and

(g) Liens arising from Permitted Investments described in clause (d) of the definition of the term “Permitted Investments”.

“Permitted Investments” means:

(a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case maturing within one year from the date of acquisition thereof;

(b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from S&P or from Moody’s;

(c) investments in certificates of deposit, banker’s acceptances and time or demand deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $500,000,000;

(d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) above and entered into with a financial institution satisfying the criteria described in clause (c) above; and

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(e) investments in “money market funds” within the meaning of Rule 2a-7 of the Investment Company Act of 1940, as amended, substantially all of whose assets are invested in investments of the type described in clauses (a) through (d) above.

“Permitted Investors” means NCIC MHG Subsidiary LLC, North Star Partnership, L.P., W. Edward Scheetz, David T. Hamamoto and Marc Gordon.

“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.

“Plan” means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which Holdings or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

“Prime Rate” means the rate of interest per annum publicly announced from time to time by Citicorp North America, Inc. as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective.

“Pro Forma Basis” means, with respect to the calculation of the financial covenants contained in Sections 6.12, 6.13 and 6.14 and the negative covenant contained in Section 6.01(a)(iv) as of any date, that such calculation shall give pro forma effect to all acquisitions and other investments, all issuances, incurrences or assumptions of Indebtedness (with any such Indebtedness being deemed to be amortized during the applicable testing period in accordance with its terms) and all sales, transfers or other dispositions of any material assets outside the ordinary course of business that have occurred during (or, if such calculation is being made for the purpose of determining whether any proposed acquisition will constitute a Permitted Acquisition, any Additional Mortgage Indebtedness may be incurred or any Incremental Extension of Credit may be made, since the beginning of) the four consecutive fiscal quarter period of the Borrower most-recently ended on or prior to such date as if they occurred on the first day of such four consecutive fiscal quarter period (including cost savings to the extent such cost savings would be permitted to be reflected in pro forma financial information complying with the requirements of GAAP and Article XI of Regulation S-X under the Securities Act of 1933, as amended, as interpreted by the Staff of the SEC, and as certified by a Financial Officer).

“Proposed Change” has the meaning assigned to such term in Section 9.02(c).

“Qualified Equity Interests” means Equity Interests of Holdings or the Borrower other than Disqualified Equity Interests.

“Register” has the meaning assigned to such term in Section 9.04(b).

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“Related Parties” means, with respect to any specified Person, such Person’s Affiliates and the respective directors, officers, employees, agents and advisors of such Person and such Person’s Affiliates.

“Release” means any release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching or migration into or through the environment (including ambient air, surface water, groundwater, land surface or subsurface strata) or within or upon any building, structure, facility or fixture.

“Required Lenders” means, at any time, Lenders having Revolving Exposures and unused Commitments representing more than 50% of the aggregate Revolving Exposures and unused Commitments at such time.

“Requirement of Law” means, with respect to any Person, (a) the charter, articles or certificate of organization or incorporation and bylaws or other organizational or governing documents of such Person and (b) any statute, law, treaty, rule, regulation, order, decree, writ, injunction or determination of any arbitrator or court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

“Restricted Payment” means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in Holdings, the Borrower or any Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancelation or termination of any Equity Interests in Holdings, the Borrower or any Subsidiary or any option, warrant or other right to acquire any such Equity Interests in Holdings, the Borrower or any Subsidiary, or any other payment (including any payment under any Swap Agreement) that has a substantially similar effect to any of the foregoing.

“Revolving Availability Period” means the period from and including the Effective Date to but excluding the earlier of the Revolving Maturity Date and the date of termination of the Revolving Commitments as contemplated in Section 2.06 or Article VII.

“Revolving Commitment” means, with respect to each Lender, the commitment, if any, of such Lender to make Revolving Loans hereunder, expressed as an amount representing the maximum possible aggregate amount of such Lender’s Revolving Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.06 and (b) reduced or increased from time to time pursuant to (i) assignments by or to such Lender pursuant to Section 9.04 or (ii) Section 2.17.  The initial amount of each Lender’s Revolving Commitment is set forth on Schedule 2.01, or in the Assignment and Assumption or Incremental Facility Amendment pursuant to which such Lender shall have assumed its Revolving Commitment, as the case may be.  The initial aggregate amount of the Lenders’ Revolving Commitments is $125,000,000.

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“Revolving Commitment Increase” has the meaning assigned to such term in Section 2.17.

“Revolving Exposure” means, with respect to any Lender at any time, the sum of the outstanding principal amount of such Lender’s Revolving Loans at such time.

“Revolving Lender” means a Lender with a Revolving Commitment or, if the Revolving Commitments have terminated or expired, a Lender with Revolving Exposure.

“Revolving Loan” means a Loan made pursuant to Section 2.01.

“Revolving Maturity Date” means February 17, 2009 or, in the event that the Collateral and Guarantee Agreement is satisfied on or prior to December 31, 2006, July 11, 2010.

“S&P” means Standard & Poor’s Ratings Group, Inc.

“SEC” means the Securities and Exchange Commission or any Governmental Authority succeeding to any of its principal functions.

“Security Documents” means the Guarantee Agreement or, if applicable, the Collateral Agreement, and each other security agreement or other instrument or document executed and delivered pursuant to Section 5.12 or 5.13 to secure any of the Obligations.

“Senior Leverage Ratio” means, on any date, the ratio of (a) Total Senior Indebtedness as of such date to (b) Consolidated EBITDA for the period of four consecutive fiscal quarters of the Borrower ended on such date (or, if such date is not the last day of a fiscal quarter, ended on the last day of the fiscal quarter of the Borrower most-recently ended prior to such date).

“SPV” has the meaning assigned to such term in Section 9.04(e).

“Statutory Reserve Rate” means a fraction (expressed as a decimal), the numerator of which is the number one and the denominator of which is (x) the number one minus (y) the aggregate of the maximum reserve percentages (including any marginal, special, emergency or supplemental reserves) expressed as a decimal established by the Board or any other banking authority (domestic or foreign) to which the Administrative Agent is subject with respect to the Adjusted LIBO Rate, for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board).  Such reserve percentages shall include those imposed pursuant to such Regulation D.  Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation.  The Administrative Agent confirms that as of the Effective Date, the amount referred to in clause (y) above is zero.  The Statutory

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Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.

“subsidiary” means, with respect to any Person (the “parent”) at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent’s consolidated financial statements if such financial statements were prepared in accordance with GAAP.

“Subsidiary” means any subsidiary of the Borrower.

“Subsidiary Loan Party” means MMRDH Parent Holding Company LLC, a Delaware limited liability company, MMRDH Junior Mezz Holding Company LLC, a Delaware limited liability company, MMRDH Intermediate Mezz Holding Company LLC, a Delaware limited liability company, and the Management Term Loan Borrower.

“Swap Agreement” means any agreement with respect to any cap, swap, forward, future or derivative transaction or option or similar agreement involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or value or any similar transaction or any combination of these transactions, provided that no phantom stock or similar plan providing for payments only on account of services provided by current or former directors, officers, employees or consultants of Holdings, the Borrower or the Subsidiaries shall be a Swap Agreement.

“Tax Amount” means, with respect to any period, the lesser of (i) the product of any cash dividends or distributions paid by Holdings and/or the Borrower in respect of preferred Equity Interests in such period (but expressly excluding any such amounts paid by Borrower to Holdings) and a fraction the numerator of which is one and the denominator of which is one minus the effective combined tax rate of Holdings (expressed as a decimal) for such period (as estimated by a Financial Officer in good faith), minus such cash dividends or distributions paid by Holdings and/or the Borrower in respect of such preferred Equity Interests and (ii) the aggregate estimated combined income tax to be paid by Holdings in respect of that same period (as estimated by a Financial Officer in good faith); provided that the Tax Amount shall be zero with respect to the portion of cash dividends or distributions paid by Holdings and/or the Borrower in respect of any preferred Equity Interest permitted to be deducted by Holdings for tax purposes.

“Taxes” means any and all present or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority.

“Total Assets” means, as of any date, the total assets (without deducting accumulated depreciation) of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) determined on a consolidated basis in accordance with GAAP.

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“Total Indebtedness” means, as of any date, the aggregate principal amount of Indebtedness of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) outstanding as of such date, provided that the term “Indebtedness” shall not include contingent obligations of Holdings, the Borrower or any Subsidiary as an account party or applicant in respect of any letter of credit or letter of guaranty unless such letter of credit or letter of guaranty supports an obligation that constitutes Indebtedness minus (a) Development Debt, (b) the aggregate amount of cash and cash equivalents (other than restricted cash) of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) (in each case, free and clear of all Liens, other than nonconsensual Liens permitted by Section 6.02) included in the consolidated balance sheet of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) in accordance with GAAP and all obligations to pay the deferred purchase price of property or services (other than (i) trade accounts payable in the ordinary course of business and (ii) any earn-out obligation until (A) such obligation becomes a liability on the consolidated balance sheet of Holdings, the Borrower and the Subsidiaries (other than the Excluded Subsidiaries) in accordance with GAAP and (B) such obligation is earned by and payable to the applicable seller under the terms and conditions of the underlying agreement with such seller) and (c) the minority interest share of Indebtedness of any Subsidiary.

“Total Senior Indebtedness” means, as of any date, (a) the aggregate principal amount of all outstanding Mortgage Indebtedness, any refinancing thereof permitted by Section 6.01(a)(ii), Additional Mortgage Indebtedness and any refinancing thereof permitted by Section 6.01(a)(iv) less the minority interest share of any such Indebtedness.

“Transactions” means the transactions described on Schedule 1.01.

“Type”, when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted LIBO Rate or the Alternate Base Rate.

“wholly-owned Subsidiary” means, with respect to any Person at any date, a subsidiary of such Person of which securities or other ownership interests representing 100% of the Equity Interests (other than directors’ qualifying shares) are, as of such date, owned, controlled or held by such Person or one or more wholly-owned Subsidiaries of such Person or by such Person and one or more wholly-owned Subsidiaries of such Person.

“Withdrawal Liability” means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.

SECTION 1.02.  Classification of Loans and Borrowings.  For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a “Revolving Loan”) or by Type (e.g., a “Eurodollar Loan”) or by Class and Type (e.g., a “Eurodollar Revolving Loan”).  Borrowings also may be classified and referred to by Class (e.g., a

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“Revolving Borrowing”) or by Type (e.g., a “Eurodollar Borrowing”) or by Class and Type (e.g., a “Eurodollar Revolving Borrowing”).

SECTION 1.03.  Terms Generally.  The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined.  Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms.  The words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”.  The word “will” shall be construed to have the same meaning and effect as the word “shall”.  Unless the context requires otherwise, (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, amended and restated, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (c) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.

SECTION 1.04.  Accounting Terms; GAAP.  Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time, provided that, if the Borrower notifies the Administrative Agent that the Borrower requests an amendment to any provision (including any definition) hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Administrative Agent notifies the Borrower that the Required Lenders request an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith.

SECTION 1.05.  Pro Forma Calculations.  With respect to any period during which any Permitted Acquisition or any sale, transfer or other disposition of any material assets occurs, for purposes of determining compliance with the covenants contained in Sections 6.12, 6.13 and 6.14, or for purposes of determining the Leverage Ratio, Senior Leverage Ratio, Consolidated EBITDA and Consolidated Cash Interest Expense, calculations with respect to such period shall be made on a Pro Forma Basis.

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ARTICLE II

The Credits

SECTION 2.01.  Commitments.  Subject to the terms and conditions set forth herein, each Lender agrees to make Revolving Loans to the Borrower from time to time during the Revolving Availability Period in an aggregate principal amount up to, but that will not result in such Lender’s Revolving Exposure exceeding, such Lender’s Revolving Commitment.  Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans.

SECTION 2.02.  Loans and Borrowings.  (a)  Each Loan shall be made as part of a Borrowing consisting of Loans of the same Class and Type made by the Lenders ratably in accordance with their respective Commitments of the applicable Class.  The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder, provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender’s failure to make Loans as required.

(b)  Subject to Section 2.11, each Revolving Borrowing shall be comprised entirely of ABR Loans or Eurodollar Loans as the Borrower may request in accordance herewith.  Each Lender at its option may make any Eurodollar Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan, provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.

(c)  At the commencement of each Interest Period for any Eurodollar Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $1,000,000.  At the time that each ABR Revolving Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $1,000,000 and not less than $1,000,000.  Borrowings of more than one Type and Class may be outstanding at the same time, provided that there shall not at any time be more than a total of twelve Eurodollar Borrowings outstanding.  Notwithstanding anything to the contrary herein, an ABR Revolving Borrowing may be in an aggregate amount that is equal to the entire unused balance of the aggregate Revolving Commitments with respect to the applicable Class of Revolving Loans.

(d)  Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the Revolving Maturity Date.

SECTION 2.03.  Requests for Borrowings.  To request a Revolving Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of the proposed Borrowing or (b) in

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the case of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of the proposed Borrowing.  Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Borrowing Request in a form approved by the Administrative Agent and signed by the Borrower.  Each such telephonic and written Borrowing Request shall specify the following information:

(i) whether the requested Borrowing is to be a Revolving Borrowing or a Borrowing of any Incremental Revolving Loan;

(ii) the aggregate amount of such Borrowing;

(iii) the date of such Borrowing, which shall be a Business Day;

(iv) whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;

(v) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term “Interest Period”;

(vi) the location and number of the Borrower’s account to which funds are to be disbursed, which shall comply with the requirements of Section 2.04; and

(vii) that as of such date Sections 4.02(a) and (b) are satisfied.

If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing.  If no Interest Period is specified with respect to any requested Eurodollar Revolving Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.  Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender’s Loan to be made as part of the requested Borrowing.

SECTION 2.04.  Funding of Borrowings.  (a)  Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by 12:00 noon, New York City time, to the account of the Administrative Agent most-recently designated by it for such purpose by notice to the Lenders.  The Administrative Agent will make such Loans available to the Borrower by promptly crediting the amounts so received, in like funds, to an account of the Borrower designated by the Borrower in the applicable Borrowing Request.

(b)  Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption and in its sole discretion, make available to the Borrower a corresponding

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amount.  In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent then the Administrative Agent shall be entitled to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Administrative Agent’s demand therefor, then the Administrative Agent shall promptly notify the Borrower, and the Borrower shall, within five Business Days, repay such corresponding amount to the Administrative Agent. The Administrative Agent shall also be entitled to recover from such Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Administrative Agent to the Borrower to the date such corresponding amount is recovered by the Administrative Agent, at a rate per annum equal to the then applicable rate of interest, calculated in accordance with Section 2.10, for the respective Loans.  No Lender’s obligation to make any Loan shall be affected by any other Lender’s failure to make any Loan.  If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender’s Loan included in such Borrowing.

