7. Commitments and Contingencies

Hotel Development Related Commitments

In order to obtain management, franchise and license contracts, the Company may commit 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. 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. As of June 30, 2016, the Company’s potential funding obligations under cash flow guarantees at hotels under development at the maximum amount under the applicable contracts, but excluding contracts where the maximum amount cannot be determined, was $5.0 million, which relates to Delano Cartagena where construction has not yet begun.

The Company has signed management, license or franchise agreements for new hotels which are in various stages of development. As of June 30, 2016, these included the following:

	Expected Room Count	Anticipated Opening	Initial Term
Hotels Currently Under Construction or Renovation:
Mondrian Doha	270	2016	30 years
Delano Dubai	110	2017	20 years
Mondrian Dubai	235	2018	15 years
Other Signed Agreements:
Delano Aegean Sea	150		20 years
Delano Cartagena	211		20 years

There can be no assurance that any or all of the Company’s projects listed above 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, in which case the Company may be unable to recover any previously funded key money, equity investments or debt financing.

Owned Hotel Commitments

The Company may have long-term commitments that are expected to be incurred by the Company or its consolidated consisting of targeted renovations at the Company’s Owned Hotels and other non-recurring capital expenditures that need to be made periodically with respect to its properties, including a renovation of the façade of Hudson as required by Applicable Law, which must be completed by April 2018, costing an estimated $6.0 million, which the Company intends to fund through amounts in restricted cash and additional funds to be provided by the Company.

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. Historically, the Company has funded the shortfall and as of June 30, 2016, approximately $0.4 million was accrued as a reduction to management fees related to these performance test provisions. Until the end of 2016 and so long as the Company funds the shortfalls, the hotel owners do not have the right to terminate the Company as hotel manager. The Company’s maximum potential amount of future fundings related to the Royalton and Morgans performance guarantee cannot be determined as of June 30, 2016, but under the hotel management agreements is limited to the Company’s base fees earned. On January 28, 2016, the Company entered into amendments to each of the hotel management agreements relating to Royalton and Morgans, both owned by the same hotel owner. In connection with owner’s potential sale of each of those hotels, the Company agreed to allow the owner to sell the hotels unencumbered by the current hotel management agreements. Under each of the amendments, the owner has the right to terminate the hotel management agreements at any time upon at least 30 days’ prior written notice in exchange for paying us $3.5 million for each of the hotels upon a termination of each agreement. The Company expects to continue to manage the hotels until they are sold.

Additionally, the Company is currently subject to performance tests under certain other of its hotel management agreements, which could result in early termination of the Company’s hotel management agreements. As of June 30, 2016, the Company is in compliance with these termination performance tests and is not exercising any contractual cure rights. Generally, the performance tests are two part tests based on achievement of budget or cash flow and revenue per available room indices. In addition, once the performance test period begins, which is generally multiple years after a hotel opens, each of these performance tests must fail for two or more consecutive years and the Company has the right to cure any performance failures, subject to certain limitations.

Litigation Regarding TLG Promissory Notes

On August 5, 2013, Messrs. Andrew Sasson and Andy Masi filed a lawsuit in the Supreme Court of the State of New York against TLG Acquisition LLC and Morgans Group LLC relating to the $18.0 million TLG Promissory Notes. See note 1 regarding the background of the TLG Promissory Notes. The complaint alleges, among other things, a breach of contract and an event of default under the TLG Promissory Notes as a result of the Company’s failure to repay the TLG Promissory Notes following an alleged “Change of Control” that purportedly occurred upon the election of the Company’s Board of Directors on June 14, 2013. The complaint sought payment of Mr. Sasson’s $16.0 million TLG Promissory Note and Mr. Masi’s $2.0 million TLG Promissory Note, plus interest compounded to principal, as well as default interest, and reasonable costs and expenses incurred in the lawsuit. On September 26, 2013, the Company filed a motion to dismiss the complaint in its entirety. On February 6, 2014, the court granted the Company’s motion to dismiss. On March 7, 2014, Messrs. Sasson and Masi filed a Notice of Appeal from this decision with the Appellate Division, First Department. On April 9, 2015, the Appellate Division, First Department, reversed the trial court’s decision, denying the motion to dismiss and remanding to the trial court for further proceedings. The Company filed a motion for reconsideration at the appellate court, which was denied on July 7, 2015. The Company filed its answer to the complaint with the trial court on May 11, 2015. On August 27, 2015, Messrs. Sasson and Masi filed a motion for partial summary judgment with the trial court and the Company filed its opposition to that motion on October 12, 2015. In February 2016, the plaintiff’s partial summary judgment motion was granted and the judge signed the order in March 2016.

