10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

For the quarterly period ended: June 30, 2012

or

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

For the transition period from              to

Commission file number: 001-33738

Morgans Hotel Group Co.

(Exact name of registrant as specified in its charter)

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

212-277-4100

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

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

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

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of August 3, 2012 was 31,152,510.

TABLE OF CONTENTS

	Page
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MORGANS HOTEL GROUP CO. CONSOLIDATED BALANCE SHEETS AS OF JUNE 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011 (REVISED)		3
MORGANS HOTEL GROUP CO. UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS FOR THE PERIODS ENDED JUNE 30, 2012 AND 2011		4
MORGANS HOTEL GROUP CO. UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE PERIODS ENDED JUNE 30, 2012 AND 2011		5
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS		7
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		39
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		68
ITEM 4. CONTROLS AND PROCEDURES		69
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS		70
ITEM 1A. RISK FACTORS		70
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		70
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		70
ITEM 4. MINE SAFETY DISCLOSURE		70
ITEM 5. OTHER INFORMATION		70
ITEM 6. EXHIBITS		70

1

FORWARD LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for “forward-looking statements” made by or on behalf of a company. We may from time to time make written or oral statements that are “forward-looking,” including statements contained in this report and other filings with the Securities and Exchange Commission and in reports to our stockholders. These forward-looking statements 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 materially from those expressed in any forward-looking statement. 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. 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 risks discussed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and other documents filed by the Company with the Securities and Exchange Commission from time to time; 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, volcanoes and hurricanes; risks associated with the acquisition, development and integration of properties; 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; the impact of any material litigation; the loss of key members of our senior management; 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.

We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results.

2

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Morgans Hotel Group Co.

Consolidated Balance Sheets

(in thousands, except per share data)

	June 30, 2012			December 31, 2011
	(unaudited)			(revised)
ASSETS
Property and equipment, net	$	301,399		$	289,169
Goodwill		66,572			66,572
Investments in and advances to unconsolidated joint ventures		13,009			10,201
Cash and cash equivalents		8,248			28,855
Restricted cash		6,149			9,938
Accounts receivable, net		12,319			10,827
Related party receivables		5,946			4,142
Prepaid expenses and other assets		6,876			5,293
Deferred tax asset, net		78,779			78,778
Other assets, net		46,567			51,669
Total assets	$	545,864		$	555,444
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Debt and capital lease obligations	$	463,385		$	439,905
Accounts payable and accrued liabilities		33,750			36,576
Deferred gain on asset sales		144,644			148,760
Other liabilities		14,153			14,394
Total liabilities		655,932			639,635
Redeemable noncontrolling interest		6,123			5,448
Commitments and contingencies
Preferred stock, $.01 par value; liquidation preference $1,000 per share, 75,000 shares authorized and issued at June 30, 2012 and December 31, 2011, respectively		55,851			54,143
Common stock, $.01 par value; 200,000,000 shares authorized; 36,277,495 shares issued at June 30, 2012 and December 31, 2011, respectively		363			363
Additional paid-in capital		282,696			286,914
Treasury stock, at cost, 5,124,985 and 5,487,289 shares of common stock at June 30, 2012 and December 31, 2011, respectively		(78,319	)		(84,543	)
Accumulated comprehensive loss		(44	)		(38	)
Accumulated deficit		(383,683	)		(354,302	)
Total Morgans Hotel Group Co. stockholders’ deficit		(123,136	)		(97,463	)
Noncontrolling interest		6,945			7,824
Total deficit		(116,191	)		(89,639	)
Total liabilities, redeemable noncontrolling interest and stockholders’ deficit	$	545,864		$	555,444

See accompanying notes to these consolidated financial statements.

3

Morgans Hotel Group Co.

Consolidated Statements of Comprehensive Loss

(in thousands, except per share data)

(unaudited)

	Three Months Ended June  30, 2012			Three Months Ended June  30, 2011			Six Months Ended June  30, 2012			Six Months Ended June  30, 2011
Revenues:
Rooms	$	25,743		$	33,485		$	46,619		$	64,519
Food and beverage		14,277			15,611			29,376			33,641
Other hotel		1,198			1,733			2,459			3,749
Total hotel revenues		41,218			50,829			78,454			101,909
Management fee-related parties and other income		6,573			3,380			12,632			6,704
Total revenues		47,791			54,209			91,086			108,613
Operating Costs and Expenses:
Rooms		7,772			9,685			15,438			20,859
Food and beverage		11,865			13,135			24,595			28,237
Other departmental		919			1,036			1,826			2,247
Hotel selling, general and administrative		9,300			10,792			18,786			23,350
Property taxes, insurance and other		3,613			3,704			7,566			7,889
Total hotel operating expenses		33,469			38,352			68,211			82,582
Corporate expenses, including stock compensation of $1.6 million, $2.0 million, $2.6 million, and $6.0 million, respectively		8,951			8,049			16,627			18,883
Depreciation and amortization		5,897			4,199			11,610			12,572
Restructuring, development and disposal costs		2,037			3,800			4,244			8,393
Total operating costs and expenses		50,354			54,400			100,692			122,430
Operating loss		(2,563	)		(191	)		(9,606	)		(13,817	)
Interest expense, net		8,203			10,014			16,004			19,008
Equity in loss of unconsolidated joint ventures		2,706			910			3,616			10,393
Gain on asset sales		(1,995	)		(620	)		(3,991	)		(620	)
Other non-operating expenses		1,919			879			2,462			2,269
Loss before income tax expense		(13,396	)		(11,374	)		(27,697	)		(44,867	)
Income tax expense		121			428			314			293
Net loss from continuing operations		(13,517	)		(11,802	)		(28,011	)		(45,160	)
(Loss) income from discontinued operations, net of taxes		—			(5	)		—			485
Net loss		(13,517	)		(11,807	)		(28,011	)		(44,675	)
Net loss attributable to noncontrolling interest		124			383			337			1,208
Net loss attributable to Morgans Hotel Group		(13,393	)		(11,424	)		(27,674	)		(43,467	)
Preferred stock dividends and accretion		2,718			2,229			5,368			4,416
Net loss attributable to common stockholders		(16,111	)		(13,653	)		(33,042	)		(47,883	)
Other comprehensive loss: Unrealized (loss) gain on valuation of swap/cap agreements, net of tax		(1	)		5			(5	)		5
Share of unrealized (loss) gain on valuation of swap agreements from unconsolidated joint venture, net of tax		—			(845	)		—			1,021
Foreign currency translation loss, net of tax		—			(3	)		—			(109	)
Comprehensive loss	$	(16,112	)	$	(14,496	)	$	(33,047	)	$	(46,966	)
(Loss) income per share:
Basic and diluted continuing operations	$	(0.52	)	$	(0.45	)	$	(1.06	)	$	(1.55	)
Basic and diluted discontinued operations	$	0.00		$	0.00		$	0.00		$	0.02
Basic and diluted attributable to common stockholders	$	(0.52	)	$	(0.45	)	$	(1.06	)	$	(1.53	)
Weighted average number of common shares outstanding:
Basic and diluted		31,261			30,498			31,185			31,255

See accompanying notes to these consolidated financial statements.

4

Morgans Hotel Group Co.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(28,011	)	$	(44,675	)
Adjustments to reconcile net loss to net cash used in operating activities (including discontinued operations):
Depreciation		8,438			11,198
Amortization of other costs		3,172			1,374
Amortization of deferred financing costs		1,936			5.974
Amortization of discount on convertible notes		1,138			1,138
Amortization of deferred gain on asset sales		(3,991	)		(620	)
Stock-based compensation		2,627			6,018
Accretion of interest on capital lease obligation		1,049			956
Equity in losses from unconsolidated joint ventures		3,616			10,393
Impairment loss and loss on disposal of assets		102			1,040
Change in fair value of TLG promissory notes		1,310			—
Change in value of interest rate caps and swaps, net		—			10
Changes in assets and liabilities:
Accounts receivable, net		(1,492	)		1,507
Related party receivables		(1,804	)		(1,555	)
Restricted cash		2,211			5,637
Prepaid expenses and other assets		(1,583	)		637
Accounts payable and accrued liabilities		(2,945	)		(3,267	)
Discontinued operations		—			(843	)
Net cash used in operating activities		(14,228	)		(5,078	)
Cash flows from investing activities:
Additions to property and equipment		(20,774	)		(2,891	)
Withdrawals (deposits) to capital improvement escrows, net		1,578			556
Distributions from unconsolidated joint ventures		4			1,619
Proceeds from asset sales, net		0			268,147
Purchase of interest in food and beverage joint ventures, net of cash		0			(19,294	)
Investments in and settlement related to unconsolidated joint ventures		(6,428	)		(7,559	)
Net cash used in investing activities		(25,620	)		240,578
Cash flows from financing activities:
Proceeds from debt		20,000			63,992
Payments on debt and capital lease obligations		(17	)		(193,496	)
Debt issuance costs		(16	)		(428	)
Cash paid in connection with vesting of stock based awards		(236	)		(398	)
Distributions to holders of noncontrolling interests in consolidated subsidiaries		(490	)		(827	)
Net cash provided by (used in) financing activities		19,241			(131,157	)
Net (decrease) increase in cash and cash equivalents		(20,607	)		104,343
Cash and cash equivalents, beginning of period		28,855			5,250
Cash and cash equivalents, end of period	$	8,248		$	109,593
Supplemental disclosure of cash flow information:
Cash paid for interest	$	12,649		$	12,275

5

	Six Months Ended June 30,
	2012		2011
Cash paid for taxes	$	643	$	149
Acquisition of interest in unconsolidated joint ventures:
Furniture, fixture and equipment	$	—	$	(706	)
Other assets and liabilities, net		—		2,999
Distributions and losses in excess of investment in unconsolidated joint ventures		—		(1,587	)
Cash included in purchase of interest in food and beverage joint ventures	$	—	$	706

See accompanying notes to these consolidated financial statements.

6

Morgans Hotel Group Co.

Notes to Consolidated Financial Statements

(unaudited)

1. Organization and Formation Transaction

Morgans Hotel Group Co. (the “Company”) was incorporated on October 19, 2005 as a Delaware corporation to complete an initial public offering that was part of the formation and structuring transactions described below. The Company operates, owns, acquires and redevelops boutique hotels primarily in gateway cities and select resort markets in the United States, Europe and other international locations, and nightclubs, restaurants, bars and other food and beverage venues in many of the hotels it operates, as well as in hotels and casinos operated by MGM Resorts International (“MGM”) in Las Vegas.

The Morgans Hotel Group Co. predecessor comprised the subsidiaries and ownership interests that were contributed as part of the formation and structuring transactions from Morgans Hotel Group LLC, now known as Residual Hotel Interest LLC (“Former Parent”), to Morgans Group LLC (“Morgans Group”), the Company’s operating company. At the time of the formation and structuring transactions, the Former Parent was owned approximately 85% by NorthStar Hospitality, LLC, a subsidiary of NorthStar Capital Investment Corp., and approximately 15% by RSA Associates, L.P.

In connection with the Company’s initial public offering, the Former Parent contributed the subsidiaries and ownership interests in nine operating hotels in the United States and the United Kingdom to Morgans Group in exchange for membership units. Simultaneously, Morgans Group issued additional membership units to the Morgans Hotel Group Co. predecessor in exchange for cash raised by the Company from the initial public offering. The Former Parent also contributed all the membership interests in its hotel management business to Morgans Group in return for 1,000,000 membership units in Morgans Group exchangeable for shares of the Company’s common stock. The Company is the managing member of Morgans Group and has full management control. On April 24, 2008, 45,935 outstanding membership units in Morgans Group were exchanged for 45,935 shares of the Company’s common stock. As of June 30, 2012, 954,065 membership units in Morgans Group remain outstanding.

On February 17, 2006, the Company completed its initial public offering. The Company issued 15,000,000 shares of common stock at $20 per share resulting in net proceeds of approximately $272.5 million, after underwriters’ discounts and offering expenses.

The Company has one reportable operating segment; it operates, owns, acquires, develops and redevelops boutique hotels, nightclubs, restaurants, bars and other food and beverage venues in many of the hotels it operates, as well as in hotels and casinos operated by MGM in Las Vegas.

Operating Hotels

The Company’s operating hotels as of June 30, 2012 are as follows:

Hotel Name	Location	Number of Rooms		Ownership
Hudson	New York, NY		834		(1	)
Morgans	New York, NY		114		(2	)
Royalton	New York, NY		168		(2	)
Mondrian SoHo	New York, NY		263		(3	)
Delano South Beach	Miami Beach, FL		194		(4	)
Mondrian South Beach	Miami Beach, FL		328		(5	)
Shore Club	Miami Beach, FL		309		(6	)
Mondrian Los Angeles	Los Angeles, CA		237		(7	)
Clift	San Francisco, CA		372		(8	)
Ames	Boston, MA		114		(9	)
Sanderson	London, England		150		(10	)
St Martins Lane	London, England		204		(10	)
Hotel Las Palapas	Playa del Carmen, Mexico		75		(11	)

7

(1) The Company owns 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.

(2) Operated under a management contract; wholly-owned until May 23, 2011, when the hotel was sold to a third-party.

(3) Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority ownership interest of approximately 20% at June 30, 2012 based on cash contributions. See note 4.

(4) Wholly-owned hotel.

(5) Operated as a condominium hotel under a management contract and owned through a 50/50 unconsolidated joint venture. As of June 30, 2012, 196 hotel residences have been sold, of which 89 are in the hotel rental pool. See note 4.

(6) Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority ownership interest of approximately 7% as of June 30, 2012. See note 4.

(7) Operated under a management contract; wholly-owned until May 3, 2011, when the hotel was sold to a third-party.

(8) The hotel is operated under a long-term lease which is accounted for as a financing. See note 6.

(9) Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority interest ownership of approximately 31% at June 30, 2012 based on cash contributions. See note 4.

(10) Operated under a management contract; owned through a 50/50 unconsolidated joint venture until November 2011, when the Company sold its equity interests in the joint venture to a third-party. See note 4.

(11) Operated under a management contract.

Restaurant Joint Venture

Prior to June 20, 2011, the food and beverage operations of certain of the hotels were operated under 50/50 joint ventures with a third party restaurant operator, China Grill Management Inc. (“CGM”). The joint ventures operated, and CGM managed, certain restaurants and bars at Delano South Beach, Mondrian Los Angeles, Mondrian South Beach, Morgans, Sanderson and St Martins Lane. The food and beverage joint ventures at hotels the Company owned were determined to be variable interest entities and the Company believed that it was the primary beneficiary of these entities. Therefore, the Company consolidated the operating results of these joint ventures into its consolidated financial statements. The Company’s partner’s share of the results of operations of these food and beverage joint ventures were recorded as noncontrolling interests in the accompanying consolidated financial statements. The food and beverage joint ventures at hotels in which the Company had a joint venture ownership interest were accounted for using the equity method, as the Company did not believe it exercised control over significant asset decisions such as buying, selling or financing, and the Company was not the primary beneficiary of the entities.

On June 20, 2011, pursuant to an omnibus agreement, subsidiaries of the Company acquired from affiliates of CGM the 50% interests CGM owned in the Company’s food and beverage joint ventures for approximately $20 million (the “CGM Transaction”). CGM has agreed to continue to manage the food and beverage operations at these properties for a transitional period pursuant to short-term cancellable management agreements while the Company reassesses its food and beverage strategy.

As a result of the CGM Transaction, the Company owns 100% of the former food and beverage joint venture entities located at Delano South Beach, Sanderson and St Martins Lane, all of which are consolidated in the Company’s consolidated financial statements. Prior to the completion of the CGM Transaction, the Company accounted for the food and beverage entities located at Sanderson and St Martins Lane using the equity method of accounting. See note 4.

8

Following the CGM Transaction, the Company owned 100% of the former food and beverage venue at Morgans, which consisted of a restaurant. In October 2011, the restaurant at Morgans was closed and is currently undergoing a renovation and re-concepting to create a lounge and restaurant expected to open in late 2012. Effective February 1, 2012, the Company transferred its ownership interest in Morgans food and beverage operations to the hotel owner by terminating the operating lease for the restaurant space.

The Company’s ownership interests in the remaining two of these food and beverage ventures covered by the CGM Transaction, relating to the food and beverage operations at Mondrian Los Angeles and Mondrian South Beach, was less than 100%, and were reevaluated in accordance with Accounting Standard Codification (“ASC”) 810-10, Consolidation (“ASC 810-10”). The Company concluded that these two ventures did not meet the requirements of a variable interest entity and accordingly, these investments in joint ventures were accounted for using the equity method, as the Company does not believe it exercises control over significant asset decisions such as buying, selling or financing. See note 4. Prior to the completion of the CGM Transaction, the Company consolidated the Mondrian Los Angeles food and beverage entity, as it was the primary beneficiary of the venture.

On August 5, 2011, an affiliate of Pebblebrook Hotel Trust (“Pebblebrook”), the company that purchased Mondrian Los Angeles in May 2011 (as discussed in note 11), exercised its option to purchase the Company’s remaining ownership interest in the food and beverage operations at Mondrian Los Angeles for approximately $2.5 million. As a result of Pebblebrook’s exercise of this purchase option, the Company no longer has any ownership interest in the food and beverage operations at Mondrian Los Angeles.

The Light Group Acquisition

On November 30, 2011 pursuant to purchase agreements entered into on November 17, 2011, certain of the Company’s subsidiaries completed the acquisition of 90% of the equity interests in a group of companies known as The Light Group (“TLG”), which develops, redevelops and operates nightclubs, restaurants, bars and other food and beverage venues, for a purchase price of $28.5 million in cash and up to $18.0 million in notes (the “TLG Promissory Notes”) convertible into shares of the Company’s common stock at $9.50 per share subject to the achievement of certain EBITDA (earnings before interest, tax, depreciation and amortization) targets for the acquired business (“The Light Group Transaction”), as discussed in note 6.

During the quarter ended June 30, 2012, the Company finalized the valuation study performed for the acquisition of TLG. As of December 31, 2011, and for the three months ended March 31, 2012, the Company incorporated preliminary allocations into its financial statements, which have been revised as a result of the valuation study.

The following table summarizes the estimated fair value of consideration paid for TLG and the allocation of purchase price to the fair value of the assets acquired and liabilities assumed, based on the results of the valuation study, at the date of acquisition (in thousands):

Purchase price consideration
Cash	$	28,500
Liabilities incurred
$18.0 million promissory notes, at face value		18,000
Total consideration	$	46,500
Purchase price allocation
Current assets	$	3,739
Management contracts		35,740
Goodwill		12,515
Other intangible assets		520
Total assets acquired	$	52,514
Current liabilities		(3,059	)
Liability arising from contingent consideration (promissory notes)		(15,510	)
Redeemable noncontrolling interest liability (discussed below)		(5,448	)
Total liabilities assumed	$	(24,017	)
Net assets acquired, at fair value	$	28,497

9

The valuation study concluded that the fair value of the up to $18.0 million TLG Promissory Notes, which are considered contingent consideration and convertible into shares of the Company’s common stock at $9.50 per share subject to certain EBITDA hurdles and discussed in note 6, on the date of issuance was estimated at approximately $15.5 million.

Adjustments to the initial allocation of purchase price during the measurement period requires the revision of comparative prior period financial information when reissued in subsequent financial statements. The effect of measurement period adjustments to the allocation of purchase price would be as if the adjustments had been taken into account on the date of acquisition. The impact of the final purchase price allocation on the Company’s previously filed consolidated statement of comprehensive loss was immaterial. The impact of the final purchase price allocation on the Company’s previously filed consolidated balance sheet is as follows (in thousands):

	December 31, 2011
Consolidated Balance Sheet	As  Originally Reported		As Adjusted		Effect of Change
Goodwill	$	69,105	$	66,572	$	(2,533	)
Other assets, net		51,348		51,669		321
Debt and capital lease obligations		442,395		439,905		(2,490	)
Redeemable noncontrolling interest liability		5,170		5,448		278

TLG Acquisition Purchase Agreement. As part of The Light Group Transaction, Morgans Group, TLG Acquisition LLC (“TLG Acquisition”), the Company’s newly-formed subsidiary, Sasson Masi F&B Holdings, LLC, Sasson Masi Nightlife Holdings, LLC, Andrew Sasson and Andy Masi entered into a Master Purchase Agreement (the “Sasson/Masi Purchase Agreement”), pursuant to which TLG Acquisition agreed to purchase 100% of the equity interest in The Light Group LLC, 50% of the equity interest in HHH Holdings LLC, and 50% of the equity interest in DDD Holdings, LLC. In addition, Morgans Group, TLG Acquisition, Zabeel Investments (L.L.C.) and Zabeel Investments Inc. entered into a separate Securities Purchase Agreement (the “Zabeel Purchase Agreement”), pursuant to which TLG Acquisition agreed to purchase the remaining 50% of the equity interest in HHH Holdings, LLC and DDD Holdings, LLC. The aggregate purchase price consists of the following: (i) $20 million in cash to Zabeel Investments (L.L.C.) and Zabeel Investments Inc., (ii) $5.5 million in cash to Mr. Sasson and $3.0 million in cash to Mr. Masi, in each case, subject to customary working capital adjustments, (iii) the issuance of 10% of the equity interests in TLG Acquisition, with 5% to Mr. Sasson and 5% to Mr. Masi, (iv) promissory notes convertible into shares of our common stock for up to $18.0 million in potential payments, allocated $16.0 million to Mr. Sasson and $2.0 million to Mr. Masi, and (v) an annual interest payment of 8% (increasing to 18% after the third anniversary of the closing date, as described below) on the promissory notes.

The Sasson/Masi Purchase Agreement provides for the seller parties, jointly and severally, and the buyer parties to provide customary indemnifications to the other parties for breaches of representations, warranties and other covenants, subject to a $5 million cap.

TLG Acquisition Operating Agreement. Concurrent with the closing of The Light Group Transaction, the TLG Acquisition operating agreement was amended and restated to provide that Morgans Group, which holds 90% of the membership interests in TLG Acquisition, is the managing member and that Messrs. Sasson and Masi, each of whom holds a 5% membership interest in TLG Acquisition, are non-managing members of TLG Acquisition. Messrs. Sasson and Masi, however, will have approval rights over, among other things, certain fundamental transactions involving TLG Acquisition and, for so long as the promissory notes remain outstanding, annual budgets, amendments or terminations of management agreements and other actions that would materially and adversely affect the likelihood that TLG Acquisition would achieve $18 million in Non-Morgans EBITDA during the applicable measurement period.

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Each of Messrs. Sasson and Masi received the right to require Morgans Group to purchase his equity interest in TLG at any time after the third anniversary of the closing date at a purchase price equal to his percentage equity ownership interest multiplied by the product of seven times the Non-Morgans EBITDA for the preceding 12 months, subject to certain adjustments (the “Sasson-Masi Put Options”). In addition, Morgans Group will have the right to require each of Messrs. Sasson and Masi to sell his 5% equity interest in TLG at any time after the sixth anniversary of the closing date at a purchase price equal to his percentage equity ownership interest multiplied by the product of seven times the Non-Morgans EBITDA for the preceding 12 months, subject to certain adjustments. The Company initially accounted for the redeemable noncontrolling interest at fair value in accordance with ASC 805, Business Combinations. Due to the redemption feature associated with the Sasson-Masi Put Options, the Company classified the noncontrolling interest in temporary equity in accordance with the Securities and Exchange Commission’s guidance as codified in ASC 480-10, Distinguishing Liabilities from Equity. Subsequently, the Company will accrete the redeemable noncontrolling interest to its current redemption value, which approximates fair value, each period. The change in the redemption value does not impact the Company’s earnings or earnings per share. The Company recorded an obligation of $6.1 million related to the Sasson-Masi Put Options, which is recorded as redeemable noncontrolling interest on the June 30, 2012 consolidated balance sheet.

Supplemental Information for TLG Acquisition. The operating results of TLG have been included in the Company’s consolidated financial statements as of the date of acquisition. The following table presents the results of TLG on a stand-alone basis (in thousands):

	TLG Operating Results Included in the Company’s Results for  the Three Months Ended June 30, 2012		TLG Operating Results Included in the Company’s Results for  the Six Months Ended June 30, 2012
Revenues	$	3,250	$	6,017
Income from continuing operations	$	3,003	$	5,457

The following table presents the Company’s unaudited revenues and loss from continuing operations on a pro forma basis (in thousands) as if it had completed the TLG Acquisition as of January 1, 2011:

	Three Months Ended June 30, 2011			Six Months Ended June 30, 2011
Total revenues, as reported by the Company	$	54,209		$	108,613
Plus: TLG total revenues		2,464			4,379
Pro forma total revenues	$	56,673		$	112,992
Total loss from continuing operations, as reported by the Company	$	(11,802	)	$	(45,160	)
Plus: TLG income from continuing operations		2,171			3,965
Pro forma loss from continuing operations	$	(9,631	)	$	(41,195	)

The above unaudited pro forma income (loss) from continuing operations for the three and six months ended June 30, 2011 excludes $1.2 million of transaction costs to acquire TLG as well as the noncontrolling interest adjustment, which would be presented on the Company’s financial statements, for the 10% ownership interest in TLG that the Company did not acquire.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company consolidates all wholly-owned subsidiaries and variable interest entities in which the Company is determined to be the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. Entities which the Company does not control through voting interest and entities which are variable interest entities, of which the Company is not the primary beneficiary, are accounted for under the equity method, if the Company can exercise significant influence.

The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished in the accompanying consolidated financial statements reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods.

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The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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.

Business Combinations

The Company recognizes identifiable assets acquired, liabilities (both specific and contingent) assumed, and non-controlling interests in a business combination at their fair values at the acquisition date based on the exit price (i.e. the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date). Furthermore, acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the acquired assets. In certain situations, a deferred tax liability is created due to the difference between the fair value and the tax basis of the acquired asset at the acquisition date, which also may result in a goodwill asset being recorded.

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 ASC 810-10, 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. For investments in which there is recourse or unfunded commitments to provide additional equity, distributions and losses in excess of the investment are recorded as a liability.

Other Assets

Other assets consist primarily of the fair value of the TLG management contracts, as discussed further in note 1. TLG operates numerous nightclubs, restaurants and bar venues in Las Vegas pursuant to management agreements with MGM. The management contract assets are being amortized, using the straight line method, over the expected life of each applicable management contract.

Additionally, other assets consists of deferred financing costs and fair value of the management contracts in the food and beverage venues at Sanderson and St Martins Lane, which the Company acquired from its restaurant joint venture partner, as discussed further in note 1. The Sanderson and St Martins Lane food and beverage management contract are being amortized, using the straight line method, over the expected life of the contracts.

Deferred financing costs included in other assets are being amortized, using the straight line method, which approximates the effective interest rate method, over the terms of the related debt agreements.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of assets and liabilities and for loss and credit carry forwards. Valuation allowances are provided when it is more likely than not that the recovery of deferred tax assets will not be realized.

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The Company’s deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Decreases to the valuation allowance are recorded as reductions to the Company’s provision for income taxes and increases to the valuation allowance result in additional provision for income taxes. The realization of the Company’s deferred tax assets, net of the valuation allowance, is primarily dependent on estimated future taxable income. A change in the Company’s estimate of future taxable income may require an addition to or reduction from the valuation allowance. The Company has established a reserve on its deferred tax assets based on anticipated future taxable income and tax strategies which may include the sale of property or an interest therein.

All of the Company’s foreign subsidiaries are subject to local jurisdiction corporate income taxes. Income tax expense is reported at the applicable rate for the periods presented.

Income taxes for the three and six months ended June 30, 2012 and 2011 were computed using the Company’s effective tax rate.

Credit-risk-related Contingent Features

The Company has entered into agreements with each of its derivative counterparties in connection with the interest rate caps and hedging instruments related to the Convertible Notes, as defined and discussed in note 6, providing that in the event the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

The Company has entered into warrant agreements with Yucaipa, as discussed in note 8, providing Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P. (collectively, the “Investors”) with consent rights over certain transactions for so long as they collectively own or have the right to purchase through the exercise of the Yucaipa Warrants (as defined in note 8) 6,250,000 shares of the Company’s common stock.

Fair Value Measurements

ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820-10 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

ASC 820-10 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820-10 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

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Currently, the Company uses interest rate caps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of ASC 820-10, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its current outstanding derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivative utilizes Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2012, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and determined that the credit valuation adjustments are not significant to the overall valuation of its derivative. Accordingly, the derivative has been classified as Level 2 fair value measurements.

In connection with its Outperformance Award Program, as discussed in note 7, the Company issued OPP LTIP Units (as defined in note 7) which were initially fair valued on the date of grant, and at each reporting period, utilizing a Monte Carlo simulation to estimate the probability of the performance vesting conditions being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times. As the Company has the ability to settle the vested OPP LTIP Units with cash, these awards are not considered to be indexed to the Company’s stock price and must be accounted for as liabilities at fair value.

Although the Company has determined that the majority of the inputs used to value the OPP LTIP Units fall within Level 1 of the fair value hierarchy, the Monte Carlo simulation model utilizes Level 3 inputs, such as estimates of the Company’s volatility. Accordingly, the OPP LTIP Unit liability was classified as a Level 3 fair value measure.

In connection with the Light Group Transaction, the Company issued the TLG Promissory Notes, which are convertible into shares of the Company’s common stock at $9.50 per share and are subject to the achievement of certain EBITDA targets for the acquired business, discussed in note 6. The TLG Promissory Notes were initially fair valued on the date of acquisition, and will be fair valued at each reporting period, utilizing a Monte Carlo simulation to estimate the probability of the achievement of certain EBITDA targets being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times.

Although the Company has determined that the majority of the inputs used to value the TLG Promissory Notes fall within Level 1 of the fair value hierarchy, the Monte Carlo simulation model utilizes Level 3 inputs, such as estimates of the Company’s volatility. Accordingly, the TLG Promissory Notes liability was classified as a Level 3 fair value measure.

Also in connection with The Light Group Transaction, the Company provided Messrs. Sasson and Masi with the Sasson-Masi Put Options. Due to the redemption feature associated with the Sasson-Masi Put Options, the Company classified the noncontrolling interest in temporary equity in accordance with the Securities and Exchange Commission’s guidance as codified in ASC 480-10, Distinguishing Liabilities from Equity. Subsequently, the Company will accrete the redeemable noncontrolling interest to its current redemption value, which approximates fair value, each period. The Company has determined that the majority of the inputs used to value the Sasson-Masi Put Options fall within Level 2 of the fair value hierarchy. Accordingly, the derivative has been classified as Level 2 fair value measurements.

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During the three months ended June 30, 2012 and June 30, 2011, the Company recognized non-cash impairment charges of $0.1 million and $0.5 million, respectively, related to the Company’s investment in Mondrian SoHo, through equity in loss of unconsolidated joint ventures. During the six months ended June 30, 2012 and June 30, 2011, the Company recognized non-cash impairment charges of $0.6 million and $2.5 million, respectively, related to the Company’s investment in Mondrian SoHo, through equity in loss of unconsolidated joint ventures. The Company’s estimated fair value relating to this impairment assessment was based primarily upon Level 3 measurements.

Fair Value of Financial Instruments

Disclosures about fair value of financial instruments are based on pertinent information available to management as of the valuation date. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold, or settled. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued liabilities, and fixed and variable rate debt. Management believes the carrying amount of the aforementioned financial instruments, excluding fixed-rate debt, is a reasonable estimate of fair value as of June 30, 2012 and December 31, 2011 due to the short-term maturity of these items or variable market interest rates.

The fair market value of the Company’s $239.4 million of fixed rate debt, which includes the Company’s trust preferred securities, TLG Promissory Notes at fair value, and Convertible Notes at face value, as discussed in note 6, as of June 30, 2012 was approximately $230.8 million, using market rates. The fair market value of the Company’s $238.1 million of fixed rate debt, which includes the Company’s trust preferred securities, TLG Promissory Notes at fair value, and Convertible Notes at face value, as discussed in note 6, as of December 30, 2011 was $229.8 million, using market interest rates.

Stock-based Compensation

The Company accounts for stock based employee compensation using the fair value method of accounting described in ASC 718-10. For share grants, total compensation expense is based on the price of the Company’s stock at the grant date. For option grants, the total compensation expense is based on the estimated fair value using the Black-Scholes option-pricing model. For awards under the Company’s Outperformance Award Program, discussed in note 7, long-term incentive awards, the total compensation expense is based on the estimated fair value using the Monte Carlo pricing model. Compensation expense is recorded ratably over the vesting period. Stock compensation expense recognized for the three months ended June 30, 2012 and 2011 was $1.6 million and $2.0 million, respectively. Stock compensation expense recognized for the six months ended June 30, 2012 and 2011 was $2.6 million and $6.0 million, respectively.

Income (Loss) Per Share

Basic net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less any dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period, plus other potentially dilutive securities, such as unvested shares of restricted common stock and warrants.

Noncontrolling Interest

The Company follows ASC 810-10, when accounting and reporting for noncontrolling interests in a consolidated subsidiary and the deconsolidation of a subsidiary. Under ASC 810-10, the Company reports noncontrolling interests in subsidiaries as a separate component of stockholders’ equity (deficit) in the consolidated financial statements and reflects net income (loss) attributable to the noncontrolling interests and net income (loss) attributable to the common stockholders on the face of the consolidated statements of comprehensive loss.

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The membership units in Morgans Group, the Company’s operating company, owned by the Former Parent are presented as noncontrolling interest in Morgans Group in the consolidated balance sheets and were approximately $6.9 million and $7.8 million as of June 30, 2012 and December 31, 2011, respectively. The noncontrolling interest in Morgans Group is: (i) increased or decreased by the limited members’ pro rata share of Morgans Group’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by exchanges of membership units for the Company’s common stock; and (iv) adjusted to equal the net equity of Morgans Group multiplied by the limited members’ ownership percentage immediately after each issuance of units of Morgans Group and/or shares of the Company’s common stock and after each purchase of treasury stock through an adjustment to additional paid-in capital. Net income or net loss allocated to the noncontrolling interest in Morgans Group is based on the weighted-average percentage ownership throughout the period.

Recent Accounting Pronouncements

Accounting Standards Update No. 2011-04—“Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”) generally provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will be effective for interim and annual periods beginning on or after December 15, 2011. The Company adopted ASU 2011-04, which did not have a material impact on its financial statements.

Accounting Standards Update No. 2011-05—“Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”) amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. ASU 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-05 for the year ended December 31, 2011, and as such, its financial statements provide the appropriate disclosure.

Accounting Standards Update No. 2011-10—Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force) (“ASU 2011-10”) clarifies when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance for Real Estate Sale (Subtopic 360-20). The provisions of ASU 2011-10 are effective for public companies for fiscal years and interim periods within those years, beginning on or after June 15, 2012. When adopted, ASU 2011-10 is not expected to have a material impact on the Company’s consolidated financial statements.

Accounting Standards Update No. 2011-12—Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05 (“ASU No. 2011-12”) defers, until further notice, ASU 2011-05’s requirement that items that are reclassified from other comprehensive income to net income be presented on the face of the financial statements. The Company has adopted ASU 2011-12 and adoption of this update did not have a material impact on its financial statements.

3. Income (Loss) Per Share

The Company applies the two-class method as required by ASC 260-10, Earnings per Share (“ASC 260-10”). ASC 260-10 requires the net income per share for each class of stock (common stock and preferred stock) to be calculated assuming 100% of the Company’s net income is distributed as dividends to each class of stock based on their contractual rights. To the extent the Company has undistributed earnings in any calendar quarter, the Company will follow the two-class method of computing earnings per share.

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Basic earnings (loss) per share is calculated based on the weighted average number of common stock outstanding during the period. Diluted earnings (loss) per share include the effect of potential shares outstanding, including dilutive securities. Potential dilutive securities may include shares and options granted under the Company’s stock incentive plan and membership units in Morgans Group, which may be exchanged for shares of the Company’s common stock under certain circumstances. The 954,065 Morgans Group membership units (which may be converted to cash, or at the Company’s option, common stock) held by third parties at June 30, 2012, the Yucaipa Warrants issued to the Investors, unvested restricted stock units, LTIP Units, stock options, OPP LTIP Units and shares issuable upon conversion of outstanding Convertible Notes have been excluded from the diluted net income (loss) per common share calculation, as there would be no effect on reported diluted net income (loss) per common share.

The table below details the components of the basic and diluted loss per share calculations (in thousands, except for per share data):

	Three Months Ended June 30, 2012			Three Months Ended June 30, 2011
Numerator:
Net loss from continuing operations	$	(13,517	)	$	(11,802	)
Net loss from discontinued operations, net of tax		—			(5	)
Net loss		(13,517	)		(11,807	)
Net loss attributable to noncontrolling interest		124			383
Net loss attributable to Morgans Hotel Group Co.		(13,393	)		(11.424	)
Less: preferred stock dividends and accretion		2,718			2,229
Net loss attributable to common stockholders	$	(16,111	)	$	(13,653	)
Denominator, continuing and discontinued operations:
Weighted average basic common shares outstanding		31,261			30,498
Effect of dilutive securities		—			—
Weighted average diluted common shares outstanding		31,261			30,498
Basic and diluted loss from continuing operations per share	$	(0.52	)	$	(0.45	)
Basic and diluted income from discontinued operations per share	$	—		$	0.00
Basic and diluted loss available to common stockholders per common share	$	(0.52	)	$	(0.45	)

	Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
Numerator:
Net loss from continuing operations	$	(28,011	)	$	(45,160	)
Net income from discontinued operations, net of tax		—			485
Net loss		(28,011	)		(44,675	)
Net loss attributable to noncontrolling interest		337			1,208
Net loss attributable to Morgans Hotel Group Co.		(27,674	)		(43,467	)
Less: preferred stock dividends and accretion		5,368			4,416
Net loss attributable to common stockholders	$	(33,042	)	$	(47,883	)
Denominator, continuing and discontinued operations:
Weighted average basic common shares outstanding		31,185			31,255
Effect of dilutive securities		—			—
Weighted average diluted common shares outstanding		31,185			31,255
Basic and diluted loss from continuing operations per share	$	(1.06	)	$	(1.55	)
Basic and diluted income from discontinued operations per share	$	—		$	0.02
Basic and diluted loss available to common stockholders per common share	$	(1.06	)	$	(1.53	)

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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 (in thousands):

Investments

Entity	As of June 30, 2012		As of December 31, 2011
Mondrian South Beach	$	1,350	$	4,015
Mondrian Istanbul		10,392		4,564
Mondrian South Beach food and beverage—MC South Beach (1)		1,109		1,465
Other		158		157
Total investments in and advances to unconsolidated joint ventures	$	13,009	$	10,201

(1) Following the CGM Transaction, the Company’s ownership interest in this food and beverage joint venture is less than 100%, and based on the Company’s evaluation, this venture does not meet the requirements of a variable interest entity. Accordingly, this joint venture is accounted for using the equity method as the Company does not maintain control over this entity.

Equity in income (loss) from unconsolidated joint ventures

	Three Months Ended June 30, 2012			Three Months Ended June 30, 2011			Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
Morgans Hotel Group Europe Ltd.	$	—		$	885		$	—		$	892
Restaurant Venture — SC London (1)		—			(290	)		—			(510	)
Mondrian South Beach		(2,400	)		(978	)		(2,665	)		(1,478	)
Mondrian South Beach food and beverage—MC South Beach (2)		(208	)		—			(356	)		—
Mondrian SoHo		(100	)		(529	)		(597	)		(2,461	)
Hard Rock Hotel & Casino (3)		—			—			—			(6,376	)
Ames		—			(1	)		—			(465	)
Other		2			3			2			5
Total	$	(2,706	)	$	(910	)	$	(3,616	)	$	(10,393	)

(1) Until June 20, 2011, the Company had a 50% ownership interest in the SC London restaurant venture. As a result of the CGM Transaction, the Company now owns 100% of the SC London restaurant venture, which is consolidated into the Company’s financial statements effective June 20, 2011, the date the CGM Transaction closed.

(2) Following the CGM Transaction, the Company’s ownership interest in this food and beverage joint venture is less than 100%, and based on the Company’s evaluation, this venture does not meet the requirements of a variable interest entity. Accordingly, this joint venture is accounted for using the equity method as the Company does not maintain control over this entity.

(3) Until March 1, 2011, the Company had a partial ownership interest in the Hard Rock and managed the property pursuant to a management agreement that was terminated in connection with the Hard Rock settlement (discussed below). Operating results are for the period we operated Hard Rock in 2011.

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Morgans Hotel Group Europe Limited

On November 23, 2011, the Company’s subsidiary, Royalton Europe Holdings LLC (“Royalton Europe”), and Walton MG London Hotels Investors V, L.L.C. (“Walton MG London”), each of which owned a 50% equity interest in Morgans Hotel Group Europe Limited (“Morgans Europe”), the joint venture that owned the 150 room Sanderson and 204 room St Martins Lane hotels, completed the sale of their respective equity interests in the joint venture for an aggregate of £192 million (or approximately $297 million) to Capital Hills Hotels Limited, a Middle Eastern investor with other global hotel holdings, pursuant to a purchase and sale agreement entered into on October 7, 2011. Also parties to the sale were Morgans Group LLC, as guarantor for Royalton Europe, and Walton Street Real Estate Fund V, L.P., as guarantor for Walton MG London. The Company received net proceeds of approximately $72.3 million, after applying a portion of the proceeds from the sale to retire the £99.5 million of outstanding mortgage debt secured by the hotels and payment of closing costs. The Company continues to operate the hotels under long-term management agreements that, including extension options, extend the term of the prior management agreements to 2041 from 2027.

Under a management agreement with Morgans Europe, prior to the sale, and with the new hotels’ owners, subsequent to the sale, the Company earns management fees and a reimbursement for allocable chain service and technical service expenses. The Company is also entitled to an incentive management fee and a capital incentive fee. The Company did not earn any incentive fees during the three and six months ended June 30, 2012 and 2011.

Prior to the Company selling its joint venture ownership interest, net income or loss and cash distributions or contributions were allocated to the partners in accordance with ownership interests. The Company accounted for this investment under the equity method of accounting.

Restaurant Venture — SC London

Until June 20, 2011, the Company had a 50% ownership interest in the SC London restaurant venture, which operated the restaurants located in Sanderson and St Martins Lane hotels in London. As a result of the CGM Transaction, the Company now owns 100% of the SC London restaurant venture, which is consolidated into the Company’s financial statements effective June 20, 2011, the date the CGM Transaction closed.

Mondrian South Beach

On August 8, 2006, the Company entered into a 50/50 joint venture to renovate and convert an apartment building on Biscayne Bay in Miami Beach into a condominium hotel, Mondrian South Beach, which opened in December 2008. The Company operates Mondrian South Beach under a long-term management contract.

The Mondrian South Beach joint venture acquired the existing building and land for a gross purchase price of $110.0 million. An initial equity investment of $15.0 million from each of the 50/50 joint venture partners was funded at closing, and subsequently each member also contributed $8.0 million of additional equity. The Company and an affiliate of its joint venture partner provided additional mezzanine financing of approximately $22.5 million in total to the joint venture through a new 50/50 mezzanine financing joint venture to fund completion of the construction in 2008. Additionally, the Mondrian South Beach joint venture initially received nonrecourse mortgage loan financing of approximately $124.0 million at a rate of LIBOR plus 3.0%. A portion of this mortgage debt was paid down, prior to the amendments discussed below, with proceeds obtained from condominium sales. In April 2008, the Mondrian South Beach joint venture obtained a mezzanine loan from the mortgage lenders of $28.0 million bearing interest at LIBOR, based on the rate set date, plus 6.0%. The $28.0 million mezzanine loan provided by the lender and the $22.5 million mezzanine loan provided by the mezzanine financing joint venture were both amended when the loan matured in April 2010, as discussed below.

In April 2010, the Mondrian South Beach joint venture amended the nonrecourse financing secured by the property and extended the maturity date for up to seven years through extension options until April 2017, subject to certain conditions. Among other things, the amendment allowed the joint venture to accrue all interest through April 2012, allows the joint venture to accrue a portion of the interest thereafter and provides the joint venture the ability to provide seller financing to qualified condominium buyers with up to 80% of the condominium purchase price. The Company and an affiliate of its joint venture partner provided an additional $2.75 million to the joint venture through the mezzanine financing joint venture resulting in total mezzanine financing provided by the mezzanine financing joint venture of $28.0 million. The amendment also provides that this $28.0 million mezzanine financing invested in the property be elevated in the capital structure to become, in effect, on par with the lender’s mezzanine debt so that the mezzanine financing joint venture receives at least 50% of all returns in excess of the first mortgage.

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The joint venture is in the process of selling units as condominiums, subject to market conditions, and unit buyers will have the opportunity to place their units into the hotel’s rental program. As of June 30, 2012, 196 hotel residences have been sold, of which 89 are in the hotel rental pool. In addition to hotel management fees, the Company could also realize fees from the sale of condominium units.

The Mondrian South Beach joint venture was determined to be a variable interest entity as during the process of refinancing the venture’s mortgage in April 2010, its equity investment at risk was considered insufficient to permit the entity to finance its own activities. Management determined that the Company is not the primary beneficiary of this variable interest entity as the Company does not have a controlling financial interest in the entity. For financial reporting purposes, the Company believes its maximum exposure to losses as a result of its involvement in the Mondrian South Beach variable interest entity is limited to its current investment, outstanding management fees receivable and advances in the form of mezzanine financing or otherwise, excluding guarantees and other contractual commitments. The Company is not committed to providing financial support to this variable interest entity, other than as contractually required, and all future funding is expected to be provided by the joint venture partners in accordance with their respective percentage interests in the form of capital contributions or loans, or by third parties.

Morgans Group and affiliates of its joint venture partner have provided certain guarantees and indemnifications to the Mondrian South Beach lenders. See note 12.

Mondrian SoHo

In June 2007, the Company entered into a joint venture with Cape Advisors Inc. to acquire and develop a Mondrian hotel in the SoHo neighborhood of New York City. The Company initially contributed $5.0 million for a 20% equity interest in the joint venture. The joint venture obtained a loan of $195.2 million to acquire and develop the hotel, which matured in June 2010.

On July 31, 2010, the mortgage loan secured by the hotel was amended, among other things, to provide for extensions of the maturity date to November 2011 with extension options through 2015, subject to certain conditions including a minimum debt service coverage test calculated, as set forth in the loan agreement, based on ratios of net operating income to debt service for the three months ended September 30, 2011 of 1:1 or greater.

Subsequent to the initial fundings, in 2008 and 2009, the lender and Cape Advisors Inc. made cash and other contributions to the joint venture, and the Company provided $3.2 million of additional funds which were treated as loans with priority over the equity, to complete the project. During 2010 and 2011, the Company subsequently funded an aggregate of $5.5 million, all of which were treated as loans. Additionally, as a result of cash shortfalls at Mondrian SoHo, the Company funded an additional $1.0 million in 2012, which has been treated in part as additional capital contributions and in part as loans from the management company subsidiary.

The Mondrian SoHo opened in February 2011 and has 263 guest rooms, a restaurant, bar and other facilities. The Company has a 10-year management contract with two 10-year extension options to operate the hotel.

Based on the decline in market conditions following the inception of the joint venture and, more recently, the need for additional funding to complete the hotel, the Company wrote down its investment in Mondrian SoHo to zero in June 2010 and recorded an impairment charge of $10.7 million through equity in loss of unconsolidated joint ventures for the year ended December 31, 2010. The Company has recorded all additional fundings as impairment charges through equity in loss of unconsolidated joint ventures during the periods the funds were contributed. As of June 30, 2012 the Company’s financial statements reflect no value for its investment in the Mondrian SoHo joint venture.

The hotel achieved the required 1:1 coverage ratio in September 2011 and the debt was extended until November 2012. The joint venture has additional extension options available in 2012 subject to similar conditions including a minimum debt service coverage test calculated, as set forth in the loan agreement, based on ratios of net operating income to debt service for the twelve months ended September 30, 2012 of 1.1:1.0 or greater. The joint venture may not be able to achieve this debt service coverage test or refinance the outstanding debt upon maturity.

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Additionally, there may be cash shortfalls from the operations of the hotel from time to time and there may not be enough operating cash flow to cover debt service payments in all months going forward, which could require additional fundings by the Company and its joint venture partner. The joint venture is discussing various options with the lenders, although there can be no assurance the joint venture will be able to extend the maturity date of the debt or refinance it on a timely basis or at all. The Company does not intend to commit significant additional monies toward the repayment of the loan or the funding of operating deficits.

In December 2011, the Mondrian SoHo joint venture was determined to be a variable interest entity as a result of the upcoming debt maturity and recent cash shortfalls, and because its equity was considered insufficient to permit the entity to finance its own activities. However, the Company determined that it was not the primary beneficiary and, therefore, consolidation of this joint venture is not required. The Company continues to account for its investment in Mondrian SoHo using the equity method of accounting. Because the Company has written its investment value in the joint venture to zero, for financial reporting purposes, the Company believes its maximum exposure to losses as a result of its involvement in the Mondrian SoHo variable interest entity is limited to its outstanding management fees receivable and advances in the form of priority loans, excluding guarantees and other contractual commitments.

Certain affiliates of the Company’s joint venture partner have provided certain guarantees and indemnifications to the Mondrian SoHo lenders for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates. See note 12.

Ames

On June 17, 2008, the Company, Normandy Real Estate Partners, and Ames Hotel Partners entered into a joint venture agreement as part of the development of the Ames hotel in Boston. Ames opened on November 19, 2009 and has 114 guest rooms, a restaurant, bar and other facilities. The Company manages Ames under a 15-year management contract.

The Company has contributed approximately $11.9 million in equity through June 30, 2012 for an approximately 31% interest in the joint venture. The joint venture obtained a loan for $46.5 million secured by the hotel, which was outstanding as of June 30, 2012. The project also qualified for federal and state historic rehabilitation tax credits which were sold for approximately $16.9 million.

In September 2011, the joint venture partners funded their pro rata shares of the debt service reserve account, of which the Company’s contribution was $0.3 million, and exercised the one remaining extension option available on the mortgage debt. As a result, the mortgage debt secured by Ames will mature on October 9, 2012. Unless the joint venture can refinance the debt or obtain an extension of the maturity date, the joint venture may not be able to repay the mortgage at maturity. The joint venture is discussing various options with the lenders, although there can be no assurance the joint venture will be able to extend the maturity date of the debt on a timely basis or at all. Additionally, there may be cash shortfalls from the operations of the hotel from time to time and there may not be enough operating cash flow to cover debt service payments in all months going forward, which could require additional fundings by the Company and its joint venture partner. The Company does not intend to commit significant monies toward the repayment of the joint venture loan or the funding of operating deficits.

Based on prevailing economic conditions and the upcoming mortgage debt maturity, the joint venture concluded that the hotel was impaired in September 2011. As a result, the Company wrote down its investment in Ames to zero and recorded its share of the impairment charge of $10.6 million through equity in loss of unconsolidated joint ventures for the year ended December 31, 2011. As of June 30, 2012, the Company’s financial statements reflect no value for its investment in the Ames joint venture.

In December 2011, the Ames joint venture was determined to be a variable interest entity as a result of the upcoming debt maturity, and because its equity was considered insufficient to permit the entity to finance its own activities. However, the Company determined that it was not the primary beneficiary and, therefore, consolidation of this joint venture is not required. Because the Company has written its investment value in the joint venture to zero, for financial reporting purposes, the Company believes its maximum exposure to losses as a result of its involvement in the Ames variable interest entity is limited to its outstanding management fees receivable, excluding guarantees and other contractual commitments.

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Certain affiliates of the Company’s joint venture partner have provided certain guarantees and indemnifications to the Ames lenders for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates. Additionally, the Company is jointly and severally liable for certain federal and state tax credit recapture liabilities. See note 12.

Shore Club

The Company operates Shore Club under a management contract and owned a minority ownership interest of approximately 7% at June 30, 2012. On September 15, 2009, the joint venture that owns Shore Club received a notice of default on behalf of the special servicer for the lender on the joint venture’s mortgage loan for failure to make its September monthly payment and for failure to maintain its debt service coverage ratio, as required by the loan documents. On October 7, 2009, the joint venture received a second letter on behalf of the special servicer for the lender accelerating the payment of all outstanding principal, accrued interest, and all other amounts due on the mortgage loan. The lender also demanded that the joint venture transfer all rents and revenues directly to the lender to satisfy the joint venture’s debt. In March 2010, the lender for the Shore Club mortgage initiated foreclosure proceedings against the property in U.S. federal district court. In October 2010, the federal court dismissed the case for lack of jurisdiction. In November 2010, the lender initiated foreclosure proceedings in state court and a bench trial took place in June 2012 during which the trial court granted a default ruling of foreclosure. Entry of a foreclosure judgment has been delayed pending, among other things, relinquishment of jurisdiction from the Florida appeals court to the trial court. The Company has operated and expects to continue to operate the hotel pursuant to the management agreement during the pendency of these proceedings, which may continue for some additional period of time in the event of post-judgment proceedings, which may include an appeal. However, there can be no assurances as to when a foreclosure sale may take place, or whether the Company will continue to operate the hotel once foreclosure proceedings are complete.

Food and Beverage Ventures at Mondrian South Beach and Mondrian Los Angeles

On June 20, 2011, the Company completed the CGM Transaction, pursuant to which subsidiaries of the Company acquired from affiliates of CGM the 50% interests CGM owned in the Company’s food and beverage joint ventures for approximately $20.0 million. CGM has agreed to continue to manage the food and beverage operations at these properties for a transitional period pursuant to short-term cancellable management agreements while the Company reassess its food and beverage strategy.

The Company’s ownership interest in the food and beverage venture at Mondrian South Beach is less than 100%, and was reevaluated in accordance with ASC 810-10. The Company concluded that this venture did not meet the requirements of a variable interest entity and accordingly, this investment in the joint venture is accounted for using the equity method, as the Company does not believe it exercises control over significant asset decisions such as buying, selling or financing.

At the closing of the CGM Transaction, the Company’s ownership interest in the food and beverage venture at Mondrian Los Angeles was also less than 100%, and was reevaluated at the time in accordance with ASC 810-10. The Company initially concluded that this venture did not meet the requirements of a variable interest entity and accordingly, this investment in the joint venture was accounted for using the equity method. Subsequently, on August 5, 2011, an affiliate of Pebblebrook, the company that purchased Mondrian Los Angeles in May 2011, exercised its option to purchase the Company’s remaining ownership interest in the food and beverage operations at Mondrian Los Angeles for approximately $2.5 million. As a result of Pebblebrook’s exercise of this purchase option, the Company no longer has any ownership interest in the food and beverage operations at Mondrian Los Angeles.

Mondrian Istanbul

In December 2011, the Company announced a new hotel management agreement for an approximately 128 room Mondrian-branded hotel to be located in the Old City area of Istanbul, Turkey. The hotel is scheduled to open in 2014. In December 2011 and January 2012, the Company contributed an aggregate of $10.3 million, $5.1 of which was funded in January 2012, in the form of equity and key money and will have a 20% ownership interest in the venture owning the hotel. The Company has no additional funding commitments in connection with this project.

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Hard Rock Hotel & Casino

Formation and Hard Rock Credit Facility

On February 2, 2007, the Company and Morgans Group (together, the “Morgans Parties”), an affiliate of DLJ Merchant Banking Partners (“DLJMB”), and certain other DLJMB affiliates (such affiliates, together with DLJMB, collectively the “DLJMB Parties”) completed the acquisition of the Hard Rock Hotel & Casino (“Hard Rock”). The acquisition was completed through a joint venture entity, Hard Rock Hotel Holdings, LLC, funded one-third, or approximately $57.5 million, by the Morgans Parties, and two-thirds, or approximately $115.0 million, by the DLJMB Parties. In connection with the joint venture’s acquisition of the Hard Rock, certain subsidiaries of the joint venture entered into a debt financing comprised of a senior mortgage loan and three mezzanine loans, which provided for a $760.0 million acquisition loan that was used to fund the acquisition, of which $110.0 million was subsequently repaid according to the terms of the loan, and a construction loan of up to $620.0 million, which was fully drawn for the expansion project at the Hard Rock. Morgans Group provided a standard nonrecourse, carve-out guaranty for each of the mortgage and mezzanine loans.

Following the formation of Hard Rock Hotel Holdings, LLC, additional cash contributions were made by both the DLJMB Parties and the Morgans Parties, including disproportionate cash contributions by the DLJMB Parties. Prior to the Hard Rock settlement, discussed below, the DLJMB Parties had contributed an aggregate of $424.8 million in cash and the Morgans Parties had contributed an aggregate of $75.8 million in cash. In 2009, the Company wrote down the Company’s investment in Hard Rock to zero.

For purposes of accounting for the Company’s equity ownership interest in Hard Rock, management calculated a 12.8% ownership interest for the years ended December 31, 2011 and 2010, based on a weighting of 1.75x to the DLJMB Parties’ cash contributions in excess of $250.0 million.

Hard Rock Settlement Agreement

On January 28, 2011, subsidiaries of Hard Rock Hotel Holdings, LLC, a joint venture through which the Company held a minority interest in the Hard Rock, received a notice of acceleration from NRFC HRH Holdings, LLC (the “Second Mezzanine Lender”) pursuant to the First Amended and Restated Second Mezzanine Loan Agreement, dated as of December 24, 2009 (the “Second Mezzanine Loan Agreement”), between such subsidiaries and the Second Mezzanine Lender, declaring all unpaid principal and accrued interest under the Second Mezzanine Loan Agreement immediately due and payable. The amount due and payable under the Second Mezzanine Loan Agreement as of January 20, 2011 was approximately $96 million. The Second Mezzanine Lender also notified such subsidiaries that it intended to auction to the public the collateral pledged in connection with the Second Mezzanine Loan Agreement, including all membership interests in certain subsidiaries of the Hard Rock joint venture that indirectly own the Hard Rock and other related assets.

Subsidiaries of the Hard Rock joint venture, Vegas HR Private Limited (the “ Mortgage Lender”), Brookfield Financial, LLC-Series B (the “First Mezzanine Lender”), the Second Mezzanine Lender, Morgans Group, certain affiliates of DLJMB, and certain other related parties entered into a Standstill and Forbearance Agreement, dated as of February 6, 2011. Pursuant to the Standstill and Forbearance Agreement, among other things, until February 28, 2011, the Mortgage Lender, First Mezzanine Lender and the Second Mezzanine Lender agreed not to take any action or assert any right or remedy arising with respect to any of the applicable loan documents or the collateral pledged under such loan documents, including remedies with respect to the Company’s Hard Rock management agreement. In addition, pursuant to the Standstill and Forbearance Agreement, the Second Mezzanine Lender agreed to withdraw its foreclosure notice, and the parties agreed to jointly request a stay of all action on the pending motions that had been filed by various parties to enjoin such foreclosure proceedings.