SECTION 2.05.  Interest Elections.  (a)  Each Revolving Borrowing initially shall be of the Type specified in the applicable Borrowing Request or designated by Section 2.03 and, in the case of a Eurodollar Borrowing, shall have an initial Interest Period as specified in such Borrowing Request or designated by Section 2.03.  Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurodollar Borrowing, may elect Interest Periods therefor, all as provided in this Section.  The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing.

(b)  To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Borrowing of the Type resulting from such election to be made on the effective date of such election.  Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request in a form approved by the Administrative Agent and signed by the Borrower.

(c)  Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02:

(i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing);

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(ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;

(iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing; and

(iv) if the resulting Borrowing is a Eurodollar Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period”.

If any such Interest Election Request requests a Eurodollar Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.

(d)  Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender’s portion of each resulting Borrowing.

(e)  If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurodollar Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period such Borrowing shall be converted to an ABR Borrowing. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing and (ii) unless repaid, each Eurodollar Borrowing shall be converted to an ABR Borrowing at the end of the Interest Period applicable thereto.

SECTION 2.06. Termination and Reduction of Commitments. (a)  Unless previously terminated, the Revolving Commitments shall terminate on the Revolving Maturity Date.

(b)  The Borrower may at any time terminate, or from time to time reduce, the Commitments of any Class, provided that each reduction of the Commitments of any Class shall be in an amount that is an integral multiple of $5,000,000 and not less than $5,000,000.

(c)  The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any such notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable, provided that a notice of termination of the Revolving Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities or the receipt of the proceeds from the issuance of other Indebtedness, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or

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prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments of any Class shall be permanent. Each reduction of the Commitments of any Class shall be made ratably among the Lenders in accordance with their respective Commitments of such Class.

SECTION 2.07. Repayment of Loans; Evidence of Debt. (a)  The Borrower hereby unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan of such Lender on the Revolving Maturity Date.

(b)  Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.

(c)  The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder for the account of the Lenders and each Lender’s share thereof.

(d)  The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be prima facie evidence of the existence and amounts of the obligations recorded therein absent manifest error, provided that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans and pay interest thereon in accordance with the terms of this Agreement.

(e)  Any Lender may request that Loans of any Class made by it be evidenced by a promissory note. In such event, the Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Administrative Agent (it being understood that any such note shall not increase the obligations of any Loan Party beyond those expressly provided for in this Agreement and the other Loan Documents). Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns).

SECTION 2.08. Prepayment of Loans. (a)  The Borrower shall have the right at any time and from time to time to prepay any Borrowing in whole or in part, subject to the requirements of this Section.

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(b)  In the event and on such occasion that the aggregate Revolving Exposures exceed the aggregate Revolving Commitments, the Borrower shall prepay Revolving Borrowings in an aggregate amount equal to such excess.

(c)  Prior to any optional or mandatory prepayment of Borrowings hereunder, the Borrower shall select the Borrowing or Borrowings to be prepaid and shall specify such selection in the notice of such prepayment pursuant to paragraph (d) of this Section.

(d)  The Borrower shall notify the Administrative Agent by telephone (confirmed by telecopy) of any prepayment hereunder (i) in the case of prepayment of a Eurodollar Borrowing, not later than 11:00 a.m., New York City time, three Business Days before the date of prepayment or (ii) in the case of prepayment of an ABR Borrowing, not later than 11:00 a.m., New York City time, one Business Day before the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date, the principal amount of each Borrowing or portion thereof to be prepaid and, in the case of a mandatory prepayment, a reasonably detailed calculation of the amount of such prepayment, provided that, if a notice of optional prepayment is given in connection with a conditional notice of termination of the Revolving Commitments as contemplated by Section 2.06, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.06 by the Borrower (by notice to the Administrative Agent on or prior to the specified date) if such condition is not satisfied. Promptly following receipt of any such notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.02, except as necessary to apply fully the required amount of a mandatory prepayment. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.10.

SECTION 2.09. Fees. (a)  The Borrower agrees to pay to the Administrative Agent for the account of each Lender a commitment fee, which shall accrue at the Applicable Rate on the average daily unused amount of the Revolving Commitment of such Lender during the period from and including the Effective Date to but excluding the date on which the Revolving Commitments terminate. Accrued commitment fees shall be payable in arrears on the last Business Day of March, June, September and December of each year and on the date on which the Revolving Commitments terminate, commencing on the first such date to occur after the date hereof. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). For purposes of computing commitment fees, a Revolving Commitment of a Lender shall be deemed to be used to the extent of the outstanding Revolving Loans.

(b)  The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent.

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(c)  All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, in the case of commitment fees and participation fees, to the Lenders entitled thereto. Fees paid shall not be refundable under any circumstances.

SECTION 2.10. Interest. (a)  The Loans comprising each ABR Borrowing shall bear interest at the Alternate Base Rate plus the Applicable Rate.

(b)  The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate.

(c)  Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrower hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2.00% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2.00% plus the rate applicable to ABR Revolving Loans as provided in paragraph (a) of this Section.

(d)  Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and upon termination of the Revolving Commitments, provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan prior to the end of the Revolving Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurodollar Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.

(e)  All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate or Adjusted LIBO Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.

SECTION 2.11. Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurodollar Borrowing:

(a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or

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(b) the Administrative Agent is advised by the Required Lenders that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period;

then the Administrative Agent shall give notice thereof to the Borrower and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing.

SECTION 2.12. Increased Costs. (a)  If any Change in Law shall:

(i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate); or

(ii) impose on any Lender or the London interbank market any other condition, cost or expense affecting this Agreement or Eurodollar Loans made by such Lender;

and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan (or of maintaining its obligation to make any such Loan) or to increase the cost to such Lender or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise), then upon request, accompanied by a copy of the certificate and information referred to in clause (c) below, the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered.

(b)  If any Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender’s capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement or the Loans made by such Lender to a level below that which such Lender or such Lender’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s policies and the policies of such Lender’s holding company with respect to capital adequacy), then from time to time upon request,  accompanied by a copy of the certificate and information referred to in clause (c) below, the Borrower will pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender’s holding company for any such reduction suffered.

(c)  A certificate of a Lender setting forth the amount or amounts necessary to compensate such Lender or its holding company and the basis for

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calculating such amount or amounts in reasonable detail, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.

(d)  Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s right to demand such compensation, provided that the Borrower shall not be required to compensate a Lender pursuant to this Section for any increased costs or reductions incurred more than 270 days prior to the date that such Lender notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s intention to claim compensation therefor; provided further that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 270-day period referred to above shall be extended to include the period of retroactive effect thereof.

SECTION 2.13. Break Funding Payments. In the event of (a) the payment of any principal of any Eurodollar Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto, (c) the failure to borrow, convert, continue or prepay any Revolving Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.08(d) and is revoked in accordance therewith) or (d) the assignment of any Eurodollar Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 9.02(c), then, in any such event, upon request, accompanied by a copy of the certificate and information to be delivered by the Lender to the Borrower pursuant to this Section 2.13 the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate that such Lender would bid were it to bid, at the commencement of such period, for dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section and the basis for calculating such amount or amounts in reasonable detail shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof.

SECTION 2.14. Taxes. (a)  Any and all payments by or on account of any obligation of any Loan Party under any Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes, provided that if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such

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payments, then (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent or Lender (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law.

(b)  Without limiting the provisions of paragraph (a) above, the Borrower shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

(c)  The Borrower shall indemnify the Administrative Agent and each Lender within 10 days after written demand therefor, accompanied by a copy of the certificate and information to be delivered to the Borrower pursuant to this clause (c), for the full amount of any Indemnified Taxes or Other Taxes paid by the Administrative Agent or such Lender, as the case may be, on or with respect to any payment by or on account of any obligation of the Borrower under any Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. The certificate as to the amount of such payment or liability delivered to the Borrower by a Lender or by the Administrative Agent on its own behalf or on behalf of a Lender shall be conclusive absent manifest error.

(d)  As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority, the Borrower shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.

(e)  Each Lender that is a U.S. Person (as such term is defined in Section 7701(a)(30) of the Code) (a “U.S. Lender”) shall (i) deliver to the Borrower and the Administrative Agent, prior to the first day on which the Borrower is required to make any payments hereunder to Lender, two copies of United States Internal Revenue Service Form W-9 (or successor forms). Each U.S. Lender that shall become a Participant pursuant to Section 9.04 shall, upon the effectiveness of the related transfer, be required to provide all the forms and statements required pursuant to this Section 2.14(e), provided that in the case of a Participant such Participant shall furnish all such required forms and statements to the Lender from which the related participation shall have been purchased, and (ii) deliver to the Borrower and the Administrative Agent two further copies of any such form of certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower.

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(f)  Each Lender that is not a U.S. Person (as such term is defined in Section 7701(a)(30) of the Code) (a “Non-U.S. Lender”) shall (i) deliver to the Borrower and the Administrative Agent, prior to the first day on which the Borrower is required to make any payments hereunder to Lender, two copies of either United States Internal Revenue Service Form W-8BEN or Form W-8ECI (or successor forms) or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of “portfolio interest,” a Form W-8BEN, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8BEN (with respect to the portfolio interest exemption), a certificate representing that such Non-U.S. Lender (x) is not a bank for purposes of Section 881(c) of the Code, is not subject to regulatory or other legal requirements as a bank in any jurisdiction, and has not been treated as a bank for purposes of any tax, securities law or other filing or submission made to any Governmental Authority, any application made to a rating agency or qualification for any exemption from tax, securities law or other legal requirements, (y) is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and (z) is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or a reduced rate of, U.S. federal withholding tax on payments by the Borrower under this Agreement, (ii) deliver to the Borrower and the Administrative Agent two further copies of any such form of certification on or before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Borrower; and (iii) obtain such extensions of time for filing and completing such forms or certifications as may reasonably be requested by the Borrower or the Administrative Agent; unless in any such case any change in treaty, law or regulation has occurred prior to the date on which any such delivery would otherwise be required that renders any such form inapplicable or would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Borrower and the Administrative Agent. Each Non-U.S. Lender that shall become a Participant or a Lender pursuant to Section 9.04 shall, upon the effectiveness of the related transfer, be required to provide all the forms and statements required pursuant to this Section 2.14(f), provided that in the case of a Participant such Participant shall furnish all such required forms and statements to the Lender from which the related participation shall have been purchased.

(g)  Notwithstanding anything to the contrary herein, the Borrower shall not be required to indemnify any U.S. Lender or the Administrative Agent, or to pay any additional amounts to such U.S. Lender or the Administrative Agent pursuant to this Section 2.14 to the extent that the obligation to pay such additional amounts would not have arisen but for a failure by such U.S. Lender to comply with the provisions of clause (e) above.

(h)  Notwithstanding anything to the contrary herein the Borrower shall not be required to indemnify any Non-U.S. Lender or the Administrative Agent, or to pay any additional amounts to such Non-U.S. Lender or the Administrative Agent, in respect of U.S. federal withholding tax pursuant to this Section 2.14 to the extent that (i) the

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obligation to withhold amounts with respect to U.S. federal withholding tax existed on the date such Non-U.S. Lender became a party to this Agreement (or, in the case of a Non-U.S. Participant, on the date such Participant became a Participant hereunder) or as of the date such Non-U.S. Lender changes its applicable lending office; provided, however, that this clause (i) shall not apply to the extent that (x) in the case of an assignee Lender or a Participant or a change in the Lender’s applicable lending office, the indemnity payments or additional amounts Lender (or Participant) would be entitled to receive (without regard to this clause (i)) do not exceed the indemnity payment or additional amounts that the Person making the assignment, participation, transfer or change in lending office would have been entitled to receive in the absence of such assignment, participation, transfer or change in lending office, or (y) such assignment, participation, transfer or change in lending office had been requested by the Borrower or made with the Borrower’s prior written consent, (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender or Non-U.S. Participant to comply with the provisions of clause (e) above or (iii) any of the representations or certifications made by a Non-U.S. Lender or Non-U.S. Participant pursuant to clause (e) above are incorrect at the time a payment hereunder is made, other than by reason of any change in treaty, law or regulation having effect after the date such representations or certifications were made.

(i)  If the Borrower determines in good faith that a reasonable basis exists for contesting any Taxes for which indemnification has been paid hereunder, the relevant Lender or the Administrative Agent, as applicable (to the extent such Lender or the Administrative Agent reasonably determines in good faith that it will not suffer any adverse effect as a result thereof), shall, subject to clause (i) of the proviso in the immediately succeeding sentence, cooperate with the Borrower in challenging such Taxes at the Borrower’s expense if so requested by the Borrower in writing. If any Lender or the Administrative Agent, as applicable, receives a refund relating to a Tax for which a payment has been made or borne by the Borrower pursuant to this Agreement, which refund in the good faith judgment of such Lender or the Administrative Agent, as the case may be, is attributable to such payment, then such Lender or the Administrative Agent, as the case may be, shall reimburse the Borrower for such amount as such Lender or the Administrative Agent, as the case may be, determines to be the proportion of the refund as will leave it, after such reimbursement, in no better or worse position than it would have been in if the payment by or borne by the Borrower had not been required; provided, however, that (i) any Lender or the Administrative Agent may determine, in its reasonable discretion consistent with the policies of such Lender or the Administrative Agent, whether to seek a refund and (ii) any Taxes that are imposed on a Lender or the Administrative Agent as a result of a disallowance or reduction of any refund with respect to which such Lender or the Administrative Agent has made a payment to the Borrower pursuant to this clause (h) shall be treated as a Tax for which the Borrower is obligated to indemnify such Lender or the Administrative Agent pursuant to this Section 2.14. Neither the Lenders nor the Administrative Agent shall be obliged to disclose information regarding its tax affairs or computations to the Borrower in connection with this clause (i) or any other provision of this Section 2.14.

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SECTION 2.15. Payments Generally; Pro Rata Treatment; Sharing of Setoffs. (a)  The Borrower shall make each payment required to be made by it under any Loan Document (whether of principal, interest or fees, or of amounts payable under Section 2.12, 2.13 or 2.14, or otherwise) prior to the time expressly required hereunder or under such other Loan Document for such payment (or, if no such time is expressly required, prior to 12:00 noon, New York City time), on the date when due, in immediately available funds, without setoff or counterclaim. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent at 2 Penns Way, Suite 200, New Castle, DE 19720, except that payments pursuant to Sections 2.12, 2.13, 2.14 and 9.03 shall be made directly to the Persons entitled thereto and payments pursuant to other Loan Documents shall be made to the Persons specified therein. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment under any Loan Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day (except to the extent provided in the definition of Interest Period) and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments under each Loan Document shall be made in dollars.

(b)  If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties.

