6. Management Agreements and Leases

As of December 31, 2014 we owned 291 hotels and 184 travel centers which are included in one of 11 operating agreements. We do not operate any of our properties.

As of December 31, 2014, 288 of our hotels are leased to our TRSs and managed by independent hotel operating companies and three hotels are leased to third parties. As of December 31, 2014, our hotel properties are managed by or leased to separate subsidiaries of Marriott, InterContinental, Sonesta, Wyndham, Hyatt, Carlson, and Morgans under nine agreements. Such hotel agreements have initial terms expiring between 2019 and 2103. Each of these agreements is for between one and 91 of our hotels. In general, the agreements contain renewal options for all, but not less than all, of the affected properties, and the renewal terms total range between 20 to 60 years. Most of these agreements generally require the third party manager or tenant to: (1) make payments to us of minimum returns or minimum rents; (2) deposit a percentage of total hotel sales into reserves established for the regular refurbishment of our hotels, or FF&E reserves; and (3) for our managed hotels, make payments to our TRSs of additional returns to the extent of available cash flow after payment of operating expenses, funding of the FF&E reserve, payment of our minimum return, payment of certain management fees and replenishment of security deposits or guarantees. Some of the third party managers or tenants or their affiliates have provided deposits or guarantees to secure their obligation to pay us.

Marriott No. 1 agreement. Our management agreement with Marriott for 53 hotels provides that as of December 31, 2014 we are paid a fixed annual minimum return of $67,976 to the extent that gross revenues of the hotels, after payment of hotel operating expenses, are sufficient to do so. We do not have any security deposits or guarantees for the 53 hotels included in our Marriott No. 1 agreement. Accordingly, the returns we receive from these hotels managed by Marriott are limited to available hotel cash flows after payment of operating expenses. We realized returns of $67,719 during the year ended December 31, 2014, under this agreement. Marriott’s base and incentive management fees are only earned after we receive our minimum returns.

We funded $4,410 for capital improvements at certain of the hotels included in our Marriott No. 1 agreement during the year ended December 31, 2014. We currently expect to fund $3,700 of capital improvements during 2015. As we fund these improvements, the annual minimum returns payable to us increase by 10% of the amounts funded.

During the three months ended December 31, 2014, we began marketing for sale our Courtyard by Marriott hotel in Norcross, GA with a net book value of $4,143 at December 31, 2014. We expect the annual minimum returns under our Marriott No. 1 agreement will decrease by 8% of the net proceeds received upon completion of a sale. There can be no assurance that we will complete the sale of this hotel or that the net proceeds of any such sale would equal or exceed the net book value.

Marriott No. 234 agreement. During the year ended December 31, 2014, we realized returns of $102,820 under our agreement with Marriott, covering 68 hotels, and requiring annual minimum returns of $105,928 as of December 31, 2014. Pursuant to our Marriott No. 234 agreement, Marriott has provided us with a limited guarantee for shortfalls up to 90% of our minimum returns through 2019. Marriott was not required to make any guarantee payments to us during the year ended December 31, 2014, because the hotels generated net operating results in excess of the guaranty threshold amount (90% of the minimum returns due to us). The available balance of this guaranty was $30,672 as of December 31, 2014.

Under our Marriott No. 234 agreement, the FF&E reserve funding requirements for all hotels included in the agreement are reduced in 2014 ( 4.8% of total hotel sales) and then increased from historical levels in 2015 ( 5.8% of total hotel sales) through the end of the agreement term in 2025.

We funded $1,500 for capital improvements during 2014 at certain of the hotels included in our Marriott No. 234 agreement during the year ended December 31, 2014. We currently expect to fund $6,700 of capital improvements during 2015. As we fund these improvements, the annual minimum returns payable to us increase by 9% of the amounts funded.

Marriott No. 5 agreement. We lease one hotel in Kauai, Hawaii to Marriott. This lease is guaranteed by Marriott and we received $10,004 of rent for this hotel during the year ended December 31, 2014. As of February 26, 2015, all rents due from Marriott for this hotel are current. The guarantee provided by Marriott with respect to this one hotel leased by Marriott is unlimited.