On March 1, 2011, the Hard Rock joint venture, the Mortgage Lender, the First Mezzanine Lender, the Second Mezzanine Lender, the Morgans Parties and certain affiliates of DLJMB, as well as the Hard Rock Mezz Holdings LLC (the “Third Mezzanine Lender”) and other interested parties entered into a comprehensive settlement to resolve the disputes among them and all matters relating to the Hard Rock and related loans and guaranties. The settlement provided, among other things, for the following:

• release of the nonrecourse carve-out guaranties provided by the Company with respect to the loans made by the Mortgage Lender, the First Mezzanine Lender, the Second Mezzanine Lender and the Third Mezzanine Lender to the direct and indirect owners of the Hard Rock;

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• termination of the management agreement pursuant to which the Company’s subsidiary managed the Hard Rock;

• the transfer by the Hard Rock joint venture to an affiliate of the First Mezzanine Lender of 100% of the indirect equity interests in the Hard Rock; and

• certain payments to or for the benefit of the Mortgage Lender, the First Mezzanine Lender, the Second Mezzanine Lender, the Third Mezzanine Lender and the Company. The Company’s net payment was approximately $3.7 million.

As a result of the settlement and completion of certain gaming de-registration procedures, the Company is no longer subject to Nevada gaming regulations.

5. Other Liabilities

Other liabilities consist of the following (in thousands):

	As of June 30, 2012		As of December 31, 2011
OPP LTIP Units Liability (note 7)	$	287	$	528
Designer fee payable		13,866		13,866
	$	14,153	$	14,394

OPP LTIP Units Liability

As discussed further in note 7, the estimated fair value of the OPP LTIP Units liability was approximately $0.3 million and $0.5 million at June 30, 2012 and December 31, 2011, respectively.

Designer Fee Payable

As of June 30, 2012 and December 31, 2011, other liabilities consist of $13.9 million related to a designer fee payable. The Former Parent had an exclusive service agreement with a hotel designer, pursuant to which the designer has made various claims related to the agreement. Although the Company is not a party to the agreement, it may have certain contractual obligations or liabilities to the Former Parent in connection with the agreement. According to the agreement, the designer was owed a base fee for each designed hotel, plus 1% of gross revenues, as defined in the agreement, for a 10-year period from the opening of each hotel. 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. A liability amount has been estimated and recorded in these consolidated financial statements before considering any defenses and/or counter-claims that may be available to the Company or the Former Parent in connection with any claim brought by the designer. The estimated costs of the design services were capitalized as a component of the applicable hotel and amortized over the five-year estimated life of the related design elements. Through December 31, 2009, interest was accreted each year on the liability and charged to interest expense using a rate of 9%.

6. Debt and Capital Lease Obligations

Debt and capital lease obligations consists of the following (in thousands):

Description	As of June 30, 2012		As of December 31, 2011		Interest Rate at June 30, 2012
Notes secured by Hudson (a)	$	115,000	$	115,000		(a	)
Clift debt (b)		88,038		86,991		9.60	%
Liability to subsidiary trust (c)		50,100		50,100		8.68	%
Convertible Notes, face value of $172.5 million (d)		167,282		166,144		2.38	%
Revolving credit facility (e)		20,000		—		5.00% (LIBOR + 4.00%, LIBOR floor of 1.00%)

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Description	As of June 30, 2012		As of December 31, 2011		Interest Rate at June 30, 2012
TLG Promissory Note (f)		16,820		15,510	(f)
Capital lease obligations (g)		6,145		6,160	(g)
Debt and capital lease obligation	$	463,385	$	439,905

(a) Mortgage Agreements

Hudson Mortgage and Mezzanine Loan

On October 6, 2006, a subsidiary of the Company, Henry Hudson Holdings LLC (“Hudson Holdings”), entered into a nonrecourse mortgage financing secured by Hudson, and another subsidiary entered into a mezzanine loan related to Hudson, secured by a pledge of the Company’s equity interests in Hudson Holdings.

Until amended as described below, the mortgage bore interest at 30-day LIBOR plus 0.97%. The Company had entered into an interest rate swap on the mortgage and the mezzanine loan on Hudson which effectively fixed the 30-day LIBOR rate at approximately 5.0%. This interest rate swap expired on July 15, 2010. The Company subsequently entered into a short-term interest rate cap on the mortgage that expired on September 12, 2010.

On October 1, 2010, Hudson Holdings entered into a modification agreement of the mortgage, together with promissory notes and other related security agreements, with Bank of America, N.A., as trustee, for the lenders (the “Amended Hudson Mortgage”). This modification agreement and related agreements extended the Hudson Mortgage until October 15, 2011. In connection with the Amended Hudson Mortgage, on October 1, 2010, Hudson Holdings paid down a total of $16 million on its outstanding loan balances.

The interest rate on the Amended Hudson Mortgage was also amended to 30-day LIBOR plus 1.03%. The interest rate on the Hudson mezzanine loan continued to bear interest at 30-day LIBOR plus 2.98%. The Company entered into interest rate caps, which expired on October 15, 2011, in connection with the Amended Hudson Mortgage, which effectively capped the 30-day LIBOR rate at 5.3% on the Amended Hudson Mortgage and effectively capped the 30-day LIBOR rate at 7.0% on the Hudson mezzanine loan.

On August 12, 2011, certain of the Company’s subsidiaries entered into a new mortgage financing with Deutsche Bank Trust Company Americas (“Primary Lender”) and the other institutions party thereto from time to time (“Securitized Lenders”), as lenders, consisting of two mortgage loans, each secured by Hudson and treated as a single loan once disbursed, in the following amounts: (1) a $115.0 million mortgage loan that was funded at closing, and (2) a $20.0 million delayed draw term loan, which will be available to be drawn over a 15-month period, subject to achieving a debt yield ratio of at least 9.5% (based on net operating income for the prior 12 months) after giving effect to each additional draw (collectively, the “Hudson 2011 Mortgage Loan”). The Company does not believe it will achieve the debt yield ratio necessary to allow it to borrow the additional $20.0 million term loan before the option expires.

Proceeds from the Hudson 2011 Mortgage Loan, cash on hand and cash held in escrow were applied to repay $201.2 million of outstanding mortgage debt under the Amended Hudson Mortgage, to repay $26.5 million of outstanding indebtedness under the Hudson mezzanine loan, and to pay fees and expenses in connection with the financing.

On December 7, 2011, the Company entered into a technical amendment with the Primary Lender whereby the Hudson 2011 Mortgage Loan is subject to an interest rate of 30-day LIBOR (with a minimum of 1.0%) plus 5.0%, at the Primary Lender’s option. At June 30, 2012, $28.0 million of the Hudson 2011 Mortgage Loan bore interest at a reserve adjusted blended rate of 30-day LIBOR (with a minimum of 1.0%) plus 4.0%. The remaining $87.0 million of the Hudson 2011 Mortgage Loan which was sold to the Securitized Lenders bore interest at a reserve adjusted blended rate of 30-day LIBOR (with a minimum of 1.0%) plus 5.0%.

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The Company maintains an interest rate cap for the amount of the Hudson 2011 Mortgage Loan that will cap the LIBOR rate on the debt under the full amount of the Hudson 2011 Mortgage Loan at approximately 3.0% through the maturity date of the loan.

The Hudson 2011 Mortgage Loan matures on August 12, 2013. The Company has three one-year extension options that permit it to extend the maturity date of the Hudson 2011 Mortgage Loan to August 12, 2016 if certain conditions are satisfied at each respective extension date. The first two extension options require, among other things, the borrowers to maintain a debt service coverage ratio of at least 1-to-1 for the 12 months prior to the applicable extension dates. The third extension option requires, among other things, the borrowers to achieve a debt yield ratio of at least 13.0% (based on net operating income for the prior 12 months).

The Hudson 2011 Mortgage Loan provides that after September 30, 2012, in the event the debt yield ratio falls below certain defined thresholds, all cash from the property is deposited into accounts controlled by the lenders from which debt service, operating expenses and management fees are paid and from which other reserve accounts may be funded. Any excess amounts are retained by the lenders until the debt yield ratio exceeds the required thresholds for two consecutive calendar quarters. Furthermore, if the Company’s management company subsidiary that manages Hudson is not reserving sufficient funds for property tax, ground rent, insurance premiums, and capital expenditures in accordance with the hotel management agreement, then the Company’s subsidiary borrowers would be required to fund the reserve account for such purposes. The Company’s subsidiary borrowers are not permitted to have any indebtedness other than certain permitted indebtedness customary in such transactions, including ordinary trade payables, purchase money indebtedness and capital lease obligations, subject to limits.

The Hudson 2011 Mortgage Loan may be prepaid, in whole or in part, subject to payment of a prepayment penalty for any prepayment prior to August 12, 2013. There is no prepayment penalty after August 12, 2013.

The Hudson 2011 Mortgage Loan contains restrictions on the ability of the borrowers to incur additional debt or liens on their assets and on the transfer of direct or indirect interests in Hudson and the owner of Hudson and other affirmative and negative covenants and events of default customary for single asset mortgage loans. The Hudson 2011 Mortgage Loan is fully recourse to our subsidiaries that are the borrowers under the loan. The loan is nonrecourse to the Company, Morgans Group and other subsidiaries, except for certain standard nonrecourse carveouts. Morgans Group has provided a customary environmental indemnity and nonrecourse carveout guaranty under which it would have liability with respect to the Hudson 2011 Mortgage Loan if certain events occur with respect to the borrowers, including voluntary bankruptcy filings, collusive involuntary bankruptcy filings, and violations of the restrictions on transfers, incurrence of additional debt, or encumbrances of the property of the borrowers. The nonrecourse carveout guaranty requires Morgans Group to maintain a net worth of at least $100 million (based on the estimated market value of our net assets) and liquidity of at least $20 million. The Company was in compliance with all requirements as of June 30, 2012.

Mondrian Los Angeles Mortgage

On October 6, 2006, a subsidiary of the Company that owned Mondrian Los Angeles entered into a nonrecourse mortgage financing secured by the hotel.

On October 1, 2010, the subsidiary entered into a modification agreement of its mortgage, together with promissory notes and other related security agreements, with Bank of America, N.A., as trustee, for the lenders. This modification agreement and related agreements amended and extended the mortgage until October 15, 2011. In connection with the amended mortgage, on October 1, 2010, the subsidiary paid down a total of $17 million on its outstanding mortgage loan balance.

The interest rate on the amended mortgage was also amended to 30-day LIBOR plus 1.64%. The Company entered into an interest rate cap, which expired on October 15, 2011, in connection with the amendment which effectively capped the 30-day LIBOR rate at 4.25%.

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On May 3, 2011, the Company completed the sale of Mondrian Los Angeles for $137.0 million to Wolverines Owner LLC, an affiliate of Pebblebrook. The Company applied a portion of the proceeds from the sale, along with approximately $9.2 million of cash in escrow, to retire the $103.5 million amended mortgage.

(b) Clift Debt

In October 2004, Clift Holdings LLC (“Clift Holdings”), a subsidiary of the Company, sold the Clift hotel to an unrelated party for $71.0 million and then leased it back for a 99-year lease term. Under this lease, Clift Holdings is required to fund operating shortfalls including the lease payments and to fund all capital expenditures. This transaction did not qualify as a sale due to the Company’s continued involvement and therefore is treated as a financing.

Due to the amount of the payments stated in the lease, which increase periodically, and the economic environment in which the hotel operates, Clift Holdings had not been operating Clift at a profit and Morgans Group had been funding cash shortfalls sustained at Clift in order to enable Clift Holdings to make lease payments from time to time. On March 1, 2010, however, the Company discontinued subsidizing the lease payments and Clift Holdings stopped making the scheduled monthly payments. On May 4, 2010, the owners filed a lawsuit against Clift Holdings, which the court dismissed on June 1, 2010. On June 8, 2010, the owners filed a new lawsuit and on June 17, 2010, the Company and Clift Holdings filed an affirmative lawsuit against the owners.

On September 17, 2010, the Company, Clift Holdings and another subsidiary of the Company, 495 Geary, LLC, entered into a settlement and release agreement with Hasina, LLC, Tarstone Hotels, LLC, Kalpana, LLC, Rigg Hotel, LLC, and JRIA, LLC (collectively, the “Lessors”), and Tarsadia Hotels. The settlement and release agreement, among other things, effectively provided for the settlement of all outstanding litigation claims and disputes among the parties relating to defaulted lease payments due with respect to the ground lease for the Clift hotel and reduced the lease payments due to Lessors for the period March 1, 2010 through February 29, 2012. Clift Holdings and the Lessors also entered into an amendment to the lease, dated September 17, 2010, to memorialize, among other things, the reduced annual lease payments of $4.97 million from March 1, 2010 to February 29, 2012. Effective March 1, 2012, the annual rent reverted to the rent stated in the lease agreement, which provides for base annual rent of approximately $6.0 million per year through October 2014 increasing in October 2014, and thereafter at 5-year intervals, by a formula tied to increases in the Consumer Price Index, with a maximum increase of 40% and a minimum of 20% at October 2014, and at each payment date thereafter, the maximum increase is 20% and the minimum is 10%. The lease is nonrecourse to the Company.

Morgans Group also entered into an agreement, dated September 17, 2010, whereby Morgans Group agreed to guarantee losses of up to $6 million suffered by the Lessors in the event of certain “bad boy” type acts.

(c) Liability to Subsidiary Trust Issuing Preferred Securities

On August 4, 2006, a newly established trust formed by the Company, MHG Capital Trust I (the “Trust”), issued $50.0 million in trust preferred securities in a private placement. The Company owns all of the $0.1 million of outstanding common stock of the Trust. The Trust used the proceeds of these transactions to purchase $50.1 million of junior subordinated notes issued by the Company’s operating company and guaranteed by the Company (the “Trust Notes”) which mature on October 30, 2036. The sole assets of the Trust consist of the Trust Notes. The terms of the Trust Notes are substantially the same as preferred securities issued by the Trust. The Trust Notes and the preferred securities have a fixed interest rate of 8.68% per annum during the first 10 years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.25% per annum. As of December 31, 2011, the Trust Notes are redeemable by the Trust, at the Company’s option, at par. As of June 30, 2012, the Company has not redeemed any Trust Notes. To the extent the Company redeems the Trust Notes, the Trust is required to redeem a corresponding amount of preferred securities.

The Company has identified that the Trust is a variable interest entity under ASC 810-10. Based on management’s analysis, the Company is not the primary beneficiary under the trust. Accordingly, the Trust is not consolidated into the Company’s financial statements. The Company accounts for the investment in the common stock of the Trust under the equity method of accounting.

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(d) October 2007 Convertible Notes Offering

On October 17, 2007, the Company issued $172.5 million aggregate principal amount of 2.375% Senior Subordinated Convertible Notes (the “Convertible Notes”) in a private offering. Net proceeds from the offering were approximately $166.8 million.

The Convertible Notes are senior subordinated unsecured obligations of Morgans Hotel Group Co. and are guaranteed on a senior subordinated basis by the Company’s operating company, Morgans Group. The Convertible Notes are convertible into shares of the Company’s common stock under certain circumstances and upon the occurrence of specified events.

Interest on the Convertible Notes is payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2008, and the Convertible Notes mature on October 15, 2014, unless previously repurchased by the Company or converted in accordance with their terms prior to such date. The initial conversion rate for each $1,000 principal amount of Convertible Notes is 37.1903 shares of the Company’s common stock, representing an initial conversion price of approximately $26.89 per share of common stock. The initial conversion rate is subject to adjustment under certain circumstances. The maximum conversion rate for each $1,000 principal amount of Convertible Notes is 45.5580 shares of the Company’s common stock representing a maximum conversion price of approximately $21.95 per share of common stock.

The Company follows ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”), which clarifies the accounting for convertible notes payable. ASC 470-20 requires the proceeds from the issuance of convertible notes to be allocated between a debt component and an equity component. The debt component is measured based on the fair value of similar debt without an equity conversion feature, and the equity component is determined as the residual of the fair value of the debt deducted from the original proceeds received. The resulting discount on the debt component is amortized over the period the debt is expected to be outstanding as additional interest expense. The equity component, recorded as additional paid-in capital, was determined to be $9.0 million, which represents the difference between the proceeds from issuance of the Convertible Notes and the fair value of the liability, net of deferred taxes of $6.4 million as of the date of issuance of the Convertible Notes.

In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions with respect to the Company’s common stock with Merrill Lynch Financial Markets, Inc. and Citibank, N.A. These call options are exercisable solely in connection with any conversion of the Convertible Notes and pursuant to which the Company will receive shares of the Company’s common stock from Merrill Lynch Financial Markets, Inc. and Citibank, N.A equal to the number of shares issuable to the holders of the Convertible Notes upon conversion. The Company paid approximately $58.2 million for these call options.

In connection with the sale of the Convertible Notes, the Company also entered into separate warrant transactions with Merrill Lynch Financial Markets, Inc. and Citibank, N.A., whereby the Company issued warrants (the “Convertible Notes Warrants”) to purchase 6,415,327 shares of common stock, subject to customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock. The Company received approximately $34.1 million from the issuance of the Convertible Notes Warrants.

The Company recorded the purchase of the call options, net of the related tax benefit of approximately $20.3 million, as a reduction of additional paid-in capital and the proceeds from the Convertible Notes Warrants as an addition to additional paid-in capital in accordance with ASC 815-30, Derivatives and Hedging, Cash Flow Hedges.

In February 2008, the Company filed a registration statement with the Securities and Exchange Commission to cover the resale of shares of the Company’s common stock that may be issued from time to time upon the conversion of the Convertible Notes.

(e) Revolving Credit Facilities

Amended 2006 Revolving Credit Facility

On October 6, 2006, the Company and certain of its subsidiaries entered into a revolving credit facility with Wachovia Bank, National Association, as Administrative Agent, and the other lenders party thereto, which was amended on August 5, 2009.

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The revolving credit facility provided for a maximum aggregate amount of commitments of $125.0 million, divided into two tranches, which were secured by the mortgages on Morgans, Royalton and Delano South Beach.

The revolving credit facility bore interest at a fluctuating rate measured by reference to, at the Company’s election, either LIBOR (subject to a LIBOR floor of 1%) or a base rate, plus a borrowing margin. LIBOR loans had a borrowing margin of 3.75% per annum and base rate loans have a borrowing margin of 2.75% per annum.

On May 23, 2011, in connection with the sale of Royalton and Morgans, the Company used a portion of the sales proceeds to retire all outstanding debt under the revolving credit facility. These hotels, along with Delano South Beach, were collateral for the revolving credit facility, which terminated with the sale of properties securing the facility.

Delano Credit Facility

On July 28, 2011, the Company and certain of its subsidiaries (collectively, the “Borrowers”), including Beach Hotel Associates LLC (the “Florida Borrower”), entered into a secured credit agreement with Deutsche Bank Securities Inc. as sole lead arranger, Deutsche Bank Trust Company Americas, as agent, and the lenders party thereto.

The credit agreement provides commitments for a $100.0 million revolving credit facility and includes a $15 million letter of credit sub-facility (the “Delano Credit Facility”). The maximum amount of such commitments available at any time for borrowings and letters of credit is determined according to a borrowing base valuation equal to the lesser of (i) 55% of the appraised value of Delano South Beach (the “Florida Property”) and (ii) the adjusted net operating income for the Florida Property divided by 11%. Extensions of credit under the Delano Credit Facility are available for general corporate purposes. The commitments under the Delano Credit Facility may be increased by up to an additional $10 million during the first two years of the facility, subject to certain conditions, including obtaining commitments from any one or more lenders to provide such additional commitments. The commitments under the Delano Credit Facility terminate on July 28, 2014, at which time all outstanding amounts on the Delano Credit Facility will be due and payable.

As of June 30, 2012, the Company’s borrowing availability on the Delano Credit Facility was $82.0 million, of which the Company had $20.0 million outstanding, and had a $10.0 million letter of credit outstanding related to the Company’s key money investment in the 310 room Mondrian-branded hotel, in the Baha Mar Resort, in Nassau, The Bahamas. In August 2011, the Company entered into a hotel management and residential licensing agreement related to this project.

The obligations of the Borrowers under the Delano Credit Facility are guaranteed by the Company and a subsidiary of the Company. Such obligations are also secured by a mortgage on the Florida Property and all associated assets of the Florida Borrower, as well as a pledge of all equity interests in the Florida Borrower.

The interest rate applicable to loans outstanding on the Delano Credit Facility is a floating rate of interest per annum, at the Borrowers’ election, of either LIBOR (subject to a LIBOR floor of 1.00%) plus 4.00%, or a base rate, as defined in the agreement, plus 3.00%. In addition, a commitment fee of 0.50% applies to the unused portion of the commitments under the Delano Credit Facility.

The Borrowers’ ability to borrow on the Delano Credit Facility is subject to ongoing compliance by the Company and the Borrowers with various customary affirmative and negative covenants, including limitations on liens, indebtedness, issuance of certain types of equity, affiliated transactions, investments, distributions, mergers and asset sales. In addition, the Delano Credit Facility requires that the Company and the Borrowers maintain a fixed charge coverage ratio (consolidated EBITDA to consolidated fixed charges) of no less than (i) 1.05 to 1.00 at all times on or prior to June 30, 2012 and (ii) 1.10 to 1.00 at all times thereafter. As of June 30, 2012, the Company’s fixed charge coverage ratio under the Delano Credit Facility was 1.29x.

The Delano Credit Facility also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Borrowers under the Delano Credit Facility to be immediately due and payable.

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(f) TLG Promissory Notes

On November 30, 2011, pursuant to purchase agreements entered into on November 17, 2011, certain of the Company’s subsidiaries completed the acquisition of 90% of the equity interests in TLG for a purchase price of $28.5 million in cash and up to $18.0 million in notes convertible into shares of the Company’s common stock at $9.50 per share subject to the achievement of certain EBITDA targets for the acquired business. The promissory notes were allocated $16.0 million to Mr. Sasson and $2.0 million to Mr. Masi (collectively, the “TLG Promissory Notes”).

The maximum payment of $18.0 million is based on TLG achieving EBITDA of at least $18.0 million from non-Morgans business (the “Non-Morgans EBITDA”) during the 27-month period starting on January 1, 2012, with ratable reduction of the payment if less than $18.0 million of EBITDA is earned. The payment is evidenced by two promissory notes held individually by Messrs. Sasson and Masi, which mature on the fourth anniversary of the closing date and may be voluntarily prepaid at any time. At either Messrs. Sasson’s or Masi’s options, the TLG Promissory Notes are payable in cash or in common stock of the Company valued at $9.50 per share. Each of the TLG Promissory Notes earns interest at an annual rate of 8%, provided that if the notes are not paid or converted on or before the third anniversary of the closing date, the interest rate increases to 18%. The TLG Promissory Notes provide that 75% of the accrued interest is payable quarterly in cash and the remaining 25% accrues and is payable at maturity. Morgans Group has guaranteed payment of the TLG Promissory Notes and interest.

As of the issue date, the fair value of the TLG Promissory Notes was estimated at approximately $15.5 million utilizing a Monte Carlo simulation to estimate the probability of the performance conditions being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times. For each simulation, the payoff is calculated at the settlement date, which is then discounted to the award date at a risk-free interest rate. The average of the values over all simulations is the expected value of the unit on the issuance date. Assumptions used in the valuations included factors associated with the underlying performance of the Company’s stock price and total stockholder return over the term of the notes including total stock return volatility and risk-free interest. The fair value of the TLG Promissory Notes was estimated as of the issue date using the following assumptions in the Monte-Carlo simulation: expected price volatility for the Company’s stock of 25%; a risk free rate of 0.4%; and no dividend payments over the measurement period.

As of June 30, 2012, the fair value of the TLG Promissory Notes was estimated at approximately $16.8 million using the following assumptions in the Monte-Carlo valuation: expected price volatility for the Company’s stock of 25%; a risk free rate of 0.3%; and no dividend payments over the measurement period.

Pursuant to a one-year consulting agreement the Company entered into with Mr. Sasson in connection with The Light Group Transaction, the Company appointed Mr. Sasson to the Company’s Board and agreed to cause Mr. Sasson to be nominated for election to the Board at the Company’s 2012 annual meeting of stockholders. In the event Mr. Sasson is not elected to the Board, the TLG Promissory Notes accelerate and become immediately due and payable. At the Company’s annual meeting of stockholders held on May 16, 2012, Mr. Sasson was elected to the Company’s Board of Directors for a one year term.

(g) Capital Lease Obligations

The Company has leased two condominium units at Hudson from unrelated third-parties, which are reflected as capital leases. One of the leases requires the Company to make annual payments, currently $582,180 (subject to increases due to increases in the Consumer Price Index), through November 2096. 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, currently $328,128 (subject to increases due to increases in the Consumer Price Index), through December 2098. The Company has allocated both lease payments between the land and building based on their estimated fair values. The portion of the payments allocated to the building has been capitalized at the present value of the future minimum lease payments. The portion of the payments allocable to the land is treated as operating lease payments. The imputed interest rate on both of these leases is 8%, which is based on the Company’s incremental borrowing rate at the time the lease agreement was executed. The capital lease obligations related to the units amounted to approximately $6.1 million as of June 30, 2012 and December 31, 2011, respectively. Substantially all of the principal payments on the capital lease obligations are due at the end of the lease agreements.

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The Company has also entered into capital lease obligations, which are immaterial to the Company’s consolidated financial statements, related to equipment at certain of the hotels.

7. Omnibus Stock Incentive Plan

RSUs, LTIP Units and Stock Options

On February 9, 2006, the Board of Directors of the Company adopted the Morgans Hotel Group Co. 2006 Omnibus Stock Incentive Plan (the “2006 Stock Incentive Plan”). An aggregate of 3,500,000 shares of common stock of the Company were reserved and authorized for issuance under the 2006 Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. On April 23, 2007, the Board of Directors of the Company adopted, and at the annual meeting of stockholders on May 22, 2007, the stockholders approved, the Company’s 2007 Omnibus Incentive Plan (the “2007 Incentive Plan”), which amended and restated the 2006 Stock Incentive Plan and increased the number of shares reserved for issuance under the plan by up to 3,250,000 shares to a total of 6,750,000 shares. On April 10, 2008, the Board of Directors of the Company adopted, and at the annual meeting of stockholders on May 20, 2008, the stockholders approved, an Amended and Restated 2007 Omnibus Incentive Plan (the “Restated 2007 Incentive Plan”) which, among other things, increased the number of shares reserved for issuance under the plan by up to 1,860,000 shares to a total of 8,610,000 shares. On November 30, 2009, the Board of Directors of the Company adopted, and at a special meeting of stockholders of the Company held on January 28, 2010, the Company’s stockholders approved, an amendment to the Restated 2007 Incentive Plan (the “Amended 2007 Incentive Plan”) to increase the number of shares reserved for issuance under the plan by 3,000,000 shares to 11,610,000 shares. On April 5, 2012, the Board of Directors of the Company adopted, and at the annual meeting of stockholders on May 16, 2012, the stockholders approved, an amendment to the Amended 2007 Incentive Plan (the “Second Amended 2007 Incentive Plan”) to increase the number of shares reserved for issuance under the plan by 3,000,000 shares to 14,610,000 shares.

The Second Amended 2007 Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation rights, shares of common stock of the Company, including restricted stock units (“RSUs”) and other equity-based awards, including membership units in Morgans Group which are structured as profits interests (“LTIP Units”), or any combination of the foregoing. The eligible participants in the Second Amended 2007 Incentive Plan include directors, officers and employees of the Company. Awards other than options and stock appreciation rights reduce the shares available for grant by 1.7 shares for each share subject to such an award.

On May 17, 2012, the Company issued an aggregate of 64,932 RSUs to the Company’s non-employee directors under the Second Amended 2007 Incentive Plan, which vested immediately upon grant. The fair value of each such RSU was $4.62 at the grant date.

A summary of stock-based incentive awards as of June 30, 2012 is as follows (in units, or shares, as applicable):

	Restricted Stock Units			LTIP Units			Stock Options
Outstanding as of January 1, 2012		669,879			2,340,972			2,324,740
Granted during 2012		320,138			121,402			—
Distributed/exercised during 2012		(142,039	)		(251,909	)		—
Forfeited during 2012		(41,462	)		—			—
Outstanding as of June 30, 2012		806,516			2,210,465			2,324,740
Vested as of June 30, 2012		243,061			1,954,858			1,458,074

As of June 30, 2012 and December 31, 2011, there were approximately $8.0 million and $8.8 million, respectively, of total unrecognized compensation costs related to unvested RSUs, LTIP Units and options. As of June 30, 2012, the weighted-average period over which this unrecognized compensation expense will be recorded is approximately 1 year.

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Total stock compensation expense related to RSUs, LTIP Units and options, which is included in corporate expenses on the accompanying consolidated statements of comprehensive loss, was $1.6 million and $2.0 million for the three months ended June 30, 2012 and 2011, respectively and $2.6 million and $6.0 million for the six months ended June 30, 2012 and 2011, respectively.

Outperformance Award Program

In connection with the Company’s senior management changes announced in March 2011, the Compensation Committee of the Board of Directors of the Company implemented an Outperformance Award Program, which is a long-term incentive plan intended to provide the Company’s senior management with the ability to earn cash or equity awards based on the Company’s level of return to stockholders over a three-year period.

Pursuant to the Outperformance Award Program, each of the Company’s senior managers hired in 2011, Messrs. Hamamoto, Gross, Flannery and Gery, received an award, in each case reflecting the participant’s right to receive a participating percentage in an outperformance pool if the Company’s total return to stockholders (including stock price appreciation plus dividends) increases by more than 30% (representing a compounded annual growth rate of approximately 9% per annum) over a three-year period from March 20, 2011 to March 20, 2014 (or a prorated hurdle rate over a shorter period in the case of certain changes of control), of a new series of outperformance long-term incentive units (the “OPP LTIP Units”), as described below, subject to vesting and the achievement of certain performance targets.

The total return to stockholders will be calculated based on the average closing price of the Company’s common shares on the 30 trading days ending on the Final Valuation Date (as defined below). The baseline value of the Company’s common shares for purposes of determining the total return to stockholders will be $8.87, the closing price of the Company’s common shares on March 18, 2011. The participating percentages granted to Messrs. Hamamoto, Gross, Flannery and Gery are 35%, 35%, 10% and 10%, respectively. In addition, in February 2012, the Company’s Chief Financial Officer, Mr. Szymanski, and the Company’s Executive Vice President and General Counsel, Mr. Smail, were each granted participating percentages of 5%, respectively.

Each of the current participants’ OPP LTIP Units vests on March 20, 2014 (or earlier in the event of certain changes of control) (the “Final Valuation Date”), contingent upon each participant’s continued employment, except for certain accelerated vesting events described below.

The aggregate dollar amount available to all participants is equal to 10% of the amount by which the Company’s March 20, 2014 valuation exceeds 130% (subject to proration in the case of certain changes of control) of the Company’s March 20, 2011 valuation and the dollar amount payable to each participant (the “Participation Amount”) is equal to such participant’s participating percentage in the total outperformance pool. Following the Final Valuation Date, the participant will either forfeit existing OPP LTIP Units or receive additional OPP LTIP Units so that the value of the vested OPP LTIP Units of the participant are equivalent to the participant’s Participation Amount.

Participants will forfeit any unvested OPP LTIP Units upon termination of employment; provided, however, that in the event a participant’s employment terminates because of death or disability, or employment is terminated by the Company without Cause or by the participant for Good Reason, as such terms are defined in the participant’s employment agreements, the participant will not forfeit the award and will receive, following the Final Valuation Date, a Participation Amount reflecting his partial service. If the Final Valuation Date is accelerated by reason of certain change of control transactions, each participant whose award has not previously been forfeited will receive a Participation Amount upon the change of control reflecting the amount of time since the effective date of the program, which was March 20, 2011.

OPP LTIP Units represent a special class of membership interest in the operating company, Morgans Group, which are structured as profits interests for federal income tax purposes. Conditioned upon minimum allocations to the capital accounts of the OPP LTIP Units for federal income tax purposes, each vested OPP LTIP Unit may be converted, at the election of the holder, into one Class A Unit in Morgans Group upon the receipt of stockholder approval for the shares of common stock underlying the OPP LTIP Units.

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During the six-month period following the Final Valuation Date, Morgans Group may redeem some or all of the vested OPP LTIP Units (or Class A Units into which they may be converted) at a price equal to the common share price (based on a 30-day average) on the Final Valuation Date. From and after the one-year anniversary of the Final Valuation Date, for a period of six months, participants will have the right to cause Morgans Group to redeem some or all of the vested OPP LTIP Units at a price equal to the greater of the common share price at the Final Valuation Date (determined as described above) or the then current common share price (calculated as determined in Morgans Group’s limited liability company agreement). Beginning 18 months after the Final Valuation Date, each of these OPP LTIP Units (or Class A Units into which they may be converted) is redeemable at the election of the holder for: (1) cash equal to the then fair market value of one share of the Company’s common stock, or (2) at the option of the Company, one share of common stock, in the event the Company then has shares available for that purpose under its stockholder-approved equity incentive plans. Participants are entitled to receive distributions on their vested OPP LTIP Units if any distributions are paid on the Company’s common stock following the Final Valuation Date.

The OPP LTIP Units were valued at approximately $7.3 million on the date of grant utilizing a Monte Carlo simulation to estimate the probability of the performance vesting conditions being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times. For each simulation, the payoff is calculated at the settlement date, which is then discounted to the award date at a risk-free interest rate. The average of the values over all simulations is the expected value of the unit on the award date. Assumptions used in the valuations included factors associated with the underlying performance of the Company’s stock price and total stockholder return over the term of the performance awards including total stock return volatility and risk-free interest. The fair value of the OPP LTIP Units were estimated on the date of grant using the following assumptions in the Monte-Carlo simulation: expected price volatility for the Company’s stock of 50%; a risk free rate of 1.46%; and no dividend payments over the measurement period.

As the Company has the ability to settle the vested OPP LTIP Units with cash, these OPP LTIP Units are not considered to be indexed to the Company’s stock price and must be accounted for as liabilities at fair value. As of June 30, 2012, the fair value of the OPP LTIP Units were approximately $0.7 million and compensation expense relating to these OPP LTIP Units is being recorded over the vesting period. The fair value of the OPP LTIP Units were estimated on June 30, 2012 using the following assumptions in the Monte-Carlo valuation: expected price volatility for the Company’s stock of 50%; a risk free rate of 0.49%; and no dividend payments over the measurement period.

Total stock compensation expense related to the OPP LTIP Units, which is included in corporate expenses on the accompanying consolidated statements of comprehensive loss, was immaterial for the three and six months ended June 30, 2012.

8. Preferred Securities and Warrants

On October 15, 2009, the Company entered into a Securities Purchase Agreement with the Investors. Under the agreement, the Company issued and sold to the Investors (i) $75.0 million of preferred stock comprised of 75,000 shares of the Company’s Series A Preferred Securities, $1,000 liquidation preference per share (the “Series A Preferred Securities”), and (ii) warrants to purchase 12,500,000 shares of the Company’s common stock at an exercise price of $6.00 per share (the “Yucaipa Warrants”).

The Series A Preferred Securities have an 8% dividend rate through October 15, 2014, a 10% dividend rate from October 15, 2014 to October 15, 2016, and a 20% dividend rate thereafter. The Company has the option to accrue any and all dividend payments. The cumulative unpaid dividends have a dividend rate equal to the dividend rate on the Series A Preferred Securities. As of June 30, 2012, the Company had undeclared and unpaid dividends of $18.3 million.

The Company has the option to redeem any or all of the Series A Preferred Securities at par at any time. The Series A Preferred Securities have limited voting rights and only vote on the authorization to issue senior preferred securities, amendments to their certificate of designations, amendments to the Company’s charter that adversely affect the Series A Preferred Securities and certain change in control transactions.

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As discussed in note 2, the Yucaipa Warrants to purchase 12,500,000 shares of the Company’s common stock at an exercise price of $6.00 per share have a 7-1/2 year term and are exercisable utilizing a cashless exercise method only, resulting in a net share issuance. Until October 15, 2010, the Investors had certain rights to purchase their pro rata share of any equity or debt securities offered or sold by the Company. In addition, the $6.00 exercise price of the Yucaipa Warrants was subject to certain reductions if, any time prior to October 15, 2010, the Company issued shares of common stock below $6.00 per share. Per ASC 815-40-15, as the strike price was adjustable until the first anniversary of issuance, the Yucaipa Warrants were not considered indexed to the Company’s stock until that date. Therefore, through October 15, 2010, the Company accounted for the Yucaipa Warrants as liabilities at fair value. On October 15, 2010, the Investors’ rights under the Yucaipa Warrants’ exercise price adjustment expired, at which time the Yucaipa Warrants met the scope exception in ASC 815-10-15 and are accounted for as equity instruments indexed to the Company’s stock. At October 15, 2010, the Yucaipa Warrants were reclassified to equity and will no longer be adjusted periodically to fair value. The Investors’ right to exercise the Yucaipa Warrants to purchase 12,500,000 shares of the Company’s common stock expires in April 2017.

The exercise price and number of shares subject to the Yucaipa Warrants are both subject to anti-dilution adjustments.

The Investors have consent rights over certain transactions for so long as they collectively own or have the right to purchase through exercise of the Yucaipa Warrants 6,250,000 shares of the Company’s common stock, including (subject to certain exceptions and limitations):

• the sale of substantially all of the Company’s assets to a third party;

• the acquisition by the Company of a third party where the equity investment by the Company is $100 million or greater;

• the acquisition of the Company by a third party; or

• any change in the size of the Company’s Board of Directors to a number below 7 or above 9.

Subject to certain exceptions, the Investors may not transfer any Series A Preferred Securities, Yucaipa Warrants or common stock until October 15, 2012. The Investors are also subject to certain standstill arrangements as long as they beneficially own over 15% of the Company’s common stock.

In connection with the investment by the Investors, the Company paid to the Investors a commitment fee of $2.4 million and reimbursed the Investors for $600,000 of expenses.

The Company calculated the fair value of the Series A Preferred Securities at its net present value by discounting dividend payments expected to be paid on the shares over a 7-year period using a 17.3% rate. The Company determined that the market discount rate of 17.3% was reasonable based on the Company’s best estimate of what similar securities would most likely yield when issued by entities comparable to the Company.

The initial carrying value of the Series A Preferred Securities was recorded at its net present value less costs to issue on the date of issuance. The carrying value will be periodically adjusted for accretion of the discount. As of June 30, 2012, the value of the Series A Preferred Securities was $55.9 million, which includes cumulative accretion of $7.8 million.

The Company calculated the estimated fair value of the Yucaipa Warrants using the Black-Scholes valuation model, as discussed in note 2.

The Company and Yucaipa American Alliance Fund II, LLC, an affiliate of the Investors, as the fund manager, also entered into a Real Estate Fund Formation Agreement (the “Fund Formation Agreement”) on October 15, 2009 pursuant to which the Company and the fund manager agreed to use their good faith efforts to endeavor to raise a private equity investment fund. The initial purpose of the private equity investment fund was to invest in hotel real estate projects located in North America. The Company was to be offered the opportunity to manage the hotels owned by the Fund under long-term management agreements. In connection with the Fund Formation Agreement, the Company issued to the fund manager 5,000,000 contingent warrants to purchase the Company’s common stock at an exercise price of $6.00 per share with a 7-1/2 year term.

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The Fund Formation Agreement terminated by its terms on January 30, 2011 due to the failure to close a fund with $100 million of aggregate capital commitments by that date, and the 5,000,000 contingent warrants issued to the fund manager were forfeited in their entirety on October 15, 2011 due to the failure to close a fund with $250 million of aggregate capital commitments by that date.

For so long as the Investors collectively own or have the right to purchase through exercise of the Yucaipa Warrants (assuming a cash rather than a cashless exercise) 875,000 shares of the Company’s common stock, the Company has agreed to use its reasonable best efforts to cause its Board of Directors to nominate and recommend to the Company’s stockholders the election of a person nominated by the Investors as a director of the Company and to use its reasonable best efforts to ensure that the Investors’ nominee is elected to the Company’s Board of Directors at each such meeting. If that nominee is not elected by the Company’s stockholders, the Investors have certain observer rights and, in certain circumstances, the dividend rate on the Series A Preferred Securities increases by 4% during any time that an Investors’ nominee is not a member of the Company’s Board of Directors. Effective October 15, 2009, the Investors nominated and the Company’s Board of Directors elected Michael Gross as a member of the Company’s Board of Directors. Effective March 20, 2011 when Mr. Gross was appointed Chief Executive Officer of the Company, the Investors’ nominated, and the Company’s Board of Directors elected, Ron Burkle as a member of the Company’s Board of Directors.

On April 21, 2010, the Company entered into a Waiver Agreement with the Investors, pursuant to which the Investors were permitted to purchase up to $88 million in aggregate principal amount of the Convertible Notes within six months of April 21, 2010 and subject to the limitations and conditions set forth therein. From April 21, 2010 to July 21, 2010, the Investors purchased $88 million of the Convertible Notes. In the event an Investor proposes to sell the Convertible Notes at a time when the market price of a share of the Company’s common stock exceeds the then effective conversion price of the Convertible Notes, the Company is granted certain rights of first refusal for the purchase of the same from the Investors. In the event an Investor proposes to sell the Convertible Notes at a time when the market price of a share of the Company’s common stock is equal to or less than the then effective conversion price of the Convertible Notes, the Company is granted certain rights of first offer to purchase the same from the Investors.

9. 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 $2.0 million and $3.0 million for the three months ended June 30, 2012 and 2011, respectively, and $4.1 million and $6.3 million for the six months ended June 30, 2012 and 2011, respectively.

As of June 30, 2012 and December 31, 2011, the Company had receivables from these affiliates of approximately $5.9 million and $4.1 million, respectively, which are included in related party receivables on the accompanying consolidated balance sheets.

As of June 30, 2012 and December 31, 2011, the TLG Promissory Notes due to Messrs. Sasson and Masi had aggregate fair values of approximately $16.8 million and $15.5 million, respectively, as discussed in note 6, which are included in debt and capital lease obligations on the accompanying consolidated balance sheets. For the three and six months ended June 30, 2012, the Company recorded $0.3 million and $0.7 million, respectively, of interest expense related to the TLG Promissory Notes.

10. Discontinued Operations

In January 2011, an indirect subsidiary of the Company transferred its interests in the property across the street from Delano South Beach to SU Gale Properties, LLC. As a result of this transaction, the Company was released from $10.5 million of nonrecourse mortgage and mezzanine indebtedness previously consolidated on the Company’s balance sheet. The property across the street from Delano South Beach was a development property.

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The following sets forth the discontinued operations of the property across the street from Delano South Beach for the three and six months ended June 30, 2011 (in thousands):

	Three Months Ended June 30, 2011			Six Months Ended June 30, 2011
Operating expenses	$	(8	)	$	(35	)
Income tax benefit (expense)		3			(323	)
Gain on disposal		—			843
(Loss) income from discontinued operations	$	(5	)	$	485

11. Deferred Gain on Assets Sold

On May 3, 2011, pursuant to a purchase and sale agreement, Mondrian Holdings sold Mondrian Los Angeles for $137.0 million to Pebblebrook. The Company applied a portion of the proceeds from the sale, along with approximately $9.2 million of cash in escrow, to retire the $103.5 million mortgage secured by the hotel. Net proceeds, after the repayment of debt and closing costs, were approximately $40 million. The Company continues to operate the hotel under a 20-year management agreement with one 10-year extension option.

On May 23, 2011, pursuant to purchase and sale agreements, Royalton LLC, a subsidiary of the Company, sold Royalton for $88.2 million to Royalton 44 Hotel, L.L.C., an affiliate of FelCor Lodging Trust, Incorporated, and Morgans Holdings LLC, a subsidiary of the Company, sold Morgans for $51.8 million to Madison 237 Hotel, L.L.C., an affiliate of FelCor Lodging Trust, Incorporated. The Company applied a portion of the proceeds from the sale to retire the outstanding balance on its revolving credit facility at the time, which was secured in part by these hotels. Net proceeds, after the repayment of debt and closing costs, were approximately $93 million. The Company continues to operate the hotels under 15-year management agreements with one 10-year extension option.

In accordance with ASC 360-20, Property, Plant and Equipment, Real Estate Sales, the Company evaluated its accounting for the gain on sales, noting that the Company continues to have significant continuing involvement in the hotels as a result of long-term management agreements, which resulted in the Company continuing to have involvement in the hotels and sharing in risks and rewards of ownership. The Company recorded deferred gains of approximately $11.2 million, $12.5 million and $55.6 million, respectively, related to the sales of Royalton, Morgans and Mondrian Los Angeles, which are deferred and recognized over the initial term of the related management agreement.

On November 23, 2011, our subsidiary, Royalton Europe, and Walton MG London, each of which owned a 50% equity interest in Morgans Europe, the joint venture that owned the 150 room Sanderson and 204 room St Martins Lane hotels, completed the sale of their respective equity interests in the joint venture for an aggregate of £192 million (or approximately $297 million). The Company received net proceeds of approximately $72.3 million, after applying a portion of the proceeds from the sale to retire the £99.5 million of outstanding mortgage debt secured by the hotels and payment of closing costs. The Company continues to operate the hotels under long-term management agreements that, including extension options, extend the term of the prior management agreements to 2041 from 2027.

The Company recorded a deferred gain of approximately $73.1 million related to the sales of its equity interests in Morgans Europe. As the Company has significant continuing involvement through long-term management agreements, similar to the discussion above, the gain on sale is deferred and recognized over the initial term of the related management agreement.

12. Commitments

In order to obtain long term management contracts, the Company has committed to contribute capital in various forms on hotel development projects. These include equity investments, key money and cash flow guarantees to hotel owners. The cash flow guarantees generally have a stated maximum amount of funding and a defined term. The terms of the cash flow guarantees to hotel owners generally require the Company to fund if the hotels do not attain specified levels of operating profit. Oftentimes, cash flow guarantees to hotel owners may be recoverable as loans repayable to the Company out of future hotel cash flows and/or proceeds from the sale of hotels.

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Development Hotel Commitments and Guarantees. The Company has signed management agreements to manage various hotels which are in the development stage. These include the following:

	Expected Room Count		Anticipated Opening		Term of Initial Management Contract
Hotels Currently Under Construction:
Delano Marrakech		73		Sept. 2012		15 years
Mondrian Marrakech		69		Late 2013		15 years
Mondrian Doha		270		2013		30 years
Mondrian London		360		Early 2014		25 years
Mondrian at Baha Mar, Bahamas		310		2014		20 years
Other Signed Agreements:
Mondrian Istanbul		128		2014		20 years
Delano Aegean Sea		200		2014		20 years
Hudson London		234		2015		20 years
Highline, New York project		175		To be determined		15 years

However, financing has not been obtained for some of these hotel projects, and there can be no assurances that all of these projects will be developed as planned. If adequate project financing is not obtained, these projects may need to be limited in scope, deferred or cancelled altogether, and to the extent the Company has previously funded key money or an equity investment on a cancelled project, the Company may be unable to recover the amounts funded.

The Company has committed to contribute key money or equity to certain hotels under development. In addition, through certain cash flow guarantees, the Company may have potential future funding obligations for certain hotels under development. The following table details the Company’s key money and equity commitments as well as potential funding obligations under cash flow guarantees at the maximum amount under the applicable contracts for hotels under development as of June 30, 2012 (in thousands):

	As of June 30, 2012
Key money	$	29,400
Equity investments		—
Cash flow guarantees		31,600
Total maximum future funding commitments	$	61,000
Amounts due within one year	$	2,500

The Company is required to fund approximately $10.0 million of key money toward the Mondrian at Baha Mar, Bahamas just prior to and at opening of the hotel. As of June 30, 2012, we have an outstanding $10.0 million standby letter of credit on the Delano Credit Facility for up to 48 months to cover this obligation. This amount is included in key money in the above table.

As the Company pursues its growth strategy, it may continue to invest in new management agreements through key money, equity investments and cash flow guarantees. To fund any such future investments, the Company may from time to time pursue additional potential financing opportunities it has available.

Operating Joint Venture Hotels Commitments and Guarantees. The following detail obligations the Company has or may have related to its operating hotels as of June 30, 2012.

Mondrian South Beach Mortgage and Mezzanine Agreements. Morgans Group and affiliates of its joint venture partner have agreed to provide standard nonrecourse carve-out guaranties and provide certain limited indemnifications for the Mondrian South Beach mortgage and mezzanine loans. In the event of a default, the lenders’ recourse is generally limited to the mortgaged property or related equity interests, subject to standard nonrecourse carve-out guaranties for “bad boy” type acts. Morgans Group and affiliates of its joint venture partner also agreed to guaranty the joint venture’s obligation to reimburse certain expenses incurred by the lenders and indemnify the lenders in the event such lenders incur liability in connection with certain third-party actions. Morgans Group and affiliates of its joint venture partner have also guaranteed the joint venture’s liability for the unpaid principal amount of any seller financing note provided for condominium sales if such financing or related

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mortgage lien is found unenforceable, provided they shall not have any liability if the seller financed unit becomes subject to the lien of the lender’s mortgage or title to the seller financed unit is otherwise transferred to the lender or if such seller financing note is repurchased by Morgans Group and/or affiliates of its joint venture at the full amount of unpaid principal balance of such seller financing note. In addition, although construction is complete and Mondrian South Beach opened on December 1, 2008, Morgans Group and affiliates of our joint venture partner may have continuing obligations under construction completion guaranties until all outstanding payables due to construction vendors are paid. As of June 30, 2012, there are remaining payables outstanding to vendors of approximately $1.0 million. Pursuant to a letter agreement with the lenders for the Mondrian South Beach loan, the joint venture agreed that these payables, many of which are currently contested or under dispute, will not be paid from operating funds but only from tax abatements and settlements of certain lawsuits. In the event funds from tax abatements and settlements of lawsuits are insufficient to repay these amounts in a timely manner, the Company and its joint venture partner are required to fund the shortfall amounts.

The Company and affiliates of its joint venture partner also have each agreed to purchase approximately $14 million of condominium units under certain conditions, including an event of default. In the event of a default under the lender’s mortgage or mezzanine loan, the joint venture partners are obligated to purchase selected condominium units, at agreed-upon sales prices, having aggregate sales prices equal to 1/2 of the lesser of $28.0 million, which is the face amount outstanding on the lender’s mezzanine loan, or the then outstanding principal balance of the lender’s mezzanine loan. The joint venture is not currently in an event of default under the mortgage or mezzanine loan. The Company has not recognized a liability related to the construction completion or the condominium purchase guarantees.

Mondrian SoHo. Certain affiliates of the Company’s joint venture partner have agreed to provide a standard nonrecourse carve-out guaranty for “bad boy” type acts and a completion guaranty to the lenders for the Mondrian SoHo loan, for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates up to 20% of such entities’ guaranty obligations, provided that each party is fully responsible for any losses incurred as a result of its own gross negligence or willful misconduct.

Mondrian SoHo opened in February 2011, and we are operating the hotel under a 10-year management contract with two 10-year extension options.

Ames. The development of the Ames hotel qualified for federal and state historic rehabilitation tax credits which were sold for approximately $16.9 million. In the event of foreclosure and certain other transfers, the Company is jointly and severally liable for certain federal historic tax credit recapture liabilities relating to these credits. These liabilities reduce over time, but as of June 30, 2012 were estimated at approximately $14.4 million, of which the Company’s pro rata share is $4.5 million.

Certain affiliates of the Company’s joint venture partner have agreed to provide a standard nonrecourse carve-out guaranty for “bad boy” type acts and a completion guaranty to the lenders for the Ames loan, for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates up to its pro rata ownership share of such entities’ guaranty obligations, provided that each party is fully responsible for any losses incurred as a result of its respective gross negligence or willful misconduct.

Other Guarantees to Hotel Owners. As discussed above, the Company has provided certain cash flow guarantees to hotel owners in order to secure management contracts. The Company’s hotel management agreements for Royalton and Morgans contain cash flow guarantee performance tests that stipulate certain minimum levels of operating performance. These performance test provisions give the Company the option to fund a shortfall in operating performance limited to the Company’s earned base fees. If the Company chooses not to fund the shortfall, the hotel owner has the option to terminate the management agreement. As of June 30, 2012, approximately $0.4 million was recorded in accrued expenses and as a reduction to management fees related to these performance test provisions. The Company’s maximum potential amount of future fundings related to the Royalton and Morgans performance guarantee cannot be determined as of June 30, 2012, but under the hotel management agreements is limited to the Company’s base fees earned.

Guaranteed Loans and Commitments. The Company has made guarantees to lenders and lessors of its owned and leased hotels, namely related to the Hudson 2011 Mortgage Loan, the Clift lease payments and the Delano Credit Facility, as discussed further in note 6.

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ITEM 2. MANAGEMENT’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 our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q for the six months ended June 30, 2012. 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

Overview

We are a fully integrated lifestyle hospitality company that operates, owns, acquires, develops and redevelops boutique hotels, primarily in gateway cities and select resort markets in the United States, Europe and other international locations, and nightclubs, restaurants, bars and other food and beverage venues in many of the hotels we operate, as well as in hotels and casinos operated by MGM Resorts International (“MGM”) in Las Vegas. Over our 28-year history, we have gained experience operating in a variety of market conditions.

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

• three hotels that we own and manage (“Owned Hotels”), consisting, as of June 30, 2012, of Hudson in New York, Delano South Beach in Miami Beach, and Clift in San Francisco (which we lease under a long-term lease that is treated as a financing), comprising approximately 1,400 rooms;

• our wholly-owned food and beverage operations (“Owned F&B Operations”), consisting, as of June 30, 2012, of certain food and beverage operations located at Hudson in New York, Delano South Beach in Miami Beach, Clift in San Francisco, and Sanderson and St Martins Lane, both in London;

• four hotels that we partially own and manage pursuant to long-term management agreements (“Joint Venture Hotels”), consisting, as of June 30, 2012, of Mondrian South Beach in Miami Beach, Shore Club in Miami Beach, Ames in Boston and Mondrian SoHo in New York, comprising approximately 1,015 rooms;

• six hotels that we manage pursuant to long-term management agreements with no ownership interest (“Managed Hotels”), consisting, as of June 30, 2012, of Royalton and Morgans in New York, Mondrian in Los Angeles, Sanderson and St Martins Lane in London, and Hotel Las Palapas in Playa del Carmen, Mexico, comprising approximately 950 rooms;

• our 90% controlling interest in a group of companies known as The Light Group (“TLG”), a leading lifestyle food and beverage management company with a ten-year track record of delivering cutting-edge food and beverage experiences at world class properties. TLG develops, redevelops and operates numerous venues in Las Vegas pursuant to management agreements with MGM, including nightclubs, such as The Bank Nightclub at Bellagio Hotel and Casino and Haze at ARIA Resort and Casino at CityCenter, restaurants, such as Yellowtail Japanese Restaurant & Lounge at Bellagio Hotel and Casino and Diablos Mexican Cantina at Monte Carlo Hotel, pool lounges and bars. TLG also serves as our food and beverage platform, operating or assisting in the development, redevelopment, concepting, design and operations of food and beverage venues in many of the hotels we operate;

• our investment in unconsolidated food and beverage operations (“F&B Venture”), consisting, as of June 30, 2012, of certain food and beverage operations located at Mondrian South Beach in Miami Beach;

• our investments in hotels under development and other proposed properties; and

• the rights and obligations contributed to Morgans Group, our operating company, in the formation and structuring transactions described in note 1 to our consolidated financial statements, included elsewhere in this report.

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We own partial interests in the Joint Venture Hotels and the F&B Venture. 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.

Our Joint Venture Hotels as of June 30, 2012 are operated under management agreements which expire as follows:

• Shore Club — July 2022;

• Mondrian South Beach — August 2026;

• Ames — November 2024; and

• Mondrian SoHo — February 2021 (with two 10-year extensions at our option, subject to certain conditions).

Our Managed Hotels as of June 30, 2012 are operated under management agreements which expire as follows:

• Mondrian Los Angeles — May 2031 (with one 10-year extension at our option);

• Royalton — May 2026 (with one 10-year extension at our option, subject to certain conditions);

• Morgans — May 2026 (with one 10-year extension at our option, subject to certain conditions);

• Sanderson — June 2018 (with one 10-year extension at our option);

• St Martins Lane — June 2018 (with one 10-year extension at our option); and

• Hotel Las Palapas in Playa del Carmen, Mexico —December 2014 (with one automatic five-year extension, so long as we are not in default under the management agreement).

We have also signed management agreements to manage various other hotels, including a Mondrian project in Doha, Qatar, a Mondrian project in The Bahamas, a Mondrian project in London, a Mondrian project in Istanbul, Turkey, a Mondrian project in Marrakech, a Delano project in Marrakech, a Delano project on the Aegean Sea in Turkey, a Hudson project in London, and a hotel project in the Highline area in New York City. However, financing has not been obtained for some of these hotel projects, and there can be no assurances that all of these projects will be developed as planned.

Our hotel management agreements may be subject to early termination in specified circumstances. For example, our hotel management agreements for Royalton and Morgans contain performance tests that stipulate certain minimum levels of operating performance. These performance test provisions related to Royalton and Morgans provide us the option to fund a shortfall in operating performance limited to our earned base fees. If we choose not to fund the shortfall, the hotel owner has the option to terminate the management agreement. As of June 30, 2012, approximately $0.4 million was recorded in accrued expenses and as a reduction to management fees related to these Royalton and Morgans performance test provisions.

TLG’s management agreements may be subject to early termination in specified circumstances. For example, all of the management agreements contain, among other covenants, a performance test that stipulates a minimum level of operating performance, and restrictions as to certain requirements of suitability, capacity, compliance with laws and material terms, financial stability, and that certain named representatives must remain employed by or under contract to TLG.

Several of our hotels are also subject to substantial mortgage and mezzanine debt, and in some instances our management fee is subordinated to the debt, and our management agreements may be terminated by the lenders on foreclosure or certain other related events. For example, Mondrian SoHo and Ames both recently experienced cash shortfalls after payment of the debt service during their seasonally slow first quarter, which continued to some extent into the second quarter of 2012. In 2012, through June 30, we have funded approximately $1.0 million in cash shortfalls at Mondrian SoHo, which have been treated in part as additional capital contributions and in part as loans from our management company subsidiary. We do not intend to commit significant monies toward the repayment of the joint venture loans or the funding of operating deficits.

