Note 10. Related Person Transactions

We have relationships and historical and continuing transactions with TA, RMR LLC, 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 our Trustees or officers. For further information about these and other such relationships and certain other related person transactions, please refer to our 2015 Annual Report.

TA: TA was our 100% owned subsidiary until we distributed its common shares to our shareholders in 2007. TA is our largest tenant and property operator, leasing 36% of our gross carrying value of real estate properties as of June 30, 2016. We are TA’s largest shareholder. As of June 30, 2016, we owned 3,420,000 of TA’s common shares, representing approximately 8.8% of TA’s outstanding common shares.

Our investment in TA shares, which is included in other assets in our condensed consolidated balance sheets, is recorded at fair value with the related unrealized gain (loss) included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets. We recognize the increase or decrease in the fair value of our TA shares each reporting period as unrealized gain (loss) on investment securities, which is a component of other comprehensive income (loss) in our condensed consolidated statements of comprehensive income. See Note 12 for further information regarding our investment in TA.

On June 1, 2015, we entered a transaction agreement with TA, or the Transaction Agreement, pursuant to which, among other things, 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, and we agreed to leaseback these development properties to TA under our TA leases.

On March 31, 2016, we purchased from TA one of these development properties for $19,683, and we and TA amended our TA No. 4 agreement to add this property. Our annual minimum rent under our TA No. 4 agreement increased by $1,673 as a result of the completion of this purchase and leaseback.

On June 22, 2016, we entered a First Amendment to Transaction Agreement with TA to, among other things, replace one of the development properties that we had agreed to purchase from and leaseback to TA with two existing travel centers owned by TA, and amend our TA leases, including amending our TA No. 5 agreement to extend its term to 2032. On June 22, 2016, we purchased these two travel centers from TA for an aggregate of $23,876 and we and TA amended our TA No. 1 agreement and TA No. 3 agreement to add these properties. Our minimum annual rent under our TA No. 1 and TA No. 3 agreements increased by $1,121 and $908, respectively, as a result of the completion of these purchases and leasebacks.

On June 30, 2016, in connection with the Transaction Agreement, as amended, we purchased one of the development properties from TA for $22,297, and we and TA amended our TA No. 2 agreement to add this property. The annual minimum rent under our TA No. 2 agreement increased by $1,895 as a result of the completion of this purchase and leaseback.

Because of the relationships between us and TA, the terms of the Transaction Agreement, and the First Amendment to Transaction Agreement described above were negotiated and approved by special committees of our Board of Trustees and the TA board of directors composed of our Independent Trustees and TA’s independent directors who are not also trustees or directors of the other party, which committees were represented by separate counsel.

As of June 30, 2016, we leased to TA a total of 197 travel centers. As of June 30, 2016, the number of travel centers leased, the terms, the annual minimum rents and the deferred rent balances under each of our TA leases were as follows:


	Number of Travel Centers	Initial Term End (1)		Minimum Annual Rent as of June 30, 2016 (2)		Deferred Rent (3)
TA No. 1 Lease	40	December 31, 2029	$	50,651	$	27,421
TA No. 2 Lease	39	December 31, 2028		49,817		29,107
TA No. 3 Lease	39	December 31, 2026		52,130		29,324
TA No. 4 Lease	39	December 31, 2030		49,274		21,233
TA No. 5 Lease	40	June 30, 2032		66,129		42,915
	197		$	268,001	$	150,000

(1)

TA has two renewal options of 15 years each under each of our TA leases.

(2)

Deferred rent for the TA Nos. 1, 2, 3 and 4 leases is due and payable on the respective initial term end dates noted above.

(3)

Deferred rent for the TA Lease No. 5 is due and payable on June 30, 2024. Deferred rent is subject to acceleration at our option upon an uncured default by, or a change in control of, TA.

We recognized rental income from TA of $68,967 and $60,884 for the three months ended June 30, 2016 and 2015, respectively, and $137,084 and $117,674 for the six months ended June 30, 2016 and 2015, respectively. Rental income for the three months ended June 30, 2016 and 2015 includes $3,585 and $1,390, respectively, and the six months ended June 30, 2016 and 2015 includes $7,229 and $1,805, respectively, of adjustments necessary to record 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, 2016 and December 31, 2015, we had receivables for current rent amounts owed to us by TA and straight line rent adjustments of $58,597 and $40,988, respectively. These amounts are included in due from related persons on our condensed consolidated balance sheets.

