Note 10. Related Person Transactions

We have relationships and historical and continuing transactions with TA, RMR LLC, its parent, RMR Inc., Sonesta and others related to them, including other companies to which RMR LLC provides management services and which have trustees, directors and officers who are also trustees, directors or officers of us, RMR Inc. or RMR LLC. For further information about these and other such relationships and certain other related person transactions, please refer to our 2014 Annual Report and our Current Reports on Form 8-K filed with the Securities and Exchange Commission, or the SEC, on June 5, 8, 12, 22, 25 and July 28, 2015.

TA: TA was formerly our 100% owned subsidiary until it was spun out to our shareholders in 2007. As of June 30, 2015, we owned 3,420,000 of TA’s common shares, representing approximately 8.9% of TA’s outstanding common shares, and we are TA’s largest shareholder. TA is our largest tenant and property operator.

On June 1, 2015, we entered a transaction agreement, or the TA Transaction Agreement, with TA, pursuant to which, among other things, (i) we and TA agreed to expand and subdivide the lease pursuant to which we then leased to TA 144 properties that TA primarily operates under the “TravelCenters of America,” “TA” and related brand names, which we historically referred to as the TA No. 1 lease and which we refer to in this Note as the Prior TA lease, into four amended and restated leases, or the New TA leases, (ii) we agreed to purchase from TA 14 travel centers and certain assets it owned at 11 properties we lease to TA for an aggregate of $279,400 and we agreed to leaseback those 25 properties to TA under the New TA leases, (iii) TA agreed to purchase from us five travel centers that we then leased to TA under the Prior TA lease for an aggregate of $45,042 and (iv) we agreed to purchase from TA five travel centers upon the completion of their development at a purchase price equal to their development costs, including the cost of the land, which costs are estimated to be not more than $118,000 in the aggregate and we agreed to leaseback these development properties to TA under the New TA leases. The terms of the TA Transaction Agreement were approved by special committees of our Independent Trustees and TA’s independent directors, none of whom are directors or trustees of the other company. Each special committee was represented by separate counsel. In June 2015 we completed the following transactions pursuant to the TA Transaction Agreement:

We entered into the four New TA leases with a subsidiary of TA, or our TA No. 1 agreement, TA No. 2 agreement, TA No. 3 agreement and TA No. 4 agreement, which as of June 30, 2015 were for 39, 37, 38 and 37 travel centers, respectively. Minimum annual rent payments under our TA No. 1 agreement, TA No. 2 agreement, TA No. 3 agreement and TA No. 4 agreement as of June 30, 2015 were $47,849, $43,192, $48,919 and $44,863, respectively, subject to future adjustment if additional properties are added or if we purchase capital improvements made to the leased travel centers. The initial terms for the TA No. 1 agreement, TA No. 2 agreement, TA No. 3 agreement and TA No. 4 agreement end on December 31, 2029, 2028, 2026 and 2030, respectively. Each New TA lease grants TA two renewal options of fifteen years each. Percentage rent, which totaled $2,896 in 2014 under the Prior TA lease, was incorporated into the minimum annual rent under the New TA leases and was otherwise eliminated for the remainder of 2015; thereafter, percentage rent will be equal to 3% of the excess of gross non-fuel revenues over gross non-fuel revenues in 2015. In the case of the five properties to be developed by TA and sold to us, the base year for percentage rent will be the calendar year in which the third anniversary of the completion of development of the property occurs and percentage rent will not apply to those properties until the next succeeding year. Also, under the Prior TA lease, TA’s deferred rent obligation totaled $107,085 and was due at the end of the Prior TA lease on December 31, 2022, but under the New TA leases, the due date of the deferred rent obligation was extended to the end of the initial terms of the New TA leases as follows: $27,421 due December 31, 2029, $29,107 due December 31, 2028, $29,324 due December 31, 2026, and $21,233 due December 31, 2030. The deferred rent obligation continues to be subject to acceleration at our option upon an uncured default under the New TA leases or a change in control of TA, each as provided under the New TA leases. TA and its primary operating subsidiary also guaranteed the obligations of its lessee subsidiaries under the New TA leases. We are recognizing these deferred rent amounts as rental income on a straight line basis over the initial terms of the New TA leases because we believe the future payment of these amounts to us by TA is reasonably assured.