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In March 2010, the lender for the Shore Club mortgage initiated foreclosure proceedings against the property in U.S. federal district court. In October 2010, the federal court dismissed the case for lack of jurisdiction. In November 2010, the lender initiated foreclosure proceedings in state court and a bench trial took place in June 2012 during which the trial court granted a default ruling of foreclosure. Entry of a foreclosure judgment has been delayed pending, among other things, relinquishment of jurisdiction from the Florida appeals court to the trial court. We have operated and expect to continue to operate the hotel pursuant to the management agreement during the pendency of these proceedings, which may continue for some additional period of time in the event of post-judgment proceedings, which may include an appeal. However, there can be no assurances as to when a foreclosure sale may take place, or whether we will continue to operate the hotel once foreclosure proceedings are complete.

Factors Affecting Our Results of Operations

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

• Occupancy;

• Average daily room rate (“ADR”); and

• Revenue per available rooms (“RevPAR”), which is the product of ADR and average daily occupancy, but does not include food and beverage revenue, other hotel operating revenue such as telephone, parking and other guest services, or management fee revenue.

Our revenues are derived from the operation of hotels, as well as the operation of nightclub, restaurant and bar venues. 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 driven by occupancy of our hotels and the popularity of our bars and restaurants with our local customers. In June 2011, we acquired from affiliates of China Grill Management (“CGM”) the 50% interests CGM owned in our prior food and beverage joint ventures at Delano South Beach, Mondrian South Beach, Mondrian Los Angeles, Morgans, Sanderson and St Martins Lane for $20.0 million (the “CGM Transaction”). As a result of the CGM Transaction, we record 100% of the food and beverage revenue, and related expenses, for our Owned F&B Operations.

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

• Management fee revenue and other income. We earn hotel management fees under our hotel management agreements. These fees may include management fees as well as reimbursement for allocated chain services. Additionally, we own a 90% controlling investment in TLG, a leading lifestyle food and beverage management company, which operates numerous venues in Las Vegas pursuant to management agreements with MGM. The primary assets of TLG consist of its management and similar agreements with various MGM affiliates. Each of TLG’s venues is managed by an affiliate of TLG, which receives revenue based on a revenue sharing arrangement. Through our ownership of TLG, we recognize management fees in accordance with the applicable management agreement, which generally provides for base management fees as a percentage of gross sales, as defined in the agreement, and incentive management fees as a percentage of net profits, as defined in the agreement. Under TLG’s management agreements, all costs associated with the construction, build-out, FF&E, operating supplies, equipment and daily operational expenses are borne by each respective MGM affiliate.

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.

Renovations at our hotels can have a significant impact on our revenues. For example, our ongoing guestroom and corridor renovations at Hudson, which began in the fourth quarter of 2011, has had a material impact on our operating results during the six months ended June 30, 2012, as discussed further below.

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The seasonal nature of the hospitality business can also impact revenues. For example, our Miami hotels are generally strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth quarter. However, given the recent global economic downturn, the impact of seasonality in 2010 and 2011 was not as significant as in prior periods and may remain less pronounced in 2012 depending on the timing and strength of the economic recovery.

In addition to economic conditions, supply is another important factor that can affect revenues. Room rates, occupancy and food and beverage revenues 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. Additionally, through our strategic relationship with MGM, we believe that the impact of competitive new supply on our food and beverage operations in Las Vegas may be minimized, as we offer nightlife and food and beverage venues at highly-visible and visited locations on the Las Vegas Strip.

Finally, competition within the hospitality industry, which includes our hotels and our restaurants, nightclubs, bars and other food and beverage venues, can affect revenues. Competitive factors in the hospitality industry include name recognition, quality of service, convenience of location, quality of the property or venue, pricing, and range and quality of nightlife, food and beverage services and amenities offered. In addition, all of our hotels, restaurants, nightclubs 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 and pricing or more convenient locations, services or amenities or significantly expand, improve or introduce new service offerings in markets in which our hotels, restaurants, nightclubs, bars, and other food and beverage venues 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 and food and beverage services, costs to operate our hotel and food and beverage management companies, and costs associated with the ownership of our assets, 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 agent commissions and reservation expense. Like rooms revenue, occupancy is a major driver of rooms expense, which has a significant correlation with rooms revenue.

• Food and beverage expense. Similar to food and beverage revenue, occupancy of the hotels in which we operate food and beverage venues, and the popularity of our restaurants, nightclubs, bars and other food and beverage venues, 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. 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. Property taxes, insurance and other consist primarily of insurance costs and property taxes.

• Corporate expenses, including stock compensation. Corporate expenses consist of the cost of our corporate office, net of any cost recoveries, which consists primarily of payroll and related costs, stock-based compensation expenses, office rent and legal and professional fees and costs associated with being a public company.

• 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.

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• Restructuring, development and disposal costs include costs incurred related to losses on asset disposals as part of major renovation projects, the write-off of abandoned development projects resulting primarily from events generally outside management’s control such as the recent tightness of the credit markets, our restructuring initiatives and severance costs related to our restructuring initiatives. These items do not relate to the ongoing operating performance of our assets.

Other Items

• Interest expense, net. Interest expense, net includes interest on our debt and amortization of financing costs and is presented net of interest income and interest capitalized.

• Equity in (income) loss of unconsolidated joint ventures. Equity in (income) loss of unconsolidated joint ventures constitutes our share of the net profits and losses of our Joint Venture Hotels, our F&B Venture and our investments in hotels under development. Further, we and our joint venture partners review our Joint Venture Hotels and F&B Venture for other-than-temporary declines in market value. In this analysis of fair value, we use discounted cash flow analysis to estimate the fair value of our investment taking into account expected cash flow from operations, holding period and net proceeds from the dispositions of the property. Any decline that is not expected to be recovered is considered other-than-temporary and an impairment charge is recorded as a reduction in the carrying value of the investment.

• Gain on asset sales. We recorded deferred gains of approximately $11.2 million, $12.5 million and $55.6 million, respectively, related to the sales of Royalton, Morgans and Mondrian Los Angeles, and a deferred gain of approximately $73.1 million related to the sale of our ownership interest in the entity that owned 50% of Sanderson and St Martins Lane, as discussed in note 11 of our consolidated financial statements. As we have significant continuing involvement with these hotels through long-term management agreements, the gains on sales are deferred and recognized over the initial term of the related management agreement.

• Other non-operating expenses include costs associated with executive terminations not related to restructuring initiatives, costs of financings, litigation and settlement costs and other items that relate to the financing and investing activities associated with our assets and not to the ongoing operating performance of our assets, both consolidated and unconsolidated.

• Income tax expense (benefit). All of our foreign subsidiaries are subject to local jurisdiction corporate income taxes. Income tax expense is reported at the applicable rate for the periods presented. We are subject to Federal and state income taxes. Income taxes for the three and six months ended June 30, 2012 and 2011 were computed using our calculated effective tax rate. We also recorded net deferred taxes related to cumulative differences in the basis recorded for certain assets and liabilities. We established a reserve on the deferred tax assets based on the ability to utilize net operating loss carryforwards.

• Noncontrolling interest. Noncontrolling interest constitutes the percentage of membership units in Morgans Group, our operating company, owned by Residual Hotel Interest LLC, our former parent, as discussed in note 1 of our consolidated financial statements, our third-party food and beverage joint venture partner’s interest in the profits and losses of our F&B Venture, and the 10% ownership interest in TLG that is held by certain prior owners of TLG.

• Income (loss) from discontinued operations, net of tax. In January 2011, we recognized income from the transfer of the property across the street from Delano South Beach. As such, we have recorded the income or loss related to this transfer in income (loss) from discontinued operations, net of tax, on the accompanying consolidated statements of comprehensive loss.

• Preferred stock dividends and accretion. Dividends attributable to our outstanding preferred stock and the accretion of the fair value discount on the issuance of the preferred stock are reflected as adjustments to our net loss to arrive at net loss attributable to common stockholders, as discussed in note 8 of our consolidated financial statements.

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 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.

43

Notwithstanding our efforts to reduce variable costs, there are limits to how much we can accomplish because we have significant costs that are relatively fixed costs, such as depreciation and amortization, labor costs and employee benefits, insurance, real estate taxes, interest 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 Developments

Recent Trends. Starting in the fourth quarter of 2008 and continuing throughout 2009, the weakened U.S. and global economies resulted in considerable negative pressure on both consumer and business spending. As a result, lodging demand and revenues, which are primarily driven by growth in GDP, business investment and employment growth weakened substantially during this period as compared to the lodging demand and revenues we experienced prior to the fourth quarter of 2008. After this extremely difficult recessionary period, the outlook for the U.S. and global economies began improving in 2010 and that improvement has continued through 2011 and the first half of 2012. However, as a result of the current European economic crisis, the outlook for the global economy remains uncertain. To date, the economic recovery has not been particularly robust, as spending by businesses and consumers remains restrained, and there are still several trends which make our performance difficult to forecast, including shorter booking lead times at our hotels.

The pace of new lodging supply has increased over the past several years as many projects initiated before the economic downturn came to fruition. For example, we witnessed new competitive luxury and boutique properties opening between 2008 and 2011 in some of our markets, particularly in Los Angeles, Miami Beach and New York, which have impacted our performance in these markets and may continue to do so. However, we believe the timing of additional new development projects may be affected by ongoing uncertain economic conditions, which may slow down the pace of new supply development, including our own, in the next few years.

Our operating results for the second quarter of 2012 reflected performance that has varied by region, and were further impacted by renovation work at several of our hotels. Operating results were strong at our comparable hotels in the Northeast with RevPAR increases of 7.8% at Royalton, 11.8% at Mondrian SoHo and 17.9% at Ames, for the three months ended June 30, 2012 as compared to the same period in 2011, all primarily driven by ADR growth. Revenues in Miami during the second quarter of 2012 were affected by bad weather in Florida in April but recovered in May and June. For example, Delano’s RevPAR declined by 5.1% in April 2012, and grew by 10.0% in May and 7.1% in June, compared to the same months in 2011. Our West Coast hotels were affected by the closure of SkyBar at Mondrian Los Angeles due to renovations which were completed in May 2012. Our London hotels were adversely impacted by the ongoing European economic crises, lower demand in the pre-Olympics period and air conditioning repairs at Sanderson, which were completed in May 2012.

For the remainder of 2012, we believe that if various economic forecasts projecting continued modest expansion are accurate, this may lead to a gradual and modest increase in lodging demand for both leisure and business travel, although we believe there could be continued pressure on rates in certain markets, as leisure and business travelers alike continue to focus on cost containment. In addition, with the completion of renovations at certain hotels and the pending re-launch of Hudson in the third quarter of 2012, we believe we are well positioned to capitalize on these modest increases in demand and potentially increase rates as a result of newly renovated rooms and common areas. However, there can be no assurances that any increases in hotel revenues or earnings at our properties will occur, or be sustained, or that any losses will not increase for these or any other reasons.

Recent Developments & Strategy. In 2011, with the arrival of our new management team, we developed a strategy that includes investing in the people, platforms, hotel properties and management opportunities that we believe are necessary to strengthen our position as a leader in lifestyle hospitality management. In 2011, we focused on our talent base and operating and service platforms. As a result, we believe we now have the right personnel in place and are developing the right platforms to support future growth. In 2012, we are focused on the final stage of our property investment program, which involves upgrading certain of our properties and repositioning some of our hospitality offerings. An important component of this investment program includes re-energizing our food and beverage offerings by improving key facilities with a focus on driving higher beverage to food ratios and re-igniting the buzz around our nightlife and lobby scenes. While these upgrades and repositioning efforts impact the financial performance of our hotels in the short-term, we believe they are an essential step to ensure our hotel properties and food and beverage offerings continue to meet the expectations of our guests and the high standards of our brands. In addition, consistent with our growing focus on management opportunities, we continue to pursue and execute new management contracts, with the goal of strengthening our profit margins by maximizing revenue, increasing our market share and managing costs. To pursue this management-focused growth strategy, we may continue to make additional investments to obtain new management agreements in the form of key money, equity investments and cash flow guarantees.

In the first half of 2012, we made significant headway with the investments in our hotels, as five of our 12 properties were being renovated or upgraded in some way.

On March 1, 2012, we completed our renovation at Delano South Beach which began in the third quarter of 2011. The renovations included the re-opening of a newly concepted restaurant, Bianca, improved public areas, such as the Rose Bar and pool and beach bars, a new nightclub, FDR, upgraded exclusive bungalows and suites, and 1,200 square feet of additional meeting space.

At Hudson, where renovations began in the fourth quarter of 2011, as of August 1, 2012, approximately 70% of the guestrooms have been renovated and are back in service. The remaining guest rooms are expected to be fully renovated and in service in September 2012. We also plan to convert 31 SRO units into guest rooms at an estimated cost of approximately $150,000 per room, and expect to have these new rooms in service by the end of October 2012 bringing the total number of rooms at Hudson to 865. Additionally, we are making progress with new food and beverage concepts at Hudson, including renovations to the existing restaurant and Hudson Bar, which we expect to debut in the fourth quarter of 2012.

44

Despite the renovation work at Hudson, ADR increased by 10.9% during the three months ended June 30, 2012 compared to the same period in 2011, as newly renovated rooms have been available for sale and well received by hotel guests.

In addition to renovations at our Owned Hotels, the owners of several managed hotels have invested funds for renovations and repositionings during 2012. In Los Angeles, Mondrian’s SkyBar, the Company’s iconic outdoor bar, and the pool, were closed in early 2012 for renovations which were completed in May 2012. Sanderson underwent significant air conditioner repairs and replacements and certain technology upgrades in preparation for the 2012 Summer Olympics. This renovation work was completed in May 2012. In New York, the restaurant at Morgans was closed beginning in the first quarter of 2012. We expect to reopen this venue as a newly re-concepted restaurant and lounge in the third quarter of 2012.

Since the end of the first quarter, we continued to aggressively pursue hotel management opportunities, successfully announcing three newly signed management agreements – Delano Marrakech, Mondrian Marrakech and Hudson London at Great Scotland Yard. We believe our pipeline of prospective deals continues to remain strong. We now have signed management agreements for eight hotels that are scheduled to open over the next three years and plan to open three of these hotels in the next eighteen months. Six of these hotels already have financing for construction or redevelopment, although there can be no assurance that all of these hotel projects will be completed as scheduled or at all.

On June 12, 2012, we announced that we had entered into a 20-year management agreement for a 200 room hotel in London to be branded a Hudson. Hudson London is scheduled to open in early 2015 and we have provided the hotel owner a cash flow guarantee once the hotel is opened.

On June 19, 2012, we announced agreements with a Moroccan entrepreneur for the management of two properties in Marrakech, Morocco — a 73 room Delano-branded hotel scheduled to open in September 2012 and a 69 room Mondrian-branded hotel scheduled to open in late 2013, both pursuant to 15-year management agreements. Under the Delano agreement, we agreed to contribute $2.5 million in key money prior to the hotel opening in September 2012, which funds are refundable if the hotel fails to open by September 30, 2012, and under the Mondrian agreement, we agreed to contribute $2.5 million in key money upon the hotel’s opening.

45

Operating Results

Comparison of Three Months Ended June 30, 2012 to Three Months Ended June 30, 2011

The following table presents our operating results for the three months ended June 30, 2012 and 2011, including the amount and percentage change in these results between the two periods. The consolidated operating results for the three months ended June 30, 2012 is comparable to the consolidated operating results for the three months ended June 30, 2011, with the exception of Mondrian Los Angeles, which we owned until May 3, 2011, Royalton and Morgans, which we owned until May 23, 2011, the completion of the CGM Transaction in June 2011 resulting in our full ownership of certain food and beverage operations previously owned through a 50/50 joint venture, the management of the San Juan Water and Beach Club, which was terminated effective July 13, 2011, our 50% ownership interest in Sanderson and St Martins Lane, which we sold in November 2011, and the acquisition of TLG in November 2011. The consolidated operating results are as follows:

	Three Months Ended
	June 30, 2012			June 30, 2011			Changes ($)			Changes (%)
	(Dollars in thousands)
Revenues:
Rooms	$	25,743		$	33,485		$	(7,742	)		(23.1	)%
Food and beverage		14,277			15,611			(1,334	)		(8.5	)
Other hotel		1,198			1,733			(535	)		(30.9	)
Total hotel revenues		41,218			50,829			(9,611	)		(18.9	)
Management fee-related parties and other income		6,573			3,380			3,193			94.5
Total revenues		47,791			54,209			(6,418	)		(11.8	)
Operating Costs and Expenses:
Rooms		7,772			9,685			(1,913	)		(19.8	)
Food and beverage		11,865			13,135			(1,270	)		(9.7	)
Other departmental		919			1,036			(117	)		(11.3	)
Hotel selling, general and administrative		9,300			10,792			(1,492	)		(13.8	)
Property taxes, insurance and other		3,613			3,704			(91	)		(2.5	)
Total hotel operating expenses		33,469			38,352			(4,883	)		(12.7	)
Corporate expenses, including stock compensation		8,951			8,049			902			11.2
Depreciation and amortization		5,897			4,199			1,698			40.4
Restructuring, development and disposal costs		2,037			3,800			(1,763	)		(46.4	)
Total operating costs and expenses		50,354			54,400			(4,046	)		(7.4	)
Operating loss		(2,563	)		(191	)		(2,372	)			(1)
Interest expense, net		8,203			10,014			(1,811	)		(18.1	)
Equity in loss of unconsolidated joint venture		2,706			910			1,796				(1)
Gain on asset sales		(1,995	)		(620	)		(1,375	)			(1)
Other non-operating expenses		1,919			879			1,040				(1)
Loss before income tax expense		(13,396	)		(11,374	)		(2,022	)		17.8
Income tax expense		121			428			(307	)		(71.7	)
Net loss from continuing operations		(13,517	)		(11,802	)		(1,715	)		14.5
Loss from discontinued operations, net of tax		—			(5	)		5			(100.0	)
Net loss		(13,517	)		(11,807	)		(1,710	)		14.5
Net loss attributable to non controlling interest		124			383			(259	)		(67.6	)
Net loss attributable to Morgans Hotel Group		(13,393	)		(11,424	)		(1,969	)		17.2
Preferred stock dividends and accretion		(2,718	)		(2,229	)		(489	)		21.9
Net loss attributable to common stockholders	$	(16,111	)	$	(13,653	)	$	(2,458	)		18.0	%

⁽¹⁾  Not meaningful.

46

Total Hotel Revenues. Total hotel revenues decreased 18.9% to $41.2 million for the three months ended June 30, 2012 compared to $50.8 million for the three months ended June 30, 2011. This decrease was primarily due to the sale in May 2011 of three hotels we previously owned. The components of RevPAR from our Owned Hotels, which consisted, as of June 30, 2012, of Hudson, Delano South Beach and Clift, for the three months ended June 30, 2012 and 2011 are summarized as follows:

	Three Months Ended
	June 30, 2012			June 30, 2011			Change ($)			Change (%)
Occupancy		74.0	%		87.4	%		—			(13.4	)%
ADR	$	273		$	250		$	23			9.0	%
RevPAR	$	202		$	219		$	(17	)		(7.6	)%

RevPAR from our Owned Hotels decreased 7.6% to $202 for the three months ended June 30, 2012 compared to $219 for the three months ended June 30, 2011. During the three months ended June 30, 2012, Hudson was under renovation.

Rooms revenue decreased 23.1% to $25.7 million for the three months ended June 30, 2012 compared to $33.5 million for the three months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results of these three hotels during all periods presented, our Owned Hotels rooms revenue decreased 7.6%, consistent with the decrease in RevPAR, which was primarily attributable to the ongoing renovations at Hudson, discussed above.

Food and beverage revenue decreased 8.5% to $14.3 million for the three months ended June 30, 2012 compared to $15.6 million for the three months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Slightly offsetting this decrease were increases related to the CGM Transaction, in which we purchased the remaining 50% interest from our joint venture partner in certain food and beverage operations at our hotels in June 2011, and the consolidation of previously unconsolidated food and beverage operations at our London hotels.

Other hotel revenue decreased 30.9% to $1.2 million for the three months ended June 30, 2012 compared to $1.7 million for the three months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results for these three hotels during all periods presented, our Owned Hotels other hotel revenue decreased 15.6%. This trend is consistent with the decrease in rooms revenue noted above, although the decrease in other hotel revenue was further impacted by the fact that, effective January 2012, Hudson no longer offers a minibar which eliminated other hotel revenue associated with minibar sales. Additionally, beginning in July 2011 and February 2012, respectively, Hudson and Delano no longer charge for standard internet connectivity.

Management Fee—Related Parties and Other Income. Management fee—related parties and other income increased by 94.5% to $6.6 million for the three months ended June 30, 2012 compared to $3.4 million for the three months ended June 30, 2011. This increase was primarily attributable to management fees earned through our contracts with MGM acquired as part of our acquisition of TLG in November 2011.

Operating Costs and Expenses

Rooms expense decreased 19.8% to $7.8 million for the three months ended June 30, 2012 compared to $9.7 million for the three months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results of these three hotels during all periods presented, our Owned Hotels rooms expense decreased 1.2%. This trend is consistent with the decrease in occupancy noted above, although the decrease in rooms expense was partially offset by increased travel agent commissions as more rooms were sold through commissionable channels than in the prior year.

Food and beverage expense decreased 9.7% to $11.9 million for the three months ended June 30, 2012 compared to $13.1 million for the three months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Partially offsetting this decrease were increases related to the CGM Transaction, discussed above, and the consolidation of previously unconsolidated food and beverage operations at our London hotels.

47

Other departmental expense decreased 11.3% to $0.9 million for the three months ended June 30, 2012 compared to $1.0 million for the three months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results for these three hotels during all periods presented, our Owned Hotels experienced a slight decrease of 2.8%.

Hotel selling, general and administrative expense decreased 13.8% to $9.3 million for the three months ended June 30, 2012 compared to $10.8 million for the three months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results of these hotels during all periods presented, our Owned Hotels selling, general and administrative expense decreased by 8.5% primarily due to reductions in expenses as a result of decreased occupancies at our Owned Hotels and a decrease in energy costs at Hudson due to the ongoing renovation, as hotel rooms were out of service.

Property taxes, insurance and other expense decreased 2.5% to $3.6 million for the three months ended June 30, 2012 compared to $3.7 million for the three months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results of these hotels during all periods presented, our Owned Hotels selling, property taxes, insurance and other expense increased by 4.6% primarily as a result of the scheduled reduction in incentive tax credits at Hudson impacting the three months ended June 30, 2012 as compared to the same period in 2011.

Corporate expenses, including stock compensation increased 11.2% to $9.0 million for the three months ended June 30, 2012 compared to $8.0 million for the three months ended June 30, 2011. This increase was primarily due to the acquisition of The Light Group.

Depreciation and amortization increased 40.4% to $5.9 million for the three months ended June 30, 2012 compared to $4.2 million for the three months ended June 30, 2011. This increase was primarily due to increased depreciation expense related to the completion of the renovation at Delano during the first quarter of 2012. Slightly offsetting this increase is the impact of the sale in May 2011 of three hotels we previously owned.

Restructuring, development and disposal costs decreased 46.4% to $2.0 million for the three months ended June 30, 2012 compared to $3.8 million for the three months ended June 30, 2011. This decrease was primarily due to severance costs related to employee and executive restructurings incurred during the three months ended June 30, 2011, for which there were no comparable costs incurred during the same period in 2012.

Interest expense, net decreased 18.1% to $8.2 million for the three months ended June 30, 2012 compared to $10.0 million for the three months ended June 30, 2011. This decrease was primarily due to a decrease in financing fees incurred during the three months ended June 30, 2012 as compared to the same period in 2011. During 2011, we had higher financing fees related to the then outstanding debt secured by Hudson, which was refinanced in August 2011 and the then outstanding debt secured by Mondrian Los Angeles, which was repaid in connection with the hotel’s sale in May 2011.

Equity in loss of unconsolidated joint ventures resulted in a loss of $2.7 million for the three months ended June 30, 2012 compared to a loss of $0.9 million for the three months ended June 30, 2011. This decrease was primarily due to the fact that we no longer record our share of equity in earnings or losses on a majority of our unconsolidated joint ventures, as they have been fully impaired.

The components of RevPAR from our comparable Joint Venture Hotels for the three months ended June 30, 2012 and 2011, which includes Shore Club, Mondrian South Beach, Ames and Mondrian SoHo, but excludes San Juan Water and Beach Club in Isla Verde, Puerto Rico, which we managed until July 13, 2011, and Sanderson and St Martins Lane, in which we sold our ownership interest in November 2011, are summarized as follows:

	Three Months Ended
	June 30, 2012			June 30, 2011			Change ($)		Change (%)
Occupancy		71.2	%		71.8	%		—		(0.9	)%
ADR	$	287		$	271		$	16		5.6	%
RevPAR	$	204		$	195		$	9		4.6	%

48

Gain on asset sales resulted in income of $2.0 million for the three months ended June 30, 2012 compared to $0.6 million for the three months ended June 30, 2011. This income was related to the recognition of gains we recorded on the sales of Royalton, Morgans and Mondrian Los Angeles, all of which occurred in May 2011, and the sale of our 50% ownership in the entity that owned Sanderson and St Martins Lane, which occurred in November 2011. As we have significant continuing involvement with these hotels through long-term management agreements, the gains on sales are deferred and recognized over the initial term of the related management agreement.

Other non-operating expenses increased to $1.9 million for the three months ended June 30, 2012 as compared to $0.9 million for the three months ended June 30, 2011. This increase in expense is primarily the result of the increase in fair value of the TLG Promissory Notes (as defined below), discussed in note 6.

Income tax expense (benefit) resulted in an expense of $0.1 million for the three months ended June 30, 2012 as compared to $0.4 million for the three months ended June 30, 2011. The slight change was primarily due to overall operating performance of the quarter.

Loss from discontinued operations, net of tax resulted in an immaterial amount of loss for the three months ended June 30, 2011, for which there was no comparable loss recorded during the three months ended June 30, 2012. The loss recorded in 2011 relates to the transfer of our ownership interests in January 2011 of the property across the street from Delano South Beach to a third party.

49

Operating Results

Comparison of Six Months Ended June 30, 2012 to Six Months Ended June 30, 2011

The following table presents our operating results for the six months ended June 30, 2012 and 2011, including the amount and percentage change in these results between the two periods. The consolidated operating results for the six months ended June 30, 2012 is comparable to the consolidated operating results for the six months ended June 30, 2011, with the exception of Mondrian Los Angeles, which we owned until May 3, 2011, Royalton and Morgans, which we owned until May 23, 2011, Hard Rock, which we managed until March 1, 2011, Mondrian SoHo, which opened in February 2011, the completion of the CGM Transaction in June 2011 resulting in our full ownership of certain food and beverage operations previously owned through a 50/50 joint venture, the management of the San Juan Water and Beach Club, which was terminated effective July 13, 2011, our 50% ownership interest in Sanderson and St Martins Lane, which we sold in November 2011, and the acquisition of TLG in November 2011. The consolidated operating results are as follows:

	Six Months Ended
	June 30, 2012			June 30, 2011			Changes ($)			Changes (%)
	(Dollars in thousands)
Revenues:
Rooms	$	46,619		$	64,519		$	(17,900	)		(27.7	)%
Food and beverage		29,376			33,641			(4,265	)		(12.7	)
Other hotel		2,459			3,749			(1,290	)		(34.4	)
Total hotel revenues		78,454			101,909			(23,455	)		(23.0	)
Management fee-related parties and other income		12,632			6,704			5,928			88.4
Total revenues		91,086			108,613			(17,527	)		(16.1	)
Operating Costs and Expenses:
Rooms		15,438			20,859			(5,421	)		(26.0	)
Food and beverage		24,595			28,237			(3,642	)		(12.9	)
Other departmental		1,826			2,247			(421	)		(18.7	)
Hotel selling, general and administrative		18,786			23,350			(4,564	)		(19.5	)
Property taxes, insurance and other		7,566			7,889			(323	)		(4.1	)
Total hotel operating expenses		68,211			82,582			(14,371	)		(17.4	)
Corporate expenses, including stock compensation		16,627			18,883			(2,256	)		(11.9	)
Depreciation and amortization		11,610			12,572			(962	)		(7.7	)
Restructuring, development and disposal costs		4,244			8,393			(4,149	)		(49.4	)
Total operating costs and expenses		100,692			122,430			(21,738	)		(17.8	)
Operating loss		(9,606	)		(13,817	)		4,211			(30.5	) (1)
Interest expense, net		16,004			19,008			(3,004	)		(15.8	)
Equity in loss of unconsolidated joint venture		3,616			10,393			(9,385	)		(90.3	)
Gain on asset sales		(3,991	)		(620	)		(3,371	)			(1)
Other non-operating expenses		2,462			2,269			193			8.5
Loss before income tax expense		(27,697	)		(44,867	)		17,170			(38.3	)
Income tax expense		314			293			21			7.2
Net loss from continuing operations		(28,011	)		(45,160	)		17,149			(38.0	)
Income from discontinued operations, net of tax		—			485			(485	)		(100.0	)
Net loss		(28,011	)		(44,675	)		16,664			(37.3	)
Net loss attributable to noncontrolling interest		337			1,208			(871	)		(72.1	)
Net loss attributable to Morgans Hotel Group		(27,674	)		(43,467	)		15,793			(36.3	)
Preferred stock dividends and accretion		(5,368	)		(4,416	)		(952	)		21.6
Net loss attributable to common stockholders	$	(33,042	)	$	(47,883	)	$	14,841			(31.0	)%

⁽¹⁾  Not meaningful.

50

Total Hotel Revenues. Total hotel revenues decreased 23.0% to $78.5 million for the six months ended June 30, 2012 compared to $101.9 million for the six months ended June 30, 2011. This decrease was primarily due to the sale in May 2011 of three hotels we previously owned. The components of RevPAR from our Owned Hotels, which consisted, as of June 30, 2012, of Hudson, Delano South Beach and Clift, for the six months ended June 30, 2012 and 2011 are summarized as follows:

	Six Months Ended
	June 30, 2012			June 30, 2011			Change ($)			Change (%)
Occupancy		69.6	%		80.9	%		—			(14.0	)%
ADR	$	263		$	241		$	22			8.9	%
RevPAR	$	183		$	195		$	(12	)		(6.3	)%

RevPAR from our Owned Hotels decreased 6.3% to $183 for the six months ended June 30, 2012 compared to $195 for the six months ended June 30, 2011. During the six months ended June 30, 2012, Delano South Beach and Hudson were under renovation.

Rooms revenue decreased 27.7% to $46.6 million for the six months ended June 30, 2012 compared to $64.5 million for the six months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results of these three hotels during all periods presented, our Owned Hotels rooms revenue decreased 5.8%, consistent with the decrease in RevPAR which was primarily attributable to the ongoing renovations at Delano South Beach and Hudson, discussed above.

Food and beverage revenue decreased 12.7% to $29.4 million for the six months ended June 30, 2012 compared to $33.6 million for the six months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Slightly offsetting this decrease were increases related to the CGM Transaction, in which we purchased the remaining 50% interest from our joint venture partner in certain food and beverage operations at our hotels, and the consolidation of previously unconsolidated food and beverage operations at our London hotels.

Other hotel revenue decreased 34.4% to $2.5 million for the six months ended June 30, 2012 compared to $3.7 million for the six months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results for these three hotels during all periods presented, our Owned Hotels other hotel revenue decreased 9.7%. This trend is consistent with the decrease in rooms revenue noted above, although the decrease in other hotel revenue was further impacted by the fact that, effective January 2012, Hudson no longer offers a minibar which eliminated other hotel revenue associated with minibar sales. Additionally, beginning in July 2011 and February 2012, respectively, Hudson and Delano no longer charge for standard internet connectivity.

Management Fee—Related Parties and Other Income. Management fee—related parties and other income increased by 88.4% to $12.6 million for the six months ended June 30, 2012 compared to $6.7 million for the six months ended June 30, 2011. This increase was primarily due to management fees earned through our contracts with MGM acquired as part of our acquisition of TLG in November 2011.

Operating Costs and Expenses

Rooms expense decreased 26.0% to $15.4 million for the six months ended June 30, 2012 compared to $20.9 million for the six months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results of these three hotels during all periods presented, our Owned Hotels rooms expense increased 0.1% primarily as a result of increased travel agent commissions as more rooms were sold through commissionable channels than in the prior year.

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Food and beverage expense decreased 12.9% to $24.6 million for the six months ended June 30, 2012 compared to $28.2 million for the six months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Partially offsetting this decrease were increases related to the CGM Transaction, discussed above, and the consolidation of previously unconsolidated food and beverage operations at our London hotels.

Other departmental expense decreased 18.7% to $1.8 million for the six months ended June 30, 2012 compared to $2.2 million for the six months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results for these three hotels during all periods presented, our Owned Hotels experienced an increase of 1.4%. This increase is not consistent with the decrease in other departmental revenues, since we continue to incur the expenses related to internet connectivity, but we no longer charge hotel guests for this service at Hudson and Delano.

Hotel selling, general and administrative expense decreased 19.5% to $18.8 million for the six months ended June 30, 2012 compared to $23.4 million for the six months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results of these hotels during all periods presented, our Owned Hotels selling, general and administrative expense decreased by 2.3%.

Property taxes, insurance and other expense decreased 4.1% to $7.6 million for the six months ended June 30, 2012 compared to $7.9 million for the six months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results of these hotels during all periods presented, our Owned Hotels selling, property taxes, insurance and other expense increased by 2.1% primarily as a result of the scheduled reduction in incentive tax credits at Hudson impacting the six months ended June 30, 2012 as compared to the same period in 2011.

Corporate expenses, including stock compensation decreased 11.9% to $16.6 million for the six months ended June 30, 2012 compared to $18.9 million for the six months ended June 30, 2011. This decrease was primarily due to increased stock compensation expense recognized during the six months ended June 30, 2011 due to the accelerated vesting of unvested equity awards granted to our former Chief Executive Officer and our former President in connection with their separation from the Company in March 2011 and increased corporate expenses recognized during the six months ended June 30, 2011 as a result of executive and other employee stock compensation related severance costs.

Depreciation and amortization decreased 7.7% to $11.6 million for the six months ended June 30, 2012 compared to $12.6 million for the six months ended June 30, 2011. This decrease was primarily due to the impact of the sale in May 2011 of three hotels we previously owned. Excluding the operating results of these three hotels during all periods presented, our Owned Hotels depreciation and amortization decreased 3.4% during the six months ended June 30, 2012 as compared to the same period in 2011, due to assets becoming fully depreciated offset by increased depreciation expense related to the completion of the renovation at Delano during the first quarter of 2012.

Restructuring, development and disposal costs decreased 49.4% to $4.2 million for the six months ended June 30, 2012 compared to $8.4 million for the six months ended June 30, 2011. This decrease was primarily due to severance costs related to employee and executive restructurings incurred during the six months ended June 30, 2011, for which there were no comparable costs incurred during the same period in 2012.

Interest expense, net decreased 15.8% to $16.0 million for the six months ended June 30, 2012 compared to $19.0 million for the six months ended June 30, 2011. This decrease was primarily due to a decrease in financing fees incurred during the six months ended June 30, 2012 as compared to the same period in 2011. During 2011, we had higher financing fees related to the then outstanding debt secured by Hudson, which was refinanced in August 2011 and the then outstanding debt secured by Mondrian Los Angeles, which was repaid in connection with the hotel’s sale in May 2011.

Equity in loss of unconsolidated joint ventures resulted in a loss of $3.6 million for the six months ended June 30, 2012 compared to a loss of $10.4 million for the six months ended June 30, 2011. During March 2011 we recognized expenses related to the Hard Rock settlement, described in note 4 to the consolidated financial statements, for which there was no comparable loss recorded during the same period in 2012. Additionally, this decrease was due to the fact that we no longer record our share of equity in earnings or losses on a majority of our unconsolidated joint ventures, as they have been fully impaired.

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The components of RevPAR from our comparable Joint Venture Hotels for the six months ended June 30, 2012 and 2011, which includes Shore Club, Mondrian South Beach and Ames, but excludes the Hard Rock, which we managed until March 1, 2011, Mondrian SoHo, which opened in February 2011, San Juan Water and Beach Club in Isla Verde, Puerto Rico, which we managed until July 13, 2011, and Sanderson and St Martins Lane, which we sold our ownership interest in November 2011, are summarized as follows:

	Six Months Ended
	June 30, 2012			June 30, 2011			Change ($)		Change (%)
Occupancy		69.2	%		66.7	%		—		3.8	%
ADR	$	291		$	279		$	12		4.1	%
RevPAR	$	201		$	186		$	15		8.1	%

Gain on asset sales resulted in income of $4.0 million for the six months ended June 30, 2012 compared to $0.6 million for the six months ended June 30, 2011. This income was related to the recognition of gains we recorded on the sales of Royalton, Morgans and Mondrian Los Angeles, all of which occurred in May 2011, and our 50% ownership in the entity that owned Sanderson and St Martins Lane, which occurred in November 2011. As we have significant continuing involvement with these hotels through long-term management agreements, the gains on sales are deferred and recognized over the initial term of the related management agreement.

Other non-operating expenses increased 8.5% to $2.5 million for the six months ended June 30, 2012 as compared to $2.3 million for the six months ended June 30, 2011. This increase was primarily the result of the increase in fair value of the TLG Promissory Notes, discussed in note 6. Offsetting this increase was a decrease related to our executive restructuring efforts which occurred during the six months ended June 30, 2011 for which there is no comparable expense incurred during the same period in 2012.

Income tax expense changed an immaterial amount, resulting in an expense of $0.3 million for the six months ended June 30, 2012 as compared to $0.3 million for the six months ended June 30, 2011.

Income from discontinued operations, net of tax resulted in income of $0.5 million for the six months ended June 30, 2011, for which there was no comparable income recorded during the six months ended June 30, 2012. The income recorded in 2011 relates to the transfer of our ownership interests in January 2011 of the property across the street from Delano South Beach to a third party.

Liquidity and Capital Resources

As of June 30, 2012, we had approximately $8.2 million in cash and cash equivalents, and the amount of borrowings available under our revolving credit facility was $52.0 million, net of $20.0 million of outstanding borrowings and $10.0 million of posted letters of credit. As of June 30, 2012, total restricted cash was $6.1 million.

We have both short-term and long-term liquidity requirements as described in more detail below.

Liquidity Requirements

Short-Term Liquidity Requirements. We generally consider our short-term liquidity requirements to consist of those items that are expected to be incurred by us or our consolidated subsidiaries within the next 12 months and believe those requirements currently consist primarily of funds necessary to pay operating expenses and other expenditures directly associated with our properties, including the funding of our reserve accounts, capital commitments associated with certain of our development projects and existing hotels, and the completion of our renovation at Hudson.

We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as determined pursuant to our debt or lease agreements related to such hotels, with the exception of Delano South Beach. Our Joint Venture Hotels and our Managed Hotels generally are subject to similar obligations under our management agreements or under debt agreements related to such hotels. These capital expenditures relate primarily to the

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periodic replacement or refurbishment of furniture, fixtures and equipment. Such agreements typically 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, our F&B Venture requires restricted cash between 2% to 4% of gross revenues of the restaurant to be to set aside for future replacement or refurbishment of furniture, fixtures and equipment.

We intend to utilize the majority of our liquidity to fund growth and development efforts, renovations at existing hotels and infrastructure improvements. We may also use cash to repay outstanding debt.

We are focused on growing our portfolio, primarily with our core brands, in major gateway markets and key resort destinations. In order to obtain long term management contracts, we have committed to contribute capital in various forms on hotel development projects. These include equity investments, key money and cash flow guarantees to hotel owners. The cash flow guarantees generally have a stated maximum amount of funding and a defined term. The terms of the cash flow guarantees to hotel owners generally require us to fund if the hotels do not attain specified levels of operating profit. Often, cash flow guarantees to hotel owners may be recoverable as loans repayable to us out of future hotel cash flows and/or proceeds from the sale of hotels.

For example, in December 2011, we announced a new hotel management agreement for an approximately 128 room Mondrian-branded hotel to be located in the Old City area of Istanbul, Turkey. The hotel is scheduled to open in 2014. In December 2011 and January 2012, we contributed an aggregate of $10.4 million, $5.1 of which was funded in January 2012, in the form of equity and key money and will have a 20% ownership interest in the venture owning the hotel. We have no additional funding commitments in connection with this project.

On June 19, 2012, we announced agreements with a Moroccan entrepreneur for the management of two properties in Marrakech, Morocco — a 73 room Delano-branded hotel scheduled to open in September 2012 and a 69 room Mondrian-branded hotel scheduled to open in late 2013, both pursuant to 15-year management agreements. Under the Delano agreement, we agreed to contribute $2.5 million in key money prior to the hotel opening in September 2012, which funds are refundable if the hotel fails to open by September 30, 2012.

At Hudson, where renovations began in the fourth quarter of 2011, as of August 1, 2012, approximately 70% of the guestrooms have been renovated and are back in service. The remaining guest rooms are expected to be fully renovated and in service in September 2012. We also plan to convert 31 SRO units into guest rooms at an estimated cost of approximately $150,000 per room, and expect to have these new rooms in service by the end of October 2012 bringing the total number of rooms at Hudson to 865. Additionally, we are making progress with new food and beverage concepts at Hudson, including renovations to the existing restaurant and Hudson Bar, which we expect to debut in the fourth quarter of 2012. To date, we have spent approximately $17.5 million on room and corridor renovations, $6.8 million of which was spent in the second quarter of 2012, and intend to spend an additional $12 to $13 million to complete all of these projects at Hudson.

In addition to reserve funds for capital expenditures, our Owned Hotels debt and lease agreements also require us to deposit cash into escrow accounts for taxes, insurance and debt service or lease payments.

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Long-Term Liquidity Requirements. We generally consider our long-term liquidity requirements to consist of those items that are expected to be incurred by us or our consolidated subsidiaries beyond the next 12 months and believe these requirements consist primarily of funds necessary to pay scheduled debt maturities, renovations and other non-recurring capital expenditures that need to be made periodically to our properties and the costs associated with acquisitions and development of properties under contract and new acquisitions and development projects that we may pursue.

Our Series A Preferred Securities, defined and discussed further below in “—Debt”, have an 8% dividend rate until October 15, 2014, a 10% dividend rate from October 15, 2014 to October 15, 2016, and a 20% dividend rate thereafter. The cumulative unpaid dividends also have a dividend rate equal to the dividend rate on the Series A Preferred Securities. We have the option to accrue any and all dividend payments, and as of June 30, 2012, have not declared any dividends. As of June 30, 2012, we have undeclared dividends of approximately $18.3 million. We have the option to redeem any or all of the Series A preferred securities at any time.

Other long-term liquidity requirements include our obligations under our Convertible Notes, defined and discussed further below in “—Debt”, which mature in October 2014, Hudson mortgage debt, which matures in August 2013 with three one-year extension options, Delano Credit Facility, which expires in July 2014, TLG promissory notes, which mature in November 2015, trust preferred securities, and the Clift lease, each as described under “—Debt.” Additionally, as part of our acquisition of TLG, each of Messrs. Sasson and Masi received the right to require Morgans Group to purchase his 5% equity interest in TLG at any time after the third anniversary of the closing date of the acquisition at a purchase price equal to his percentage equity ownership interest multiplied by the product of seven times the Non-Morgans EBITDA for the preceding 12 months, subject to certain adjustments (the “Sasson-Masi Put Options”). The aggregate purchase price for the Sasson-Masi Put Options, which become exercisable in December 2014, would have been an estimated $6.1 million based on the contractual formula applied as of June 30, 2012.

We anticipate we will need to renovate Clift in the next few years, which will require additional capital that we expect to fund from the sources described below.

Additionally, as our new managed hotels are developed, to the extent we have committed to contribute key money or equity, these amounts will come due prior to the hotel opening. As of June 30, 2012, our long term key money commitments were approximately $26.9 million and our potential funding under cash flow guarantees at the maximum amount under the applicable contracts for hotels under development was $31.6 million. Financing for some of our development projects has not yet been identified. Given the uncertain economic environment and continuing challenging conditions in the credit markets, these and other projects may not be able to obtain adequate project financing in a timely manner or at all. If adequate project financing is not obtained, these projects may need to be limited in scope, deferred or cancelled altogether, and to the extent we have previously funded key money on a cancelled project, we may be unable to recover the amounts funded.

Sources of Liquidity. Historically, we have satisfied our short-term and long-term liquidity requirements through various sources of capital, including our existing working capital, cash provided by operations, equity and debt offerings, long-term mortgages and mezzanine loans on our properties, and more recently, cash generated through asset dispositions . In the future, we may require additional debt or equity financings to satisfy both our short-term and long-term liquidity requirements or may need to access other sources. These sources may include joint venture transactions and new financing opportunities, which may involve the restructuring of our outstanding debt or preferred securities, the disposition of assets and businesses, and the repurchase from time to time of our outstanding debt securities in open market transactions or otherwise. Given the uncertain economic environment and continuing challenging conditions in the credit markets, however, we may not be able to access any of these sources or obtain financings on terms acceptable to us or at all. We will continue to explore various options from time to time as necessary for our liquidity requirements or advantageous in pursuing our business strategy.

Although the credit and equity markets remain challenging, we believe that these sources of capital will become available to us in the future to fund our long-term liquidity requirements. However, our ability to obtain additional debt is dependent upon a number of factors, including our degree of leverage, borrowing restrictions imposed by existing lenders and general market conditions. We will continue to analyze which source of capital is most advantageous to us at any particular point in time.

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Other Liquidity Matters

In addition to our expected short-term and long-term liquidity requirements, our liquidity could also be affected by potential liquidity matters at our Joint Venture Hotels, as discussed below.

Mondrian South Beach Mortgage and Mezzanine Agreements. The nonrecourse mortgage loan and mezzanine loan agreements related to Mondrian South Beach matured on August 1, 2009. In April 2010, the Mondrian South Beach joint venture amended the nonrecourse financing and mezzanine loan agreements secured by Mondrian South Beach and extended the maturity date for up to seven years through extension options until April 2017, subject to certain conditions.

Morgans Group and affiliates of our joint venture partner have agreed to provide standard nonrecourse carve-out guaranties and provide certain limited indemnifications for the Mondrian South Beach mortgage and mezzanine loans. In the event of a default, the lenders’ recourse is generally limited to the mortgaged property or related equity interests, subject to standard nonrecourse carve-out guaranties for “bad boy” type acts. Morgans Group and affiliates of our joint venture partner also agreed to guaranty the joint venture’s obligation to reimburse certain expenses incurred by the lenders and indemnify the lenders in the event such lenders incur liability in connection with certain third-party actions. Morgans Group and affiliates of our joint venture partner have also guaranteed the joint venture’s liability for the unpaid principal amount of any seller financing note provided for condominium sales if such financing or related mortgage lien is found unenforceable, provided they shall not have any liability if the seller financed unit becomes subject again to the lien of the lender mortgage or title to the seller financed unit is otherwise transferred to the lender or if such seller financing note is repurchased by Morgans Group and/or affiliates of our joint venture at the full amount of unpaid principal balance of such seller financing note. In addition, although construction is complete and Mondrian South Beach opened on December 1, 2008, Morgans Group and affiliates of our joint venture partner may have continuing obligations under construction completion guaranties until all outstanding payables due to construction vendors are paid. As of June 30, 2012, there are remaining payables outstanding to vendors of approximately $1.0 million. Pursuant to a letter agreement with the lenders for the Mondrian South Beach loan, the joint venture agreed that these payables, many of which are currently contested or under dispute, will not be paid from operating funds but only from tax abatements and settlements of certain lawsuits. In the event funds from tax abatements and settlements of lawsuits are insufficient to repay these amounts in a timely manner, we and our joint venture partner are required to fund the shortfall amounts.

We and affiliates of our joint venture partner also have each agreed to purchase approximately $14 million of condominium units under certain conditions, including an event of default. In the event of a default under the lender’s mortgage or mezzanine loan, the joint venture partners are obligated to purchase selected condominium units, at agreed-upon sales prices, having aggregate sales prices equal to 1/2 of the lesser of $28.0 million, which is the face amount outstanding on the lender’s mezzanine loan, or the then outstanding principal balance of the lender’s mezzanine loan. The joint venture is not currently in an event of default under the mortgage or mezzanine loan. We have not recognized a liability related to the construction completion or the condominium purchase guarantees.

Mondrian SoHo. On July 31, 2010, the lender amended the debt financing on the property to provide for, among other things, extensions of the maturity date of the mortgage loan secured by the hotel to November 2011 with extension options through 2015, subject to certain conditions including a minimum debt service coverage test calculated, as set forth in the loan agreement, based on ratios of net operating income to debt service for the three months ended September 30, 2011 of 1:1 or greater. The joint venture achieved the required 1:1 coverage ratio as of September 30, 2011 and the maturity of this debt was extended to November 2012. The joint venture has additional extension options available in 2012 subject to similar conditions including a minimum debt service coverage test calculated, as set forth in the loan agreement, based on ratios of net operating income to debt service for the twelve months ended September 30, 2012 of 1.1:1.0 or greater. The joint venture may not be able achieve this debt service coverage test or refinance the outstanding debt upon maturity. Additionally, there may be cash shortfalls from the operations of the hotel from time to time and there may not be enough operating cash flow to cover debt service payments in all months going forward, which could require additional fundings by us and our joint venture partner. In 2012, through June 30, we have funded approximately $1.0 million in cash shortfalls at Mondrian SoHo, which have been treated in part as additional capital contributions and in part as loans from our management company subsidiary. The joint venture is discussing various options with the lenders, although there can be no assurance the joint venture will be able to extend the maturity date of the debt on a timely basis or at all. We do not intend to commit significant additional monies toward the repayment of the loan or the funding of operating deficits.

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Certain affiliates of our joint venture partner have agreed to provide a standard nonrecourse carve-out guaranty for “bad boy” type acts and a completion guaranty to the lenders for the Mondrian SoHo loan, for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates up to 20% of such entities’ guaranty obligations, provided that each party is fully responsible for any losses incurred as a result of its respective gross negligence or willful misconduct.

Mondrian SoHo opened in February 2011, and we are operating the hotel under a 10-year management contract with two 10-year extension options.

Ames. As of June 30, 2012, the joint venture’s outstanding mortgage debt secured by the hotel was $46.5 million. In October 2010, the mortgage loan matured, and the joint venture did not satisfy the conditions necessary to exercise the first of two remaining one-year extension options available under the loan, which included funding a debt service reserve account, among other things. As a result, the mortgage lender for Ames served the joint venture with a notice of default and acceleration of debt. In February 2011, the joint venture reached an agreement with the lender whereby the lender waived the default, reinstated the loan and extended the loan maturity date until October 9, 2011. In September 2011, the joint venture partners funded their pro rata shares of the debt service reserve account, of which our contribution was $0.3 million, and exercised the one remaining extension option available on the mortgage debt. As a result, the mortgage debt secured by Ames will mature on October 9, 2012. Unless the joint venture can refinance the debt or obtain an extension of the maturity date, the joint venture may not be able to repay the mortgage at maturity. The joint venture is discussing various options with the lenders, although there can be no assurance the joint venture will be able to extend the maturity date of the debt on a timely basis or at all. Additionally, there may be cash shortfalls from the operations of the hotel from time to time and there may not be enough operating cash flow to cover debt service payments in all months going forward, which could require additional fundings by us and our joint venture partner. We do not intend to commit significant monies toward the repayment of the joint venture loan or the funding of operating deficits.

Additionally, the development of the hotel qualified for federal and state historic rehabilitation tax credits which were sold for approximately $16.9 million. In the event of foreclosure and certain other transfers, we are jointly and severally liable for certain federal historic tax credit recapture liabilities. These liabilities reduce over time, but as of June 30, 2012, were estimated at approximately $14.4 million, of which our pro rata share is $4.5 million.

Certain affiliates of our joint venture partner have agreed to provide a standard nonrecourse carve-out guaranty for “bad boy” type acts and a completion guaranty to the lenders for the Ames loan, for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates up to its pro rata ownership share of such entities’ guaranty obligations, provided that each party is fully responsible for any losses incurred as a result of its respective gross negligence or willful misconduct.

Potential Litigation. We may have potential liability in connection with certain claims by a designer for which we have accrued $13.9 million as of June 30, 2012, as discussed in note 5 of our consolidated financial statements.

Other Possible Uses of Capital. As we pursue our growth strategy, we may continue to invest in new management agreements through key money, equity investments and cash flow guarantees. To fund any such future investments, we may from time to time pursue various potential financing opportunities available to us.

We have a number of additional development projects signed or under consideration, some of which may require equity investments, key money or credit support from us. In addition, through certain cash flow guarantees, we may have potential future fundings for hotels under development.

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Comparison of Cash Flows for the Six Months Ended June 30, 2012 to the Six Months Ended June 30, 2011

Operating Activities. Net cash used in operating activities was $15.0 million for the six months ended June 30, 2012 as compared to net cash used in operating activities of $5.1 million for the six months ended June 30, 2011. This increase in cash used was primarily due to a decline in operating results at Delano South Beach and Hudson, two of our Owned Hotels, which were under renovation during the six months ended June 30, 2012.

Investing Activities. Net cash used in investing activities amounted to $25.6 million for the six months ended June 30, 2012 as compared to net cash provided by investing activities of $240.6 million for the six months ended June 30, 2011. The change was primarily related to the net proceeds we received from the sale of Mondrian Los Angeles, Royalton and Morgans during May 2011 slightly offset by the purchase of joint venture interests in certain food and beverage entities in CGM in June 2011. Cash used in investing activities for the six months ended June 30, 2012 were related to renovation costs incurred at Delano South Beach and Hudson, two of our Owned Hotels which were under renovation during the six months ended June 30, 2012.

Financing Activities. Net cash provided by financing activities amounted to $19.2 million for the six months ended June 30, 2012 as compared to net cash used in financing g activities of $131.2 million for the six months ended June 30, 2011. This change is primarily due to the repayment of debt associated with the three hotels we sold during May 2011, for which there was no comparable transaction during 2012. The cash provided by financing during the six months ended June 30, 2012 was primarily due to increased funds being borrowed from our revolving credit facility to fund our Owned Hotels renovations and investments in hotels under development.

Debt

Hudson Mortgage and Mezzanine Loan. On October 6, 2006, our subsidiary, Henry Hudson Holdings LLC (“Hudson Holdings”), entered into a nonrecourse mortgage financing secured by Hudson, and another subsidiary entered into a mezzanine loan related to Hudson, secured by a pledge of our equity interests in Hudson Holdings.

Until amended as described below, the mortgage bore interest at 30-day LIBOR plus 0.97%. We had entered into an interest rate swap on the mortgage and the mezzanine loan on Hudson which effectively fixed the 30-day LIBOR rate at approximately 5.0%. This interest rate swap expired on July 15, 2010. We subsequently entered into a short-term interest rate cap on the mortgage that expired on September 12, 2010.

On October 1, 2010, Hudson Holdings entered into a modification agreement of the mortgage, together with promissory notes and other related security agreements, with Bank of America, N.A., as trustee, for the lenders (the “Amended Hudson Mortgage”). This modification agreement and related agreements extended the Hudson Mortgage until October 15, 2011. In connection with the Amended Hudson Mortgage, on October 1, 2010, Hudson Holdings paid down a total of $16.0 million on its outstanding loan balances.

The interest rate on the Amended Hudson Mortgage was also amended to 30-day LIBOR plus 1.03%. The interest rate on the Hudson mezzanine loan continued to bear interest at 30-day LIBOR plus 2.98%. We entered into interest rate caps, which expired on October 15, 2011, in connection with the Amended Hudson Mortgage, which effectively capped the 30-day LIBOR rate at 5.3% on the Amended Hudson Mortgage and effectively capped the 30-day LIBOR rate at 7.0% on the Hudson mezzanine loan.

On August 12, 2011, certain of our subsidiaries entered into a new mortgage financing with Deutsche Bank Trust Company Americas (“Primary Lender”) and the other institutions party thereto from time to time (“Securitized Lenders”), consisting of two mortgage loans, each secured by Hudson and treated as a single loan once disbursed, in the following amounts: (1) a $115.0 million mortgage loan that was funded at closing, and (2) a $20.0 million delayed draw term loan, which will be available to be drawn over a 15-month period, subject to achieving a debt yield ratio of at least 9.5% (based on net operating income for the prior 12 months) after giving effect to each additional draw (collectively, the “Hudson 2011 Mortgage Loan”). We do not believe we will achieve the debt yield ratio necessary to allow us to borrow the additional $20.0 million term loan before the option expires.

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Proceeds from the Hudson 2011 Mortgage Loan, cash on hand and cash held in escrow were applied to repay $201.2 million of outstanding mortgage debt under the Amended Hudson Mortgage and to repay $26.5 million of outstanding indebtedness under the Hudson mezzanine loan, and pay fees and expenses in connection with the financing.

On December 7, 2011, we entered into a technical amendment with the Primary Lender whereby the Hudson 2011 Mortgage Loan is subject to an interest rate of 30-day LIBOR (with a minimum of 1.0%) plus 5.0%, at the Primary Lender’s option. At June 30, 2012, $28.0 million of the Hudson 2011 Mortgage Loan bore interest at a reserve adjusted blended rate of 30-day LIBOR (with a minimum of 1.0%) plus 4.0%. The remaining $87.0 million of the Hudson 2011 Mortgage Loan which was sold to the Securitized Lenders bore interest at a reserve adjusted blended rate of 30-day LIBOR (with a minimum of 1.0%) plus 5.0%.

We maintain an interest rate cap for the amount of the Hudson 2011 Mortgage Loan that will cap the LIBOR rate on the debt under the full amount of the Hudson 2011 Mortgage Loan at approximately 3.0% through the maturity date of the loan.

The Hudson 2011 Mortgage Loan matures on August 12, 2013. We have three one-year extension options that permit us to extend the maturity date of the Hudson 2011 Mortgage Loan to August 12, 2016 if certain conditions are satisfied at each respective extension date. The first two extension options require, among other things, the borrowers to maintain a debt service coverage ratio of at least 1-to-1 for the 12 months prior to the applicable extension dates. The third extension option requires, among other things, the borrowers to achieve a debt yield ratio of at least 13.0% (based on net operating income for the prior 12 months).

The Hudson 2011 Mortgage Loan provides that after September 30, 2012, in the event the debt yield ratio falls below certain defined thresholds, all cash from the property is deposited into accounts controlled by the lenders from which debt service, operating expenses and management fees are paid and from which other reserve accounts may be funded. Any excess amounts are retained by the lenders until the debt yield ratio exceeds the required thresholds for two consecutive calendar quarters. Furthermore, if our management company subsidiary that manages Hudson is not reserving sufficient funds for property tax, ground rent, insurance premiums, and capital expenditures in accordance with the hotel management agreement, then our subsidiary borrowers would be required to fund the reserve account for such purposes. Our subsidiary borrowers are not permitted to have any indebtedness other than certain permitted indebtedness customary in such transactions, including ordinary trade payables, purchase money indebtedness and capital lease obligations, subject to limits.