(c)  If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Revolving Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans, provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans to any assignee or participant, other than to the Borrower or any Subsidiary or other Affiliate thereof (as to which the provisions of this paragraph shall apply). The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of setoff and counterclaim with

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respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.

(d)  Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption and in its sole discretion, distribute to the Lenders the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.

(e)  If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.04(a) or (b), 2.15(d) or 9.03(c), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender’s obligations under such Sections until all such unsatisfied obligations are fully paid.

SECTION 2.16. Mitigation Obligations; Replacement of Lenders. (a)  If any Lender requests compensation under Section 2.12, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.14, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates that would eliminate or, if elimination is not possible, reduce to the extent practicable the amounts payable pursuant to Section 2.12 or 2.14, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not be inconsistent with its internal policies or otherwise adversely affect such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.

(b)  If any Lender requests compensation under Section 2.12, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.14, or if any Lender defaults in its obligation to fund Loans hereunder, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that (i) the Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld, (ii) such Lender shall have received payment of an

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amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts) and (iii) in the case of any such assignment resulting from a claim for compensation under Section 2.12 or payments required to be made pursuant to Section 2.14, such assignment will result in a material reduction in such compensation or payments. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise (including as a result of any action taken by such Lender under paragraph (a) above), the circumstances entitling the Borrower to require such assignment and delegation cease to apply.

SECTION 2.17. Incremental Extensions of Credit. (a)  At any time and from time to time during the Revolving Availability Period, subject to the terms and conditions set forth herein, the Borrower may, by notice to the Administrative Agent (whereupon the Administrative Agent shall promptly deliver a copy to each of the Lenders), request to add (i) one additional tranche of revolving loans (the “Incremental Revolving Loans”) or (ii) one increase in the aggregate amount of the Revolving Commitments (each such increase, a “Revolving Commitment Increase” and, together with the Incremental Revolving Loans, the “Incremental Extensions of Credit”), provided that at the time of each such request and upon the effectiveness of each Incremental Facility Amendment, (A) no Default has occurred and is continuing or shall result therefrom, (B) the Borrower shall be in compliance on a Pro Forma Basis with the covenants contained in Sections 6.12, 6.13 and 6.14 recomputed as of the last day of the most-recently ended fiscal quarter of the Borrower and (C) the Borrower shall have delivered a certificate of a Financial Officer to the effect set forth in clauses (A) and (B) above, together with reasonably detailed calculations demonstrating compliance with clause (B) above (which calculations shall, if made as of the last day of any fiscal quarter of the Borrower for which the Borrower has not delivered to the Administrative Agent the financial statements and certificate of a Financial Officer required to be delivered by Section 5.01(a) or (b) and Section 5.01(c), respectively, be accompanied by a reasonably detailed calculation of Consolidated EBITDA and Consolidated Cash Interest Expense for the relevant period). Notwithstanding anything to contrary herein, the aggregate principal amount of the Incremental Extensions of Credit shall not exceed $25,000,000.

(b)  The Incremental Revolving Loans (i) shall rank pari passu or junior in right of payment in respect of the Collateral and with the Obligations in respect of the Revolving Commitments, and (ii) other than pricing or maturity date, shall have the same terms as the Revolving Loans, provided that (A) if the Applicable Rate (which, for such purposes only, shall be deemed to include all upfront or similar fees or original issue discount payable to all Lenders providing such Incremental Revolving Loans) relating to any Incremental Revolving Loan exceeds the Applicable Rate relating to the Revolving Loans immediately prior to the effectiveness of the applicable Incremental Facility Amendment, the Applicable Rate relating to the Revolving Loans shall be adjusted to be equal to the Applicable Rate (which, for such purposes only, shall be deemed to include all upfront or similar fees or original issue discount payable to all Lenders providing such Incremental Revolving Loans) relating to such Incremental Revolving Loans, (B) any Incremental Revolving Loan shall not have a final maturity date earlier than the

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Revolving Maturity Date and (C) any Incremental Revolving Loan shall not have a weighted average life that is shorter than the weighted average life of the Revolving Loans.

(c)  Each notice from the Borrower pursuant to this Section shall set forth the requested amount and proposed terms of the relevant Incremental Extension of Credit. Any additional bank, financial institution, existing Lender or other Person that elects to extend Incremental Extensions of Credit shall be reasonably satisfactory to the Borrower and the Administrative Agent (any such bank, financial institution, existing Lender or other Person being called an “Additional Lender”) and, if not already a Lender, shall become a Lender under this Agreement pursuant to an amendment (an “Incremental Facility Amendment”) to this Agreement and, as appropriate, the other Loan Documents, executed by Holdings, the Borrower, such Additional Lender and the Administrative Agent. No Lender shall be obligated to provided any Incremental Extension of Credit, unless it so agrees. Commitments in respect of any Incremental Extensions of Credit shall become Commitments (or in the case of any Revolving Commitment Increase to be provided by an existing Revolving Lender, an increase in such Revolving Lender’s Revolving Commitment) under this Agreement. An Incremental Facility Amendment may, without the consent of any other Lenders, effect such amendments to any Loan Documents as may be necessary or appropriate, in the opinion of the Administrative Agent, to effect the provisions of this Section (including to provide for voting provisions applicable to the Additional Lenders comparable to the provisions of clause (B) of the second proviso of Section 9.02(b)). The effectiveness of any Incremental Facility Amendment shall, unless otherwise agreed to by the Administrative Agent and the Additional Lenders, be subject to the satisfaction on the date thereof (each, an “Incremental Facility Closing Date”) of each of the conditions set forth in Section 4.02 (it being understood that all references to “the date of such Borrowing” in Section 4.02 shall be deemed to refer to the Incremental Facility Closing Date). The proceeds of any Incremental Extensions of Credit will be used only for general corporate purposes, including Permitted Acquisitions.

ARTICLE III

Representations and Warranties

Each of Holdings and the Borrower represents and warrants to the Lenders that:

SECTION 3.01. Organization; Powers. Each of Holdings, the Borrower and the Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and as proposed to be conducted, to execute, deliver and perform its obligations under each Loan Document to which it is a party and to effect the Transactions and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required.

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SECTION 3.02. Authorization; Enforceability. The Transactions to be entered into by each Loan Party have been duly authorized by all necessary corporate or other action and, if required, action by the holders of such Loan Party’s Equity Interests. This Agreement has been duly executed and delivered by each of Holdings and the Borrower and constitutes, and each other Loan Document to which any Loan Party is to be a party, when executed and delivered by such Loan Party, will constitute, a legal, valid and binding obligation of Holdings, the Borrower or such Loan Party (as the case may be), enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law.

SECTION 3.03. Governmental Approvals; No Conflicts. The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect and except filings necessary to perfect Liens created under the Loan Documents, (b) will not violate any Requirement of Law applicable to Holdings, the Borrower or any Subsidiary, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon Holdings, the Borrower or any Subsidiary or their respective assets, or give rise to a right thereunder to require any payment to be made by Holdings, the Borrower or any Subsidiary or give rise to a right of, or result in, termination, cancelation or acceleration of any obligation thereunder, and (d) will not result in the creation or imposition of any Lien on any asset of Holdings, the Borrower or any Subsidiary, except Liens created under the Loan Documents and liens permitted under Section 6.02.

SECTION 3.04. Financial Condition; No Material Adverse Change. (a)  (i)The Borrower has heretofore furnished to the Lenders the combined balance sheet and combined statements of income, stockholders’ equity and cash flows of Morgans Hotel Group Co. Predecessor (x) as of and for the fiscal years ended December 31, 2004, reported on by BDO Seidman, LLP, independent registered public accounting firm, and (y) as of and for the fiscal quarter and the portion of the fiscal year ended September 30, 2005 (and comparable period for the prior fiscal year), certified by a Financial Officer and (ii) the balance sheet of Holdings as of October 21, 2005, reported on by BDO Seidman, LLP, independent registered public accounting firm. Such financial statements present fairly, in all material respects, the financial position and results of operations and cash flows of Holdings and its subsidiaries as of such dates and for such periods in accordance with GAAP consistently applied, subject to year-end audit adjustments and the absence of footnotes in the case of the statements referred to in clause (i)(y) above.

(b)  The Borrower has heretofore furnished to the Lenders the pro forma consolidated balance sheet of Holdings as of September 30, 2005, prepared giving effect to the Transactions as if the Transactions had occurred on such date. Such pro forma consolidated balance sheet (i) has been prepared in good faith based on the same assumptions used to prepare the pro forma financial statements included in the Information Memorandum (which assumptions are believed by Holdings and the Borrower to be reasonable), (ii) is based on the best information available to Holdings

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and the Borrower after due inquiry, (iii) accurately reflects all adjustments necessary to give effect to the Transactions and (iv) presents fairly, in all material respects, the pro forma financial position of Holdings and its subsidiaries as of September 30, 2005, as if the Transactions had occurred on such date.

(c)  Except as disclosed in the financial statements referred to above or the notes thereto or in the Information Memorandum and except for the Disclosed Matters, after giving effect to the Transactions, none of Holdings, the Borrower or the Subsidiaries has, as of the Effective Date, any material direct or contingent liabilities, unusual long-term commitments or unrealized losses.

SECTION 3.05. Properties. (a)  Each of Holdings, the Borrower and the Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for Liens permitted hereby and other exceptions to title that do not materially interfere with its ability to conduct its business as currently conducted or as proposed to be conducted or to utilize such properties for their intended purposes.

(b)  Each of Holdings, the Borrower and the Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by Holdings, the Borrower and the Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

(c)  As of the Effective Date, none of Holdings, the Borrower or any Subsidiary has received notice of, or has knowledge of, any pending or contemplated condemnation proceeding affecting any Existing Hotel Property or any sale or disposition thereof in lieu of condemnation that could reasonably be expected to result in a Material Adverse Effect.

SECTION 3.06. Litigation and Environmental Matters. (a)  There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of Holdings or the Borrower threatened against or affecting Holdings, the Borrower or any Subsidiary (i) as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve any challenge to the validity or enforceability of the Loan Documents or the Transactions.

(b)  Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, to the knowledge of Holdings or the Borrower, none of Holdings, the Borrower or any Subsidiary (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any

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Environmental Liability, (iii) has received notice of any claim with respect to any Environmental Liability or (iv) knows of any basis for any Environmental Liability.

(c)  Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect.

SECTION 3.07. Compliance with Laws and Agreements. Each of Holdings, the Borrower and the Subsidiaries is in compliance with (a) all Requirements of Law applicable to it or its property and (b) all indentures, agreements and other instruments binding upon it or its property, except, in the case of clause (b) of this Section, where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

SECTION 3.08. Investment and Holding Company Status. None of Holdings, the Borrower or any Subsidiary is (a) an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a “holding company” as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935.

SECTION 3.09. Taxes. Each of Holdings, the Borrower and the Subsidiaries (a) has timely filed or caused to be filed all Tax returns and reports required to have been filed, except to the extent that failure to do so could not reasonably be expected to result in a Material Adverse Effect, and (b) has paid or caused to be paid all Taxes required to have been paid by it, except any Taxes that are being contested in good faith by appropriate proceedings, provided that Holdings, the Borrower or such Subsidiary, as the case may be, has set aside on its books adequate reserves therefor and the failure to pay such Taxes pending resolution of the contest would not reasonably be expected to result in a Material Adverse Effect.

SECTION 3.10. ERISA. No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. The present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of such Plan by an amount that could reasonably be expected to result in a Material Adverse Effect, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed the fair market value of the assets of all such underfunded Plans by an amount that could reasonably be expected to result in a Material Adverse Effect.

SECTION 3.11. Disclosure. The Borrower has disclosed to the Lenders all agreements, instruments and corporate or other restrictions to which Holdings, the Borrower or any Subsidiary is subject, and all other matters known to any of them, that,

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individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. To the knowledge of Holdings or the Borrower, neither the Information Memorandum nor any of the other reports, financial statements, certificates or other information furnished by or on behalf of any Loan Party to the Administrative Agent or any Lender in connection with the negotiation of any Loan Document or delivered thereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided that, with respect to projected financial information, Holdings and the Borrower represent only that such information was prepared in good faith based upon assumptions believed by them to be reasonable at the time delivered and, if such projected financial information was delivered prior to the Effective Date, as of the Effective Date.

SECTION 3.12. Subsidiaries. Holdings does not have any subsidiaries other than the Borrower and the Subsidiaries. Schedule 3.12 sets forth the name of, and the ownership interest of the Borrower and each Subsidiary in, each Subsidiary and identifies each Subsidiary that is a Subsidiary Loan Party, in each case as of the Effective Date.

SECTION 3.13. Insurance. Schedule 3.13 sets forth a description of all insurance maintained by or on behalf of Holdings, the Borrower or any Subsidiary as of the Effective Date. As of the Effective Date, all premiums in respect of such insurance have been paid. Holdings and the Borrower believe that the insurance maintained by or on behalf of Holdings, the Borrower and the Subsidiaries is in such amounts (with no greater risk retention) and against such risks as is (i) customarily maintained by companies of established repute engaged in the same or similar businesses operating in the same or similar locations and (ii) adequate.

SECTION 3.14. Labor Matters. Except for Disclosed Matters and such other matter that in the aggregate would not reasonably be expected to have a Material Adverse Effect, none of Holdings, Borrower, nor any of the Subsidiaries has received written notice, or otherwise has reason to believe that it is engaged in any unfair labor practice that would reasonably be expected to have a Material Adverse Effect. There is (i) no unfair labor practice complaint pending against Holdings, Borrower or any of the Subsidiaries or, to the knowledge of Holdings or the Borrower, threatened against any of them, before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against Holdings, Borrower or any of the Subsidiaries or, to the knowledge of Holdings or the Borrower, threatened against any of them, (ii) no strike, labor dispute, slowdown or stoppage pending against Holdings, Borrower or any of the Subsidiaries or, to the knowledge of Holdings or the Borrower, threatened against Holdings, Borrower or any of the Subsidiaries and (iii) to the knowledge of Holdings or the Borrower, no union representation question existing with respect to the employees of Holdings, Borrower or any of the Subsidiaries and, to the knowledge of Holdings or the Borrower, no union organizing activities are taking place.

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SECTION 3.15. Solvency. Immediately after the consummation of the Transactions, (a) the fair value of the assets of each Loan Party, at a fair valuation, will exceed its debts and liabilities, subordinated, contingent or otherwise, (b) the present fair saleable value of the property of each Loan Party will be greater than the amount that will be required to pay the probable liability of its debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured, (c) each Loan Party will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured, and (d) each Loan Party will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following the Effective Date.

ARTICLE IV

Conditions

SECTION 4.01. Effective Date. The obligations of the Lenders to make Loans hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02):

(a) The Administrative Agent and the Joint Lead Arrangers (or their counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement.