We purchased from TA, for $227,877, 12 travel centers it owned and certain assets it owned at 10 properties TA leased from us. We leased back these properties to TA under the New TA leases. TA’s minimum annual rent increased by $19,597 as a result of the completion of the sale and leaseback of these properties.

TA purchased from us, for $45,042, five travel centers that we previously leased to TA under the Prior TA lease. These properties were subleased by TA to its franchisees. TA’s minimum annual rent decreased by $3,874 as a result of our completion of the sale of these properties. We recognized a gain of $11,015 on these sales.

We and TA entered into an amendment to the lease that we have historically referred to as our TA No. 2 lease, and which we now refer to as our TA No. 5 agreement. Among other things, this amendment eliminated percentage rent payable on fuel, which, in 2014 totaled $2 but was not paid by TA because we had previously waived payment of the first $2,500 of percentage rent due under the TA No. 5 agreement.

Pursuant to the TA Transaction Agreement, TA elected to postpone beyond June 30, 2015, but not later than December 31, 2015, the sale to us of two other travel centers and the assets at one other property that we lease to TA for $51,506 in the aggregate.

As of June 30, 2015, we leased to TA a total of 151 travel centers under the New TA leases and 40 travel centers under the TA No. 5 agreement.

We recognized rental income of $58,836 and $55,395 for the three months ended June 30, 2015 and 2014, respectively, and $115,626 and $110,678 for the six months ended June 30, 2015 and 2014, respectively, under our leases with TA. On June 9, 2015, we began recognizing the $42,915 deferred rent obligation due on June 30, 2024 under the TA No. 5 agreement as rental income on a straight line basis over the remaining initial term of the lease because we believe the future payment of this amount to us by TA is reasonably assured. Rental income for the three months ended June 30, 2015 and 2014 includes $1,390 and $408, respectively, and for the six months ended June 30, 2015 and 2014 includes $1,805 and $845, respectively, of adjustments necessary to record the scheduled rent increase under our Prior TA lease, the deferred rent obligations under our TA leases and the estimated future payment to us by TA for the cost of removing underground storage tanks on a straight line basis. As of June 30, 2015 and December 31, 2014, we had accounts receivable from TA of $42,997 and $40,253, respectively, which amounts are included in due from related persons on our condensed consolidated balance sheets.

Under our leases with TA, we funded $40,415 and $21,923 for the six months ended June 30, 2015 and 2014, respectively, for qualifying capital improvements at the leased travel centers and, as a result, TA's minimum annual rent payable to us increased by approximately $3,435, and $1,863, respectively.

Acquisition of Interest in our Manager: On June 5, 2015, we and three other REITs to which RMR LLC provides management services – Government Properties Income Trust, or GOV, Select Income REIT, or SIR, Senior Housing Properties Trust, or SNH, and collectively with GOV and SIR, the Other REITs – participated in a transaction, or the Up-C Transaction, by which we and the Other REITs each acquired an interest in RMR Inc.

The Up-C Transaction was completed pursuant to a transaction agreement by and among us, our manager, RMR LLC, its then sole member, Reit Management & Research Trust, or RMR Trust, and RMR Inc. and similar transaction agreements that each Other REIT entered with RMR LLC, RMR Trust and RMR Inc. RMR Trust is owned by our Managing Trustees, Barry and Adam Portnoy. Pursuant to these transactions agreements: we contributed to RMR Inc. 1,490,000 of our common shares, valued at the volume weighted average trading prices during the 20 days prior to the acquisition, and $12,622 in cash; GOV contributed to RMR Inc. 700,000 of its common shares and $3,917 in cash; SIR contributed to RMR Inc. 880,000 of its common shares and $15,880 in cash; SNH contributed to RMR Inc. 2,345,000 of its common shares and $13,967 in cash; RMR Trust contributed to RMR Inc. $11,520 in cash, which RMR Inc. contributed to RMR LLC; RMR LLC issued 1,000,000 of its class B membership units to RMR Inc.; RMR Inc. issued 5,019,121 shares of its class A common stock to us, 1,541,201 shares of its class A common stock to GOV, 5,272,787 shares of its class A common stock to SNH, 3,166,891 shares of its class A common stock to SIR and 1,000,000 shares of its class B-1 common stock and 15,000,000 shares of its class B-2 common stock to RMR Trust; RMR Trust delivered 15,000,000 of the 30,000,000 class A membership units of RMR LLC which RMR Trust then owned to RMR Inc.; and RMR Inc. delivered to RMR Trust our common shares, the common shares of the Other REITs and the cash which had been contributed by us and the Other REITs to RMR Inc.