The Hudson 2011 Mortgage Loan may be prepaid, in whole or in part, subject to payment of a prepayment penalty for any prepayment prior to August 12, 2013. There is no prepayment penalty after August 12, 2013.

The Hudson 2011 Mortgage Loan contains restrictions on the ability of the borrowers to incur additional debt or liens on their assets and on the transfer of direct or indirect interests in Hudson and the owner of Hudson and other affirmative and negative covenants and events of default customary for single asset mortgage loans. The Hudson 2011 Mortgage Loan is fully recourse to our subsidiaries that are the borrowers under the loan. The loan is nonrecourse to us, Morgans Group and our other subsidiaries, except for certain standard nonrecourse carveouts. Morgans Group has provided a customary environmental indemnity and nonrecourse carveout guaranty under which it would have liability with respect to the Hudson 2011 Mortgage Loan if certain events occur with respect to the borrowers, including voluntary bankruptcy filings, collusive involuntary bankruptcy filings, and violations of the restrictions on transfers, incurrence of additional debt, or encumbrances of the property of the borrowers. The nonrecourse carveout guaranty requires Morgans Group to maintain a net worth of at least $100 million (based on the estimated market value of our net assets) and liquidity of at least $20 million.

Notes to a Subsidiary Trust Issuing Preferred Securities. In August 2006, we formed a trust, MHG Capital Trust I (the “Trust”), to issue $50.0 million of trust preferred securities in a private placement. The sole assets of the Trust consist of the trust notes due October 30, 2036 issued by Morgans Group and guaranteed by Morgans Hotel Group Co. The trust notes have a 30-year term, ending October 30, 2036, and bear interest at a fixed rate of 8.68% for the first 10 years, ending October 2016, and thereafter will bear interest at a floating rate based on the three-month LIBOR plus 3.25%. These securities are redeemable by the Trust at par.

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Clift. We lease Clift under a 99-year nonrecourse lease agreement expiring in 2103. The lease is accounted for as a financing with a liability balance of $88.0 million at June 30, 2012.

Due to the amount of the payments stated in the lease, which increase periodically, and the economic environment in which the hotel operates, our subsidiary that leases Clift is not always able to operate Clift at a profit and Morgans Group may fund cash shortfalls sustained at Clift in order to enable our subsidiary to make lease payments from time to time. On March 1, 2010, however, we discontinued subsidizing the lease payments and stopped making the scheduled monthly payments. On May 4, 2010, the lessors under the Clift ground lease filed a lawsuit against Clift Holdings LLC, which the court dismissed on June 1, 2010. On June 8, 2010, the lessors filed a new lawsuit and on June 17, 2010, we and our subsidiary filed an affirmative lawsuit against the lessors.

On September 17, 2010, we and our subsidiaries entered into a settlement and release agreement with the lessors under the Clift ground lease, which among other things, effectively provided for the settlement of all outstanding litigation claims and disputes among the parties relating to defaulted lease payments due with respect to the ground lease for the Clift hotel and reduced the lease payments due to the lessors for the period March 1, 2010 through February 29, 2012. Effective March 1, 2012, the annual rent reverted to the rent stated in the lease agreement, which provides for base annual rent of approximately $6.0 million per year through October 2014 increasing in October 2014, and thereafter at 5-year intervals, by a formula tied to increases in the Consumer Price Index, with a maximum increase of 40% and a minimum of 20% at October 2014, and at each payment date thereafter, the maximum increase is 20% and the minimum is 10%. The lease is nonrecourse to us. Morgans Group also entered into a limited guaranty, whereby Morgans Group agreed to guarantee losses of up to $6 million suffered by the lessors in the event of certain “bad boy” type acts.

Convertible Notes. On October 17, 2007, we completed an offering of $172.5 million aggregate principal amount of our 2.375% Senior Subordinated Convertible Notes (“Convertible Notes”) in a private offering, which included an additional issuance of $22.5 million in aggregate principal amount of Convertible Notes as a result of the initial purchasers’ exercise in full of their overallotment option. The Convertible Notes are senior subordinated unsecured obligations of Morgans Hotel Group Co. and are guaranteed on a senior subordinated basis by our operating company, Morgans Group. The Convertible Notes are convertible into shares of our common stock under certain circumstances and upon the occurrence of specified events. The Convertible Notes mature on October 15, 2014, unless repurchased by us or converted in accordance with their terms prior to such date.

In connection with the private offering, we entered into certain Convertible Note hedge and warrant transactions. These transactions are intended to reduce the potential dilution to the holders of our common stock upon conversion of the Convertible Notes and will generally have the effect of increasing the conversion price of the Convertible Notes to approximately $40.00 per share, representing a 82.23% premium based on the closing sale price of our common stock of $21.95 per share on October 11, 2007. The net proceeds to us from the sale of the Convertible Notes were approximately $166.8 million (of which approximately $24.1 million was used to fund the Convertible Note call options and warrant transactions).

We follow Accounting Standard Codification (“ASC”) 470-20, Debt with Conversion and other Options (“ASC 470-20”). ASC 470-20 requires the proceeds from the sale of the Convertible Notes to be allocated between a liability component and an equity component. The resulting debt discount is amortized over the period the debt is expected to remain outstanding as additional interest expense. The equity component, recorded as additional paid-in capital, was $9.0 million, which represents the difference between the proceeds from issuance of the Convertible Notes and the fair value of the liability, net of deferred taxes of $6.4 million, as of the date of issuance of the Convertible Notes.

Amended 2006 Revolving Credit Facility. On October 6, 2006, we and certain of our subsidiaries entered into a revolving credit facility with Wachovia Bank, National Association, as Administrative Agent, and the lenders thereto, which was amended on August 5, 2009.

The revolving credit facility provided for a maximum aggregate amount of commitments of $125.0 million, divided into two tranches, which were secured by mortgages on Morgans, Royalton and Delano South Beach.

The revolving credit facility bore interest at a fluctuating rate measured by reference to, at our election, either LIBOR (subject to a LIBOR floor of 1%) or a base rate, plus a borrowing margin. LIBOR loans have a borrowing margin of 3.75% per annum and base rate loans have a borrowing margin of 2.75% per annum.

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On May 23, 2011, in connection with the sale of Royalton and Morgans, we used a portion of the sales proceeds to retire all outstanding debt under the revolving credit facility. These hotels, along with Delano South Beach, were collateral for the amended revolving credit facility, which terminated upon the sale of any of the properties securing the facility.

Delano Credit Facility. On July 28, 2011, we and certain of our subsidiaries (collectively, the “Borrowers”), including Beach Hotel Associates LLC (the “Florida Borrower”), entered into a secured Credit Agreement (the “Delano Credit Facility”), with Deutsche Bank Securities Inc. as sole lead arranger, Deutsche Bank Trust Company Americas, as agent, and the lenders party thereto.

The Delano Credit Facility provides commitments for a $100 million revolving credit facility and includes a $15 million letter of credit sub-facility. The maximum amount of such commitments available at any time for borrowings and letters of credit is determined according to a borrowing base valuation equal to the lesser of (i) 55% of the appraised value of Delano South Beach (the “Florida Property”) and (ii) the adjusted net operating income for the Florida Property divided by 11%. Extensions of credit under the Delano Credit Facility are available for general corporate purposes. The commitments under the Delano Credit Facility may be increased by up to an additional $10 million during the first two years of the facility, subject to certain conditions, including obtaining commitments from any one or more lenders to provide such additional commitments. The commitments under the Delano Credit Facility terminate on July 28, 2014, at which time all outstanding amounts under the Delano Credit Facility will be due and payable. Our availability under the Delano Credit Facility was $82.0 million as of June 30, 2012, of which $20.0 million of borrowings were outstanding and $10.0 million of letters of credit were posted.

The obligations of the Borrowers under the Delano Credit Facility are guaranteed by us. Such obligations are also secured by a mortgage on the Florida Property and all associated assets of the Florida Borrower, as well as a pledge of all equity interests in the Florida Borrower.

The interest rate applicable to loans under the Delano Credit Facility is a floating rate of interest per annum, at the Borrowers’ election, of either LIBOR (subject to a LIBOR floor of 1.00%) plus 4.00%, or a base rate, as set forth in the agreement, plus 3.00%. In addition, a commitment fee of 0.50% applies to the unused portion of the commitments under the Delano Credit Facility.

The Borrowers’ ability to borrow under the Delano Credit Facility is subject to ongoing compliance by us and the Borrowers with various customary affirmative and negative covenants, including limitations on liens, indebtedness, issuance of certain types of equity, affiliated transactions, investments, distributions, mergers and asset sales. In addition, the Delano Credit Facility requires that we and the Borrowers maintain a fixed charge coverage ratio (consolidated EBITDA to consolidated fixed charges) of no less than (i) 1.05 to 1.00 at all times on or prior to June 30, 2012 and (ii) 1.10 to 1.00 at all times thereafter. As of June 30, 2012, our fixed charge coverage ratio was 1.29x.

The Delano Credit Facility also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Borrowers under the Delano Credit Facility to be immediately due and payable.

TLG Promissory Notes. On November 30, 2011 pursuant to purchase agreements entered into on November 17, 2011, certain of our subsidiaries completed the acquisition of 90% of the equity interests in TLG for a purchase price of $28.5 million in cash and up to $18 million in notes convertible into shares of our common stock at $9.50 per share subject to the achievement of certain EBITDA targets for the acquired business. The promissory notes were allocated $16.0 million to Mr. Sasson and $2.0 million to Mr. Masi (collectively, the “TLG Promissory Notes”).

The maximum payment of $18.0 million is based on TLG achieving EBITDA of at least $18 million from non-Morgans business (the “Non-Morgans EBITDA”) during the 27-month period starting on January 1, 2012, with ratable reduction of the payment if less than $18 million of Non-Morgans EBITDA is earned. The payment is evidenced by two promissory notes held individually by Messrs. Sasson and Masi, which mature on the fourth anniversary of the closing date and may be voluntarily prepaid at any time. At either Messrs. Sasson’s or Masi’s options, the TLG Promissory Notes are payable in cash or in our common stock valued at $9.50 per share. Each of the TLG Promissory Notes earns interest at an annual rate of 8%, provided that if the notes are not paid or converted on or before the third anniversary of the closing date, the interest rate increases to 18%. The TLG Promissory Notes provide that 75% of the accrued interest is payable quarterly in cash and the remaining 25% accrues and is payable at maturity. Morgans Group has guaranteed payment of the TLG Promissory Notes and interest.

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As of the issue date, the fair value of the TLG Promissory Notes was estimated at approximately $15.5 million utilizing a Monte Carlo simulation to estimate the probability of the performance conditions being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times. For each simulation, the payoff is calculated at the settlement date, which is then discounted to the issue date at a risk-free interest rate. The average of the values over all simulations is the expected value of the unit on the issuance date. Assumptions used in the valuations included factors associated with the underlying performance of our stock price and total stockholder return over the term of the notes including total stock return volatility and risk-free interest. The fair value of the TLG Promissory Notes was estimated as of the issue date using the following assumptions in the Monte-Carlo simulation: expected price volatility for the Company’s stock of 25%; a risk free rate of 0.4%; and no dividend payments over the measurement period.

As of June 30, 2012, the fair value of the TLG Promissory Notes was estimated at approximately $16.8 million using the following assumptions in the Monte-Carlo valuation: expected price volatility for our stock of 25%; a risk free rate of 0.3%; and no dividend payments over the measurement period.

Hudson Capital Leases. We lease two condominium units at Hudson which are reflected as capital leases with balances of $6.1 million at June 30, 2012. Currently annual lease payments total approximately $900,000 and are subject to increases in line with inflation. The leases expire in 2096 and 2098.

Mondrian Los Angeles Mortgage. On October 6, 2006, our subsidiary that owned the Mondrian Los Angeles entered into a nonrecourse mortgage financing secured by the hotel.

On October 1, 2010, the subsidiary entered into a modification agreement of its mortgage, together with promissory notes and other related security agreements, with Bank of America, N.A., as trustee, for the lenders. This modification agreement and related agreements amended and extended the mortgage until October 15, 2011. In connection with the amendment, on October 1, 2010, the subsidiary paid down a total of $17 million on its outstanding mortgage loan balance.

The interest rate on the mortgage was also amended to 30-day LIBOR plus 1.64%. We entered into an interest rate cap, which expired on October 15, 2011, in connection with the amendment, which effectively capped the 30-day LIBOR rate at 4.25%.

On May 3, 2011, we completed the sale of Mondrian Los Angeles for $137.0 million to Wolverines Owner LLC, an affiliate of Pebblebrook. We applied a portion of the proceeds from the sale, along with approximately $9.2 million of cash in escrow, to retire the $103.5 million mortgage.

Joint Venture Debt. See “— Off-Balance Sheet Arrangements” for descriptions of joint venture debt.

Seasonality

The hospitality business is seasonal in nature. For example, our Miami hotels are generally strongest in the first quarter, whereas our New York hotels are generally strongest in the fourth quarter. Quarterly revenues also may be adversely affected by events beyond our control, such as the current recession, extreme weather conditions, terrorist attacks or alerts, natural disasters, airline strikes and other considerations affecting travel.

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 or increase our borrowings, if available under our Delano Credit Facility, to meet cash requirements.

Capital Expenditures and Reserve Funds

We are obligated to maintain reserve funds for capital expenditures at our Owned Hotels as determined pursuant to our debt or lease agreements related to such hotels, with the exception of Delano South Beach. Our Joint Venture Hotels and our Managed Hotels generally are subject to similar obligations under our management agreements or under debt agreements related to such hotels. These capital expenditures relate primarily to the periodic replacement or refurbishment of furniture, fixtures and equipment. Such agreements typically require the

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hotel owners 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 F&B Venture requires the venture to set aside restricted cash of between 2% of gross revenues of the restaurant in 2010 and increasing annually to 4% of gross revenues of the restaurant in 2013 and thereafter. As of June 30, 2012, approximately $0.4 million was available in restricted cash reserves for future capital expenditures under these obligations related to our Owned Hotels.

On March 1, 2012, we completed a $10.8 million renovation at Delano South Beach which began in the third quarter of 2011. The renovations included the re-opening of a newly concepted restaurant, Bianca, improved public areas, such as the Rose Bar and pool and beach bars, a new nightclub, FDR, upgraded exclusive bungalows and suites, and 1,200 square feet of additional meeting space.

At Hudson, where renovations began in the fourth quarter of 2011, as of August 1, 2012, approximately 70% of the guestrooms have been renovated and are back in service. The remaining guest rooms are expected to be fully renovated and in service in September 2012. We also plan to convert 31 SRO units into guest rooms at an estimated cost of approximately $150,000 per room, and expect to have these new rooms in service by the end of October 2012 bringing the total number of rooms at Hudson to 865. Additionally, we are making progress with new food and beverage concepts at Hudson, including renovations to the existing restaurant and Hudson Bar, which we expect to debut in the fourth quarter of 2012. To date, we have spent approximately $17.5 million on room and corridor renovations, $6.8 million of which was spent in the second quarter of 2012, and intend to spend an additional $12 to $13 million to complete all of these projects at Hudson.

We anticipate we will need to renovate Clift in the next few years, which will require capital and will most likely be funded by equity contributions, debt financing, possible asset sales, future operating cash flows or a combination of these sources.

The Hudson 2011 Mortgage Loan provides that, in the event the debt yield ratio falls below certain defined thresholds, all cash from the property is deposited into accounts controlled by the lenders from which debt service, operating expenses and management fees are paid and from which other reserve accounts may be funded. Any excess amounts are retained by the lenders until the debt yield ratio exceeds the required thresholds for two consecutive calendar quarters. Furthermore, if our management company subsidiary that manages Hudson is not reserving sufficient funds for property tax, ground rent, insurance premiums, and capital expenditures in accordance with the hotel management agreement, then our subsidiary borrowers would be required to fund the reserve account for such purposes. Our subsidiary borrowers are not permitted to have any indebtedness other than certain permitted indebtedness customary in such transactions, including ordinary trade payables, purchase money indebtedness and capital lease obligations, subject to limits.

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 determine the fair value of our derivative financial instruments using models which 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.

As of June 30, 2012, we had one interest rate cap outstanding and the fair value of this interest rate cap was insignificant.

In connection with the sale of the Convertible Notes, we entered into call options which are exercisable solely in connection with any conversion of the Convertible Notes and pursuant to which we will receive shares of our common stock from counterparties equal to the number of shares of our common stock, or other property, deliverable by us to the holders of the Convertible Notes upon conversion of the Convertible Notes, in excess of an amount of shares or other property with a value, at then current prices, equal to the principal amount of the converted Convertible Notes. Simultaneously, we also entered into warrant transactions, whereby we sold warrants to purchase in the aggregate 6,415,327 shares of our common stock, subject to customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock. These Convertible Notes warrants may be exercised over a 90-day trading period commencing January 15, 2015. The call options and the Convertible Notes warrants are separate contracts and are not part of the terms of the Convertible Notes and will not affect the holders’

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rights under the Convertible Notes. The call options are intended to offset potential dilution upon conversion of the Convertible Notes in the event that the market value per share of the common stock at the time of exercise is greater than the exercise price of the call options, which is equal to the initial conversion price of the Convertible Notes and is subject to certain customary adjustments.

On October 15, 2009, we entered into a securities purchase agreement with Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P., which we refer to collectively as the Investors. Under the securities purchase agreement, we issued and sold to the Investors (i) $75.0 million of preferred stock comprised of 75,000 shares of the our Series A preferred securities, $1,000 liquidation preference per share, and (ii) warrants to purchase 12,500,000 shares of the Company’s common stock at an exercise price of $6.00 per share. The Yucaipa Warrants have a 7-1/2 year term and are exercisable utilizing a cashless exercise method only, resulting in a net share issuance. The exercise price and number of shares subject to the warrant are both subject to anti-dilution adjustments.

We and Yucaipa American Alliance Fund II, LLC, an affiliate of the Investors, as the fund manager, also entered into a real estate fund formation agreement on October 15, 2009 pursuant to which we and the fund manager agreed to use good faith efforts to endeavor to raise a private investment fund. In connection with the agreement, we issued to the fund manager 5,000,000 contingent warrants to purchase our common stock at an exercise price of $6.00 per share with a 7-1/2 year term.

The fund formation agreement terminated by its terms on January 30, 2011 due to the failure to close a fund with $100 million of aggregate capital commitments by that date, and the 5,000,000 contingent warrants issued to the fund manager were forfeited in their entirety on October 15, 2011 due to the failure to close a fund with $250 million of aggregate capital commitments by that date.

Off-Balance Sheet Arrangements

As of June 30, 2012, we had unconsolidated joint ventures that we account for using the equity method of accounting, most of which have mortgage or related debt, as described below. In some cases, we provide nonrecourse carve-out guaranties of joint venture debt, which guaranty is only triggered in the event of certain “bad boy” acts, and other limited liquidity or credit support, as described below.

Mondrian South Beach. We own a 50% interest in Mondrian South Beach, an apartment building which was converted into a condominium and hotel. Mondrian South Beach opened in December 2008, at which time we began operating the property under a 20-year management contract. We also own a 50% interest in a mezzanine financing joint venture with an affiliate of our Mondrian South Beach joint venture partner through which a total of $28.0 million in mezzanine financing was provided to the Mondrian South Beach joint venture. As of June 30, 2012, the joint venture’s outstanding mortgage and mezzanine debt was $74.2 million, which does not include the $28.0 million mezzanine loan provided by the mezzanine financing joint venture.

In April 2010, the Mondrian South Beach joint venture amended its nonrecourse financing secured by the property and extended the maturity date for up to seven years, through extension options until April 2017, subject to certain conditions. Among other things, the amendment allowed the joint venture to accrue all interest through April 2012, allows the joint venture to accrue a portion of the interest thereafter and provides the joint venture the ability to provide seller financing to qualified condominium buyers with up to 80% of the condominium purchase price. The amendment also provides that the $28.0 million mezzanine financing invested in the property by the mezzanine financing joint venture be elevated in the capital structure to become, in effect, on par with the lender’s mezzanine debt so that the mezzanine financing joint venture receives at least 50% of all returns in excess of the first mortgage.

Morgans Group and affiliates of our joint venture partner have agreed to provide standard nonrecourse carve-out guaranties and provide certain limited indemnifications for the Mondrian South Beach mortgage and mezzanine loans. In the event of a default, the lenders’ recourse is generally limited to the mortgaged property or related equity interests, subject to standard nonrecourse carve-out guaranties for “bad boy” type acts. Morgans Group and affiliates of our joint venture partner also agreed to guaranty the joint venture’s obligation to reimburse certain expenses incurred by the lenders and indemnify the lenders in the event such lenders incur liability in connection with certain third-party actions. Morgans Group and affiliates of our joint venture partner have also guaranteed the joint venture’s liability for the unpaid principal amount of any seller financing note provided for condominium sales if such financing or related mortgage lien is found unenforceable, provided they shall not have any liability if the seller financed unit becomes subject again to the lien of the lender’s mortgage or title to the seller financed unit is otherwise transferred to the lender or if such seller financing note is repurchased by Morgans Group and/or affiliates of our joint venture at the full amount of unpaid principal balance of such seller financing note. In addition, although construction is complete and Mondrian South Beach opened on December 1, 2008, Morgans Group and affiliates of

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our joint venture partner may have continuing obligations under construction completion guaranties until all outstanding payables due to construction vendors are paid. As of June 30, 2012, there are remaining payables outstanding to vendors of approximately $1.0 million. Pursuant to a letter agreement with the lenders for the Mondrian South Beach loan, the joint venture agreed that these payables, many of which are currently contested or under dispute, will not be paid from operating funds but only from tax abatements and settlements of certain lawsuits. In the event funds from tax abatements and settlements of lawsuits are insufficient to repay these amounts in a timely manner, we and our joint venture partner are required to fund the shortfall amounts.

The Mondrian South Beach joint venture was determined to be a variable interest entity as during the process of refinancing the venture’s mortgage in April 2010, its equity investment at risk was considered insufficient to permit the entity to finance its own activities. We determined that we are not the primary beneficiary of this variable interest entity as we do not have a controlling financial interest in the entity. For financial reporting purposes, we believe our maximum exposure to losses as a result of our involvement in the Mondrian South Beach variable interest entity is limited to its current investment, outstanding management fees receivable and advances in the form of mezzanine financing or otherwise, excluding guarantees and other contractual commitments. We have not committed to providing financial support to this variable interest entity, other than as contractually required, and all future funding is expected to be provided by the joint venture partners in accordance with their respective ownership interests in the form of capital contributions loans, or by third parties.

We account for this investment under the equity method of accounting. At June 30, 2012, our investment in Mondrian South Beach was $1.4 million. Our equity in loss of Mondrian South Beach was $2.4 million and $1.0 million for the three months ended June 30, 2012 and 2011, respectively. Our equity in loss of Mondrian South Beach was $2.7 million and $1.5 million for the six months ended June 30, 2012 and 2011, respectively.

Ames. On June 17, 2008, we, Normandy Real Estate Partners, and Ames Hotel Partners, entered into a joint venture to develop the Ames hotel in Boston. Upon the hotel’s completion in November 2009, we began operating Ames under a 20-year management contract. As of June 30, 2012, we had an approximately 31% economic interest in the joint venture.

As of June 30, 2012, the joint venture’s outstanding mortgage debt secured by the hotel was $46.5 million. In September 2011, the joint venture partners funded their pro rata shares of the debt service reserve account, of which our contribution was $0.3 million, and exercised the one remaining extension option available on the mortgage debt. As a result, the mortgage debt secured by Ames will mature October 9, 2012. Unless the joint venture can refinance the debt or obtain an extension of the maturity date, the joint venture may not be able to repay the mortgage at maturity. The joint venture is discussing various options with the lenders, although there can be no assurance the joint venture will be able to extend the maturity date of the debt on a timely basis or at all. Additionally, there may be cash shortfalls from the operations of the hotel from time to time and there may not be enough operating cash flow to cover debt service payments in all months going forward, which could require additional fundings by us and our joint venture partner. We do not intend to commit significant monies toward the repayment of the joint venture loan or the funding of operating deficits.

Additionally, the development of the hotel qualified for federal and state historic rehabilitation tax credits which were sold for approximately $16.9 million. In the event of foreclosure and certain other transfers, we are jointly and severally liable for certain federal historic tax credit recapture liabilities. These liabilities reduce over time, but as of June 30, 2012, were estimated at approximately $14.4 million, of which our pro rata share is $4.5 million.

Certain affiliates of our joint venture partner have agreed to provide a standard nonrecourse carve-out guaranty for “bad boy” type acts and a completion guaranty to the lenders for the Ames loan, for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates up to its pro rata ownership share of such entities’ guaranty obligations, provided that each party is fully responsible for any losses incurred as a result of its respective gross negligence or willful misconduct.

Based on prevailing economic conditions and the upcoming mortgage debt maturity, the joint venture concluded that the hotel was impaired in September 2011. As a result, we wrote down our investment in Ames to zero and recorded our share of the impairment charge of $10.6 million through equity in loss of unconsolidated joint ventures for the year ended December 31, 2011. As of June 30, 2012, our financial statements reflect no value for our investment in the Ames joint venture.

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The Ames joint venture was determined to be a variable interest entity during the process of refinancing the venture’s mortgage in October 2011, as its equity investment at risk was considered insufficient to permit the entity to finance its own activities. In October 2011, the joint venture partners funded their pro rata shares of the debt service reserve account, of which our contribution was $0.3 million, in order to complete a refinancing of the outstanding mortgage debt of the venture. We determined that we are not the primary beneficiary of this variable interest entity as we do not have a controlling financial interest in the entity. Because we have written our investment value in the joint venture to zero, for financial reporting purposes, we believe our maximum exposure to losses as a result of our involvement in the Ames variable interest entity is limited to our outstanding management fees receivable, excluding guarantees and other contractual commitments.

We have not committed to providing financial support to this variable interest entity, other than as contractually required and all future funding is expected to be provided by the joint venture partners in accordance with their respective ownership interests in the form of capital contributions or mezzanine financing, or by third parties.

Mondrian SoHo. In June 2007, we contributed approximately $5.0 million for a 20% equity interest in a joint venture with Cape Advisors Inc. to develop a Mondrian hotel in the SoHo neighborhood of New York. The joint venture obtained a loan of $195.2 million to acquire and develop the hotel. Subsequent to the initial fundings, in 2008 and 2009, the lender and Cape Advisors Inc. made cash and other contributions to the joint venture, and we provided $3.2 million of additional funds which were treated as a loans with priority over the equity, to complete the project. During 2010 and 2011, we subsequently funded an aggregate of $5.5 million, all of which were treated as loans.

Additionally, as a result of cash shortfalls at Mondrian SoHo, we funded an additional $1.0 million in 2012, which has been treated in part as additional capital contributions and in part as loans from the management company subsidiary.

Based on the decline in market conditions following the inception of the joint venture and, more recently, the need for additional funding to complete the hotel, we wrote down our investment in Mondrian SoHo to zero in June 2010 and recorded an impairment charge of $10.7 million through equity in loss of unconsolidated joint ventures for the year ended December 31, 2010. We have recorded all additional fundings as impairment charges through equity in loss of unconsolidated joint ventures during the periods the funds were contributed. As of June 30, 2012, our financial statements reflect no value for our investment in the Mondrian SoHo joint venture.

On July 31, 2010, the mortgage loan secured by the hotel was amended to, among other things, provide for extensions of the maturity date to November 2011 with extension options through 2015, subject to certain conditions including a minimum debt service coverage test calculated, as defined, based on ratios of net operating income to debt service of 1:1 or greater.

The hotel achieved the required 1:1 coverage ratio in September 2011 and the debt was extended until November 2012. The joint venture has additional extension options available in 2012 subject to similar conditions including a minimum debt service coverage test calculated, as set forth in the loan agreement, based on ratios of net operating income to debt service for the twelve months ended September 30, 2012 of 1.1:1.0 or greater. The joint venture may not be able to achieve this debt service coverage test or refinance the outstanding debt upon maturity. Additionally, there may be cash shortfalls from the operations of the hotel from time to time and there may not be enough operating cash flow to cover debt service payments in all months going forward, which could require additional fundings by us and our joint venture partner. The joint venture is discussing various options with the lenders, although there can be no assurance the joint venture will be able to extend the maturity date of the debt or refinance it on a timely basis or at all. We do not intend to commit significant additional monies toward the repayment of the loan or the funding of operating deficits.

Certain affiliates of our joint venture partner have agreed to provide a standard nonrecourse carve-out guaranty for “bad boy” type acts and a completion guaranty to the lenders for the Mondrian SoHo loan, for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates up to 20% of such entities’ guaranty obligations, provided that each party is fully responsible for any losses incurred as a result of its own gross negligence or willful misconduct.

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In December 2011, the Mondrian SoHo joint venture was determined to be a variable interest entity as a result of the upcoming debt maturity and recent cash shortfalls, and because its equity was considered insufficient to permit the entity to finance its own activities. However, we determined that we are not its primary beneficiary and, therefore, consolidation of this joint venture is not required. We continue to account for our investment in Mondrian SoHo using the equity method of accounting. Because we have written our investment value in the joint venture to zero, for financial reporting purposes, we believe our maximum exposure to losses as a result of our involvement in the Mondrian SoHo variable interest entity is limited to our outstanding management fees receivable and advances in the form of priority loans, excluding guarantees and other contractual commitments.

Mondrian SoHo opened in February 2011, and we are operating the hotel under a 10-year management contract with two 10-year extension options.

Shore Club. As of June 30, 2012, we owned approximately 7% of the joint venture that owns Shore Club. On September 15, 2009, the joint venture received a notice of default on behalf of the special servicer for the lender on the joint venture’s mortgage loan for failure to make its September monthly payment and for failure to maintain its debt service coverage ratio, as required by the loan documents. On October 7, 2009, the joint venture received a second letter on behalf of the special servicer for the lender accelerating the payment of all outstanding principal, accrued interest, and all other amounts due on the mortgage loan. The lender also demanded that the joint venture transfer all rents and revenues directly to the lender to satisfy the joint venture’s debt. In March 2010, the lender for the Shore Club mortgage initiated foreclosure proceedings against the property in U.S. federal district court. In October 2010, the federal court dismissed the case for lack of jurisdiction. In November 2010, the lender initiated foreclosure proceedings in state court and a bench trial took place in June 2012 during which the trial court granted a default ruling of foreclosure. Entry of a foreclosure judgment has been delayed pending, among other things, relinquishment of jurisdiction from the Florida appeals court to the trial court. We have operated and expect to continue to operate the hotel pursuant to the management agreement during the pendency of these proceedings, which may continue for some additional period of time in the event of post-judgment proceedings, which may include an appeal. However, there can be no assurances as to when a foreclosure sale may take place, or whether we will continue to operate the hotel once foreclosure proceedings are complete.

Mondrian Istanbul. In December 2011, we announced a new hotel management agreement for an approximately 128 room Mondrian-branded hotel to be located in the Old City area of Istanbul, Turkey. Upon completion and opening of the hotel, we will operate the hotel pursuant to a 20-year management agreement, with a 10-year extension option. The hotel is scheduled to open in 2014. As of June 30, 2012, we have contributed a total of $10.4 million in the form of equity and key money and have a 20% ownership interest in the venture owning the hotel.

Food and Beverage Venture at Mondrian South Beach. On June 20, 2011, we completed the CGM Transaction, pursuant to which we acquired from affiliates of CGM the 50% interests CGM owned in our food and beverage joint ventures for approximately $20.0 million.

Our ownership interest in the food and beverage venture at Mondrian South Beach is less than 100%, and was reevaluated in accordance with ASC 810-10. We concluded that this venture did not meet the requirements of a variable interest entity and accordingly, this investment in the joint venture is accounted for using the equity method, as we do not believe we exercise control over significant asset decisions such as buying, selling or financing.

At June 30, 2012, our investment in this food and beverage venture was $1.1 million. Our equity in loss of was $0.2 million for the three months ended June 30, 2012 and $0.4 million for the six months ended June 30, 2012.

Other Development Stage Hotels. We have a number of additional development projects signed or under consideration, some of which may require equity investments, key money or credit support from us. In addition, through certain cash flow guarantees, we may have potential future fundings for hotels under development.

In August 2011, we entered into a hotel management and residential licensing agreement for a 310 room Mondrian-branded hotel, to be the lifestyle hotel destination in the 1,000 acre destination resort metropolis, Baha Mar Resort, in Nassau, The Bahamas. The hotel is scheduled to open in 2014. We are required to fund an aggregate of approximately $10 million of key money just prior to and at opening of the hotel. We have a $10.0 million standby letter of credit outstanding on the Delano Credit Facility for up to 48 months to cover this obligation.

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Additionally, we have committed to contribute approximately £9 million, or approximately $15 million, in key money toward the development of Mondrian London, which amount will come due prior to the hotel opening which is expected to be in late 2013 when the development is completed.

On June 12, 2012, we announced that we had entered into a 20-year management agreement for a 200 room Hudson-branded hotel in London. Hudson London is scheduled to open in early 2015.

Additionally, on June 19, 2012 we announced agreements with a Moroccan entrepreneur for the management of two properties in Marrakech, Morocco — a 73 room Delano-branded hotel scheduled to open in September 2012 and a 69 room Mondrian-branded hotel scheduled to open in late 2013, both pursuant to 15-year management agreements. Under the Delano agreement, we agreed to contribute $2.5 million in key money prior to the hotel opening in September 2012, which funds are refundable if the hotel fails to open by September 30, 2012, and under the Mondrian agreement, we agreed to contribute $2.5 million in key money upon the hotel’s opening.

As of June 30, 2012, our key money commitments, which are discussed by development hotel above in “Liquidity Requirements—Short-Term Liquidity Requirements” and “Liquidity Requirements-Long-Term Liquidity Requirements,” were approximately $29.4 million. As of June 30, 2012, potential funding under cash flow guarantees at the maximum amount under the applicable contracts for hotels under development was $31.6 million.

For further information regarding our off balance sheet arrangements, see note 4 to our consolidated financial statements.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. 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. No material changes to our critical accounting policies have occurred since December 31, 2011.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market 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 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 June 30, 2012, our total outstanding consolidated debt, including capital lease obligations, was approximately $463.4 million, of which approximately $135.0 million, or 29.1%, was variable rate debt. At June 30, 2012, the one month LIBOR rate was 0.24%.

As of June 30, 2012, the $135.0 million of variable rate debt consisted of our outstanding balance of $115.0 million on the Hudson 2011 Mortgage Loan and our $20.0 million of borrowings outstanding under our Delano Credit Facility. In connection with the Hudson 2011 Mortgage Loan, an interest rate cap for 3.0% in the amount of approximately $135.0 million, the full amount available under the mortgage after certain hurdles are met, as discussed above in “— Debt,” was entered into in August 2011, and was outstanding as of June 30, 2012. This interest rate cap matures in August 2013. The outstanding borrowings of $20.0 million on our Delano Credit Facility as of June 30, 2012 are not subject to an interest rate hedge. If interest rates on this $135.0 million variable rate debt

68

increase by 1.0%, or 100 basis points, the increase in interest expense would reduce future pre-tax earnings and cash flows by approximately $1.4 million annually. The maximum annual amount the interest expense would increase on the $115.0 million of variable rate debt outstanding as of June 30, 2012 under the Hudson 2011 Mortgage Loan is $3.2 million due to our interest rate cap agreement, which would reduce future pre-tax earnings and cash flows by the same amount annually. If interest rates on this $135.0 million variable rate decrease by 1.0%, the decrease in interest expense would increase pre-tax earnings and cash flow by approximately $1.4 million annually.

As of June 30, 2012, our fixed rate debt, excluding our Hudson capital lease obligation, of $322.2 million consisted of the trust notes underlying our trust preferred securities, the Convertible Notes, the Clift lease, and the TLG Promissory Notes. The fair value of some of these debts is greater than the book value. As such, if interest rates increase by 1.0%, or approximately 100 basis points, the fair value of our fixed rate debt at June 30, 2012, would decrease by approximately $29.1 million. If market rates of interest decrease by 1.0%, or 100 basis points, the fair value of our fixed rate debt at June 30, 2012 would increase by $34.9 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.

We have entered into agreements with each of our derivative counterparties in connection with our interest rate caps and hedging instruments related to the Convertible Notes, providing that in the event we either default or are capable of being declared in default on any of our indebtedness, then we could also be declared in default on our derivative obligations.

Currency Exchange Risk

As we have international operations at hotels that we manage in London and Mexico, currency exchange risks between the U.S. dollar and the British pound and the U.S. dollar and Mexican peso, respectively, arise as a normal part of our business. We reduce these risks by transacting these businesses in their local currency.

Generally, we do not enter into forward or option contracts to manage our exposure applicable to day-to-day 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, with the exception of the sale of our interests in our two London hotels, in connection with which we entered into a foreign currency forward contract due to the material nature of the transaction.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15 of the rules promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our chief executive officer and the chief financial officer concluded that the design and operation of these disclosure controls and procedures were effective as of the end of the period covered by this report.

There were no changes in our internal control over financial reporting (as defined in Rule 13a-15 promulgated under the Securities Exchange Act of 1934, as amended) that occurred during the quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

69

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We are 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 our financial position, results of operations or liquidity.

ITEM 1A. RISK FACTORS.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, projected results and future prospects.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. MINE SAFETY DISCLOSURE.

Not Applicable.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

The exhibits listed in the accompanying Exhibit Index are filed as part of this report.

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SIGNATURES

Pursuant to the requirements 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.

MORGANS HOTEL GROUP CO.

/s/ MICHAEL J. GROSS

Michael J. Gross

Chief Executive Officer

/s/ RICHARD SZYMANSKI

Richard Szymanski

Chief Financial Officer and Secretary

August 3, 2012

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EXHIBIT INDEX

Exhibit Number	Description
2.1	Agreement and Plan of Merger, dated May 11, 2006, by and among Morgans Hotel Group Co., MHG HR Acquisition Corp., Hard Rock Hotel, Inc. and Peter Morton (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on May 17, 2006)
2.2	First Amendment to Agreement and Plan of Merger, dated as of January 31, 2007, by and between Morgans Hotel Group Co., MHG HR Acquisition Corp., Hard Rock Hotel, Inc., (solely with respect to Section 1.6 and Section 1.8 thereof) 510 Development Corporation and (solely with respect to Section 1.7 thereof) Peter A. Morton (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed on February 6, 2007)
3.1	Amended and Restated Certificate of Incorporation of Morgans Hotel Group Co.(incorporated by reference to Exhibit 3.1 to Amendment No. 5 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on February 6, 2006)
3.2	Amended and Restated By-laws of Morgans Hotel Group Co. (incorporated by reference to Exhibit 3.2 to Amendment No. 5 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on February 6, 2006)
3.3	Certificate of Designations for Series A Preferred Securities (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on October 16, 2009)
4.1	Specimen Certificate of Common Stock of Morgans Hotel Group Co. (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-129277) filed on January 17, 2006)
4.2	Junior Subordinated Indenture, dated as of August 4, 2006, between Morgans Hotel Group Co., Morgans Group LLC and JPMorgan Chase Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on August 11, 2006)
4.3	Supplemental Indenture, dated as of November 2, 2009, by and among Morgans Group LLC, the Company and The Bank of New York Mellon Trust Company, National Association (as successor to JPMorgan Chase Bank, National Association), as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 4, 2009)
4.4	Amended and Restated Trust Agreement of MHG Capital Trust I, dated as of August 4, 2006, among Morgans Group LLC, JPMorgan Chase Bank, National Association, Chase Bank USA, National Association, and the Administrative Trustees Named Therein (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on August 11, 2006)
4.5	Amended and Restated Stockholder Protection Rights Agreement, dated as of October 1, 2009, between Morgans Hotel Group Co. and Mellon Investor Services LLC, as Rights Agent (including Forms of Rights Certificate and Assignment and of Election to Exercise as Exhibit A thereto and Form of Certificate of Designation and Terms of Participating Preferred Stock as Exhibit B thereto) (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on October 2, 2009)
4.6	Amendment No. 1, dated as of October 15, 2009, to Amended and Restated Stockholder Protection Rights Agreement, dated as of October 1, 2009, between the Registrant and Mellon Investor Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on October 16, 2009)
4.7	Amendment No. 2, dated as of April 21, 2010, to Amended and Restated Stockholder Protection Rights Agreement, dated as of October 1, 2009, between Morgans Hotel Group Co. and Mellon Investor Services LLC, as Rights Agent (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 22, 2010)
4.8	Indenture related to the Senior Subordinated Convertible Notes due 2014, dated as of October 17, 2007, by and among Morgans Hotel Group Co., Morgans Group LLC and The Bank of New York, as trustee (including form of 2.375% Senior Subordinated Convertible Note due 2014) (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on October 17, 2007)
4.9	Registration Rights Agreement, dated as of October 17, 2007, between Morgans Hotel Group Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on October 17, 2007)

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Exhibit Number	Description
4.10	Form of Warrant for Warrants issued under Securities Purchase Agreement to Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 16, 2009)
4.11	Warrant, dated October 15, 2009, issued to Yucaipa American Alliance Fund II, LLC (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on October 16, 2009)
4.12	Warrant, dated October 15, 2009, issued to Yucaipa American Alliance Fund II, LLC (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on October 16, 2009)
4.13	Form of Amended Common Stock Purchase Warrants issued under Securities Purchase Agreement to Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P. (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on December 14, 2009)
4.14	Amendment No. 1 to Common Stock Purchase Warrant issued under the Real Estate Fund Formation Agreement to Yucaipa American Alliance Fund II, LLC, dated as of December 11, 2009 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on December 14, 2009)
4.15	Amendment No. 1 to Common Stock Purchase Warrant issued under the Real Estate Fund Formation Agreement to Yucaipa American Alliance Fund II, LLC, dated as of December 11, 2009 (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on December 14, 2009)
10.1*†	Morgans Hotel Group Co. Amended and Restated 2007 Omnibus Incentive Plan
31.1*	Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2*	Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*	Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2*	Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.1#	XBRL Instance Document
101.2#	XBRL Taxonomy Extension Schema Document
101.3#	XBRL Taxonomy Extension Calculation Linkbase Document
101.4#	XBRL Taxonomy Extension Label Linkbase Document
101.5#	XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

† Denotes a management contract or compensatory plan, contract or arrangement.

# Furnished, not filed

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EX-10.1

Exhibit 10.1

MORGANS HOTEL GROUP CO.

AMENDED AND RESTATED 2007 OMNIBUS INCENTIVE PLAN

TABLE OF CONTENTS

	Page
1. PURPOSE		A-1
2. DEFINITIONS		A-1
3. ADMINISTRATION OF THE PLAN		A-4
3.1. Board		A-4
3.2. Committee		A-5
3.3. Terms of Awards		A-5
3.4. Deferral Arrangement		A-6
3.5. No Liability		A-6
3.6. Share Issuance/Book-Entry		A-6
4. STOCK SUBJECT TO THE PLAN		A-6
5. EFFECTIVE DATE, DURATION AND AMENDMENTS		A-7
5.1. Effective Date		A-7
5.2. Term		A-7
5.3. Amendment and Termination of the Plan		A-7
6. AWARD ELIGIBILITY AND LIMITATIONS		A-7
6.1. Service Providers and Other Persons		A-7
6.2. Successive Awards and Substitute Awards		A-7
6.3. Limitation on Shares of Stock Subject to Awards and Cash Awards		A-8
7. AWARD AGREEMENT		A-8
8. TERMS AND CONDITIONS OF OPTIONS		A-8
8.1. Option Price		A-8
8.2. Vesting		A-8
8.3. Term		A-8
8.4. Termination of Service		A-9
8.5. Limitations on Exercise of Option		A-9
8.6. Method of Exercise		A-9
8.7. Rights of Holders of Options		A-9
8.8. Delivery of Stock Certificates		A-9
8.9. Transferability of Options		A-9
8.10. Family Transfers		A-9
8.11. Limitations on Incentive Stock Options		A-10
8.12. Notification of Disqualifying Disposition		A-10
9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS		A-10
9.1. Right to Payment and Grant Price		A-10
9.2. Other Terms		A-10
9.3. Term		A-10
9.4. Transferability of SARS		A-11
9.5. Family Transfers		A-11
10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS		A-11
10.1. Grant of Restricted Stock		A-11
10.2. Restrictions		A-11
10.3. Restricted Stock Certificates		A-11
10.4. Rights of Holders of Restricted Stock		A-12
10.5. Rights of Holders of Stock Units		A-12
10.5.1. Voting and Dividend Rights		A-12
10.5.2. Creditor’s Rights		A-12
10.6. Termination of Service		A-12

A-i

	Page
10.7. Purchase of Restricted Stock		A-12
10.8. Delivery of Stock		A-12
11. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK		A-13
11.1. General Rule		A-13
11.2. Surrender of Stock		A-13
11.3. Cashless Exercise		A-13
11.4. Other Forms of Payment		A-13
12. TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS		A-13
12.1. Dividend Equivalent Rights		A-13
12.2. Termination of Service		A-13
13. OTHER STOCK-BASED AWARDS AND LLC UNITS		A-14
14. TERMS AND CONDITIONS OF PERFORMANCE AND ANNUAL INCENTIVE AWARDS		A-14
14.1. Performance Conditions		A-14
14.2. Performance or Annual Incentive Awards Granted to Designated Covered Employees		A-15
14.2.1. Performance Goals Generally		A-15
14.2.2. Business Criteria		A-15
14.2.3. Timing For Establishing Performance Goals		A-16
14.2.4. Settlement of Performance or Annual Incentive Awards; Other Terms		A-16
14.3. Written Determinations		A-16
14.4. Status of Section 14.2 Awards Under Code Section 162(m)		A-16
15. PARACHUTE LIMITATIONS		A-16
16. REQUIREMENTS OF LAW		A-17
16.1. General		A-17
16.2. Rule 16b-3		A-17
17. EFFECT OF CHANGES IN CAPITALIZATION		A-18
17.1. Changes in Stock		A-18
17.2. Reorganization in Which the Company Is the Surviving Entity Which does not Constitute a Corporate Transaction		A-18
17.3. Corporate Transaction		A-18
17.4. Adjustments		A-19
17.5. No Limitations on Company		A-19
18. GENERAL PROVISIONS		A-19
18.1. Disclaimer of Rights		A-19
18.2. Nonexclusivity of the Plan		A-20
18.3. Withholding Taxes		A-20
18.4. Captions		A-20
18.5. Other Provisions		A-20
18.6. Number and Gender		A-20
18.7. Severability		A-21
18.8. Governing Law		A-21
18.9. Code Section 409A		A-21

A-ii

MORGANS HOTEL GROUP CO.

AMENDED AND RESTATED 2007 OMNIBUS INCENTIVE PLAN

Morgans Hotel Group Co., a Delaware corporation (the “Company”), sets forth herein the terms of the amendment and restatement of its 2007 Omnibus Incentive Plan in the form of this Amended and Restated 2007 Omnibus Incentive Plan (the “Plan”), as follows:

1. PURPOSE

The Plan is intended to enhance the Company’s and its Affiliates’ (as defined herein) ability to attract and retain highly qualified officers, outside directors, key employees, and other persons, and to motivate such persons to serve the Company and its Affiliates and to expend maximum effort to improve the business results and earnings of the Company, by providing to such persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. To this end, the Plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units (including deferred stock units), dividend equivalent rights, cash awards and any other stock-based award under the Plan. Any of these awards may, but need not, be made as performance incentives to reward attainment of annual or long-term performance goals in accordance with the terms hereof. Stock options granted under the Plan may be non-qualified stock options or incentive stock options, as provided herein, except that stock options granted to outside directors and any consultants or advisers providing services to the Company or an Affiliate shall in all cases be non-qualified stock options.

2. DEFINITIONS

For purposes of interpreting the Plan and related documents (including Award Agreements), the following definitions shall apply:

2.1 “Affiliate” means, with respect to the Company, any company or other trade or business that controls, is controlled by or is under common control with the Company within the meaning of Rule 405 of Regulation C under the Securities Act, including, without limitation, any Subsidiary. For purposes of granting stock options or stock appreciation rights, an entity may not be considered an Affiliate unless the Company holds a “controlling interest” in such entity, where the term “controlling interest” has the same meaning as provided in Treasury Regulation 1.414(c)-2(b)(2)(i), provided that the language “at least 50 percent” is used instead of “at least 80 percent” and, provided further, that where granting of stock options or stock appreciation rights is based upon a legitimate business criteria, the language “at least 20 percent” is used instead of “at least 80 percent” each place it appears in Treasury Regulation 1.414(c)-2(b)(2)(i).

2.2 “Annual Incentive Award” means an Award made subject to attainment of performance goals (as described in Section 14) over a performance period of up to one year (the Company’s fiscal year, unless otherwise specified by the Committee).

2.3 “Award” means a grant of an Option, Stock Appreciation Right, Restricted Stock, Stock Unit, Dividend Equivalent Rights, cash award, or any Other Stock-Based Award under the Plan.

2.4 “Award Agreement” means the written agreement between the Company and a Grantee that evidences and sets out the terms and conditions of an Award. The Committee may provide for the use of electronic, Internet, or other nonpaper Award Agreements, and the use of electronic, Internet, or other nonpaper means for the acceptance thereof and actions thereunder by a Grantee.

2.5 “Benefit Arrangement” shall have the meaning set forth in Section 15 hereof.

2.6 “Board” means the Board of Directors of the Company.

2.7 “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 Committee 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 Committee for subsequent events).

A-1

2.8 “Cause” means, with respect to any Grantee, the meaning of such term as set forth in the employment agreement between the Company (or any Affiliate) and the Grantee or, in the event there is no such employment agreement (or if any such employment agreement does not contain such a definition), such term shall mean (i) willful or gross misconduct or willful or gross negligence in the performance of his or her duties for the Company or any Affiliate, (ii) neglect of his or her duties for the Company or any Affiliate after written notice and opportunity to cure, (iii) dishonesty, fraud, theft, embezzlement or misappropriation of funds, properties or assets of the Company or of any Affiliate, (iv) conviction of a felony or (v) a direct or indirect material breach of the terms of any agreement with the Company or any Affiliate.

2.9 “Code” means the Internal Revenue Code of 1986, as now in effect or as hereafter amended.

2.10 “Committee” means a committee of, and designated from time to time by resolution of, the Board, which shall be constituted as provided in Section 3.2.

2.11 “Company” means Morgans Hotel Group Co.

2.12 “Corporate Transaction” shall be deemed to have occurred if (i) any person or group of persons (as defined in Section 13(d) and 14(d) of the Exchange Act) together with its affiliates, excluding employee benefit plans of the Company, is or becomes, directly or indirectly, the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act) of securities of the Company representing 40% or more of the combined voting power of the Company’s then outstanding securities; or (ii) individuals who at the beginning of any two-year period constitute the Board, plus new directors of the Company whose election or nomination for election by the Company’s shareholders is approved by a vote of at least two-thirds of the directors of the Company still in office who were directors of the Company at the beginning of such two-year period, cease for any reason during such two-year period to constitute at least two-thirds of the members of the Board; or (iii) a merger or consolidation of the Company with any other corporation or entity is consummated regardless of which entity is the survivor, other than a merger of consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the Company is completely liquidated or all or substantially all of the Company’s assets are sold.

2.13 “Covered Employee” means a Grantee who is a covered employee within the meaning of Section 162(m)(3) of the Code.

2.14 “Disability” means the Grantee is unable to perform each of the essential duties of such Grantee’s position by reason of a medically determinable physical or mental impairment which is potentially permanent in character or which can be expected to last for a continuous period of not less than 12 months; provided, however, that, with respect to rules regarding expiration of an Incentive Stock Option following termination of the Grantee’s Service, Disability shall mean the Grantee is unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

2.15 “Dividend Equivalent Right” means a right, granted to a Grantee under Section 12 hereof, to receive cash, Stock, other Awards or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments.

2.16 “Effective Date” means April 10, 2008, the date this Amended and Restated 2007 Omnibus Incentive Plan was approved by the Board.

2.17 “Exchange Act” means the Securities Exchange Act of 1934, as now in effect or as hereafter amended.

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2.18 “Fair Market Value” with respect to a share of Stock means the value of a share of such Stock determined as follows: if on the Grant Date or other determination date the Stock is listed on an established national or regional stock exchange, is admitted to quotation on The NASDAQ Stock Market, Inc. or is publicly traded on an established securities market, the Fair Market Value of a share of Stock shall be the closing price of the Stock on such exchange or in such market (if there is more than one such exchange or market the Committee shall determine the appropriate exchange or market) on the Grant Date or such other determination date (or if there is no such reported closing price, the Fair Market Value shall be the mean between the highest bid and lowest asked prices or between the high and low sale prices on such trading day) or, if no sale of Stock is reported for such trading day, on the next preceding day on which any sale shall have been reported. If the Stock is not listed on such an exchange, quoted on such system or traded on such a market, Fair Market Value of the share of Stock shall be the value of the Stock as determined by the Committee by the reasonable valuation method, in a manner consistent with Internal Revenue Code Section 409A (“Code Section 409A”). “Fair Market Value” with respect to an Award means the value of the Award as determined by the Committee in good faith, taking into consideration applicable tax and accounting rules and regulations.

2.19 “Family Member” means a person who is a spouse, former spouse, child, stepchild, grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother, sister, brother-in-law, or sister-in-law, including adoptive relationships, of the Grantee, any person sharing the Grantee’s household (other than a tenant or employee), a trust in which any one or more of these persons have more than fifty percent of the beneficial interest, a foundation in which any one or more of these persons (or the Grantee) control the management of assets, and any other entity in which one or more of these persons (or the Grantee) own more than fifty percent of the voting interests.

2.20 “Good Reason” means (a) a substantial adverse alteration in the Grantee’s title or responsibilities from those in effect immediately prior to the Corporate Transaction; (b) a reduction in the Grantee’s annual base salary as of immediately prior to the Corporate Transaction (or as the same may be increased from time to time) or a material reduction in the Grantee’s annual target bonus opportunity as of immediately prior to the Corporate Transaction; or (c) the relocation of the Grantee’s principal place of employment to a location more than 35 miles from the Grantee’s principal place of employment as of the Corporate Transaction or the Company’s requiring the Grantee to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company’s business to an extent substantially consistent with the Grantee’s business travel obligations as of immediately prior to the Corporate Transaction. The Grantee’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder, provided that the Grantee provides the Company with a written notice of resignation within ninety (90) days following the occurrence of the event constituting Good Reason.

2.21 “Grant Date” means, as determined by the Committee, the latest to occur of (i) the date as of which the Committee approves an Award, (ii) the date on which the recipient of an Award first becomes eligible to receive an Award under Section 6 hereof, or (iii) such other date as may be specified by the Committee.

2.22 “Grantee” means a person who receives or holds an Award under the Plan.

2.23 “Incentive Stock Option” means an “incentive stock option” within the meaning of Section 422 of the Code, or the corresponding provision of any subsequently enacted tax statute, as amended from time to time.

2.24 “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.

2.25 “Non-qualified Stock Option” means an Option that is not an Incentive Stock Option.

2.26 “Option” means an option to purchase one or more shares of Stock pursuant to the Plan.

2.27 “Option Price” means the exercise price for each share of Stock subject to an Option.

2.28 “Other Agreement” shall have the meaning set forth in Section 15 hereof.

2.29 “Other Stock-Based Award” shall mean any right granted under Section 13 of the Plan.

2.30 “Outside Director” means a member of the Board who is not an officer or employee of the Company.

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2.31 “Performance Award” means an Award made subject to the attainment of performance goals (as described in Section 14) over a performance period of up to ten (10) years.

2.32 “Plan” means this Morgans Hotel Group Co. Amended and Restated 2007 Omnibus Incentive Plan, an amendment and restatement of the Morgans Hotel group Co. 2007 Omnibus Incentive Plan.

2.33 “Purchase Price” means the purchase price for each share of Stock pursuant to a grant of Restricted Stock or Other Stock-Based Award.

2.34 “Reporting Person” means a person who is required to file reports under Section 16(a) of the Exchange Act.

2.35 “Restricted Stock” means shares of Stock, awarded to a Grantee pursuant to Section 10 hereof.

2.36 “SAR Exercise Price” means the per share exercise price of a SAR granted to a Grantee under Section 9 hereof.

2.37 “Securities Act” means the Securities Act of 1933, as now in effect or as hereafter amended.

2.38 “Service” means service as a Service Provider to the Company or an Affiliate. Unless otherwise stated in the applicable Award Agreement, a Grantee’s change in position or duties shall not result in interrupted or terminated Service, so long as such Grantee continues to be a Service Provider to the Company or an Affiliate. Subject to the preceding sentence, whether a termination of Service shall have occurred for purposes of the Plan shall be determined by the Committee, which determination shall be final, binding and conclusive.

2.39 “Service Provider” means an employee, officer or director of the Company or an Affiliate, or a consultant or adviser currently providing services to the Company or an Affiliate.

2.40 “Stock” means the common stock, par value $.01 per share, of the Company.

2.41 “Stock Appreciation Right” or “SAR” means a right granted to a Grantee under Section 9 hereof.

2.42 “Stock Unit” means a bookkeeping entry representing the equivalent of one share of Stock awarded to a Grantee pursuant to Section 10 hereof.

2.43 “Subsidiary” means any “subsidiary corporation” of the Company within the meaning of Section 424(f) of the Code.

2.44 “Substitute Awards” means Awards granted upon assumption of, or in substitution for, outstanding awards previously granted by a company or other entity acquired by the Company or any Affiliate or with which the Company or any Affiliate combines.

2.45 “Ten Percent Stockholder” means an individual who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding stock of the Company, its parent or any of its Subsidiaries. In determining stock ownership, the attribution rules of Section 424(d) of the Code shall be applied.

3. ADMINISTRATION OF THE PLAN

3.1. Board

The Board shall have such powers and authorities related to the administration of the Plan as are consistent with the Company’s certificate of incorporation and by-laws and applicable law. The Board shall have full power and authority to take all actions and to make all determinations required or provided for under the Plan, any Award or any Award Agreement, and shall have full power and authority to take all such other actions and make all such other determinations not inconsistent with the specific terms and provisions of the Plan that the Board deems to be necessary or appropriate to the administration of the Plan, any Award or any Award Agreement. All such actions and determinations shall be by the affirmative vote of a majority of the members of the Board present at a meeting or by unanimous consent of the Board executed in writing in accordance with the Company’s certificate of incorporation and by-laws and applicable law. The interpretation and construction by the Board of any provision of the Plan, any Award or any Award Agreement shall be final, binding and conclusive.