(b) The Administrative Agent and the Joint Lead Arrangers shall have received a favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of Sullivan & Cromwell LLP, counsel for Holdings, the Borrower and the Subsidiaries, substantially in the form of Exhibit B and covering such other matters relating to the Loan Parties, the Loan Documents or the Transactions as the Administrative Agent or either Joint Lead Arranger shall reasonably request. Each of Holdings and the Borrower hereby requests such counsel to deliver such opinion.

(c) The Administrative Agent and the Joint Lead Arrangers shall have received such documents and certificates as the Administrative Agent, either Joint Lead Arranger or their counsel may reasonably request relating to the organization, existence and good standing of each Loan Party, the authorization of the Transactions and any other legal matters relating to the Loan Parties, the Loan Documents or the Transactions, all in form and substance satisfactory to the Administrative Agent, the Joint Lead Arrangers and their counsel.

(d) The Administrative Agent and the Joint Lead Arrangers shall have received a certificate, dated the Effective Date and signed by a Financial Officer

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or the President or a Vice President of Holdings, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02.

(e) The Administrative Agent, the Joint Bookrunners, the Joint Lead Arrangers and their Affiliates shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses (including fees, charges and disbursements of counsel) required to be reimbursed or paid by any Loan Party under any Loan Document.

(f) The Effective Date Guarantee Requirement shall have been satisfied and the Administrative Agent and the Joint Lead Arrangers shall have received a completed Perfection Certificate dated the Effective Date and signed by a Financial Officer or legal officer of Holdings, together with all attachments contemplated thereby, including the results of a search of the Uniform Commercial Code (or equivalent) filings made with respect to the Loan Parties in the jurisdictions contemplated by the Perfection Certificate and copies of the financing statements (or similar documents) disclosed by such search and evidence reasonably satisfactory to the Administrative Agent and the Joint Lead Arrangers that the Liens indicated by such financing statements (or similar documents) are permitted by Section 6.02 or have been released.

(g) The Administrative Agent shall have received evidence that the insurance required by Section 5.07 is in effect.

(h) All consents and approvals required to be obtained from any Governmental Authority or other Person in connection with the Transactions shall have been obtained, and all applicable waiting periods and appeal periods (including any extensions thereof) shall have expired and there shall be no governmental or judicial action, actual or threatened, that could reasonably be expected to restrain, prevent or impose burdensome conditions on the Transactions.

(i) The Lenders shall have received a pro forma consolidated balance sheet of Holdings as of September 30, 2005, reflecting all pro forma adjustments as if the Transactions had been consummated on such date, and such pro forma consolidated balance sheet shall be consistent in all material respects with the forecasts and other information previously provided to the Lenders.

(j) The Lenders shall have received (i)(a) audited combined balance sheets and combined statements of operations and comprehensive income, stockholders’ equity and cash flows of Morgans Hotel Group Co. Predecessor as of and for the fiscal years ended December 31, 2004 and the related notes thereto and (b) the audited balance sheet of Holdings as of October 21, 2005 and the related notes thereto, in each case accompanied by a true and correct copy of the reports thereon by BDO Seidman, LLP, independent registered public accounting firm, and (ii) unaudited combined balance sheets and combined statements of

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operations and comprehensive income, stockholders’ equity and cash flows of Morgans Hotel Group Co. Predecessor as of and for the fiscal quarter and portion of the fiscal year ended September 30, 2005 (and for the comparable periods for the prior fiscal year), prepared in accordance with GAAP consistently applied (subject to year-end audit adjustments and the absence of footnotes) and certified by a Financial Officer, which financial statements described in clauses (i) and (ii) shall not be materially inconsistent with the financial statements or forecasts previously provided to the Lenders.

(k) The Joint Lead Arrangers shall be satisfied that the Transactions (other than the effectiveness of this Agreement) shall be or have been consummated in all material respects as described on Schedule 1.01 or otherwise on terms reasonably acceptable to the Joint Lead Arrangers (and no material aspect of the Transactions shall have been modified in a manner material and adverse to the Lenders without the consent of the Joint Lead Arrangers). The Lenders shall have received a certificate of a Financial Officer or a legal officer of Holdings certifying that the Formation and Structuring Transactions have been consummated and the Debt Prepayment has occurred.

(l) After giving effect to the Transactions, none of Holdings, the Borrower or any Subsidiary shall have outstanding any shares of preferred stock or Disqualified Equity Interests or any Indebtedness, other than (i) Indebtedness incurred under the Loan Documents, (ii) Indebtedness outstanding under the Management Term Loan Credit Agreement and (iii) Indebtedness set forth on Schedule 6.01. The terms and conditions of all Indebtedness to remain outstanding after the Effective Date (including terms and conditions relating to interest rates, fees, amortization, maturity, redemption, subordination, covenants, events of default and remedies) shall be satisfactory in all respects to the Lenders.

(m) The Administrative Agent and the Joint Lead Arrangers shall be satisfied that, after giving effect to the Transactions on the Effective Date, the Leverage Ratio for the most recently ended four fiscal quarter period ending at least 45 days prior to the Effective Date shall be no more than 5.00 to 1.00, and the Lenders shall have received a certificate of a Financial Officer certifying to that effect.

The Administrative Agent shall notify the Borrower and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or prior to 5:00 p.m., New York City time, on March 15, 2006 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time).

SECTION 4.02. Each Credit Event. The obligation of each Lender to make a Loan on the occasion of any Borrowing is subject to receipt of the request therefor in accordance herewith and to the satisfaction of the following conditions:

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(a) The representations and warranties of each Loan Party set forth in the Loan Documents shall be true and correct on and as of the date of such Borrowing.

(b) At the time of and immediately after giving effect to such Borrowing no Default shall have occurred and be continuing.

Each Borrowing (provided that a conversion or a continuation of a Borrowing shall not constitute a “Borrowing” for purposes of this Section) shall be deemed to constitute a representation and warranty by Holdings and the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section.

ARTICLE V

Affirmative Covenants

Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees, expenses and other amounts (other than contingent amounts not yet due) payable under any Loan Document shall have been paid in full, each of Holdings and the Borrower covenants and agrees with the Lenders that:

SECTION 5.01. Financial Statements and Other Information. The Borrower will furnish to the Administrative Agent and each Joint Lead Arranger:

(a) within 90 days after the end of each fiscal year of Holdings, Holdings’s audited consolidated balance sheet and audited consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows as of the end of and for such year, and related notes thereto, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by BDO Seidman, LLP or other independent registered public accountants of recognized national standing (without a “going concern” or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of Holdings and its subsidiaries on a consolidated basis in accordance with GAAP consistently applied, provided that the filing of such financial statements with the Securities and Exchange Commission shall constitute delivery for purposes of this Section;

(b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year of Holdings, Holdings’s unaudited consolidated balance sheet and unaudited consolidated statements of operations and comprehensive income, stockholders’ equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by a Financial Officer as presenting fairly in all material respects the financial condition and results of operations of Holdings and its subsidiaries on a

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consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes, provided that the filing of such financial statements with the Securities and Exchange Commission shall constitute delivery for purposes of this Section;

(c) concurrently with any delivery of financial statements under paragraph (a) or (b) above, a certificate of a Financial Officer (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with the covenants contained in Sections 6.12, 6.13 and 6.14 and (iii) stating whether any change in the application of GAAP to the financial statements of Holdings has occurred since the later of the date of the Borrower’s audited financial statements referred to in Section 3.04 and the date of the prior certificate delivered pursuant to this paragraph (c) indicating such a change and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate;

(d) prior to the commencement of each fiscal year of the Borrower, a detailed consolidated budget for such fiscal year (including a projected consolidated balance sheet and consolidated statements of projected operations, comprehensive income and cash flows as of the end of and for such fiscal year and setting forth the assumptions used for purposes of preparing such budget) and, promptly when available, any significant revisions of such budget; and

(e) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of Holdings, the Borrower or any Subsidiary, or compliance with the terms of any Loan Document, as the Administrative Agent or any Lender may reasonably request.

SECTION 5.02. Notices of Material Events. Holdings and the Borrower will furnish to the Administrative Agent (for distribution to each Lender through the Administrative Agent) written notice of the following promptly after obtaining knowledge thereof:

(a) the occurrence of any Default;

(b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or, to the knowledge of a Financial Officer or another executive officer of Holdings, the Borrower or any Subsidiary, affecting Holdings, the Borrower or any Affiliate thereof that, if adversely determined, could reasonably be expected to result in a Material Adverse Effect;

(c) the occurrence of any ERISA Event or any fact or circumstance that gives rise to a reasonable expectation that any ERISA Event will occur that, in either case, alone or together with any other ERISA Events that have occurred or

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are reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect; and

(d) any other development (including notice of any Environmental Liability) that results in, or could reasonably be expected to result in, a Material Adverse Effect.

Each notice delivered under this Section shall be accompanied by a written statement of a Financial Officer or other executive officer of Holdings setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto.

SECTION 5.03. Information Regarding Collateral. (a)  In the event that the Collateral and Guarantee Requirement has been satisfied, the Borrower will furnish to the Administrative Agent prompt written notice of any change (i) in any Loan Party’s corporate name, (ii) in the jurisdiction of incorporation or organization of any Loan Party or (iii) in any Loan Party’s organizational identification number. The Borrower agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Administrative Agent to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral. The Borrower also agrees promptly to notify the Administrative Agent if any material portion of the Collateral is damaged or destroyed.

(b)  In the event that the Collateral and Guarantee Requirement has been satisfied, at the time of delivery of financial statements pursuant to Section 5.01(a) or (b), the Borrower shall deliver to the Administrative Agent a certificate executed by a Financial Officer or chief legal officer of Holdings (i) setting forth the information required pursuant to the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate delivered on the Effective Date or the date of the most recent certificate delivered pursuant to this Section and (ii) certifying that all Uniform Commercial Code financing statements (including fixture filings, as the case may be) or other appropriate filings, recordings or registrations, including all refilings, rerecordings and reregistrations, containing a description of the Collateral have been filed of record in each governmental, municipal or other appropriate office in each jurisdiction identified pursuant to clause (i) above to the extent necessary to protect and perfect the security interests under the Collateral Agreement for a period of not less than 18 months after the date of such certificate (except as noted therein with respect to any continuation statements to be filed within such period).

SECTION 5.04. Existence; Conduct of Business. Each of Holdings and the Borrower will, and will cause each Subsidiary to, do or cause to be done all things necessary to obtain, preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges, franchises, patents, copyrights, trademarks and trade names material to the conduct of its business, provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 6.03.

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SECTION 5.05. Payment of Obligations. Each of Holdings and the Borrower will, and will cause each Subsidiary to, pay its material obligations, including Tax liabilities, before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) Holdings, the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP, (c) such contest effectively suspends collection of the contested obligation and the enforcement of any Lien securing such obligation and (d) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect.

SECTION 5.06. Maintenance of Properties. Except to the extent the failure to do so could not reasonably be expected to result in a Material Adverse Effect, each of Holdings and the Borrower will, and will cause each Subsidiary to, keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted.

SECTION 5.07. Insurance. Each of Holdings and the Borrower will, and will cause each Subsidiary to, maintain, with financially sound and reputable insurance companies, (a) insurance in such amounts (with no greater risk retention) and against such risks as is (i) customarily maintained by companies of established repute engaged in the same or similar businesses operating in the same or similar locations and (ii) considered adequate by Holdings and the Borrower and (b) all other insurance as may be required by law or any other Loan Document. The Borrower will furnish to the Lenders, upon request of the Administrative Agent, information in reasonable detail as to the insurance so maintained.

SECTION 5.08. Casualty and Condemnation. In the event that the Collateral and Guarantee Requirement has been satisfied, the Borrower (a) will furnish to the Administrative Agent (for distribution to each Lender through the Administrative Agent) prompt written notice of any casualty or other insured damage to any material portion of the Collateral or the commencement of any action or proceeding for the taking of any material portion of or any material interest in the Collateral under power of eminent domain or by condemnation or similar proceeding.

SECTION 5.09. Books and Records; Inspection and Audit Rights. Each of Holdings and the Borrower will, and will cause each Subsidiary to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. Each of Holdings and the Borrower will, and will cause each Subsidiary to, permit any representatives designated by the Administrative Agent or any Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested.

SECTION 5.10. Compliance with Laws. Each of Holdings and the Borrower will, and will cause each Subsidiary to, comply with all Requirements of Law with respect to it or its property except to the extent that the failure to do so, individually

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or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

SECTION 5.11. Use of Proceeds. The proceeds of the Revolving Loans will be used only for general corporate purposes, including Permitted Acquisitions. No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations T, U and X.

SECTION 5.12. Additional Subsidiaries. If any additional Subsidiary is formed or acquired after the Effective Date, the Borrower will, within thirty Business Days after such Subsidiary is formed or acquired, notify the Administrative Agent and the Lenders thereof.

SECTION 5.13. Further Assurances. (a)  Each of Holdings and the Borrower will, and will cause each Subsidiary Loan Party to, execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements, fixture filings, mortgages, deeds of trust and other documents), that may be required under any applicable law, or that the Administrative Agent or the Required Lenders may reasonably request, to cause the Effective Date Guarantee Requirement to be and remain satisfied and to cause the Collateral and Guarantee Requirement, if satisfied, to remain satisfied, all at the expense of the Loan Parties. Each of Holdings and the Borrower also agrees to provide to the Administrative Agent, from time to time upon request, evidence reasonably satisfactory to the Administrative Agent as to the perfection and priority of the Liens created or intended to be created by the Security Documents.

(b)  In the event that the Collateral and Guarantee Requirement has been satisfied, if any material assets (including any real property or improvements thereto or any interest therein with a fair market value in excess of $5,000,000) are acquired by the Borrower or any Subsidiary Loan Party after the Effective Date (other than assets constituting Collateral under the Collateral Agreement that become subject to the Lien created by the Collateral Agreement upon acquisition thereof), the Borrower will notify the Administrative Agent and the Lenders thereof.

SECTION 5.14. Interest Rate Protection. Holdings will, directly or indirectly, maintain in effect one or more Swap Agreements the effect of which is that at least 50% of Total Indebtedness will be subject to interest at a fixed rate or the interest cost in respect of which will be fixed, in each case on terms and conditions reasonably acceptable to the Joint Lead Arrangers.