The class A common stock and class B-1 common stock of RMR Inc. share ratably as a single class in dividends and other distributions of RMR Inc. when and if declared by the board of directors of RMR Inc. and have the same rights in a liquidation of RMR Inc. The class B-1 common stock of RMR Inc. is convertible into class A common stock of RMR Inc. on a 1:1 basis. The class A common stock of RMR Inc. has one vote per share. The class B-1 common stock of RMR Inc. has 10 votes per share. The class B-2 common stock of RMR Inc. has no economic interest in RMR Inc., but has 10 votes per share and is paired with the class A membership units of RMR LLC owned by RMR Trust. The class A membership units of RMR LLC owned by RMR Trust are required to be redeemed by RMR LLC upon request by RMR Trust for class A common stock of RMR Inc. on a 1:1 basis, or if RMR Inc. elects, cash. Under the governing documents of RMR Inc., upon the redemption of a class A membership unit of RMR LLC by RMR Trust, the class B-2 common stock of RMR Inc. “paired” with an equal number of class A membership units are cancelled for no additional consideration.

As part of the Up-C Transaction and concurrently with entering into the transaction agreements, on June 5, 2015:

We entered an amended and restated business management agreement, or the amended business management agreement, with RMR LLC, and an amended and restated property management agreement, or the amended property management agreement, with RMR LLC. The amendments made by these agreements are described below in this Note under “Amendment and Restatement of Management Agreements with RMR LLC.” Each Other REIT also entered amended and restated business and property management agreements with RMR LLC which made similar amendments to their management agreements with RMR LLC.

We entered a registration rights agreement with RMR Inc. covering the class A common stock of RMR Inc. that we received in the Up-C Transaction, pursuant to which we received demand and piggyback registration rights, subject to certain limitations. Each Other REIT entered into a similar registration rights agreement with RMR Inc.

We entered a lock up and registration rights agreement with RMR Trust and Barry and Adam Portnoy pursuant to which RMR Trust and Barry and Adam Portnoy agreed not to transfer the 1,490,000 of our common shares RMR Trust received in the Up-C Transaction for a period of 10 years and we granted them certain registration rights, subject to certain limited exceptions. Each Other REIT also entered into a similar lock up and registration rights agreement with RMR Trust and Barry and Adam Portnoy.

As a result of the Up-C Transaction: RMR LLC became a subsidiary of RMR Inc.; RMR Inc. became the managing member of RMR LLC; through our ownership of class A common stock of RMR Inc., we currently own an indirect 16.2% economic interest in RMR LLC; through their ownership of class A common stock of RMR Inc., GOV, SIR and SNH currently have an indirect 5.0%, 10.2% and 17.0% economic interest in RMR LLC, respectively; and RMR Trust through its ownership of 1,000,000 shares of class B-1 common stock of RMR Inc., 15,000,000 shares of class B-2 common stock of RMR Inc. and 15,000,000 class A membership units of RMR LLC currently directly and indirectly has a 51.6% economic interest in RMR LLC and controls 91.4% of the voting power of outstanding capital stock of RMR Inc.

Pursuant to the transaction agreements, we and each Other REIT agreed to distribute half of the shares of class A common stock of RMR Inc. received in the Up-C Transaction to our respective shareholders as a special distribution, and RMR Inc. agreed to facilitate this distribution by filing a registration statement with the SEC to register the shares of class A common stock of RMR Inc. to be distributed and by seeking a listing of those shares on a national stock exchange upon the registration statement being declared effective by the SEC.

The distribution of shares of class A common stock of RMR Inc. that we and the Other REITs have agreed to make to our and the Other REITs’ shareholders will be made only after a registration statement, including a prospectus, is declared effective by the SEC.