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3.2. Committee.

The Board has delegated to the Committee the powers and authorities related to the administration and implementation of the Plan, as set forth in Section 3.1 above and other applicable provisions, consistent with the certificate of incorporation and by-laws of the Company and applicable law.

(i) Except as provided in Subsection (ii) and except as the Board may otherwise determine, the Committee appointed by the Board to administer the Plan shall consist of two or more Outside Directors of the Company who: (a) qualify as “outside directors” within the meaning of Section 162(m) of the Code and who (b) meet such other requirements as may be established from time to time by the Securities and Exchange Commission for plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act and (c) who comply with the independence requirements of the stock exchange on which the Common Stock is listed.

(ii) The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not be Outside Directors, who may administer the Plan with respect to employees or other Service Providers who are not executive officers or directors of the Company, may grant Awards under the Plan to such employees or other Service Providers, and may determine all terms of such Awards.

In the event that the Plan, any Award or any Award Agreement entered into hereunder provides for any action to be taken by or determination to be made by the Committee, such action may be taken or such determination may be made by the Board. Unless otherwise expressly determined by the Board, any action or determination by the Committee shall be final, binding and conclusive. To the extent permitted by law, the Committee may delegate its authority under the Plan to a member of the Board.

3.3. Terms of Awards.

Subject to the other terms and conditions of the Plan, the Committee shall have full and final authority to:

(i) designate Grantees,

(ii) determine the type or types of Awards to be made to a Grantee,

(iii) determine the number of shares of Stock to be subject to an Award,

(iv) establish the terms and conditions of each Award (including, but not limited to, the exercise price of any Option, the nature and duration of any restriction or condition (or provision for lapse thereof ) relating to the vesting, exercise, transfer, or forfeiture of an Award or the shares of Stock subject thereto, and any terms or conditions that may be necessary to qualify Options as Incentive Stock Options),

(v) prescribe the form of each Award Agreement evidencing an Award, and

(vi) amend, modify, or supplement the terms of any outstanding Award. Such authority specifically includes the authority, in order to effectuate the purposes of the Plan but without amending the Plan, to modify Awards to eligible individuals who are foreign nationals or are individuals who are employed outside the United States to recognize differences in local law, tax policy, or custom. Notwithstanding the foregoing, no amendment, modification or supplement of any Award shall, without the consent of the Grantee, impair the Grantee’s rights under such Award other than amendments or modifications necessary to comply with Code Section 409A and amendments pursuant to Section 5.3.

The Company may retain the right in an Award Agreement to cause a forfeiture of the gain realized by a Grantee on account of actions taken by the Grantee in violation or breach of or in conflict with any employment agreement, non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate thereof or otherwise in competition with the Company or any Affiliate thereof, to the extent specified in such Award Agreement applicable to the Grantee. Furthermore, the Company may annul an Award if the Grantee is an employee of the Company or an Affiliate thereof and is terminated for Cause as defined in the applicable Award Agreement or the Plan, as applicable.

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Furthermore, if the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002 and any Grantee who knowingly engaged in the misconduct, was grossly negligent in engaging in the misconduct, knowingly failed to prevent the misconduct or was grossly negligent in failing to prevent the misconduct, shall reimburse the Company the amount of any payment in settlement of an Award earned or accrued during the twelve-(12) month period following the first public issuance or filing with the United State Securities and Exchange Commission (whichever first occurred) of the financial document that contained such material noncompliance.

Notwithstanding the foregoing, no amendment or modification may be made to an outstanding Option or SAR, including without limitation by replacement of underwater Options or SARs with cash or other award type, that would be treated as a repricing under the rules of the stock exchange on which the Stock is listed or result in replacement of underwater Options or SARs with cash or other award with an exercise price below the Fair Market Value as of the date of such replacement award, in each case, without the approval of the stockholders of the Company, provided, that, appropriate adjustments may be made to outstanding Options and SARs pursuant to Section 17 or Section 5.3 and may be made to make changes to achieve compliance with applicable law, including Code Section 409A.

3.4. Deferral Arrangement.

The Committee may permit or require the deferral of any award payment into a deferred compensation arrangement, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or dividend equivalents, including converting such credits into deferred Stock equivalents, and restricting deferrals to comply with hardship distribution rules affecting 401(k) plans. Any such deferrals shall be made in a manner that complies with Code Section 409A.

3.5. No Liability.

No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award or Award Agreement.

3.6. Share Issuance/Book-Entry

Notwithstanding any provision of this Plan to the contrary, the issuance of the Stock under the Plan may be evidenced in such a manner as the Committee, in its discretion, deems appropriate, including, without limitation, book-entry registration or issuance of one or more Stock certificates.

4. STOCK SUBJECT TO THE PLAN

Subject to adjustment as provided in Section 17 hereof, the number of shares of Stock available for issuance under the Plan shall be fourteen million six hundred ten thousand (14,610,000) all of which may be granted as Incentive Stock Options. Stock issued or to be issued under the Plan shall be authorized but unissued shares; or, to the extent permitted by applicable law, issued shares that have been reacquired by the Company. If any shares covered by an Award are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Stock subject thereto, then the number of shares of Stock counted against the aggregate number of shares available under the Plan with respect to such Award shall, to the extent of any such forfeiture or termination, again be available for making Awards under the Plan. The number of shares available for issuance under the Plan shall be reduced by the number of shares subject to Options and SARs. Upon a grant of Awards other than Awards of Options or SARs, the number of shares available for issuance under the Plan shall be reduced by 1.7 times the number of shares of Stock subject to such Awards and any shares underlying Options or SARs not purchased or forfeited shall be added back to the limit set forth above by 1.7 times the number of shares of Stock subject to such Awards. The number of shares of Stock available for issuance under the Plan shall not be increased by (i) any shares of Stock tendered or withheld or Award surrendered in connection with the purchase of shares of Stock upon exercise of an Option, or (ii) any shares of Stock deducted or delivered from an Award payment in connection with the Company’s tax withholding obligations.

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The Committee shall have the right to substitute or assume Awards in connection with mergers, reorganizations, separations, or other transactions to which Section 424(a) of the Code applies. The number of shares of Stock reserved pursuant to Section 4 may be increased by the corresponding number of Awards assumed and, in the case of a substitution, by the net increase in the number of shares of Stock subject to Awards before and after the substitution. The Committee may adopt reasonable counting procedures to ensure appropriate counting, to avoid double counting (as, for example, in the case of tandem or substitute awards).

5. EFFECTIVE DATE, DURATION AND AMENDMENTS

5.1. Effective Date.

The amendment and restatement of the 2007 Omnibus Incentive Plan shall be effective as of the Effective Date of the Plan, subject to approval of the Plan by the Company’s stockholders within one year of the Effective Date. Upon approval of the Plan by the stockholders of the Company as set forth above, all Awards made under the Plan on or after the Effective Date shall be fully effective as if the stockholders of the Company had approved the Plan on the Effective Date. If the stockholders fail to approve the Plan within one year of the Effective Date of the Plan, any Awards made hereunder shall be null and void and of no effect.

5.2. Term.

The Plan shall terminate automatically ten (10) years after its adoption by the Board and may be terminated on any earlier date as provided in Section 5.3.

5.3. Amendment and Termination of the Plan

The Board may, at any time and from time to time, amend, suspend, or terminate the Plan as to any shares of Stock as to which Awards have not been made. No Awards shall be made after termination of the Plan. No amendment, suspension, or termination of the Plan shall, without the consent of the Grantee, impair rights or obligations under any Award theretofore awarded under the Plan.

5.4 Additional Provisions

Any provision of the Plan or any Award Agreement notwithstanding, the Committee may cause any Award granted hereunder to be amended, modified or cancelled in consideration of a cash payment, an alternative Award or both made to the holder of such cancelled Award equal to or greater than the Fair Market Value of such cancelled Award.

6. AWARD ELIGIBILITY AND LIMITATIONS

6.1. Service Providers and Other Persons

Subject to this Section 6, Awards may be made under the Plan to: (i) any Service Provider to the Company or of any Affiliate, including any Service Provider who is an officer or director of the Company, or of any Affiliate, as the Committee shall determine and designate from time to time and (ii) any other individual whose participation in the Plan is determined to be in the best interests of the Company by the Committee.

6.2. Successive Awards and Substitute Awards.

An eligible person may receive more than one Award, subject to such restrictions as are provided herein. Notwithstanding Sections 8.1 and 9.1, the Option Price of an Option or the grant price of a SAR that is a Substitute Award may be less than 100% of the Fair Market Value of a share of Common Stock on the original date of grant; provided, that, the Option Price or grant price is determined in accordance with the principles of Code Section 424 and the regulations thereunder; as modified by Code Section 409A and the regulations thereunder as Options that are non-qualified stock options and SARs.

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6.3. Limitation on Shares of Stock Subject to Awards and Cash Awards.

During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act:

(i) the maximum number of shares of Stock subject to Options or SARs that can be awarded under the Plan to any person eligible for an Award under Section 6 hereof is 2,000,000 (two million) shares per calendar year.

(ii) the maximum number of shares that can be awarded under the Plan, other than pursuant to an Option or SAR, to any person eligible for an Award under Section 6 hereof is 2,000,000 (two million) shares per calendar year.

(iii) the maximum amount that may be earned as an Annual Incentive Award or other cash Award in any calendar year by any one Grantee shall be $10,000,000 (ten million dollars) and the maximum amount that may be earned as a Performance Award or other cash Award in respect of a performance period of greater than one year by any one Grantee shall be $25,000,000 (twenty-five million dollars).

The preceding limitations in this Section 6.3 are subject to adjustment as provided in Section 17 hereof.

7. AWARD AGREEMENT

Each Award granted pursuant to the Plan shall be evidenced by an Award Agreement, in such form or forms as the Committee shall from time to time determine. Award Agreements granted from time to time or at the same time need not contain similar provisions but shall be consistent with the terms of the Plan. Each Award Agreement evidencing an Award of Options shall specify whether such Options are intended to be Non-qualified Stock Options or Incentive Stock Options, and in the absence of such specification such options shall be deemed Non-qualified Stock Options.

8. TERMS AND CONDITIONS OF OPTIONS

8.1. Option Price

The Option Price of each Option shall be fixed by the Committee and stated in the Award Agreement evidencing such Option. Except in the case of Substitute Awards, the Option Price of each Option shall be at least the Fair Market Value on the Grant Date of a share of Stock; provided, however, that in the event that a Grantee is a Ten Percent Stockholder, the Option Price of an Option granted to such Grantee that is intended to be an Incentive Stock Option shall be not less than 110 percent of the Fair Market Value of a share of Stock on the Grant Date. In no case shall the Option Price of any Option be less than the par value of a share of Stock.

8.2. Vesting.

Subject to Sections 8.3 and 17.3 hereof, each Option granted under the Plan shall become exercisable at such times and under such conditions as shall be determined by the Committee and stated in the Award Agreement. For purposes of this Section 8.2, fractional numbers of shares of Stock subject to an Option shall be rounded down to the next nearest whole number.

8.3. Term.

Each Option granted under the Plan shall terminate, and all rights to purchase shares of Stock thereunder shall cease, upon the expiration of ten years from the date such Option is granted, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Committee and stated in the Award Agreement relating to such Option; provided, however, that in the event that the Grantee is a Ten Percent Stockholder, an Option granted to such Grantee that is intended to be an Incentive Stock Option shall not be exercisable after the expiration of five years from its Grant Date. If on the day preceding the date on which a Grantee’s Options would otherwise terminate, the Fair Market Value of shares of Stock underlying a Grantee’s Options is greater than the Option Price of such Options, the Company shall, prior to the termination of such Options and without any action being taken on the part of the Grantee, consider such Options to have been exercised by the Grantee. The

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Company shall deduct from the shares of Stock deliverable to the Grantee upon such exercise the number of shares of Stock necessary to satisfy payment of the Option Price and all withholding obligations.

8.4. Termination of Service.

Each Award Agreement shall set forth the extent to which the Grantee shall have the right to exercise the Option following termination of the Grantee’s Service. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.

8.5. Limitations on Exercise of Option.

Notwithstanding any other provision of the Plan, in no event may any Option be exercised, in whole or in part, prior to the date the Plan is approved by the stockholders of the Company as provided herein or after the occurrence of an event referred to in Section 17 hereof which results in termination of the Option.

8.6. Method of Exercise.

An Option that is exercisable may be exercised by the Grantee’s delivery to the Company of written notice of exercise on any business day, at the Company’s principal office, on the form specified by the Company. Such notice shall specify the number of shares of Stock with respect to which the Option is being exercised and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised plus the amount (if any) of federal and/or other taxes which the Company may, in its judgment, be required to withhold with respect to an Award. The minimum number of shares of Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of (i) 100 shares or such lesser number set forth in the applicable Award Agreement and (ii) the maximum number of shares available for purchase under the Option at the time of exercise.

8.7. Rights of Holders of Options

Unless otherwise stated in the applicable Award Agreement, an individual holding or exercising an Option shall have none of the rights of a stockholder (for example, the right to receive cash or dividend payments or distributions attributable to the subject shares of Stock or to direct the voting of the subject shares of Stock ) until the shares of Stock covered thereby are fully paid and issued to him. Except as provided in Section 17 hereof, no adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such issuance.

8.8. Delivery of Stock Certificates.

Promptly after the exercise of an Option by a Grantee and the payment in full of the Option Price, such Grantee shall be entitled to the issuance of a stock certificate or certificates evidencing his or her ownership of the shares of Stock subject to the Option. Notwithstanding any other provision of this Plan to the contrary, the Company may elect to satisfy any requirement under this Plan for the delivery of stock certificates through the use of book-entry.

8.9. Transferability of Options

Except as provided in Section 8.10, during the lifetime of a Grantee, only the Grantee (or, in the event of legal incapacity or incompetency, the Grantee’s guardian or legal representative) may exercise an Option. Except as provided in Section 8.10, no Option shall be assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of descent and distribution.

8.10. Family Transfers.

If authorized in the applicable Award Agreement, a Grantee may transfer, not for value, all or part of an Option which is not an Incentive Stock Option to any Family Member. For the purpose of this Section 8.10, a “not for value” transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic relations order in settlement of marital property rights; or (iii) a transfer to an entity in which more than fifty percent of the voting interests are owned by Family Members (or the Grantee) in exchange for an interest in that entity. Following a transfer under this Section 8.10, any such Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer. Subsequent transfers of transferred Options are prohibited except to Family Members of the original Grantee in accordance with this Section 8.10 or by will or the laws of descent and distribution. The events of termination of Service of Section 8.4 hereof shall continue to be applied with respect to the original Grantee, following which the Option shall be exercisable by the transferee only to the extent, and for the periods specified, in Section 8.4.

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8.11. Limitations on Incentive Stock Options.

An Option shall constitute an Incentive Stock Option only (i) if the Grantee of such Option is an employee of the Company or any Subsidiary of the Company; (ii) to the extent specifically provided in the related Award Agreement; and (iii) to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the shares of Stock with respect to which all Incentive Stock Options held by such Grantee become exercisable for the first time during any calendar year (under the Plan and all other plans of the Grantee’s employer and its Affiliates) does not exceed $100,000. This limitation shall be applied by taking Options into account in the order in which they were granted.

8.12. Notification of Disqualifying Disposition

If any Grantee shall make any disposition of Shares issued pursuant to the exercise of an Incentive Stock Option under the circumstances described in Code Section 421(b) (relating to certain disqualifying dispositions), such Grantee shall notify the Company of such disposition within ten (10) days thereof.

9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS

9.1. Right to Payment and Grant Price.

A SAR shall confer on the Grantee to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise over (B) the grant price of the SAR as determined by the Committee. The Award Agreement for a SAR shall specify the grant price of the SAR, which shall be at least the Fair Market Value of a share of Stock on the date of grant. SARs may be granted in conjunction with all or part of an Option granted under the Plan or at any subsequent time during the term of such Option, in conjunction with all or part of any other Award or without regard to any Option or other Award; provided that a SAR that is granted subsequent to the Grant Date of a related Option must have a SAR Exercise Price that is no less than the Fair Market Value of one share of Stock on the SAR Grant Date.

9.2. Other Terms.

The Committee shall determine at the date of grant or thereafter, the time or times at which and the circumstances under which a SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the time or times at which SARs shall cease to be or become exercisable following termination of Service or upon other conditions, the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Stock will be delivered or deemed to be delivered to Grantees, whether or not a SAR shall be in tandem or in combination with any other Award, and any other terms and conditions of any SAR.

9.3. Term.

Each SAR granted under the Plan shall terminate, and all rights to purchase shares of Stock thereunder shall cease, upon the expiration of ten years from the date such SAR is granted, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Committee and stated in the Award Agreement relating to such SAR. If on the day preceding the date on which a Grantee’s SAR would otherwise terminate, the Fair Market Value of shares of Stock underlying a Grantee’s SAR is greater than the SAR Exercise Price of such SAR, the Company shall, prior to the termination of such SAR and without any action being taken on the part of the Grantee, consider such SAR to have been exercised by the Grantee. The Company shall deduct from the shares of Stock deliverable to the Grantee upon such exercise the number of shares of Stock necessary to satisfy payment of the SAR Exercise Price and all withholding obligations

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9.4. Transferability of SARS

Except as provided in Section 9.5, during the lifetime of a Grantee, only the Grantee (or, in the event of legal incapacity or incompetency, the Grantee’s guardian or legal representative) may exercise a SAR. Except as provided in Section 9.5, no SAR shall be assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of descent and distribution.

9.5. Family Transfers.

If authorized in the applicable Award Agreement, a Grantee may transfer, not for value, all or part of a SAR to any Family Member. For the purpose of this Section 9.5, a “not for value” transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic relations order in settlement of marital property rights; or (iii) a transfer to an entity in which more than fifty percent of the voting interests are owned by Family Members (or the Grantee) in exchange for an interest in that entity. Following a transfer under this Section 9.5, any such SAR shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer. Subsequent transfers of transferred SARs are prohibited except to Family Members of the original Grantee in accordance with this Section 9.5 or by will or the laws of descent and distribution.

10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS

10.1. Grant of Restricted Stock.

Awards of Restricted Stock or Stock Units may be made for no consideration (other than par value of the shares which is deemed paid by Services already rendered).

10.2. Restrictions.

At the time a grant of Restricted Stock or Stock Units is made, the Committee may, in its sole discretion, establish a period of time (a “restricted period”) applicable to such Restricted Stock or Stock Units. Each Award of Restricted Stock or Stock Units may be subject to a different restricted period. The Committee may, in its sole discretion, at the time a grant of Restricted Stock or Stock Units is made, prescribe restrictions in addition to or other than the expiration of the restricted period, including the satisfaction of corporate or individual performance objectives, which may be applicable to all or any portion of the Restricted Stock or Stock Units in accordance with Section 14.1 and 14.2. Restricted Stock, Stock Units Awards or Other Stock-Based Awards may be granted or sold as described in the preceding sentence in respect of past or future services and other valid consideration, or in lieu of, or in addition to, any cash compensation due to such Grantee. Notwithstanding the foregoing, Restricted Stock and Stock Units that vest solely by the passage of time shall not vest in full in less than three (3) years from the Grant Date; provided, however, up to ten percent of the shares reserved for issuance under this Plan may be granted pursuant to this Section 10 or the other provisions of this Plan without being subject to the foregoing restrictions. Restricted Stock and Stock Units for which vesting may be accelerated by achieving performance targets shall not vest in full in less than one (1) year from the Grant Date. Neither Restricted Stock nor Stock Units may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the restricted period or prior to the satisfaction of any other restrictions prescribed by the Committee with respect to such Restricted Stock or Stock Units. The limitations stated in this Section 10.2 apply to Sections 13 and 14.

10.3. Restricted Stock Certificates.

The Company shall issue, in the name of each Grantee to whom Restricted Stock has been granted, stock certificates representing the total number of shares of Restricted Stock granted to the Grantee, as soon as reasonably practicable after the Grant Date. The Committee may provide in an Award Agreement that either (i) the Secretary of the Company shall hold such certificates for the Grantee’s benefit until such time as the Restricted Stock is forfeited to the Company or the restrictions lapse, or (ii) such certificates shall be delivered to the Grantee, provided,

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however, that such certificates shall bear a legend or legends that comply with the applicable securities laws and regulations and makes appropriate reference to the restrictions imposed under the Plan and the Award Agreement. Notwithstanding any other provision of this Plan to the contrary, the Company may elect to satisfy any requirement under this Plan for the delivery of stock certificates through the use of book-entry.

10.4. Rights of Holders of Restricted Stock.

Unless the Committee otherwise provides in an Award Agreement, holders of Restricted Stock shall have the right to vote such Stock and the right to receive any dividends declared or paid with respect to such Stock. The Committee may provide that any dividends paid on Restricted Stock must be reinvested in shares of Stock, which may or may not be subject to the same vesting conditions and restrictions applicable to such Restricted Stock. All distributions, if any, received by a Grantee with respect to Restricted Stock as a result of any stock split, stock dividend, combination of shares, or other similar transaction shall be subject to the restrictions applicable to the original Grant.

10.5. Rights of Holders of Stock Units.

10.5.1. Voting and Dividend Rights.

Holders of Stock Units shall have no rights as stockholders of the Company. The Committee may provide in an Award Agreement evidencing a grant of Stock Units that the holder of such Stock Units shall be entitled to receive, upon the Company’s payment of a cash dividend on its outstanding Stock, a cash payment for each Stock Unit held equal to the per-share dividend paid on the Stock. Such Award Agreement may also provide that such cash payment will be deemed reinvested in additional Stock Units at a price per unit equal to the Fair Market Value of a share of Stock on the date that such dividend is paid.

10.5.2. Creditor’s Rights.

A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Award Agreement.

10.6. Termination of Service.

Unless the Committee otherwise provides in an Award Agreement or in writing after the Award Agreement is issued, upon the termination of a Grantee’s Service, any Restricted Stock or Stock Units held by such Grantee that have not vested, or with respect to which all applicable restrictions and conditions have not lapsed, shall immediately be deemed forfeited. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Restricted Stock and Stock Unit Awards issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service. Upon forfeiture of Restricted Stock or Stock Units, the Grantee shall have no further rights with respect to such Award, including but not limited to any right to vote Restricted Stock or any right to receive dividends with respect to shares of Restricted Stock or Stock Units.

10.7. Purchase of Restricted Stock.

The Grantee shall be required, to the extent required by applicable law, to purchase the Restricted Stock from the Company at a Purchase Price equal to the greater of (i) the aggregate par value of the shares of Stock represented by such Restricted Stock or (ii) the Purchase Price, if any, specified in the Award Agreement relating to such Restricted Stock. The Purchase Price shall be payable in a form described in Section 11 or, in the discretion of the Committee, in consideration for past or future Services rendered to the Company or an Affiliate.

10.8. Delivery of Stock.

Upon the expiration or termination of any restricted period and the satisfaction of any other conditions prescribed by the Committee, the restrictions applicable to shares of Restricted Stock or Stock Units settled in Stock shall lapse, and, unless otherwise provided in the Award Agreement, a stock certificate for such shares shall be delivered, free of all such restrictions, to the Grantee or the Grantee’s beneficiary or estate, as the case may be. Neither the Grantee, nor the Grantee’s beneficiary or estate, shall have any further rights with regard to a Stock Unit once the share of Stock represented by the Stock Unit has been delivered.

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11. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK

11.1. General Rule.

Payment of the Option Price for the shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock shall be made in cash or in cash equivalents acceptable to the Company.

11.2. Surrender of Stock.

To the extent the Award Agreement so provides, payment of the Option Price for shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock, if any, may be made all or in part through the tender to the Company of shares of Stock, which shall be valued, for purposes of determining the extent to which the Option Price or Purchase Price has been paid thereby, at their Fair Market Value on the date of exercise or surrender.

11.3. Cashless Exercise.

With respect to an Option only (and not with respect to Restricted Stock), to the extent permitted by law and to the extent the Award Agreement so provides, payment of the Option Price for shares purchased pursuant to the exercise of an Option may be made all or in part by delivery (on a form acceptable to the Committee) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell shares of Stock and to deliver all or part of the sales proceeds to the Company in payment of the Option Price and any withholding taxes described in Section 18.3.

11.4. Other Forms of Payment.

To the extent the Award Agreement so provides, payment of the Option Price for shares purchased pursuant to exercise of an Option or the Purchase Price for Restricted Stock may be made in any other form that is consistent with applicable laws, regulations and rules.

12. TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS

12.1. Dividend Equivalent Rights.

A Dividend Equivalent Right is an Award entitling the recipient to receive credits based on cash distributions that would have been paid on the shares of Stock specified in the Dividend Equivalent Right (or other award to which it relates) if such shares had been issued to and held by the recipient. A Dividend Equivalent Right may be granted hereunder to any Grantee. The terms and conditions of Dividend Equivalent Rights shall be specified in the grant. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be reinvested in additional shares of Stock, which may thereafter accrue additional equivalents. Any such reinvestment shall be at Fair Market Value on the date of reinvestment. Dividend Equivalent Rights may be settled in cash or Stock or a combination thereof, in a single installment or installments, all determined in the sole discretion of the Committee. A Dividend Equivalent Right granted as a component of another Award may provide that such Dividend Equivalent Right shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other award. A Dividend Equivalent Right granted as a component of another Award may also contain terms and conditions different from such other award.

12.2. Termination of Service.

Except as may otherwise be provided by the Committee either in the Award Agreement or in writing after the Award Agreement is issued, a Grantee’s rights in all Dividend Equivalent Rights or interest equivalents shall automatically terminate upon the Grantee’s termination of Service for any reason.

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13. OTHER STOCK-BASED AWARDS AND LLC UNITS

Other forms of Awards (“Other Stock-Based 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, 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 the 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 Grantee who is rendering services to the issuing Affiliate.

For purposes of calculating the number of shares of Stock underlying an Other Stock-Based Award relative to the total number of shares of Stock reserved and available for issuance under this Section, the Committee shall establish in good faith the maximum number of shares of Stock to which a Grantee of such Other Stock-Based 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 Stock-Based Award shall be reduced accordingly by the Committee and the related shares of Stock shall be added back to the shares of Stock available for issuance under the Plan. Other Stock-Based 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 Committee shall determine the Grantees to whom, and the time or times at which, Other Stock-Based 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 Grantee for the acquisition of Other Stock-Based Awards; and the restriction and conditions applicable to Other Stock-Based 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 Committee may require that Other Stock-Based Awards be held through a limited partnership or similar “look-through” entity, and the Committee 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. The provision of the grant of Other Stock-Based Awards need not be the same with respect to each Grantee.

Subject to the provisions of this Plan and the award agreement or such other agreement and unless otherwise determined by the Committee at grant, the Grantee of an award under this Section shall be entitled to receive, currently or on a deferred basis, interest or dividends or interest equivalents or Dividend Equivalent Rights with respect to the number of shares of Stock covered by the Award, as determined at the time of the Award by the Committee, in its sole discretion, and the Committee may provide that such amounts (if any) shall be deemed to have been reinvested in additional shares of Stock or otherwise reinvested.

Shares of Stock (including securities convertible into shares of Stock) issued on a bonus basis under this Section may be issued for no cash consideration.

14. TERMS AND CONDITIONS OF PERFORMANCE AND ANNUAL INCENTIVE AWARDS

14.1. Performance Conditions

The right of a Grantee to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to reduce the amounts payable under any Award subject to performance conditions, except as limited under Sections 14.2 hereof in the case of a Performance Award or Annual Incentive Award intended to qualify under Code Section 162(m). The Committee also has the authority to provide for accelerated vesting of any Award based on the achievement of performance goals pursuant to the performance conditions set forth in this Section 14. If and to the extent required under Code Section 162(m), any power or authority relating to a Performance Award or Annual Incentive Award intended to qualify under Code Section 162(m), shall be exercised by the Committee and not the Board.

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In the event that applicable tax and/or securities laws change to permit Board discretion to alter the governing performance measures without obtaining shareholder approval of such changes, the Board shall have sole discretion to make such changes without obtaining shareholder approval provided the exercise of such discretion does not violate Code Section 409A. In addition, in the event that the Committee determines that it is advisable to grant Awards that shall not qualify as performance-based compensation, the Committee may make such grants without satisfying the requirements of Code Section 162(m) and base vesting on performance measures other than those set forth in this Section 14.

14.2. Performance or Annual Incentive Awards Granted to Designated Covered Employees

If and to the extent that the Committee determines that a Performance or Annual Incentive Award to be granted to a Grantee who is designated by the Committee as likely to be a Covered Employee should qualify as “performance-based compensation” for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Performance or Annual Incentive Award shall be contingent upon achievement of pre-established performance goals and other terms set forth in this Section 14.2.

14.2.1. Performance Goals Generally.

The performance goals for such Performance or Annual Incentive Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 14.2. Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being “substantially uncertain.” The Committee may determine that such Performance or Annual Incentive Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance or Annual Incentive Awards. Performance goals may differ for Performance or Annual Incentive Awards granted to any one Grantee or to different Grantees.

14.2.2. Business Criteria.

One or more of the following business criteria for the Company, on a consolidated basis, and/or specified subsidiaries or business units of the Company (except with respect to the total stockholder return and earnings per share criteria), shall be used by the Committee (and not by the Board) in establishing performance goals for such Performance or Annual Incentive Awards: (1) total stockholder return; (2) such total stockholder return as compared to total return (on a comparable basis) of a publicly available index such as, but not limited to, the Standard & Poor’s 500 Stock Index; (3) net income; (4) pretax earnings; (5) earnings before interest expense, taxes, depreciation and amortization, with or without adjustments used from time to time by the Company in its publicly filed financial statements; (6) pretax operating earnings after interest expense and before bonuses, service fees, and extraordinary or special items; (7) operating margin; (8) earnings per share; (9) return on equity; (10) return on capital; (11) return on investment; (12) operating earnings; (13) working capital; (14) ratio of debt to stockholders’ equity (15) revenue; (16) brand awareness; (17) revenue per available room; (18) number of rooms or units; (19) debt reduction; (20) customer satisfaction; and (21) any other business criteria used in the Company’s publicly announced guidance. Business criteria may be measured on an absolute basis or on a relative basis (i.e., performance relative to peer companies) and on a GAAP or non-GAAP basis. The Committee may provide, in a manner that meets the requirements of Code Section 162(m) that any evaluation of performance may include or exclude any of the following events that occur during the applicable performance period: (a) asset write-downs; (b) litigation or claim judgments or settlements; (c) the effect of changes in tax laws, accounting principles or other laws or provisions affecting reported results; (d) any reorganization or restructuring programs; (e) extraordinary nonrecurring items as described in Accounting Principles Board Opinion No. 30 and/or in management’s discussing and analysis of financial condition and results of operations appearing in the Company’s annual report to shareholders for the applicable year; (f) acquisitions or divestitures; and (g) foreign exchange gains and losses. To the extent such inclusions or exclusions affect Awards to Covered Employees, they shall be prescribed in a form that meets the requirements of Code Section 162(m) for deductibility.

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14.2.3. Timing For Establishing Performance Goals.

Performance goals shall be established not later than the earlier of (i) 90 days after the beginning of any performance period applicable to such Performance or Annual Incentive Awards and (ii) the day on which 25% of any performance period applicable to such Awards has expired, or at such other date as may be required or permitted for “performance-based compensation” under Code Section 162(m).

14.2.4. Settlement of Performance or Annual Incentive Awards; Other Terms.

Settlement of such Performance or Annual Incentive Awards shall be in cash, Stock, other Awards or other property, in the discretion of the Committee. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be made in connection with such Performance or Annual Incentive Awards. The Committee shall specify the circumstances in which such Performance or Annual Incentive Awards shall be paid or forfeited in the event of termination of Service by the Grantee prior to the end of a performance period or settlement of Performance Awards.

14.3. Written Determinations.

All determinations by the Committee as to the establishment of performance goals, the amount of any potential Performance Awards and as to the achievement of performance goals relating to Performance Awards, and the amount of any potential individual Annual Incentive Awards and the amount of final Annual Incentive Awards, shall be made in writing in the case of any Award intended to qualify under Code Section 162(m). To the extent permitted by Section 162(m), the Committee may delegate any responsibility relating to such Performance Awards or Annual Incentive Awards.

14.4. Status of Section 14.2 Awards Under Code Section 162(m)

It is the intent of the Company that Performance Awards and Annual Incentive Awards under Section 14.2 hereof granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Code Section 162(m) and regulations thereunder shall, if so designated by the Committee, constitute “qualified performance-based compensation” within the meaning of Code Section 162(m) and regulations thereunder. Accordingly, the terms of Section 14.2, including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Grantee will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee, at the time of grant of Performance Awards or an Annual Incentive Award, as likely to be a Covered Employee with respect to that fiscal year. If any provision of the Plan or any agreement relating to such Performance Awards or Annual Incentive Awards does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements.

15. PARACHUTE LIMITATIONS

Notwithstanding any other provision of this Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by a Grantee with the Company or any Affiliate, except an agreement, contract, or understanding that expressly addresses Section 280G or Section 4999 of the Code (an “Other Agreement”), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Grantee (including groups or classes of Grantees or beneficiaries of which the Grantee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Grantee (a “Benefit Arrangement”), if the Grantee is a “disqualified individual,” as defined in Section 280G(c) of the Code, any Option, Restricted Stock or Stock Unit held by that Grantee and any right to receive any payment or other benefit under this Plan shall not become exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Grantee under this Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Grantee under this Plan to be considered a “parachute payment” within the meaning of Section 280G(b)(2) of the Code as then in effect

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(a “Parachute Payment”) and (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Grantee from the Company under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Grantee without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to exercise, vesting, payment, or benefit under this Plan, in conjunction with all other rights, payments, or benefits to or for the Grantee under any Other Agreement or any Benefit Arrangement would cause the Grantee to be considered to have received a Parachute Payment under this Plan that would have the effect of decreasing the after-tax amount received by the Grantee as described in clause (ii) of the preceding sentence, then the Grantee shall have the right, in the Grantee’s sole discretion, to designate those rights, payments, or benefits under this Plan, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to the Grantee under this Plan be deemed to be a Parachute Payment; provided, however, that in order to comply with Code Section 409A, the reduction or elimination will be performed in the order in which each dollar of value subject to an Award reduces the Parachute Payment to the greatest extent.

16. REQUIREMENTS OF LAW

16.1. General.

The Company shall not be required to sell or issue any shares of Stock under any Award if the sale or issuance of such shares would constitute a violation by the Grantee, any other individual exercising an Option, or the Company of any provision of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of any shares subject to an Award upon any securities exchange or under any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares hereunder, no shares of Stock may be issued or sold to the Grantee or any other individual exercising an Option pursuant to such Award unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company, and any delay caused thereby shall in no way affect the date of termination of the Award. Without limiting the generality of the foregoing, in connection with the Securities Act, upon the exercise of any Option or any SAR that may be settled in shares of Stock or the delivery of any shares of Stock underlying an Award, unless a registration statement under such Act is in effect with respect to the shares of Stock covered by such Award, the Company shall not be required to sell or issue such shares unless the Committee has received evidence satisfactory to it that the Grantee or any other individual exercising an Option may acquire such shares pursuant to an exemption from registration under the Securities Act. Any determination in this connection by the Committee shall be final, binding, and conclusive. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an Option or a SAR or the issuance of shares of Stock pursuant to the Plan to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option (or SAR that may be settled in shares of Stock) shall not be exercisable until the shares of Stock covered by such Option (or SAR) are registered or are exempt from registration, the exercise of such Option (or SAR) (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption.

16.2. Rule 16b-3.

During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act, it is the intent of the Company that Awards pursuant to the Plan and the exercise of Options and SARs granted hereunder will qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any provision of the Plan or action by the Committee does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Committee, and shall not affect the validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the Committee may exercise its discretion to modify this Plan in any respect necessary to satisfy the requirements of, or to take advantage of any features of, the revised exemption or its replacement.

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17. EFFECT OF CHANGES IN CAPITALIZATION

17.1. Changes in Stock.

If the number of outstanding shares of Stock is increased or decreased or the shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company on account of any recapitalization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Company occurring after the Effective Date, the number and kinds of shares for which grants of Options and other Awards may be made under the Plan shall be adjusted proportionately and accordingly by the Company. In addition, the number and kind of shares for which Awards are outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of the Grantee immediately following such event shall, to the extent practicable, be the same as immediately before such event. Any such adjustment in outstanding Options or SARs shall not change the aggregate Option Price or SAR Exercise Price payable with respect to shares that are subject to the unexercised portion of an outstanding Option or SAR, as applicable, but shall include a corresponding proportionate adjustment in the Option Price or SAR Exercise Price per share. The conversion of any convertible securities of the Company shall not be treated as an increase in shares effected without receipt of consideration. Notwithstanding the foregoing, in the event of any distribution to the Company’s stockholders of securities of any other entity or other assets (including an extraordinary dividend but excluding a non-extraordinary dividend of the Company) without receipt of consideration by the Company, the Company shall, in such manner as the Company deems appropriate, adjust (i) the number and kind of shares subject to outstanding Awards and/or (ii) the exercise price of outstanding Options and Stock Appreciation Rights to reflect such distribution.

17.2. Reorganization in Which the Company Is the Surviving Entity Which does not Constitute a Corporate Transaction.

Subject to Section 17.3 hereof, if the Company shall be the surviving entity in any reorganization, merger, or consolidation of the Company with one or more other entities which does not constitute a Corporate Transaction, any Option or SAR theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option or SAR would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price or SAR Exercise Price per share so that the aggregate Option Price or SAR Exercise Price thereafter shall be the same as the aggregate Option Price or SAR Exercise Price of the shares remaining subject to the Option or SAR immediately prior to such reorganization, merger, or consolidation. Subject to any contrary language in an Award Agreement evidencing an Award, any restrictions applicable to such Award shall apply as well to any replacement shares received by the Grantee as a result of the reorganization, merger or consolidation. In the event of a transaction described in this Section 17.2, Stock Units shall be adjusted so as to apply to the securities that a holder of the number of shares of Stock subject to the Stock Units would have been entitled to receive immediately following such transaction.

17.3. Corporate Transaction.

Subject to the exceptions set forth in the last sentence of this Section 17.3 and the last sentence of Section 17.4, upon the occurrence of a Corporate Transaction:

(i) all outstanding shares of Restricted Stock shall be deemed to have vested, and all Stock Units shall be deemed to have vested and the shares of Stock subject thereto shall be delivered, immediately prior to the occurrence of such Corporate Transaction, and

(ii) either of the following two actions shall be taken:

(A) fifteen days prior to the scheduled consummation of a Corporate Transaction, all Options and SARs outstanding hereunder shall become immediately exercisable and shall remain exercisable for a period of fifteen days, or

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(B) the Committee may elect, in its sole discretion, to cancel any outstanding Awards of Options, Restricted Stock, Stock Units and/or SARs and pay or deliver, or cause to be paid or delivered, to the holder thereof an amount in cash or securities having a value (as determined by the Committee acting in good faith), in the case of Restricted Stock or Stock Units, equal to the formula or fixed price per share paid to holders of shares of Stock and, in the case of Options or SARs, equal to the product of the number of shares of Stock subject to the Option or SAR (the “Award Shares”) multiplied by the amount, if any, by which (I) the formula or fixed price per share paid to holders of shares of Stock pursuant to such transaction exceeds (II) the Option Price or SAR Exercise Price applicable to such Award Shares.

With respect to the Company’s establishment of an exercise window, (i) any exercise of an Option or SAR during such fifteen-day period shall be conditioned upon the consummation of the event and shall be effective only immediately before the consummation of the event, and (ii) upon consummation of any Corporate Transaction the Plan, and all outstanding but unexercised Options and SARs shall terminate. The Committee shall send written notice of an event that will result in such a termination to all individuals who hold Options and SARs not later than the time at which the Company gives notice thereof to its stockholders. This Section 17.3 shall not apply to any Corporate Transaction to the extent that provision is made in writing in connection with such Corporate Transaction for the assumption or continuation of the Options, SARs, Stock Units and Restricted Stock theretofore granted, or for the substitution for such Options, SARs, Stock Units and Restricted Stock for new common stock options and stock appreciation rights and new common stock units and restricted stock relating to the stock of a successor entity, or a parent or subsidiary thereof, with appropriate adjustments as to the number of shares (disregarding any consideration that is not common stock) and option and stock appreciation right exercise prices (an “Equivalent Award”), in which event the Plan, Options, SARs, Stock Units and Restricted Stock theretofore granted shall continue in the manner and under the terms so provided. If the Grantee receives an Equivalent Award in connection with a Corporate Transaction and his employment is terminated by the Company without Cause or by the employee with Good Reason within one year following the Corporate Transaction involuntarily, the Equivalent Award may be exercised in full beginning on the date of such termination and for such period as the Committee shall determine.

17.4. Adjustments.

Adjustments under this Section 17 related to shares of Stock or securities of the Company shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. No fractional shares or other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share. The Committee shall determine the effect of a Corporate Transaction upon Awards other than Options, SARs, Stock Units and Restricted Stock, and such effect shall be set forth in the appropriate Award Agreement. The Committee may provide in the Award Agreements at the time of grant, or any time thereafter with the consent of the Grantee, for different provisions to apply to an Award in place of those described in Sections 17.1, 17.2 and 17.3. This Section 17 does not limit the Company’s ability to provide for alternative treatment of Awards outstanding under the Plan in the event of change of control events that are not Corporate Transactions.

17.5. No Limitations on Company.

The making of Awards pursuant to the Plan shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or transfer all or any part of its business or assets.

18. GENERAL PROVISIONS

18.1. Disclaimer of Rights

No provision in the Plan or in any Award or Award Agreement shall be construed to confer upon any individual the right to remain in the employ or service of the Company or any Affiliate, or to interfere in any way with any contractual or other right or authority of the Company either to increase or decrease the compensation or other payments to any individual at any time, or to terminate any employment or other relationship between any individual and the Company. In addition, notwithstanding anything contained in the Plan to the contrary, unless

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otherwise stated in the applicable Award Agreement, no Award granted under the Plan shall be affected by any change of duties or position of the Grantee, so long as such Grantee continues to be a director, officer, consultant or employee of the Company or an Affiliate. The obligation of the Company to pay any benefits pursuant to this Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Company to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any Grantee or beneficiary under the terms of the Plan.

18.2. Nonexclusivity of the Plan

Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations upon the right and authority of the Committee to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the Committee in its discretion determines desirable, including, without limitation, the granting of equity awards otherwise than under the Plan.

18.3. Withholding Taxes

The Company or an Affiliate, as the case may be, shall have the right to deduct from payments of any kind otherwise due to a Grantee any federal, state, or local taxes of any kind required by law to be withheld with respect to the vesting of or other lapse of restrictions applicable to an Award or upon the issuance of any shares of Stock upon the exercise of an Option or pursuant to an Award. At the time of such vesting, lapse, or exercise, the Grantee shall pay to the Company or the Affiliate, as the case may be, any amount that the Company or the Affiliate may reasonably determine to be necessary to satisfy such withholding obligation. Subject to the prior approval of the Company or the Affiliate, which may be withheld by the Company or the Affiliate, as the case may be, in its sole discretion, the Grantee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company or the Affiliate to withhold shares of Stock otherwise issuable to the Grantee or (ii) by delivering to the Company or the Affiliate shares of Stock already owned by the Grantee. The shares of Stock so delivered or withheld shall have an aggregate Fair Market Value equal to such withholding obligations. The Fair Market Value of the shares of Stock used to satisfy such withholding obligation shall be determined by the Company or the Affiliate as of the date that the amount of tax to be withheld is to be determined. A Grantee who has made an election pursuant to this Section 18.3 may satisfy his or her withholding obligation only with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements. The maximum number of shares of Stock that may be withheld from any Award to satisfy any federal, state or local tax withholding requirements upon the exercise, vesting, lapse of restrictions applicable to such Award or payment of shares pursuant to such Award, as applicable, cannot exceed such number of shares having a Fair Market Value equal to the minimum statutory amount required by the Company to be withheld and paid to any such federal, state or local taxing authority with respect to such exercise, vesting, lapse of restrictions or payment of shares.

18.4. Captions

The use of captions in this Plan or any Award Agreement is for the convenience of reference only and shall not affect the meaning of any provision of the Plan or such Award Agreement.

18.5. Other Provisions

Each Award granted under the Plan may contain such other terms and conditions not inconsistent with the Plan as may be determined by the Committee, in its sole discretion.

18.6. Number and Gender

With respect to words used in this Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, etc., as the context requires.

A-20

18.7. Severability

If any provision of the Plan or any Award Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction.

18.8. Governing Law

The validity and construction of this Plan and the instruments evidencing the Awards hereunder shall be governed by the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan and the instruments evidencing the Awards granted hereunder to the substantive laws of any other jurisdiction.

18.9. Code Section 409A

The Committee intends to comply with Code Section 409A, or an exemption to Code Section 409A, with regard to Awards hereunder that constitute nonqualified deferred compensation within the meaning of Code Section 409A. To the extent that the Committee determines that a Grantee would be subject to the additional 20% tax imposed on certain nonqualified deferred compensation plans pursuant to Code Section 409A as a result of any provision of any Award granted under this Plan, such provision may be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Committee.

*  *  *

To record adoption of the Plan by the Board as of April 10, 2008, and approval of the Plan by the stockholders on May 20, 2008, and the amendment of the Plan by the Board as of April 5, 2012, and the approval by the stockholders on May 16, 2012, the Company has caused its authorized officer to execute the Plan.

MORGANS HOTEL GROUP CO.
By:	/s/ Richard Szymanski
	Title: Chief Financial Officer

A-21

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, Michael J. Gross, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Morgans Hotel Group Co. for the fiscal quarter ended June 30, 2012;

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

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

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

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

5. The registrant’s other certifying officer 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/ MICHAEL J. GROSS

Michael J. Gross

Chief Executive Officer

Date: August 3, 2012

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, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Morgans Hotel Group Co. for the fiscal quarter ended June 30, 2012;

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

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

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

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

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

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

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

5. The registrant’s other certifying officer 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 Financial Officer

Date: August 3, 2012

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 Quarterly Report on Form 10-Q of Morgans Hotel Group Co. (the “Company”) for the fiscal quarter ended June 30, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Michael J. Gross, 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 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/ MICHAEL J. GROSS

Michael J. Gross

Chief Executive Officer

Date: August 3, 2012

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 Quarterly Report on Form 10-Q of Morgans Hotel Group Co. (the “Company”) for the fiscal quarter ended June 30, 2012, 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 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 Financial Officer

Date: August 3, 2012

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.

XML

Investments in and Advances to Unconsolidated Joint Ventures (Details Textual)	1 Months Ended	3 Months Ended	6 Months Ended						1 Months Ended					3 Months Ended								3 Months Ended			1 Months Ended	6 Months Ended					1 Months Ended	6 Months Ended				6 Months Ended		1 Months Ended		6 Months Ended	12 Months Ended					1 Months Ended		6 Months Ended				6 Months Ended	12 Months Ended
	Nov. 23, 2011 USD ($)	Sep. 30, 2011	Jun. 30, 2012 USD ($) Hotels	Jun. 30, 2011 USD ($)	Jun. 30, 2012	Dec. 31, 2011 USD ($)	Jun. 30, 2012 Unconsolidated Joint Ventures [Member] USD ($)	Dec. 31, 2011 Unconsolidated Joint Ventures [Member] USD ($)	Nov. 30, 2011 Royalton Europe and Walton MGLondon [Member] GBP (£)	Nov. 23, 2011 Royalton Europe and Walton MGLondon [Member] USD ($)	Nov. 23, 2011 Royalton Europe and Walton MGLondon [Member] GBP (£)	Feb. 02, 2007 Morgans Parties [Member]	Feb. 02, 2007 DLJMB Parties [Member]	Jun. 30, 2011 CGM [Member] USD ($)	Jun. 20, 2011 CGM [Member]	Nov. 23, 2011 Sanderson [Member] Royalton Europe and Walton MGLondon [Member] Room	Nov. 23, 2011 St Martins Lane [Member] Royalton Europe and Walton MGLondon [Member] Room	Jun. 30, 2012 Mondrian South Beach food and beverage MC South Beach (2) [Member] Unconsolidated Joint Ventures [Member] USD ($)	Dec. 31, 2011 Mondrian South Beach food and beverage MC South Beach (2) [Member] Unconsolidated Joint Ventures [Member] USD ($)	Jun. 30, 2012 SC London restaurant venture [Member] Unconsolidated Joint Ventures [Member]	Jun. 20, 2011 SC London restaurant venture [Member] Unconsolidated Joint Ventures [Member]	Jun. 30, 2012 Morgans Europe [Member] USD ($)	Jun. 30, 2011 Morgans Europe [Member] USD ($)	Nov. 23, 2011 Morgans Europe [Member] Unconsolidated Joint Ventures [Member]	Nov. 30, 2011 Morgans Europe [Member] Royalton Europe and Walton MGLondon [Member] USD ($)	Jun. 30, 2012 Mondrian Istanbul [Member] USD ($)	Jan. 31, 2012 Mondrian Istanbul [Member] USD ($)	Dec. 31, 2011 Mondrian Istanbul [Member] USD ($) Room	Jun. 30, 2012 Mondrian Istanbul [Member] Unconsolidated Joint Ventures [Member] USD ($)	Dec. 31, 2011 Mondrian Istanbul [Member] Unconsolidated Joint Ventures [Member] USD ($)	Apr. 30, 2008 Mondrian South Beach [Member]	Jun. 30, 2012 Mondrian South Beach [Member] USD ($) Hotels	Aug. 08, 2006 Mondrian South Beach [Member]	Jun. 30, 2012 Mondrian South Beach [Member] Unconsolidated Joint Ventures [Member] USD ($)	Dec. 31, 2011 Mondrian South Beach [Member] Unconsolidated Joint Ventures [Member] USD ($)	Jun. 30, 2012 Mondrian South Beach [Member] Joint Venture Partners [Member] USD ($)	Apr. 30, 2008 Mondrian South Beach [Member] Mortgage Lenders [Member] USD ($)	Sep. 30, 2011 Mondrian SOHO [Member]	Feb. 28, 2011 Mondrian SOHO [Member] Room Options	Jun. 30, 2012 Mondrian SOHO [Member] USD ($)	Sep. 30, 2012 Mondrian SOHO [Member]	Dec. 31, 2011 Mondrian SOHO [Member] USD ($)	Dec. 31, 2010 Mondrian SOHO [Member] USD ($)	Jun. 30, 2010 Mondrian SOHO [Member] USD ($)	Jun. 30, 2007 Mondrian SOHO [Member] USD ($)	Sep. 30, 2011 Ames [Member] USD ($)	Nov. 30, 2009 Ames [Member] Room	Jun. 30, 2012 Ames [Member] USD ($)	Jun. 30, 2012 Shore Club [Member]	Aug. 05, 2011 Mondrian Los Angeles Food and Beverage Venture [Member] USD ($)	Jun. 20, 2011 Former food and beverage joint venture entities [Member]	Jun. 30, 2012 Hard Rock Hotel & Casino (3) [Member] Loans	Dec. 31, 2011 Hard Rock Hotel & Casino (3) [Member] USD ($)	Dec. 31, 2010 Hard Rock Hotel & Casino (3) [Member] USD ($)	Dec. 31, 2007 Hard Rock Hotel & Casino (3) [Member] USD ($)	Mar. 01, 2011 Hard Rock Hotel & Casino (3) [Member] USD ($)	Jan. 28, 2011 Hard Rock Hotel & Casino (3) [Member] USD ($)	Dec. 31, 2009 Hard Rock Hotel & Casino (3) [Member] USD ($)	Feb. 02, 2007 Hard Rock Hotel & Casino (3) [Member] USD ($)	Feb. 02, 2007 Hard Rock Hotel & Casino (3) [Member] Morgans Parties [Member] USD ($)	Feb. 02, 2007 Hard Rock Hotel & Casino (3) [Member] DLJMB Parties [Member] USD ($)
Investments in and Advances to Unconsolidated Joint Ventures (Textual) [Abstract]
Equity ownership in JV - condo renovation and conversion					50.00%										50.00%					100.00%	50.00%			50.00%		20.00%							50.00%																		100.00%
Investment in hotel												33.00%	67.00%																																20.00%			31.00%	7.00%
Company's ownership interest in food and beverage joint venture																		less than 100%
Basis Spread on Variable Rate																															6.00%	3.00%
Number of room joint venture owns																150	204											128
Equity interests in the joint venture										$ 297,000,000	£ 192,000,000
Proceeds from the sale	72,300,000																								72,300,000
Outstanding mortgage debt secured									99,500,000
Long term agreement before hotel sales																						2027
Long term agreement after hotel sales																						2041
Management of hotel, incentive fees received			0	0																		0	0
Gross purchase price acquired building and land in joint venture																																110,000,000
Initial equity investment			13,009,000			10,201,000	13,009,000	10,201,000										1,109,000	1,465,000										10,392,000	4,564,000				1,350,000	4,015,000
Equity method investment balances																											5,100,000	10,300,000				15,000,000								0				0		0		0		0								0
Additional contribution to equity from joint venture partners																																8,000,000
Mortgage loan received																																124,000,000
Interest Rate of mortgage loan																															LIBOR, based on the rate set date, plus 6.0%	LIBOR plus 3.0%
Proceeds of financing from lender and affiliates																																				22,500,000	28,000,000
Extended maturity date of nonrecourse financing																																7 years
Extended maturity date of nonrecourse financing Date																																Apr. 01, 2017
Seller financing to qualified condominium buyers, maximum condominium purchase price, percentage																																80.00%
Additional capital provided by joint venture partners																										0										2,750,000
Mezzanine financing provided by the partners																																				28,000,000
Least percentage of all returns in excess of the first mortgage																																50.00%
Ownership of CGM in company's food and beverage joint venture														20,000,000
Number of hotel residences sold			196																													196
Number of rented hotel residence			89																													89
Contribution in the joint venture																																													5,000,000			11,900,000												57,500,000	115,000,000
Equity Method Investment Summarized Financial Information Liabilities																																													195,200,000			46,500,000
Minimum net operating income to debt service ratio		1:1 or greater
Additional contribution to equity from joint venture partners																																								3,200,000
Aggregate funding																																								1,000,000		5,500,000
Hotel achieved the required coverage ratio																																						1:1
Number of guest rooms																																							263								114
Net operating income to debt																																									1.1:1.0 or greater
Company has management contract																																							10 years								15 years
Number of extension option																																							2
Hotel Opening Date																																															Nov. 19, 2009
Joint venture tax credits sold																																																16,900,000
Equity method investment maturity date of secured mortgage debt																																																Oct. 09, 2012
Company's Pro Rata Share of Deposit to Joint Venture Debt Service Account																																														300,000
Impairment charge																																											10,700,000			10,600,000
Purchase price by the pebble book company to buy remaining interest in Mondrian Los Angeles																																																		2,500,000
Acquisition date of the Hard Rock Hotel & Casino																																																				Feb. 02, 2007
Number of mezzanine Loans																																																				3
Joint venture debt financing provided by lender																																																											760,000,000
Debt repaid																																																							110,000,000
Construction loan																																																											620,000,000
Additional cash contributions by joint venture partners																																																												75,800,000	424,800,000
Company 's equity ownership interest																																																					12.80%	12.80%
Equity ownership interest weighting to DLJMB Parties																																																					175.00%	175.00%
Cash contribution in excess of																																																					250,000,000	250,000,000
Amount due and payable under second mezzanine loan agreement																																																									96,000,000
First Mezzanine Lender indirect equity interests																																																								100.00%
Company 's net payment to lender																																																								$ 3,700,000

XML

Discontinued Operations (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2011
Discontinued operations of the property across the street from Delano South Beach
Income from discontinued operations	$ (5)	$ 485
Delano South Beach [Member]
Discontinued operations of the property across the street from Delano South Beach
Operating expenses	(8)	(35)
Income tax expense	3	(323)
Gain on disposal		843
Income from discontinued operations	$ (5)	$ 485

XML

Preferred Securities and Warrants (Details Textual) (USD $)	1 Months Ended	6 Months Ended
	Oct. 31, 2009	Jun. 30, 2012 Directors	Dec. 31, 2011	Oct. 15, 2011 Warrant	Jan. 30, 2011	Apr. 21, 2010	Oct. 15, 2009 Warrant
Preferred Securities and Warrants [Line Items]
Series A Preferred Securities		$ 55,851,000	$ 54,143,000
Per share value of Preferred Securities sold of Series A		$ 1,000	$ 1,000
Preferred Securities issued of Series A		75,000	75,000
Term of warrants issued to investor	7 years 6 months
Preferred Securities and Warrants (Textual) [Abstract]
Common stock at an exercise price							6.00
Fund formation agreement expiration date		Jan. 30, 2011
Aggregate capital commitments					100,000,000
Contingent warrants forfeited				5,000,000
Undeclared and unpaid dividends		18,300,000
Change in size of board of directors, lower range		7
Change in size of board of directors, upper range		9
Equity investment acquisition		100,000,000
Beneficially own		10.00%
Commitment fee of investment		2,400,000
Reimbursement Expenses		600,000
Issue of contingent warrants							5,000,000
Forfeited aggregate capital commitments				250,000,000
Convertible notes purchased by investors						88,000,000
Issue of Convertible Notes						88,000,000
Series A Preferred Stock [Member]
Preferred Securities and Warrants [Line Items]
Series A Preferred Securities		55,851,000,000
Per share value of Preferred Securities sold of Series A							$ 1,000
Preferred Securities issued of Series A							75,000
Preferred stock Series A dividend rate through October 15, 2014		8.00%
Preferred stock Series A dividend rate from October 15, 2014 to October 15, 2016		10.00%
Preferred stock Series A dividend rate After October 15, 2016		20.00%
Expected dividend payments period used to compute fair value of the preferred securities		7 years
Discounted dividend payments expected		17.30%
Cumulative accretion		$ 7,800,000
Investors dividend rate on the Series A Preferred Securities increases		4.00%
Yucaipa [Member]
Preferred Securities and Warrants [Line Items]
Right to purchase common stock through the exercise of warrants		6,250,000					12,500,000
Exercise price of warrants or rights		$ 6.00					$ 6.00
Term of warrant		7 years 6 months
Investors consent rights warrants		6,250,000
Common stock expires		2017-04
Investors collectively own or right to purchase through exercise of shares		875,000
Minimum common stock price per share in terms of warrant		$ 6.00