InterContinental agreement. During the year ended December 31, 2014, we realized returns and rents of $139,543 under our agreement with InterContinental covering 91 hotels and requiring annual minimum returns and rents to us of $140,758 as of December 31, 2014. During the year ended December 31, 2014, we were paid all minimum returns and rents due to us and our available security deposit was replenished by $5,204 from the net operating results these hotels generated in excess of the minimum returns and rents due to us. The available balance of this security deposit was $32,967 as of December 31, 2014.

Under this agreement, InterContinental is required to maintain a minimum security deposit of $30,000 in 2014 and $37,000 thereafter. On January 6, 2014, we entered into a letter agreement with InterContinental under which the minimum security deposit balance required to be maintained during 2014 and 2015 will be reduced by two dollars for every dollar of additional security deposit InterContinental provides to us. During the first quarter of 2014, InterContinental provided us $4,283 of additional security deposits. We refunded this amount to InterContinental in October 2014. Also, during the period from December 31, 2014 to February 26, 2015, InterContinental provided us $2,782 of additional security deposits.

When we reduce the amounts of the security deposits we hold for this agreement or any other operating agreements for payment deficiencies, we record income equal to the amounts by which this deposit is reduced up to the minimum return or minimum rent due to us. However, reducing the security deposits does not result in additional cash flow to us of the deficiency amounts, but reducing amounts of security deposits may reduce the refunds due to the respective lessees or managers who have provided us with these deposits upon expiration of the respective lease or management agreement. The security deposits are non-interest bearing and are not held in escrow. Under all of our hotel contracts that include a security deposit, any amount of the security deposits which are applied to payment deficits may be replenished from future cash flows from the applicable hotel operations pursuant to the terms of the respective contracts.

Under our InterContinental agreement, the FF&E reserve funding required for all hotels included in the agreement is reduced in 2014 ( 3% of total hotel sales) and 2015 ( 4% of total hotel sales) and returns to historical levels in 2016 ( 5% of total hotel sales) through the end of the agreement term in 2036.

We funded $15,743 for capital improvements to certain of the hotels included in our InterContinental agreement during the year ended December 31, 2014. We currently expect to fund $10,000 for capital improvements under this agreement during 2015. As we fund these improvements, the annual minimum returns payable to us increase by 8% of the amounts funded.

As noted above, we have entered an agreement to acquire a Holiday Inn & Suites branded hotel located in Rosemont, IL with 300 rooms. We plan to add this hotel to our InterContinental agreement. We expect the annual minimum returns payable to us under our InterContinental to increase by 8% of the amount of our investment in this hotel.

Sonesta agreement. Our management agreement with Sonesta provides that we are paid a fixed annual minimum return ( $71,919 as of December 31, 2014) equal to 8% of our invested capital, as defined in the management agreement, to the extent that gross revenues of the hotels, after payment of hotel operating expenses and certain base management fees to Sonesta, are sufficient to do so. We do not have any security deposits or guarantees for our hotels managed by Sonesta. Accordingly, the returns we receive from hotels managed by Sonesta are limited to available hotel cash flows after payment of operating expenses. Sonesta’s incentive management fees, but not its other fees, are only earned after we receive our minimum returns. We realized returns of $30,918 during the year ended December 31, 2014, under this agreement. We have the right to terminate these management agreements if our minimum returns are less than 6% of our invested capital for certain periods.

Our Sonesta agreements do not require FF&E escrow deposits. Under our Sonesta agreements, we are required to fund capital expenditures made at our hotels. We funded $115,836 for renovations and other capital improvements to hotels included in our Sonesta agreement during the year ended December 31, 2014. We currently expect to fund approximately $27,000 for renovations and other capital improvements during 2015. The annual minimum returns due to us under the Sonesta agreement increase by 8% of the amounts funded in excess of threshold amounts, as defined therein. See Note 9 for further information regarding our relationship with Sonesta.