Amendment and Restatement of Management Agreements with RMR LLC: As part of the Up-C Transaction, on June 5, 2015, we and RMR LLC entered into the amended business management agreement, which amended and restated our pre-existing business management agreement with RMR LLC and the amended property management agreement, which amended and restated our pre-existing property management agreement with RMR LLC. Our amended business management agreement and amended property management agreement are referred to together in this Note as our amended management agreements. Our amended management agreements were effective as of June 5, 2015.

Our amended management agreements have terms that end on December 31, 2035, and automatically extend on December 31st of each year for an additional year, so that the terms of the agreements thereafter end on the 20th anniversary of the date of the extension. We have the right to terminate each amended management agreement: (i) at any time on 60 days’ written notice for convenience, (ii) immediately upon written notice for cause, as defined therein, (iii) on 60 days’ written notice given within 60 days after the end of any calendar year for a performance reason, as defined therein, and (iv) by written notice during the 12 months following a change of control of RMR LLC, as defined therein. RMR LLC has the right to terminate the amended management agreements for good reason, as defined therein.

If we terminate one or both of our amended management agreements for convenience, or if RMR LLC terminates one or both of our amended management agreements for good reason, we have agreed to pay RMR LLC a termination fee in an amount equal to the sum of the present values of the monthly future fees, as defined therein, for the terminated amended management agreement(s) for the remaining term. If we terminate one or both of our amended management agreements for a performance reason, as defined therein, we have agreed to pay RMR LLC the termination fee calculated as described above, but assuming a remaining term of 10 years. We are not required to pay any termination fee if we terminate one or both of our amended management agreements for cause or as a result of a change of control of RMR LLC.

Accounting for Investment in RMR Inc.: On June 5, 2015, we acquired 5,019,121 shares of class A common stock, or 33.5%, of RMR Inc. The value of our common shares issued to RMR Inc. is valued differently for accounting purposes than as stated in the respective transaction agreements. The transaction agreements calculate the value of our common shares using a 20 day volume weighted average trading price, or $57,817. For accounting purposes, the common shares are valued at the closing price of those shares on the date of the transaction, or $55,922. We account for this investment under the cost method of accounting and have recorded this investment at fair value (Level 3 inputs as defined in the fair value hierarchy under GAAP). We have determined the fair value of the RMR Inc. investment to be $129,722 as of June 5, 2015, based on valuing RMR Inc. using comparable company multiples. We have concluded, for accounting purposes, that the consideration paid for this investment in RMR Inc.’s class A common stock represented a discount to the fair value of these shares. As a result, we have recorded other liabilities of $73,800. Our investment in RMR Inc. is included in other assets in our condensed consolidated balance sheets. The carrying value of our investment in RMR Inc., including transaction costs, is $132,296 as of June 30, 2015. The other liabilities are included in accounts payable and other liabilities in our condensed consolidated balance sheets and are being amortized on a straight line basis over the 20 year life of the business and property management agreements with RMR LLC as a reduction to business management fee expense and property management fee expense, which are included in general and administrative and hotel operating expenses, respectively, in our condensed consolidated statements of comprehensive income. Amortization of this other liability included in general and administrative expense for the three months ended June 30, 2015 totaled $231.

RMR LLC Management Fees and Reimbursements: We recognized business and property management fees of $9,468 and $10,925 for the three months ended June 30, 2015 and 2014, respectively, and $28,464 and $20,585 for the six months ended June 30, 2015 and 2014, respectively. The business management fees for the six months ended June 30, 2015, include estimated 2015 incentive fees of $8,822, based on our common share total return as of June 30, 2015. The actual amount of incentive fees payable to RMR LLC for 2015, if any, will be based on our common share total return for the two year period ended December 31, 2015, and will be payable in 2016. The business management fees recognized for the three months ended June 30, 2015, reflect the reversal of ($205), which is the amount by which the estimated 2015 incentive fee accrued as of March 31, 2015 exceeded the amount of that fee estimated as of June 30, 2015. Although no incentive fee was ultimately payable to RMR LLC for 2014, business management fees we recognized for the three and six months ended June 30, 2014 include $1,445 and $2,296, respectively, of then estimated 2014 incentive fees that would have been payable in common shares after the year end 2014 based on our common share total return as of those respective 2014 periods.