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Organization and Formation Transaction (Details Textual) (USD $)	1 Months Ended		3 Months Ended		6 Months Ended													3 Months Ended		6 Months Ended								6 Months Ended	1 Months Ended					6 Months Ended
	Aug. 31, 2011	Feb. 28, 2006	Jun. 30, 2012 Hotels	Jun. 30, 2011	Jun. 30, 2012 Hotels	Jun. 30, 2011	Dec. 31, 2011	Nov. 30, 2011	Apr. 24, 2008	Feb. 17, 2006	Feb. 17, 2006 IPO [Member] Hotels	Jun. 30, 2012 The Light Group LLC [Member]	Nov. 30, 2011 The Light Group LLC [Member]	Jun. 30, 2012 HHH Holdings LLC [Member]	Jun. 30, 2012 DDD Holdings LLC [Member]	Jun. 30, 2012 MR Sasson [Member]	Jun. 30, 2012 MR Masi [Member]	Jun. 30, 2012 The Light Group [Member]	Jun. 30, 2011 The Light Group [Member]	Jun. 30, 2012 The Light Group [Member]	Jun. 30, 2011 The Light Group [Member]	Jun. 30, 2012 TLG Acquisition [Member]	Jun. 30, 2012 Zabeel Investments (L.L.C.) and Zabeel Investments Inc [Member]	Nov. 30, 2011 Maximum [Member]	Jun. 20, 2011 Former food and beverage joint venture entities [Member]	Jun. 30, 2012 Former food and beverage joint venture entities [Member] Maximum [Member]	Jun. 30, 2012 Morgans food and beverage operations [Member]	Jun. 30, 2012 Hudson [Member]	Jun. 30, 2011 Affiliates [Member]	Jun. 20, 2011 Affiliates [Member]	Jun. 30, 2012 Unconsolidated joint venture one [Member]	Jun. 30, 2012 Unconsolidated joint venture two [Member]	Jun. 30, 2012 Unconsolidated joint venture three [Member]	Jun. 30, 2012 North Star Hospitality [Member]	Jun. 30, 2012 RSA Associates [Member]
Organization and Formation Transaction (Textual) [Abstract]
Ownership Interest																																		85.00%	15.00%
Number of operating Hotels											9
Membership units exchangeable for common stock											1,000,000
Company owns part of a property of Hudson structured as a condominium																												100.00%
Minority ownership interest																															20.00%	7.00%	31.00%
Hudson constitute of the square footage of the entire building																												96.00%
Ownership interest acquired			50.00%		50.00%																	90.00%			100.00%	100.00%	100.00%			50.00%
Payment to acquired interest from affiliates																													$ 20,000,000
Beneficially own			10.00%		10.00%											5.00%	5.00%
Acquisition agreed to purchase of equity interest												100.00%	90.00%	50.00%	50.00%
Aggregate purchase price								28,500,000					28,500,000			5,500,000	3,000,000	28,500,000		28,500,000			20,000,000
Percentage of equity issue in noncontrolling interest			10.00%		10.00%											5.00%	5.00%
Promissory notes												18,000,000
Notes convertible into shares of the Company's common stock			18,000,000		18,000,000											16,000,000	2,000,000							18,000,000
Organization and Formation Transaction (Additional Textual) [Abstract]
Membership units exchanged for common stock									45,935
Membership units in Morgans Group outstanding			954,065		954,065				45,935
Issued shares of common stock			36,277,495		36,277,495		36,277,495			15,000,000
Issued price of common stock										$ 20
Net proceeds from issuance of shares		272,500,000
Number of hotel residences sold			196		196
Number of rented hotel residence			89		89
Payment to purchase remaining ownership interest	2,500,000
Acquisition of the equity interests								90.00%
Notes convertible into shares of the Company's common stock			$ 9.50		$ 9.50			$ 9.50
Fair value of promissory note			15,500,000		15,500,000
Long term debt extended percentage bearing fixed interest percentage rate			8.00%		8.00%
Annual interest payment after the third anniversary of the closing date on the promissory notes			18.00%		18.00%
Breaches of representations, warranties and other covenants			5,000,000		5,000,000
Ownership interest acquired			50.00%		50.00%																	90.00%			100.00%	100.00%	100.00%			50.00%
EBITDA target for maximum promissory note amount			18,000,000		18,000,000
Obligation related to the sasson masi put option					6,100,000
Income from continuing operations			$ (13,517,000)	$ (11,802,000)	$ (28,011,000)	$ (45,160,000)												$ 3,003,000	$ 2,171,000	$ 5,457,000	$ 3,965,000

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Omnibus Stock Incentive Plan (Tables)

6 Months Ended

Jun. 30, 2012

Omnibus Stock Incentive Plan [Abstract]

Summary of stock-based incentive awards

	Restricted Stock Units			LTIP Units			Stock Options
Outstanding as of January 1, 2012		669,879			2,340,972			2,324,740
Granted during 2012		320,138			121,402			—
Distributed/exercised during 2012		(142,039	)		(251,909	)		—
Forfeited during 2012		(41,462	)		—			—
Outstanding as of June 30, 2012		806,516			2,210,465			2,324,740
Vested as of June 30, 2012		243,061			1,954,858			1,458,074

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Deferred Gain on Assets Sold (Details Textual)	1 Months Ended								6 Months Ended		1 Months Ended	6 Months Ended		6 Months Ended
	Nov. 23, 2011 USD ($)	Jun. 30, 2012 USD ($)	Dec. 31, 2011 USD ($)	Nov. 23, 2011 GBP (£)	Nov. 23, 2011 Old Agreement [Member]	Nov. 23, 2011 New Agreement [Member]	Nov. 23, 2011 Sanderson [Member] Room	Nov. 23, 2011 St Martins Lane [Member] Room	Jun. 30, 2012 Mondrian Los Angeles [Member] USD ($)	May 03, 2011 Mondrian Los Angeles [Member] USD ($)	May 31, 2011 Mondrian Los Angeles [Member] Secured Debt [Member] USD ($)	Jun. 30, 2012 Royalton LLC [Member] USD ($)	May 23, 2011 Royalton LLC [Member] USD ($)	Jun. 30, 2012 Morgans [Member] USD ($)	May 23, 2011 Morgans [Member] USD ($)	Nov. 23, 2011 Walton MG [Member]	Nov. 23, 2011 Morgans Europe [Member] USD ($)
Deferred gain on assets sold (Textual) [Abstract]
Purchase and sale agreement										$ 137,000,000			$ 88,200,000		$ 51,800,000
Cash in ESCROW										9,200,000
Repayment of outstanding indebtedness											103,500,000
Net proceeds ,after repayment of debt and closing cost										40,000,000					93,000,000
Repayment of mortgage secured debt				99,500,000
Agreement period to operate hotel									20 years			15 years		15 years
Extension given to operate hotel									10 years			10 years		10 years
Ownership interest acquired		50.00%														50.00%
Number of rooms in hotel under joint venture							150	204
Sale of hotels of joint venture aggregate				192,000,000
Sale of hotels of joint venture aggregate one	297,000,000
Proceeds received by the company for sale of its joint venture interests	72,300,000
Extend term of existing management agreements					2027	2041
Deferred gain on asset sales		$ 144,644,000	$ 148,760,000						$ 55,600,000			$ 11,200,000		$ 12,500,000			$ 73,100,000

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Debt and Capital Lease Obligations (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011	Oct. 17, 2007
Debt and Capital Lease Obligations
Debt and capital lease obligations	$ 463,385	$ 439,905
Revolving credit facility [Member]
Debt and Capital Lease Obligations
Debt and capital lease obligations	20,000
Interest Rate	5.00%
Notes secured by Hudson [Member]
Debt and Capital Lease Obligations
Debt and capital lease obligations	115,000	115,000
Clift debt [Member]
Debt and Capital Lease Obligations
Debt and capital lease obligations	88,038	86,991
Interest Rate	9.60%
Liability to subsidiary trust [Member]
Debt and Capital Lease Obligations
Debt and capital lease obligations	50,100	50,100
Interest Rate	8.68%
Convertible Notes, face value of $172.5 million [Member]
Debt and Capital Lease Obligations
Debt and capital lease obligations	167,282	166,144
Interest Rate	2.38%		2.375%
TLG Promissory Note [Member]
Debt and Capital Lease Obligations
Debt and capital lease obligations	16,820	15,510
Interest Rate	8.00%
Capital lease obligations [Member]
Debt and Capital Lease Obligations
Debt and capital lease obligations	$ 6,153	$ 6,160

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Investments in and Advances to Unconsolidated Joint Ventures (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Investments in and advances to unconsolidated joint ventures
Total investments in and advances to unconsolidated joint ventures	$ 13,009	$ 10,201
Unconsolidated Joint Ventures [Member]
Investments in and advances to unconsolidated joint ventures
Total investments in and advances to unconsolidated joint ventures	13,009	10,201
Mondrian South Beach [Member] | Unconsolidated Joint Ventures [Member]
Investments in and advances to unconsolidated joint ventures
Total investments in and advances to unconsolidated joint ventures	1,350	4,015
Mondrian Istanbul [Member] | Unconsolidated Joint Ventures [Member]
Investments in and advances to unconsolidated joint ventures
Total investments in and advances to unconsolidated joint ventures	10,392	4,564
Mondrian South Beach food and beverage MC South Beach (1) [Member] | Unconsolidated Joint Ventures [Member]
Investments in and advances to unconsolidated joint ventures
Total investments in and advances to unconsolidated joint ventures	1,109	1,465
Other [Member] | Unconsolidated Joint Ventures [Member]
Investments in and advances to unconsolidated joint ventures
Total investments in and advances to unconsolidated joint ventures	$ 158	$ 157

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Commitments (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012
Key Money and Equity Commitments
Key money	$ 29,400
Equity investments
Cash flow guarantees	31,600
Total maximum future funding commitments	61,000
Amounts due within one year	$ 2,500

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Related Party Transactions (Details Textual) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011
Related Party Transactions (Textual) [Abstract]
Management fees	$ 2,000,000	$ 3,000,000	$ 4,100,000	$ 6,300,000
Related party receivables	5,946,000,000		5,946,000,000		4,142,000
Interest expense related to TLG Promissory Notes	300,000		700,000
TLG Promissory Notes [Member]
Related Party Transactions (Textual) [Abstract]
TLG Promissory Notes to Messrs. Sasson and Masi	$ 16,800,000		$ 16,800,000		$ 15,500,000

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Income (Loss) Per Share

6 Months Ended

Jun. 30, 2012

Income (Loss) Per Share [Abstract]

Income (Loss) Per Share

3. Income (Loss) Per Share

The Company applies the two-class method as required by ASC 260-10, Earnings per Share (“ASC 260-10”). ASC 260-10 requires the net income per share for each class of stock (common stock and preferred stock) to be calculated assuming 100% of the Company’s net income is distributed as dividends to each class of stock based on their contractual rights. To the extent the Company has undistributed earnings in any calendar quarter, the Company will follow the two-class method of computing earnings per share.

Basic earnings (loss) per share is calculated based on the weighted average number of common stock outstanding during the period. Diluted earnings (loss) per share include the effect of potential shares outstanding, including dilutive securities. Potential dilutive securities may include shares and options granted under the Company’s stock incentive plan and membership units in Morgans Group, which may be exchanged for shares of the Company’s common stock under certain circumstances. The 954,065 Morgans Group membership units (which may be converted to cash, or at the Company’s option, common stock) held by third parties at June 30, 2012, the Yucaipa Warrants issued to the Investors, unvested restricted stock units, LTIP Units, stock options, OPP LTIP Units and shares issuable upon conversion of outstanding Convertible Notes have been excluded from the diluted net income (loss) per common share calculation, as there would be no effect on reported diluted net income (loss) per common share.

The table below details the components of the basic and diluted loss per share calculations (in thousands, except for per share data):

	Three Months Ended June 30, 2012			Three Months Ended June 30, 2011
Numerator:
Net loss from continuing operations	$	(13,517	)	$	(11,802	)
Net loss from discontinued operations, net of tax		—			(5	)
Net loss		(13,517	)		(11,807	)
Net loss attributable to noncontrolling interest		124			383
Net loss attributable to Morgans Hotel Group Co.		(13,393	)		(11.424	)
Less: preferred stock dividends and accretion		2,718			2,229
Net loss attributable to common stockholders	$	(16,111	)	$	(13,653	)
Denominator, continuing and discontinued operations:
Weighted average basic common shares outstanding		31,261			30,498
Effect of dilutive securities		—			—
Weighted average diluted common shares outstanding		31,261			30,498
Basic and diluted loss from continuing operations per share	$	(0.52	)	$	(0.45	)
Basic and diluted income from discontinued operations per share	$	—		$	0.00
Basic and diluted loss available to common stockholders per common share	$	(0.52	)	$	(0.45	)

	Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
Numerator:
Net loss from continuing operations	$	(28,011	)	$	(45,160	)
Net income from discontinued operations, net of tax		—			485
Net loss		(28,011	)		(44,675	)
Net loss attributable to noncontrolling interest		337			1,208
Net loss attributable to Morgans Hotel Group Co.		(27,674	)		(43,467	)
Less: preferred stock dividends and accretion		5,368			4,416
Net loss attributable to common stockholders	$	(33,042	)	$	(47,883	)
Denominator, continuing and discontinued operations:
Weighted average basic common shares outstanding		31,185			31,255
Effect of dilutive securities		—			—
Weighted average diluted common shares outstanding		31,185			31,255
Basic and diluted loss from continuing operations per share	$	(1.06	)	$	(1.55	)
Basic and diluted income from discontinued operations per share	$	—		$	0.02
Basic and diluted loss available to common stockholders per common share	$	(1.06	)	$	(1.53	)

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Debt and Capital Lease Obligations (Details Textual) (USD $)	6 Months Ended					6 Months Ended				6 Months Ended		1 Months Ended	6 Months Ended		1 Months Ended	6 Months Ended		1 Months Ended		6 Months Ended				6 Months Ended				1 Months Ended	6 Months Ended	24 Months Ended	6 Months Ended		1 Months Ended		6 Months Ended		1 Months Ended	6 Months Ended			6 Months Ended			6 Months Ended	1 Months Ended	6 Months Ended		6 Months Ended			6 Months Ended				6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012 MR Sasson [Member]	Jun. 30, 2012 Hudson Lease 1 [Member]	Jun. 30, 2012 Hudson Lease 2 [Member]	Jun. 30, 2012 Hudson Lease One and Hudson Lease Two [Member]	Jun. 30, 2012 Hudson Lease [Member] Hotels	Jun. 30, 2012 The Light Group LLC [Member]	Nov. 30, 2011 The Light Group LLC [Member]	Jun. 30, 2012 Call Options Purchased [Member]	Jun. 30, 2012 Interest Rate Swap [Member]	Aug. 31, 2006 Liability to Subsidiary Trust Issuing Preferred Securities [Member]	Jun. 30, 2012 Liability to Subsidiary Trust Issuing Preferred Securities [Member]	Jun. 30, 2012 Hudson Mortgage Loan [Member]	Aug. 31, 2011 Hudson Mezzanine Loan [Member]	Jun. 30, 2012 Hudson Mezzanine Loan [Member]	Jun. 30, 2012 Hudson Mezzanine Loan [Member] Interest Rate Cap [Member]	Aug. 31, 2011 Amended Hudson Mortgage Loan [Member]	Oct. 31, 2010 Amended Hudson Mortgage Loan [Member]	Jun. 30, 2012 Amended Hudson Mortgage Loan [Member]	Jun. 30, 2012 Amended Hudson Mortgage Loan [Member] Interest Rate Cap [Member]	Jun. 30, 2012 Hudson 2011 Mortgage Loan [Member]	Aug. 12, 2011 Hudson 2011 Mortgage Loan [Member]	Jun. 30, 2012 Hudson 2011 Mortgage Loan [Member] Interest Rate Cap [Member]	Jun. 30, 2012 25.0 million of the Hudson 2011 Mortgage Loan [Member]	Jun. 30, 2012 90.0 million of the Hudson 2011 Mortgage Loan [Member]	Jun. 30, 2012 Convertible Notes With Warrant Attached [Member]	Oct. 31, 2004 Clift debt [Member]	Jun. 30, 2012 Clift debt [Member]	Feb. 29, 2012 Clift debt [Member]	Jun. 30, 2012 Clift debt [Member] Maximum [Member]	Jun. 30, 2012 Clift debt [Member] Minimum [Member]	May 31, 2011 Subsidiary Mondrian Los Angeles Mortgage Loan [Member]	Oct. 31, 2010 Subsidiary Mondrian Los Angeles Mortgage Loan [Member]	Jun. 30, 2012 Subsidiary Mondrian Los Angeles Mortgage Loan [Member]	May 03, 2011 Subsidiary Mondrian Los Angeles Mortgage Loan [Member]	Nov. 30, 2011 TLG Promissory Note [Member] Simulation	Jun. 30, 2012 TLG Promissory Note [Member]	Nov. 30, 2011 TLG Promissory Note [Member] MR Sasson [Member]	Nov. 30, 2011 TLG Promissory Note [Member] MR Masi [Member]	Jun. 30, 2012 TLG Promissory Note [Member] The Light Group LLC [Member]	Nov. 30, 2011 TLG Promissory Note [Member] The Light Group LLC [Member]	Jun. 30, 2012 Trust Preferred Securities Subject to Mandatory Redemption [Member]	Jun. 30, 2012 Trust Preferred Securities Subject to Mandatory Redemption [Member] Liability to Subsidiary Trust Issuing Preferred Securities [Member]	Oct. 31, 2007 Convertible Notes [Member]	Jun. 30, 2012 Convertible Notes [Member]	Oct. 17, 2007 Convertible Notes [Member]	Jun. 30, 2012 Convertible Notes [Member] Maximum [Member]	Jun. 30, 2012 Delano Credit Facility [Member] Room	Jul. 28, 2011 Delano Credit Facility [Member]	Jun. 30, 2012 Delano Credit Facility [Member] Prior to June 30, 2012 [Member]	Jun. 30, 2012 Delano Credit Facility [Member] Thereafter to June 30, 2012 [Member]	Jun. 30, 2012 Delano Credit Facility [Member] Maximum [Member]	Aug. 12, 2011 Term Loan [Member] Hudson 2011 Mortgage Loan [Member]	Jun. 30, 2012 Revolving credit facility [Member]	Jun. 30, 2012 Revolving credit facility [Member] Minimum [Member]	Jun. 30, 2012 Delano Credit Sub-Facility [Member]	Jun. 30, 2012 Libor Rate [Member] Delano Credit Facility [Member]	Jun. 30, 2012 Libor Rate [Member] Revolving credit facility [Member]	Jun. 30, 2012 Base Rate [Member] Delano Credit Facility [Member]	Jun. 30, 2012 Base Rate [Member] Revolving credit facility [Member]
Debt and Capital Lease Obligations (Textual) [Abstract]
Debt & capital lease obligations minimum Interest														0.97%		2.98%				1.03%		5.00%			5.00%	4.00%									1.64%									3.25%					1.00%						4.00%	1.00%		4.00%	3.75%	3.00%	2.75%
Interest rate on debt											30-day LIBOR rate at approximately 5.0%			30-day LIBOR plus 0.97%		30-day LIBOR plus 2.98%				30-day LIBOR plus 1.03%		30-day LIBOR with minimum of 1.0%			30-day LIBOR with minimum of 1.0%	30-day LIBOR with minimum of 1.0%									30-day LIBOR plus 1.64%									interest rate, float and reset quarterly at the three-month LIBOR rate plus 3.25%
Interest rate swap on mortgage, LIBOR rate											5.00%
Interest rate expired date											Jul. 15, 2010										Oct. 15, 2011			Sep. 12, 2010											Oct. 15, 2011
Modification agreements extended the Hudson mortgage														until October 15, 2011
Paid outstanding loan balances																			$ 16,000,000															$ 17,000,000
Debt instrument face amount																							115,000,000		87,000,000	28,000,000																					172,500,000		100,000,000					20,000,000			15,000,000
Conversion of note to common stock																																														1,000
Revolving credit facility provided for a maximum amount of commitments																																																		100.0					125.0
Debt yield ratio minimum																						9.50%
Available term loan to be drawn														15 months
Derivative effective cap interest rate																	7.00%				5.30%														4.25%
Hudson 2011 Mortgage Loan Matures																						Aug. 12, 2013
Debt yield ratio minimum percentage																						13.00%
Debt service coverage ratio																						1.0
Future prepayment penalty																						0
Prepayment penalty prior to date																						Aug. 12, 2013
Maintain minimum net worth																						100,000,000
Minimum liquidity																						20,000,000
Sale of subsidiary company	0	(19,294,000)																										71,000,000					137,000,000
Cash in ESCROW																																				9,200,000
Debt repayment															26,500,000			201,200,000															103,500,000
Additional term loan before expiration of option																							20,000,000
Leased it back																												99-year lease term
Increase in Consumer Price Index																															40.00%	20.00%
Increase in Rent in future period																													5 years
Increase in Consumer Price Index Future																															20.00%	10.00%
Morgans Group agreed to guarantee losses																													6,000,000
Revolving credit facility, initiation date																																																	Jul. 28, 2011						Oct. 06, 2006
Revolving credit facility, Description																																																	The maximum amount of such commitments available at any time for borrowings and letters of credit is determined according to a borrowing base valuation equal to the lesser of (i) 55% of the appraised value of Delano South Beach (the “Florida Property”) and (ii) the adjusted net operating income for the Florida Property divided by 11%.						Divided into two tranches, which were secured by the mortgages on Morgans, Royalton and Delano South Beach
Credit facility appraised value																																																	55.00%
Credit facility Florida Property divided																																																	11.00%
Credit Facility may be increased by up to an additional																																																					10
Credit Facility may be increased by up to an additional, years																																																	2 years
Delano letter of credit outstanding																																																	10,000,000
Delano credit facility covenant ratio																																																	Borrowers maintain a fixed charge coverage ratio (consolidated EBITDA to consolidated fixed charges) of no less than (i) 1.05 to 1.00 at all times on or prior and (ii) 1.10 to 1.00 at all times thereafter
Number of rooms in hotel under development with outstanding letter of credit																																																	310
Delano Credit Facility Fixed charge coverage ratio																																																			1.05	1.10
Delano Credit Facility Covenant Compliance																																																	1.29
Purchase agreements of TLG Promissory Notes																																									Nov. 17, 2011
Ownership interest in the light group								100.00%	90.00%
Purchase price acquisition of TLG in notes convertible into shares																																							16,000,000	2,000,000		18,000,000
Purchase price acquisition of TLG in per share unit																																										$ 9.50
Non-Morgans EBITDA								18,000,000
Interest rate increases (max)																																						18.00%
Accrued interest payable in cash																																						75.00%
Accrued interest payable on maturity																																						25.00%
Fair value of TLG Promissory Notes																																					15,500,000	16,800,000
Risk free rate of price volatility simulation																																					0.40%	0.30%
Number of runs using Black Scholes and binomial formulas																																					100,000
Effectively capped interest description																	30-day LIBOR rate at 7.0%				30-day LIBOR rate at 5.3%														30-day LIBOR rate at 4.25%
LIBOR floor rate																						1.00%			1.00%	1.00%
Interest Cap For Mortgage Loan																						0.30%
Extended Hudson 2011 Mortgage Loan Maturity date																						Aug. 12, 2016
Reduced annual lease payments																														4,970,000
Preferred securities issued												50,000,000
Amount of common stock owned by the company through the trust													100,000
Proceeds used to purchase of junior subordinated notes issued													50,100,000
Trust notes and preferred notes interest rate													8.68%
Trust Notes Redeemed																																											0
Interest Rate																													9.60%									8.00%					8.68%			2.38%	2.375%								5.00%
Net proceeds from offering																																													166,800,000
Initial conversion rate for each principal amount of convertible Notes of common stock																																														37.1903		45.5580
Equity component recorded as additional paid-in-capital																																														9,000,000
Net of deferred taxes																																														6,400,000
Payment for call options										58,200,000
Convertible Notes Warrants, Shares																											6,415,327
Exercise price of warrants or rights																																														$ 40.00
Purchase of the call options, net of the related tax benefit										20,300,000
Convertible Notes Warrants, value																																														34,100,000
Initial conversion price of common stock																																														$ 26.89		$ 21.95
Revolving credit facility, description of the interest rate																																																	(subject to a LIBOR floor of 1.00%) plus 4.00%, or a base rate, as defined in the agreement, plus 3.00%						LIBOR (subject to a LIBOR floor of 1%) or a base rate, plus a borrowing margin
Revolving credit facility, description of the interest rate																																																							LIBOR loans had a borrowing margin of 3.75% per annum and base rate loans have a borrowing margin of 2.75% per annum
Imputed interest rate of leased						8.00%
Delano Credit Facility terminate																																																	Jul. 28, 2014
Borrowing availability on the delano credit facility																																																	82,000,000
Amount outstanding under the delano credit facility																																																	20,000,000
Delano credit facility unused commitment fee																																																	0.50%
Price volatility of stock expected simulation																																					25.00%	25.00%
Dividend payments measurement simulation																																					$ 0.00	$ 0.00
Capital leased payment require																													6,000,000
Hudson lease payments				$ 582,180	$ 328,128
Consulting agreement period			1 year
Number of Condominium Unit							2

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Organization and Formation Transaction (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Nov. 30, 2011
Purchase price consideration
Cash		$ 28,500
Purchase price allocation:
Liability Arising From Contingent Consideration Promissory Notes	(15,510)
Total liabilities assumed	(24,017)
Net assets acquired,at fair value	28,497
The Light Group [Member]
Purchase price consideration
Cash	28,500
Liabilities incurred
$18.0 million promissory notes, at face value	18,000
Total consideration	46,500
Purchase price allocation:
Current assets	3,739
Goodwill	12,515
Other intangible assets	520
Total assets acquired	52,514
Current liabilities	(3,059)
Redeemable noncontrolling interest liability	(5,448)
The Light Group [Member] | Management Contract [Member]
Purchase price allocation:
Management contracts	$ 34,520

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Organization and Formation Transaction (Details)	6 Months Ended
	Jun. 30, 2012 Room
Hudson [Member]
Operating Hotels:
Location of hotels	New York, NY
Number of rooms	834
Ownership	The Company owns 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.
Morgans [Member]
Operating Hotels:
Location of hotels	New York, NY
Number of rooms	114
Ownership	Operated under a management contract; wholly-owned until May 23, 2011, when the hotel was sold to a third-party.
Royalton [Member]
Operating Hotels:
Location of hotels	New York, NY
Number of rooms	168
Ownership	Operated under a management contract; wholly-owned until May 23, 2011, when the hotel was sold to a third-party.
Mondrian SOHO [Member]
Operating Hotels:
Location of hotels	New York, NY
Number of rooms	263
Ownership	Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority ownership interest of approximately 20% at June 30, 2012 based on cash contributions. See note 4.
Delano South Beach [Member]
Operating Hotels:
Location of hotels	Miami Beach, FL
Number of rooms	194
Ownership	Wholly-owned hotel.
Mondrian South Beach [Member]
Operating Hotels:
Location of hotels	Miami Beach, FL
Number of rooms	328
Ownership	Operated as a condominium hotel under a management contract and owned through a 50/50 unconsolidated joint venture. As of June 30, 2012, 196 hotel residences have been sold, of which 89 are in the hotel rental pool. See note 4
Shore Club [Member]
Operating Hotels:
Location of hotels	Miami Beach, FL
Number of rooms	309
Ownership	Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority ownership interest of approximately 7% as of June 30, 2012. See note 4.
Mondrian Los Angeles [Member]
Operating Hotels:
Location of hotels	Los Angeles, CA
Number of rooms	237
Ownership	Operated under a management contract; wholly-owned until May 3, 2011, when the hotel was sold to a third-party.
Clift [Member]
Operating Hotels:
Location of hotels	San Francisco, CA
Number of rooms	372
Ownership	The hotel is operated under a long-term lease which is accounted for as a financing. See note 6.
Ames [Member]
Operating Hotels:
Location of hotels	Boston, MA
Number of rooms	114
Ownership	Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority interest ownership of approximately 31% at June 30, 2012 based on cash contributions. See note 4.
Sanderson [Member]
Operating Hotels:
Location of hotels	London, England
Number of rooms	150
Ownership	Operated under a management contract; owned through a 50/50 unconsolidated joint venture until November 2011, when the Company sold its equity interests in the joint venture to a third-party. See note 4.
St Martins Lane [Member]
Operating Hotels:
Location of hotels	London, England
Number of rooms	204
Ownership	Operated under a management contract; owned through a 50/50 unconsolidated joint venture until November 2011, when the Company sold its equity interests in the joint venture to a third-party. See note 4.
Hotel Las Palapas [Member]
Operating Hotels:
Location of hotels	Playa del Carmen, Mexico
Number of rooms	75
Ownership	Operated under a management contract.

XML

Omnibus Stock Incentive Plan (Details) (Omnibus Stock Incentive Plan [Member])	6 Months Ended
	Jun. 30, 2012
Restricted Stock Units (RSUs) [Member]
Summary of stock-based incentive awards
Outstanding as of January 1,2012, RSU	669,879
Granted during 2012, RSU	320,138
Distributed/exercised during 2012, RSU	(142,039)
Forfeited during 2012, RSU	(41,462)
Outstanding as of June 30, 2012, RSU	806,516
Vested as of June 30, 2012, RSU	243,061
Stock Options [Member]
Summary of stock-based incentive awards
Outstanding as of June 30, 2012, RSU	2,324,740
Ending Balance, Vested Shares	1,458,074
Ending Balance	2,324,740
LTIP Units [Member]
Summary of stock-based incentive awards
Outstanding as of January 1,2012, RSU	2,340,972
Granted during 2012, RSU	121,402
Distributed/exercised during 2012, RSU	(251,909)
Outstanding as of June 30, 2012, RSU	2,210,465
Vested as of June 30, 2012, RSU	1,954,858

XML

Organization and Formation Transaction (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Consolidated Balance Sheet
Goodwill	$ 66,572	$ 66,572
Other assets, net	46,567	51,669
Debt and capital lease obligations	463,385	439,905
Redeemable noncontrolling interest liability	6,123	5,448
The Light Group [Member] | As Originally Reported [Member]
Consolidated Balance Sheet
Goodwill		69,105
Debt and capital lease obligations		442,395
Redeemable noncontrolling interest liability		5,170
The Light Group [Member] | As Originally Reported [Member] | Other Intangible Assets [Member]
Consolidated Balance Sheet
Other assets, net		51,348
The Light Group [Member] | As Adjusted [Member]
Consolidated Balance Sheet
Goodwill		66,572
Debt and capital lease obligations		439,905
Redeemable noncontrolling interest liability		5,448
The Light Group [Member] | As Adjusted [Member] | Other Intangible Assets [Member]
Consolidated Balance Sheet
Other assets, net		51,669
The Light Group [Member] | Effect of Change [Member]
Consolidated Balance Sheet
Goodwill		(2,533)
Debt and capital lease obligations		(2,490)
Redeemable noncontrolling interest liability		278
The Light Group [Member] | Effect of Change [Member] | Other Intangible Assets [Member]
Consolidated Balance Sheet
Other assets, net		$ 321

XML

Organization and Formation Transaction (Details 3) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Operating Results
Revenues	$ 14,277	$ 15,611	$ 29,376	$ 33,641
Income from continuing operations	(13,517)	(11,802)	(28,011)	(45,160)
The Light Group [Member]
Operating Results
Revenues	3,250		6,017
Income from continuing operations	$ 3,003	$ 2,171	$ 5,457	$ 3,965

XML

Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2012

Summary of Significant Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company consolidates all wholly-owned subsidiaries and variable interest entities in which the Company is determined to be the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. Entities which the Company does not control through voting interest and entities which are variable interest entities, of which the Company is not the primary beneficiary, are accounted for under the equity method, if the Company can exercise significant influence.

The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished in the accompanying consolidated financial statements reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

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.

Business Combinations

The Company recognizes identifiable assets acquired, liabilities (both specific and contingent) assumed, and non-controlling interests in a business combination at their fair values at the acquisition date based on the exit price (i.e. the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date). Furthermore, acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the acquired assets. In certain situations, a deferred tax liability is created due to the difference between the fair value and the tax basis of the acquired asset at the acquisition date, which also may result in a goodwill asset being recorded.

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 ASC 810-10, 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. For investments in which there is recourse or unfunded commitments to provide additional equity, distributions and losses in excess of the investment are recorded as a liability.

Other Assets

Other assets consist primarily of the fair value of the TLG management contracts, as discussed further in note 1. TLG operates numerous nightclubs, restaurants and bar venues in Las Vegas pursuant to management agreements with MGM. The management contract assets are being amortized, using the straight line method, over the expected life of each applicable management contract.

Additionally, other assets consists of deferred financing costs and fair value of the management contracts in the food and beverage venues at Sanderson and St Martins Lane, which the Company acquired from its restaurant joint venture partner, as discussed further in note 1. The Sanderson and St Martins Lane food and beverage management contract are being amortized, using the straight line method, over the expected life of the contracts.

Deferred financing costs included in other assets are being amortized, using the straight line method, which approximates the effective interest rate method, over the terms of the related debt agreements.

Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of assets and liabilities and for loss and credit carry forwards. Valuation allowances are provided when it is more likely than not that the recovery of deferred tax assets will not be realized.

The Company’s deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Decreases to the valuation allowance are recorded as reductions to the Company’s provision for income taxes and increases to the valuation allowance result in additional provision for income taxes. The realization of the Company’s deferred tax assets, net of the valuation allowance, is primarily dependent on estimated future taxable income. A change in the Company’s estimate of future taxable income may require an addition to or reduction from the valuation allowance. The Company has established a reserve on its deferred tax assets based on anticipated future taxable income and tax strategies which may include the sale of property or an interest therein.

All of the Company’s foreign subsidiaries are subject to local jurisdiction corporate income taxes. Income tax expense is reported at the applicable rate for the periods presented.

Income taxes for the three and six months ended June 30, 2012 and 2011 were computed using the Company’s effective tax rate.

Credit-risk-related Contingent Features

The Company has entered into agreements with each of its derivative counterparties in connection with the interest rate caps and hedging instruments related to the Convertible Notes, as defined and discussed in note 6, providing that in the event the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

The Company has entered into warrant agreements with Yucaipa, as discussed in note 8, providing Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P. (collectively, the “Investors”) with consent rights over certain transactions for so long as they collectively own or have the right to purchase through the exercise of the Yucaipa Warrants (as defined in note 8) 6,250,000 shares of the Company’s common stock.

Fair Value Measurements

ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820-10 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

ASC 820-10 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820-10 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Currently, the Company uses interest rate caps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of ASC 820-10, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its current outstanding derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivative utilizes Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2012, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and determined that the credit valuation adjustments are not significant to the overall valuation of its derivative. Accordingly, the derivative has been classified as Level 2 fair value measurements.

In connection with its Outperformance Award Program, as discussed in note 7, the Company issued OPP LTIP Units (as defined in note 7) which were initially fair valued on the date of grant, and at each reporting period, utilizing a Monte Carlo simulation to estimate the probability of the performance vesting conditions being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times. As the Company has the ability to settle the vested OPP LTIP Units with cash, these awards are not considered to be indexed to the Company’s stock price and must be accounted for as liabilities at fair value.

Although the Company has determined that the majority of the inputs used to value the OPP LTIP Units fall within Level 1 of the fair value hierarchy, the Monte Carlo simulation model utilizes Level 3 inputs, such as estimates of the Company’s volatility. Accordingly, the OPP LTIP Unit liability was classified as a Level 3 fair value measure.

In connection with the Light Group Transaction, the Company issued the TLG Promissory Notes, which are convertible into shares of the Company’s common stock at $9.50 per share and are subject to the achievement of certain EBITDA targets for the acquired business, discussed in note 6. The TLG Promissory Notes were initially fair valued on the date of acquisition, and will be fair valued at each reporting period, utilizing a Monte Carlo simulation to estimate the probability of the achievement of certain EBITDA targets being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times.

Although the Company has determined that the majority of the inputs used to value the TLG Promissory Notes fall within Level 1 of the fair value hierarchy, the Monte Carlo simulation model utilizes Level 3 inputs, such as estimates of the Company’s volatility. Accordingly, the TLG Promissory Notes liability was classified as a Level 3 fair value measure.

Also in connection with The Light Group Transaction, the Company provided Messrs. Sasson and Masi with the Sasson-Masi Put Options. Due to the redemption feature associated with the Sasson-Masi Put Options, the Company classified the noncontrolling interest in temporary equity in accordance with the Securities and Exchange Commission’s guidance as codified in ASC 480-10, Distinguishing Liabilities from Equity. Subsequently, the Company will accrete the redeemable noncontrolling interest to its current redemption value, which approximates fair value, each period. The Company has determined that the majority of the inputs used to value the Sasson-Masi Put Options fall within Level 2 of the fair value hierarchy. Accordingly, the derivative has been classified as Level 2 fair value measurements.

During the three months ended June 30, 2012 and June 30, 2011, the Company recognized non-cash impairment charges of $0.1 million and $0.5 million, respectively, related to the Company’s investment in Mondrian SoHo, through equity in loss of unconsolidated joint ventures. During the six months ended June 30, 2012 and June 30, 2011, the Company recognized non-cash impairment charges of $0.6 million and $2.5 million, respectively, related to the Company’s investment in Mondrian SoHo, through equity in loss of unconsolidated joint ventures. The Company’s estimated fair value relating to this impairment assessment was based primarily upon Level 3 measurements.

Fair Value of Financial Instruments

Disclosures about fair value of financial instruments are based on pertinent information available to management as of the valuation date. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold, or settled. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued liabilities, and fixed and variable rate debt. Management believes the carrying amount of the aforementioned financial instruments, excluding fixed-rate debt, is a reasonable estimate of fair value as of June 30, 2012 and December 31, 2011 due to the short-term maturity of these items or variable market interest rates.

The fair market value of the Company’s $239.4 million of fixed rate debt, which includes the Company’s trust preferred securities, TLG Promissory Notes at fair value, and Convertible Notes at face value, as discussed in note 6, as of June 30, 2012 was approximately $230.8 million, using market rates. The fair market value of the Company’s $238.1 million of fixed rate debt, which includes the Company’s trust preferred securities, TLG Promissory Notes at fair value, and Convertible Notes at face value, as discussed in note 6, as of December 30, 2011 was $229.8 million, using market interest rates.

Stock-based Compensation

The Company accounts for stock based employee compensation using the fair value method of accounting described in ASC 718-10. For share grants, total compensation expense is based on the price of the Company’s stock at the grant date. For option grants, the total compensation expense is based on the estimated fair value using the Black-Scholes option-pricing model. For awards under the Company’s Outperformance Award Program, discussed in note 7, long-term incentive awards, the total compensation expense is based on the estimated fair value using the Monte Carlo pricing model. Compensation expense is recorded ratably over the vesting period. Stock compensation expense recognized for the three months ended June 30, 2012 and 2011 was $1.6 million and $2.0 million, respectively. Stock compensation expense recognized for the six months ended June 30, 2012 and 2011 was $2.6 million and $6.0 million, respectively.

Income (Loss) Per Share

Basic net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less any dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period, plus other potentially dilutive securities, such as unvested shares of restricted common stock and warrants.

Noncontrolling Interest

The Company follows ASC 810-10, when accounting and reporting for noncontrolling interests in a consolidated subsidiary and the deconsolidation of a subsidiary. Under ASC 810-10, the Company reports noncontrolling interests in subsidiaries as a separate component of stockholders’ equity (deficit) in the consolidated financial statements and reflects net income (loss) attributable to the noncontrolling interests and net income (loss) attributable to the common stockholders on the face of the consolidated statements of comprehensive loss.

The membership units in Morgans Group, the Company’s operating company, owned by the Former Parent are presented as noncontrolling interest in Morgans Group in the consolidated balance sheets and were approximately $6.9 million and $7.8 million as of June 30, 2012 and December 31, 2011, respectively. The noncontrolling interest in Morgans Group is: (i) increased or decreased by the limited members’ pro rata share of Morgans Group’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by exchanges of membership units for the Company’s common stock; and (iv) adjusted to equal the net equity of Morgans Group multiplied by the limited members’ ownership percentage immediately after each issuance of units of Morgans Group and/or shares of the Company’s common stock and after each purchase of treasury stock through an adjustment to additional paid-in capital. Net income or net loss allocated to the noncontrolling interest in Morgans Group is based on the weighted-average percentage ownership throughout the period.

Recent Accounting Pronouncements

Accounting Standards Update No. 2011-04—“Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”) generally provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will be effective for interim and annual periods beginning on or after December 15, 2011. The Company adopted ASU 2011-04, which did not have a material impact on its financial statements.

Accounting Standards Update No. 2011-05—“Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”) amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. ASU 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-05 for the year ended December 31, 2011, and as such, its financial statements provide the appropriate disclosure.

Accounting Standards Update No. 2011-10—Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force) (“ASU 2011-10”) clarifies when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance for Real Estate Sale (Subtopic 360-20). The provisions of ASU 2011-10 are effective for public companies for fiscal years and interim periods within those years, beginning on or after June 15, 2012. When adopted, ASU 2011-10 is not expected to have a material impact on the Company’s consolidated financial statements.

Accounting Standards Update No. 2011-12—Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05 (“ASU No. 2011-12”) defers, until further notice, ASU 2011-05’s requirement that items that are reclassified from other comprehensive income to net income be presented on the face of the financial statements. The Company has adopted ASU 2011-12 and adoption of this update did not have a material impact on its financial statements.

XML

Organization and Formation Transaction (Details 4) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Revenues:
Total revenues, as reported by the Company	$ 47,791	$ 54,209	$ 91,086	$ 108,613
Pro forma total revenues		56,673		112,992
Operating Income (Loss)
Total loss from continuing operations, as reported by the Company	(13,517)	(11,802)	(28,011)	(45,160)
Pro forma loss from continuing operations		(9,631)		(41,195)
The Light Group [Member]
Revenues:
Total revenues, as reported by the Company		2,464		4,379
Operating Income (Loss)
Total loss from continuing operations, as reported by the Company	$ 3,003	$ 2,171	$ 5,457	$ 3,965

XML

Other Liabilities (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
Other Sundry Liabilities [Abstract]
Estimated fair value of the OPP LTIP Units Liability	$ 287	$ 528
Designer fee payable	13,866	13,866
Other Liabilities	$ 14,153	$ 14,394

XML

Commitments (Details Textual) (USD $) In Millions, unless otherwise specified	6 Months Ended			12 Months Ended	6 Months Ended			12 Months Ended	6 Months Ended
	Jun. 30, 2012 Mondrian South Beach [Member]	Jun. 30, 2012 Mondrian South Beach [Member] Construction Contracts [Member]	Jun. 30, 2012 Mondrian SO HO Hotel [Member]	Dec. 31, 2011 Development Hotel Commitments and Guarantees [Member] Mondrian London [Member]	Jun. 30, 2012 Development Hotel Commitments and Guarantees [Member] Mondrian at BAHA MAR Hotel [Member]	Jun. 30, 2012 Development Hotel Commitments and Guarantees [Member] Mondrian at BAHA MAR Hotel [Member] Letter of Credit [Member]	Jun. 30, 2012 Operating Joint Venture Hotels Commitments and Guarantees [Member]	Dec. 31, 2011 Operating Joint Venture Hotels Commitments and Guarantees [Member] Mondrian SO HO Hotel [Member]	Jun. 30, 2012 Operating Joint Venture Hotels Commitments and Guarantees [Member] Ames Hotel [Member]
Commitments (Textual) [Abstract]
Management agreement for operating Hotel (In Yrs )								10 years
Extension of management agreements				10 years				10 years
Letter of Credit Facility Outstanding						$ 10.0
Commitment key money investment						10.0
Letter of Credit facility Period (in Months)					48 months
Commitments Guarantee Obligations Percentage			20.00%
Proceeds from sale of tax credits									16.9
Joint ventures' tax credits recapture liabilities in aggregate									14.4
Company's pro rata share									4.5
Accrued expenses and reduction to management fees							0.4
Payables outstanding to vendors		1.0
Purchase of condominium units by The Company and its Affiliates	$ 14
Condominium units Sales Price Description	equal to 1/2 of the lesser of $28.0 million

XML

Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2012	Dec. 31, 2011
ASSETS
Property and equipment, net	$ 301,399	$ 289,169
Goodwill	66,572	66,572
Total investments in and advances to unconsolidated joint ventures	13,009	10,201
Cash and cash equivalents	8,248	28,855
Restricted cash	6,149	9,938
Accounts receivable, net	12,319	10,827
Related party receivables	5,946,000	4,142
Prepaid expenses and other assets	6,876	5,293
Deferred tax asset, net	78,779	78,778
Other assets, net	46,567	51,669
Total assets	545,864	555,444
LIABILITIES AND STOCKHOLDERS' DEFICIT
Debt and capital lease obligations	463,385	439,905
Accounts payable and accrued liabilities	33,750	36,576
Deferred gain on asset sales	144,644	148,760
Other liabilities	14,153	14,394
Total liabilities	655,932	639,635
Redeemable noncontrolling interest	6,123	5,448
Commitments and contingencies
Preferred stock, $.01 par value; liquidation preference $1,000 per share, 75,000 shares authorized and issued at June 30, 2012 and December 31, 2011, respectively	55,851	54,143
Common stock, $.01 par value; 200,000,000 shares authorized; 36,277,495 shares issued at June 30, 2012 and December 31, 2011, respectively	363	363
Additional paid-in capital	282,696	286,914
Treasury stock, at cost, 5,124,985 and 5,487,289 shares of common stock at June 30, 2012 and December 31, 2011, respectively	(78,319)	(84,543)
Accumulated comprehensive loss	(44)	(38)
Accumulated deficit	(383,683)	(354,302)
Total Morgans Hotel Group Co. stockholders' deficit	(123,136)	(97,463)
Noncontrolling interest	6,945	7,824
Total deficit	(116,191)	(89,639)
Total liabilities, redeemable noncontrolling interest and stockholders' deficit	$ 545,864	$ 555,444

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Omnibus Stock Incentive Plan (Details Textual) (USD $)	1 Months Ended	3 Months Ended		6 Months Ended					1 Months Ended		1 Months Ended		1 Months Ended		1 Months Ended			6 Months Ended
	May 31, 2012	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011	Dec. 31, 2011	Jun. 30, 2012 Executive Vice President [Member]	Feb. 09, 2006 2006 Stock Incentive Plan [Member]	May 31, 2007 2007 Incentive Plan [Member]	Feb. 22, 2007 2007 Incentive Plan [Member]	May 31, 2008 Restated 2007 Incentive Plan [Member]	May 20, 2008 Restated 2007 Incentive Plan [Member]	Jan. 31, 2010 Amended 2007 Incentive Plan [Member]	Jan. 20, 2010 Amended 2007 Incentive Plan [Member]	May 31, 2012 Second Amended 2007 Incentive Plan [Member]	Apr. 30, 2012 Second Amended 2007 Incentive Plan [Member]	Apr. 05, 2012 Second Amended 2007 Incentive Plan [Member]	Jun. 30, 2012 OPP LTIP Units [Member]	Jun. 20, 2011 OPP LTIP Units [Member]	Mar. 18, 2011 OPP LTIP Units [Member]	Jun. 30, 2012 OPP LTIP Units [Member] Hamamoto [Member]	Jun. 30, 2012 OPP LTIP Units [Member] Gross [Member]	Jun. 30, 2012 OPP LTIP Units [Member] Flannery [Member]	Jun. 30, 2012 OPP LTIP Units [Member] Gery [Member]	Jun. 30, 2012 OPP LTIP Units [Member] Chief Financial Officer [Member]	Jun. 30, 2012 OPP LTIP Units [Member] General Counsel [Member]
Omnibus Stock Incentive Plan (Textual) [Abstract]
Common stock reserved and authorized								3,500,000		6,750,000		8,610,000		11,610,000			14,610,000
Additional shares reserved for issuance									3,250,000		1,860,000		3,000,000			3,000,000
Shares available for grant				1.7
Restricted stock units issued															64,932
Fair value of restricted stock units	$ 4.62
Unrecognized compensation costs		$ 8,000,000		$ 8,000,000		$ 8,800,000
Grant date fair value per share of OPP LTIP unit																				$ 8.87
weighted-average period over unrecognized compensation expense				1 year
Stock compensation expenses		1,600,000	2,000,000	2,600,000	6,000,000
Cash or Equity Award Period																		3 years
Increase in companies total return to stockholders																		30.00%
Compounded annual growth rate																		9.00%
Increase in companies total return to stockholders over																		Three-year period from March 20, 2011 to March 20, 2014 (or a prorated hurdle rate over a shorter period in the case of certain changes of control),
Closing price of company's common shares																		30 days
Participating percentages granted							5.00%														35.00%	35.00%	10.00%	10.00%	5.00%	5.00%
Aggregate dollar amount available to all participants																		10.00%
Amount available to all participants valuation exceeds																		130.00%
Valuation Date																		18 months
Grant Units valued																			$ 7,300,000
Outperformance long-term incentive units simulation																		100000 Times
Outperformance long-term incentive units fair value		700,000		700,000
Expected price volatility for the Company's stock																		50.00%
Risk free rate																		1.46%
Dividend payments																		$ 0
Risk free rate																		0.49%

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Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011
Cash flows from operating activities:
Net loss	$ (28,011)	$ (44,675)
Adjustments to reconcile net loss to net cash used in operating activities (including discontinued operations):
Depreciation	8,438	11,198
Amortization of other costs	3,172	1,374
Amortization of deferred financing costs	1,936	5,974
Amortization of discount on convertible notes	1,138	1,138
Amortization of deferred gain on asset sales	(3,991)	(620)
Stock-based compensation	2,627	6,018
Accretion of interest on capital lease obligation	1,049	956
Equity in loss of unconsolidated joint ventures	3,616	10,393
Impairment loss and loss on disposal of assets	102	1,040
Change in fair value of TLG promissory notes	1,310	0
Change in value of interest rate caps and swaps, net	0	10
Changes in assets and liabilities:
Accounts receivable, net	(1,492)	1,507
Related party receivables	(1,804)	(1,555)
Restricted cash	2,211	5,637
Prepaid expenses and other assets	(1,583)	637
Accounts payable and accrued liabilities	(2,945)	(3,267)
Discontinued operations		(843)
Net cash used in operating activities	(14,228)	(5,078)
Cash flows from investing activities:
Additions to property and equipment	(20,774)	(2,891)
Withdrawals (deposits) to capital improvement escrows, net	1,578	556
Distributions from unconsolidated joint ventures	4	1,619
Proceeds from asset sales, net	0	268,147
Purchase of interest in food and beverage joint ventures, net of cash	0	(19,294)
Investments in and settlement related to unconsolidated joint ventures	(6,428)	(7,559)
Net cash used in investing activities	(25,620)	240,578
Cash flows from financing activities:
Proceeds from debt	20,000	63,992
Payments on debt and capital lease obligations	(17)	(193,496)
Debt issuance costs	(16)	(428)
Cash paid in connection with vesting of stock based awards	(236)	(398)
Distributions to holders of noncontrolling interests in consolidated subsidiaries	(490)	(827)
Net cash provided by financing activities	19,241	(131,157)
Net (decrease) increase in cash and cash equivalents	(20,607)	104,343
Cash and cash equivalents, beginning of period	28,855	5,250
Cash and cash equivalents, end of period	8,248	109,593
Supplemental disclosure of cash flow information:
Cash paid for interest	12,649	12,275
Cash paid for taxes	643	149
Acquisition of interest in unconsolidated joint ventures:
Furniture, fixture and equipment	0	(706)
Other assets and liabilities, net	0	2,999
Distributions and losses in excess of investment in unconsolidated joint ventures	0	(1,587)
Cash included in purchase of interest in food and beverage joint ventures	$ 0	$ 706

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Income (Loss) Per Share (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Numerator:
Net loss from continuing operations	$ (13,517)	$ (11,802)	$ (28,011)	$ (45,160)
Net loss from discontinued operations, net of tax		(5)		485
Net loss	(13,517)	(11,807)	(28,011)	(44,675)
Net loss attributable to noncontrolling interest	124	383	337	1,208
Net loss attributable to Morgans Hotel Group	(13,393)	(11,424)	(27,674)	(43,467)
Preferred stock dividends and accretion	2,718	2,229	5,368	4,416
Net loss attributable to common stockholders	$ (16,111)	$ (13,653)	$ (33,042)	$ (47,883)
Denominator, continuing and discontinued operations:
Weighted average basic common shares outstanding	31,261	30,498	31,185	31,255
Effect of dilutive securities
Weighted average diluted common shares outstanding	31,261	30,498	31,185	31,255
Basic and diluted loss from continuing operations per share	$ (0.52)	$ (0.45)	$ (1.06)	$ (1.55)
Basic and diluted income from discontinued operations per share	$ 0.00	$ 0.00	$ 0.00	$ 0.02
Basic and diluted loss available to common stockholders per common share	$ (0.52)	$ (0.45)	$ (1.06)	$ (1.53)

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Investments in and Advances to Unconsolidated Joint Ventures (Tables)

6 Months Ended

Jun. 30, 2012

Investments in and Advances to Unconsolidated Joint Ventures [Abstract]

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 (in thousands):

Investments

Entity	As of June 30, 2012		As of December 31, 2011
Mondrian South Beach	$	1,350	$	4,015
Mondrian Istanbul		10,392		4,564
Mondrian South Beach food and beverage—MC South Beach (1)		1,109		1,465
Other		158		157
Total investments in and advances to unconsolidated joint ventures	$	13,009	$	10,201

(1) Following the CGM Transaction, the Company’s ownership interest in this food and beverage joint venture is less than 100%, and based on the Company’s evaluation, this venture does not meet the requirements of a variable interest entity. Accordingly, this joint venture is accounted for using the equity method as the Company does not maintain control over this entity.

Equity in income (loss) from unconsolidated joint ventures

Equity in income (loss) from unconsolidated joint ventures

	Three Months Ended June 30, 2012			Three Months Ended June 30, 2011			Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
Morgans Hotel Group Europe Ltd.	$	—		$	885		$	—		$	892
Restaurant Venture — SC London (1)		—			(290	)		—			(510	)
Mondrian South Beach		(2,400	)		(978	)		(2,665	)		(1,478	)
Mondrian South Beach food and beverage—MC South Beach (2)		(208	)		—			(356	)		—
Mondrian SoHo		(100	)		(529	)		(597	)		(2,461	)
Hard Rock Hotel & Casino (3)		—			—			—			(6,376	)
Ames		—			(1	)		—			(465	)
Other		2			3			2			5
Total	$	(2,706	)	$	(910	)	$	(3,616	)	$	(10,393	)

(1) Until June 20, 2011, the Company had a 50% ownership interest in the SC London restaurant venture. As a result of the CGM Transaction, the Company now owns 100% of the SC London restaurant venture, which is consolidated into the Company’s financial statements effective June 20, 2011, the date the CGM Transaction closed.

(2) Following the CGM Transaction, the Company’s ownership interest in this food and beverage joint venture is less than 100%, and based on the Company’s evaluation, this venture does not meet the requirements of a variable interest entity. Accordingly, this joint venture is accounted for using the equity method as the Company does not maintain control over this entity.

(3) Until March 1, 2011, the Company had a partial ownership interest in the Hard Rock and managed the property pursuant to a management agreement that was terminated in connection with the Hard Rock settlement (discussed below). Operating results are for the period we operated Hard Rock in 2011.

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Income (Loss) Per Share (Details Textual)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Income (Loss) Per Share (Textual) [Abstract]
Assumption of net income is distributed as dividends for calculation of net income per share	100.00%	100.00%	100.00%	100.00%
Securities excluded from the diluted net income (loss) per common share calculation			954,065

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Debt and Capital Lease Obligations (Tables)

6 Months Ended

Jun. 30, 2012

Debt and Capital Lease Obligations [Abstract]

Debt and Capital Lease Obligations

Description	As of June 30, 2012		As of December 31, 2011		Interest Rate at June 30, 2012
Notes secured by Hudson (a)	$	115,000	$	115,000		(a	)
Clift debt (b)		88,038		86,991		9.60	%
Liability to subsidiary trust (c)		50,100		50,100		8.68	%
Convertible Notes, face value of $172.5 million (d)		167,282		166,144		2.38	%
Revolving credit facility (e)		20,000		—		5.00% (LIBOR + 4.00%, LIBOR floor of 1.00%)

Description	As of June 30, 2012		As of December 31, 2011		Interest Rate at June 30, 2012
TLG Promissory Note (f)		16,820		15,510	(f)
Capital lease obligations (g)		6,145		6,160	(g)
Debt and capital lease obligation	$	463,385	$	439,905

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Organization and Formation Transaction

6 Months Ended

Jun. 30, 2012

Organization and Formation Transaction [Abstract]

Organization and Formation Transaction

1. Organization and Formation Transaction

Morgans Hotel Group Co. (the “Company”) was incorporated on October 19, 2005 as a Delaware corporation to complete an initial public offering that was part of the formation and structuring transactions described below. The Company operates, owns, acquires and redevelops boutique hotels primarily in gateway cities and select resort markets in the United States, Europe and other international locations, and nightclubs, restaurants, bars and other food and beverage venues in many of the hotels it operates, as well as in hotels and casinos operated by MGM Resorts International (“MGM”) in Las Vegas.

The Morgans Hotel Group Co. predecessor comprised the subsidiaries and ownership interests that were contributed as part of the formation and structuring transactions from Morgans Hotel Group LLC, now known as Residual Hotel Interest LLC (“Former Parent”), to Morgans Group LLC (“Morgans Group”), the Company’s operating company. At the time of the formation and structuring transactions, the Former Parent was owned approximately 85% by NorthStar Hospitality, LLC, a subsidiary of NorthStar Capital Investment Corp., and approximately 15% by RSA Associates, L.P.

In connection with the Company’s initial public offering, the Former Parent contributed the subsidiaries and ownership interests in nine operating hotels in the United States and the United Kingdom to Morgans Group in exchange for membership units. Simultaneously, Morgans Group issued additional membership units to the Morgans Hotel Group Co. predecessor in exchange for cash raised by the Company from the initial public offering. The Former Parent also contributed all the membership interests in its hotel management business to Morgans Group in return for 1,000,000 membership units in Morgans Group exchangeable for shares of the Company’s common stock. The Company is the managing member of Morgans Group and has full management control. On April 24, 2008, 45,935 outstanding membership units in Morgans Group were exchanged for 45,935 shares of the Company’s common stock. As of June 30, 2012, 954,065 membership units in Morgans Group remain outstanding.

On February 17, 2006, the Company completed its initial public offering. The Company issued 15,000,000 shares of common stock at $20 per share resulting in net proceeds of approximately $272.5 million, after underwriters’ discounts and offering expenses.

The Company has one reportable operating segment; it operates, owns, acquires, develops and redevelops boutique hotels, nightclubs, restaurants, bars and other food and beverage venues in many of the hotels it operates, as well as in hotels and casinos operated by MGM in Las Vegas.