ARTICLE VI

Negative Covenants

Until the Commitments have expired or been terminated and the principal of and interest on each Loan and all fees, expenses and other amounts payable (other than

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contingent amounts not yet due) under any Loan Document have been paid in full, each of Holdings and the Borrower covenants and agrees with the Lenders that:

SECTION 6.01. Indebtedness; Certain Equity Securities. (a)  The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except:

(i) Indebtedness created under the Loan Documents;

(ii) Indebtedness existing on the date hereof and set forth in Schedule 6.01 and extensions, renewals and replacements of any such Indebtedness, provided that such extending, renewal or replacement Indebtedness (A) shall not be Indebtedness of an obligor that was not an obligor with respect to the Indebtedness being extended, renewed or replaced (unless such obligor is a Subsidiary formed specifically for that purpose), (B) shall not be in a principal amount that exceeds the principal amount of the Indebtedness being extended, renewed or replaced (plus any accrued but unpaid interest and redemption premium thereon), (C) shall not have an earlier maturity date or shorter weighted average life than the Indebtedness being extended, renewed or replaced and (D) shall not have terms (including covenants, events of default, remedies, redemption provisions and sinking fund provisions, but excluding financial terms such as interest rates and redemption provisions) less favorable in any material respect to the Lenders than the terms of the Indebtedness being extended, renewed or replaced;

(iii) Indebtedness outstanding under the Management Term Loan Credit Agreement and extensions, renewals and replacements of such Indebtedness, provided that such extending, renewal or replacement Indebtedness (A) shall not be Indebtedness of an obligor that was not an obligor with respect to Indebtedness being extended, renewed or replaced (unless such obligor is a Subsidiary formed specifically for that purpose), (B) shall not be in a principal amount that exceeds the principal amount of the Indebtedness being extended, renewed or replaced (plus any accrued but unpaid interest and redemption premium thereon), (C) shall not have an earlier maturity date or shorter weighted average life than the Indebtedness being extended, renewed or replaced, (D) if applicable, shall rank pari passu or junior in right of payment in respect of the Collateral and with the obligations in respect of the Revolving Loans and (E) shall not have terms (including covenants, events of default, remedies, redemption provisions and sinking fund provisions, but excluding financial terms such as interest rates and redemption provisions) less favorable in any material respect to the Lenders than the terms of the Management Term Loan Credit Agreement;

(iv) Additional Mortgage Indebtedness and extensions, renewals and replacements thereof if, on the date of such incurrence or extension, renewal or replacement and after giving effect thereto on a Pro Forma Basis, the Senior Leverage Ratio shall not exceed 5.00 to 1.00;

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(v) Indebtedness of the Borrower to any Subsidiary and of any Subsidiary to the Borrower or any other Subsidiary, provided (A) that Indebtedness of any Subsidiary that is not a Loan Party to the Borrower or any Subsidiary Loan Party shall be subject to Section 6.04 and (B) Indebtedness of the Borrower to any Subsidiary and Indebtedness of any Subsidiary Loan Party to any Subsidiary that is not a Subsidiary Loan Party shall be subordinated to the Obligations on terms reasonably satisfactory to the Administrative Agent;

(vi) Guarantees by the Borrower of Indebtedness of any Subsidiary and by any Subsidiary of Indebtedness of the Borrower or any other Subsidiary, provided that (A) the Indebtedness so Guaranteed is permitted by this Section (other than clause (a)(ii) or (a)(viii)), (B) Guarantees by the Borrower or any Subsidiary Loan Party of Indebtedness of any Subsidiary that is not a Loan Party shall be subject to Section 6.04 and (C) Guarantees permitted under this clause (vi) shall be subordinated to the Obligations of the applicable Subsidiary Loan Party to the same extent and on the same terms as the Indebtedness so Guaranteed is subordinated to the Obligations;

(vii) (A) Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of any fixed or capital assets, including Capital Lease Obligations and any Indebtedness assumed by the Borrower or any Subsidiary in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, provided that such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement, and (B) extensions, renewals and replacements of any such Indebtedness so long as the outstanding principal amount of such extensions, renewals and replacements does not exceed the principal of the Indebtedness being extended, renewed or replaced (plus any accrued but unpaid interest and premium thereon), provided that the aggregate principal amount of Indebtedness permitted by this clause (vii) shall not exceed $5,000,000 at any time outstanding;

(viii) Indebtedness of any Person that becomes a Subsidiary after the date hereof, provided that such Indebtedness exists at the time such Person becomes a Subsidiary and is not created in contemplation of or in connection with such Person becoming a Subsidiary, and extensions, renewals and replacements of any such Indebtedness so long as the principal amount of such extensions, renewals and replacements does not exceed the principal of the Indebtedness being extended, renewed or replaced (plus any accrued but unpaid interest and redemption premium thereon), provided that the aggregate principal amount of Indebtedness permitted by this clause (viii) shall not exceed $5,000,000 at any time outstanding;

(ix) other unsecured Indebtedness of the Borrower or any Subsidiary in an aggregate principal amount not exceeding $5,000,000 at any time outstanding;

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(x) Indebtedness owed to any Person (including obligations in respect of letters of credit for the benefit of such Person) providing workers’ compensation, health, disability or other employee benefits or property, casualty or liability insurance, pursuant to reimbursement or indemnification obligations to such Person, in each case incurred in the ordinary course of business;

(xi) Indebtedness of the Borrower or any Subsidiary in respect of performance bonds, bid bonds, appeal bonds, surety bonds, performance and completion guarantees and similar obligations (other than in respect of other Indebtedness), in each case provided in the ordinary course of business;

(xii) Indebtedness in respect of Swap Agreements permitted by Section 6.07;

(xiii) Capital Lease Obligations of the Borrower or any Subsidiary resulting from any arrangement whereby the Borrower or such Subsidiary sells or transfers any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rents or leases such property or other property that it intends to use for substantially the same purpose or purposes as the property sold or transferred if, on the date of such incurrence on a Pro Forma Basis, the Senior Leverage Ratio shall not exceed 5.00 to 1.00; and

(xiv) Guarantees and/or indemnities (other than in respect of payment of principal or interest) by the Borrower or any Subsidiary in respect of capital contributions, project completions and cost-overruns and other performance matters (including environmental, fraud, misappropriation, bankruptcy and other customary non-recourse carveouts), in each case in connection with investments or Indebtedness otherwise permitted under this Agreement.

(b)  Holdings will not create, incur, assume or permit to exist any Indebtedness except (i) Indebtedness created under the Loan Documents and the Management Term Loan Credit Agreement and (ii) Indebtedness that would be permitted to be created, incurred or assumed by the Borrower or any Subsidiary under Sections 6.01(a)(vi), (x), (xi), (xii) and (xiv).

(c)  Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, issue any preferred Equity Interests except in the case of Holdings or the Borrower, preferred Equity Interests that are Qualified Equity Interests or trust preferred securities in an aggregate principal amount not exceeding $150,000,000 at any time outstanding, provided that any such preferred Equity Interests or trust preferred securities issued by the Borrower to Holdings for purposes of matching preferred Equity Interests or trust preferred securities issued by Holdings shall be excluded from the calculation of such amount.

SECTION 6.02. Liens. (a)  Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, create, incur, assume or permit to exist any Lien on

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any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except:

(i) Liens created under the Loan Documents;

(ii) Permitted Encumbrances;

(iii) any Lien on any property or asset of the Borrower or any Subsidiary existing on the date hereof and set forth in Schedule 6.02, provided that (A) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary (other than assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business) and (B) such Lien shall secure only those obligations that it secures on the date hereof and extensions, renewals and replacements thereof so long as the principal amount of such extensions, renewals and replacements does not exceed the principal amount of the obligations being extended, renewed or replaced (plus any accrued but unpaid interest and premium thereon);

(iv) Liens securing Indebtedness permitted by clause (a)(iii) of Section 6.01, provided that such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary (other than assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business);

(v) Liens securing Indebtedness permitted by clause (a)(iv) of Section 6.01, provided that (A) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary (other than assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business) and (B) the Indebtedness secured thereby does not exceed the fair market value of the property or assets securing such Indebtedness at the time such security interest attaches;

(vi) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary after the date hereof prior to the time such Person becomes a Subsidiary, provided that (A) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary, as the case may be, (B) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary (other than assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business) and (C) such Lien shall secure only those obligations that it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as the case may be, and extensions, renewals and replacements thereof so long as the principal amount of such extensions, renewals and replacements does not exceed the principal amount of the obligations being extended, renewed or replaced (plus any accrued but unpaid interest and premium thereon);

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(vii) Liens on fixed or capital assets acquired, constructed or improved (including any such assets made the subject of a Capital Lease Obligation incurred) by the Borrower or any Subsidiary, provided that (A) such Liens secure Indebtedness incurred to finance such acquisition, construction or improvement and permitted by clause (vii)(A) of Section 6.01(a) or to extend, renew or replace such Indebtedness and permitted by clause (vii)(B) of Section 6.01(a), (B) such Liens and the Indebtedness secured thereby are incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement (provided that this clause (B) shall not apply to any Indebtedness permitted by clause (vii)(B) of Section 6.01(a) or any Lien securing such Indebtedness), (C) the Indebtedness secured thereby does not exceed the lesser of the cost of acquiring, constructing or improving such fixed or capital asset or, in the case of Indebtedness permitted by clause (vii)(A) of Section 6.01, its fair market value at the time such security interest attaches, and in any event, the aggregate principal amount of such Indebtedness does not exceed $5,000,000 at any time outstanding and (D) such Liens shall not apply to any other property or assets of the Borrower or any Subsidiary (except assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business);

(viii) Liens of a collecting bank arising in the ordinary course of business under Section 4-208 of the Uniform Commercial Code in effect in the relevant jurisdiction covering only the items being collected upon;

(ix) Liens representing any interest or title of a licensor, lessor or sublicensor or sublessor under any lease or license permitted by this Agreement;

(x) Liens that are rights of setoff relating to deposit accounts in favor of banks and other depositary institutions arising in the ordinary course of business;

(xi) Liens not otherwise permitted by this Section to the extent that neither (A) the aggregate outstanding principal amount of the obligations secured thereby nor (B) the aggregate fair market value (determined as of the date such Lien is incurred) of the assets subject thereto exceeds $1,000,000 at any time outstanding;

(xii) Liens granted by a Subsidiary that is not a Loan Party in favor of the Borrower or another Loan Party in respect of Indebtedness or other obligations owed by such Subsidiary to such Loan Party; and

(xiii) Liens securing Indebtedness permitted by clause (a)(xiii) of Section 6.01, provided that such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary (other than assets financed by the same financing source pursuant to the same financing scheme in the ordinary course of business).

SECTION 6.03. Fundamental Changes. (a)  Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or liquidate

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or dissolve, except that, if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing (i) any Person may merge into the Borrower in a transaction in which the Borrower is the surviving entity, (ii) any Person (other than the Borrower) may merge into any Subsidiary in a transaction in which the surviving entity is a Subsidiary and (if any party to such merger is a Subsidiary Loan Party) is a Subsidiary Loan Party, (iii) any Subsidiary (other than a Subsidiary Loan Party) may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interests of the Borrower and is not materially disadvantageous to the Lenders and (iv) any Subsidiary (other than the Revolving Borrower and any Subsidiary Loan Party) may merge into another Person in a transaction permitted by Section 6.05 in which such Person is the surviving entity, provided that any such merger involving a Person that is not a wholly-owned Subsidiary immediately prior to such merger shall not be permitted unless also permitted by Sections 6.04 and 6.05.

(b)  The Borrower will not, and Holdings and the Borrower will not permit any Subsidiary to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and the Subsidiaries on the Effective Date and businesses reasonably related thereto.

(c)  Holdings will not engage in any business or activity other than the ownership of Equity Interests of the Borrower and activities incidental thereto and compliance with its obligations under the Loan Documents and the Management Term Loan Credit Agreement. Holdings will not own or acquire any assets (other than Equity Interests of the Borrower, cash and Permitted Investments) or incur any liabilities (other than liabilities under the Loan Documents and the Management Term Loan Credit Agreement, liabilities imposed by law, including tax liabilities, and other liabilities incidental to its existence as a public holding company and permitted business and activities).

SECTION 6.04. Investments, Loans, Advances, Guarantees and Acquisitions. Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, purchase, hold or acquire (including pursuant to any merger with any Person that was not a wholly-owned Subsidiary prior to such merger) any Equity Interests (but specifically excluding (x) Holdings’ right to acquire and hold additional Equity Interests in (including, for this purpose, to the extent not otherwise falling within the definition of “Equity Interests”, any trust preferred securities of) the Borrower and (y) redemptions or other repurchases by the Borrower or Holdings of any such Equity Interests in accordance with the provisions of Sections 4.2(e) and 7.4(d) of the LLC Agreement) in or evidences of Indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions) any assets of any other Person constituting a business unit, except:

(a) Permitted Investments;

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(b) Permitted Acquisitions;

(c) investments existing on the date hereof and set forth on Schedule 6.04;

(d) payroll, travel and similar advances to cover matters that are expected at the time of such advances ultimately to be treated as expenses of Holdings, the Borrower or any Subsidiary for accounting purposes and that are made in the ordinary course of business;

(e) (i) investments by Holdings in Equity Interests of the Borrower, by the Borrower or any other Loan Party (other than Holdings) in Equity Interests of a Subsidiary Loan Party or any direct or indirect wholly owned Subsidiary of any Loan Party and (ii) loans or advances made by the Borrower or any other Loan Party (other than Holdings) to any Subsidiary Loan Party or any direct or indirect wholly owned Subsidiary of any Loan Party and (iii) any contribution of assets from a Loan Party or a wholly owned direct or indirect Subsidiary of a Loan Party to another Loan Party or wholly owned direct or indirect Subsidiary of a Loan Party;

(f) investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, in each case in the ordinary course of business;

(g) investments in the form of Swap Agreements permitted by Section 6.07;

(h) investments of any Person existing at the time such Person becomes a Subsidiary or consolidates or merges with the Borrower or any Subsidiary (including in connection with a Permitted Acquisition) so long as such investments were not made in contemplation of such Person becoming a Subsidiary or of such consolidation or merger;

(i) investments resulting from pledges or deposits described in clause (c) or (d) of the definition of the term “Permitted Encumbrance”;

(j) investments received in connection with the disposition of any asset permitted by Section 6.05;

(k) receivables or other trade payables owing to the Borrower or a Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms, provided that such trade terms may include such concessionary trade terms as the Borrower or any Subsidiary deems reasonable under the circumstances;

(l) investments by the Borrower or a Subsidiary in Equity Interests in joint ventures the primary business of which are businesses of the type conducted by the Borrower and the Subsidiaries on the Effective Date and businesses reasonably related thereto, provided that immediately after giving effect to such

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investment, (i) the Borrower or such Subsidiary will own Equity Interests in such joint venture representing at least 50% of the aggregate equity value represented by the issued and outstanding Equity Interests in such joint venture, (ii) the Borrower or a Subsidiary will manage or otherwise be responsible for the day-to-day operations of such joint venture pursuant to a customary management contract (or will have been designated to act in such capacity upon project completion) or will have influence over such day-to-day operations by virtue of a franchise arrangement (or will have been designated to have such influence upon project completion) or (iii) the Borrower or a Subsidiary will be the managing member or day-to-day administrative member of such joint venture, or will have approval rights over major decisions with respect to such joint venture;

(m) other investments, loans and advances by the Borrower or any Subsidiary in an aggregate amount, as valued at cost at the time each such investment, loan or advance is made and including all related commitments for future investments, loans or advances (and the principal amount of any Indebtedness that is assumed or otherwise incurred in connection with such investment, loan or advance) and without giving effect to any write-downs or write-offs thereof, that at the time of, and after giving effect to, the making thereof would not exceed 25% of Total Assets as of the end of the fiscal quarter immediately prior to the date of such investment for which financial statements have been delivered pursuant to Section 5.01;

(n) repurchases by either of Holdings or the Borrower of common Equity Interests previously issued by such entity, subject to an aggregate limit of not more than 5% of the outstanding shares of common stock or common membership interests, as applicable; and

(o) any Guarantees and/or indemnities permitted by Section 6.01(a)(xiv).