The business management fees we recognized for the 2015 and 2014 periods are included in general and administrative expenses in our condensed consolidated financial statements. The property management amounts are included in property operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements and are comprised of fees we recognized under both our pre-existing property management agreement and our amended property management agreement. In accordance with the terms of our pre-existing business management agreement, we issued 63,119 and 54,423 of our common shares to RMR LLC for the six months ended June 30, 2015 and 2014, respectively, as payment for portions of the base business management fees we recognized for those periods. Our amended business management agreement requires that 100% of the management fees due to RMR LLC be paid by us in cash.

Pursuant to our pre-existing and amended management agreements with RMR LLC, we are responsible for paying all of the property level operating costs at the one office building we own which is attached to a hotel we own. These property level costs include certain payroll and related costs, which costs are generally incorporated into rents charged to our office tenants at this building. The total of the property management related reimbursements we paid to RMR LLC was $29 and $15 for the three months ended June 30, 2015 and 2014, respectively, and these costs are included in hotel operating expenses in our condensed consolidated financial statements for these periods. In addition we have historically awarded share grants to certain RMR LLC employees under our equity compensation plan and we accrue estimated amounts for such share grants throughout each year based upon historical practices. The amounts accrued for share grants to RMR LLC employees were $647 and $877 for the three months ended June 30, 2015 and 2014, respectively, and $1,383 and $1,115 for the six months ended June 30, 2015 and 2014, respectively, and these amounts are included in our general and administrative expenses in our condensed consolidated financial statements for these periods.

Sonesta: As of June 30, 2015, Sonesta was managing 22 of our hotels pursuant to long term management agreements. Pursuant to these management agreements, we incurred management, system, reservation fees and reimbursement of certain guest loyalty, marketing program and third party reservation transmission expenses payable to Sonesta of $5,887 and $4,717 for the three months ended June 30, 2015 and 2014, respectively, and $10,401 and $8,330 for the six months ended June 30, 2015 and 2014, respectively. These amounts are included in hotel operating expenses in our condensed consolidated statements of comprehensive income. In addition, we also incurred procurement and construction supervision fees payable to Sonesta in connection with capital expenditures at our hotels managed by Sonesta of $323 and $1,203 for the three months ended June 30, 2015 and 2014, respectively, and $676 and $1,750 for the six months ended June 30, 2015 and 2014, respectively. These amounts have been capitalized in our condensed consolidated financial statements.

On April 28, 2015, we acquired a building and land parcel adjacent to a hotel we own which is managed by Sonesta for $750, excluding closing costs. This land was added to that hotel property and constitutes invested capital under our Sonesta agreement.

In July 2015, we acquired a portfolio of nine extended stay hotels with 1,094 suites located in eight states for $85,000, excluding closing costs. In connection with this acquisition, we entered into a long term management agreement for Sonesta to manage these hotels. The terms of the management agreement are substantially consistent with the terms of our other management agreements with Sonesta for extended stay hotels, and this management agreement was combined with our other Sonesta hotel management agreements under our existing pooling agreement with Sonesta. We expect to invest approximately $45,000 to substantially renovate these hotels in connection with their conversion to the upscale, extended stay Sonesta ES Suites® hotel brand.

AIC: As of June 30, 2015, our investment in AIC had a carrying value of $6,910, which amount is included in other assets on our condensed consolidated balance sheets. We recognized income of $23 and $125 related to our investment in AIC for the three months ended June 30, 2015 and 2014, respectively, and $95 and $28 for the six months ended June 30, 2015 and 2014, respectively. Our other comprehensive income includes unrealized gains (losses) on securities held for sale which are owned by AIC of ($64) and $23 for the three months ended June 30, 2015 and 2014, respectively, and ($19) and $41 for the six months ended June 30, 2015 and 2014, respectively.

In June 2015, we and the other shareholders of AIC renewed our participation in an insurance program arranged by AIC. In connection with that renewal, we purchased a three-year combined property insurance policy providing $500,000 of coverage annually with the premium to be paid annually and a one year combined policy providing terrorism coverage of $200,000 for our properties. We currently expect to pay AIC an aggregate annual premium, including taxes and fees, of approximately $2,656 in connection with these policies for the policy year ending June 30, 2016, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.