Operating Hotels

The Company’s operating hotels as of June 30, 2012 are as follows:

Hotel Name	Location	Number of Rooms		Ownership
Hudson	New York, NY		834		(1	)
Morgans	New York, NY		114		(2	)
Royalton	New York, NY		168		(2	)
Mondrian SoHo	New York, NY		263		(3	)
Delano South Beach	Miami Beach, FL		194		(4	)
Mondrian South Beach	Miami Beach, FL		328		(5	)
Shore Club	Miami Beach, FL		309		(6	)
Mondrian Los Angeles	Los Angeles, CA		237		(7	)
Clift	San Francisco, CA		372		(8	)
Ames	Boston, MA		114		(9	)
Sanderson	London, England		150		(10	)
St Martins Lane	London, England		204		(10	)
Hotel Las Palapas	Playa del Carmen, Mexico		75		(11	)

(1) The Company owns 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.

(2) Operated under a management contract; wholly-owned until May 23, 2011, when the hotel was sold to a third-party.

(3) Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority ownership interest of approximately 20% at June 30, 2012 based on cash contributions. See note 4.

(4) Wholly-owned hotel.

(5) Operated as a condominium hotel under a management contract and owned through a 50/50 unconsolidated joint venture. As of June 30, 2012, 196 hotel residences have been sold, of which 89 are in the hotel rental pool. See note 4.

(6) Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority ownership interest of approximately 7% as of June 30, 2012. See note 4.

(7) Operated under a management contract; wholly-owned until May 3, 2011, when the hotel was sold to a third-party.

(8) The hotel is operated under a long-term lease which is accounted for as a financing. See note 6.

(9) Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority interest ownership of approximately 31% at June 30, 2012 based on cash contributions. See note 4.

(10) Operated under a management contract; owned through a 50/50 unconsolidated joint venture until November 2011, when the Company sold its equity interests in the joint venture to a third-party. See note 4.

(11) Operated under a management contract.

Restaurant Joint Venture

Prior to June 20, 2011, the food and beverage operations of certain of the hotels were operated under 50/50 joint ventures with a third party restaurant operator, China Grill Management Inc. (“CGM”). The joint ventures operated, and CGM managed, certain restaurants and bars at Delano South Beach, Mondrian Los Angeles, Mondrian South Beach, Morgans, Sanderson and St Martins Lane. The food and beverage joint ventures at hotels the Company owned were determined to be variable interest entities and the Company believed that it was the primary beneficiary of these entities. Therefore, the Company consolidated the operating results of these joint ventures into its consolidated financial statements. The Company’s partner’s share of the results of operations of these food and beverage joint ventures were recorded as noncontrolling interests in the accompanying consolidated financial statements. The food and beverage joint ventures at hotels in which the Company had a joint venture ownership interest were accounted for using the equity method, as the Company did not believe it exercised control over significant asset decisions such as buying, selling or financing, and the Company was not the primary beneficiary of the entities.

On June 20, 2011, pursuant to an omnibus agreement, subsidiaries of the Company acquired from affiliates of CGM the 50% interests CGM owned in the Company’s food and beverage joint ventures for approximately $20 million (the “CGM Transaction”). CGM has agreed to continue to manage the food and beverage operations at these properties for a transitional period pursuant to short-term cancellable management agreements while the Company reassesses its food and beverage strategy.

As a result of the CGM Transaction, the Company owns 100% of the former food and beverage joint venture entities located at Delano South Beach, Sanderson and St Martins Lane, all of which are consolidated in the Company’s consolidated financial statements. Prior to the completion of the CGM Transaction, the Company accounted for the food and beverage entities located at Sanderson and St Martins Lane using the equity method of accounting. See note 4.

Following the CGM Transaction, the Company owned 100% of the former food and beverage venue at Morgans, which consisted of a restaurant. In October 2011, the restaurant at Morgans was closed and is currently undergoing a renovation and re-concepting to create a lounge and restaurant expected to open in late 2012. Effective February 1, 2012, the Company transferred its ownership interest in Morgans food and beverage operations to the hotel owner by terminating the operating lease for the restaurant space.

The Company’s ownership interests in the remaining two of these food and beverage ventures covered by the CGM Transaction, relating to the food and beverage operations at Mondrian Los Angeles and Mondrian South Beach, was less than 100%, and were reevaluated in accordance with Accounting Standard Codification (“ASC”) 810-10, Consolidation (“ASC 810-10”). The Company concluded that these two ventures did not meet the requirements of a variable interest entity and accordingly, these investments in joint ventures were accounted for using the equity method, as the Company does not believe it exercises control over significant asset decisions such as buying, selling or financing. See note 4. Prior to the completion of the CGM Transaction, the Company consolidated the Mondrian Los Angeles food and beverage entity, as it was the primary beneficiary of the venture.

On August 5, 2011, an affiliate of Pebblebrook Hotel Trust (“Pebblebrook”), the company that purchased Mondrian Los Angeles in May 2011 (as discussed in note 11), exercised its option to purchase the Company’s remaining ownership interest in the food and beverage operations at Mondrian Los Angeles for approximately $2.5 million. As a result of Pebblebrook’s exercise of this purchase option, the Company no longer has any ownership interest in the food and beverage operations at Mondrian Los Angeles.

The Light Group Acquisition

On November 30, 2011 pursuant to purchase agreements entered into on November 17, 2011, certain of the Company’s subsidiaries completed the acquisition of 90% of the equity interests in a group of companies known as The Light Group (“TLG”), which develops, redevelops and operates nightclubs, restaurants, bars and other food and beverage venues, for a purchase price of $28.5 million in cash and up to $18.0 million in notes (the “TLG Promissory Notes”) convertible into shares of the Company’s common stock at $9.50 per share subject to the achievement of certain EBITDA (earnings before interest, tax, depreciation and amortization) targets for the acquired business (“The Light Group Transaction”), as discussed in note 6.

During the quarter ended June 30, 2012, the Company finalized the valuation study performed for the acquisition of TLG. As of December 31, 2011, and for the three months ended March 31, 2012, the Company incorporated preliminary allocations into its financial statements, which have been revised as a result of the valuation study.

The following table summarizes the estimated fair value of consideration paid for TLG and the allocation of purchase price to the fair value of the assets acquired and liabilities assumed, based on the results of the valuation study, at the date of acquisition (in thousands):

Purchase price consideration
Cash	$	28,500
Liabilities incurred
$18.0 million promissory notes, at face value		18,000
Total consideration	$	46,500
Purchase price allocation
Current assets	$	3,739
Management contracts		35,740
Goodwill		12,515
Other intangible assets		520
Total assets acquired	$	52,514
Current liabilities		(3,059	)
Liability arising from contingent consideration (promissory notes)		(15,510	)
Redeemable noncontrolling interest liability (discussed below)		(5,448	)
Total liabilities assumed	$	(24,017	)
Net assets acquired, at fair value	$	28,497

The valuation study concluded that the fair value of the up to $18.0 million TLG Promissory Notes, which are considered contingent consideration and convertible into shares of the Company’s common stock at $9.50 per share subject to certain EBITDA hurdles and discussed in note 6, on the date of issuance was estimated at approximately $15.5 million.

Adjustments to the initial allocation of purchase price during the measurement period requires the revision of comparative prior period financial information when reissued in subsequent financial statements. The effect of measurement period adjustments to the allocation of purchase price would be as if the adjustments had been taken into account on the date of acquisition. The impact of the final purchase price allocation on the Company’s previously filed consolidated statement of comprehensive loss was immaterial. The impact of the final purchase price allocation on the Company’s previously filed consolidated balance sheet is as follows (in thousands):

	December 31, 2011
Consolidated Balance Sheet	As  Originally Reported		As Adjusted		Effect of Change
Goodwill	$	69,105	$	66,572	$	(2,533	)
Other assets, net		51,348		51,669		321
Debt and capital lease obligations		442,395		439,905		(2,490	)
Redeemable noncontrolling interest liability		5,170		5,448		278

TLG Acquisition Purchase Agreement. As part of The Light Group Transaction, Morgans Group, TLG Acquisition LLC (“TLG Acquisition”), the Company’s newly-formed subsidiary, Sasson Masi F&B Holdings, LLC, Sasson Masi Nightlife Holdings, LLC, Andrew Sasson and Andy Masi entered into a Master Purchase Agreement (the “Sasson/Masi Purchase Agreement”), pursuant to which TLG Acquisition agreed to purchase 100% of the equity interest in The Light Group LLC, 50% of the equity interest in HHH Holdings LLC, and 50% of the equity interest in DDD Holdings, LLC. In addition, Morgans Group, TLG Acquisition, Zabeel Investments (L.L.C.) and Zabeel Investments Inc. entered into a separate Securities Purchase Agreement (the “Zabeel Purchase Agreement”), pursuant to which TLG Acquisition agreed to purchase the remaining 50% of the equity interest in HHH Holdings, LLC and DDD Holdings, LLC. The aggregate purchase price consists of the following: (i) $20 million in cash to Zabeel Investments (L.L.C.) and Zabeel Investments Inc., (ii) $5.5 million in cash to Mr. Sasson and $3.0 million in cash to Mr. Masi, in each case, subject to customary working capital adjustments, (iii) the issuance of 10% of the equity interests in TLG Acquisition, with 5% to Mr. Sasson and 5% to Mr. Masi, (iv) promissory notes convertible into shares of our common stock for up to $18.0 million in potential payments, allocated $16.0 million to Mr. Sasson and $2.0 million to Mr. Masi, and (v) an annual interest payment of 8% (increasing to 18% after the third anniversary of the closing date, as described below) on the promissory notes.

The Sasson/Masi Purchase Agreement provides for the seller parties, jointly and severally, and the buyer parties to provide customary indemnifications to the other parties for breaches of representations, warranties and other covenants, subject to a $5 million cap.

TLG Acquisition Operating Agreement. Concurrent with the closing of The Light Group Transaction, the TLG Acquisition operating agreement was amended and restated to provide that Morgans Group, which holds 90% of the membership interests in TLG Acquisition, is the managing member and that Messrs. Sasson and Masi, each of whom holds a 5% membership interest in TLG Acquisition, are non-managing members of TLG Acquisition. Messrs. Sasson and Masi, however, will have approval rights over, among other things, certain fundamental transactions involving TLG Acquisition and, for so long as the promissory notes remain outstanding, annual budgets, amendments or terminations of management agreements and other actions that would materially and adversely affect the likelihood that TLG Acquisition would achieve $18 million in Non-Morgans EBITDA during the applicable measurement period.

Each of Messrs. Sasson and Masi received the right to require Morgans Group to purchase his equity interest in TLG at any time after the third anniversary of the closing date at a purchase price equal to his percentage equity ownership interest multiplied by the product of seven times the Non-Morgans EBITDA for the preceding 12 months, subject to certain adjustments (the “Sasson-Masi Put Options”). In addition, Morgans Group will have the right to require each of Messrs. Sasson and Masi to sell his 5% equity interest in TLG at any time after the sixth anniversary of the closing date at a purchase price equal to his percentage equity ownership interest multiplied by the product of seven times the Non-Morgans EBITDA for the preceding 12 months, subject to certain adjustments. The Company initially accounted for the redeemable noncontrolling interest at fair value in accordance with ASC 805, Business Combinations. Due to the redemption feature associated with the Sasson-Masi Put Options, the Company classified the noncontrolling interest in temporary equity in accordance with the Securities and Exchange Commission’s guidance as codified in ASC 480-10, Distinguishing Liabilities from Equity. Subsequently, the Company will accrete the redeemable noncontrolling interest to its current redemption value, which approximates fair value, each period. The change in the redemption value does not impact the Company’s earnings or earnings per share. The Company recorded an obligation of $6.1 million related to the Sasson-Masi Put Options, which is recorded as redeemable noncontrolling interest on the June 30, 2012 consolidated balance sheet.

Supplemental Information for TLG Acquisition. The operating results of TLG have been included in the Company’s consolidated financial statements as of the date of acquisition. The following table presents the results of TLG on a stand-alone basis (in thousands):

	TLG Operating Results Included in the Company’s Results for  the Three Months Ended June 30, 2012		TLG Operating Results Included in the Company’s Results for  the Six Months Ended June 30, 2012
Revenues	$	3,250	$	6,017
Income from continuing operations	$	3,003	$	5,457

The following table presents the Company’s unaudited revenues and loss from continuing operations on a pro forma basis (in thousands) as if it had completed the TLG Acquisition as of January 1, 2011:

	Three Months Ended June 30, 2011			Six Months Ended June 30, 2011
Total revenues, as reported by the Company	$	54,209		$	108,613
Plus: TLG total revenues		2,464			4,379
Pro forma total revenues	$	56,673		$	112,992
Total loss from continuing operations, as reported by the Company	$	(11,802	)	$	(45,160	)
Plus: TLG income from continuing operations		2,171			3,965
Pro forma loss from continuing operations	$	(9,631	)	$	(41,195	)

The above unaudited pro forma income (loss) from continuing operations for the three and six months ended June 30, 2011 excludes $1.2 million of transaction costs to acquire TLG as well as the noncontrolling interest adjustment, which would be presented on the Company’s financial statements, for the 10% ownership interest in TLG that the Company did not acquire.

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Consolidated Balance Sheets (Parenthetical) (USD $)	Jun. 30, 2012	Dec. 31, 2011
Consolidated Balance Sheets [Abstract]
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, liquidation preference per share	$ 1,000	$ 1,000
Preferred stock, shares authorized	75,000	75,000
Preferred stock, shares issued	75,000	75,000
Common stock, par value	$ 0.01	$ 0.01
Common stock reserved and authorized	200,000,000	200,000,000
Common stock par issued	36,277,495	36,277,495
Treasury stock, shares	5,124,985	5,487,289

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Deferred Gain on Assets Sold

6 Months Ended

Jun. 30, 2012

Deferred Gain on Assets Sold [Abstract]

Deferred Gain on Assets Sold

11. Deferred Gain on Assets Sold

On May 3, 2011, pursuant to a purchase and sale agreement, Mondrian Holdings sold Mondrian Los Angeles for $137.0 million to Pebblebrook. The Company applied a portion of the proceeds from the sale, along with approximately $9.2 million of cash in escrow, to retire the $103.5 million mortgage secured by the hotel. Net proceeds, after the repayment of debt and closing costs, were approximately $40 million. The Company continues to operate the hotel under a 20-year management agreement with one 10-year extension option.

On May 23, 2011, pursuant to purchase and sale agreements, Royalton LLC, a subsidiary of the Company, sold Royalton for $88.2 million to Royalton 44 Hotel, L.L.C., an affiliate of FelCor Lodging Trust, Incorporated, and Morgans Holdings LLC, a subsidiary of the Company, sold Morgans for $51.8 million to Madison 237 Hotel, L.L.C., an affiliate of FelCor Lodging Trust, Incorporated. The Company applied a portion of the proceeds from the sale to retire the outstanding balance on its revolving credit facility at the time, which was secured in part by these hotels. Net proceeds, after the repayment of debt and closing costs, were approximately $93 million. The Company continues to operate the hotels under 15-year management agreements with one 10-year extension option.

In accordance with ASC 360-20, Property, Plant and Equipment, Real Estate Sales, the Company evaluated its accounting for the gain on sales, noting that the Company continues to have significant continuing involvement in the hotels as a result of long-term management agreements, which resulted in the Company continuing to have involvement in the hotels and sharing in risks and rewards of ownership. The Company recorded deferred gains of approximately $11.2 million, $12.5 million and $55.6 million, respectively, related to the sales of Royalton, Morgans and Mondrian Los Angeles, which are deferred and recognized over the initial term of the related management agreement.

On November 23, 2011, our subsidiary, Royalton Europe, and Walton MG London, each of which owned a 50% equity interest in Morgans Europe, the joint venture that owned the 150 room Sanderson and 204 room St Martins Lane hotels, completed the sale of their respective equity interests in the joint venture for an aggregate of £192 million (or approximately $297 million). The Company received net proceeds of approximately $72.3 million, after applying a portion of the proceeds from the sale to retire the £99.5 million of outstanding mortgage debt secured by the hotels and payment of closing costs. The Company continues to operate the hotels under long-term management agreements that, including extension options, extend the term of the prior management agreements to 2041 from 2027.

The Company recorded a deferred gain of approximately $73.1 million related to the sales of its equity interests in Morgans Europe. As the Company has significant continuing involvement through long-term management agreements, similar to the discussion above, the gain on sale is deferred and recognized over the initial term of the related management agreement.

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Document and Entity Information	6 Months Ended
	Jun. 30, 2012	Aug. 03, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	Morgans Hotel Group Co.
Entity Central Index Key	0001342126
Document Type	10-Q
Document Period End Date	Jun. 30, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q2
Current Fiscal Year End Date	--12-31
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		31,152,510

XML

Commitments

6 Months Ended

Jun. 30, 2012

Commitments [Abstract]

Commitments

12. Commitments

In order to obtain long term management contracts, the Company has committed to contribute capital in various forms on hotel development projects. These include equity investments, key money and cash flow guarantees to hotel owners. The cash flow guarantees generally have a stated maximum amount of funding and a defined term. The terms of the cash flow guarantees to hotel owners generally require the Company to fund if the hotels do not attain specified levels of operating profit. Oftentimes, cash flow guarantees to hotel owners may be recoverable as loans repayable to the Company out of future hotel cash flows and/or proceeds from the sale of hotels.

Development Hotel Commitments and Guarantees. The Company has signed management agreements to manage various hotels which are in the development stage. These include the following:

	Expected Room Count		Anticipated Opening		Term of Initial Management Contract
Hotels Currently Under Construction:
Delano Marrakech		73		Sept. 2012		15 years
Mondrian Marrakech		69		Late 2013		15 years
Mondrian Doha		270		2013		30 years
Mondrian London		360		Early 2014		25 years
Mondrian at Baha Mar, Bahamas		310		2014		20 years
Other Signed Agreements:
Mondrian Istanbul		128		2014		20 years
Delano Aegean Sea		200		2014		20 years
Hudson London		234		2015		20 years
Highline, New York project		175		To be determined		15 years

However, financing has not been obtained for some of these hotel projects, and there can be no assurances that all of these projects will be developed as planned. If adequate project financing is not obtained, these projects may need to be limited in scope, deferred or cancelled altogether, and to the extent the Company has previously funded key money or an equity investment on a cancelled project, the Company may be unable to recover the amounts funded.

The Company has committed to contribute key money or equity to certain hotels under development. In addition, through certain cash flow guarantees, the Company may have potential future funding obligations for certain hotels under development. The following table details the Company’s key money and equity commitments as well as potential funding obligations under cash flow guarantees at the maximum amount under the applicable contracts for hotels under development as of June 30, 2012 (in thousands):

	As of June 30, 2012
Key money	$	29,400
Equity investments		—
Cash flow guarantees		31,600
Total maximum future funding commitments	$	61,000
Amounts due within one year	$	2,500

The Company is required to fund approximately $10.0 million of key money toward the Mondrian at Baha Mar, Bahamas just prior to and at opening of the hotel. As of June 30, 2012, we have an outstanding $10.0 million standby letter of credit on the Delano Credit Facility for up to 48 months to cover this obligation. This amount is included in key money in the above table.

As the Company pursues its growth strategy, it may continue to invest in new management agreements through key money, equity investments and cash flow guarantees. To fund any such future investments, the Company may from time to time pursue additional potential financing opportunities it has available.

Operating Joint Venture Hotels Commitments and Guarantees. The following detail obligations the Company has or may have related to its operating hotels as of June 30, 2012.

Mondrian South Beach Mortgage and Mezzanine Agreements. Morgans Group and affiliates of its joint venture partner have agreed to provide standard nonrecourse carve-out guaranties and provide certain limited indemnifications for the Mondrian South Beach mortgage and mezzanine loans. In the event of a default, the lenders’ recourse is generally limited to the mortgaged property or related equity interests, subject to standard nonrecourse carve-out guaranties for “bad boy” type acts. Morgans Group and affiliates of its joint venture partner also agreed to guaranty the joint venture’s obligation to reimburse certain expenses incurred by the lenders and indemnify the lenders in the event such lenders incur liability in connection with certain third-party actions. Morgans Group and affiliates of its joint venture partner have also guaranteed the joint venture’s liability for the unpaid principal amount of any seller financing note provided for condominium sales if such financing or related mortgage lien is found unenforceable, provided they shall not have any liability if the seller financed unit becomes subject to the lien of the lender’s mortgage or title to the seller financed unit is otherwise transferred to the lender or if such seller financing note is repurchased by Morgans Group and/or affiliates of its joint venture at the full amount of unpaid principal balance of such seller financing note. In addition, although construction is complete and Mondrian South Beach opened on December 1, 2008, Morgans Group and affiliates of our joint venture partner may have continuing obligations under construction completion guaranties until all outstanding payables due to construction vendors are paid. As of June 30, 2012, there are remaining payables outstanding to vendors of approximately $1.0 million. Pursuant to a letter agreement with the lenders for the Mondrian South Beach loan, the joint venture agreed that these payables, many of which are currently contested or under dispute, will not be paid from operating funds but only from tax abatements and settlements of certain lawsuits. In the event funds from tax abatements and settlements of lawsuits are insufficient to repay these amounts in a timely manner, the Company and its joint venture partner are required to fund the shortfall amounts.

The Company and affiliates of its joint venture partner also have each agreed to purchase approximately $14 million of condominium units under certain conditions, including an event of default. In the event of a default under the lender’s mortgage or mezzanine loan, the joint venture partners are obligated to purchase selected condominium units, at agreed-upon sales prices, having aggregate sales prices equal to 1/2 of the lesser of $28.0 million, which is the face amount outstanding on the lender’s mezzanine loan, or the then outstanding principal balance of the lender’s mezzanine loan. The joint venture is not currently in an event of default under the mortgage or mezzanine loan. The Company has not recognized a liability related to the construction completion or the condominium purchase guarantees.

Mondrian SoHo. Certain affiliates of the Company’s joint venture partner have agreed to provide a standard nonrecourse carve-out guaranty for “bad boy” type acts and a completion guaranty to the lenders for the Mondrian SoHo loan, for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates up to 20% of such entities’ guaranty obligations, provided that each party is fully responsible for any losses incurred as a result of its own gross negligence or willful misconduct.

Mondrian SoHo opened in February 2011, and we are operating the hotel under a 10-year management contract with two 10-year extension options.

Ames. The development of the Ames hotel qualified for federal and state historic rehabilitation tax credits which were sold for approximately $16.9 million. In the event of foreclosure and certain other transfers, the Company is jointly and severally liable for certain federal historic tax credit recapture liabilities relating to these credits. These liabilities reduce over time, but as of June 30, 2012 were estimated at approximately $14.4 million, of which the Company’s pro rata share is $4.5 million.

Certain affiliates of the Company’s joint venture partner have agreed to provide a standard nonrecourse carve-out guaranty for “bad boy” type acts and a completion guaranty to the lenders for the Ames loan, for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates up to its pro rata ownership share of such entities’ guaranty obligations, provided that each party is fully responsible for any losses incurred as a result of its respective gross negligence or willful misconduct.

Other Guarantees to Hotel Owners. As discussed above, the Company has provided certain cash flow guarantees to hotel owners in order to secure management contracts. The Company’s hotel management agreements for Royalton and Morgans contain cash flow guarantee performance tests that stipulate certain minimum levels of operating performance. These performance test provisions give the Company the option to fund a shortfall in operating performance limited to the Company’s earned base fees. If the Company chooses not to fund the shortfall, the hotel owner has the option to terminate the management agreement. As of June 30, 2012, approximately $0.4 million was recorded in accrued expenses and as a reduction to management fees related to these performance test provisions. The Company’s maximum potential amount of future fundings related to the Royalton and Morgans performance guarantee cannot be determined as of June 30, 2012, but under the hotel management agreements is limited to the Company’s base fees earned.

Guaranteed Loans and Commitments. The Company has made guarantees to lenders and lessors of its owned and leased hotels, namely related to the Hudson 2011 Mortgage Loan, the Clift lease payments and the Delano Credit Facility, as discussed further in note 6.

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Consolidated Statements of Comprehensive Loss (Unaudited) (USD $) In Thousands, except Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Revenues:
Rooms	$ 25,743	$ 33,485	$ 46,619	$ 64,519
Food and beverage	14,277	15,611	29,376	33,641
Other hotel	1,198	1,733	2,459	3,749
Total hotel revenues	41,218	50,829	78,454	101,909
Management fee-related parties and other income	6,573	3,380	12,632	6,704
Total revenues	47,791	54,209	91,086	108,613
Operating Costs and Expenses:
Rooms	7,772	9,685	15,438	20,859
Food and beverage	11,865	13,135	24,595	28,237
Other departmental	919	1,036	1,826	2,247
Hotel selling, general and administrative	9,300	10,792	18,786	23,350
Property taxes, insurance and other	3,613	3,704	7,566	7,889
Total hotel operating expenses	33,469	38,352	68,211	82,582
Corporate expenses, including stock compensation of $1.6 million, $2.0 million, $2.6 million, and $6.0 million, respectively	8,951	8,049	16,627	18,883
Depreciation and amortization	5,897	4,199	11,610	12,572
Restructuring, development and disposal costs	2,037	3,800	4,244	8,393
Total operating costs and expenses	50,354	54,400	100,692	122,430
Operating loss	(2,563)	(191)	(9,606)	(13,817)
Interest expense, net	8,203	10,014	16,004	19,008
Equity in loss of unconsolidated joint ventures	2,706	910	3,616	10,393
Gain on asset sales	(1,995)	(620)	(3,991)	(620)
Other non-operating expenses	1,919	879	2,462	2,269
Loss before income tax expense	(13,396)	(11,374)	(27,697)	(44,867)
Income tax expense	121	428	314	293
Net loss from continuing operations	(13,517)	(11,802)	(28,011)	(45,160)
(Loss) income from discontinued operations, net of taxes	0	(5)	0	485
Net loss	(13,517)	(11,807)	(28,011)	(44,675)
Net loss attributable to noncontrolling interest	124	383	337	1,208
Net loss attributable to Morgans Hotel Group	(13,393)	(11,424)	(27,674)	(43,467)
Preferred stock dividends and accretion	2,718	2,229	5,368	4,416
Net loss attributable to common stockholders	(16,111)	(13,653)	(33,042)	(47,883)
Other comprehensive loss:
Unrealized (loss) gain on valuation of swap/cap agreements, net of tax	(1)	5	(5)	5
Share of unrealized (loss) gain on valuation of swap agreements from unconsolidated joint venture, net of tax	0	(845)	0	1,021
Foreign currency translation loss, net of tax	0	(3)	0	(109)
Comprehensive loss	$ (16,112)	$ (14,496)	$ (33,047)	$ (46,966)
(Loss) income per share:
Basic and diluted continuing operations	$ (0.52)	$ (0.45)	$ (1.06)	$ (1.55)
Basic and diluted discontinued operations	$ 0.00	$ 0.00	$ 0.00	$ 0.02
Basic and diluted attributable to common stockholders	$ (0.52)	$ (0.45)	$ (1.06)	$ (1.53)
Weighted average number of common shares outstanding:
Basic and diluted	31,261	30,498	31,185	31,255

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Debt and Capital Lease Obligations

6 Months Ended

Jun. 30, 2012

Debt and Capital Lease Obligations [Abstract]

Debt and Capital Lease Obligations

6. Debt and Capital Lease Obligations

Debt and capital lease obligations consists of the following (in thousands):

Description	As of June 30, 2012		As of December 31, 2011		Interest Rate at June 30, 2012
Notes secured by Hudson (a)	$	115,000	$	115,000		(a	)
Clift debt (b)		88,038		86,991		9.60	%
Liability to subsidiary trust (c)		50,100		50,100		8.68	%
Convertible Notes, face value of $172.5 million (d)		167,282		166,144		2.38	%
Revolving credit facility (e)		20,000		—		5.00% (LIBOR + 4.00%, LIBOR floor of 1.00%)

Description	As of June 30, 2012		As of December 31, 2011		Interest Rate at June 30, 2012
TLG Promissory Note (f)		16,820		15,510	(f)
Capital lease obligations (g)		6,145		6,160	(g)
Debt and capital lease obligation	$	463,385	$	439,905

(a) Mortgage Agreements

Hudson Mortgage and Mezzanine Loan

On October 6, 2006, a subsidiary of the Company, Henry Hudson Holdings LLC (“Hudson Holdings”), entered into a nonrecourse mortgage financing secured by Hudson, and another subsidiary entered into a mezzanine loan related to Hudson, secured by a pledge of the Company’s equity interests in Hudson Holdings.

Until amended as described below, the mortgage bore interest at 30-day LIBOR plus 0.97%. The Company had entered into an interest rate swap on the mortgage and the mezzanine loan on Hudson which effectively fixed the 30-day LIBOR rate at approximately 5.0%. This interest rate swap expired on July 15, 2010. The Company subsequently entered into a short-term interest rate cap on the mortgage that expired on September 12, 2010.

On October 1, 2010, Hudson Holdings entered into a modification agreement of the mortgage, together with promissory notes and other related security agreements, with Bank of America, N.A., as trustee, for the lenders (the “Amended Hudson Mortgage”). This modification agreement and related agreements extended the Hudson Mortgage until October 15, 2011. In connection with the Amended Hudson Mortgage, on October 1, 2010, Hudson Holdings paid down a total of $16 million on its outstanding loan balances.

The interest rate on the Amended Hudson Mortgage was also amended to 30-day LIBOR plus 1.03%. The interest rate on the Hudson mezzanine loan continued to bear interest at 30-day LIBOR plus 2.98%. The Company entered into interest rate caps, which expired on October 15, 2011, in connection with the Amended Hudson Mortgage, which effectively capped the 30-day LIBOR rate at 5.3% on the Amended Hudson Mortgage and effectively capped the 30-day LIBOR rate at 7.0% on the Hudson mezzanine loan.

On August 12, 2011, certain of the Company’s subsidiaries entered into a new mortgage financing with Deutsche Bank Trust Company Americas (“Primary Lender”) and the other institutions party thereto from time to time (“Securitized Lenders”), as lenders, consisting of two mortgage loans, each secured by Hudson and treated as a single loan once disbursed, in the following amounts: (1) a $115.0 million mortgage loan that was funded at closing, and (2) a $20.0 million delayed draw term loan, which will be available to be drawn over a 15-month period, subject to achieving a debt yield ratio of at least 9.5% (based on net operating income for the prior 12 months) after giving effect to each additional draw (collectively, the “Hudson 2011 Mortgage Loan”). The Company does not believe it will achieve the debt yield ratio necessary to allow it to borrow the additional $20.0 million term loan before the option expires.

Proceeds from the Hudson 2011 Mortgage Loan, cash on hand and cash held in escrow were applied to repay $201.2 million of outstanding mortgage debt under the Amended Hudson Mortgage, to repay $26.5 million of outstanding indebtedness under the Hudson mezzanine loan, and to pay fees and expenses in connection with the financing.

On December 7, 2011, the Company entered into a technical amendment with the Primary Lender whereby the Hudson 2011 Mortgage Loan is subject to an interest rate of 30-day LIBOR (with a minimum of 1.0%) plus 5.0%, at the Primary Lender’s option. At June 30, 2012, $28.0 million of the Hudson 2011 Mortgage Loan bore interest at a reserve adjusted blended rate of 30-day LIBOR (with a minimum of 1.0%) plus 4.0%. The remaining $87.0 million of the Hudson 2011 Mortgage Loan which was sold to the Securitized Lenders bore interest at a reserve adjusted blended rate of 30-day LIBOR (with a minimum of 1.0%) plus 5.0%.

The Company maintains an interest rate cap for the amount of the Hudson 2011 Mortgage Loan that will cap the LIBOR rate on the debt under the full amount of the Hudson 2011 Mortgage Loan at approximately 3.0% through the maturity date of the loan.

The Hudson 2011 Mortgage Loan matures on August 12, 2013. The Company has three one-year extension options that permit it to extend the maturity date of the Hudson 2011 Mortgage Loan to August 12, 2016 if certain conditions are satisfied at each respective extension date. The first two extension options require, among other things, the borrowers to maintain a debt service coverage ratio of at least 1-to-1 for the 12 months prior to the applicable extension dates. The third extension option requires, among other things, the borrowers to achieve a debt yield ratio of at least 13.0% (based on net operating income for the prior 12 months).

The Hudson 2011 Mortgage Loan provides that after September 30, 2012, in the event the debt yield ratio falls below certain defined thresholds, all cash from the property is deposited into accounts controlled by the lenders from which debt service, operating expenses and management fees are paid and from which other reserve accounts may be funded. Any excess amounts are retained by the lenders until the debt yield ratio exceeds the required thresholds for two consecutive calendar quarters. Furthermore, if the Company’s management company subsidiary that manages Hudson is not reserving sufficient funds for property tax, ground rent, insurance premiums, and capital expenditures in accordance with the hotel management agreement, then the Company’s subsidiary borrowers would be required to fund the reserve account for such purposes. The Company’s subsidiary borrowers are not permitted to have any indebtedness other than certain permitted indebtedness customary in such transactions, including ordinary trade payables, purchase money indebtedness and capital lease obligations, subject to limits.

The Hudson 2011 Mortgage Loan may be prepaid, in whole or in part, subject to payment of a prepayment penalty for any prepayment prior to August 12, 2013. There is no prepayment penalty after August 12, 2013.

The Hudson 2011 Mortgage Loan contains restrictions on the ability of the borrowers to incur additional debt or liens on their assets and on the transfer of direct or indirect interests in Hudson and the owner of Hudson and other affirmative and negative covenants and events of default customary for single asset mortgage loans. The Hudson 2011 Mortgage Loan is fully recourse to our subsidiaries that are the borrowers under the loan. The loan is nonrecourse to the Company, Morgans Group and other subsidiaries, except for certain standard nonrecourse carveouts. Morgans Group has provided a customary environmental indemnity and nonrecourse carveout guaranty under which it would have liability with respect to the Hudson 2011 Mortgage Loan if certain events occur with respect to the borrowers, including voluntary bankruptcy filings, collusive involuntary bankruptcy filings, and violations of the restrictions on transfers, incurrence of additional debt, or encumbrances of the property of the borrowers. The nonrecourse carveout guaranty requires Morgans Group to maintain a net worth of at least $100 million (based on the estimated market value of our net assets) and liquidity of at least $20 million. The Company was in compliance with all requirements as of June 30, 2012.

Mondrian Los Angeles Mortgage

On October 6, 2006, a subsidiary of the Company that owned Mondrian Los Angeles entered into a nonrecourse mortgage financing secured by the hotel.

On October 1, 2010, the subsidiary entered into a modification agreement of its mortgage, together with promissory notes and other related security agreements, with Bank of America, N.A., as trustee, for the lenders. This modification agreement and related agreements amended and extended the mortgage until October 15, 2011. In connection with the amended mortgage, on October 1, 2010, the subsidiary paid down a total of $17 million on its outstanding mortgage loan balance.

The interest rate on the amended mortgage was also amended to 30-day LIBOR plus 1.64%. The Company entered into an interest rate cap, which expired on October 15, 2011, in connection with the amendment which effectively capped the 30-day LIBOR rate at 4.25%.

On May 3, 2011, the Company completed the sale of Mondrian Los Angeles for $137.0 million to Wolverines Owner LLC, an affiliate of Pebblebrook. The Company applied a portion of the proceeds from the sale, along with approximately $9.2 million of cash in escrow, to retire the $103.5 million amended mortgage.

(b) Clift Debt

In October 2004, Clift Holdings LLC (“Clift Holdings”), a subsidiary of the Company, sold the Clift hotel to an unrelated party for $71.0 million and then leased it back for a 99-year lease term. Under this lease, Clift Holdings is required to fund operating shortfalls including the lease payments and to fund all capital expenditures. This transaction did not qualify as a sale due to the Company’s continued involvement and therefore is treated as a financing.

Due to the amount of the payments stated in the lease, which increase periodically, and the economic environment in which the hotel operates, Clift Holdings had not been operating Clift at a profit and Morgans Group had been funding cash shortfalls sustained at Clift in order to enable Clift Holdings to make lease payments from time to time. On March 1, 2010, however, the Company discontinued subsidizing the lease payments and Clift Holdings stopped making the scheduled monthly payments. On May 4, 2010, the owners filed a lawsuit against Clift Holdings, which the court dismissed on June 1, 2010. On June 8, 2010, the owners filed a new lawsuit and on June 17, 2010, the Company and Clift Holdings filed an affirmative lawsuit against the owners.

On September 17, 2010, the Company, Clift Holdings and another subsidiary of the Company, 495 Geary, LLC, entered into a settlement and release agreement with Hasina, LLC, Tarstone Hotels, LLC, Kalpana, LLC, Rigg Hotel, LLC, and JRIA, LLC (collectively, the “Lessors”), and Tarsadia Hotels. The settlement and release agreement, among other things, effectively provided for the settlement of all outstanding litigation claims and disputes among the parties relating to defaulted lease payments due with respect to the ground lease for the Clift hotel and reduced the lease payments due to Lessors for the period March 1, 2010 through February 29, 2012. Clift Holdings and the Lessors also entered into an amendment to the lease, dated September 17, 2010, to memorialize, among other things, the reduced annual lease payments of $4.97 million from March 1, 2010 to February 29, 2012. Effective March 1, 2012, the annual rent reverted to the rent stated in the lease agreement, which provides for base annual rent of approximately $6.0 million per year through October 2014 increasing in October 2014, and thereafter at 5-year intervals, by a formula tied to increases in the Consumer Price Index, with a maximum increase of 40% and a minimum of 20% at October 2014, and at each payment date thereafter, the maximum increase is 20% and the minimum is 10%. The lease is nonrecourse to the Company.

Morgans Group also entered into an agreement, dated September 17, 2010, whereby Morgans Group agreed to guarantee losses of up to $6 million suffered by the Lessors in the event of certain “bad boy” type acts.

(c) Liability to Subsidiary Trust Issuing Preferred Securities

On August 4, 2006, a newly established trust formed by the Company, MHG Capital Trust I (the “Trust”), issued $50.0 million in trust preferred securities in a private placement. The Company owns all of the $0.1 million of outstanding common stock of the Trust. The Trust used the proceeds of these transactions to purchase $50.1 million of junior subordinated notes issued by the Company’s operating company and guaranteed by the Company (the “Trust Notes”) which mature on October 30, 2036. The sole assets of the Trust consist of the Trust Notes. The terms of the Trust Notes are substantially the same as preferred securities issued by the Trust. The Trust Notes and the preferred securities have a fixed interest rate of 8.68% per annum during the first 10 years, after which the interest rate will float and reset quarterly at the three-month LIBOR rate plus 3.25% per annum. As of December 31, 2011, the Trust Notes are redeemable by the Trust, at the Company’s option, at par. As of June 30, 2012, the Company has not redeemed any Trust Notes. To the extent the Company redeems the Trust Notes, the Trust is required to redeem a corresponding amount of preferred securities.

The Company has identified that the Trust is a variable interest entity under ASC 810-10. Based on management’s analysis, the Company is not the primary beneficiary under the trust. Accordingly, the Trust is not consolidated into the Company’s financial statements. The Company accounts for the investment in the common stock of the Trust under the equity method of accounting.

(d) October 2007 Convertible Notes Offering

On October 17, 2007, the Company issued $172.5 million aggregate principal amount of 2.375% Senior Subordinated Convertible Notes (the “Convertible Notes”) in a private offering. Net proceeds from the offering were approximately $166.8 million.

The Convertible Notes are senior subordinated unsecured obligations of Morgans Hotel Group Co. and are guaranteed on a senior subordinated basis by the Company’s operating company, Morgans Group. The Convertible Notes are convertible into shares of the Company’s common stock under certain circumstances and upon the occurrence of specified events.

Interest on the Convertible Notes is payable semi-annually in arrears on April 15 and October 15 of each year, beginning on April 15, 2008, and the Convertible Notes mature on October 15, 2014, unless previously repurchased by the Company or converted in accordance with their terms prior to such date. The initial conversion rate for each $1,000 principal amount of Convertible Notes is 37.1903 shares of the Company’s common stock, representing an initial conversion price of approximately $26.89 per share of common stock. The initial conversion rate is subject to adjustment under certain circumstances. The maximum conversion rate for each $1,000 principal amount of Convertible Notes is 45.5580 shares of the Company’s common stock representing a maximum conversion price of approximately $21.95 per share of common stock.

The Company follows ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”), which clarifies the accounting for convertible notes payable. ASC 470-20 requires the proceeds from the issuance of convertible notes to be allocated between a debt component and an equity component. The debt component is measured based on the fair value of similar debt without an equity conversion feature, and the equity component is determined as the residual of the fair value of the debt deducted from the original proceeds received. The resulting discount on the debt component is amortized over the period the debt is expected to be outstanding as additional interest expense. The equity component, recorded as additional paid-in capital, was determined to be $9.0 million, which represents the difference between the proceeds from issuance of the Convertible Notes and the fair value of the liability, net of deferred taxes of $6.4 million as of the date of issuance of the Convertible Notes.

In connection with the issuance of the Convertible Notes, the Company entered into convertible note hedge transactions with respect to the Company’s common stock with Merrill Lynch Financial Markets, Inc. and Citibank, N.A. These call options are exercisable solely in connection with any conversion of the Convertible Notes and pursuant to which the Company will receive shares of the Company’s common stock from Merrill Lynch Financial Markets, Inc. and Citibank, N.A equal to the number of shares issuable to the holders of the Convertible Notes upon conversion. The Company paid approximately $58.2 million for these call options.

In connection with the sale of the Convertible Notes, the Company also entered into separate warrant transactions with Merrill Lynch Financial Markets, Inc. and Citibank, N.A., whereby the Company issued warrants (the “Convertible Notes Warrants”) to purchase 6,415,327 shares of common stock, subject to customary anti-dilution adjustments, at an exercise price of approximately $40.00 per share of common stock. The Company received approximately $34.1 million from the issuance of the Convertible Notes Warrants.

The Company recorded the purchase of the call options, net of the related tax benefit of approximately $20.3 million, as a reduction of additional paid-in capital and the proceeds from the Convertible Notes Warrants as an addition to additional paid-in capital in accordance with ASC 815-30, Derivatives and Hedging, Cash Flow Hedges.

In February 2008, the Company filed a registration statement with the Securities and Exchange Commission to cover the resale of shares of the Company’s common stock that may be issued from time to time upon the conversion of the Convertible Notes.

(e) Revolving Credit Facilities

Amended 2006 Revolving Credit Facility

On October 6, 2006, the Company and certain of its subsidiaries entered into a revolving credit facility with Wachovia Bank, National Association, as Administrative Agent, and the other lenders party thereto, which was amended on August 5, 2009.

The revolving credit facility provided for a maximum aggregate amount of commitments of $125.0 million, divided into two tranches, which were secured by the mortgages on Morgans, Royalton and Delano South Beach.

The revolving credit facility bore interest at a fluctuating rate measured by reference to, at the Company’s election, either LIBOR (subject to a LIBOR floor of 1%) or a base rate, plus a borrowing margin. LIBOR loans had a borrowing margin of 3.75% per annum and base rate loans have a borrowing margin of 2.75% per annum.

On May 23, 2011, in connection with the sale of Royalton and Morgans, the Company used a portion of the sales proceeds to retire all outstanding debt under the revolving credit facility. These hotels, along with Delano South Beach, were collateral for the revolving credit facility, which terminated with the sale of properties securing the facility.

Delano Credit Facility

On July 28, 2011, the Company and certain of its subsidiaries (collectively, the “Borrowers”), including Beach Hotel Associates LLC (the “Florida Borrower”), entered into a secured credit agreement with Deutsche Bank Securities Inc. as sole lead arranger, Deutsche Bank Trust Company Americas, as agent, and the lenders party thereto.

The credit agreement provides commitments for a $100.0 million revolving credit facility and includes a $15 million letter of credit sub-facility (the “Delano Credit Facility”). The maximum amount of such commitments available at any time for borrowings and letters of credit is determined according to a borrowing base valuation equal to the lesser of (i) 55% of the appraised value of Delano South Beach (the “Florida Property”) and (ii) the adjusted net operating income for the Florida Property divided by 11%. Extensions of credit under the Delano Credit Facility are available for general corporate purposes. The commitments under the Delano Credit Facility may be increased by up to an additional $10 million during the first two years of the facility, subject to certain conditions, including obtaining commitments from any one or more lenders to provide such additional commitments. The commitments under the Delano Credit Facility terminate on July 28, 2014, at which time all outstanding amounts on the Delano Credit Facility will be due and payable.

As of June 30, 2012, the Company’s borrowing availability on the Delano Credit Facility was $82.0 million, of which the Company had $20.0 million outstanding, and had a $10.0 million letter of credit outstanding related to the Company’s key money investment in the 310 room Mondrian-branded hotel, in the Baha Mar Resort, in Nassau, The Bahamas. In August 2011, the Company entered into a hotel management and residential licensing agreement related to this project.

The obligations of the Borrowers under the Delano Credit Facility are guaranteed by the Company and a subsidiary of the Company. Such obligations are also secured by a mortgage on the Florida Property and all associated assets of the Florida Borrower, as well as a pledge of all equity interests in the Florida Borrower.

The interest rate applicable to loans outstanding on the Delano Credit Facility is a floating rate of interest per annum, at the Borrowers’ election, of either LIBOR (subject to a LIBOR floor of 1.00%) plus 4.00%, or a base rate, as defined in the agreement, plus 3.00%. In addition, a commitment fee of 0.50% applies to the unused portion of the commitments under the Delano Credit Facility.

The Borrowers’ ability to borrow on the Delano Credit Facility is subject to ongoing compliance by the Company and the Borrowers with various customary affirmative and negative covenants, including limitations on liens, indebtedness, issuance of certain types of equity, affiliated transactions, investments, distributions, mergers and asset sales. In addition, the Delano Credit Facility requires that the Company and the Borrowers maintain a fixed charge coverage ratio (consolidated EBITDA to consolidated fixed charges) of no less than (i) 1.05 to 1.00 at all times on or prior to June 30, 2012 and (ii) 1.10 to 1.00 at all times thereafter. As of June 30, 2012, the Company’s fixed charge coverage ratio under the Delano Credit Facility was 1.29x.

The Delano Credit Facility also includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Borrowers under the Delano Credit Facility to be immediately due and payable.

(f) TLG Promissory Notes

On November 30, 2011, pursuant to purchase agreements entered into on November 17, 2011, certain of the Company’s subsidiaries completed the acquisition of 90% of the equity interests in TLG for a purchase price of $28.5 million in cash and up to $18.0 million in notes convertible into shares of the Company’s common stock at $9.50 per share subject to the achievement of certain EBITDA targets for the acquired business. The promissory notes were allocated $16.0 million to Mr. Sasson and $2.0 million to Mr. Masi (collectively, the “TLG Promissory Notes”).

The maximum payment of $18.0 million is based on TLG achieving EBITDA of at least $18.0 million from non-Morgans business (the “Non-Morgans EBITDA”) during the 27-month period starting on January 1, 2012, with ratable reduction of the payment if less than $18.0 million of EBITDA is earned. The payment is evidenced by two promissory notes held individually by Messrs. Sasson and Masi, which mature on the fourth anniversary of the closing date and may be voluntarily prepaid at any time. At either Messrs. Sasson’s or Masi’s options, the TLG Promissory Notes are payable in cash or in common stock of the Company valued at $9.50 per share. Each of the TLG Promissory Notes earns interest at an annual rate of 8%, provided that if the notes are not paid or converted on or before the third anniversary of the closing date, the interest rate increases to 18%. The TLG Promissory Notes provide that 75% of the accrued interest is payable quarterly in cash and the remaining 25% accrues and is payable at maturity. Morgans Group has guaranteed payment of the TLG Promissory Notes and interest.

As of the issue date, the fair value of the TLG Promissory Notes was estimated at approximately $15.5 million utilizing a Monte Carlo simulation to estimate the probability of the performance conditions being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times. For each simulation, the payoff is calculated at the settlement date, which is then discounted to the award date at a risk-free interest rate. The average of the values over all simulations is the expected value of the unit on the issuance date. Assumptions used in the valuations included factors associated with the underlying performance of the Company’s stock price and total stockholder return over the term of the notes including total stock return volatility and risk-free interest. The fair value of the TLG Promissory Notes was estimated as of the issue date using the following assumptions in the Monte-Carlo simulation: expected price volatility for the Company’s stock of 25%; a risk free rate of 0.4%; and no dividend payments over the measurement period.

As of June 30, 2012, the fair value of the TLG Promissory Notes was estimated at approximately $16.8 million using the following assumptions in the Monte-Carlo valuation: expected price volatility for the Company’s stock of 25%; a risk free rate of 0.3%; and no dividend payments over the measurement period.

Pursuant to a one-year consulting agreement the Company entered into with Mr. Sasson in connection with The Light Group Transaction, the Company appointed Mr. Sasson to the Company’s Board and agreed to cause Mr. Sasson to be nominated for election to the Board at the Company’s 2012 annual meeting of stockholders. In the event Mr. Sasson is not elected to the Board, the TLG Promissory Notes accelerate and become immediately due and payable. At the Company’s annual meeting of stockholders held on May 16, 2012, Mr. Sasson was elected to the Company’s Board of Directors for a one year term.

(g) Capital Lease Obligations

The Company has leased two condominium units at Hudson from unrelated third-parties, which are reflected as capital leases. One of the leases requires the Company to make annual payments, currently $582,180 (subject to increases due to increases in the Consumer Price Index), through November 2096. 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, currently $328,128 (subject to increases due to increases in the Consumer Price Index), through December 2098. The Company has allocated both lease payments between the land and building based on their estimated fair values. The portion of the payments allocated to the building has been capitalized at the present value of the future minimum lease payments. The portion of the payments allocable to the land is treated as operating lease payments. The imputed interest rate on both of these leases is 8%, which is based on the Company’s incremental borrowing rate at the time the lease agreement was executed. The capital lease obligations related to the units amounted to approximately $6.1 million as of June 30, 2012 and December 31, 2011, 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, which are immaterial to the Company’s consolidated financial statements, related to equipment at certain of the hotels.

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Other Liabilities

6 Months Ended

Jun. 30, 2012

Other Liabilities [Abstract]

Other Liabilities

5. Other Liabilities

Other liabilities consist of the following (in thousands):

	As of June 30, 2012		As of December 31, 2011
OPP LTIP Units Liability (note 7)	$	287	$	528
Designer fee payable		13,866		13,866
	$	14,153	$	14,394

OPP LTIP Units Liability

As discussed further in note 7, the estimated fair value of the OPP LTIP Units liability was approximately $0.3 million and $0.5 million at June 30, 2012 and December 31, 2011, respectively.

Designer Fee Payable

As of June 30, 2012 and December 31, 2011, other liabilities consist of $13.9 million related to a designer fee payable. The Former Parent had an exclusive service agreement with a hotel designer, pursuant to which the designer has made various claims related to the agreement. Although the Company is not a party to the agreement, it may have certain contractual obligations or liabilities to the Former Parent in connection with the agreement. According to the agreement, the designer was owed a base fee for each designed hotel, plus 1% of gross revenues, as defined in the agreement, for a 10-year period from the opening of each hotel. 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. A liability amount has been estimated and recorded in these consolidated financial statements before considering any defenses and/or counter-claims that may be available to the Company or the Former Parent in connection with any claim brought by the designer. The estimated costs of the design services were capitalized as a component of the applicable hotel and amortized over the five-year estimated life of the related design elements. Through December 31, 2009, interest was accreted each year on the liability and charged to interest expense using a rate of 9%.

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Other Liabilities (Tables)

6 Months Ended

Jun. 30, 2012

Other Liabilities [Abstract]

Schedule of Other Liabilities

	As of June 30, 2012		As of December 31, 2011
OPP LTIP Units Liability (note 7)	$	287	$	528
Designer fee payable		13,866		13,866
	$	14,153	$	14,394

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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2012

Summary of Significant Accounting Policies [Abstract]

Basis of Presentation

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company consolidates all wholly-owned subsidiaries and variable interest entities in which the Company is determined to be the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. Entities which the Company does not control through voting interest and entities which are variable interest entities, of which the Company is not the primary beneficiary, are accounted for under the equity method, if the Company can exercise significant influence.

The consolidated financial statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The information furnished in the accompanying consolidated financial statements reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Use of Estimates

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.

Business Combinations

Business Combinations

The Company recognizes identifiable assets acquired, liabilities (both specific and contingent) assumed, and non-controlling interests in a business combination at their fair values at the acquisition date based on the exit price (i.e. the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date). Furthermore, acquisition-related costs, such as due diligence, legal and accounting fees, are not capitalized or applied in determining the fair value of the acquired assets. In certain situations, a deferred tax liability is created due to the difference between the fair value and the tax basis of the acquired asset at the acquisition date, which also may result in a goodwill asset being recorded.

Investments in and Advances to Unconsolidated Joint Ventures

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 ASC 810-10, 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. For investments in which there is recourse or unfunded commitments to provide additional equity, distributions and losses in excess of the investment are recorded as a liability.

Other Assets

Other Assets

Other assets consist primarily of the fair value of the TLG management contracts, as discussed further in note 1. TLG operates numerous nightclubs, restaurants and bar venues in Las Vegas pursuant to management agreements with MGM. The management contract assets are being amortized, using the straight line method, over the expected life of each applicable management contract.

Additionally, other assets consists of deferred financing costs and fair value of the management contracts in the food and beverage venues at Sanderson and St Martins Lane, which the Company acquired from its restaurant joint venture partner, as discussed further in note 1. The Sanderson and St Martins Lane food and beverage management contract are being amortized, using the straight line method, over the expected life of the contracts.

Deferred financing costs included in other assets are being amortized, using the straight line method, which approximates the effective interest rate method, over the terms of the related debt agreements.

Income Taxes

Income Taxes

The Company accounts for income taxes in accordance with ASC 740-10, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the tax and financial reporting basis of assets and liabilities and for loss and credit carry forwards. Valuation allowances are provided when it is more likely than not that the recovery of deferred tax assets will not be realized.

The Company’s deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Decreases to the valuation allowance are recorded as reductions to the Company’s provision for income taxes and increases to the valuation allowance result in additional provision for income taxes. The realization of the Company’s deferred tax assets, net of the valuation allowance, is primarily dependent on estimated future taxable income. A change in the Company’s estimate of future taxable income may require an addition to or reduction from the valuation allowance. The Company has established a reserve on its deferred tax assets based on anticipated future taxable income and tax strategies which may include the sale of property or an interest therein.

All of the Company’s foreign subsidiaries are subject to local jurisdiction corporate income taxes. Income tax expense is reported at the applicable rate for the periods presented.

Income taxes for the three and six months ended June 30, 2012 and 2011 were computed using the Company’s effective tax rate.

Credit-risk-related Contingent Features

Credit-risk-related Contingent Features

The Company has entered into agreements with each of its derivative counterparties in connection with the interest rate caps and hedging instruments related to the Convertible Notes, as defined and discussed in note 6, providing that in the event the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.

The Company has entered into warrant agreements with Yucaipa, as discussed in note 8, providing Yucaipa American Alliance Fund II, L.P. and Yucaipa American Alliance (Parallel) Fund II, L.P. (collectively, the “Investors”) with consent rights over certain transactions for so long as they collectively own or have the right to purchase through the exercise of the Yucaipa Warrants (as defined in note 8) 6,250,000 shares of the Company’s common stock.

Fair Value Measurements

Fair Value Measurements

ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. ASC 820-10 applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements; accordingly, the standard does not require any new fair value measurements of reported balances.

ASC 820-10 emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, ASC 820-10 establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

Currently, the Company uses interest rate caps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. To comply with the provisions of ASC 820-10, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its current outstanding derivative fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivative utilizes Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2012, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative position and determined that the credit valuation adjustments are not significant to the overall valuation of its derivative. Accordingly, the derivative has been classified as Level 2 fair value measurements.

In connection with its Outperformance Award Program, as discussed in note 7, the Company issued OPP LTIP Units (as defined in note 7) which were initially fair valued on the date of grant, and at each reporting period, utilizing a Monte Carlo simulation to estimate the probability of the performance vesting conditions being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times. As the Company has the ability to settle the vested OPP LTIP Units with cash, these awards are not considered to be indexed to the Company’s stock price and must be accounted for as liabilities at fair value.

Although the Company has determined that the majority of the inputs used to value the OPP LTIP Units fall within Level 1 of the fair value hierarchy, the Monte Carlo simulation model utilizes Level 3 inputs, such as estimates of the Company’s volatility. Accordingly, the OPP LTIP Unit liability was classified as a Level 3 fair value measure.

In connection with the Light Group Transaction, the Company issued the TLG Promissory Notes, which are convertible into shares of the Company’s common stock at $9.50 per share and are subject to the achievement of certain EBITDA targets for the acquired business, discussed in note 6. The TLG Promissory Notes were initially fair valued on the date of acquisition, and will be fair valued at each reporting period, utilizing a Monte Carlo simulation to estimate the probability of the achievement of certain EBITDA targets being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times.

Although the Company has determined that the majority of the inputs used to value the TLG Promissory Notes fall within Level 1 of the fair value hierarchy, the Monte Carlo simulation model utilizes Level 3 inputs, such as estimates of the Company’s volatility. Accordingly, the TLG Promissory Notes liability was classified as a Level 3 fair value measure.

Also in connection with The Light Group Transaction, the Company provided Messrs. Sasson and Masi with the Sasson-Masi Put Options. Due to the redemption feature associated with the Sasson-Masi Put Options, the Company classified the noncontrolling interest in temporary equity in accordance with the Securities and Exchange Commission’s guidance as codified in ASC 480-10, Distinguishing Liabilities from Equity. Subsequently, the Company will accrete the redeemable noncontrolling interest to its current redemption value, which approximates fair value, each period. The Company has determined that the majority of the inputs used to value the Sasson-Masi Put Options fall within Level 2 of the fair value hierarchy. Accordingly, the derivative has been classified as Level 2 fair value measurements.

During the three months ended June 30, 2012 and June 30, 2011, the Company recognized non-cash impairment charges of $0.1 million and $0.5 million, respectively, related to the Company’s investment in Mondrian SoHo, through equity in loss of unconsolidated joint ventures. During the six months ended June 30, 2012 and June 30, 2011, the Company recognized non-cash impairment charges of $0.6 million and $2.5 million, respectively, related to the Company’s investment in Mondrian SoHo, through equity in loss of unconsolidated joint ventures. The Company’s estimated fair value relating to this impairment assessment was based primarily upon Level 3 measurements.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Disclosures about fair value of financial instruments are based on pertinent information available to management as of the valuation date. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented are not necessarily indicative of the amounts at which these instruments could be purchased, sold, or settled. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

The Company’s financial instruments include cash and cash equivalents, accounts receivable, restricted cash, accounts payable and accrued liabilities, and fixed and variable rate debt. Management believes the carrying amount of the aforementioned financial instruments, excluding fixed-rate debt, is a reasonable estimate of fair value as of June 30, 2012 and December 31, 2011 due to the short-term maturity of these items or variable market interest rates.