SECTION 6.05. Asset Sales. Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, sell, transfer, lease or otherwise dispose of any asset, including any Equity Interest owned by it, nor will Holdings or the Borrower permit any Subsidiary to issue any additional Equity Interest in such Subsidiary (other than issuing directors’ qualifying shares and other than issuing Equity Interests to the Borrower or another Subsidiary in compliance with Section 6.04(e)(i)), except:

(a) sales, transfers, leases and other dispositions of (i) inventory, (ii) used or surplus equipment and (iii) Permitted Investments, in each case in the ordinary course of business;

(b) sales, transfers, leases and other dispositions to the Borrower or a Subsidiary, provided that any such sales, transfers, leases or other dispositions involving a Subsidiary that is not a Loan Party shall be made in compliance with Section 6.09;

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(c) sales, transfers and other dispositions of accounts receivable in connection with the compromise, settlement or collection thereof consistent with past practice;

(d) sales, transfers, leases and other dispositions of property to the extent that such property constitutes an investment permitted by clause (f), (h) or (j) of Section 6.04 or another asset received as consideration for the disposition of any asset permitted by this Section (in each case, other than Equity Interests in a Subsidiary, unless all Equity Interests in such Subsidiary are sold);

(e) sale and leaseback transactions not prohibited by any other Section of this Article VI;

(f) leases entered into in the ordinary course of business, to the extent that they do not materially interfere with the business of Holdings, the Borrower or any Subsidiary;

(g) licenses or sublicenses of intellectual property in the ordinary course of business, to the extent that they do not materially interfere with the business of Holdings, the Borrower or any Subsidiary;

(h) dispositions resulting from any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of the Borrower or any Subsidiary;

(i) sales, transfers and other dispositions of assets or any direct or indirect interest therein, provided that promptly following the receipt of any cash proceeds from such sale, transfer or disposition, the Borrower or the applicable Subsidiary will use such proceeds to (x) acquire, maintain, develop, construct, improve, upgrade or repair assets useful in the business of the Loan Parties, or make investments pursuant to Section 6.04(b), in each case within nine months of such receipt or (y) repay outstanding Indebtedness, and

(j) sales, transfers and other dispositions of assets (other than Equity Interests in a Subsidiary unless all Equity Interests in such Subsidiary are sold) that are not permitted by any other clause of this Section, provided that the aggregate fair market value of all assets sold, transferred or otherwise disposed of in reliance upon this clause (i) shall not exceed $5,000,000 during any fiscal year of the Borrower,

provided that all sales, transfers, leases and other dispositions permitted hereby (other than those permitted by clause (b)) shall be made for fair value (as determined by a Financial Officer in good faith) and, in the event of sale, transfer, lease or other disposition of all or substantially all of the Borrower’s or the applicable Subsidiary’s interest in any Existing Hotel Property, for at least 75% cash consideration and/or like-kind consideration payable at the time of such sale, transfer or other disposition, provided that assumed debt shall be deemed to be cash for purposes of such determination.

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SECTION 6.06. [Intentionally Omitted.]

SECTION 6.07. Swap Agreements. Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, enter into any Swap Agreement, except (a) Swap Agreements required by Section 5.14 or entered into to hedge or mitigate risks to which the Borrower or any Subsidiary has actual exposure (other than those in respect of shares of capital stock or other equity ownership interests of the Borrower or any Subsidiary), (b) Swap Agreements entered into in order to effectively cap, collar or exchange interest rates (from fixed to floating rates, from one floating rate to another floating rate or otherwise) with respect to any interest-bearing liability or investment of the Borrower or any Subsidiary and (c) the Borrower or any Subsidiary will be entitled to issue interest rate protection pursuant to one or more Swap Agreements if and to the extent that one or more other wholly-owned Subsidiaries of the Borrower or such Subsidiary is purchasing or already owns offsetting interest rate protection for the same duration (or longer) and notional amount (or greater), provided that any such offsetting Swap Agreement arrangements will be disregarded for purposes of determining Holdings’s compliance with the requirements of Section 5.14.

SECTION 6.08. Restricted Payments. (a)  Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, declare or make, or agree to pay or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except (i)  the Subsidiaries may declare and pay dividends ratably with respect to their Equity Interests, (ii) Holdings may declare and pay dividends with respect to its common stock payable solely in shares of common stock, (iii)  the Borrower may, or may make Restricted Payments to Holdings so that Holdings may (and Holdings may), make Restricted Payments pursuant to and in accordance with stock option plans or other benefit plans approved by Holdings’s board of directors for management or employees of Holdings, the Borrower and the Subsidiaries, (iv) the Borrower may make Restricted Payments to Holdings at such times and in such amounts (A) as shall be necessary to permit Holdings to discharge its general corporate and overhead (including franchise taxes and directors fees) expenses incurred in the ordinary course and other permitted liabilities and (B) as shall be necessary to pay the Tax liabilities of Holdings directly attributable to (or arising as a result of) the operations of the Borrower and the Subsidiaries; provided, however, that (1) the amount of Restricted Payments pursuant to clause (B) of this clause (iv) shall not exceed the amount that the Borrower and the Subsidiaries would be required to pay in respect of federal, State and local taxes were the Borrower and the Subsidiaries to pay such taxes as stand-alone taxpayers, (2) all Restricted Payments made to Holdings pursuant to this clause (iv) are used by Holdings for the purposes specified herein within ten Business Days after Holdings’s receipt thereof and (3) no Default shall have occurred and be continuing or would result therefrom, (v) each of Holdings, the Borrower may declare and pay dividends in respect of Qualified Equity Interests and/or trust preferred securities otherwise permitted hereunder and (vi) Holdings and the Borrower may make repurchases of common Equity Interests permitted by Section 6.04(n).

SECTION 6.09. Transactions with Affiliates. Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, sell, lease or otherwise transfer any

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property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except (i) transactions in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arm’s-length basis from unrelated third parties or, in the case of management and/or franchise agreements arising in the ordinary course of business, agreements between any Subsidiary and the Borrower or any other Subsidiary as reasonably deemed appropriate by the Borrower, (ii) transactions between or among the Borrower and the Subsidiary Loan Parties not involving any other Affiliate, (iii) payroll, travel and similar advances to cover matters permitted under Section 6.04(d), (iv)  the payment of reasonable fees to directors or managers of Holdings, the Borrower or any Subsidiary who are not employees of Holdings, the Borrower or any Subsidiary, and compensation and employee benefit arrangements paid to, and indemnities provided for the benefit of, directors, managers, officers or employees of Holdings, the Borrower or the Subsidiaries in the ordinary course of business, (v) any issuances of securities or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment agreements, stock options and stock ownership plans approved by Holdings’s board of directors, (vi) employment and severance arrangements entered into in the ordinary course of business between Holdings, the Borrower or any Subsidiary and any employee thereof and approved by Holdings’s board of directors, (vii) transactions contemplated by and payments due to Ian Schrager under the Consulting Agreement and the Services Agreement, (viii) any Restricted Payment permitted by Section 6.08 or any distributions of cash or other assets from any Person to any Loan Party or any Subsidiary in respect of Equity Interests held by such Loan Party or Subsidiary in that Person and (ix) capital contributions by the Borrower to a Subsidiary or by a Subsidiary to any other Subsidiary, provided that a Financial Officer has determined in good faith that the terms of such contribution are fair and reasonable to the contributing party.

SECTION 6.10. Restrictive Agreements. Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of Holdings, the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any of its Equity Interests or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary, provided that (i) the foregoing shall not apply to restrictions and conditions imposed by (A) law or (B) any Loan Document or the Management Term Loan Credit Agreement, (ii) the foregoing shall not apply to restrictions and conditions existing on the date hereof identified on Schedule 6.10 (but shall apply to any extension or renewal of, or any amendment, modification or replacement expanding the scope of, any such restriction or condition), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary or any assets pending such sale, provided that such restrictions and conditions apply only to the Subsidiary or assets that is or are to be sold and such sale is permitted hereunder, (iv) the foregoing shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to

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the property or assets securing such Indebtedness and (v) clause (a) of the foregoing shall not apply to customary provisions in leases and other contracts restricting the assignment thereof.

SECTION 6.11. Amendment of Material Documents. Neither Holdings nor the Borrower will, nor will they permit any Subsidiary to, amend, modify, waive, terminate or release (a) its certificate of incorporation, by-laws or other organizational documents, (b) the Indebtedness permitted under Section 6.01(a)(ii) or (a)(iii) or (c) any agreements governing joint ventures of the Borrower or any Subsidiary as of the Effective Date, in each case if the effect of such amendment, modification, waiver, termination or release is adverse to Holdings, the Borrower, any Subsidiary or the Lenders.

SECTION 6.12. Interest Expense Coverage Ratio. The Borrower will not permit the ratio of (a) Consolidated EBITDA to (b) Consolidated Cash Interest Expense (determined on a Pro Forma Basis in accordance with Section 1.05), in each case for any period of four consecutive fiscal quarters of the Borrower ending on or about any date during any such period to be less than 2.0 to 1.0.

SECTION 6.13. Leverage Ratio. The Borrower will not permit the Leverage Ratio (determined on a Pro Forma Basis in accordance with Section 1.05) to exceed 6.5 to 1.0.

SECTION 6.14. Senior Leverage Ratio. The Borrower will not permit the Senior Leverage Ratio (determined on a Pro Forma Basis in accordance with Section 1.05) to exceed 5.0 to 1.0.

SECTION 6.15. Changes in Fiscal Periods. Holdings will neither (a) permit its fiscal year or the fiscal year of the Borrower or any Subsidiary to end on a day other than December 31, nor (b) change its method of determining fiscal quarters.

SECTION 6.16. Availability of Exceptions. For the avoidance of doubt, in determining compliance with the restrictions set forth in this Article VI with respect to any proposed financing, purchase, sale or other transaction, the Loan Parties shall be entitled to elect and rely upon any single exception or any combination of applicable exceptions as they deem appropriate.

ARTICLE VII

Events of Default

If any of the following events (any such event, an “Event of Default”) shall occur:

(a) the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise;

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(b) the Borrower shall fail to pay any interest on any Loan or any fee or any other amount (other than an amount referred to in paragraph (a) of this Article) payable under any Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of three Business Days;

(c) any representation or warranty made or deemed made by or on behalf of Holdings, the Borrower or any Subsidiary in any Loan Document or any amendment or modification thereof or waiver thereunder, or in any written report, certificate, financial statement or other document furnished pursuant to or in connection with any Loan Document or any amendment or modification thereof or waiver thereunder, shall prove to have been incorrect in any material respect when made or deemed made;

(d) Holdings or the Borrower shall fail to observe or perform any covenant, condition or agreement contained in (i) Section 5.02, 5.04 (with respect to keeping in effect the existence of Holdings or the Borrower) or 5.11 or Section 6.01 (indebtedness), Section 6.03 (fundamental change), Section 6.08 (restricted payments) or (ii) any other Section of Article VI not referred to in clause (i) above and such failure shall continue unremedied for a period of 10 days after the Borrower receives written notice thereof from any Lender or the Administrative Agent;

(e) any Loan Party shall fail to observe or perform any covenant, condition or agreement contained in any Loan Document (other than those specified in paragraph (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after Borrower receives written notice thereof from any Lender or the Administrative Agent to the Borrower, provided that if such default is susceptible of cure but cannot reasonably be cured within such 30 day period and the Borrower shall have commenced to cure such default within such 30 day period and is working in good faith to cure the same, such 30 day period shall be extended for up to an additional 30 days;

(f) (i) Holdings, the Borrower or any Subsidiary Loan Party shall fail to make any payment of principal or interest (regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable or (ii) the Subsidiary borrower thereunder shall fail to make any payment of principal or interest (regardless of amount) in respect of Indebtedness outstanding under the NY/CA Mortgage Loan or any refinancing thereof permitted hereunder or Indebtedness outstanding under the FL Mortgage Loan or any refinancing thereof permitted hereunder, when and as the same shall become due and payable;

(g) any event or condition occurs that results in any Material Indebtedness, Indebtedness outstanding under the NY/CA Mortgage Loan or any refinancing thereof permitted hereunder or Indebtedness outstanding under the FL Mortgage Loan or any refinancing thereof permitted hereunder becoming due prior to its scheduled maturity, provided that this paragraph (g) shall not apply to secured

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Indebtedness that becomes due as a result of the sale, transfer or other disposition (including as a result of a casualty or condemnation event) of the property or assets securing such Indebtedness (to the extent such sale, transfer or other disposition is not prohibited under this Agreement);

(h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of Holdings, the Borrower or any Subsidiary Loan Party or its debts, or of a substantial part of its assets, under any federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings, the Borrower or any Subsidiary Loan Party or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered;

(i) Holdings, the Borrower or any Subsidiary Loan Party shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or petition described in paragraph (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Holdings, the Borrower or any Subsidiary Loan Party or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any formal action for the purpose of effecting any of the foregoing;

(j) Holdings, the Borrower or any Subsidiary Loan Party shall become unable, admit in writing its inability or fail generally to pay its debts as they become due;

(k) one or more judgments for the payment of money in an aggregate amount in excess of $5,000,000 shall be rendered against Holdings, the Borrower, any Subsidiary Loan Party or any combination thereof (provided that in determining whether the foregoing threshold is satisfied, there shall be excluded any portion of such judgments that is fully covered by a solvent third party insurance company (less any applicable deductible) and as to which the insurer has not disputed, in writing, its responsibility to cover such judgment, order, decree or arbitration award) and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of Holdings, the Borrower or any Subsidiary Loan Party to enforce any such judgment;

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(l) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect;

(m) in the event that the Collateral and Guarantee Requirement has been satisfied, any Lien purported to be created under any Security Document shall cease to be, or shall be asserted by any Loan Party not to be, a valid and perfected Lien on any Collateral with a fair value in excess of $5,000,000, with the priority required by the applicable Security Document, except (i) as a result of the sale or other disposition of the applicable Collateral in a transaction permitted under the Loan Documents or (ii) as a result of the Administrative Agent’s failure to (A) maintain possession of any stock certificates, promissory notes or other instruments delivered to it under the Collateral Agreement or (B) file Uniform Commercial Code continuation statements;

(n) any Loan Document or any Guarantee of the Loan Document Obligations shall for any reason be asserted by any Loan Party in writing not to be a legal, valid and binding obligation of any Loan Party party thereto;

(o) the Guarantees of the Loan Document Obligations by Holdings, the Borrower and the Subsidiary Loan Parties pursuant to the Guarantee Agreement or, if applicable, the Collateral Agreement shall cease to be in full force and effect (in each case, other than in accordance with the terms of the Loan Documents); or

(p) a Change in Control shall occur;

then, and in every such event (other than an event with respect to Holdings or the Borrower described in paragraph (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times:  (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately, and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event with respect to Holdings or the Borrower described in paragraph (h) or (i) of this Article, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.