We funded $55,059 and $40,415 of qualifying capital improvements for the six months ended June 30, 2016 and 2015, respectively, under our TA leases, and, as a result, TA’s annual minimum rent payable to us increased by $4,680 and $3,435, respectively.

We determine percentage rent due under our TA leases annually and recognize any resulting amount as rental income when all contingencies are met. We had aggregate deferred percentage rent under our TA leases of $279 for the three months ended June 30, 2016 and $529 for the six months ended June 30, 2016, which amounts are net of any waived amounts. In connection with the June 2015 lease modification with TA, we recorded $2,048 of percentage rent during the three months ended June 30, 2015 because this amount was no longer contingent. We waived $61 and $289 of percentage rent for the three months ended June 30, 2016 and 2015, respectively, and $372 and $548 for the six months ended June 30, 2016 and 2015, respectively. As of June 30, 2016, we have cumulatively waived all of the $2,500 of percentage rent we previously agreed to waive.

RMR LLC: Pursuant to our business management agreement with RMR LLC, we recognized net business management fees of $34,825 and $9,461 for the three months ended June 30, 2016 and 2015, respectively, and $48,605 and $28,449 for the six months ended June 30, 2016 and 2015, respectively. The business management fees for the three and six months ended June 30, 2016 include estimated 2016 incentive fees of $25,920 and $31,236, respectively, based on our common share total return as of June 30, 2016. The actual amount of incentive fees payable to RMR LLC for 2016, if any, will be based on our common share total return for the three year period ending December 31, 2016, and will be payable in 2017. The net business management fees we recognized for the three and six months ended June 30, 2015 included a reversal of $205 for the three months ended June 30, 2015 and an expense of $8,822 for the six months ended June 30, 2015 regarding then estimated 2015 incentive fees; in January 2016, we paid RMR LLC an incentive fee of $62,263 for 2015. The net business management fees we recognized for the 2016 and 2015 periods are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

In accordance with the terms of our business management agreement, we issued 63,119 of our common shares to RMR LLC for the period from January 1, 2015 through May 31, 2015 as payment for a part of the business management fee we recognized for that period. Beginning June 1, 2015, all management fees under our business management agreement are paid in cash.

Pursuant to our property management agreement with RMR LLC, we recognized property management fees of $11 and $7 for the three months ended June 30, 2016 and 2015, respectively, and $25 and $16 for the six months ended June 30, 2016 and 2015, respectively. These fees are payable to RMR LLC in connection with the management of the office building component of one of our hotels. These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

We are generally responsible for all of our operating expenses, including certain expenses incurred by RMR LLC on our behalf. We reimbursed RMR LLC $46 and $31 for property management related expenses related to the office building component of one of our hotels for the three months ended June 30, 2016 and 2015, respectively, and $84 and $66 for the six months ended June 30, 2016 and 2015, respectively. These amounts are included in hotel operating expenses in our condensed consolidated statements of comprehensive income.

We have historically awarded share grants to certain RMR LLC employees under our equity compensation plans. In addition, under our business management agreement we reimburse RMR LLC for our allocable costs for internal audit services. The amounts recognized as expense for share grants to RMR LLC employees and internal audit costs were $618 and $327 for the three months ended June 30, 2016 and 2015, respectively, and $1,107 and $1,125 for the six months ended June 30, 2016 and 2015, respectively. These amounts are included in general and administrative expenses in our condensed consolidated statements of comprehensive income.

We lease office space to RMR LLC in the office building component of our hotel in Baltimore, MD. Pursuant to our lease agreement with RMR LLC, we recognized rental income from RMR LLC for leased office space of $9 and $17 for the three and six months ended June 30, 2016 and 2015, respectively.

RMR Inc.: In connection with our June 2015 acquisition of shares of class A common stock of RMR Inc., we recorded a liability for the amount by which the estimated fair value of these shares exceeded the price we paid for these shares. This liability is included in accounts payable and other liabilities in our condensed consolidated balance sheets. A part of this liability is being amortized on a straight line basis through December 31, 2035 as an allocated reduction to our business management fee expense. We amortized $896 and $1,793 of this liability, respectively, for the three and six months ended June 30, 2016, and $231 of this liability for both the three and six months ended June 30, 2015. These amounts are included in the net business management fee amounts for such periods. As of June 30, 2016, the remaining unamortized amount of this liability was $69,969.