Wyndham agreement. During the year ended December 31, 2014, we realized returns and rents of $26,884 from our hotels managed or leased by Wyndham covering 22 hotels and requiring annual minimum returns and rents to us of $27,429 as of December 31, 2014. The guarantee provided by Wyndham with respect to 22 hotels managed by Wyndham is limited to $35,656 ( $6,582 remaining at December 31, 2014), subject to an annual payment limit of $17,828 and expires on July 28, 2020. During the year ended December 31, 2014, Wyndham made $7,581 of guaranty payments to us. The guarantee provided by Wyndham with respect to the lease with Wyndham Vacation Resorts, Inc., or Wyndham Vacation, for part of one hotel is unlimited.

Under our Wyndham agreement, the FF&E reserve funding required for all hotels included in the agreement is subject to available cash flow after payment of our minimum return. No FF&E escrow deposits were required during the year ended December 31, 2014. The reserve amount was 2% of total hotel sales in 2014, increases to 3% of total hotel sales in 2015, increases to 4% of total hotel sales in 2016 and increases to 5% of total hotel sales in 2017 through the end of the agreement term in 2038.

We funded $26,515 for renovations and other capital improvements to hotels included in our Wyndham agreement during the year ended December 31, 2014. We currently expect to fund approximately $9,000 for renovations and other capital improvements in 2015. As we fund these improvements, the annual minimum returns payable to us increase by 8% of the amounts funded.

Morgans agreement. We lease the Clift Hotel, a full service hotel in San Francisco, CA to a subsidiary of Morgans under a lease agreement that expires in 2103. On October 14, 2014, the annual rent due to us increased from $5,956 to $7,595 as prescribed in the lease. On each fifth anniversary thereafter during the lease term, the rent due to us will be increased further based on changes in the consumer price index with minimum increases of 10% and maximum increases of 20%. Although the contractual lease terms would qualify this lease as a direct financing lease under GAAP, we account for this lease as an operating lease due to uncertainty regarding the collection of future rent, and we recognize rental income from this lease on a cash basis in accordance with GAAP.

TA agreements. Our 184 owned travel centers are leased to and operated by separate subsidiaries of TA under two agreements. Our lease for 144 travel centers expires in 2022 and has no renewal option. Our lease for 40 travel centers expires in 2024 and has two 15 year renewal options. TA has guaranteed its subsidiary tenants’ obligations under the leases. Our travel center leases with TA do not require FF&E escrow deposits. However, TA is required to maintain the leased travel centers, including structural and non‑structural components. Under both our leases with TA, TA may request that we fund additional amounts for capital improvements to the leased facilities in return for minimum rent increases. However, TA is not obligated to request and we are not obligated to fund any such improvements. As we fund these improvements, the minimum rents payable to us increase. We funded $66,133 for capital improvements to our travel center properties during 2014. See Note 9 for further information regarding our leases with TA.

As of December 31, 2014, the average remaining current terms of our leases and management agreements, from parties other than our TRSs, weighted based on minimum returns or rents was approximately 14.9 years. As of December 31, 2014, our travel center and hotel leases provide for contractual minimum rents to be paid to us during the remaining current terms as follows:


2015	$	253,643
2016		253,734
2017		253,839
2018		253,737
2019		253,367
Thereafter		2,736,932
Total	$	4,005,252

In 2003, we settled all our outstanding claims with Prime Hospitality Corp., or Prime, a former manager, arising from its July 2003 lease default by entering a management agreement for our 24 AmeriSuites® hotels effective on January 1, 2004. We are amortizing the $44,281 balance of the retained deposits and the value of other property received from Prime pursuant to this settlement, into our income on a straight line basis over the initial 15 year term of the management contract for the affected hotels. The unamortized balance of $11,808 at December 31, 2014 is included in accounts payable and other liabilities in the accompanying Consolidated Balance Sheets. In October 2004, Prime was sold to the Blackstone Group, or Blackstone. In January 2005, Blackstone sold the AmeriSuites® brand and transferred operating responsibility for these hotels to Hyatt. We estimate that future amortization of the retained deposits and the value of other property as of December 31, 2014 will be approximately $2,952 per year through 2018.