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ARTICLE VIII

The Administrative Agent

Each of the Lenders hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto. The provisions of this Article are solely for the benefit of the Administrative Agent and the Lenders, and the Borrower shall not have rights as a third party beneficiary of any of such provisions.

The bank serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent, and such bank and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with Holdings, the Borrower or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent hereunder.

The Administrative Agent shall not have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated by the Loan Documents that the Administrative Agent is required to exercise in writing as directed by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary or believed by the Administrative Agent in good faith to be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth in the Loan Documents, the Administrative Agent shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to Holdings, the Borrower or any Subsidiary that is communicated to or obtained by the bank serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or wilful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by Holdings, the Borrower or a Lender, and the Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document or (v) the satisfaction of any condition set forth in Article IV or elsewhere in

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any Loan Document, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.

The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed or sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.

The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.

In determining compliance with any condition hereunder to the making of a Loan that by its terms must be fulfilled to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender unless the Administrative Agent shall have received notice to the contrary from such Lender prior to the making of such Loan.

Subject to the appointment and acceptance of a successor Administrative Agent as provided in this paragraph, the Administrative Agent may resign at any time upon notice to the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor approved by the Borrower, such approval not to be unreasonably withheld. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent that shall be a bank with an office in New York, New York, or an Affiliate of any such bank. Upon the acceptance of its appointment as Administrative Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from all its duties and obligations under the Loan Documents. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the Administrative Agent’s resignation hereunder, the provisions of this Article and

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Section 9.03 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Administrative Agent was acting as Administrative Agent.

Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this any Loan Document or any related agreement or any document furnished thereunder.

Notwithstanding anything herein to the contrary, none of the Bookrunners or Arrangers or syndication or documentation agents listed on the cover page hereof shall have any powers, duties or responsibilities under any Loan Document, except in its capacity, as applicable, as the Administrative Agent or a Lender hereunder.

ARTICLE IX

Miscellaneous

SECTION 9.01. Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows:

(a) if to Holdings or the Borrower, to it at 475 Tenth Avenue, New York, New York 10018 (Telecopy No. (212) 277-4270);

(b) if to the Administrative Agent, to Citicorp North America, Inc., 399 Park Avenue, New York, NY 10022, Attention of Susan Godwin (Telecopy No. (646) 291-3638); and

(c) if to any other Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire.

Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. Notices and other communications to the Lenders hereunder may also be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender pursuant to Article II if such Lender has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrower may, in its

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discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt.

SECTION 9.02. Waivers; Amendments. (a)  No failure or delay by the Administrative Agent or any Lender in exercising any right or power under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of any Loan Document or consent to any departure by any Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent or any Lender may have had notice or knowledge of such Default at the time. No notice or demand on the Borrower or Holdings in any case shall entitle the Borrower or Holdings to any other or further notice or demand in similar or other circumstances.

(b)  Except as provided in Section 2.17 with respect to any Incremental Facility Amendment, neither any Loan Document nor any provision thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by Holdings, the Borrower and the Required Lenders or, in the case of any other Loan Document, pursuant to an agreement or agreements in writing entered into by the Administrative Agent and the Loan Party or Loan Parties that are parties thereto, in each case with the consent of the Required Lenders, provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender, (ii) reduce the principal amount of any Loan or reduce the rate of interest thereon, or reduce any fees payable hereunder, without the written consent of each Lender affected thereby, (iii) postpone the maturity of any Loan, or any date for the payment of any interest or fees payable hereunder, or reduce the amount of, waive or excuse any such payment, or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender affected thereby, (iv) change Section 2.15(b) or (c) in a manner that would alter the pro rata sharing of payments required thereby, without the written consent of each Lender adversely affected thereby, (v) change any of the provisions of this Section or the percentage set forth in the definition of “Required Lenders” or any other provision of any Loan Document specifying the number or percentage of Lenders (or Lenders of any Class) required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the written consent of each Lender (or each Lender of such Class, as the case may be) (it being understood that, with the consent of the Required Lenders, additional extensions of credit pursuant to this

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Agreement may be included in the determination of the Required Lenders on substantially the same basis as the Revolving Commitments on the date hereof), (vi) release any Subsidiary Loan Party from its Guarantee under the Collateral Agreement (except as expressly provided in the Collateral Agreement), or limit its liability in respect of such Guarantee, without the written consent of each Lender, (vii) release all or substantially all the Collateral from the Liens of the Security Documents, without the written consent of each Lender, (viii) change any provisions of any Loan Document in a manner that by its terms adversely affects the rights in respect of payments due to Lenders holding Loans of any Class differently than those holding Loans of any other Class, without the written consent of Lenders holding a majority in interest of the outstanding Loans and unused Commitments of each affected Class or (ix) modify the protections afforded to an SPV pursuant to the provisions of Section 9.04(e) without the written consent of such SPV; provided further that (A) no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent without the prior written consent of the Administrative Agent, (B) any waiver, amendment or modification of this Agreement that by its terms affects the rights or duties under this Agreement of Lenders holding Loans or Commitments of a particular Class (but not the Lenders holding Loans or Commitments of any other Class) may be effected by an agreement or agreements in writing entered into by Holdings, the Borrower and requisite percentage in interest of the affected Class of Lenders that would be required to consent thereto under this Section if such Class of Lenders were the only Class of Lenders hereunder at the time and (C) if the terms of any waiver, amendment or modification of any Loan Document provide that any Class of Loans (together with all accrued interest thereon and all accrued fees payable with respect to the Commitments of such Class) will be repaid or paid in full, and the Commitments of such Class (if any) terminated, as a condition to the effectiveness of such waiver, amendment or modification, then so long as the Loans of such Class (together with such accrued interest and fees) are in fact repaid or paid and such Commitments are in fact terminated, in each case prior to or substantially simultaneously with the effectiveness of such amendment, then such Loans and Commitments shall not be included in the determination of the Required Lenders with respect to such amendment.

(c)  In connection with any proposed amendment, modification, waiver or termination (a “Proposed Change”) requiring the consent of all Lenders or all affected Lenders, if the consent of the Required Lenders (and, to the extent any Proposed Change requires the consent of Lenders holding Loans of any Class pursuant to clause (v) or (viii) of paragraph (b) of this Section, the consent of a majority in interest of the outstanding Loans and unused Commitments of such Class) to such Proposed Change is obtained, but the consent to such Proposed Change of other Lenders whose consent is required is not obtained (any such Lender whose consent is not obtained as described in paragraph (b) of this Section being referred to as a “Non-Consenting Lender”), then, so long as the Lender that is acting as Administrative Agent is not a Non-Consenting Lender, the Borrower may, at its sole expense and effort, upon notice to such Non-Consenting Lender and the Administrative Agent, require such Non-Consenting Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender

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accepts such assignment), provided that (a) the Borrower shall have received the prior written consent of the Administrative Agent, which consent shall not unreasonably be withheld and (b) such Non-Consenting Lender shall have received payment of an amount equal to the outstanding principal of its Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts).

SECTION 9.03. Expenses; Indemnity; Damage Waiver. (a)  The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent, the Joint Bookrunners and the Joint Lead Arrangers and their respective Affiliates, including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, the Joint Bookrunners and the Joint Lead Arrangers, in connection with the syndication of the credit facilities provided for herein, the preparation and administration of the Loan Documents or any amendments, modifications or waivers of the provisions thereof (whether or not the transactions contemplated hereby or thereby shall be consummated) and (ii) all out-of-pocket expenses incurred by the Administrative Agent or any Lender, including the fees, charges and disbursements of any counsel for the Administrative Agent or any Lender, in connection with the enforcement or protection of its rights in connection with the Loan Documents, including its rights under this Section, or in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans.

(b)  The Borrower shall indemnify the Administrative Agent and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”), against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the reasonable fees, charges and disbursements of any counsel for any Indemnitee, incurred by or asserted against any Indemnitee by any third party or by Holdings, the Borrower or any Subsidiary arising out of, in connection with, or as a result of (i) the execution or delivery of any Loan Document or any other agreement or instrument contemplated thereby, the performance by the parties to the Loan Documents of their respective obligations thereunder, (ii) any Loan or the use of the proceeds therefrom, (iii) any actual or alleged presence or Release of Hazardous Materials on, at, to or from any property currently or formerly owned or operated by Holdings, the Borrower or any Subsidiary, or any other Environmental Liability related in any way to Holdings, the Borrower or any Subsidiary, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by Holdings, the Borrower or any Subsidiary and regardless of whether any Indemnitee is a party thereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses result from the gross negligence, bad faith or wilful misconduct of such Indemnitee.

(c)  To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent under paragraph (a) or (b) of this Section, each

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Lender severally agrees to pay to the Administrative Agent such Lender’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent in its capacity as such. For purposes hereof, a Lender’s “pro rata share” shall be determined based upon its share of the aggregate Revolving Exposures and unused Commitments at the time. The obligations of the Lenders under this paragraph (c) are subject to the last sentence of Section 2.02(a) (which shall apply mutatis mutandis to the Lenders’ obligations under this paragraph (c)).

(d)  To the fullest extent permitted by applicable law, neither Holdings nor the Borrower shall assert, and each hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, any Loan Document or any agreement or instrument contemplated thereby, the Transactions, any Loan or the use of the proceeds thereof.

(e)  All amounts due under this Section shall be payable not later than ten Business Days after written demand therefor.

SECTION 9.04. Successors and Assigns. (a)  The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that (i) the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of each Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section. Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants (to the extent provided in paragraph (c) of this Section) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.

(b)  (i) Subject to the conditions set forth in paragraph (b)(ii) below, any Lender may assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld or delayed) of the Administrative Agent; provided further that no Lender may assign or otherwise transfer its rights or obligations hereunder to Holdings, the Borrower, any Subsidiary Loan Party or any of their respective Affiliates.

(ii)  Assignments shall be subject to the following additional conditions: (A) except in the case of an assignment to a Lender, an Affiliate of a Lender or an assignment of the entire remaining amount of the assigning Lender’s Commitment or Loans of any Class, the amount of the Commitment or Loans of the assigning Lender

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subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $1,000,000 unless the Administrative Agent otherwise consent (such consent not to be unreasonably withheld or delayed), (B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement, provided that this clause (B) shall not be construed to prohibit assignment of a proportionate part of all the assigning Lender’s rights and obligations in respect of one Class of Commitments or Loans, (C) the parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, provided that assignments made pursuant to Section 2.16(b) or Section 9.02(c) shall not require the signature of the assigning Lender to become effective, and (D) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire and any tax forms required by Section 2.14(e) or (f).

(iii)  Subject to acceptance and recording thereof pursuant to paragraph (b)(v) of this Section, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 2.12, 2.13, 2.14 and 9.03 and to any fees payable hereunder that have accrued for such Lender’s account but have not yet been paid). Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this Section shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (c)(i) of this Section.

(iv)  The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive, and Holdings, the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.

(v)  Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee, the assignee’s completed Administrative Questionnaire and any tax forms required by Section 2.14(e) or (f) (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section and any written consent to such assignment

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required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.

(vi)  The words “execution”, “signed”, “signature” and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act or any other similar state laws based on the Uniform Electronic Transactions Act.

(c)  (i)  Any Lender may, without the consent of the Borrower or the Administrative Agent, sell participations to one or more banks or other entities (a “Participant”) in all or a portion of such Lender’s rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it), provided that (A) such Lender’s obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (C) Holdings, the Borrower, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce the Loan Documents and to approve any amendment, modification or waiver of any provision of the Loan Documents, provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in the first proviso to Section 9.02(b) that affects such Participant. Subject to paragraph (c)(ii) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 2.12, 2.13 and 2.14 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were a Lender, provided that such Participant agrees to be subject to Section 2.15(c) as though it were a Lender.

(ii)  A Participant shall not be entitled to receive any greater payment under Section 2.12 or Section 2.14 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.14 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 2.14(e) and (f) as though it were a Lender.

(d)  Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender,

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including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest, provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(e)  Notwithstanding anything to the contrary contained herein, any Lender (a “Granting Lender”) may grant to a special purpose funding vehicle (an “SPV”), identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement, provided that (i) nothing herein shall constitute a commitment by any SPV to make any Loan and (ii) if an SPV elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPV hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender. Each party hereto hereby agrees that no SPV shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPV, such party will not institute against, or join any other person in instituting against, such SPV any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof. In addition, notwithstanding anything to the contrary contained in this Section 9.04, any SPV may (i) with notice to, but without the prior written consent of, the Borrower and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Granting Lender or to any financial institutions (consented to by the Borrower and Administrative Agent) providing liquidity or credit support to or for the account of such SPV to support the funding or maintenance of Loans and (ii) disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPV.

SECTION 9.05. Survival. All covenants, agreements, representations and warranties made by the Loan Parties in the Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to any Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Loan Documents and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any fee or any other amount payable under this Agreement is outstanding and unpaid and so long as the Commitments have not expired or terminated. The provisions of Sections 2.12, 2.13, 2.14 and 9.03 and

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Article VIII shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans, the expiration or termination of the Commitments or the termination of this Agreement or any provision hereof.

SECTION 9.06. Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement, the other Loan Documents and any separate letter agreements with respect to fees payable to the Administrative Agent or to the Joint Lead Arrangers, the Joint Bookrunners or any of their Affiliates, or the syndication of the Loans and Commitments constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.