On July 6, 2016, a judgment was entered in the Supreme Court of the State of New York. At that time, the Company posted a bond in the amount of approximately $3.0 million, thereby staying enforcement of the judgment pending the Company’s appeal. Plaintiffs also have a claim for attorneys’ fees, which they have recently estimated to total approximately $1.0 million, which the Company intends to dispute and oppose. Although the TLG Promissory Notes were repaid and retired in December 2014, this lawsuit remains pending in connection with issues related primarily to the interest rates applicable to the TLG Promissory Notes.

Litigation Regarding Pending Acquisition of Company by SBEEG Holdings LLC

Following the announcement of the execution of the definitive agreement under which the Company would be acquired by SBE, as discussed further in footnote 13, four putative class action lawsuits were filed by purported stockholders of the Company challenging the merger and the merger agreement.

The first complaint was filed in the Supreme Court of New York, New York County on May 27, 2016 (the “New York Action”). On June 15, 2016, the plaintiff in the New York Action filed a notice of voluntary discontinuance without prejudice, thereby voluntarily discontinuing the New York Action.

The other three complaints were filed in the Court of Chancery of the State of Delaware. On June 29, 2016, the Court of Chancery of the State of Delaware entered an order, among other things, consolidating the three actions filed in Delaware (the “Consolidated Action”) and appointing co-lead counsel and Delaware counsel in the Consolidated Action.

On June 30, 2016, plaintiffs in the Consolidated Action filed a Verified Consolidated Amended Class Action Complaint (the “Complaint”). The Complaint names as defendants the individual members of our Board of Directors, SBE, Merger Sub, Ronald W. Burkle, The Yucaipa Companies, LLC, Yucaipa American Alliance Fund II, L.P., Yucaipa American Alliance (Parallel) Fund II, L.P., Yucaipa American Alliance Fund II, LLC, Yucaipa American Funds, LLC, and Yucaipa American Management, LLC. The Complaint alleges, among other things, that the members of the Company’s Board of Directors breached their fiduciary duties to the Company’s stockholders by approving the merger and authorizing the Company to enter into the merger agreement, that Mr. Burkle and the Yucaipa entities are controlling stockholders of the Company and breached their purported fiduciary duties, and that SBE and Merger Sub aided and abetted these alleged fiduciary breaches. The Complaint further alleges that, among other things, Mr. Burkle and the Yucaipa entities pressured the Company into entering into the merger agreement and approving the merger and frustrated the Company’s efforts to explore other potential strategic alternatives; that the merger consideration is financially inadequate; that the sales process leading up to the merger and the merger agreement was flawed; and that the deal-protection provisions in the merger agreement are unduly preclusive and therefore prevent a potential topping bidder or topping bidders from making a superior proposal. The Complaint seeks, among other things, certification of the proposed class, preliminary and permanent injunctive relief (including enjoining or rescinding the merger), unspecified damages, and an award of other unspecified attorneys’ and other fees and costs.

The Company believes that the claims asserted in the Complaint are without merit and intend to defend against them. However, a

negative outcome in these lawsuits, or any follow-on lawsuit, could have a significant impact on the Company if they result in preliminary or permanent injunctive relief or damages. The Company is not currently able to predict the outcome of the litigation or any follow-up lawsuit with any certainty.

Environmental

As a holder of real estate, the Company is subject to various environmental laws of federal, state and local governments. Compliance by the Company with existing laws has not had an adverse effect on the Company and management does not believe that it will have a material adverse impact in the future. However, the Company cannot predict the impact of new or changed laws or regulations.

Other Litigation

The Company is involved in various lawsuits and administrative actions in the normal course of business, in addition to the other litigation noted above. The Company has recorded the necessary accrual for contingent liabilities related to outstanding litigations.