As of June 30, 2016, we owned 2,503,777 shares of class A common stock of RMR Inc. We receive dividends on our RMR Inc. class A common shares as declared and paid by RMR Inc. to all holders of its class A common shares. We received a dividend of $749 on our RMR Inc. class A common shares during the three months ended June 30, 2016, which was for the period from December 14, 2015 through March 31, 2016. Since then, we have not yet received any other dividends on our RMR Inc. class A common shares. On July 12, 2016, RMR Inc. declared a regular quarterly dividend of $0.25 per class A common share payable to shareholders of record on July 22, 2016. RMR Inc. has stated that it expects to pay this dividend on or about August 18, 2016.

Our investment in RMR Inc. shares, which is included in other assets in our condensed consolidated balance sheets is recorded at fair value with the related unrealized gain (loss) included in cumulative other comprehensive income (loss) in our condensed consolidated balance sheets. We recognize the increase or decrease in the fair value of our RMR Inc. shares each reporting period as unrealized gain (loss) on investment securities, which is a component of other comprehensive income (loss) in our condensed consolidated statements of comprehensive income. See Note 12 for further information on our investment in RMR Inc.

Sonesta: Sonesta is owned by our Managing Trustees. As of June 30, 2016, Sonesta managed 33 of our hotels pursuant to management and pooling agreements.

On February 1, 2016, we acquired two extended stay hotels with 262 suites located in Cleveland and Westlake, OH for $12,000, excluding acquisition related costs, and entered into a long term management agreement with Sonesta for each hotel on terms substantially consistent with those of our existing management agreements with Sonesta for extended stay hotels. These management agreements were added to our existing pooling agreement with Sonesta.

Pursuant to our Sonesta agreement, we incurred management, system, reservation fees and reimbursement of certain guest loyalty, marketing program and third party reservation transmission fees from Sonesta of $6,995 and $5,887 for the three months ended June 30, 2016 and 2015, respectively, and $12,295 and $10,401 for the six months ended June 30, 2016 and 2015, respectively. In addition, we incurred procurement and construction supervision fees from Sonesta of $581 and $323 for the three months ended June 30, 2016 and 2015, respectively, and $924 and $676 for the six months ended June 30, 2016 and 2015, respectively. These amounts are included in hotel operating expenses or have been capitalized, as appropriate, in our condensed consolidated financial statements.

On January 4, 2016, we and Sonesta amended our pooling agreement and management agreements. Under the amended pooling agreement, a hotel may be designated as “non-economic” and removed from the pooling agreement and subject to sale and we have an early termination right under each management agreement, in each case if the applicable hotel does not meet certain criteria for the stipulated measurement period. Pursuant to the amendment, these stipulated measurement periods begin on the later of January 1, 2017 and January 1st of the year beginning at least 18 months following the effective date of the applicable management agreement. The amendment to the pooling agreement and management agreements with Sonesta were negotiated and recommended by a Special Committee of our Board of Trustees comprised solely of our Independent Trustees, and were approved by our Independent Trustees and also by our Board of Trustees.

On July 29, 2016, we entered into an agreement to acquire a full service hotel with 236 rooms located in Milpitas, CA for a purchase price of $52,000, excluding acquisition related costs. We currently expect to complete this acquisition during the fourth quarter of 2016. This acquisition is subject to completion of diligence and other closing conditions; accordingly, we can provide no assurance that we will acquire this property or that its acquisition will not be delayed or the terms of the acquisition will not change. Upon acquisition of this hotel, we intend to rebrand the hotel as a Sonesta hotel, to enter into a hotel management agreement with Sonesta for this property on terms consistent with our other applicable hotel management agreements with Sonesta and to add that management agreement to our Sonesta agreement.

AIC: We and six other companies to which RMR LLC provides management services each own AIC in equal amounts. We and the other AIC shareholders participate in a combined property insurance program arranged and reinsured in part by AIC. We currently expect to pay aggregate annual premiums, including taxes and fees, of approximately $3,958 in connection with this insurance program for the policy year ending June 30, 2017, which amount may be adjusted from time to time as we acquire and dispose of properties that are included in this insurance program.

As of June 30, 2016 and December 31, 2015, our investment in AIC had a carrying value of $7,023 and $6,834, respectively. These amounts are included in other assets in our condensed consolidated balance sheets. We recognized income of $17 and $23 related to our investment in AIC for the three months ended June 30, 2016 and 2015, respectively, and $94 and $95 for the six months ended June 30, 2016 and 2015, respectively. Our other comprehensive income includes our proportionate part of unrealized gains (losses) on securities which are owned by AIC of $43 and ($64) for the three months ended June 30, 2016 and 2015, respectively, and $95 and ($19) for the six months ended June 30, 2016 and 2015, respectively.

See Note 11 for additional information about our agreements with TA and Sonesta.