SECTION 9.07. Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction.

SECTION 9.08. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and each of its Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender or any such Affiliate to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured or are owed to a branch or office of such Lender different from the branch or office holding such deposit or obligated on such Indebtedness. The applicable Lender shall notify the Borrower and the Administrative Agent of such setoff and application, provided that any failure to give or any delay in giving such notice shall not affect the validity of any such setoff and application under this Section. The rights of each Lender and its Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender and its respective Affiliates may have.

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SECTION 9.09. Governing Law; Jurisdiction; Consent to Service of Process. (a)  This Agreement shall be construed in accordance with and governed by the law of the State of New York.

(b)  Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in any Loan Document shall affect any right that the Administrative Agent or any Lender may otherwise have to bring any action or proceeding relating to any Loan Document against Holdings, the Borrower or their respective properties in the courts of any jurisdiction.

(c)  Each of the parties hereto hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to any Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.

(d)  Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in any Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law.

SECTION 9.10. WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.

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SECTION 9.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.

SECTION 9.12. Confidentiality. Each of the Administrative Agent, the Joint Lead Arrangers, the Joint Bookrunners and the Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority, (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to any Loan Document or the enforcement of rights thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, (g) with the consent of the Borrower or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent or any Lender on a nonconfidential basis from a source other than Holdings or the Borrower. For the purposes of this Section, “Information” means all information received from Holdings or the Borrower or any Subsidiary relating to Holdings or the Borrower or any Subsidiary or the business of any of them, other than any such information that is available to the Administrative Agent or any Lender on a nonconfidential basis prior to disclosure by Holdings or the Borrower, provided that, in the case of information received from Holdings, the Borrower or any Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.

SECTION 9.13. Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts that are treated as interest on such Loan under applicable law (collectively the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) that may be contracted for, charged, taken, received or reserved by the Lender holding such Loan in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at

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the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender.

SECTION 9.14. USA Patriot Act. Each Lender hereby notifies Holdings and the Borrower that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies Holdings and the Borrower, which information includes the name and address of Holdings and the Borrower and other information that will allow such Lender to identify Holdings and the Borrower in accordance with the Act.

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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.

MORGANS HOTEL GROUP CO.,
by
	/s/ Marc Gordon
	Name:	Marc Gordon
	Title:	Chief Investment Officer and Executive Vice President of Capital Markets
MORGANS GROUP LLC,
by
	/s/ Marc Gordon
	Name:	Marc Gordon
	Title:	Authorized Signatory
CITICORP NORTH AMERICA, INC., individually and as Administrative Agent,
by
	/s/ David Bouton
	Name:	David Bouton
	Title:	Vice President
MORGAN STANLEY SENIOR FUNDING, INC., as Joint Lead Arranger and Co-Syndication Agent,
by
	/s/ Eugene F. Martin
	Name:	Eugene F. Martin
	Title:	Vice President
MORGAN STANLEY BANK,
by
	/s/ Eugene F. Martin
	Name:	Eugene F. Martin
	Title:	Vice President

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MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, as Joint Lead Arranger and Co-Syndication Agent,
	by
		/s/ Stephen Paras
		Name:		Stephen Paras
		Title:		Managing Director
MERRILL LYNCH CAPITAL CORPORATION,
	by
		/s/ Stephen Paras
		Name:		Stephen Paras
		Title:		Managing Director
BANK OF AMERICA, N.A., as Documentation Agent,
	by
		/s/ Roger C. Davis
		Name:	Roger C. Davis
		Title:	Senior Vice President
BANK OF AMERICA, N.A.,
	by
		/s/ Roger C. Davis
		Name:		Roger C. Davis
		Title:		Senior Vice President

82

EX-14.1

Exhibit 14.1

MORGANS HOTEL GROUP CO.
CODE OF BUSINESS CONDUCT AND ETHICS

The Board of Directors of Morgans Hotel Group Co.(with its subsidiaries, the “Company”) has adopted this code of ethics (this “Code”) to:

•promote honest and ethical conduct, including fair dealing and the ethical handling of conflicts of interest;

•promote full, fair, accurate, timely and understandable disclosure;

•promote compliance with applicable laws and governmental rules and regulations;

•ensure the protection of the Company’s legitimate business interests, including corporate opportunities, assets and confidential information; and

•deter wrongdoing.

All directors, officers and employees of the Company are expected to be familiar with the Code and to adhere to those principles and procedures set forth in the Code which apply to them.

For purposes of this Code, the “Code of Ethics Contact Person” will be the Chairman of the Corporate Governance and Nominating Committee.

From time to time, the Company may amend or waive some provisions of this Code.  Any and all waivers of this Code must be approved in advance and in writing as set forth below. Any amendment or waivers of the Code for executive officers or directors of the Company may be made only by the Board of Directors or the Corporate Governance and Nominating Committee of the Board and must be promptly disclosed as required by Securities and Exchange Commission (“SEC”) or Nasdaq rules.  Any waiver for other employees may be made only by the Code of Ethics Contact Person, and must be reported in writing to the Corporate Governance and Nominating Committee.

I.Honest and Candid Conduct

Each director, officer and employee owes a duty to the Company to act with integrity.  Integrity requires, among other things, being honest and candid.  Deceit and subordination of principle are inconsistent with integrity.

Each director, officer and employee must:

•Act with integrity, including being honest and candid while still maintaining the confidentiality of information where required or consistent with the Company’s policies.

•Observe both the form and spirit of laws and governmental rules and regulations, accounting standards and Company policies.

•Adhere to a high standard of business ethics.

II.Conflicts of Interest

A “conflict of interest” occurs when an individual’s private interest interferes or appears to interfere with the interests of the Company.  A conflict of interest can arise when a director, officer or employee takes actions or has interests that may make it difficult to perform his or her Company work objectively and effectively.  For example, a conflict of interest would arise if a director, officer or employee, or a member or his or her family, receives improper personal benefits as a result of his or her position in the Company.  Any material transaction or relationship that could reasonably be expected to give rise to a conflict of interest should be discussed in advance with the Code of Ethics Contact Person or, if it involves the Code of Ethics Contact Person, with the Chairman of the Board.

Service to the Company should never be subordinated to personal gain and advantage.  Conflicts of interest should, wherever possible, be avoided.

Anything that would present a conflict for a director, officer or employee would likely also present a conflict if it is related to a member of his or her family.

III.Disclosure

Each director, officer or employee involved in the Company’s disclosure process, including the Chief Executive Officer, the Chief Financial Officer and the Chief Accounting Officer (the “Senior Financial Officers”), is required to be familiar with and comply with the Company’s disclosure controls and procedures and internal control over financial reporting, to the extent relevant to his or her area of responsibility, so that the Company’s public reports and documents filed with the SEC comply in all material respects with the applicable federal securities laws and SEC rules.  In addition, each such person having direct or supervisory authority regarding these SEC filings or the Company’s other public communications concerning its general business, results, financial condition and prospects should, to the extent appropriate within his or her area of responsibility, consult with other Company officers and employees and take other appropriate steps regarding these disclosures with the goal of making full, fair, accurate, timely and understandable disclosure.

Each director, officer or employee who is involved in the Company’s disclosure process, including without limitation the Senior Financial Officers, must:

•Familiarize himself or herself with the disclosure requirements applicable to the Company as well as the business and financial operations of the Company.

•Not knowingly misrepresent, or cause others to misrepresent, facts about the Company to others, whether within or outside the Company, including to the Company’s independent auditors, governmental regulators and self-regulatory organizations.

•Properly review and critically analyze proposed disclosure for accuracy and completeness (or, where appropriate, delegate this task to others).

2

IV.Compliance

It is the Company’s policy to comply with all applicable laws, rules and regulations.  It is the personal responsibility of each employee, officer and director to adhere to the standards and restrictions imposed by those laws, rules and regulations.

It is against Company policy and in many circumstances illegal for a director, officer or employee to profit from undisclosed information relating to the Company or any other company.  Any director, officer or employee may not purchase or sell any of the Company’s securities while in possession of material nonpublic information relating to the Company.  Also, any director, officer or employee may not purchase or sell securities of any other company while in possession of any material nonpublic information relating to that company.

Any director, officer or employee who is uncertain about the legal rules involving a purchase or sale of any Company securities or any securities in companies that he or she is familiar with by virtue of his or her work for the Company, should consult with the Code of Ethics Contact Person before making any such purchase or sale.

V.Reporting and Accountability

The Corporate Governance and Nominating Committee is responsible for applying this Code to specific situations in which questions are presented to it and has the authority to interpret this Code in any particular situation.  Any director, officer or employee who becomes aware of any existing or potential violation of this Code is required to notify the Code of Ethics Contact Person promptly.  Failure to do so is itself a violation of this Code.

Any questions relating to how this Code should be interpreted or applied should be addressed to the Code of Ethics Contact Person.  A director, officer or employee who is unsure of whether a situation violates this Code should discuss the situation with the Code of Ethics Contact Person to prevent possible misunderstandings and embarrassment at a later date.

Each director, officer or employee must:

•Notify the Code of Ethics Contact Person promptly of any existing or potential violation of this Code.

•Not retaliate against any other director, officer or employee for reports of potential violations that are made in good faith.

The Corporate Governance and Nominating Committee and the Code of Ethics Contact Person shall take all action they consider appropriate to investigate any violations reported to them.  If a violation has occurred, the Company will take such disciplinary or preventive action as it deems appropriate, after consultation with the Corporate Governance and Nominating Committee, in the case of a director or executive officer, or the Code of Ethics Contact Person, in the case of any other employee.

3

VI.Corporate Opportunities

Employees, officers and directors owe a duty to the Company to advance the Company’s business interests when the opportunity to do so arises.  Employees, officers and directors are prohibited from taking (or directing to a third party) a business opportunity that is discovered through the use of corporate property, information or position, unless the Company has already been offered the opportunity and turned it down.  More generally, employees, officers and directors are prohibited from using corporate property, information or position for personal gain and from competing with the Company.

Sometimes the line between personal and Company benefits is difficult to draw, and sometimes there are both personal and Company benefits in certain activities.  Employees, officers and directors who intend to make use of Company property or services in a manner not solely for the benefit of the Company should consult beforehand withthe Code of Ethics Contact Person.

VII.Confidentiality

In carrying out the Company’s business, employees, officers and directors often learn confidential or proprietary information about the Company, its clients, suppliers, or joint venture parties.  Employees, officers and directors must maintain the confidentiality of all information so entrusted to them, except when disclosure is authorized or legally mandated.  Confidential or proprietary information of our Company, and of other companies, includes any non-public information that would be harmful to the relevant company or useful or helpful to competitors if disclosed.

VIII.Fair Dealing

We have a history of succeeding through honest business competition.  We do not seek competitive advantages through illegal or unethical business practices.  Each employee, officer and director should endeavor to deal fairly with the Company’s clients, service providers, suppliers, competitors and employees.  No employee, officer or director should take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or any unfair dealing practice.

IX.Protection and Proper Use of Company Assets

All employees, officers and directors should protect the Company’s assets and ensure their efficient use.  All Company assets should be used only for legitimate business purposes.

4

EX-21.1

Exhibit 21.1

List of Subsidiaries of Morgans Hotel Group Co.

(as of February 17, 2006)

Subsidiary	Jurisdiction of Incorporation  or Organization
Morgans Hotel Group Co.	Delaware
Morgans Group LLC	Delaware
Morgans Hotel Group Management LLC	New York
MMRDH Parent Holding Company LLC	Delaware
MMRDH Junior Mezz Holding Company LLC	Delaware
MMRDH Intermediate Mezz Holding Company LLC	Delaware
MMRDH Senior Mezz Holding Company LLC	Delaware
Morgans Holdings LLC	Delaware
Morgans/Delano Pledgor LLC	Delaware
Madison Bar Company LLC	Delaware
SC Morgans/Delano LLC	Delaware
SC Madison LLC	Delaware
SC Collins LLC	Delaware
Beach Hotel Associates LLC	Delaware
Royalton Pledgor LLC	Delaware
43rd Restaurant LLC	Delaware
Royalton LLC	Delaware
Hudson Pledgor LLC	Delaware
SC 58th Street LLC	Delaware
58th Street Bar Company LLC	Delaware
Mondrian Pledgor LLC	Delaware
8440 LLC	Delaware
Sunset Restaurant LLC	Delaware
Mondrian Holdings LLC	Delaware
Henry Hudson Holdings LLC	Delaware
Hudson Leaseco LLC	New York
Hudson Managing Member LLC	Delaware
Shore Club Holdings LLC	Delaware
Philips South Beach LLC	Illinois
SC Restaurant LLC	Delaware
Clift Holdings LLC	Delaware
SC Geary LLC	Delaware
495 Geary LLC	Delaware
495 ABC License LLC	Delaware
Morgans/LV Investment LLC	Delaware
MHG Scottsdale Holdings LLC	Delaware
Collins Hotel Associates LLC	Delaware

EX-31.1

Exhibit 31.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO
17 CFR 240.13a-14(a)/15(d)-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, W. Edward Scheetz, President and Chief Executive Officer of Morgans Hotel Group Co., certify that:

1.      I have reviewed this annual report on Form 10-K of Morgans Hotel Group Co. for the fiscal year ended December 31, 2005;

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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

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

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

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

5.      The Registrant’s other certifying officers 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 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.

/s/ W. EDWARD SCHEETZ

W. Edward Scheetz

President and Chief Executive Officer

Date:  March 28, 2006

EX-31.2

Exhibit 31.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO
17 CFR 240.13a-14(a)/15(d)-14(a),
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Richard Szymanski, Chief Financial Officer of Morgans Hotel Group Co., certify that:

1.      I have reviewed this annual report on Form 10-K of Morgans Hotel Group Co. for the fiscal year ended December 31, 2005;

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 officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

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

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

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

5.      The Registrant’s other certifying officers 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 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.

/s/ RICHARD SZYMANSKI

Richard Szymanski

Chief Executive Officer

Date:  March 28, 2006

EX-32.1

Exhibit 32.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER PURSUANT TO
RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Morgans Hotel Group Co. (the “Company”) for the annual period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), W. Edward Scheetz, as Chief Executive Officer of the Company hereby certifies, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

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

2.      The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

/s/ W. EDWARD SCHEETZ

W. Edward Scheetz

Chief Executive Officer

Date:  March 28, 2006

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-32.2

Exhibit 32.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER PURSUANT TO
RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Morgans Hotel Group Co. (the “Company”) for the annual period ended December 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Richard Szymanski, as Chief Financial Officer of the Company hereby certifies, pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

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

2.      The information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of the Company.

/s/ RICHARD SZYMANSKI

Richard Szymanski

Chief Executive Officer

Date:  March 28, 2006

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.