The fair market value of the Company’s $239.4 million of fixed rate debt, which includes the Company’s trust preferred securities, TLG Promissory Notes at fair value, and Convertible Notes at face value, as discussed in note 6, as of June 30, 2012 was approximately $230.8 million, using market rates. The fair market value of the Company’s $238.1 million of fixed rate debt, which includes the Company’s trust preferred securities, TLG Promissory Notes at fair value, and Convertible Notes at face value, as discussed in note 6, as of December 30, 2011 was $229.8 million, using market interest rates.

Stock-based Compensation

Stock-based Compensation

The Company accounts for stock based employee compensation using the fair value method of accounting described in ASC 718-10. For share grants, total compensation expense is based on the price of the Company’s stock at the grant date. For option grants, the total compensation expense is based on the estimated fair value using the Black-Scholes option-pricing model. For awards under the Company’s Outperformance Award Program, discussed in note 7, long-term incentive awards, the total compensation expense is based on the estimated fair value using the Monte Carlo pricing model. Compensation expense is recorded ratably over the vesting period. Stock compensation expense recognized for the three months ended June 30, 2012 and 2011 was $1.6 million and $2.0 million, respectively. Stock compensation expense recognized for the six months ended June 30, 2012 and 2011 was $2.6 million and $6.0 million, respectively.

Income (Loss) Per Share

Income (Loss) Per Share

Basic net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less any dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) available to common stockholders, less dividends on unvested restricted common stock, by the weighted-average number of common stock outstanding during the period, plus other potentially dilutive securities, such as unvested shares of restricted common stock and warrants.

Noncontrolling Interest

Noncontrolling Interest

The Company follows ASC 810-10, when accounting and reporting for noncontrolling interests in a consolidated subsidiary and the deconsolidation of a subsidiary. Under ASC 810-10, the Company reports noncontrolling interests in subsidiaries as a separate component of stockholders’ equity (deficit) in the consolidated financial statements and reflects net income (loss) attributable to the noncontrolling interests and net income (loss) attributable to the common stockholders on the face of the consolidated statements of comprehensive loss.

The membership units in Morgans Group, the Company’s operating company, owned by the Former Parent are presented as noncontrolling interest in Morgans Group in the consolidated balance sheets and were approximately $6.9 million and $7.8 million as of June 30, 2012 and December 31, 2011, respectively. The noncontrolling interest in Morgans Group is: (i) increased or decreased by the limited members’ pro rata share of Morgans Group’s net income or net loss, respectively; (ii) decreased by distributions; (iii) decreased by exchanges of membership units for the Company’s common stock; and (iv) adjusted to equal the net equity of Morgans Group multiplied by the limited members’ ownership percentage immediately after each issuance of units of Morgans Group and/or shares of the Company’s common stock and after each purchase of treasury stock through an adjustment to additional paid-in capital. Net income or net loss allocated to the noncontrolling interest in Morgans Group is based on the weighted-average percentage ownership throughout the period.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

Accounting Standards Update No. 2011-04—“Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”) generally provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 will be effective for interim and annual periods beginning on or after December 15, 2011. The Company adopted ASU 2011-04, which did not have a material impact on its financial statements.

Accounting Standards Update No. 2011-05—“Comprehensive Income (Topic 220): Presentation of Comprehensive Income” (“ASU 2011-05”) amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement, statement of comprehensive income or (2) in two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. ASU 2011-05 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-05 for the year ended December 31, 2011, and as such, its financial statements provide the appropriate disclosure.

Accounting Standards Update No. 2011-10—Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force) (“ASU 2011-10”) clarifies when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance for Real Estate Sale (Subtopic 360-20). The provisions of ASU 2011-10 are effective for public companies for fiscal years and interim periods within those years, beginning on or after June 15, 2012. When adopted, ASU 2011-10 is not expected to have a material impact on the Company’s consolidated financial statements.

Accounting Standards Update No. 2011-12—Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in ASU No. 2011-05 (“ASU No. 2011-12”) defers, until further notice, ASU 2011-05’s requirement that items that are reclassified from other comprehensive income to net income be presented on the face of the financial statements. The Company has adopted ASU 2011-12 and adoption of this update did not have a material impact on its financial statements.

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Related Party Transactions

6 Months Ended

Jun. 30, 2012

Related Party Transactions [Abstract]

Related Party Transactions

9. 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 $2.0 million and $3.0 million for the three months ended June 30, 2012 and 2011, respectively, and $4.1 million and $6.3 million for the six months ended June 30, 2012 and 2011, respectively.

As of June 30, 2012 and December 31, 2011, the Company had receivables from these affiliates of approximately $5.9 million and $4.1 million, respectively, which are included in related party receivables on the accompanying consolidated balance sheets.

As of June 30, 2012 and December 31, 2011, the TLG Promissory Notes due to Messrs. Sasson and Masi had aggregate fair values of approximately $16.8 million and $15.5 million, respectively, as discussed in note 6, which are included in debt and capital lease obligations on the accompanying consolidated balance sheets. For the three and six months ended June 30, 2012, the Company recorded $0.3 million and $0.7 million, respectively, of interest expense related to the TLG Promissory Notes.

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Omnibus Stock Incentive Plan

6 Months Ended

Jun. 30, 2012

Omnibus Stock Incentive Plan [Abstract]

Omnibus Stock Incentive Plan

7. Omnibus Stock Incentive Plan

RSUs, LTIP Units and Stock Options

On February 9, 2006, the Board of Directors of the Company adopted the Morgans Hotel Group Co. 2006 Omnibus Stock Incentive Plan (the “2006 Stock Incentive Plan”). An aggregate of 3,500,000 shares of common stock of the Company were reserved and authorized for issuance under the 2006 Stock Incentive Plan, subject to equitable adjustment upon the occurrence of certain corporate events. On April 23, 2007, the Board of Directors of the Company adopted, and at the annual meeting of stockholders on May 22, 2007, the stockholders approved, the Company’s 2007 Omnibus Incentive Plan (the “2007 Incentive Plan”), which amended and restated the 2006 Stock Incentive Plan and increased the number of shares reserved for issuance under the plan by up to 3,250,000 shares to a total of 6,750,000 shares. On April 10, 2008, the Board of Directors of the Company adopted, and at the annual meeting of stockholders on May 20, 2008, the stockholders approved, an Amended and Restated 2007 Omnibus Incentive Plan (the “Restated 2007 Incentive Plan”) which, among other things, increased the number of shares reserved for issuance under the plan by up to 1,860,000 shares to a total of 8,610,000 shares. On November 30, 2009, the Board of Directors of the Company adopted, and at a special meeting of stockholders of the Company held on January 28, 2010, the Company’s stockholders approved, an amendment to the Restated 2007 Incentive Plan (the “Amended 2007 Incentive Plan”) to increase the number of shares reserved for issuance under the plan by 3,000,000 shares to 11,610,000 shares. On April 5, 2012, the Board of Directors of the Company adopted, and at the annual meeting of stockholders on May 16, 2012, the stockholders approved, an amendment to the Amended 2007 Incentive Plan (the “Second Amended 2007 Incentive Plan”) to increase the number of shares reserved for issuance under the plan by 3,000,000 shares to 14,610,000 shares.

The Second Amended 2007 Incentive Plan provides for the issuance of stock-based incentive awards, including incentive stock options, non-qualified stock options, stock appreciation rights, shares of common stock of the Company, including restricted stock units (“RSUs”) and other equity-based awards, including membership units in Morgans Group which are structured as profits interests (“LTIP Units”), or any combination of the foregoing. The eligible participants in the Second Amended 2007 Incentive Plan include directors, officers and employees of the Company. Awards other than options and stock appreciation rights reduce the shares available for grant by 1.7 shares for each share subject to such an award.

On May 17, 2012, the Company issued an aggregate of 64,932 RSUs to the Company’s non-employee directors under the Second Amended 2007 Incentive Plan, which vested immediately upon grant. The fair value of each such RSU was $4.62 at the grant date.

A summary of stock-based incentive awards as of June 30, 2012 is as follows (in units, or shares, as applicable):

	Restricted Stock Units			LTIP Units			Stock Options
Outstanding as of January 1, 2012		669,879			2,340,972			2,324,740
Granted during 2012		320,138			121,402			—
Distributed/exercised during 2012		(142,039	)		(251,909	)		—
Forfeited during 2012		(41,462	)		—			—
Outstanding as of June 30, 2012		806,516			2,210,465			2,324,740
Vested as of June 30, 2012		243,061			1,954,858			1,458,074

As of June 30, 2012 and December 31, 2011, there were approximately $8.0 million and $8.8 million, respectively, of total unrecognized compensation costs related to unvested RSUs, LTIP Units and options. As of June 30, 2012, the weighted-average period over which this unrecognized compensation expense will be recorded is approximately 1 year.

Total stock compensation expense related to RSUs, LTIP Units and options, which is included in corporate expenses on the accompanying consolidated statements of comprehensive loss, was $1.6 million and $2.0 million for the three months ended June 30, 2012 and 2011, respectively and $2.6 million and $6.0 million for the six months ended June 30, 2012 and 2011, respectively.

Outperformance Award Program

In connection with the Company’s senior management changes announced in March 2011, the Compensation Committee of the Board of Directors of the Company implemented an Outperformance Award Program, which is a long-term incentive plan intended to provide the Company’s senior management with the ability to earn cash or equity awards based on the Company’s level of return to stockholders over a three-year period.

Pursuant to the Outperformance Award Program, each of the Company’s senior managers hired in 2011, Messrs. Hamamoto, Gross, Flannery and Gery, received an award, in each case reflecting the participant’s right to receive a participating percentage in an outperformance pool if the Company’s total return to stockholders (including stock price appreciation plus dividends) increases by more than 30% (representing a compounded annual growth rate of approximately 9% per annum) over a three-year period from March 20, 2011 to March 20, 2014 (or a prorated hurdle rate over a shorter period in the case of certain changes of control), of a new series of outperformance long-term incentive units (the “OPP LTIP Units”), as described below, subject to vesting and the achievement of certain performance targets.

The total return to stockholders will be calculated based on the average closing price of the Company’s common shares on the 30 trading days ending on the Final Valuation Date (as defined below). The baseline value of the Company’s common shares for purposes of determining the total return to stockholders will be $8.87, the closing price of the Company’s common shares on March 18, 2011. The participating percentages granted to Messrs. Hamamoto, Gross, Flannery and Gery are 35%, 35%, 10% and 10%, respectively. In addition, in February 2012, the Company’s Chief Financial Officer, Mr. Szymanski, and the Company’s Executive Vice President and General Counsel, Mr. Smail, were each granted participating percentages of 5%, respectively.

Each of the current participants’ OPP LTIP Units vests on March 20, 2014 (or earlier in the event of certain changes of control) (the “Final Valuation Date”), contingent upon each participant’s continued employment, except for certain accelerated vesting events described below.

The aggregate dollar amount available to all participants is equal to 10% of the amount by which the Company’s March 20, 2014 valuation exceeds 130% (subject to proration in the case of certain changes of control) of the Company’s March 20, 2011 valuation and the dollar amount payable to each participant (the “Participation Amount”) is equal to such participant’s participating percentage in the total outperformance pool. Following the Final Valuation Date, the participant will either forfeit existing OPP LTIP Units or receive additional OPP LTIP Units so that the value of the vested OPP LTIP Units of the participant are equivalent to the participant’s Participation Amount.

Participants will forfeit any unvested OPP LTIP Units upon termination of employment; provided, however, that in the event a participant’s employment terminates because of death or disability, or employment is terminated by the Company without Cause or by the participant for Good Reason, as such terms are defined in the participant’s employment agreements, the participant will not forfeit the award and will receive, following the Final Valuation Date, a Participation Amount reflecting his partial service. If the Final Valuation Date is accelerated by reason of certain change of control transactions, each participant whose award has not previously been forfeited will receive a Participation Amount upon the change of control reflecting the amount of time since the effective date of the program, which was March 20, 2011.

OPP LTIP Units represent a special class of membership interest in the operating company, Morgans Group, which are structured as profits interests for federal income tax purposes. Conditioned upon minimum allocations to the capital accounts of the OPP LTIP Units for federal income tax purposes, each vested OPP LTIP Unit may be converted, at the election of the holder, into one Class A Unit in Morgans Group upon the receipt of stockholder approval for the shares of common stock underlying the OPP LTIP Units.

During the six-month period following the Final Valuation Date, Morgans Group may redeem some or all of the vested OPP LTIP Units (or Class A Units into which they may be converted) at a price equal to the common share price (based on a 30-day average) on the Final Valuation Date. From and after the one-year anniversary of the Final Valuation Date, for a period of six months, participants will have the right to cause Morgans Group to redeem some or all of the vested OPP LTIP Units at a price equal to the greater of the common share price at the Final Valuation Date (determined as described above) or the then current common share price (calculated as determined in Morgans Group’s limited liability company agreement). Beginning 18 months after the Final Valuation Date, each of these OPP LTIP Units (or Class A Units into which they may be converted) is redeemable at the election of the holder for: (1) cash equal to the then fair market value of one share of the Company’s common stock, or (2) at the option of the Company, one share of common stock, in the event the Company then has shares available for that purpose under its stockholder-approved equity incentive plans. Participants are entitled to receive distributions on their vested OPP LTIP Units if any distributions are paid on the Company’s common stock following the Final Valuation Date.

The OPP LTIP Units were valued at approximately $7.3 million on the date of grant utilizing a Monte Carlo simulation to estimate the probability of the performance vesting conditions being satisfied. The Monte Carlo simulation used a statistical formula underlying the Black-Scholes and binomial formulas and such simulation was run approximately 100,000 times. For each simulation, the payoff is calculated at the settlement date, which is then discounted to the award date at a risk-free interest rate. The average of the values over all simulations is the expected value of the unit on the award date. Assumptions used in the valuations included factors associated with the underlying performance of the Company’s stock price and total stockholder return over the term of the performance awards including total stock return volatility and risk-free interest. The fair value of the OPP LTIP Units were estimated on the date of grant using the following assumptions in the Monte-Carlo simulation: expected price volatility for the Company’s stock of 50%; a risk free rate of 1.46%; and no dividend payments over the measurement period.

As the Company has the ability to settle the vested OPP LTIP Units with cash, these OPP LTIP Units are not considered to be indexed to the Company’s stock price and must be accounted for as liabilities at fair value. As of June 30, 2012, the fair value of the OPP LTIP Units were approximately $0.7 million and compensation expense relating to these OPP LTIP Units is being recorded over the vesting period. The fair value of the OPP LTIP Units were estimated on June 30, 2012 using the following assumptions in the Monte-Carlo valuation: expected price volatility for the Company’s stock of 50%; a risk free rate of 0.49%; and no dividend payments over the measurement period.

Total stock compensation expense related to the OPP LTIP Units, which is included in corporate expenses on the accompanying consolidated statements of comprehensive loss, was immaterial for the three and six months ended June 30, 2012.

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Preferred Securities and Warrants

6 Months Ended

Jun. 30, 2012

Preferred Securities and Warrants [Abstract]

Preferred Securities and Warrants

8. Preferred Securities and Warrants

On October 15, 2009, the Company entered into a Securities Purchase Agreement with the Investors. Under the agreement, the Company issued and sold to the Investors (i) $75.0 million of preferred stock comprised of 75,000 shares of the Company’s Series A Preferred Securities, $1,000 liquidation preference per share (the “Series A Preferred Securities”), and (ii) warrants to purchase 12,500,000 shares of the Company’s common stock at an exercise price of $6.00 per share (the “Yucaipa Warrants”).

The Series A Preferred Securities have an 8% dividend rate through October 15, 2014, a 10% dividend rate from October 15, 2014 to October 15, 2016, and a 20% dividend rate thereafter. The Company has the option to accrue any and all dividend payments. The cumulative unpaid dividends have a dividend rate equal to the dividend rate on the Series A Preferred Securities. As of June 30, 2012, the Company had undeclared and unpaid dividends of $18.3 million.

The Company has the option to redeem any or all of the Series A Preferred Securities at par at any time. The Series A Preferred Securities have limited voting rights and only vote on the authorization to issue senior preferred securities, amendments to their certificate of designations, amendments to the Company’s charter that adversely affect the Series A Preferred Securities and certain change in control transactions.

As discussed in note 2, the Yucaipa Warrants to purchase 12,500,000 shares of the Company’s common stock at an exercise price of $6.00 per share have a 7-1/2 year term and are exercisable utilizing a cashless exercise method only, resulting in a net share issuance. Until October 15, 2010, the Investors had certain rights to purchase their pro rata share of any equity or debt securities offered or sold by the Company. In addition, the $6.00 exercise price of the Yucaipa Warrants was subject to certain reductions if, any time prior to October 15, 2010, the Company issued shares of common stock below $6.00 per share. Per ASC 815-40-15, as the strike price was adjustable until the first anniversary of issuance, the Yucaipa Warrants were not considered indexed to the Company’s stock until that date. Therefore, through October 15, 2010, the Company accounted for the Yucaipa Warrants as liabilities at fair value. On October 15, 2010, the Investors’ rights under the Yucaipa Warrants’ exercise price adjustment expired, at which time the Yucaipa Warrants met the scope exception in ASC 815-10-15 and are accounted for as equity instruments indexed to the Company’s stock. At October 15, 2010, the Yucaipa Warrants were reclassified to equity and will no longer be adjusted periodically to fair value. The Investors’ right to exercise the Yucaipa Warrants to purchase 12,500,000 shares of the Company’s common stock expires in April 2017.

The exercise price and number of shares subject to the Yucaipa Warrants are both subject to anti-dilution adjustments.

The Investors have consent rights over certain transactions for so long as they collectively own or have the right to purchase through exercise of the Yucaipa Warrants 6,250,000 shares of the Company’s common stock, including (subject to certain exceptions and limitations):

• the sale of substantially all of the Company’s assets to a third party;

• the acquisition by the Company of a third party where the equity investment by the Company is $100 million or greater;

• the acquisition of the Company by a third party; or

• any change in the size of the Company’s Board of Directors to a number below 7 or above 9.

Subject to certain exceptions, the Investors may not transfer any Series A Preferred Securities, Yucaipa Warrants or common stock until October 15, 2012. The Investors are also subject to certain standstill arrangements as long as they beneficially own over 15% of the Company’s common stock.

In connection with the investment by the Investors, the Company paid to the Investors a commitment fee of $2.4 million and reimbursed the Investors for $600,000 of expenses.

The Company calculated the fair value of the Series A Preferred Securities at its net present value by discounting dividend payments expected to be paid on the shares over a 7-year period using a 17.3% rate. The Company determined that the market discount rate of 17.3% was reasonable based on the Company’s best estimate of what similar securities would most likely yield when issued by entities comparable to the Company.

The initial carrying value of the Series A Preferred Securities was recorded at its net present value less costs to issue on the date of issuance. The carrying value will be periodically adjusted for accretion of the discount. As of June 30, 2012, the value of the Series A Preferred Securities was $55.9 million, which includes cumulative accretion of $7.8 million.

The Company calculated the estimated fair value of the Yucaipa Warrants using the Black-Scholes valuation model, as discussed in note 2.

The Company and Yucaipa American Alliance Fund II, LLC, an affiliate of the Investors, as the fund manager, also entered into a Real Estate Fund Formation Agreement (the “Fund Formation Agreement”) on October 15, 2009 pursuant to which the Company and the fund manager agreed to use their good faith efforts to endeavor to raise a private equity investment fund. The initial purpose of the private equity investment fund was to invest in hotel real estate projects located in North America. The Company was to be offered the opportunity to manage the hotels owned by the Fund under long-term management agreements. In connection with the Fund Formation Agreement, the Company issued to the fund manager 5,000,000 contingent warrants to purchase the Company’s common stock at an exercise price of $6.00 per share with a 7-1/2 year term.

The Fund Formation Agreement terminated by its terms on January 30, 2011 due to the failure to close a fund with $100 million of aggregate capital commitments by that date, and the 5,000,000 contingent warrants issued to the fund manager were forfeited in their entirety on October 15, 2011 due to the failure to close a fund with $250 million of aggregate capital commitments by that date.

For so long as the Investors collectively own or have the right to purchase through exercise of the Yucaipa Warrants (assuming a cash rather than a cashless exercise) 875,000 shares of the Company’s common stock, the Company has agreed to use its reasonable best efforts to cause its Board of Directors to nominate and recommend to the Company’s stockholders the election of a person nominated by the Investors as a director of the Company and to use its reasonable best efforts to ensure that the Investors’ nominee is elected to the Company’s Board of Directors at each such meeting. If that nominee is not elected by the Company’s stockholders, the Investors have certain observer rights and, in certain circumstances, the dividend rate on the Series A Preferred Securities increases by 4% during any time that an Investors’ nominee is not a member of the Company’s Board of Directors. Effective October 15, 2009, the Investors nominated and the Company’s Board of Directors elected Michael Gross as a member of the Company’s Board of Directors. Effective March 20, 2011 when Mr. Gross was appointed Chief Executive Officer of the Company, the Investors’ nominated, and the Company’s Board of Directors elected, Ron Burkle as a member of the Company’s Board of Directors.

On April 21, 2010, the Company entered into a Waiver Agreement with the Investors, pursuant to which the Investors were permitted to purchase up to $88 million in aggregate principal amount of the Convertible Notes within six months of April 21, 2010 and subject to the limitations and conditions set forth therein. From April 21, 2010 to July 21, 2010, the Investors purchased $88 million of the Convertible Notes. In the event an Investor proposes to sell the Convertible Notes at a time when the market price of a share of the Company’s common stock exceeds the then effective conversion price of the Convertible Notes, the Company is granted certain rights of first refusal for the purchase of the same from the Investors. In the event an Investor proposes to sell the Convertible Notes at a time when the market price of a share of the Company’s common stock is equal to or less than the then effective conversion price of the Convertible Notes, the Company is granted certain rights of first offer to purchase the same from the Investors.

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Discontinued Operations

6 Months Ended

Jun. 30, 2012

Discontinued Operations [Abstract]

Discontinued Operations

10. Discontinued Operations

In January 2011, an indirect subsidiary of the Company transferred its interests in the property across the street from Delano South Beach to SU Gale Properties, LLC. As a result of this transaction, the Company was released from $10.5 million of nonrecourse mortgage and mezzanine indebtedness previously consolidated on the Company’s balance sheet. The property across the street from Delano South Beach was a development property.

The following sets forth the discontinued operations of the property across the street from Delano South Beach for the three and six months ended June 30, 2011 (in thousands):

	Three Months Ended June 30, 2011			Six Months Ended June 30, 2011
Operating expenses	$	(8	)	$	(35	)
Income tax benefit (expense)		3			(323	)
Gain on disposal		—			843
(Loss) income from discontinued operations	$	(5	)	$	485

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Summary of Significant Accounting Policies (Details Textual) (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012 Simulation	Jun. 30, 2011	Dec. 31, 2011
Summary of Significant Accounting Policies (Textual) [Abstract]
Simulation to estimate the probability of the performance vesting conditions			100,000
Conversion value of TLG promissory notes			$ 9.50
Fixed rate debt	$ 239,400,000		$ 239,400,000		$ 238,100,000
Fair market value of fixed rate debt	230,800,000		230,800,000		229,800,000
Compensation expense recognized	1,600,000	2,000,000	2,600,000	6,000,000
Membership units in noncontrolling interest	6,945,000		6,945,000		7,824,000
Mondrian SOHO [Member]
Details of Significant Accounting Policies [Line Items]
Non-cash impairment charges recognized	$ 100,000	$ 500,000	$ 600,000	$ 2,500,000
Yucaipa Warrants [Member]
Details of Significant Accounting Policies [Line Items]
Right to purchase common stock through the exercise of warrants	6,250,000		6,250,000

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Commitments (Details)	6 Months Ended
	Jun. 30, 2012 Room
Mondrian Istanbul [Member]
Hotels Currently Under Construction
Expected Room Count	128
Anticipated Opening	2014
Term of Initial Management Contract	20 years
Other Signed Agreements
Expected Room Count	128
Anticipated Opening	2014
Term of Initial Management Contract	20 years
Delano Marrakech [Member]
Hotels Currently Under Construction
Expected Room Count	73
Anticipated Opening	Sept. 2012
Term of Initial Management Contract	15 years
Other Signed Agreements
Expected Room Count	73
Anticipated Opening	Sept. 2012
Term of Initial Management Contract	15 years
Mondrian Marrakech [Member]
Hotels Currently Under Construction
Expected Room Count	69
Anticipated Opening	Late 2013
Term of Initial Management Contract	15 years
Other Signed Agreements
Expected Room Count	69
Anticipated Opening	Late 2013
Term of Initial Management Contract	15 years
Mondrian Doha [Member]
Hotels Currently Under Construction
Expected Room Count	270
Anticipated Opening	2013
Term of Initial Management Contract	30 years
Other Signed Agreements
Expected Room Count	270
Anticipated Opening	2013
Term of Initial Management Contract	30 years
Mondrian London [Member]
Hotels Currently Under Construction
Expected Room Count	360
Anticipated Opening	Early 2014
Term of Initial Management Contract	25 years
Other Signed Agreements
Expected Room Count	360
Anticipated Opening	Early 2014
Term of Initial Management Contract	25 years
Mondrian at Baha Mar Bahamas [Member]
Hotels Currently Under Construction
Expected Room Count	310
Anticipated Opening	2014
Term of Initial Management Contract	20 years
Other Signed Agreements
Expected Room Count	310
Anticipated Opening	2014
Term of Initial Management Contract	20 years
Delano Aegean Sea [Member]
Hotels Currently Under Construction
Expected Room Count	200
Anticipated Opening	2014
Term of Initial Management Contract	20 years
Other Signed Agreements
Expected Room Count	200
Anticipated Opening	2014
Term of Initial Management Contract	20 years
Hudson London [Member]
Hotels Currently Under Construction
Expected Room Count	234
Anticipated Opening	2015
Term of Initial Management Contract	20 years
Other Signed Agreements
Expected Room Count	234
Anticipated Opening	2015
Term of Initial Management Contract	20 years
Highline New York Project [Member]
Hotels Currently Under Construction
Expected Room Count	175
Anticipated Opening	To be determined
Term of Initial Management Contract	15 years
Other Signed Agreements
Expected Room Count	175
Anticipated Opening	To be determined
Term of Initial Management Contract	15 years

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Income (Loss) Per Share (Tables)

6 Months Ended

Jun. 30, 2012

Income (Loss) Per Share [Abstract]

Components of the basic and diluted loss per share calculations

	Three Months Ended June 30, 2012			Three Months Ended June 30, 2011
Numerator:
Net loss from continuing operations	$	(13,517	)	$	(11,802	)
Net loss from discontinued operations, net of tax		—			(5	)
Net loss		(13,517	)		(11,807	)
Net loss attributable to noncontrolling interest		124			383
Net loss attributable to Morgans Hotel Group Co.		(13,393	)		(11.424	)
Less: preferred stock dividends and accretion		2,718			2,229
Net loss attributable to common stockholders	$	(16,111	)	$	(13,653	)
Denominator, continuing and discontinued operations:
Weighted average basic common shares outstanding		31,261			30,498
Effect of dilutive securities		—			—
Weighted average diluted common shares outstanding		31,261			30,498
Basic and diluted loss from continuing operations per share	$	(0.52	)	$	(0.45	)
Basic and diluted income from discontinued operations per share	$	—		$	0.00
Basic and diluted loss available to common stockholders per common share	$	(0.52	)	$	(0.45	)

	Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
Numerator:
Net loss from continuing operations	$	(28,011	)	$	(45,160	)
Net income from discontinued operations, net of tax		—			485
Net loss		(28,011	)		(44,675	)
Net loss attributable to noncontrolling interest		337			1,208
Net loss attributable to Morgans Hotel Group Co.		(27,674	)		(43,467	)
Less: preferred stock dividends and accretion		5,368			4,416
Net loss attributable to common stockholders	$	(33,042	)	$	(47,883	)
Denominator, continuing and discontinued operations:
Weighted average basic common shares outstanding		31,185			31,255
Effect of dilutive securities		—			—
Weighted average diluted common shares outstanding		31,185			31,255
Basic and diluted loss from continuing operations per share	$	(1.06	)	$	(1.55	)
Basic and diluted income from discontinued operations per share	$	—		$	0.02
Basic and diluted loss available to common stockholders per common share	$	(1.06	)	$	(1.53	)

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Discontinued Operations (Tables)

6 Months Ended

Jun. 30, 2012

Discontinued Operations [Abstract]

Discontinued operations of the property across the street from Delano South Beach

	Three Months Ended June 30, 2011			Six Months Ended June 30, 2011
Operating expenses	$	(8	)	$	(35	)
Income tax benefit (expense)		3			(323	)
Gain on disposal		—			843
(Loss) income from discontinued operations	$	(5	)	$	485

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Discontinued Operations (Details Textual) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Jun. 30, 2012
Discontinued Operations (Textual) [Abstract]
Nonrecourse mortgage and mezzanine indebtedness	$ 10.5

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Other Liabilities (Details Textual) (USD $)	6 Months Ended
	Jun. 30, 2012	Dec. 31, 2011
Other Liabilities (Textual) [Abstract]
Estimated fair value of the OPP LTIP Units Liability	$ 287,000	$ 528,000
Other liabilities related to designer fee payable	$ 13,900,000	$ 13,900,000
Base fee due designer	1.00%
Base fees payable for period from hotel opening	10 years
Amortization Expense Over Estimated Life	5 years
Interest expense	9.00%

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Consolidated Statements of Comprehensive Loss (Unaudited) (Parenthetical) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Consolidated Statements of Comprehensive Loss [Abstract]
Stock compensation expenses	$ 1.6	$ 2.0	$ 2.6	$ 6.0

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Investments in and Advances to Unconsolidated Joint Ventures

6 Months Ended

Jun. 30, 2012

Investments in and Advances to Unconsolidated Joint Ventures [Abstract]

Investments in and Advances to Unconsolidated Joint Ventures

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 (in thousands):

Investments

Entity	As of June 30, 2012		As of December 31, 2011
Mondrian South Beach	$	1,350	$	4,015
Mondrian Istanbul		10,392		4,564
Mondrian South Beach food and beverage—MC South Beach (1)		1,109		1,465
Other		158		157
Total investments in and advances to unconsolidated joint ventures	$	13,009	$	10,201

(1) Following the CGM Transaction, the Company’s ownership interest in this food and beverage joint venture is less than 100%, and based on the Company’s evaluation, this venture does not meet the requirements of a variable interest entity. Accordingly, this joint venture is accounted for using the equity method as the Company does not maintain control over this entity.

Equity in income (loss) from unconsolidated joint ventures

	Three Months Ended June 30, 2012			Three Months Ended June 30, 2011			Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
Morgans Hotel Group Europe Ltd.	$	—		$	885		$	—		$	892
Restaurant Venture — SC London (1)		—			(290	)		—			(510	)
Mondrian South Beach		(2,400	)		(978	)		(2,665	)		(1,478	)
Mondrian South Beach food and beverage—MC South Beach (2)		(208	)		—			(356	)		—
Mondrian SoHo		(100	)		(529	)		(597	)		(2,461	)
Hard Rock Hotel & Casino (3)		—			—			—			(6,376	)
Ames		—			(1	)		—			(465	)
Other		2			3			2			5
Total	$	(2,706	)	$	(910	)	$	(3,616	)	$	(10,393	)

(1) Until June 20, 2011, the Company had a 50% ownership interest in the SC London restaurant venture. As a result of the CGM Transaction, the Company now owns 100% of the SC London restaurant venture, which is consolidated into the Company’s financial statements effective June 20, 2011, the date the CGM Transaction closed.

(2) Following the CGM Transaction, the Company’s ownership interest in this food and beverage joint venture is less than 100%, and based on the Company’s evaluation, this venture does not meet the requirements of a variable interest entity. Accordingly, this joint venture is accounted for using the equity method as the Company does not maintain control over this entity.

(3) Until March 1, 2011, the Company had a partial ownership interest in the Hard Rock and managed the property pursuant to a management agreement that was terminated in connection with the Hard Rock settlement (discussed below). Operating results are for the period we operated Hard Rock in 2011.

Morgans Hotel Group Europe Limited

On November 23, 2011, the Company’s subsidiary, Royalton Europe Holdings LLC (“Royalton Europe”), and Walton MG London Hotels Investors V, L.L.C. (“Walton MG London”), each of which owned a 50% equity interest in Morgans Hotel Group Europe Limited (“Morgans Europe”), the joint venture that owned the 150 room Sanderson and 204 room St Martins Lane hotels, completed the sale of their respective equity interests in the joint venture for an aggregate of £192 million (or approximately $297 million) to Capital Hills Hotels Limited, a Middle Eastern investor with other global hotel holdings, pursuant to a purchase and sale agreement entered into on October 7, 2011. Also parties to the sale were Morgans Group LLC, as guarantor for Royalton Europe, and Walton Street Real Estate Fund V, L.P., as guarantor for Walton MG London. The Company received net proceeds of approximately $72.3 million, after applying a portion of the proceeds from the sale to retire the £99.5 million of outstanding mortgage debt secured by the hotels and payment of closing costs. The Company continues to operate the hotels under long-term management agreements that, including extension options, extend the term of the prior management agreements to 2041 from 2027.

Under a management agreement with Morgans Europe, prior to the sale, and with the new hotels’ owners, subsequent to the sale, the Company earns management fees and a reimbursement for allocable chain service and technical service expenses. The Company is also entitled to an incentive management fee and a capital incentive fee. The Company did not earn any incentive fees during the three and six months ended June 30, 2012 and 2011.

Prior to the Company selling its joint venture ownership interest, net income or loss and cash distributions or contributions were allocated to the partners in accordance with ownership interests. The Company accounted for this investment under the equity method of accounting.

Restaurant Venture — SC London

Until June 20, 2011, the Company had a 50% ownership interest in the SC London restaurant venture, which operated the restaurants located in Sanderson and St Martins Lane hotels in London. As a result of the CGM Transaction, the Company now owns 100% of the SC London restaurant venture, which is consolidated into the Company’s financial statements effective June 20, 2011, the date the CGM Transaction closed.

Mondrian South Beach

On August 8, 2006, the Company entered into a 50/50 joint venture to renovate and convert an apartment building on Biscayne Bay in Miami Beach into a condominium hotel, Mondrian South Beach, which opened in December 2008. The Company operates Mondrian South Beach under a long-term management contract.

The Mondrian South Beach joint venture acquired the existing building and land for a gross purchase price of $110.0 million. An initial equity investment of $15.0 million from each of the 50/50 joint venture partners was funded at closing, and subsequently each member also contributed $8.0 million of additional equity. The Company and an affiliate of its joint venture partner provided additional mezzanine financing of approximately $22.5 million in total to the joint venture through a new 50/50 mezzanine financing joint venture to fund completion of the construction in 2008. Additionally, the Mondrian South Beach joint venture initially received nonrecourse mortgage loan financing of approximately $124.0 million at a rate of LIBOR plus 3.0%. A portion of this mortgage debt was paid down, prior to the amendments discussed below, with proceeds obtained from condominium sales. In April 2008, the Mondrian South Beach joint venture obtained a mezzanine loan from the mortgage lenders of $28.0 million bearing interest at LIBOR, based on the rate set date, plus 6.0%. The $28.0 million mezzanine loan provided by the lender and the $22.5 million mezzanine loan provided by the mezzanine financing joint venture were both amended when the loan matured in April 2010, as discussed below.

In April 2010, the Mondrian South Beach joint venture amended the nonrecourse financing secured by the property and extended the maturity date for up to seven years through extension options until April 2017, subject to certain conditions. Among other things, the amendment allowed the joint venture to accrue all interest through April 2012, allows the joint venture to accrue a portion of the interest thereafter and provides the joint venture the ability to provide seller financing to qualified condominium buyers with up to 80% of the condominium purchase price. The Company and an affiliate of its joint venture partner provided an additional $2.75 million to the joint venture through the mezzanine financing joint venture resulting in total mezzanine financing provided by the mezzanine financing joint venture of $28.0 million. The amendment also provides that this $28.0 million mezzanine financing invested in the property be elevated in the capital structure to become, in effect, on par with the lender’s mezzanine debt so that the mezzanine financing joint venture receives at least 50% of all returns in excess of the first mortgage.

The joint venture is in the process of selling units as condominiums, subject to market conditions, and unit buyers will have the opportunity to place their units into the hotel’s rental program. As of June 30, 2012, 196 hotel residences have been sold, of which 89 are in the hotel rental pool. In addition to hotel management fees, the Company could also realize fees from the sale of condominium units.

The Mondrian South Beach joint venture was determined to be a variable interest entity as during the process of refinancing the venture’s mortgage in April 2010, its equity investment at risk was considered insufficient to permit the entity to finance its own activities. Management determined that the Company is not the primary beneficiary of this variable interest entity as the Company does not have a controlling financial interest in the entity. For financial reporting purposes, the Company believes its maximum exposure to losses as a result of its involvement in the Mondrian South Beach variable interest entity is limited to its current investment, outstanding management fees receivable and advances in the form of mezzanine financing or otherwise, excluding guarantees and other contractual commitments. The Company is not committed to providing financial support to this variable interest entity, other than as contractually required, and all future funding is expected to be provided by the joint venture partners in accordance with their respective percentage interests in the form of capital contributions or loans, or by third parties.

Morgans Group and affiliates of its joint venture partner have provided certain guarantees and indemnifications to the Mondrian South Beach lenders. See note 12.

Mondrian SoHo

In June 2007, the Company entered into a joint venture with Cape Advisors Inc. to acquire and develop a Mondrian hotel in the SoHo neighborhood of New York City. The Company initially contributed $5.0 million for a 20% equity interest in the joint venture. The joint venture obtained a loan of $195.2 million to acquire and develop the hotel, which matured in June 2010.

On July 31, 2010, the mortgage loan secured by the hotel was amended, among other things, to provide for extensions of the maturity date to November 2011 with extension options through 2015, subject to certain conditions including a minimum debt service coverage test calculated, as set forth in the loan agreement, based on ratios of net operating income to debt service for the three months ended September 30, 2011 of 1:1 or greater.

Subsequent to the initial fundings, in 2008 and 2009, the lender and Cape Advisors Inc. made cash and other contributions to the joint venture, and the Company provided $3.2 million of additional funds which were treated as loans with priority over the equity, to complete the project. During 2010 and 2011, the Company subsequently funded an aggregate of $5.5 million, all of which were treated as loans. Additionally, as a result of cash shortfalls at Mondrian SoHo, the Company funded an additional $1.0 million in 2012, which has been treated in part as additional capital contributions and in part as loans from the management company subsidiary.

The Mondrian SoHo opened in February 2011 and has 263 guest rooms, a restaurant, bar and other facilities. The Company has a 10-year management contract with two 10-year extension options to operate the hotel.

Based on the decline in market conditions following the inception of the joint venture and, more recently, the need for additional funding to complete the hotel, the Company wrote down its investment in Mondrian SoHo to zero in June 2010 and recorded an impairment charge of $10.7 million through equity in loss of unconsolidated joint ventures for the year ended December 31, 2010. The Company has recorded all additional fundings as impairment charges through equity in loss of unconsolidated joint ventures during the periods the funds were contributed. As of June 30, 2012 the Company’s financial statements reflect no value for its investment in the Mondrian SoHo joint venture.

The hotel achieved the required 1:1 coverage ratio in September 2011 and the debt was extended until November 2012. The joint venture has additional extension options available in 2012 subject to similar conditions including a minimum debt service coverage test calculated, as set forth in the loan agreement, based on ratios of net operating income to debt service for the twelve months ended September 30, 2012 of 1.1:1.0 or greater. The joint venture may not be able to achieve this debt service coverage test or refinance the outstanding debt upon maturity. Additionally, there may be cash shortfalls from the operations of the hotel from time to time and there may not be enough operating cash flow to cover debt service payments in all months going forward, which could require additional fundings by the Company and its joint venture partner. The joint venture is discussing various options with the lenders, although there can be no assurance the joint venture will be able to extend the maturity date of the debt or refinance it on a timely basis or at all. The Company does not intend to commit significant additional monies toward the repayment of the loan or the funding of operating deficits.

In December 2011, the Mondrian SoHo joint venture was determined to be a variable interest entity as a result of the upcoming debt maturity and recent cash shortfalls, and because its equity was considered insufficient to permit the entity to finance its own activities. However, the Company determined that it was not the primary beneficiary and, therefore, consolidation of this joint venture is not required. The Company continues to account for its investment in Mondrian SoHo using the equity method of accounting. Because the Company has written its investment value in the joint venture to zero, for financial reporting purposes, the Company believes its maximum exposure to losses as a result of its involvement in the Mondrian SoHo variable interest entity is limited to its outstanding management fees receivable and advances in the form of priority loans, excluding guarantees and other contractual commitments.

Certain affiliates of the Company’s joint venture partner have provided certain guarantees and indemnifications to the Mondrian SoHo lenders for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates. See note 12.

Ames

On June 17, 2008, the Company, Normandy Real Estate Partners, and Ames Hotel Partners entered into a joint venture agreement as part of the development of the Ames hotel in Boston. Ames opened on November 19, 2009 and has 114 guest rooms, a restaurant, bar and other facilities. The Company manages Ames under a 15-year management contract.

The Company has contributed approximately $11.9 million in equity through June 30, 2012 for an approximately 31% interest in the joint venture. The joint venture obtained a loan for $46.5 million secured by the hotel, which was outstanding as of June 30, 2012. The project also qualified for federal and state historic rehabilitation tax credits which were sold for approximately $16.9 million.

In September 2011, the joint venture partners funded their pro rata shares of the debt service reserve account, of which the Company’s contribution was $0.3 million, and exercised the one remaining extension option available on the mortgage debt. As a result, the mortgage debt secured by Ames will mature on October 9, 2012. Unless the joint venture can refinance the debt or obtain an extension of the maturity date, the joint venture may not be able to repay the mortgage at maturity. The joint venture is discussing various options with the lenders, although there can be no assurance the joint venture will be able to extend the maturity date of the debt on a timely basis or at all. Additionally, there may be cash shortfalls from the operations of the hotel from time to time and there may not be enough operating cash flow to cover debt service payments in all months going forward, which could require additional fundings by the Company and its joint venture partner. The Company does not intend to commit significant monies toward the repayment of the joint venture loan or the funding of operating deficits.

Based on prevailing economic conditions and the upcoming mortgage debt maturity, the joint venture concluded that the hotel was impaired in September 2011. As a result, the Company wrote down its investment in Ames to zero and recorded its share of the impairment charge of $10.6 million through equity in loss of unconsolidated joint ventures for the year ended December 31, 2011. As of June 30, 2012, the Company’s financial statements reflect no value for its investment in the Ames joint venture.

In December 2011, the Ames joint venture was determined to be a variable interest entity as a result of the upcoming debt maturity, and because its equity was considered insufficient to permit the entity to finance its own activities. However, the Company determined that it was not the primary beneficiary and, therefore, consolidation of this joint venture is not required. Because the Company has written its investment value in the joint venture to zero, for financial reporting purposes, the Company believes its maximum exposure to losses as a result of its involvement in the Ames variable interest entity is limited to its outstanding management fees receivable, excluding guarantees and other contractual commitments.

Certain affiliates of the Company’s joint venture partner have provided certain guarantees and indemnifications to the Ames lenders for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates. Additionally, the Company is jointly and severally liable for certain federal and state tax credit recapture liabilities. See note 12.

Shore Club

The Company operates Shore Club under a management contract and owned a minority ownership interest of approximately 7% at June 30, 2012. On September 15, 2009, the joint venture that owns Shore Club received a notice of default on behalf of the special servicer for the lender on the joint venture’s mortgage loan for failure to make its September monthly payment and for failure to maintain its debt service coverage ratio, as required by the loan documents. On October 7, 2009, the joint venture received a second letter on behalf of the special servicer for the lender accelerating the payment of all outstanding principal, accrued interest, and all other amounts due on the mortgage loan. The lender also demanded that the joint venture transfer all rents and revenues directly to the lender to satisfy the joint venture’s debt. In March 2010, the lender for the Shore Club mortgage initiated foreclosure proceedings against the property in U.S. federal district court. In October 2010, the federal court dismissed the case for lack of jurisdiction. In November 2010, the lender initiated foreclosure proceedings in state court and a bench trial took place in June 2012 during which the trial court granted a default ruling of foreclosure. Entry of a foreclosure judgment has been delayed pending, among other things, relinquishment of jurisdiction from the Florida appeals court to the trial court. The Company has operated and expects to continue to operate the hotel pursuant to the management agreement during the pendency of these proceedings, which may continue for some additional period of time in the event of post-judgment proceedings, which may include an appeal. However, there can be no assurances as to when a foreclosure sale may take place, or whether the Company will continue to operate the hotel once foreclosure proceedings are complete.

Food and Beverage Ventures at Mondrian South Beach and Mondrian Los Angeles

On June 20, 2011, the Company completed the CGM Transaction, pursuant to which subsidiaries of the Company acquired from affiliates of CGM the 50% interests CGM owned in the Company’s food and beverage joint ventures for approximately $20.0 million. CGM has agreed to continue to manage the food and beverage operations at these properties for a transitional period pursuant to short-term cancellable management agreements while the Company reassess its food and beverage strategy.

The Company’s ownership interest in the food and beverage venture at Mondrian South Beach is less than 100%, and was reevaluated in accordance with ASC 810-10. The Company concluded that this venture did not meet the requirements of a variable interest entity and accordingly, this investment in the joint venture is accounted for using the equity method, as the Company does not believe it exercises control over significant asset decisions such as buying, selling or financing.

At the closing of the CGM Transaction, the Company’s ownership interest in the food and beverage venture at Mondrian Los Angeles was also less than 100%, and was reevaluated at the time in accordance with ASC 810-10. The Company initially concluded that this venture did not meet the requirements of a variable interest entity and accordingly, this investment in the joint venture was accounted for using the equity method. Subsequently, on August 5, 2011, an affiliate of Pebblebrook, the company that purchased Mondrian Los Angeles in May 2011, exercised its option to purchase the Company’s remaining ownership interest in the food and beverage operations at Mondrian Los Angeles for approximately $2.5 million. As a result of Pebblebrook’s exercise of this purchase option, the Company no longer has any ownership interest in the food and beverage operations at Mondrian Los Angeles.

Mondrian Istanbul

In December 2011, the Company announced a new hotel management agreement for an approximately 128 room Mondrian-branded hotel to be located in the Old City area of Istanbul, Turkey. The hotel is scheduled to open in 2014. In December 2011 and January 2012, the Company contributed an aggregate of $10.3 million, $5.1 of which was funded in January 2012, in the form of equity and key money and will have a 20% ownership interest in the venture owning the hotel. The Company has no additional funding commitments in connection with this project.

Hard Rock Hotel & Casino

Formation and Hard Rock Credit Facility

On February 2, 2007, the Company and Morgans Group (together, the “Morgans Parties”), an affiliate of DLJ Merchant Banking Partners (“DLJMB”), and certain other DLJMB affiliates (such affiliates, together with DLJMB, collectively the “DLJMB Parties”) completed the acquisition of the Hard Rock Hotel & Casino (“Hard Rock”). The acquisition was completed through a joint venture entity, Hard Rock Hotel Holdings, LLC, funded one-third, or approximately $57.5 million, by the Morgans Parties, and two-thirds, or approximately $115.0 million, by the DLJMB Parties. In connection with the joint venture’s acquisition of the Hard Rock, certain subsidiaries of the joint venture entered into a debt financing comprised of a senior mortgage loan and three mezzanine loans, which provided for a $760.0 million acquisition loan that was used to fund the acquisition, of which $110.0 million was subsequently repaid according to the terms of the loan, and a construction loan of up to $620.0 million, which was fully drawn for the expansion project at the Hard Rock. Morgans Group provided a standard nonrecourse, carve-out guaranty for each of the mortgage and mezzanine loans.

Following the formation of Hard Rock Hotel Holdings, LLC, additional cash contributions were made by both the DLJMB Parties and the Morgans Parties, including disproportionate cash contributions by the DLJMB Parties. Prior to the Hard Rock settlement, discussed below, the DLJMB Parties had contributed an aggregate of $424.8 million in cash and the Morgans Parties had contributed an aggregate of $75.8 million in cash. In 2009, the Company wrote down the Company’s investment in Hard Rock to zero.

For purposes of accounting for the Company’s equity ownership interest in Hard Rock, management calculated a 12.8% ownership interest for the years ended December 31, 2011 and 2010, based on a weighting of 1.75x to the DLJMB Parties’ cash contributions in excess of $250.0 million.

Hard Rock Settlement Agreement

On January 28, 2011, subsidiaries of Hard Rock Hotel Holdings, LLC, a joint venture through which the Company held a minority interest in the Hard Rock, received a notice of acceleration from NRFC HRH Holdings, LLC (the “Second Mezzanine Lender”) pursuant to the First Amended and Restated Second Mezzanine Loan Agreement, dated as of December 24, 2009 (the “Second Mezzanine Loan Agreement”), between such subsidiaries and the Second Mezzanine Lender, declaring all unpaid principal and accrued interest under the Second Mezzanine Loan Agreement immediately due and payable. The amount due and payable under the Second Mezzanine Loan Agreement as of January 20, 2011 was approximately $96 million. The Second Mezzanine Lender also notified such subsidiaries that it intended to auction to the public the collateral pledged in connection with the Second Mezzanine Loan Agreement, including all membership interests in certain subsidiaries of the Hard Rock joint venture that indirectly own the Hard Rock and other related assets.

Subsidiaries of the Hard Rock joint venture, Vegas HR Private Limited (the “ Mortgage Lender”), Brookfield Financial, LLC-Series B (the “First Mezzanine Lender”), the Second Mezzanine Lender, Morgans Group, certain affiliates of DLJMB, and certain other related parties entered into a Standstill and Forbearance Agreement, dated as of February 6, 2011. Pursuant to the Standstill and Forbearance Agreement, among other things, until February 28, 2011, the Mortgage Lender, First Mezzanine Lender and the Second Mezzanine Lender agreed not to take any action or assert any right or remedy arising with respect to any of the applicable loan documents or the collateral pledged under such loan documents, including remedies with respect to the Company’s Hard Rock management agreement. In addition, pursuant to the Standstill and Forbearance Agreement, the Second Mezzanine Lender agreed to withdraw its foreclosure notice, and the parties agreed to jointly request a stay of all action on the pending motions that had been filed by various parties to enjoin such foreclosure proceedings.

On March 1, 2011, the Hard Rock joint venture, the Mortgage Lender, the First Mezzanine Lender, the Second Mezzanine Lender, the Morgans Parties and certain affiliates of DLJMB, as well as the Hard Rock Mezz Holdings LLC (the “Third Mezzanine Lender”) and other interested parties entered into a comprehensive settlement to resolve the disputes among them and all matters relating to the Hard Rock and related loans and guaranties. The settlement provided, among other things, for the following:

• release of the nonrecourse carve-out guaranties provided by the Company with respect to the loans made by the Mortgage Lender, the First Mezzanine Lender, the Second Mezzanine Lender and the Third Mezzanine Lender to the direct and indirect owners of the Hard Rock;

• termination of the management agreement pursuant to which the Company’s subsidiary managed the Hard Rock;

• the transfer by the Hard Rock joint venture to an affiliate of the First Mezzanine Lender of 100% of the indirect equity interests in the Hard Rock; and

• certain payments to or for the benefit of the Mortgage Lender, the First Mezzanine Lender, the Second Mezzanine Lender, the Third Mezzanine Lender and the Company. The Company’s net payment was approximately $3.7 million.

As a result of the settlement and completion of certain gaming de-registration procedures, the Company is no longer subject to Nevada gaming regulations.

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Commitments (Tables)

6 Months Ended

Jun. 30, 2012

Commitments [Abstract]

Development Hotel Commitments and Guarantees

	Expected Room Count		Anticipated Opening		Term of Initial Management Contract
Hotels Currently Under Construction:
Delano Marrakech		73		Sept. 2012		15 years
Mondrian Marrakech		69		Late 2013		15 years
Mondrian Doha		270		2013		30 years
Mondrian London		360		Early 2014		25 years
Mondrian at Baha Mar, Bahamas		310		2014		20 years
Other Signed Agreements:
Mondrian Istanbul		128		2014		20 years
Delano Aegean Sea		200		2014		20 years
Hudson London		234		2015		20 years
Highline, New York project		175		To be determined		15 years

Key Money and Equity Commitments

	As of June 30, 2012
Key money	$	29,400
Equity investments		—
Cash flow guarantees		31,600
Total maximum future funding commitments	$	61,000
Amounts due within one year	$	2,500

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Investments in and Advances to Unconsolidated Joint Ventures (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2012	Jun. 30, 2011	Jun. 30, 2012	Jun. 30, 2011
Equity in income (loss) from unconsolidated joint ventures
Total	$ (2,706)	$ (910)	$ (3,616)	$ (10,393)
Unconsolidated Joint Ventures [Member]
Equity in income (loss) from unconsolidated joint ventures
Total	(2,706)	(910)	(3,616)	(10,393)
Morgans Hotel Group Europe Ltd [Member] | Unconsolidated Joint Ventures [Member]
Equity in income (loss) from unconsolidated joint ventures
Total		885		892
Restaurant Venture SC London (1) [Member] | Unconsolidated Joint Ventures [Member]
Equity in income (loss) from unconsolidated joint ventures
Total		(290)		(510)
Mondrian South Beach [Member] | Unconsolidated Joint Ventures [Member]
Equity in income (loss) from unconsolidated joint ventures
Total	(2,400)	(978)	(2,665)	(1,478)
Mondrian South Beach food and beverage MC South Beach (2) [Member] | Unconsolidated Joint Ventures [Member]
Equity in income (loss) from unconsolidated joint ventures
Total	(208)		(356)
Mondrian SOHO [Member] | Unconsolidated Joint Ventures [Member]
Equity in income (loss) from unconsolidated joint ventures
Total	(100)	(529)	(597)	(2,461)
Hard Rock Hotel & Casino (3) [Member] | Unconsolidated Joint Ventures [Member]
Equity in income (loss) from unconsolidated joint ventures
Total				(6,376)
Ames [Member] | Unconsolidated Joint Ventures [Member]
Equity in income (loss) from unconsolidated joint ventures
Total		(1)		(465)
Other [Member] | Unconsolidated Joint Ventures [Member]
Equity in income (loss) from unconsolidated joint ventures
Total	$ 2	$ 3	$ 2	$ 5

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Organization and Formation Transaction (Tables)

6 Months Ended

Jun. 30, 2012

Organization and Formation Transaction [Abstract]

Operating Hotels

Hotel Name	Location	Number of Rooms		Ownership
Hudson	New York, NY		834		(1	)
Morgans	New York, NY		114		(2	)
Royalton	New York, NY		168		(2	)
Mondrian SoHo	New York, NY		263		(3	)
Delano South Beach	Miami Beach, FL		194		(4	)
Mondrian South Beach	Miami Beach, FL		328		(5	)
Shore Club	Miami Beach, FL		309		(6	)
Mondrian Los Angeles	Los Angeles, CA		237		(7	)
Clift	San Francisco, CA		372		(8	)
Ames	Boston, MA		114		(9	)
Sanderson	London, England		150		(10	)
St Martins Lane	London, England		204		(10	)
Hotel Las Palapas	Playa del Carmen, Mexico		75		(11	)

(1) The Company owns 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.

(2) Operated under a management contract; wholly-owned until May 23, 2011, when the hotel was sold to a third-party.

(3) Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority ownership interest of approximately 20% at June 30, 2012 based on cash contributions. See note 4.

(4) Wholly-owned hotel.

(5) Operated as a condominium hotel under a management contract and owned through a 50/50 unconsolidated joint venture. As of June 30, 2012, 196 hotel residences have been sold, of which 89 are in the hotel rental pool. See note 4.

(6) Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority ownership interest of approximately 7% as of June 30, 2012. See note 4.

(7) Operated under a management contract; wholly-owned until May 3, 2011, when the hotel was sold to a third-party.

(8) The hotel is operated under a long-term lease which is accounted for as a financing. See note 6.

(9) Operated under a management contract and owned through an unconsolidated joint venture in which the Company held a minority interest ownership of approximately 31% at June 30, 2012 based on cash contributions. See note 4.

(10) Operated under a management contract; owned through a 50/50 unconsolidated joint venture until November 2011, when the Company sold its equity interests in the joint venture to a third-party. See note 4.

(11) Operated under a management contract.

Purchase price allocation

Purchase price consideration
Cash	$	28,500
Liabilities incurred
$18.0 million promissory notes, at face value		18,000
Total consideration	$	46,500
Purchase price allocation
Current assets	$	3,739
Management contracts		35,740
Goodwill		12,515
Other intangible assets		520
Total assets acquired	$	52,514
Current liabilities		(3,059	)
Liability arising from contingent consideration (promissory notes)		(15,510	)
Redeemable noncontrolling interest liability (discussed below)		(5,448	)
Total liabilities assumed	$	(24,017	)
Net assets acquired, at fair value	$	28,497

Impact of the final purchase price allocation on the Company's previously filed financial statements

	December 31, 2011
Consolidated Balance Sheet	As  Originally Reported		As Adjusted		Effect of Change
Goodwill	$	69,105	$	66,572	$	(2,533	)
Other assets, net		51,348		51,669		321
Debt and capital lease obligations		442,395		439,905		(2,490	)
Redeemable noncontrolling interest liability		5,170		5,448		278

Operating results of TLG

	TLG Operating Results Included in the Company’s Results for  the Three Months Ended June 30, 2012		TLG Operating Results Included in the Company’s Results for  the Six Months Ended June 30, 2012
Revenues	$	3,250	$	6,017
Income from continuing operations	$	3,003	$	5,457

Revenues and loss from continuing operations on a pro forma basis

	Three Months Ended June 30, 2011			Six Months Ended June 30, 2011
Total revenues, as reported by the Company	$	54,209		$	108,613
Plus: TLG total revenues		2,464			4,379
Pro forma total revenues	$	56,673		$	112,992
Total loss from continuing operations, as reported by the Company	$	(11,802	)	$	(45,160	)
Plus: TLG income from continuing operations		2,171			3,965
Pro forma loss from continuing operations	$	(9,631	)	$	(41,195	)